Prevention and treatment of recessions

 Everything should be made as simple as possible,” said Einstein, “but not simpler.” What then is the simplest possible explanation for the present global economic downturn? What’s the simplest mode of prevention? And is it also the simplest cure? In a growing economy, one should expect land values to rise. But rational expectations gave way to belief in the greater fool. Banks lent money against land values inflated by that belief, until the illusion became unsustainable: the bubble had burst. So land values fell, leaving borrowers owing more than their collateral was worth, and lenders unable to collect, hence unable to lend again: a credit crunch. Every “unexpected” credit crunch has started with a speculative bubble, usually in the land market, occasionally in the stock market—but never in the market for buildings, because a building is worth no more than the cost of constructing a similar building, whereas land, as a gift of nature, has no construction cost; so the speculative component of “property” values is in land values.

To prevent bubbles and the ensuing bursts, we need auto-stabilizers on asset values—feedback mechanisms that limit buying and promote selling when prices rise, and vice versa when prices fall, so that asset-price growth stabilizes around the long-term trends. Such mechanisms can be obtained by tax reform: get rid of taxes on income, profits, payrolls, sales, consumption, value-added, savings, capital gains, inheritances, and holdings or transfers of “property”, and replace them with a holding charge of so many percent per year on the values of shares (payable by the company, for simplicity) and land—not buildings, just land. When asset values rise, the holding charges rise, making the assets less desirable and limiting the price rises; and the reverse when prices fall. What could be simpler?

Is the preventative also a cure? Yes, because governments funded via charges on asset values have an incentive to do things that increase asset values. Such things include provision of infrastructure, which creates employment, raises land values in serviced locations, and increases profitability, hence share prices. And the resulting expectation of rising asset values—due to genuine improvement, not speculation—makes it safe again to borrow and lend against the assets. What could be simpler?

How shall asset values be assessed to calculate the holding charges? For shares it’s simple, because shares are continuously traded and all shares in the same tranche have the same value. For land, in this age of computers and geographic information systems—think of car GPS units and Google Maps—it’s only slightly more complex. Property transaction records could be purged of personal identifying information and entered into a cumulative database, together with zoning restrictions, and the system could continuously update the assessed value of every piece of land in the jurisdiction.

In Australia, governments have assessed land values and derived at least some revenue from them since long before the computer age. Computers merely speed up the process. Land is a huge revenue base; in Australia the total land value exceeds $3 trillion ($3,000,000,000,000). If Australia’s 125 taxes were replaced by a holding charge on land values and another on share values, its system of revenue would be as simple as possible, given the need for auto-stabilizers.

The reform could even be voluntary: taxpayers could choose to remain in the old system, temporarily or permanently, or opt out by accepting holding charges. The applicable rates could be negotiable on transition to the new system, but standardized when the assets next changed hands.

The simplicity of the new system would attract enough participants to make the auto-stabilizers work. Stabilization of asset values via holding charges would repair the capitalist system by ensuring that the fruits of productive effort are enjoyed by the producers—not confiscated by taxes, nor blown into asset bubbles that end in golden parachutes for the few, bankruptcy for the many, and recession for all of us.

Can Australia again lead the way?


Gavin R. Putland, BE PhD


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