THE IMPLEMENTATION OF AND
COMPENSATION FOR LAND TAXATION

Part 1
Social Justice, Land Rights for All, Collection of Site Revenue and Resource Rentals, Environmental Protection, Sustainable Development, Decentralisation, Opposition to Anti-Enterprise Taxes and Monopolies, Proportional Representation, Freedom from unfair sex and other unfair discrimination, Civil Liberties, Human Rights, Responsible Government Expenditure, Exclusive Land Occupation, Collection of Misappropriated "Economic Rent," Natural Public Revenue, Abolition of Involuntary Unemployment, Wealth Producers to keep Full Value of their Production and Enterprise, Reducing Speculation.
41 Contents 

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By MIKE LYNCH
Transport Consultant, Perth, Western Australia
Currently completing an MA in Science and Technology Policy at Murdoch University Internet Link Exchange
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Published in Progress, official organ of Tax Reform Australia, 31 Hardware Street, Melbourne, Victoria, 3000, Australia, September-October 1996, pp 7-9
Annual Subscription $18; Telephone 03 9670 2754; E-mail mhassed@lexicon.net.au
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THE IMPLEMENTATION OF AND COMPENSATION
FOR LAND TAXATION

Part 1
By MIKE LYNCH

FOCUSING ON IMPLEMENTING THE NEW PARADIGM--
GEONOMICS/GEORGISM--THE MINI-SERIES

This article has been chosen as an opening to a debate that anyone can join over the next few issues. Other members are producing articles, and there is one by Maurie Fabrikant, which is too large to be published in Progress, but which can be sent to anyone requesting it. Also, when submitting comments or articles on Implementation, please consider the length and language suitable to Newcomers. It is hoped you will enjoy this first instalment. Although Henry George made strong argument against compensation being given, it is interesting to consider the concept in the present context.

It is necessary to mention that the producers of Progress do not always subscribe to the beliefs or evidence in individual articles

Let's slip into George's remedy. I will identify four general positions in the debate as to whether the Georgist remedy should be implemented with or without implementation:

I prefer the fourth of these positions, but will deal with each in turn.

Gradual Implementation

The main argument in favour of gradual change is the enormity of the change. There is little fiscal difference between this position and that of immediate implementation with universal compensation. A small impost on "Land" or gradual (generational) implementation would not warrant compensation.

Gradual introduction may be less complicated and easier to achieve politically. But it would be easier to reverse and perverse. The twenty odd years needed to gradually transform the collection of revenue for government from productive activity to that of "Rental Surplus" is expecting a continuing political dedication of herculean proportions. The alternative where resumptions happens immediately means that the omelette has to be unscrambled. In fact a hundred per cent chaange might be as easy to achieve as the first of the incremental changes.

Implementation of and Compensation for Land Taxation_Mike Lynch


Picture of Henry George

 

Do you know this man?

 

 

This is a famous and influential thinker who has been semi-erased from history.

Picture of Henry George by courtesy of
Geonomics (USA)



Immediate implementation
with no compensation

While the argument that when other taxes are introduced there is no compensation or concern for injustice is very reasonable, it underrates the enormity and universality of the Georgist remedy. The seizure of total Economic Rent without compensation has the distinct air of retrospectivity. It reaches back to seize wealth previously acquired. In a pure Georgist world that acquisition is questioned, but this is not yet such a world. Imagine you are a politician in the recent election campaign. How would you sell an idea that attacks what the middle class see as their security and birthright?

"It's a rip-off"

First they will be told that they have been doing something essentially bad in all their security arrangements until now. Then they will be told that they will have to pay taxes on a component of their property that they just spent a working life paying off a mortgage on. Further, they will lose a huge proportion of the resale value of their property or much of their estate. Add the incredible insult to such an individual who is soon to, or has, retired.

Tell them they will have to go on paying taxes even though they have little income. Even this nest egg has been eroded because much of their portfolio was, of course sensibly, in property trusts. But they will be allowed to defer the payments! This happens now with rates, but the proportion is small and the unimproved value is included. If the value of their house is about the same as the unimproved land value and depreciating, a "community charge" at about 10% of the total unimproved value would, [1] with interest, repossess the house in about 10 years.

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Selling the proposal to other sectors would have been equally as difficult. How will you convince farmers whose only real asset is the family farm that they have the debts but no capital gains? The frugal farmer who hasn't got on the banks' mortgage treadmill will wonder where their perceived wealth has gone. Likewise the businessman who decided to invest in premises rather than rent will be disadvantaged as would those who invested in property to lease. Should we penalise the non-profit organisation trustees because in the past they have been expected to invest in property in the name of fiduciary conservatism?

Immediate implementation
with limited compensation

There would seem good moral reasons for at least some interest groups receiving compensation. There are good practical reasons why compensation should be universal. Any partial compensatory scheme should be universal. Any partial compensatory schemes will always have an artitrary element. Besides why put very powerful interest groups totally offside?

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Land charges could best be promoted not as an ideological change but rater a refinement of the current free market system. Accordingly the business and private investment decisions made under the current economic regime should not be condemned as somehow immoral but rather leading to less than optimum outcomes.

Even compensating the most overt land speculators and idle inheritors, would provide them with a chance to invest more constructively in the economy. This would I believe be much less dislocating than immediately collecting the total Economic Rent and just hoping that the economy will immediately sort itself out. The financial sector would not survive the elimination of a sizeable proportion of their mortgage portfolio without some system of compensation. I am sure most of the community would not want to invite such economic chaos.

A 100% change
might be as easy to achieve
as the first of the
incremental changes.

Immediate implementation
with universal compensation

The final option is about changing to Georgist taxation broadly and with little notice. Without that option, few are going to vote for Georgists, and so gradual change will not occur. A sudden an total change to land-based taxation without compensation would be a dramatic example of the typical land speculation collapse. The economy and society would need to be eased through such dramatic change. As I suggest below the only people to benefit from the absence of compensation would be young working people, who live at home, and who could buy more fast expensive foreign cars. That is, if they have jobs. Imagine how disruptive the Georgist change could be.

Only the sharks benefit

Think about George's time. His main targets, the railroads and the timber concessions etc., would have gone under and with them most of the financial system. "Good job," you say. But it doesn't mean that some new order will appear within weeks; and it takes only a couple of weeks to starve. In a Georgist world the market would be self-regulating, but until the transition is finished, we are not in a Georgist world, but rather entering one hell of a depression typical of the land monopolists' world when land speculation collapses. Now eventually the "fire sale" of assets may bring new players into the market, but how long will it take?

Implementation of and Compensation for Land Taxation_Mike Lynch

One can look to total upheavals like the "Reconstruction (Carpetbaggers) Period"  in the USA, or the current transitions in Eastern Europe, to feel that total disruption breeds more disruption. The shutdown of the old economy, short of some immediate redistributive process, would create a diabolical credit squeeze. If there was an immediate, total compensation scheme pay out, the effect would be a disastrous demand-led boom. Only the sharks benefit.

Australian Constitution

Finally, the Australian constitution presents an amost insurmountable barrier to broad tax reform without compensation. I can't imagine the Australian electorate voting as a majority, in a majority of states, to allow the Federal Government to acquire property without the just terms specified in clause 51 (xxxi)  [2]. This is not important if change is gradual or the reforms very limited as the Australian High Court recognises that compensation is unnecessary in limited cases. So how could compensation be given and, at the same time, some tax or other financial rewards be offered that would induce individuals to vote for the proposal?

An implementation scenario:
Let's balance the vertical fiscality!

A Georgist "community charge" would solve what is generally acknowledged as the major crises in the Australian federation's taxation system, vertical fiscal imbalance. This is the fact that the states have the constitutional functions and spend the funds that the federal government collects. Current suggested changes are all unworkable. State Consumption taxes are unconstitutional. Proposals for fixed shares of revenue would still leave the states open to the vagaries of a federal government changing its mind whenever it suits. No federal or state government, nor any of the electorate, wants the states to charge income taxes. Apart from some user-pays (or rather, "beneficiary-pays") charges, most state taxes are profoundly regressive on both the poor and business. A broad charge on the unimproved value of land  [3] would readily pay for the short fall in state and local government incomes. In both cases the short fall made up by the federal government is about half their total current expenditure. A Georgist charge is the plausible solution.

Just how the change would come about would be determined by the political process  [4]. Yet with a compensation regime in place, most corporate and individual members of the economy should hardly notice the change so far as their initial financial position is concerned. I'll detail a number of different government, individual and corporate circumstances to explain how the scenario could happen, and allude to how the compensation system might work.

NOTES

1. This rate can be seen as the return expected now by an investor of fiannce in the unimproved value component of land. It covers the interest, inflationary expectations, and a desire for a reasonalbe profit rate. The rate of community charge could equate up to the current value of economic rent. It is important to understand that the interest rate here is for borrowed money.

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Because of the speculative nature of the land market the borrowed rate can, as we all know, get extremely high. These peculative borrowing margins plus the expecation of profit are the surpluses that would allow government to pay a fair compensation interest rate and resume the unimproved value of the land within a generation. "We can have their land and they can eat it too."

2. In the US the 5th Amendment would need changing.

3. Anything less than 5% community charge would seem to me to be a gradual change, probably best introduced in two stages without compensation. Some writers, e.g. Fred Harrison [U.K.], argue for 20%. I surmise the states and local municipalities would need to charge at or just above 10% to replace federal funding. Once established the community charge will no longer be able to be determined by sale of unimproved land and so some form of tendering or auctioning of the site rent charge would need to occur.

4. Currently no major political party would seem ideologically opposed to a Georgist land chage yet none support it. There is a lot of work for Georgist activists to do.

(To be continued)

Write any comments to:
Progress
31 Hardware Street Melbourne, Vic 3000, Australia

Implementation of and Compensation for Land Taxation_Mike Lynch


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