I recently read Alison Pennington’s AFR article, and the commentary by Rayna Fahey, Advocacy Director at Prosper Australia, highlighting the core problems in our economy: we do not tax wealth enough, and unearned property wealth has skyrocketed to society-distorting levels.

Pennington makes the point that Australia has shifted to an overreliance on taxing earned income, rather than wealth, which is eroding our society and our national identity. She makes the point, persuasively, that it’s time to stop taxing work and start taxing rent.

And Fahey points out that the explosion of wealth concentrated in land is exacerbated because we don’t tax the “unearned windfalls generated by government decisions”.

The Australian economy is locked in a decades-long slow, toxic spiral. Wages are stagnant. Housing is unaffordable. Productivity is low. Wealth inequality is spiralling out of control. We keep reaching for the same failed solutions, yet a major cause of our rot remains untouched: a broken, inefficient tax system that taxes the people who create wealth (workers) while protecting those who simply hoard it (rentiers).

For some time, I’ve been thinking about what could be done, especially at a state level.

Sydney and Melbourne are the most expensive cities in Australia, and amongst the most expensive in the world. State governments have a really important role to play.

What if the solution was simple? What if we phased out payroll tax and replaced it with a comprehensive land tax based on unimproved land value?

If we slowly increase tax on land, it would tackle the excessive power and wealth of rentiers, redirect investment to productive rather than parasitic use, and reduce taxes on productive employers and workers.

This is, first and foremost, a moral argument. It is about justice and unearned wealth.

Most people accept tax on work (even grudgingly), but land value? That is viewed differently, by government and thanks to decades of property-owner propaganda, by much of the publc.

Since 1980, housing prices soared by more than 200 percent, driven almost entirely by land value, not construction costs.

Did a Melbourne landowner build the rail link that doubled their property’s value? No. The community, funded by all taxpayers, created that value. Did a Sydney property speculator individually create the demand that tripled their lot’s value? No. The collective action of the millions of people who chose to live and work in the city created that value.

When a state government announces a new rail link or tram line, the land around the stations instantly surges in price. This “unearned increment” is pure profit, generated by the public, but captured privately by the landowner.

The core driver of modern inequality is that the return on capital vastly exceeds the rate of economic growth — and most of the capital behind that wealth is actually non-productive, speculative real estate.

In fact, as Pennington points out, last year the average Sydney home “earned” $16,000 more than the average Sydney worker.

Australians’ total land wealth has soared past $10 trillion. This growth is driven by public investment and location, not individual effort or entrepreneurial risk-taking.

And just one percent of the population owns a quarter of all the investment properties in Australia. Australia-wide, home ownership levels have fallen from 70 percent to 65 percent in the last 20 years. The myth of “mum and dad investors” is just that — a myth that benefits the ultra-wealthy.

Since the Howard Government, Australia’s tax system has been distorted to enable this this massive wealth to flow untaxed to that miniscule proportion of private owners.

In recent years, I’ve had a shift in my thinking on payroll tax.

I’ve been increasingly convinced that although it is a tax paid by employers, the consequence is primarily shifted onto workers. Specifically, it creates perverse incentives where hiring workers is taxed but sacking workers and automating jobs is tax-free! This creates additional financial incentives (beyond just not paying wages) for employers to replace people with AI and machines.

Meanwhile land tax on unimproved value increases the holding cost of land, helps shift the concentration of wealth more equally and is a direct intervention against the parasitic process of rentierism.

By increasing land tax on unimproved value, we target the hoarded, unearned wealth of the rentier class.

Land is the one asset that cannot be moved offshore; it is fixed. It is also the source of a very large proportion of the wealth of the ultra-rich (with shares and ownership of private companies making up a large part of the rest).

This makes land tax a powerful, efficient, and unavoidable tool for changing the concentration of wealth. It forces ultra-wealthy speculators who land-bank to either sell or develop, immediately boosting housing supply and construction. Because land-banking is less profitable, the ultra-wealthy will be forced to invest in more productive areas, like buildings, plant and infrastructure, that has more social and economic benefits.

This reform tackles the core of wealth inequality.

Land ownership is correlated with wealth, so taxing it is inherently progressive. Land ownership is fundamentally correlated with wealth. The most valuable land in Australia is overwhelmingly held by the wealthiest individuals and corporations — not “mum and dad” investors.

This is a direct intervention to ensure that the massive land value created by society is reclaimed for the social benefit of everyone.

I know the entrenched property lobby will fight this. They will raise three false, recycled and weak arguments.

First, they will say it is a double tax for homeowners because of stamp duty. This problem has already been solved by the ACT Government. Shifting to a better land tax could involve the phasing out of stamp duty over time. In short, this is not a problem of the policy just a simple matter of phasing.

Second, they will say that it hurts asset-rich, cash-poor retirees. This is a legitimate equity issue (although in truth most properties are owned by the ultra-rich), also easily resolved through a deferral mechanism.

Third, they will say that it will crash the market. In fact, the very point of this proposal is to moderate (not crash) the prices in the property market. In practice, the property market will simply reprice over time as the new land tax is phased in and the future tax liability is capitalised into the purchase price. This transfer of wealth from existing property owners to future buyers is not a crisis; it is precisely how we make housing affordable for the next generation.

The primary true opposition to this proposal is actually the political and economic power of the property owning industry and class.

A land tax directly targets the accumulated wealth and primary asset base of the highly organised and politically influential homeowners and property investors. There is a material difficulty in challenging this group because it re-concentrates wealth from the ultra-rich to the rest of society.

I’ve been thinking about this because often the challenges of plutonomy, inequality and excessive wealth feel like it can only be tackled by the Commonwealth government. What is it that state governments can do?

This proposal is hardly new or invented by me.

Georgists have argued for land taxes for over a century. The business lobby has called for payroll taxes to be abolished since they were invented.

The scale and urgency of the present crisis we are in — the crisis of inequality, economic malaise, housing unaffordability and more.

But we cannot seriously fight inequality while allowing one of the largest pools of unearned, unadulterated wealth — the value of land — to remain relatively untaxed.

So, land tax instead of payroll tax, is it time?