One way to come to the same conclusion concerning the need for revenues to come from an all-in, single-rate charge on land and natural resource values is to examine where all the tax concessions (read privileges) currently lie.
This was the enlightening topic on Geraldine Doogue’s “Saturday Extra” this morning with professor of law at Melbourne University Miranda Stewart and journalist Brian Toohey.
“While the US as a whole continues its painstakingly slow trudge towards economic recovery …” [Why does every financial commentary start off like this, these days?]
No, Matthew Murphy, there is no recovery. Got it? No recovery. We’re going deeper into the shit, not coming out of it. Oh, you’re trying to be a cheerleader, perhaps?
You don’t really understand what has happened do you, Matthew? You and many other financial commentators.
It’s like this. As my report “Unlocking the Riches of Oz: a case study of the social and economic costs of real estate bubbles (1972-2006)” demonstrated, it became fashionable in the west from the outset of the 1970s to wind back land-based revenues and to replace them with more and more taxes on work and productivity. So, people have taken their lead from what tax regimes are telling them to do and have become rent-seekers – because that’s now where the tax breaks are. They’re being quite logical. You’re not being logical, because you’re seeing faux recoveries and believing that economies are miraculously repairing themselves, Matthew. They’re not. There’s still too much household debt around to be able to stimulate demand.
Meanwhile, with nothing, or very little, by way of land-based revenues to keep the lid on land prices over the last forty years, real estate bubbles have grown bigger and bigger – until this God-almighty one we’ve had since 1996.
But people like you, Matthew, are saying the property markets are recovering. Well, that’s very bad, because the bubbles have an enormous amount of deflating to do before economies can be got back to work, but they aint deflated enough, and private debt remains too high.
Matthew, it doesn’t matter how many times Tony Abbott says “Australia is now open for business” there can be no recovery–here or in the US–because there are rotten tax systems to be addressed – along the lines of the Henry Tax Review.
No proper tax reform, no recovery. Got it, Matthew?
Good!
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ps. Otherwise, you’re article was OK, Matthew.
No, it’s not.
“We must support Australian products, and stop importing competitors’ goods from overseas where their cost of labour is much cheaper.”
Really? We shouldn’t do trade or business with those whose incomes are lower than ours?
Should a doctor not do business with a tradesman, if the tradesman’s income is lower than his then? The argument is clearly a fallacious one.
Trade, especially free trade, is a civilizing influence, and history is replete with examples of protective barriers generating trade wars, and worse.
The real response to India and China’ cheaper goods is for the west to un-tax labour and capital in order to keep prices, including the deadweight costs of taxation, down and to switch revenues to land and resource rents which can’t be passed on in prices as taxes are. Also, whereas taxes add to prices and costs, revenues derived from land and natural resources provide cheaper, not dearer, access to resources. Tariff policies act to inflate land values and mortgages at a severe cost to productivity. Excessive debt is the main reason Australian manufacturing is dying. That, and a tax regime that fines labour and capital.
There’s been a gut reaction in favour of ‘protective’ tariffs as a means of retaining industry has been growing in Australia in view of Australia’s continuing loss of manufacturing industries, but we need to look at the facts.
It’s difficult to beat Henry George’s Protection or Free Trade which canvasses the issues thoroughly, but the late EJ Craigie gives a good summary.
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Just the same, beware of upcoming overly-secretive Trans-Pacific Partnerships Agreements (TPPs), which endeavour to pass themselves off as free trade agreements, when they’re certainly not folks!
1. Re-write economics to understate the importance of land rent; roll it in with capital and call the new study “neo-classical economics”. [See chapter and verse of this in Mason Gaffney’s “Neo-classical Economics as a Stratagem against Henry George”.]
2. Get all economists to claim “There’s not enough natural resource rent to replace tax revenues. It’s only about one per cent of the economy”, without doing the basic mathematics. [Although the claim is patently false*, it is repeated in many economics text books. *Total US land prices have been conservatively assessed at $14.488 trillion. If US GDP in 2012 was $16.245 trillion and land rent is 1%, that means land rent would be about $162.45 billion. But if we divide the land rent by total US land prices, that discloses the overall capitalisation rate, i.e., $162.45 billion divided by $14,488 billion suggests a capitalisation rate of only 1.12%! Sure! Ask any assessor/valuer whether this is even remotely possible!]
3. So, now that we’ve hidden the real quantum of natural resource rent in the economy–at least 25% of GDP–from proper analysis (because it is economists, not land valuers or assessors, who are gifted with the responsibility of ‘running the economy’), the rentier class may then seek to maximise its share of that 25% of the economy. [Remember, although the economic rent of land and natural resources is community-generated, it is predominantly expropriated by the 1%.]
4. Environmental plunder proceeds apace; wealth disparities widen; slowly but surely, financial and social collapse takes hold.
BUSINESS SPECTATOR 31 Jan, 2:19 PM
It’s time to fix Australia’s leaky tax sieve
If the Coalition is serious about addressing our ‘budget emergency’, then it should start with the billions of dollars in foregone revenue that the government fails to collect annually via selective and differential tax policies. Simply slashing expenditure won’t cut it.
A new report by the International Monetary Fund – on Italy no less – provides important insight into Australia’s tax system. No other advanced country foregoes more tax revenue, through “differential, or preferential, treatment of specific sectors, activities, regions or agents”, on an annual basis than Australia.
This can take the form of selective or differential allowances, exemptions, rate relief, credits and tax deferrals. Australia has seen them all: negative gearing, capital gains taxes and superannuation concessions to name just a few.
These revenues are important since they have “major consequences for the fairness, complexity, efficiency and effectiveness” of the tax system and the broader economy. They change incentives and create opportunities for certain sectors (individuals or organisations) to succeed at the expense of others.
The IMF estimates that this behaviour reduces Australian government revenue by around 8 per cent of GDP. This is more than enough to completely cut the deficit, sharply reduce government debt and leave the budget well placed to handle a declining terms of trade and an ageing population.
Australian governments – of both the left and right persuasion – have proved to be wasteful in recent decades. For the most part, we could afford it. An unprecedented period of prosperity provided ample opportunity for tax cuts, welfare increases and pork barrelling … so much pork barrelling.
We spent money like drunken sailors, feeling smug about our modest surpluses, and then suddenly the money dried up. Tax revenues fell sharply as the global financial crisis began and they have, at best, only mildly improved since then.
The political narrative has been one of reckless spending. But the truth is that our budget deficits are a result of a narrowing tax base and tax cuts that went too far too quickly and without regard for the future.
It was a simple narrative, one with clear lines of blame and appeal to voters, but it missed the complexities of government budgets. It would have been a much tougher sell to blame the population for getting old or for not earning enough or for struggling to find work. It would be a tougher sell still to blame excessive tax cuts.
The Coalition understands this, though it will not admit to it publicly. Look how quickly it wound back its surplus pledge – implicitly recognising the difficulty of running a surplus while dealing with a narrowing tax base and unfavourable demographics.
Now it faces the difficulty of addressing the issue. The evidence so far suggests its members are thinking too narrowly and failing to identify the real issue. The Commission of Audit, set up to identify spending cuts across the government, is a valid endeavour and one worth pursuing but one that is clearly too narrow. The Commission will find a range of spending cuts but that will do little to create a sustainable long-term budget.
If we have a budget emergency – as the Coalition has suggested – then everything should be on the table. Last week I discussed many of the issues that need to be addressed, including winding back negative gearing, cutting superannuation concessions for the wealthy, the aged pension and broadening the tax base via a land tax (Raise taxes to reduce inequality, January 24; A tonic for Australia’s inequality ills, January 27). Those suggestions were made with reference to improving inequality, but they are equality valid approaches to creating a sustainable budget.
Understandably, some people are upset at the prospect of paying more tax. But the truth is we are a relatively low tax-paying country and, as the IMF has shown, there are plenty of ways to avoid paying tax.
Improving our budget balance now – and more importantly, creating a sustainable budget in coming decades – will require hard and often unpopular decisions. But if the Abbott / Hockey government is serious about debt reduction, then it must make those decisions and, in the process, create a long and worthwhile economic legacy.
Why exclude the Goulburn Valley canner, SPC Ardmona, Prime Minister Abbott?
A series of letters in THE AGE today suggests the federal government should be consistent about whom it subsidises. Maybe there’s another side to Treasurer Joe Hockey’s damning indictment of “the entitlement mentality”?
BUSINESS SPECTATOR
Chinese buyers don’t want your house, they want the land
Forget about off-the-plan apartments. What cashed-up overseas Chinese buyers really want is a house in Australia, and more precisely, the land on which the house sits.
For the right house in the right suburb, they are outbidding Australian buyers by $100,000 to $200,000 – and sometimes more – to secure the property. They are importing inflation to their country of choice.
“Many people say, erroneously, that Chinese investors are only buying new-built – I can say categorically that that is not true,” says Andrew Taylor, co-founder of juwai.com, a property website visited by 1.5 million potential Chinese investors each month.
“To most Chinese buyers, re-sales (existing properties) are far more appealing,” says Taylor.
Taylor estimates that Chinese investors spent $5.3 billion buying Australian residential real estate in 2013 – but this is a mere drop compared to the estimated $38 billion to $50 billion they spent buying houses overseas last year.
“The bulk of our enquiries are for established homes, priced at $600,000 to $1.1 million in Australia – the sort of price range most Australians are also targeting.”
One buyer, who didn’t want to give his name, experienced the competition first-hand recently when he looked to buy a home in Epping, a Northern Sydney suburb.
“We saw this house on a Saturday afternoon and when we went to make an offer on the Monday morning, it was already sold – $200,000 more than the asking price ($1 million),” he says.
He subsequently found out that the young Chinese buyer intended to knock it down and spend another $500,000 building a new house on the site.
Veteran Sydney agent Barry Goldman says: “The majority of Chinese buyers prefer to purchase brand new property, or if not new, the property must be substantially renovated or knocked down and rebuilt.
“In Sydney’s leafy mid-north shore suburbs, it is not uncommon to see old houses knocked down and brand new double brick two-storey mansions in their place,” says Goldman, chief executive of Leda Real Estate.
Joseph Ngo, branch manager of LJ Hooker Glen Waverley agent in Melbourne, says it is not unusual for his agency to sell homes in sought-after Melbourne suburbs for $100,000-$200,000 above the expected sale price.
“I recently sold a home for $2.3 million – $500,000 over the asking price,” he says.
“They pay $1.2-$1.3 million for a house and think nothing of tearing it down. Then build a 60-square (557 square metres) mansion on the land. They are buying the land, not the house,” says Ngo.
John McGrath, chief executive of McGrath Estate Agents, says: “We have seen buyer inquiries from clients of Chinese origin (local and overseas) double in the last 12 months.”
Citing figures from the FIRB, McGrath said 9,768 approvals for residential real estate purchases or development were given to foreigners in the 2012 financial year – compared with 4,715 approvals in 2009-2010.
NSW experienced 45 per cent growth – the highest in the nation – in foreign investment in residential real estate.
In total, FIRB recorded residential sales of $4.2 billion to overseas Chinese buyers in the 2012 financial year – up 70 per cent on the $2.4 billion recorded in 2009-10.
Many of these buyers have friends or relatives in Australia to bid for them. Those without the local connections are still able to purchase – and there have been countless anecdotes of overseas Chinese buyers flying in to inspect and buy Australian properties they found on the internet.
According to the FIRB website, foreigners can buy established properties in Australia if they have valid visas – for example, work or student visas. The rationale is that they need somewhere to live, but must sell when the visa expires. While foreigners are otherwise technically not allowed to buy established homes, a Canberra government source said non-resident foreign persons can buy, but they need to apply for approval to buy established dwellings for redevelopment.
Juwai’s Taylor says China’s economic ascendancy has unleashed unprecedented purchasing power for its citizens, and is now washing up on the shores of Australia, the United States, Europe, South America, and Southeast Asia.
“The true power of the Chinese buyer is represented by more than 63 million people whose wealth and incomes provide them with the ability to purchase international property,” says Taylor, who points out that 90 million Chinese search for property online every month. More than 60 per cent pay in cash.
Globally, Taylor says Chinese purchases of residential properties totalled at least $38 billion and possibly as much as $50 billion last year.
And just as they are moving out of tier one cities in China, overseas Chinese investors are now moving out of capital cities, like London, to Manchester and Birmingham.
In Australia, Taylor says, the Chinese are also buying in tier two cities – Gold Coast, Perth and Adelaide. And surprisingly, juwai.com is getting enquiries for properties in Wagga Wagga, in the south west of NSW.
“We didn’t really understand why, until we found out that a Chinese company has made a big investment in Wagga.” (The state-owned Wuai Group has partnered with Sydney-based company ACA Capital Investment to build a $400m trade centre in Wagga.)
The mainland Chinese passion for real estate remained unfulfilled in their home market until about 15 years ago, when private ownership was first permitted, according to Taylor. “They are going through their first property cycle. Property is like gold to them.”
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