LAND PRICES UP: WAGES DOWN

Workers’ share of productivity has shrunk for some time.

Analysts fail to espy, however, wages and non-rent profits to be what is left after economic rent has been privatised into land prices. Although most of us are involved in the process, a significant share of land prices is held by only a small fraction of the population.

No political party wants to acknowledge this reciprocal relationship between land prices and wages, because many Australians are heavily committed to treating homes as an investment, instead of a place to live.

This is undoubtably a function of the tax regime giving all the wrong signals to investors.

Since 1984, land prices on all categories of real estate have risen at an average of 9.25% pa while GDP growth has increased at nothing like that rate.  Australian Bureau of Statistics catalogues 5204 and 6416 show that the land component of average home values has reached 66.63%.In many locations the land share of residential value is beyond 80%.

The land share of real estate values may be managed by an all-in land tax, together with the abolition of some one hundred inefficient taxes, as recommended by The Henry Tax Review. However, the attack by vested interests killed that option more than ten years ago, together with political ardour for tax reform.

As the profits share of GDP has been rising comparative to wages, the principle of calling for higher taxes on businesses is obviously a sound one: but how to do it? We need to discriminate between the struggling small to medium enterprises and those making super profits, the latter companies having obviously displayed the ability to shrug free from paying a fair contribution.

Therefore, it’s worth noting that land cannot be hidden – nor flee overseas.

As the cost of living rises, the Australian tax regime is overdue for repair if workers’ real wages are to increase.

It’s time for the Albanese government to resurrect “Australia’s Future Tax System” overseen by Ken Henry.

Is it up to it?

ARE WE BECOMING ANCIENT ROME?

Latifundia perdidere Italiam: Pliny the Elder (AD 24 – 79)

With tax regimes favouring property ‘investment’ and fining real wealth creation, the question must be asked.

The answer really does appear to be ‘yes’ – so we may anticipate some sort of crash. Let’s trust it’s not the collapse of Pax Americana/Pax Sinae?

Self-interested politicians provide a lead: there’s more money to be had in pumping property prices than in working for a living. All but a handful of them are into property spec in a big way, such as they’re unlikely to legislate the necessary taxing of land rent and abolition of taxes that will reduce prices and our enormous levels of private debt.

Seems we must look to younger and increasingly dispossessed swinging voters to call governments and policymakers to account. Only then will the polity change.

There are latent signs that millennials do perceive the issue.

CANBERRA’S LEASEHOLD LAND SYSTEM

by Leo Foley (June 2007)

The Road to Leasehold

Section 125 of the Commonwealth of Australian Constitution Act provided for the seat of government to be within territory belonging to the Commonwealth.  In 1901, the Parliament moved “… to secure an area of not less than 1000 square miles…, the ground only to be let on leases to utilisers…” 

Later, Section 9 of the Seat of Government (Administration) Act 1910 provided:

“No Crown land in the Territory shall be disposed of for any estate of freehold”.

Legislators of the time were determined that they “shall not play into the hands of the speculators”.  Instead, Edmund Barton, first Prime Minister of Australia, termed the arrangement as a matter of good business: “we shall lease it on fair terms and still make a profit for the Commonwealth”.

Ideology rode high.  Austin Chapman sought a “brand of municipal socialism which would present to the world a spectacle not previously seen in; an entire city, and all connected with the city owned and managed for the people of Australia.”

The development of Canberra was informed by the experience of Washington in the United States.  Reference was made to the land in Pennsylvania Ave which, while locked up in private hands for 100 years, was said to have increased in value by hundreds of millions of dollars through the unearned increment. 

Most Australians supported the development of a Territory for the seat of government.  But no one was willing to pay for it.  What better way to escape the dilemma than to establish an onus on the yet unknown residents of the as yet unselected Territory to meet the cost of developing the capital.

Some optimistic members of Parliament considered that the capital city would be a paying income from land rent would almost certainly overtake the expenditure.

By 1920, however, political parties had lost their zeal for land tenure reform.  Parliament was uninterested, but for the lone voice of John Grant, who declared himself to be a disciple of Henry George.

The City Leases Ordinance 1921 empowered the Minister to grant leases of land within the city area for periods not exceeding 99 years.  The basic provisions were:

  • an annual rent of 5% of the unimproved value of the land;
  • the value of the land to be reappraised after 20 years;
  • the construction of a building, in accordance with the lease, was to be commenced within one year and completed within two years of the granting of the lease.

John Grant moved to disallow the 20-year revaluations, saying that a five-year period between reappraisals was essential.  This later proved to be an important point.

The first sale of leases was held in December 1924.  Residential land was sold at auction for £400 pounds, but the bid prices merely fixed the capital values, so all the purchaser paid at auction was the first year’s land rent, which amounted to 5% of the capital value. 

In 1925, the seeds of destruction for the leasehold system were sown.  The Federal Capital Commission consented to leases being transferred without a building being erected on the leased land.  Parliament after Parliament had previously insisted that land in the Territory should be made available to land users only.  That restriction had been intended to keep land speculators away, but the door was opened allowing the land speculators to enter.  It was the greatest of many mistakes made by the Commission.

By the end of 1929, 485 leases had been granted.  Of this number, 186 had been surrendered.  But around 130 had been transferred by speculators, a very large proportion of the existing leases.

Senator Elliott, a fierce critic of the land rent system, attempted to obtain a site for his legal practice.  He was informed via the commission that there was no land for sale.  Local agents, however, advised that there were a great number of sites which previous purchasers were willing to sell.  He purchased leases for four blocks from two Sydney woman, who had secured them just four months earlier for the first year’s land rent of 20 pounds per block (80).  He paid them 1100 pounds for the four blocks.

In 1928, the head of the Federal Capital Commission (Butters) informed the Parliamentary Public Accounts Committee that the residential blocks auctioned in 1924 were really “a substantial gift by the Commonwealth Government to the purchasers”.  

The majority of Australians were either ignorant of this orgy of land speculation or indifferent.  Canberra was seen as faraway and artificial, and people had grown indifferent to land and its administration.

The system was under pressure on other fronts too.  Residents of Canberra found they could not buy into the property market in Melbourne or Sydney, because they had not benefited from the capital gain (the unearned increment).  One witness claimed that the leasehold system “might not be a disadvantage if the whole of Australia were under leasehold, but the difference in tenure is against Canberra.” 

Another witness, commenting on purchasers who had paid more than the going rate for a lease. claimed that “the Federal Capital Commission is virtually in the position of trustees for the people of Australia.  As such it should take care of the assets committed to its care, but at the same time it should protect the beneficiaries from their own folly and not take advantage of their weakness.” 

The Commission critics of the time were attacking the whole concept of leasehold, calling for its abandonment.  John Grant died in 1928, and the ideology of the founders was gone.

The absence of any published works elucidating basic principles of the Canberra leasehold system has always been notable.  As the years passed, the land administrators knowledge or appreciation of historical origins and development of Canberra’s leasehold system lessened. 

Treasury, by the late 1950s, had little knowledge of the difference between freehold and leasehold, and was not interested in the difference, preferring to regard them both as being equal sources of revenue, without distinction.

The land critics of the 1950 — 1970 period differed from the critics of the Federal Capital Commission period.  The more modern-day ones were attacking the administration or operation of the system.

Dark clouds gathered over Australia’s experiment.  By 1970, the rosy dawn predicted by its sponsors began to look suspiciously like a sunset.  The leasehold system of land tenure had not failed in itself but its operation was obstructed and destroyed by indifferent administration.

The Purpose Clause

In Canberra, the planner was given the power, through the ‘Purpose Clause’ of the lease, to control land use down to minute particulars.  Such power and such arbitrariness was unnecessary.  The purpose clause should merely have indicated the general purpose for which the leased land may be used, without being too particular.

If, for example, the planners arrange only one butcher, or one foodstore in a suburban shopping centre, it creates a monopoly affecting cost and quality of service.  Abolishing competition is not town planning.  It is more akin to a system of licensing of business. 

Valuation problems

There is no land market in Canberra in the same sense as there is in a freehold area.

  • Supply:  the Commonwealth is the landowner, controlling the number of block available for purchase, making them relatively scarce or plentiful.  Prices rise if blocks are scarce.
  • Demand:  the Commonwealth can also affect demand to some degree by transferring persons to and from the city.  This was important in Canberra’s formative years.
  • It is anomalous that the authority who values the land is also the land owner and the receiver of rents.  Valuation should be thoroughly independent of all other Commonwealth agencies and responsible to Parliament. 

The Premium

Premium payments have been allowed to obtain land.  It departs from the principle that no capital outlay is required to become the holder of a Canberra lease – just a year’s rental.

20-year reappraisals

In early days, it was necessary to make the lease as attractive as possible by leaving the rent at a modest and unaltered level for a long period.  20 years was fixed.  By 1970, the same justification no longer existed.  Rents set in 1952 may have been reasonable, but by 1957 they were low, very cheap by 1962 and peppercorn in 1969.

Rates in Canberra

Each block received two separate valuations:

  • a valuation for land rent purposes, and
  • an annual valuation for rating purposes. 

Public servants seconded to the capital paid not only their house rental, but land rent and rates as well.  They were disgruntled.

In 1928, a Board of Review considered the question ‘why were any rates at all imposed in Canberra?’  That is, in a land rent system, why were rates necessary?

The justification for rates being levied in Canberra was found to be that since rates were payable in other parts of Australia, therefore they should also be paid in Canberra.  No consideration was made of the payment of land rent

A misunderstanding of the concept of rates lies at the heart of the problem.  Rates levied on the unimproved value of land are, in the words of the late Lord Goshen, rent charged in favour of the community.  Essentially, they are no different from the land rent paid for a crown lease. 

In a progressive community land values have a constant tendency to rise.  If the rent is fixed for 20 years, annual rates increases could be regarded as a supplementary rent.  However, this is not the concept of rates that is popularly held. 

Rates are regarded as a payment for municipal services and they are justified on the ground that municipal services add value of the land.  In Canberra, where the annual rental value of unimproved land should be entirely absorbed by rent, rates are an absurdity.  It is impossible to separate Commonwealth and municipal expenses so there is no basis for the level of rates to be estimated.

Rates in Canberra should have been abolished and the land rent remain as the sole payment for all leased land.

The demise of the system

In 1965, the joint committee was informed that “the originators of the scheme never contended that the Commonwealth must show a profit from the venture…”  That is how history can be changed.  Not one word in the public records of Australia will be found to support that statement.  In fact, it is the complete opposite of the original objectives of the policy of leasehold tenure.

Confused minds, departmental minds, freehold minds and small minds proved inadequate to implement the grand undertaking.  It led to the demise of the system.

John Gorton’s changes

Under pressure from lessees, in a by-election, The Prime Minister, John Gorton, put forward changes to the system that took effect from 1971.

  • the payment of land rent ceased;
  • the reappraisal of land values every 20 years for rental purposes ceased; and
  • the income lost in consequence was to be made up by increased rates.

The changes signalled the complete breakdown of the administration of Canberra’s leasehold system.  It was estimated that the government transferred $100 million in equity to lessees at that time, resulting in the loss of an important source of revenue.’

What of the future? 

By 1970, there were 23,000 lessees in Canberra.  But what of the next 23000 lessees? 

All land has a rental value and if the Commonwealth does not get this value, the lessees will.  The rent will be capitalised into land prices.  Hence, all Canberra leases sold at exactly the same price as freehold.

Lessees pay their rates which need not exist, and they pay for their homes, shops and offices against the ever rising barrier of high land costs.  In short, instead of paying land rent to the Commonwealth, they pay interest to the mortgagee companies for the money to build. 

Should the Commonwealth ever require to resume leased land for public purposes, it will have to buy back at enormous cost land which has been so lightly given away. 

Every decade the land rent should be increasing substantially and in one lifetime if the leasehold system was properly administered and land rent collected in the manner suggested, Canberra could be one of the richest cities in the world.  It would be unique in that it would have no municipal rates and far from being a drain on Commonwealth finances it could begin repaying to the Commonwealth the capital expenditure of past years.  This was the vision of its founders.

Lessons for future reforms

“A river is at its purest closest to its source”.

From the beginning, absolute principles should be laid down:

  • the lessee is entitled to the undisputed occupancy of the leased land and to its exclusive use during the currency of the lease; 
  • the lessee is entitled to nothing more or nothing less; 
  • in particular he is not entitled to increments in the value of the land accruing over the term of the lease.

Postscript

A tremendous responsibility rested on parliamentary representatives to see that the interests of Australians and their children’s interests were protected.  They should have referred to Australia’s formative years when the words unearned increment were basic to any discussion of leasehold tenure in the proposed Federal Territory.  As King O’Malley said at the Federal convention held in Adelaide in 1897: “the unearned increment created by the expenditure of the people’s money belongs to the people…”  

The experiment failed due to their lack of understanding.

pps: Subsequent to Leo Foley writing this history in June 2007, Canberra embarked on a 20-year program to replace stamp duty with land tax.

LAND RENT IN AUSTRALIA

Leo Foley

by Leo Foley (July 2007)

From its earliest days, Australia has understood the concept of all land belonging to the Crown. 

When Australia was settled by the British in 1788, no recognition of prior ownership by indigenous people was recognized, and all of the land was claimed to belong to the Crown.  Governor Phillip made grants to ex-convicts (emancipists), and later to free settlers and marines. 

Emancipists were granted 30 acres, plus 20 more if they were married.  Free settlers and marines received 100 acres.  Grants were dependent on the land being actually settled and used. 

However, speculation arrived with the Second Fleet.  Governor Phillip returned to England in 1792, and Major Grose, of the New South Wales Corps administered the colony.  He made grants to his officers and allowed them to trade land.  The NSW Corps became notorious for their monopoly control of the rum trade (the ‘rum corps’), but less well known is their exploitation of settlers to become great landed proprietors.  Using monopoly trade practices and debt, they seized mortgaged properties and bought up land from disinterested grantees.

Colonial officials in London saw the dangers, but their attempts to place residential conditions were not enforced in the Colony.  By 1828, 3 million acres had been granted, but less than 10% was cleared, and only a quarter of that cultivated.  From 1821, grants to emancipists ceased, and larger sheep runs were handed to favoured free settlers, the size of the grants dependent on the number of convicts taken on. 

Grants ceased in 1831, when land was sold without limit, by auction.  The system was based on Wakefield’s theory that land should be sold at a price sufficient to produce a fund to pay the costs of bringing out emigrants (including many female) to work as labourers, but expensive enough to deter those emigrants from purchasing land.  In Wakefield’s mind, everyone would be happy – the rich would hold all the land, and the poor would never lack employment.  In theory.

But Australia is a big land.  The land sales policy transformed Australia.  As land was bought in huge tracts, poorer sheep owners moved to unsettled areas and ran their sheep over unlimited areas.  The ‘Squatters’ were born.  Naming them as trespassers had no effect, so a licence system was established.  For the payment of a small fee, they could use the land they claimed, and in time they received official recognition as owners of the land they grabbed.  A few hundred individuals controlled the land.

In Australia, water is scarce.  Squatters were required to pay £1 an acre for the land they claimed.  But by selectively purchasing land with access to water, huge areas could be controlled.  In one case 258,000 acres were secured as a single sheep station by the purchase of seven hundred 40-acre blocks with water access in different parts of the property.  Thousands of colonists and future settlers were shut out.

Various schemes to break up the large land holdings were attempted.  ‘Selectors’ were entitled to select lands occupied by squatters, but the squatters used dummy selectors (even from asylums) to ensure they continued to control the land.  By 1884, selectors had occupied over 23 million acres of Crown lands in NSW, but nearly all of it had passed into the hands of the squatters.  Much of the money required to fund this scam was sourced from London.  This led to a new phenomenon, the absentee landlord.

Squatters enjoyed the fruits of their land monopoly.  Their riches were used to buy land in the growing cities, and the proceeds of land sales in the new colony of Port Phillip (Melbourne) was mostly transferred to Sydney.  Squatters also gained political rights, enjoying multiple votes as property owners.  The property franchise ensured they controlled the Legislative Council

Between 1861 and 1894, 50 million acres were alienated to large holdings.  In the same period, there was a large increase in the urban population, as would-be farmers sought factory work.

Australia’s only rebellion, the Eureka Stockade, was a revolt against unfair miner’s licence fees, but less well known was their call to ‘unlock the land’.  The Melbourne newspaper, ‘The Argus’, campaigned in 1854 for a land tax to unlock the land.  So did the celebrated social activist, Caroline Chisholm.  On calls for compensation to squatters, she said, “they should compensate the colony for the frightful and demoralizing effect of such a system as the one we now have working.”

In 1870 William Gresham campaigned in Melbourne through the Land Tenure Reform League.  He called for alienated land to be repurchased, and the fee simple of the public domain to vest in perpetuity in the people.  Occupancy should be subject to rental, allowing the revenue of the state to be derived solely from the rental of land.  All indirect taxes would be abolished.

Australia’s first land tax was introduced in Victoria in 1877.  Aimed at land holdings over 640 acres, it was another measure to break up the large estates. 

By 1915, all States, the Commonwealth and New Zealand had introduced a land tax.  Australia federated in 1901, and in 1910 a Federal land tax was introduced. (See below) 

The Capital of Australia, Canberra, was settled on a leasehold system, with freehold in the Australian Capital Territory.  (See ‘Canberra in Crisis’, by Frank Brennan)

At local government level, rates are levied on land values only in NSW, Queensland, Northern Territory and ACT.  The system is optional in Victoria, SA and WA, and is used by many municipalities.  By 1970, 70% of municipalities, controlling 95% of Australia’s rateable land use, used unimproved land values for rating purposes.  Tasmania is the only State where all Councils have always levied rates on improved values (house, plus land).  In the 1990s, however, many Victorian municipalities changed from site value rating to improved values.  The State Government controlled the process by creating financial disincentives to continue rating on unimproved values.

The Federal Land Tax

Until 1909, over 99% of the Federal revenue of £15.5 million was obtained from customs and excise, and the Postmaster-General.  But those sources were inadequate for the Labor Party program of old-age and invalid pensions, the Australian Navy and large infrastructure developments.  A fresh source of revenue was required, and it was decided to implement the then popular idea of Henry George of securing the rent of land for public purposes.

The Federal Land Tax Act was passed in 1910, levying one penny plus 1/30000th of a penny on the first pound of land value, after exempting the first £5000.  It increased progressively by 1/30000th of a penny up to £75000, where the increment of tax was 6d in the £ (over £75000), and the average rate 3½d in the £.

As if the tax wasn’t complicated enough, various amendments increased the complexity.  In 1914, the rate was increased o 1/18750th of a penny!  In 1918, the rate was increased by 20%, but that was removed in 1922.  In 1927, it was reduced by 10%, and during the depression it was reduced by a further 33.33% in 1932, and a further 50% in 1933.  The lower rates remained in force until at least 1938.

In 1942 the Federal Government took over the Income Tax powers from the States.  It has retained them ever since.  Income tax became the main source of revenue for the Commonwealth, and Land Tax became less relevant.  The Federal Government abolished the Federal Land Tax in 1953, leaving the field to the States. 

The Federal Land Tax

Strengths

  • Captured some of the value of land for the community
  • Ensured that land was recognized as a community resource.
  • Established Valuers General in all States;
  • Created an ability to calculate national land values.

Weaknesses

  • Exemption of first £5000 value permitted fraud and evasion.  Larger estates were subdivided between family members, each member securing the £5000 exemption. 
  • The graduated rates of tax were unjust, making taxpayers face different levels of tax depending on their circumstances.  This distinction was based on ‘class’.
  • Small parcels of land were not subject to tax, which tended to keep the price of all land high.
  • Did not enjoy bipartisan support, so was marginalized and eventually scrapped.

Opportunities

  • The need for large infrastructure projects might create opportunities for the collection of rent from those who will benefit.  However, as the principal beneficiaries are resource companies, it is not likely to be seen by the public as the collection of ‘land rent’.
  • Strategic alliances exist if we are prepared to work with groups who may have different agendas
  • Availability of land has become a central issue in the ‘affordable housing’ debate;

Threats

  • Land is now seen as a State issue.  A strategic approach is required to lure the Federal Government back into the land tax field;
  • The ‘user-pays’ philosophy has overtaken the ‘unearned increment’ as the prominent idea in the popular mood.

There is no legal reason why the Federal Government should not again collect a land tax, but there are few signs of interest to do so.  So-called ‘reform’ of the tax system focus on consumption taxes and tweaking income taxes.