I can understand your reasoning with the miners, Bryan, but if you're saying we should all be paying the rental value of the land we own instead of taxes, you've lost me. Don't you think governments all around the world would have done this if it is superior to paying taxes? What about elderly people who have a home but no significant income because they're retired? It wouldn't work.

Hoju wrote:

"if you're saying we should all be paying the rental value of the land we own instead of taxes, you've lost me. Don't you think governments all around the world would have done this if it is superior to paying taxes?"

If Edison is saying we should use this new electric light, he's lost me. Don't you think cities all around the world would have adopted this if it is superior to using candles?

If Dr Semmelweis is saying that obstreticians should wash their hands in chlorine before touching the patient, he's lost me. Don't you think obstetricians all around the world would have done this if it is reduces the risk of disease?

Besides, if sharing the rental value of land were such a good idea, wouldn't Mr Mugabe be doing it? - http://groups.yahoo.com/group/ozgeo/message/179 .

"What about elderly people who have a home but no significant income because they're retired? It wouldn't work."

What about elderly people who don't own a home, and who therefore pay the rental value of the land they live on AND the house they live in, PLUS taxes on their consumption, but who have no significant income because they're retired? How come that works?

But if you insist that those who are relatively well off must be kept in the manner to which they are accustomed, see http://www.moneymorning.com.au/20100602/the-losers-take-all.html#comment-12095 and http://www.moneymorning.com.au/20100602/the-losers-take-all.html#comment-12161 .

Hoju of course Bryan did not get his land value tax proposal out of thin air. The Henry Review recently and the Harvey Business Tax Review in 2001 (Victoria) strongly endorse a land value tax. There is a strong body of research behind land value taxation. All political parties have been very quiet to date on the land tax recommendation in the Henry Review, but it is a discussion that this country is yet to have -in this century at least.

I am glad you are concerned about the aged etc. Land value tax would enhance the government's ability to provide good health, education and services without recourse to taxing away the incomes of people while they are working. Good for workers. Good for retirees. Let's acknowledge that our land and natural resources are Australia's wealth and our governments have a responsibility to secure it for all Australians. Margaret

The problem, Bryan, is that your analogy is not right.

Can I suggest that a miner "acquires" his resource by securing a tenement and investing often considerable funds in exploring the tenement, and if (against very long adds) he finds a resource, then he must invest more very substantial funds in resource assessment, metallurgical testing, feasibility studies and the like. But there is no profitable business there yet. To achieve that requires the investment of further substantial capital.

The analogy that is more appropriate in the real estate business is that of a developer who acquires a potential development site, but must invest capital in order to build the hotel (or whatever else the asset might be) that can support a business, develop profits and pays tax.

The reality is that if you impose an additional super tax on either business, it is less likely that the business will developed.

In fact, Bryan, you raise an interesting point. Land is surely an asset of the Australian people. Doesn't that mean that owners of land should be paying a royalty to the State Government for the use of that land?

I think that if you look at WA royalties you will find that producers of nickel and mineral sands pay a royalty of 5% of the realised revenue. Producers of iron ore, bauxite and diamonds pay 7.5% of the realised value.

An accurate analogy would be that the owner of a rental property should pay a royalty of either 5% or 7.5% of the annual rental revenue. Note that that is before any outgoings. Note also that any profit would be taxed at 30%.

And just for fun, lets charge a "fairer" return for the Australian people for the use of the national asset (the land) and charge a Super Profits Tax of 40% of earnings before interest tax and depreciation. As well as the royalty and corporate tax.

How would your property development mates feel about that do you reckon??

I beg to differ that my analogy is inappropriate, Herbert. I believe I made it clear I'm talking 'going concerns' which distinguishes my analogy from yours - i.e. a POTENTIAL hotel site.

I agree with you that there are enormous funds expended in exploration, feasibilty, development, etc. in mining, but the RSPT proposal kicks in AFTER all these costs, and once the enterprise is running at a significant profit. And this approach has a number of benefits recommeding it in comparison to the royalty approach.

Once the ore is being mined profitably, the silent partner/owner of the ore is clearly entitled to his (our) 50 per cent share in the EBIT as demonstrated by what occurs with the other forms of going concern businesses I mention.

The critical point is that the RSPT is founded in sound business practice, before tax considerations, and is appropriate economically. No, the miners won't be able to make quite such profits at our expense. That's a bad thing? They might take their bat and ball and go home? Like they didn't with the petroleum resource rent?

Don't forget, I said that if we undertake rent collection, arbitrary taxation of labour and capital must be reduced. That, indeed, is one of the shortcomings of the RSPT proposal. At least Ken Henry recommended a company tax rate of 25%, but the government has only proposed a reduction from 30% to 28%

As to your second point, Herbert, I do indeed agree that "Land is surely an asset of the Australian people". However, in the case of those parcels of land (sites) that are not mineral assets we already have an efficient way of capturing the land rent of these - municipal rates and state land taxes on site values. We assess a site value on every rateable property in Australia and do it better than anywhere else in the world. So, no, I think we might pass on your suggestion that my "property development mates" pay a 'before outgoings royalty' on their businesses.

Ken Henry, in fact, had the 'second leg' pretty right. Instead of the crass array of state land taxes with their thresholds, exemptions and multiple rates, he recommended there should be a comprehensive land tax, possibly replacing payroll taxes and stamp duties.

But I know the political likelihood of that admirable target, if people can't even see through the crass self-interested arguments of Australia's miners.

But stranger things can happen. I was pleasantly incredulous when the president of the Property Council of Australia suggested a comprehensive land tax a couple of days before Rudd and Swan released their slant on Ken Henry's review. If they can see that building owners and managers would benefit from a land-based revenue system, maybe Australians can eventually be educated to see it's far better than taxing incomes.

Bryan. Thank you for your responses to my points.

You say: "However, in the case of those parcels of land (sites) that are not mineral assets we already have an efficient way of capturing the land rent of these - municipal rates and state land taxes on site values."

But, as I understand things, rates are generally a small proportion of the rateable land value, and in any case are designed to be a payment for services provided by the council, not a payment to the Australian people as "rent". And as to Land Tax, in NSW "Land tax is calculated on the combined value of all the taxable land you own above the land tax threshold. The rate of tax is $100 plus 1.6 per cent of the land value between the threshold and the premium rate threshold and 2 per cent thereafter." Land tax is not "rent" either, but lets let that pass.

So, given the thresholds, it appears that the combination of rates and land tax is unlikely to be more than 2% of the rateable value, whereas the WA royalty is 7.5% of revenue. How would you feel if 7.5% of rental income were passed to the Australian people, in addition to rates, land tax and corporate tax?

And you are proposing, if I understand you correctly, that 50% of the profits from mining should be passed to the Australian people. By your logic, shouldn't fifty percent of the property profits also be passed to the Australian people?

There are numerous "public" assets that we need to consider. These include forests, resources, water resources, land, fisheries, TV and radio broadcasting licenses, broadband spectrum, etc etc.

Why shouldn't we apply one sensibly structured payment regime for all of these to give the Australian people a "fairer" return? At the same rates?

My hunch is that if we did a careful comparative analysis of the "rents" paid to the Australian people for the use of these public assets, we will find that the mining industry already is paying substantially more than other industries.

One of the problems of this whole discussion is that the 'debate', such as it is, is being undertaken with emotional slogans, and precious few facts that can be compared and understood

Council rates and land taxes do only collect a miserably small part of our land rent, Herbert. We publicly collect about $40 billion of our $325+ billion in land rent and should aim at bringing it up to par with a comprehensive land tax as recommended by Ken Henry.

Although 10% of everyone's site value (take a look at your rates notice) could replace all taxation, this would not be necessary if we also started to get the fair rent from licensing the other natural resources you mention, but like our mining rent (which IMO should be struck @ 50% of EBIT) they are currently hopelessly inadequate. But now that the chips are down, I notice that Alan Kohler, Robert Gottliebsen and the Daily Reckoning crowd start to clot with business against the best interests of the people. By all means reduce taxation, but grabbing the rent for public revenue can never be a bad thing.

You say "Land tax in not rent either" but it is. Technically, taxes on land are resource rents not taxes. Taxes are arbitrary and may be passed on in prices. Rents cannot be, no matter what the mining industry is claiming.

BTW, Herbert, you could add to the list of other public resource assets you mention, aircraft corridors.

OK, so I'm dreaming. But I'm very happy to have Ken Henry and his crew starting to see the light. We'll need their insights to get through the next 10 years - or else.

I agree with your analysis Bryan, and also agree that the naming of the tax seems very clumsy. In the jumble of words that have been used in the name the phrase "super profits" stands out, which seems a very judgemental statement when something which better described "a tax on unearned income" would probably have been much better understood by the voters, and also harder to defend by the mining companies and their well resourced lobbyists. Those people who understand business pricing and costs would not think that a 6% return on investment was the threshold beyond which a business incurs "super profits". OK, it's not that simple, but that's my point. Once you have to resort to complex business metrics which most voters don't have sufficient business experience to understand I think you've lost the argument.

Anyway, back to your original point - given that all Australians own the resources that the miners are extracting (and profiting from) it doesn't seem unreasonable that a share of those profits are returned to us. It works fine for the Norwegians and North Sea Oil, why shouldn't it work for Australians in the middle of a mining boom?

You guys make some compelling points. But what I don't get is why you treat one industry exploiting one form of public asset differently from all the other industries doing the same.

Seriously, why not a standard, well-designed tax regime that is "fair" in the sense that it is the same for all industries with a public asset component, and such that there is a defensible logic.

I don't see, Bryan, why a 50% super tax (do you mean it to apply to EBITDA, and would you charge corporate tax afterwards?) should apply to mining projects, but not to all the other public asset classes. How do you justify that logically?

Yes, EBITDA, Herbert. And, of course it should apply to forestry, fishing, spectrum licences, etc., too, but that aint in the offing - yet.

That would square these natural resource industries with my hotel analogy (EBITDA). THEN, taxes are paid - but they should not be paid. All we should take for revenue is the rent, then get out of the taxation industry business.

To correct a maxim: the only real certainties in life are death and rent, Herbert. Taxes are optional - and wrong.

Thanks for your sensible input. Much appreciated.

To clarify Bryan (excuse me if I'm a bit slow). But I think you are saying that:

1. There should be a uniform "rent" for the use of all the public assets identified, not just resources, being 50% of EBITDA.

2. After the "rent" is paid, there are no further taxes.

Thanks.

Land value tax would enhance the government's ability to provide good health, education and services without recourse to taxing away the incomes of people while they are working.

>>Ar, most homeowners are also tax payers.

Good for workers. Good for retirees. Let's acknowledge that our land and natural resources are Australia's wealth and our governments have a responsibility to secure it for all Australians. Margaret

Yes margaret, is this so our incompitent governments can once again waste the billions (of our money).

It's time that all expenditure was taken away from all governments so they can't get thier grubby little hands on it.

Remember, they will still be rich once they are done playing politics and stuffing up our futures. Meanwhile, many of our tax payers will have lost their jobs, houses, businesses and some their lives.

They are just a joke and the polls are showing just that.

Not much support comming from the 'tall poppies' either, I might add.

I think the cats got their tongues!

Herbert,

Sorry for being so sketchy. There are two distinct categories of natural resources:-

1. Mining, oil, fishing, forestry, spectrum, aircraft corridors, viz, our licensed natural resources that are permitted to operate as 'going concerns': these should all be at the rate of 50% EBITDA, eventually with no other taxes.

2. All other sites (residential, rural, commercial and industrial) for which title is held.

There are two possible assessment methods, either (a) the estimated rental value of the vacant site, or (b) a rate struck at a percentage of the current vacant site value which aims to approach (a), the site rent. (a) is the preferable option, because when (b) is adopted, the rate in the dollar will have to increase or decline as site values increase or decline. It's best simply to assess the annual rent which will self-adjust to good and bad periods (but under such a system there must be far fewer bad periods.)

Re 2: There is virtually no rental market on the vacant land value of sites except for rural land at the moment, but if real estate is put to the market with a rent revenue liability of $x, or $y, etc., such a market would develop rapidly.

To those who might say: "I've paid the freehold value of my property, why should I pay its annual rental value, you could say: OK, so an upfront payment also means your road is only ever sealed once, the police force and national defence force is only paid once to defend your property, freeways and railways stations are not extended or maintained, etc., etc.

Either system would have to be phased in gradually, so that recent purchasers were not unduly penalised, and income/company tax and GST MUST be reduced concomitantly.

As taxes are gradually abolished off employment, production, company earnings and exchange, the revenue system would at last give a green light to producing and getting things done, whilst collecting land and resource rents to the public coffer would quickly chase the speculators (rent-seekers that the current system actually ENCOURAGES to behave like parasites) out of the real estate market.

This is economics' new frontier. It would finally put paid to real estate bubbles and ensuing financial busts. I know, I know: "Try telling that to your local real estate institute!" The question has to be asked: Is there in fact a genuine real estate market if people can simply hold their properties out of the market at their whim for capital gains purposes?

Paradoxically, the real estate market wouldn't experience recurrent busts and real estate agencies would be much better off under such a system, but they're currently under the misaprehension that speculators do add value. If this were really so, they might like to explain what's happening at the moment in Portugal, Ireland, Italy, Greece, Spain (and very soon in the UK and USA ... and later, in China and Australia.)

Bryan Kavanagh,
Without the 'paricites' of realestate, as you refer to us, people would have nowhere to live as many are simply not capable of committing to paying off a loan. They can't even avoid paying interest on an 'interest free' deal.

In any case, as the cost of owning a rental property increases, we jack the rents up.

After all, we are not a charity.

rehctub:

Yes, governments waste money. But when you have shrunk the government as far as possible, so that it uses as little revenue as possible, you still need to decide what's the least evil way to raise that minimum revenue.

“In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.” So said Milton Friedman, interviewed by the Times Herald (Norristown, PA), Dec.1, 1978. I quote him not because he's a hero of mine, but because he's a hero of the small-government brigade, and because, with the Nobel Prize safely under his belt, he could afford to tell the truth.

You say: "In any case, as the cost of owning a rental property increases, we jack the rents up."

You are arguing from a false premise to a foregone conclusion. The all-in land tax proposed by Ken Henry is not a cost of owning a *rental* property. It's a cost of owning land, whether the land is for rent or not, and whether it's actually rented or not. Even the existing State land tax is not a cost of owning a *rental* property. In so far as it applies to residential property, it's a cost of owning any non-owner-occupied property. Seeking or finding a tenant for the property does not add to the cost. But if the cost is sufficiently high, it compels the owner to find a tenant, or sell the property to someone who will. If the property is a vacant lot, this obviously requires building a dwelling. Thus the effect of the land-holding "tax" is to increase the supply of accommodation and increase the availability of the existing supply. This is the exact opposite to the effect of a tax on transactions -- e.g. stamp duty, GST, payroll tax, income tax.

"After all, we are not a charity." The idea is not to turn you into a charity. The idea is to turn you into a value-adding business.

Bryan. Thank you for a constructive and interesting discussion. And thanks particularly for showing up in comments. So many people who put up articles fail to engage in the comments later - often for obvious reasons!

You have gone quite some way in convincing me of the merit of your arguments. Key to tax is having the tax as broad as it can possibly be, and charging economic "rent" for the use of public assets is a very good way to do it.

I do think that your suggested rate of 50% of EBITDA sounds high, but if it is offset by the removal of other taxes and royalties, it may work.

Have you done any modelling to see what tax revenue might be generated under your scheme? I wouldn't mind betting that you would be surprised at how much you would generate at even 25% of EBITDA.

Also, you don't provide much detail of what you think the rate of land tax would be in a "fairer" system.

Of course implementation of these ideas will be a challenge. But with the right leadership....................

grputland, thanks for that, it was a very costructive response and I think I was on the wrong track.

Land tax on vacant land.

One problem I see is if developers, who 'land bank' get taxed.

You see developers 'land bank' so they can afford to develop the land when it becomes a viable project.

Often they will buy large lots, bank it and wait for progress which then drives demand which then makes the project viable.

The 'North Lakes' development at Brisbanes' outer north is a prime example.

The developer purchased this land for a song, in todays values, held it for many years, then developed it in stages.

When they purchased, the average lot was worth say $20,000. Now that is more like $250,000.

If they had been taxed on the 'real value', chances are the project would have never happened.

rehctub:

I invite you to keep thinking along the same lines, and apply the same logic to developers as to everyone else.

"Often they will buy large lots, bank it and wait for progress which then drives demand which then makes the project viable."

True. And their land-banking adds to the overall demand for land, driving up land prices to the detriment of prospective users. But if they pay a holding charge on the value of the land that they hold, they will develop it and resell it as soon as possible, in order to minimize their holding costs. In so doing, they will add to the supply of *developed* land for the benefit of prospective home-buyers.

The same holding cost will make them refrain from buying land until they are ready to develop it. That's not a problem. It's efficiency in the use of a finite resource. (What *is* a problem is that under the present stamp duty regime, developers incur stamp duty whenever they acquire land for development, regardless of how promptly they develop it. But I'm not defending that regime.)

Of course developers will claim that a tax on land-banking discourages development. This claim isn't spin. It's an outright lie. The truth is that a tax on land-banking discourages land-banking. Developers complain about it because land-banking is more lucrative than development. The fact that development is socially useful while land-banking is socially destructive is of no concern to them.

grputland
Do your self a favour and spend a little time with a developer and watch the hoops they have to jump through just to get approvals in place.

Is is more than often that the zonning change is required before the land can be developed, rather than the developer waiting for the price to rise.

True developers work on margins and that it.

If they could buy land today, develop it tommorow and make a decent margin, most land shortages would be gone.

Governments and councils are the one who hold up the process, not developers as a whole.

>>The same holding cost will make them refrain from buying land until they are ready to develop it.

Again, do some homework. Do you have any idear how much the average lot would cost if they could only afford to buy land with DA's in place?

Some approvals take years, even decades. If we go taxing them we all loose.

In fact, some developers had their wings clipped when Anna Lie decided to place this 'urban footprint' on much of the land that was being 'land banked'.

Many developers resorted to 40ac lots just to get rid of their stock.

Remember, councils receive about the same rates for 40 ac as they do for 600M2. Where's the logic in that I ask.

We have developers screeming to develop and governments putting the brakes on, which ultimately means we, the tax payer, get less return on the rates as we would if the lots were fully developed.

The overall shortage of land has very little to do with developers.

For a long time now I’ve promoted that “Australia Day” should be renamed “Low Life Landlord Day” Tell me the government hasn’t got extortion down to a fine art! You are a social parasite in my book! It’s because of people like you , my children can’t get their own home! And why are homes here, twice the price of ones in America and other western countries? No wonder the real-estate industry win the low life industry award each year hands down! It’s ever human’s right to have a roof over their heads and not to be bleed dry by greed driven low life’s like you! When are we likely to see valve for our tax dollar asshole?

rehctub:

It is not necessary to debate whether development delays are caused by governments or by developers, because in each case the solution is the same.

To the extent that the delay is caused by governments concerned about the cost of the infrastructure headworks required by the new development, the solution is to finance the infrastructure out of the uplift caused by the headworks and by permission to develop, but in such a way as to guarantee that the clawback cannot exceed the uplift and therefore cannot make an otherwise viable development unviable. A holding charge on the value of the land fits the bill. (So does a capital gains tax with appropriate deductions -- just as a matter of curiosity.)

To the extent that the delay is caused by governments afraid of NIMBYists, the solution is to buy off the NIMBYists by promising uplifts in land values due to infrastructure. But again this requires a viable method of financing the infrastructure.

To the extent that delay is caused by developers, a holding charge on the value of the land pressures the developers to get on with it. Of course it also helps to cut taxes on the developers' inputs (payroll tax, conveyancing stamp duty, insurance taxes) and taxes on the value added by their actual development (GST, company tax). But it doesn't help to cut public charges on the locational value of the land, or on any uplifts in the location value, because these things (with rare and accidental exceptions) are not the developers' doing.

Objections to land-value capture typically take the form "If you want to encourage X, you have to cut taxes on Y," and hope you won't notice that X does not follow from Y.

Peterson,
While I feel sorry for your kids situation, I invite you to simply visit your local pubs/clubs etc on any weekend and you will soon see why many gen-Y's can't afford their own home as they live for thier weekends and piss most of their money away.

I know, I have two of them myself.

Perhaps as parents we should explain to them that you can only spend a dollar once and, chances are that the huge wages many of them earn today, may well be but a 'pipe dream' tomorrow.

Sure, houses are much higher today than in years gone past, but so to are wages and borrowing conditions, until recently, have been somewhat easy compared to the 80's.

Most can afford a home, they simply choose not to go without many things. Remember, wants verses needs!