Taxes on wages in Australia were fairly minimal until WWII, since which time they’ve been ratcheted up significantly. Federal taxes before the war consisted mainly of customs and excise charges and the federal land tax, introduced in 1910.
The States and municipalities also levied land-based taxes. These played an important part in the development of Australia, especially in regional areas.
This chart from American Government Finance in the Long Run 1790 – 1990 shows property taxes were also the main source of revenue in the United States until the 1940s.
Land Values Research Group studies since 1943 showed the positive role played by property taxes in developing Australia. Particularly interesting is the case of Victoria which until 1920 had rated on the basis of net annual value rating (NAV) at municipal level. After that time, municipalities were given the right to choose to ‘rate’ on unimproved land value – now site value rating (SV).
Many municipalities made the change to SV rating, and there was not one instance where the economic performance of the city did not improve immediately after the change to SV in comparison with cities that had remained on the NAV system. This statement held true even during times of economic recession.
However, as the US chart shows, it became fashionable following WWII to wind back the importance of property taxes. There is little doubt that the property lobby led this putsch, often using “the poor widow” as the stooge to promote their cause.
California’s Proposition 13, which reduced property taxes by almost 60% from 1978, represented the full flowering of the retrogression. That the once ‘Golden State’ has since lost its economic preeminence is not coincidental. Where several other states followed the economic decline by enacting similar legislation, it’s instructive to note the superior economic performance of those US states which retained higher property taxes.
Following the popular trend, Australia has lowballed property taxes from the early 1970s, when the Whitlam Government decided to ‘assist’ municipal funding federally.
Meanwhile, the UK rating system had been permitted to fall into disrepair. It was eventually dismantled.
So, she green light had been given to larger and larger speculative land booms and busts from which it has become increasingly difficult for nations to extract themselves.
The remedy is obvious, but banks, the 0.1% (including Donald Trump?) and their acolytes remain opposed. They’d rather people suffer than address the issue.
With nary a whimper, capitalism has been permitted to morph into rentierism and is suffering consequences warned by Adam Smith and Henry George.
To paraphrase someone or other: Increasing poverty must create great universities, because it could not possibly be the other way around.
A NEW ZEALAND COMMENTARY by Bob Keall
20 November 2017
The issue here is not some woolly concern about buses and trains or boats and planes. The issue is about access – whether by road, rail, water, air, pipes, wires, airports or airwaves. Any or all of them influence land values profoundly. Because of this direct cost/benefit relationship the capital cost of the reticulation and its maintenance must be met by a charge on the enhanced land values, spread over say a 20 year period, thereafter generating a cashflow for other such assets, building an inheritance for posterity. Local roads have been built in this way and should continue so. “Free” water has to be captured & reticulated.
With the capital cost thus covered there is then scope for user charges i.e. your private car on the road, bus fares or cartage charges; train fares or freight charges; metered water; competitive market rentals for the use of wires or radio spectrum, or at least, (in the absence of competition), a return on capital at the current rate of interest. Neither Land Value Rates nor User Charges can cover the cost of both the capital investment and the operation. Wasted water incurs further capital cost.
In the case of both roads and rail, if the capital cost were covered in this way, cheaper fares and freight charges would relieve congestion as between cars, buses, trucks and trains, for both passengers and freight.
In the case of wires & airwaves the reticulation would best be done by a Regional Power Authority renting out spare capacity to competing telephone, TV or IT service providers. It would also reduce the tiers in the electricity supply chain from 4 to 2 and ensure maintenance and cheaper power, instead of dividends now to remote investors, at the expense of maintenance. User pays for electricity avoids waste and expensive capital investment (likewise water). Examples of this are Vector in Auckland & Electra in Wellington in Local ownership.
Providing the reticulation and its maintenance and recovering the cost from the enhanced land values is a core government function – central or local. Loans raised for these purposes are a traditional trustee security. Using or operating the facility (competitively) is the private sector role, at market rentals. In the absence of competition e.g. water, airports, the service should be supplied at marginal cost.
A common experience, here and abroad, is that privatised utilities get run down and have to be rescued by the state e.g. British Rail, TranzRail, Enron Electricity in California, water supply in U.K.. Dividends have been paid at the expense of maintenance. This would be highly likely in the case of private toll roads reverting after a short “investment” term.
Any toll road, public or private, is another ruse by which a multitude of monkeys pay peanuts now to benefit the property gorillas. Congestion pricing unselectively hits those who cannot avoid it or afford it. The congestion must be relieved by upgrading and integrating public transport (supra).
The reality is that service utilities need the underpinning of a charge on the land values they enhance in order to allow a viable operating cost. At the same time the charge progressively secures to the community the enhanced value instead of capitalising it for the speculator.
Toll Holdings re-built a run-down rail and transport service for a rental, if the Govt re-built and maintained the tracks. Govt buy-back of the operation solved nothing.
Likewise the Govt should recover Telecom’s unbundled Local Loop, for market rentals to competing operators. Thus we would all share in the free market instead of being robbed by it.
The place for the private operator is in the delivery of services. Ownership of the monopoly rights is the province of local and central government. Recognising this neatly resolves the political conundrum confronting us of defining public/private property and establishes the proper partnership between the public and the private sectors.
There is also a place for Uniform Annual Charges. Water, sewerage and admin’ are unrelated to the view from the high or low side of the road. Site advantage is a matter for Central Govt land tenure, not the limited context of Local Govt.
About 1995 the then Auckland Regional Services Trust, now Infrastructure Auckland, with its interest in “Ports of Auckland”, etc demonstrated that communally owned natural monopolies and infrastructural assets can make a valuable contribution to major community projects. We should build on that example not plunder it.
In 1998 Rt. Hon. Helen Clark advocated that the principle be extended to include transport, airports, water and electricity. But, concurrently, Telstra Clear has consent from the Auckland City Council to reticulate “New Zealand’s first national full service broadband network – the only system able to carry a full range of telephone, data, internet, mobile and cable television services to business and residential customers”. (NZH 30.1.02).
All the above functions should be coordinated and undertaken by the Auckland Regional Council, in line with Helen Clark’s perception, and the principle applied to Local Govt. across the country. These are core local government functions and would add to our heritage for posterity.
The coordinated reticulation should be financed (as in the past for roads, water and sewerage) by a combination of:
– loan money (an inter-generational sinking fund)
– a Resource Rental paid by operators
– Land Value Rates
This is now in hand with the new Labour Govt. & our “Local Govt Reform”.
*An affiliate of the International Georgist Union, London and Prosper Australia Inc., Melbourne
P.O.Box 223, Waikanae 5250
Email: firstname.lastname@example.org Website: www.resourcerentalsrevenue.org
How Metro can recapture some of the value it creates
By Walter Rybeck November 24 at 4:00 PM
However, the logical solution to make Metro a world-class transit system has not been heard by the public. Not from the management or board of the Washington Metropolitan Area Transit Authority, not from state and local officials in the jurisdictions that fund Metro, and not from the local media, which correctly declare that the region’s transportation system is in crisis mode.
Metro literally creates its own revenue source. A congressional study I directed in 1980 for the House Banking, Finance and Urban Affairs Committee revealed the astonishing fact that the subway system, although less than 40 percent complete at that time, had already generated $3 billion to $5 billion worth of new land value in the District, Maryland and Virginia. This bonanza of Metro-induced location values has multiplied many times over. A limited number of owners of prime sites near stations reap these Metro-generated land values as windfalls; this fuels land speculation and gentrification.
Metro has every right to receive this treasure, which is a direct reflection of the services it provides. For Metro funders to cry poverty while allowing the lion’s share of these publicly created “Metro dollars” to slip away to lucky landlords who did nothing to earn them would be laughable were it not so self-defeating.
Clearly, the traditional property tax is not suited to recapturing this vast store of Metro’s rightful income. As customarily administered, the property tax falls most heavily on real estate improvements — the homes, apartments, commercial buildings and industrial structures that are the lifeblood of the community — so imposing tax burdens on them seriously harms homeowners, businesses and the regional economy.
Instead, Metro jurisdictions should enact a universal property-tax abatement to greatly reduce or eliminate taxation of privately created building values. In other words, instead of facing a single tax rate on their total property value, owners would find a low or zero rate on their privately created building value and a higher rate imposed on the socially created value of their sites. This would let the property tax work mainly to return and recycle publicly created land values. Property owners would be taxed more equitably, charged in proportion to their Metro access advantages and their other public-sector benefits.
A universal property-tax abatement would bring about results that exceed the wildest dreams of transit supporters and local political leaders, namely:
- It would create ample funds to meet Metro’s current and long-term operating and maintenance needs for safe, reliable and efficient service.
- It would allow Metro to avoid excessive fare increases that discourage the use of mass transit. Keeping fares low would enhance the values of sites served by Metro, values that would then be recycled to further enhance Metro’s financial resources.
- It would reduce speculation by landlords who line their pockets with Metro-generated land values. This would occur when a robust tax on location values minimized windfalls, taking the profit out of keeping developable sites in cold storage while owners hope for future gains.
- It would stimulate affordable transit-oriented development as this tax strategy reduces land-acquisition costs and makes it cheaper to construct, improve and maintain housing and commercial buildings.
- It would ease the region’s severe traffic congestion, as well as the air pollution that congestion causes, when more commuters shift from cars to public transit.
No other fiscal proposal could achieve as much. This is not untried or untested. It relies on the same principles that make Hong Kong’s MTR transit system one of the rare profitable transit systems in the world. Hong Kong’s success stems from recycling the land values it creates to support its first-rate infrastructure.
What excuse can those responsible for Metro’s future give for failing to reach out to those with expertise in this reform and move to adopt this hopeful way forward? Area leaders can continue giving crutches to help Metro limp along. Or they can implement a universal property tax abatement — in essence, transforming the property tax into a public service access fee — making our region more prosperous with a sustainable transit system that will be the envy of cities across the nation.
The writer, a former staff director of the House Subcommittee on the City, is a former associate director of the National Commission on Urban Problems.
RADICAL TAX REFORM: THE ANSWER TO TAX EVASION, BUDGET DEFICITS AND WELFARE CUTS
by Duncan Pickard
The governments of almost all countries have budget deficits and increasing national debts. The taxes* they currently collect are unable to meet the increasing costs of health and welfare provision for their older people and for the care and education of their young ones. Because the taxes they impose on earned incomes, employment and trade have severe negative effects on economic activity, the bases of the taxes are reduced, which means that different sources of revenue are needed. Heads of governments have signed up to international projects, initiated by the Organisation for European Co-operation and Development (OECD), to prevent multinational companies and rich individuals from avoiding and evading taxation by relocating their money to countries with very low levels of taxation. They see this as an easy way to obtain more revenue. Dwyer (1), in his essay “Tax Dodging and the Coming Tax Wars” has described the problems involved when trying to collect taxes from companies and individuals who move money from one country to another. He has emphasised the failure of politicians to see the futility of their plans. International projects to “wage war on tax avoidance” are fundamentally flawed because they are illegitimate in International Law. Individual countries are able to enforce laws only within their territorial boundaries. No sovereign state must obey others and so can not be obliged to collect taxes on their behalf. Exhortations by politicians to the chief executives of multinational companies to ‘pay their fair share of taxes’ are correctly met with the response that they pay all the taxes that they are legally obliged to pay. It is the legal duty of the directors of companies to maximise the financial returns of their shareholders and to comply with that they have to minimise the amount of tax the companies pay using all legal avoidance measures which are allowed.
It should be obvious to experienced politicians that their reliance on tax systems which are outdated, over-complicated and are severely disadvantageous to employment and enterprise should be replaced by a system which is suitable for the purpose of obtaining all the funds for the essential functions of government. Hoping for significant improvements from tinkering with tax systems which have a long history of failure is ludicrous. There are examples of countries where tax revenues are obtained in sufficient amounts without detrimental effects on economic activity and with little or no avoidance or evasion. They are Singapore (2)and Hong Kong(3). They derive most of the money needed for government from the collection of ground rent. They have few natural resources, but they have no annual budget deficits and high levels of economic prosperity.
The collection of ground rent for the necessary functions of government was proposed by Adam Smith in 1776 (4) and William Ogilvie in1781 (5). It was supported by David Ricardo (6) and John Stuart Mill (7), and the theory was refined by Henry George (8) in “Progress and Poverty” (1879). He called it the ‘Single Tax’. I shall refer to it as Annual Ground Rent (AGR) which includes the economic rent of natural resources such as the electromagnetic spectrum and mineral and fossil fuel deposits as well as the ground on which we stand. Classical economists subscribe to the four tenets which a tax system should have, they are :-
1. It should not hinder employment or trade and so reduce the total fund from which the tax or charge must be paid.
2. For fairness, the amount of tax or charge levied should be related to the ability to pay and for justice, earned incomes should not be taxed whilst unearned rental incomes are left untaxed.
3. A tax or charge should be cheaply and easily
collected so that the costs of administration are as low as possible.
4. There should be no opportunity for avoidance or evasion.
*The Oxford dictionary defines ‘Tax’ as ‘a contribution to state revenue compulsorily levied on individuals, property or businesses’.
The collection of the annual ground rent is the only fiscal charge which complies with these four tenets of taxation; most of the fiscal systems in use around the world fail miserably in comparison. An important feature of AGR is that it provides incentives to enterprise and trade by optimising the use of land. Almost all cities have areas of land which are derelict and disused; they contribute nothing to the creation of wealth and increase the cost of using other land whether to rent or buy, because they make useable land scarce. A large area of land in the countryside is also unused or underused. By making an annual rental charge for occupying such land its owners would either make use of it or allow someone else to use it. Without the need for income taxes and sales taxes (such as VAT) are reduced, employment and trade will increase and costs of production will fall (9).
Those who advocate “wars on tax cheats” to collect more tax by international co-operation stand to be accused of behaving like a physician who repeatedly treats the symptoms of a disease and does not look for its cause and never finds a cure. They opt for what they think is the easiest target without evaluating what is needed for the target to be hit or whether they have chosen the correct target. Instead of trying to raise more from existing taxes by trying to devise more effective ways of enforcement, they should be thinking of better methods of collecting the revenue they need. The tenets of taxation listed above should be on display in every politician’s office.
The economic case for the collection of the economic rent of every country to provide for its necessary functions is invincible. The reason why it is rarely used is due to the failure to overcome the claims of those with vested interests in retaining the status quo, who are usually a minority of the population but possess the loudest and most strident voices. The importance of gaining or retaining political power always over- rides plans for radical change. Election manifestos contain vague promises of ‘fairness’, ‘justice’ and ‘working for the many, not the few’, with no commitments to the radical tax reforms which are needed. In Britain many years ago all the revenue for government was obtained from those who owned the land.(10) Gradually, taxation has been shifted onto the earnings of those who work, leaving most of the unearned rental value of the land to be collected by those who own it. It is not very long ago that ownership of land was a necessary qualification for having the right to vote or be eligible to be elected to parliament. The laws pertaining to the imposition of taxes were made by landowners. Reference is often made to “The Law of the Land” which should be called “The Law of the Landowners”. The bias towards protecting the privileges of landowners has even been backed by the European Court of Human Rights. It declares the ‘right of everyone to the peaceful possession of his property’ but this only applies to a person’s existing possessions. It does not extend protection of property rights to include the right to property for everyone. Therefore it is not a universal human right.
In the United Kingdom, a significant shift of the burden of taxation towards earned incomes and away from unearned incomes began about fifty years ago with the abolition of Schedule ‘A’ Property Tax whilst exemption from tax on mortgage interest was retained. The shift was accelerated twenty years later with greater emphasis on the ambition for a “Home – Owning Democracy”. The government introduced the right of council house tenants to buy their homes at heavily discounted prices. Banks were allowed to provide mortgages for house purchase, a function which had been dominated by Building Societies whose lending capacity was limited by the amount of money which savers had deposited with them. This restrained rises in house prices. Their business model was based on the requirement for borrowers to have the ability to repay what they had borrowed. They were averse to taking risks and defaults were few. Lending by banks was very different. Instead of close scrutiny of borrowers’ ability to repay, banks increasingly relied on the value of the collateral against which the mortgage was secured. So long as house prices were rising, the amount of money they were prepared to lend also rose. Banks were not restricted by the amount savers had on deposit because their fractional reserve facility allowed lending to rise with the demand for it. Residential property became the most profitable form of investment and many peoples’ net financial worth was gained more from the increase in the price of their houses, or more accurately, in the price of the land on which their houses stood, than from paid employment. The preference of lenders for investment in landed property meant that those who wanted to invest in productive industry found it very difficult to obtain financial backing.
The increase in the price of residential property is almost all untaxed, unearned income, a fact which is ignored by politicians and officials in the Treasury and the Bank of England. The high and rising price of houses is seen to be beneficial to the national economy because as more money is spent on houses, the higher is the GDP and the more politicians congratulate themselves on the success of their economic policy. The shortcomings of GDP as an index of economic prosperity are well known but the resistance to the adoption of a better index is formidable, from owners of residential property, the financial sector and politicians (11). Nothing is produced by much of what is included in GDP. For instance, money which is spent on land does not produce more of it and money which is wasted on projects which fail, adds to GDP, as does the cost of repairing the damage caused by natural disasters although there is little net gain to the national wealth.
A much better measure of economic prosperity is the amount of Annual Ground Rent in a country. One of the natural laws of economics states that as the population grows and production increases, the demand for land rises, which inevitably increases its economic rental value. AGR is the surplus which remains from wealth production after labour and capital have received their just returns for their contribution to the production of wealth. All national governments should be obliged to collect the relevant statistics and publish the size of their AGR. They would then know the amount of revenue available to satisfy their necessary budgetary requirements, and could abolish all the harmful taxes which impede employment and trade, only retaining taxes on detrimental activities such as smoking and excessive alcohol consumption.
It is accepted by most economists that countries should never aim to have an annual budget surplus. “That such a surplus would normally lead to a weak economy is obvious. When the government has a surplus it is taking away from the purchasing power of its citizens more than it is adding back through its spending. Thus, it is contributing to a lack of demand”. (12) This statement needs to be challenged because it does not take account of the harmful effects on employment and trade of income taxes and general sales taxes. If government revenue is obtained from AGR and harmful taxes abolished, the resulting increase in wealth creation will produce sufficient growth in economic rent (AGR) for a budget surplus, which can be distributed as a national dividend and there will be no lack of demand.
Politicians refuse to accept that they are responsible for recessions and the consequent damage to the lives of their citizens (13). By wilfully ignoring the importance of speculative investment in land in the recurrence of booms and recessions, they persuade themselves that such events are inevitable and unpredictable. Instead of using their political power to prevent them, they react afterwards with stimulants, such as ‘Quantitative Easing’ to correct for ‘excessive exuberance’ or ‘market failure’. It is little wonder that the former governor of the Bank of England was unable to provide an adequate answer the Queen’s question, “Why did nobody see this (recession) coming”? All recessions are preceded by booms in landed property prices as speculative investors, encouraged by exemptions from taxation sanctioned by the government, bid prices up above what people can afford. A crash inevitably follows (14).
How have Singapore and Hong Kong managed to achieve the economic prosperity which has made them envied by others? Hong Kong was fortunate when the ‘ barren rock’ was leased from China in the nineteenth century because the ownership of the land remained with China and anyone who wanted to occupy land in Hong Kong had to lease it from the British colonial authority on the island. As the population grew and production increased, the prices bid for leases increased and the colonial authority used the money to fund the provision of basic services. The prosperity of Hong Kong had spectacular growth in the decade from 1961 under the supervision of its Financial Secretary, John Cowperthwaite. He refused to impose tariffs or give subsidies and he called his economic policy ‘positive non- intervention’ and said his job was to see that no economic harm was done. All the measures of social progress showed marked improvement, such as the rate of unemployment, literacy and the average age at death.
Singapore’s history of prosperity dates from the county’s achievement of independence in 1965. According to Phang Sock Yong of Singapore Management University, the city state flourished because its economic model contained ‘elements of (Henry) George’s land value capture. Singapore passed the Land Acquisition Act in 1966 which gave the state broad powers to acquire land. In 1973, the concept of a statutory date was introduced, which fixed compensation values for land at the statutory date, November 30 1973. State land as a proportion of total land grew from 44% to 76% by 1985 and to about 90% in 2015. Rents that accrued from economic growth were invested in more and better infrastructure and taxes that damaged the economy were held down’.
After adopting the radical reform I have described, the need for “a war on tax cheats” will disappear. Multinational companies which are involved in large increases in the production of wealth by their innovations and investments, automatically increase the amount of AGR, which currently adds to the price of landed property or disappears abroad. With taxes on employment and trade abolished, unemployment will be minimised and wages will rise. All employers, including the multinational companies will be in competition for labour, and the enormous cost of welfare provision for the unemployed and underemployed will be greatly reduced. Governments will no longer need to persist in their futile attempts to impose taxes on the profits of corporations and the elusive money of rich individuals, most of whom make profits from expensive residential property on which they rarely pay tax.
1. Dwyer,T. (2016) Tax dodging and the Coming Tax Wars, in Rent Unmasked, ed. Fred Harrison, Shepheard-Walwyn, London.
2. Sandilands, R. (2016)The Culture of Prosperity, in Rent Unmasked, ed. Fred Harrison, Shepheard- Walwyn, London.
3. Purves, A. (2015) No Debt High Growth Low Tax, Shepheard-Walwyn, London
4. Smith, Adam (1776) The Wealth of Nations. Glasgow Edition, Oxford, 1976.
5. Ogilvie, William (1781) Essay on the Right to Property in Land, in Birthright in Land, Othilla Press, London, (1997).
6. Ricardo, D. (1818) Principles of Political Economy and Taxation, Prometheus Books, London. (1996).
7. Mill J.S. (1886) The Principles of Political Economy, Longmans, London.
8. George, Henry (1879) Progress and Poverty, Robert Schalkenbach Foundation, New York, (1979).
9. Gaffney, M. (2013) Europe’s Fatal Affair with Value Added Taxation, Groundswell, www.masongaffney.org
10. Harrison, Fred (2006) Ricrado’s Law, Shepheard-Walwyn, London.
11. Fiorentini, L. (2013) Gross Domestic Problem, Zed Books, London
12. Stiglitz, J. (2016) The Euro and its Threat to the Future of Europe, Allen Lane, London.
13. Harrison, Fred (2015) As Evil Does, Geophilos, London.
14. Harrison, Fred (2005) Boom Bust: House Prices, Banking and the Depression of 2010, Shepheard-Walwyn, London.
Duncan Pickard BSc. PhD. Was a lecturer at the University of Leeds until 1990, he then took up farming full-time. He has farmed in Scotland since 1992 in partnership with his wife and two of their sons and their wives. They own 650 acres and farm another 1,000 acres on contract or on short-term leases. Dr. Pickard is the author of Lie of the Land (2004), Land Research Trust.
The good ship Australia was spoiled for a ha’rporth of tar.
From Vietnam onward, we cravenly followed Uncle Sam into any expeditionary war, because we’ve been terrified somebody may attack us. We’re fearful we can’t look after ourselves, so we need our big Uncle, you see?
Uncle is good enough to sell us much of his war weaponry, first-rate or otherwise. He sells a lot of it elsewhere, too, and has a rampant and big war machine.
Uncle used to keep his horns in, but now he’ll turn up anywhere for a fight, especially if there’s a leader to be removed for wanting to come off the dollar, or for access to oil. Uncle used to make a lot of good stuff at home and didn’t turn warlike until Vietnam, but fighting, banking, and building up land prices, have now become his economy.
Oz went all the way with LBJ, and now we’re still waltzing Matilda with Uncle in order to ensure the economy continues to reward parasitic rent-seeking leeches – even if it does mean the 99.9% must suffer for it.
This is not a good time for Australia.