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Global financial collapse: What’s happening to us?

By Bryan Kavanagh - posted Friday, 27 April 2012


The first of these two charges emanates from the property industry and a print media beholden to real estate advertising. Accordingly, it is undeniable that articles warning of the likely outcome of the giant real estate bubble we experienced from the outset of the new century were subordinated to soothing pieces about the benefits of home ownership: also advice to young couples and investors that they might miss out if they didn’t get into the market right now.

The few articles pointing to the existence of a bubble that did make it through were often subject of ‘concern’ by real estate industry leaders. These worthies were not noted for having ever called a real estate bubbles before it had burst.

The press and mainstream media in general have accordingly aided and abetted the idea that the right to real estate should come with no greater strings than local council rates.

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In the latter connection I’m reminded of my late father-in-law who, more often than not, used to trot down to the municipal offices to complain about his rates. When council justified its valuations, he’d occasionally take the discussion of how he was paying too much up with me. “Did you ever go into the Australian Taxation Office to complain about the far greater amounts of income tax you used to pay?” I once inquired of him. “Don’t be stupid. You can’t do that”, he exploded.

On the other hand, fortunately most of the textbooks in economics do show land-based revenues to be the fairest revenue base. This is because it can be shown they are not arbitrary taxes, they are technically rents in nature and can’t therefore be passed on in prices like other taxes.

John Locke (1632–1704) wisely said: “It is in vain in a country whose great fund is land to hope to lay the public charge on anything else; there at last it will terminate.”

Today, we ignore this injunction to our great social and economic distress. The deadweight of taxation cascades everywhere throughout our prices and via an incredibly cumbersome tax administration, sending prices soaring and making manufacturing uncompetitive overseas. It is all this deadweight, not simply our labour costs as claimed render us uncompetitive.

So, the public capture of the economic rent of our land does not act detrimentally on the economy, and economic papers on ATCOR (all taxes come out of rent) and EBOR (excess burdens come out of rent) are unfortunately too few and far between.

In Roosevelt Institute Working Paper No. 6 Principles and Guidelines for Deficit Reduction, Joseph Stiglitz concluded: “One of the general principles of taxation is that one should tax factors that are inelastic in supply, since there are no adverse supply side effects. Land does not disappear when it is taxed. Henry George, a great progressive of the late nineteenth century, argued, partly on this basis, for a land tax. It is ironic that rather than following this dictum, the United States has been doing just the opposite through its preferential treatment of capital gains.

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But it is not just land that faces a low elasticity of supply. It is the case for other depletable natural resources. Subsidies might encourage the early discovery of some resource, but it does not increase the supply of the resource; that is largely a matter of nature. That is why it also makes sense, from an efficiency point of view, to tax natural resource rents at as close to 100 per cent as possible.”

Thus endeth rebuttal of the property industry’s great lie.

The land tax base is insufficient to raise any worthwhile amount of revenue

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About the Author

Bryan Kavanagh is a real estate valuer and associate of the Land Values Research Group.

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