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Land Taxation & the Renewal of Growth in the Irish Economy

A Briefing on Rent-as-Public-Revenue requested by

Mr Joe Costello T.D.
Minister of State for Trade and Development
Department of Foreign Affairs & Trade
Republic of Ireland

Fred Harrison
Land Research Trust
London

Land Taxation & the Renewal of Growth in the Irish Economy

At our meeting on September 24, 2012, arranged by Mr Konrad Dechant, I explained that Ireland’s economy would gain significantly by shifting the public’s finances away from taxes on wages and onto the rents of land and natural resources. I pointed out that such a fiscal restructuring would alter the terms of trade in Ireland’s favour. By cutting the costs of hiring people, the price of exported goods would be lowered without reducing people’s take-home pay. This would increase exports, and increase the attraction of investment in Ireland from both domestic and foreign sources, rendering the Republic an attractive place for corporations to locate their production facilities.

Killing the Celtic Tiger

Understanding why the Irish economy really collapsed is the pre-condition for recalibrating public policies in ways that would enable Ireland to recover from the worst depression since the 1930s. We may illustrate the internal dynamics of the market economy by briefly reviewing the impact, over the past two decades, of the inflow of capital into Ireland.

Take, as one example, the inflow of EU structural funds (over €60bn?). This money did improve the nation’s infrastructure. But it also had an unintended consequence of the kind that exposed the weakness in the structure of the economy. The investments automatically raised the price of land. We know from the empirical evidence documented in the literature that the net gains from such infrastructural investments are captured by land owners. They capitalise the net gains into the price of this one asset. In Ireland (as in Portugal, Spain, southern Italy and Greece), that effect triggered property speculation, which in turn led to the over-extension of bank loans which, in turn, undermined the financial sector. The causal sequence – the chain of events, the flow of funds – is vital to understand. It is currently ignored by most analysts. And that is why (if present policies are retained) the regulation of banks will not prevent the next cyclical land-led property boom/bust and social implosion.

The only way to prevent the next boom/bust is to re-arrange financial incentives. The only market-based policy capable of achieving this is a significant land tax. If such a revenue-raiser had been in place over the 1990s-2007, Ireland’s enterprises would have enjoyed growth without the prospect of the Celtic Tiger being neutered in 2008. The inflow of the capital that the nation needed would have been re-cycled back into productive investment, yielding yet more job-creating capital formation. Instead, the incentive structure was biased to encourage rational people to indulge in the one activity that yielded the highest capital gains for minimal entrepreneurial effort: land speculation.

The Best Kept Economic Secret

The trade-related strengths of the land tax are not discussed in the academic economic literature. I have reviewed the university textbooks, and I find that there is no coherent discussion on fiscal policy of the kind that examines the dynamic influences of the tax shift. This void in the fiscal knowledge base is a serious constraint on policy-making. Law-makers who rely on consultants who have been schooled in orthodox economics are not provided with a full briefing on all the policy options that favour optimal development.

The most thorough recent study of tax policy was undertaken in Britain by the authoritative Institute for Fiscal Policy. A panel of distinguished economists was chaired by Nobel laureate Sir James Mirrlees.2 (A copy of their two reports may be downloaded from http://www.ifs.org.uk/mirrleesReview ) A taste of the significance of the tax shift is given on page 2 of Chapter 16 of the Mirrlees report. Here, we read that their intention was to “contrast the strong case for taxing land values with the strong case against taxing business property”. The report states:

“To understand how to tax land and property, it is important to keep these issues and themes distinct. To be clear:
• Land, whether used for business or residential property, can be taxed at an arbitrarily high rate on economic efficiency grounds.
• Business property is an input into the production process and, on efficiency grounds, should not be taxed.
• Owner-occupied housing combines the features of an investment and a consumption good, and we should consider its taxation from both these points of view.
• Rental housing is an investment good from the point of view of the owner and a consumption good from the view of the renter. Overall, there is a presumption in favour of taxing it at a similar level to owner-occupied housing” (Mirrlees et al., 2011: 368).

The report, Review of the Tax System, concluded that

The taxation of property in the UK is currently something of a mess. As we have seen when considering the practicalities involved in implementing an ideal system, up to a point this is understandable. But it remains both desirable and feasible to clear up much of the mess. Our conclusions can be summarized thus: There is a strong case for introducing a land value tax. The priority should be to use it to replace the economically damaging business rates system (Mirrlees, 2010: 36. Emphasis added).

Mirrlees and his associates employ non-scholastic language to leave readers in no doubt about their views on the state of the British tax regime (which was largely inherited by the Republic of Ireland). While Mirrlees advocated a charge on land, notice the limits to their ambitions. They state in their concluding paragraph on page 39:

This is a radical set of proposals, and the changes would need to be phased in carefully. But this is also an area where the current practice is a long way from an economically rational and efficient system. Stamp duty and business rates defy the most basic of economic principles by taxing transactions and produced inputs respectively. Income tax and capital gains tax create a significant bias against the rental market in favour of owner-occupation. Meanwhile, council tax is indefensibly regressive and, thanks to spineless government refusal to undertake a revaluation, we find ourselves in the absurd position that tax bills are still based on relative property prices in 1991. Over time, this arrangement will come to be seen as more and more untenable. At some point, some government will have to grasp the challenge of making the case for intelligent reform.

Why confine the direct charge to raising a tiny fraction of the budgetary requirements of the state? In the same chapter in which they affirm the correctness of the theory of charges on land rents, they stress the received wisdom of taxing people’s consumption. Their advocacy of consumption taxes did not make sense in terms of the needs of the UK economy, which was locked in the trough of the severest downturn since the Depression of the 1930s. To escape from the depths of recession, it was vital that debt-laden consumers should spend more in the shops. So why add to the price of goods with taxes?

Will the Real Tiger show its Stripes?

In view of the neglect, in the technical literature, of the rent/revenue policy, we have to turn to empirical evidence. The most revealing data would stem from a comparative analysis of Ireland with a comparable economy which did directly draw very heavily on rents. Taiwan is such a case. It was the first of the Asian Tigers to emerge after World War II, and it did so precisely because of the decision that was taken to switch to land rents as a primary source of public revenue.3 But with a population of 23m and GDP at around $650bn, sceptics would persuade themselves that this Tiger could not be reasonably compared to Ireland.

So we suggest that Ireland’s Department of Foreign Affairs and Trade undertake a study of the performance of the Hong Kong economy to infer the benefits from rent-as-public-revenue.

A quick survey of British colonial history would provide the poignant context for this comparative analysis. The appropriate starting point would be the 1840s. In that decade, Ireland endured the terrible consequences of Westminster’s financial policies. These policies put the capital G in the Great Famine. Historians have recorded how food was exported while people died from hunger, and the rents of the British landlords were exported to the UK. But on the other side of the world, at the farthest most point of the British Empire, something remarkable was about to happen. In 1843, Britain acquired a barren rock on the Chinese coast. This became Hong Kong. On January 4, Lord Aberdeen, the Foreign Secretary, dispatched his instructions to the new colony, declaring:

“The principle source from which revenue is to be looked for is the land…Her Majesty’s Government conceived that they would be fully justified in securing to the Crown all the benefits to be expected from the increased value which such a state of things would confer upon the Land. Her Majesty’s Government would therefore caution you against the permanent alienation of any portion of the land, and they would prefer that Parties should hold the land under Leases from the Crown, the terms of which might be sufficiently long to warrant the holders in building upon their allotments.”4

This decision was not inspired by fiscal enlightenment. The British government was continuing with its mission to alienate the rents of the kingdom in favour of landowners; transferring the fiscal burden onto the labouring population. But Britain could not legally employ this fiscal strategy in Hong Kong, because it had acquired the rock on a lease. So the UK had no choice but to instruct the colonial government to collect the rents from sub-leases. It was not legally possible to remain faithful to the Westminster model of transferring the beneficial interest in land to private landowners. What were the demographic and macro-economic consequences?

Compare Hong Kong with Ireland. The empire’s outpost flourished. Capital flowed in, public infrastructure was funded by the Crown out of the rents, and Hong Kong became a successful experiment in optimum fiscal policy. The population grew, and grew. And grew. Tellingly, during the communist era people risked their lives to climb the bamboo curtain to escape mainland China so that they may live and work in Hong Kong. The constant expansion of population placed strains on public services, but the colonial government was able to fund the demands on the social infrastructure out of the rise in land rents. Those rents automatically increased with the rise in the prosperity of the people who settled in the colony. In other words, the rents of land and natural resources are a buoyant source of public revenue.

What of the history of Ireland during the 19th and first half of the 20th century? The trends were the reverse of those that turned Hong Kong into the world’s No. 1 dynamic market economy. (This rating is by the Washington-based Heritage Foundation, which compiles an annual index with the Wall Street Journal.5)

Table 1

Who had the Tiger in its Fiscal Tank?

 

 

Ireland

Hong Kong
Population

4.2m

6.9m
GDP (PPP) [2008]

$160bn

$242bn
Corporate Tax Rate

12.5%

17.5%
Top Income Tax Rate

42%

16% (Gross Income)

Note: In Hong Kong, individuals are taxed either progressively, between 2% and 17%, on incomes adjusted for deductions and allowances, or at the flat rate of 16% on gross income, depending on which liability is lower.

Table 1 provides some illustrative data for 2008, the last year of growth in the business cycle that ended in 2010. From this we see that tiny Hong Kong, with no natural resources, performed a remarkable feat compared to the land-and-resource-rich Republic of Ireland. Hong Kong is literally a barren rock. Mountains had to be demolished to make space for the merchants of the 19th century and to install the world-class infrastructure for the 21st century. And yet, she could support a population of nearly 7m people, compared with Ireland’s 4m people. Today (to cite one example of infrastructural excellence), Hong Kong’s metro system is the envy of the world. It was funded out of the rents from sites surrounding the metro stations. Hong Kong demonstrates that public infrastructure pays for itself: it is not a capital cost which, elsewhere, burdens the working population.6 Because Hong Kong draws a large part of its revenue by auctioning leases and from various land-related charges, it can rely less on income taxes.

The overall outcome is as theory would predict.

Ireland’s lower corporate tax rate is a two-edged sword: it attracted foreign capital, but the net gains were either (i) capitalised into disruptively higher land values, which helped to fuel the property boom/bust, or (ii) were repatriated.
Hong Kong’s much lower income tax heightened incentives to work, save and invest. Hong Kong is recognised as the most competitive economy in the world. We only need to compare the skyline of Hong Kong with Dublin to appreciate that something remarkably different was, and is, driving the Asian Tiger’s economic engine.

But the most poignant contrast is provided by the data on migration.

People migrated into the island of Hong Kong: it was and remains a magnet of opportunity for people who want to improve their lives.
Ireland is an island from which the young have been forced to flee ever since the 1840s. They took with them the skills and enterprise that ought to be ploughed into Ireland’s future.

Ireland’s tragic outflowing tide of souls did reverse momentarily at the turn into the 21st century. But we now know that this was a cruel illusion. The exodus has resumed. Last year, over 70,000 people left Ireland, which is back to levels last seen in the Great Famine.7

Strategic Policy-Making

It would be an historic mistake for the Irish government to now adopt a trivial property tax of the kind employed by countries like the UK (which taxes an arbitrary value placed on both buildings and land). Rather than making a rushed decision under current crisis conditions, the Irish government would be well advised to begin from scratch, to examine the virtues of the rent-based revenue-raiser from all angles – social, demographic and legal, as well as economic. This would require the commissioning of expert research.8 Above all, the people of Ireland are entitled to an informed public debate. Following such a debate, people would be in a position to express their preferences on the question of whether they want fiscal policy to be shifted in the direction that serves both the needs of the individual as well as the common good.

A New Beginning for Ireland

The current socio-economic crisis could be turned from a tragedy into a blessing.

Under current policies, in the judgement of the present author, there will be no authentic recovery of the Irish economy and society. The reasons are spelt out in The Traumatised Society.
The crisis is Europe-wide, manifesting itself in the depletion of both culture and economic infrastructure, but the shared pain offers no comfort to the parents who once again endure the sight of their children fleeing the land of their birth. Long-range forecasts provided by agencies like the OECD are based on wishful thinking (but note the new sombre mood in the IMF’s World Economic Outlook, published on October 8, 2012).9
The one policy that is capable of firing the economic engines is the tax shift that progressively transfers the funding of public services onto the rents of land. This policy rests on the natural justice principle of people paying for the benefits received.

A controlled phasing in of the new fiscal paradigm (which would need to be revenue neutral, to begin with), would have an electrifying effect.

The markets would immediately compute and price in the huge advantages that would accrue to those who invested in Ireland. Interest rates, for example, would decline when the markets realised that the Irish economy was to benefit from long-term stable growth.
The human effect? The reversal of the exodus of the talented young of Ireland. The fabric of the nation would be enriched by the one fiscal system that was pro-growth of the community-balancing, culture-enriching, environment-friendly kind.

The prognosis: a unique phase of cultural renewal. The foundations would be laid for a new post-land speculation society, the characteristics of which would be for the people of Ireland to define and create.

October 8, 2012

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By Emer – October 15, 2012

Call for professional site valuations for property tax – The Irish Times …

Call for professional site valuations for property tax – The Irish Times …

SUZANNE LYNCH

A PROFESSIONAL property assessor should be used to undertake site valuations when the property tax is introduced, an economics conference heard yesterday.

Speaking at the Dublin Economics Workshop in Galway, economist Ronan Lyons said a State-wide checklist should be introduced to ensure assessors deliver comparable estimates.

Those who have their real estate assessed should be given a tax credit in year one to offset the cost, he added.

Mr Lyons rejected the idea of a full-value tax, proposing instead a site-value tax, which would take account of features such as proximity to public transport or the site’s propensity to flooding.

A property tax, which will replace the €100 household charge, is to be introduced in the budget. According to the Government’s latest submission to the International Monetary Fund and EU, the property tax will be based on house valuation rather than square footage.

Earlier, Patrick King of Dublin Chamber of Commerce and Karl Deeter of Irish Mortgage Brokers proposed an alternative approach to property tax which would link the property tax liability to local authority expenditure, based on site size.

Addressing delegates, Mr King said a nationalised property tax model did not address the issue of vertical imbalances in the local government system. “Through this system the property tax would be used to directly fund the local authority. It would be simple, fair and achievable and would have very low administration and compliance costs.”

He questioned the feasibility of basing a tax on house value in what he described as the current dysfunctional property market.

Outlining how per-square-metre tax liability could be worked out for individual local authorities using resources such as data from the Property Registration Authority of Ireland, Mr King said such a system would be equitable.

“Establishing a direct linkage between local taxation and local services has in other jurisdictions delivered a level of accountability and transparency.”

Mr Lyons said integrating the new tax into the existing tax system was also key to the effective implementation of the property tax. For PAYE workers, the property tax should be listed as an extra line in the payroll, while deduction at source should be the default position, but not compulsory. Self-employed property owners should pay through their annual tax returns, he added.

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By Emer – October 15, 2012

Press Reports on Site Value Tax in Ireland

 

Image: tlindenbaum via Flickr

Aaron McKenna picked up our arguments for a Site Value Tax over a property tax in his article in The Journal. See extract below

Efficient use

A better property tax (or at least a less bad one) would be a site value based tax, such as that economist Ronan Lyons has been calling for. This tax would be based on the value of the land a building is on, not the building itself.

There are a myriad of reasons why a site value tax would be better.

A tax on the value of your property is a disincentive to many efficient things you could do with that building: For example, if you were to spend money to make your house more energy-efficient it would increase the value and, therefore, your annual tax bill.

A tax on the value of the land the building sits on incentivises more efficient use of that land. For example if you have a derelict site in a town or city you will pay the same tax for owning a wreck as you would for opening a shop or building an apartment complex. In the property value based tax system you will pay more tax if you do something efficient with the land.

A site value-based tax would also provide a disincentive to the speculative zoning of land – for example from farming to residential – because you’ll still pay the increased taxes on the land even if you’re doing nothing with it.

Any tax is going to have to contain a raft of offsetting exemptions and rules for those in negative equity, the poor, rural dwellers, and so on. There is no advantage or disadvantage to a site value tax when constructing these rules. But the for the government, the main upside in a property value tax is that they will get a windfall from a property boom.

That’s not very advantageous to you and I, Joe Citizens who really don’t need the government egging on higher home prices. And it’s not at all good for society that the property tax should discourage people from making the most efficient use of their land.

Aaron McKenna is a businessman and a columnist for TheJournal.ie. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna.

Read: More columns from Aaron McKenna on TheJournal.ie>

 

Also see

Debate Needed on Property or Site Value Tax – Indymedia Ireland
In an interview today on DriveTime on Radio 1 today (~6:30pm), author of.

and
www.indymedia.ie/article/102479Report on property tax to be brought to Cabinet ‘shortly’
Today the group, Smart Taxes Network, suggested the government may be suppressing the report because it proposes a site value tax, a claim the Department …
www.thejournal.ie/property-tax-cost-607996-Sep2012/

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By Emer – September 25, 2012

Call for debate on Property Taxes by Dermot Lacey, Irish Labour Party

 Smart Taxes does not agree with all of what Dermot has to say about a property tax below here – but that is not the point.  The point is that we need this debate before any decision is made, hence we make space here for his opinion as a former Mayor of Dublin City. 

Don’t forget to come to Trinity College next Monday 7.30pm for the “A Fair Property Tax?” public debate.  Tell your friends to come too.  

It has been extraordinary, indeed somewhat surreal, that as a Country, we have been having an extended debate the introduction of a Property Tax/Council Charge in the absence of virtually any contribution from those who actually work within the local government sector and try to make a dysfunctional system work at all. Instead we have had myriad opinion pieces from academics, ill informed commentators, vested interests and frequently the oppositionists from the Far Left who have opposed every single suggestion as to how we should finance our system fairly and with democratic accountability.

Too often the voice of the Constructive left has been sidelined and the platform left to the opportunists. Across the world Socialists and Social Democrats advocate payment into a collective fund, toward the provision of collective services. All across the world, that is, except for the Trendy Left and Nationalist Left in Ireland. Here they simply oppose, campaign and seek to instil fear and selfish individualism. I oppose their agenda just as much as I oppose those who broke this country and brought Ireland to its knees.

No Public representative particularly wants to advocate more tax. However surely this country has had enough of those who promise without cost and who offer Public Services without any reference to payment or appropriate taxation.

The truth is that since the populist and cowardly abolition of Domestic Rates Local Government has been starved of funding. The promise to reimburse Councils for the Rates foregone never honoured by Government. I have calculated that since that decision approximately E4billion has been withheld from dublin City Council alone by Government. That cannot be sustained.

It is clear that the Household Charge has many flaws and that the collection model was seriously defective. The Government has made clear that this will be addressed in the context of a new progressive and fairer property tax to be introduced from 2013.

Without even knowing what that tax will be, how it will be assessed, on whom it will be applied and what allowances and exemptions will be made for those who cannot afford to pay, the pretend Far Left in Ireland have already said No. So much for Social Solidarity, so much for honesty and so much for the redistribution of wealth that they claim to stand for.

We need an honest debate on Local Government Reform and on Local Government Financing.

I have proposed before that a Forum on the Financing of Local Government be established. It would be comprised of the main Political Parties, the Social Partners and the Councillor Representative Bodies. The Forum would be charged, with agreeing a consensus approach on the issue. There would be an opportunity to contribute for the wider public and it would be given twelve months to report.

The Forum could consider either a national and common approach to the funding issue or, as I would prefer, a range of options that could be determined, as appropriate by local elected Councils.

These could include everything from property taxes, a tourist or hotel bed levy, planning enforcement charges, a variable income or sales tax and so on. Real responsibility will then rest with local Councillors who will also have real flexibility in how to spend the money.

In the meantime, unlike the ULA/PBP/SP/SF/JPF campaigners, the Dublin City Council Finance Committee –against the wishes of the Sinn Fein Chairperson – has made a detailed submission on a proposed property tax. I was pleased that the Committee, representative of a broad range of Councillors and civic society, endorsed the thrust of the proposals I submitted.

In essence we agreed that:

1) Property Tax raised locally should be retained by the relevant Local Authority in which the money is raised.

2) That recognition of the difference purchase costs in some areas be recognized with appropriate banding for setting the rate to be established. The charge would also reflect the size and value of the property.

3) That an ability to pay clause be an essential element of any new Property Tax.

4) Rcognizing the need for Equalisation Measures, but also the often higher costs associated with higher population areas that a maximum of 10% be taken from the sum collected as a contribution to an Equalisation Fund. Central Government should contribute any sums necessary to ensure adequate finance for the overall scheme

5) .That Local Councils be allowed to vary the nationally set rate by a maximum of 5%.

6) Provision be made for costs incurred in protecting and upgrading Heritage and Cultural properties that are open to the public.

7) That a penalty would be applied for any deliberate dereliction of property in an attempt to avoid payment. In short that there be no reward for dereliction of property.

We also agreed in principle that given the enormous sums expended in Stamp Duty that a sliding scale would apply to cover the years 2008 to 1998:

While we did not agree on specific figures my own suggestions were that the following scale would apply:

90% abatement for First house bought in 2007 and 2008

80%abatement for First house bought in 2006 and 2005

60% abatement for First House bought in 2004 and 2003

50% abatement for First House bought in 2002 and 2001

40% abatement for First House bought in 2000 and 1999

30% abatement for First House bought in 1998 and 1997

I also suggested that given the normal high costs incurred with the purchase of a first house that an abatement sliding from 70% to 20% be applied for the first five years of such purchase in future.

Smart Taxes does not agree with much in Dermot Lacey’s piece but that is not the point. The point is that it calls for a debate where we can argue our different positions and contribute to a good decision.

Financing is central to any real reform of Local Government and, in my opinion, reform of Local Government must be central to how we reform Ireland. Honesty rather than sloganeering and playing to the gallery must be central to both.”

Dermot Lacey is Leader of the Labour Group on Dublin City Council and a former Lord Mayor.

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By Emer – September 21, 2012

“The Fair Tax” launch party

Senator Terry Leyden, Green Party leader Eamonn Ryan and Fr Sean Healy

“The Fair Tax” was launched by Smart Taxes in Buswells hotel yesterday. Fr Sean Healy introduced the book with a call for general tax reform. He pointed out that Social Justice Ireland has always been a supporter of land value tax. A proposal for a land value tax to fund a citizens income has been floated in a recent European conference held on social justice issues, with which he heartily agrees. He commended the book using the words of economist Colm McCarthy in the preface.
“There is nothing to celebrate in the disaster which has befallen the country as a result of the credit-fueled property bubble, but the willingness to tear up the system of tax subsidies to the property sector is one small consolation. The restoration of any form of tax on residential property should be welcomed. Basing the tax on site-values, rather than on the capital values of the built capital stock, would be even better and this volume makes a persuasive case for a re-consideration of government intentions”.
Judy Osborne then gave a brief overview of her contribution to the book. Judy’s background is in conservation, planning and local government. The adoption of a site value tax would vastly improve the outcome for communities from all of these perspectives. Dr Constantin Gurdgiev followed and strongly emphasised the ‘value capture’ potential of a site value tax in the Irish context and its superiority over further taxing income. The effective tax rate for many middle income earners is over 50% taking levies into account, he said.  Any further increase would have a disincentiving effects on education. A well well designed site value tax could reduce that burden to help retain educated young productive people. I (Emer Ó Siochrú) then finished by reminding the audience of the long land struggle in Ireland and that a site value tax can be seen in that historical framework –  of reclaiming ‘the land for the people’.

Over 17 TDs were present as well as advisors and a number of Seanad members. They came from a range of political perspective, from Fianna Fail to Sinn Fein to Green Party. We were gratified to see Pearse Doherty, Sinn Fein economic spokesperson who was still suffering jet lag from his flight from Australia. All feedback was very positive and while they could not immediately promise to  support a site value tax,  all left demanding to see the Property Expert Group Report and data on zoned land held by the Department of the Environment in order to inform themselves better on the subject.

The media were not interested however, no recognizable journalists were spotted at the party. We hope they will come to the debate in Trinity next Monday the 24th September to report on the growing demand for a proper discussion of the form of the new property tax for Ireland.

Thanks to Fr Sean Healy Judy and Constantin and all who helped make the event so enjoyable.

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By Emer – September 19, 2012

Invitation to the Launch of “The Fair Tax” in Buswells Hotel 6.00pm 18th September

Will the 99% of Irish people be bounced into a second bailout of the elite 1% that includes the bankers, speculators and property developers?  Could it be happening again under the Fine Gael Labour Coalition’s cloak of secrecy over their proposed new property tax?  This book is a wake up call that must not be ignored by the Irish people…

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By Emer – September 17, 2012

Support for Land Value Tax in the UK from an unlikely quarter

The case for a land-value tax posted in the IEA website

Duncan Stoddard
4 September 2012

 

‘Buy land, they’re not making it anymore.’ – Mark Twain

The UK economy is beset by three compounding problems: no growth, a high deficit and a constricting straightjacket of regulations. I posit that a reform to land-use planning, partnered with a land-value tax (LVT) substituted for business rates and council tax, offers a potential solution to all of these.

The unique merits of a land-value tax have pressed on the minds of economists for over 200 years. Economics has taught us how to analyse taxes against the criteria of efficiency, equity and revenue raising potential. The taxes most heavily applied in the UK today succumb to the theory of the second best: for example, income tax damages efficiency by perverting labour supply decisions; business rates distort firms’ input decisions, such that scarce resources are misallocated and final goods are not produced in the least-cost way. The key driver of inefficiency in both cases is the responsiveness of the payer, or the elasticity. High elasticities imply a greater distortion and greater efficiency loss.

In accordance with the sacrifice principle of Mill and others, an equitable tax system is one in which the utility burden is equalised across payers. By this criterion progressivity is desirable. Revenue raising potential is a function of the size of the tax base and the ability to avoid or evade.  Link to full article

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By Emer – September 7, 2012

New book from Smart Taxes : ” the Fair Tax” Supported by History, agreed by economists, feared by the 1%

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By Emer – September 7, 2012

Land and Money Reform Synergy in New Zealand

A Land Backed Currency Issued By A Local Authority. This is an intriguing and very innovative concept developed in New Zealand by Deirdre Kent and published in the Ethical Markets Review. The paper is very long so I will post only excerpts, the summary and autobiographic details.  It links a land value tax with a new local government issued money and with a new medium of land ownership that recalls Chris Cook’s Capital Partnership model.  The full paper can be downloaded here:  A Land Backed Currency Issued By A Local Authority 

Proposal for issuing Rates Vouchers using a Contract to pay an ongoing Land Levy:

To balance the ‘patriarchal’ monoculture of bank issued interest-bearing debt currency we need to have a series of ‘matrifocal’ smaller currencies issued with a circulation incentive. The proposal is to let Councils issue Rates Vouchers. This new money is designed to decay not increase in value. In order to link the new money to the value of the land we propose the Council contract with would-be property owners to give them newly created Rates Vouchers, (valid for payment of rates) to buy their land. In exchange the landowner creates a land covenant requiring the landowner to pay a regular sum to Council, this sum to be a little less than what they would have paid in mortgage on the land value and rates together. It would be paid partly in Rates Vouchers and partly in NZ dollars, (the rate to be determined, being aware that to pay the NZ dollar component becomes progressively harder over time). In effect the Council gradually buys up the land but the guardianship and responsibility remains with the owner and the title is burdened. The Land Levy is ongoing. It is not a mortgage that eventually gets paid off.

Land Rental Index Would the payment be linked to inflation?

No. Inflation is linked to interest rates, which assume a one-size-fits-all situation for the whole country. Land isn’t like that. Some sites are more desirable than others. The payment would be linked to a Land Rental Index. This is an index of averaged land rental values for a geographical zone over time. Land rental values are much more stable over time than are interest rates.

Be clear this isn’t a land price index. Speculation in land drives prices up but doesn’t drive rentals up. It is the rental value that is important. And as land prices come down, the rentals remain much the same. Land keeps its intrinsic value over time.

So what is a land rental value? It is the value of the weekly rent on the property less the cost of the improvements expressed as a weekly figure. See what landlords are charging, subtract out the costs of improvements. Then you have got a land rental value for that property. I rent it for $600 a week and it has a building worth $200 a week then the land is worth $400 a week. Do this calculation of land rentals or a convenient sample and then take the average change year on year. The value of the improvements goes up when it there is investment in improvements.

Because it is an index of the land rental value over time, it doesn’t vary much. Only sudden catastrophic events like land subsidence or an earthquake will change the land rental value dramatically. It could drop away to zero. When a major new service like a rail link arrives, the land rental rises. So you pay what it is worth….

…Wouldn’t the Council then own the land?

No. The fact that the contract gave money up to the value of the land does not change the ownership of the land, but the required Land Levy is included in the title as an encumbrance – a big one. It would be enough to drop the price of the property dramatically and make it more affordable. Because the encumbrance is on the title, the ‘owner’ then effectively becomes the guardian of the land or ‘kaitiaki o whenua’, as it should be. The owners are fully responsible for what happens there.

This is an opt-in scheme where would-be homebuyers can contract with local government to covenant their land with a financial obligation, an agreement to pay a regular sum to council in exchange for the Council giving them a lump sum to pay for their land. At this stage the Council is exempting them from all land related like rates and other charges. The sum paid will be negotiated case by case according to legislative guidelines and be, say, the amount they would have paid in mortgage interest on the land together with the rates, minus say 10-15% or it may be up to 20%, depending on the land use.

Legislation may be required. This scheme would require legislation to amend the Land Transfer Act to clarify or reintroduce a provision for a ‘rentcharge’ in a ‘Memorandum of Encumbrance against the Title’. This has been used in the past, with perpetual rentcharges. There will also be legislation needed to specify what purchasers could expect from councils and what land levy must be paid. A land index must be created in law. The penalties for noncompliance must be spelt out in law. The Reserve Bank Act will also have to be amended to allow for local currencies and for the establishment of a bank dealing in local authority currencies. There are possibly other Acts that may require amending like the Securities Act and the Local Government Act.

So what is a covenant?

There is a provision in property law that allows land to be covenanted, or subject to a solemn promise. It is an agreement often between adjoining landowners to do something (affirmative covenant) or to refrain from doing something (restrictive covenant) with relation to the land. An example of an affirmative covenant is a promise to build a fence, while an example of a restrictive covenant is a promise not to develop land for commercial use. Each covenant has two sides: the burden and the benefit. The burden is the promissor’s duty to perform the promise and the benefit is the promissee’s right to enforce the promise. These covenants ‘run with the land’, which means that subsequent owners of that land must honour the covenant. The title becomes burdened.

How will a Rates Voucher work?

The Rates Voucher is a promise by the local government to accept the note for the payment of rates. If it were a note the Mayor and Treasurer would sign it. This is done interest-free at almost zero cost to local government. On the note would be printed the words “This note is valid for the payment of rates to Wellington City Council” or something similar. And ultimately they must be acceptable for the payment of rates.

The incentive for circulation is dealt with not by a negative interest rate, but by making the note redeemable on a certain fixed date. This will be further explained later.

But how would you guard against inflation or deflation of the currency?

If there is too much local currency in circulation it will become gradually less trusted. People will go back to the national dollar. The rationale for having a local currency backed by a promise to accept it for rates is to create the conditions for people to trust it and accept it. Therefore there has to be careful management of the amount of currency in circulation. Since councils have to buy petrol, machinery and other things that can only be bought using national currency, each council would have to decide what proportion of the rates bill would be billed in the local currency. It may be 33% for instance. If there are too many local dollars out there, the council will not be able to accept them all.

So how would it work out? A council that collects $120 million in rates a year might issue just $40 million in local currency annually and these would be issued with an expiry date. The object is to design it to be a ‘use it or lose it’ currency, just like Flybuys or the tickets you buy for a concert or a game of rugby or a plane trip. If you don’t present your ticket on that date, it is no good trying to present it once the concert, rugby game or plane trip has been and gone. Because they know the size of their rates take, each council knows how much to issue….

…Example 1

A couple in Otaki wanted to buy a section for $127,000. The rates on the land are $800 a year. If they were to get a mortgage of $127,000 at 6.9% they would have to pay $8723 a year in interest. The total land associated outgoings would be $9723 a year. The couple then enters into a contract with the council to receive the $127,000 they needed in Rates Vouchers, and in exchange there are no further rates obligations. But in the covenant they agree to pay Council, say, $8094 a year from then on. The council could charge them for water and sewerage.

Suppose they then spent $450,000 building a house. The price of their house when they came to sell it would represent anything they put into it less depreciation.

…Effect on house prices

The covenanted properties, being financially ‘burdened’, would then have a very much lower market value. With dropping house prices this arrangement would benefit would-be first homebuyers. According to the Productivity Commission (Dec 2011) land values are typically 60% for most Auckland, North Shore and Queenstown homes and even more for older homes in big cities, so the covenanting process would actually drop the price of the property by a whopping 60%.

But the landowner would in exchange be relieved from all land related taxes – rates. And very soon, when the local government issues a Citizen’s Dividend, landowners would get other financial benefits (more about Citizens Dividend later). While the property value would drop dramatically, the landowner would still have the same or slightly more equity and so would not be disadvantaged. In fact they could be considerably advantaged, because there is a larger market in the group of buyers for cheaper properties.

This paper is advocating a switch to Land Levies on a plot-by-plot basis, exchanging the new levy for removal of the old burdens. The country can then move gradually and smoothly to a fairer system. It does this by the accumulated benefits of a growing number of individual actions.

Summary

We can stabilise land values, reduce our indebtedness, make banks safer, help small and medium sized businesses, even out rises and falls in property prices, help prevent inflation or deflation, move to a low carbon economy, make it much easier for people to buy their first home, and reduce poverty – all by the same simple action repeated thousands of times. Moreover we have now maximised the chance for resilience in the face of threat by moving away from a monopoly currency which, together with poor tax policies, has caused so many monetary, sovereign debt and bank crises. The local authority solution is easiest because local authorities already have their revenue tied to property value. This moves it to revenue tied to land rental value. Several birds are killed with one stone. The monetary and land issues are all dealt with together and the bonus is more wealth equality and a genuine start to environmental healing. If appropriate engagement of Maori is managed so that they trust councils more, local authorities that adopt this policy will be oases of prosperity and happiness in a time of high unemployment and misery.

Author

Deirdre Kent April, 2012, Otaki, New Zealand ph 06 364 7779 or 021 728 852. She has been in and out of green politics since the Values Party in 1975. The author of Healthy Money Healthy Planet – Developing Sustainability through New Money Systems, 2005, she co-founded and worked for Otaki Transition Town and Otaki Timebank. In late 2011 she co-founded the New Economics Party http://neweconomics.net.nz and wrote its website.

All comments, suggestions, information please contact the author at deirdrekent@me.com. Her ideas are developed from conversations with Adrian Wrigley of http://systemicfiscalreform.com to whom she is deeply indebted. The two paragraphs on Maori have been written by Catherine Davis.

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By Emer – July 24, 2012

Land Value Tax explained by the Lib Dems in the UK

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By Emer – July 23, 2012