Alternative Economic Review No. 2: The immovable tax
The global economic crisis
from a non-neoclassical viewpoint
The immovable tax
One obvious consequence of Ricardo's law (see last month's editorial) is that a tax on the rental value of land cannot be “passed on” in the rent of the land; that is, it cannot be shifted onto a tenant. The maximum rent that the landlord can extract is the margin by which the productivity of the land exceeds that of the most productive land that can be had for no rent, and this margin is not increased by taking any part of it from the landlord in the form of a tax. Indeed, because the tax imposes a holding cost on land, so that holding the land idle becomes unattractive, it forces land onto the rental market so that better land can be had for no rent; hence the margin by which the productivity of any given piece of land exceeds that of the best rent-free land is reduced; that is, rents are reduced. Of course the manner in which the revenue from the tax is spent can, and often does, raise rental values again; but the tax itself does not. And because the tax does not raise rents of sites, neither does it raise prices of sites — prices being capitalized rents.
Unlike a sales tax liability, which can be reduced by selling less, a land tax liability cannot be reduced or avoided by withholding land from the market, because the tax is payable on the value of the land whether it is on the market or not. Hence, while a sales tax can raise prices by causing a scarcity of items for sale, a land tax cannot raise rents by causing a scarcity of land to let. On the contrary, by encouraging site owners to let or sell their sites in order to cover their tax liabilities, a land tax strengthens the bargaining positions of prospective tenants and buyers.
That a holding tax on values of sites cannot raise the rents of buildings is even more obvious: the tax is on the sites, not the buildings! Furthermore, in order to earn income to cover the tax, site owners must put their sites to use. This forces buildings onto the market and induces construction of additional buildings, and the increase in supply of buildings tends to reduce their rents and prices.
This is not to say that differences in land tax liabilities in respect of the same land cannot lead to differences in rents. If different classes of tenants lead to different land-tax bills for the landlord, then arbitrage by landlords will cause different classes of tenants to pay different rents. But the familiar case in which owner-occupied residential land is exempt from land tax does not create such a straightforward arbitrage opportunity: a landlord can avoid the tax on a site by selling the site to an owner-occupant or another landlord, and in the former case the owner-occupant is removed from the rental market, with a downward effect on rents. Furthermore, a tax that exempts owner-occupied sites is still fully payable in respect of unoccupied sites, and its efficacy in forcing such sites onto the market is unimpaired. Moreover, even if the exemption for owner-occupied sites produced higher rents than a tax with no such exemption, this would not mean that it produced higher rents than if there were no land tax at all!
Further arguments are given in section 3, and especially subsection 3.6, of Prosper Australia's submission to the Review of State Taxation conducted by the Independent Pricing and Regulatory Tribunal of New South Wales (IPART).
Of course, site owners tend not to like a tax that they cannot shift onto tenants or buyers. So how do they campaign against it? Why, by claiming that they can shift it onto tenants and buyers, of course! The “land tax raises rents” hoax is particularly pervasive, having been endorsed in the submission by the Tenants' Union of NSW to the aforesaid review, and not denied in the submission by Shelter NSW.
On the expenditure side, a tax on site values (or, better still, on increases in site values) gives governments an incentive to provide infrastructure that raises site values for the benefit of site owners. So those who oppose land tax by pretending that it is shifted onto tenants and buyers get their come-uppance in the form of decaying infrastructure. But unfortunately they are not the only ones who suffer.
How many idle sites could be forced onto the market by a holding tax, and how would this affect the availability of housing? Karl Fitzgerald at Earthsharing Australia (the sister organization of Prosper Australia) has some answers in the first “I Want to Live Here” Report. The official rental vacancy rates published by the Real Estate Institute of Victoria (e.g. 1.2% for Melbourne in September 2007) include only those vacant properties that are available for rent. They do not include speculative vacancies — that is, vacant lots and unoccupied buildings for which the owners are not seeking tenants. Earthsharing Australia surveyed a sample area in inner Melbourne and found that speculative vacancies, if filled in, would add a conservative 11.7% to the population housing capacity, giving a “genuine vacancy rate” (including both official vacancies and speculative vacancies, calculated on the expanded stock) of about 11%. This stunning result prompted a page-3 article in Melbourne's broadsheet newspaper, The Age, on November 16. But the article gives the last word to the Victorian executive director of the Housing Industry Association, Caroline Lawrey, who reportedly said that the owner of a property had the right to determine if and when it was developed. In other words, a site owner had the right to hold the site out of use unless and until someone paid whatever ransom the owner demanded! A sufficiently high holding tax on the site would prize it loose.
Meanwhile Australia is on the second hump of a two-humped property boom. The first hump was simply a bubble. The recession that would normally have followed the bursting of that bubble was temporarily averted by an historic improvement in the terms of trade (the China effect). This together with the associated high rate of “skilled immigration” was enough to revive the property market, so that the fall in turnover in 2004 was not followed by a similarly precipitous fall in prices. In short, disaster has been temporarily averted in Australia because the local property market crashed while the global economy was still on the way up. In the USA, the story is simpler: there was a property bubble, followed by a property crash, to be followed by a crash-induced recession. Numerian at The Agonist calls it “The Most Anticipated Recession Ever”.
But could it have been anticipated even longer? In “The Subprime Mortgage Crisis Viewed in the 12-Year Rear View Mirror”, posted at Trust Matters, Charles H. Green summarizes the prudent growth of mortgage securitization from antiquity to 1995, and the subsequent abandonment of prudence.
“I've always been very suspicious of the idea that securitization and insurance and re-insurance between financial institutions actually reduced risk,” says Ian Welsh. “What it did, it seemed to me, was make small disasters much less common, and make having a big catastrophe much more likely.” The problem is that while these risk-sharing arrangements increase diversity for individual players in the system, they reduce diversity for the system — as he explains in “The Risks of ‘Spreading the Risk’”, posted at The Agonist. This of course has sinister implications for the current subprime mess.
Austrian economics is clearly not Georgist. But neither is it neoclassical. Prof. Mason Gaffney credits the Austrians with the concept of period of production, meaning the reciprocal of the fractional rate of turnover of capital. Land, of course, does not have a period of production. Therefore the neoclassicists had to discredit the whole concept of period of production in order to maintain their conflation of land with capital. The task was taken up by two Americans of different generations, namely J.B. Clark and Frank Knight. Their attacks on the Austrians, according to Gaffney, can be understood only when one realizes that they are attacks on anti-Marxists by anti-Georgists. Of course all Georgists admit that capital turns over. Furthermore, the Austrian understanding of interest in terms of time-preference is quite compatible with Georgist rent theory: while the interest of money is the market price of time-preference, the rent of land is the market price of spatial preference. Suzanne at Adventures in Daily Living, a self-declared adherent of the Austrian School, offers a convincing anecdote in support of Murray Rothbard's controversial tome Man, Economy, & State as an introduction to Austrian economics — and then announces that she is backing Ron Paul for President.
It is too early to say whether AER will regularly feature a post from a contributor who just doesn't get it. In any case, what the next contributor doesn't get is the distinction between copyrights and patents. Copyrights stop you from copying other peoples thoughts, but don't stop you from independently thinking similar thoughts and profiting from them. Patents do both. Hence copyrights encourage creativity by protecting you from blatant copiers, whereas patents stifle creativity through the fear that someone else, unknown to you, may have laid or may be about to lay an exclusive claim to some trivial part of your invention or to some ridiculously broad generalization of it, in which case your ignorance of that circumstance will not protect you, and the other party will be able to take your complex idea in return for not suing you over a simple one. This contrast concerning independent reinvention is the fundamental difference between copyright law and patent law, and the fundamental reason why copyrights are basically just while patents are basically iniquitous. As the conflation of land with capital as “means of production” leads either to the privatization of both (capitalism) or to the nationalization of both (socialism), so the conflation of patents with copyrights as “intellectual property” (IP) leads either to the acceptance of both (the capitalist/monopolist position) or to the rejection of both (the libertarian/anarchist position). Shaun Connell at the Rebirth of Freedom Foundation belongs to the latter camp and consequently offers the article “Intellectual Ownership”, which appears to be a diatribe against copyrights on music recordings, but which uses terms and analogies more appropriate to patents than to copyrights.
In “Designer Chinese and IP in China are not contradictions”, Noric Dilanchian at Lightbulb contrasts China's traditionally anarchist attitude to IP with its present monopolistic obligations under international trade rules, and suggests that a Hegelian synthesis is in progress. Of course your editor wonders whether the distinction between patent-like IP and copyright-like IP will be part of the synthesis.
Articles for the next edition of Alternative Economic Review (published December 26, 2007) may be submitted via the carnival submission form. Information on future editions can be found on the index page for this carnival. For further submission guidelines, see the carnival homepage.
[First published at gavonomics.blogspot.com. Edited Nov.30, 2007. Relocated Nov.13, 2009.]