MODERN MONETARY THEORY (MMT) PLUS LVT?

Australia is about to have an election in which both sides are concerned about producing a budget surplus.

That is absolutely ridiculous in a situation where Australia’s massive private debt bubble (brought about by impossibly high mortgages) is in the process of bursting.

It’s the private debt about which we really should be worried – and a surplus budget will add incredible fuel to this deflationary fire!

Forget budget surpluses, guys! It’s time to spend up big – and responsibly!

Stephanie Kelton is not so good on the private debt issue, but she can’t be beaten on why governments should NOT be seeking to balance the budget.

THE INVISIBLE OPTION

I put the failure of land taxes to gain more than a toehold in economic thinking these days down to the fact that economists who support the relative benefits of resource rents–Nobel prize-winners though they may sometimes be–are rarely reported in a media perceiving the interests of its big bosses and major advertisers are not well served by abolishing rent-seeking. “There must be no such thing as public resource rents, there are only income and sales taxes – just remember that!” Free press? Baloney!

It’s counter-intuitive, but ad valorem land taxes respond precisely to the needs of an increasingly complex society. The benefits of available infrastructure, the relative size and location of each parcel in terms of community amenities, and even of new advances in science and technology are all differentially reflected in the market value of each and every allotment.

The principle of Ockham’s Razor is that the answer to complex problems is often a simple solution. Land taxes and electromagnetic spectrum rents are elegant solutions to the increasing economic canker and deadweight losses generated by income and sales taxes.

Far higher levels of resource rents replacing income and sales taxes may not be the answer to all of our economic ills – but the switch has much to recommend it.

Maybe economic cycles of death and renewal will always be with us , but we have an amazing and much underutilised tool which could prevent the cycles from being so repetitively socially devastating.

THE DAY AFTER THE BUDGET

Economists, from John Locke, Adam Smith, David Ricardo, JS Mill, Tom Paine and Henry George, to Mason Gaffney, Joseph Stiglitz and Michael Hudson, were/are onto something. They thought/think, it’s crazy taxing productivity and workers, and grossly under-taxing unearned ‘ground rents’.

Adam Smith said not taxing ground rent generates monopolies. He was right.

Locke said all taxes come out of land rent anyway, so ground rents ought to be taxed directly. Gaffney says the excess burden of this taxation also comes out of rent. I’ve carefully assessed the burden on productivity for Australia over a period at $2.35. This effectively acts to halve our GDP. [!]

So, why do we continue to carry this ridiculous burden of taxation around our necks? Were/are these famous economists wrong? No, they weren’t/aren’t. So, what the ……?

It’s like this. We do it for the 0.1% and their hangers-on who work for the 0.1%, and for others who ape the 0.1% in the forlorn hope of getting wealthy in property speculation like the 0.1%. Simple.

Unrealistically escalating taxes, land prices and share markets, based on rent-seeking instead of production, cause economies to founder, into repetitive recessions and eventually into economic depression. When things get bad enough for the 0.1%, reserve banks will bail them out so they may pump the share market up to unrealistic levels.

It wasn’t always this bad. In fact, Australia did even better than the USA in capturing unearned incomes – at all three levels of government.

There were some terrible decisions taken to reverse this situation in the last depression and following WWII. In this great confusion, it’s difficult to believe the 0.1% were not behind these swift changes ‘for the good of the people’. We was dudded! Ayn Rand and the Reagan-Thatcher era compounded these ills that have delivered us to this point in history.

So why won’t economists act to fix this incredibly stupid situation?

Because they believe what the 0.1% has told them: “There’s not enough rent!” (Though all taxation comes out of rent.) What they really mean is: “There’s not enough rent for you! It’s all ours! You just keep paying taxes on your wages whilst we ship our banking and rent-seeking profits out to the Caymans!”

The Henry Tax Review tried to enlighten us to start making the switch back to a better tax regime (Australia’s Future Tax System), recommending we abolish more than 100 taxes and introduce a land tax. The 0.1% saw to it that it got nowhere.

And so, we keep having these ridiculous annual budgets based on a false ‘scarcity’ instead of the actual abundance; and we keep aiming for the ludicrously false security of a ‘balanced budget’. [Sigh!]

So, let’s capture the economy’s ‘externalities’–economic rents–folks!

SPELLING IT OUT

Despite agreeing with MichaeL Hudson that we’re being comprehensively done over by the FIRE sector–that is, finance, insurance and real estate–I certainly don’t condemn all FIRE sector practitioners.

Isn’t this having the proverbial “two bob, each way”?

No, it’s not. I know many in the banking industry who wouldn’t disagree with the ideas that are found on this website. It’s just that they’re not at the top of the tree.

I remember a certain bank manager who was sent to the bush during the late 1980s boom because he was unable to recommend to his staff that they invest virtually everyone into a new or bigger mortgage. He was your old-style reputable banker: an avuncular Spencer Tracy type who understood the good side of banking. Fittingly, he was later called back to his major branch and his expertise acknowledged, in order to sort out the branch’s financial mess when the real estate bubble burst at the outset of the 1990s.

As for the real estate industry, I’ve known many reputable real estate agents and valuers who would “buy and sell” most economists on where the economy “is at”, and why. As in banking, many are not all into skullduggery at all.

Economists on the other hand …… there are none so blind …..

Locke WAS RIGHT

It is vain in a country whose great fund is land to hope to lay the publick charge on anything else; there at last it will terminate.

John Locke (1632-1704), “Some Considerations of the Lowering of Interest”

________________________________________

To have made the abovementioned statement–akin to Mason Gaffney’s modern ATCOR and EBCOR (‘all taxes come out of rent’, and ‘excess burden comes out of rent’)–Locke was clearly aware that if we fail to capture ground rent directly, other sources of public revenue must introduce needless cost burdens into the community.

So-called ‘tax reform’ has always managed to skirt around this basic fact. The claim has been that “there’s not enough rent”, even though it can indeed be shown that all taxes do come out of rent anyway.

So, what’s the point of retaining income tax or taxes on goods, services and exchange?

Well, it suits certain people, especially the politically powerful 0.1%. Landowners are then able to pass these costs on, you see? This way, they’re able to avoid paying their fair share into the public purse. And, of course, land can’t be hidden in the Caymans!

Martin Feldstein has assessed income tax injects a deadweight loss of $2 for every $1 of tax levied. I’ve said that all taxes cost Australians $2.35 for every dollar levied between 1972 and 2006, and that had we done as John Locke suggested, Australian GDP would have actually doubled during this period. [This shows we needn’t replace all current taxation to achieve the same effect: we’d only have to take half the amount in economic rent in a thusly-stimulated economy.]

Taxation, instead of capturing ground rents, explains the inadequacy of our politicians: terribly failing economies; increasing private debt and social distress. It’s just that people don’t understand the economic underpinnings of these failures. Education is required on the point.

Maybe this old cartoon bears more than a little truth?