Will company tax cuts trickle down or trickle up?

By Catherine Cashmore

The proposal to cut the company tax rate from 30% to 25% has received much media attention.

We are repeatedly told it is needed to boost investment.

The rational follows that companies are more likely to invest in productivity if they don’t have to pay as much tax on their gross income.

It sounds great to businesses. Especially smaller companies that are struggling against a macro economic environment that is not conducive to growth.

But will a company tax cut really profit productivity and labour? Or is there something missing in the equation?

A similar query came up when Thomas Piketty released his magnum opus ‘Capital in the Twenty-First Century’.

It attracted more attention than any other economics book in recent history.

Praised by Nobel-prize winners and politicians alike, Piketty claimed to have produced a ‘new theoretical framework that affords a deeper understanding of the underlying mechanisms of Capital and Inequality.’

According to Piketty, the world risks ‘terrifying consequences’ unless a global wealth tax is implemented — a policy that requires universal recognition across country borders.

Without it, Piketty argues that the accumulation of capital will become increasingly concentrated in the hands of the rich, accentuating the inequality gap and keeping the poor, poor.

It took a 26-year-old US grad student (Matt Rognlie) to realise that Piketty had ‘Got it wrong!’

Rognlie split Piketty’s data between the net capital income from land, and the net capital income from all other sources and noticed something ‘shocking.’

‘A single component of the capital stock—housing (land)—accounts for nearly 100% of the long-term increase in the capital/income ratio, and more than 100% of the long-term increase in the net capital share of income.’

In other words, it is land (not capital) that has taken all the gains.

Bloomberg declared it ‘a dramatic, startling insight that was somehow overlooked before Rognlie came along.’

The Economist heralded it the ‘most serious and substantive critique that Mr Piketty’s work has yet faced.’

But of course, Rognlie had merely done what the classical economists had been doing for centuries.

He separated land from capital (that which is man-made), and in doing so uncovered the obvious.

The insight should not be surprising to any Australian – especially those living in Sydney and Melbourne.

They face the highest real estate prices against wage income we have ever witnessed in this country – and as a consequence, hold highest household debt in the OECD.

The total value of Australian residential real estate is over 6.6 trillion.

Land makes up at least 60% of that value in our two biggest capitals.

The economics term used to quantify this is “land rent” or “economic rent.”

Land rent is not an annual payment made by a tenant.

It’s the revenue that can be earned from sitting on a block that is appreciating in value with no effort or enterprise.

Can you imagine what it would do to productivity if we lowered the price of land (and private debt levels) instead of granting a company tax cut?

After all, company tax is not payable unless the company actually makes a profit.

The same cannot be said for the rents and prices that companies and individuals pay for their business premises, or homes.

In the simplest terms, the higher the rent or price paid, the less money available for wages and business investment.

The classical economists understood this.

They also recognised how changes to tax policy have the ability to either mute or inflate the housing cycle.

In a competitive market, real estate prices are merely a reflection of what the banks are willing to lend.

Any tax cut to labour income increases the borrowing capacity of those purchasing land – and as a consequence, land inflation.

In other words – the direct benefit of tax cuts on labour and capital are quickly competed away in higher land prices.

The roll on effects to the broader economy are significant.

Speculation fuels the real estate market when land prices are high and increasing.

Employees need to live further from business premises to access affordable accomodation – increasing commute times and productivity losses.

Properties are held vacant and land is banked, restricting the available supply further.

Homeless numbers increase, putting pressure on the welfare system.

The economy suffers as a result.

Some argue that the equity in land can be invested back into productive labour.

However, the macroeconomic effects highlighted above are clear evidence that this is not really the reality.

There is nothing quite so compelling to real estate investors or home owners as “growing rich in their sleep” – as the classical economists would quip.

Successful producers may reinvest their profits into further production.

But rent seekers – those benefiting from unearned gains – know where the easy profits lie.

Dr Gavin Putland demonstrates this in his latest paper “Trickle Down Economics” for the taxation think tank Prosper Australia.

The report investigates the relationship of land’s share of GDP against economic growth.

The following graph demonstrates the effect quite well:

The dark blue band (including the small aqua-coloured segments) show the land rent – i.e. the value (assuming a yield of 5% per annum)

The green band shows the real “capital gains”.

This assumes that 6% of the land value is sold each year, having been bought 8 years earlier. (Hence no “capital gains” are shown for the first 8 years.)

Where the green section gives way to the small aqua segments (1919–22 and 1938–49), the “capital gains” are negative. During these periods, the land value is indicated by the top of the aqua band (measured on the left-hand scale), while the land rent plus “capital gain” is indicated by the bottom of the aqua band.

The red band shows tax for all levels of government as a fraction of GDP (measured on the inverted right-hand scale).

Finally, the light blue band is the ‘meat in the sandwich’. It demonstrates what is left over for labour and “capital” when the others (land rent and tax) have taken their share.

The squeeze is significant.

Putland shows that land rent as a proportion of GDP has increased from 2% in the early 1950s to more than 20% of GDP in 2017.

Since 2003, the economic rent of land has consistently exceeded 15% of GDP.

Significantly, the “Global Financial Crisis” in 2008 and the recession of the early 1990s were preceded by notable squeezes on the percentage of GDP accruing to labour and capital, as distinct from land.

Putland is not the only one to point out how high and rising land values can lead to massive economic recessions.

In 2014 the IMF (International Monetary Fund) highlighted that

“..boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises…..” (IMF “Era of Benign Neglect of House Price Booms is Over” June 11 2014)

The double edged sword of higher land prices and damaging productivity taxes (which produce deadweight losses) lead to a drain on the capacity of workers and employers to invest in future growth.

Accordingly, Putland highlights the gains to landowners do not “trickle down” to labour and capital as one may imagine.

There is a “trickle-up” effect: when labour and capital get a greater fraction of GDP, economic growth is faster.

The overall effect of that growth eventually makes landowners better off in *absolute* terms, in spite of their smaller *fraction* of the pie.

However, without changes to land (or tax) policy, the overall bargaining position of labour and capital is reduced, and productivity decreases as more and more wealth is diverted back to landholders.

This is due to David Ricardo’s “Law of Rent.”

*Net* returns to labour and capital tend to become independent of location (due to their mobility).

However, any locational boost to the *gross* returns is claimed by the owners of location itself — through the economic rent of land.

To explain it another way.

Wealth is divided among economic rent (in this case land), wages, and profit as their respective returns.

Production = Rent + Wages + Profit,

To rearrange the equation,

Wages + Profit = Production – Rent.

In other words, wages and profit are not what labor and capital *produce* – they are what’s left after economic rent is taken out!

The locational value of land will always take the gains.

How do we combat this?

Putland’s cure lies within the tax system.

Similar to the Henry Tax Review in 2008 when it concluded “economic growth would be higher if governments raised more revenue from land and less revenue from other tax bases.”

Most of our taxes carry what is termed ‘deadweight losses.’

Deadweight losses are easy to understand.

Income tax is a discouragement to work.

Payroll tax acts as a discouragement to employ – so on and so forth.

Quantifying the effect that deadweight taxes have on the economy as a whole is not easy.

Some researchers suggest it’s as much as $2 for every $1 collected.

In other words – the “revenue” from your income tax payments may as well be thrown down the drain. They cause more harm than good.

(Meditate on that next time you do your tax return.)

Contrary to the above, taxes that improve the competitive position of tenants and land buyers relative to landlords and sellers — such as land-value taxes, and vacancy taxes (applicable to both vacant land and vacant accommodation) — have a negative deadweight!

As Putland highlights.

Taxes that make it uneconomic to own vacant land and buildings, force owners to either build accommodation and seek tenants, or sell their land to someone who will.

A land-value tax does not penalise the building and letting of accommodation.

Rather it increases the amount of accommodation as vacant properties and banked lots are employed into use – thereby lowering rents and prices.

Importantly, land taxes fall exclusively on the owner of land – they cannot be passed onto tenants.

All else being equal, a tax on land, reduces the amount buyers have or are willing to pay upfront. The effect is to lower land prices.

Land taxes are a way to claw back the economic rent that is currently privatised by landowners, (only to be reinvested into more speculative investment.)

Company tax cuts need not be a bad thing if they are replaced by taxes that reduce speculation in the land market.

On their own however, they will merely add to the boom bust nature of our economy.

Putland’s paper will be launched in Melbourne on Wednesday April 18th at 6pm. For more information contact Prosper Australia.

Comments

  1. – A LOT OF words that can be summarized by a few words.
    – If one wants to strenghten an economy then one must increase wages. That will increase demand and increase production.

    • Or put in an income guarantee that would end homelessness, give Aussies an upper hand over foreign “students” in the rental market, and allow Aussie workers to threaten to quit their jobs and go on the income guarantee unless the boss gives them a pay rise.

      Martin Luther King wanted it and now Black Lives Matter wants it, so the lack of an income guarantee is racist.

    • Catherine Cashmore

      Not quite Willy2 – the whole point of the article is to demonstrate that company tax cuts or wage increases won’t do a thing for the economy whilst it is the land market that takes the gains,.

    • Like the hospitality penalty rates cut was suppose to line the pockets of workers, create more jobs and be gone the 10% surcharge. I know this may come as a shock but none of this has happened and never will.

  2. The article seems to equate wealth to income. Can anyone explain the relationship between the rent that is paid as income (a flow) and the rent that inflates the capital value of the land (a stock)?

    • I am a bit of a Georgist myself but this is drawing a pretty long bow. I would suggest removing most of the financialisation in the economy would soon correct this ( note that it starts about when the RBA was set up in 1959 )

      I am much more interested in a modern industrial policy for Australia. I agree with Carol Quigley that goods are wealth that you have and credit is a claim on wealth that you don’t have yet. I believe we need to focus on getting some goods for wealth and not credit promises which could easily go poof.

  3. adelaide_economistMEMBER

    Yes, ‘rent’ is supposed to be a dirty word just not in the warped way it has become that in modern day Australia. Renters are denigrated but rentiers are not (and are in fact worshipped).

  4. DreadnotMEMBER

    It would have been interesting to separate the of Labor and Other Capital (productive capital?) in the blue section of the graph. My guess is that returns to labor will be shown to be squeezed the most. Unfortunately, rent seekers – rentiers in classic economics – in today’s monopolistic and dualopolistic Australia don’t only include land owners. Add big pharma, private toll roads operators, private pipelines owners, supermarkets and big banks. All need to be taxed to level the competition playing field instead of emphasizing regulation. Private owners will always ‘game’ the regulator.

    • Adair Turner: Clip property’s wings
      In an automated economy, without intervention, the rewards are inevitably concentrated in various forms of rent—especially for those who own land in urban centres, technologies that benefit from network effects (Google, Facebook) and inventions. All of these things are concentrated in relatively few hands, fuelling the income gap.

      So far, we’ve left land as a free-for-all, greatly benefiting its holders, and increased the advantages of those with intellectual property, for example by extending copyrights for decades after an artist has died. If we’re serious about inequality, we need to change course; economics should concentrate on devising new, smart taxes and regulations to put property back in its place.

      Adair Turner, Chairman of the Institute for New Economic Thinking

      https://www.prospectmagazine.co.uk/economics-and-finance/back-to-school-13-top-economists-on-the-one-idea-economics-still-has-to-learn

      • Stephen Morris

        I don’t want to be difficult but this is a much more complicated issue than most people understand, because most economists (brought up in the tradition of cardinalism) don’t understand what “rent” actually is. That misunderstanding leads to all sorts of problems, one of which I will come to in a moment.

        Very briefly, a logically consistent definition of “rent” sees it as a benefit sustained over time due to a “metastable” distribution of rights. In every case, we must ask, “How would the Players in the Game redistribute their rights through negotiation in the absence of transaction costs and the ‘anti-catalytic’ effects of Prisoners’ Dilemma”. If that renegotiation is restricted and a sustained benefit results, then that benefit is rent. From there we may go on to define “windfall rents” and “incumbency rents” (see the link).

        This is why “rent” is the most general sense is closely related to constitutional issues like Democracy and the right of internal secession, the absence of which raise transaction cost barriers and thus create rents.

        So much for abstract theory. How does it relate to the specific issue here?

        First, the worst rent-seeking is not individual rent-seeking but communal rent-seeking. To take a specific example (and this will really get up the nose of a lot of people here), the Australian system of fuel excise (a “tax on distance”) is a rent-seeking mechanism by which money is pulled out of regional and rural Australian communities (typically engaged in activities which enjoy a comparative advantage in world markets) and re-distributed largely per capita to metropolitan communities which do not. This is just one example. Many others are discussed at the end of this comment.

        Would a land tax fix that sort of rent-seeking?

        Probably not!

        It depend on how the proceeds are spent. If the proceeds of land tax on metropolitan land are spent on the metropolis itself (very likely), then it will do absolutely nothing to alter the overall flow of rent from those regions and industries which enjoy a comparative advantage to those populations which do not.

        And this is Australia’s real problem of rent-seeking. It’s not actually rent-seeking by individuals but by powerful voting blocs which use the (non-democratic) system of elective government to re-direct rents to their own communities (in the ways outlined in the foregoing link). The result is misallocation of resources on a continental scale.

        And most economists wouldn’t even acknowledge the existence of the problem! In fact, many of them are beneficiaries of the rent flow.

        The question we must ask is, ““How would the Players in the Game redistribute their rights through negotiation in the absence of transaction costs and the ‘anti-catalytic’ effects of Prisoners’ Dilemma”.

        The easiest way to answer that is to try it!! By removing the transaction cost barriers associated with non-democratic government.

        Which brings us back to questions of direct democracy.

        p.s. I have to go out for most of today, so I’ll be unable to look at this again until this afternoon.

      • (To Stephen Morris)

        As fuel excise is a tax on distance, so land tax is a tax on proximity. That does not of itself mean that the revenue from land tax will be spent equitably. But if it is spent in a certain location, making that location more desirable and raising its land values, that location will subsequently contribute more land tax. That helps a bit.

      • Stephen Morris

        Gavin, thank you for your reply. Forgive me if I get a little excited over the topic of rent but it’s something I’ve been studying for years in the more abstract field of constitutional political economy. I do recognise that I’m way out on the fringe, but solutions to intractable problems often rely on thinking well outside the square.

        A tax on land is no doubt better than no tax on land!

        But it really does depend on how the money is spent. To take an extreme example to illustrate the point, if the tax on land was spent entirely on the owner of the land (a “community” of one!) it would clearly have no effect whatsoever. Moving slightly away from this, if land tax collected by municipality is spent entirely within the municipality then it will do nothing to alleviate the rent-seeking of the metropolises.

        If resource rents from the exporting States are spent (largely per capita) on the metropolises then this would perpetuate the problem of rent-transfer from those engaged in industries which enjoy a comparative advantage to those which do not.

        I provided a longer answer to Karl Fitzgerald below which suggests that the real solution to rent seeking lies in democratisation. Ultimately, without democratisation any attempts to remedy rent-seeking will eventually be subverted by the rent-seekers themselves.

    • Yes, it would be “interesting” to separate the returns to labour and true capital. But I don’t yet know how to do that with useful accuracy. (E.g., the ABS “gross operating surplus” doesn’t help much, because it considers only incorporated entities and counts returns to assets other than true capital.)
      OTOH, given the current political alignments, it’s probably also useful to portray the fight over the economic pie in a way that unambiguously puts labour and capital on the same side.

  5. Stephen Morris

    This analysis (and Rognlie’s) fails to differentiate between the relatively large number of wealthy and the relatively small number of VERY wealthy.

    Most of Bill Gates’s wealth or Mark Zuckerberg’s wealth is capitalised rent . . . and it’s NOT land rent!!

    The problem with land taxes is that the are hugely regressive.

    Consider two cases.

    Tech billionaire A has wealth of $50 billion of which 1 million is land.

    Struggling first home buyer B has wealth of $0.75 million, comprising 1 million of land, $0.5 million of debt, 0.25 million of other property.

    Let’s apply a 1% pa tax on land.

    Tech billionaire A pays $10,000 a year, or 0.00002% of his wealth.

    Struggling first home buyer B pays $10,000 a year, or 1.33% of his wealth.

    Why limit rent taxes to land. Why not tax ALL rent, either:

    a) through an explicit rent tax as proposed by the The Henry Review; or

    b) indirectly through an annual tax on NET wealth, as the Swiss cantons do.

    Wealth subject to the tax includes (see http://taxsummaries.pwc.com/ID/Switzerland-Individual-Other-taxes) not just real estate but:

    – immovable assets (real estate);

    – movable assets (securities and other investments);

    – cash, gold, precious metals;

    – cash value of life assurance policies;

    – shares in undistributed inheritances;

    – business capital, shares in a partnership; and

    – motor vehicles, boats, etc.

    Pension funds are not considered as assets, and all liabilities can be deducted in order to determine net wealth. In some cantons there is an allowance depending on the status of the taxpayer (married, single, number of dependants) while in others an allowance is made in the tax rate.

    Taxpayers must declare worldwide assets belonging to all immediate family members. Foreign real estate and qualifying business interest are exempt but made be taken into account in determining the tax rate. Liabilities are allocated according to the location of gross assets.

    Typical assessments on CHF1,000,000 owned by a married couple are (from the same source):

    Zurich 0.188%

    Basel City [2010 rates] 0.58%

    Geneva approximately 0.5%

    • Catherine Cashmore

      Stephen the article is written about the Australian economy and land rent in particular. As you well know – Prosper Australia Advocates a tax on all economic rent – land rent or otherwise. The article makes it clear that we’re talking about land rent – hence the graph. I suggest you read the report when it is published tomorrow.

      • One other thing about the rich and the VERY rich.

        You make the comment:

        ‘A single component of the capital stock—housing (land)—accounts for nearly 100% of the long-term increase in the capital/income ratio, and more than 100% of the long-term increase in the net capital share of income.’

        In other words, it is land (not capital) that has taken all the gains.

        That’s not quite true. “All the gains” have been taken by:

        a) land, which is relatively widely held by many people who are only moderately wealthy; AND

        b) a tiny number of businesses which account for all of the non-land rent.

        Hendrik Bessembinder’s study of monthly US stock returns over 90 years shows that:

        a) the monthly return on most stocks (52%) over 90 years is negative;

        b) most stocks (51%) have a negative lifetime return; and

        c) half of all US stock-market wealth creation has come from 0.33% of listed companies. That is 1 in 300! Of 26,000 stocks in the study’s database, 86 provided half of aggregate wealth creation, 282 provided 75% of aggregate wealth creation, and 983 account for all net wealth aggregation!

        (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447 or a useful summary from Morningstar here: https://www.morningstar.com.au/stocks/article/most-stocks-stink/8437)

        In other words, wealth increase doesn’t just come from land. It comes from land and the tiny proportion of companies which earn vast (non-land) economic rent.

        It’s a pity Australians are so provincial and refuse to look at solutions devised in other countries like Switzerland.

        The essential issue I am raising (and it may be answered in the paper) is this: how is the regressive nature of land tax to be addressed:

        a) those who buy or have bought land with borrowed money will be taxed on the gross value; while

        b) those who have vast net wealth in other forms will be let off.

        How is that either fair or efficient, when there is a precedent for a workable system (a tax on net worldwide wealth) that avoids these problems . . . if only one cares to look beyond the shores of Australia.

      • Stephen Morris

        Catherine, I saw you reply below.

        I’m not trying to be difficult, but as someone who has spent most of his adult life worrying about the problem of rent in its most general sense I would like to draw your attention to some of these issues so that they may be properly addressed in the debate which will no doubt arise from this proposal.

        I think there are three matters which you (and Prosper Australia) might like to consider to advance understanding of this issue:

        a) would land tax tax do anything at all to address Australia’s real problem of “communal rent-seeking” discussed above in my reply to David Collyer. The answer to that lies largely in how the proceeds of land tax are spent;

        b) the “Piketty issue”, discussed last night. I would suggest that this is a problem of looking at aggregates. (It’s a bit like the recent Treasury report on Big Australia which claims an overall benefit but ignores the difference between the winners – i.e. the rent-seekers – and the losers). In this case, the apparent zero net (aggregate) contribution of non-land capital is concealing massive differences between the majority of firms which are actually making a loss, and the very few who are pulling in vast economic rent. I think Piketty himself refers to the ability of the very rich to earn higher rates of return than the average because of their access to better information (and also, of course, their political power). These are the real rent-seekers, while the vast majority of mum-and-dad investors with their superannuation funds are not keeping up with the growth in land value; and

        c) how would land tax address the regressivity problem of those (generally less wealthy) who have bought land but have a corresponding debt. They could end up being taxed on a tax base greater than their net wealth!

        I must go out now (I’m do the timing for a running event today) so I won’t be able to comment any further until this afternoon.

        Again, I’m not trying to be difficult or to score points. The fact that rent tax of any kind is being discussed is better than nothing. But unless the real issues are addressed (especially communal rent-seeking) this whole process will end up being subverted . . . . . by the rent-seekers!

      • Karl FitzgeraldMEMBER

        Stephen – land is only considered in this report as it has the best data trail back to 1910. So yes these findings are conservative, as stated at the report launch. State resource rents and spectrum are sporadic data sets at best. As Gavin references a number of times in the report, the Total Resource Rents of Australia report looks at the taxable capacity of monopoly rents. Trickle Up Economics – the report – can now be accessed.

        What Gavin’s work reveals is the notion that landlords could be better off by accepting higher taxes on land (in absolute terms, rather than relatively). Yes, if labour and capital faced a comparatively smaller tax burden, the resultant demand drivers for land will ….Trickle Up. A fascinating perspective on ‘give and take’.

      • Stephen Morris

        Karl, contrary to Winston Churchill, land is not the “mother of all rents”. The belief that it is reflects just how little economists understand the real nature of rent.

        The mother of all rents is . . . . The State.

        The State is the provider of “governmental services.” Its output comprises:

        a) legislation;

        b) administration;

        c) arbitration (both between customers and the government provider, and between different customers), and

        d) other specific services which vary from community to community.

        The ownership of land – and the terms under which it is owned – is in the gift of the State. The very fact that Prosper Australia is talking about the land taxes (imposed by the State!!) reflects this.

        And the government industry is hugely monopolised:

        a) governmental services are provided by States;

        b) States are highly integrated providers of governmental services: all governmental services are provided by the same sovereign State (or, in the case of federations, by one of two sovereign States – the central and the provincial – each operating within its fixed jurisdictional limits);

        c) States are organised throughout the world as regional monopolies. For any region, only one State (or, in the case of federations, one of two States operating within different fixed jurisdictions) may provide any governmental service; and

        d) most regional monopoly States participate in an anti-competitive market sharing agreement (codified in the UN Charter) under which each supplier commits not to offer, or attempt to offer, governmental services within the franchise area of another supplier.

        This aspect of monopolisation goes unrecognised because people are so used to it. Even the nomenclature is altered to hide the fact. In discussing the government industry it is absolutely conventional to use terms derived from the Latin unus rather than the Greek monos. Thus, a “monopoly state” is conventionally called a “unitary state.” The “European Monopoly” is invariably referred to as the “European Union.”

        The Prosper Australia report (while no doubt well-meaning) accepts this world view in its entirety. It assumes that “Australia” (the State known as The Commonwealth of Australia) will continue to be a horizontally integrated monopoly provider of governmental services on a continental scale.

        The consequences of this are profound. It seems, for example, that Prosper Australia implicitly accepts without question (I could see no discussion to the contrary) the idea that resource rents from those industries and regions which enjoy a comparative advantage should be collected by the Commonwealth (i.e. monopoly) government and distributed per capita. This perpetuates the communal rent-seeking of the type referred to in my response to David Collyer this morning. The metropolises continue to be “rent-seekers” in the sense that they seek to live off the rents extracted form other communities, communities which enjoy the comparative advantage they do not.

        This actually perpetuates the real problem of Australian rent-seeking.

        The decline in Australia’s prosperity relative to the rest of the world has tracked the increasing monopolisation of the Australian government industry since 1901. Until Federation and for a short time thereafter, Australia enjoyed a form of quasi-competition known as “competition-by-comparison” in the government industry. Different provincial governments (what we confusingly call “State Governments”) operated in parallel and could be compared to provide some (albeit limited) competitive pressure.

        The steady monopolisation of the government industry by the Commonwealth has been accompanied by ever-increasing communal rent-seeking and the allocative inefficiency which inevitably results from it. The internationally uncompetitive – but politically powerful – metropolises are way too big and are demanding ever more resources be diverted into them. See, for example, the earlier link on “New Economic Geography” and the discussion of projects like Westlink.

        By failing to recognise that the Prosper Australia report ensures that it will continue and worsen.

        The real solution to rent-seeking in Australia lies asking: “What would the Players in the Game negotiate in the absence of metastability?”

        Well, we know from the historical record that they have consistently voted against monopolisation. Of 44 constitutional referendums held since 1901, 32 sought to increase the powers of the monopoly government. Of these only 2 were successful: the 1946 social security referendum and the 1967 referendum to transfer power over aboriginal affairs. Monopolists typically argue that “Australians always vote NO in referendums”. But that is not the case. Of the remaining 12 referendums half were approved, and that is a success rate reflected in provincial (i.e. State Government) referendums.

        Not only in Australia but worldwide, monopolisation is rarely approved by the Players in the Game. It is almost always achieved through non-democratic means. In Australia the principal mechanism has been through capture of the government industry regulator, the High Court. In Europe, for example, (in the case of the European Constitution which was voted down in referendums) it was achieved through bypassing voters altogether.

        These results suggest that the real solution to rent-seeking lies somewhere that Prosper Australia has no intention of looking:

        a) in democratisation, through the campaign for initiative-and-referendum; and

        b) in re-invigoration of the federal system.

        Until economists can learn to think outside their square they will have no hope of understanding – let alone remedying – rent-seeking.

        [A more detailed discussion of these issues may be found here: https://www.scribd.com/document/177030302/An-Essay-in-Comparative-Constitutional-Law-14-10-2005-Complete , including in particular the Appendix on Methods for Handling Government Industry Monopolies.]

    • The Traveling Wilbur

      That Bill and Mark will pay less tax under almost any tax system that approaches ‘normal’ that you would care to propose is not ‘regressive’. It is hardly bloody surprising is what it is. And what you mean is it is possibly inefficient, not regressive, given your other thoughts above.

      However, I would rather design a ‘fair’ one-size-fits-all tax system that actually collects something than a mythic collect-everything-from-everyone-‘equally’ system that brings in less. Far less, considering the current tax collection regime’s track record for getting dosh back from the ‘only’ wealthy segment of this country.

      Jesus. Save me from smart people.

      • The regressive nature arises from taxing gross – not net – wealth. It means that moderately wealthy people, whose assets (typically property) are offset by the debt to finance those assets, pay a higher rate on their net wealth than the very wealthy who are actually the main recipients of economic rent.

        It’s not a difficult problem to solve. There are existing examples of net wealth tax.

        If the full paper (which I have not read) addresses this issue, then clearly these comments will be irrelevant.

    • Stephen Morris, a land tax is impossible to avoid while attempting to tax gold is like attempting to stop cocaine smuggling. One automotive journalist said the luxury car tax is impossible to avoid – so that is a good tax and should be raised to 50% (with an exemption for utes).

      NSW has a 2% land tax on foreigners and foreigners can not vote – so they could raise it to 4% and not be impacted politically.

      Car rego is $800/year in Vic and that is bloody regressive. The braindead “Greens” should have made bus travel free during the off-peak.

      We are fast approaching a point when 51% of the voters own no land. Alaska has a fossil fuel mining tax and uses it to fund UBI. The “Greens” put in a fossil fuel mining tax but did not even give me a $50 cheque! Rudd gave me a $900 cheque.

      • Catherine Cashmore

        Stephen – as stated “housing (land)—accounts for *nearly* 100% of the increase” I suggest you read the report – the research speaks for itself. My commentary is merely a summary of Dr Putland’s findings. It’s clear enough.

    • Under a property implemented land-value tax, the struggling first home buyer in your example would not pay the full $10,000. As long ago as 1885, Henry George himself proposed that “In cases in which it became necessary to consider the relations of mortgagee and mortgager, I would treat them as joint owners.” Moreover, it seems to me that such an arrangement would be needed only in the case of mortgages entered into before the tax is introduced. The rule concerning future mortgages, whatever it happens to be, will by “priced in” by the market.

      If you are suggesting that a land tax, by itself, is regressive in the way it treats the wealthiest 0.01% by comparison with the wealthiest 10%, you will be right in many cases. But that’s a pretty heavy qualification of “regressive”. One also needs to consider the 10% relative to the 90%. And, as others have pointed out, there are ways of taxing economic rents other than ground-rents.

      Yes, I am well aware that land titles are created by the state, and that to maximize the privileges that go with land titles is therefore to maximize that aspect of state power — a fact of which allodial “libertarians” should be reminded at every opportunity.*

      Concerning some of the other issues you raise, perhaps the best response is to point out that the scope of any particular study is necessarily limited.

      * I consider myself a libertarian. I have critics who dispute that assessment. 🙂

      • Stephen Morris

        1. As a practical matter., if mortgaged land is deemed to be owned jointly by mortgagee and mortgagor, would the mortgagee be taxed?

        If Yes, then either:

        a) lenders would simply pass on that cost to the mortgagor, otherwise lending for land would be uncompetitive against lending for any other purpose (and might not even cover the lender’s cost of funds). In this case, the mortgagor would still end up paying the land tax on the gross rather than the net amount; or

        b) lenders would not lend against land, in which case the first home buyers would be squeezed out of the market altogether.

        If No, I could see my former corporate finance colleagues devising all sorts of tax minimisation schemes to ensure that all borrowing was in some way attributable to land.

        2. If the effect of land tax is “priced into the market” (i.e. the price of land falls) what happens to the person who has recently borrowed to buy land before the tax is introduced? They’re still “paying” the land tax but instead of paying it annually, they’re paying the present value in one lump sum as the value of their land falls. (Perhaps there is a grandfathering provision to exempt recently purchased land, but that would necessarily reduce the present value of the tax collected by the same amount as the amount of pre-regime protection offered.)

        3. “And, as others have pointed out, there are ways of taxing economic rents other than ground-rents.” That was why I raised the issue of Swiss-style net wealth taxes. These tax the present value of all future economic rent (i.e. one’s wealth).

        4. Unless something is done to promote democratisation (the means by which the monopoly power of the State is controlled by the citizens) any such schemes will eventually be subverted by rent-seekers using their political influence. It may be no coincidence that the polity which continues to apply net wealth taxes is Switzerland, where the monopoly power of the State is constrained by genuine (i.e. direct) democracy.

        5. Is there any meaningful definition of Libertarian? https://nudges.wordpress.com/2008/04/10/obama-libertarian-paternalist/

    • It seems that my previous reply to this post was added to the moderation queue because it included a link (to a discussion between Henry George and David Dudley Field).

  6. That was a tabloid style article.
    Tweets.
    Statements.
    No paragraphs.
    Impossible to read.

  7. 1. be interesting to know the funding make up of Prosper – who its major donors are.
    2. the reduced co rate really isn’t great for biz owners – esp those who have large retained earning (franking credits) (eg. rate of 27.5% will lead to an addition tax cost of approx 10.7% to end recipient

    its typical political BS (a major democratic flaw which is becoming all too apparent) whilst China plays Go(game)

    • Catherine Cashmore

      Prosper Australia is an NGO. Funding comes from a number of sources outlined in the annual report on the Prosper Australia website.