THE DEPRESSION – A SUMMARY

pulling threads togetherMy thanks to those who visit this site regularly.  Newcomers who can’t review everything that’s gone before might appreciate a summary:-

It may be hard to believe, but the world is experiencing the early stages of economic depression. You’d never know it, because the media seizes upon anything at all that may be seen as a “sign of recovery” from the slump.  Because of the failure of communism, it sees no serious alternative to the status quo, because it hasn’t accepted or realised that there is an alternative to tax regimes that foster private capture of publicly-generated land rent, and the repetitive cycles of boom and bust that this engenders.

Maybe it’s not all that bad; not a depression?  Why, countries, such as Australia, China, India and Brazil haven’t even experienced the effects of the global financial collapse (GFC), have they?  To which anybody cognisant of the incredible hurdles still to be got over would reply :  “Yet!”

Signs of recovery will prove false until the deadening burden of debt is liquidated from the system, whether it be government debt, household debt, or a combination of both of these.  Australia’s particular problem is the level of household debt.

Governments may employ only one of three approaches to combat the GFC:-

1.         PRINT MORE MONEY – ‘to avoid deflation’.  [The Bernanke option.]

The US finds this ‘solution’ to be eminently satisfactory, because the world still believes the US dollar and its T-notes and bills remain atop the pile of floundering currencies.

However, it is valid to inquire how printing more money and bailing out banks can possibly solve anything, because pandering to an errant financial, insurance and real estate (FIRE) sector certainly won’t create ONE more dollar of real wealth.

2.        AUSTERITY MEASURES – to ‘reverse’ the spendthrift mentality that developed through boom/bubble times. [Greek/Irish/Spanish options.]

These involve higher levels of taxation and slashing government spending and jobs.  History shows that this approach can’t solve the debt problem during a depression because it leads to lower levels of production and employment as the government tries vainly to reduce the ill effects of debt.  This alternative also panders to the already-failed FIRE sector of the economy to which we CAN’T look for assistance.

3.        ABOLISH TAXES – and collect land rent for revenue.  [The untried option.]

Whereas the first two options above were tried in the 1890s and 1930s depressions and failed abysmally, with WWI and WWII arising out of each, this method encourages production and employment and gives the signal to a privileged and powerful group of people that seeking to corner the public’s surplus rent is no longer acceptable: the criterion now must be real wealth-creation – not creating real estate bubbles and debt.

This option was  actually employed successfully by Sir Stamford Raffles in Indonesia (then known as the ‘Spice Islands’ or the Dutch East Indies)  to exit from an economic depression brought about by innumerable taxes levied by the Dutch.  Raffles went on to found Singapore on the same principle of abolishing taxes and collecting the economic rent, a surplus in the production process.

The approach was also part of the 1909 UK “Peoples Budget” before WWI, but was defeated by the House of Lords who preferred to send Britains to war rather than to discourage rent-seeking.

If you see these are the available options, and that only the last one works, you certainly do not have to apologise for NOT being an economist, because you understand more about economics than those economists who tinker with impractical mathematical models that ignore the massive quantum of production’s surplus rent.  (Yes, unfortunately this includes Austrian economists!)

And … welcome to the Georgist School of economics!  The positive way out of the depression – working our way out of it …. without taxation.

But it aint easy.  It’s difficult to educate people to a new mindset that demonstrates how private rent-seeking has kept them poor.  Just look at the ill-informed resistance of Australians to the introduction of the Resource Super Profit Tax, which would fairly capture our mineral rent for ALL the citizenry.

You can’t imagine a worse, if mindless, reception if the Australian government were to seek to introduce the second leg of rent capture, the comprehensive land tax/rent system recommended (to replace payroll taxes and stamp duties) by Ken Henry’s panel for Australia’s Future Tax System.

Finally, Australia is the closest country in the world to solving this economic depression, thanks mainly to Ken Henry’s review panel’s rent-capture recommendations, but because of a contrived ignorance concerning option three above, it looks like the depression will continue to roll in relentlessly upon us.

Let’s hope that enlightenment can somehow break through the “we’re right, you’re wrong” childish party politics that splits and subverts a reasoned discussion of economic reform.

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RSPTING AUSTRALIANS AND THEIR MINERAL RESOURCES

 

RSPT

RSPT IS NOT SOME WEIRD TAX INVENTED BY KEN HENRY

During my time as valuer with the Australian Taxation Office I served a stint valuing hotels.  Later, in the Commonwealth Bank, I came to value other forms of  ‘going concerns’, such as service stations, nursing homes, restaurants, etc.

The methods used for hotels were  to capitalise either the net rental or the net profit.  If a tenant paid an ingoing for a lease, this premium was also rentalised over the term of the lease and added to the rent reserved under the lease.

Rentals obviously bore a relationship to the hotel’s turnover in liquor, meals and accommodation and to the net profit of the business.  A capitalisation rate was established by analysis of sales of leased hotels trading at a similar turnover.  I’d study the subject hotel’s profit and loss statements over the last few years and make adjustments for any non-recurrent items, trying to ascertain an explanation for any variations in trade during the period in question.

In the case of an owner-occupied hotel, I’d similarly analyse comparable sales evidence and examine the subject’s profit and loss accounts.

I found the net profit of owner-occupied hotels before interest and tax (EBIT) to be approximately double that of hotels where the business was operated by a tenant.  If I added back the lessee’s rent, his EBIT plus rent usually equated to the EBIT of an owner-occupied hotel doing similar trade.

Over the years, I came to see this 50/50 approximation applied not only to the valuation of hotels, but to other businesses, including quarries.

Why shouldn’t it?  The landlord has leased his freehold and business to a tenant on a partnership of some equality. The owner gets his 50% share of EBIT as rent, and the tenant receives his as business profit.

So, the Henry Review’s recommendations for a 40% Resource Super Profit Tax (RSPT) on mining has impeccable business credentials (even though the Rudd government has attached some minor, unnecessary considerations to it). The RSPT parallels what occurs in the business world except  in the case of mining Australians are the landlords and the miners are the tenants.  Australian miners should ReSPecT this relationship and pay the  fair rent.

On the other hand, if miners like Clive Palmer, “Twiggy” Forrest and their representative Mitch Hooke want to say that their company tax on top of the proposed RSPT rent is too much, I’d have to agree.  In this respect, they are in the same boat as most Australians who pay taxes on the incomes they’ve earned instead of a rent on the land they occupy.

The miners have the wrong end of the stick.  We should all be paying our land or resource rents to the public purse, then work to have all arbitrary imposts and taxes removed.

Until Australians learn to appreciate the vast difference between a rent and a tax – and public debate on the issue demonstrates that politicians of all stripes clearly do not yet understand this difference – we’ll continue to have the sort of ridiculous arguments being put against the RSPT by the mining industry and other highly placed but  ill-informed personages.

And I wish we’d stop calling it an RSPT or a miners’ “super profit”.  It’s a trendy name for a natural resource rent, pure and simple.  There are taxes and there are land rents:  one can be passed on in prices and the other cannot.

In the meantime, we’ll continue to have a relatively few people steal much of the natural surplus that is our rent and inflate it up into bubbles, bringing on financial calamity every 18 years or so.

READING A CLASSICAL ECONOMICS FORMULA INTO A PROFIT AND LOSS STATEMENT

A connection I make between  a classical economics equation – not found in current junk economics textbooks – and profit and loss statement may serve to reinforce the point that the RSPT is fair and appropriate.  Australia needs it.

Classical economists observed that production (after costs are deducted) was the sum of land rent, wages and interest:

P = R + W + I

Note here that ‘interest’ is not used in the sense of financial interest but in the classical sense of ‘interest’ being the return on capital.  Along with other classical economists, the American social philosopher Henry George observed that, of these three income forms, rent is the only one that isn’t created by labour or capital.  Being generated by public factors alone, it is indeed a surplus in the production process.

So George tweaked the formula to:

P – R = W + I

to show that if rent is captured to the public purse, it becomes unnecessary to tax ( fine?) wages and capital.  He further observed that real wages and returns to capital can’t increase in the medium to long term unless rent is captured for necessary government and is not privatised by companies or individuals (where the latter necessitates the introduction of production-distorting taxes).

This explains why poverty persists and why real prosperity continues to elude us, even though innovation and production techniques improve geometrically.  The vast increases in wealth simply flow directly to those who have privatised the public’s land rents.

The formula works either at the national level or in an individual business, so let’s marry it to a profit and loss statement:-

PRODUCTION        = $ z

less costs:

$a, $b, $c, $interest , $WAGES, $taxation = Net Profit

add back:

$interest (because we’re not interested in debt to equity arrangements) and $taxation = EBIT  (i.e. RENT + INTEREST; remember, the latter ‘interest’ is in the classical sense of return on capital).

For extractive industries, divide EBIT by 2 = (Australians’) RENT and (miners’ return on capital) INTEREST.

As I’ve shown above, this applies in similar ‘going concern’ business arrangements.

Although the land rent for other non-going concern commercial or industrial enterprises is also be found within the EBIT, it will be much less than 50% in those cases, and will be picked up best by land value-based revenues on real estate titles.

European proposals to tax banks’ “super profits” in the same way as resource extraction is misguided.  Exorbitant flows of excessive rent to banks via interest charges would be curtailed quite  nicely by capturing title-based land rents.

So, give us a break on the government’s 40% RSPT, won’t you please, miners?  You’re wrong.  Why don’t you instead just zero in on eliminating company taxes and income taxes?  We’re all in the same boat with you on that one, and might even join you in trying to get rid of those.

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Postscripts:

1.  Maybe I’m a little tough on economists, because there are still a few who can see the great possibilities of resource rents.

2.  The Australian e-journal Online Opinion published my blog on RSPT mining tax today (3 June). If you have any thoughts on the RSPT why not add a comment, or respond to other comments on the article?  Self-serving arguments being put by the miners demand a response.

3.  On second thoughts, maybe the miners ARE having to downsize:-

Downsizing mining

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NEW FACES IN DOWNING STREET (AND AN AUSTRALIAN ADDENDUM)

cam-clegg

BRITISH BONHOMIE

Well, there was David Cameron transitioning into number 10 without so much as a suitcase in sight.

And wasn’t the new found camaraderie between him and Nick Clegg pleasantly agreeable to behold?  You’ve got to wish them both ‘good luck’ in dealing with the UK’s horrible financial plight which almost went missing during the election campaign.

No, you’ve got to wish them more than luck.  You’ve got to wish they discover the fantastic potential of public rent-capture, if the UK is ever to resolve its dire economic situation satisfactorily.

If the Cameron-Clegg team doesn’t discover rent it, too, will be thrown upon the scrap heap of history to which the UK public has consigned a miserable Gordon Brown.

Brown was gracious, almost statesmanlike, during the handover but, regardless of his claim to being one of Britain’s great Chancellors of the Exchequer, Gordon Brown amounted to a political failure, a mere snake oil salesman for 20th century junk economics, a period in world economies that US professor of economics Michael Hudson has described as “The Counter-Enlightenment.”

“Counter Enlightenment”: that is indeed descriptive of the economics that has been permitted to seize us by our ‘user pays’ (never ‘beneficiary pays’) throats because, where classical economic reform had advocated taxing away land rent, ‘modern’ neo-liberal economics has promoted its privatisation through rent-seeking in real estate and mineral resources, converting freeways into tollways (and similarly privatising other natural monopolies), and numerous forms of price-gouging – with the results we now see all about us.  It’s not coincidental.  It’s been a devastating period of false, non-scientific economics.  And that’s the way economics is being taught in our universities, folks!

We’ve allowed the rent the community creates – and which represents the community – to be stolen by carpet-baggers.  As a result, a sense of community has disappeared at the same time rent-seeking by greedy ‘investors’ has replaced productivity and real wealth creation.

HALLELUJA!

The new Conservative/Lib-Dem coalition could take a lead from Australia.

It wasn’t until I took a few days off interstate with my wife, that the enormity of some of Ken Henry’s recommendations for “Australia’s Future Tax System” really sank home.  Whilst away, I was able to see them in a broader perspective.

Henry’s panel actually came out in favour of slashing taxes and capturing Australia’s economic rents!

I wondered to what extent the efforts of Michael Hudson, my colleagues or I may have influenced the panel’s decision, or had they arrived at their conclusions quite independently?  I guess we’ll never know.  It doesn’t really matter.

What does matter is that Australia has taken the first hesitant steps in becoming the hub of a counter revolution in economics – and the Henry Review should be heartily congratulated for the part it has played in that process.

Now to convince timorous politicians, whether in Australia, the UK, or elsewhere, to play their historical part in this counter revolution.

It would be nice to see messrs Rudd, Cameron, Clegg and Obama leave office having solved their economic conundrums in the tradition of David Ricardo, Adam Smith, John Stuart Mill and Henry George, instead of departing the political scene defeated, still clinging tenaciously to the dismal ‘supply and demand’ economics that served Margaret Thatcher, Ronald Reagan and Gordon Brown so poorly.

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GREECE AGAIN

Euro

SO, A PETROL BOMB WILL FIX THINGS?

What sort of mentality is it that brings a petrol bomb along to a protest rally at an Athens bank? One that doesn’t so much as flinch at the three tragic deaths it caused?

Clearly, emotions in Greece are beyond raw, but all of us outside Greece know what must be done. The Greeks have got to buckle down and honour the additional loans they’ve been given by the IMF and their European brothers.

That might mean extending retirement age from 53, cutting salaries and working much harder for decades to get the country’s head back above water. No doubt the Greek Right also think this way.  The Left disagrees.  It thinks there’s got to be another way out – but its fringe throws petrol bombs.

It’s easy to regard the Greeks as wanton miscreants, living on the slate as if there’s no tomorrow. We conclude that they’re simply paying the penalty for having lived high on the hog. We’ve been more circumspect than Greece. Have we? Have we really?

Is there another analysis of the Greek crisis?

I see a striking similarity between those who took out subprime loans in the USA and events in Greece. Both were living on the edge. Both were simply the outliers, the harbingers of something that was to be visited upon them by a system that had been allowed to run rampant.

Neither those who took out subprime loans in the US, nor Greeks who chose an unsustainable lifestyle, ever had a snowflakes chance in hell of making good their escape from indebtedness to the banking system.  They seem to have an inkling that a rotten tax regime is behind their deep travail, but have little or no understanding of economic rent.

Greeks protesters chose their targets well:  parliament, the tax office, and banks.

Do I hear you exclaim:  “Bullfeathers! They ARE just wanton miscreants?”

What if they reflect OUR future?  Could Greece be the canary in the mine – as were subprime loans to the Americans?

I’m always skeptical when the doctor, the IMF, is called in. The Greeks can’t pay their debt, so give them more. I think I can understand why Angela Merkel is worried about whether she’s ever going to see Germany’s loan repaid.  Maybe in her heart of hearts she realises German banks also funded the party in Greece, and ….. oh well, now she’s got to keep playing the game and supporting the Euro?

Greece has reached its anger phase.  We remain in denial.

Acceptance will come to us both …. but not today.

GOVERNMENT DISRESPECTS HENRY REVIEW PANEL

 

Ken Henry (2)

AFTS_logo_red

A GOOD REPORT

[PITY ABOUT THE GOVERNMENT BACKSLIDING ON IT]

Happily, I was wrong.  The recommendation for a more comprehensive land tax to replace the ragged array of state land taxes does remain intact.  It’s well and truly visible in the picture “Australia’s Future Tax System” painted by Ken Henry today.  But the Rudd government rejected it.

The AFTS report is very good. The panel deserves congratulations for a more rigorous effort than usually passes for tax reform in Australia.

[However, someone connected with producing the land tax aspect of AFTS didn’t see that high land prices simply reflect the private capitalization of land rent which remains uncollected by government.  He or she has taken on board the real estate industry’s furphy that it has something to do with the supply and demand of land.  Issues of supply and demand count for nothing in a tax-induced real estate bubble.]

And, hey, the government has accepted the recommendation for a resource rent tax of 40%!  Excellent stuff!  But there the good news ends. The rest was all an election year cop-out by an increasingly timorous Rudd government.  Realpolitik rules!  Efficacy?  Leadership?  What’s that?

I couldn’t express it any better than Alan Kohler does in his excellent Business Spectator article here.

In summary, the numbers are as follows:-

Henry Review recommendations:                              138

Recommendations accepted:                                        1.75

Recommendations rejected or deferred:          136.25

Let’s hope whoever wins government later this year has the intestinal fortitude to do what’s right, to complement the resource rental tax with the proposed comprehensive tax on land values.  As Ken Henry’s report shows, it provides scope to abolish a number of atrocious state taxes.

And, as my submission to AFTS showed, such a comprehensive tax on land values is an essential ingredient in staving off some of the devastation that’s going to occur when our real estate bubble bursts shortly.

Ken Henry

THE BIG DAY!

Reclaim the public domainTOMORROW (SUNDAY): THE BIG DAY!

The government releases the Henry review panel’s recommendations for “Australia’s Future Tax System” tomorrow.

This is THE great opportunity to minimize the damage that’s going to occur when the Australia’s real estate bubble bursts and our banks are left exposed like shags on a rock shortly.

To what extent will the government slash taxation and capture our publicly-generated land and resource rents? Will the Rudd federal government seize the opportunity, or will Kevin Rudd backslide again?

NEGATIVE GEARING

Leaks suggest the Henry review panel has recommended that ‘negative gearing’ be abolished. That’s good, because that’s where some taxpayers have historically been roped into helping finance other taxpayers real estate ‘investments’. [!]  As negative gearing has also acted to escalate the prices of homes, but not necessarily their real values, it will be a boon to first homebuyers should the hearsay prove accurate.

RESOURCE RENT TAX

It’s also said that a federal resource rent tax has been recommended for mineral extraction.  Such a ‘super profits’ tax, i.e. resource rent, might be resisted by the mining industry but if it is, our miners can expect a hard time from Australians increasingly cognisant of the fact that we’ve been short-changed, done in the eye, for far too long: we need a fairer share of resource rents to find its way back at long last into Australia’s coffers.

When a business run as a ‘going concern’ is leased to a tenant (i.e. both the freehold and the business), it is not uncommon for net profit before income tax and depreciation to be split approximately 50/50 as between the landlord and the tenant as rent and profit, respectively. It is beyond time that a similar arrangement came into existence for mining, because existing state mineral royalties are risible: ten cents a tonne to the government insults Australians to whom the natural resources belong.  Miners need to recognise this partnership with the Australian people.

Company tax on mining companies would need to be abolished, of course, and the sum of state royalties and the federal resource rent should not exceed 50% of the adjusted net profit, or the mining companies WOULD then have something about which to complain.

A FEDERAL LAND TAX?

Ken Henry’s recommendations went forward to the Rudd government in December 2009, reportedly with a recommendation for a federal land tax.

Even the Property Council of Australia (PCA) has come out in support of a federal land tax which would reform state land taxes, with their dog’s breakfast of exemptions, thresholds, multiple rates and aggregation provisions, etc.  Maybe the Land Values Research Group’s website introductory page influenced the PCA?  It shows that EVERYBODY benefits from public capture of land rent and concomitantly reduced taxes.

But has the recommendation for a federal land tax gone missing, because it has been reported that Prime Minister Rudd and Treasurer Swan actually required Ken Henry to review some of his own panel’s recommendations.[!]

Er, with a view of removing what, exactly, Kevin and Wayne …?

We’ll all know tomorrow!