PRIVATISING LAND RENT
All posts by Bryan Kavanagh
UNFORTUNATELY, WE’RE SEEING THE FOURTH K-WAVE TO ITS CONCLUSION
Economists pay little or no attention to Nikolai Kondratieff’s ‘Long Wave’. It’s the period between two economic depressions.
Kondratieff took 36 price, value and quantity time series datasets in the USA, UK, France and Germany (from 1788 into the 1920s) to make the case that the ‘long wave’ (the ‘Kondratieff Wave’ or K-Wave) found in these analyses is characterised, first, by an inflationary half which trends to a peak after thirty or so years, then downwards for a similar period into a deflationary trough.
Although the economist Joseph Schumpeter held Nikolai Kondratieff to be an economist of the first order, Kondratieff’s work is ignored by modern economists, because it reflects poorly on their abilities. And there’s always “the natural business cycle” excuse, even for a financial depression.
Kondratieff had no explanation for the cause of the three long waves he studied. However, having a real estate valuation background, I’ve made a case that each K-Wave is explicable in terms of real estate bubbles and bursts growing exponentially larger as the growth in wages and profits to small to medium enterprises declines into another economic catastrophe.
At a symposium on tax reform at Melbourne University on 2 August 2005 also addressed by Professor John Freebairn, Professor Julian
Disney and Tim Colebatch, I spoke about “Collapsing Economies and National Resource Rents”. I argued the case that economic rent/unearned income is a significant proportion of the economy, and that we’ve been allowing increasing amounts of land rent to become privatised and capitalised into incredibly burgeoning land prices.
My symposium speech concentrated on financial destruction being wrought by taxing productivity and failing to tax speculatively rising land prices sufficiently. It was applauded as making sense to the audience, but of course ignored and worsened as governments of both persuasions and the RBA continued to prop up the real estate market at every turn, instead of having the tax regime provide signals that might generate real wealth.
Private debt has increased to impossible levels as we continue levying taxes on wages, profits and good and services while we continue to pump land prices. Unaccounted underlying inflation from rising land prices and the excess burden from taxing wages and profits presents a looming disaster for Australians. In the absence of politucal action, it will be left to correct itself. The second-half descent of the K-Wave towards the 2027-2030 depressionary trough has been remorseless and ruinous times are palpable.
Neoclassical and neoliberal economists remain at the levers.
DARYL FAIRWEATHER PUT A CASE
WE’VE BEEN HERE BEFORE ….
…. for example, 2600 years ago
According to Plutarch, in the Athens of 594 BC ‘the disparity of fortune between the rich and the poor had reached its height, so that the city seemed to be in a dangerous condition, and no other means for freeing it from disturbances seemed possible but despotic power.’
The poor, finding their status worsened with each year- the government in the hands of their masters, and the corrupt courts deciding every issue against them- began to talk of violent revolt. The rich, angry at the challenge to their property, prepared to defend themselves by force.
Good sense prevailed; moderate elements secured the election of Solon, a businessman of aristocratic lineage, to the supreme archonship.
Solon devalued the currency, thereby easing the burden of all debtors (although he himself was a creditor); he reduced all personal debts, and ended imprisonment for debt; he cancelled arrears for taxes and mortgage interest, he established a graduated income tax that made the rich pay at a rate twelve times that required of the poor; he reorganized the courts on a more popular basis; he arranged that the sons of those who had died in war for Athens should be brought up and educated at the government’s expense.
The rich protested that his measures were outright confiscation; the radicals complained that he had not redivided the land; but within a generation almost all agreed that his reforms had saved Athens from revolution.
-“The Lessons of History”, Will and Ariel Durant, 1968
SCIENTIFIC EXPLANATION
A scientific explanation uses observations and measurements to explain something we see in the natural world.
HENRY GEORGE & “AUSTRALIA’S FUTURE TAX SYSTEM”
In Progress and Poverty (1879) Henry George said that national income is distributed to land, labour and capital as rent wages and interest, respectively, as in the equation:
P = R + W + I
Australia’s Future Tax System (AFTS) document “Architecture of Australia’s Tax and Transfer System” (2008) produced its own version of the equation:
Yt = rRt + wLt + iKt
where for a given time period t the national income is Y, land R and capital K, and their respective incomes are rent (r), wages (w) and interest (i) .
Henry George was smart, however. He did something novel and different from the AFTS people. Realising that rent had first claim upon production and national income, he made the transposition:
P – R = W + I
showing that wages and interest are what remains, what’s left over, after rent has been deducted.
So, we may conclude that there’s a reciprocal relationship between privatised rent, and wages and non-rent profits.
If only we and our politicians and modern day economists were as smart as Henry George; they might see the answer to Australia’s lingering socio-economic problem: namely, the decline in people’s real wages and the diminishing returns to small and medium enterprises, while big businesses and their super-profits, or rents, are flourishing as never before.
That is, private rent extraction is turned into sharply increasing land prices instead of being taxed away (in lieu of taxes on wages, profits and goods and services). This means we have to levy taxes on everything and push up hidden cost-push inflation not accounted for in the CPI.
So, as rent continues to be privately capitalised into higher and higher land prices, the greater also become issues of housing affordability, debt, poverty, health and educational outcomes.
There are simple answers, but we’re constantly told there aren’t.
VIDA GOLDSTEIN ON SOCIALISM
The West Australian, Friday May 25, 1906
Socialism from a woman’s point of view
Address by Miss Vida Goldstein
Miss Vida Goldstein, the Victorian lady-suffragist at present visiting this State, fulfilled her desire to address a Perth audience on “Socialism” last night in St. George’s Hall. The audience, which was a good one, mainly consisted of ladies but there was a goodly sprinkling of men. Mr. R.H. Hall, president of the A.N.A., occupied the chair.
Miss Goldstein said she felt particularly interested in so many women coming to hear what she termed “a fair and impartial consideration of socialism,” especially as in the Eastern States an attempt was being made to enlist the aid of women in the anti-socialistic movement.
No one could, with a mind above paltry and selfish consideration, be other than a supporter of the movement in favour of altering the present social system. She had seen herself too much misery to be other than a supporter of some alteration. Socialism was in ethics an economic problem. The system, as held by some in its application to marriage and religion, was apart. There were anti-socialists in those ranks as well. The simple fact was that the present social condition must be altered.
She briefly cited the views of writers and thinkers with respect to the misery that existed today. It did not follow that because most of her quotations were based on old-world conditions that they were applicable only to the old world. Some urged that the conditions were altogether different in Australia, where life was freer and wages better. But those who said this only looked at life from the attic window. Let them go and see the misery in Australia, and they would agree with her that a change was required even in this new world.
It was said Australia was a working paradise. Let them look at facts on pounds, shillings and pence lines and take a man with a wife and five children earning 37s. 6d. a week, which it was said was a living wage. A list of bare living expenses she had compiled showed that he would really require £2 18s. 6d., and at that he would have to be a non-smoker and non-drinker. In the absence of this wage he must always be in debt and want and become a burden to the State. That was how it worked out in New South Wales, and she did not think her case had been over-stated. (Hear, hear!)
Socialists contended that this would be remedied if property and the means of production were divided amongst the people. It was said that, if so, equality would result whether men were workers or not. That was not so. Under the system he who would not work could not eat. Every care was being taken to develop scientifically the vegetable and animal life of the world. But man was a lawless part of the world, and the individualists had attained a position which had become intolerable in every country. Could anyone conceive of the God-made law of supply and demand shutting out millions of tons of food and clothing, from starving and shivering millions. The God-made law meant equal supply and equal demand. The world’s law was really the devil’s law. (Hear, hear!)
The working man had all down the ages, been taught to work in support of others. Now, as the result of legislation, he was a voter and a legislator in fact. Of course, those who disliked
restriction upon capital objected to the reforms these legislators had introduced and carried into law. But the conditions of the people had demanded them. In America capitalists poured fortunes into their pockets from the efforts of little children seven and eight years of age. That was sufficient to condemn capitalism root and branch. (Applause.)
The socialistic efforts in Australia had to some extent obviated the existence here of the American crime. But she could give some heart-rending accounts of the existence of hundreds she had personally met in Victoria and New South Wales and to whom the few laws already passed did not apply. Adulteration, which was the result of competition, also condemned capitalism. Anti-socialists put adulteration down to the great demand of the people for cheaper goods. It was the dealer who created this taste, in his desire to compete, to the detriment of his fellow-dealer. And so the people, believing they were getting the same article, and being enticed to buy it at a cheaper rate than before, bought adulterated goods. Dishonesty was an essential part of present-day commercialism. (Hear, hear!)
Trusts were a form of co-operation for the benefit of the capitalist; socialism was a form of co-operation for the benefit of the worker. (A Male Voice: “Oh !”) Collectivism, she had no doubt, would come in the form of public ownership of utilities and then the bigger industries, and she believed land would be the first of the former. In this connection she was glad to see that in Western Australia they had made greater strides than had been the case in other States.
As things were, the landowner sat down and watched his labourers increasing the value of his property, and year by year he raised the rent. Railways came, and he raised the rent. Towns grew up around, and once more the rent went up. But still he sat down. Anti-socialists had made an attempt, said Miss Goldstein, to hoodwink the women into joining their ranks by pointing to the abolition of the marriage tie and religion. Quotations had in support been taken from articles written in Victoria and Queensland socialist organs. By themselves they were blasphemous and scurrilous, but taken as a whole they simply preached against the growing “churchianity” of the Church. (Hear, hear!)
The ethics of Christianity and the ethics of socialism were the same. Socialism, in fact, had its foundation in the Sermon on the Mount. Then what about the sanctity of the home and the abolition of the marriage tie? What about it now, in a system which allowed a double standard of morality in men and women, and even encouraged it in the divorce court, which allowed it in the giving away of daughters to titled roues; which allowed ten people of different sexes to sleep in one room? Would they like to go back to the old conditions when a man could sell his wife? That had been changed. Then followed other conditions; but women were still always held in bondage. But, with still further economic changes, women had begun to win independence, but so far only a little independence. She thought nothing was more degrading than for a woman to have to marry for a home. Love should be the sole reason. (Applause.)
Surely, those with a brain to think, eyes to see, and a mind to reason must realise that the capitalist system must cease and a co-operative system prevail in its place. She urged all women not to take any notice of the old interpretation of natural laws that would be dangled before them. Let them read and look for themselves. She fully believed that socialism would be the next development in society. There would be failures, no doubt, but out of these a success would evolve. The final socialism must rest firmly on the principle of love of God and love of man. Everybody would have equal opportunities with everybody else, till the final consummation came—a grand brotherhood of man. (Applause.)
A discussion followed Miss Goldstein’s address.
SOCIALISM
Socialism used to be about public capture of surplus value as a means of abolishing poverty.
Many people have worked for socialism – generally to little effect.
The word ‘socialist’ has become a derisory epithet to be dropped on those progressives believing a failing capitalist system needs significant adjustment.
Turning words on their head is a tool of financial parasites, such that few people today want to be called ‘socialist’.
I’m happy to be a Georgist and socialist.
SOCIETY’S TAXABLE INCOME
From Fred Harrison’s Share the Rents
Rent: Society’s Taxable Income (aka ATCOR)
by Fred Harrison on 2 January 2020
JOHN LOCKE said it first. In 1691, he wrote a letter to a Member of Parliament in which he warned that it was futile to tax workers’ wages. His insight was published in Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of Money. Such taxes would reduce take-home pay below what people needed to live on. So taxpayers would defend their living standards by reducing the Rent that they paid for the use of land. In other words – ATCOR: All Taxes Come Out of Rent.
Rent is society’s net income – the residual value after covering the costs of living. It is what people can afford to pool in the public purse, after looking after themselves from the fruits of their labour.
Locke’s theory made sense for a society in which people were free. That freedom was defined by the right to determine how much of income was net of the living costs. But by the time Locke was helping to shape public policy, the aristocracy had already begun to re-enserf English folk in a post-medieval form. They did so by roping off the commons. That deprived the peasantry of their right to self-sustaining life.
Locke’s version of liberty was expressed in his trilogy “life, liberty and estate” – the doctrine of the social contract. Estate was the old English term for land. But 200 years earlier, the aristocracy had begun in earnest to turf people off the commons to make way for sheep, while Henry VIII legitimised the theft of land by grabbing the estates of the monasteries and abbeys. Over the following centuries, an increasing proportion of the population lost the freedom to determine their destiny as Parliament sanctioned the enclosure of common land.1
Adam Smith intervened in 1776 with his proposals for the revision of governance. The state, he explained, should be funded in a way that caused minimal damage. This would be achieved by paying for public services out of Ground Rent – the nation’s taxable income.
If governments had adopted Smith’s model, taxes would have been removed from earned incomes, the wages and the revenue people could earn by investing their savings in productive enterprises. Those taxes, Smith stressed, inflicted damage on the nation’s wealth and people’s health.
Taxes were bad, and they were futile: people shifted the burden off their wages and onto the net income that they could afford to yield as Ground Rent. To reinforce his argument for a systemic transformation of the financial system, Smith provided at least 10 examples of how government revenue did, indeed, come out of the nation’s Rents.2
The virtue of the direct payment of Ground Rent into the public purse was the benign impact on industry. By this means “no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before”. That was why Ground Rent, and the ordinary rent of land, were what he called “the species of revenue which can best bear to have a peculiar tax imposed upon them”. This contrasted with a tax on a manufacturer: the burden would be passed on in the form of higher prices paid by consumers. They, in turn, would be left with less income, which meant they would have to reduce what they paid as Rent to their landlords. A tax levied on the producer would ultimately result in “a reduction of rent, the final payment of the tax would fall upon the landlord”.
Another virtue of Rent-as-public-revenue was its transparency, because “the quantity and value of the land which any man possesses can never be a secret, and can always be ascertained with great exactness”. This contrasted with taxing the producer of goods, which caused “endless vexation as no people could support”. Smith noted that “land is a subject which cannot be removed, whereas stock easily may”. By raising revenue directly from Rent, auditing the taxable capacity of a nation entailed no difficulty.3 It neutralised the temptation to dodge taxes by transferring assets to tax havens.
Ground Rent and houses
For Adam Smith, “Ground-rents are a still more proper subject of taxation than the rent of houses,” because that charge would not raise the rents that people paid for their dwellings. A levy on Ground Rent would fall on the owner of the Ground Rent, who (as a monopolist) was already exacting “the greatest rent which can be got for the use of his ground”. But if the tax was levied on the tenant, “the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent”. Smith believed that raising revenue from Ground Rent was reasonable, because this was revenue which the owner received “without any care or attention of his own”.4
House prices and the Window Tax
Observing how, in 1775, taxes were levied on windows in people’s homes, Smith emphasised that “The natural tendency of the window-tax, and of all other taxes upon houses, is to lower rents. The more a man pays for the tax, the less, it is evident, he can afford to pay for the rent”. The increase in the rent of dwellings had more than offset the taxes on windows. This was because of the rising demand for dwellings; it did not falsify the theory. And, as Smith concluded, “Had it not been for the tax, rents would probably have risen still higher”.5
Taxes on the profits of farming
A tenant farmer would not reduce his output in response to a tax levied directly on his profit. Why not? Because he would still be liable for Rent to the landlord. He would, therefore, continue to produce at the same level of activity. But, noted Smith, to protect his profit, the farmer would end up “paying less rent to the landlord. The more he is obliged to pay in the way of tax, the less he can afford to pay in the way of rent”.6
The Poll Tax on slaves
Smith tracked the impact of the Poll Tax that was levied on the slaves on plantations in the English colonies in the Carolinas of America and the islands of the West Indies. Those taxes, Smith explained, reduced the profits of the agricultural enterprises. And so “As the planters are, the greater part of them, both farmers and landlords, the final payment of the tax falls upon them in their quality of landlords without any retribution”.7
Taxes on the sale of property
When taxes are levied on the transfer of property, the buyer is in the best bargaining position. “He considers what the land will cost him in tax and price together,” observed Smith. “The more he is obliged to pay in the way of tax, the less he will be disposed to give in the way of price.” So the tax on land is passed on in the form of a lower price paid to the seller.8
A tax on the wages of labour
The chaos caused by a tax on wages was carefully examined by Smith. He concluded that, whichever way the burden was twisted (reducing profits, raising the price of consumer goods or inflating the wages paid to workers), there was no escaping the ultimate outcome. “In all cases a direct tax upon the wages of labour must, in the long-run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed upon the proper assessment of a sum equal to the produce of the tax, partly upon the rent of land, and partly upon consumable commodities.” He branded those taxes as “absurd and destructive”, and he was emphatic about their disruptive effects.
The declension of industry, the decrease of employment for the poor, the diminution of the annual produce of the land and labour of the country, have generally been the effects of such taxes. In consequence of them, however, the price of labour must always be higher than it otherwise would have been in the actual state of the demand: and this enhancement of price, together with the profit of those who advance it, must always be finally paid by the landlords and consumers.
The consumers to whom Smith referred were rich people, most of them landowners.
One detects sorrow in Smith’s words as he recorded how, while the deadweight burden of bad taxes did, ultimately, come out of Rent, this circuitous route victimised the poor by pricing them out of work.9
Taxes on the “necessaries of life”
In the 18th century, the principal taxes on the “necessaries of life” were on salt, leather, soap and candles. These taxes caused an increase in wages, but the charges would ultimately “fall upon the rent of the landlord”. Again, Smith expresses the bitter consequences of this indirect way of raising revenue for government. One manifestation was the “forced frugality” imposed on the working population. Another outcome was a reduction in fertility, and some people resorted to immoral behaviour. Immorality affected children whose parents were impoverished. If the children survived the hardships to which the bad conduct of their parents exposed them, such conduct commonly corrupted their morals, “so that, instead of being useful to society by their industry, they become public nuisances by their vices and disorders”. That was a human price paid for bad fiscal policy.
Taxes upon necessaries, so far as they affect the labouring poor, are finally paid, partly by landlords in the diminished rent of their lands, and partly by rich consumers, whether landlords or others in the advanced price of manufactured goods; and always with a considerable over-charge.
The landlords pay the heaviest price, because they “always pay in a double capacity; in that of landlords, by the reduction of their rent; and in that of rich consumers, by the increase of their expense”.10
The tax on wine
Smith was driven to the same conclusion when he analysed the economics of a tax on the production of wine. “The whole weight of the tax, therefore, would fall upon the rent and profit; properly upon the rent of the vineyard.” The producers of commodities such as sugar were aware of this effect, so they asserted that a tax on output would not fall on consumers, but would reduce the Rent they received as plantation owners. Smith pointed out that this argument demonstrated that, to the contrary, if the tax was extracted out of the Rent of plantation land then it was an appropriate charge!11
The impact of tithes
Traditionally, communities supported their church and clergy by allocating a proportion of their produce as a tithe. That charge “diminishes more what would otherwise be the rent of the landlord”. Smith reviewed the relative virtues of a Land Tax compared to a tithe in the colonies compared to the charge levied on rent-rolls in Great Britain. But he saw no reason to alter his conclusion: one way or another, the charge came out of Rent. As Smith noted, “There is no farmer who does not compute beforehand what the church tithe, which is a land-tax in kind, is, one year with another, likely to amount to”.12 This enables the farmer to make “a proportionable abatement in the rent which he agrees to pay to the landlord”.13
Silence of the post-classical economists
Macro-economists of the 20th century omitted from their mathematical models this process of shifting the tax burden onto Rent. There can be one reason only for that omission: the scholars would be obliged to discuss the logic of the roundabout method of raising government revenue. They would have to address Adam Smith’s arguments that this tortuous method under-funded not just the material infrastructure of the nation, it also corrupted the moral fibre of the population.
The earliest land-grabbers accepted this situation as the price to be paid for consolidating their privileges, which stemmed from the privatisation of the nation’s Rent. Besides, the suffering caused by under-production in the economy and the blunting of human sensibilities was endured by others, not them. But the final outcome was the failure of governance. As Smith noted, if landlords ceased to play their part by direct payment of Rent into the public purse, “it is altogether impossible that the tenant should continue to do his”. The outcome was distress, a decline of output, and the indebtedness of governments.14
Footnotes
1. Locke wrote fine prose on the theory of governance, in which he championed the freedom of the individual. But he profited from the practises of his time: he invested in the Royal African Company, which transported slaves to America. He also contributed to the constitution for the colonists who deprived the indigenous peoples of their land and settled in Carolina, where they established slave plantations.
2. The page references provided here are to the 1976 edition of The Wealth of Nations, edited by Edwin Cannan and published by the University of Chicago Press.
3. Bk 5, Ch 2, Pt 2, Article 1, pp. 370, 374-375.
4. Bk 5, Ch 2, Pt 2, Article 1, p.370.
5. Bk 5, Ch 2, Pt 2, Article 1, p.373.
6. Bk 5, Ch 2, Pt 2, Article 2, p.383.
7. Bk 5, Ch 2, Pt 2, Article 2, p.384.
8. Bk 5, Ch 2, Pt 2, Arts. 1 & 2, p.390.
9. Bk 5, Ch 2, Pt 2, Art. 3, p.392-4.
10. Bk 5, Ch 2, Pt 2, Art. 4, p.400-403.
11. Bk 5, Ch 2, Pt 2, Art. 4, p.424-425.
12. Bk 5, Ch 2, Pt 2, Art. 1, p.362.
13. Bk 5, Ch 3, p.472.
14. Bk 5, Ch 3, p.464-465.
MAR-A-LAGO
