HIA wants debate on stamp duty, not negative gearing

The Housing Industry Association (HIA) has released an excellent report from the consulting firm of top Australian economist Chris Murphy on The Economic Impacts of Negative Gearing of Residential Property (see the news report Don’t slash negative gearing, says HIA). The report makes the important point that any tightening of negative gearing rules (e.g. discounting the amount that can be deducted) would have an adverse impact on the supply of rental properties, leading to higher rents. It also argues attention should move from negative gearing to a bigger issue affecting the housing market: stamp duty. As I’ve noted before on this blog, stamp duty is a highly inefficient tax and should be abolished (see Grattan joins fight against stamp duty).

Independent Economics has estimated that stamp duty costs the economy 71 cents for every dollar of revenue it raises. This loss results from investment in housing being discouraged, and from families being discouraged from moving, which reduces the efficiency of the labour market. Very large economic benefits – of several billions of dollars – would be achieved if stamp duty were replaced with more efficient taxes such as the GST or ideally a land tax (see the chart I’ve copied and pasted from the report below).

stampdutyreform

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6 Responses to HIA wants debate on stamp duty, not negative gearing

  1. But doesn’t stamp duty all fall on the seller anyway? In which case all the arguments against it being inefficient drop out, and you have to argue, in a rather convoluted way, that a market without stamp duties would suddenly make everyone more mobile – as if mobility is a magic efficiency pudding waiting around to be fed to the labour market.

    I mean if that were really the case, then improving labour mobility could be achieved by making housing far more expensive to buy, so that more households do the noble thing and rent in order to be more mobile for their potential employers.

    http://onlinelibrary.wiley.com/doi/10.1111/1475-4932.12056/abstract
    http://econrsss.anu.edu.au/~aleigh/pdf/StampDuty.pdf

    • Gene Tunny says:

      Cam, thanks for the comment and the links. The Leigh & Davidoff finding strikes me as odd. I expect stamp duty would be partly borne by the seller, but not completely.

      Regarding labour mobility, US and Australian studies have shown it’s an important way that labour markets adjust. The impact on labour mobility from removing stamp duty may not be huge, but I expect it would have some impact and that would be good for efficiency as people move to areas with better opportunities for them.

      • Jim says:

        Gene / Cameron

        I think in a way you are both right. Stamp duty (and real estate agent’s fees) create a pretty big transaction cost that may discourage mobility. For example, if I moved cities, I’d face a post tax transaction cost of about $30K ($40K+ pre tax). That adjust the tradeoff slightly.

        Cameron is also right. If you rent, it is easier to be mobile. There is a gel of a lot to be said for that.

        I also wonder about the motivations of the HIA in engaging this report and asking these specific questions. Of course they don’t want negative gearing scrapped as it may either: a) slow the development of new housing stock, or; b) discourage investors building such expensive houses as investors are making their decisions based on post-tax cash flow impacts. Clearly HIA don’t want anything to happen that will reduce building activity.

        Once a house is built, HIA is no longer interested. So scrapping stamp duty (where most of the revenue is raised through transfer of existing stock) is not really an issue to them.

  2. Gene Tunny says:

    Thanks Jim. I can see why HIA is concerned about stamp duty but agree it’s not as big an issue as others for them.

  3. Katrina Drake says:

    Stamp Duty does has one redeeming feature – it is very difficult to avoid.

    Although generally, I think stamp duty is inefficient, and should be abolished, but only in conjunction with a re-think of negative gearing.

    I feel that stamp duty certainly does restrain mobility. Many people consider their own home as a tax-free property investment, but paying stamp duty $30,000 to move closer to work is a dis-incentive, and results in longer commutes.

    Stamp duty is a dis-incentive for people from buying homes in regional areas when they are re-located looking for employment . Owner occupied homes are far better maintained, than rental properties generally. Hence the reason for all these expensive yet delapidated rental properties in regional areas.

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