How indeed?

Supporters of the ideas of Henry George were behind the founding of labour parties in Australia and the UK, and Andrew Fisher and Keir Hardie became early leaders of those parties.

Despite the Asquith Liberal Party government having introduced the land tax in the UK “People’s Budget” of 1909—only to have it defeated in the House of Lords—the fact that the Labour Party also favoured the introduction of a land tax began to diminish the popularity of the longer-established Liberal Party. Whilst a land tax remains a plank in the UK Liberal Party platform, in the Labour Party’s wish for respectability [hello, Tony Blair!] a land tax has disappeared from its aspirations altogether. That suits banking and speculative interests down to the ground (so to speak).

It’s now the same in Australia.

Andrew Fisher’s first Australian Labor Party government introduced a federal land tax in 1910. This had the effect of breaking up enormous estates and, along with municipal rates, played a strong part in the development of Australia’s regional areas.

Although land taxes had worked well at all three levels of government in Australia, Liberal Prime Minister Robert Gordon Menzies abolished the federal land tax in 1952, leaving it the province of the states and municipalities only.

But in a 33 minute parliamentary speech on 24 February 1953 Labor leader Arthur Calwell, vehemently attacked the decision: “We of the Australian Labour Party have always believed that the land is the patrimony of the people, and that nobody has a complete and absolute title to it …. The land belongs to the people, and its use must be safeguarded and protected at all times …. We have always believed in the land tax, and when happy days come again we shall restore the measure, imposing the tax to the statute book of this country.”

But, no. Apparently Calwell and others in favour of a federal land tax were misguided and delusional; they’d become an embarrassment. So, in 1963 Cyril Wyndham, the new Labor Party national secretary decided to simply write the land tax out of the ALP’s 1964 policy platform altogether – without the mandatory party vote. [!]

See Clyde Cameron’s “How Labor Lost Its Way”.

Even in successfully capitalist America, property taxes had played a more significant role than the taxing of earnings until 1933. It’s been largely downhill ever since, especially after the undue influence of “voices for freedom” (sic) Ayn Rand, Margaret Thatcher, Ronald Reagan, America’s Heritage Foundation, and Australia’s Institute of Public Affairs had taken control of public policy. These bodies, supported by all political parties because they have serious money backing them, have wrongly decided that extractive rent-seeking by banking and speculative interests should be treated no differently from those earned incomes which actually create wealth.

Private rent-seeking in natural resources has superseded productivity, generating impossible levels of public and private debt, and bringing down world economies. But the situation remains a mystery to the many supporters of progressive democratic parties who’ve forgotten their roots.

That, unfortunately, is why the world is where it is now, folks!

Bryan Kavanagh

The Case

As Australian capital cities spill out into the hinterlands, our regional cities and towns serviced by good infrastructure fail, worse than ever, to attract their share of population growth. Politicians regularly breast-beat about the developmental imbalance, occasionally sending this or that centrally-located administrative department off to the regions in order to redress this lopsidedness artificially. They always manage, however, to overlook the sort of natural incentives that could be employed to encourage people out of our clogging cities.

Why not remove IMPEDIMENTS to living in the regions?

Such as:-

1. Increasing council site value rates and State land taxes in order to facilitate removal or reduction of payroll taxes, stamp duty, motor registration fees, rail freight charges and differential petroleum costs, the latter of which will require cooperation of the oil companies. Site values will increase more in capital cities than in the regions.
2. Getting rid of council rates on buildings, as in Victoria where all municipalities fine people for constructing buildings or for redeveloping properties. Site value rating, with a single rate in the dollar and no minimum rate, is an essential foundation for economic activity and for decentralisation to occur naturally. It encourages construction and economic activity, instead of penalising it by rating on capital improved values, or by net annual value rating.
3. In site value rating States, such as Queensland and New South Wales, we should be looking at abolishing ‘minimum rates’, because these have the deleterious effect that owners of the least valuable sites effectively subsidise owners of more valuable land. Abolishing the minimum rate would put everyone on a fair and equitable footing and better encourage construction activity.
4. Reforming State land taxes, so that all properties are levied with a single rate charge on land values, with no exemptions, thresholds or aggregation provisions.

Anticipated results

As site values in capital cities are substantially higher than those in the regions, the increased rates in cities and the removal of obstacles in the regions clearly offer incentives to relocate from the cities to where both real estate and council rates are cheaper.

It was, after all, differential council rating and the federal land tax (1910-1952) that had initially assisted to establish and develop Australia’s regional towns and cities. There was virtually no federal income tax during the greater part of that period. When people ask “Where is the money to come from?” we might well re-visit how our forebears handled the situation to respond: “From part of the uplift in land values that infrastructure and population delivers to local landholders.”

Studies confirm this outcome

Economists accept that taxes on land, unlike other taxes and charges, carry no excess burden because they are in the nature of rents which can’t be passed on in prices. However, as the foregoing amounts to a big claim for the efficacy of land-based revenues in relation to decentralisation, where’s the practical evidence behind the efficacy of rating and taxing land values?

There’s plenty of evidence. The State of Victoria used to rate entirely on the net annual value of properties (NAV), i.e. on the improved rental value, until legislation was passed in 1920 which allowed municipalities to change to unimproved capital value rating (since redefined as site value rating).

Between 1943 and 1986 the Land Values Research Group conducted many municipal rating studies, amongst other things, quantifying the benefits enjoyed by those 67 municipalities which chose to switch from NAV to SV rating to leave improvements untaxed. In all cases, even during periods of recession, where the change to SV occurred, building activity not only rose, but increased at rates greater than those in adjacent NAV-rating municipalities which had not made the switch.

These comparative results also held for State-based agricultural activity, as represented by areas under crops:-

Go for it Australia: you’ve done it before!

It’s not all that difficult to comprehend: if you un-tax people for being productive and remove obstacles placed in the way of their living outside the capital cities, some people will take the hint. We need to offer ongoing structural incentive if decentralisation is to occur!

And whilst the vast majority of developers are currently to be found within our State capitals, the impetus provided by such a positive regionalisation program would encourage a change of habit for some developers – to venture out into the regions, to where the action is.

Hello, Regional Development Victoria? Australia? Do you hear me?

ps. America used to do it, too.

2018, a busy year that often took me away from this blog, but it seems I’m finishing with a flurry of activity.

Yesterday, I found myself defending real estate valuers on Twitter when an article suggested many of them in the UK are valuing commercial properties too high for their clients. I mentioned this was not my experience as a valuer in Australia where the vast majority of valuers always use current sales evidence, even when the market is in decline, and most were honorable and professional people.  

I do remember, however, when the 1991 downturn hit Melbourne, there was one particular valuer notable for being too amenable to his clients’ wishes: but I’m not being a Pollyanna in saying there was no more than a handful of such bods.

On a different tack, I’m certain that valuers have a better grip on what the economy’s up to than most economists. Valuers are in the market that dictates the direction of the economy, and they can see what’s going on. Not so, economists: the land market is almost invisible to them.

On reflection for that matter, most seasoned real estate agents, too, have a better understanding of the economy than economists.

Why then do governments look only to economists for advice and guidance? Maybe because economists have such a cosy rapport with banking and finance that they’ll never blow the whistle on lax credit standards creating land price bubbles – and super-profits for banksters (at least until the bubble bursts)?  

Nikolai Kondratieff was onto something, but the Ruskies put an end to him in one of Stalin’s Siberian gulags. Kondratieff didn’t say what caused the Kondratieff Longwave, but in an article in 2001 and a talk at Melbourne University in 2005, I consider I was able to show they’re caused by tax systems favouring land speculation over productivity. Although this situation only suits the 0.1%, we persist with it.

This particular ‘K-Wave’ is an extended one: it started after WWII, peaked in 1972-3, and has headed downwards towards its depressionary trough ever since the 1970s. Hence, the widening poverty gap, declining real wages and increasingly larger real estate bubble burstings.

This is a particularly interesting K-Wave, insofar as the lesser 18-year cycle is due in 2026 (i.e. 2008 + 18 years), with the usual mid-term recession about to happen in 2019-20. My only query is: with Australian private debt levels at these historic highs–we’re #1 in the world–how is it possible for Australia to hold on and to recover a little before 2026?

Of course, none of this boom-bust need occur were we to tax away publicly-generated resource rents (with zero deadweight loss) instead of taxing incomes (which ensures a deadweight loss of $2.00 for each $1:00 of income tax levied). But we don’t. Our politicians seem to prefer we continue with this nonsense .

HENRY GEORGE
by Francis Adams (1862 – 1893)

I came to buy a Book. It was a shop
Down in a narrow quiet street, and here
They kept, I knew, these socialistic books.
I entered. All was bare, but clean and neat.
The shelves were ranged with unsold wares; the counter
Held a few sheets and papers. Here and there
Hung prints and calendars. I rapped, and straight
A young girl came out through the inner door.
She had a clear and simple face; I saw
She had no beauty, loveliness , nor charm,
But, as your eyes met those grey-lit eyes
Like to a mountain spring so pure, you thought:
“He’d be a clever man who looked, and lied!”

I asked her for the book….We spoke a little…
Her words were as her face was, as her eyes.
Yes, she’d read many books like this of mine;
Also some poets, Shelley, Byron too,
And Tennyson, but “poets only dreamed!”

Thus, then, we talked, until by chance I spoke
A phrase and then a name. ‘Twas “Henry George”.
Her face lit up. O it was beautiful,
Or never woman’s face was! “Henry George?”
She said and then a look, a flush, a smile,
Such as sprung up in Magdalene’s cheek
When some voice uttered Jesus, made her angel.
She turned and pointed up the counter. I,
Loosing mine eyes from that ensainted face,
Looked also. ‘Twas a print, a common print,
The head and shoulders of a man. She said,
Quite in a whisper: “Henry George! That’s him.”

Darling, that in this life of wrong and woe,
The lovely woman-soul within you brooded
And wept and loved and hated and pitied,
And knew not what its helplessness could do,
Its helplessness, its sheer bewilderment –
That then those eyes should fall, those angel eyes,
On one who’d brooded, wept, loved, hated, pitied,
Even as you had, but therefrom had sprung
A hope a plan, a scheme to right this wrong,
And make this woe less hateful to the sun –
And that pure soul had found its Master thus
To listen to, remember, watch and love,
And trust the dawn that rose up through the dark:
O this was good
For me to see, as for some weary hopeless
Longer and toiler for “the Kingdom of Heaven”
To stand some lifeless twilight hour, and hear,
There in a dim-lit house of Lazarus,
Mary who said: “Thus, thus he looked, he spake,
The Master!” – So to hear her rapturous words,
And gaze upon her upraised heavenly face!

~~~

On 30 January of this year, I submitted the following submission to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. It was published on the Commission’s website as PWF.0001.0001.0129, even though it wasn’t strictly in accordance with the Commission’s Terms of Reference #5 which stated that The Commission is not required to inquire into, and may not make recommendations in relation to macro-prudential policy, regulation or oversight.

The likely reason for this restriction is that if this aspect of banking were to be investigated it may have answered the question of the ages, or even led to the truth about land prices. [!]

__________________________________________________

BACKGROUND TO THE BANKING SWINDLE

Australia’s national income (Y) is distributed between production factors, natural resources (R), labour (L) and capital (K) as factor incomes rent (r), wages (w) and interest (i) for a given time period (t), viz:-

Y_t = rR_t + wL_t + iK_t

As natural resources (land, the electromagnetic  spectrum, &c.) have no cost of production, rent (r) is an ‘unearned income’, or, as economists have it, a surplus or ‘economic rent’. It is therefore not the property of companies nor of any individual.

The private capitalization of land rent generates Australia’s land prices. Theoretically, were all land rent to be captured publicly, land prices must reduce to zero, as there is nothing left to capitalise. Since the early 1970s, we’ve chosen to capture less and less of the economic rent of our land via rates and land tax, and land prices have exploded exponentially – as per Table 61 of Australian Bureau of Statistics Catalogue 5204.0.

The great beneficiaries of this explosion in land prices (from circa 25% of house prices in 1970 to 75% in 2017), have been Australia’s banks which generate mortgages based upon the security of a combination of the gently increasing value of dwellings and this incredible escalation in land prices.

In fact, whereas prudent bank lending was once taken to be one-third of the main income-earner’s wage, we have seen this escalate towards ten times the combined wages of husbands and wives. As banking risk management (against the possibility of a decline in land prices) has declined, competition between banks to generate mortgages at any cost has increased, thereby acting further to inflate land price and, of course, irrational profits. (I outlined this process in “Unlocking the Riches of Oz – a case study of the social and economic costs of real estate bubbles 1972 to 2006“.)

It cannot be denied that the declining standards of risk management in banking– rising at times to control fraud (of which other submissions will provide examples)– have engendered the greatest land price bubble in Australia’s history.

Our qualms have been ‘assured’ though by two fairy tales invoked by our banks:-

(1) that record private debt is not a threat to financial stability, as bank debt is simply a matter of one group of Australians ‘lending’ to others, and

(2) there is no bubble in Australian land prices. (The latter seems always to be the narrative – at least until the bubble bursts. Following the previous bubble-burst, the ANZ Bank’s Don Mercer assured us banks would never permit this to occur again.[!]) 

I submit that should this swindle in generating land price bubbles not be held (at the very least) to instance a continuing culture of failed bank risk management, then nothing ever will.

1. An end to banks generating mortgages against bubble-inflated land prices, because banks generate ‘super profits’ against these, then expect government guarantees and bailouts when the bubble eventually bursts.

2. A return to more circumspect lending criteria, so that such bubbles are not permitted to generate.

3. A recommendation for far greater public capture of economic rent (and less taxation of wages and profits), as recommended by “Australia’s Future Tax System”, so that banks and speculators are unable to rent-seek to the extent they have.

I trust the Commission will make recommendations that delimit the socio-economic financial damage wrought by excessive bank rent-seeking behaviours as exhibited by land price bubble peaks in: 1973 (followed by the 1974-75 recession); 1981 (followed by the 1982-83 recession); 1988-89 (followed by the 1991 recession); from 1996 – current (followed by the 20xx economic depression).

PWF.0001.0001.0129

Instead of taking publicly-generated land rent for public finance, we gift it to the 0.1%.

Therefore, we have to tax ourselves for working, or earning a profit.

That means the vast majority of us live in debt for most of our working lives so we may service their land prices and our taxation (and all the deadweight losses in the economy that go with it), whilst the 0.1% experience obscene luxury at our expense.

This is ridiculous when you stop to think about it.

Although it can be fixed by our political representatives making a simple fiscal adjustment on our behalf, we prefer things the way they are.

Why is this?