Michael Hudson makes the case that Latvia – and other ex-Soviet states – whose people are now suffering under huge debt burdens could have been protected by land value taxes.
…There were almost no commercial banks in the Soviet Union. Rather than helping these countries create banks of their own, Western Europe encouraged its own banks to create credit and load down these economies with interest charges – in euros and other hard currencies for the banks’ protection. This violated a prime axiom of finance: never denominate your debts in hard currency when your revenue is denominated in a softer one. But as in the case of Iceland, Europe promised to help these countries join the Euro by suitably helpful policies. The “reforms” consisted in showing them how to shift taxes off business and real estate (the prime bank customers) onto labor, not only as a flat income tax but a flat “social service” tax, so as to pay Social Security and health care as a user fee by labor rather than funded out of the general budget largely by the higher tax brackets.
Unlike the West, there was no significant property tax. This obliged governments to tax labor and industry. But unlike the West, there was no progressive income or wealth tax. Latvia had the equivalent of a 59 percent flat tax on labor in many cases. (American Congressional committee heads and their lobbyists can only dream of so punitive a tax on labor, so free a lunch for their main campaign contributors!) With a tax like this, European countries had nothing to fear from economies that emerged tax free with no property charges to burden their labor with taxes, low housing costs, low debt costs. These economies were poisoned from the outset. That is what made them so “free market” and “business friendly” from the vantage point of today’s Western economic orthodoxy.
Lacking the power to tax real estate and other property – or even to impose progressive taxation on the higher income brackets – governments were obliged to tax labor and industry. This trickle-down fiscal philosophy sharply increased the price of labor and capital, making industry and agriculture in neoliberalized economies so high-cost as to be uncompetitive with “Old Europe.” In effect the post-Soviet economies were turned into export zones for Old Europe’s industry and banking services.
Western Europe had developed by protecting its industry and labor, and taxing away the land rent and other revenue that had no counterpart in a necessary cost of production. The post-Soviet economies “freed” this revenue to be paid to Western European banks. These economies – debt-free in 1991 – were loaded down with debt, denominated in hard currencies, not their own. Western bank loans were not used to upgrade their capital investment, public investment and living standards. The great bulk of these loans were extended mainly against assets already in place, inherited from the Soviet period. New real estate construction did indeed take off, but the great bulk of it has now sunk into negative equity. And the Western banks are demanding that Latvia and the Baltics pay by squeezing out even more of an economic surplus with even more neoliberal “reforms” that threaten to drive even more of their labor abroad as their economies shrink and poverty spreads. (link to article)
