Thanks to US colleague, Richard Biddle, for sending this thoughtful piece in SALON by Jesse Myerson: Everyone is reading Piketty wrong – including Piketty!
Thanks to US colleague, Richard Biddle, for sending this thoughtful piece in SALON by Jesse Myerson: Everyone is reading Piketty wrong – including Piketty!
Endorsements
“One of the most important but underappreciated ideas in economics is the Henry George principle of taxing the economic rent of land, and more generally, natural resources. This wonderful set of essays, written over a long and productive scholarly career, should be compulsory reading: An inveterate optimist, Mason Gaffney makes an excellent case that, by applying the Henry George principle, we can reduce inequality, and raise ample public revenues to be directed at any one of a multitude of society’s ills. In this collection of witty and original essays, Gaffney also offers plausible solutions to problems of urban renewal and finance, environmental protection, the cycle of boom and bust, and conflict generated by rent-seeking multinational corporations.” — Joseph Stiglitz, University Professor of International Affairs, Columbia University
“If the Nobel Prize Committee ever returns to its original mission of awarding prizes for research that benefits society, they should give serious consideration to the life’s work of Mason Gaffney. He has shown how to create a peaceful, prosperous economy that does not depend on imperialism or exploitation. With the possible exceptions of Gunnar Myrdal and Kenneth Boulding, I can think of no other economist in the past 50 years who has advanced socially beneficial ideas in economics as much as Gaffney.” — Clifford Cobb, author, historian
“Gaffney is the preeminent scholar of what’s ailing our economy and how to revitalize it with job opportunities and decent living standards for all Americans.” — Walt Rybeck, Director, Center for Public Dialogue; authour of Re-solving the Economic Puzzle
“In 1970, I was an uppity Nader’s Raider, on the trail of giant California land barons. I stumbled on a hilarious account of California’s preposterous irrigation system with its crisscrossing canals. I just had to meet the author, so I tracked Mason down in Washington DC, where he then worked for Resources for the Future. He invited me and my ex to dinner, fried us up hamburgers with soy sauce, sang Gilbert and Sullivan tunes with his own words, and sent us on our way with reprints and the dictum, “Tax capital and labor and you drive them away; tax land and you drive it into use!” That meeting led me to study economics in Mason’s old department at UC Berkeley, and into a lifetime of learning from him.” — Mary M. Cleveland, Columbia University
“Mason Gaffney’s insightful writings on public finance, the structure of capital goods, and the business cycle are a bolt of enlightenment, in contrast to the dreary and almost useless mainstream thought that treats symptoms rather than causes. You cannot find better economic writing than that of Professor Mason Gaffney.” — Fred Foldvary, San Jose State University
“Prof. Gaffney writes about important questions, with elegance, clarity and wit. I always enjoy reading his papers. When I refer to one of them to check on a point, I often find myself re-reading the whole paper, because I find it so engaging. When I read other economists I find errors in their thinking. That doesn’t seem to happen when I read Mason Gaffney’s work.” — Nicolaus Tideman, Virginia Polytechnic Institute
“Here is an economist that the vast majority of our tribe is too defectively educated to understand, and so — as happened with Henry George — he will be ignored or resisted. Economics is not the dismal science — it is economists who are dismal. We are dismal because we have lost our imagination. One need not agree with everything that Mason says to marvel at the depth of his mind and the reach of his wit. We have here marvelous observations and comments upon the timeless necessity of ‘getting and spending’.” — Daniel Bromley, Professor Emeritus, University of Wisconsin-Madison; Visiting Professor, Humboldt University-Berlin, Editor, Land Economics
“Mason Gaffney is a national treasure. He boldly treads where few other economists even dare to peek: at the extraction of rent from the many by the few. Such rent extraction is now massive and threatens to destroy our democracy. To those who wonder how to stop it, my advice is simple: read Gaffney.” — Peter Barnes, author of Capitalism 3.0 and The Sky Trust
“While too much his own man to be a disciple, Mason Gaffney is widely known as the leading active Georgist economist. This selection of his extensive writings provides an excellent introduction to his body of thought. All apply economics to the design of a more productive economy and a fairer society, and most discuss how expanding land taxation can go far in achieving these goals. These stimulating and thought-provoking articles are written with flair, elegance, and erudition.” — Richard Arnott, University of Calirfornia, Riverside
“Gaffney is the modern Adam Smith if futilitarian economics is to be overcome and the world succeed.” – Bryan Kavanagh, Australian Real Estate Valuer and Researcher
“A crisp cocktail of geography, history and economics, chilled by crackling-clear prose. In these sparkling essays on rent, land and taxes, Mason Gaffney gives us Henry George in his time and for our own.” — James Galbraith, author of Inequality and Instability, and winner of the 2014 Leontief Prize
“Most economists neither really understand their subject nor love its history. Mason Gaffney’s love of truth and the history of economics pervades what he has written. One of my few regrets in life is not having been closer than 7,650 miles away from Mason Gaffney to discuss in detail crucial derailments in economic thought and tax policy, such as John Bates Clark’s (absurdly successful) fraudulent attempt to pretend that land is merely man-made capital — and therefore land rents should not be taxed.” — Dr. Terry Dwyer, Economist, lawyer, Former Tax advisor to the Australian Prime Minister
“One does not have to be a Georgist to appreciate Mason Gaffney’s unique place in and perspective on economics and its recent history–the latter informed by an all-too-rare acquaintance with the disciplines more distant history. These essays are a delight and a wonderful testament to Mason’s wide-ranging interests and contributions.” — Steven G. Medema, University of Colorado, Denver
“Mason Gaffney has taught generations of urban planners and economists to appreciate how taxing land can improve cities, the economy, and the environment. His rare combination of theoretical rigor, political passion, and clear writing impressed me early in my own academic career. This wonderful collection of his incisive essays will educate and entertain everyone who wants to know more about land and taxes.” — Donald Shoup, Distinguished Professor of Urban Planning, UCLA
The scope, scale and quality of Prof. Mason Gaffney’s anthology are truly breathtaking. This little gem will be on my student’s required reading list with a note: ‘They don’t make economists this way anymore.’ Yes, unfortunately, when they made Mase, they broke the mold.” — Steve H. Hanke, The Johns Hopkins University
“If you have ever wondered why big cities have empty lots while development sprawls far into what was once farmland, Mason Gaffney’s essays will explain it all in clear and upbeat terms. For decades Gaffney has led the Georgist movement that seeks to tax land, but not buildings, to foster the best use of land while ending the subtle, and corrosive, redistribution of wealth to building owners. Even if you disagree with Mase his insights will bring new clarity to economics.” — David Cay Johnston, Pulitzer Prize winning tax journalist
“Mason Gaffney is an ideal “liberal arts” economist: Question everything, especially your own views; use common sense; be open about your judgments, and encourage debate by stating your conclusions boldly. I don’t always agree with him, but I always learn from him. The economics profession would be a lot richer if it had a lot more like Mason, and a lot fewer technicians.” — David Colander, Middlebury College
It is risible, as Pax Americana collapses, that we look to our economists for a lead. With a handful of notable exceptions, were these not the very people that missed the Great Recession-cum-Global Financial Crisis altogether? Mainstream financial commentary has it that things can’t be all that bad, because economists still await the next technical definition of a recession–two quarters of negative growth–to eventuate.
Yes, much of the world has indeed moved in and out of recession–but this is a full-blown economic depression–and although most people seem to realise something is indeed radically awry, as economists can’t tell us we’re in a recession, much less an economic depression, we’re failing to get to grips with essential reform of tax systems which brought about this world financial collapse in the first instance.
As the US is more than $17.5 trillion in debt and Australia has shunted billions into keeping itself out of a recession, it is arguably beyond time we now saw the technical definitions of recession and depression as completely useless.
Aren’t we frogs beginning to feel much more than warm in this water-filled frying pan?
No?
Oh, that’s all right then!
The basic economic problem of our time is financial.
by Michael Hudson
Exchange rates, stock and bond prices are fluctuating wildly as a result of huge waves of computerized bets on credit washing back and forth globally. This financial fibrillation is a result of transforming the character of money to make the privilege of credit creation “free” and guaranteed by governments (taxpayers). Banks can create new credit freely on their computer keyboards, borrowing liquidity from the central bank at only 0.25 percent in the United States and similarly low rates in Japan and other countries.
This free creation of low-interest credit enables banks and their large institutional customers to make economic gains in an unprecedented way: not by producing goods and services to sell at a markup (profit), but to make “capital” gains by buying assets expected to rise in price.
These assets include not only real estate and target companies in the “real” economy, but foreign currencies, and even bets on which way interest rates, exchange rates and asset prices will move. Much of this trading is done by computerized swapping in quick in-and-out deals.
The financial system and its credit creation have become decoupled from the “real”economy, even as they have risen to dominate it.
19th-century economists followed Ricardo in treating money (and hence its superstructure of credit) as “saved-up labor”. Writers in the Ricardian stream (down through the “naïve” populist economics of Henry George) treated economies as a barter system. Money was only a “veil”, a set of counters for underlying relationships of industrial capital, wage labor and landowners. But this failed to explain the buildup of unpayable bills, debts, etc.
Marx found two major sources of financial instability. The first source was in the economy’s production and distribution system, reflecting in the degree of exploitation of wage labor. The accumulation of profits saved by the industrial capitalist and other property owners would impoverish the domestic market by squeezing out too much surplus value. These savings exceed the opportunity to invest or for the monetary base to support and shrinking markets would lead to a financial crash, approximately every eleven years.
Marx elaborated a second source of instability in Vol. III of Capital (and in his notes for Book III of his posthumous Theories of Surplus Value). That was the savings and debts to mount up at exponential rates the “magic of compound interest”. Marx described this as a purely mathematical law of doubling times for financial capital, decoupled from the “real” economy and its employment functions that he analyzed in Vol. I of Capital.
Today’s “free credit” distortion was not anticipated by the 19th-century classical economists.
Prior to World War II, economists integrated monetary theory into classical value theory in the way that William Petty had done in the 17th century. Money ultimately was convertible into gold or silver, which had a labor cost of production. The assumption was that a pound sterling embodied the same labor for digging and refining as goods for which it would exchange.
In reality, this assumption was always shaky. It was not miners who possessed bullion, after all, but their employers. The labor embodied in these precious metals was the surplus over and above their basic subsistence needs, not their labor itself. And this surplus was taken by the owners of the mines, along with the government as taxer.
Still, there was a tangible physical monetary foundation to national banking and credit systems. Debts were convertible into bullion on demand, prior to World War I.
This monetary constraint obliged economies to operate in balance, with a minimum of debts, unpaid bills, or the purchase of assets on credit because the volume of bullion would not support more than a small margin over this debt.
The result was savings that enabled banks to make loans. If banks lent out more than the value of assets they held in reserve, there would be a run on them, and they would be wiped out. In fact, all banks faced a basic liquidity problem. The key to 100% reserve banking (savings banks, S&Ls, etc.) was to pay low interest rates to short-term depositors, and make longer-term loans at a higher interest rate. This margin was how banks made their money. But even so, there was a liquidity problem: A bank could not turn a three-year mortgage into immediate cash to pay depositors.This disparity between short-term debt and long-term assets aggravated financial crises.
Central banks were formed to provide liquidity in times of need, against assets of basic long-term value.
The expansive tendency of free credit is to purchase all revenue-yielding assets with low-interest debt, up to the point where interest absorbs all profit, net rental income, public tax revenue, and living standards over and above basic subsistence levels and then to intrude into the economy’s “bone” and push industry, real estate, the fiscal system and labor below break-even rates. The basic dynamic at work is much like that of a real estate speculator borrowing to buy a rental property, and paying interest to the bank, hoping to keep some surplus rent for himself, and to sell the property later for a price gain (“capital”) gain, although most of the price is a rising land value and rising capitalization rate as interest rates enable larger amounts of credit to be borrowed against a given flow of income.
What appeared to be a real estate bubble during 2001-2008 was basically a financial bubble. It resulted from banks making mortgage loans on easier terms to an unprecedented degree: falling interest rates, lower down payments (down to zero), and lower amortization rates (perpetual “interest-only” loans) enabled rental income to be “capitalized” at a more highly debt-leveraged rate than ever before. The price of housing or other assets is whatever banks will lend.
The process became self-feeding. As bank loans bid up real estate prices, borrowers factored in the anticipated asset-price gain into their borrowing plans. Banks themselves made loans of over 100% of the property, expecting the inflation of property prices to enable borrowers to refinance the mortgage loan at a high enough rate to cover the interest that was due. (This is what Hyman Minsky called the “Ponzi” phase of the business cycle: when banks lent their customers enough new credit to cover the interest charge.)
Real estate speculation and hoarding thus was a function of easier mortgage loan terms, not of intrinsically rising prosperity or rental income. In fact, the purchase of speculative rental property investment in search of capital gains grew so large that rents actually declined as new buyers sought renters to cover the property¹s carrying costs and bank charges.
Likewise as property prices have crashed by 30% in the United States, rents are rising as people prefer to rent than to buy, waiting for housing prices to fall further.
So the real estate sector has become an extension of the financial sector. The result is the symbiotic FIRE sector: finance, insurance and real estate. Politically, the dominance of landed aristocracies (from the 11th through 19th centuries) was replaced by that of a financial elite. Instead of “captains of industry” becoming the leaders of industrial capitalism, “emperors of finance” became the rulers of finance capitalism.
And, unlike industrialists, their financial time frame was short-term. It was based on the purchase and sale of property at “capital” gains caused by asset-price inflation, not by extracting rent or producing profits from employing labor to produce goods to sell at a profit.
The result of this shift from industrial to finance capitalism has been to shift the character of the economic crisis away from the circular flow of income between producers and consumers (“Say’s Law”) to making gains financially in balance-sheet terms (asset-price inflation, a.k.a. “the Bubble”).
The taxing and rating of land values in Australia for public works and water supply
Dr Terry Dwyer
Dr Sun Yat-Sen (1866-1925):
“The land tax as the only means of supporting the government is an infinitely just, reasonable, and equitably-distributed tax, and on it we will found our new system.”
“We propose that the government shall levy a tax proportionate to the price of the land, and if necessary buy back the land according to its price.”[1]
Overview
Many Australians would still agree with Dr Sun Yat-Sen’s observations. The history of Australian land value taxation and rating of land values for municipal and public utility financing is valuable for at least three reasons.
The history of Australian use of land value taxation or land value rating to finance public works has several sources.
One source was the old British tradition of using rates on real estate to cover municipal costs. The English rating system was originally based on the annual rental value of the property in its improved state. It was not a land value-based rating system. Its origins lay in the Poor Law of Queen Elizabeth I who wanted landholders to take over the burden of maintaining the poor of a parish. Given that the landholders had greatly increased their landholdings by participating in the plunder of the monasteries which had formerly supported the poor, it was understandable that Queen Elizabeth would place the burden of maintaining the poor upon those landholders. The idea of a rate comes from the Latin phrase pro rata meaning to apportion the cost of something across a group of people in proportion to their share. The bigger the value of your property in the parish the more you were asked to pay in rates to look after the poor or for other municipal projects such as building bridges.
But a more active source for land value taxation in Australia came from agitation over land settlement. The Australian colonists had seen vast areas of fertile land captured by squatters who had, whether by grant, purchase, lobbying or influence, acquired possession or ownership. This land was seen to be locked up against further settlement by farmers.
Some of the colonial governors such as Sir Richard Bourke[2] and Sir George Gipps[3] in New South Wales and Sir George Grey[4] in South Australia and later New Zealand were keenly aware of land grabbing and did their best to either prevent it or impose charges on the landholders. Sir George Gipps retorted, properly and correctly, to squatters complaining about taxation without representation that “to take a rent for the use of Crown land is not to impose a tax”.
Thus the Victorian Land Tenure Reform League (1870-73)[5] demanded an end to further grants of freehold property so that the land of Victoria would in future be held as a public revenue source through leasing.
After the American, Henry George, published his Progress and Poverty in 1879 advocating resumption of public ownership of land through taxation of land values, his work found ready acceptance in Australia with people who had seen in their lifetimes the same sort of grabbing of a continent which George was complaining about in relation to California and the American West. Accordingly when he visited Australia in the 1890s on a speaking tour across the east coast colonies, his lectures were well attended and well reported reaching a wide and receptive audience.
Thus by the 1880s the Australian colonies were starting to introduce land taxes to make up for the cash flows they were no longer receiving as they ran out of land to sell off as freehold. The idea was that having sold off the country too cheaply, colonial governments should go back and demand that the landholders pay rent in the form of a land value tax.
When the Australian colonies federated in 1901, many members of the early Federal Parliaments were keen supporters of land value taxation, which is why the Federal capital of Canberra was designed to be a full rent paying leasehold system. Parliament did not intend to make gifts to land speculators. Canberra was meant to be fully supporting out of land rents with no other taxes or charges laid upon the people.[6] It was, in fact, intended to be a living example of a city built on the Henry George theorem, some 70 odd years before the Henry George theorem was ever discussed in the American public finance literature. As we shall see, Australia has the curious distinction of having done in practice or tried to do in practice things which American economists have much later advocated in theory. Yet Australians have not recognised the merits of their own practical genius and have abandoned these early institutions in favour of American and UK practices for “regulated” private monopolies which the best American economists have acknowledged as theoretically highly inferior.
Meanwhile, at the local level, experiments were being conducted in using land value rating for the financing of public works. One of the most interesting examples was the development of an agricultural irrigation district in Mildura in Victoria by the Chaffey Brothers. The Chaffey Brothers financed their irrigation development by selling off land and using the proceeds to service the land with water through the digging of canals and ditches paid for from the sale of the land as irrigated land. But they went further and created a system of rating the landholders to maintain the irrigation works established.[7] Although their experiment failed financially in the Victorian 1890s crash, it set a precedent which was noticed and later used as the basis for financing Victorian irrigation districts by Alfred Deakin a Victorian politician who later became Australian Prime Minister.
In the early 1900s, across the border in New South Wales, the City of Sydney experienced an outbreak of bubonic plague. Much of this was blamed on unsanitary and dilapidated state of rental slums inhabited by working class people. Sir Joseph Carruthers, New South Wales Premier and founder of the Liberal party, therefore introduced the Local Government Act of 1906 to ensure cities and municipalities had the financial resources to undertake public works such as sanitation, provision of roads and drainage etc. What is important is that he reformed the old-fashioned British rating system on annual improved value by replacing the rating base with unimproved land values. Thus from 1906, virtually all local public works in New South Wales were financed by rates on unimproved land values or site values alone. There were no longer taxes on improvements such as housing.
This was no accident. He later wrote “My government remitted the Land Tax, amounting to £40,000 a year when the Local Government Act was passed, and the sole power of taxing land on its unimproved capital value was handed over to the local governing bodies. This gave them ample revenue to carry out the work of local government, and to this, to a large extent, eased the drain on consolidated revenue account. This system of local government came into operation on 1st January 1907, as a result of legislation carried by my Government. It has worked well and stood the test of time. I claim to be the first man in the English-speaking world to give practical effect to the reform of taxing the unimproved value of the land instead of taxing the land and ‘the improvements thereon’. …. The embodiment of the principle of ‘taxation on unimproved values’ was a great victory to the principles so ably enunciated by Henry George, a man whom I met and long conversed with on many occasions over 20 years ago. I think that the years of actual experience of our system of taxation for local government purposes reveal a success beyond the most sanguine anticipations of anyone, and I doubt if there are many who can find fault with its operation. ” (Carruthers 2005).[8]
Eventually, the reformed basis of local government rating was adopted or largely adopted for major semi-government authorities such as water and electricity supply networks. Thus the Sydney Metropolitan Water Sewerage and Drainage Board from 1888 (later known as the Sydney Water Board) constructed all the dams, pipes and water filtration and sewerage works at the expense of ratepayers, with no cost at all being met by the State Treasury. The Board was a federation of local municipal councils, serving the whole metropolitan area of Sydney. In a similar way the Sydney County Council operated all the distribution networks servicing the City of Sydney. In the case of the Sydney Water Board, the rating basis was originally the assessed annual value (rental value of improved real estate) but this later gave way to rating on site values. The result was that public works to a great extent were financed off budget with no cost to the State Treasury. The Water Board would borrow money to build a dam or extend its network, provide for amortising the loan over 20 or 30 years and in the meantime service the interest and principal repayments as well as the ongoing maintenance and operation of the works from its rate revenue.
In effect, the landholders were made to pay over time for the water sewerage and drainage which added value to their lands. In the same way, local government covered the costs of providing roads curbing and guttering. (An advantage of amortised loan funding paid off by rates was that the costs of infrastructure were spread over time, avoiding one-off impacts on the budgets of young families such as now occur under the current “user pays” system where infrastructure costs can mean another $120,000 added to the cost of a block of land. At the same time, the fact that rates attached to land titles meant that buyers were able to pay less to acquire a block of land for a home.)
The system of rating on land values was not used for all Australian public utilities. For example the Australian Gas Light Company had a Royal Charter from King William IV which gave it a monopoly as a private incorporated partnership to supply the City of Sydney with gas. The company was a regulated franchised private utility, similar to the model adopted by US cities and used in Britain prior to the wave of municipal nationalization of public utilities made popular by Joseph Chamberlain, the reforming Conservative Mayor of Birmingham in the early 1900s.
Railways in Australia were always a colonial and State government responsibility and were never financed by rating the landholders. As a result, the operating losses of railways featured largely in State government budgets. [9] State governments eventually had to put a limit to the losses they were willing to accept and, by the 1980s, the inevitable result was widespread closure of branch lines, fee increases and withdrawal of services. No consideration ever seems to have been given to recovering the costs of maintaining the fixed infrastructure from land value rating.
Curiously, proposals have been made since the 1990s for building a very fast train (VFT) between Australia’s East Coast capitals of Brisbane, Sydney, Canberra and Melbourne. However, private would-be investor proposals have foundered on economic losses, without means of capturing the increased land values along the route. Federal or State government use of the land rating system does not appear to have received much consideration.[10]
Some other public utilities such as the Postmaster General’s Department (Post Office, telegraph and telephone) and airports were the responsibility of the Federal government from 1901. The Federal government financed capital expenditure on these assets largely out of loans and general tax revenue. This was the position into the 1970s.
Land value taxation
Running parallel with State government moves since 1906 towards financing local government through land value rating was the introduction of the Federal land tax in 1910. This was introduced by Labour Prime Minister Andrew Fisher. The tax was imposed upon unimproved land valued in excess of £5,000 throughout Australia. In contrast to land value rating which was imposed at a uniform rate on virtually all land, the Federal land tax was levied at a graduated scale on the total value of land in the hands of a given owner. Its object was presented as being in large part to break up large estates, especially those in the hands of wealthy and absent British investors.
A similar motivation lay behind Queensland’s use of land tax in the 1920s with a discriminatory rate against overseas landholders. Notwithstanding protests from London, the Governor had to concede that such a tax was within the legislative power of the Queensland Parliament.
Land valuation
It is sometimes asserted by writers with no practical experience of the subject, notably some American economic writers, that land values cannot be objectively determined and that only improved real estate can be valued. This argument would generally be greeted with incredulity in Australia. Over a century’s experience with many Court cases decided has shown that site values can be assessed with as tolerable accuracy as anything else in this world. While it is true that it may be easier in any particular case to value the real estate as an improved whole rather than work out the underlying land value, this is not true when trying to value thousands of parcels of land. In working out the land value for a particular parcel where there is a building or improvement, it is true that the valuer must make adjustments and make judgements as to the utility of worth of the improvements and their depreciated value. But it is worth noting that some improvements are no improvements at all – on the contrary, they are impediments on the land.
Thus what is often not realised by armchair critics is that land values are often implicitly given by the market. Wherever a piece of real estate is purchased and the existing building demolished to make way for another, one has direct evidence of the bare land value – the purchaser is clearly not interested in paying for the existing building. Values thereby revealed can be used to extrapolate land values over a much larger area. This is much easier than valuing each site individually. While there are disputes over valuations from time to time most of these are reasonably easily disposed of and seem relatively simple compared to income tax disputes.
Land value rating for public works
The system of using land value rating to finance public works was widespread by the 1930s, especially for irrigation projects. However it is worth noting that as early as the 1930s irrigators had successfully lobbied the Victorian Premier to have the Treasury assume the responsibility of financing irrigation headworks. That is to say, the irrigators managed to make the general taxpayer pay for some of the irrigation works which added value to their land.
Yet in the 1920s and 1930s in New South Wales the Sydney Harbour Bridge was financed by loans and by a mixture of general tax revenue, toll charges and, significantly, a major portion of the cost was recovered through a rate on land values on both sides of the harbour.[11]
Hence in the post-war years the financing of a large part of public works was successfully carried out through land value rating. In particular, Sydney’s major water supply dam, Warragamba Dam, was financed solely by loans and rates on land values. The massive expansion of Sydney from the 1940s to the 1980s was financed this way. The State Treasury did not pay a cent towards building that infrastructure.
In the 1970s, the Whitlam Labour Government, started to give grants to local government. The grants were financed out of the general income tax and sales taxes. Thus the effect was to subsidise ratepayers or landholders at the expense of those paying the income tax, predominantly wage and salary earners.
Further, by the 1980s the New South Wales State government introduced “rate pegging” meaning that local government councils were limited in how much they could increase their rates or land revenues from year to year. The inevitable result of rate pegging was that local government councils were driven to find extra revenue from distorting taxes and charges. Councils started to charge for all sorts of “services” on a so-called user pays basis. For example, in Sydney, one council started charging fees in the order of $10,000 per residential building renovation permit. Thus a tax of $10,000 was imposed upon anyone in that suburb wanting to add an extra room to a house.
The trend to crude and misplaced “user pays” went further. To give another example, many local government councils ceased to provide garbage removal services as part of what was covered by general land rates and were encouraged in this by the State Government. A working family could find itself paying an extra $200 a year for garbage services while a wealthy billionaire with a harbourside home could find his land value rates reduced and his house rising in value by $20,000 because rates were no longer being levied against it to cover the garbage.
Apart from this perverse redistribution of wealth, an interesting economic distortion has emerged. In the past Sydney never had a serious problem with people dumping garbage illegally. Since councils collected the garbage as a matter of course in return for rates, no one would dump garbage in public places. Following the advent of “user pays” for garbage there have been increasing numbers of cases where people have been dumping illegally. Accordingly, fines for illegal dumping have been increased and the taxpayers New South Wales now have to pay for officers to police the Sydney Water catchment to prevent illegal dumping of household rubbish in the water catchment. This is a morbid example of how misconceived “user pays” can not only create economic distortions but actually trigger increases in government expenditure to cope with behavioural responses to those distortions.
“Reform” of public utilities – water as an example
Since the late 1970s, State governments had been starting to turn to semi-government authorities. For example in one election, the New South Wales government drew a dividend out of the State Electricity Commission in order to prop up its annual budget. Unfortunately that dividend came out of the reserves the Electricity Commission had set aside for depreciation allowances – which meant that a few years later the State Government was forced to enter into a “public-private partnership” (doubtless at greater cost) to build a major new generating plant to avoid further ongoing brownouts.
Naturally this led to community dissatisfaction and scrutiny started to be focused on the economic performance of public utilities. Hence in the 1980s, the Federal Government undertook the promotion of various microeconomic reforms. These were meant to complement broader microeconomic reforms such as floating the exchange rate and reducing tariff protection for manufacturing industry.
As part of this process, it was alleged that water authorities throughout the country were generally inefficient and fail to achieve a going rate of return on the capital invested in them. This claim was widely (but incorrectly) accepted, including by the Industry Commission which produced a report on the water industry in 1992.[12] The claim was however incorrect because, as was pointed out by Professor Bob Walker[13], the method of accounting used was incorrect. If one applied normal commercial accounting principles based on actual historic cost of assets, the water authorities were covering their costs and earning superior returns as monopolies. However the figures being used by Federal bureaucrats and economists were based on the replacement cost of assets.
Public discontent with the existing system was also fuelled by stories such as it costing more for a glass of water in a restaurant at Circular Quay on Sydney’s waterfront than for a bottle of French champagne. This argument, of course, failed to take into account the value being sustained for the landholder by having water available for the skyscraper on the site and cleverly but dishonestly pretended that the land value rate was being passed on as an addition to the rent charged. As the Industry Commission in its 1992 report clearly admitted, if land value rates for water were abolished, landholders would only increase the rents accordingly and there would be no benefit to producers or other land users.[14] Nonetheless, the argument that city businesses were being penalised to subsidise households or that existing households were being penalised on their land values to subsidise new suburban developments got airplay in the media. One cannot blame the public for not understanding the concept that a tax on land rent cannot be shifted forward and that, conversely, any remission of the tax will not be passed on to the benefit of producers and consumers. However it is harder to understand why Treasury economists failed to advise Ministers or Parliamentarians as to the real economic effects of reducing land rate charges and replacing them with charges on users.
At the same time, there were demands for inefficient monopoly public utilities to be opened up to competition processes. The National Competition Inquiry made recommendations which are now incorporated in the National Access Regime in Part IIIA of the Federal Competition and Consumer Act 2010 (Cth) which purports to promote the efficient operation of, use of and investment in monopoly infrastructure. The regime provides for access to the services of infrastructure facilities on appropriate terms, through the declaration of services.
The rather naive idea was that public monopoly infrastructure can and should be operated on a normal commercial private sector basis and funded entirely out of user charges. No allowance was made for recovery of external benefits from infrastructure networks through previous mechanisms such as land value rating. Further the regime as adopted by State Governments throughout Australia involves setting guaranteed rates of return, recovered solely by user charges, on the basis of depreciated optimised replacement cost of assets.
Strangely the private sector supported this reform, apparently not realising that while it would favour private sector investors in private monopoly infrastructure including privatised electricity networks, airports et cetera, few private lobby groups seem to recognise that this process would inevitably mean higher input costs for manufacturing industry. This was partly perhaps due to official assurances that prices would likely fall as utilities became more efficient by cutting excessive labour costs such as eliminating overmanning and redundant or “gold plated” investment.
The results of these reforms (so-called) since the mid 1990s are now visible for all to see.
Some examples will suffice.[15]
A impoverished irrigation project
The first example is from Queensland and is of the Burdekin irrigation scheme. This was the last major irrigation project undertaken in Australia. It involved the construction of the Burdekin dam on a tropical river which could have major variations in flows. The irrigation area was to be developed for sugarcane farms. It was originally financed in the 1980s by the Federal government covering all the costs of the original dam with the State government bearing the costs of the pipes and the channels. However the State government resumed all the land to be irrigated and resold it at a profit to the irrigators. The profit arose because the State government resumed the land at dry land (pre-irrigation) values and resold the land at wet land (irrigation) values. Thus like the Chaffey Brothers nearly 100 years before the State government recouped much of its expenditure through sales of the now irrigated land.
The farmers were charged by the Queensland irrigation authority for the maintenance costs of the system but these covered operating costs rather than capital costs, it being assumed that the capital costs had all been recovered or written off.
However things changed after the irrigation authority was corporatised as a State-owned monopoly water company, Sunwater. Sunwater set out to earn a rate of return on its capital base. The matter was the subject of extensive submissions to the Queensland Competition Authority.[16]
Fundamentally, the irrigators were arguing that they should only be charged for the operating costs of the scheme and that Sunwater should not be allowed to set prices so as to gain a return on sunk capital investment. In particular, the farmers pointed out that they had already paid in the prices given for irrigated land for the infrastructure. Further they objected that it was irrational to seek a return on assets which had cost the State government nothing, such as the dam itself which was paid for by a grant by the Federal government. They also pointed out that the replacement cost of assets would keep rising with inflation so that the State government monopoly would keep getting an ever increasing return on a fictional value of “investment”. They also noted that no business in a competitive industry can demand a price for a rate of return on the replacement cost of assets but considers itself to do well if it gets a good return on its historic accounting costs. It takes time for replacement costs to feed through in competitive markets and they only feed through as new investment has to be made.
Unfortunately for the irrigators, their complaints were scrupulously ignored. The result has been that costs are now so high that the Burdekin irrigation scheme will not be developed as originally planned. The costs are now so high that new irrigators could not reasonably expect to make a profit growing sugarcane at the irrigation prices which would be demanded for the extension of the scheme as originally planned. Meanwhile the costs for the remaining irrigators are higher than they would have been had those costs being shared across more irrigators.
The net result is that many of the existing irrigators faced severely reduced incomes and some were facing insolvency in what had formerly been a fairly prosperous agricultural region. Water prices were not the sole cause of this, demand for sugar cane also played a part but there is little doubt that soaring water costs severely damaged the incomes of farmers and have stymied the further development of production. This is an ironic outcome, given that the professed objective of the National Competition Policy was to prevent monopoly abuse by State-owned utilities.
Canberra – ACTEW as a rapacious water monopoly
The second example is an urban one from the city of Canberra, the Federal capital.
Unlike New South Wales, Canberra had covered its waterworks from the sale of land as serviced land by the Federal government. Water rates had always been based on the unimproved value of the land. Thus, shortly after self-government was introduced in 1988, water prices were 47 cents per kilometre of water over an allowed amount of 455 kilolitres per property, most costs being covered by land rates. This “free” allowance was given on the basis that through the amount paid for the land in the first place, together with ongoing land rates, households had already contributed towards the cost of the water supply. It was really a “pre-paid” allowance rather than a “free” allowance. The 47 cent charge for excess water was in effect a scarcity charge.
Following self-government and the National Competition Policy, the government of the Australian Capital Territory merged the Territory’s water and electricity authorities into a Territory-owned corporation named ACTEW (an acronym for “ACT electricity and water”). The system of rating land values was abolished and replaced by a small fixed service charge with the great bulk of revenue now to be recovered from per kilolitre charges. The “free” allowance was gradually reduced, then abolished, and no longer exists. While there were some steps in the original charging scale, effectively the lower charged amount of water is very small relative to what used to be normal household usage. The standard charge is now $5.10 per kilolitre as compared to 47 cents in 1990.[17] Per capita usage of water by households in Canberra is now 20 per cent of what it used to be in the 1950s.
An increase in charges of more than tenfold in the space of just over 20 years is obviously a heavy burden on workers and producers.
It has also had interesting, if depressing, results. During a long drought of nearly 10 years which finished about 3 years ago, many private and public trees died off in Canberra for want of water, destroying the value of a large social investment. Further, as gardens were turned into dirt through lack of water, dirt would start washing into drains and clogging them so that when a storm comes there can be local flooding as stormwater drains no longer cope. Another interesting aspect has been that during the drought, trees no longer being watered sent their roots into sewerage drains all across the town, causing obstruction and breakage. The long-term repair costs can only be guessed at. Another side-effect has been that the lack of water usage within houses has resulted in insufficient flow to keep sewage moving at times so ACTEW has had to spend more money clearing sewerage drains as well as stormwater drains. In a final irony on the inefficiency of “user pays” where users are charged above short run marginal cost (SRMC), it has transpired that the water engineers now sometimes have to add fresh water to the sewage upon arrival at the sewage treatment plant to make sure it flows properly through the system.
This is an extreme example of what has occurred across the Australian water sector, including Sydney and Melbourne, where costs have been inflated by desalination plants which have hardly needed to be used and which were only commissioned due to political vetoes on the construction of dams previously long planned (the Shoalhaven River in the case of Sydney and the Mitchell River in the case of Melbourne).
In the case of Sydney and Melbourne, when their water boards were corporatized by state governments in the 1990s, the assets previously constructed and paid for by ratepayers and water users were vested in companies owned by the State Treasuries. Thus for example several billion dollars’ worth of assets paid for by the ratepayers of Sydney from 1888 to 1994 became the property of the State Treasury which had never paid a cent towards the construction of Sydney’s water supply assets. These assets were then revalued at their replacement costs and the State’s so-called independent regulator then permitted Sydney Water Corporation to charge prices designed to recover a rate of return for the Treasury from those assets and pay the Treasury a dividend out of that return. It is a curious conception of economic efficiency which says that it is efficient to take away someone’s assets and then charge him the privilege of using what he has already paid for and what was his.[18] The effect, of course, was to create a monopoly rent for the Treasury and levy a disguised indirect tax on water.[19]
The shift away from the land value rating system for water to so-called “user pays” pricing has been widely praised by “economists” who never understood that efficient pricing for water should, as the Industry Commission itself recognised in 1992, comprise a two-part tariff:-
Unfortunately, the Industry Commission never understood that the land value rating system had already covered the first fixed charge part, the access charge, needed to recover the fixed costs of water systems. The latest Productivity Commission (the renamed Industry Commission) report of 2011[20] represents a further decline in insight as that later report does not even consider optimal pricing of water systems.
As might be expected, high water costs and other utility costs are a major concern to manufacturing industry. In some cases, major industries such as Australian Iron and Steel have been able to secure special deals for themselves. In the case of steel produced at Port Kembla, semi-treated recycled water was made available at a special price for the steel mill.
At the household level, an increasing response is for private households to put in water tanks to catch rainwater from roof tops. In decades past, the presence of water tanks in cities had been prohibited partly from concerns about mosquito borne diseases, such as Ross River fever or dengue fever, and partly from concerns about diseases flowing back into the main water system where tanks were connected to the main system and dead animals might be decomposing in water tanks. Now that water tanks are legal in cities, many households have spent thousands of dollars duplicating the water supply system and installing water tanks and their own irrigation systems to replace or supplement the use of the mains water system. In the case of Canberra for example it does not take much time to work out that $20,000 per household in a city with perhaps 100,000 dwellings amounts to $2 billion which would have covered the cost of 4-6 new dams, where one dam only was needed to expand capacity. The deadweight loss of the tenfold increase in prices is obvious.
Electricity monopoly rents
A similar story has unfolded in the case of electricity pricing.
The cost of generating electricity in Australia is generally around four to five cents per kilowatt-hour. Distribution charges on a historic cost basis might add another three to four cents. In Canberra in 1974 price of electricity per kilowatt-hour was
By contrast, the price per kilowatt-hour in Canberra is as at December 2014 now 20.13 cents (GST inclusive) per kilowatt-hour. The price in Sydney is as high as 32.6 cents per kilowatt hour. Electricity prices have been driven higher not only by inflated regulatory costs awarded to private and public monopolists but also by compulsory targets for use of renewable energy and subsidies to households for using solar power panels.
There is a grim revenge for electricity users in this story. Large companies have looked more and more to self-generation while households have embraced “Green” subsidies for solar panels. The result has been exit from a Balkanized grid and economies of scale being thrown away as duplicated electricity generation takes off.
Hence electricity network companies are now starting to complain of a potential “death spiral” where so many households and companies have become self-generators feeding back into the grid but not meeting its fixed costs so that prices have to keep rising in turn for those users still drawing from the grid prompting ever more customers to opt for self-generation.[21]
As with water pricing in the ACT huge excess burdens are being created by massive duplication of infrastructure with thousands of households becoming, at great expense, their own electricity producers as well as water suppliers.[22]
Land taxation developments
The Federal land tax was introduced in 1910 but in 1952 was transferred by the Federal government to the States partly to compensate them from the Federal government takeover of all income taxes during World War II.
After 1952, most of the states introduced or expanded various concessions or exemptions in the land tax. The tax as noted above was never a uniform impersonal tax but depended on aggregating all parcels of land in the hands of an owner and applying a graduated rate after particular exemptions. This was inherently inefficient as it requires landholders to lodge returns with the State Revenue Offices which then have the problem of trying to find non-lodging landholders by doing their own checking of land registries. By contrast, the simple flat land value rating adopted at the municipal level simply involves sending a bill for each parcel of land to each registered landholder. Among the concessions for land tax were generous exemptions for primary producers and homeowners as well as a general threshold limit. There are considerable variations between States and Territories in these concessions.
Curiously, while introducing or expanding land tax concessions, State governments have over the last 30 years increased rates of stamp duty, that is, charges on land transfers. Not content with rising revenues from increasing land sale values, they have also raised percentage rates of stamp duty on properties. Where stamp duty rates were once as low as 1% they can now reach 7% or thereabouts. Given that a 7% charge on a multimillion dollar real estate transaction can be worth millions of dollars, lawyers have exercised some ingenuity in finding methods of avoiding such charges for their clients.[23] A favourite method used to be to have land held by a company and transfer the shares in the company rather than transfer the land, thereby avoiding the stamp duty on real estate. While all jurisdictions have legislated to try to treat such sales as if they were land sales, there are still more sophisticated methods of avoiding the stamp duty as a transaction tax.
The foolishness of state government policies in shifting away from a steady tax on land holding towards a high tax on real estate transactions readily becomes apparent in the resulting instability of state government revenues. Prior to the global financial crisis, State governments had ridden the speculative boom but saw their stamp duty revenues collapse along with the decline in economic activity. The Federal government saw similar instability in its capital gains tax revenues from real estate.
It is obvious that both Federal and State governments would be much better off (as well as the economy generally) if they abandoned stamp duties and capital gains taxes on real estate transactions and simply shared a uniform flat rate land value tax instead. Indeed, that has been advocated for the State governments by the Henry Review into taxation.[24]
An interesting feature of the Australian land value tax regime is that for most of its history it has been shared by at least two tiers of government and at various times, land values have been taxed or rated by two or more of Federal, State, local government or semi-government authorities. This sharing of the tax base has occurred with no explicit intergovernmental agreement or coordination required. This is because each of the relevant land value based charges are all capitalised and the private market value of the land adjusts to take into account all land value rates or taxes. Mathematically, if there are four levels of government, imposing respective tax rates t1, t2,t3,,t4, in the static case the market value will be given by:
Land revenue raising and economic development
Because land value rating was not being uniformly or consistently applied across all Australia, it is possible to make some general observations as to the relative progress of various States with somewhat different systems of taxation.
After 1906 New South Wales placed higher reliance on land taxation and moved to site (land) value rating both to free up land for settlement and encourage the rebuilding of urban slums. The State of Victoria and Melbourne stayed with the old British system of taxing both land and buildings to pay for local government services. At Federation in 1901, Melbourne was a larger city than Sydney. But from 1906, New South Wales gradually overtook Victoria in terms of economic activity, population and general prosperity and by the 1980s had clearly displaced Melbourne as Australia’s financial capital. Only now, as New South Wales has reduced its reliance on ratepayer funded financing of public works (such as water supply) and services (such as garbage collection) and moved to user charges, has Melbourne started to catch up again.
The progress of Queensland was more remarkable. Queensland like New South Wales had adopted site value rating and exempted improvements. However Queensland went further to try to collect land rents to help its budget and keep other taxes and charges lower than other states. By ensuring, whether through coal freights or other quasi-royalty devices, that the Crown extracted rent for its mineral resources, successive Queensland governments were able to keep other taxes, such as stamp duties and financial taxes, below the levels of other States.
The progress of Queensland’s capital Brisbane compared to Sydney and Melbourne was even more remarkable. As communications improved and technology developed, the ability of transactions or labour and capital to move increased. When the southern States imposed financial institutions duties many companies moved their corporate treasuries to Brisbane. In the 1950s, Brisbane was described as a large country town: by the 1980s it was well on the way to becoming a city of some 2 million people and Australia’s third metropolitan capital.
The future
The story of Australian land value taxation and land value rating is a mixed story of inspiration, success, complacency and comfort, followed by decline, decay and partial abandonment through misguided “reform”. In financing public utilities, Australia led the way with a system which would have been envied by Hotelling and Vickrey among other economists and which was far superior to the American system of regulated monopoly utilities. Fixed costs of capital investment were recovered by lump sum charges and land values and users could be charged operating costs alone. However, in the guise of reform and in the interests of monopoly private rent seekers and state Treasuries hungry for disguised revenue, national competition policy was perverted to introduce a British privatisation model which was worse than the American model (at least American utilities are not allowed by regulators to charge a rate of return on money never invested).
While it is now beginning to dawn upon Australians that they have destroyed the country’s competitive advantage in energy, they have yet to realise the enormity of the disguised indirect tax system they have imposed upon their own manufacturing industry and their workers through an inflated cost structure for all public utilities from roads, airports, electricity, gas, water and telecommunications.
It has suited governments to disguise these exactions because in some cases they have extracted large lump sums to help with temporary budget difficulties from monopolists willing to pay a premium for the right to tax the public. It is also suited governments, both Federal and State, to shift capital formation off their budget expenditures so that they can spend on more popular handouts. In addition, it suits governments to levy taxes disguised in the form of utility prices because these are not counted in statistics of tax to GDP ratios or in calculations of household tax burdens. In addition there is a Constitutional prohibition in Australia on States levying excise taxes so it is convenient to evade that prohibition by charging inflated monopoly prices for utilities.
But there are some signs of second thoughts. The Henry Review into taxation, like other reviews into State taxation, has defended and supported land value taxation and argued that more reliance should be placed on it instead of upon less efficient taxes such as real estate transfer taxes. In Canberra, the ACT government has announced that it will gradually abolish various transaction taxes and reduce stamp duties on real estate in order to raise more revenue from land value rates.
REFERENCES
Brennan, F. (1971). Canberra in Crisis: A History of Land Tenure and Leasehold Administration. Canberra, Australia, Dalton Publishing Company.
Carruthers, S. J. (2005). A Lifetime in Conservative Politics: Political Memoirs of Sir Joseph Carruthers. Sydney, University of New South Wales Press.
[1] See http://www.wealthandwant.com/themes/underpop/Sun_Yat-Sen.htm (accessed 7 January 2014)
[2] For a biography and an account of his attempts to make the squatters pay for use of Crown land see http://adb.anu.edu.au/biography/bourke-sir-richard-1806 (accessed 7 January 2014). “Bourke’s governorship was a period of active economic growth. Between 1831 and 1837 revenue increased from £122,855 to £354,802 and exports from £324,168 to £760,054. This growth began before Bourke arrived, but it was accelerated by his administration, especially of land. In 1831 land was sold only within certain boundaries, the so-called limits of location, but unauthorized squatting on unoccupied crown lands was becoming common. At the Cape Bourke had seen that large tracts were needed for raising stock in a dry climate, so he did not restrict squatting in New South Wales. But at the Cape he had also seen the crown’s land rights overlooked, and much revenue lost by mere occupation. In New South Wales, therefore, after approval from London, an Act was passed in 1833 (4 Wm IV, no 10) empowering commissioners to prevent the crown’s rights in occupied crown lands from falling into abeyance. In 1836, partly because wealthy occupants complained of depredations by poorer squatters, and partly because he thought additional powers of eviction were needed, the Crown Lands Occupation Act (7 Wm IV, no 4) was passed. It provided for annual occupation licences for depasturing stock on unsurveyed ‘runs’ beyond the limits of location, where commissioners of crown lands, also acting as magistrates, were to carry the rule of law”. The present author is proud to acknowledge him as a relative.
[3] For a biography and a short overview of his struggle against the land grabbing of the squatters, see the Australian Dictionary of Biography http://adb.anu.edu.au/biography/gipps-sir-george-2098 (accessed 7 January 2014). “Wentworth’s enmity, however, was more serious; it went back to 1840 when his scheme to purchase most of New Zealand’s South Island for a song was blocked by Gipps who reported to the Colonial Office: ‘If all the jobs which have been done since the days of Sir Robert Walpole were collected into one job, they would not make so big a job as the one Mr Wentworth asks me to lend a hand in perpetrating; the job, that is to say, of making to him a grant of twenty million acres at the rate of one thousand acres for a farthing’. Wentworth never forgave him and never missed an opportunity from then on to speak against him.” See also Lord Stanley’s support of Gipps against the claims of the squatters http://trove.nla.gov.au/ndp/del/article/37157387 (accessed 7 January 2014)
[4] “Nevertheless Grey contributed much to liberal and socialist thought in New Zealand. He taxed the unimproved value of land in 1878 and later supported bills for breaking up large estates in the interests of the smallholders. He thought that the state should guarantee employment, adequate wages and fair working conditions, and championed trade unions and voluntary industrial arbitration. He nursed a morbid hatred of landlordism and aristocracy, and wanted both the upper house and the governorship to be elective. For years he fought against plural voting and finally had it abolished in 1889.” http://adb.anu.edu.au/biography/grey-sir-george-2125 (accessed 7 January 2014).
[5] Gresham, W.H. (William Hutchison) & Spencer, Herbert & Land Tenure Reform League of Victoria 1870, Land reform league : [Tracts no. 1-7], [Land Tenure Reform League of Victoria, Melbourne. See National Library record http://trove.nla.gov.au/work/19703235?selectedversion=NBD6373396 (accessed 7 January 2014)
[6] This is clear from Brennan, F. (1971). Canberra in Crisis: A History of Land Tenure and Leasehold Administration. Canberra, Australia, Dalton Publishing Company.
It may be noted that Walter Burley Griffin, the Chicago architect of Canberra, was a president of the Henry George Club of that city.
[7] For a brief and not necessarily sympathetic synopsis see http://adb.anu.edu.au/biography/chaffey-george-5544
[8] pp 173, 184-5
[9] Indeed, it was encoding the New South Wales Public accounts for the Bureau of Statistics in Sydney as a young cadet that I first discovered the interesting accounting fact that accumulated losses could show up in the asset side of the balance sheet.
[10] The Federal Treasury’s sole contribution seems to have been to worry about how to deny a tax deduction to the joint venturers for losses arising in the early years of any such project. “Penny wise, pound foolish” is perhaps too kind a description for such attitudes.
[11] “The way in which the construction of the bridge was financed was defined in the Sydney Harbour Bridge Bill. Two thirds of the cost of the bridge was to be paid for by the then Railway Commission and the remaining third of the cost was to be borne by rate payers residing in the City of Sydney and North Shore municipalities which were charged a betterment tax. This tax was levied from 1923, well before the bridge was opened for use.
Financing the construction of the bridge was always a contentious issue, one that continued until the opening of the bridge. Agitation by various interest groups, such as the Tax Payers Association, the Graziers Associations and individual Councillors, had reached a peak by 1931. As a result the introduction of a users’ toll was being seriously considered by the newly elected Lang Government. By 1932 the imposition of a toll for the use of the bridge had been decided and new argument as to which users were to pay ensued. It was finally agreed that pedestrians would not be charged for their crossing of the bridge.
The prospect of a toll on their new bridge enraged some Sydneysiders. Residents living just north of the city felt particularly put out by the fact that they would have to pay to use the bridge. Research conducted by the National Roads and Motorists’ Association in late 1931 suggested that it would cost motorists an extra 30 pounds a year if they drove to the city daily from the North Shore, understandably unwelcome news to those who would be in this situation. Those living in the northern suburbs of Sydney also felt it unfair they should foot a substantial portion of the bill for the new bridge via their taxes (and pay a toll) as they felt I would be used by, and benefit, those who lived outside of their municipality too.” http://www.rms.nsw.gov.au/roadprojects/projects/shb_precinct/documents/summary_report.pdf at page 3 – all excellent arguments for recovering the costs out of general land values.
[13] For this and more references see http://www.pc.gov.au/__data/assets/pdf_file/0015/15423/sub052.pdf (accessed 7 January 2014).
[14] See note 2 at page 6.93 of the Industry Commission 1992 Report http://www.pc.gov.au/__data/assets/pdf_file/0004/6943/26water.pdf Strangely the Commission did not seem to realize that one sentence had by itself destroyed the whole argument for naïve “user pays” as opposed to a principle of “beneficiary pays”.
[15] The present author speaks on these matters with direct personal knowledge, having been variously involved as an economist, a lawyer and a public commentator. If he speaks harshly, he hopes to be forgiven and pleads in mitigation the words of Aeneas to Queen Dido from the Roman poet, Virgil Infandum, regina, iubes renovare dolorem – Umspeakable, O Queen, the griefs you order me to relivet! (Virgil , Aeneid , II, 3). There can surely be nothing more distressing to a true economist to discover his beloved subject being prostituted to manufacture and profit privately from the production of scarcity instead of economics being applied to the generation of abundance. True economists sympathize with Peter Paul Rubens when he painted “Abundance triumphing over Avarice” for the Banqueting House in London in the 17th century.
[16] The sorry history can be found at http://www.qca.org.au/water/burdekin-haugton/ (accessed 7 January 2014)
[17] Some of the history may be found at http://www.icrc.act.gov.au/water-and-sewerage/inquiries-and-investigations/ It may amuse more cynical readers that when a new independent Commissioner recommended in 2013 that prices be cut, the ACT Government and ACTEW immediately set about overturning the ruling by the “independent” regulator.
[18] A nice analogy would be to allow someone to capture people as slaves and then graciously allow the slaves to pay 50% of their earnings as a “rent” for the privilege of being able to go and work for someone else. The analogy is not fanciful. Before the Civil War in the USA, slaves were “investments” and were sometimes “rented out”. Most investors would love to invest in a business where they could seize assets from someone else and then charge the former users for the privilege of using what the former users used to own – and having that charge indexed for inflation. The present author at this stage should declare his interest as a superannuation investor in some such monopolies.
[19] Having it disguised is legally important since States are prohibited by section 90 of the Constitution from levying excise taxes. Hence the monopoly rent must be dressed up legally as part of a “price for a service”. So far, the ruse seems to have worked and the Judges have nodded somnolently. One can hardly blame them when presented with confusing economic “expert” reports which few people would understand.
[20] http://pc.gov.au/projects/inquiry/urban-water/report (accessed 7 January 2011). For some of the evidence the Commission chose not to discuss or deal with, see http://pc.gov.au/__data/assets/pdf_file/0019/104275/20101129-canberra.pdf at page 166 and http://pc.gov.au/__data/assets/pdf_file/0019/110548/20110606-canberra.pdf at p 632.
[21] This raises the nice question for a superannuation investor as to when he dumps his shares in a monopoly which has sucked its victims dry to the point of evanescence.
[22] The present author paid a large amount for subsidized solar panels and solar electricity output to avoid being hostage to monopoly electricity charges. Even before visiting the poet Du Fu’s cottage in Chengdu, he does not wish to be as cold as Du Fu must have been in winter.
[23] Amusingly, a senior lawyer and respected company director recounted to me the story of when he had to fly from Sydney to Canberra as part of a State Government privatization of a public asset to avoid the stamp duty which would have otherwise been imposed on a transaction concluded within New South Wales. When Governments set about avoiding their own taxes one has ask where rationality has been left behind.
[24] http://www.taxreview.treasury.gov.au/content/Content.aspx?doc=html/pubs_reports.htm (accessed 7 January 2014).
This is surely Michael Hudson’s best interview yet – where his simmering outrage is supported by incredibly insightful economic analysis.