The ownership of land and access to other environmental assets become increasingly the key factor in determining socio-ecoomic position. How to capture the economic surplus more effectively for public purposes? Multinational businesses are able to use tax havens and transfer pricing to minimise their company taxation liabilities. High income earners are reducing their income tax by the use of family trusts, income-splitting and other means of gaining maximum benefits from allowances against taxation. -- Frank Stilwell, article. "The Natural Economy" book recommended -- John Young.


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by Frank Stilwell, Associate Professor of Economics, University of Sydney

The ideas of Henry George have been ignored by most economists in the twentieth century but they have enduring relevance in understanding the political economy of Australian cities and regions. The capacity of landowners, particularly in the major metropolitan areas to capture the unearned income, is a major source of socio-economic inequality.

The failure to adequately tax that surplus is an element in the impoverishment of the public sector . The accentuation of these tendencies by the processes of urban growth further limits our capacity as a nation to achieve more balanced regional development. An understanding and a resolution of these problems is essential to the creation of a more productive economy and a more equitable society.

Urban land and inequality
Consider residential land near ,or with a view of, Sydney harbour. The market value of such land has escalated in the last couple of decades. As the urban area has grown, the demand for accessibility to the features that make Sydney so distinctive has increased; gentrification has proceeded apace in many of the inner city suburbs, townhouse and home-unit developments had led to more `urban consolidation', and foreign capital has surged into the real estate market.The result is a massive increase in the wealth of those fortunate enough to have owned land in the area and in the wealth of their children who have inherited valuable estates.

The capacity of landowners to gain such increments of unearned wealth is partly due to the role of government in the urban land market. The use of zoning to restrict the uses to which land can be put is an obvious case in point: zoning of land as residential, for example, raises its value above what would otherwise pertain in the market if it were restricted to agricultural purposes. Changes in the zoning of land are, of course, the source of tremendous `windfall' profits for land owners. However , in the case of the Sydney example, where most of the land in question has not been subject to any such change of its zoning status, the driving force behind the rising land process is the intrinsic nature of the urban growth process itself. There is a growing imbalance between the demand for central accessible sites and their fixed supply . This generates enormous increments of unearned wealth for land-owners as the urban area continues to grow.

The concept of `positional goods' developed by Fred Hirsch (in his book Social Limits to Growth) as relevance in this context. Some goods simply cannot be produced in greater quantities to cater to growing demand. Environmental assets, and land in particular , are the most obvious cases in point. As economic growth continues, the ownership of and access to those assets comes increasingly to be the key factor in determining socio-economic position.

Australian metropolitan areas are becoming more socio-economically divided as a result of these processes. Sydney is just the most extreme case because its land values for prime sites are the highest. Similar trends are evident in all the metropolitan areas. Of course, the division between the status of more well-to-do suburbs and suburbs of lower socio-economic status is of long standing in Australian cities, as in most cities around the world. This division is reflected in the quality of housing and the standards of local services but its roots are in differential land prices. The social-spatial inequalities are now widening. Research by Hunter and Gregory at the Australian National University (published in the journal Urban Policy & Research, September1996) indicates that there has been a widening gulf between the richest and poorest urban localities over the last couple of decades.

These intra-urban inequalities show up in the operation of labour markets. Unemployment tends to be higher, other things being equal, in localities which are distant from the major centres of employment opportunities. More generally, the differential incidence of unemployment reflects the social class composition of the residents. That in turn is shaped by the way in which the housing market operates as a `sorting mechanism', separating those that can afford to buy houses in areas with good access to employment opportunities and social facilities from those who cannot. This process depends in turn on the value of the land on which the houses stand. Thus land, housing and labour markets interact to perpetuate and intensify the polarisation of prosperity and poverty.

So what we are witnessing is a process of circular and cumulative causation, operating to intensify urban socio-economic inequalities. The cumulatively most advantaged people are the landowners of prime residential sites and their children who stand to inherit them. The cumulatively disadvantaged are aspiring new home-owners and the tenants in the housing rental sector who bear the costs of the inflationary processes flowing through from land and housing purchase prices to rental levels. The result is that the `great Australian dream' of home ownership is ceasing to be a realisable goal for many young people, at least as far as accessible urban locations is concerned.

Concurrently the tendency for speculation to proliferate is accentuated. Seeking capital appreciation through the ownership of urban land and residential property carries few of the risks associated with investment in productive economic activity. It can also be a very effective hedge against inflationary pressures. However it is a `zero-sum' game in that it is concerned with the redistribution of income and wealth rather than the expansion of economic potential and wealth-creation for the society as a whole. Like other forms of speculation, it diverts resources from more productive purposes. The urban property system, and in particular the accrual of economic rent by landowners, thereby adversely affects macroeconomic efficiency as well as distributional inequity.

Capturing the economic surplus
Balanced economic development requires an effective relationship between individual and collective concerns. The central problem with the modern urban economy is that the fruits of progress are privately appropriated to the detriment of our collective concerns. The market permits privatisation of access to environmental assets and the private capture of the appreciation of land values associated with economic growth in general and urban growth in particular . Public environmental amenity and the quality of a public sector, the effectiveness of which depends on adequate tax revenues, suffer accordingly. How to capture the economic surplus more effectively for public purposes? Public ownership of land and productive industry is one means but this is being rapidly eroded with the current vogue for privatising profitable public enterprises. Taxation is the other principal means of capturing the economic surplus, but its effectiveness is also being significantly impaired by contemporary political-economic trends.

Multinational businesses are able to arrange their affairs globally, using tax havens and transfer pricing to minimise their company taxation liabilities. High income earners are reducing their income tax by the use of family trusts, income-splitting and other means of gaining maximum benefits from allowances against taxation. The `fiscal crisis of the state' seems to have become a permanent state of affairs, `soluble' it seems only by further impoverishment of the public sector.

Tax reform is obviously crucial in these circumstances. The Howard government is currently aiming at a shift between the burden of income taxation and indirect taxation on goods and services. Politically, the task must be to refocus the tax debate on more fundamental issues, particularly the taxation of unearned income. By comparison with other forms of taxation, taxes on unearned incomes are efficient, equitable and ethically unobjectionable.Taxation on the economic rent from land follows logically from this way of analysing the nature of contemporary economic problems. Of course, it remains a matter of contention as to whether the single tax advocated by Henry George could adequately substitute for all other forms of taxation. As a matter of political pragmatism, a balance between taxation on assets, income and expenditure seems inescapable. But the balance could be radically changed towards taxes on assets, of which land is quantitatively the largest component, and the transmission of those assets,particularly through inheritance.

Many other anomalies could be addressed concurrently, including the elimination of payroll taxes: it is absurd to tax the use of labour at a time of widespread unemployment. The introduction of a carbon tax could also be a potent means of providing incentives to switch to more environmentally sustainable patterns of technology and energy use.

Followers of Henry George face an obvious dilemma in judging whether such eclectic reformism is too much of a departure from the traditional single-tax advocacy, but political pragmatism seems to render it inevitable. Some reorientation towards land taxation as a greater share of the whole could occur through the eradication of the exemption of owner -occupied property from existing capital gains and land taxes. More indirectly it could occur through the reintroduction of inheritance taxes, since land is often the most valuable element in estates. No doubt there would be political opposition to such initiatives but such is the case with any imposition or extension of taxes: in the end their acceptability depends on what relief is given from existing taxes and how effectively they are presented to the public as a means of making the tax system more equitable and efficient.

Regional government
Local government rate revenues are the other means of linking tax more directly to land values. These have the advantage from a Georgist perspective that they are an annual charge rather than a periodic impost, as with the taxes described above. However, while local government rates are just seen as a charge for locally-provided services there are obvious political limits to the extent they can be raised. Their marginal status in the overall tax system reflects the marginal status of local government in the three-tier federal government structure.

This marginal status is linked, in turn, with the relatively small scale of the areas covered by local government in metropolitan areas. The difference in rateable values between different localities, such as the wealthy areas around Sydney's harbourside and the poorer areas in the far western suburbs, means that local government is not in a position to deal with the redress of modern urban inequalities. Localities with high land values have a high capacity for capture of the economic surplus, and thus are in a position to provide good quality services. The reverse is true in areas where land values are low . So, inequalities are perpetuated.

Henry George noted a century ago the contrast between wealth and poverty was most striking in "the great cities where the ownership of a little patch of ground is a fortune" (Progress and Poverty, Book 3, Ch. 8). The sheer scale of modern metropolitan areas today causes the socio-economic inequalities to be manifest as spatial inequalities, transcending the boundaries of historic local government structures.

A radical move for redress of this imbalance would be in the introduction of a system of regional government. In place of the three-tier system, which is a hangover from Australia' s colonial origins, we could have a two-tier system of effective regional government and a national government. Some 60-70 regions across the nation would probably be appropriate, taking as a possible starting point the regions delineated in the report of the Taskforce on Regional Development presented to the Federal Government in1993. Each of the major metropolitan areas could be a region, while non-metropolitan regions could be defined as appropriate clusters of existing local government areas.

Such reform, if it could be implemented, would provide a more effective means of addressing one of the principal problems arising from the current structure of public finance -- the fragmentation of the local governments to whom the bulk of income from taxes on unimproved property values accrue. A system of regional government could also be conducive to more effective regional policies,addressing the pronounced metropolitan bias which gives rise to such inflated land values in cites like Sydney. It would provide the capacity to implement effective decentralisation policies. Indeed metropolitan land taxation at a substantially higher rate than in non-metropolitan regions -- reflecting the difference in land values -- would itself produce a powerful incentive for decentralisation and regional development. It could help put a brake on the cycle of metropolitan growth, rising land prices and growing socio-economic inequality.

To provide a final illustration of this point, take the case of the developer contributions which are required under Section 94 of the Environment Assessment Act. These are currently paid by developers to local councils. As Garrick Small argued at a recent symposium sponsored by the Association for Good Government, there is a case for making such payments an ongoing contribution based on the appreciation of land values rather than a single up-front charge. In this way, the government can recoup the full effects of infrastructure improvements on land values, including quite distant sites as well as immediately affected sites.

But which government? An infrastructure improvement in an outer metropolitan suburb can have effects on land values in inner -metropolitan areas. Indeed,to the extent that such infrastructure construction facilitates further urban expansion in the aggregate it will normally raise the land values of more central sites. So the revenues from taxing these incremental land values would most sensibly go to a government with jurisdiction over the whole metropolitan area.

These are complex economic issues and major political challenges. However unless we can, as a society, develop appropriate structures of taxation and governance we will experience greater social division, a deterioration in the quality of the public sector and increased imbalance in patterns of urban and regional development. The concerns raised by Henry George one hundred years ago are just as relevant today: indeed the case for reform is increasingly urgent. __END OF ARTICLE__

Frank Stilwell is an Associate Professor in the Department of Economics at the University of Sydney.
His profile is at: http://www.usyd.edu.au/su/econ/staff/stilwell.htm
Published work includes these books: 1.Regional Economic Policy, London, Macmillan, 1972 (also published in Spanish and Turkish).; 2.Australian Urban and Regional Development, Sydney, Australia & New Zealand Book Co., 1974; 3.Normative Economics: An Introduction to Micro-economic Theory and Radical Critiques, Sydney, Pergamon Press, 1975 (also published in Italian); 4.Readings in Political Economy, (Edited, with E.L Wheelwright), Sydney, ANZ, 1976, 2 volumes; 5.Economic Crisis, Cities and Regions, Sydney, Pergamon Press, 1980; 6.The Accord and Beyond: the Political Economy of the Labor Government, Pluto Press, Sydney, 1986; 7.Understanding Cities and Regions: Spatial Political Economy, Pluto Press, Sydney, 1992; 8.Beyond the Market: Alternatives to Economic Rationalism (Edited, with S. Rees and G. Rodley), Pluto Press, Sydney, 1993 (also published in Japanese); 9.Economic Inequality: Who Gets What in Australia, Pluto Press, Sydney, 1993; 10.Reshaping Australia: Urban Problems and Policies, Pluto Press, Sydney 1993.

To read a comment on this article, and Frank Stilwell's response, read "Urban Land, Inequality and Taxation -- Revisited" at: http://www.multiline.com.au/~georgist/good98feb5.htm

The Natural Economy
  By John Young
Dear sir,
My book The Natural Economy was published in London in June, and I want to bring it to the attention of as many people as possible. I hope the readers of Good Government can help.

Henry George had intended his Science of Political Economy to give a comprehensive picture of a healthy economic order . He died leaving it unfinished. My book takes George' s positions, deepens and extends them and incorporates later insights. But it remains truly Georgist. It presents an integrated picture of what a healthy economy must be, and it does it in a way that, hopefully, will appeal to non-Georgists as well as to the most committed Georgist. From the reactions so far I have high hopes that it does indeed get through to those who lack a knowledge of Georgism.

Last July it was launched at the international Georgist conference in England, and I then spent some weeks in England and Ireland promoting it. The response was very encouraging, including the response from bookshops.This book could well be a major breakthrough in getting our message to people who have not heard of Henry George. So I am very keen to promote it as widely as possible. Can you help?How? First by buying and reading it! And there will be opportunities to quote it or refer to it -- in conversation, in letters to editors, perhaps in articles. Or you might like to visit libraries, show them the book and invite them to order a copy . These may be high school libraries, university libraries, local libraries. Also, your local bookshops could well be happy to stock it -- they will often order two or three from the distributor , then more after they are sold.

You could think about giving it as a present -- perhaps to high school and university students or relatives or friends you believe would be interested. Have you acquaintances or friends in public life or in business who would appreciate a copy? Do you belong to organisations which might be interested?

A point that needs to be emphasised to people is that it is not a typical economics book: the very word economics turns many off -- we know why! The terms social ethics or social justice give people a better idea of the book.

The Natural Economy is for Georgists (but it does not "preach to the converted"). It is for economists of any kind (if only they will read it!). It is for people in general who want to see the causes of our economic maladies and the cure.

The book (recommended retail price $29.95) is available from bookshops, and from the Association for Good Government, or from the Henry George Foundation of NSW , 122 Little Eveleigh Street, Redfern 2016. For the information of bookshops, the Australian distributor is Keith Ainsworth Pty Ltd, 6/88 Batt Street, Penrith NSW 2750, phone (02) 4732 3411, fax (02) 4721 8259. -- John Young, 1a Stewart Street, Eastwood NSW 2122


At this time of the year plans for 1998 are being formulated. You can help to make1998 successful for the Association by suggesting educational and promotional ideas for us to try, including the content or format of the magazine. Please address your ideas to our postal address. We shall be arranging a meeting of interested persons in January. You are very welcome to come. Please give me a call to obtain the date and venue -- (02) 9744-8815. Richards Giles, Secretary

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