Breaking in on Rent-Seekers
Bryan Kavanagh
[Reprinted from The Age, 11 March, 2009]
Put to the vote: as many are of
the opinion that a public tax upon the land ought to be raised to
defray the public charge, say yea
Carried in the affirmative, none dissenting.
- Philadelphias first tax law, 30 January 1693
The above wisdom is timeless, but todays very sophisticated
rent-seeker knows better. Before the property market peaked, he
demanded that council rates and land taxes be wound back because
prices had been escalating and hed been slugged
badly. But as the real estate bubble bursts, he now says that
property-based revenues need to be wound back, because people holding
real estate have been hurt enough already, and the last
thing they need is property taxes causing any more damage.
Property tax relief is necessary both on the upside and the downside,
it seems.
The truth is that the public capture of publicly-generated land rent
never does harm to society. To the contrary; it may be dawning on
policymakers and analysts that the real estate bubble was the
inevitable result of inadequate land value capture. They may even
consider extending and fortifying council rates and State land taxes
in order to prevent damaging real estate bubbles from developing again
in the future.
Unlike the late 17th century Philadelphians, much of local government
doesnt appreciate the ingenuity of the reasoning behind the
rating system by which it is mainly funded. Therefore, it often wont
defend it against those hostile ratepayers who attack it because they
can. (Ratepayers are rarely to be seen knocking on the door of the
federal treasurer, protesting against their income taxes!) Meanwhile,
State governments reduce State land taxes, acceding to powerful landed
interests whose property values must apparently be allowed to achieve
nosebleed heights unfettered by land-based revenues.
The big end of town has been equally adept at capturing the surplus
rent created by public infrastructure, even combining with government
in unholy alliances against the interests of the public by privatising
Australias highways, airports and public utilities. Governments
of all persuasions have allowed cobwebs to settle on the old idea of
capturing part of the uplift in land values that public infrastructure
projects endow. But times may be changing: recent losses by new
tollways in New South Wales and Victoria attest to peoples
growing concern about losing the longstanding principle of the freedom
of the highways and byways.
Favoured by a tax system doling bountiful handouts to rent-seekers,
real estate became the name of the game throughout the first decade of
the new millennium. The bubble developed remorselessly over eight
years from 1999 as Australians became distracted from the main game by
the false signals given by a terminally ill, perverse tax regime. As
we caught the contagion, the obscene levels of interest paid under
mortgages to banks largely signified the land rent lost to the public
purse after it had become privately capitalised into sharply increased
land prices. But subsequent inquiries into housing affordability
always managed to turn a blind eye to the option of increasing the
level of land value capture in order to contain the rate of land price
escalation. An ill-informed property lobby still appears to contain
public opinion.
So, Australian Bureau of Statistics Catalogue No. 5506.0 now tells us
that we collected less than $40 billion from taxes on property
in 2007. Although publicly-generated land rent was $325 billion, we
chose to fine labour and capital to the extent of some $285 billion
for daring to work, allowing eighty-six percent of Australias
land rent to be privately capitalised into the bubble - and
thereby establishing the conditions necessary for an extraordinary
financial collapse.
Presumably also on the advice of the same gormless economic high
priests who have been advising them, governments now wantonly throw
huge sums of public funds into the economic vortex in the forlorn hope
of being able to rekindle a fast-foundering economy. The
long-established wisdom that public capture of publicly-generated land
rent represents the best interests of the public remains out of
fashion. It should soon become clear to the dullest of economists,
though, that taxation policy failure has been the catalyst for this
financial implosion, and that the road to recovery doesnt lie in
ritually sacrificing further government funds into an abyss. The
question instead becomes whether Australians can be re-educated in
time to reverse a potentially horrific social meltdown by reasserting
an old economic verity.
Ken Henrys review of the tax system is timely and urgent. We
need not only rid ourselves of those taxes penalising thrift, industry
and exchange, but to re-establish the principle of public capture of
our land values if we are to turn our parlous situation around
quickly. Land rent represents community, insofar as it is generated by
the community and its assets, not by any individuals. Time will
undoubtedly prove, for better or worse, that at this time in our
history Australia urgently needed to re-discover age-old community
values.
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