Implementation of and Compensation for Land Taxation ..Mike Lynch

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COMPENSATION POSSIBILITIES
DURING CHANGEOVER
TO GEORGISM

Part 2 and Conclusion of
THE IMPLEMENTATION OF AND COMPENSATION FOR LAND TAXATION (1996)

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By MIKE LYNCH
Transport Consultant, Perth, WA.
Currently completing an MA in Science and Technology Policy at Murdoch University

Henry George moving to free a trapped bull "Near the window by which I write. a great bull is tethered by a ring in his nose.   Grazing round and round he has wound his rope about the stake until now he stands a close prisoner, tantalised by the rich grass he cannot reach, unable even to toss his head to rid him of the flies that cluster on his shoulders.

This bull, a very type of massive strength, who, because he has not wit enough to see how he might be free, suffers want in sight of plenty, and is helplessly preyed upon by weaker creatures, seems to me to be no unfit emblem of the working masses.

But until they trace effect to cause, until they see how they are fettered and how they may be freed, their struggles and outcries are as vain as those of the bull.   Nay they are vainer.   I shall go out and drive the bull in the way that will untwist the rope.   But who shall drive men to freedom?"

Introduction to Protection or Free Trade 1888 by Henry George.

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From Progress, official organ of Tax Reform Australia, Melbourne, Victoria, November-December 1996, pp 11-12

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 enjoyed his 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

Last issue, Mike talked about whether the Georgist remedy should be implemented with or without compensation. These categories were discussed: - gradual implementation, immediate implementation with no compensation, immediate implementation with limited compensation, or immediate implementation with universal compensation. Following on from there, here is the remainder of the article.

Governments

The Federal Government would need to be in control of the change at least in the initial period. It would have a number of paramount functions, particularly the need to control or encourage economic activity. Employment, foreign reserves and inflation would continue to need monitoring. The essence of the change I propose is that the redistribution that currently occurs between the commonwealth and the states will now occur via adjustments to household and business incomes. As I detail below, federal taxes will be redistributed as compensation for the new "community charges" of the states. As the compensation packages are redeemed, there would be a steady decline in federal taxation. The Federal Government, consistent with Georgist theory, could let the throttle off. Depending mainly on the external account, federal taxes would move to their own share of Georgist finance well within a decade."

Implementation of and Compensation for Land Taxation_Mike Lynch

The states will immediately gain sufficient funds to satisfy their own expenditure needs. The states need not levy the community charge at the same rate. NSW, for example, may have a lower percentage rate because land values in that state are, relatively, higher. Generally, non-user charges on household and business should be dropped. Property charges based on transfer would be scrapped.

Local government currently charge some unimproved rates but the reforms would see these used universally for rating. It would need to provide increases sufficient to cover the other half of their income needs that currently come in the form of grants from federal and state governments.

Individuals and households

Households with realty, limited income and no mortgage.
This group are mainly retirees and will have to pay the states' community charge. The provision of some form of compensation would be necessary if a real injustice is to be avoided. Whatever the form of the compensation bond, it should be sufficient to provide funds for most or all of the community charges and allow the eventual redemption of the principle. This could happen over various periods with the average retirees being able to see out their lives without their personal situations changing dramatically [5]. There should be scope for the bonds of individuals to be transferable and redeemable at any time [6].

Households with realty, income and no mortgage
These households would find themselves paying both the state community charge and federal income tax. A system of bonds where the federal government is paying out with one hand and collecting income tax with the other hand could be implemented. A simpler system might see the discounting of income taxes to reclaim the unimproved value for the community. Households would have time to make arrangements to ensure their community charges are paid on their expected property requirements after they retire.

Households with realty, income and a mortgage
New home owners, or owners still mortgaged because they have upgraded their housing, would pay the state community charge.

Here the procedure I suggest may seem a little roundabout. It entails the valuing of the unimproved land component of the realty which would be identified, depending on amount owing, with the mortgage. The mortgagor would continue to pay the financial institution, but would gain income tax relief from the federal government, that would eventually acquire the land component of the realty. This would seem to be a less complicated procedure that issuing bonds or attempting to compensate the financial institution. Other alternatives may be preferred. What is important is that the adjustment leaves nobody seriously worse off.

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Individuals without realty, with income and no mortgage
Workers living in rented dwellings illustrate how disruptive to the nation a total, uncompensated and immediate implementation of land reform could be. Many of this group are heavily into consumption rather than saving and the reform would remove even their contribution to national saving through taxation. With a long lead in, this shift of fiscal responsibility might be matched by more saving oriented young people, but immediate implementation could be especially disastrous for Australia's foreign debt. They have a direct political incentive to support a Georgist remedy. There would be a dramatic reduction in the price of the first home they would buy because the land component in new or resold properties would be removed from day one of the reforms.

Corporation and other businesses

Small business, including farms, would manifest similar positions and could be dealt with in a similar way to the household examples.

Investing corporations like investment funds, trusts and corporations should be compensated for unimproved land value previously held. This could be done through both the company tax system and bonds. While the dividends may be less than speculative expectations they will be government guaranteed. The companies would need to find new outlets if they had relied on the activities of land monopolisation and speculation as land would immediately attract a state community charge. A more positive investment attitude will be necessary on their part which would enhance their returns and the performance of the economy generally.

Financial Institutions' lending portfolios would not be much effected if the compensation for mortgages is paid to mortgagors rather than mortgagees. In the case of banks, insurers, major property trust or companies, any bonds issued would not be readily redeemed or transferred. This would allow the federal government and Reserve Bank to exercise control over the money supply and credit in the early period of the transition.

Conclusion

My purpose in this paper was to argue how a century after George's death, a majority of families in western democracies have something to lose and many would suffer severe hardship from Georgist reforms without compensation. I further argue, that even those readily identified as receiving unjustified benefits from the current system would best be compensated on the practical grounds of not making intractable, powerful enemies and easing the anarchic dislocation of what is enormous change.

Implementation of and Compensation for Land Taxation _Mike Lynch

Land reform charges are the only viable way of giving the states and local governments adequate taxing powers. A system of compensation is necessary for selling the proposal to the electorate. The average owner of unimproved land value could be compensated through their federal income taxes. Pensioners would receive bonds to compensate for charges they did not expect before retirement. The compensation to corporations, financiers and trustees would allow the government an opportunity to manage the change for optimum economic performance that the Georgist remedy can deliver. The bottom line of the reforms is that all regular taxpayers should be no worse off once their mortgage payments, land-based "community charge" and other taxation is considered. In time, all will be better off due to the continual reduction in federal-based taxes as bonds and the unimproved value of land is redeemed.

The likelihood of rapid change to land-based taxation is slim and so the compensation option is unlikely to be necessary. However, without a plausible system of compensation, the normal argument of Georgists that rapid change is desirable is fraught with injustice and would lead to economic chaos.

"We can have their land
and they can eat it too."

NOTES

5. In footnote 1, I pointed out the large surplus that would exist between the return on government-backed bonds and the size of community charge based on the expected returns of speculative land dealings. It follows that both a reasonable interest rate could be paid and the unimproved value resumed within a manageable transition period. A simple example would be where the community charge is 10%, an individual's unimproved !and is $100,000. A 20-year bond issued at 5% would only provide half the necessary funds for the community charge each year and so a $5,000 lien on the unimproved value would be excised by the government. At the end of 20 years, the dividend would end and the unimproved value of the land would be wholly government owned.

6. The rate of return from the bonds would be about that of a bank account. For many retirees and conservative trustees, they will be an ideal investment. If the bond has not been resumed through unpaid community charges after 20 years, the Government could have established funds sufficient to buy them out or may reissue them as, say, infrastructure bonds. They would always be seen to be underwritten by the asset of the unimproved land.

The Editorial Committee has received comments on Mike Lynch's article and has held them over until next issue, as the remaining part of the article needed to be published. Most of the letters received so far are from long-time Georgists. We would like to encourage people hearing this discussion for the first time to respond too. Comments will be on-going over the next two issues, or until interest is minimal! Also, if the on-going discussion produces questions for the Enquirer’s s Forum, do not hesitate to send them to: Progress, 31 Hardware Street Melbourne, Vic 3000

(THE END)


Published in Progress, official organ of Tax Reform Australia, 31 Hardware Street, Melbourne, Victoria, Australia, September-October 1996, pp 7-9
Annual Subscription $18; Telephone 03 9670 2754; E-mail jessikaw@earthsharing.org.au

Implementation of and Compensation for Land Taxation_Mike Lynch


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