Prosper Australia

Letter published 8 March

You’ve got to love real estate spruikers. They are so consistent and always so wrong.

David Morrell purports to be a buyers’ advocate. On 5th March in The Age he was saying how you can’t go wrong with “land banking” in Toorak. Well maybe.

Land banking is the quite revolting activity of buying up desirable land (often in the path of government infrastructure projects) and then holding out until you get your desired price. “Land bankers” (or should that be “bankers” with a “w”) help force up prices and slow down development. Their activities and profit seeking mean that the rest of us who want land for mundane uses such as housing ourselves end up paying more.

If David Morrell thinks this is good for buyers then I wonder what he has been smoking.

photo credit: Omar Eduardo

Taken from an early 1900’s document

I don’t know what the country is coming to; I work from morning till night every day of my life and yet it’s as much as I can do to make ends meet.

I am Simply Working for the Landlord ! ! !

How often do we hear such a declaration; yet, how few, even among those who make it, pause to consider its full signifcance ? There appear to be a mysterious tacit mental agreement that, above all things, no matter who else may go short,

The Landlord Must Be Paid.

Why the LANDLORD more than the butcher, baker, grocer, or other persons who furnish us with one or other of the daily necessaries of existence ? Is it because the landlord needs the money more than others? No! for, as a matter of fact, he needs it less than any of them, for he generally has plenty and to spare. Is it that he gives us more of the good things of the world in return for money than any of the others? No! for, as a matter of fact, he gives us nothing except permission to continue to occupy a certain portion of God’s earth, and he raises the rent as often as possible, and still gives nothing in return.

Is IT BECAUSE WE HAVE A GREATER AFFECTION FOR HIM as an individual than for anyone else ? Hardly! for, in point of fact, our feelings towards him have rather an opposite tendency.

What Then is the Reason ?

Sinply that the landlord, by reason of his ownership of the site upon which we live, or carry on business, has THE POWER TO BRING RUIN AND DESTRUCTION UPON US if we refuse to pay the tribute he exacts from us. This is a very serious matter to every householder, every shopkeeper, and shop employee, every business man and clerk, and, in short, every worker, whether by hand or brain, throughout the length and breadth of the land; for, in the power of the landlord to exact from each and all rent tribute for the

Permission to Occupy a Piece of the Earth

lies the secret of trade depression, industrial inactivity, Iow wages, and scarcity of employment. This may not at first sight be apparent, but a little enquiry into the operation of “the law of rent” will soon reveal the fact.

Here is an illustration: Twenty years ago, the owner of a vacant lot in George-street built thereon a shop and dwelling, which, when completed, was let on a three years’ Iease at a rent £2 per week, the tenant to keep the place in good repair. Upon the renewal of the lease for a further short term, the rent was raised on the unhappy tenant (who had just got fairly established and could not afford to leave) to £4 per week, although the landlord had done nothing at all to increase the comfort or accommodation of the building.

The extra rent aimost ruined the shopkeeper, who had to reduce the wages of an assistant, whom he had engaged, as well as to deny himself and family of certain articles of food and clothing, to which they had hitherto been accustomed but by dint of close attention and untiring energy, he managed to improve his business, and ultimately, after he had earned the £4 tribute for his landlord, he had a little for himself, even after paying wages to the additional hands he had engaged to assist. But he did not enjoy the advantage of his extra work, worry, and anxiety long. The lease expired, and once more the lease went up and swallowed all the extra profits, entailing further reductions in working expenses and

Another Lowering of Wages.

And so the process has gone on until today, the rent of that one shop is £12 per week, although not a shilling has been spent upon it by the landlord since the day it was completed. Just think of the shame and the monstrosity of the thing. The tenant

Must now Earn £12 for the Landlord

every week before he can earn ONE SHILLING FOR HIMSELF, aud he gets nothing in return, except the wretched accommodation of a structure that when new paid the owner l0 per cent interest on his capital at a rental of £2 per week, and which now, after twenty years wear and tear, would not realise £I00 if pulled down and sold as old material.
It is self evident that with such a

Heavy Incubus of Rent

to meet weekly, the price of his goods must be raised to the highest point which competition with other shopkeepers in the same locality will permit, whilst the wages of employees will be reduced in a corresponding degree. And when we consider that the SAME PRINCIPLE IS IN OPERATION in every branch of industry, we can form some idea of the share of the earnings of every member of the community which is annually appropriated by landlords in rent.

Every advance in Rent

means a corresponding reduction in wages, for even when wages are not directly reduced by the rack-rented employer, the purchasing power is lessened by the ever advancing tide of rent. Rent is added to the cost of every commodity, and consequently every purchaser, in addition to paying rent directly to his own landlord is compelled to contribute his quota to the rent of every person with whom he deals.
And when we reflect that

Rent has to be Deducted from the Wages

of the men who get the raw material, the men who fashion it into a finished product, the men engaged in conveying the product to market, the wholesale and retail dealers and the clerks, storemen, shopmen and others in their employ, it is tolerably certain that rent absorbs an enormous proportion of the annual wealth production of the community; and the larger the proportion that is absorbed by the landlord in rent the smaller must necessarily be the proportion that remains available for distribution in wages to employees and profits to employers, and in inverse ratio, the smaller the proportion that is absorbed in rent the larger is the balance available for division between wages and profits. Obviously then it is to the interests of employers and employees alike to bring about a REDUCTION IN RENT

The Single Tax

will do it, for the value of land fictitiously inflated by private monopoly is the main factor in determining rent. The taxation of land values will destroy land monopoly and thus reduce the value of land. And as by the destruction of monopoly, a corresponding increase in the available supply of land will take place, it necessarily follows that rents will fall in corresponding ratio, wages will rise with the increased avenues open to the employment of labor and a HEALTHY ACTIVITY WILL SOON MANIFEST ITSELF IN EVERY BRANCH OF INDUSTRY THROUGHOUT THE LAND.

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

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

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

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

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

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

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

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

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

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

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

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

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

For example:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There — that wasn’t hard, was it?

The Howard government’s industrial relations agenda is supposedly about job-creation, as if the cost of labour — including wages and salaries, penalty rates and other perks, and the difficulty of reversing bad hiring decisions — were the last remaining barrier to full employment.

Sorry that we have to state the bleeding obvious, but:

• Jobs cannot be created unless the employer can pay the rent or mortgage on the business premises out of the proceeds of the business; and
• Jobs cannot be created unless the workers can pay the rent or mortgage on housing within commuting distance of those jobs, out of wages that the employer can pay out of the proceeds of the business.

So, if job-creation is the aim, why is the Government so concerned about the cost of labour and so unconcerned about the cost of accommodation? Why is it bad news when wages blow out, but good news when housing prices blow out? Why is the Government willing to force down labour costs by freeing up the supply of labour — e.g. by requiring more disabled people to seek work — but not willing to force down accommodation costs by freeing up the supply of accommodation — e.g. by taxing vacant land so that the owners have to build on it, and taxing unoccupied premises so that the owners have to seek buyers or tenants?

The only possible explanation is that the unearned profits of property speculators are considered more important than the earned wages of workers. In other words, the property market is privileged while the labour market is not.

In every marginal electorate, politicians promise to take revenue raised by nationwide or statewide taxes and spend it on projects that confer purely local economic benefits. This practice is corrupt and unnecessary — corrupt because a minority of taxpayers are bribed at the expense of the majority, and unnecessary because, if a project is economically justified, it can be funded out of the benefit that it confers — and, by implication, from within the area that gets the benefit.

If a project confers a benefit on a limited area, you can’t share in the benefit unless you live or do business in the area; and for that purpose you need access to real estate in the area. Therefore the market value of the benefit is manifested as uplifts in land values in the affected area. If the project satisfies a cost-benefit test, the total uplift will exceed the cost, so the project can be funded by clawing back only a fraction of the uplift through the tax system, leaving the rest of the uplift as an unearned windfall for owners of property in the affected area — and without burdening the taxpayers outside that area.

This funding mechanism can be set up in a revenue-neutral manner by increasing marginal land tax rates and abolishing or reducing other taxes. Then, when a certain project increases land values in a certain area, the land tax assessments automatically rise only in that area, even if the government funding the project is responsible for a much larger area, such as the State or the Commonwealth. The affected property owners can only gain, because their tax bills don’t increase unless their land values do, and their land values don’t increase unless, in the judgment of the market, the owners are better off in spite of the tax implication. Moreover, the higher the marginal rate of land tax, the greater the range of projects that become self-funding through the ensuing uplifts in land values, hence the greater the number of projects that actually proceed, delivering windfalls to property owners — and the greater the range of other taxes that can be scrapped when the new system is introduced.

In short, when a public project passes a cost-benefit test, and when its benefit is confined to a specific area and measurable in economic terms, there is “never ever” any excuse for failing to fund the project, and “never ever” any need to draw funding from outside the affected area. Voters should therefore punish any politician who claims that the government can’t afford a much-needed project in their area, or who promises to spend their taxes for the economic benefit of any other area!

The Mitcham-Frankston tollway, also known as EastLink, will reduce commuting times in suburbs serviced by the tollway and in suburbs serviced by alternative routes, such as the untolled Springvale and Stud roads, whose congestion levels will be reduced by EastLink. The market value of this benefit (net of tolls) will be manifested as uplifts in land values in the lucky suburbs (because you have to live or work in those suburbs to get the benefit). So owners of property in those suburbs will benefit from EastLink even if they don’t use it and don’t pay the toll on it. But people who live in rental accommodation and who commute via EastLink will pay for it twice — they’ll pay the toll and their rents will go up. How equitable is that?

To satisfy the “beneficiary pays” principle, road projects must be funded out of the uplifts in land values that they cause. If a project satisfies a cost-benefit test, the total uplift will exceed the cost, so the project can be funded by clawing back only a fraction of the uplift through the tax system, leaving the rest of the uplift as an unearned windfall for the property owners.

This system can be set up in a revenue-neutral manner by abolishing payroll tax and other job-destroying State taxes, and strengthening land tax. From then on, desirable infrastructure pays for itself through the increase in taxable land values that it causes. The higher the marginal rate of land tax (or the fraction of properties to which that marginal rate applies), the greater the range of projects that become self-funding through the ensuing uplifts in land values, and the greater the range of other taxes that can be scrapped when the new system is introduced.

Property owners can only gain from this arrangement, because their tax bills don’t increase unless their property values do, and their property values don’t increase unless, in the judgment of the market, the owners are better off in spite of the tax implication. Indeed, if projects pay for themselves, they are more likely to proceed, so property owners are more likely to get the uplifts in land values. The tax means the owners get only a fraction of the uplifts, but a fraction of something is better than 100 percent of nothing!

So is there ever any need for tolls? Yes — on certain routes, at certain times of the day, tolls can prevent congestion by encouraging travel at other times. But they are not needed 24/7, and they are never needed for funding.