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Danger lurking for the agriculture sector in tax debate

- Monday, February 15, 2016

If some of the recent contributions to the debate on future taxation policy in Australia are anything to go by, there is real danger lurking for the agriculture sector. A recent contribution proposing a number of different forms of land or estate taxes highlights this risk, especially when poorly researched proposals are thrown into the mix with little real thought or analysis.

The budgetary problem that currently confronts the Australian Government was spelled out fairly clearly by the Secretary to the Treasury in a speech last week. Put simply, government expenditure exceeds government taxation revenue, and there is no real evidence that the persistent budget deficit will be corrected in the foreseeable future. The Australian Government's gross debt is projected to reach almost 30% of GDP by mid 2018, by many measures the highest it has been since the early 1990s, and currently the Australian Government faces monthly interest payments in excess of $1 billion, even at current low interest rates. The consequences of continuing current trends are there for all to see in the situation faced by Greece and Spain. While Australia is a very long way from the predicament faced by those nations, government debt gets harder and harder to address the more entrenched expenditure patterns become, so early action to correct the problem is preferable to putting it off then facing much more painful remedies at a later date. 

Given that background, some tough decisions are required in relation to both the expenditure and the revenue side of the Australian Government's budget. The current tax debate is one half of that discussion. However, a recent contribution to that discussion by Jessica Irvine, a senior writer for the Sydney Morning Herald, showed that this discussion has a long way to go before reaching maturity. 

When an opinion piece on tax reform is entitled "How to hit the rich where it really hurts", it should not come as a surprise that the proposals contained in the article seemed more focused on forcing the wealthy to pay more tax rather than analysing the issues in any great depth. The article contained statements like

"It is right to think that rich people should pay more tax than the poor. Happiness studies show an extra dollar means a lot more to a poor person than a wealthy person. So, we maximise society's wellbeing when we raise taxes from the rich, rather than the poor."


"The problem with a lot of rich people is they are wiley. They didn't get all that money just by toeing the line and playing by the rules. New social experiments have shown wealthier people display more unethical behaviour. They are more likely to cut off pedestrians and other drivers at intersections, more likely to help themselves to more candy from a free candy jar and more likely to say it is OK to steal and overcharge in a business context."

The demonising of the wealthy as the cause of all the budgetary problems faced by the Government is somewhat contradicted by inconvenient truths such as the top 10% of income earners actually contribute more than 50% of total taxation revenues, and 50% of Australian households (those with the lowest income) pay no net tax after government support measures are netted out.

Leaving those factual issues aside, Irvine proposes that the solution is a "broad-based land tax"  based on the justification that "Almost all economists agree that a broad-based land tax, applied in a progressive way to tax high value land the most, is the most efficient and fair tax reform we could pursue. It hits the rich where it really hurts."  She conceded that "Of course, there needs to be protection for asset-rich, but cash-poor people living in rich suburbs but with little income to pay their land tax bill. No worries, it can be deducted from their estate when they die and the property is sold."

Irvine then used the example of the ACT, which is proposing the implementation of a broad-based land tax by 2020, as an example that such a system could be implemented, with blithe assumptions that it would produce economic benefits - and best of all slug the rich for more tax.

There are a couple of major issues with the proposal that perhaps the author should have considered a little more carefully. Firstly, all Australian states already have land taxes in place, the only exception generally being a person's principal residence, and land that is used for agricultural purposes. Presumably, the proposal Irvine is advancing is to extend that current tax to land that is currently exempt - which would include a person's principal residence and agricultural land. 

There is also an additional form of land tax paid by most landholders in the form of Local Government rates - payable on the basis of the value of the land and including a persons principal residence and agricultural land. So the notion that the payment of an annual land tax by property owners is something new or novel is completely wrong. In reality, one whole tier of Government in Australia is already paid for by property-owners - presumably those same rich people that run over pedestrians and pinch lollies!

Using the ACT example is also highly misleading. The ACT just happens to be the only State or Territory in Australia that does not have local government in addition to the State or Territory level of government. So in effect the ACT Government is both State and Local Government all rolled into one, and the proposal to introduce a land tax in the ACT is in effect simply implementing the Local Government funding mechanism that already exists elsewhere in Australia.

The risk for agriculture in this debate lies in the potential for any proposed land tax to be extended to include agricultural land, and in the proposal that 'unpaid' land tax could simply be accumulated and eventually deducted from a person's estate - in effect an inheritance tax or death duties. 

For a sector such as agriculture which experiences highly volatile annual returns and in which much of the wealth generation that occurs arises from increasing land values rather than annual operating profits, an annual land tax could dramatically reduce profitability, and have a very big impact in years of drought or poor commodity prices. In addition, the return of death duties in one or another guise would see a return of the situation that existed during the 1960s when farm families were routinely forced into large debt on the death of one parent and forced sales on the death of both just to pay death duties. 

All involved in agriculture need to be aware of the debate surrounding land tax, the potential implications for the owners of farm land, and the misguided enthusiasm some commentators seem to have that such a tax is the solution to Australian Government budgetary problems while at the same time 'hitting the rich where it hurts" . 

When such sentiments, supported by populist rhetoric and sub-undergraduate level analysis are given prominence by major media outlets, the risks Australian agriculture faces in the current debate become very obvious.

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