HOUSING AFFORDABILITY (CONT’D): “STOP THE WASTE”, MR ABBOTT?

Thanks to Dr Gavin Putland for this suggestion:-

Could cheaper housing pay for Tony Abbott’s promises?

Housing is unaffordable because there isn’t enough of it where it is needed (that is, where the jobs are!) or because too much of it is held off the market while the owners wait for “capital gains”. In either case, the rental value of the underlying land is not fully realized as rent paid to a landlord, or as earning opportunities enjoyed by an owner-occupant (“imputed rent”), but is wasted because the required housing has not been built or isn’t fully occupied.

This waste is encouraged by the tax system. Why spend any of your money to build apartments and pay tax on the rental income, if you can spend all your money on vacant land and pay tax on only half the “capital gain”? Why live in the house you own, when only absentee owners are allowed to claim “negative gearing”? Why build a dwelling to let, if you can claim “negative gearing” by simply buying an established dwelling? Why keep your investment home occupied, if you can claim “negative gearing” by making the home “available” to let while demanding too much rent or being too picky about tenants?

One way to “stop the waste”, as Tony Abbott might say, is to tax wasted land as if it were not wasted, so that the owners can’t afford to waste it. For income-tax purposes, let every non-owner-occupied property be deemed to be earning an annual rent of at least 7.5% of the site value — that is, 7.5% of the value of the land and airspace, excluding buildings. If the property earns more than this Minimum Deemed Rent (MDR), it is taxed on what it actually earns; if it earns less (or nothing at all), it is taxed on the MDR.

Because the MDR ignores values of buildings, it does not penalize construction, and is not unduly ambitious when expressed as a rental yield (7.5% of the site value is a lower percentage of the total value). If your property is fully developed and fully let, it will already be earning more than the minimum rent, so the MDR won’t affect you. But if your property is grossly underdeveloped or underoccupied, the MDR will increase your taxable income, hence your tax bill. No longer will you game the “negative gearing” rules by demanding too much rent or being too picky about tenants, because you’ll pay tax on the minimum rent whether you get it or not.

Under no circumstances will it be possible to “pass on” the MDR in higher rents. The MDR imposes a tax penalty for not having a tenant, forcing you to reduce the asking rent to attract a tenant. Until you get a tenant, there is no one to whom to pass on the penalty; when you have a tenant, there is no penalty to pass on.

If you are land-rich but income-poor, any additional taxable income due to the MDR will fall in a low tax bracket. If your tax bill still isn’t low enough, you really ought to get a tenant or several.

I note in passing that if every mortgage were deemed to be yielding at least a certain minimum rate of interest for tax purposes, lenders would have an incentive to reduce the principal on non-performing mortgages, so that the Minimum Deemed Interest would not lead to bigger tax bills than the mortgages are worth. This simple and permanent tax reform could avoid the need for more radical temporary measures such as jubilees, court-ordered cram-downs and eminent domain.

To estimate how much revenue the MDR would raise, let us suppose (conservatively) that rural land is already fully utilized, so that the additional revenue would come from Australia’s residential and commercial land, whose total value is about $3 trillion. If 1/15 of that is unoccupied (to say nothing of how much is underused), that’s $200 billion of site value, on which the MDR (at 7.5% per annum) would be $15 billion per annum. At a marginal tax rate of 30%, the extra revenue would be $4.5 billion per annum. That may not be enough to fill the black hole left by Mr Abbott’s middle-class welfare, corporate welfare and tax cuts. But every little bit helps.

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