Prosper Australia

By Nadia Weiner, Director, Adam Smith Club, Sydney, Australia

Although Adam Smith is often quoted, the so-called “Father of Economics” has rarely been read, either by his detractors or his admirers. Consequently he is often misunderstood.

Smith, who made such a strong stand against the protectionist mercantile system of trade of his day, devoted over one third of his masterpiece An Inquiry into the Nature and Causes of the Wealth of Nations, to discussing the subject of government revenue and the methods by which it may be best collected, including new taxes. This is not generally known.

When examining the different forms of taxation, Smith adheres to four maxims which a good tax should conform to:

• “The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”
• “The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.”
• “Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.”
• “Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.”

Bearing all these things in mind, there are two types of taxation which obtain Smith’s recommendations: a tax on luxury consumables and a tax on ground-rents (the annual value of holding a piece of land).

On the subject of luxury consumables, he is adamant about the definition of ‘luxury’ and of ‘necessary.’ By his definition, a ‘necessary’ may vary from place to place and from time to time. At the time of his writing, linen shirts, leather shoes and a minimum of food and shelter were definitely to be regarded as essential to a minimum decent standard of living. Taxes on salt, soap, etc., he harshly criticised as inequitably taking from the poorest elements of society. Taxes on luxuries, which were to include tobacco, he considered excellent in that no one is obliged to contribute to the tax: “Taxes upon luxuries have no tendency to raise the price of any other commodities except that of the commodities taxed… Taxes upon luxuries are finally paid by the consumers of the commodities taxed, without any retribution.”

More deserving of praise is the tax on ground-rents: “Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them.”

Excise, customs, taxes on profits, were, according to Smith, either expensive to collect, as in the case of excise, or disincentives to produce, as in the tax on profits. He reserves harsh words for taxes which occasion the invasion of privacy, and on the subject of excise he says: “To subject every private family to the odious visits and examination of the tax-gatherers… would be altogether inconsistent with liberty.”

The harshest condemnation of all, however, was for taxes upon labour: “In all cases, a direct tax upon the wages of labour must, in the long run, occasion both a greater reduction in the rent of land, and a greater rise in the price of manufactured goods, than would have followed from a proper assessment of a sum equal to the produce of the tax, [levied] partly upon the rent of land, and partly upon consumable commodities.”

Mason Gaffney, Professor of Economics, University of California, Riverside

The following is the introduction to Professor Gaffney’s paper Neo-classical Economics as a Stratagem against Henry George, 5 July 1994.

This paper formed the basis of a book: The Corruption of Economics, Mason Gaffney and Fred Harrison, Shepheard-Walwyn (Publishers) Ltd, London, 1994. Buy the book

Introduction: The power of neo-classical economics

Neoclassical economics is the idiom of most economic discourse today. It is the paradigm that bends the twigs of young minds. Then it confines the fluorescence of older ones, like chicken-wire shaping a topiary. It took form about a hundred years ago, when Henry George and his reform proposals were a clear and present political danger and challenge to the landed and intellectual establishments of the world. Few people realise to what a degree the founders of Neoclassical economics changed the discipline for the express purpose of deflecting George, discomfiting his followers, and frustrating future students seeking to follow his arguments. The stratagem was semantic: to destroy the very words in which he expressed himself. Simon Patten expounded it succinctly. “Nothing pleases a… single taxer better than… to use the well-known economic theories… [therefore] economic doctrine must be recast” (Patten 1908, p.219; Collier, 1979, p.270).

George believed economists were recasting the discipline to refute him. He states so, as though in the third person, in his last book, The Science of Political Economy (George, 1898, pp.200-209). George’s self-importance was immodest, it is true. However, immodesty may be objectivity, as many great talents from Frank Lloyd Wright to Mohamed Ali and Frank Sinatra have displayed. George had good reasons, which we are to demonstrate. George’s view may even strike some as paranoid. That was this writer’s first impression, many years ago. I have changed my view, however, after learning more about the period, the literature, and later events.

Having taken shape in the 1880-1890s, Neo-Classical Economics (henceforth NCE) remained remarkably static. Major texts by Marshall, Seligman, and Richard T. Ely, written in the 1890s, went through many reprintings each over a period of 40 years with few if any changes. “It was for the Chautauqua Literary and Scientific Circle (1884) that I wrote the first edition of my Outlines, under the title Introduction to Political Economy. In this first edition of the Outlines there is to be found the general philosophy and principles that have shaped all future editions, including that of 1937″ (Ely, 1938, p.81).

Not until 1936 was there another major “revolution,” and that was hived off into a separate compartment, macro-economics, and contained there so as not to disturb basic tenets of NCE. Compartmentalisation, we will see in several instances, is the common NCE defense against discordant data and reasoning. After that came another 40 years of Samuelson’s “neoclassical synthesis.” J.B. Clark’s treatment of rent, dating originally from his obvious efforts to refute Henry George (see below), “has been followed by an admiring Paul Samuelson in all of the many editions of his Economics” (Dewey, p.430).

Clark’s capital theory “… gives the appearance of being specially tailored to lead to arguments for use against George” (Collier, 1979, p.270). “The probable source from which immediate stimulation came to Clark was the contemporary single tax discussion” (Fetter, 1927, p.142). “To date, capital theory in the Clark tradition has provided the basis for virtually all empirical work on wealth and income” (Dewey, 1987, p.429; cf. Tobin, 1985). Later writers have added fretworks, curlicues and arabesques beyond counting, and achieved more isolation from history, and from the ground under their feet, than in Patten’s dreams, but all without disturbing the basic strategy arrived at by 1899, tailored to lead to arguments against Henry George.

To most modern readers, probably George seems too minor a figure to have warranted such an extreme reaction. This impression is a measure of the neo-classicals’ success: it is what they sought to make of him. It took a generation, but by 1930 they had succeeded in reducing him in the public mind. In the process of succeeding, however, they emasculated the discipline, impoverished economic thought, muddled the minds of countless students, rationalised free-riding by landowners, took dignity from labour, rationalised chronic unemployment, hobbled us with today’s counterproductive tax tangle, marginalised the obvious alternative system of public finance, shattered our sense of community, subverted a rising economic democracy for the benefit of rent-takers, and led us into becoming an increasingly nasty and dangerously divided plutocracy.

The present paper purports to identify the elements of Neo-Classical Economics (NCE) that were planted there to sap and confound George, and show how they continue to warp, debase and vitiate much of the discipline called economics. Once a paradigm is well-ensconced it becomes a power in itself, a set of reflexes to sort the true and false. Any exception spoils the web of interpretation through which art seeks to make human experience intelligible. Only the young, the brave, the energetic, the sincere and the sceptical can break off such fetters. This work is addressed and dedicated to them.

By Fred E. Foldvary

Fred received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at the Latvian University of Agriculture, Virginia Tech, John F. Kennedy University, California State University at Hayward, the University of California at Berkeley Extension, and Santa Clara University.

Fred is also a researcher and author on public finance, governance, ethical philosophy, and land economics. He may be contacted by foldvary@pobox.com.

For the past hundred years, economics has been dominated by the neoclassical school of thought. Neoclassical guys have constructed a big mansion of economic theory, and some of the rooms look very elegant, but there are some parts of the house of neo-econ which are shoddy, badly constructed, incomplete, and designed from faulty blueprints. It needs a make-over.

Henry George, the late-19th-century economist and social philosopher, was good at juicing up and fixing drab, dull, clumsy economic doctrines. His followers, Georgists or geoists, can take a worn out economic theory and spruce it up into a shining object of utility and beauty. So let’s apply a Georgist eye to the broken doctrines of the neoclassical guy for an economic make-over.

Neoclassical guys like to talk about trade-offs. Resources are scarce while human desires are unlimited, so if you want more of one thing, you have to give up getting something else. This is true for goods, but the neos apply this also to the two outcomes we want from an economy, efficiency and equity. An efficient economy maximizes the output we can get from input resources. Equity means economic justice, how fair and equitable is the distribution of wealth.

The neoclassical guy says that if we want more equity, the cost is less efficiency, and if we want more efficiency, we have to sacrifice equity. That’s because in neo thought, a more equal distribution of income requires redistribution from the rich to the poor, and higher taxes on the rich reduce investment and production.

The problem here is that neoclassical guys suffer from economic amnesia. They know about land and rent, but they forget this when they think about anything else. One big reason for the inequality of wealth is the highly unequal income from land rent. If society shares this rent equally, there is no reduction in efficiency, and indeed there is greater efficiency.

Neoclassicals also forget to factor in the capitalization of public services into land rent. Public works pump up land rent, and if the landowners don’t pay for the works from that rent, their land value jumps up and this creates incentives for speculators to buy land to get that rent, driving land prices up even higher. Speculatively high land values then stop folks from getting land for current use. Tapping that rent eliminates the subsidy, and so land gets used more productively.

The Georgist eye can see that a shift from today’s punitive taxes towards public revenue from land rent would increase both efficiency and equity.

The neoclassical guy knows that land has a fixed supply, so tapping the rent creates no excess burden or deadweight loss for the economy. But this knowledge gets boxed in, compartmentalized. It’s stuck in the attic of the economic mansion and forgotten about in the other rooms. In contrast, the Georgist eye always keeps the whole mansion in mind. The neoclassical guy needs a theory make-over to tear down the walls he has constructed and get an economic blueprint that is whole and integrated. The Georgist will also take land theory from the attic and place it prominently in the living room.

Another faulty area of neoclassical thought is the producer surplus, the difference between the price of a good and the cost of production. The neoclassical guy draws a supply curve sloping up as some producers have higher costs and so need a higher price to be profitable. But the neoclassical guy also says that in a competitive industry, in the long-run, the firms only make normal profits, the usual returns to labor and assets. If profits are higher than that, firms will enter the industry to get those extra profits, driving the price down and squeezing out the profit.

But there is a contradiction here. If there is a producer surplus, a gain above costs and normal returns, how can there also be no economic profits? Neos don’t think about this, or else they get bewildered and end up relaxing the assumption of no economic profit. The Georgist eye can clear this up. In competitive markets, the owners don’t get the producer surplus; it goes to the input providers, but not to labor or capital goods. It goes to the factor which cannot move or expand, land. The producer surplus is land rent!

Neoclassical guys like to point out that price controls, such as minimum wages and rent controls, create problems such as more unemployment and a housing shortage. But they are perplexed about poverty. They say some controls and welfare programs may be required because in the market, some folks just end up poor. Again, the Georgist eye sees more clearly. Henry George explained why poverty persists in the midst of progress. The free market will eliminate poverty, but only if it is truly free of all trade barriers, including all taxes on production and exchange, and only if the rent is shared or tapped for public revenue.

The neoclassical guy is puzzled because he sees a grin but no body, while the Georgist eye can see it is the Cheshire cat. The fat cat is grinning, because he reaps what others sow, and the public can’t see the cat because their neoclassical economists don’t even know it’s there.

To do a complete make-over on the neoclassical guy, the Georgist needs to teach him the law of rent and the law of wages. This was in classical theory, but the neoclassicals threw it out when they tucked land in the attic. It’s simply a model with grades of land of decreasing productivity.

The least productive land in use is called the ‘margin of production,’ which is where the general wage level is set. After paying for wages and capital goods, the rest is a surplus that goes to rent.

If Georgists and geoists could do a make-over on all the neoclassical guys, what a difference it would make. Economists would put land rent at the center of economic policy, and soon the public would understand it, and policy makers could no longer ignore it. Poverty would be extirpated, the welfare state eliminated, and conflicts over land would diminish.

But to do this, the Georgist eye must see 20-20. The geoist eye needs a clear vision, not clouded by the astigmatism of statist monetary doctrines and the myopia of blaming corporations. The clear eye needs the ethical understanding that the only evil is coercive harm to others. The Georgist eye needs to understand the problem of mass democracy and its remedy, small-group voting. Only with this complete understanding, going a bit beyond classical thought, will the Georgist eye be able to turn the bumbling, stumbling neoclassical guy into a cool economics dude who is hip to the cause and cure of our economic woes.

Derived from the presentation by Lev Lafayette at the Hume Global Learning Centre, June 28, 2006

Introduction

Tonight I am representing Prosper Australia, an organisation which has, in various guises, been a part of Victoria for over one hundred years. One key objective of the organisation is the reduction, as much as possible of taxes on labour and capital, and for public finances to be derived instead from site rental. Because when it comes down to it, there are only two sources for public revenue; the goods and services which are produced or the resources that are used.

The idea of public financing through site rental was extremely popular in the early days of Australia, supported by both the Liberal Party of Alfred Deakin and his Labor opponent Andrew Fisher. Indeed Alfred Deakin illustrated the case quite succinctly when he said;

“The whole of the people have the right to the ownership of land and the right to share in the value of land itself, though not to share in the fruits of land which properly belong to the individuals by whose labour they are produced.”

In this period many local councils adopted site rental as the main source of income and for a period the Commonwealth derived much of its income from site rental. The idea was not subject to the partisanship of Party politics; famous supporters of site rental include Labor’s Arthur Calwell and Clyde Cameron and the Liberal Minister in the Menzies, Holt and Gorton governments, Sir Allen Fairhall.

Because we also have a candidate from the Liberal Party here tonight, I should also mention that I am a member of the Australian Labor Party. For several years I was the policy convenor of the Labor Left - Pledge Unions faction, the so-called “hard left” socialist group which strongly opposed the privatisation of public assets and had such disconcerting foreign affairs policies such as ending apartheid in South Africa, self-determination of East Timor, democracy in Indonesia and a state for the Palestinians.

The point of laying these cards on the table is to illustrate that regardless of whether one believes that economies are best served by markets or by planning, or whether social equity has a greater priority over economic efficiency that one can find good and just reasons to be part of the site rental movement, whose claims include equity, efficiency, markets and planning! The fact that you would find stubborn socialists such as Clyde Cameron in agreement with amicable liberals like Allen Fairhall should give indication of the adaptability of the basic principle of site rental.

This leads to the purpose of tonight’s presentation. Some elements of the last State budget seemed quite contrary to the Labor Party’s stated objectives as put in their National Constitution. That constitution refers to matters such as the abolition of poverty, a greater equality in the distribution of wealth, income and opportunity, and the abolition of exploitation. The assumption is that these decisions; decisions which will reduce opportunity and further impoverish those who are already poor, were made in ignorance rather than malice. Hence the title of tonight’s event: “Please Explain, Mr. Brumby”.

Something that should be said is that Prosper Australia made multiple attempts to contact Mr. Brumby and invite him to tonight’s function in his own electorate. However, he has chosen to attend a different engagement. Offers were also made to send a representative of his office or to have a written statement presented at the meeting. These opportunities also have not been taken up.

What Was In The Last State Budget?

The last State budget made (almost) everyone very happy. With a large surplus, the preparation to spend big in an election year and with the assistance of some rather optimistic economic projections, the mass media sang the praises of the State government and indeed, in most cases, this is deserved.

The last state budget witnessed a 10% reduction in Payroll Tax over three years costing some $533 million, and a $170 million reduction in WorkCover premiums. A $300 “School Starting Bonus” will be paid to families with children entering prep and year 7, along with a $500 Trades Bonus to those completing apprenticeships. A ten-year allocation of $10.5 billion has been made to improve mass transit facilities in Melbourne and regional Victoria. A budget surplus of $300 million per annum is planned and net financial liabilities remain below 7% of Gross Social Product.

There are flies in the ointment however; $100 million dollars was earmarked to the “Building Tomorrow’s Schools Today Fund” from the expected sale of Victoria’s share in the Snowy Mountains Hydroelectric Scheme. The budget also announced that schools in needy areas such as Broadmeadows, Altona, Western Heights and Dandenong would be modernised and upgraded. This announcement is now at risk because the Federal government pulled out of the sale of the Snowy leaving the State governments of New South Wales and Victoria with unfunded promises. Why the State government tied upgrades and maintenance of schools to the privatisation of a public asset is beyond reason.

One can also certainly argue that the cuts to payroll taxes are too modest and too slow. It is true that payroll taxes have a low compliance cost and it is also true that they effect a narrow band of employers (those whose payroll is greater than about $40 000 per month). But this does not change what the tax effectively is; a tax on employing too many people. This occurs when organisations like the Australian Industry Group claims that over 13,000 manufacturing jobs would be lost in Victoria this year.

But the biggest problem now facing Victoria is the issue of housing affordability. There is a real crisis in this issue and the actions in the State budget will make matter worse, contrary to the vested-interest claims of organisations such as the Real Estate Institute of Victoria and the Property Council of Australia. In particular the big cuts in land tax to those who have what is mis-named “investment properties” valued at over $2.7 million of unimproved site rental. This change, costing the public coffers some $167 million dollars, is on top of last years’ massive cuts which announced $823 million over five years.

Although this seems politically expedient, a very strong case can be made that this is not in the best interests of Victoria. Land is not like any other economic good. It is obviously in fixed supply and “investments” in buying land are demonstrably different to capital investments in buildings, manufacturing, or service-provision. If you spend money in any of these other areas goods are produced; people are employed. But putting money into land neither employs nor creates any additional goods or services. Indeed, what it does do is increase the cost of land as the available supply is reduced. Increases in the value of land are primarily due to inaction on the part of the landlord; either through community-provided infrastructure and economic activity, or by increases in population.

This matter can been seen rather simply and empirically. Research from the Housing Industry Association over the past thirty three years shows quite clearly that the cost of building a house in Australia has gone up slightly less than the rate of inflation, that is an increase of 8.4 fold. However, in the same period the price of land has gone up sixteen-fold in Melbourne, eighteen-fold in Perth, nineteen-fold in Brisbane, fifty-one fold in Sydney and a massive seventy-fold in Adelaide.

The only brake on this mindless speculation has been land tax. It stands to reason that if land is taxed and other goods and services are not, then an investor will strongly prefer to put their money in something productive. This has been well-known to economists since the days of Adam Smith and if you read the statements of Nobel Prize winners in economics over the last thirty years you will discover that they are virtually unanimous on this matter; from the left-wing to the right you find the likes of socialist Franco Modigliani, the iconoclastic William Vickrey, social democrats like James Tobin and the Keynesian Paul Samuelson, conservatives like Robert Solow and James Buchanan Jnr, and the arch-capitalist Milton Friedman.

These names are all Nobel Prize winners in economics; you can assume that they know something about the subject matter. The expert opinions in Australia say the same thing; the 2001 Harvey Commission on Business Productivity suggested rolling numerous property taxes into a single land tax. The Commonwealth’s Productivity Commission pleads to the states to broaden the base of the tax rather than thumping people with more onerous charges on the productive labour they carry out. Yet the politicians are not listening; or they are listening to the wrong people.

Future Problems and Solutions

Serious problems will arise due to the decisions made in the last state budget. Where a greater return is available from land speculation than from productive investment it is obvious that an investment will prefer the former; and whilst the individual speculator will benefit greatly in the short term the community as a whole will suffer in the longer term; this is as per the laws of the multiple prisoner’s dilemma problem in game theory. Ultimately it means that everyone loses - even those who gain in the short run relative to everyone else.

The most obvious effect of the changes will be that housing affordability will continue to worsen. Encouraging “investors”, to put money into landed estates rather than productive use will inevitably reduce the effective supply of land and reduce the quantity of dwellings produced. The rather dramatic statistics provided previously from the Housing Industry Association will get worse; the possibility of young people in this state ever owning their own home becomes increasingly remote and onerous.

Apart from the obvious loss of jobs in the home building industry resulting from such changes, one must also be aware of the losses in commercial and industrial building. And, as mentioned previously, whilst the modest cuts to payroll tax will slow down job losses it will not reverse them. The highly internationally competitive manufacturing industry will be harshly hit.

One final area of great concern is the viability and stability of returns on superannuation funds. Like any other individual investor, group investment organisations, like superannuation funds, will seek to maximise their return. If the taxation system is changed, as it has been, to encourage resource holdings rather than productive investment then the funds will follow; even if in the long-run there’s detrimental effects overall.

There are however some practical measures that can be taken to reverse these dire trends and some of the disconcerting changes in the last State budget and subsequent events. Indeed, it would be very remiss to come here with just criticisms and offering no solutions.

The first is to renege on the proposal to cut the top rate of land tax and use the monies raised to pay for the aforementioned school upgrades in needy areas. It makes sense to reduce a strong incitement to short-term speculation, preferring to encourage long-term investment to the more impoverished elements of society. The $167 million dollar gift to the biggest landlords in the state stands in stark contrast to the need to invest in our children and their future.

The second is to investigate the funding and provision of public transport infrastructure through increases in land values. The proposed construction of a train station at Coolaroo has, to say the least, taken far too long to be implemented in reality. To give an example of alternative method of funding consider California in 1890s who in 1887 passed the Wright Act which allowed communities to irrigate districts and pay for them by taxing the resultant rise in land value.

In the next ten years, the Central Valley was transformed into over 7,000 independent farms. Within a few decades, those tree-less, semi-arid plains became the “bread basket of America”, one of the most productive areas on the planet.

Thirdly, lobbying one’s local council is of critical importance. Despite an excellent history in Melbourne, following the forced amalgamations in the 1990s nearly all local councils rate property rather than land; Monash is the exception and the continuing success of that municipality is worthy of note. The rating of property rather than land means that rate-payers are punished for improving their home. A comparison can be made with cities like Pittsburgh and Harrisburg in the United States which rate land much more than property. The results are obvious; less vacant sites, less derelict buildings, more industry, more effective use of land. In the 1970s Dr. Ken Lusht, visiting from Pennsylvania State University, found those Melbourne councils that rated land alone had 50% more built value per acre than those that rated both land and buildings. Between 1974 and 1984, the last year the government released these statistics, the number of businesses in the towns taxing property decreased by 20% while in the towns taxing only land it increased by more than 10%.

Finally, joining Prosper Australia and advocating the justness and positive effects of land taxation is imperative. There are, undoubtably those who prefer to receive as much income as possible from the most unproductive investments. They are a powerful and well-financed lobby group. The distribution of income in Australia means that the the top twenty percent of Australia receives 48.5% of the national income whereas the bottom forty percent earns 13%, whereas in terms of household assets the top twenty percent have 63% of national household assets, whereas the bottom fifty has a mere 5%. One can be certain that the distribution of land values is worse still.

A handful of people in Australia receive the lion’s share of the site rent of this nation; this is monies extracted from labourers and productive investors and wealth created from such people. The economist, David Ricardo, saw with great clarity, describing the interest of the landlord (by which he meant literally - not the person who owns and invests in houses) as utterly opposed to the interests of all other classes. Then John Stuart Mill following this lead wrote;

“Landlords grow rich in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title.”

This simple principle of public finance, so far-reaching in its justness and effectiveness, is the orientation that Victoria needs.

Karl Williams, former President, Prosper Australia Inc.

200 Word Overview

Geonomics (’law of the Earth’) represents a completely different way of looking at The Earth. Starting from the self-evident (but ignored!) principle that The Earth (land and natural resources) should be the equal and common birthright of all humanity, a radically different set of economic and social principles emerge. However, the means to implement these principles is relatively simple - essentially, taxing land values rather than production.

That unemployment is inevitable in modern industrialised economies is not true. In economic terms, land has the unique qualities which gives landholders unique monopolist powers and the ability to make massive speculative profits while their land lies idle or under used while its value is rising.

At once we turn economic relations on their head by the collection of the land rent which will force landholders to put their land to full use (employing others and not wasting surrounding amenities) or passing the land titles on to those who can use it themselves. The flip side is that this massive source of government revenue allows us to phase out unfair, punitive taxes on production.

Many unique and urgently-needed environmental benefits flow from Geonomics - halting urban sprawl, encouraging sustainable agriculture and allowing us to put a true value on the intangible benefits of natural resources.

Geonomics encompasses a set of sweeping changes to the present economic systems based on a relatively simple adjustment to our tax system. It is based on a timeless philosophy that was elaborated upon to the greatest degree by the 19th century social philosopher and reformer, Henry George. The underlying philosophy is undeniably self-evident, but how far have we strayed from these noble ideals today?! It is that the Earth (land and natural resources) should be every person’s natural birthright - i.e. should be our equal and common inheritance - as it was not created by any person, but is rather the gift of Nature/God/The Universe. This should be the first listing in the UN Declaration of Human Rights, but it doesn’t even get a mention!

Universal land rights are central to Geonomics for not only indigenous peoples have been dispossessed, but nearly all of us find that we’re born on to a planet where “all the seats are taken” with the result that, effectively, we have to pay someone else for permission to live.

Land is not just a piece of dirt, but is the necessary “living space” integral with human existence - at least as long as the Law of Gravity holds! In economic terms, the nature of land also has unique qualities, including:

1. Being relatively fixed in supply (you can’t make any more of it)
2. Having a constant demand (we all need at least enough on which to stand)
3. It’s value is not built up by the landholder, but by the community (the all-important locational value of land would be nothing if not for the presence of population and tax-funded infrastructure).

Previous attempts to achieve land justice have all been flawed because they have clung to the sense of wanting to “own” the Earth like another mere commodity. Many indigenous peoples have reiterated that we belong to the Earth, rather than the Earth belonging to us. But in more economic terms, so called “land reform” that relies on outright land ownership in perpetuity is doomed to failure, in terms of social justice, because to “divvy up” land equitably is impossible for the following reasons:

1. Land has vastly different values. How can one divide up amongst the population central business district land, suburban land, rural & agricultural land, and wilderness?
2. Even if (1) could be overcome, land values change constantly. Sooner or later all would have unequal landholdings, depending on such circumstances as population movements and the siting of infrastructure such as roads, schools, electricity supply, the provision of irrigation etc.
3. Even if (1) & (2) could be overcome, what about next year? And the year after that, and after that ……? In other words, the newborn have missed out on the impossibly-fair divvy-up, not to mention immigrants and other newcomers who will constitute the new class of landless who happened to arrive too late.

Land is not confiscated

It should be stressed that Geonomics does not propose the confiscation of land in order to have some shared Commons, as to own a permanent home is an almost universal human need. The actual solution is elegantly simple, but with profound effects. It is this:-

In return for each individual’s exclusive use of Our One Earth, it is only fair that society be reimbursed for the loss of that resource. Therefore, each landholder should repay society a land rent (not at all an arbitrary tax) in precisely-calculated accordance with the value of the land holdings. That is, those who use more valuable land should pay more rent back to society based on the land value. Importantly, land titles and security of tenure remain as before.

This rent represents a potentially huge source of community/government revenue. But there is a flip-side to this revenue-raising equation.

A more just tax system

By collecting the land rent and thereby dispensing land justice based on our differing needs for Our One Earth, we can start to phase out taxes on production. These taxes are robbery! - why should someone be treated as a social nuisance and effectively fined every week through the imposition of, say, income taxes just because they work and support themselves and perhaps even provide employment for someone else? Therefore we have TWO forms of robbery which Geonomics eliminates:

• The economic rent (the technical term for rent based on land values) misappropriated by landowners. This rightly belongs to society.
• The taxes on production (income tax, sales tax, payroll tax etc.) which rob people for no justifiable reason at all.

The rationale for this type of reform could be summarised as:

• “What society does for you, you should return to society.”
• “What you do for yourself is rightfully yours.”

It should be noted that this principle certainly does not stand for any loony right-wing individualism - Geonomics only applies to the means of government revenue raising. So far as government expenditure is concerned, there is every means by which social welfare for the underprivileged can be made as before.

Unemployment

Arguably, the most serious problem in the world today is that of unemployment. All the think-tanks, political policy makers, social commentators and ordinary people will NEVER solve this absurdly-unnecessary problem unless the land problem is addressed first and foremost. Why call it “absurd”? - because on the one hand there are millions of people out of work who want to work and, on the other hand, there are endless needs for more work to be done (more teachers, carers for the elderly, builders of better housing & infrastructure etc.). Something is screwed up here! The key to this absurdity is the fact that we’ve made it profitable to make speculative profits through holding land idle or grossly under-used. The right land can be held until its value is built up by the community, then sold back to the community (who effectively pay for it twice, the first time through their taxes). Not only are there truly “unearned” forms of income here (and there are losers for each speculative winner), but essential land is kept idle or under used. And idle land equates to idle hands.

How can Geonomics encourage the full and efficient use of land? Essentially, it is because the land rent financially encourages the landholder either to use the land to its full potential (thereby creating a need to employ others to work on that land) or else to pass on the land to someone else who will do so. This is because the land rent remains fixed - so whether the landholder uses the land or not, that same rent is payable. One cannot keep land idle for long, for the land must be productively used in order to cover the rental dues belonging to society.

Taxes on pollution

Some taxes are necessary, such as carbon taxes and pollution taxes which discourage the abuse of natural resources. Similarly, taxes on alcohol and tobacco (forcing users, in effect, to pay for their future health costs) should remain. Other social undesirables, such as violent pornography, could also be discouraged through the tax system. However, the vast majority of taxes are those which fall on production - income, sales, company, payroll taxes etc., - and these not only rob people for no good reason (remembering that we are now collecting the land rent), but discourage real wealth creation. Encouraging truly productive activities will be as simple as ending the confiscation of part of their earnings! In other words, the private sector is given every incentive to create wealth and jobs because earnings will be retained rather than being taxed.

Historically, there have been huge campaigns mounted by a very few wealthy, vested interests to oppose this simple but fundamental change to our tax system. The traditional land barons and property developers have, more than anyone else, much to lose - what they will, in fact, lose are their privileges! Large landholders under the present system can simply sit on their land and wait for the community to build up its value as population grows and tax-funded infrastructure expands. The land can be kept unused, without penalty, until the community is prepared to bid what the landholder is prepared to accept. However, when the community is collecting the rent, the boot will be on the other foot. Labour will be in demand, as land is used as it should be.

If you were running an enterprise and arranged for the purchase of a large and expensive item of capital equipment (say, a printing press or a network of computers), how long would you wait to use it after it had been delivered? Paying millions of dollars for your purchase, no businessman in his right mind would let the shrink-wrap remain for a single day before immediately putting the item to full use? Have you then, ever wondered about multi-million-dollar blocks of land that are used as single-storey car parks in the city for years or, in the suburbs, as market gardens or simply as land which grows nothing but thistles? And all around live thousands who need that land in order to work - not to farm it, but to use its valuable location (why it’s so expensive in the first place) in order to produce goods and services. Collect the rent and there’ll be lots of busy hands and no more thistles!

But it’s not just in the private sector that there will be employment-producing, wealth-creating activity magically spring into being with the simple adjustment of taxing land values rather than production. Have you not also wondered why governments cannot afford to keep investing in badly-needed infrastructure such as roads, schools and public meeting places? It’s because the governments’ funds (OUR taxes) disappear into the “Black Hole” of land values!!! If we collect the rent this could never happen.

Rejuvenating public transport and community

To illustrate the point, let us look at something that’s long been neglected because of its expense - public transport. Rail networks are efficient and environmentally-friendly people-movers, but governments can’t afford to invest the hundreds of millions that are needed for a proper system because the investment goes, like all infrastructure spending, into improving land values. In order to recover part of its outlay, governments must set prohibitively-high fare structures which often, in the end, yield less revenue because people are so discouraged by the expense. But if we switched from the false principle of “user pays” to “beneficiary pays” and required the landholder to pay for the benefits conferred of a railway line being opened up, then such infrastructure could be self-funding. Here we would have a completely different ball game - with any infrastructure spending there would be increased land values and, importantly, more land rent to collect. With rent to collect, fares could be reduced. As fares are reduced, adjacent land becomes more desirable - hence there is more rent to collect. More rent means less fares means more rent means ……. until, in the end, the only question to answer is whether public transport should be free or whether some nominal charge should be imposed to make it appreciated and prevent unnecessary overuse.

Why not have magnificent botanical gardens in every single suburb? Because we’re not collecting the rent to pay for such quality of living and to encourage truly productive labour. Why not more public plazas, community facilities, sports grounds, public libraries? Because up until now the funds which paid for these facilities disappeared into the Black Hole. And besides the beautification of our surroundings, the improved quality of life for all and the boost to employment, isn’t it simply nicer to live as a community? We’ll still have our own houses and back-yards, but we’ll bring back the “village feel” to living, as we have common access to attractive shared facilities with our neighbours. Compare this to so-called Economic Rationalism which would have the “winners” in society living in private fortresses, like millionaires in Beirut! There is much more to say on these ideals, which address many social problems concerning urban alienation and anonymity - nut it out for yourself!

Open and just tax collection

In our truly civil society, massive resources will not be wasted on the tax system as they are now. We shall have professionally-qualified land valuers make an annual assessment on all land, taking into account access to all community-created amenities such as distance to schools and public transport, clarity of water and TV reception etc. and discounting for things such as noise and pollution from roads and factories. Everyone’s assessment will be supported by the factors taken into account, made more objective by computer-assisted comparisons between similar sites. Importantly, you’ll also be able to scrutinise your neighbour’s assessment and that of Kerry Packer. The system is virtually corruption-proof! And what about this: this tax cannot be evaded! No-one can shift it offshore or bury it in convoluted accounting transactions! Of all things on this planet, land is the one thing which cannot be hidden.

Furthermore, this will enable us to scrap the massive waste of having an army of Tax Department officials chasing an army of smart lawyers and creative accountants. This expensive absurdity produces ZERO wealth and, in any case, makes tax virtually optional for the rich. Moreover, it intrudes for no good reason into our private lives - why on earth should we be accountable for the income we earn or the goods we sell? And the compliance costs of filling in returns and forwarding remittances and keeping records and dodging taxes where possible through the black economy - isn’t this not only an unproductive way of spending our valuable time, but also a financial burden?

What’s the other barrier to employment - probably so accepted within our present paradigm that we can’t see it for what it is? It’s simply the price of land. Before anyone can undertake any work, unless they’re squatters, they need some land on which to stand. If they want to work more productively, that land will have passing traffic and surrounding amenities, and will be accessible to customers. But the big up-front barrier to self-employment (whether individually or collectively) is the vast amount (often representing decades of life savings) required to purchase land or the constant drain of loan repayments and interest. So what will change with Geonomics? Simply this - land will have no price!!! At the point where we’re eventually collecting the full site rent, the value of the surrounding amenities will be exactly offset by the rental dues to society. Here the zero (approximately) price of land (buildings and other improvements, of course, have retained their purchase price) will be asserted rather than fully explained, but it should be noted that when one is to purchase a property, one will be effectively bidding for the improvements and ensuring that one can make suitable use of the surrounding amenities which will be paid for through rental dues.

Globalisation - Glocalisation

The breathtaking changes brought about by this simple switch in the tax system go on and on. Urban sprawl will be greatly curbed - unused or under-used sprawling land will give way to a natural urban landscape. Cities will be much more compact, further encouraging public transport networks, cyclists and even pedestrians. Other great urban environmental problems will be dramatically curbed - cities sprawling over farmland and natural reserves, wastage of resources as pipelines and roads “leapfrog” over idle land, and time and fossil fuels being wasted because of daily commuting from distant suburbs.

Agricultural/rural problems? By basing the rental calculations on what is termed the “maximum sustainable yield”, farmers will be positively encouraged to farm sustainably as they will be saddled with the same fixed annual rent in perpetuity based on what the land is capable of producing in the long term. They will have to plan long-term in order to cover their rent. Again, technicalities won’t be discussed here.

Wilderness, natural reserves and other natural resources?

Today, they too often go to the person who makes the highest cash bid, with little accounting for externalities (detrimental effects impacting elsewhere). Furthermore, intangible benefits (ecological, aesthetic, recreational, spiritual and inherent worth) are rarely taken into account in determining land use as they are not traded on the market place and are not accorded a $ value. But the focus on land assessment (rather than the scrutinising of individual activities) positions Geonomics to factor all these items into a “good guess equation” to determine whether, say, the $ returns to the community through the rental collection will outweigh the benefits that society (non-human as well, if we like) would otherwise derive from preserving such an area. A good guess at the true value of land and natural resources is better than a wild guess, and a wild guess is better than no guess at all. This is the absurd state of things today with respect to “natural capital” - not even a guess is made of its value, and it can be depleted without affecting our Gross National Product at all.

This we also assert, (and debate it rather than laugh at it if you disagree) that Geonomics encompasses a set of “natural laws” that promote prosperity and social justice. These laws cannot be ignored without dire consequences - witness our endless economic problems despite every best effort as well as the advances of science. Geonomics is not a panacea for all economic and social problems, but without it there can be no solution to such problems. Many other problems would be addressed, directly and indirectly, by conforming to The Law of the Earth, such as inflation, high interest rates, foreign control and, if not already self-evident to you, the reader, great disparities of wealth.

Rewarding creativity

There will still be some lesser disparities of wealth, but not because of lack of opportunity. Some will prefer to live a life of voluntary simplicity, perhaps, and society requires little in return from those who reside on land with few surrounding amenities. On the other hand, some great inventors, sports persons, actors and authors, for instance, will earn much more than others if, in a free and fair market, people are prepared to pay for what those individuals demand for their services. But, mostly, all the great forms of privilege will be abolished, for the simple rule of not reaping what one has not sown will be our society’s guiding light. Other speculative forms of wealth can be discouraged through the tax system - for example, a 1% tax on foreign currency transactions and share market trading will discourage frenetic speculative activities but not those of genuine long-term investors. These speculative activities are just legalised forms of robbery - the massive profits that can be literally made in hours are taking wealth out of someone else’s pockets.

The good and inspiring society

The EarthSharing network truly represents The Good Society, and we want all to understand how we could simply bring about social justice and economic prosperity for all. Your willingness to understand and pass on the true laws of economics will be your personal contribution to achieving this noble ideal.

Since the Howard government gained control of the Senate, we have been hearing numerous proposals for reducing the top marginal rate of income tax. The excuse is that high marginal rates reduce the incentive for wealth creation and encourage tax minimization. Let’s put this excuse to the test.

A holding tax is a tax of so many percent of the value of an asset per year, payable by the owner of the asset. If income tax were replaced by holding taxes, the top marginal rate of income tax would be zero. Beat that! And if those holding taxes were confined to assets that taxpayers can neither create nor destroy nor move out of the taxing jurisdiction — assets such as land and monopolies — the taxes would cause zero reduction in the stock of assets and zero discouragement to the production of new assets. That takes care of wealth creation.

What about tax minimization? With holding taxes on assets that can’t be destroyed or moved, the only way to reduce your tax is to sell assets to other taxpayers who are more willing to pay the taxes, or to the government, which can then charge rent for use of the assets (”rent” in lieu of “tax”). So your desire to minimize your individual tax bill does not cause an overall loss of revenue, but reallocates resources to those who can most easily pay the taxes or rents on them — in other words, to those who would use the resources most productively, leading to even more wealth creation.

(As for tax evasion — that is, outright fraud — you can’t hide land from the government that has sovereignty over it, and you can’t hide a monopoly from the government that grants it or regulates it.)

So, if the politicians are really concerned about wealth creation and tax minimization, why are they fiddling with income tax rates instead of replacing income taxes with holding taxes? Could it be that they’re not telling us their true motives?

SPIN: The Family Home is exempt from land tax. (And all the people shall say: Amen.)

FACT: If home buyers don’t have to pay land tax, they can afford higher mortgage repayments, hence higher prices. While the price of a house is limited by the cost of construction and by competition among builders, a home is not just a house; it also includes land, which is a limited natural resource, and whose price is therefore determined by what people are willing and able to pay for it. So there is nothing to stop higher land prices from absorbing the entire benefit of the tax “exemption”, in which case the buyer still pays the tax — to the seller instead of the government!

SPIN: The Family Home is exempt from capital gains tax. (And all the people shall say: Amen.)

FACT: If you don’t have to pay capital gains tax on your old home, you can afford to pay more for the new one. So you do!

SPIN: The Family Home gets concessional treatment in assets tests on welfare payments. (And all the people shall say: Amen.)

FACT: The “concessional” treatment of the home increases the attractiveness of investing in the home and therefore increases its price. The benefit to incumbent owners comes at the expense of first-time buyers.

SPIN THIS IF YOU CAN: When you go bankrupt, why are your creditors allowed to take your home but not your superannuation? Because the tax and welfare systems treat your home more “generously” than your super! If your creditors could take your super, they’d be taking some of it from the government through the effect on your tax liabilities and welfare entitlements; but when they take your home, they’re taking nearly all of it from you. If your home were less “protected” from the government, the government would be more inclined to protect it from your creditors!

The Howard government’s industrial relations agenda attacks the wages and conditions of workers as if this were the only way to reduce the cost of hiring. What about the administrative costs imposed by government?

For example:

• If you become an employer, you must also become a tax collector and tax agent, deducting and remitting pay-as-you-earn income tax from employees, and issuing group certificates.
• If you become an employer, you must also become a superannuation agent, paying 9 percent of your employees’ wages into personal superannuation funds. You may even have to give a choice of funds — just like the independent brokers, except that you don’t get any commission!

Why should all this be done by employers? Why not by banks and other financial institutions? After all, financial institutions ought to have more knowledge of tax and super than most employers, and could do this work with greater economies of scale than even the largest employers. And unlike employers, financial institutions charge fees for their services!

So instead of deducting tax from a worker’s wages, the employer could simply deposit the gross wages into the nominated bank account, and the bank would deduct tax from all deposits made by the employer. And instead of making a super contribution on top of the worker’s wages, the employer could roll the super contribution into the gross wages, and the bank would deduct the super contribution.

If you have more than one employer, the simplification would be even greater. Instead of claiming the tax-free threshold from one employer, letting the others deduct tax at the top marginal rate, and sorting out the mess at the end of the financial year, you would tell all your employers to deposit your wages into a common bank account, and the bank would deduct tax and super from the total deposits made by those employers.

So prospective employers would no longer be deterred by the complexities of personal tax and superannuation.

A rental property is said to be negatively geared if the owner’s expenses (including mortgage interest and maintenance) exceed the rental income, so that the property makes an annual loss. If the tax system allows negative gearing deductibility, that loss can be deducted from other income for tax purposes. Abolition of this deductibility, loosely known as “abolition of negative gearing”, would make the owner’s expenses deductible against the rent alone — not against other income.

SPIN: Negative gearing deductibility helps renters and first home buyers by encouraging property investors to “supply accommodation”; the larger the supply, the lower the rents and prices.

FACT: The only investors who actually add to the supply of accommodation are those who build new accommodation. Therefore, if negative gearing deductibility were really intended to maximize the supply of accommodation, it would be allowed only for new construction — not for future purchases of established properties. But in fact the negative gearing rules fail to distinguish between new and established properties, giving no incentive to build rather than buy. So the supply of accommodation is lower than it could be, and rents and prices are consequently higher than they could be. That’s good for current owners of rental properties, but bad for renters and first home buyers.

VERDICT: Negative gearing deductibility could help renters and first home buyers if it were done properly. But it isn’t. It’s done so that established property investors get a tax break at the expense of other taxpayers plus higher rents and prices at the expense of renters and first home buyers.

Who are the real winners and losers under the Howard government’s industrial relations reforms? We think you can work it out for yourselves. Here are some hints:

1. If workers in firms with less than 100 employees have lost their protection against unfair dismissal (not to be confused with unlawful dismissal), and if all other workers have lost their protection against unfair dismissal as long as their employers can claim “operational requirements”, how will this effect workers’ ability to get home loans? And how will that affect the value of your home?

2. If workers’ wages become more dependent on the workers’ own bargaining power, which workers will lose more: those with more bargaining power, or those with less? In the past, have these workers been comparatively well-paid or poorly-paid? Are they more likely to be home owners or renters? How will this affect the rents received by mum-and-dad property investors, and the values of their investments?

3. If small employers initially become more profitable, how will this affect their ability to pay rent for commercial premises? And how will that affect commercial rents, and prices of commercial property?

4. Will commercial landlord be winners or losers? What about residential landlords? So will the winners tend to be bigger or smaller than the losers?

There — that wasn’t hard, was it?