WHY BELIEVE AN ECONOMIC SYSTEM TELLING YOU BLACK IS WHITE?

TruthThe Herald Sun tells us today that one in every four Victorians receives welfare assistance.

As government resources are currently stretched, questions will be asked about what categories of welfare recipients are less deserving than others, so that the welfare bill may be reduced.

That seems OK, doesn’t it?  People shouldn’t be receiving welfare they don’t deserve, should they?

That also appears to be in keeping with Dr Ken Henry’s recent inquiry into Australian transfer payments, where he suggested there are too many classifications for welfare recipients.

But what if there was another way of looking at the question?  What if every Australian was entitled to a universal basic income? 

That’d be great, but how could we possibly fund it?

Well, I’ve shown that there’s enough land rent available to abolish all taxation. So, what if Australians’ rightful entitlement to their share of mineral, fishing, forestry, spectrum and aircraft licenses were used for the purpose?

It’s certainly possible, and it would provide a universal basic income for everybody: a “citizen’s dividend”.

However, there’s a problem.

We’ve been brainwashed by the few people who aggrandize themselves by stealing our land and natural resource rents to believe that the current tax system is the best we can do for ourselves.

In fact, they’re already telling us that Australian wages will have to be suppressed if we’re not to fall into the economic recession that has gripped the world.

That’s actually a prescription for disaster. Lower wages will send the economy into a downward spiral.

It was understood in the “Progressive Era” that higher wages from production assisted economies, whereas lower wages did not, but Thatcherite/Reaganite economics has turned this logic on its head. We’re now told we’ve got to favour the big boys: risk-takers, entrepreneurs, employers, CEOs.  And we’ve come to believe it!

Progressive Era economists of all shades of politics would tell us this is nonsense, that it is workers with a dollar in their pockets to be spent who create employment for others. Today, there is no such middle ground consensus.

We’ve swallowed, hook, line and sinker, the web of lies neo-liberal economists have spun for us over the last thirty years of “economic rationalism”: wages must be kept to a minimum, and there is little or no place for government.    

George Orwell’s “Big Brother” is now well and truly ensconced in western society, favouring privileged rent-seekers at the expense of worker and industry alike.

And the results are there for all to see. As the West descends into terminal decline, lowly China is beginning to emerge economically, because she encourages production.

Nevertheless, there are warning signs that China, too, is falling victim to her real estate speculators. The difference is she is trying to deal with them; we aren’t. Systemic indifference to financial corruption is highlighted in the film “Inside Job”, but it’s a pity it failed to make the connection to tax systems’ complicity in setting us up for financial and economic collapse.

I should give Michael Hudson the last word on the incredible “back is white” economic system into which the West has now degenerated, where we penalise workers and production and reward uber-wealthy rent seekers. As usual, he’s right on the money.

THE TAX SET-OFF

pea and thimbleAN ALTERNATIVE TO TAXATION

If, as I claim, tax systems are responsible for creating this (and every other) economic depression, how do we make the switch to land and natural resource rents for revenue?

“It’s impossible!” do I hear you say? “Too many vested interests in the status quo!”

Well, consider this. What if Australia was to introduce an all-in federal land ‘tax’ as advocated by Ken Henry’s panel of inquiry into “Australia’s Future Tax System”, and the new revenue could be offset by companies and individuals, not against other income, but directly against other taxes payable?

Think about it. You could reduce your tax liability by the amount you paid in land ‘tax’ (more properly, land rent).

Therefore, it does not become “just another tax”, but an alternative to tax, because it actually reduces the amount you have to pay in other taxes.

Let’s re-visit the mining tax fiasco, where Australian mining billionaires protested in the streets, claiming they couldn’t bear a 40% resource rent tax on their profits. The principle would also apply to them.  What if the resource rent abated their company tax, their payroll tax, etc., by the amount of resource rent they paid? Wouldn’t this pull the rug from under their argument?

Proceeds from land and resource rents could also be used to abolish the Goods and Services tax.

This in-built compensation system is so patently fair it would be interesting to see from which quarter detractors might arise.

No doubt existing rent-seeking parasites would trot out the case of the poor widow, crying crocodile tears for the fact that she doesn’t earn income against which to offset her land tax.  “She’s currently exempt from tax, but now she’ll have to pay!”

Oh, she doesn’t pay GST now?  You’re not currently worried about that? In circumstances where the poor widow’s children who might inherit her real estate can’t help her out, she could do what she is currently allowed to do, that is, not to pay municipal rates or land tax, but have them put as a charge on title, payable when she passes.

Easy!

Bring on the tax set-off!

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(Acknowledgement to Ray Brownlee and Bob Keall)

AUSTRALIAN BUBBLE PRICKED?

LVRG B&WSome Australians still cling to a belief that their land values aren’t going to collapse.  As some wit suggested in connection with the bubble:  We’re different here; we have kangaroos.

My colleague Dr Gavin Putland at the Land Values Research Group has provided a list of warnings readers might find interesting.

Planets aligning for a revolution in thinking?

planets alignJust as “Australia’ Future Tax System” has recommended capture of land and natural resource rents in order to abolish taxes inhibiting employment and productivity, James K Galbraith has now lauded the capture of economic rent to Congress, saying:

What creates jobs is the revolving capital that supports payrolls. A tax policy aimed at supporting employment would shift the tax burden away from labor, and off of short-term capital, and place it instead on long-term capital accumulations. If this reduces the investment in fixed capital that is desired for other reasons — in particular, investment with broad public benefits — then that sort of investment should be done by public authority, funded by an infrastructure bank.

Thus as a general rule fixed assets — notably land — should be taxed more heavily than income. The tax on property is a good tax, provided it is designed to fall as heavily as possible on economic rents. This basic argument, going back to Ricardo, remains sensible, for it aims to not-interfere where there is, in fact, no public purpose to interfere with private decision-taking. Payroll taxes and profits taxes do interfere directly with current business decisions. Taxes effectively aimed at economic rent, including land rent and mineral rents, and at “absentee landlords” as Veblen called them, do not.

There is little doubt that the cuddly populist Mike Moore, who recently gave a rousing speech in Madison against Wisconsin selling off its patrimony, would be on song with this call from the son of the late John Kenneth Galbraith.

Many others, such as David McWilliams and Michael Hudson, aware that debt that can’t be repaid won’t be repaid, argue that badly risk-managed housing debt must be written off: banks should shoulder their share of the responsibility in financing a housing bubble.

Hudson’s studies go back to biblical times to show that enlightened kings and emperors did indeed write off debts that were impossible to pay, so why do today’s governments, reputedly representing their citizens, try to shackle them (and, indeed, future generations) to meeting both impossible mortgages and impossible bank debt? It is surely the great abomination of our times that people are turned into tax slaves for banking institutions?    

We can learn from history. Sensing a revolution from the people, the Physiocrats tried to argue the case for l’impote unique (the single tax) to Louis XVI … or else. The French people eventually chose a bloody revolution to replace their aristocratic plutocracy, but failed to put the necessary economic reform into place.  (Shades of Egypt? Libya?)

On the other hand, by virtue of his benevolent dictatorship in Java, Sir Thomas Stamford Raffles was able to act differently. He listened to the people of the ‘Spice Islands” (now Indonesia), abolishing their incredible amount of taxation in favour of a 30% rent that could by paid in kind. Thus were the Spice Islands able to exit from economic depression as Europe and America continued to languish.

So, although there are these signs the planets are aligning, and leadership is being given, it clearly needs to be supported by basic education about how the rentier class aggrandises itself by stealing the public’s rent, and by sending the populace deeply into tax-induced debt. The widening gap between rich and poor is solely explicable in these terms.

That Louis XVI preferred to lose his head rather than consider l’impote unique, should serve as a timely warning, even in the 21st century, that people in the street still need to be educated to understand how arbitrary taxation hinders production and employment whilst the capture of land and natural resource rents – as suggested for Ken Henry’s panel in Australia and James K Galbraith in the USA – actually fosters both.

DISASTER UPON DISASTER

japan disasterEvents issuing from the Japanese earthquake have taken the ongoing economic collapse of  The United States, Portugal, Greece, Ireland, Italy, Spain and other world economies off newspapers’ front pages.

Live on TV we witnessed yet another natural disaster, this time an earthquake, its after-shocks, and several tsunami waves hammering Japan. The horror of loss of life and destruction transfixed us as people, sometimes in vain, attempted to flee the terror of the tsunami in their vehicles.

We pray the attendant man-made accidents, failing nuclear power plants, may be cooled and remedied without further loss of life.

This tragedy, overlaid on top of Japan’s failing economic performance over twenty years seems to pose insuperable hurdles with which she has to deal. 

A GLIMMER OF LIGHT?

So, where’s the good news?

As he travels in New York’s subway, it’s nice to see Irishman David McWilliams recounting a heartening story. He relates the successful turnaround in the fortunes of the New York subway to the approach Ireland must take with its billowing debt.  

One hopes Ireland’s new Taoiseach, Enda Kenny, has the wit to see that the Irish want change – and McWilliams’ formula to initiate that change is quite correct.

A CONFLUENCE

James K GalbraithAGREEING ON ECONOMIC RENT?

I note on the Roosevelt Institute website, James K Galbraith testified on “Sensible Tax Reform” before the US Senate Finance Committee on 8 March 2011.

Insofar as his item 6. Should we tax labor, capital – or rent? came out in favour of the latter, Galbraith’s recommendations for tax reform are remarkably similar to those of Ken Henry in Australia.

I congratulated Galbraith on his submission by e-mail and received a thank you in reply.

With Greens on the left of politics arguing that a proper price should be put upon the use and abuse of our planetary resources, and the Tea Party right wanting taxation to be reduced, does this remarkable confluence towards the centre on tax reform represent the catalyst that might reconcile both political extremes?  

As it offers the only logical escape from the economic lunacy that has delivered the world into its deep economic plight, let’s hope so.

THE GRAND LIE OF MODERN ECONOMICS

road-to-inequality_RGB(72dpi)MAYBE IT EXPLAINS WHY ECONOMISTS CAN FORECAST NOTHING?

I’ve alluded several times to Mason Gaffney’s engaging account of how universities such as Cornell were endowed and set up to kill off the idea advocated by many social philosophers throughout history, but especially as distilled and expressed so powerfully in Henry George’s “Progress and Poverty” in 1879.

Everyday people responded positively to the process so clearly described by George.  For the first time in history they were cottoning onto how much of the wealth they produce is stolen by taxation-promoting, parasitic rentiers.

This small but wealthy rentier band reacted urgently to George. His idea must be killed off quickly in universities by conflating land and capital. This new paradigm must be enforced within academe and Georgism excised from economics altogether. Its proponents should be excoriated and derided, and antagonists declaim that “economic rent is only a tiny part of the economy today anyway”.

Thus was the 18 year cycle of boom and bust set in concrete; thus did the earnings of the poor and middle class continue to be reduced by taxation; thus did rent-seeking parasites dine obscenely off publicly-generated economic rent; thus, as Mike Moore said in Madison Wisconsin last Saturday, do 44 US citizens accumulate unto themselves the same amount of wealth owned by 150 million of their brothers and sisters.

And so it has become de rigueur for modern economics to pooh pooh Henry George’s ‘fiscal adjustment’ to set economies aright; that is, to use the publicly-generated rent of land and natural resources, instead of taxation, for revenue.

EXAMPLES

This theory [Georgism] still has its adherents, likeable and mainly older people, who overlook the fact that land rent forms such a small percentage of national income: that 2% is nothing to the present tax percentages, which are around 30.

–      Jan Pen, “Income Distribution”, Pelican Books, London 1974 

George over-estimated the future importance of rents and rental income. Governments at every level have grown tremendously in the last century. Even if governments could take all rents without rebellion or severe recession, rents would not come close to covering expenses. In 1929, property rents accounted for about 6 percent of national income. The percentage has dropped to well under one percent today. Whereas property taxes once provided 65 percent of state and local budgets, they now supply about 17 percent.

–      Todd G Buchholz, “New Ideas From Dead Economists”, Plume Books, New York, 2007

The first surprising implication of this fundamental growth equation is that, in the modern world, land per person, which had completely dominated income determination before 1800, no longer matters in economic growth. This is because land rents have fallen to only a few percent of total output in modern high-income economies.  Figure 10.3 shows this trend for England. Farmland rents, which were 23 percent of national income in 1760, fell to 0.2 percent by 2000. In part this decrease was offset by a rise in the site rental value of urban land. But by 2000 urban land rents represented only 4 percent of national income, even in crowded England with its very high housing costs.

–      Gregory Clark, “A Farewell to Alms: A Brief Economic History of the World”, Princeton University Press, New Jersey, 2007

COMING CLEAN

Hmmm … so that’s 2 percent, well under one percent and 4.2 percent? Where lies veracity and intellectual rigour in these three opinions?

The truth is that it lies far from each of these poorly researched sources.

The first hint that land rent may be grossly understated in modern neo-classical economics textbooks came to me in the form of Dr JFN Murray’s excellently-researched valuation text “Principles and Practice of Valuation”, published by the Commonwealth Institute of Valuers in Sydney in 1969:-

Economists have, because of the lack of a satisfactory basis for isolating and understanding the causes of economic phenomena, occurring in a world of infinite complexity, been compelled to develop their methodology within a framework of imaginary models and to show, by reasoning, how a given set of conditions is always and inevitably followed by particular effects. A phenomenon is then explained by showing that it is bound to occur by the operation of the set of conditions postulated by the hypothesis. The illustrations are, however, often vested with an air of unreality because, in the desire to achieve simplicity, the process of elimination is carried so far that the only factors remaining are more appropriate to the Garden of Eden. ….

The theory of valuation is a pragmatical extension of economic theories relating to value and price, but it is remarkable to find that there is an almost complete dissociation between economic theory and the theory of valuation, although the latter from the materialistic viewpoint stands in the forefront of the social sciences. ….

The professional valuer with his insistence on demonstrative proof and acceptance of harsh realities has displayed intolerance of the tenuous abstractions of pure economics. His is a branch of applied economics, which takes into account all the complexities of land utilization and of commerce, and is closely aligned with scientific method, in that it depends upon empirical verification of hypothesis. ….

With some notable exceptions the principles of valuation are in general correspondence with economic theory, but a reintegration of the two sciences, which have been separated since the time of Adam Smith, would greatly advance learning.”  [My emphasis]

So, could the Land Values Research Group find an economist who might undertake impartial research into the real quantum of land rent within the Australian economy?  We did: Dr Terry Dwyer.  His paper “The Taxable Capacity of  Australian Land and Resources” provides a time series analysis of land rent from 1911 to 1999. It was published in the refereed academic journal Australian Tax Forum Volume 18 Number 1, 2003.

I have used Dwyer’s technique to extend his analysis to 2010 and constructed the chart below to put it into pictorial form. It assists to correct the nonsensical sort of economic rent estimations provided by Pen, Buchholz, Clark and others.

GDP breakup

THE CLINCHER

Table 61 in Australian Bureau of Statistics Catalogue 5204.0 assesses Australia’s total land (site) values at $3.6144 trillion in 2010.

Even on Clark’s (highest) estimate of rent being only 4.2% of Australia’s c.$1.35 trillion economy, viz, $56.7 bn, this is suggestive of a capitalization rate of 1.5%.  As Dr Murray might have said: how totally unrealistic can economists get?

ps: I’m a professionally qualified valuer. Economists need to speak to us about the extent of land rent in the economy.

 I’m not sure whether Pen, Buchholz or Clark were able to forecast the global financial crisis. Quite independently, Georgists in the US, UK and Australia did.

Maybe the Georgist school of economics is onto something?

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Social reform is not to be secured by noise and shouting; by complaints and denunciation; by the formation of parties, or the making of revolutions; but by the awakening of thought and the progress of ideas. Until there be correct thought, there cannot be right action; and when there is correct thought, right action will follow. Power is always in the hands of masses of men. What oppresses the masses is their own ignorance, their own short-sighted selfishness. – Henry George, Social Problems, Chapter 22: Conclusion

BE POSITIVE

LET’S CELEBRATE REAL ACHIEVEMENT

On ANZAC Day, Australia and New Zealand remember the WW1 defeat inflicted upon their soldiers by the Turks at Gallipoli. Some celebrate this enormous loss of life as Australia’s coming of age in the world of international affairs. That’s debatable.

Most Australians consider the Eureka Rebellion at Ballarat a Pyrrhic victory. By facing the odds, the miners, although badly defeated, made their point concerning “No taxation without representation” and legislation was later to confirm their case.

Burke and Wills

Another heroic tragedy remembered in Australian history is the Burke and Wills expedition from Melbourne to the Gulf of Carpentaria. After an epic journey crossing Australia from south to north, an exhausted Burke and Wills missed the depot party at the “Dig Tree” on Coopers Creek by only a matter of hours, lending a dramatic irony to their terrible saga.

Dig Tree  

Although these events need to be remembered, Australians tend to seek out and revel in these tragedies, none of which should ever have occurred; there are better things to celebrate.

Of course, we do celebrate our sporting achievements and, to a lesser extent, the efforts of our inventors, scientists, performing artists, businessmen and public servants.

But some of the really amazing things we’ve done that should be the cause for celebration are allowed to be buried and forgotten under the dust of history.

One such thing was the founding of the national capital, Canberra, on a leasehold system of landholding so as to exclude land speculators and stop land prices from escalating upwards. It was a formidable effort.

But such became the level of ignorance of the principles involved in this aspect of the formation of the Australian Capital Territory that speculative interests came to undermine it, so that Canberra land values are now indistinguishable from those of other capital cities.

Also certainly worthy of great celebration was Ken Henry’s recent recommendation, after lengthy public argument and discussion with his panel, that Australia’s 128 taxes be reduced to only four. Ho hum went the media; ho hum went the Australian public. Fie! Fie! cried those with a vested interest in the status quo.

After many years of public service Ken Henry has retired as Treasury secretary. Over the next few years, let’s hope Australians are able to warm to, put into practice, and celebrate the incredibly positive template for tax reform he and his panel have set for Australia’s future prosperity.

Henry’s is a prescription for tax reform that could give a lead to the world, as Australians have done, almost unsung, in so many other fields.

DOCUMENTARY GETS CLOSE

inside jobINSIDE JOB

With the words of Oscar winning documentary director Charles Ferguson still resident between my ears, to the effect that no prosecutions have been brought to bear from the extensive Wall Street corruption and fraud exposed in the US, I popped along today to the Rivoli, Camberwell, to see his film.

It was worth the effort. Its material was much better than most such documentaries. Matt Damon narrated.

The audience couldn’t constrain ironic chuckles as outrageously rent-rewarded investment bank, treasury and reserve bank officials and their academic hangers-on, presumably all paid for their acumen, took it it in turns to feign absolute ignorance of critical events during the global financial collapse, despite the roles they’d played in it.  They knew nothing.  It was all a complete surprise.

The rent and value-free economics expounded in Harvard economics degree and MBA courses gave the ‘boys club’ the life raft by which to enrich themselves at public expense. No other Harvard course could possibly offer such perversions nor generate such social and financial chaos. Other universities fell into line with the Harvard paragon.

And Barack Obama showed by appointing the same class of culprits he, too, is in Wall Street’s thrall.  He owes them; they contributed generously to his campaign for the presidency, thereby ‘insuring’ themselves.  Overcrowded US jails are places only for the poor.

When, three-quarter way through, the documentary alluded to “the corruption of economics”, I leaned forward anticipating Mason Gaffney’s thoroughgoing exposition from Fred Harrison’s book of the same name, but was unfortunately disappointed. Maybe this might be the basis for Charles Ferguson’s next outing? (It would be a worthy subject for any director.)

Like most films documenting the financial collapse, Inside Job shows the pattern originally set during Ronald Reagan’s presidency attained full blossom with Bill Clinton’s repeal of the Glass-Steagall Act in 1999.  The line between banks of deposit and investment banks having been removed, it became a matter of “Go for it boys! Anything goes!”  In this confusion between free enterprise and total license was born new forms of financial derivatives, packaged with falsely analysed risk ratings, these weird products often insured, reinsured …. until the truth spilled out that many of them stood for nothing.

Ultimately, though, the laugh is not on the culprits, but on the people of the US (as undoubtedly it will also prove to be on Australians), because it is they who’ve allowed themselves to be defrauded by a false economics and by lying cheats who’ve aggrandized themselves at the expense of the public.

A Chinese commentator tellingly reflects counterpoint to these predatory individuals. It is suggestive of why the sun now sets on a once glorious Pax Americana and a new economic dawn begins to spread across China’s eastern horizon.