Let us start with an allegory. Long long ago, in a village far away, the elders there found that the villagers were eating more pies year by year. So they came up with a clever pie tax to charge extra money for every pie, so that they could restrain pie demand and expand the village treasure box. Every extra pie villagers buy, they must pay an extra 10% tax. The elders required all the pie makers to execute this new tax policy.
How does the new pie tax work when villagers buy pies? Here is a chart:
1 pie =$1+ 10%tax average $1.10/pie
2 pies=$1+ 10% tax +$1+20% tax average $1.15/ pie
3 pies=$1+ 10% tax +$1+20% tax+$1+30% tax average $1.20/ pie
4 pies average $1.25/pie
Despite the new pie tax, demand still keeps increasing. In order to avoid price panic, the elders design new pie models to make smaller pies without changing the price labels. Villagers gradually notice that pie size has shrunk, so they need to buy more pies. More pies cost more money. However, the villagers do not notice that the more pies they buy, the greater average price they pay for each pie. The villagers have become victims of “bracket creep”.
The tax system in the village may seem to be unusual, unlikely and unfair. However, a similar system has operated in NSW for many decades. The stamp duty system in NSW causes house buyers to become victims of bracket creep. Due to inflation and the hot property market, house buyers are forced into a higher bracket and pay a larger percentage of tax under the outdated stamp duty system.
Some things never change
The current stamp duty system in NSW has remained unchanged for a long time. The table below retrieved from OSR (Office of State Revenue) Website is produced based on two NSW official documents—Stamp Duty Act 1974 and Stamp Duty Act 1987. In this table, the two lowest thresholds were introduced more than 40 years ago, and other thresholds were applied around 20 years ago.
Compared with this time-frozen stamp duty system, house prices in NSW have experienced unprecedented changes. In “Housing Prices in Australia-1970 to 2003” from Macquarie University, the median house price in Sydney was $31,800 in 1974. According to a media release from the REIA (Real Estate Institute of Australia), the median house price was more than $1,000,000 in 2015. If a person wants to buy a million-dollar house today, the stamp duty will be $40,490.
Stamp duty table adapted from the website of Office of State Revenue
A case study
We interviewed Mr. Chapman who has lived in Newtown for nearly forty years. Newtown is a suburb in Sydney’s inner west, which is about 4 kilometers away from the central business district. Due to this ideal location and developed facilities for habitation, Newtown is a typical place reflecting increasing house prices in Sydney. Mr. Chapman showed his house transaction documents from 1977, where he paid $288 in stamp duty. This house today would sell for one million dollars, and the stamp duty would be over 4%. He exclaimed: “Same house same street, but this time, the state government collects over $40,000!” He points out that he sees the stamp duty system as an “antique” tax system, which is thwarting people’s basic need to own a house in NSW. He said: “Back in the old days, people had to save up a 10% deposit, nowadays, they need to save up 10% deposit plus 5% stamp duty, in effect, a 15% deposit”.
Stamp Duty Payment Details in House transaction document (1977) by courtesy of Mr. Chapman
He also mentioned that, compared with the inflexibility of stamp duty, the income tax system changes from time to time. In the Australian Government Tax Discussion Paper (2015), “Individuals” chapter, there is a sentence: “the tax thresholds are not indexed, which means that they do not automatically keep pace with either inflation or wage growth”. In order to relieve the negative effect from bracket creep in the income tax system for individuals, the federal government periodically adjusts the tax thresholds to maintain efficiency and fairness to some extent. If we compare the tables of “Tax Rates 2014 – 2015” and “Tax Rates 2011 – 2012”, it is very evident that the government made adjustments both in the tax-free threshold and the tax rate in the next two tax brackets.
Individual Income Tax Rates Comparison 2014-15 with 2011-12 adapted from Australian Taxation office
Mr. Chapman said: “With income tax, the scales are sometimes adjusted for bracket creep, while the stamp duty scales have never been adjusted. House buyers are paying a greater and greater percentage in stamp duty”. He thinks stamp duty is affecting housing affordability. There are two significant factors that are causing problems in housing affordability. The first is the increasing housing price, which is frequently mentioned in the media. However, the extra burden caused by bracket creep in stamp duty is hardly mentioned at all.
With inflation and soaring house prices, stamp duties have become a heavy and extra burden to buyers, but a considerable source of revenue for the NSW government. According to the NSW government Land Related Transfer Duty Report, the total amount of duty paid from residential property transactions was more than 5.3 billion in 2015, which accounts for three quarters of the total stamp duty raised.
Out with the old and in with the new
Recently, there have been debates around tax reform, suggesting the abolition of stamp duty. A paper released by the McKell Institute in March this year called for property tax in NSW to be made fairer by ending stamp duty and extending land tax. Another report by NCOSS (NSW Business Chamber and NSW Council of Social Service) calls for the government to consider “replacing conveyancing stamp duty with a broad-based land tax”. Their models show that it would help to make full use of housing stock, benefiting first home buyers, people who move regularly, and those who want to upsize or downsize their houses. These reports also point out that reform could create thousands of jobs and contribute roughly 5 billion dollars to the state economy.
However, despite these recommendations, the state Treasurer, Gladys Berejiklian has rejected these proposals indicating that they do not have “the support of the community”. Stamp duty only becomes an issue to people when they buy a house, while these reform proposals would impact every house-owner in NSW with everyone paying a “broad-based land tax”. Maybe this explains why the Treasurer has adopted this point of view. According to official statistics, there are about 7.5 million house-owners in NSW, but slightly over 18 thousand transactions.
The tax discussion paper indicates that “Australia’s tax system is increasingly outdated” and that stamp duties are “the tax with particularly high costs to economic growth”. Bracket creep in the stamp duty scales has persisted for far too long. Successive governments have failed to anything about it. Maybe now is the time for change.
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