23 May 2011

Lift property tax to boost revenue, say OECD economists | The Australian

Congrats on your new home.
Here's a fat tax bill.
-Love ATO & OECD 
Lift property tax to boost revenue, say OECD economists 

That's a tricky one. The economics degree inside me says: "First, find the PAPER FIRST, THEN COMMENT". Annoyingly enough, journalists almost NEVER cite their sources.  So far, I haven't found it - let me know if you do.  The journalist that has presented the article has gotten to the key findings but failed to explain the logic AND, on the face of it, it's bad logic. Any drain to the cash of households will depress economic activity.

However, by assuming a flexible world, a tax on houses will reduce house prices (falling cost of housing), but will be offset by the tax (rising cost of housing), the net is no effect - the cost of housing to consumers is close enough to zero, but government receipts go up. Economists call this a "perfectly crowding out effect". Even if the total cost of house ownership became even higher, then this would direct capital savings away from houses and into productive assets (businesses) which will ultimately benefit everyone in the longer term.

While price point elasticities will impinge upon this theoretical result, let me point you to some evidence.  The First Home Owners Grant (FHOG) has done nothing to affect the buy in price for first home owners.  There is sufficient evidence that where the grant was increase, prices simply increased.  So Howard gave you 7 grand extra, prices just increased by 7 grand.  Where the FHOG when up to $24'000 prices rose sharply.  I admit however that prices have not come off since the FHOG was scaled back, but I might point to a general downward price stickiness in home as a reason why. The important thing is that the FHOG did not help the first home owner, it was a subsidy that was paid to older Australians who already owned capital.  If anything it made it harder on first homeowners through competition and timing transactions.

GST is exactly the same.  GST has a split between the legal and economic incidences of the tax. Who pays GST?  Economically it's consumers. Legally, its the enterprise that has to write a cheque to the ATO once a quarter (or month, or week, depending on your turnover). In this sense, the FHOG was paid to first home owners, but it was the sellers who benefited   At least the GST makes no pretense about being a consumption tax.  If we were all about honest government (which lets face it, no one is), then this should be called RVS or "The Residential Vendors Subsidy". 

What isn't addressed is the in equity of this plan. It will retrospectively penalise the young who recently bought houses as the high time by making them pay an unplanned tax on top of a bloody high mortgage. But those who jump in to a cheaper market now after the tax is imposed will benefit by way of a lower price (comparatively of course).  The way to fix that problem would be to grandfather the tax free status, but, that creates it's own economic problems as it encourages "market stickiness" where people will seek to hold on to assets that are tax free. Further, those who used their home as semi-retirement savings will find their depressed house prices will eat into their retirement budgets.

Which ever way you look at it, it's hard to find a strictly pareato improvement where you improvement the lot of every one over all and nobody is worse off.  Perhaps some times you just have to take the utilitiarian approach and admit that at  the end of the day, it's going to be some poor sucker that has to pay.  

The most important thing is that you can expect such a move to be disruptive. But disruptive is the whole point to reform, is it not?