How the State Labor governments are to blame for unaffordable housing

Gavin R. Putland

May 26, 2007

Summary

This paper shows that State and Territory governments could make housing more affordable, especially for renters and first-time buyers, by the following measures:

• Replace property stamp duties, betterment levies, and development/infrastructure levies with a site windfall tax (SWT) — that is, a tax payable on the transfer of a property and equal to a fraction of the real increase in the site value since the last transfer, with a deduction for any cost incurred by the taxpayer in contributing to that increase (e.g. infrastructure built by a developer). Allow the SWT to be negative in the case of a reduced site value. To avoid retrospectivity, allow a taxpayer disposing of a property acquired before the introduction of the SWT ("D-day") to pay tax as if the property had been sold and bought back (at market price) on the day before D-day. Share the SWT on each site with the responsible local government.

• Replace all recurrent property taxes, including municipal rates and any special-purpose levies that amount to recurrent taxes on property owners, with an incremental land tax (ILT) — that is, a site value tax with an inflation-adjusted site threshold, the initial threshold for each site being set so that the ILT payable on that site immediately replaces the recurrent property taxes on the same site or its improvements. In the case of an owner-occupied residential site, defer the ILT at a nominal interest rate until the next transfer of title, and cap it to some fraction of the real increase in the site value during the period of deferral (thus eliminating periodic rate bills for ordinary home owners). Share the ILT on each site with the responsible local government.

These reforms would not cause any loss of revenue, would not leave any individual taxpayers worse off or involve any element of retrospectivity, and do not (and never did) require any authorization or cooperation from Canberra. So there is not (and never was) any fiscal, political, or legal excuse for not implementing them. That they have not been implemented is therefore entirely the fault of the State and Territory governments.

Contents

1.  What is "affordability"?

1.1  An opportunity for mischief
1.2  Mostly not capacity to pay
1.3  Not lack of utility
1.4  Not simply low rents or prices
1.5  Not necessarily a cost for present owners
1.6  A prerequisite for full employment
1.7  Answer: A matter of competition

2.  Four crucial distinctions

2.1  Buildings vs. sites
2.2  Improved land vs. unimproved land
2.3  Developed land vs. raw land
2.4  Transaction taxes; holding taxes; transfer taxes

3.  Taming those development levies

3.1  The spin
3.2  The facts
3.3  The SWT as an infrastructure levy
3.4  Avoiding "retrospectivity"

4.  Taming the NIMBYists

5.  De facto building taxes

5.1  Untaxing buildings
5.2  No more rate bills for home owners

6.  Empirical evidence

Conclusion

Notes

Copyright

1.  What is "affordability"?

1.1  An opportunity for mischief

In a speech delivered in Edinburgh on July 17, 1909, a certain British MP declared:

A portion, in some cases the whole, of every benefit which is laboriously acquired by the community is represented in the land value, and finds its way automatically into the landlord's pocket. If there is a rise in wages, rents are able to move forward, because the workers can afford to pay a little more. If the opening of a new railway or a new tramway, or the institution of an improved service of workmen's trains, or a lowering of fares, or a new invention, or any other public convenience affords a benefit to the workers in any particular district, it becomes easier for them to live, and therefore the landlord and the ground landlord, one on top of the other, are able to charge them more for the privilege of living there.

Some years ago in London there was a toll-bar on a bridge across the Thames, and all the working people who lived on the south side of the river had to pay a daily toll of one penny for going and returning from their work. The spectacle of these poor people thus mulcted of so large a proportion of their earnings appealed to the public conscience: an agitation was set on foot, municipal authorities were roused, and at the cost of the ratepayers the bridge was freed and the toll removed. All those people who used the bridge were saved 6d. a week. Within a very short period from that time the rents on the south side of the river were found to have advanced by about 6d. a week, or the amount of the toll which had been remitted.

... [I]n the parish of Southwark about £350 a year, roughly speaking, was given away in doles of bread by charitable people in connection with one of the churches, and as a consequence of this the competition for small houses, but more particularly for single-roomed tenements is, we are told, so great that rents are considerably higher than in the neighbouring district.

The MP was Winston S. Churchill [1]. In view of his observations, what assurance can we have that higher wages — the constant demand of the Labor Party and the Trade Unions — will not be competed away in higher rents and home prices? (Except that only some workers will get the higher wages while others lose their jobs!) And what assurance can we have that more generous welfare payments — another obsession of the Left — will not suffer the same fate? Indeed, what assurance do we have that Labor's policies on wages and welfare are not intended, at least in part, to keep the Party in favour with the property lobby, which represents the interests of landlords and potential sellers?

But let us put the issue in more general and less partisan terms: If the political alignments are such that nothing can be done for renters and potential buyers unless there is a side-benefit for landlords and potential sellers, can anything be done at all? Or is housing affordability a zero-sum game in which renters and potential buyers, being the weaker side, are condemned to lose? To answer these questions, we must consider the ingredients of affordability and unaffordability, the balance between them, and the affect of each on established property owners.

1.2  Mostly not capacity to pay

According to Churchill, if workers in a particular area get more spending power (e.g. because they save on bridge-tolls or bread), rents in that area will rise to cancel the advantage. This claim was nothing new, but was simply a statement of Ricardo's law as applied to wages and residential rents. It is also an obvious consequence of locational arbitrage: if workers in a particular location have a particular advantage, more workers are induced to move there, and the consequent demand for accommodation pushes up rents in that location, until the rent premium cancels the initial advantage and stops the migration. The locational component of rent is the land rent or, more generally, the site rent — that is, a payment for the use of space. It does not include the so-called "rent" of buildings, because the value of a building is limited by its depreciated construction cost, and because the value of a site reflects the value of its location even if no buildings yet occupy the site.

Similar comments apply to the prices (i.e. lump-sum values) of sites, because these are capitalized rental values (and may be re-annualized as mortgage interest).

Even if the increase in spending power is not restricted to particular locations, the overall supply of land is still fixed. More importantly, from the viewpoint of private economic agents, the supply of land with a particular zoning, or within a particular distance of particular supplies or markets or infrastructure, is also fixed. So any increase in effective demand for land is not offset by a market-driven increase in supply. And of course no economic agent — worker or employer — can function without occupying space. Consequently, any increase in capacity to pay for that space is converted by the market into higher rents.

1.3  Not lack of utility

If the infrastructure in a particular location is run down or overloaded, rents and prices of land in that location may fall, but only because the utility of living or working on that land is reduced. This may make it easier to afford housing in that location, but does not make it easier to afford housing of given utility. Similarly, if land values rise in a particular location because of better infrastructure, this does not of itself make it harder to afford housing of given utility. It does not even imply that renters in that location are forced to move to a cheaper location, because better infrastructure often translates into greater capacity to pay rent. For example, new freeways or cheaper public transport make it possible to save money on commuting, while better coverage by public transport may make it possible to live without a car; in either case, the savings may be spent on accommodation. But even if renters must indeed move because their location goes up-market, that is better than not being able to afford accommodation at all.

1.4  Not simply low rents or prices

All else being equal, a reduction in rents or prices means an improvement in affordability. But all else need not be equal. If a reduction in rents or prices is caused by a loss of utility or (which may be the same thing) a loss of capacity to pay, that does not constitute an improvement in affordability. Similarly, if rents or prices somehow remain constant while utility improves or spending power increases, that is an improvement in affordability.

1.5  Not necessarily a cost for present owners

As an improvement in affordability does not necessarily mean a reduction in rents or prices, it does not necessarily come at the expense of incumbent property owners. If the economy grows, and if the benefit of that growth is shared between property owners, tenants, and prospective buyers, then the gain for tenants and prospective buyers amounts to an improvement in affordability; yet this gain is not a loss for current owners, but rather a share of the overall gain, of which current owners also receive a share. Thus, if the policy that improves housing affordability also promotes overall economic growth, housing affordability is not a zero-sum game.

1.6  A prerequisite for full employment

Indeed, housing affordability by itself promotes economic growth. To prove this, suffice it to note that:

• jobs cannot be created unless the employer can pay the rent or mortgage on the business premises out of the proceeds of the business; and

• jobs cannot be created unless the workers can pay the rent or mortgage on housing within commuting distance of those jobs, out of wages that the employer can pay out of the proceeds of the business.

The second condition implies that if housing is unaffordable, employment (and hence economic growth) will be restricted either because workers, on the wages offered, cannot afford housing where the jobs are available, or because employers, in view of the wages needed to pay for housing, cannot afford to offer jobs.

1.7  Answer: A matter of competition

In summary, affordability is an increasing function of utility and capacity to pay (which are sometimes the same thing), and a decreasing function of rent or price. But the combined effect cannot be determined by separately evaluating the changes in utility, in capacity to pay, and in rent or price, because these variables are not independent; an increase in utility or in capacity to pay, which by itself increases affordability, also tends to cause an increase in rent or price, which by itself reduces affordability. To see which effect is dominant, we must focus on the mechanism by which a change in utility or in capacity to pay is converted into a change in rent or price. That mechanism is competition. If the vacancy rate is low, prospective tenants and owner-occupants face much competition while prospective lessors and sellers do not; therefore the successful bidders will need to try hard, and will consequently pay high rents or prices relative to the utility of the housing and their spending power. If the vacancy rate is high, prospective lessors and sellers must compete for tenants and buyers while prospective tenants and buyers face little competition; therefore the successful bidders need not try very hard, and will consequently pay low rents or prices relative to the utility of the housing and their spending power. Thus we arrive at a short definition:

• Affordability of housing is the competitive advantage of renters and buyers relative to lessors and sellers.

In a context of overall economic growth, greater affordability can coexist with absolute gains for lessors and sellers provided that the gains of renters and buyers do not absorb all of the growth.

2.  Four crucial distinctions

2.1  Buildings vs. sites

A site is a piece of ground or airspace, including any attached rights to construct buildings on that ground or into that airspace, but excluding any actual buildings or other works. Buildings can be produced by private entities (individuals or firms). Sites cannot. Increasing the permitted building height on a residential lot or permitting finer subdivision may effectively create additional housing sites; but that is the prerogative of governments, not private entities. From the viewpoint of private entities, then, the supply of sites is fixed.

Taxation can reduce the supply of buildings by deterring their construction. But taxation cannot reduce the supply of sites, because taxpayers cannot create sites or eliminate them or move them into or out of the taxing jurisdiction.

As every home must include a habitable building or part thereof, any increase in the supply of residential buildings tends to strengthen the competitive positions of renters and buyers — that is, to improve affordability. So the preceding paragraph implies that for maximum affordability:

• Any taxes on residential property should be on sites rather than buildings.

This emphasis on buildings arises not because a building can be worth more than its depreciated construction cost, but rather because, for those who lack the means to add to the supply of buildings, a shortage of buildings is equivalent to a shortage of usable sites.

2.2  Improved land vs. unimproved land

Buildings, fences, walls, drains and other artificial structures on or under land are called improvements. The construction of all such items, like the construction of buildings, can be deterred by taxation. The improved value of a block of land includes the value added by improvements within the block. The unimproved value of the block excludes the value added by improvements within the block, but includes the locational value added by improvements on surrounding land — including roads, power lines and other services that pass by just outside the block.

For present purposes we may take the site value as being synonymous with the unimproved value [2]. In particular, the site value includes the locational value, because the party buying the block usually cannot afford to add locational value by "building up" the surrounding area.

But the scope of the "block" is relative. For the consumer buying a single lot in a new estate, the block is the single lot, and the adjacent roads and other services provided by the developer add to the locational value, hence the site value. But for the developer, the block is the whole estate, and the services provided by the developer are improvements to that block. That is, roads, footpaths, drains, sewers, underground power lines, water mains, and gas mains provided by a developer within an estate are, from the viewpoint of the developer, improvements.

2.3  Developed land vs. raw land

What a home builder or home buyer calls "land" is not raw land, but developed land, i.e. land that has been serviced by roads, footpaths, drains, sewers, power, water, etc., and which has been subjected to various government charges. To the extent that these services and charges are costs borne by developers as a condition of development, they must be recovered through the resale prices of developed land, or else development will become uneconomic. The implication is that, while taxes cannot reduce the supply of land in general, they can reduce the supply of developed land; this is possible because a developed estate is substantially improved from the developer's viewpoint, although a vacant lot in that estate is unimproved from the buyer's viewpoint.

These observations, however, tell us only that taxes can reduce the supply of developed land; they do not tell us which taxes actually do so.

2.4  Transaction taxes; holding taxes; transfer taxes

A transaction tax is one for which the tax liability is attached to an avoidable economic exchange (the "transaction"). A holding tax, on the contrary, is a periodic tax payable by the owner of an asset regardless of any transactions (e.g. rent payments) that occur during the period of ownership. In this paper, a transfer tax is one which is payable at the time of transfer (e.g. sale) of an asset, but which may or may not be apportioned to the transfer price; in form it resembles a transaction tax, but in substance it may be a transaction tax or a holding tax, depending on how it is calculated.

Obvious examples of holding taxes on property are municipal rates and State land taxes. If municipal rates are levied on improved values, they deter construction and extension of buildings and thereby restrict the supply of housing and damage affordability. But if they apply to site values only, they have no such effect; on the contrary, they encourage owners of vacant sites to build on the sites and seek tenants in order to cover the rate bill, thereby adding to the supply of accommodation, strengthening the bargaining position of tenants, and improving affordability. All this is consistent with the principle that any taxes on residential property should be on sites rather than buildings.

An obvious example of a transaction tax on property is a conveyancing stamp duty based on the sale price. This is also a transfer tax, as the tax liability is realized on transfer of the title. If the stamp duty is payable by the seller, the seller will try to add it to the price. If it is payable by the buyer, the buyer will try to subtract it from the price. In the end, the cost will be shared between the buyer and the seller in inverse proportion to their bargaining power, regardless of who actually "pays" the tax to the revenue office. But, as the tax is partly borne by the buyer, it damages affordability.

Only by resisting or delaying the sale can the seller shift any part of the burden onto the buyer (if the seller remits the stamp duty) or prevent the buyer from shifting the whole burden onto the seller (if the buyer remits the duty). In either case, it is by discouraging sales that the stamp duty affects affordability.

The same logic would apply even if stamp duty were levied on the site value only, because the stamp duty would still impede sales of sites; the fixed stock of sites is immaterial to the argument because it does not imply fixed turnover of sites.

But the same logic does not apply to holding taxes on sites, which do not target turnover but rather encourage site owners to build accommodation and seek tenants (or sell the sites). Thus we see that for maximum affordability:

• Holding taxes on sites are preferable to transaction taxes on sites.

Now suppose that the stamp duty payable on each transfer is some fraction of the real increase in the site value since the last transfer. (In practice, such a duty would be payable by the seller because the seller knows, or should know, the taxable site value at the time of acquisition, and is therefore able to work out the tax bill in advance, without relying on anyone else's honesty.) Let us call this arrangement a site windfall tax (SWT). The SWT, being payable on each transfer of title, is a transfer tax. But it has the substance of a holding tax in that the total tax paid on an asset over the long term is not proportional to the frequency with which the asset changes hands. If a transfer tax is a true transaction tax, a higher frequency of transfers over the same time frame means a larger total tax bill, and each transfer creates an additional liability; but with the SWT, a higher frequency of transfers merely divides the taxable capital gain into a larger number of smaller steps, and each transaction merely realizes an already accumulated tax liability. Moreover the SWT, by definition, cannot cause a property investor to make a capital loss, but merely reduces capital gains (and, if allowed to be negative, reduces capital losses due to other causes), whereas a true transaction tax can cause or increase a capital loss. Thus the SWT does not discourage sales in the ways that existing stamp duties do, and therefore does not damage affordability to the same degree. So we have our first specific proposal:

Replace property stamp duties with a site windfall tax (SWT), which is payable on the transfer of a property and equal to a fraction of the real increase in the site value since the last transfer.

3.  Taming those development levies

3.1  The spin

As building values are limited by depreciated construction costs, wide fluctuations in residential property values are mostly fluctuations in site values. This elementary fact is traditionally obfuscated by describing the state of the market in terms of "house prices" rather than "home prices" or "land prices". But in recent years there has been an outbreak of glasnost as the major property developers, through their mouthpieces such as the Housing Industry Association and the Property Council of Australia, have campaigned against the increasingly prevalent lump-sum infrastructure levies imposed on developers by State and local governments: the developers blame the levies for allegedly driving up prices of developed land.

3.2  The facts

While the developer of a new estate may provide considerable infrastructure within the estate — e.g. roads, footpaths, drains, sewers, power lines, water mains, and gas mains — governments or their corporatized utilities still need to provide the headworks that connect the internal networks to the outside systems, plus any incidental works to ensure that the systems have sufficient capacity to handle the new estate. The headworks and incidental works are the "infrastructure" that the development levies are intended to pay for.

In opposing these levies, the developers fail to tell us that the provision of infrastructure, by itself, increases the value of the serviced land. So even if the infrastructure were funded out of general taxes, first home buyers would still pay for it in the prices of housing lots and house-land packages.

3.3  The SWT as an infrastructure levy

If development levies raise land prices, they do so only by causing a bottleneck in the supply of developed land — by delaying development (or at least the resale of developed lots) until such time as the developers can recover the levies. This sort of bottleneck cannot be prevented by funding infrastructure out of general taxes, because that would attach a fiscal cost to every development application so that governments would be less likely to approve development. But it can be loosened by replacing the development levies with an SWT on the residential lots resold by the developer, provided that the cost of providing the internal infrastructure and acquiring the land between the lots (if that land is to be transferred to the public domain as a condition of development) is allowed as a deduction against the SWT base; the SWT will then tax the unearned gains in site values due to the headworks, incidental works, and approval of development, but will not penalize the actual work of development, and cannot cause an otherwise profitable development to become unprofitable. Admittedly, a component of the uplift in lot values will be due to the infrastructure provided by the developer between the lots, and the SWT will unfortunately take a fraction of that component; but this is a minor imperfection by comparison with existing levies which bear absolutely no relation to uplifts in site values, including those due to public works, and which can cause otherwise profitable developments to become unprofitable.

But would the SWT be sufficient to pay for the headworks and incidental works?

The market cannot value the benefit of infrastructure except through the price of access to the infrastructure: market value equals price of access. But the price of access has two components: the obvious one, namely the charges (fares, tolls, etc.) payable for actual use of the infrastructure; and the hidden one, namely the price of living or doing business in a location when the service provided by the infrastructure is available, as opposed to a location where it is not available. "Location, location..."

The "hidden" component of the price of access to infrastructure is the uplift in site values caused by provision of the infrastructure. Moreover, the benefit of the infrastructure to the public (as opposed to the provider, i.e. the government) is net of charges for actual use; that is, it is equal to the "hidden" component of the price of access:

• The net benefit of infrastructure is the total uplift in site values caused by the infrastructure.

It follows that the cost/benefit ratio of an infrastructure project is simply the cost/uplift ratio. If the "cost" is understood as the cost to the provider, this is also net of charges for actual use, so that the cost/uplift ratio is the fraction of the uplift that must be recovered through the tax system in order to pay for the project. If the project passes a cost-benefit test, this fraction is less than 100%. If the necessary fraction is reclaimed through the SWT, the project is funded.

More generally, if a certain fraction of every uplift is reclaimed through the tax system (e.g. via the SWT), infrastructure projects whose cost/benefit ratios are equal to that fraction will be self-funding, while projects with lower cost/benefit ratios will be more than self-funding, yielding a net contribution to revenue which may be used for, e.g., tax cuts, while the remainder of the uplifts accrues to the property owners, ensuring that they gain in absolute terms in spite of any associated improvement in housing affordability.

In short, a tax based on unearned uplifts in site values can finance any infrastructure that is worth building. We have already seen that such a tax has the substance of a holding tax even if it is payable on transfers, and that holding taxes are preferable to transaction taxes for the purpose of affordability. We may therefore state as a guiding principle that:

• All taxes for the funding of infrastructure should be based solely on unearned uplifts in site values.

The SWT taxes all unearned increases in site values howsoever caused. These include not only increases due to market trends or infrastructure, but also increases due to rezoning, which some jurisdictions (including the ACT) tax by means of so-called betterment levies. So let us modify the SWT proposal as follows:

Replace not only property stamp duties, but also development levies and betterment levies, with the SWT.

Furthermore, as the taxes to be replaced by the SWT are imposed by local and State governments, both of which have some responsibility for infrastructure, it would be appropriate to:

Share the SWT on each site between the responsible local and State governments.

3.4  Avoiding "retrospectivity"

If every property sold after a certain day ("D-day") pays SWT on the real increase in the site value since acquisition, even if acquisition occurred before D-day, then the continuing turnover in the property market will cause a steady stream of SWT revenue to start immediately, allowing the immediate abolition of existing property-transfer taxes. That turnover will also ensure that uplifts due to infrastructure projects are immediately reflected as increases in revenue. But vendors who have received large uplifts before D-day will pay more tax on those uplifts than they would have paid under the old system, and might therefore allege that the SWT is retrospective. To avoid this, let us modify the SWT as follows:

Allow a taxpayer disposing of a property acquired before the introduction of the SWT ("D-day") to pay tax as if the property had been sold and bought back (at market price) on the day before D-day.

Under this option, any property vendor who pays more tax than would have been payable under a continuation of the old system does so solely because the site has increased in value after D-day. The exercise of this option does not affect the financing of infrastructure, because uplifts caused by infrastructure after D-day are still immediately reflected in higher SWT receipts through normal market turnover.

4.  Taming the NIMBYists

Not-In-My-Back-Yard campaigns against proposed housing developments restrict the supply of housing and inflate prices and rents. To the extent that such campaigns are motivated by fear of property devaluations caused by noise, traffic, loss of views, increased supply of accommodation, or (in the case of more affordable housing) prejudice against the kinds of neighbours that the new housing will attract, the motive can be neutralized by promising compensation for any devaluations. If the SWT is allowed to be negative, it gives partial compensation. Because the overall trend in site values is upward, a 100% SWT rate on negative windfalls ("wipeouts") could be funded by a less-than-100% rate on positive windfalls, giving complete compensation for devaluations. But even without that ultimate refinement, the SWT would reduce the ferocity of NIMBY campaigns.

5.  De facto building taxes

5.1  Untaxing buildings

As noted above, municipal rates levied on improved values discourage building and damage affordability. The same is true of all other recurrent taxes that tend to increase with the quantity of accommodation, whether such taxes are called fire levies, ambulance levies, garbage collection levies, water access levies (as distinct from consumption charges), sewerage access levies, toilet pedestal taxes, or by any other names. Some such taxes are imposed by local governments, and some by State governments. All amount to de facto holding taxes on buildings.

The supply of buildings, and therefore the affordability of accommodation, would be increased if all these taxes were shifted onto site values. Hence the following proposal:

Abolish the existing recurrent property taxes, including municipal rates and any special-purpose levies that amount to recurrent taxes on property owners, in favour of an incremental land tax (ILT) — that is, a holding tax on the margin by which the site value exceeds an inflation-adjusted threshold which is allowed to vary from site to site, the initial threshold for each site being set so that the ILT payable on that site immediately replaces the revenue from the abolished taxes. Share the ILT on each site between the responsible local and State governments.

The method of calculating the threshold ensures that there are no losers in the transition from the old system to the new. This is obviously crucial for political feasibility.

If the ILT were allowed to be negative, it would provide partial compensation (in the form of a periodic payment) to owners of devalued sites who continue to hold those sites. This would be a further defence against NIMBYists.

5.2  No more rate bills for home owners

For most taxpayers, income taxes are administered on a pay-as-you-earn basis, and consumption taxes on a pay-as-you-spend basis. In contrast, recurrent property taxes tend to appear as periodic bills, so that the cash with which to pay them is not automatically available. The need to set aside cash for the tax bill is especially likely to annoy residential owner-occupants, for whom the taxable property value is not realized as an obvious cash flow.

To avoid this political liability, the ILT can be modified as follows:

In the case of an owner-occupied residential site, defer the ILT at a nominal interest rate until the next transfer of title, and cap it to some fraction of the real increase in the site value during the period of deferral.

As the ILT would replace municipal rates, this provision would eliminate periodic rate bills for ordinary home owners.

The deferred ILT, together with the SWT, would greatly improve the affordability of homes for first-time buyers. If owner-occupants can sell their old homes without paying any tax, they can spend the entire proceeds — including unearned capital gains — on new homes, and thereby outbid first-time buyers who have no capital gains to spend. A transfer-tax liability for sellers would automatically reduce the imbalance without specific tax concessions for first-time buyers.

6.  Empirical evidence

When looking for statistical evidence of the effects of taxation on housing affordability, what variable should we use as a measure of affordability? We have already seen that affordability does not simply mean low rents or prices; indeed, if the same policies that enhance the competitive positions of renters and buyers also encourage the provision of infrastructure, which raises rents and prices, affordability will be paradoxically correlated with higher nominal rents and prices. We have also seen that affordability does not simply mean low returns to owners, high capacity to pay, or high or low utility. As some of these concepts are vague, any combination of them would be correspondingly vague.

Affordability ought to mean a low incidence of homelessness. But for the purpose of correlating affordability with tax policy, homelessness is too susceptible to non-tax influences. For example, if one jurisdiction criminalizes street-dwellers as "vagrants" (or worse), it will drive its homeless people into other jurisdictions and thereby make its own rate of homelessness look good, without doing anything about affordability of housing. And if another jurisdiction (or some institution within it) treats the homeless more kindly, it may attract homeless people from other places and thereby make its own housing policies look worse than they are.

These difficulties disappear if we shift attention from the end to the proximate means. To improve affordability, by definition, is to increase the competitive advantage of renters and buyers relative to lessors and sellers. This in turn is the inevitable result of increased construction of accommodation. So any correlation between tax policy and construction is strong evidence of a similar correlation between tax policy and affordability of housing.

It should be obvious that the SWT and the ILT, by shifting taxes off buildings, would encourage construction. That the same reform would shift a tax burden onto sites does not invalidate the conclusion, because sites cannot be produced by taxpayers, but can be pushed onto the market (and thereby made available for construction or immediate occupation) by holding taxes. Indeed, numerous empirical studies of municipal rating systems have confirmed that shifting property taxes off buildings and onto sites causes an increase in construction. A sample of the results may be found in Section 3 of reference [3]. The conclusion of these studies is not surprising. What should be surprising is that so many studies were considered necessary. In any other debate about taxation, one would not be challenged to prove that taxing a product reduces its production; that would be common ground.

Conclusion

Because of the correlation between utility or spending power on one hand, and rents or prices on the other, affordability of housing is to be understood not in terms of utility, spending power, rents, or prices, but rather in terms of the competitive advantage of renters and buyers relative to lessors and sellers.

Affordable housing is a prerequisite not only for reducing homelessness and housing stress, but also for reducing unemployment.

For optimal affordability of housing:

• All taxes on residential property should be on sites rather than buildings;

• All taxes on sites should be holding taxes rather than transaction taxes; and

• All taxes for the funding of infrastructure should be based solely on unearned uplifts in site values caused by (among other things) the infrastructure.

But if a policy on affordable housing is to be politically feasible, it must avoid creating a class of losers.

Applying these principles to Australian conditions leads to the following prescriptions:

• All local and State transfer taxes on property should be replaced by a single site windfall tax (SWT) proportional to the real increase in the site value since the last transfer, with a deduction for any cost incurred by the taxpayer in contributing to that increase; and

• The bewildering array of recurrent property taxes should be replaced by a single incremental land tax (ILT) — that is, a recurrent tax on site values, with the threshold for each site calculated so that the recurrent tax payable on the site does not change in the transition to the new system.

Notes

Copyright © Gavin R. Putland (http://grputland.com). Permission is given to copy and distribute this entire document verbatim in any medium provided this notice is preserved.