Illustration: Simon Letch The brother of Australia's longest serving Treasurer, Tim Costello, wants inheritance tax reintroduced. The federal Labor party has toyed with imposing the so called "Buffet rule", named after the famous US investor Warren Buffett who was shocked to find he paid less tax, as a share of his income, than a middle class family. The Buffet rules says no tax payer should pay less than about 30 per cent of their income in tax. US President Barack Obama has tried to introduce just such a rule, but failed to get it past Congress. Others might say let's just introduce a new income tax rate for the very rich. Why not take 60 cents out of every dollar someone earns over $500,000? Sure, you can do all that. You will likely raise some millions from wealthy, but honest, Aussies.

But with so much in the tax debate, all is not as it seems. Economists call it "unintended consequences". 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. It's not clear whether being unethical explains why people get rich. Or, if, once rich, the normal penalties that apply are so small compared to your total wealth, you just don't care if you break the law. Probably both. The problem with trying to raising income taxes on the rich is that they see you coming. They have the resources to simply arm up with a fancy lawyer and accountant and start to hiding their income and assets, divesting them to family members or disguising personal income as company income. Likely, our tax evaders will set up a series of cascading trust arrangements where income is sheltered and distributed in a tax preferred way. It is very easy for rich business people, for example, to set up a company and pass off income as profits, taxed at the lower company rate of 30 cents.

Better yet, they can pass off personal expenses as business expenses – tax free business trip to Paris anyone? As long as our company tax rate stays well south of our top personal income tax rate – currently approaching 50 cents after the Medicare Levy and temporary budget repair levy – there is a strong incentive to relabel money as profit, not personal income. But increasing the company tax rate is not the answer either. It is little appreciated, but a higher company tax rate hurts wages, because it eats into a company's ability to give their staff a raise. Wages are by far the biggest cost most businesses face and hit with higher tax, it is the cost they will seek to constrain. So if we can't lift the company tax rate and lifting top income tax rates only encourages tax avoidance: what should we do? How do we hit rich people where it really hurts? The answer is surprisingly simple. We need to attack wealth, not income. Income is highly mobile and easy to shift around. Wealth is not. The major asset most people have is property, which is rather hard to disguise.

This gives the tax man an advantage: he might not know where your Bermuda billions are hidden, but he sure knows where you live. Shifting our focus to taxing wealth not income has become increasingly important as wealth inequality has risen. Inequality in earnings has risen, but it is this disparity in the ownership of assets – land, property and shares – that has really blown out over the past decades. If you want to tax rich people, you need to go after them where they sleep at night. Drive around the inner suburbs of Sydney; it's not hard to find the wealth. 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.

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. If you really wanted to smooth the path for reform, you could exempt everyone living in a home they already own, and only apply the land tax to properties sold from now on. Better yet, abolish stamp duty, which would reduce the upfront cost of buying and replace it with a lower annual tax. Sound crazy, like it would never happen? Not true. The ACT government has executed just such a tax switch and will progress to a full land tax regime by 2020. Economists believe the ACT economy will get a boost from the move. Stamp duty, essentially a tax on transactions, stops people from moving, distorting activity in the economy. But land tax is hard to avoid, leading to less distortion of economic activity. And as a simple revenue raiser, land tax is hard to beat.

If Mike Baird applied the same land tax that applies to NSW investment properties to Malcolm Turnbull's $50 million harbourside mansion, he'd score an easy $1 million in extra revenue a year ($39,540 for the first $2,947,000 then 2 per cent over that). Obviously, households of more modest means would be asked to make a much smaller contribution. States could solve their fiscal woes in one fell swoop and stop begging the federal government for GST income. Taxes could be raised by the level of government that actually spend them, on hospitals and schools, reducing waste and duplication. Sure, it wouldn't be popular. But that is very far from saying it's not the right thing to do.