1. goods and services should be made dearer by applying taxes to them
2. business profits should be taxed
3. my earnings should be taxed
4. my earnings should be further reduced by mandatory provision for my health care
5. my income should be further reduced by the cost of my education
6. superannuation funds should be allowed to invest my retirement allowance in shares and real estate (for a fee) at their whim
7. land-based revenues (i.e. land rents) can be passed on in prices, like taxes
8. I should not have to pay any land rent on the land that I own
9. there is no connection between inadequate public capture of land rent and rapidly escalating land prices
10. rapidly escalating land prices don’t increase the levels of household debt
11. rapidly escalating land prices are good for the nation
12. rapidly escalating land prices are good for my children
13. rapidly escalating land prices are good for future generations
14. rapidly escalating land prices and real estate speculation are unrelated
15. rapidly escalating land prices and real estate speculation are unrelated
16. rapidly escalating land prices and the negative gearing of real estate investments are unrelated
17. rapidly escalating land prices and economic recessions and depressions are unrelated
18. rapidly escalating land prices are simply a matter of supply and demand; there is no such thing as a real estate bubble
19. the educational system would tell me if the tax system was constructed to favour rapidly escalating land prices
20. my own intelligence would let me know if the tax system was constructed to favour rapidly escalating land prices
21. lawyers would let me know if the tax system was constructed to favour rapidly escalating land prices
22. the churches would le me know if the tax system was constructed to favour rapidly escalating land prices
23. my political party would let me know if the tax system was constructed to favour rapidly escalating land prices
24. the real estate industry would let me know if the tax system was constructed to favour rapidly escalating land prices
25. I am fully across why the world is currently experiencing a financial collapse

Although it’s bad enough that there were involuntary poor in America in the first place, The End of the American Dream website provides 22 statistics demonstrating that America’s middle class has been driven into the ranks of the poor, too.

It’s not just the US, of course.  Twenty-one years after the collapse of the Soviet Union, people across the world are beginning to doubt the ability of their political leaders to arrest this new and deepening financial collapse.

Incredibly, President Barack Obama actually retained George W Bush’s failed economic goons to keep their hands upon the financial levers.

Perhaps the kindest thing that can be said about this is that his advisors mightn’t have understood that the collapse of the US Empire was at hand, and considered he’d better not ‘scare the horses’ by undertaking systemic change.  A bit of re-regulation here, a bit of an overhaul of Wall Street there, coupled with some of his powerful oratory might do the trick, they advised.  That Obama accepted this warped advice proves the Presidency to be beyond him.

However, he’s not alone. There’s no evidence elsewhere that leaders have been more successful.  All have had their feet of clay exposed.  As the economic depression enfolds country after country, only a handful of outstanding economists have pointed to the one alternative to keeping the fiat printing presses running hot and putting people further into hock for what is likely to be generations.  But they are ignored by ‘experts’ startled like rabbits in the headlights.

Meanwhile, financial analysts also go out of their way to miss the point as they continue to mouth their daily platitudes in the press and on television.  Slowly-boiled frogs spring to mind.   Within their self importance they are entirely clueless, and it’s necessary that those aware of the real economic  facts retain their sense of humour as they witness the crass witlessness of the pundits.  They are all sham and shamelessness.

Does anyone still believe the US has been running a system of free enterprise since the early 1970s?  Real wages have been falling ever since then as taxation, debt and land prices rose.  Rather, America has been exposed as a once-free country that grants special privileges to rent-seekers garnering the nation’s publicly-generated land rents unto themselves.

None has been more successful in doing so than the banking sector as it pocketed skyrocketing rents by way of mortgage repayments on bubble-inflated land prices.

As publicly-created US land rent became increasingly privatised instead of captured via property taxes as once it was, people have railed in a desultory fashion against related increases in the taxation of employment, industry and saving that, except for its war industries, has slowly but surely ground the US to a halt.

However, their heads fixed firmly within the mortgage noose, few Americans were moved to rebel.  Casey Research lists 10 benefits one expatriate found by emigrating.  His plaintively insistent case is well argued, but lacks practicality for most US citizens.

Those who know their history understand full well that taxation and land speculation has caused the collapse of each and every Empire.  How sad that Americans didn’t learn from history the risks of allowing most of its economic rent to be privately expropriated.

Click on this excellent animated cartoon of our economic situation.  It’s worth watching!

It is based on a talk by anthropologist/social theorist David Harvey.  Right at the end, David says “I don’t have the solution, but I think I know what the nature of the problem is.”

The solution is not the nationalisation of the means of production, distribution and exchange, but the collection of rent, the surplus product, the conclusion Marx himself seemed to be reaching when he died.

So, the cartoon’s final diagram could have been to the only workable solution shown below.  That is, abolish taxes and collect the land rent to increase wages (with no attendant inflation).

THE WORLD’S GREATEST HOAX

The fudging together of land and private property has been the parasites’ coup of all coups.  Poverty, dispossession and criminal activity stem from this hoax.

Although a site may indeed be possessed exclusively upon payment of its rent, all the great philosophers have insisted that up-front capitalised payment should not be used to commute the obligation to pay the annual rent for exclusive possession of a piece of land. Even freehold titleowners were expected to pay their ‘quit rents’.

Indeed, an owner of a property (from the Middle English ‘owerner’) was once the person who owed the rent.

“Once, natural resources were fully used for the benefit of all, and not appropriated for selfish ends. This was the age of the Great Commonwealth of peace and prosperity.”   Confucius  551 – 479 BC

“The land shall not be sold in perpetuity, for the land is mine.”  Leviticus 25:23

“Equity therefore does not permit property in land.…. Observe now the dilemma to which this leads. Supposing the entire habitable globe to be so inclosed, it follows that if the landowners have a valid right to its surface, all who are not landowners have no right at all to its surface.”  Social Statics: The Right to Land – Herbert Spencer

“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.”  Some Considerations of the Lowering of Interest – John Locke

We’re having this economic depression because we’ve been convinced by non-productive rent-seeking leeches that day is night – that land is indeed “private property”.

The chicanery that allows people to protest that they have no further obligation once they’ve paid for a piece of land leads directly to the super wealthy stealing from the earnings of the poor. Incredibly, the wealthy, the middle class, the poor, the churches, the law, and those who claim to support freedom, have come to sanctify the social and economic idiocy that this fallacy entails.

If we accept the falsehood that the property tax, rates, land tax or the economic rent of land should NOT be captured for the common wealth, we paint ourselves into a corner from which revenues must then be derived from taxing private production, thrift and employment – and thereby inflating recurrent real estate bubbles.

This mindset, into which much of the world has morphed, turns on its head what throughout history has constituted private property. Was not private property once the earnings produced from one’s toil? How was it ever deemed acceptable for the state to steal from people’s earned incomes except through this, the world’s greatest con job?

Those who consider land to be “private property”, and believe land-based revenues should be reduced or even abolished, no doubt also go about their daily affairs ignorant of what exactly has caused this collapse of the world’s financial systems.

Might I suggest that Ponzi schemes are secondary in their crassness only to the notion that land has somehow morphed into “private property”?

From this, it follows that the first line in any Bill of Rights must lay down the community’s responsibility to collect the rent, so that individuals aren’t taxed.

Two verses that usually go missing from Woody Guthrie’s “This Land is Your Land”:-

As I went walking, I saw a sign there

On the sign it said “No Trespassing”

 But on the other side, it didn’t say nothing

 That side was made for you and me.

 In the squares of the city, in the shadow of the steeple

 By the relief office, I saw my people

 As they stood there hungry, I stood there asking

 If this land was made for you and me. 

POPULATION SHIFTS

Most people are clearer about the need for Australia to decentralise its population than they are about the niceties that distinguish Julia Gillard’s re-badged ministry for Sustainable Population from those minister Tony Burke exercised in his recently constituted role as Kevin Rudd’s minister for Population. The new title sounds better, though.

Five months out from the Victorian election, the regions are being courted again. If the coalition wins government, it has promised to spend $1 billion on looking after them. On the other hand, the Brumby government says it will move 400 public servants to Ballarat, Bendigo and Moe, spend $100 million to lure students away from Melbourne and $260 million on infrastructure in its $600 million 5 year decentralisation package.

State and federal governments over the years have attempted to address the exaggerated drift of population from the regions that James McAulay noted clots “like mud” to Australia’s coastal capitals. It’s patently wrong that rural and regional areas must wait patiently until the government of the day looks like losing an election before the regions are thrown a few more scraps.  A fairer system must be possible.

Attempts at decentralisation have met with little success because the techniques employed have been fundamentally flawed, ranging from such approaches as offering taxpayer-funded incentives to businesses, to the re-location of government departments. These have come at a significant cost to taxpayers – the Whitlam government’s involvement in the Albury-Wodonga project springs to mind – and the temporarily-arrested population loss from those regions selectively favoured has eventually resumed.

CANBERRA

In some respects Canberra stands out as an exception. Whilst it may skeptically be put that you’d have to expect a federal public servant-based city to blossom strongly, this would be to ignore the method under which Canberra was founded. With some tweaking it might even offer an effective model to assist Australia to effloresce, to decentralise.

Canberra was established on a leasehold system of land tenure whereby, if people agreed to pay the rent on a piece of land secured under a long term lease, the land was theirs, provided they built a house on it. The rent being many times less than the capitalised price they’d have to pay for a block of land in other capital cities, the wondrous new land management tool initially encouraged people to settle in Canberra. The proceeds went into funding the running of Canberra.

But by 1971 lawyer Frank Brennan documented in “Canberra in Crisis” how vested interests had effectively dismantled the Canberra leasehold system by ensuring that the city failed to capture anything like the national capital’s full market site rents. ACT taxation accordingly began to escalate to fill the revenue vacuum generated by this failure.

Later, in an article entitled “Canberra’s leasehold legacy” in the ANU Reporter of 21 September 1994 Dr Julie Smith reported that the once effective leasehold system designed to “take the load of the cost of the creation of the Commonwealth off the backs of the people of Australia” had finally been scuppered: “Once housing costs in Canberra were among the lowest in Australia. Now they are comparable to the other cities. This is no coincidence.”

[So this must now be the ultimate irony?]

LEASEHOLD UNNECESSARY

However, it isn’t necessary that Australia reconstitute itself under a leasehold system of landholding in order to stimulate the regions; only that it capture significantly less revenue from employment, thrift and industry and more from rates and taxes on land values.

Clearly, as land values are higher in our capital cities than in the regional areas (“location, location, location!”), a land-based revenue system will produce cheaper rates and land taxes in Australia’s rural and regional areas, and therefore stimulate greater employment opportunities in those areas.

This would finally address a pathological revenue system that supports capital city development at the expense of the regions. The existing bias actually explains much of the population drift to the capital cities: that’s where the jobs are because that’s where the tax advantages and best infrastructure are both to be found.

STUMBLING BLOCKS

The Rudd Government recently ruled out in the strongest terms any possibility that it would introduce Ken Henry’s panel’s recommendation that a comprehensive land tax should be used to replace iniquitous taxes such as payroll tax and stamp duties. This thereby ensures that Australia will continue to pay lip service to decentralisation.

Insofar as it ignores Canberra’s brilliant genesis this is most regrettable. It wrongly assumes that people can’t be educated to the fairness of paying revenue based upon the value of relative locational benefits.

It’s worth noting that not only would an across-the-board higher level of rates and land taxes assist the regions – provided other taxes are reduced or abolished accordingly – but it would also act to put a ceiling on escalating land prices and the attendant mortgage debt currently being shouldered by Australian households.

The latter approach to decentralisation would, of course, be anathema to the same interests that sabotaged the successful ACT experiment, which is somehat similar to mining billionaires labelling the proposed Resource Super Profit Tax “another big tax” when it is, in fact, a natural resource rent owed to the public purse.

The economics textbooks tell us that public capture of land and resource rents can’t be passed on in prices or affect production incentives adversely, and Julia Gillard’s today re-naming the miners’ “super profits tax” a “resource rent tax” seems to acknowledge this point at last.

Decentralisation is obviously necessary if Australia is to unclog its capital cities and utilise the infrastructure available in the regions.  Many people are beginning to wonder, however, whether a bi-polar party-political system, funded to a large extent by vested interests, is any longer capable of acting in the best interests of the Australian people.

Recent history suggests the two major parties are increasingly in the thrall of sectional interests and paid lobbyists. This has come at a great cost to the national interest and to our rural and regional areas.

I was apalled at the nonsense that tried to pass itself off as reasoned discussion when 3AW shock jock Neil Mitchell interviewed mining magnate Clive Palmer on radio this morning.  It was hopeless.

As the proposed resource rent is going to cost mining jobs, opined Palmer, the new Prime Minister Julia Gillard’s commitment to negotiate with mining companies isn’t good enough.  She must scrap the resource super profits tax altogether, said Palmer.

Now here’s the thing, Neil and Clive: there’s a vast difference between a tax and a natural resource rent.  A tax hits labour and capital, whereas a resource rent is a charge for use of the community’s natural resources.

How did you both ignore the fact that taxes keep the returns to labour and capital down – even Clive Palmer’s labour and capital – and that to the extent you capture land and resource rents to the community you raise the returns of labour and capital?  Amazingly, you both managed to avoid this critical point for about ten minutes.

C’mon guys, even the economic textbooks make the distinction between arbitrary taxes and targeted resource rents*, so in whose interests were you working this morning?  ‘Cos it certainly wasn’t the Australian people’s.

Oh!  “Australia’s rent-seeking parasites”?  OK …. now I understand.  But aren’t rent-seeking leeches the reason the world’s having this global financial crisis, Neil, Clive ….?  #

* “Pure rent is in the nature of a “surplus” which can be taxed without affecting production incentives.”  ECONOMICS – Second Australian Edition, Samuelson, Hancock and Wallace, 1975.

# If you can put aside an hour to learn about how the GFC is affecting Europe and what needs to be done about it, Professor Michael Hudson will bring you right up-to-date.

My thanks to those who visit this site regularly.  Newcomers who can’t review everything that’s gone before might appreciate a summary:-

It may be hard to believe, but the world is experiencing the early stages of economic depression. You’d never know it, because the media seizes upon anything at all that may be seen as a “sign of recovery” from the slump.  Because of the failure of communism, it sees no serious alternative to the status quo, because it hasn’t accepted or realised that there is an alternative to tax regimes that foster private capture of publicly-generated land rent, and the repetitive cycles of boom and bust that this engenders.

Maybe it’s not all that bad; not a depression?  Why, countries, such as Australia, China, India and Brazil haven’t even experienced the effects of the global financial collapse (GFC), have they?  To which anybody cognisant of the incredible hurdles still to be got over would reply :  “Yet!”

Signs of recovery will prove false until the deadening burden of debt is liquidated from the system, whether it be government debt, household debt, or a combination of both of these.  Australia’s particular problem is the level of household debt.

Governments may employ only one of three approaches to combat the GFC:-

1.         PRINT MORE MONEY – ‘to avoid deflation’.  [The Bernanke option.]

The US finds this ‘solution’ to be eminently satisfactory, because the world still believes the US dollar and its T-notes and bills remain atop the pile of floundering currencies.

However, it is valid to inquire how printing more money and bailing out banks can possibly solve anything, because pandering to an errant financial, insurance and real estate (FIRE) sector certainly won’t create ONE more dollar of real wealth.

2.        AUSTERITY MEASURES – to ‘reverse’ the spendthrift mentality that developed through boom/bubble times. [Greek/Irish/Spanish options.]

These involve higher levels of taxation and slashing government spending and jobs.  History shows that this approach can’t solve the debt problem during a depression because it leads to lower levels of production and employment as the government tries vainly to reduce the ill effects of debt.  This alternative also panders to the already-failed FIRE sector of the economy to which we CAN’T look for assistance.

3.        ABOLISH TAXES – and collect land rent for revenue.  [The untried option.]

Whereas the first two options above were tried in the 1890s and 1930s depressions and failed abysmally, with WWI and WWII arising out of each, this method encourages production and employment and gives the signal to a privileged and powerful group of people that seeking to corner the public’s surplus rent is no longer acceptable: the criterion now must be real wealth-creation – not creating real estate bubbles and debt.

This option was  actually employed successfully by Sir Stamford Raffles in Indonesia (then known as the ‘Spice Islands’ or the Dutch East Indies)  to exit from an economic depression brought about by innumerable taxes levied by the Dutch.  Raffles went on to found Singapore on the same principle of abolishing taxes and collecting the economic rent, a surplus in the production process.

The approach was also part of the 1909 UK “Peoples Budget” before WWI, but was defeated by the House of Lords who preferred to send Britains to war rather than to discourage rent-seeking.

If you see these are the available options, and that only the last one works, you certainly do not have to apologise for NOT being an economist, because you understand more about economics than those economists who tinker with impractical mathematical models that ignore the massive quantum of production’s surplus rent.  (Yes, unfortunately this includes Austrian economists!)

And … welcome to the Georgist School of economics!  The positive way out of the depression – working our way out of it …. without taxation.

But it aint easy.  It’s difficult to educate people to a new mindset that demonstrates how private rent-seeking has kept them poor.  Just look at the ill-informed resistance of Australians to the introduction of the Resource Super Profit Tax, which would fairly capture our mineral rent for ALL the citizenry.

You can’t imagine a worse, if mindless, reception if the Australian government were to seek to introduce the second leg of rent capture, the comprehensive land tax/rent system recommended (to replace payroll taxes and stamp duties) by Ken Henry’s panel for Australia’s Future Tax System.

Finally, Australia is the closest country in the world to solving this economic depression, thanks mainly to Ken Henry’s review panel’s rent-capture recommendations, but because of a contrived ignorance concerning option three above, it looks like the depression will continue to roll in relentlessly upon us.

Let’s hope that enlightenment can somehow break through the “we’re right, you’re wrong” childish party politics that splits and subverts a reasoned discussion of economic reform.

RSPT IS NOT SOME WEIRD TAX INVENTED BY KEN HENRY

During my time as valuer with the Australian Taxation Office I served a stint valuing hotels.  Later, in the Commonwealth Bank, I came to value other forms of  ‘going concerns’, such as service stations, nursing homes, restaurants, etc.

The methods used for hotels were  to capitalise either the net rental or the net profit.  If a tenant paid an ingoing for a lease, this premium was also rentalised over the term of the lease and added to the rent reserved under the lease.

Rentals obviously bore a relationship to the hotel’s turnover in liquor, meals and accommodation and to the net profit of the business.  A capitalisation rate was established by analysis of sales of leased hotels trading at a similar turnover.  I’d study the subject hotel’s profit and loss statements over the last few years and make adjustments for any non-recurrent items, trying to ascertain an explanation for any variations in trade during the period in question.

In the case of an owner-occupied hotel, I’d similarly analyse comparable sales evidence and examine the subject’s profit and loss accounts.

I found the net profit of owner-occupied hotels before interest and tax (EBIT) to be approximately double that of hotels where the business was operated by a tenant.  If I added back the lessee’s rent, his EBIT plus rent usually equated to the EBIT of an owner-occupied hotel doing similar trade.

Over the years, I came to see this 50/50 approximation applied not only to the valuation of hotels, but to other businesses, including quarries.

Why shouldn’t it?  The landlord has leased his freehold and business to a tenant on a partnership of some equality. The owner gets his 50% share of EBIT as rent, and the tenant receives his as business profit.

So, the Henry Review’s recommendations for a 40% Resource Super Profit Tax (RSPT) on mining has impeccable business credentials (even though the Rudd government has attached some minor, unnecessary considerations to it). The RSPT parallels what occurs in the business world except  in the case of mining Australians are the landlords and the miners are the tenants.  Australian miners should ReSPecT this relationship and pay the  fair rent.

On the other hand, if miners like Clive Palmer, “Twiggy” Forrest and their representative Mitch Hooke want to say that their company tax on top of the proposed RSPT rent is too much, I’d have to agree.  In this respect, they are in the same boat as most Australians who pay taxes on the incomes they’ve earned instead of a rent on the land they occupy.

The miners have the wrong end of the stick.  We should all be paying our land or resource rents to the public purse, then work to have all arbitrary imposts and taxes removed.

Until Australians learn to appreciate the vast difference between a rent and a tax – and public debate on the issue demonstrates that politicians of all stripes clearly do not yet understand this difference – we’ll continue to have the sort of ridiculous arguments being put against the RSPT by the mining industry and other highly placed but  ill-informed personages.

And I wish we’d stop calling it an RSPT or a miners’ “super profit”.  It’s a trendy name for a natural resource rent, pure and simple.  There are taxes and there are land rents:  one can be passed on in prices and the other cannot.

In the meantime, we’ll continue to have a relatively few people steal much of the natural surplus that is our rent and inflate it up into bubbles, bringing on financial calamity every 18 years or so.

READING A CLASSICAL ECONOMICS FORMULA INTO A PROFIT AND LOSS STATEMENT

A connection I make between  a classical economics equation – not found in current junk economics textbooks – and profit and loss statement may serve to reinforce the point that the RSPT is fair and appropriate.  Australia needs it.

Classical economists observed that production (after costs are deducted) was the sum of land rent, wages and interest:

P = R + W + I

Note here that ‘interest’ is not used in the sense of financial interest but in the classical sense of ‘interest’ being the return on capital.  Along with other classical economists, the American social philosopher Henry George observed that, of these three income forms, rent is the only one that isn’t created by labour or capital.  Being generated by public factors alone, it is indeed a surplus in the production process.

So George tweaked the formula to:

P – R = W + I

to show that if rent is captured to the public purse, it becomes unnecessary to tax ( fine?) wages and capital.  He further observed that real wages and returns to capital can’t increase in the medium to long term unless rent is captured for necessary government and is not privatised by companies or individuals (where the latter necessitates the introduction of production-distorting taxes).

This explains why poverty persists and why real prosperity continues to elude us, even though innovation and production techniques improve geometrically.  The vast increases in wealth simply flow directly to those who have privatised the public’s land rents.

The formula works either at the national level or in an individual business, so let’s marry it to a profit and loss statement:-

PRODUCTION        = $ z

less costs:

$a, $b, $c, $interest , $WAGES, $taxation = Net Profit

add back:

$interest (because we’re not interested in debt to equity arrangements) and $taxation = EBIT  (i.e. RENT + INTEREST; remember, the latter ‘interest’ is in the classical sense of return on capital).

For extractive industries, divide EBIT by 2 = (Australians’) RENT and (miners’ return on capital) INTEREST.

As I’ve shown above, this applies in similar ‘going concern’ business arrangements.

Although the land rent for other non-going concern commercial or industrial enterprises is also be found within the EBIT, it will be much less than 50% in those cases, and will be picked up best by land value-based revenues on real estate titles.

European proposals to tax banks’ “super profits” in the same way as resource extraction is misguided.  Exorbitant flows of excessive rent to banks via interest charges would be curtailed quite  nicely by capturing title-based land rents.

So, give us a break on the government’s 40% RSPT, won’t you please, miners?  You’re wrong.  Why don’t you instead just zero in on eliminating company taxes and income taxes?  We’re all in the same boat with you on that one, and might even join you in trying to get rid of those.

_____________________________________________________

Postscripts:

1.  Maybe I’m a little tough on economists, because there are still a few who can see the great possibilities of resource rents.

2.  The Australian e-journal Online Opinion published my blog on RSPT mining tax today (3 June). If you have any thoughts on the RSPT why not add a comment, or respond to other comments on the article?  Self-serving arguments being put by the miners demand a response.

3.  On second thoughts, maybe the miners ARE having to downsize:-