POLITICS DEFEATS POLICY

Did you know?

There are 3 income sources:-

  1. from labour (wages)
  2. from capital (interest), and
  3. from natural resources (rents).

Governments tax wages and capital heavily and resource rents lightly.

This differential weighting in tax regimes encourages private rent-seeking in resources such as land (or, for certain companies, minerals and spectrum).

We go further in Australia. We offer additional incentives to invest in residential properties (land), including by offering tax incentives to “negatively gear” an investment property, so that the interest paid on a loan will exceed the income the property generates. This loss is tax deductible against other income. Renters, and those who cannot, or do not, negatively gear their real estate, have to forgo the decided privilege of having other taxpayers subsidise their properties.

The cumulative effect of these pathological incentive effects is to inflate property bubbles. These then burst into recession, or worse – as across the world at the moment.

So, with tax systems generating massive (if virtually invisible) deadweight on workers and businesses which is passed on in prices, workers and businesses fare worse and worse, and national economic performance deteriorates.

More and more people and companies therefore turn their attention to the benefits of rent-seeking in real estate, and household debt balloons at the expense of more productive activity.

Governments hold inquiry after inquiry into tax reform, but fail to implement their findings.  These inevitably come to the conclusion that most inefficient taxes ought to be abolished, and more public revenue should be drawn from land and natural resource rents – which cannot be passed on in prices.

These findings are ignored because they offend all of those who have housing investments (and investments in mining or spectrum).  It’s simply a numbers game in which most politicians are also involved, and in which the public good loses out to poor policy.

In this scenario, economies decline and collapse as pundits earnestly advise us that recovery is just around the corner. (Oh, and “Interest rates will increase soon”, of course!)

Politicians, fearful of taking action for the public good instead of favouring vested interests, temporise by playing party politics, grandstanding on minor issues and appealing to fear in order to retain office. There is no suggestion of thoroughgoing policy reform in the area of taxation – only inquiries.

So nothing gets done, except voters throw out successive governments in the hope the economy will improve without addressing rent-seeking in real estate (and mining and spectrum).

But it cannot get better unless we address tax regimes that foster rent-seeking.