Fascinating article.

thanks
Rosie

If the supply of land remains fixed, the land tax will just be passed on to the users of the land (with some substitution away from land intensive uses because prices will rise).

The way to break the problem is to liberalize land use regulation as proposed by demographia.com Remove artificial scarcity imposed by government (and those rent-seekers manipulating government rules for their own gain). Of course, the only savings for most Australians are their houses so the political backlash would be tough to deal with. But every day the distortion goes on, the more capital is misallocated to unproductive uses. The problem will need to addressed one way or another.

Mr. Cavangh,
I regrert being one who got his Economy wrong.
Thirty years ago I saved for my old-age.
To-day I bought a lemon for half a dollar.
That half dollar, when I saved it, would have bought ten lemons.
Who robbed nine lemons from me?

The hundred Economists who have before you contributed to this publication on the same matter never told me the tief's name.

There is though one fact I know.
They are not building any house or flat. They are in an air conditioned office writing something important about housing for a fat salary

Thanks for this article, Bryan Kavanagh.

I was surprised that an article written by someone from inside real estate could write an article which seems to me to be against the whole justification for that sector of the economy.

One thing about taxing land.

It seems to me that land taxes in Queensland are unfair to a certain kind of land owner, that kind being one who owns a large amount but is not seeking to use that land to gouge profits from rent, land speculation or property development. One such land owner is in my family. Most of his land has been left largely untouched, whilst all around others have raked in huge profits by bulldozing natural habitat to build free standing houses, or where houses exist, knocking them down and the surrounding trees to build blocks of units.

As a result land values have skyrocketed and has to pay taxes according to those values.

None of the invaluable ecological services provided by his land are paid for by those around and there is no commensurate discount from his land taxes or council rates.

As a consequence of one huge land tax bill he is left with no choice but to sell a large block of land on which one of the few decent contiguous of urban rainforest is to be found in Brisbane.

Almost certainly that will be massively degraded by the new owner as a consequence even if council rules are properly adhered to and the overall microclimate and ecology of Brisbane will be further degraded.

Ultimately my family member would agree that it is not particularly fair that he owns so much land whilst many others don't own any. If the system was set up to rectify that, instead of just ultimately enriching speculators at his and everyone else's expense, he would not object.

I fear that your proposal to increase land taxes, unless it takes account of people in his circumstances, will only make matters worse.

Disclosure:

Bryan Kavanagh is my colleague in the Land Values Research Group.

Re "Our Legislators are all Landholders; and they are not yet persuaded that all Taxes are finally paid by the Land...":

I happen to know that Bryan has previously attributed this quote -- correctly -- to Ben Franklin (http://blog.lvrg.org.au/2007/09/220-years-later-we-still-avoid-issue.html). Why did Franklin get confused with John Locke? Maybe because Locke wrote something similar, namely: "It is in vain in a country whose great fund is land to hope to lay the publick charge of the Government on anything else; there at last it will terminate. The merchant (do what you can) will not bear it, the labourer cannot, and therefore the landholder must: and whether he were best to do it by laying it directly where it will at last settle, or by letting it come to him by the sinking of his rents, ... let him consider." So I thought I should set the record straight.

Stev:

Go back to your textbooks: a tax on a commodity in inelastic supply is borne by the supplier. So land tax can't be passed on in rents. So landlords don't like it. So they campaign against it by pretending that it *can* be passed on in rents! But, as Franklin and Locke imply, whatever taxes are imposed in lieu of land tax end up hitting landlords by reducing market rents.

Removing zoning restrictions won't stop developers from hoarding land while waiting for prices to rise. But higher land tax would stop them -- by turning land into a hot potato. Land tax deters speculative hoarding and thereby makes land more affordable for the rest of us.

I think there are some serious problems with the statistics presented in this article.

So I am a parasite for having a couple of investment properties which I rent out for the equivalent of 80% the competetive holding costs

Please tell me, who is the bigger parasite

me for subsidizing my rental tenants

or the tenants?

Oooh look prices to GDP peak in 1932….

that would be due to the collapse of GDP, following the “Great Depression” more than escalating land prices.

a trough in 1910s and 1940s… well, fighting “world war” tends to detract folk from buying housing.

I remember post 1989, people fled from housing investment in droves, needing to pay living expenses in the “Recession we had to have”.

Since then prices seem to have escalated.

I say "seem to"

simply scratch beneath the surface

Prevailing Interests rates between 1996 and 2007 falling, falling, falling

Making investment viability competitively more attractive and thus prices climb.

and Bryan, falsely claims more difficult housing affordability, as supposedly reflected by increased prices to earnings and to GDP.

Listen Bryan, any ‘affordability’ calculation, which ignores the price of money (the interest paid for mortgage debt), in a debt financed housing market, is deliberately perpetrating a fraud on the public who might rely upon it as truth.

If you want to see a flat line for housing prices and constant “affordability”, it is simple.

Constant borrowing rates, constant GDP performance and stable housing production.

However, if you happen to live in the real world, you will find all those factors fluctuate and when they fluctuate, so to does both the “price” and “affordability” of housing.

The real skill is to anticipate when the fluctuations will occur.

Then, some see such “speculation” as immoral.

I, on the other hand, see speculation as a stabilising influence in any unstable market place…

because those who act “counter-cyclical” to the market, reduce the extent to which the “sheep” get fleeced.

There is not much more I can say about this bit of “intellectual fairy-floss”,

other than, Bryan you need to improve your comprehension of basic economics before you next attempt.

I await your next "effort"

Dear Col,

You ask:

> So I am a parasite for having a couple of investment
> properties which I rent out for the equivalent of
> 80% the competetive holding costs
>
> Please tell me, who is the bigger parasite
>
> me for subsidizing my rental tenants
>
> or the tenants?

Well, by your own admission, you pay 20% of the holding cost and get 100% of the pre-tax capital gains, while your tenants pay 80% of the holding cost and get 0% of the pre-tax capital gains. And somehow you're subsidizing them!

What? Your capital gain could be a loss? OK -- so would it be fair if your tenants got 80% of any gain and bore 80% of any loss, while you got 20% of any gain and bore 20% of any loss? No? Why not? Because interest rates might vary? OK -- suppose you could fix your interest rate by paying more, so that you bear 30% of the holding cost. Should your tenants then get 70% of any capital gain and bear 70% of any loss?

> I, on the other hand, see speculation as a stabilising
> influence in any unstable market place…
>
> because those who act “counter-cyclical” to the market,
> reduce the extent to which the “sheep” get fleeced.

This is true of the market for a commodity that is continually produced and consumed - like wheat. The speculators provide an inventory service, buying the stuff when it's cheap (raising the price) and selling it when it's expensive (lowering the price).

But when you have a fixed stock of something that can't be produced - like land - the only possible effect of speculators is to raise prices by adding to demand while supply remains fixed.

That said, property investors CAN add to the supply of HOUSES (not to be confused with land) and should be encouraged to do so. But the present tax system is much kinder to property investors in their capacity as owners of land than in their capacity as providers of houses.

And if the prices drop who is going to subsidize Col for his loss? At least he's taking the risk by buying in the first place. And how can you meaningfully talk of pre-tax capital gains ... its going to get taxed! Which obviously affects what he gets. How exactly is somebody who is paying for the property or properties getting a free ride?

This article has some serious flaws. Does anybody really believe that private rental income makes up 28% of our GDP?? Did anybody notice how the publication date of Terry Dwyer's article is 2003 but the diagram suggests the figures go to 2007? Then of course I noticed the words "Based on" .... hmm. I think Dwyer's work has been used slightly out of context.

The only problem with my figures, David Jennings, is your misunderstanding of them. The figure for 'rent' in my break-up of GDP chart since 1911 is NOT private rentals, it is the total annual rental value of all of Australia's land, residential, commercial, industrial and rural (freehold and leasehold). And this figure is NOT 28% of the economy, but 32.5%; 4% of GDP representing that part of rent that is captured to the public. If we took much more and abolished income taxes, we wouldn't have recurrently bursting real estate bubbles followed by recession (or, in this case, economic depression.)

If Ken Henry's review is intellectually rigorous, it should come to the same conclusion.

And Col Rouge deserves to be compensated when his property values fall? Oh? I thought banks were the only parasites that expect to be compensated by taxpayers when they undertake bad commercial decisions?

I apologise for attributing a statement of Benjamin Franklin's to John Locke.

"Removing zoning restrictions won't stop developers from hoarding land while waiting for prices to rise."

This statement is false as it completely misses the effect of development restrictions. The main effect of having severe development controls and an obscure development process is to restrict landowners from subdividing. Such a process can quickly increase supply independently of developers hoarding land. One local government got very worried about the potential of subdivisions to make things a bit tougher for the developers a few years back, so they introduced a range of new restrictions. The claim was that the restrictions were to preserve the character of the area, but the effect was to greatly restrict new supply from small subdivisions. And the claim of preserving the character of the area now seems ludicrous, with a large number of large and revolting developments since approved.

Give landowners back their rights and the housing crisis will fix itself.

To David Jennings. Why do you dispute the figures? If you want to be taken seriously, you have to do more than blow raspberries at those prepared to put the work in, and then share their results. Where is your work, and results?

Dear Fester,

I think we're at cross purposes: greenfields vs. brownfields.

As Stev cited the pro-sprawl Demographia website, I thought he was complaining about restrictions on greenfield developments beyond the urban fringe. Such developments are in the hands of an oligopoly, leading to credible reports of hoarding and "drip-feeding" to keep prices high.

In contrast, your references to preserving the "character of the area" and restricting supply from "small subdivisions" make me think you are referring to council-supported NIMBY campaigns against infill development.

If you are suggesting that infill developers are more anxious to get on with the job than greenfield developers, I agree.

You wrote: "Give landowners back their rights and the housing crisis will fix itself."

So how do you give them the right to build? For one thing, you need to get council rates on site values alone, so that building is not penalized. For another, you need to reform stamp duty so that it doesn't impeded the transactions associated with building. For another, you need a politically and economically viable method of financing the infrastructure improvements needed by new developments, so that strain on the existing infrastructure will not be cited against them. My latest submission on that can of worms is at http://www.parliament.vic.gov.au/osisdc/inquiries/UrbanGrowthBoundary/Submissions/OSISDC_UGB_sub70_Prosper_Aust_12.10.09.pdf (8 pages). It floats the idea that restrictions on outward growth might become redundant if infill growth were sufficiently encouraged.

Gee, just a bit sensitive about your numbers there aren't you!

"Coincidentally, land rent has also grown to 32.5 per cent of GDP." Is there anybody else saying this? You don't actually tell in the article how you got this figure and whether you can back it up. Maybe instead of insulting the person who queried your figures you could explain yourself

"The figure for 'rent' in my break-up of GDP chart since 1911 is NOT private rentals, it is the total annual rental value of all of Australia's land, residential, commercial, industrial and rural (freehold and leasehold)."

Those rents are all private sector rentals.

I derived the figures in the same manner that Dr Terry Dwyer got his figures, Lucy. It's explained in detail in "The Taxable Capacity of Australian Land and Resources" if you'd like to do a search. I touched upon the method in the report on land price bubbles, "Unlocking the Riches of Oz". I didn't want to get into technical in an opinion piece.

BTW, you say they are all private rents. They are actually total public and private land rent. Sure, most land rent is captured privately, but they weren't privately-created. The point of my commentary was that they are publicly-created and if we captured more of them we could slash taxes, get the economy moving, and keep the lid on the rate of land price escalation. You're against this?

Ah grputland… I knew you couldn’t resist….

hook, line and sinker

I will actually only benefit from the post-tax capital gain

So, why do you assume I benefit from the pre-tax capital gain?

Do you feel the state shares “responsibility” for their parasitic “leeching” off of the capital gain, in which I take all the “risk” and they take none?

Now to capital gain

No gain in guaranteed and we all know market realizable values go up and down.

I take and bear that risk, as mentioned by David Jennings

My tenants take no risk.

They RENT the right to utilize a house commodity, for a known and agreed cost, fixed per the lease and suffer no front end investment exposure.

When we consider the rental return on property yields average 5% pa, that 5% as a weekly rent, represents 1/1000 the purchase cost.

I would suggest that is a reasonable deal.

Because, if it was not a “reasonable deal”, I would not have a queue of alternative tenants wanting to offer me a better deal.

“This is true of the market for a commodity that is continually produced and consumed”

Rental housing is a commodity,

which is continually produced and

continually consumed, by the week.

Every week people consume “housing rentals”, there is also movement in who rents, some new renters, some old renters moving out and into their own property or others dying just like any other "Market", with lots of "buyers and sellers"

There is no difference between housing and wheat or currency exchange or pork-bellies.

“fixed stock of something that can't be produced”

That, in the context of housing, is such an absolute misrepresentation of fact, to the point

It is a LIE.

House stocks are not fixed, there exists a whole industry busy building, renovating and redeveloping houses and land blocks.

Bryan Kavanagh I demand you identify where I suggested I receive “compensation” !

You make no comment to my alternative reasons for your price spikes

I suppose responding to REALITY is tougher than writing fairy-floss?

You “demand” ‘Col Rouge’, eh? Oh, well, I’d better answer then! Just follow the argument, Col. David Jennings asked “And if the prices drop who is going to subsidise Col for his loss?” OK, so you don’t want to be compensated. Excellent! That puts you one up on the banks. (See, Col’s happy, David – he doesn’t want to be subsidized when his land values fall!)

But, you think the cost of money has a lot to do with the spiking of real estate bubbles, do you, Col? Maybe a few individuals make their decisions on that basis, but how cheap were REAL interest rates when inflation’s recently been low. [I think they call that ‘sucker bait’.] And how do you account for the spiking of real estate bubbles both when money’s been cheap and when it’s been dear (as in early ’70s and ’80s?). A decent knowledge of real estate bubbles shows that the cost of money matters little at the macro level; it’s the advantages perverse tax systems give to real estate investment over production in the long haul that will override the cost of money.

As far as world wars affecting my chart of Australia’s land values divided by GDP, Col - of course! Thorstein Veblen-John R Commons' ‘Institutional School’ of economic thought holds, correctly IMO, that world wars are a consequence of a preceding period of speculative economic behavior. It certainly doesn’t arise in a vacuum. At http://thedepression.org.au/?p=1616 I’ve blogged that I foresee WWIII when we’ve again failed to utilise the revenue system to resolve economic depression. War as an ‘alternative’ has long been seen as the ‘only way out’ for the aristocracy and property speculators.
But that’s so much more “fairy floss”, again, isn’t it, Col?

Dear grputland,

Thanks for the reply and clarification. I'd have replied sooner but I have been ripping up old carpet and polishing a floor.

Infill development competes with new development, and probably carries substantial inherent benefits for infrastructure and the environment. I agree with you that it is development well worth encouraging.

"you need a politically and economically viable method of financing the infrastructure improvements needed by new developments, so that strain on the existing infrastructure will not be cited against them."

That raises questions like "What is the infrastructure cost for each additional citizen?". I suspect that the cost is very substantial, and is reflected in the large debt being incurred by government in trying to cope with the current rate of population growth.

I will read your submission later, but on perusal I note agreement on the benefits of higher density. A point of difference is that I dont believe extra taxation is necessary. I hold the opinion that local government should encourage infill development far more than they are at present. Such a measure would remove the incentive for greenfield land hoarding. Reducing immigration would have a similar effect, as well as greatly reducing the infrastructure burden.

The problem is that your whole article hinges on the technical details. Its up to you to show us where you got the data from and how you put it together. Its not up to us to do that for you. After all, you are trying to persuade us with your opinion piece. In short, you wrote it --- you substantiate it.

I think David Jenning's point about compensation was meant sarcastically.

"BTW, you say they are all private rents. They are actually total public and private land rent."

Well if they are public rents then what is your point? Because that money is coming straight back to the public purse.

What do you mean that land rent isn't privately created? Somebody had to buy the land and build the house. THats all done privately.

As for the cost of money. Well people were kicking up a stink in 1989 when the interest rates were 17%. How many households really read the Tax Act before buying a house? I think they go to the bank first.

"As far as world wars affecting my chart of Australia’s land values divided by GDP, Col - of course! Thorstein Veblen-John R Commons' ‘Institutional School’ of economic thought holds, correctly IMO, that world wars are a consequence of a preceding period of speculative economic behavior. It certainly doesn’t arise in a vacuum. At http://thedepression.org.au/?p=1616 I’ve blogged that I foresee WWIII when we’ve again failed to utilise the revenue system to resolve economic depression. War as an ‘alternative’ has long been seen as the ‘only way out’ for the aristocracy and property speculators. But that’s so much more “fairy floss”, again, isn’t it, Col?"

OMG you are citing your own blog post as authority? Thorsten Veblen -- he died in 1929 so his "theory" wasn't really applied to WWII. Where is this theory of wars as a consequence of speculative behaviour written anyway? Are you suggesting that Australia's property market will lead Kevin Rudd to start WWIII? How are we in a depression?

This article has some serious flaws and the author's hyper-critical response to any criticism highlights that.

He cites, "The Taxable Capacity of Australian Land and Resources" as a paper that substantiates his figures. But thats Terry Dwyer's work not Bryan Kavanagh's. And at any rate I've read Dwyer's article and he talks in detail about the difficulties in measuring the data. He certainly doesn't present anything as simply as what Kavanagh is saying. Moreover, a lot of the land held by corporate interests would be unsuitable for residential purposes thereby not supporting the author's housing affordability argument. There are no statistics presented in Dwyer's article that directly correlate to what Bryan Kavanagh is saying.

Also he wrote in his article: "As we capture only 4 per cent of GDP through rates, land taxes and other taxes on immovable property, this means that privatised land rent now represents an enormous 28.5 per cent of our GDP!"

So I did quote him more less correctly.

He also wrote:
"Maybe, as our real estate spruikers tell us, we have established a new, permanent plateau from which we will continue to launch ourselves ever upwards, but the collapse in real estate around the world can hardly make us sanguine of this possibility?"

Some vulnerable real estate markets collapsed but not all around the world. A lot of markets in a lot of cities remain stable. Try buying something in New York or London.

Dear Col,

You wrote:

> hook, line and sinker
> ...
> So, why do you assume I benefit from the pre-tax capital gain?

The words "pre-tax" were meant to specify the point of comparison rather than the final outcome. But never mind; have it your way -- what I should have written was:

"Well, by your own admission, you pay 20% of the holding cost and get 100% of the POST-tax capital gains, while your tenants pay 80% of the holding cost and get 0% of the POST-tax capital gains. And somehow you're subsidizing them!"

Now how does that get you off the hook? -- and me, apparently, on it?

> Do you feel the state shares “responsibility” for their
> parasitic “leeching” off of the capital gain,

Capital gains are created by the community through its growth. Retaining for the community part of what is created by the community is not parasitism. Private appropriation of it *is* parasitism. Similarly, public appropriation of privately created benefits through income tax, payroll tax, stamp duty and GST is parasitism. Why don't you complain about that instead?

> in which I take all the “risk” and they take none?

Wrong. When the property market tanks, the States lose stamp-duty revenue and the Feds lose CGT revenue (to say nothing of the flow-on effects). It would be better for all parties if the growth in property values were more steady and predictable.

> “fixed stock of something that can't be produced”
>
> That, in the context of housing,

I was referring to LAND, not houses. The intermediate term "housing" seems designed to obscure the difference.

> is such an absolute
> misrepresentation of fact, to the point
>
> It is a LIE.

Told by whom? Who said the stock of houses, or even housING, was fixed?

> House stocks are not fixed, there exists a whole
> industry busy building...

I not only acknowledged that, but even said it should be encouraged.

So what's your beef, Col?

Fester wrote: "I dont believe extra taxation is necessary."

Neither do I. What I advocate is redesigning the revenue BASE so that future investments in infrastructure pay for themselves by expanding the BASE without further changes in rates or thresholds. The initial redesign can be revenue-neutral -- or, in view of the long-term benefits, perhaps even revenue-negative. Considering the effect of infrastructure on property values, property investors should enthusiastically support this arrangement.

Lucy and David:

If you have trouble believing the magnitudes involved, consider that Australia's land, according to the ABS, is worth a bit over $3 trillion. Assuming (conservatively) that the total return is 8% per annum (comprising 3% rent and 5% real capital gains), that's an economic rent of at least $240 billion per annum, which in turn is a bit less than 24% of GDP. And that doesn't consider the other sources of economic rent, including natural resources, natural monopolies, statutory monopolies, and other government-created licences and privileges.

At present, that economic rent is mostly privatized. The idea is to capture more economic rent for public revenue, so that less revenue needs to be raised from taxes that punish productive activity.

Out of curiosity grputland is the Land Values Research Group affiliated to any other organisation?
Does that organisation have any particular ideological slant or mission statement?
Was Dwyer's paper independently written?

I think you may be stretching economic theory a little, grputland, in order to defend your position. And in doing so, you are in danger of tripping over your own feet.

You are just a little rude to Stev, I think.

>>Stev: Go back to your textbooks: a tax on a commodity in inelastic supply is borne by the supplier. So land tax can't be passed on in rents.<<

You are right about the "textbook", of course, but - as even my ancient copy points out - the concept of inelastic supply is merely theoretical, relying completely on the concept of a "supplier". In the case of land, any theoretical basis for applying "inelastic supply" arguments will founder on the dynamism of the demand curve.

Which, in a confused and roundabout manner, you yourself recognize:

>>But when you have a fixed stock of something that can't be produced - like land - the only possible effect of speculators is to raise prices by adding to demand while supply remains fixed.<<

You should have acknowledged at the same time the impact on the demand curve of interest rates, as Col points out, as well as the changes over time in family income patterns (far more double-income families) as well as in the mix of destinations for discretionary consumer spending.

But this is where you start making real difficulties for yourself:

>>Capital gains are created by the community through its growth<<

The community creates capital gains? Since when?

Think of countries where it is illegal to own land, i.e. illegal to invest capital in the asset "land".

Q: Under what circumstances do capital gains occur in such an environment?

A: They don't. As a result, you are entirely reliant upon the benevolence of your political system to provide the roof over your head.

Capital is required, before capital gains can occur. Those capital gains are uniquely the result of the application of capital.

Prove it for yourself. Take away capital, no capital gains. Take away capital gains, no capital. "Community" creates nothing, without the presence of both capital, and capital gains.

QED

Dr Terry Dwyer's paper was commissioned by the Land Values Research Group because of his status as a former tax policy expert within Treasury and for his renowned academic ability. Any innuendo that the paper was rigged would be to overlook that it was published in a refereed academic journal, Australian Tax Forum (Vol 18, No. 1, 2003).

Where and how did I derive my figures since Dwyer's data ends in 1999 also asks David Jennings. That was just before the current ten year land price bubble, BTW. I've already mentioned I used the same techniques explained in Terry Dwyer's paper, so I'll assume that anybody genuinely interested in the data has at least examined Appendix 1 of his report.

ABS Catalogue 5204 (Table 61) lists Australia's total site values as follows: 2000 $1,258,000 million, 2001 $1,331,400 million, 2002 $1,646,700 million, 2003 $1,931,100 million, 2004 $2,311,100 million, 2005 $2,439,300 million, 2006 $2,702,700 million, 2007 $3,015,900 million, 2008 $3,147,800.

I calculated a Current Yield at 5% of site value for each year (as did Dwyer) to add to the calculated Accrual Yield. If Dwyer was to be as conservative as he had been, he would probably calculate an accrual yield rate for this period using site values from 2001 to 2008, not those from 2000 to 2007. Then, allowing for inflation, he would subtract something like 2.5% from that rate before applying it to the ABS site values to obtain the smoothed Accrual Yield of 10.2%

This would have given him something like a Total Smoothed Land Income for each year (from 2000 to 2008) as follows: $159,776 million, $169,098 million, $209,144 million, $245,265 million, $293,528 million, $309,811 million, $343,264 million, $383,043 million, $399,796 million.

But, then, who am I to put words into Terry Dwyer's mouth? So, my land rent figures were conservatively rounded, respectively, to $145,000 million, $170,000 million, $195,000 million, $220,000 million, $260,000 million, $280,000 million, $310,000 million, $330,000 million and $350,000. I had no difficulty being slightly conservative lest my data be challenged.

Dwyer states: “Smoothed land income consists of an assumed annual current yield of 5% on land values plus an annual increment (called the “accrual yield”) based on long run compound growth rates for land values.”

So this not a reference to actual income earned – which would be taxable – but an assumed yield plus a further increment. Dwyer’s smoothed land income also contains the type of things which people would earn from the land such as agricultural income.

It’s funny how in smoothed land income then morphs into land rent figures. Even funnier when you realise that these are not actual incomes earned, but just assumptions based on land values. So the whole crux of your argument – more or less that the evil owners are earning huge rents whilst not paying tax – is really baseless piffle

David Jennings:

Not surprisingly, the Land Values Research Group believes that public revenue should be raised from economic rent, not from taxes on productive activities -- partly because untaxing production would lead to more production, and partly because any practical method of collecting economic rent would act as an auto-stabilizer on land prices, avoiding bubbles, bursts and GFCs. If that's an ideology, so be it.

> Dwyer's smoothed land income also contains the type of
> things which people would earn from the land such as
> agricultural income.

Only to the extent that such earnings are capitalized in land prices -- i.e. to the extent that they are returns to the land, and not to labour or produced capital.

To Stev (in response to Pericles):

Er... yes, I was a bit abrupt -- sorry.

Pericles:

You wrote:

> the concept of inelastic supply is merely theoretical,
> relying completely on the concept of a "supplier".

In the case of land, one must distinguish between the original supplier (Nature/God/Providence/whatever) and the middlemen (landlords, sellers). The latter can withhold land from the market and thereby vary the supply offered BY THEM, whereas the supply offered by the original supplier is fixed. Hence opponents of "land tax" love to substitute the middlemen for the original supplier, in order to pretend that "land tax" can be passed on in rents. But the argument is fallacious because the "tax" is payable whether the land is offered to the market or not; that is, it is levied on the land as supplied by the original supplier, not as supplied by the middlemen.

To the extent that your argument depends on a denial of "inelastic supply", it is likewise fallacious.

[To be continued.]

Pericles [continued]:

> The community creates capital gains? Since when?

Since the first time someone dug a well, causing an increase in the desirability of a nearby location claimed by someone else (at the beginning of the neolithic age, I suppose). Even if the claimant helped to dig the well, he did so as a labourer, not as a land claimant.

> Think of countries where it is illegal to own land,
> i.e. illegal to invest capital in the asset "land".

I didn't know I was writing about such countries, but anyway...

> Q: Under what circumstances do capital gains occur in such
> an environment?
>
> A: They don't.

Not in the (unlikely) event that the government collects the market rent. But whatever part of the rental value is uncollected is capitalized as a price; and if the price isn't allowed to show up in a sale, it will show up somewhere else -- presumably as bribery or extortion.

> As a result, you are entirely reliant upon the benevolence
> of your political system to provide the roof over your
> head.

Non sequitur. You don't put up a roof to get a capital gain. You do it to make the land habitable so that you can use it or get rent for it.

And if that awful Land Values Research Group had its way, you wouldn't have to pay income tax on the rent!

> Capital is required, before capital gains can occur.

Wrong, because so-called capital gains are made on land and other non-producible assets. True (produced) capital cannot gain in value except in the short term; in the longer term, any gain in value induces production of competing capital, which reduces values again.

> Those capital gains are uniquely the result of the
> application of capital.

Not uniquely. Applying fixed capital (e.g. infrastructure) can indeed increase the value of nearby land. But so can other things (e.g. population growth, closure of a noisy venue).

If we were to collect the greater part of the imputed land rent that you refer to as 'baseless piffle', David, we wouldn't be having this GFC. Tax people for working, you'll have less work; tax people for speculating in baseless piffle you'll have no real estate bubbles that have a habit of bursting into recessions.

That's a new angle, grputland.

>>In the case of land, one must distinguish between the original supplier (Nature/God/Providence/whatever) and the middlemen (landlords, sellers). The..."tax" is payable whether the land is offered to the market or not; that is, it is levied on the land as supplied by the original supplier, not as supplied by the middlemen.<<

You propose to tax God?

I wish you luck in tracking down his postal address.

What you managed to do, of course, is to single-handedly demolish your own argument on inelasticity of supply.

>>The [landlords, sellers] can withhold land from the market and thereby vary the supply offered BY THEM<<

Using your logic, you can apply the same construction to saucepans. The supply of alumina is finite, the original supplier is God. Despite the antics of the middle-men (saucepan manufacturers) the supply of alumina is rigidly inelastic, therefore any tax on aluminium products (e.g. GST) cannot be passed on to the consumer.

Hardly.

You use similar logic on the community creation of capital gains.

>>the first time someone dug a well, causing an increase in the desirability of a nearby location claimed by someone else<<

But the water that the well was accessing was provided by...

Yup. That man again.

Pericles:

> That's a new angle, grputland.

I suppose it would be for those who buy the property lobby's arguments.

> You propose to tax God? I wish you
> luck in tracking down his postal address.

I propose to "tax" the middlemen on the supply defined by "God". The middlemen pay because (as you imply) God won't.

That's looking at the God/owner step in the supply chain. If, instead, we look at the owner/renter step, the owners become the suppliers. But this is not the role in which the owners are "taxed", because the "tax" isn't on the supply as defined BY THEM.

Either way, the conclusion is the same: the renters don't pay.

> What you managed to do, of course, is to
> single-handedly demolish your own argument
> on inelasticity of supply.

No, I neutralized what I understood to be *your* argument. You quote me:

> > The [landlords, sellers] can withhold land
> > from the market and thereby vary the supply
> > offered BY THEM
>
> Using your logic,...

No, you're the one who's trying to undermine inelasticity of supply -- remember?

But anyway...

> you can apply the same construction to saucepans.
> The supply of alumina is finite,

That's NOT the same logic, because in that context the "supply of alumina", like the buying and selling of saucepans, is a FLOW, not a stock. And the FLOW is variable even if the stock isn't.

The supply of land for SALE, as opposed to mere ownership, is likewise variable. Hence a tax on the SALE of land can be passed on, at least in part, to the buyer, although a tax on the OWNERSHIP cannot. Nowhere do I deny that.

But if you insist on confusing the God/owner step with the owner/renter step, and stocks with flows, you can reach any conclusion you like.

But this imputed land rent is a false figure. It does not exist. It assumes a 5% return on land based on land values. But there is no proof that all land owners are earning anything like this amount.

Notwithstanding the effect it would have on land prices, its a bad idea.

For example, if I own land worth $1 million then 5% of that would be worth $50,000. Now if I live on that land then I'm not earning anything from it - there is no rent.

Even if I rented it out and earned $50,000 rent from it I would already be paying tax on it because it forms part of my overall income.

If I earned a salary of $150,000 pa and paid 30% tax overall - that would be $45,000 then this figure is comparable to the taxable amount of "land income." But if you taxed me at 100% of land income I would be worse off - so good luck getting me to vote for that.

If you taxed me at a lower rate, and abolished income tax (yay!), then ok I would be better off. Or would I?

Well then lets say you taxed me at 75% of land income or $37,500 then I'm paying less tax, as is everybody else. But then the Government collects less tax - so less money for health (hello ageing population), less money for education (hello illiterate white kids), less money for roads, defence, police, etc. So overall I'm actually kind of poorer and really all that you've done is change the label on income tax.

No, no, David, 'taint simply a name change. Why not? Well, my colleague Gavin Putland gives pretty well the full story at http://blog.lvrg.org.au/2010/01/problem-price-of-land-is-infinite.html (esp. good figures at 5.6).

But is David correct in saying that the 32% of GDP is not a real figure?

Since the land doesn’t generate the “rent” the tax bill will need to be paid from income. So really it is a disguised tax on income – the same wine in a different bottle.

But most crucially, the pivotal claim of a great untaxed land rent income claim doesn’t hold up because there is no evidence that the owner-occupiers are obtaining any direct financial benefit other than the warm glow of knowing that property prices are going up. It is a fair point that investing in infrastructure adds to the value of land. But .... so to do the owner-occupiers by doing any number of socially rewarding activities like holding down a job, being good citizens etc. You can’t tax everything.

If Australia did go ahead and adopt this wacky idea, what would happen? Well lots of home-owners are paying off mortgages. Say that for Homeowner A his house is worth $800,000 and the total loan amount payable over 20 years is $1.4 million. If the land tax got introduced what would happen? Well prices would fall because who would want to be stuck with a tax liability. It would now make so much more sense to rent. So lets say the house price drops by a figure between $100,000 to $300,000 or even just stagnates for a decade. The homeowner could sell his house but he’d make a loss plus he’d still have the loan to pay off because the loan is a legally binding contract. Homeowner A could hang on to his house. But he’s still making a loss, albeit a smaller one. A private tragedy for Home-owner A perhaps, but when that is magnified across the Australia economy its a catastrophe.

So in sum, the theory doesn’t work. The figures are not concrete, the estimate might be inflated to 28.5% or 32% of GDP but it is not really that much in reality. So there was a lot of smoke and mirrors and I wasted my time thinking about this. But still, I was right all along. Yay me!

No, Lucy, David is quite incorrect. The 32.5% of land rent/land income that flows into the GDP from land is as real as the oil and minerals that flow from particular situations.

That's why we pay increasingly ludicrous capital sums to obtain a site for ourselves. What we pay for a site represents the crystallisation (or capitalisation) of the land rent that has not been collected for public purposes.

If we capture more rent to the public purse, there's less rent to be capitalised into land price. If David still doesn't get it, let me ask him which of two otherwise identical blocks of land will he pay more for: the one with a total rates and land tax bill of $3000 in one municipality, or the other with total rates and land tax of $2000 in another nearby? It might sound sound hypothetical, but it is capable of a response.

I note David's ongoing concern that, say, if a new federal land tax were introduced, it might unduly penalise recent purchasers of land. That could be solved equitably. I wonder why the usual selective crocodile tears for 'the poor widow' hasn't been introduced yet. She's always a good one to trot out, too. [She doesn't loom large I note with taxes like the GST.

Dear David,

A few loose ends.

(1) What if the figures are wrong? What if the current return on the land value is not 5%, but 4%, or (let's be silly) 2%? It still represents so much publicly generated income flowing into private pockets. If the flow isn't stopped at the source, the government needs to obtain that much more revenue via taxes that divert PRIVATELY generated income into the public purse,* in which case both the initial privatization of socially created value, and the compensating socialization of privately created value, cause perverse incentives.

* This is true for ANY given total revenue requirement. For present purposes there's no need to debate what that requirement is. If you say governments should spend less, whatever they spend still has to come from somewhere.

(2) You are correct in saying that desirable activities of owner-occupants add value to land. But you miss the point that the effect is an EXTERNALITY. The uplift in value of one piece of land is almost entirely the work of the neighbours, not the work of the owner, and is therefore not deterred by clawing back some of the uplift from the owner. Contrast this with (say) wage income, which is the fruit of the work of the wage earner, so that a tax on the income DOES deter the work.

(3) Concerning land mortgaged to a bank: The paper at http://blog.lvrg.org.au/2010/01/problem-price-of-land-is-infinite.html deals with this by treating the mortgagor and mortgagee as joint owners, so that the borrower effectively claims the amount owing as a deduction against the "taxable" value. There are other possibilities, e.g.:

(a) Allow a deduction for the inflation-adjusted cost of acquisition, even if it exceeds the amount currently owed; or

(b) Allow a deduction for the value at the time of the reform, even if (as usual) it exceeds the cost of acquisition; that is, "tax" only future increases in value.

The British "People's Budget" of 1909 used method (b), and was blocked by the Lords. I'm not aware of anyone pushing method (a).

People, let's look at empirical case studies: Pittsburgh-(10-30% LVT), Hong Kong-(20%), Switzerland-(10%), Kiauchau(inChina-6% single tax-a-German-colony); Britain 1066-1500. Most of the above claims by anti-LVT-ers can be easily falsified by the empirical data (e.g. high interest rates in the 1980s and we still got a commercial-property-bubble, likewise with the Panic of 1857, 1837 being the obvious ones; money-supply-is endogenous-people). Anyways...

First, unlike the rest of the U.S. (or California with prop 13), Pittsburgh had land values rise of 5% and is a manufacturing power-house (growing roughly 10% despite the GFC). Why? I suppose because it promotes production, over speculation (i.e. a productive NON-FIRE economy; it is pro-capitalist, over pro-landlord: the 4500 vacant commercial properties after a land tax introduced fell to only 200, thus providing employment (http://www.buec.udel.edu/craige/nta_lvt.htm#_edn11). Thus, evading reckless speculation, which after the bubble burst, results in collateral constraints (credit contracts), foreclosures, unemployment etc. Pittsburgh introduced LVT 20 years ago, from a floundering manufacturing base to being-voted America’s entrepreneurial capital. Academic papers which trace this (and how LVT allowed the building of MORE HOMES and reduced urban sprawl AT THE SAME TIME) can be found here: Tideman, "A-Markov-Chain Monte-Carlo-Analysis-of-the-Effect-of-Two-Rate-Property-Taxes-on Construction", Journal of Urban Economics, 2000, vol. 47, issue 2, p. 216-247; Schwab, Robert. “The-Impact-of-Urban-Land-Taxes: The Pittsburgh Experience”, National Tax Journal L1(March 1997), 1-36.

Secondly, Hong Kong is another example where 35% of the funding is land revenue based- it has had a fairly rapid economic growth thanks to shifting the burden onto land: http://www.hkdf.org/pr.asp?func=show&pr=24

Thirdly, read this (on a single tax colony): http://query.nytimes.com/gst/abstract.html?res=9A06E6DD1530E233A25752C0A9639C946196D6CF
Curiously, when adopted in Frankfurt, it contradicts Mr. Jennings’ claim that LVT means schools, hospitals cannot be funded (Hello, David! Instead of paying my bloated mortgage or rent,GST, payroll, I could being save for old age!): “In 1895 the common value tax was introduced together with an increment tax The result was in 1901 that the town raised the sum of 621 000 marks from ground rent and 270 000 marks from transfer tax...this enabled Wilmersdorf to ADD TO SCHOOLS, PUBLIC PARKS AND SUCH OTHER IMPROVEMENTS...” Land tax was a resounding success..then came WW1...

Fourthly, Swiss cantons have had similar experiences as German colonies. Makes sense: *if your only source of revenue is land, it makes sense to invest in schools, hospitals etc in appropriate locations (as they lift up land values)*. Socialisation of investment, as Keynes put it, but minus the unearned increment (i.e. a quid pro quo- Without workers, there would be no labour. Without savers, there would be no capital. So you can justify both wages and capital. But why do landowners deserve rent? Without landowners, the land and natural resources would still be available. They have existed since the planet was formed. They have not been created by human effort or ingenuity. Even land drainage or reclamation requires labour and capital applied to natural resources).

Finally, it should not be forgotten highways, turnpikes, roads etc., where all built in the U.K. when the King, in the 13-14th century, compelled landlords to extract rents from the land in order to do so. It was the ‘Golden Age’ of British wages, rather than a modern age of debt peonage: http://books.google.com.au/books?id=EzpoEQW-rNkC&printsec=frontcover&dq=a+history+of+english+wages&source=bl&ots=f1fgEH8btf&sig=I0N9fXcQQq9HTrvh7Y_Dmx5Bl2g&hl=en&ei=7r1rS4n5OsmekQXw7viFBA&sa=X&oi=book_result&ct=result&resnum=1&ved=0CAcQ6AEwAA And on the topic of investment, curiously, Mr. Jennings’ forgets to mention that abolishing GST, income, payroll, and capital gain taxes might allow for higher incomes and therefore the ability for parents to send their kids to private schools.

GOD SAVE THE QUEEN!

Cheers,
Steve

ps David, or any other anti-LVTers out there, I would love to discuss this with you further over the phone if need be; contact me at u4398412@anu.edu.au.

There’s a very timely article in response to attempts by the Government and various commentators such as Bernard Salt (http://www.theaustralian.com.au/business/property/inconvenient-truth-on-ageing/story-e6frg9gx-1225826489968) to scapegoat older people for the Government’s anticipated financial problems. The article “Cost of housing and cost of dependency in Australia” of 6 Feb 10 by Sheila Newman at http://candobetter.org/node/1823 shows that, in comparison to the elderly, the property ‘industry’ is a far greater burden on the rest of us.

By having caused the hyperinflation of housing costs in the last generation, they have literally driven many Australians into poverty, most of all welfare recipients including pensioners. Many, even previously prosperous Australians, describe their predicament as ’slavery’ as a result of the inflation of housing costs.