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Land Value Tax

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The Fiscal Summit Counter-Narrative: Part One

The Fiscal Summit Counter-Narrative: Part Two, Defining Fiscal Sustainability.

…Because of the very great importance of the fiscal sustainability/fiscal responsibility/fiscal crisis/solvency rhetoric, the first session of the Fiscal Sustainability Teach-In Counter-Conference covered the topic “What Is Fiscal Sustainability?” and the primary speaker was Professor Bill Mitchell of the University of Newcastle. Audios, videos, presentation slides, and transcripts for the presentation are available at selise’s site and a slightly different version of the transcripts is available from Corrente as well.

Bill Mitchell’s Presentation on Fiscal Sustainability

Bill Mitchell is one of the three thinkers most responsible for the development of Modern Monetary Theory (MMT) and its approach to Fiscal Sustainability. Bill’s a prolific writer and blogger whose career has been devoted to Macroeconomics and to public policy intended to achieve Full Employment and price Stability. He’s watched and lived through the growing dominance of neoliberal ideology and the developing economic inequality that belief in it has created, and he has fought it every step of the way. His presentation was a distillation of his views on fiscal sustainability fueled by his search for a new economic paradigm transcending neoliberalism. Here are his main points, supplemented by a few comments of my own.

— The last 25 years of neoliberal dominance in Australia and elsewhere was a period in which the major western governments abandoned the goal of full employment they had previously embraced in the post WWII period, in favor of the goal of “full employability.” As a result, unemployment rates have been trending upwards over the neoliberal period but also are very high now. This is how people are affected by neoliberalism, and it’s real.

— “Fiscal policy has saved the world from a Great Depression, yet, two years later… ” (now four), “… after the handouts have been gratefully received by the top end of town, after we’ve put some sort of floor into the downward spiral, we’ve now seen this mass hysteria, … We’ve completely lost track of what’s happened, and we’re basically setting ourselves up again for the next crash… .”

— All the talk now is about “financial ratios divorced from any context or what else is happening or what other goals you might have … .all applying the logic that related moralists to a monetary system that ended in 1971.”

— But this ratio fever isn’t just restricted to the hawks/austerians: “… the progressives even buy into this fiscal rule that you’ve got to balance budgets over the business cycle. … You just impose these fiscal rules out of context and with no comprehension of what it means… . “

— “You won’t find a definition of fiscal sustainability by making analogies between households and sovereign governments… . “ Those analogies are flawed because: “The household uses the currency and always has to finance their spending whether it’s through earning income, whether it’s through borrowing, whether it’s through using up past savings or running down/selling assets. A national government who issues its own currency and floats it never has to do that… .”

LetsGetItDone Comment: This is a key point which will come up again and again in these posts on the counter-narrative. Neither the austerian/deficit hawks nor, generally the deficit doves, make the distinction between Governments with non-convertible fiat currencies with freely floating exchange rates and no appreciable debts in foreign currencies (nations sovereign in their own currencies); and other nations that are either currency users, have pegged their currencies to those of other nations, or owe significant debts in foreign currencies. This distinction is of fundamental importance because all the instances of insolvency or hyperinflation we’ve seen have occurred in systems with non-fiat currencies, currencies pegged to the currencies of other nations, or appreciable quantities of external debt in currencies not their own.

The historical evidence suggests that nations sovereign in their own currencies cannot have solvency problems and are also more resistant to inflation than nations in other categories. To discuss fiscal sustainability without making this critical distinction between currency issuers and currency users ignores an issue that is central to fiscal sustainability and guarantees that good policy cannot result from such an analysis and related policy approaches. Austerity/deficit hawk analyses almost always ignore this distinction and blithely compare currency sovereign nations with others. That’s why their analyses often involve predictions that nearly always turn out to wrong, and that’s why austerity policies in currency sovereign nations like the US, Australia, Japan, Canada, and the UK only work to prolong recessions, unless the private sector blows huge debt bubbles to compensate for the failure of government to deficit spend to close output gaps caused by demand leakage, as they did during the 1990s. Back to Bill!

— “You won’t find a definition of fiscal sustainability by referring to these ratios that are now in everybody’s lounge rooms each night. These ratios are largely irrelevant.” … You won’t find a definition of fiscal sustainability in any invariant fiscal rule.”

— “So where should we start in trying to come up with a concept of fiscal sustainability? … ask yourself the question “Why do we bother to have a government in the first place? … The reason we want them is because they can advance the well-being of all of us, acting as our agents, in a way that we can’t do it individually… . And we might call that the public purpose of government.”

— “So what are the dimensions of that? … the sustainable goal of the economy should be the zero waste of the people in the economy… . as a consequence of the way we structure our economy and the way that policy intervenes to manipulate the economy.”

— “And then from my point of view, that means, we – the state – should be responsible for maximizing employment: making sure everybody who wants to work can work, with decent working conditions and wage levels that provide them with a sustainable life in the cultural and social setting that we live in.”

— “Now, what that means in a macroeconomic sense is that once the private sector has made its spending decisions … then the role of government advancing public purpose … is to ensure that its policy intervention is consistent with those private decisions such that you get full employment. … That seems to me to be a basic element of what we mean by fiscal sustainability.“

— “And so if it’s typical that the non-government sector will want to save, then there will be spending gaps … the government then has a choice. It can either fill that spending gap with fiscal policy and ensure that advanced public purpose via full employment, or it can decline to do that and either run smaller deficits than are required or even try to run surpluses, which governments have been doing prior to the crisis, and accept the fact that in taking that decision you will have persistent and chronic underutilization of labor and ultimately that strategy will be self-defeating.”

— There are bad and good deficits. The bad ones come from Government not maintaining aggregate demand through deficit spending and are produced by the automatic stabilizers. They leave a bad, depressed economy with high unemployment. Good deficits result from a government deficit spending strategy that produces high employment, high income growth, falling poverty rates, and smiling faces.

— “You can’t define fiscal sustainability independently of the real economy and what the other sectors in the economy are doing… . .” Government spending ”… constraints are voluntary… . And in a fiat monetary system, the national government doesn’t have to issue any debt at all. And so fiscal sustainability can’t be caught – a pure concept of it – can’t be caught up and tied in with any of these voluntary constraints.”

— “And we need to get the message across more vehemently that what that means is that our national governments can spend whatever they want. And it has no imperative, like a household, to facilitate funding of that spending … . The limits are clear that a sovereign government can only buy what’s available for sale. Their real limits, if there’s something out there available for sale, the government can always afford to buy it. And that’s a sovereign government… . “

— “What we’ve got to stop is news broadcasts having a barrage of these financial ratios in our face everyday. They’re largely irrelevant and they abstract and re-orient the debate away from what really matters and that’s the real side of the economy and the capacity of our national governments to work on the real side to improve our lives and advance public purpose.”

LetsgetItDone’s Comment: Bill’s bottom line is that fiscal sustainability has nothing to do with deficit and debt numbers including debt-to GDP ratios, but everything to do with whether the Government spends to achieve the economic public purpose of “the zero waste of the people in the economy.” He defines a clear line from “public purpose” to “zero waste of the people in the economy” to Government spending to enable full employment at a living wage with price stability. But why is that “fiscal sustainability”? Well, to see why, consider this alternative definition:

the extent to which patterns of Government spending do not undermine the capability of the Government to continue to spend to achieve its public purposes.

This one is more explicit in tying patterns of spending to maintaining the capability to spend to achieve public purposes. But it turns out that these notions are closely connected by considering what happens if Governments don’t spend to enable full employment with a living wage and price stability, but instead rely on an employment buffer stock to control inflation. I think what happens is the growth of economic inequality due to the growth of an increasing number of “wasted” people, followed by increasing political inequality in the long run.

What also happens is the degradation of skills of working people and along with it the decay of real wealth like housing stock, neighborhoods, educational systems, communities and other essential aspects of a civilized and free society. This, in turn, causes a decline in productive capacity over time, which in its turn, limits the capacity of the Government to freely spend in the short run without causing demand-pull inflation. So, austerity in its effects on productive capacity degrades fiscal sustainability, not through insolvency, but by creating additional inflation constraints on government so that it is restricted in its ability to spend to achieve for the public purpose.

Further, political inequality, in its turn, reinforces the economic inequality still further, and as the years go by, the relatively few increasingly wealthy institutions and people continually increase their control over the political process and use government spending for their own purposes rather than for the public purpose. So, it turns out that the failure to spend to achieve full employment, in the absence of aggressive policy to redistribute nominal wealth, undermines the Government’s capability to continue to spend for the public purpose, and is therefore fiscally irresponsible. I’ll have more to say about fiscal responsibility and fiscal irresponsibility later on in this series.

Bill Mitchell’s presentation was followed by a panel discussion and then a Q and A session. Both were incredibly rich and added great depth to Bill’s already excellent presentation. In the interests of space, I’ll telescope these as much as I can and also introduce comments of my own on the questions and answers. But before I do, I’ll provide some follow-up references on the Bill’s presentation. Bill’s written prolifically of fiscal sustainability. More than a hundred of his posts deal with it in some way. Here’s the link to the last page of his links. For the rest just follow the links at the bottom of each page. I’ve written a bit about fiscal sustainability too: here, here, here, here, here, here, and

Professor Frank Convery believes that Irish people will never accept land value taxation even though it is the best kind of property tax:  and Frank knows it is because he participated in the EEA conference of environmental taxation in Dublin 2010 which showcased site value tax as an ‘environmental tax’.  Maybe he thinks Irish people are too thick to get the message of what is in their interest.  It might help if they were actually given the information and offered the choice, don’t you think?.  But Frank and his fellow professionals in his new organ  www.public policy.ie funded by philanthropist Chuck Feeney, did not think it is worth bothering even to explore the merits and demerits of site value tax in their submission to the Expert Group on property tax.  They relied instead on the now well-out-of-date Commission on Taxation Report.  “Despite a site value tax having these advantages as a resource tax, the Commission recommended against it; in particular their view that it would be very difficult to gain public acceptance for this basis is persuasive  (See P 158).   Can you believe that PublicPolicy.ie’s byline is “Independant Thinking”!   Why Chuck would fund such a status-quo defending, pro-more-mortgage-debt policy defeats us.  We will post a critique of the submission when we have calmed down enough.  Here meanwhile is an article, the kind that we should be seeing in the Irish media about the value of a site or land tax in Philadelphia,US.  Americans are obviously smarter than us then…

From Keystone Politics. “We Have to Shift …to Taxing What Does Not Move” 

Via Miriam Hill, Center City District director Paul Levy is making great points about the need for pro-growth tax reform in Philly:

“We have to shift from taxing what is mobile to taxing what does not move,” he said at a news conference about the report. Mayor Nutter had started reducing the wage tax, but then held it steady when the recession reduced city revenue. His administration plans to restart those reductions in the middle of next year, but the Center City District wants that to happen more quickly.

“The simple argument, it seems to me, is that taxes and wages depress demand. It’s not that we have weak office demand,” Levy said. “It’s that we have a tax structure that deflects office demand to the suburbs. It causes the higher-wage jobs to move to the suburbs … and that, I think, weakens one of the major sources of demand for retail.”

That’s exactly right, although I would draw a clearer distinction between taxing property improvements and taxing land. Property improvements are capital, and capital and labor are elastic – if you tax them, you will get less of them at the margins.

Land, however, is not elastic. The supply of land is always the same. If you tax land values, nobody will make less land. Landowners can’t take Philly’s land out of Philly.

Funding more public services with a land value tax on unimproved land would be a good idea, because land value is just the value added by the community.

Think about it: land values only increase in a neighborhood when a bunch of properties in the neighborhood improve. That raises the value of the nice buildings, as well as the price of vacant lots in the neighborhood. Taxing only the unimproved land would recapture that value for the public, instead of giving vacant lot owners and speculators a windfall. Plus, the land value tax can’t be passed along to tenants – it’s borne entirely by the land owner.

Speculation’s not the entire problem with vacant land in Philly, but it’s definitely a big part of the problem. Bills like this one from Maria Quinones-Sanchez that raise the cost of owning vacant buildings and vacant land are generally a good idea, since they tend to drive out people who aren’t really serious about doing anything to develop the parcel.

But for exactly the same reason, it’s a good idea to tax unimproved land as a way to raise general revenue.

This would also be a good way to bring some relief to property tax payers in high-demand neighborhoods. If you tax vacant lots and surface parking lots and other unimproved land at the same rate as multi-family condos and office buildings,  speculators and others wasting expensive land on low value uses will pick up the tab for a greater share of the city’s budget, and responsible property owners will pay less.

Mayor Nutter’s Actual Value Initiative (AVI) would work well with a land value tax, since it would put greater development pressure on vacant lot owners in expensive areas to add more housing quickly, or sell to somebody else who will add more housing. Currently, speculators like to hold out on building until rents are too high. But with AVI, the land tax bill would start to bite speculators as soon as rents started rising, pushing them to build more housing faster.

Site-value tax easier to implement and better for economy

RONAN LYONS

OPINION: A good property tax is about getting land used well and financing local services and amenities

A RESIDENTIAL property tax in Ireland is a key part of fixing the gap between public spending and public revenues. Last week, as part of the ESRI’s Renewal series, Claire Keane, John Walsh, Tim Callan and Michael Savage published Property Tax in Ireland: Key Choices, outlining how a property tax might work and the effect it might have.

They recommended an annual tax on owner-occupied residences (but not rented properties) based on the full value of the property, with exemptions for those below certain income thresholds.

There are a number of concerns with this proposal.

Firstly, there should be no ongoing exemptions from a property tax, only deferrals. For those who are property-wealthy but income-poor (such as older couples) the State can wait until they ultimately sell the property and then take the fair amount.

It’s also possible to ease the burden on those who bought at the peak through a transitional arrangement such as tax credits against their property tax bills that must be used by 2020.

The problem with income- based exemptions is that they turn a property tax into something suspiciously like an income tax. Income tax and VAT are indiscriminate revenue raisers, which is why people care about whether they are progressive (Ireland’s income tax system is among the most progressive in the world, with the top 10 per cent of earners paying 40 per cent of income tax) or regressive (Ireland’s VAT system is very regressive, hitting poorest households the hardest).

Every other form of tax or public charge, from cigarette duties to water charges, is designed to help society use its scarce resources well. A good property tax is a cross between a wealth tax, a means of funding local services and a tool for making sure land is used well.

The ESRI researchers opted for a tax on the full value of each property, rather than just the site value, even though a site-value tax – specified in the last two programmes for government

and the memorandum of understanding with the EU and IMF – would both be easier to implement and better for Ireland’s economic recovery.

A full-value tax punishes people for making their homes more energy-efficient, for building an extension or, indeed, improving their property in any way that would increase its value.

A site-value tax encourages you to use your plot of land in socially beneficial ways.

Another major drawback of a full-value tax is that it would encourage people to sit on land rather than use it. Conversely, a site-value tax encourages owners of derelict or vacant sites to use them, sell them or else pay the rest of society for the privilege of wasting valuable land.

Perhaps most crucially, given parlous public finances, it is far easier to estimate site values than full property values. Indeed, I’ve already estimated the contours of land value in Ireland, a dataset and model I’m happy to share with any government body. Put at its simplest, the value of the site you live on depends on just two factors: the site size (known from the Land Registry) and the value of land in your area, which can be measured easily through what economists call “fixed effects”.

On the other hand the full value of the property you live in depends not just on site size and land values, but also on dozens of other factors such as the number and size of bedrooms, bathrooms, other rooms and outhouses, all the way down to whether the attic is converted.

The forthcoming register of house prices will give none of the information needed to estimate the value of these attributes.

The country will be depending on people like me to estimate hundreds of things like the effect of double-glazing on the value of terraced properties in Connacht-Ulster since 2009.

We are in the paradoxically lucky position of being able to design a property tax from scratch. Thus, we need to bear

in mind “cause and effect”. In other words, why do we want a property tax and what effect will it have? Clearly the “why” is in part about revenue – but if that’s all it is we could just increase income tax. A well designed property tax is about getting land used well and financing local services and amenities, which ultimately drives differences in land values around the country.

A full-value property tax with income exemptions is just income tax in another form, an indiscriminate form of revenue raising that will damage Ireland’s competitiveness and punish useful activities like building on a derelict site.

A site-value tax, with deferrals for those who have the wealth, but don’t have the income, will generate the same revenue but also encourage Irish households to use land, a scarce commodity, in socially beneficial ways.

Ronan Lyons is an urban economist based at Balliol College, Oxford

Here’s my Sunday Times article from April 22, 2012 (unedited version, as usual):

Just when you thought the taxpayers can breath easier when it comes to the banks, the latest data from the Irish, Spanish and Italian authorities shows that the banks of the European ‘periphery’ have dramatically ramped up their holdings of their countries’ Government bonds. In 3 months through February 2012, Irish banks increased their holdings of Government bonds by 21%, Spanish – by 26%, Italian – by 31%. Back in late 2008 I warned that the banking crisis will go from the stage where sovereign debt increases will be required to sustain zombified banking systems, to the stage when the banks will be used as tools for financing over-indebted sovereigns, to the final stage when the weak nations’ sovereign debt will become fully concentrated within the banking systems they have nationalized. Sadly, this prediction is now becoming a reality. As GIPS’ banks increased their risk exposures to the Governments that underwrite them, German and French banks have been aggressively deleveraging out of the riskiest sovereign bonds. In Q1 2012, Portugal ranked as the second most risky Sovereign debtor in the world in CMA Global Sovereign Credit Risk Report, Ireland ranked seventh and Spain ranked tenth, with Greece de-listed from the ratings due to its recent default. This concentration of risk on already sick balancesheets of the largely insolvent banks is a problem that can reignite the Eurozone banking crisis.

I have been undertaking some research recently on Land Value Taxation for the Scottish Green Party MSPs and the following are some useful references on the topic.

THE REPORT – A Land Value Tax for Scotland. Fair, Efficient, Sustainable.

FIRST, some key ones

Connellan, Owen, 2004. Land value taxation in Britain: experience and opportunities. Lincoln Institute of Land Policy, Cambridge, Massachusetts

Harrison, Fred, 2006. Wheels of Fortune. Institute for Economic Affairs

Jones, Jerry, 2008. Land Value for Public Benefit. Labour Land Campaign, London

Lloyd, Toby, 2009. Bon’t Bet the house on it. No turning back to housing boom and bust. Compass, London

Maxwell, Dominic & Vigor, Anthony, 2005. Time for Land Value tax? IPPR, London

AND the Mirrlees Review Tax by Design Chapter 16 on land and property (draft)

See all links

OECD to Northern Europe: Raise Your Property Taxes!

By Stephen Smith   of International Business Times

February 16, 2012 5:45 PM EST

The Organization for Economic Co-operation and Development released a report on Tuesday calling on Germany to raise its property taxes dramatically and reduce taxes on labor. The group, whose membership is made up of 34 of the world’s leading market economies, also made similar recommendations for Denmark, Norway and the UK over the past month.

For Germany, the organization recommended tripling its property taxes, while reducing its wage taxes and social security contributions, which currently make up 64 percent of total tax revenue, compared with the OECD average of 52 percent, according to the German language Immobilien Zeitung. Property taxes, meanwhile, amount to only 1 percent of total revenue collected, against an OECD average of 3 percent. The group also called on Germany to reform its assessment mechanisms, as many properties are valued far below their true market worth.

On Wednesday the OECD also called on Norway to raise its property taxes and eliminate its mortgage interest deduction, Dow Jones reported on Wednesday. It advised the Scandinavian nation to reconsider its “implicit tax subsidy on owner-occupied housing,” which “imposes distortions on savings,” with taxation on owner-occupied housing going as low as 0 percent in some cases.

The International Monetary Fund also made a similar recommendation to Norway this month (.pdf):

One structural factor behind high mortgage debt in Norway is the very favorable tax treatment provided to owner-occupied housing: mortgage interest is tax-deductible, the tax on imputed rent was abolished in 2005, and effective rates of property taxation are amongst the lowest in the OECD. Gradually reducing the implicit tax subsidy for owner-occupied housing-perhaps by introducing a fixed nominal cap on the amount of a mortgage that is eligible for interest deduction and by bringing property tax valuations closer to market valuations-could free resources for productivity-enhancing tax cuts, improve progressivity, and bolster financial stability by reducing risks associated with excessive mortgage debt.

The two groups’ advice, however, was rebuffed by Norway’s minister of finance, Sigbjorn Johnsen, who said at the press conference on Wednesday: “I have no plans to increase housing taxes.”

Denmark was subject to the same advice last month, with the Nordic Labour Journal reporting that the OECD advised the country to cut income taxes and increase property taxes. The Danish government plans to incorporate some of the OECD’s recommendations into its 2012 tax reform, but a property tax hike will not be on the table. As the NLJ writes, “[t]his is because property taxes were ring-fenced in the coalition agreement covering this parliamentary term.”

Britain also got the same advice from the OECD in January, when it suggested an overhaul of the nation’s property and council tax systems, according to the Guardian:

[OECD economist Romain] Duval said Britain’s council tax regime was “highly regressive” and needed reform. “In England, the tax liability for properties over £320,000 is only twice the liability for properties of £70,000 and three times the liability for houses under £40,000. Low-income households are entitled to a council tax benefit. However, the takeup is only around 65%.”

Duval said the OECD advocated a replacement with “a property tax based on current market values or a land tax”.

The OECD has been a strong proponent recently of land value taxes, which date back to Adam Smith but were most vigorously promoted by 19th century economist Henry George. He promoted a land value tax—which is assessed on the unimproved value of underlying land, not penalizing intensive development like many property taxes today—as a replacement for all tariffs and levies, however the OECD has settled on a more moderate position, instead advocating a shift in emphasis away from other taxes and towards the land value tax.

Land value taxes can be tricky because of practical difficulties in estimating a plot’s value, especially if it is a unique piece of land, or if land parcels like it do not change hands very often. Newer computer-assisted methods of land appraisal have made this job easier, though, and many countries around the world have adopted the tax. The OECD has been a strong proponent recently of land value taxes, which date back to Adam Smith but were most vigorously promoted by 19th century economist Henry George. He promoted a land value tax—which is assessed on the unimproved value of underlying land, not penalizing intensive development like many property taxes today—as a replacement for all tariffs and levies, however the OECD has settled on a more moderate position, instead advocating a shift in emphasis away from other taxes and towards the land value tax.

Land value taxes can be tricky because of practical difficulties in estimating a plot’s value, especially if it is a unique piece of land, or if land parcels like it do not change hands very often. Newer computer-assisted methods of land appraisal have made this job easier, though, and many countries around the world have adopted the tax.