The bailout to end all taxes

Guest post by Gavin R. Putland

In Australia we have the world’s most overpriced housing. Federal and State governments and the Reserve Bank live in fear that the bottom will fall out of the housing market, leaving recent buyers with negative equity, causing a financial collapse and depression after the example of Lithuania, Latvia and Estonia. In a desperate attempt to keep the music going, governments have been pumping taxpayers’ money — your money — into the housing market.

The Federal Government brought in the First Home Owners’ Boost to inflate a fresh bubble at the bottom of the housing market, and kept it going just long enough for the bubble to spread to the top of the market — through first-time buyers leveraging their grants, then sellers leveraging their capital gains, and so on. The original $7000 Federal grant for first-time buyers is still in place. Various State governments have their own grants on top of this. Instead of bailing out the banks, Australian governments in the main are trying to bail out the housing market before the problem reaches the banks.

If a government spends your taxes to help someone buy property, it’s only fair that the government retains an interest in that property and eventually gets some revenue from it, so that you can have a tax cut later on. This would make the spending sustainable. But it seems that governments aren’t in the business of being fair or thinking ahead. They just take your money and give it to someone else — or borrow money, give it to someone else, and take your money to pay the interest!

And it doesn’t stop with outright grants. The hundred-billion-dollar binge on hastily-announced infrastructure projects is also about supporting property values — or, more precisely, land values. The benefit of an infrastructure project is worth whatever people willingly pay for it; and what they don’t pay for actual use of the infrastructure, they pay for access to locations where the infrastructure is available, as opposed to locations where it isn’t. “Location, location!” And the value of a location is the land value — not building values, which are limited by construction costs, but the value of the land, which has a location, and therefore a locational value, even if nothing has yet been built on it. So the benefit of the infrastructure, net of user charges, appears in land values. Property investors know this; in February 2010, the front cover of Australian Property Investor magazine screams “FOLLOW THE INFRASTRUCTURE”, with the subtitle “FIND OUT WHERE MAJOR PROJECTS WILL SEND RENTS AND PROPERTY PRICES SOARING”.

That’s great if it’s your property rising in value. But more often it’s property in some marginal electorate where the government wants to buy other people’s votes with your money. And if you’re a renter, infrastructure projects that enhance your own neighbourhood still don’t do you any good, because then you have to pay more rent to live in that neighbourhood! If governments were fair, infrastructure would be paid for out of the uplifts in land values caused by the infrastructure, without dipping into your pocket unless you’re getting some of the uplifts. But again, fairness is not the aim. And again, what makes the process unfair also makes it unsustainable.

If we are to avoid a Baltic-style depression and avoid a sovereign debt crisis, the bailout of the property market must be made fiscally sustainable. How can this be done without encroaching on liberty? By setting up an alternative, sustainable system of financing government, and letting you “opt in” to the new system by accepting bailout money, or “opt out” by not accepting it!

Under present conditions the most obvious opting-in mechanism is something that looks like the abominable first home buyers’ grants, but isn’t a gift and isn’t limited to first home buyers. It works like this:

When you buy a property, the government offers you an up-front payment (called the co-payment) equal to a certain percentage of the current land value, on the condition that after a certain period (called the rent-free period), the government gets the right to collect the full market rent of the site (i.e. the land, excluding buildings). Acceptance of the offer is voluntary. If you accept it, the attached condition is attached to the land, not to you; it’s a lien against the land (so let’s call it a rent lien). If you’re buying a property that is already subject to a rent lien, the co-payment is offered in return for a reduction in the rent-free period. There’s a scale of co-payments and rent-free periods: the bigger the co-payment, the shorter the resulting rent-free period. But the maximum available rent-free period is 70 years for residential purposes and 50 years for other purposes.

The “government” in question could be the Commonwealth or a State. Hence the Commonwealth could end up collecting the rent on some land and the State on other land.

(In the case of the Commonwealth, the right to collect the rent would be legislated under the taxation power for want of an alternative head of power; but because that right would depend on voluntary agreements, it would not be a tax in any other sense. At the State level, the corresponding right could be legislated using either the taxation power or the land power. In either case, while the government would collect rent from the title holder, all other prerogatives of ownership would remain with the title holder.)

Notice that if a property does not yet have a rent lien attached, you are free to buy it outright, without attaching a rent lien — and without any subsidy from the taxpayers.

But if the property already has a rent lien attached, you buy it subject to the rent lien. Obviously the duration of the remaining rent-free period will influence the market price.

Also notice that if you already own a property without a rent lien, it never becomes subject to a rent lien as long as you don’t sell it. In particular, religious, charitable and educational institutions can retain their present properties indefinitely without subjecting them to rent liens. Like anyone else, they can buy other properties without rent liens as long as they don’t accept co-payments. And if the supply of properties for sale without rent liens dries up, governments will be free to let land to such organizations for peppercorn rents, just as they do now.

Of course there’s no restriction on the availability of co-payments; they’re offered to first-time buyers and repeat buyers, owner-occupants and investors, individuals and corporations, for residential and non-residential property, regardless of how many co-payments the buyer has used in the past. No restriction is needed, because the taxpayers get something in return for the co-payments: the revenue that the government gets through rent liens is so much revenue that doesn’t need to come from taxes.

All this follows from the basic opting-in arrangement. But we can speed up the adoption of rent liens, and hence the abolition of existing taxes, by adding the following features:

(a) The government will let you buy an extension of the rent-free period on any property that you own; but you can’t extend the rent-free period beyond the aforesaid maximum (70 years for residential purposes; 50 years otherwise), measured from the present date.

(b) Home-owners who outlive their rent-free periods in defiance of actuarial expectations get free extensions as long as they continue to live in the same homes. This is the only possible exception to the 70-year maximum.

(c) A property buyer may seek and obtain a co-payment at any time after the purchase, provided that the usual scale of rent-free periods is applied, and provided that if the buyer is a distressed borrower, the co-payment goes to the lender and is paid on the condition that the balance owing is reduced by some larger amount.

(d) If you’re an individual or firm owning property, and if the combined site-rental value of all your property exceeds your recurrent tax bill from a particular government, you can sell that government a rent lien over your property in return for a “co-payment” in the form of a tax exemption. The rent-free period is negotiable (and obviously depends on the margin by which the site rent exceeds the tax).

(e) Sales of Crown land are permitted, but must be subject to rent liens (which obviously reduce the up-front sale prices).

Of these, (a) and (b) make the deal more attractive by adding flexibility and removing the perversely-named “longevity risk”, while (c) and (d) provide additional ways of opting in. In particular, (d) would allow some taxpayers to get immediate relief from either State or Federal taxes. Point (e) provides some up-front revenue to offset the co-payments, but in a fiscally responsible way: the opportunity to charge rent for the land is only temporarily forgone.

When most of the land in the country is yielding revenue through rent or through sales of extensions, how much revenue will be raised and what taxes could it displace?

One might be tempted to answer that Australia’s land is worth roughly $3 trillion, so that if it yields (conservatively) 4% per annum in rent and 5% per annum in capital gains, and if the rent liens captured all the rents and capital gains (which they wouldn’t), they would bring in about $270 billion per annum, which is barely enough to replace Federal taxes.

But that’s almost irrelevant, because land values wouldn’t stay constant as existing taxes were phased out. The supply of land, whether we mean the overall supply or the supply within acceptable distance of essential services or markets, is limited. But access to suitably located land is essential to economic participation. So the rents and prices of land are competed upward until they absorb the economy’s capacity to pay. Why haven’t rising incomes solved the “housing affordability” problem? Because they’ve been soaked up by rising land values! Similarly, as existing taxes are reduced or abolished in response to rising income from rent liens, the revenue capacity of the rent liens will rise to absorb the benefits of the tax cuts — including not only the reductions in tax bills, but also the increased production due to reduced disincentives.

Furthermore, collecting revenue from land values effectively takes infrastructure off-budget, because every infrastructure project that passes a cost-benefit test pays for itself by expanding the revenue base (land values) without the need to increase anything resembling a tax rate. When revenue comes from land values, infrastructure is seen to be an investment, not an expense. The present tax system makes it look like an expense, by failing to capture benefits in order to cover costs.

The implication is that the potential revenue from rent liens is more than enough to replace taxes. What then should be done with the “excess” revenue? The libertarian answer (I presume) is that the excess revenue, together with a large part of the present revenue, should not be collected in the first place, and that a rent lien should therefore allow the government to collect only part of the site rent, so that the uncollected portion would be capitalized in the selling price of land. This would be a bonanza for property owners — including those whose sites are subject to rent liens — because the public share of the rent (and hence of increases in the rent) would give governments the incentive and the ability to invest in infrastructure that increases land values, while the private share would give property owners a net gain from the same infrastructure projects — most of which would be unviable if the provider did not claw back a share of the uplift in land values.

Meanwhile there would be no taxes, no tax-induced distortions and disincentives, no tax-related paperwork, no invasions of privacy in the name of taxation, no odious and arguably unconstitutional obligations to collect tax from other people, and no fear of prosecution for making a mistake with tax.

If a government collects the rental value of land (or part thereof), it doesn’t inhibit the enterprise of the people any more than private landlords inhibit the enterprise of their tenants — indeed less, because a private landlord typically charges rent for both the site and the building and constrains redevelopment of the building, whereas the government would only charge rent for the site. As the site of a property is not created by the owner, and as the rental value of the site is conferred by the surrounding community rather than the owner, collecting the rental value of the site from the property owner does not diminish the reward for any productive activity of the owner. In contrast, any kind of tax diminishes the reward for the activity subject to the tax.

Libertarians consider it virtuous to accumulate assets during their working lives so that when they eventually retire, they can live on income from assets without burdening the taxpayers. I submit that governments should likewise accumulate assets until they can finance their necessary activities (whatever they are) without burdening the taxpayers. The ideal assets for the purpose are claims on the rent of land — rent liens — which governments can accumulate through voluntary agreements.

7 thoughts on “The bailout to end all taxes

  1. Pingback: The bailout to end all taxes « Thoughts on Freedom « Taxes

  2. Thanks to ToF for the clean formatting of the above post.

    As I write (Mar.2, 5.26pm), the first of the two links in the text is temporarily broken because the web host is switching to new servers. But the link should be working again in a few hours.

  3. Since submitting the above post, I have noticed that the LDP proposes a negative income tax (http://ldp.org.au/index.php?option=com_content&id=1167). That prompts me to offer the following.

    APPENDIX: HOW LIBERTARIAN IS A CITIZEN’S DIVIDEND?

    In the above post I wrote: “The implication is that the potential revenue from rent liens is more than enough to replace taxes. What then should be done with the `excess’ revenue? The libertarian answer (I presume) is that the excess revenue, together with a large part of the present revenue, should not be collected in the first place…”

    Hence you might ask:

    (1) Why do I only “presume” this to be the libertarian answer?

    (2) As I am a self-confessed Georgist, what is the Georgist answer?

    It is easier to answer these in the reverse order.

    (2) The “purest” Georgist answer is that the State should collect the entire rental value of the land, and that if the resulting revenue is greater than reasonable spending requirements, the excess should be distributed to the people as a “citizen’s dividend” — the Georgist version of a basic income, distinguished from other versions by the fact that it is funded out of land rents.

    (1) While the “presumed” answer is consistent with the libertarian ideals of small government and minimal taxation, the following libertarian arguments also warrant consideration.

    First, according to Locke, a labourer has the right to use the earth, and to appropriate that part of the earth with which he has mixed his labour, “at least where there is enough, and as good left in common for others.” In particular, he has the right to appropriate the land that he improves, as long as there is “still enough and as good left; and more than the yet unprovided could use.” The quoted condition is known as the “Lockean proviso”. All this is accepted by Georgists. When the Lockean proviso begins to be violated — that is, when the land left over (in its unimproved state) is no longer “as good” as that already appropriated (again in its unimproved state) — then, according to Ricardo’s law, the land already appropriated will command a site rent (the word “site” referring to the unimproved state). This rent is the measure of the encroachment on equal rights to land when the Lockean proviso does not hold. According to Georgists, this rent is therefore the compensation that the appropriator owes to his fellows for the encroachment on their equal rights, and the enforcement of such compensation is, or is part of, the minimum function of the State. Even if one somehow denies that full public collection of the site rent is PRESCRIBED by Locke’s position, it is certainly CONSISTENT with Locke’s position, because the rent exists only when Locke’s premise is violated.

    Second, it seems that a negative income tax (NIT) is respectable in libertarian circles. And a negative income tax is equivalent to a basic income. For example, the LDP’s proposal of a flat 30% income tax with a threshold of $30,000, allowing the “tax” to be negative when income is below the threshold (http://ldp.org.au/index.php?option=com_content&id=1167), is equivalent to a flat 30% tax with NO THRESHOLD combined with a basic income of $9000. Whichever way you express it, the graph of after-tax income vs. pre-tax income is the same. If the NIT is subject to some sort of activity test, the same test can be applied to the basic income, thus maintaining the equivalence. But a basic income needs to be funded somehow. Fund it out of the rent of land, and you get what Georgists call a citizen’s dividend.

    These observations may help to explain why there are Georgists who call themselves geo-libertarians or even geo-anarchists, and why there are so many issues on which Georgists sound like libertarians.

  4. The 30/30 was a good reform proposal but many in the party such as myself think it needs improvement. I’d be partial to an opt in system with tiered welfare – conditional (in kind transfers)and unconditional (cash transfers) welfare that tapers off, paid as a basic income, and revenue raised purely from a GST. Medicare to be changed into something like HECS as per Terje Petersen’s suggestions and the usual competitive reforms and caveats apply.

    I would like a reduction in taxes and spending, and I am partial to raising such revenue with a LVT – but I fear a backlash since the base may noit be large enough to have a low rated, efficient, equitable tax applied to it.

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