Ever since the property market got up off the mat in 1996, we’ve pumped up a massive bubble in residential land prices, aided and abetted by increasing “low” interest rates. (Whether these were low in real terms is questionable.)

With the overnight cash rate now at 2.5%, higher than most places in the world, the AUD has become too high, adversely impacting against our export markets. So, we probably need to cut the cash rate to weaken the dollar.

But lower interest rates would again introduce more investors into our already-bloated housing market. So we have a dilemma here, don’t we?

Problem is, interest rate policy doesn’t distinguish between productive activity and speculative real estate investment.  And gross yields of under 3% show it is speculative: people are hoping the big capital gains will continue ad infinitum. Of course, such low yields cannot: they must revert towards the long-term mean.

And the RBA’s continuing problem is that it can only work with the blunt instrument of interest rate policy. The Governor’s jawboning about the dollar being too high, and housing looking a bit peaky, is unlikely to bring about the desired results. So, as he can’t stop speculation, he has one hand tied behind his back and can only use his mouth.

And onward we lurch ….. towards the greatest property bust in history.

Wouldn’t it have been far better for Australia had state governments reformed their land taxes? Think about it. What if we had all-in land taxes, with no thresholds, exemptions or multiple rates? What if the states could tweak the rate up at times like these – to deter further “investors” from entering the housing market, in order the productive side of the economy may be assisted by lower interest rates?

But politicians are lily-livered and are into property speculation themselves. They’re not going to reform land taxes for the public good, as politicians were once prepared to do.

Sad really. So get out there again, Glenn Stevens. Tell us the property bubble might have an unhappy ending. Tell us you can’t lower the cash rate because that will encourage Joe Sixpack to become a property “investor” too.

The RBA is thoroughly compromised and its Governor has been reduced to a spruiker.  (Just yell “Run for the hills!“, Glenn!)

_____________________________________________________

But, then, I guess the whole banking sector is out of control?

“Please, please borrow some more!  We know you’re loaded to the gills with debt, but can’t you afford a little more at this price – effectively negative?”

Is this Australia’s future writ large? Because God help investors and homeowners with mortgages if our interest rates ever head in the other direction!

YEP! AND RENT-SEEKING IS THE MECHANISM, KIDS!

MULTI-GENERATIONAL ENSLAVEMENT?

“When we talk about houses being dear and our children not being able to buy, the answer is very simple.

The parents are very happy that the prices are dear because they have all made money.

And the children? Where were they when the prices were depressed? I didn’t see any children wanting to buy anything at all.

Now that the prices have gone up they want to buy. I am very happy that they want to buy. I want them to buy.

And I agree it’s difficult. So parents have to help.

I am glad to say that they are helping, but they have to help more.

That is how the Chinese do it; all the family chips in. My Chinese buyers are 20 to 25-year-olds without much money, who are helped by the family. We should do the same.”

• Harry Triguboff, Australian Financial Review, 3 September 2014

Prosper Australia media release 4 September 2014

Engaging States in tax reform

Last night Professor John Freebairn gave a passionate speech at the 123rd Annual Henry George Commemorative Dinner, on the difficulty of meaningful tax reform.

“The problem is we don’t have a Paul Keating or a Peter Costello who is willing to spend a year or two to explain why the current system is broken and why some alternatives will work” stated Professor John Freebairn.

“If you want examples of how to get it wrong, think of what Wayne Swan did with the Resource Rent tax. He sat on it, he went for a Christmas holiday, got his kids to bury it in the sand, and then suddenly announced this is what we’re going to do. The current Treasurer is no better with his budget performance.”

“I have no idea in where we’re going to find a good politician.“

Freebairn warned strongly about the dangers vested interests pose to reform.

“Today we heard this great story that superannuation is paid by business. Yes they write the cheque to the superannuation fund. But if you’re in a full employment economy (and tax reform is about the long run), superannuation is actually paid by the employee in lower current take-home pay. Business is quite happy to accept that when they pay wages and PAYE taxes, that’s borne by the employee. But it’s exactly the same for payroll tax and for superannuation and for workers compensation. It’s a tough argument to get over, but self-interested rent seeking business groups will go on with this and get away with it. They should not.”

On state tax reform, Freebairn was direct.

“States can only really place taxes on immobile assets. Land is the obvious one. A good tax system is simple. We should have a comprehensive tax base on the unimproved land value with minimal exemptions. Bring occupied housing into the net, bring primary production into the rent, tax other governments, tax special uses any and have a nice single flat rate, not the progressive rate.”

“The progressive Land Tax rate causes enormous distortions. Australia Post would like to own all it’s post offices. It would have enormous efficiency gains. But it would be a massive landlord paying 2.25% Land Tax. The way it gets out of it is that that it franchises its post office to someone who pays zero or 1% land tax. This creates all sorts of organisational and inefficiency problems.”

“What I am proposing is a revenue neutral package, replace the current land tax, replace the conveyance tax on property, and double the local government rate.“

“Why don’t states engage in tax reform? The rationale is that most of the pain for state tax reform is borne by the states. Most of the benefits would be reaped by the Commonwealth in higher income taxes, with big gains in corporate tax.”

“I do hope we see effective tax reform in my lifetime” finished Freebairn.

The sentiment of the evening was that neither side of Victorian politics were interested in deep seated reform, instead placating the commercial interests that fund their election campaigns. 

TRANSCRIPT

“PRICE BOOM MAY END IN NASTY SHOCK”

May I be so bold as to suggest Prosper Australia has been quite influential in slowly bringing about a realistic analysis of the Australian property market?  Their range of submissions to inquiries, beginning with those to Australia’s Future Tax System and more recently from associates, Philip Soos and Paul Egan, have been ground-breaking, thoroughly researched, and bound to impact upon open minds.

A well-attended and enjoyable Henry George Commemoration Speech delivered last evening by Professor John Freebairn at the Royal Society in Melbourne added a little more icing to Prosper’s educational cake concerning the absolute counter-productiveness of the current tax regime.

Thanks in no small part to the efforts of Prosper Australia, the broader community is becoming increasingly aware of the need for thoroughgoing tax reform if we are to weather this storm.

Following on from yesterday’s post, one really does have to question Tony Abbott’s judgement as Prime Minister when, in question time in the House of Representatives today, he thanked “the honourable (Liberal) member for his question” to a questioner who looked and sounded remarkably like a woman.  Two female Liberal colleagues seated behind Abbott at the despatch box exchanged questioning glances at this faux pas, although they should be getting used to these from ol’ Tone by now.  [Has Australia uncovered its very own George W Bush?]

But in a lucid moment you did acknowledge that superannuation contributions forwarded by employers on behalf of their employees are effectively deductions from workers incomes, Tony.  Correct!  So, why not, as a step towards justice in employment, let people retain their earnings, freed from taxation and superannuation levies altogether?  No?  You do understand there is an alternative to taxation, Tony?  It called capturing OUR economic rents.

Thanks, Tone & Clive.  I guess we now tighten our belts, so the big miners can let theirs out a notch or two?

OK, so let me get this right: banks have the economic rents of our land locked up in their mortgages, and we want to let mineral super-profit rents owed to the Australian people to continue to flow to the mining companies?  Oh, and aren’t 80% of the latter super-profits expatriated to overseas interests, along with their normal profits?  Well, I suppose that’s fair – in a Nigerian sort of way!

I now expect Bill Shorten & Co will quietly try to match your largesse with the big boys, Tony, in order to win back some of the scratch the banks and miners have outlaid to the Liberal Party for favours.  Seems to me there’s the Australian people, then there are the leeching 1% and their politicians.

I think Australians are beginning to wake up to what’s going on here.

Now there’s a brief but solid submission from Kavanagh, Bryan!    🙂
 

…. BUT WE’RE BREACHING THESE …

Work creates wealth. Working shouldn’t be taxed, because penalising work gives all the wrong signals, encouraging speculative activity and creating vast wealth differentials.

Owning land per se doesn’t create wealth, but location, size, shape, topography, services, infrastructure, population and transport bring general amenity, generating an annual income to individual sites.  The income from land is the proper subject of revenue, because the owner of the site didn’t create it.  Everything external to the site did.  We should pay society for the value of the relative privilege expressed in the annual value of our site.

Failure to acknowledge and act upon self-defeating tax regimes–that is, continuing to tax people and businesses for working–is a recipe for economic and social disaster – anywhere.

Look around you. Look how many things are going awry overseas in connection with land/territory–Israel/Palestine, Syria, Iraq, the Ukraine, etc.–for flawed land and taxation regimes.  It’s not a pretty sight, is it?  Fortunately, it’s not matched by the same level of social disaster at home, but it is latent as we sell off our public utilities, face unaffordable housing, bad budgets, rising unemployment, and so on.

We should definitely not be trying to treat all the pathologies that spill out of these errant tax regimes.  It won’t work. We need to fix the economies by genuine revenue reform–and start literally from the ground–along the lines suggested by the Henry Tax Review 2008, for example: “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases”.

Then, you won’t have Tweedledum and Tweedledummer political parties promoting speculation.

Then you will be able to remedy environmental destruction, poverty, health, education, social and international strife.

Then you will have funding for science and the arts.

By starting at the wrong end—endeavouring to deal with the problems generated by failed tax regimes—we’re simply digging deeper holes for ourselves.

But the 1% are committed to fighting for things as they are, and for the moment, they have all the say.