Dr Terence Dwyer, Visiting Fellow, Asia-Pacific School of Economics and Management, Australian National University

Executive Summary

  • Land tax has long been endorsed by economists as a perfectly efficient tax.  It also has long roots in Australian and Victorian history.
  • A basic argument for land tax is that it is the one tax base that cannot flee from the State in response to a tax.  Capital and labour can emigrate – land cannot. 
  • Nor can land tax be shifted as an extra cost to business.  Ultimately, land tax must be borne by the landholder at the time of introduction. 
  • Once a land tax has been established, any purchaser of land discounts the price to allow for the tax and, in that sense, it is not a burden on anyone other than the owner at the time of introduction.
  • Land tax is a uniquely efficient way of recapturing the benefits that Government services or infrastructure may confer on land values.
  • Hong Kong, Queensland and New South Wales have historically been able to surpass Victoria’s economic progress by using land revenues and land tax to keep other taxes down.   Inter-State and international tax competition is becoming ever more significant and the need to use a tax base that cannot run ever more important.
  • Where a land tax is used to cut other taxes on mobile bases such as capital or labour, it is even possible that land holders may gain from the tax.  Not only do they benefit as workers or capital owners, the reduction of other taxes can entice capital and labour into the State, bidding up land values.  A “win-win” situation or “free lunch” is possible when an efficient tax replaces less efficient taxes.
  • Reform can bring lower land tax rates up and re-examine exemptions.  Public support for reform may be encouraged by legislating to ensure that the land revenue can only be used to finance public infrastructure and reductions in other taxes.  In particular, cuts to footloose financial taxes and stamp duty on land conveyances may be considered.   


 “To tax and to please, no more than to love and be wise is not given to man.” – Edmund Burke

Edmund Burke’s sober reflection is a reminder that in any tax reform there are winners and losers.  However, while the reform of an existing tax system is perhaps more difficult than the simple introduction of a new tax, it does have the advantage that, in abolishing or reducing other taxes, one may please more people than those who are offended by the new tax. 

It is often said that in economics there is no such thing as a free lunch.  This is not always true.  Where an economic change allows for greater efficiency and productivity, it is possible to come out ahead, and ensure that the gains of the winners exceed the losses of the losers. 

In tax reform it is, therefore, vitally important to ensure that the tax being introduced or increased is more efficient than those which are being reduced or abolished.  Not all taxes are equally efficient.  Many have long since gone by the wayside – the 18th century Window Tax for example.

The basic principle of an efficient tax is that it should raise the revenue required without distorting the decisions of producers or consumers. 

A tax should thus be unavoidable in both the economic and legal senses.  Neither a change of actual conduct nor a shuffling of paper should alter tax liabilities.  Taxes such as conveyance duties which can be avoided or deferred through economic responses, such as delaying transactions, or legal responses, such as indirect changes of ownership, are therefore not efficient. 

A long line of economists of impeccable standing have long supported the merits of a land tax. In recent years the concept of land value taxation  has received some noteworthy endorsements.  Not only Adam Smith, John Stuart Mill and others in the past, but modern economists such as William Vickrey, Milton Friedman and Martin Feldstein, the Chairman of President Reagan’s Council of Economic Advisers, have all accepted that a land tax is a theoretically ideal tax. 

Adam Smith wrote “Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own.  Though a part of this revenue should be taken from him in order to defray the expences of the state, no discouragement will thereby be given to any sort of industry.  The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before.  Ground-rents, and the ordinary rent of land, are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them. …. Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the Sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon. ….  Nothing can be more reasonable than that a fund which owes its existence to the good government of the state, should be taxed peculiarly, or that it should contribute something more than the greater part of other funds, towards the support of that government.”[1]

Feldstein (1976) p 96 acknowledges a tax on unimproved land values “involves no distortion” and is clearly efficient.  He suggests the reason for non-adoption is that such taxation may seem inequitable because it discriminates against individuals holding land.[2]   This is an equity rather than an efficiency argument and is not relevant where the tax revenue is used to finance infrastructure which adds value to land.   Professor Milton Friedman has stated “taxes would be best placed on the land, and not on improvements.”

Professor James Tobin of Yale has stated that “I think in principle it is a good idea to tax unimproved land, and particularly capital gains (windfalls) on it.  Theory says that we should try to tax items with zero or low elasticity, and those include sites.”

Professor Paul Samuelson of MIT has stated “Pure land rent is in the nature of a ‘surplus’ which can be taxed heavily without distorting production incentives or efficiency.”

On November 7, 1990, thirty prominent United States economists including Nobel prize winners James Buchanan, Franco Modigliani and Robert Solow wrote to Michael Gorbachev urging that, in moving to a market economy, the Soviet Union raise its revenue from land.  Among the signatories were William Vickrey, former President of the American Economic Association, Lowell Harris Professor Emeritus of Economics at Columbia University, Carl Kaysen, Professor of Economics, Massachusetts Institute of Technology, William Baumol, Professor of Economics at Princetown University, Zvi Griliches, Professor of Economics at Harvard University and Richard Musgrave, Professor Emeritus of Political Economy at Harvard University.  

These economists wrote that “It is important that the rent of land be retained as a source of government revenue.  While the governments of developed nations with market economies collect some of the rent of land in taxes, they do not collect nearly as much as they could, and they therefore make unnecessarily great use of taxes that impede their economies – taxes on such things as incomes, sales and the value of capital. …  The component of land value that arises from community growth and provision of services is the most sensible source of revenue for financing public services that raise the rental value of surrounding land.  These services include roads, urban transit networks, parks, and public utility networks for such services as electricity, telephones, water and sewers.”

What these American economists urged in 1990, Australia had already invented over a hundred years ago.  As Scheftel wrote “To Australasia, the Western world owes, among numerous experiments in social science, the system of taxation on the unimproved value of land.”[3] 

                                                                  Tax Theory

                                                 The Three Factors of Production

To see why economists have long regarded land taxation as uniquely efficient, one must remember that every good or service, that is, all income, represents the fruits of the three factors of production – land, labour and capital. 

By land is meant all natural resources, including the site value of unimproved land and the other free gifts of Nature such as water, minerals or the electromagnetic spectrum. 

By capital is meant all man-made means of production, such as buildings, machines and physical infrastructure.  As Adam Smith pointed out, all incomes resolve themselves into the rent of land, the profits of capital or the wages of labour.  Often, as in the case of a sole trader operating from his own premises, the three types of income will be enjoyed by him without any observed itemisation.  Nonetheless, in an economic sense, he is deriving the three forms of income in running his business.

Thus all taxes fall on the returns to land, labour or capital.  One of these factors of production, capital, can be allowed by its owners to run down or they can remove it from the State.  Another, labour, can emigrate or cease to work.  Only the first – land – cannot run.

This basic feature of land, its immobility, lies at the centre of the classical economic argument for land taxation.  If one has to tax, it is far better to aim at a target that cannot move. 

The Concept of the Lump Sum Tax

Economists regard a lump sum tax as uniquely efficient.  The idea is that the taxpayer has no choice but to pay.  Nothing that he does can eliminate the tax liability.  Often, in text books, a lump sum tax is portrayed as a fixed money sum (e.g. not calculated by reference to income or assets) which the taxpayer has to pay.  This an example of a lump sum tax, but the idea is a little broader than that. 

The real idea of a lump sum tax is that the tax liability does not change with the behaviour of the taxpayer.  For example, the rates or taxes on my land may change with its value, but I cannot change the market valuation of my land.  A  rate or tax on my unimproved land value is thus an efficient lump sum tax.  There is nothing I can do to avoid the tax.  There is nothing I can do to alter the amount of the tax.  Not even bankruptcy can avoid it.  The tax liability is fixed by external forces and can be enforced against the land if I try not to pay. 

Can land tax be shifted?

It might be said that a land tax can be shifted by selling the land.  That is not correct.  A person who buys the land knows that there is an annual tax liability which goes with the land.  The price the purchaser pays to the seller wishing to avoid the tax will therefore be discounted to take account of the annual tax burden on the land.  

This is a virtually unique aspect of a pure land tax.  Once imposed, it stays with the land it is imposed on and cannot be avoided. 

Any attempt to avoid such a tax creates a one-off loss for the seller.  The purchaser, by allowing for the tax, does not pay the tax at all – either then or in the future.  In that sense an known and long established land tax is said to be a “burdenless tax”.  Everyone who has bought land has bought knowing what the tax is and has allowed for it.  Every future buyer knows about it and will allow for it.  It is therefore no more a burden than buying into a leasehold knowing that one has to pay rent to the head landlord. 

Can the tax be shifted to a lessee? 

If a land tax cannot be shifted or avoided by selling the land, some may ask whether it can be, if not avoided, at least shifted to lessees and tenants.  The argument is often put (by business people, not by economists) that a land tax can passed on to the tenant and becomes an extra cost of production.  It is said to act thereby as a disincentive to business activity.  In particular, attention may be drawn to the common practice, in commercial leases, of requiring the tenant to pay all taxes and charges, including land tax. 

Taking a long run point of view, it is important to ask what the value of land represents.  The value of land represents the flow of rents it can command.  The amount of those rents in the future represent the increased profitability, over and above the norm, which capital or labour may earn using that site.

A tenant is willing to pay rent to a landholder because by using that land he can be more productive than elsewhere.  Now suppose that the landholder tries to make the tenant, in the long run, pay extra for the land.  By definition, the tenant’s labour and capital are no longer earning more than the norm they could get elsewhere.  The tenant will, therefore, in the long-run quit and look for other land on which to ply his trade. 

It may be argued that he will not leave because other land is also subject to land tax which the tenant will have to pay.  But there is always other, less valuable, land.  By moving there he would face a lower land tax liability.  Thus, by shifting to lower valued land, the tenant, unlike the landholder, can reduce or eliminate any impact of the landlord’s attempt to pass the tax on to him.  The tenant can move to avoid the tax, the landholder cannot.

To put it another way, those who assert that a land tax can be passed on to the tenant in the long-run are really saying that landholders are so stupid as not to be extracting the maximum rent they could from the tenants in the first place.  Such a proposition has only to be stated to see its falsity.

In the short run, however, there can be a shifting of an increase in a land tax burden to the tenant.  Contractual obligations cannot be terminated or varied at will, without explicit statutory authority (which is sometimes provided in taxing legislation).  In the case of a long term fixed lease eg. a thirty year leasehold at a fixed rent of $10,000 a year, the tenant may be forced by contract to bear part of the burden of the land tax.  He may, for example, be subletting further to other tenants on short leases.  He shares in the burden of the land tax with the landholder just as he shares in the rents to be obtained from the short lessees.  In such cases, a long tenant is really like a co-owner of the land. 

But other tenants, subject to variable rents by the landholder, have no economic interest in the land.  For them to be locked into not only variable rents but increased taxes at the instance of the landholder is to allow a short-run shifting of the tax.  Thus in designing a land tax, it is logical to apportion the unimproved value between owner and long-term lessees who have an interest in the land and apportion the tax liability accordingly, with provision for rent re-negotiation if it sought to pass on the tax.  For example, a 99 year lease on a peppercorn is almost worth as much as a freehold and would be taxed accordingly but a 3 year lease with annual rent reviews is of little market value and may be ignored. 

Another way of seeing why, in the long run, a land tax cannot be passed on to tenants is to look at the concept of the real cost of production.  The reason for taxing land is the same reason for buying it – they aren’t printing any more of it.  Land is in fixed supply, and its maker is not charging for it.  Unlike labour and capital there is no human cost of production involved.  Thus land acquires value not from its cost of production but from competition from its scarcity value.  The value of land is determined by the demand for it and by nothing else. 

So rent does not enter into the price of output as a cost of production – it is the other way round.  The value of the output in excess of the remuneration of capital and labour required to produce it flows to the landholder.  Potential users bid against each other only so far as they can generate a surplus over labour and capital costs from using the land.

A demonstration that rent is a price determined by demand, not a real cost of production, occurs when shops are empty in a recession.  Landlords have no choice but to cut their rents, whether in the central business district or elsewhere, or leave their premises empty.  This phenomenon shows that landlords are not free to simply increase rents – if they could, they would already be doing it. 

Short and long run effects of reliance on land tax.

An abstract discussion of tax theory is not very interesting.  It is more interesting to see what happens in practice when land taxes or land revenues are used to keep other taxes down. 

Around the turn of the century, New South Wales placed higher reliance on land taxation and moved to site value rating both to free up land for settlement and encourage the rebuilding of urban slums.  Since Federation, New South Wales has overtaken Victoria in terms of economic activity, population and general prosperity. 

The progress of Queensland has been more remarkable.  By ensuring, whether through coal freights or other quasi-royalty devices, that the Crown extracted  rent for its mineral resources, successive Queensland governments have been able to keep other taxes, such as stamp duties and financial taxes, below the levels of other States. 

The progress of Brisbane compared to Sydney and Melbourne has been truly remarkable.  As communications have improved and technology developed, the ability of transactions or labour and capital to move has increased.  The exodus of Victorians to Queensland following Queensland’s abolition of death duties is another example of the importance of not having avoidable taxes where one has open borders.

Internationalisation of tax competition

What has been said for competition within Australia also increasingly applies outside Australia.  Recent pressure to reduce stamp duty on share transactions came from Hong Kong.  As Australian companies are listed overseas and Australians can invest in the shares of overseas companies or bank overseas, the ability to tax financial transactions becomes less. 

Internationalisation of tax competition means that labour and capital are increasingly free to shift the burden of any tax which it is proposed to be put upon them.  The theoretical observation that there are only three factors of production – and two of them can run – becomes of profound political and economic significance for the development of a local economy.  For example, what would happen if Victoria abolished land tax and increased its stamp duties on share transfers above other States?  Would it not find that Melbourne lost out completely to Sydney as a financial centre?

Who Bears a Land tax?

So far land tax has been considered in the absence of an existing tax system.  It is therefore worthwhile to consider in more detail who bears a land tax. 

A land tax in isolation

The introduction of a new tax on land in isolation really amounts to an assertion by the Crown of a claim to a larger part of the rent for land.  Therefore the market value of land tends to fall.  The Crown is taking more of the rent and the private landholder is left with less.  The true economic rent of the land, of course, remains unchanged but the private landholder is getting less of it.  The fall in market value reflects the value of the reduced private share of rent. 

This process of private land values falling in response to the imposition of a land tax points to a set of identifiable losers.  From the Government’s point of view, if a land tax does lead to a slow down in land value speculation or even a fall in land values there are some advantages.  For example, there is the advantage that the cost of resuming land for public works is reduced.  A land tax thus not only raises revenue, but reduces the cost to the Treasury of necessary resumptions for roads, rail or other public infrastructure. 

It can also be shown that an increase in a land tax increases the cost of holding land out of production.  This squeezes speculative activity and forces speculators to make land available for development.  This is of some significance for employment and economic activity. 

Landlord and tenant

In the long run as noted, the incidence of a land tax is upon the landholder (which includes long lessees on fixed rents).  In the short run, an increase in land tax may be passed on to lessees but that will cease to apply once contracts are renegotiated.

Distortions under a graduated scale or used based land tax system

So far the discussion has assumed a simple uniform land tax with no exemptions based on different uses.  If, as is the case, a land tax has a graduated rate scale there is a temptation to break up parcels.  Indeed parcel splitting was the first response of graziers to the Colonial and Federal land taxes which used  graduated rates to penalise the larger pastoral holdings. 

Parcel splitting led to the first anti-avoidance legislation under the colonial  Land and Income Tax Acts.  In the modern context, parcel splitting is likely to occur when CBD sites are strata titled or subdivided.  Such examples show that it is desirable to move to a uniform tax rate for land tax. 

The extent of such responses to a graduated rate scale does not, however, undermine the broad arguments in favour of the economic efficiency of the land tax.  Parcel splitting is often not possible and involves costs. 

Similarly where a land tax system exempts certain uses and not others distortions can arise.  For example, if agricultural land is exempt while urban land is not there could be pressure for rezoning. 

Again, however, the distortions here should not be exaggerated.  Compared to other taxes, the scope for manipulation of either parcels or land use is relatively limited.  Nonetheless, as a broad principle, the aim of a land tax should be to have a uniform rate and limit exemptions only to governmental or other quasi-public functions.  In practice further exemptions are often granted.

Who bears a land tax when other taxes are cut?

It is often a complaint of tax reformers that they do not start with a clean slate.  But this can be an advantage.  Where there are bad taxes discouraging the productive use of labour and capital, tax reform can deliver bonus dividends.  It is possible to have a “win-win” situation. 

Suppose, for example, that taxes on labour, such as payroll tax, or capital, for example, share duties or financial institutions duties, are cut.  Victoria then becomes a lower cost jurisdiction for business activity.  As business seeks to relocate activity in Victoria, the demand for Victorian land must rise. 

For example, if Victoria had no payroll tax or financial taxes relocation of foreign banks from Sydney to Melbourne would drive up the demand for office space in the Melbourne CBD.  Such an induced demand for Victorian land  driving up rents can offset the adverse impact of a land tax on landholders. 

Thus a shift from taxes on labour or capital to land tax may even, to some extent at least, be in the landholder’s best interests.  This is over and above any benefit landholders may gain in other capacities – for example, a bank or superannuation fund which is a landholder may gain benefits in the first place from reduction or abolition of financial taxes or conveyance duties. 

Which taxes should be cut to produce the best dividends? 

Once it is seen that there is a possibility of a “win-win” situation in shifting from other taxes towards a land tax, the next question is which taxes could be the first to be cut.  Bearing in mind the basic principle that all taxes fall on land, labour or capital, the answer is that the taxes on the most footloose activities should be cut first. 

Labour is less mobile than electronic transactions.  Abolition of taxes on mobile transactions such as financial transactions or share conveyances would be among the first candidates for abolition.  In the case of such footloose activities there is the greatest chance that the revenue lost from abolition of taxes would be  compensated for by an offsetting induced increase in other revenue.  For example, the land tax base or other bases such as payroll tax, as employment in the financial sector moves to Melbourne. 

In the longer run taxes on labour should also be considered for reduction so that Victoria’s manufacturing base is competitive with other States as well as internationally. 

Who bears a land tax when the revenue is used to provide benefits? 

Just as using a land tax to cut other taxes can offset any adverse effect on landholders, so the same is true where land tax revenues are used to provide benefits to land. 

This can be seen from the origins of the word “rate.”  Originally the idea behind a rate was to secure a pro rata contribution from landholders towards infrastructure which provided common benefits – such as a dam, a road or a bridge.  Rates were often voted for by landholders in their collective interest.  Similar phenomena can be observed today when agricultural co-operatives levy their members for rates to contribute to weirs etc. 

The ability of land to capture external benefits has long been observed.  Sir Winston Churchill, for example, 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 to the ratepayers the bridge was freed and the toll removed.  All those people who used the bridge were saved six pence 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 six pence a week, or the amount of the toll which had been remitted.

And a friend of mine was telling me the other day that, in 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.”[4]

A more recent example of how infrastructure provision benefits landholders emerged in discussion on the Very Fast Train (VFT) linking Sydney – Canberra – Melbourne.  The promoters argued that the VFT would be economic if account could be taken of its beneficial effect on land values due to improved communications.  The private sector promoters argued there should be some  means for them to recapture the benefits they were creating for landholders. 

Where a State provides infrastructure such as roads, railways, water, sewerage, etc and funds it through a land tax on site values it is really acting in the same way as an improving landlord.  A land tax used to service land through the provision of beneficial infrastructure need not adversely affect landholders – quite the reverse. 

As Adam Smith observed, it is often desirable that the sovereign undertake works which, while of the greatest public benefit, are not sufficiently worthwhile for any individual.  This is commonly the case with land and infrastructure.  With divided ownership no one landholder finds it sufficiently in his interest alone to pay for the costs for major infrastructure. 

The concept that a land tax need not represent a burden if the tax is used to provide benefits to land or landholders has led modern economists to construct mathematical examples of a “Henry George Theorem”.  Under certain theoretical assumptions, if tax revenue from a land tax is spent on benefits only available in the jurisdiction where the tax is raised, the private value of land need not fall at all.  This is because, by providing local benefits, the tax induces such a sufficient offsetting demand for the land from capital and labour outside the jurisdiction that rents are bid up in response. 

The theoretical insight provided by the “Henry George Theorem” points to a genuine “free lunch” or “win-win” scenario.  The practical relevance of such scenarios can be seen in the United States where local municipalities have wide taxing and spending powers in relation to education.  In jurisdictions where property taxes are high but educational services are of higher quality, property values are not adversely affected by the imposition of local property taxes – people want to move in to get the benefits of good education for their children. 

Land tax theory – Summary

At first instance a land tax in isolation appears to be a severe burden on landholders.  In practice, however, a tax need not be felt as a tax nor be a burden under two conditions. 

C   First a tax may already have been factored in, as when a buyer purchases land knowing what the tax is.

C   Second, even when the tax is first imposed it may not be a burden if its proceeds are used –

      (1)        either to cut other taxes which are a deterrent to business                             locating in the area or;

      (2)        to provide infrastructure which makes the land more accessible or productive. 

This theoretical insight points to solutions for gaining voter and business acceptance of increasing land taxation –  namely to ensure that the revenue raised is used to eliminate worse taxes or provide needed infrastructure. 

Land tax – Practical Issues for Victoria

The Rate Scale

A problem of a progressive or graduated rate scale is the issue of parcel splitting or ownership splitting.  It should therefore be an objective to move towards a uniform rate scale.  This, however, should be achieved by moving the lower rates up, not by cutting the higher rates.  To cut the higher rates would be to give a windfall to the owners of high valued land.  That is not necessary.  Having bought the land under the existing tax rates, such owners have already allowed for it and cannot really claim to be bearing the existing tax. 

However, in moving the lower rates up, it must be recognised that household or business budgets can be upset by sudden or unanticipated increases in tax burdens.  It is therefore suggested that while the lower rates are raised, the adjustment speed of tax liability could be constrained by some sort of rolling cap on increases. 

For example, it would be possible to write a safety valve into the legislation so that although the tax was X% of site value the tax in no case was to exceed 130% or so of  the tax in the previous year.  In that way even if the tax rates were increased, no taxpayer would be able to publicly complain of tax increases in excess of 30% . 

Percentages of course can be misleading in any case – an increase in the land tax burden from $100 to $200 is 100% increase but not a thing to much complain of.  Nonetheless, it is desirable to anticipate the inevitable fluctuations in liabilities which occur when either a rate or a band of taxation is adjusted.  In the case of properties near a previous low band a change can create large percentage changes in liability.  By using a rolling cap to limit annual increases, such transitional effects are not allowed to distract from the merits of the overall tax change.  In the design of a rolling cap on land tax increases there would need to be a minimum increase below which any cap did not apply.  For example, an increase from $0 to $20 is an infinite percentage increase, but not something to worry about.  Therefore a rolling cap could be designed so that the increase in liability should not be more than say 30% or 40% of the previous year’s liability subject to such a cap not applying if the increase is less than, say, $200.

Constitutional issues and Federal-State fiscal relations

There are no constitutional problems in Victoria levying land tax.  Land tax is not an excise or a customs duty nor is it a Federally-taken income tax.  Neither Section 90 nor Section 92 of the Constitution in any way limit the State of Victoria in the use it makes of its land tax base.  In using its land tax base the Crown in right of Victoria is doing no more than exercising its ultimate sovereignty over the land. 

In relation to Federally-owned land, although the States may not be able to levy tobacco taxes etc in those areas, there is generally no problem in levying State land tax on the interest of a lessee in the land.  Thus while a State cannot impose land tax on the Federal Airports Corporation’s land, it can impose land tax on the interest of a 50 year airport lessee.

                                                             Native title issues

The Crown’s ultimate ownership of land over and above any other interest in land remains recognised by the High Court even after the Mabo and Wik decisions.  It is an interesting question whether native title land rights are liable to forfeiture to the States because of non-payment of land taxes in the past.  Presumably, if such rights are interests in land and were not exempt they may have been liable for past land taxes.   

Leaving aside the question of forfeiture for non-payment of past taxes, by imposing a land tax or rent charge for the use of its land, the Crown can bring rationality to bear on native title issues.  Those who claim an interest in land can be required to place it on the land register, declare a value for it and be taxed thereupon.  Any special interest group or speculator who declares a higher value for his interest in land would obviously be liable to pay a higher land tax.  If such persons are minded to avoid their land tax liabilities by declaring artificially low values then they can be compulsorily acquired at their own valuation without any injustice.  By the same token, a non-exclusive co-existing land interest would naturally have a low market and taxable value in any event as compared to an interest which was asserted to be exclusive.

The application of such a principle in case of native title claims is an illustration of the general principle that a general, non-discriminatory, land tax forces all  landholders to put their land to good use and discourages opportunistic rent-seeking claims or speculative withholding of resources from the community.  The Federal Racial Discrimination Act, of course, is irrelevant in the case of a general, non discriminatory, State land tax. 

                               Interaction with Federal income and capital gains taxes

Sir Joe Bjelke-Petersen used to say that the only good tax was a Federal tax.  That, however, was on the assumption that the States would get a decent share of the revenue.  Perhaps a more appropriate maxim is that the only good State tax is a State tax which is deductible against Federal income tax.  In this regard, land tax has unnoticed “double deduction” advantages. 

For all income producing activities, land tax is deductible against Federal income tax.  In addition, to the extent that land tax is reflected in lower land values than otherwise, it also effectively produces a reduced capital gain for Federal income tax purposes.  Thus, State land tax generates an economic “double deduction” effect against Federal income tax and capital gains tax liabilities.   There is no other State tax which achieves this effect. 

By contrast, other State taxes, for example, financial institutions duty, stamp duty on conveyances are often non-deductible being treated as non-depreciable  capital expenses.  In relation to land used for principal residences there is no Federal tax benefit to offset a State land tax.  This represents an argument for concessional treatment for owner occupied housing under a State land tax. 

Land tax has long-run economic virtues but some unpopularity

The prime virtue of a land tax, namely that it cannot be shifted or avoided, is the very reason that it tends to be strongly resisted.  No one likes taxes, especially taxes they cannot avoid.  Every taxpayer prefers to enjoy the illusion that he can play the game so as to make others pay.  Thus one Canadian Chancellor of the Exchequer is said to have remarked that “In his experience of taxation, and it was considerable, the only truly popular tax was the tax on the other fellow.”  An unavoidable tax is an unpopular tax. Yet it is the unavoidable tax that is the best tax.

It is perhaps for reasons of visibility that governments have often preferred indirect to direct taxes so that the illusion can be maintained.  However, such a policy is ultimately foolish.  The game of shifting or avoiding taxes consumes large resources and drives away business and investment.  That ultimately leaves all the players poorer.  A direct and unavoidable tax such as land tax is in the end to be preferred. 

Unless taxpayers can see the revenue from a land tax is reducing other burdens upon them or being used to bring them benefits in the form of improved infrastructure there is likely to be resistance to land tax reform.  It is also important, because of the potential impact on market land values during transition periods, for change to be gradual and sensitive to variations in tax liabilities.

Once it is realised that the revenue from such a tax can be used to cut other taxes or improve the productive capacity of the economy by providing useful public works it can be seen that a “free lunch” can be had.  Good economics can be turned into good politics if the taxpayers’ attention can be turned and focused on the bonus dividends available from sensible tax reform.

The case for using land revenues to cut taxes on mobile business below New South Wales and Queensland

Given that financial taxes are taxes on the most mobile of economic activities they should rank first for tax reduction.  The recent experience in stamp duty reduction forced upon New South Wales and Victoria by Queensland shows the leverage that can be gained from a strong fiscal base resting on land revenues.  However, it should be noted that Queensland’s example followed on that of Hong Kong. 

Hong Kong has long enjoyed a tradition of using land revenues through a leasing system of Crown land to keep tax rates low.  This goes back to the advice of Lord Aberdeen to Sir Henry Pottinger, the first Governor of Hong Kong.   Pottinger was advised that “if, as a result of the establishment of a free port and the introduction of those liberal arrangements by which foreigners would be encouraged to come, a great commercial entrepot were created, then H M Government would feel justified in securing to the Crown the increased values that the land would then have.”[5]

The case for not reducing CBD land tax rates

Reducing the highest land tax rate on CBD properties would not cut costs for business.  In the long-run, that is, whenever the leases were renegotiated, landholders would extract from tenants the benefit of any tax reduction.  Land tax reductions are certainly irrelevant to attracting financial sector business.  If it were otherwise, Hong Kong could hardly have achieved major financial centre status by relying so heavily on lease rentals to the Crown. 

Instead of cutting the top land tax rate it would be better to move up lower rates and cut other taxes.  For example, large landholders could be benefited by cutting or abolishing land conveyance duties or mortgage security duties.  These are considerable costs on the reallocation of land to its highest and best use. 

Similarly, large landholders would benefit if the land rich company provisions were removed from stamp duty.  Those provisions are avoidable in any case and  basically a hassle for all concerned, including the revenue authorities. 

An elegantly expressed argument in favour of a swap from stamp duty on land to a land tax on holding land was given by John Stuart Mill, who wrote “All taxes must be condemned which throw obstacles in the way of the sale of land, or other instruments of production.  Such sales tend naturally to render the property more productive.  A seller, whether moved by necessity or choice, is probably someone who is either without the means, or without the capacity, to make the most advantageous use of the property for productive purposes;  while the buyer, on the other hand, is at any rate not needy, and is frequently both inclined and able to improve the property, since, as it is worth more to such a person than to any other, he is likely to offer the highest price for it.  All taxes, therefore, and all difficulties and expenses, annexed to such contracts, are decidedly detrimental; especially in the case of land … too great facilities cannot be given to enable land to pass into the hands, and assume the modes of aggregation or division, most conducive to its productiveness. …  All taxes on the transfer of land and property should be abolished; but as the landlords have no claim to be relieved from any reservation which the state has hitherto made in its own favour from the amount of their rent, an annual impost equivalent to the average produce of these taxes should be distributed over the land generally in the form of a land tax.”[6]

Another reason for not reducing CBD land tax rates is the possible windfall to CBD owners were reductions for water access charges to occur.  The Industry Commission report on water pricing has been used to argue the case that site rating is inappropriate for access charges for water or other reticulated services.  That report is flawed, as discussed later.  But such windfalls, if a change were to occur, should not be ignored in considering the land tax question. 

Earmarking land tax revenue

Given the criticism likely to be attracted by any tax reform it may be wise to forestall criticism by earmarking the revenue for capital works of benefit to business, towns and shires or for tax reduction. 

If land tax revenue were earmarked to a fiscal consolidation and infrastructure fund which could only be used for public works such as roads, bridges, schools hospitals etc, or for payment to the consolidated revenue fund in exchange for tax reductions, then political resistance to such a tax reform might be reduced by such an explicit trade off. 

For example, in recent years, in all States, Budgetary pressure has led to a reduction in the services and infrastructure made available for rural and regional areas.  A specific fund for infrastructure, including rural and regional infrastructure, could be attractive to the community.  For example, at the Federal level the sale of one third of Telstra has been made more palatable by earmarking some of the proceeds for specific funds to improve rural and regional telecommunications infrastructure. 

Similarly, urban residents can be expected to welcome some assurance that urban infrastructure will be renewed or improved.  At the same time, by shifting capital works off the central consolidated revenue fund, freedom would be given to cut other taxes. 

Consideration might also be given to the question of overcoming local government resistance to a State land tax or land rent charge by introducing a degree of revenue sharing with local government.  A percentage of land tax revenues could be earmarked for local government with corresponding reductions in the amount passed through the central Budget from the Federal Government.  In effect, by earmarking some of the land tax revenue for local government the State could use for its own budget some of the Federal funding for local government. 

Another option to explore would be whether local governments could be allowed to shift from capital improved value to the site value base of a land tax and piggyback their own rates on top of the State land tax.  The administrative duplication in having two different systems of valuation could be avoided.  From an administrative point of view, leaving aside the economic benefits of not taxing capital improvements, site value is more easily established when mass valuations have to be made. 

Making the tax convenient for taxpayers

Adam Smith observed that every tax should be levied in the manner most convenient to taxpayers.  A failure to adhere to this principle can engender unnecessary resistance to even the best of taxes.  Income tax would never have risen to the dominance it now possesses in the economy without the introduction of the PAYE system during World War II.  If, for example, land tax were increased and payable in annual bills issued on 31 December with payments due  at the same time when most householders and businesses were meeting their Christmas spending bills, the inconvenience would be considerable. 

Any move to reform land tax should be accompanied by a modernisation of collection arrangements.  There should be quarterly, monthly, or even PAYE remittances or withholding options.  In the case of unsatisfactory payers the Revenue could be allowed to impose mandatory garnishees or PAYE obligations on taxpayers.  To further encourage quarterly or monthly remittances discounts could be offered on the annual liability assessment.  It is always better to offer a taxpayer a concession for doing something rather than impose a penalty for doing something else. 

Another point worth considering is offering a stamp duty exemption where the purchaser of land accepts a faster imposition of land tax liability.  Just as in 1694 landholders were allowed to pay a lump sum to redeem their land from tax liability in the UK the opposite approach could be used to encourage taxpayers to give the State a permanent steady source of revenue in lieu of a one-off tax on change of ownership.  Another option might be to ease the transition by giving credit on a sliding scale to those who have paid stamp duty on land purchases in recent years.

One of the merits of land tax over transactions taxes such as stamp duty is the State’s revenue base will become more stable and less subject to boom and bust cycles in real estate markets.  A stamp duty exemption in return for becoming subject to land tax could also be considered as an option for exempt land such as agricultural land. 

As noted before, home owners do not benefit from Federal income tax deductions or capital gains offsets in relation to State land tax.  Rather than exempting land held as a principal private residence altogether, a useful option might be to offer a 48.5% rebate to home owners on the general rate of land tax to recognise its non deductibility.  Total exemption is a concession which becomes a right.  But a 48.5% rebate can be a permanent reminder to taxpayers that they are being treated concessionally. 

Taxpayers would benefit from the improved deductibility of this State tax versus those taxes it was replacing.  Victoria’s failure to tax land represents to a large extent a shift of revenue from the State to the Federal Treasury through the income tax and capital gains tax.  Given that Victoria’s level of reimbursement from the Federal Treasury through financial assistance grants is not proportionate to its contribution, Victorians have a good deal to gain by placing greater reliance on a tax which indirectly transfers revenue from the Federal Treasury to the State Treasury.


In general terms, exemptions from any land tax should be limited.  Exemptions for particular commercial uses such as agricultural uses can create economic distortions and even work adversely to those they were intended to benefit.  For example, exempt agricultural land near an urban area can become subject to heavy speculative bidding which drives out bona fide farmers. 

In principle, leaving aside transitional problems, one would have a preference for limiting exemptions to land held for public or quasi-public functions.  Thus it is a nonsense for the State to tax itself and not much less a nonsense for a State to tax its local or semi government authorities. 

Given that land used for State purposes should be exempt, other bodies serving public functions have a case to claim a similar exemption.  The Industry Commission report on Charitable Organisations in Australia suggested that there should be a similar treatment of private sector and charitable sectors in relation to indirect taxes such as land tax. 

This recommendation however, loses considerable force when it is realised that the charitable sector is often in ‘competition’ with the public sector.  If public hospitals and schools are not to be subject to land tax it seems hard to argue that non government schools and hospitals – which are charitable on the basis that they serve a public benefit – should also be taxed.  Therefore there seems little objection to land tax exemption for land actually used for charitable purposes. 

The legal definition of charity requires public benefit and in a pluralistic society benefits to the public need not be provided only by governments.  Indeed it is desirable that there be competing bodies finding the best way of serving public purposes. 

In relation to Federally owned land there is a Constitutional barrier on the imposition of State land tax under Section 118 of the Constitution.  However the Federal Government has tended toward a policy of disposing of Federally owned land and leasing land from commercial developers and others. 

Where land is privately owned but leased to the Federal Government there is no difficulty in imposing and collecting land tax.  Where Federally owned land is not used by the Federal Government but leased, a State land tax statute could place the legal obligation on the lessee and thereby avoid the restrictions of Section 118 of the Constitution. 

Although in general terms it might be argued that Federally owned land should be exempt on the same basis as other land serving public functions given the inequality in the revenue sharing arrangements between Commonwealth and States such largesse seems unwarranted.  

Primary production land poses special problems.  Because of its current exemption, it is unlikely that farmers would welcome the introduction of a land tax.  Whatever the theoretical arguments, it is understandable that the government may be reluctant to remove that exemption. 

However, an opportunity to reconsider the matter may be afforded by a question of Native Title.  If Native Title claims were to become subject to land tax, which is desirable, it would be hard to justify an exemption for other primary producers.  Farmers may be, indeed, quite happy to accept some liability for land tax in return for increased security of tenure knowing that frivolous or vexatious Native Title claims will be discouraged by being subject to the same burden.

In relation to householders it has been suggested that the existing exclusion from exemption be retained but they should be offered a concessional rebate as the tax rate is increased. 

Mines raise special problems.  They are an example of a land asset which is diminished in value through use.  The traditional approach has been for the Crown to demand a royalty per ton extracted as a form of rent.  This approach can be criticised because royalties inevitably distort the best extraction techniques.  Theoretically it would be desirable to subject the mines to the general land tax on their unimproved value and convert the royalties to a depletion charge based on changes on the value of the mine due to extraction taking place in that year.  Such a combination of land tax and a depletion charge can avoid the problem that royalties create of discouraging mining of low grade ores.

Historic buildings raise special issues.  One criticism of a land tax sometimes voiced is that by forcing land to be put to best economic use, it encourages demolition of historic buildings for taller sky-scrapers.  However, this is not an argument in favour of a blanket exemption from land tax for land with historic buildings.  If there are preservation orders or restrictions on the use of the land, such restrictions should be reflected in the valuation which should be substantially reduced by the restriction on potential use.

Relationship of land tax to other changes

 Capital improved value rating versus site value for land tax

In some ways the move to capital improved value rating at the local level is unfortunate.  In 1906 the Carruthers Government in New South Wales deliberately moved to unimproved value rating as an anti-slum measure.  By abolishing the tax on improvements – a legacy from the British rate system – the Carruthers Government sought to encourage urban rebuilding.  That policy has served New South Wales well.  Unlike America, where taxes are imposed on buildings, Sydney has been remarkably free to date of the slums and decrepit buildings that characterise many American cities. 

Capital improved value rating can be justified perhaps for some services such as fire protection where the benefit is related to the value of the property.  In the longer run it can be argued  that, because capital is ultimately mobile, all benefits provided by urban services ultimately accrue to the landholder, not the building owner.  Hence there is still an argument for site value rating over capital improved rating. 

From an administrative point of view, although site values are less easily established individually for mass valuation, there is greater uniformity across blocks and site value is to be preferred.  To the extent that a move from site value rating to capital improved rating has given windfall benefits to high valued sites with minimal improvements, an increase in the State land tax can claw back some of that windfall.

Water pricing reforms

The Industry Commission inquiry into the water industry went through both a draft and final report stage.  Paradoxically the draft report has a better discussion of the economics of water pricing than the final report.  As noted in one footnote a shift from site rating for water charges to per litre charges can result in no benefit to business at all.  If, as is inevitable, reduced land based water rates are ultimately swallowed up by increased private rental charges, a trading business may gain no benefit in a shift from site value rating to per litre charges.

Thus it has been observed that “A shift away from land value rating systems may, in some cases, amount to windfall gains for land holders, through the capitalisation of abolished rates, financed by the imposition of higher costs on both domestic and business users, for water and sewerage services. For example, the Industry Commission argued for imposing user charges for water supply instead of land rates.  It then conceded that ‘Of course, commercial land prices would tend to rise if this tax on business users were eliminated’[7]  In other words, the actual production of goods and services, as opposed to landholding, would gain nothing. Business and consumers would not gain: they would be subjected to new user charges and no reduction in rents.”[7]

What the Industry Commission overlooked was that site value rating operates as a lump sum  access charge (which it recommended) in the first place.  It is reasonable that landholders pay in proportion to the site value.  The value, for example, of a city block which was denied access to water, sewerage, electricity etc would be far less than the value it has when there is access available to those services.  It is not unreasonable that infrastructure access charges reflect such a value-adding benefit. 

What businesses need in order to be nationally and internationally competitive is the lowest possible marginal cost of production.  Low costs per litre of water, per kilowatt of electricity etc are important in securing low costs of production.  To the extent that network infrastructure can be funded from fixed access charges, then volume usage charges can be kept low.  Charges for volume should only reflect incremental cost. 

Site value rating overcomes a common ‘freeloader’ difficulty faced by private providers of infrastructure.  For example, when the Australian Gaslight Company plans to extend its reticulation infrastructure into an area, it surveys householders and asks whether they wish to have gas available.  It is in the interests of every householder to say yes whether or not they intend to connect.  If the gas pipeline is laid, the value of their site is increased without any requirement to pay unless and until they choose to connect.  This ‘freeloader’ behaviour is not possible when faced by an infrastructure provided with rating powers.  The  infrastructure provider is not deterred from providing infrastructure on the basis that its investment may be under-utilised.


The simple land tax has long been endorsed by economists as an ideal tax, from 18th century French physiocrats, through Adam Smith, John Stuart Mill, Henry George and modern economists such as Milton Friedman, William Vickrey and Martin Feldstein, the Chairman of President Reagan’s Council of Economic Advisers.  It has also been endorsed by statesmen such as Sir Winston Churchill, Sir John Quick, Sir Samuel Griffith, Sir George Grey and Senator George Pearce. 

Land tax has deep roots in Victoria’s and Australia’s history.  Given its economic virtues and the established precedents available for the implementation of the tax, it has the strongest claims for consideration as a means of relieving the burden of other, more disruptive, taxes.

In any case, at a State level other tax choices are severely limited.  The Commonwealth has seized the income tax base and sections 90 and 92 of the Federal Constitution stand in the way of the imposition of State indirect taxes on consumption.

Their reliance on land revenues, whether from royalties or site value rating, have helped New South Wales and Queensland overtake Victoria in economic development during this century.  By reserving to the Crown lease rentals from land, Hong Kong has been able to maintain an internationally competitive tax rate on labour and capital and has advanced since World War II to the status of the world’s third financial centre. 

It is interesting to contemplate how competitive Victoria’s tax system could now be if Victoria had followed Sir John Quick’s advice in the 19th century and protected its land revenues and if the Commonwealth had not been able to seize through the crude oil levy and the resource rent tax the wealth of Bass Strait.  Fortunately,  however, lost opportunities are not lost forever and Victoria has a chance, by reforming its land tax, to place its tax system on a far more competitive basis. 

In effect, the argument for greater reliance on land tax is that the Sovereign should behave in the same way as an improving landlord.  The improving landlord ploughs back his rents into improving the amenity of his sites so that their value is bid up by people wanting to locate there.  There is no reason why public finance cannot operate on similar business principles. 

Ultimately no country or state can impose arbitrary or irrational taxation.  In a world of increasing mobility of people, ideas and capital, bad tax policies have adverse consequences sooner than they used to.  No amount of anti avoidance legislation can ever protect fundamentally avoidable taxes.  If legal avoidance is suppressed, economic avoidance then takes place.  Real transactions move out of the country.  Faced with open borders, a State should look  to the one tax base that is permanent, immobile and easily assessed.


A Short History of Land Tax

                                                   History of land tax in England

When William the Conqueror seized England after the Battle of Hastings in 1066, all the land of the Kingdom passed to him.  The King then parcelled out those lands to his followers in return for rent.  That rent took the form of military service to the Crown and was required together with other payments in kind or cash. 

The King’s revenues therefore came from his ownership of the land and not from taxation.  That is why the Common Law has traditionally frowned upon tax legislation as penal legislation which derogates from Common Law rights.  The feudal theory of taxation was that the King should live ‘off his own’ and leave his subjects’ property alone. 

In time, the King’s nobles resented paying their feudal dues and sought to evade them through devices such as the trust.  Gradually, as the King’s revenues declined from his own lands, he was forced to seek Parliamentary approval on behalf of the people for taxes.  The struggles over taxation in the 17th century led by 1662 to the Statute of Tenures which abolished military tenures.

After the Glorious Revolution, the land tax was allowed to be commuted in 1694.  Local rating remained on the parishes to provide those social services which used to be provided by the previously abolished monasteries.

Much later, in the 19th century, there was a strong movement towards reintroduction of land taxation led by the British Liberal Party about 1909.  Prominent among supporters of land taxation were Winston Churchill and Lloyd George.

Land tax in Australia

The colonists brought English law with them to Australia.  Hence the concept of Crown ownership of land meant that the revenues from land such as licence fees charged to squatters, were not subject to Parliamentary appropriation.  As Governor Darling retorted to William Charles Wentworth “To take a rent for the use of Crown land was not to impose a tax”.  Later, however, the Crown gave over the management of its lands to the New South Wales Legislative Council.

During the 19th century in Australia there was strong movement for breaking up large pastoral holdings for closer settlement.  John Stuart Mill’s arguments against unearned increment from land holding and later Henry George’s espousal of land taxation had wide influence in the colonies.  In New South Wales free traders led by George Reid supported land taxation while Sir John Quick and others championed similar moves in Victoria.

Sir John Quick was one of the founding fathers of  Federation, He was a boy in Bendigo in November 1856 when responsible government was established in Victoria.  His doctoral thesis A History of land Tenure in the Colony of Victoria (Bendigo 1883) may be found in the National Library in Canberra.  Quick argued that land should only be alienated on leasehold terms so that the Crown did not deprive itself of future land revenues in perpetuity.  As he wrote in his Notebook “The settlement of the land question in particular involved momentous problems and responsibilities.  It meant the disposal of over 56 million acres of the landed inheritance of the Victorian people for all times.  …. “Unlock the lands” was the watchword of the party thus formed, which may be regarded as the first definite organisation of the Liberal Party in Victoria.”[8]  

Quick’s views were shared by many Victorians.  “The Victorian Land Tenure Reform League in its 1872 circular argued for retention of land revenue.  The League argued that by retaining land revenue “with an absolute freedom from taxation, and full and unfettered scope for industry, every inhabitant of the country would enjoy a beneficial interest from a share in state lands … “  A rent on state lands being light and for the manifest benefit, would meet all the requirements of a just and desirable means of raising revenue.  It would be easily and cheaply collected, and would greatly reduce the expenses of government by rendering unnecessary some of the present costly and otherwise hurtful departments.”[9]

Mr Berry in Victoria and Sir George Grey in New Zealand were both proponents of land taxation.  An unsuccessful attempt was made in 1875 to introduce land tax in Victoria but a land tax was introduced by 1877.  Mr John Ballance, New Zealand Treasurer, said on the introduction of the land tax “We believe that no form of wealth is more legitimately called upon to contribute a portion of the public revenue of the colony than the value of land minus improvements, which for brevity, I shall call the unimproved value, as no other commodity increases so rapidly in value from the increase of population and the natural progress of a country.  By exempting improvements, we award a premium to industry and discourage a system of speculation which thrives only upon the labour of others.”[10]

Scheftel observes that revenue requirements were prominent in the move to land taxes.  “The weakness of the State finances during the 1870s and 80s is attributable to several causes.  First, the indebtedness of the colonies and the over expenditure for purposes of public improvements of all kinds produced an ever increasing drain on the Treasury.  Secondly, the remission of the tariff duties in some of the states caused deficit.  Thirdly the loss of the land fund further increased this deficit in the colonies.  Under these circumstances direct taxation had to be resorted to.  It is significant, therefore, that synchronously with the movement to reduce the tariff duties which had obviated for a long time the necessity of direct taxation, the land taxes were either proposed or enacted. … Griffith’s coalition government [in Queensland] came into power and succeeded in putting through the legislature the Valuation and Rating Bill of 1890 by which the powers of the local authorities were extended to raise revenue by rating on the unimproved value of land.  Mr Griffith had always favoured the tax on unimproved value and urged it with success.”[11]

It is remarkable that at least three of the Founding Fathers of Federation, Sir Samuel Griffith, Sir John Quick and Sir George Grey were so committed to land taxation.[12]

Interestingly, some graziers of New South Wales who supported free trade were willing to accept a land tax.  They reasoned they were better off to accept a land tax rather than to have labour costs inflated by indirect taxes which would push up wage demands. 

In 1906, under the Carruthers Government, New South Wales took the step of abolishing taxation, at local government level, of buildings or improvements.  Rates were to be based on unimproved land values regardless of tenancy. 

Under the British system, if a property were unoccupied there were no rates levied.  This led to a spectacular example in the early 1970s of a new office block being left vacant for several years because the rate of capital appreciation more than compensated for the loss of rent and there were no holding charges by way of rates on an unoccupied office building.

The New South Wales system of rating on unimproved land value eliminated such distortions and by not taxing improvements, gave landholders every incentive to put their land to the best use.

Land tax was taken up at the Federal level in 1910 and remained in force until 1951 when the Menzies Government handed it back to the States.  The 1910 land tax was a graduated scale and was designed not only to raise revenue but to break up large absentee stakes.

One of the merits of land tax which Queensland has observed is that it is possible to have differential rates on residents or absentees.  Thus, a State government can raise more money from non resident investors without prejudicing local voters.  There are, of course, avoidance routes which can be used to circumvent such restrictions.

Interestingly, one of the reasons for all land in the ACT being held on leasehold was the idea that Canberra should be a tax haven.  If the Commonwealth were to grant the land on leasehold, all the increase in value resulting from the establishment of a national capital would flow back to the Commonwealth and no other taxes would be required in the ACT.  Because the lease rentals were not regularly adjusted the system fell into desuetude and the Gorton government in 1971 rolled the lease rentals into the rating system.

Since World War II there has been less emphasis on land taxation, but its influence may still be seen in the differential progress of different States which have followed different policies.  For example, there is empirical evidence to show that local government areas which did not tax improvements fared less well over the century than those which simply taxed unimproved land.


[1].   Adam Smith  An Inquiry into the Nature and Causes of the Wealth of Nations, 1776, Glasgow Edition, Oxford, 1976, Page 844 Chapter V.ii.e

[2].   See also Musgrave (1959) p 158.

[3].   Scheftel p  18.

[4].   Sir Winston Churchill, speech delivered at King’s Theatre Edinburgh, July 17 1909.

[5].   Rabushka (1979) pp 62-63 quoting Lord Aberdeen’s instructions of 4 January 1843 to Sir Henry Pottinger.

[6].   Mill, John Stuart (1849 – 1872) Principles of Political Economy with Some of their Applications to Social Philosophy, Toronto Edition, 1965, Edited V. W. Bladen, Book 5, Chapter 5, Section 1, pp 858-859.

.           Industry Commission (1992)  Water Resources and Waste Water Disposal, Report No. 26, 17 July 1992, AGPS, Canberra, p 93 note 2

[7].         Dwyer, T M and Larkin, J T (1995), Refocusing Microeconomic Reform Business Council of Australia, Melbourne 1995, p 78

[8].         Sir John Quick’s Notebook Page 14.

[9].         Scheftel p 32.

[10].       Quoted in The Australasian, September 17, 1878, p 305, Scheftel p 25.

[11].       Scheftel pp 26, 29.

[12].       Graham writes of Griffith at p 49 “One bill, however, which he brought forward in 1890, but did not attempt to pass, calls for a special mention.  This was a remarkable measure, which he termed the Elementary Law of Property, and in which were laid down certain principles of Natural Law, which declared that all persons should have equal right to life and freedom of opportunity, that the right to take advantage of natural forces belonged equally to all members of the community, that all land is by Natural Law the common property of the community and that every man is entitled to the full value of his labour. …  Some thirty years later he again brought the principles declared in the bill before the public.  Shortly after his retirement from the bench, he published an article upon what he termed ‘the fundamental error’ of all social life …. and he suggested that if the community at large could be taught to regard the principles of Natural Law as set out in his elementary law of property as axiomatic, in the same way as they regarded many other rules of right and wrong, the world might at length attain to a fraternity rule …”


Dwyer, T M and Larkin, J T (1995), Refocusing Microeconomic Reform Business Council of Australia, Melbourne 1995

Feldstein, M (1976)  On the theory of tax reform Journal of Public Economics v 6 July-August 1976 pp 77-104

Graham, A Douglas (1939) The Life of the Right Honourable Sir Samuel Walker Griffith GCMG, PC  John Murtagh Macrossan lecture for 1938. University of Queensland, Law Book Company.

Industry Commission (1992)  Water Resources and Waste Water Disposal, Report No. 26, 17 July 1992, AGPS, Canberra

Musgrave, R A (1959)  The Theory of Public Finance: A Study in Public Economy  McGraw Hill, New York, 1959

Quick, Sir John, Sir John Quick’s Notebook (Edited L. E. Fredman, Newcastle, New South Wales 1965, a reprint of Sir John Quick’s recollections published in the Melbourne Herald as Sir John Quick’s Notebook in nine parts between January 4 and 13, 1926)

Rabushka, A (1979)  Hong Kong: A Study in Economic Freedom University of Chicago Press 1979

Scheftel, Yetta (1916) The Taxation of Land Value, Houghton Mifflin Company, Boston 1916.

[1].   Adam Smith  An Inquiry into the Nature and Causes of the Wealth of Nations, 1776, Glasgow Edition, Oxford, 1976, Page 844 Chapter V.ii.e

[1].   See also Musgrave (1959) p 158.

[1].   Scheftel p  18.

[1].   Sir Winston Churchill, speech delivered at King’s Theatre Edinburgh, July 17 1909.

[1].   Rabushka (1979) pp 62-63 quoting Lord Aberdeen’s instructions of 4 January 1843 to Sir Henry Pottinger.

[1].   Mill, John Stuart (1849 – 1872) Principles of Political Economy with Some of their Applications to Social Philosophy, Toronto Edition, 1965, Edited V. W. Bladen, Book 5, Chapter 5, Section 1, pp 858-859.

.           Industry Commission (1992)  Water Resources and Waste Water Disposal, Report No. 26, 17 July 1992, AGPS, Canberra, p 93 note 2

[1].         Dwyer, T M and Larkin, J T (1995), Refocusing Microeconomic Reform Business Council of Australia, Melbourne 1995, p 78

[1].         Sir John Quick’s Notebook Page 14.

[1].         Scheftel p 32.

[1].         Quoted in The Australasian, September 17, 1878, p 305, Scheftel p 25.

[1].         Scheftel pp 26, 29.

[1].         Graham writes of Griffith at p 49 “One bill, however, which he brought forward in 1890, but did not attempt to pass, calls for a special mention.  This was a remarkable measure, which he termed the Elementary Law of Property, and in which were laid down certain principles of Natural Law, which declared that all persons should have equal right to life and freedom of opportunity, that the right to take advantage of natural forces belonged equally to all members of the community, that all land is by Natural Law the common property of the community and that every man is entitled to the full value of his labour. …  Some thirty years later he again brought the principles declared in the bill before the public.  Shortly after his retirement from the bench, he published an article upon what he termed ‘the fundamental error’ of all social life …. and he suggested that if the community at large could be taught to regard the principles of Natural Law as set out in his elementary law of property as axiomatic, in the same way as they regarded many other rules of right and wrong, the world might at length attain to a fraternity rule …”


Dwyer, T M and Larkin, J T (1995), Refocusing Microeconomic Reform Business Council of Australia, Melbourne 1995

Feldstein, M (1976)  On the theory of tax reform Journal of Public Economics v 6 July-August 1976 pp 77-104

Graham, A Douglas (1939) The Life of the Right Honourable Sir Samuel Walker Griffith GCMG, PC  John Murtagh Macrossan lecture for 1938. University of Queensland, Law Book Company.

Industry Commission (1992)  Water Resources and Waste Water Disposal, Report No. 26, 17 July 1992, AGPS, Canberra

Musgrave, R A (1959)  The Theory of Public Finance: A Study in Public Economy  McGraw Hill, New York, 1959

Quick, Sir John, Sir John Quick’s Notebook (Edited L. E. Fredman, Newcastle, New South Wales 1965, a reprint of Sir John Quick’s recollections published in the Melbourne Herald as Sir John Quick’s Notebook in nine parts between January 4 and 13, 1926)

Rabushka, A (1979)  Hong Kong: A Study in Economic Freedom University of Chicago Press 1979

Scheftel, Yetta (1916) The Taxation of Land Value, Houghton Mifflin Company, Boston 1916.