IMF Accepts role of Taxation as GFC catalyst
THE International Monetary Fund believes the tax treatment of housing is too generous and has called for capital gains tax to be levied on the family home.
Let’s look a little deeper into this IMF Report: Debt Bias and Other Distortions: Crisis-Related Issues in Tax Policy (PDF). The Exec Summary starts off with:
Tax distortions are likely to have encouraged excessive leveraging and other financial market problems evident in the crisis. These effects have been little explored, but are potentially macro-relevant. Taxation can result, for example, in a net subsidy to borrowing of hundreds of basis points, raising debt-equity ratios and vulnerabilities from capital inflows.
Little explored? Heard of the 18 year land cycle? See Phil Anderson explain it clearly here on Sky News.
32. Housing is commonly subject to special tax treatment that may have increased
household leverage and house prices. Taxation does not explain the widespread house price boom—that occurred in countries with very different tax systems—and there are no obvious tax changes that might have triggered its collapse. But taxation does create substantial distortions in a market of central macroeconomic importance. (p17)
Great to see the acceptance that taxation does create distortions, but ‘Taxation does not explain the widespread house price boom’ ? Dr Gavin Putland’s report on Recessions Begin at Home showed how domestic, independent tax policy and the continual ignorance of land rents was the catalyst to a property-led recession.
If, as I contend, recessions come mostly from domestic property markets, then the real significance of globalization lies in international arbitrage by property investors, which causes property bubbles and bursts to form global waves: recessions are global chiefly because property bubbles are global.
Back to the IMF:
76. Tax effects on asset prices, however, can be complex and hard to predict. Three
aspects of price behavior are potentially important: level, rate of increase, and volatility. Tax measures can affect all three, and in ways that may be difficult to anticipate:
• A higher rate of CGT may cause the price of an asset to fall but its rate of appreciation to increase (in order to continue yielding the after-tax return available on other assets). It is even possible for a higher CGT rate to be associated with higher asset prices (because any capital loss attracts a larger tax break). (p31)
Here the IMF’s Fiscal Affairs Department points out that a Capital Gains Tax (CGT) may impede the ability of taxation to curb the next inevitable property bubble. Why not go to the source and place the tax on land as a holding charge, rather than rely on a turnover charge as per the CGT? Then land prices are kept at levels that reflect the earning capacity of that location rather than the capital gains one can extort from the human right to a roof over our head? It also deals with the tax evasion and avoidance issues mentioned.
It is time for two dimensional economics to step aside in the need for an all-encompassing three dimensional model that moves beyond wage and capital costs, to include the one thing we all can’t avoid – some land upon which to stand!
The tragedy of present bailout economics is that governments have lost faith in how to get out of this recession – they seem hell-bent on kicking the next bubble into gear as a way to ensure their short-term re-election. Do voters retain a sense of history?
Of note, the term ‘land’ or ‘economic rent’ was not mentioned once in the IMF report.