Taxing position, position, position

Lady Bracknell is the most memorable character Oscar Wilde invented - except for Oscar himself of course. In Wilde’s play The Importance of Being Earnest, she sizes up Jack as a potential son-in-law and grills him about many things, including the number of his house in Belgrave Square.

Alas, she observes on hearing the number, it’s the unfashionable side. Still, she consoles herself, “that can be changed”. Jack wonders whether she’s talking about changing the side of the square he lives on or the fashion itself. Lady Bracknell replies with stern surprise. “Both, if necessary, I presume”.

That exchange contains plenty of economics that the good citizens of Brisbane might reflect upon as they receive their new, invariably higher land valuations and pay the higher rates and land taxes that go with them.

Though it’s sometimes unfashionable to admit it, most of us are like Lady Bracknell. We prefer the fashionable side of the square. More trees, less noise, better view. Who knows, it might be nearer the river?

Unlike Lady Bracknell, most of us lack the means let alone the hubris to change the fashion. The flat topography of Belgrave Square is one thing but rerouting the Brisbane River is quite another!

However Jack’s quest for fashionable real estate raises the dilemma of what economists call “positional” or “status” goods. If I buy bread, you don’t go without yours. The baker just makes more. But with “positional” goods, one person’s enjoyment of them is - by definition - another’s abstinence. There’s only so much river-frontage, so one person’s “absolute river-front” becomes another’s “water glimpses”.

Something similar goes for “status” goods like Mercedes cars and “designer” accessories. They’re usually high quality. But most of their price premium is for their status value. Supply must be constrained to retain this exclusivity. So rising demand often just raises prices, just as it does on Brisbane’s waterfront. Though Chinese “knock offs” of similar quality cost $200 odd, Hermes sells “Kelly bags” for $7,000 plus. They enhance their exclusivity further by holding back supply to create waiting lists. It’s tough at the top!

And we’re becoming more like Lady Bracknell.

According to one estimate the unimproved capital value of the land underneath new homes - that’s the “positional” component - has gone from 20 per cent of its price to around 60 per cent!

In the last three years of the housing boom Brisbane’s river-front unit prices rose by 8.4 per cent per year compared with a 5.8 per cent for the rest. Remember, they were already more expensive. So the extra price rises measure the growing importance of position. Like they say - position, position, position.

It’s really a kind of “arms race” and it’s just as economically inefficient.

Military rivals escalate their spending just to maintain parity when they could achieve the same by both spending nothing. Likewise we can scale back the arms race in positional goods by taxing them more heavily. There will be no less water-front than before but the revenue can be re-circulated as tax cuts elsewhere.

Put another way, Jack’s enjoyment of fashionable houses generates a kind of pollution for others, his gain being their loss. And pollution should be taxed. You don’t have to believe in higher taxes overall to think that taxes should be progressive - with rates rising as a proportion of the value of what is taxed, whether it’s income, land or cars. And that’s just what our income, land and “luxury car” taxes do.

Mostly this is justified on the grounds of fairness. But does it reduce economic growth - for instance by discouraging harder work?

In fact despite greater emphasis on the “fair go” (or was it because of it?), Australian economic reform has actually accompanied faster economic growth than reform in New Zealand, the UK and America, which cut top tax rates much more than us and accentuated growing wage inequalities where we offset them.

Of course if you think that our economy exists to meet human needs rather than to expand for its own sake then - at least up to the point where disincentive effects predominate - progressive taxes increase economic efficiency. Redistributing income to the less well off helps meet their more urgent needs at the expense of the less urgent needs of the better off.

In the meantime, the ever growing significance of positional or status goods is another reason for thinking that progressive taxation is efficient. It diverts economic energies away from positional “arms races” and towards more productive endeavours.

The Great English liberal John Stuart Mill put it well, many decades before Lady Bracknell was a glint in her great creator’s eye:

A great portion of the expenses of the higher and middle classes in most countries ... is not incurred for the sake of the pleasure afforded by the things on which the money is spent, but from regard to opinion, and an idea that certain expenses are expected from them, as an appendage of station; and I cannot but think that expenditure of this sort is a most desirable subject of taxation. If taxation discourages it, some good is done, and if not, no harm; for in so far as taxes are levied on things which are desired and possessed from motives of this description, nobody is the worse for them. When a thing is bought not for its use but for its costliness, cheapness is no recommendation.

Tax cuts usually involve lifting thresholds at which higher marginal rates cut in rather than cutting the top marginal rate. So they should. Should we defend this tradition of the “fair go” against its many enemies on the grounds that it’s fair, or that it’s efficient.

Both, if necessary, I presume.