Tax regimes currently fail to capture enough land rent.  Land prices, reflecting the excessive private capitalisation of publicly-generated rent, form dangerous bubbles.

Ignoring prudential risk management, banks continue to provide credit into the bubble for the purchase of grossly overpriced real estate.

This bubble in land prices eventually bursts and prices tank towards the long term mean.

People cut their spending in an attempt to deal with their over-commitment to mortgages. This adversely affects businesses and the broader economy.

Businesses go broke and people lose their jobs.

Banks fail.

By reversing the process, capturing rent and abolishing taxes (as recommended by the Henry Tax Review) the depression may be remedied.

However, this is not done and the economic depression lingers.

5 thoughts on “THE DEPRESSION IN 120 WORDS”

  1. It’s not so much a matter of blame as one of observation. Mind you, councils have no control over their total rates ( at least here the total rate take is set by state apparatus ). And states if they raise their own taxes lose out under the GST.

    Historically, I wouldn’t know.

    However, pretty much all the expenses that can easily be cut are federal. Tassie is facing the need to cut the budget by 10% immediately, with global and local considerations likely to trend incomes down further over the next five years.

  2. “Most tax is only necessary because of federal government growth beyond its original bounds.”

    Yes, but why is this? It’s not simply as you infer: that the feds are power-hungry. For example, during the period of the Whitlam government local government around Australia cried havoc! saying it had absolutely no scope at all to increase rates and sought federal assistance. (Too near the people who might make them accountable, perhaps?) Local government’s claim was complete bullfeathers, but Whitlam chose to pay half their revenue out of federal funds thereafter. It remains largely funded by the federal government today. That’s completely wrong!

    The States, too, have also proved too timorous to use their vast revenue powers, and, as I said earlier, also put out a mendicant hand for ‘assistance’. Now, we simply blame the feds for taxing us too much! Local, state and commonwealth levels are ALL capable of funding themselves (from rent preferably), but the two lower levels have chosen to bludge on us. Federalism has failed, insofar as each jurisdiction should use is own revenue base, for the sake of transparency and accountability. And land and natural resource rents could easily fund all three levels! Imagine – no taxation of labour and capital at all. No deadweight from taxation cascading through the economy! No 0.1% stealing our land rent.

    Don’t simply blame the Commonwealth government for the failings of local and State governments. There’s a more complicated story.

  3. Interesting note – I looked at Federal expenses the other day – less than $100 Billion of what is spent by the federal government is within its original remit.

    Most tax is only necessary because of federal government growth beyond its original bounds.

  4. Good point. Ironically, in feudal times when we captured the rent, Thorold Rogers tells us in the 15th and first quarter of the 16th century, the humble labourer was able to have two-thirds of his salary still available for other spending (or saving) after food, clothing and rent. When the 0.1% legislated to keep wages down it failed to do so, so they decided to tax people. That worked!

  5. Good summary. Things inevitably go badly when the systems our societies are based upon are set up to the advantage of some over others.

    It’s a lot harder to see it today because it is a matter of the many vs the rest, rather than the few vs the many like it was in feudal times.

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