Illustration: Jim Pavlidis We all know that diamonds and rubies derive value depending on their degree of scarcity. Well it's the same for most other things too. And wherever you find scarcity – of natural resources, of workers, of investment – there too will you find economists, seeking to help society organise itself so as to squeeze out the most utility possible – to ensure scarce resources are allocated to their best ends. Now, saying something is scarce, is not the same as saying the supply of it is absolutely fixed.

Land taxes provide governments with a more stable source of ongoing revenue than volatile stamp duties. Women can have more babies, growing the potential labour supply. Governments can print money to stimulate investment. But of all the factors of production, the supply of land is the most fixed. A land tax means wealthier people pay more than poorer people. While much is made of the need to maximise the productive use of workers and capital, it is land that is the real missing piece of the productivity puzzle.

Ultimately, the square footage surface of the earth was determined a long time ago. That's not to say the supply of habitable land is fixed. Rising sea levels or pouring a lot of sand into a harbour can change supply at the margin. And the supply of residential land is even more malleable, with rezoning. And because homes can be built on top of other homes – otherwise known as apartments – potential housing supply can be boosted significantly from its present level. In its inaugural five-year Productivity Review released last week, the Productivity Commission devoted an entire chapter to ways to make more efficient use of land.

The need for reform should be obvious. With a rapidly growing population, supply of new homes has failed to keep pace, causing higher house prices and increasing social segregation between high income inner-city dwellers and lower income outer-urban dwellers. "Left unaddressed, the efficiency of cities and their liveability are likely to deteriorate," the commission warns. Its report advocates for further reform of excessively prescriptive zoning laws and lengthy approval delays to boost housing supply. But alongside boosting supply, it is also incumbent on responsible governments to ensure we are doing everything we can to get the most out of Australia's existing housing stock.

Any impediments to the efficient allocation of land need to be swept away. Inconvenient then, that the single biggest impediment to efficient land allocation is also the biggest single source of revenue for most state governments. Yes, we need to keep talking about stamp duty. Almost a decade ago, the Henry tax review recommended abolishing it, in favour of a broad-based land tax. Treasury recently estimated every additional dollar raised in stamp duty on residential property reduces the living standards of Australian households by 72¢ in the long run.

"Stamp duties on residential property add to the price of houses, and can discourage people from moving to locations that may be closer to preferred jobs, family networks and schools. This can result in increased commuting times and costs," the commission summarises. The tax also acts as a barrier to older households downsizing and to owners over-investing in home renovations. "All of these factors result in the retention of land for relatively unproductive purposes." The answer is simple, in economic theory at least. Abolish all stamp duty and raise the exact same amount of revenue by levying an annual charge to all homeowners, according to the unimproved value of their land.

Wealthier people pay more than poorer people. Low income households, such as retirees, can get a concession, or only have the land tax deducted when they come to sell. According to the commission: "Taxes based on land values avoid the imposition of penalties for moving, and the inequity of tax burdens falling disproportionately on those who choose to move, whether for work or lifestyle reasons." Land taxes would also provide governments with a more stable source of ongoing revenue than volatile stamp duties. NSW actually came within a whisker of introducing a land tax earlier, with a proposed emergency services levy on households to replay a levy on insurance contracts, but Premier Gladys Berejiklian ultimately baulked at the idea of a "great big new tax". More's the pity.

Meanwhile, the ACT government is well into a 20-year phased transition away from stamp duty to land tax as its major source of revenue. When the reform started in 2012-13, stamp duty and taxes on insurance policies made up 24¢ in every dollar raised. This has since fallen to 16¢, while revenue raised from general rates – an effective land tax – has risen from 18¢ to 27¢. South Australia has also begun phasing out stamp duty on non-residential, non-primary production land, with the aim of abolishing this type of duty by July next year. Loading As states slowly reform, the Productivity Commission says the federal government should act as a facilitator and also to ensure states who do reform are not disadvantaged by the way the GST is distributed.

The commission has laid down a compelling argument for change. All that's missing is more politicians with the courage to implement it.