A betterment levy: a cure to current ills

First, the GST, payroll and income taxes are abolished; we would see increases wages and purchasing power simultaneously. Second, this is not a bad thing, if you believe in housing affordability for your grand children and removing the boom bust cycle. Locally, every eight years, and nationally every 18 years, land values plummet (like now) and in turn destabilising the banking system (like now). As the graph below reveals, land booms precede recessions. It is time this stopped.

Under the status quo, land inflation causes a surge in consumption via a wealth effect and investment motivated by capital gains. This stimulus to the economy evaporates once land values slump. We must instead generate genuine output. Money poured in land speculation could be better spent on sustainable investments like scientific research or business investment - real, disposable wealth.

A betterment levy, implemented over 10 years while other taxes are phased out, so as not to mess with company asset sheets, would eliminate speculative advances in land values. On the supply side, speculators must relinquish idle sites like the 1,000 empty homes in one small suburb of Melbourne, increasing supply. On the demand side, the capital incentive to buy land is eliminated, thus reducing prices. This will reduce household debt, casting thousands of families onto the brink of poverty and debt. Land is bought for today’s use, not tomorrow’s speculative gain. It is no wonder Pittsburgh has the lowest foreclosure rate in the US of any city or county.

3.  “How will pensioners pay?”

They won’t. Pensioners, at least for this generation, should pay NO taxes (or at least have a citizen’s dividend given to them). PAYE schemes can occur over time or payments can be deferred if need be (in very rare instances), for those who are asset rich, income poor.

4.  “This levy sounds like nationalisation of land, even socialism.”

Actually, the status quo is socialism: millions of regulations, taxes on production and monopoly power due to owning land in the right location. Rent is an economic surplus, the result of economic activity by individuals. Taxing it has no deadweight loss (i.e. it does not distort output) and is created by all us (i.e. the community). Therefore, rents, not wages and profits, should be distributed between the state and the individual.

As Winston Churchill reminds us, incomes and speculation in shares, at least, are based on the quid pro quo rule (exchange like for like). Landlords evade this law of exchange when they reap windfall gains from the state. A labourer sells his work and gets paid (and taxed!) because he performs a service. A person invests in stock which allows the company to increase its capital base. A landlord, however, does nothing yet reaps the rewards of something he did not physically contribute to.

Government does not control the land whatsoever: it is up to the individual how they use it. The levy simply encourages the efficient use of land - a finite, natural resource. If used effectively, it can make the landlord wealthier without negative social excesses.

5. “A betterment levy will not hurt accounts and property developers as demand for property development increases.”

It makes property development more profitable in the long run. In Pittsburgh construction, after a land tax was introduced was 68 per cent greater than pre-land tax due to asset price stability. Savings are funnelled not into land, but onto the land: more renovations and development of land occurs, employing labour. Alas, something tells me when land values plummet, there won’t be much “property development” going on. Clearly, stable land prices mean projects can be sustained over time, not just when the boom happens.

Finally, accountants can become assessors and start up their own business.

Conclusion

Economists from the left (Keynes, Stiglitz) and to the right (Friedman, Hayek) all agree a betterment levy or a non-value added land tax is “the least bad” tax. Had Churchill’s and George’s reforms been implemented 100 years ago the world, today, would have been a better place. Now is Rudd’s chance to set things right; to limit the fetish of land speculation and to make things both efficient and equitable for future generations. A betterment levy works if there is the political will to implement them. The problem, perhaps, with vested interest groups at stake is that a betterment levy is too good to be implemented entirely.