‘A fundamental truism of economics is that if you tax something, you get less of it’, writes economics lecturer Stephen Kirchner in The Conversation. This helps explain why Australia’s housing market is chronically under-supplied and affordability is an issue.
The Tax Burden On Housing
The Henry Tax Review recommended that saving via owner-occupied housing remain tax-exempt.
Stephen Kirchner says:
“The pre-occupation with the principal residence exemption from capital gains tax and negative gearing has diverted attention from the fact that housing in Australia, far from being supported by the tax system, is in fact very heavily taxed. A recent report by private consultancy, the Centre for International Economics (CIE), Taxation of the Housing Sector in Australia, prepared for the Housing Industry Association, quantifies the tax burden and its adverse implications for housing affordability.
The tax burden on new housing includes direct taxes such as the goods and services tax, stamp duty, land tax and council rates, as well as a variety of indirect taxes on inputs into housing and hidden taxes that arise from the planning and approvals process. CIE estimate that these taxes account for 44% of the purchase price of a representative new home in Sydney or around $267,879. Most of the burden of these taxes falls on home buyers and not home builders because the demand side of the housing market is less price sensitive than the supply-side.
The tax burden on housing also accounts for much of the financing cost of a new home and thus the burden of mortgage debt and associated interest payments. The cost of financing the tax component of the price of a new house in Sydney is equivalent to 33% of the after-tax income of a young couple aged between 24 and 35 on average wages. The burden is even higher in the first year when stamp duty is paid, accounting for a staggering 72% of after-tax income.
Australia’s under-supplied housing market and housing affordability problem is largely due to the tax burden on housing. Abolishing the principal residence exemption from capital gains tax and negative gearing would only add to this tax burden and further reduce housing supply.”
How To Improve Both Tax Efficiency AND Housing Affordability
Substituting more efficient taxes such as the goods and services tax for inefficient taxes on residential property should be considered.
“CIE estimate that replacing taxes on housing with a broadening of the GST base could increase GDP by around 2% and increase residential construction by 14%, providing a much needed boost to housing supply.
The main obstacle to a reform of this type is the dependence of state and local governments on residential property taxes, accounting for around 40% of their total revenues. This points to the need for a federal-state compact on tax reform that finances the abolition of inefficient taxes on residential property through changes in the GST rate or base. State and federal governments unwilling to consider such a compact are not serious about addressing housing affordability.
The solution to Australia’s housing affordability problem is to build more and cheaper houses. This can only be achieved by easing the tax burden on housing and not through the abolition of existing tax concessions.”
Are our pollies reading The Conversation, I wonder?