Breaking in on the Rent Seekers


Bryan Kavanagh (LVRG)

11 March 09
As published in the Age today (Business Opinion page)

“Put to the vote: as many are of the opinion that a public tax upon the land ought to be raised to defray the public charge, say ‘yea’… ”
“… Carried in the affirmative, none dissenting.”
– Philadelphia’s first tax law, 30 January 1693

The above wisdom is timeless, but today’s very sophisticated rent-seeker knows better. Before the property market peaked, he demanded that council rates and land taxes be wound back because prices had been escalating and he’d been ‘slugged’ badly. But as the real estate bubble bursts, he now says that property-based revenues need to be wound back, because people holding real estate have been ‘hurt’ enough already, and the last thing they need is property taxes causing any more ‘damage’. Property tax relief is necessary both on the upside and the downside, it seems.

The truth is that the public capture of publicly-generated land rent never does harm to society. To the contrary; it may be dawning on policymakers and analysts that the real estate bubble was the inevitable result of inadequate land value capture. They may even consider extending and fortifying council rates and State land taxes in order to prevent damaging real estate bubbles from developing again in the future.

Unlike the late 17th century Philadelphians, much of local government doesn’t appreciate the ingenuity of the reasoning behind the rating system by which it is mainly funded. Therefore, it often won’t defend it against those hostile ratepayers who attack it because they can. (Ratepayers are rarely to be seen knocking on the door of the federal treasurer, protesting against their income taxes!) Meanwhile, State governments reduce State land taxes, acceding to powerful landed interests whose property values must apparently be allowed to achieve nosebleed heights unfettered by land-based revenues.

The big end of town has been equally adept at capturing the surplus rent created by public infrastructure, even combining with government in unholy alliances against the interests of the public by privatising Australia’s highways, airports and public utilities. Governments of all persuasions have allowed cobwebs to settle on the old idea of capturing part of the uplift in land values that public infrastructure projects endow. But times may be changing: recent losses by new tollways in New South Wales and Victoria attest to people’s growing concern about losing the longstanding principle of the freedom of the highways and byways.

Favoured by a tax system doling bountiful handouts to rent-seekers, real estate became the name of the game throughout the first decade of the new millennium. The bubble developed remorselessly over eight years from 1999 as Australians became distracted from the main game by the false signals given by a terminally ill, perverse tax regime. As we caught the contagion, the obscene levels of interest paid under mortgages to banks largely signified the land rent lost to the public purse after it had become privately capitalised into sharply increased land prices. But subsequent inquiries into housing affordability always managed to turn a blind eye to the option of increasing the level of land value capture in order to contain the rate of land price escalation. An ill-informed property lobby still appears to contain public opinion.

So, Australian Bureau of Statistics Catalogue No. 5506.0 now tells us that we collected less than $40 billion from taxes on ‘property’ in 2007. Although publicly-generated land rent was $325 billion, we chose to fine labour and capital to the extent of some $285 billion for daring to work, allowing eighty-six percent of Australia’s land rent to be privately capitalised into the bubble – and thereby establishing the conditions necessary for an extraordinary financial collapse.

Presumably also on the advice of the same gormless economic high priests who have been advising them, governments now wantonly throw huge sums of public funds into the economic vortex in the forlorn hope of being able to rekindle a fast-foundering economy. The long-established wisdom that public capture of publicly-generated land rent represents the best interests of the public remains out of fashion. It should soon become clear to the dullest of economists, though, that taxation policy failure has been the catalyst for this financial implosion, and that the road to recovery doesn’t lie in ritually sacrificing further government funds into an abyss. The question instead becomes whether Australians can be re-educated in time to reverse a potentially horrific social meltdown by reasserting an old economic verity.

Ken Henry’s review of the tax system is timely and urgent. We need not only rid ourselves of those taxes penalising thrift, industry and exchange, but to re-establish the principle of public capture of our land values if we are to turn our parlous situation around quickly. Land rent represents community, insofar as it is generated by the community and its assets, not by any individuals. Time will undoubtedly prove, for better or worse, that at this time in our history Australia urgently needed to re-discover age-old community values.

3 Comments

  1. Colin Cook12-03-2009

    That GST is not part of Henry’s Review gives little room for optimism. What we really need is a Federally declared National Flat Rate Land Tax for the States to collect and use – so that the States could not be pushed into a race to the lowest rate. And demolish the GST. I recommend a 2% Land Tax to offset a 2% Reduction in GST. With regular increments in the National Rate with appropriate reductions in GST until that silly, regressive tax in no more.

  2. Bryan Kavanagh25-03-2009

    I have to agree absolutely with Mr Cook. “Australia’s Future Tax System” panelist, Dr Greg Smith suggested at the Melbourne public hearing (last Monday night) that if the review has been told GST must remain, that does not preclude it from being wound back.[!]

    I suggested that we do need federally-administered land value capture program (to put an end to this ridiculous race-to-the-bottom at State level). It should then be rebated back to the States – much like the GST. If it can replace some of the GST, all the better!

    I made the point that we are experiencing the GFC because of inadequate home-grown land value capture, and that while landowners and property speculators claw back ALL their taxation through increases in their property values (ie. through asset price growth), renters don’t have this option. Thus is the wedge driven into Australian society. Thus do our rich and poor continue to divide. It’s a gaping hole that must be filled by AFTS .

  3. Tashia Pauline02-12-2010

    Wonderful job:) I will want a decent amount of time to think about your article!!

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