Many attempts to analyse the cause of the Global Financial Crisis (GFC) contain more than a grain of truth. The vast majority, however, provide no useful hint to a remedy. As the process is structural and extremely repetitive, a cure needs to be found.
Banks did indeed extend excessive credit for the purchase of residential real estate without due regard for the bubble developing in the background. Where was their credit management during this time?
Whether the failure of banks merits bailouts from public funds warrants far greater debate than has occurred internationally.
Who makes the decisions that people have to be further fleeced in order to retain public trust and confidence in an errant banking system? Would not private takeovers following due diligence investigation be more orderly and appropriate? Why exactly are banks different when they fail?
And, yes, the world’s reserve banks were also at fault in their poor monitoring of bank exposure to the gigantic bubble in land prices.
When Federal Reserve Governor Edward M. Gramlich urged examiners to investigate mortgage lending in 2000, it was Alan Greenspan Chairman of the U.S. Federal Reserve who personally intervened to thwart the initiative. In 2001 U.S. Treasury official Sheila C. Bair met with the same lack of success in having subprime lenders either adopt or adhere to a code of best practice.
But the failure of banks and their overseers simply aided a pathological process that was long before underway. It remains largely unrecognised and is based upon mistruths about revenue sources.
In days of yore we captured a far greater proportion of the economic rent of land for revenue, whether in the fifteenth century and first quarter of the sixteenth (when the English labourer with a family of five still retained two-thirds of his wage after food clothing and rent) or before the U.S. turned to income tax as a ‘temporary’ measure at WWI. It was not until WWII that the Australian federal government also assumed the income taxing power from the states.
In Unlocking the Riches of Oz: A case study of the social and economic costs of real estate bubbles 1972 to 2006, I mentioned the more recent decline of property-based revenues as a proportion of all taxation. It became a worldwide fashion arising from mistruths about land ‘taxes’: more correctly called the economic rent of land.
The Henry Reviewof Australia’s taxation system certainly did not capture the public’s imagination when it was released in May of 2010. Its recommendation to establish an all-in federal land tax to replace poorly applied state land taxes was greeted with dismay in some quarters, not the least of them politicians in the major parties—and even from the public, notwithstanding recommendation also to abolish a vast number of less-efficient taxes.
Public distrust of land-based revenues underestimates their advantages and has been carefully founded upon two misrepresentations that would do Joseph Goebbels proud: Firstly, land-based revenues are unfair, and secondly, the land tax base is insufficient to raise any worthwhile amount of revenue
Land-based revenues are unfair
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