Prime Minister Malcolm Turnbull has the chance to do something transformative and lasting in May's budget. Credit:Andrew Meares There's no doubt about what's the worst tax in Australia, and no doubt about the best bang-for-your-buck tax swap. The treasury set out the numbers in a discussion paper prepared for the tax review Malcolm Turnbull ditched. The worst of the taxes it examined was stamp duty. On the treasury's estimate real estate stamp duty shrinks the economy by an astounding 72¢ for each extra dollar it collects. None of the other taxes it examined come close. The economic cost of company tax is around 50¢ for each extra dollar collected, the cost of income tax somewhere between 20¢ and 30¢, and the cost of the GST between 17¢ and 20¢. It can be seen straight away that cutting income tax in order to push up the GST won't do much, which is why Turnbull junked the idea. A slow cut in company tax paid for by a slow increase in income tax facilitated by bracket creep (which is essentially what the government is proposing) won't achieve that much either, despite the rhetoric about jobs and growth.

But a move out of stamp duty into a tax with a really low economic cost ... that would give you about the best benefit a tax switch could buy. One tax, and only one, has an extraordinarily low economic cost. It's land tax, sometimes levied as council rates. Its economic cost is so low it's negative. The treasury's calculations suggest every extra dollar it raises actually boosts the economy by 10¢. It means that a stamp duty for land tax swap could boost the economy by a massive 82¢ for each dollar swapped. There's no bigger benefit imaginable from rejigging tax. But the discussion paper concludes wistfully that stamp duties and land taxes are state matters, and says the idea should be looked at as part of the separate federation white paper that Turnbull also junked.

A stamp duty for land tax swap could boost the economy by a massive 82¢ for each dollar swapped. There’s no bigger benefit imaginable. The 2009 Henry Tax Review has chapter and verse on why the benefits would be so big. People who move house frequently are whacked with much more stamp duty than people who tend to stay put. So they experiment with staying put, driving longer distances clogging up roads. Or they don't take good jobs. They renovate rather than move, or buy bigger houses than they need in case they run out of room. Older Australians put off downsizing in order to put off stamp duty. "Ideally, there is no place for stamp duty in a modern Australian tax system," it concludes. In contrast, land tax doesn't discourage anyone from doing anything, except from wasting land. It makes unoccupied properties and holiday homes more costly. It prods people into using land well, and into downsizing if it makes sense.

So far only the Australian Capital Territory has taken the plunge and begun swapping stamp duty for land tax. It's doing so slowly over 20 years so that people who have just bought properties aren't hit by full stamp duty followed by full land tax. But there's a quicker way to get the benefits; an ingenious solution cooked up in the office of Greens leader Richard Di Natale and costed by the Parliamentary Budget Office. It would happen instantly, on July 1. From that date all transactions would be free of stamp duty and would in return face land tax. Properties that hadn't changed hands wouldn't face land tax, until they did swap owners. It would cost the states a lot up front in return for a regular stream that wouldn't make up the difference for a decade. Which is where Turnbull, Scott Morrison and the budget come in. They would borrow to lend the states enough to make up the difference until 2030. The magic of accounting means it would have a zero effect on the underlying cash deficit. It'd be off the books. Nor would it push up net government debt, because net debt is gross debt net of money that the Commonwealth is owed, and the Commonwealth would be owed that money by the states. After June 30, 2030, the changeover would be complete and the Commonwealth budget no worse off (or probably better off, because of the resulting economic boost). The Commonwealth would have bought the best economic boost a tax-switch can buy for a song.

Loading It wouldn't solve the housing crisis. Axing stamp duty would make houses more affordable, which would allow buyers to bid up prices. At the same time the land tax would weigh down on prices, making the ultimate outcome "uncertain", in view of the Henry Review. But if they're serious about tax, they'll do it. There's still time.