Disguised Increments: The Externalities Factor in Land Economics
Leo Foley
[2011]
Why is it so difficult to recruit people to the idea of Land Value
Taxation? Are they all doing so well under the present system that
they don't want to know?
They must see the inequalities that it turns up.
Is it just that they hope to get in for their own piece of the
action? Hey, it could be their turn next! - As if society could be run
like a Tattslotto draw, with a Jackpot for the lucky few!
Is the whole subject so difficult that it is beyond the understanding
of most people?
Perhaps it is any one, or perhaps all, of these things. But I don't
think so: I think people simply do not realise how much wealth is out
there, how it comes to be, and that they should have a share of it -
by right; in fact, by birthright!
They do not understand about the Common Wealth. They accept the
dominant paradigm of a lucky few controlling land and natural
resources, while the rest of us struggle to make ends meet. It is seen
as the natural order of things. That's why Twiggy Forrest and Gina
Reinhart were able to stand on the back of a truck, getting sympathy
from Australians who they have deprived of their rightful bounty. "We
need more", they lamented, and they got it. In the past year
their combined wealth has risen by $16 billion - not a bad return for
their media campaign!
But even that is small chips. The real money is in urban land. But
that is spread across many more people, so any attempt to recoup some
of the rent for public purposes - and lets not fudge here; no matter
what the purist debate says, we're talking about a tax! - will raise
the hackles of many more people. Just, it might be. Fair and
equitable, it most certainly is. But just try to tell that to the
ordinary guy with a mortgage, or even an investment property. For him,
its just another attack on what he sees as his hard work. He's not
interested!
But if there were a way to show just how much rent is out there,
currently going into just a few pockets, then it may be possible to
initiate a mass movement for ordinary people to claim their just
rewards. To start that movement, it will be necessary to identify
those 'hollow logs', establish just how much sits in them, and
publicise what could be done with those extra billions. Because in
those 'hollow logs' are the "Disguised Increments" of land.
Last month, a great Australian passed away in Brisbane. While Joh
Bjelke-Peterson rode roughshod over all good governance practice in
Queensland, Philip Day was a constant thorn in his side - perhaps that
alone qualifies him as a great Australian, but Phil Day was much, much
more:- a lawyer, town planner and academic, he was a progressive,
public-spirited man and a values-based administrator. In his book,
Hijacked Inheritance, (2005) he examines our National Anthem, "Advance
Australia Fair".
Fair? Ummm, is Australia fair? When the song became popular, in the
early part of the twentieth century, Australia was striving to be the
most egalitarian society on earth. It wasn't, of course, but there was
a national commitment to the "Fair Go", and that drove
policy making for 40, perhaps 50, years. By the time "Advance
Australia Fair" became the National Anthem in 1984, that
egalitarian zeal had already subsided, and the age of the individual
had begun. Philip Day laments the "inequality, insecurity and
alienation" of our society, and the social ills they spawn. Not
to mention the increased household debt, and the privatisation of
community institutions. That is the Australia of today. So, where did
Australia Fair start to go wrong?
Here are a few starter thoughts:
We live in a free market society, but what is truly a free market?
Look at the restrictions we face in any market - the regulations, the
constraints, the bureaucratic requirements. Is it any wonder that our
economy stalls?
Earned Income
We go to work; we rest; we play;
When we work productively, we are entitled to the fruits of our
labour. From the factory labourer to the managing director, a
pay-scale rewards us for the benefit we provide to the company.
Artists, sportspersons and inventors are rewarded for their talent and
initiative, while entrepreneurs are rewarded for their ability to
market a useful product. They all earn their income through their
labour.
But there is another group of people who do nothing to earn their
income. They own land, or have rights to some natural resource. In
many cases, titles are handed down from one generation to the next.
They do not have to work. They can simply charge the rest of us a rent
to access that land or natural resource, so we can go about our
business of making a living. This is unearned income! The landowners
are supported by the law, having a title or licence that is backed by
the Courts. But that is a man-made law, developed by the very
landowners (or their forebears) that benefit from its provisions. The
rest of us pay them for the privilege that they bestowed upon
themselves.
Equality under the law implies the equal ownership of natural
resources. There is nothing wrong with land being owned on individual
titles. That is necessary so we can call it ours, and build a home or
business there; but the rental value of the land, which reflects the
economic benefits bestowed by the whole community, belongs to all of
the community in equal shares. That would make the system fair.
These days, rent-seeking is associated with political lobbying -
seeking some subsidy, tax-exemption or regulation that primarily
benefits the lobbying group. It is inefficient because it does not
create any benefit for society; it merely redistributes resources from
taxpayers to the special-interest groups.
But there are other rent-seekers. People who hoard land, and release
it for housing or commercial use only when their extortionate price
has been paid, are rent-seekers too. It is legal, but that is the only
distinction from the usual protection racket, where a gang takes a cut
from a shopkeeper's profits.
At the heart of our problem, I suggest, is the notion of the public
good.
- Governments no longer know what is public and what is private.
They sell off public assets and businesses, but then enter markets
that should be left solely to the private sector. Expediency
trumps philosophy.
- We should be confident in our entitlement to the fruits of our
labour and entrepreneurial efforts; it is ours. Yet, it is
necessary to make some contribution to the conduct of the state?
On what basis should that contribution be calculated?
Another speaker today has spoken of the benefits of a Land Tax. I
agree completely. But the land under our feet is only part of the
Common Wealth. When we think of land, we need to think more broadly -
and include all of our natural resources, as well as other community
created wealth generators - the things we do as a society that help
build our communities. Here is a list of just some of the things that
are not colloquially called land, but are part of our Common Wealth:
- ambient air (the right to breathe it and the license to
pollute),
- water and the beds under it,
- wild fish, game, and vegetation,
- the environment,
- natural scenery,
- the ecology,
- weather,
- falling water,
- the radio spectrum,
- the natural gene pool,
And these are some of the human additions to the Common Wealth, which
should be treated in exactly the same way as land:
- docks,
- aquifers,
- rights of way, e.g., a right-of-way is a very valuable asset,
as railways show
- take-off/landing time slots for aircraft,
- "air rights" to strata in the third dimension of
cities,
- Any franchise, license or privilege giving territorial rights:.
A 'Disguised Increment' is the Cream that rises from the milk of
these privileges!
Today, I will examine just a sample. We will look at:
- Environment - externalities; mineral extraction
- Land use - zoning, betterment, housing
- Public infrastructure - public transport, community services
- Climate Change
Environment
We will start with the environment because there, externalities are
easier to understand. The price we pay for some things is sometimes
much less than their actual cost. There are numerous examples of such
"external costs" or "externalities." Pollution of
a river by a paper-making company, for example. Or, nutrient runoff
from agricultural practices that ruins fishing grounds eg Gulf of
Mexico - long before BP filled it with oil. Closer to home, the
Barrier Reef is under threat from nutrient runoff. The classic example
is acid rain, where the damage might not even be in the same country.
These costs are not borne by the company that creates the problem, but
are imposed on society. We all pay.
Mining operations can have external costs too. The external cost of
mining could include the destruction of the fish habitat in local
rivers or adjacent seas, while the use of cyanide in the mining
operation can create a cocktail of trouble for local people. The
external costs are borne by the public at large, not by the mining
company. The additional profits obtained from these morally bankrupt
scenarios are the "Disguised Increments" of our economic
system.
Because the ecological relationships are complex, calculating the
costs of externalities is not easy. But that is no excuse for not
attempting to put a price on them. As far as possible, the producer
should bear all the costs of production, and a truly free market can
then decide if the price is too high. On balance, production may not
be much affected, because the community should receive monetary
compensation to the extent of the costs imposed on them.
Lets look at Land Use
Re-zoning land from rural to residential or commercial will always
increase the value of that land. Literally overnight, or at the stroke
of a Ministerial pen, windfall profits are conferred on landowners.
The decision to rezone the land, whether taken by the Minister, a
Planning Authority, or a local Council, is made on behalf of the
community. But all of the windfall gains are bestowed upon a few
private landholders. This encourages speculation in land, with
Planning Schemes being seen as "speculator's guides".
But it is not a new phenomenon. Leonie Sandercock wrote "Cities
for Sale" in 1975; she lamented that urban planners continue to
devise land-use plans which perpetuate the transfer of income from the
poor to the rich. Three decades on, her prophesies have become 'de
rigueur'.
Overcoming that particular problem is not even difficult. The
collection of 'betterment' would collect that windfall gain for the
community. 'Betterment' is simply that - the collection of the
unearned capital gains resulting from land use rezoning. It has been
recommended for generations, but it is testament to the strength of
the land-owning lobby that they have been able to defy those
recommendations and influence legislators to their private benefit. It
helps that many of those legislators understand the issue all too
well, often being substantial landholders themselves!
But zoning changes are no longer the only means of privatising the
value of land. We have now made an art-form of speculating in housing;
'property' as it is generally called. To encourage home ownership, tax
advantages are provided to the homeowner. This extends to the land
that the house sits on. No distinction is made between the land - a
natural resource - and the building - a man-made construction. The
land on which our principal residence sits is exempt from any Land
Tax. While that seems to be popular, the taxes levied in lieu of it
are discriminatory, inefficient and distortionary in our economy. The
gains of home owners are paid for by those needing a roof over their
heads. As the British economist Martin Weale argues, the accumulation
of property wealth is in effect
an act of theft perpetrated on the younger generation, who
must pay the exorbitant prices demanded by baby-boomers, or rent.
But one house is no longer enough. To reduce the inefficient taxes
levied on individual's labour and productive effort, property has
become society's bulwark against the taxman. Concessions are given for
interest payments, maintenance, and even holidays - er, business trips
- to view the property interstate. That the claims for maintenance far
exceed the value of all houses it is supposedly spent on does not faze
our decision-makers; property is king, and if negative gearing forces
house prices up so new entrants to the housing market are left behind,
we can always give them a grant to get them onto the bloated mortgage
treadmill. This is absurd public policy; driven by a madness where
everyone knows the scheme will stall and self-destruct at some point.
But we can't blame the participants for their part in this lunacy. It
is the natural result of the decline of our egalitarian society. When
government policies reward speculation and rent-seeking above honest
toil, it is inevitable that people will choose that path. When the tax
system encourages dishonesty and deceit, it is little wonder that our
society is less inclined towards the common good.
The disguised increments in the housing market are thinly disguised
indeed; they are there in full view for anyone with the will to look.
Yet we are blind to it.
We'll move on to Infrastructure
Public transport is another area in which anyone with a little wit,
and a matching will, can see the problem of unearned increments. The
solution is just as simple.
Politicians assume that public services cannot be self-financing, and
insist that subsidies are necessary. Well patronised public transport
systems can pay for themselves, if only the system is established
properly. Ticket sales can cover the running costs of the service. It
is paying for the capital costs that drags the operators into deficit.
But it need not be so.
If the transport operator was able to collect the value that their
services create, there would be no deficit. That value includes the
part that leaks out into the private sector and is capitalised into
the value of land. Sites within 400 metres of new railway stations are
uplifted progressively, dependent only on the proximity of the rail
station.
How do I know this? I've read the inside story of the Jubilee Line
extension in London, which is the subject of
Taken for a Ride by Don Riley. He is a property owner south of
the Thames, who became very wealthy because the Jubilee Line provided
easy access to his properties. He calculated that the rail extension,
which cost $3.5 billion, returned $13.5 billion to lucky landowners
along the line. A later study by UK's Treasury confirmed his findings,
even if their figure of $12 billion was slightly lower.
But London is not the only example. A barren rock on the south coast
of China has become one of the commercial hubs of the world. Hong Kong
was developed as a free market model for the world. Its success is
astounding; but perhaps the most remarkable aspect is that its wealth
has been created on a land value capture model. Its public transport
system is integrated into the city's commercial and residential needs.
The State-controlled land agency MTR allows private developers to
build high value commercial hubs at and above railway stations, but
always to the MTR's high standards. Profits are shared with MTR, which
is able to expand the network to cater for the rapidly expanding
population. Since profits are substantial ($5 billion pa), the
citizens of Hong Kong gain worthwhile benefits. They get all the
benefits of a modern, integrated system, while the fares have been
frozen since 1997.
Capturing the value of land to pay for public services makes sense.
Not to do so allows the uplift in land value to accrue to private
landholders, who have done nothing to earn the windfall.
In slightly different ways, Singapore and Japan also collect
increased land values for the public good. Fred Harrison shows how in
his book, Wheels of Fortune. All of this information is freely
available to our politicians. They prefer to continue to disguise
these increments (billions of dollars annually), and allow them to
accrue to a few landowners.
By comparison, lets briefly look at New York. Its Metro is wholly
financed by the fares paid by its users. It struggled for funds over
the years, and fell into disrepair; many users moved to car use
instead. Meanwhile, in the vicinity of the stations, speculators made
a killing, which retarded the city's economy. If the system had been
funded as it should have been, through land value capture, it could
have provided a low-cost (perhaps free), high quality service, while
avoiding the need for the wasteful highway network.
We have looked at externalities in the environment, land use and
infrastructure; and we have found that 'Disguised Increments' exist in
all of them. So, as a society, what have we learned? We need to look
at a modern problem to see whether we are likely to do better than we
have in the past. And what bigger issue is there in our time than
climate change?
I have no intention of entering the debate whether global warming is
real, is caused by carbon dioxide, or is the result of other man-made
emissions. For the sake of this presentation, I will accept all of
those propositions, and concentrate on the remedies so far proposed.
The favoured remedy is the 'cap and trade' system, which seems to have
won the day from a carbon tax. That is, a market-based solution is
preferred over a bureaucratic one.
But will it work? And who will be the big winners?
It seems that there is a lot of faith embedded in the claims being
made. While economic logic tells us that a higher price on oil and
coal will lead to lower consumption, a lesson learned in the 70's was
that the oil price spike did not cure our addiction to oil at all.
People still needed to move; industry still needed to manufacture. So,
unless alternative energy systems are found, the level of pollution is
not likely to reduce much, despite the higher price.
A worrying sign is the enthusiasm for 'cap and trade' shown by major
banks, such as Goldman Sachs, and the big consulting firms. They
weren't too interested in a carbon tax, where governments collect the
cash, but are very keen on being part of a market in carbon. The
recent behaviour of these corporate financial giants should make us
wary of their public interest claims. What schemes will be conjured
this time? The potential for fraud is huge, but we are told to just
accept it - and pay the price!
'Cap and Trade' does not reduce emissions by the major players. It
allows the big polluters to continue to pollute as before, as long as
they can buy carbon credits to offset their pollution. So the system
says its OK to foul the atmosphere - for a fee! Or to continue
polluting in the US, Europe or Australia, by upgrading a factory in
China or India. For a bit of fun, you might like to check out
CheatNeutral.com It provides a forum where we can offset our marital
infidelities by purchasing some chastity from more monogamous souls!
What we are trying to achieve is lower carbon emissions. That is the
'cap' part. If we set the cap at where we think it ought to be (around
350 parts per million is the most common figure), and enforce it, the
emission problem is solved. The 'trade' part would be unnecessary.
'Trade' is the carrot being offered to the polluting industries to
compensate them for their sins of the past. It is similar to the
claims of the slave owners who demanded compensation for their loss of
property rights. President Lincoln said 'no' and stood firm. Should
we?
Europe has had an emissions trading scheme for some time now.
Citigroup's analysis of it is not inspiring. Prices up; emissions up;
profits up - mainly in the banking industry. But, of course, we are
told our scheme will be better. Who knows? While we have no effective
way of valuing the climate or the atmosphere, we will continue to be
in the hands of the financial sector. And they will capture the
'Disguised Increments'. Surely this is the real Tragedy of the Commons
- the loss of our appreciation of its value.
Summary
This paper has barely touched the surface of externalities in the
land market. While we have looked at some environmental and land-use
issues, and shown how public transport infrastructure could be
self-funding, there is no time to examine some of the other
rent-seekers:-
- the banks, for example, with their creation of credit, and
promotion of high property prices;
- the technology revolution, using public spectrum at discounted
rates; and,
- public utilities (now private, in many cases) where profits are
no longer returned to the people, but are either privatised or
confiscated as hidden taxes.
There are many more examples. These are the Disguised Increments of
our times.
So, why don't we, as a society, revolt against these travesties? Why
do we accept them?
The world is ready for change! An international survey of 29000
people, conducted by the BBC, found that two out of three wanted a
transformation of our economic systems. People are dissatisfied with
the status quo. But, as yet, there is no popular movement to inspire
the masses to make society a better place for the majority of people.
Barack Obama had the word - Change - but, so far, no sign of any
substance.
But, the climate change issue shows how much the world has already
changed. Global issues affect us all. There seems little point in
Australia acting alone. Wilkinson and Pickett, in The Spirit Level,
say, "We depend on world cooperation like never before. Policies
to reduce carbon emissions depend on a sense of social responsibility,
of cooperation and public-spiritedness." And the whole theme of
their book is that, to achieve those things, we need more equal
societies throughout the world. Their evidence shows that more equal
societies do better on public spiritedness.
So that brings us back to our National Anthem. How fair is Australia?
Australia could be fairer, as we have seen, if we shifted from
rent-seeking towards a more inclusive Australian society, where
everyone shares in the Common wealth of the nation. Two practical
steps could become giant leaps forward:
- eradicate the unearned increment; and,
- capture the community-generated value of land for the whole
community.
These are political matters. They are morally just; they are
economically sound. That is not in question. The only reason they are
not already in place is because our politicians do not have the
courage to challenge the rent-seekers. Yet, the people are screaming
out for a values-based approach to policy; the prize is there to be
had. Surely a tax package that reduces the burden on labour, on
capital, on sales and on entrepreneurship, and which continues to
provide all existing government services, could be 'sold' to the
electorate. The time is right. In the words of modern Goliath, 'Just
do it'.
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