Here’s a tip for Federal and State politicians, and the people who advise them.

Take the current debate on tax reform.

Hit Ctrl+H.

Find ‘GST’, replace with ‘land tax’.

Hit return.

Now you’ve got a positive agenda for tax reform.

Everything that is currently being said for reforming the GST – that the tax base needs to be broadened, that the rate needs to change – can and should be said for land tax.

But unlike a bigger GST, a reformed broad-based land tax is a positive reform. It won’t fall disproportionately on the poor, is simple to administer, will promote productive economic activity, and make housing more affordable.

Broadening the tax base and reforming the rates

Each State already has its own land tax system, and each fails to realise its positive potential and is ripe for reform. (Aside from the States, the Australian Capital Territory is reforming its rates system, which is like land tax, to better realise its potential; and the Northern Territory does not have land tax – it should.)

Two key reforms are required. First, broaden the tax base to include land used for owner-occupied housing, primary industry and other currently exempt uses – bringing in owner-occupied housing would, by itself, more than double the land tax base. It would encourage owners to bring developable land to the market, rather than hoarding it under a owner-occupied house or, for that matter, a few beehives.

Second, replace the present structure of land tax, which applies to the total unimproved value of an owner’s land holdings at increasing marginal rates – this discourages large landholding and, amongst other things, frustrates institutional investment in rental housing. Instead, apply it to the unimproved value of each parcel of land owned, at marginal rates increasing by the per square metre value of the land.

Land tax gets at wealth

As a politician or adviser, you may be discomfited by the thought of a ‘tax on the family home’. Take heart: everyone else is talking about more GST on everything that families (and other people) buy. And as the ACOSS-NATSEM analysis shows, the costs from an increased GST would impact most heavily on those with the lowest incomes.

By contrast, a reformed land tax gets at wealth – particularly, housing wealth. The wealthiest 20 per cent of households owns almost half, by value, of the owner-occupied housing in Australia; the top 40 per cent owns almost three-quarters.

It is equitable to tax this wealth – particularly the land value component. The unimproved value of land does not reflect any work or effort put in by the owner; instead, it reflects the economic development of the whole community. The value of the improvements made by individual owners, such as houses, farms and factories, doesn’t get picked up by a sound, broad-based land tax.

Now, it will be objected that some high housing-wealth households are actually on low incomes (in particular, home-owning Age Pensioners). A reformed land tax can easily accommodate these households: simply allow the land tax liability to accrue as a charge against the property where payment would otherwise cause an owner undue hardship. (The charge would be paid when the property is eventually sold or transferred.) Just how readily available this provision should be is open to debate: there may be valid reasons for letting older households who are wealthy in housing to feel a bit of a nudge towards selling it to someone else who’ll make more use of it.

It will also be objected that land tax, as it currently applies to rental housing, ends up being paid by low-wealth, low-income tenants – but that’s misconceived, at best. Unlike GST, the cost of land tax cannot be passed on by landlords to the end users of land, if we assume the operation of the usual market conditions.

Because GST is payable only upon sale, this facilitates the vendor holding out for a higher price that covers the cost of the tax (in other words, the taxman is happy to wait until the vendor finds a purchaser who will pay the higher price). By contrast, land tax is charged annually, whether or not the property is let. There is no waiting while the landlord, as the vendor of housing services, holds out for a higher price; on the contrary, the landlord is given a strong reason to get the property let – to generate rent, to pay the tax – which means meeting the market.

(If you’re not convinced, consider a counterfactual: say land tax was abolished – like a party of New South Wales property-owners was proposing at this year’s State election. Without land tax, we should expect more landlords to do the lazy thing and leave their properties vacant – thereby reducing available supply, and increasing rents.)

So unlike GST, land tax gets at wealth – in particular, wealth in land, which is unearned wealth. And it stays with those who are wealthy in land – and can even be made to stay with their land, if it is too hard to make the low-income owner pay.

Unlike work and enterprise, and the goods and services they produce, land by its nature cannot be taxed out of existence – but it can be taxed into the market, increasing affordability for all who use it.