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The Forum > Article Comments > Propping up Australian real estate > Comments

Propping up Australian real estate : Comments

By Bryan Kavanagh, published 13/1/2010

We tax people who are doers, yet reward those who live off the citizens’ rent.

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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?
Posted by David Jennings, Monday, 18 January 2010 1:53:29 PM
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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
Posted by Pericles, Monday, 18 January 2010 2:18:50 PM
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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.
Posted by Bryan Kavanagh, Monday, 18 January 2010 10:29:59 PM
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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
Posted by David Jennings, Tuesday, 19 January 2010 5:45:22 PM
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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.]
Posted by grputland, Tuesday, 19 January 2010 6:56:38 PM
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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).
Posted by grputland, Tuesday, 19 January 2010 7:02:26 PM
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