Prosper Australia

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Consider these three points:

1. Property developers have openly stated they are reducing the supply of property to the market in order to massage land banking profits:




While some already owe more than their home is worth, the result of prices initially boosted by first home buyer grants, but which fell when the grants were removed, so far, prices have mostly held steady on the estates. This is in no small part because developers have limited the supply of blocks in recent months.




2. The story of banks starving developers of finance hit the mainstream on the weekend.
   
   
   
   

   A key reason was that banks, spooked by the financial crisis, sharply cut back the flow of finance for new commercial developments. Bureau figures show only 1.7 per cent of new home lending in 2009 went to investors building new housing, a phenomenal fall from 11.6 per cent 20 years earlier.

   
   

3. With land prices skyrocketing $766 per day in the December quarter alone in Melbourne, the benefit of capital gains far outstripped the possible rental revenue. Why supply property when you are experiencing such gains? This motivates small time developers to massage supply in line with their profiteering ambitions.

This story of banks restricting credit began in the Business Spectator:

One of the reasons why we have such a strong housing property market is that banks are restricting loans to property developers but spraying housing buyers with loans. There is a shortage of dwellings, so buyers armed with bank cash want to buy, but the industry can’t create sufficient new dwelling stock partly because of bank lending policies.

The motivations for such speculative profits are holding the Australian economy from it’s true potential. Not only are developers and speculators constraining supply, so are banks.

With the Brumby government having re-zoned 230,000 sites as residential land over the last 2 years and rushed through streamlined planning, this can hardly be used as an excuse any more.

By implementing a system of Resource Rentals we can reduce our debt burden to banks, level the playing field from speculative hoarding and genuinely unleash the land of opportunity. Will the Henry Review have the ticker to stand up to lobbyists?

photo credit: Robbert van der Steeg

Surprise! A new Age survey found that investors were concerned about the Henry Review’s proposed Resource Rent Tax:

… a staggering 92 per cent believed that the higher taxes would hurt the share prices of resource stocks. Long-term effects were also considered, with 25 per cent believing that a resource rental tax was ’short-sighted’ and likely to ‘damage mining’ as an industry. More frightening was that 45 per cent of investors said the implications of the tax would make them rethink their investments in the sector.

These figures suggest significant support for a mining campaign against the tax, at least among those actively in the stock market. However, the miners have a big job ahead of them balancing this campaign against an already-widespread perception among investors that the tax is damaging to earnings. Too vigorous a response could increase risk-aversion significantly.

The miners have some room to move. When asked about how the government should deal with any resistance to the tax, 42 per cent of investors reckon authorities should ‘give in’ to miner demands. If the miners threatened to move offshore, 23 per cent said ‘let them go’. The results sounded one note of caution in that 36% of investors agreed the government should counter-threaten with nationalisation of assets. This figure is likely to be higher among the general population.
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It seems investors are keen to fashion Australia’s economy into a resources powerhouse – with all of the population increases that entails – but they don’t want to pay for it.

With this BRIC-led resource boom in full steam, a number of countries are charging over 70% in Resource Rents (Norway, Bolivia, Bahrain). Let’s hope the Rudd government can keep the public’s interest front and centre when the lobbyists knock on their door. Extraction should never be confused with production.

Please read our Dec – Jan edition of Progress (8MB), a special on Resource Rents.

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Dr Gavin Putland

Taken from the Dec – Jan edition of Progress.
Download Progress (8MB)

If a “site” is a piece of ground or airspace, then the “rent” of the site is simple enough: it is the price per unit time that the highest rational bidder will pay for the use of that ground or airspace, subject to any legal constraints on the uses to which that ground or airspace may be put.

But what if the “site” confers — or simply is — the right to exploit a mineral deposit? At any given time, that right will command a rent of so much per year. But because the deposit is depletable, the time over which the rent can be collected is limited. Moreover, as other deposits are depleted, the value of this deposit will presumably increase over time.

“Hotelling’s rule” says that because the conservation of this resource must be competitive with other uses of capital, the capitalized rent per unit of the remaining portion of this deposit must increase at the going rate of interest, in which case the present value of the right to exploit the deposit is independent of the timing. But this rule assumes unrestricted competition between uses of “capital”.

If in fact the “capital” available to exploit this deposit comes from a limited pool of which the owners expect some element of economic rent, then the remaining portion of the deposit must appreciate faster than the going rate of interest in order to justify its conservation. If, in addition, this deposit is a small part of the global reserve, exploiting it faster will not significantly accelerate the appreciation of the remaining portion, in which case the company with access to the resource will simply deplete the resource as fast as its capital allows. That (as Michael Hudson told me in October) is what typically happens.
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Peter Martin, the journalist with the biggest sieve (catching all those Henry Tax report leaks), wrote recently on the LP’s highly secretive Ergas report:

The report proposes an annual land tax that would extend to the family home and would be used to fund the abolition of real estate stamp duty. ”It would be obvious nonsense to exclude the family home. It would create an unbearably low base.”

Company tax would be modeled on the resource rent tax that is presently in place for offshore petroleum and which the government’s Henry review recommends extending onshore.

Bryan Kavanagh stated:

So, we have a coalition report (the Ergas report) recommending a 20% flat income tax, plus a land tax which must include the family home, and the Henry Report that Glenn Milne initially inferred an across-the-board federal land tax, but which we’re assured by Peter Martin now excludes the family home.

With the GFC still raising it’s ugly head with recent sharemarket tremors, the need for other nations to review their tax system will no doubt continue. With the recent NZ tax review also recommending a greater role for land taxes in a highly mobile marketplace, our beliefs have never been more important.

If governments are serious about avoiding boom-busts, then the harnessing of the community created locational value of land (and other licensed monopolies) cannot be ignored. Billowing credit levels (as per helicopter Ben) will do little for the productive economy or sustainable growth. Resource Rents must be the prime revenue base for an economy concerned with reward for effort.

photo credit: mugley

The plot thickens with Glenn Milne reporting

THE Federal Government’s biggest tax inquiry in more than two decades is set to propose a national land tax, a new resource tax and a congestion tax for clogged cities.

The Henry Review, by Treasury head Ken Henry, is also expected to canvass a federal clawback of GST revenues, which now go entirely to the states, to fund the Government’s proposed takeover of the public hospital system.

Dr Henry’s report, due at the end of the month, is also believed to favour a national payroll tax to replace the state system.

One of its controversial proposals is for a national land tax to replace state-based stamp duties payable on the sale of homes and investment properties.

A national land tax would open up the Government to claims of taxing the family home. But it could mean big savings for many Victorians – for houses priced $550,000 and under Victorian homebuyers pay $14,370 more in stamp duty than Queenslanders.

There are many other advantages of a move towards a Land Tax, especially the signal it sends our bloated property market that land speculation is a destructive practice. Such a replacement of stamp duties will remove an impediment to property turnover, helping the market reach a truer price discovery. The efficiency gains this will deliver are undeniable amongst independent economists.

With foreign investment in property growing, having a uniform Land Tax rate will assist the people in sharing from the ever increasing value of land. It also signals in a globalised world where capital is just so mobile, that a Land Tax is the fairest way to ensure that all pay their fair share. Wealth cannot be off-shored under this system.

The move towards a resource rent tax on mining companies is another admission that the earth’s scarce resources are part of our common wealth. Why should workers be taxed so that the privileged can make money in their sleep through resource speculation and hoarding? Check some of our recent tax submissions.

An interesting Christmas break to come…

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Re the AFTS Tax Forum in Melbourne late last week, a number of articles came out highlighting points favourable to our cause.

Tim Colebatch writes in Scrap Negative Gearing:

The review, chaired by Treasury secretary Ken Henry, is due to deliver its report to the Government by the end of this year. Professor Sorensen, a corporate tax expert, is one of several leading international economists brought out to advise the review on possible directions for reform.

His joint paper with Mr Johnson proposes a radical change to Australia’s corporate tax system, allowing companies to deduct a standard return to shareholders — roughly 5 per cent on their equity — from their taxable income, cutting company tax by up to a third.

They suggest the cost to revenue — up to $24 billion a year — could be filled by closing long-established loopholes in the taxation of capital income, including:

- Closing the negative gearing loophole used by more than a million housing landlords, by imputing a standard profit margin on rental housing investments.

- Taxing home owners an imputed rent on the annual value of their housing.

Whilst there was the usual acceptance of land rents being the most efficient method, we need a public education campaign on how this can help avoid future boom busts.

photo credit: Pulpolux !!!

The Business Council of Australia wants to raise GST in return for a halving of corporate tax rates in its latest Henry Review submission. This will increase the regressive rate of taxation upon the less privileged.

With effective corporate tax rates at barely 5% due to the plethora of tax loopholes, this proposal will do nothing to reduce boom bust blowouts, let alone a future based on economic justice.

If that’s the best the leading lights of the business community can do, then it is no wonder the social fabric of society is falling apart.

ABC reported:

However, the Federal Treasurer Wayne Swan has poured cold water on the BCA’s GST proposal within hours of its announcement, saying it is one of the few areas of taxation that is off limits to the Henry Tax Review.

“There’s only one exclusion, or two exclusions that we’ve put in place in terms of Henry: we’ve said we’re not going to raise the GST which I see has been put on the agenda today by one of our business organisations,” he said.

“That aside, the one other exclusion, it is a genuine root and branch review of the tax system.”

Whilst that last quote may get tongues wagging, Swan forgot to mention that the second exclusion was superannuation related. We are concerned that this week’s Henry Review tax summit in Melbourne is an ‘invite only’ affair and that none of our 11 submission authors were invited. This suggests that the inclusion of land rents as a plausible tax option is also being excluded.

This is a concern in an age where globalisation is threatening resource sovereignty, tax loopholes abound, infrastructure deficits have a 20 year backlog, urban sprawl forever dominates, environmental refugees are looming and carbon speculators are soon to make a killing.

And yet the BCA wants to ignore this and look after their own lot.

If land rents are allowed to be capitalised into higher and higher land prices, the stresses on the community will threaten our very freedoms. Ross Gittens quoted taxes on immovable property as the most efficient tax in his Monday article ‘A light on the hill for future tax reformers :

This view is that, in an ever-more globalised world where the barriers between national economies are being broken down, the least mobile factors of production should be taxed most and the most mobile factors should be taxed least.

This suggests a hierarchy of taxes running from the least economically inefficient and hence most growth-enhancing to the most inefficient and growth-inhibiting. So, running from best to worst, we have: recurrent taxes on immovable property (such as land tax and council rates), consumption taxes, personal income taxes and company income tax

Treasury officials would do well to read Gavin Putland’s Recessions Begin at Home and Dr Terry Dwyer’s submission to the Henry Review.

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Dr Terence Dwyer

 - B.A. (Hons) B.Ec. (Hons) (Syd.) M.A. Ph.D. (Harvard), Dip. Law (Syd.), FTIA, Visiting Fellow, Crawford School of Economics and Management, Australian National University.

Dr Dwyer’s Submission to the Henry Tax Review

Executive Summary

• The Treasury tax paper acknowledges the three factors of production but needs to follow through on the logic of its’ analysis.
• All taxes resolve themselves into taxes on the incomes of the three factors of production, land, labour and capital.
• All taxes are distorting, save a tax on economic rent. Taxes on capital and labour are both distorting – they suppress factor supplies to the economy.
• Land value taxation has long been endorsed by economists as a perfectly efficient tax. It also has long roots in Australian history.
• A basic argument for land value tax is that it is the one and only tax base that cannot flee in response to a tax. Capital and labour can emigrate – land cannot.
• Nor can a land value tax be shifted as an extra cost to business. Ultimately, a land value tax must be borne by the landholder at the time of introduction.
• Once a land value tax has been established, any purchaser of land discounts the price to allow for the tax and, in that sense, it is not a burden on anyone other than the owner at the time of introduction.
• Land value taxation is not distorting because it is capitalized – it cannot be avoided. A land value tax becomes a burden-less tax and has a zero marginal tax rate.

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by Gavin R. Putland

A speech by Treasury Secretary Ken Henry on “The Future of State Revenue”, delivered on Mar.27, belatedly received some coverage in the Australian Financial Review on May 5.

At one point Dr Henry said:

Globalisation means that the things governments tax are becoming increasingly mobile. This has implications for tax system design.

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But there are some inherently immobile tax bases, such as land. The importance of taxing these bases effectively is likely to increase in the future.

Returning to this theme later, he added:

I have noted that the taxation of immobile bases will become an increasingly important matter in the context of increasing globalisation. One of those bases is our non-renewable resources.

Referring to our non-renewable resources as a tax base is rather crude. While it is convenient to refer to the ‘taxation’ of resources, the royalties and other charges imposed by the Commonwealth and the States represent a return to Australians for assigning certain rights to appropriate — exploit, if you prefer — those resources. They represent a disposal price.

True. But why not apply the same logic to land? That is, why not consider “land tax” and “rates” on land values as a return to Australians for assigning certain rights to appropriate land?
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It seems that another whitewash of economic theory is being subtly thrust upon us with the ongoing Henry Tax review. According to Henry, he has re-written economic theory.

The 3 sources of taxation are now labour, capital and consumption. The Corruption of Economics continues with Land, the most essential of all factors of productions, all but left out of the equation.

We predicted that the outcome of this tax review would support a higher GST. We still have a year of compromises to go until the final report, but one would expect this damaging development to continue.

And here we have the property lobby commenting in typical unbiased fashion:

The Housing Industry Association’s acting Victorian executive director, Robert Harding, said a higher GST would be a more efficient money-raiser for the states if it were allowed to replace stamp duty, but he doubted that any government would have the political will to push such a change through.

Marc Moncrief quotes an independent source!

Why is the GST the preferred new medium of tax experts? It is a sleight of hand to introduce regressive taxation. A worldwide development is seeing GST as a means to downgrade the importance of progressive taxation (the lesser of two evils).

As the GST is a flat tax, with no tax free threshold, all citizens and visitors pay the same rate. This hurts the poor more than the wealthy.

If the mobility of labour is cited, surely the progressive means to capture revenue is via a Land based tax. A Site Rental on all land at a flat rate would naturally be progressive. Those living in Toorak have a higher site value due to location than those struggling families forced to live in the sprawling suburbs.

In the above quoted article, Brumby states that the Henry push to remove stamp duties and payroll taxes can only be funded by a lifting of the GST. We wait with baited breath in the hope that some sensibility will be reached by avoiding an increased GST. A higher holding charge on land will remove the speculative impetus that has caused this Global Financial Crisis (GFC). It would also fund the removal of the damaging payroll and stamp duties that we have been lobbying for.

Compliance anyone?