Prosper Australia

by Karl Fitzgerald

as published in Arena Magazine, Feb-March, 2008, Edition 93

In a period where the twin crises of global warming and the wealth gap are attacking society from both sides, policy makers are continually limited in their effectiveness by a two dimensional approach to economics.

Land prices have increased at 4 times the rate of GDP and dwarfed wages growth by 1000 to 1 since WW2 (The Poverty Inquiry to end all Inquiries, Tony O’Brien, Figure 1, p5) . Such damning statistics beckon the ALP to take a hard look at the economic fundamentals undermining union wage demands. For Julia Gillard’s ‘War on Poverty’ to be successful, policymakers must look outside the square.

2008 marks the half way point in our promise to halve world poverty with the Millennium Development Goal’s 2015 deadline. With the wealth gap accelerating in both Developed and Developing countries, a serious flaw is evident in modern economics.
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by Dr Gavin Putland

Given that the economy is managed so that a certain percentage of people must be losers, the majority stands to gain by ensuring that the losers are selected not from its own ranks, but from the ranks of some already disadvantaged minority. That’s why, forty years after Dr. King’s mountaintop” speech, African Americans still haven’t reached the Promised Land. The solution is to minimize the need for losers. Here’s how.

Forty years ago, as Martin Luther King Jr. spoke of the Promised Land and prophesied “I may not get there with you,” a quiet revolution in economic theory was beginning, which would ensure that Dr. King’s hearers, except perhaps the occasional Caleb or Joshua, wouldn’t get there either. The architects of the revolution didn’t plan it that way, but that’s the way it turned out.

The revolution concerned the relationship between unemployment and inflation. A paper by Milton Friedman, published in the month before Dr. King spoke, and another by Edmund Phelps, published a few months later, gave reason to believe that in the long term, if unemployment falls below a certain rate, inflation speeds up, whereas if unemployment rises above that rate, inflation slows down. That magic unemployment number became known as the Non-Accelerating-Inflation Rate of Unemployment, usually abbreviated by the acronym NAIRU.
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by Bryan Kavanagh

As featured in today’s Business Age, 28/03/08

WHEN it mattered, the US Federal Reserve, US banks and rating agencies failed the risk-management test — in much the same way that Australia is now failing it.

This is because none of these bodies comprehends the manner in which the real estate market leads the economy. Many considerations flow from this, because businesses and individuals borrow against the value of their property assets. So when real estate bubbles burst and banks and mortgagors are left exposed, analysts flounder with such hogwash as “business cycles and recessions are a natural part of the financial landscape”. Another knee-jerk reaction to systemic failure is simply to blame banks and borrowers. It seems anything will do, rather than tackle the fundamental flaw in risk management.
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With the recent passing of the highly respected Georgist Clyde Cameron, we feel it is timely to look at the wisdom of his core beliefs:

EXTRACT FROM AN ADDRESS BY THE HON.CLYDE R. CAMERON A.O.

But now it is an oversimplification to say that the lessons of the Maritime Strike of 1890 were the sole reason for the formation of the Australian Labour Party in the following year. In South Australia; the seeds of discontent were sown on 28th December 1836, when the first white settlers came ashore at Glenelg. Among them were unemployed working men in search of work in the new colony.

South Australia was the only Australian Colony that did not at any stage rely upon transported convicts for cheap labour. And yet the real cost of employing what passed for free men was very much less than the cost of housing., feeding and guarding convict laborers in New South Wales, Victoria, Western Australia and Tasmania.

South Australia was able to prove that wage slavery can provide cheaper labour power than any other form of slavery. Slave owners have the responsibility for feeding and housing their human beasts of burden and of keeping them healthy enough to perform a full day’s work.
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Read this PBS transcript on Monopoly’s original intention to teach about the dangers of land monopoly. Understand how the world’s most popular boardgame was subverted to teach young people the opposite to the games original intent. It is interesting that not more people have twigged that something is wrong in the land game when most Monopoly games end with someone in tears. With a new book out by Philip E Orbanes that glosses over its’ georgist inspirations, ‘Monopoly: The World’s Most Famous Game–And How It Got That Way’, it’s time we remind ourselves of its original intent by reading either this PBS TV special by the History Detectives, or go all the way and read the classic detective-like book The Billion Dollar Monopoly Swindle by Richard Anspach, available in our bookshop for $25.

by Leo Foley
The primary source for this paper is “Canberra in Crisis” by Frank Brennan, 1971

The Road to Leasehold - the origins of the Canberra leasehold system..

Canberra is the offspring of politics and a social ideal.

• The politics were those of Federation and nation making.
• The ideal was one of social and economic freedom.

In the early years of Federation, there was a widespread belief in the need for government ownership of all the land within the proposed federal territory. It was considered that the taking of the unearned increment for the people would make the capital city a paying proposition within a few years. In 1901, the Prime Minister, Edmund Barton spoke of the territory to be chosen for the seat of government: “we shall be able to get the land on fair terms, lease it on fair terms and still make a profit for the Commonwealth”.

These were the years when the words ‘unearned increment’ were basic to any discussion of leasehold tenure in the proposed Federal Territory. As King O’Malley (Labour, Tas) saw it, ‘Every dollar spent by the people of Australia in the erection of that capital will create an unearned increment in the property for miles around. The question is, are the people of Australia prepared to spend thousands, yea millions, and then lose the benefit of their expenditure? I say the unearned increment created by the expenditure of the people’s money belongs to the people…”
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By Dr. Gavin R. Putland (revised June 12, 2003)

In response to A Vision of Sustainable Transport in Queensland (Queensland Greens, February 2003)

Summary

Any new public transport service increases property values (or, more precisely, land values) along the route. The total increase in land values is consistently much larger than the fixed cost of providing the service. If the tax system were reformed so as to claw back an appropriate fraction of all increases in land values, every desirable public transport development would automatically pay for itself in fiscal terms — while still delivering a windfall to property owners. Under the proposed reforms, all sensible public transport proposals that are currently stalled for want of funding would be able to proceed, delivering benefits to property owners, the travelling public, and the environment.

1. The problem

The marginal cost of public transport is the cost of carrying an extra passenger. If the price of a ticket covers the marginal cost plus a reasonable profit margin, then the service provider will find it attractive to carry more passengers. However, the marginal cost is not the only cost to be covered.

It costs money to build a railway even if you don’t provide any trains. And it costs money to provide trains even if they never run. And it costs money to run a train even if it carries no passengers. These are examples of fixed costs. It is usually impossible to cover all the fixed costs from ticket sales. If you raise the ticket price above the marginal cost, each ticket defrays some of the fixed costs, but you sell fewer tickets. If you keep raising the ticket price, you eventually reach a point where the loss of revenue caused by decreased sales outweighs the gain in revenue caused by higher prices; and this point is usually reached long before the fixed costs are fully covered.

Hence, if public transport is to be viable in microeconomic terms (i.e. from the viewpoint of the provider), it needs another source of income as a supplement to ticket prices. If the supplement comes from conventional taxation, it has two problems:

1. It is inequitable; taxpayers who have no access to public transport still have to pay for it, while taxpayers in poor areas pay for transport services in rich areas.
2. It is inefficient; conventional taxes stifle the economy by penalizing work, employment, saving, investment and consumption.

These problems discourage governments from providing public transport and restrict the subsidies available to service providers, forcing them to raise ticket prices above the marginal cost to the level that minimizes losses, which level leads to low ticket sales. The result is a public transport system that is too thinly spread, too expensive and too infrequent to attract the travelling public away from their cars. The public then demand more expenditure on roads, which further squeezes the funding available for public transport — completing the vicious cycle.

(Note: It is arguable that the cost of running an extra train or bus should be regarded as a marginal cost rather than a fixed cost. But, wherever we draw the line between fixed and marginal costs, the essential conclusion is the same: we cannot cover all the fixed costs from ticket prices.)

2. Snake oil: Public-Private Partnerships (PPPs)

It is fashionable nowadays to claim that the problem of financing public infrastructure, such as transport, can be solved by handing it over to the private sector.

Of course the private sector has always been involved to some extent. Traditionally, when a government department wants to build something big, it calls tenders for the major components of the project, and the successful tenderers are usually from the private sector; but the department retains overall responsibility for the project and finances it from borrowed or saved funds. The new fashion, however, is to hand over both the overall management and the financing to a principal private contractor. This arrangement is called a public-private partnership (PPP), where “public” apparently describes the source of subsidies and other special favours conferred on the private partner.

The basic problem of public transport is that the fixed costs of provision cannot be recovered through ticket prices. This problem cannot be solved by privatizing it unless the private contractor can build the system at lower cost and/or inspire the public to pay higher ticket prices. Even if this condition is met, the advantage of the private contractor is only one of degree, not one of essence. But in fact the condition is not met. Here are some of the reasons:

1. PPPs increase costs, including:

1. Interest: As governments can levy taxes to repay their debts, it is safer to lend to the public sector than to the private sector. So the public sector can borrow at lower interest. To the extent that PPPs replace public borrowing by private borrowing, they increase interest costs.
2. Dividends: Private firms, unlike government departments, need to make profits and pay dividends to their shareholders.
3. Set-up costs: Under PPPs, the big accounting firms rake in huge sums in consultancy fees, both from governments seeking advice on the feasibility of PPP projects and from corporations bidding for principal contracts (and can anyone not see the conflict of interest?!).
4. Social costs: Experience shows that the main “savings” made by private principal contractors come in the form of inferior wages and conditions for their own employees and inferior contractual protection of wages and conditions of subcontractors’ employees. This expedient does not reduce costs, but merely shifts costs onto the employees and their families and the social security system (i.e. the taxpayer).

2. A PPP-provided transport system is likely to be inferior in design and build, and hence less attractive to passengers, than a publicly provided system, because of:

1. Moral hazard: For a government department, providing substandard public transport is bad politics; but for a private firm, it may be a safe way to cut costs and boost shareholder value — especially if the taxpayers have promised to bail you out if you can’t sell enough tickets to stay viable.
2. Technical errors: Because the PPP concept is new, private principal contractors have less experience in infrastructure provision than the responsible government departments and are therefore more likely to make mistakes. (Of course, some of these mistakes could also be listed under higher costs.)
3. Market constraints: While a private firm need not worry about a political backlash against high ticket prices, it is no more immune to market forces than governments are: if tickets are too expensive, passengers may use other modes of public transport, or use cars, or stay home. (And even if a private firm can raise ticket prices without delivering a better service, this does not represent a gain to the travelling public.)
4. Short time horizons: Under the best-known form of PPP, namely the build-own-operate-transfer (BOOT) contract, the principal contractor has a limited time (e.g. 25 years) in which to recover its costs and make its profits before handing over the system to the public sector (the “transfer”). This handicap increases the required cost savings and/or increases the required ticket prices. Moreover, the transfer requirement is an admission that it is desirable to have the system publicly owned and operated!
5. Commercial errors: Because the history of PPPs is short by comparison with the service lives of PPP projects, and because innovation in PPPs continues, the financial details of PPPs are not adequately tested and may fail in unexpected ways, causing cost blowouts. At best, such failures will be caused by honest mistakes; at worst, they will be caused by misleading and deceptive conduct.

6. Alternative competitive models: While it is true that competition in the private sector encourages efficiency and reduces costs, the benefit of that competition can be obtained through the traditional tendering process without resorting to PPPs.

For governments, one attraction of PPPs is the avoidance of public debt. However, when a government privatizes an infrastructure project, it forgoes the income (e.g. from ticket sales) that it could earn by keeping the project public, and must subsidize the project if it is not microeconomically viable. The expenses involved in the subsidy (if any) and forgone income are equivalent to servicing a debt; and for the reasons given above, the equivalent debt for the PPP option is greater than the debt for the traditional public financing option. But this equivalence is not recognized by accrual-based accounting methods, in which a debt is counted as a negative contribution to net worth, while the present value of a future series of outgoing payments is not (see Appendix A on the present value of an annuity). So the technical avoidance of debt allows the government to pretend that its financial position is better than it is, and that the taxpayers are getting something for nothing when in fact they are losing.

Governments need to be consistent in their attitude to debt. If the limits on government borrowing are too low, they should be increased; if not, they should not be circumvented by financial arrangements that are equivalent to borrowing but called by other names.

Of course, the fact that PPPs increase costs means that private firms — including contractors, consultants and banks — stand to gain at public expense if PPPs are more widely adopted. In view of the dependence of political parties on corporate donations, this increases the pressure on governments to adopt a “PPP or nothing” policy. When this policy trickles down to the public servants who must make recommendations concerning infrastructure projects, they realize that they will not get any project approved unless they “adjust the assumptions” (the non-criminal method of cooking figures) to make the PPP financing option come out on top. So the myth is perpetuated.

3. The problem in terms of benefits

When we say that the fixed costs of public transport cannot be recovered through ticket prices, we are stating the problem purely in terms of costs. To understand why the costs cannot be recovered from ticket buyers, we have to consider not only costs but also benefits. The obvious benefits of public transport include:

• reduced road congestion and associated delays,
• reduced road trauma,
• reduced pollution,
• reduced energy consumption,
• reduced road construction/maintenance costs,
• reduced car acquisition/maintenance costs, and
• reduced space consumption by carports, driveways and car parks.

If these benefits were enjoyed fully and exclusively by the users of public transport in proportion to their use, then the users would be willing to pay the full market value of these benefits in ticket prices. But in fact, as we shall see, some benefit accrue to non-users, so that users cannot be expected to pay for them at all, while other benefits accrue to occasional users out of proportion to their use, so that regular users cannot be expected to pay through ticket purchases (which are proportional to use).

In economic jargon, the problem is that public transport produces positive externalities, i.e. benefits enjoyed by people who don’t pay. The solution, then, is to find a way to make the beneficiaries pay, i.e. to internalize the externalities.

Two recent policy documents produced by the Queensland Greens (references [ 2] and [ 3]) acknowledge many economic benefits of public transport, but signally fail to offer a coherent strategy for internalizing those benefits — i.e. for turning them into cash flows to pay for more public transport. The main funding proposal in these documents, namely the reallocation of most of the road budget to public transport, addresses only one of the seven benefits on the above list. The suggestion that reduced ticket prices will not lead to reduced revenue (because of increased patronage) is budget-neutral. The more recent document [ 3] suggests that when residential developments are approved outside public transport spine areas, the approvals should stipulate that the developers provide linking public transport at their own cost. This proposal is financially sound, being based on the unstated premise that approvals for development increase the values of developers’ land holdings. But it would tend to increase the numbers of transport providers and interchange points, leading to difficulties of coordination, and would do nothing to improve services in areas that are already developed. It also requires a separate deal to be struck for every service so provided, raising the possibility of inconsistency or even corruption. What is needed is a system that is equally financially sound, but which automatically covers the cost of any sensible extension or improvement of public transport.

4. Solution: Land Value Taxation (LVT)

Reducing road funding to pay for public transport reclaims one of the benefits on the above list (”reduced road construction/maintenance costs”). Let us consider the other benefits:

• If public transport reduces the congestion and delays on the roads servicing a particular area, that area becomes a more desirable place to live, and people will pay more to live there — even if they commute by car.
• Because travel by public transport is safer than travel by car, safety-conscious commuters will pay more to live in an area with public transport than in an area without, other things being equal.
• If a city produces less pollution, it becomes a more desirable place to live and increases the price premium that people will pay to live in that city, as opposed to a rural area. Again, this benefit is shared by those who don’t actually use the public transport. (Reduced energy consumption is of course correlated with reduced pollution.)
• If public transport allows residents in a particular area to get by without cars, or with one car per household instead of two, the incidental costs of living in that area are reduced, so that people will pay more for just being there. These benefits do not accrue to households in strict proportion to their use of public transport; for example, even occasional use may eliminate the need for a second car.
• If public transport allows commercial property owners in a particular area to devote less space to car parks and associated driveways, the owners can devote a higher percentage of their space to business, and investors will be willing to pay more for that space. This logic applies regardless of whether the investors themselves use the public transport.

Now, to live or do business in a particular area, you need access to a building (or a share thereof) plus a site, i.e. a piece of land (or a share thereof). Because of competition between new and existing buildings, the price of a building cannot rise much above the depreciated replacement cost, while the rent of a building cannot rise much above the interest on that cost. Nor can the price and rent of a building fall far below these respective levels (unless the building is so badly located as to impair its intended use). So, if public transport drives people to pay more for the privilege of living or doing business in a particular area, they pay more for access to the land, not for access to buildings. That is:

* Most benefits of public transport are reflected in increased land values.

The increases in land values obviously cannot be captured in ticket prices, because people do not buy land with their tickets. But increased land values are certainly realized in cash whenever land is sold or let or used for business. These cash flows can be captured for public purposes through the mechanism of land value taxation (LVT).

Under an LVT régime, the owner of each site annually pays a certain (small) percentage of the land value into the public treasury. That percentage is called the LVT rate. The gross rental value of a site is the market rent that a landlord could charge for the site. In order to receive this rent, the landlord must own the site and pay the LVT, so that the LVT is an expense incurred in obtaining the rent. Hence we subtract the LVT from the gross rental value to obtain the net rental value of the site; in this essay, the word net means “net of LVT”. Using these definitions and a bit of high-school mathematics (see Appendix A for the details), we can establish the following:

* If the value of a site increases by a certain fraction while the LVT rate remains constant, then

• the annual LVT liability increases by the same fraction, and
• the gross rental value increases by the same fraction, and
• the net rental value increases by the same fraction.

In other words, if the value of a site increases while the LVT rate remains constant, the owner always gets an unearned windfall in spite of the tax! But the public treasury also gets a contribution. This is reasonable because the unearned windfall increases the owner’s capacity to pay tax. It is even more reasonable if the unearned windfall is due to a public project funded by the treasury: “Render to Caesar the things that are Caesar’s.”

The total increase in land values caused by a desirable public transport project is consistently greater than the fixed cost of the project; indeed, because the benefits of public transport are largely realized as increased land values, we may regard the ratio of the total increase in land values to the fixed cost as the figure of merit of the project. So, by capturing a sufficient fraction of the increased land values through LVT, we can obtain enough revenue to cover the fixed cost. One minor complication is that the revenue from LVT is an annuity, whereas most of the fixed cost of the project usually appears up-front as a capital cost. But the capital cost is easily converted to an annuity by borrowing. Contrary to the current PPP dogma, financing an investment by borrowing is perfectly rational and responsible when the investment yields more than enough revenue to repay the loan.

Furthermore, ignoring the connection between public infrastructure and land values, and considering LVT simply as a general-purpose tax, we must conclude that LVT is an exceptionally convenient, efficient and equitable method of raising revenue. It is convenient because it has negligible compliance cost. It is efficient because the value of land is not due to any activity of the owner, so that taxing the value in the hands of the owner cannot discourage any economic activity. It is equitable because the value of land owned by a household tends to increase much more than proportionally with household income — so that, for example, a flat-rate LVT is more progressive than any practical “progressive” income tax — and concessions are easily devised to deal with exceptional households that are asset-rich but income-poor.

The method by which land values are calculated for the purpose of taxation is described in Appendix B. Some minor details of definition are relegated to Appendix C.

5. Funding of other infrastructure

While the present policy discussion is concerned with public transport, we should note that public transport is not the only kind of infrastructure that can pay for itself through increases in land values.

For example, the value of land in a new suburb is enhanced when the suburb is provided with a state school. Similarly, any improvement to an existing state school enhances land values in its student catchment area. A British study published in 2001 found that being in the catchment area of a desirable state school could increase the value of a home by up to 19 percent, and that the additional mortgage cost of moving into such a catchment area — i.e. the price charged by the incumbent landowners for admission to the desired “free” state school — was typically 700 to 1400 pounds a year [ 1, p.14].

6. Friendly fire: Property owners’ associations and LVT

People of privilege will always risk their complete destruction rather than surrender any material part of their advantage.

— John Kenneth Galbraith.

Property owners and their associations are vociferous in complaining about land value taxes, opposing any suggestion that LVT rates be increased, and applauding any political party (e.g. the Liberal Party in Queensland) that professes a long-term goal of doing away with LVT. Superficially their position makes sense; it seems obvious that the owners of any asset class stand to lose if that asset class is taxed. It is only when one considered the connection between land values and infrastructure (such as public transport) that the folly of their position is exposed.

If LVT rates are sufficiently high, the increased annual taxes collected on the increased land values caused by desirable public infrastructure projects are enough to pay for the projects. So the projects go ahead, and the landowners reap unearned windfalls in the form of increased sale values and increased after-tax rental values (see Appendix A again — and note that the landowners gain from increased land values no matter how high the tax rate may be). The only owners who might suffer from the increased annual tax are those who do not realize the rental value of their land as cash flows (e.g. residential owner-occupants). Even these owners have the opportunity to be winners, because they can sell up and move out and pocket the capital gains. Nevertheless, for political reasons it is inevitable that such owners would be offered special concessions, such as the option of allowing unpaid LVT to accumulate as a debt against the property. But this is a concession to sentiment; from a purely financial viewpoint, all landowners whose LVT bills increase are winners, because the rental value of their land after tax also increases.

But if LVT rates are not high enough to recoup the costs of public infrastructure projects, those projects face fiscal barriers and may therefore not proceed, in which case landowners miss out on the associated windfalls. Admittedly, in the presence of LVT, the landowners only get a fraction of the increases in gross rental values; but a fraction of something is better than 100 percent of nothing!

Nor is this all. While a desirable public project increases the values of most affected sites, there will usually be a few sites that decline in value — e.g. business sites that are bypassed, or residential sites that lose a desirable view or are affected by noise. The owners of such properties are said to suffer wipeouts instead of windfalls. Under an LVT system, these owners receive partial compensation in the form of reduced tax assessments. The higher the LVT rate, the greater the the compensation for wipeouts, and the lower the risk of a successful NIMBY (Not In My Back Yard!) campaign against the project.

NIMBY campaigns would be even less likely if landowners had a legal right to full compensation (not merely partial compensation) for wipeouts. Under the present tax system, which underutilizes LVT, infrastructure projects do not generate enough new revenue to cover fixed costs, so that, if full compensation for wipeouts were made mandatory, it would constitute yet another fiscal barrier to development. But if LVT rates were sufficiently high, desirable projects would generate enough additional revenue, via increases in land values, to cover fixed costs plus full compensation for the few landowners who suffered wipeouts.

In summary, if LVT rates are too low, landowners suffer because projects that would enrich landowners languish on the shelf for want of funding and for fear of a NIMBYist backlash.

The above arguments apply to changing land values at a constant (high or low) LVT rate. But even if the LVT rate is increased, landowners do not suffer provided that the increase in LVT is balanced by cuts in transaction taxes, because those tax cuts increase the rental value of land (see Appendix A again). So not only do landowners have nothing to fear from high LVT rates; they also have nothing to fear from the transition to those rates.

7. LVT and rail freight

The Queensland Greens policy documents [ 2, 3] complain that rail freight lines have been neglected in favour of environmentally destructive road freight, and suggest that rail freight carriage could be encouraged by allowing door-to-door access via private rail sidings [ 3].

If rail freight charges were kept sufficiently low, the revival of freight lines passing through industrial and commercial land would increase the value of that land. The values of land holdings adjacent to the lines would be further increased if permission were given to build private sidings. These windfalls could be partially recaptured through LVT to cover the fixed costs of the rail freight services, so that freight charges would only need to cover marginal costs.

8. LVT and urban sprawl

The Queensland Greens policy documents [ 2, 3] seem to imply that the car is the only cause of urban sprawl. Reference [ 2] goes so far as to say “The emphasis on the car in the town planning process since the 1960s has been solely responsible for the massive sprawl that all Australian cities are now facing.”

Certainly the car is a major contributor to sprawl, with its demands for storage space, parking space and moving space. But to blame the car alone is a gross exaggeration, because sprawl is caused not only by non-optimal use of land, but also by complete non-use of large amounts of land inside urban areas. In 2000, two researchers from the Brookings Institution studied land waste in 70 American cities with populations over 100,000. They found that, on average, about 15 percent of urban land was vacant, while typically there were about 3 abandoned structures per 1000 inhabitants [ 1, pp.83-4]. Some cities were spectacularly worse than average; e.g., 43 percent of land in Phoenix was vacant, while Philadelphia reported 36.5 abandoned structures per 1000 inhabitants. Considering that we will always need roads and parking spaces (even if only for buses!), one is inclined to think that optimal use of presently unused urban land would reduce sprawl as much as any feasible reduction in car use.

(Note: While it may seem that unused land is environmentally desirable, unused urban land is not likely to be in its natural state — indeed, as the above figures show, it may even be littered with abandoned buildings — and even if it is in its natural state, the environmental benefit is vitiated by isolation from other virgin land. Occasionally a piece of land may be of such unique ecological value that it must be preserved even if it is surrounded by urban development; but usually it is better to keep the city more compact and save more virgin land outside.)

Unused urban land is a symptom of inadequate LVT rates. If the annual interest and LVT payable after the purchase of a piece of land are together less than the annual real increase in the land value, then a speculator can buy the land and sell it for a capital gain without having to earn any income from the land in the mean time. By keeping the land vacant, or failing to use any existing structure on the land, the speculator can retain maximum freedom to sell the land for any desired use at the most opportune time. Land speculation constitutes an artificial demand for land and pushes up land prices, forcing genuine land users to seek cheaper land further out of town. This scattering of development is itself a form of sprawl, and causes further sprawl as space-consuming roads must be built to service the remote suburbs.

If the LVT rate is slightly higher, the speculator may not be able to cover the LVT liability from the capital gain alone, but may be able to cover it by some temporary cheap development such as a car park, warehouse, or self-storage centre. Such developments, known in the trade as “cash crops” or “tax payers”, are designed to cover the property tax liability while minimizing capital expenditure.

The higher the LVT rate, the higher the annual cost of holding land, and the greater the pressure on landowners to cover their tax liabilities by putting land to its best possible use — instead of wasting it and causing sprawl. LVT does not discourage governments from reserving land of unique ecological value or setting aside a reasonable amount of land for parks and gardens, because these things make a city a more desirable place to live and consequently increase LVT receipts from other land in the city. But LVT does militate against purely speculative holding of land. In so doing, it improves the competitive position of tenants and intending buyers (see Appendix A).

A secondary cause of sprawl is property taxes levied on the values of land plus buildings, instead of land values alone. Including values of buildings in the tax base is obviously a disincentive to the construction of new buildings and the renovation or extension of existing buildings. While the additional annual tax may not seem very high when expressed as a percentage of the capital investment, it is many times higher when expressed as a percentage of the annualized value of the investment and can easily have a decisive effect on viability.

Minimizing sprawl is therefore a matter of maximizing the taxation of land values and minimizing (preferably eliminating) the taxation of building values.

9. Implementation

In principle, all we have to do is reduce or abolish transaction taxes and make up the lost revenue by increasing LVT rates, until the LVT rates are sufficient to recover the fixed costs of desirable public infrastructure, including public transport, through the resulting increases in land values. In practice, the problem is complicated by the existence of three levels of government: Federal, State and Local. But the complication is minor; for any project, if the total of the LVT rates levied by the respective levels of government is more than sufficient to cover the fixed cost, then the governments will have an incentive to fund the project jointly, with each level of government contributing in proportion to its expected LVT windfall. So let us consider the three level of government separately and ask which taxes could be replaced by LVT.

(a) Local:

Local councils already impose LVT in the form of “rates”. In Queensland and NSW, the value of the land alone is rated. In other States, some councils rate the total value of the land and building(s); these councils should confine the tax to land values alone, and compensate for the lost revenue by increasing the LVT rate.

Local councils also raise revenue from various service charges in addition to “rates”. If these charges are not easily avoidable and not proportional to use of the services, they too should be abolished in favour of higher LVT rates — especially if the availability of the services enhances the value of land.

(b) State:

The States impose some of the worst taxes in the present system, such as payroll tax, stamp duties and debit taxes. These taxes feed into the prices of goods and services and impede transactions, including employment. Thus they increase the cost of living for poor households while reducing their opportunities to help themselves. The States also impose LVT in the form of State land taxes. But these taxes are riddled with multiple thresholds and politically-motivated exemptions which reduce their effectiveness for capturing increases in land value caused by State-funded projects.

What all these taxes have in common, however, is that they are collected from or through businesses that operate on commercial and industrial land. So, given that the current mess of State taxes is to be replaced by a single flat-rate State LVT, it would be logical for that LVT to apply only to commercial and industrial land. The landlords and owner-occupants of such land would pay the LVT, while the tenant businesses would simply forget about State taxes.

What about gambling taxes? At first sight it may seem that these taxes discourage gambling. However, the effect of taxation on the odds is not sufficient to deter problem gamblers, while the availability of gambling is limited by licensing, not taxation. Moreover, while a gambling licence increases the value of the land to which the licence applies, it reduces the total value of surrounding land by a greater margin. (Why? Because gambling is an unproductive business that draws customers away from more productive businesses, reducing overall productivity.) So if the States were totally reliant on land values for revenue, they would have an overall incentive to reduce the number of gambling licences — whereas at present they have an incentive to grant more licences so that they can collect more gambling taxes.

(c) Federal:

If commercial and industrial land is to be taxed at State level, that leaves residential and agricultural land to be taxed at Federal level. A Federal “tax” on residential and agricultural land is not such bad politics as one might think, because it need not look or feel like a tax.

When we think of Federal taxes, we tend to think of income tax, company tax, GST and excises. However, the most stultifying Federal taxes — and hence the ones most fit to be replaced — are not officially called taxes. They are officially called means tests on social security benefits. But means tests are fully equivalent to taxes, both in terms of their fiscal effects and in terms of the economic disincentives that they cause.

On your income, your effective marginal tax rate (EMTR) is the number of cents that the government claws back from each additional dollar that you earn. You don’t care how many of those cents are clawed back by the Tax Office and how many by Centrelink, and neither does the government; the combined number is all that counts. So an income-tested benefit, abated at a certain marginal rate within a certain income band, is equivalent to a non-income-tested benefit of the same amount plus an income tax surcharge at the same marginal rate within the same income band, payable by recipients of the benefit. Newstart allowance, for example, is clawed back at a maximum rate of 70 cents in the dollar. The result is that a job seeker who finds a bit of casual work faces a higher EMTR than an executive on a six-figure salary.

Similarly, on your assets, your effective marginal rate of taxation is the number of dollars per fortnight that the government claws back for each additional $1000 worth of assets that you own. Again, how the clawback is divided between the Tax Office and Centrelink makes no difference to you or to the government. So an assets-tested benefit, abated at a certain marginal rate within a certain band of asset values, is equivalent to a non-assets-tested benefit of the same amount plus a wealth tax at the same marginal rate within the same range of asset values. A pensioner subject to the assets test loses $3 per fortnight per additional $1000 of assets, which is equivalent to paying interest at a marginal rate of almost 8 percent per year on one’s own money — not exactly an incentive to save for one’s retirement!

LVT is free of such disincentives (see Appendix A). But what all these disincentives have in common is that they affect individuals and families living on residential and agricultural land. So if the present tangle of means tests is to be replaced by a single flat-rate Federal LVT, it would be logical for that LVT to apply only to residential and agricultural land. In the case of owner-occupants, the LVT could be deducted from the total of welfare payments otherwise due to the occupants, and any LVT over and above the total of benefits could be written off; that is, the LVT could become a single means test (SMT) replacing all current means tests. Absentee landlords, of course, should simply receive a bill for the Federal LVT.

(A technicality: It is arguable that if your equity in your home is worth less than the land under it, then your SMT should be based on the equity, not the land value. Otherwise first home buyers would be deterred by sudden large decreases in welfare entitlements.)

10. Instead of a conclusion

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. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. 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.

… Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon, or to make to its owner so much more than compensation for the loss which he might sustain by this use of it. Nothing can be more reasonable than that a fund which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.

— Adam Smith (1723-1790),
The Wealth of Nations, V.ii.75,76.

Appendix A: Mathematics of LVT

Using the distributive law, we can easily verify that
(1 - x)(1 + x + x2 + … + xn-1) = 1 - xn.

Rearranging this gives a formula for the sum of a geometric progression:
1 + x + x2 + … + xn-1 = (1 - xn) / (1 - x) . (1)

Using this result, we can find a formula for the present value of an annuity. Consider n annual payments, each of an amount A, with the first payment due at the end of the first year. Let the annual discounting rate, or “interest rate”, be i (e.g. if i=0.05, the discounting rate is 5 percent per annum). Then the first payment is discounted by one year, so its present value is A / (1+i); and the second payment is discounted by two years, so its present value is A / (1+i)2; etc. So the present value of the series of n payments is
P = A/(1+i) + A/(1+i)2 + … + A/(1+i)n
= [A/(1+i)] {1 + 1/(1+i) + … + 1/(1+i)n-1} .

The factor in curly braces is a geometric progression which may be evaluated using Eq.(1), with x = 1/(1+i). Doing this and simplifying, we get
P = (A / i) [1 - 1/(1+i)n ] .

In the case of a perpetuity (i.e. a perpetual annuity), we let n –> infinity, so that the term 1/(1+i)n approaches zero, and we have simply
P = A / i . (2)

This is the present value of a payment of A per year in perpetuity, with the first payment due after 1 year.

Now let’s apply this to land rent and land value taxation (LVT). In Eq.(2), let A be the annual rental value of a piece of land, net of LVT. This is the rent (net of LVT) that a landlord could get for the land, or the advantage (net of LVT) that would accrue to an owner-occupant making optimal use of the land. Then P in Eq.(2) is the present value of the perpetual rent stream, which is the value (selling price) of the land. If we rename this value as V, Eq.(2) becomes
V = A / i . (3)

This V is also called the unimproved capitalized value (UCV) of the land.

Now let E be the gross annual rental value of the land, including LVT. This is the market rent that a tenant would pay for the use of the land, knowing that the actual remittance of LVT is the landlord’s responsibility. Let the annual LVT rate, expressed as a fraction of the UCV, be t. Then the annual tax payable is tV, and the net annual rental value (i.e. net of LVT) is
A = E - tV. (4)

Substituting this into Eq.(3) and solving for V gives the sale value of the land as
V = E / (i+t) . (5)

Substituting for V from Eq.(3) and rearranging gives the net rental value of the land as
A = iE / (i+t) . (6)

The annual LVT payable is T = tV. From Eq.(5), this is
T = tE / (i+t) . (7)

In Eqs. (5) and (6), notice that the sale value V and the net rental value A are decreasing functions of t ; that is, as the LVT rate increases, V and A decrease. However, no value of t can reduce V or A to zero. Moreover, for a given LVT rate, V and A are proportional to the gross rental value E. This leads to our first important conclusion:

* For a given LVT rate — however high it may be — any development that increases the gross rental value of land also increases its sale value and net rental value in the same proportion.

We may therefore speak simply of “developments that increase the value of land” without having to specify which measure of “value” we mean.

Now consider what happens when the value of a piece of land increases because of some fortunate “development” (e.g. a public transport project). Because of the proportionality between the various measures of value, a landowner who can realize the increase in A as a cash flow (e.g. a landlord who charges market rents or a business owner-occupier who uses the land optimally) wins in every way. Another landowner who cannot realize an increase in A (e.g. a residential owner-occupant) does not have any additional cash flow to cover the increased LVT, but can avoid the increase in LVT and pocket the increase in V by selling out and moving to another location. Alternatively, (s)he can allow the increased LVT to accumulate as a debt against the increased sale value until the property is eventually sold or bequeathed. (But if the LVT for this class of owner is collected as a deduction from social security, the owner might not be affected at all, because his/her social security entitlement might already be zero. And if the owner is a charitable concern, such as a hospital, one might reasonably grant an exemption.) All this is summarized in our second important conclusion:

* For a given LVT rate — however high it may be — all property owners gain or have the opportunity to gain from any development that increases the value of their land.

Comment: Because of the proportionality between V and A in Eqs. (5) and (6), the fraction by which the LVT reduces the sale value of the land is the same as the fraction of the gross rental value taken in tax. That fraction is T/E, which may be found from Eq.(7):
T/E = t / (i+t) . (8)

For example, if the LVT rate is equal to the discounting rate (t=i), then the sale value of the land is reduced by half. But no value of t can reduce the sale value by 100 percent. This peculiarity arises because the annual LVT is expressed as a fraction of the “reduced” sale value, i.e. the sale value in the presence of LVT, not what the sale value would be in the absence of LVT.

There is one more complication to be considered. At first, we took the gross rental value E as “given”; for example, Eqs. (5) to (7) express the sale value, net rental value and annual LVT in terms of E. Then we considered “developments” (e.g. public transport projects) as causing increases in E. But another cause of such increases is tax cuts.

Because business transactions take place on land, all taxes on transactions, such as income tax, company tax, GST, payroll tax, stamp duties and debit taxes, are effectively charges for various uses of land. Similarly, because government services are consumed on land, charges for such services are effectively charges for various uses of land. If such taxes and charges were reduced, the respective uses of land would become more profitable, so tenants would offer more rent for such uses, so the gross rental value of the land (E) would increase — by the amount of the reduction of taxes and charges. Hence, if the lost revenue from these taxes and charges were replaced by LVT, the increase in gross rent would cancel the increase in LVT, so that, on average, net rental values would be unchanged and landowners would be no worse off. (Landowners who cannot realize the increased gross rent would receive special treatment as above.)

Moreover, transaction taxes render some transactions unprofitable that would otherwise be profitable, so that the volume of transactions is reduced; this is called the deadweight effect of taxation. Reductions in transaction taxes would reduce the deadweight effect and increase the volume of business that could be done on each piece of land, further increasing its gross rental value. But the LVT replacing the lost revenue from transaction taxes would have no deadweight effect, because LVT is not a transaction tax and cannot be avoided by avoiding transactions; LVT is a tax on the value of the land, which value does not depend on any activity of the owner (taxpayer). So the removal of transaction taxes would cause a net reduction in deadweight, which would fund an increase in the net rental value of the land (over and above the additional LVT replacing the lost transaction taxes). This represents a net gain to landowners.

Thus we have two more conclusions:

• LVT can generate sufficient revenue to compensate for any abolitions or reductions of transaction taxes.
• Property owners have nothing to fear from any LVT rate increase that simply replaces the revenue lost due to reductions or abolitions of transaction taxes.

In the category of “transaction taxes” we can also include taxes on the values of buildings — including the component of municipal rates that falls on buildings in States other than Queensland and NSW. Property taxes on buildings are transaction taxes in that (a) a tax liability is created by every decision to build, extend or renovate a building, which decision involves a transaction or set of transactions, and (b) the tax liability therefore discourages the decision to build, extend or renovate, and consequently has a deadweight cost. But the same cannot be said of LVT, because (a) the decision to buy land does not create a tax liability, but merely transfers the existing tax liability (reflected in the purchase price) from seller to buyer, and (b) even if the tax were to discourage the purchase, this would not amount to deadweight, because the purchase of land (unlike the purchase of buildings or other products) cannot create a new asset, but merely transfers ownership of an existing one.

N.B.: A reduction in transaction taxes, by itself, enables tenants to pay more rent, and competition between tenants ensures that they do; but an increase in LVT, by itself, does not enable landowners to charge higher rents or prices. Taxes on transactions are passed on in prices because if producers cannot cover these taxes, supply decreases and prices rise. But this mechanism does not work with land, because land has no producers and its supply is fixed. So landowners cannot shift the burden of LVT onto tenants or other customers, but tenants can shift the benefit of transaction tax cuts onto landlords.

Here is some more evidence that the burden of LVT cannot be shifted:

• It is said that for every two economists you get three opinions. But virtually all economists agree that LVT cannot be shifted.
• Because LVT is a fixed overhead cost, it does not change the prices at which traders maximize their profits (allowing for the effect of prices on sales); if traders could raise profits by raising prices, they would do so with or without the tax. “Traders” include landlords, for whom “prices” mean rents and “sales” mean occupancy rates. So neither can LVT be passed on in rents.
• If it were more profitable to do business on one site than on another, the additional demand for the first site would raise its gross rental value so as to cancel the difference in profitability. So the effect of land rents is to equalize the profitability of all unimproved sites, reducing profit margins to those obtainable on marginal sites, i.e. sites with zero rental value. More desirable sites are called supermarginal (or viable) and yield positive rent. Less desirable sites are called submarginal (or unviable). LVT cannot cause supermarginal sites to become submarginal, because marginal sites pay no tax, while supermarginal sites pay only part of their gross rental values in tax. Because traders who own higher-taxed sites must compete with those who own lower-taxed sites, and because the tax does not reduce competition by putting any sites out of business, differences in LVT liabilities cannot be passed on in prices. Again, this argument applies to rents as to other prices.

Warning: Landowners resent LVT because they cannot pass it on in rents and prices. So they campaign against it — by claiming that they can pass it on! But in so doing, they campaign against a tax which would pay for projects that would increase the value of their land while allowing other tax cuts that would further increase the value of their land. So they pay the just penalty for their unenlightened self-interest. The tragedy is that everyone else also pays.

Although this essay emphasizes the benefits of LVT to landowners, the reduction or elimination of the speculative motive (discussed above in connection with urban sprawl) confers a substantial benefit on intending buyers and on tenants. Those who wish to use land face a choice between buying and renting. If one option becomes more expensive, demand shifts away from it and re-balances the prices. Similarly, landowners have a choice between selling their land and letting it to tenants. If one option becomes more attractive, owners become more willing to offer that option, and the shift in supply re-balances the prices. Thus there is a nexus between prices and rents. If LVT discourages speculation, land becomes more affordable to those who wish to buy it for productive purposes (because they no longer have to compete with speculators), and hence more affordable for tenants. However, because cuts in transaction taxes tend to increase land rents, “more affordable” does not mean cheaper in dollar terms; it means cheaper in relation to capacity to pay.

At this point it may be helpful to summarize the effects on land values of replacing transaction taxes with LVT:

(i) The tax liability on the land reduces its after-tax rental value, hence sale value.

(ii) The reduction/elimination of the speculative motive reduces sale values, hence rental values. But, because land speculation is inflationary, the reduction of speculation allows lower interest rates, increasing the sale value for a given rental value while maintaining affordability for intending buyers.

(iii) The abolition/reduction of transaction taxes makes the use of land more profitable, increasing rental values, hence sale values.

(iv) The reduction of deadweight increases the variety of profitable uses of land, increasing rental values, hence sale values.

(v) Public projects that increase land values become self-funding, so that more such projects are completed and more land values are enhanced by this mechanism.

The author claims that (i) and (iii) roughly cancel out, while (iv) and (v) represent substantial gains to property owners. Point (ii) reduces the net gain to landowners in terms of rental values, but not necessarily in terms of sale values, and represents a gain for tenants and intending buyers. Most importantly, (iv) and (v) represent overall gains to the community (city, state or country), so that nobody’s gain needs to be anybody else’s loss: if you make a bigger cake, everyone can have a bigger slice.

Appendix B: Computing Unimproved Capitalized Values (UCVs)

First a note on terminology: improvements to a block of land include buildings, fences and other structures on the land, but not roads or power lines or other services that pass by just outside the land; the latter are regarded as contributing to the locational value of the land, which is part of the unimproved value. Improvements are so-called because they normally add to the economic value of the land as measured by the market.

Now, every time a property is sold or let, we can obtain a spot value for V (the UCV or sale price of the land) as follows:

(a) If the property is sold without improvements, the sale price is V.

(b) If the property is let without improvements, the annual rent is E, and V is found from Eq.(5).

(c) If the property is sold with improvements which are promptly demolished by the purchaser, then V is the total price that the purchaser was willing to pay for the bare site, i.e. the sale price plus the anticipated cost of demolishing the improvements.

(d) If the property is sold with improvements which are used by the purchaser, the depreciated replacement value of the improvements is subtracted from the sale price to obtain V.

(e) If the property is let with improvements, the depreciated replacement value of the improvements is multiplied by the applicable interest rate to produce an annualized value, which is then subtracted from the annual rent to produce E. Then V is found from Eq.(5).

Recent spot values are brought up to date with reference to local trends. Then their accuracy is checked, and unknown values are filled in, by exploiting the requirement of spatial continuity: in the absence of significant boundaries (see note iii below), the unimproved rental value per unit area must be a smoothly-varying function of position.

For agricultural land, it may be impossible to obtain nearby recent spot values. However, such land can be valued from records of stock-carrying capacity, crop yields and operating costs; and the influence of public infrastructure on operating costs is readily estimated.

Notes:

1. Methods (a), (b) and (c) are preferred to (d) and (e), because if the location of a building interferes with its intended use, the value that the building adds to the site can be less than the depreciated replacement value of the building. An extreme example of this is found in method (c), in which the useless “improvements” have a negative effect on the sale price.

2. The equations in Appendix A assume that rent is paid annually in arrears. So in points (d) and (e) above, the “annual rent” must be defined as the future value, after one year, of the full year’s rental payments.

3. For the purpose of spatial continuity, significant boundaries obviously include visible barriers to movement, such as waterways, freeways (between entry/exit points) and railways (between stations). The fact that railways can mark sudden changes in land value per unit area is well known, as attested by the expression “the wrong side of the tracks”. But significant boundaries also include invisible lines such as boundaries of suburbs (some suburbs being more prestigious than others) and boundaries of catchment areas for state schools (some schools having better reputations than others).

Opponents of LVT — e.g. speculators who want to maximize their investment in (appreciating) land and minimize their exposure to (depreciating) improvements — often claim that it is impossible to value land separately from buildings. On this basis, they argue that if land is taxed at all, it should be taxed on the improved capitalized value (ICV), i.e. the value of the land plus improvements. This broadening of the tax base results in a reduction of the rate on unimproved land, which just happens to suit the plans of the speculators.

But consider this: How do you calculate the ICV of a home that has not recently been sold or let? If a comparable home has recently been sold or let nearby, you can use that for a benchmark. If not, you have to estimate the depreciated replacement value of the improvements and then add the value of the land, which is found by interpolation between known values using spatial continuity; in other words, there are cases in which you can’t value the house and land together unless you can value them separately!

The valuation of land, as distinct from buildings and other improvements erected thereon, is a well developed science. For more than a century, local governments in Australia, especially Queensland and NSW, have been charging rates on land values alone. The claim that it can’t be done is self-serving and not to be believed.

Appendix C: UCV vs. Site Value (SV)

In Queensland, rates are levied on the unimproved capital value (UCV). In Victoria, a few councils levy rates on the site value (SV). The SV includes human works that have become merged with the land (e.g. old draining, grading, tree-felling and tree-planting) whereas the UCV excludes them. The SV is considered more objective because, as the years pass and the land changes hands, it may become difficult to distinguish merged improvements from natural features. The “land value” as defined in NSW is closer to the SV than to the UCV.

The capital-improved value (CIV) is synonymous with the improved capitalized value (ICV).

Because both the UCV and the SV exclude the most visible and valuable improvements, such as buildings, the difference between them is usually minor and of interest only to professional valuers. For the purposes of this essay and of wider economic policy, the two terms may be used interchangeably.

References

[1] Don Riley, Taken for a ride: Trains, taxpayers and the treasury (Teddington, England: Centre for Land Policy Studies, 2001). Note: Numerous sources are cited in the footnotes. In particular, the idea that landowners stand to gain from high rates of LVT is apparently due to Prof. William Vickrey (1914-1996).

[2] Rod Milne et al., Breaking Brisbane’s car culture: A public transport vision for Brisbane (Queensland Greens, January 2002), downloadable from www.qld.greens.org.au/info/misc/pub_trans_report.html.

[3] Rod Milne et al., A vision of sustainable transport in Queensland (Queensland Greens, February 2003), from www.qld.greens.org.au/info/misc/pub_trans_report.html.

For the arguments against PPPs, the author is indebted to various speakers at the Queensland Council of Unions Government Revenues and Services Forum, Customs House, Brisbane, April 2, 2003.

The single means test (SMT) is the author’s invention.

Disclaimer / declaration

The opinions expressed in this essay are those of the author and not necessarily those of any organization with which the author is affiliated. The tax/welfare reforms proposed in this essay are aimed specifically at funding of public transport and are not necessarily the reforms that the author would prefer if the terms of reference were wider.

At the time of writing, the author is not a property owner, nor a shareholder, nor a welfare recipient, nor a member of any political party. These circumstances may change.

Copyright © Gavin Richard Putland, June 4, 2003 –

Permission is given to transmit this essay by email, to republish it on WWW sites, and to print it in non-profit newspapers and periodicals, always provided that the essay remains intact and that this copyright notice is included.

It is suspected that the author is Mark Twain

Suppose I am the owner of an estate and 100 slaves, all the land about being held in the same way by people of the same class as myself. It is a profitable business, but there are many expenses and annoyances attached to it. I must keep up my supply of slaves either by buying or breeding them. I must pay an overseer to keep them continually to their work with a lash. I must keep them in a state of brutish ignorance (to the detriment of their efficiency), for fear they should learn their rights and their power, and become dangerous. I must tend them in sickness and when past work. And the slaves have all the vices and defects that slavery engenders; they have no self-respect or moral sense; they lie, they steal, they are lazy, shirking work whenever they dare; they do not care what mischief their carelessness occasions me so long as it is not found out; their labour is obtained by force, and given grudgingly; they have no heart in it. All these things worry me.

Flash!

Suddenly a brilliant idea strikes me. I reflect that there is no unoccupied land in the neighbourhood, so that if my labourers were free they would still have to look to me for work somehow. So one day I announce to them that they are all free, intimating at the same time I will be ready to employ as many as I may require on such terms as we may mutually and independently agree. What could be fairer? They are overjoyed, and falling on their knees, bless me as their benefactor. Then they go away and have a jollification, and next day come back to me to arrange the new terms.

They believe …

Most of them think they would like to have a piece of land and work it for themselves, and be their own masters. All they want is a few tools they have been accustomed to use, and some seed, and these they are ready to buy from me, undertaking to pay me with reasonable interest when the first crop comes in, offering the crop as security. As for their keep, they can easily earn that by working a few weeks on and off on any of the plantations, or by taking a job clearing or fencing, or such like. This will keep them going for the first year, and after that they will be better able to take care of themselves.

Hold on, now!

“But,” softly I observe, “you are going too fast. Your proposals about the tools and seed and your maintenance are all right enough, but the land, you remember, belongs to me. You cannot expect me to give you your liberty and my own land for nothing. That would not be reasonable, would it?” They agree it would not, and begin to propose terms. A fancies this bit of land, and B that. But it soon appears that I want this bit of land for my next year’s clearing, and that for my cows, and another is too close to my house and would interfere with my privacy, and another is thick forest or swamps, and would require too long and costly preparation for me who must have quick returns in order to live, and in short that there is no land suitable that I care to part with.

The benefactor

Still I am ready to do what I promised – “to employ as many as I may require, on such terms as we may mutually and independently agree.” But as I have now got to pay them wages instead of getting their work for nothing. I cannot of course employ 80 many of them. I can find work for ninety of them, however, and with these I am prepared to discuss terms.

At once a number volunteered their services at such wages as their imagination had been picturing to them. I tell the ninety whose demands are most reasonable to stand on one side. The remaining ten look blank, and seeing that since I won’t let them have any of the land, it is a question of hired employment or starvation, they offer to come for a little less than the others. I tell these now to stand aside, and ten others to stand out instead. These look blank now, and offer to work for less still, and so the “mutual and voluntary” settlement of terms proceeds.

But, meanwhile, I have been making a little calculation in my head, and have reckoned up what the cost of keeping a slave, with his food and clothes, and a trifle over to keep him contented, would come to, and I offer that. They won’t hear of it, but as I know they can’t help themselves, I say nothing, and presently first one and then another gives in, till I have got my ninety, and still there are ten left out, and very blank indeed they look. Whereupon, the terms being settled, I graciously announce that though I don’t really want any more men, still I am willing, in my benevolence, to take the ten, too, on the same terms, which they promptly accept, and again hail me as their benefactor, only not quite so rapturously as before.

Wage slaves?

So they all set to at the old work at the old place, and on the old terms, only a little differently administered; that is, that whereas I formerly supplied them with food, clothes, etc., direct from my stores, I now give them a weekly wage representing the value of those articles, which they w ill henceforth have to buy for themselves.

There is a difference, too, in some other respects, indicating a moral improvement in our relations. I can no longer curse and flog them. But then I don’t want to; it’s no longer necessary; the threat of dismissal is quite as effective, even more so; and much more pleasant for me.

I can no longer separate husband from wife, parent from child. But then again, I don’t want to. There would be no profit in it; leaving them their wives and children has the double advantage of making them more contented with their lot, and giving me greater power over them, for they have now got to keep these wives and children out of their own earnings.

My men are now as eager as ever to come to me to work as they formerly were to run away from work. I have neither to buy or breed them; and if any suddenly leave me, instead of letting loose the bloodhounds, I have merely to hold up a finger or advertise, and I have plenty of others offering to take their place. I am saved the expense and worry of incessant watching and driving. I have no sick to attend, or worn-out pensioners to maintain. If a man falls ill there is nothing but my good nature to prevent my turning him off at once; the whole affair is a purely commercial transaction - so much wages for so much work. The patriarchal relation of slave-owner and slave is gone, and no other has taken its place. When the man is worn out with long service I can turn him out with a clear business conscience, knowing that the State will see that he does not starve.

Instead of being forced to keep my men in brutish ignorance, I find public schools established at other people’s expense to stimulate their intelligence and improve their minds, to my great advantage, and their children compelled to attend these schools. The service I get, too, being now voluntarily rendered (or apparently so) is much improved in quality. In short, the arrangement pays me better in many ways.

I am capital and I employ people!

But I gain in other ways besides pecuniary benefit. I have lost the stigma of being a slave driver, and have, acquired instead the character of a man of energy and enterprise, of justice and benevolence. I am a “large employer of labour,” to whom the whole country, and the labourer especially, is greatly indebted, and people say, “See the power of capital! These poor labourers, having no capital, could not use the land if they had it, so this great and far-seeing man wisely refuses to let them have it, and keeps it all for himself, but by providing them with employment his capital saves them from pauperism, and enables him to build up the wealth of the country, and his own fortune together.”

Whereas it is not my capital that does any of these things. It is not my capital but the labourer’s toil that builds up my fortune and the wealth of the country. It is not my employment that keeps him from pauperism, but my monopoly of the land forcing him into my employment that keeps him on the brink of it. It is not want of capital that keeps the labourer from using the land, but my refusing him the use of the land that prevents him from acquiring capital. All the capital he wants to begin with is an axe and a spade, which a week’s earnings would buy him, and for his maintenance during the first year, and at any subsequent time, he could work for me or for others, turnabout, with his work on his own land. Henceforth with every year his capital would grow of itself, and his independence with it, and that this is no fancy sketch, anyone can see for himself by taking a trip into the country, where he will find well-to-do farmers who began with nothing but a spade and an axe (so to speak) and worked their way up in the manner described.

Enter the landlord

But now another thought strikes me. Instead of paying an overseer to work these men for me, I will make him pay me for the privilege of doing it. I will let the land as it stands to him or to another – to whomsoever will give the most for the billet. He shall be called my tenant instead of my overseer, but the things he shall do for me are essentially the same, only done by contract instead of for yearly pay. He, not I, shall find all the capital, take all the risk, and engage and supervise the men, paying me a lump sum, called rent, out of the proceeds of their toil, and make what he can for himself out of the surplus. The competition is as keen in its way for the land, among people of his class, as it is among the labourers for employment, only that as they are all possessed of some little means (else they could not compete) they are in no danger of immediate want, and can stand out for rather better terms than the labourers, who are forced by necessity to take what terms they can get. The minimum in each case amounts practically to a “mere living”, but the mere living they insist on is one of a rather higher standard than the labourers’; it means a rather more abundant supply and better quality of those little comforts which are next door to necessaries. It means, in short, a living of a kind to which people of that class are accustomed.

For a moderate reduction in my profits, then – a reduction equal to the tenant’s narrow margin of profit – I have all the toil and worry of management taken off my hands, and the risk too, for be the season good or bad, the rent is bound to be forthcoming, and I can sell him up to the last rag if he fails of the full amount, no matter for what reason; and my rent takes precedence of all other debts. All my capital is set free for investment elsewhere, and I am freed from the odium of a slave owner, notwithstanding that the men still toil for my enrichment as when they were slaves, and that I get more out of them than ever. If I wax rich while they toil from hand to mouth, and in depressed seasons find it hard to get work at all; it is not, to all appearances, my doing, but merely the force of circumstances, the law of nature, the state of the labour market – fine sounding names that hide the ugly reality.

If wages are forced down it is not I that do it; it is that greedy and merciless man the employer (my tenant) who does it. I am a lofty and superior being, dwelling apart and above such sordid considerations. I would never dream of grinding these poor labourers, not I! I have nothing to do with them at all; I only want my rent-and get it. Like the lilies of the field, I toil not, neither do I spin, and yet (so kind is Providence!) my daily bread (well buttered) comes to me of itself. Nay, people bid against each other for the privilege of finding it for me; and no one seems to realise that the comfortable income that falls to me like the refreshing dew is dew indeed; but it is the dew of sweat wrung from the labourers’ toil. It is the fruit of their labour which they ought to have; which they would have if I did not take it from them.

This sketch illustrates the fact that chattel slavery is not the only nor even the worst form of bondage. When the use of the earth – the sole source of our daily bread – is denied unless one pays a fellow creature for permission to use it, people are bereft of economic freedom. The only way to regain that freedom is to collect the rent of land instead of taxes for the public domain.

Once upon a time, labour leaders in the USA, the UK and Australia understood these facts. The labour movements of those countries were filled with people who fought for the principles of ‘the single tax’ on land at the turn of the twentieth century. But since then and they have gradually yielded to the forces of privilege and power daring no longer to come to grips with this fundamental question, lest they, too, become ridiculed. And so the world continues to wallow in this particular ignorance – and in its ensuing poverty and debt.

By Fred E. Foldvary, Senior Editor, The Progress Report

The daily cyberzine at http://www.progress.org/

A man was walking down a shopping street and came to a store window where there was a big drawing full of lines and squiggles. A sign by the drawing asked, “Can you see the picture?” All the man could see was a chaos of lines going every which way. He stared at it and tried to make out some kind of design, but it was all a jumble. Then he saw that some of the lines formed ears, and whiskers, and a tail. Suddenly he realised that there was a cat in the picture. Once he saw the cat, it was unmistakable. When he looked away and then looked back at the drawing, the cat was quite evident now.

The man then realised that the economy is like the cat. It seems to be a jumble of workers, consumers, enterprises, taxes, regulations, imports and exports, profits and losses - a chaos of all kinds of activities. Here are fine houses and shops full of goods, but yonder is poverty and slums. It doesn’t make any sense unless we understand the basic principles of economics. Once we have this understanding, the economy becomes clear - we see the cat instead of a jumble. We then know the cause of poverty and its remedy. But since most folks don’t see the cat, social policy just treats the symptoms without applying the remedies that would eliminate the problem.

What is this economics cat? It starts with the three factors or resource inputs of production: land, labour, and capital goods. Land includes all natural resources and opportunities. Labour is all human exertion in the production of wealth. Capital goods are tools (such as machines and buildings) used to produce wealth. The owners of land get rent, workers get wages, and the owners of capital goods get a capital return.

Picture an unpopulated island where we’re going to produce one good, corn, and there are ten grades of land. On the best land, we can grow ten bushels of corn per week; the second land grows nine bushels, and so on to the worst land that grows zero bushels. We’ll ignore capital goods at first. The first settlers go the best land. While there is free ten-bushel land, rent is zero, so wages are 10. When the 10-bushel land is all settled, immigrants go to the 9-bushel land.

Wages in the 9-bushel land equal 9 while free land is available. What then are wages in the 10-bushel land? They must also be 9, since labour is mobile. If you offer less, nobody will come, and if you offer a bit more than 9, everybody in the 9-bushel land will want to work for you. Competition among workers makes wages the same all over (we assume all workers are alike). So that extra bushel in the 10-bushel land, after paying 9 for labour, is rent.

That border line where the best free land is being settled is called the “margin of production.” When the margin moves to the 8- bushel land, wages drop to 8. Rent is now 1 on the 9-bushel land and 2 on the 10-bushel land. Do you see what the trend is? As the margin moves to less productive lands, wages are going down and rent is going up. We can also now see that wages are determined at the margin of production. That is the “law of wages.” The wage at the margin sets the wage for all lands. The production in the better lands left after paying wages goes to rent. That is the “law of rent.” If you understand the law of wages and the law of rent, you see the cat! To complete our cat story, suppose folks can get land to rent and sell for higher prices later rather than using it now. This land speculation will hog up lands and make the margin move further out than without speculation, lowering wages and raising rent even more.

Now we have good news and bad news. The good news is that when we put in the capital goods we first left out from the example above, the tools and technology increase the productivity of all the lands. If production doubles, rent doubles, and wages go up. Wages won’t double, because workers have to pay for the tools, but even if wages go up 50 percent, that’s good news, and why industrialised economies have a high standard of living. Also, high skills enable educated workers to have a wage premium above the basic wage level. The bad news is that the technology enables us to extend the margin to less productive land, which lowers wages again. So there is this constant race between technology raising wages and lower margins reducing wages.

It’s bad enough that a low margin sets the wage level at the poverty level, especially in countries with low technology and low skills. Government then taxes away a large chunk of those wages, which hurts those workers with higher wages. The result is a highly unequal distribution of income. Workers have the low wage set at the margin and reduced further by taxes, while the owners of land get all the extra production as rent, but pay less in taxes because of tax breaks to landowners. (Capital-goods returns boil down to wages and rents, because capital goods are ultimately produced using land and labour.)

Behold the cat! The margin at the least productive land sets low wages, and the rest goes to rent, resulting in inequality, with poverty for low-skilled workers. If we see the cat, the remedy is also clear: stop taxing workers, and let everybody share the rent. If we get public revenues from the rent instead of wages, the public benefits equally from the rent, while workers get the full product of their labour. And wages will be higher, too, because by collecting the rent, we eliminate land speculation, moving the margin up to more productive lands, which raises the wage level. The economy grows faster too, since the government no longer punishes enterprise and investment with taxes, so wages go up faster over time. We all become fat cats. Those who see the cat have a clear picture of how the economy works. They can see why we have social problems, and what the remedy is. Those who don’t see the cat keep trying treat the symptoms with welfare, but they never cure the economic disease. Others see the welfare as not curing anything, and think they can just get rid of the welfare. Only those who see the cat realise that the remedy is a shift of public revenue from labour to land so that we eliminate poverty and thus any need for the welfare state.

Do you see the cat?

A New Route to Social Equity: Henry George and the Science of Geonomics

Caspar Davis

Throughout the modern era there has been a near-constant struggle between the principles of social justice expressed by eighteenth century writers like Tom Paine and even Adam Smith, and the desire of the rich to monopolize both wealth and power. Paine and the French Physiocrats observed that land and natural resources were provided by God or nature for the use of all, and that nothing could be made or grown without access to them. They argued that because the land and natural resources were provided by Providence and not by any human act, equity demanded that their fruits be shared by all. To be sure, work and tools were required to grow crops or mine ore, and those who provide them should receive fair compensation. But the value provided by nature should not accrue to any individual.

Socialists focus on control of the means of production, but without access to land and its resources wealth and machinery would be worthless. No one can exist, let alone produce anything without a place to do it, and both materials and, increasingly, energy are needed for any serious production. Because of its unique character, the Classical economists (unlike their “neop-classical” counterparts) recognized Land (including all natural resources) as a distinct factor of production, together with Labour and Capital.

Henry George

Henry George (1839-1897), was the last of the great Classical economists. His first book, Progress and Poverty (1879), was the best-selling book in English to that date, save only the Bible. George wrote several other popular but substantial books, and also had an international reputation as a lecturer, speaking throughout the English-speaking world, from Australia to England. He greatly influenced philosophers and politicians from Leo Tolstoy and G. B. Shaw to Clarence Darrow, Sun Yat Sen and Winston Churchill, among many others.

Like Tom Paine, George drew a sharp distinction between land and capital. Capital, he said, was a subset of wealth, i.e. that part of wealth which is devoted to economic activity; to production, transportation, sales, or services provided for profit. Like labour, capital represents human effort and deserves fair recompense. Land, however, is another matter. It is produced by no person, and whoever uses it prevents others from doing so. Moreover, most of the economic value of land is created by society as a whole, not by the “owner”. Population growth creates demand for land and for resources, and population, together with public roads, pipelines, and utilities cause the value of land to rise even if the owner does nothing with it. Since the economic value of raw land and its natural resources results entirely from social action, that value should be shared by all and not accrue to any single “owner”. George said that this result could easily be accomplished by taxing away all or most of the “economic rent”— i.e. the rent that raw land or its resources would bring on the open market.

George added that society should collect the rent not only from land and natural resources, but also that accruing from special privileges such as patents and licenses like taxi licenses, radio and TV licenses, satellite orbits etc. which enable a few to profit from monopolies Everything beyond a fair return for the inventor or license holder’s time and ingenuity should accrue to society as a whole.

Neo-Classical Economics and the Appropriation of the Commons

George’s ideas were ridiculed by the new breed of academic “Neo-Classical” economists, who asserted that land and natural resources were merely subsets of capital, not qualitatively different from tools and factories. This doctrine represents a radical departure from Classical economics, and lies at the heart of “modern” or Neo-Classical economic theory. The private sequestration of land and other natural resources has become a fundamental dogma of the Neo-Classical faith.

Of course land holding is nothing new, nor was it in George’s day; but even now real estate is treated quite differently from other property. It has its own terminology and is governed by a discrete body of law. Even in England, the term “landowner” did not come into use until the 1600’s. The prior term was “landholder”. Unlike manufactured goods which are made by people and sold to others, so that their provenance can be traced to the maker, land tenure is rooted either in long habitation or more usually in violent theft—called conquest. The principal thief (‘king’ or ‘conqueror’) granted pieces of land to his followers who held ‘title’ to it from the thief-in-chief, the king. Unlike Labour, which is actual individual effort, or Capital, the title to which is rooted in the labour which gave it its form, title to Land is rooted in the private appropriation of a common resource, usually by force. Title to Land is almost invariably founded on the most recent theft to be legitimized by the local legal system.

It is not practical in modern society for most resources to be held in common. In practice, this usually leads to bureaucratic management which often benefits no one very much. True commons tend to suffer ‘The Tragedy of the Commons.’ Overuse or abuse benefits an abuser much more than it harms any individual user, so there is much more incentive to abuse than to prevent abuse, until it is too late. For example, if I put one more sheep on the common than it will adequately maintain, each person’s sheep will only be slightly less well nourished but I will have an extra sheep. This encourages others to also run more sheep, and soon the grass is gone.

Beginning with the Norman Conquest, much of England’s land was enclosed by those who rendered service to the king. Later on, those with the wealth and political power began to pass legislation legalizing their appropriation of the remaining commons (the ‘Enclosure’ movement). Nor did appropriation stop with the land. One after another, farmland, timber, hydrocarbons, minerals, fish, pollution and carbon sinks (such as air and water), plant and animal species and now even DNA sequences have been sequestered for private profit. Today, corporate scouts roam the planet looking for genetic material which might have commercial value, in order to patent it.

The privatization of public resources has been justified and applauded by the Neo-Classical economic priesthood, who claim that it creates a rising tide of prosperity that elevates all boats. This claim is repeated constantly, not only by economists and the business elite, but also by journalists and politicians. But no matter how large the crowds that admire the emperor’s fictional clothes, it does not change the fact that he is naked.

According to the Centre For Social Justice’s Growing Gap Report by Armine Yalnizyan, a Toronto Economist:, “The role of the transfer system (income supports from government) and tax system… provided remarkable stability in the distribution of incomes over the last generation. This stability is [now] deteriorating dramatically and rapidly: since 1994, the ratio of after-tax income between richest and poorest families has escalated to the highest point since 1973. The fastest change has been in the last year for which we have data, between 1995 and 1996… Governments have told us we can “grow our way to equity,” that the market will produce results that make everyone better off, but it’s becoming evident that inequality is growing in Canada despite economic growth.”

The inequity of ownership resulting from private sequestration of land is palpable in the statistics of land ownership, as is shown below:

Location	Concentration of ownership
Brazil	2% of landowners control 60% of the arable land (as of 1985)
El Salvador	2% of the population owns 60% of the land
Great Britain	2% of the population owns 74% of the land
Pakistan	3% of the population owns 80% of the land
USAM	3% of population owns 95% of privately held land (as of 1979)
Florida	1% of the population owns 77% of the land

(Data compiled by Alanna Hartzok)

In Arizona, California, Maine, Nevada, New Mexico and Oregon, one percent of the population owns over two-thirds of the land.

Nevertheless, there are real benefits to having a personal or family interest in land. How then can we reap the benefits of private use and enjoyment while maintaining the equity and sense of respect inherent in common ownership?

The Geonomic Solution

Henry George suggested that society should collect rent for the Land (as broadly defined) from those who command exclusive use of this common heritage. He recommended that the rent be used to replace existing taxes, which in those days were mainly tariffs and excise taxes, both of which tended to inhibit economic activity. Today, the principal taxes are income tax, payroll taxes and sales taxes, all of which impinge negatively on employment and economic activity, and which also tend to impact most heavily on people with lower incomes. They are also very hard to administer, requiring an army of accountants and tax collectors, and relatively easy to avoid or evade, creating an array of loopholes and exceptions, and a large “underground economy.”

1. A Georgist or Geonomic tax code, based on the taxation of land and natural resources, but not of improvements to the land, has the following effects, among others:
2. It reconciles common land and resource rights with private tenure, enabling society to collect the value accruing from its actions yet preserving the benefits of private ownership.
3. It enables the reduction or elimination of payroll taxes and taxes on labour and capital, by shifting the burden to land and natural resources.It reconciles equity and efficiency, which Neo-Classical economists and institutions like the IMF and the WTO claim must be traded off against one another. Land is immobile and it cannot be hidden. Surprisingly, the value of residential lots tends to vary more than the value of the buildings on them. Open assessment records would ensure fairness. Resource taxes would help to assign their true value to dwindling natural resources which are often sold for far less than their replacement would cost, and in many cases (due to subsidies) for less even than the true cost of recovering them. Even radical Neo-Conservatives like Milton Friedman, who is opposed to all taxes, has acknowledged that the land tax is the least harmful tax.
4. It can finance generous public services without driving away business or population and without stifling useful employment or taxing investment in real capital. Neither land nor resources are mobile. Those who would live or do business in a jurisdiction must use land to do so. At present, those who use land, whether to extract resources or build houses or business facilities, are often heavily subsidized. A land tax which recovered most of the economic rent would recover for the community the value created by the community.
5. It contains urban sprawl by encouraging the intensive development of urban land and by making the developers and owners of suburban land pay more of the true costs of providing them with roads and utilities, which are now heavily subsidized by the rest of the community. It is much less costly to provide public utilities to developments in or near the urban core than in outlying districts. Most North American cities have very low population density. Since World War II the tendency has been to abandon urban cores for car-dependent suburbs, whose wide streets and large lots serve little purpose other than to keep neighbours apart. The preference for them is based more on habit than convenience or reason. Higher densities can actually make neighbourhoods safer and more vibrant. Narrow streets and front porches encourage social contact and promote safety. Greater density makes neighbourhood coffee shops, stores and mini parks—as well as public transit— economically and socially viable. Lack of sprawl preserves the surrounding countryside for agriculture, green space, and parks.
6. It creates jobs without inflation or deficits. It is the only tax of any serious revenue potential that does not bear down on and suppress production and exchange. Unlike income and payroll taxes, it does not penalize work and employment. Unlike sales tax and GST it does not penalize production and trade. But it does assign their true value to natural resources and thereby offers a powerful incentive to husband and preserve them.

Geonomics meshes very comfortably with other tax shifting measures being advocated by many progressive economists and environmentalists. The general idea of green and equitable tax shifting is to stop taxing “goods” like employment, initiative, and economic activity and start taxing “bads” like carbon emissions and other pollutants, traffic congestion, speculative holding of vacant urban lots, and reckless use of common goods like fish, old growth forests, and water. An essential corollary is to stop the subsidizing of “bads” which is all too prevalent in modern society.

Jeffery Smith, the Portland-based founder of Geonomics, suggests that land taxes could not only fund necessary public services but also provide a "Geo-dividend," a basic income for everyone, as the Alaskan state oil royalty does for Alaskans.

The stated purpose of economic progress has always been to provide more goods with less effort, to provide greater leisure for people to pursue the arts and personal development. Today we have incalculably more total wealth and more efficient production than ever before, but we also have less balance. A few are immensely wealthy. But most working people work harder than ever just to stay afloat. Forty years ago, most families had only one member working outside the home. Today it usually takes two or more people working just to provide the basic necessities. Millions are unable to find even minimum wage work, and almost every day we hear of more mass layoffs and more deep wage cuts.

As Henry George said long ago, whoever is able to deny people access to the land is able to wring from them all but the barest means of subsistence. He can force them to work like slaves for less than the cost of maintaining slaves. Actual access to land is no longer practical for many people, but Geonomic taxes could recover the value of the land and other common resources for the good of all.