All posts by Bryan Kavanagh

I'm a real estate valuer who worked in the Australian Taxation Office (ATO) and Commonwealth Bank of Australia (CBA) before co-founding Westlink Consulting, a real estate valuation practice. I discovered, by leaving publicly-generated land rents to be privately capitalised by banks and individuals into escalating land price bubbles, this generates repetitive recessions and financial depressions. We need a tax-switch: from wages, profits and commodities onto economic rents/unearned incomes, if we are to create prosperity and minimise excessive private debt.

STEWARDSHIP?

Tasmania’s Leo Foley last night gave the 120th Henry George commemoration dinner address at the Pumphouse Hotel in Carlton.

“The 120th!” mused Prosper Australia’s President, Lloyd Churches, in introducing Leo.  “Do you realise that means the first annual dinner was in 1891, the year after Henry George visited Australia?  He actually addressed thousands of people at the Exhibition Building in 1890, just across the other side of the road from where we’re gathered tonight?”

Well, we weren’t there in thousands tonight, but in an urbane, encouraging and thoughtful speech, Leo Foley urged Georgists to consider returning moral compass to an electorate grown tired and cynical of the foundering political process.

We should consider standing for office to explain how taxes and the increasing privatisation of our natural resource rents had placed the world in the situation it finds itself at this critical point in history.

We need to show people how the value of government is actually embedded in our land values, Foley observed.

He announced he is throwing his own hat in the ring to stand as a candidate for the October municipal elections in the City of Hobart.

The Georgist road in politics is not an easy one, but we do have people with deep knowledge of economics and the ability to counter the electorate’s confusion of land with “private property”.

He suggested the word “stewardship” should loom larger in the Georgist approach, as a counter to the problematic term “ownership”.

In delivering the vote of thanks to Leo on behalf of an appreciative audience, I agreed if we are to progress the movement we do indeed need to choose our words and actions carefully, and that he was onto something with “stewardship” as relating to our tenure of land.

On further reflection this morning, as stewards also of the ideas of Henry George, it does seem to be time for Georgists to step into the political arena.

 

 

BERNANKE HOLED UP IN JACKSON WYOMING

If you want to stuff economies up completely, you’ll continue to treat the crazy thoughts of the modern day economist with some respect.

The current financial state of world economies attest to the veracity of this statement, which at first flush might appear like an exaggeration. Unfortunately, it’s not.

With the help of a nonsensical training that teaches them to ignore that between one third and one half of all economies is publicly-generated economic rent*, they’ve managed to turn the commonsense logic of daily living into an occult art, underpinned by nonsensical mathematical models.  Reality, it seems, comes a bad last with economists.

Whilst economies founder against the specious rocks of supply and demand economists have created, the wonder of it all is that we, and our politicians, still take heed of these modern day high priests of obfuscation and nonsense!

At the Federal Reserve Bank’s annual get-together for these twisted souls at Jackson Hole, their leader-in-chief  Ben Bernanke has at last admitted he’s out of tricks about how to resurrect the US economy. He’s wiping his hands!  Wonder of wonder!  I said as much back here. He now says “political leaders will have to do more to boost jobs and the housing market.”

Fat chance! Our so-called political leaders are in the thrall of OTHER economists, and the following facts continue to elude them:-

  1. Tax systems currently punish workers and producers alike
  2. Tax systems reward the parasitical rentier class by allowing them to privatise the public’s  land and natural resource rents*
  3. Tax systems therefore send production offshore, to where land, labour and taxes are cheaper
  4. If we really want to resurrect economies, we need to shift revenues off production, exchange, thrift and industry and onto natural resource rents, including land

As these simple details are far too difficult for the failed modern economist, business analyst and political leader to contend with — and a number of people (though rapidly diminishing) still believe economists have something to offer us — the world economic depression is therefore destined to continue having its way with us, when it need not.

Errant tax regimes will meanwhile help keep rentier-thief billionaires’ methods invisible to the vast majority of humanity.  Where the only certainties in life are death and rents, we’ve come to believe their spiel that it’s death and taxes – and don’t quite understand the difference.

 

 

Bill Batt warns New York State

Metroland ONLINE THE ALTERNATIVE NEWSWEEKLY OF NEW YORK’S CAPITAL REGION  10 February 2011

Tax the Land

—  Bill Batt

I put property-tax cappers in the same category as flat-Earthers. It’s troubling that we have policy shapers who understand so little of land economics. That other states—with disastrous results like California’s Proposition 13—have gone down this path is no reason for New York to drive off a cliff too.

When we realize that the property tax is really separate taxes on land and on buildings, each with its own very different dynamics, we’ll better be able to address an alternative. Buildings are a stock—a thing—that depreciates just like a car or a computer, and penalizes owners that improve their property. Land has a flow of value that economists call “rent,” or sometimes ground rent. One can no more cap the flow of rent than one can stop gravity. If one caps the part of rent taken in taxes, it leaves more to flow through the land sites into private pockets.

Sure, the Legislature can enact a tax cap, but this will create more problems than it solves. In Shakespeare’s Henry IV, Glendower boasts, “I can call spirits from the vasty deep.” To which Hotspur answers, “Why, so can I, or so can any man; But will they come when you do call for them?” The property-tax cap or a circuit-breaker proposal is an equally hollow boast: We can cap the tax burden, but land values will increase, which only disrupts real-estate markets and development further, just when we need them most.

Rent flow reflects the vitality of the economy and is stifled when that wealth is frozen in land sites, which are as much as half the total real estate value in a locality. What we really need is as much turnover in wealth as we can get, not locking it up in land wasted as slums, parking space and vacant lots.

Recently, in The Atlantic, conservative writer and the New America Foundation’s Reihan Salam asked, “What if the problem isn’t the property tax at all but rather, well, all other taxes? In 1879, Henry George . . . found it perverse that we tax productive activities like work and innovative investment while letting landowners grow rich simply because they scooped up property at the right time. . . . When you tax income, aren’t you punishing people for working hard? But when you tax an asset like land, you’re simply encouraging the most valuable use of that land. . . . Simply put, the better you govern, the more valuable the property. The more valuable the property, the more revenue you raise.”

There are solutions, tried and true: The first is to un-tax buildings altogether and remove the penalty it imposes on people who improve or maintain their property. Most residential parcels pay less, and underused and vacant parcels in high-value urban cores pay more, providing an incentive to develop. That reverses sprawl and fosters urban revitalization, without throwing precious public dollars at the problem. Another is to have taxes paid in increments rather than in a yearly lump sum.

The third part is to give households the option of deferring their tax burden until they sell. Then they pay up with interest what they rightfully owe and don’t shift their burden onto others unfairly. Twenty- four states do this in some way.

The value of land is due not to what any landowner does—often they don’t even live in the area—but what the total community does. The increase in value is a windfall gain often called the “unearned increment.” Since that value is socially created wealth, it follows that it’s the rightful source of public revenue, and we should recapture its flow rather than tax people’s work and products which they’ve earned with brain and brawn.

A land value tax fits best all textbook principles (as well as actual practice) of solid tax theory: It is “neutral,” meaning it doesn’t interfere in market choices; it is efficient in not damping vitality; it is progressive as it can’t be shifted to tenants. It is easy to administer, simple and stable.

There’s a reason why so many nations, as well as some places in the United States, are now looking anew at taxing land value.

______________________________________

Bill Batt, a political scientist, has worked as a university professor and a policy analyst for the New York State Legislature.  He serves on the board of the Center for the Study of Economics, and the executive committee of the London-based International Union for Land Value Taxation. More at urbantools.org

THE MORTGAGE

 

 

 

 

 

Will Carleton (1845-1912) “Farm Yard Ballads”

The Mortgage

We worked through spring and winter, through summer and through fall,

But the mortgage worked the hardest and steadiest of all:

It worked on nights and Sundays, it worked each holiday

It settled down among us, and it never went away;

 

Whatever we kept from it seemed almost as bad as theft

It watched us every minute and it ruled us right and left.

The rust and blight were with us sometimes and sometimes not

The dark-browed, scowling mortgage was for ever on the spot.

 

The weevil and the cutworm, they went as well as came,

The mortgage stayed for ever eating hearty all the same.

It nailed up every window, stood guard on every door,

And happiness and sunshine made their home with us no more.

 

Till with failing crops and sickness we got stalled upon the grade,

And there came a dark day on us when the interest wasn’t paid.

And there came a sharp foreclosure, and I kind of lost my hold,

And grew weary and discouraged, and the farm was cheaply sold.

 

The children left and scattered, when they hardly yet were grown;

My wife she pined and perished, and I found myself alone.

What she died of was a mystery, and the doctor never knew,

But I knew she died of mortgage just as well’s I wanted to.

 

If to trace a hidden sorrow were within the doctor’s art,

They’d have found a mortgage lying on that woman’s broken heart.

Worm or beetle, drought or tempest, on a farmer’s land may fall,

But for first class ruination trust a mortgage ‘gainst them all.

_________________________________

–         As reprinted in PROGRESS February 1928

THE PERFECT SQUELCH?

DEMOLITION JOB

With great humility, a certain libertarian once wrote to Georgist libertarian Dan Sullivan:

You should not presume to speak on behalf of libertarians, since you are obviously in the position of not understanding. Instead you should ask for clarifications.

To whose belly Sullivan proceeded to apply a blow torch along these lines:-

OK. Complete novice that I am, I will undoubtedly benefit from your erudition on what the following passages mean. Please do explain them. Feel free to interpret each sentence and go into detail, so that we might benefit from your intellectual prowess:

***

from Albert J. Nock, founder and first editor of The Freeman, and author of Our Enemy the State, which you can get from Laissez Faire Books:

“The only reformer abroad in the world in my time who interested me in the least was Henry George, because his project did not contemplate prescription, but, on the contrary, would reduce it to almost zero.  He was the only one of the lot who believed in freedom, or (as far as I could see) had any approximation to an intelligent idea of what freedom is, and of the economic prerequisites to attaining it….One is immensely tickled to see how things are coming out nowadays with reference to his doctrine, for George was in fact the best friend the capitalist ever had.  He built up the most complete and most impregnable defense of the rights of capital that was ever constructed, and if the capitalists of his day had had sense enough to dig in behind it, their successors would not now be squirming under the merciless exactions which collectivism is laying on them, and which George would have no scruples whatever about describing as sheer highwaymanry.”

***

from Nock, The God’s Lookout, February 1934, p. 320-324:

“So long as the State stands as an impersonal mechanism which can confer an economic advantage at the mere touch of a button, men will seek by all sorts of ways to get at the button, because law-made property is acquired with less exertion than labour-made property.  It is easier to push the button and get some form of State-created monopoly like a land-title, a tariff, concession or franchise, and pocket the proceeds, than it is to accumulate the same by work.  Thus a political theory that admits any positive intervention by the State upon the individual has always this natural law to reckon with…”

The American state at the outset took over the British principle of giving landlords a monopoly of economic rent.  That shifted the switch; it established the State’s character as a purveyor of privilege. Then financial speculators sought a privilege, and Hamilton, with his “corrupt squadron in Congress,” as Mr. Jefferson called them, arranged it.  Then bankers, then industrialists; Hamilton also arranged that.  Then, as the century went on, innumerable industrial subgroups, and subclasses of special interest, were heard from, and were accommodated.

Then farmers, artisans, ex-soldiers, promoters of public utilities, began to accumulate political power with a view toward privilege.  Now, since the advent of universal suffrage, we are seeing the curious spectacle of the “unemployed” automatically transformed into the strongest kind of pressure-group; their numerical strength and consequent voting-power compelled Mr. Roosevelt to embrace the extraordinary doctrine that the State owes its citizens a living–an expedient little noticed at the time, I  believe, but profoundly interesting to the student of historical continuity.

Moreover,…when the State confers a privilege, natural law impels the beneficiary to work it for all it is worth; and therefore the State must at once initiate a whole series of positive interventions to safeguard, control, and regulate that privilege.  A steady grist of “social” legislation must be ground; bureaus, boards and commissions must be set up, each with its elaborate mechanism; and thus bureaucracy comes into being.

As the distribution of privilege goes on, the spawning of these regulative and supervisory agencies also goes on; and the result is a continuous enhancement of State power and a progressive weakening of social power, until, as in Rome after the Antonines, social power is quite extinguished–the individual lives, moves, and has his being only for the governmental machine, and society exists only in the service of the State.  Meanwhile, at every step in this process, natural law is pushing interested persons, groups and factions on to get clandestine control of these supervisory agencies and use them for their own advantage; and thus a rapid general corruption sets in, for which no cure has ever yet been found, and from which no recovery has ever yet been made.

***

James Buchanan (1986):

The landowner who withdraws land from productive use to a purely private use should be required to pay higher, not lower, taxes.

[I don’t know much about Mr. Buchanan. Is he a Marxist?]

***

Adam Smith, Wealth of Nations:

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed.

***

Karl Marx:

“Henry George is the capitalists’ last ditch.”

[Since you say Georgism is Marxist, then this must be some kind of cryptic endorsement.  Perhaps you could decrypt it?]

***

Thomas Jefferson:

[Feel free to skip the first four paragraphs, which are undoubtedly due to Marx’s influence on Jefferson. I particularly would like to hear your analysis of the last and longest quote.]

“I set out on this ground, which I suppose to be self-evident, that the earth belongs in usufruct to the living; that the dead have neither powers nor rights over it. The portion occupied by any individual ceases to be his when he ceases to be, and reverts to the society…”

“Whenever there are in any country uncultivated lands and unemployed poor, it is clear that the laws of property have been so far extended as to violate natural right.

“In Europe the lands [that are not] cultivated are locked up against the cultivator.  …This begets dependence, subservience and venality, suffocates the germ of virtue and prepares fit tools for the design of ambition.

“I think our governments will remain virtuous..as long as there are vacant lands [available] in any part of America.  When [Americans] get piled up on each other in large cities, as in Europe, they will become corrupt, as in Europe.

“That the lands within the limits assumed by a nation belong to the nation as a body has probably been the law of every people on earth at some period of their history.  A right of property in movable things is admitted before the establishment of government.  A separate property in lands not till after that establishment. The right to movables is acknowledged by all the hordes of Indians surrounding us.  Yet by no one of them has a separate property in lands been yeilded for individuals.  He who plants a field keeps possession till he has gathered the produce, after which one has as good a right as another to occupy it.

“Government must be established and laws provided, before lands can be separately appropriated and their owner protected in his possession.  Till then the property is in the body of the nation.”

***

[This intro is from The World’s Great Speeches, 1942, Garden City Publishing, Inc.]

“Richard Cobden [1804-1865], statesman and economist, has won world fame as a powerful advocate of free trade.”

“I hold that the Landed proprietors are the parties who are responsible if the laborers have not employment. You have absolute power; there is no doubt about that. You can, if you please, legislate for the laborers, or yourselves.”

***

Frank Choderov: Second editor of The Freeman, and author of One is a Crowd and Income Tax, Root of All Evil. This quote is out of From Christmas to Christmas, Analysis, Vol 1., No. 4:

“On earth as it is in Heaven.” Whatever Heaven connotes to the theologian, to the layman it sublimates the highest aspiration of the human spirit– which is Freedom.  Can a Heaven which embraces slavery, economic or political, have any meaning?  It is fantastic, blasphemous, if you will, to speak of Heaven-on-earth as a place where one man must pay another for the privilege of living.  Surely, the Milky Way has not been reduced to private ownership, nor are the Elysian Fields preempted and for sale.

“Then again, are the standards of eternal life fixed by monopoly exactions? Is there a tax on immortality? Do soul bureaucrats hound the spirits into collectivized subjectivity?  Or rather, do we not think of Heaven-on-earth as an existence wherein every man may do that which he will, provided he infringe not on the equal right of every other man?…”

***

[Perhaps you could not only interpret Herbert Spencer’s meaning, but answer his questions? Then he and I will both become enlightened by you.]

from Social Statics:

“It can never be pretended that the existing titles to landed property are legitimate. The original deeds were written with the sword, soldiers were the conveyancers, blows were the current coin given in exchange, and for seals, blood. Those who say that ‘time is a great legalizer” must find satisfactory answers to such questions as — How long does it take for what was originally wrong to become right? At what rate per annum does an invalid claim become valid?”

***

Stephen Pearl Andrews is quoted here from Liberty and the Great Libertarians, which, according to Laissez Faire Books, “offers choice selections from many of the greatest authors on liberty”.

Andrews’s works include Comparison of the Common Law with the Roman, French or Spanish Civil Law, and The Constitution of Government in the Sovereignty of the Individual, from which this quote is taken:

“The very foundation principles of the ownership of lands, as vested in individuals and protected by law, cannot escape much longer from a searching and radical investigation…. Land reform, in its present aspect, is merely the prologue to a thorough and unsparing, but philosophical and equitable agrarianism, by means of which either the land itself, or an equal participation in the benefits of the land, shall be secured to the whole people. Science, not human legislation, must finally govern the distribution of the soil.”

***

Robert G. Ingersoll, as quoted in Liberty and the Great Libertarians, p. 189

“Now, the land belongs to the children of nature. Nature invites into this world every babe who is born. And what would you think of me, for instance, tonight, if I had invited you here — nobody had charged anything, but you had been invited — and when you got here you had found one man pretending to occupy a hundred seats, another fifty, another seventy five, and thereupon you were compelled to stand up — what would you think of the invitation? It seems to me that every child of nature is entitled to his share of land, and that he should not be compelled to beg the privilege to work the soil of a babe that happened to be born before him.”

***

Louis F. Post as quoted in Liberty and the Great Libertarians, p. 349, Land Liberty and Justice

“Since in justice rights are equal, there must in justice be equal rights to land. Without land man cannot sustain life. It is to him as water to the fish or air to the bird — his natural environment. And if to get land whereby to support life, any man is compelled to give his labor or the products of his labor to another, to that extent his liberty is denied him and his right to pursue happiness is obstructed. Enforced toil without pay is the essence of slavery, and permission to use land can be no pay for toil; he who give it parts with nothing that any man ever earned, and he who gets it acquires nothing that nature would not freely offer him but for the interference of land monopolists.”

[That last sentence deserves detailed analysis]

***

Edwin C. Walker, from Liberty and the Great Libertarians

“The conception and the facts of liberty and slavery result from association, not isolation; and the sparseness or density of population, the simplicity or complexity of association, will create the customs, rules and laws governing human relations. Therefore, what the solitary man may rightfully do is no measure of what he may rightfully do when he comes into contact with another man. The liberty of one is conditioned upon the liberty of the other.”

***

William Lloyd Garrison, as quoted in Liberty and the Great Libertarians, p.355

“Men mistake when they imagine the Single Tax agitation to aim only at fiscal change, a new method of taxation. Its sole purpose is to secure the larger freedom of the race. It is not the method but the result that is precious. For it is idle to talk of the equal rights of men when the one thing essential to such equality is withheld. The Physiocrats of France grasped the central truth, and saw that freedom of natural opportunity, composed in the term land, was the foundation-stone of freedom and justice. Had the French Revolution proceeded along their line, it would have had a different ending. The succeeding spectre of Napoleon, devastating Europe and wading through the blood of his sacrificed countrymen to the throne, would not have affrighted mankind. The fruits of liberty would have been gathered.”

***

Luke North (Editor of Everyman) as quoted in Liberty and the Great Libertarians, p. 356

The demand of the centuries, never so virile and insistent as today, is for equal freedom. The modern Everyman asks not for himself what all may not have. The asking were vain, indeed, for there is no freedom till all are free. Master and slave are bound by the same thong. Human solidarity is not a moral fancy but a stern fact.

***

Karl Hess, Sr., speechwriter for Barry Goldwater and creator and first editor of The Libertarian Party News:

“All taxes should be placed on land values until the state is abolished entirely.”

[Of course, Hess also said, “I loved education, which is why I spent as little time as possible in school.” This is suspiciously similar, if not as succinct, as the quote by George Bernard Shaw in my tagline. Perhaps, then, Karl Hess was also a Marxist Collectivist. There is one under every bed, you know.]

–      Dan Sullivan

The only time my education was interrupted was when I was in school.” –George Bernard Shaw

HOUSING SHORTAGE – PHOOEY!

 

Click on Prosper Australia’s Karl Fitzgerald to see him help dispel the ‘housing shortage’ myth on Channel 7’s TODAY TONIGHT.

 

I’m sure Karl doesn’t agree with the Pauline Hanson dog whistle tilt:  I’d bet there are many, many more Australians than foreigners holding residential properties vacant, but that’s not the line Channel 7 chose to go with.

KNOW YOUR ENEMY

WHAT DO THESE THINGS HAVE IN COMMON?

Housing unaffordability

The global financial collapse

National governments moving to own, or guarantee, banks

Governments cutting costs and increasing taxes

Governments increasing expenditures and failing to cut costs

Ineffectual government

Failing infrastructure

Ineffective demand

Failing businesses

Ineffectual economic and financial analysis

Increasing unemployment

A widening gap between the rich and poor

Protests in Canberra tomorrow about the importation of New Zealand apples

——————————oooOOOooo——————————–

Few people concerned with any of the items on the list define the FUNDAMENTAL situation correctly. I’ll use the last item on the list to make the case.

Apple growers are obviously concerned about importing the apple disease, fire blight, if New Zealand apples are permitted into Australia. New Zealanders don’t allow our apples to be imported because of the possibility of importing our fruit flies, so why should we risk introducing their fire blight?

But isn’t the pre-eminent concern about what the importation of apples might do to the local apple industry? Is fire blight as likely, or as common, as fruit fly? Isn’t the opposition to importing apples mainly because the New Zealand dollar is cheaper than ours, therefore their apples might be able to be brought to our markets cheaper, and out-sell Australian apples?

Why is our dollar and our labour dearer than New Zealand’s? Might it have anything to do with our taxes and land prices being higher, therefore (as with Chinese goods) we are unable to compete with them?

OK, maybe we don’t want to risk importing fire blight, but the “protectionist” argument against other imports usually comes back to Australia’s relatively higher taxes and land prices generating our uncompetitive labour costs.  (I showed in the second-last blog how we can have higher wages without higher costs.)

It’s little understood that Australia has the dearest land in the world, and that our tax regime blatantly encourages the pathology to infect the whole economy. Despite the fact that land price can disappear overnight, banks then proceed to lend against it.

In considering any item on the above list, it’s only when we come to appreciate that current tax regimes act to inflate land prices that we can begin to find solutions to it – and to the world’s deepening financial crisis.

Land and natural resource charges represent the antidote for the enemy within the gates – which is not just the financial crooks, but the main enemy of economic prosperity – taxes and land prices.

__________________________________________

 

LATEST NEWS!

 

 

 

Land tax is something to build on

Martin Wolf’s piece published in the Financial Times on 8 June 2006 is worthy of resurrection:-

LAND TAX IS SOMETHING TO BUILD ON

How should one finance infrastructure? How should one decide what infrastructure to build? The answer to these two questions would appear self-evident: we should build infrastructure if benefits exceed the cost and we should finance it by taxing the beneficiaries.

Who are those beneficiaries? Landowners is the answer. Land taxation is the natural, efficient and just way to finance the capital cost of infrastructure. That is the point of a thought-provoking pamphlet by Fred Harrison, research director of the Land Research Trust.*

Consider a simple example. In a busy town the average house price is £300,000, of which half is the cost of building (or replacing) the house and the rest the value of the land. Some way away is an isolated village. Here the identical house costs £200,000, of which just £50,000 is the land value.

Consider what would happen if a road were built, for the first time, between the town and the village. Residents of the town would want to move to the village to take advantage of the cheap houses and the amenities. Assume, for simplicity’s sake, that the benefit of the village’s amenities to the marginal movers offsets the cost of the extra time they would spend travelling. The price of village houses must jump by £100,000.

Owners of the village housing will capture the benefit of taxpayer-funded road-building. To them this will be a massive windfall gain. In general, the rise in the price of land will account for most, if not all, of the capitalised value of the surplus of benefits over costs to users of the infrastructure.

Often, as Mr Harrison shows, the benefit-cost ratio for infrastructure that improves accessibility of cities or mobility within them is very large. London’s Jubilee line cost £3.4bn to build, but raised land values in adjoining areas by close to £14bn. The benefits were evidently enormous. The same, no doubt, would be true of Crossrail, the endlessly postponed west-east rail link across London. The government’s 10-year transport plan would be another example: the cost was estimated at £180bn, but the gains to landowners might be far bigger.

Thus, increases in land values give not only a good indication of the benefits of infrastructure investments, but also provide an efficient and just way of financing their costs. It is efficient to tax these values because the tax would reduce the size of a windfall, while other taxes used to pay for infrastructure reduce effort, penalise the division of labour or discourage capital accumulation. It is also just, because the chief beneficiaries would bear the cost.

It is possible to charge users of infrastructure, as well. Where there is congestion or there are variable costs, such user charges are appropriate. But relying only on user pricing is undesirable if the infrastructure is then under-used. Often it is technically infeasible, as well: road use has long been an example.

William Vickrey, the Nobel-laureate economist, was an exponent of charging landowners: thus “equity and efficiency are both served”, he argued, “by having landlords contribute to the network costs of the services so as to enable their prices to be brought closer to marginal costs. In the long run, the increased efficiency of the local economy would tend to redound to the benefit of the landlords by raising their market rents by more than the subsidy.”

The use of the rise in the price of land as a means of defraying the cost of investment in infrastructure is easy when, as in Hong Kong, the government owns the ground. A monopoly private owner would also be able to internalise the benefits of the infrastructure investments he makes.

In the UK, however, such voluntary methods would fail because of the incentives for enjoying a free ride on investments made by others. That is why a land tax related to site value is the simplest way of extracting benefits from large-scale public investment.

The generation of data on land values is not impossible: Denmark has done it for 80 years. A simple way of financing local infrastructure would then be via a tax on site values. The revenue could go, in whole or in part, to the relevant local authorities. If the latter were also deprived of the right to vary the rate, they would have an incentive to make investments that raise land values and increase their revenue.

At present, however, the lack of any easy means of raising finance is proving a huge obstacle to desirable investments. Then, when investment does take place, as with the Jubilee line, it merely pours vast windfall gains on landowners at the expense of taxpayers. The result has been a long history of inadequate investment and undue reliance on inherently damaging and unjust taxation. The UK is choking on the inadequacy of its own infrastructure. The time to make a change is now.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Fred Harrison, Wheels of Fortune: Self-funding Infrastructure and the Free Market Case for a Land Tax, Institute of Economic Affairs, 2006

martin.wolf@ft.com

The third way: why business and unions are both wrong

THE IMPASSE

Newspaper editorials seem mystified that retail spending is down. They point to the fact that Australia’s national debt, unlike other nations, is well under control, as though this is somehow germane to our commercial slowdown.

Editors also reflect that maybe online shopping is responsible for cutting a swathe through spending in the shops.

In an obvious attempt to be optimistic, there’s no mention of the world record ratio of household debt to disposable income, i.e. above 150 per cent, to which Australians have shackled themselves in recent years.

Many people have hit the stumbling block and been forced to cut back on their spending, but others, aware of the catastrophic effects of the financial collapse overseas, have set themselves on a debt reduction program. Accordingly, a slight downturn in the ratio nearer to the 150 per cent mark shows their efforts are beginning to work. Unfortunately, such reduction in household debt doesn’t assist our economic performance.

Surely then Australia’s world record household debt levels explains the collapse in consumer confidence and demand? Mortgage debt, of course, accounts for by far the greatest part of household debt, and credit cards for much of the rest.

So, how does politics’ Left respond to this unwelcome slowdown?

Unions are looking for pay rises for their workers. They say this will help relieve their members’ debt and might get them spending again. The unions are aggrieved Qantas wants to put off 1000 staff to restructure towards Asia and at OneSteel’s announcement of job cuts, and they know more can be expected in retail if things don’t change. So, more money in workers’ pockets will resurrect economic activity, they claim. And they’re partly correct.

Meanwhile, marking the 20th anniversary of the Superannuation Guarantee Levy, former Prime Minister Paul Keating notes that unit labor costs decreased every year the levy rose, from 4 per cent in 1991 to 9 per cent in 2002, despite employers claiming it would prove to be a cost to them. He’d like it increased to 15 per cent, but will settle for 12 per cent immediately.

Mr Keating apparently hasn’t noticed average weekly wages have trended down ever since 1972.  (Some apparent real increases since 1998 were at least partly the result of redefining Australian CPI following the US Boskin Commission’s recommendations in 1996, wherein it opined the CPI had been overstated, and  employed more stable “rental equivalents” in preference to house prices.)

As Paul Keating dusts down his Louis XVI clocks, one wonders whether he has workers’ interests at heart, or just his own place in Australia’s economic history. Isn’t workers’ most immediate need in hard times to be able to access their own earnings?  Isn’t compulsory superannuation based upon the incredibly patronising premise that governments and super funds know better than you how to manage your retirement and financial affairs?

For that matter, now that the union movement itself has an integral stake in industry superannuation funds, wherein lies its true allegiance? Does it lie in making favourites out of particular shares, or certain REITs, or in looking after the here and now of its members, as once it did?

On the other hand, business is becoming choleric about the possibility of further wage increases. Salary rises have recently exceeded increases in productivity, they rightly claim, despite the longer trend in real average weekly wages having declined from the outset of the 1970s.

So, you can bet that industrial relations, which for employers amounts to keeping the lid on salaries if production isn’t also increasing, is again about to hit the headlines and become contentious. Like the unions’ logic that wage increases will help increase effective demand, that these should not be allowed to occur unless there is a corresponding increase in productivity also seems a valid proposition.  Both sides are partly right.

However, as our economic performance worsens, the inevitable outcome of rapidly hardening attitudes between unions and business is likely to be greater strike action and IR conflict. Whilst this tension between labour and capital is age-old, neither side offers resolution to the immediate problem of ineffective demand.

If unions have their way with pay rises, it will be inflationary and put further pressures on business to reduce staffing levels. If business holds its line on no further pay rises, from whence shall effective demand arise?

If the current approaches of labour and capital can be seen not to address the problem, is there any alternative to these rapidly bifurcating attitudes? Must we find ourselves in one camp or the other?

Let us consider how to provide wage increases without adversely affecting business or generating inflation.

THE SOLUTION

The Henry review of the tax system seems to offer the only solution for Australia. Ken Henry’s panel strongly argued the need to abolish many inefficient taxes that adversely affect business, increasing its costs and adding to consumer prices.

The tax inquiry showed a transition to a greater reliance upon natural resource rents and reformed State land taxes, both being in the nature of a community-generated surplus product, otherwise known as economic rent, won’t add to business costs if a greater part of it is captured to revenue coffers.

As natural resource-based revenues do not add to business costs is the one point on which all economists do agree, it’s a pity neither of the major parties has been prepared to take this up and educate the public to that effect. Vast ignorance exists on this critical point, and the parties remain fearful and delinquent in not mentioning it.

It is therefore clearly possible that tax cuts can deliver increased incomes both to businesses and consumers without being inflationary.

Is this not the solution to the impasse currently confronting unions, businesses and all Australians? Would not this action assist debt to be paid down whilst also restoring consumer confidence that the tax system is finally providing better signals, namely, that increased productive effort will be rewarded instead of punished?

If the public tax forum to be held in Canberra on 4th and 5th of October fails to grasp this nettle, Australia’s economic future appears certain to grow increasingly bleak.