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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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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!
Posted by David Jennings, Friday, 22 January 2010 2:41:59 PM
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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.
Posted by Bryan Kavanagh, Friday, 22 January 2010 6:36:27 PM
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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).
Posted by grputland, Sunday, 24 January 2010 11:45:28 PM
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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...
Posted by AustralianWhig89, Friday, 5 February 2010 5:04:23 PM
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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.
Posted by AustralianWhig89, Friday, 5 February 2010 5:10:13 PM
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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.
Posted by daggett, Saturday, 6 February 2010 5:44:58 PM
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