The Case for Re-introduction of Federal Land Tax Regime

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Most – by far – of the public revenue that is presently raised emanates from taxes levied on:-

  • Wealth that is earned, and
  • Wealth that is exchanged.

A relatively small quantity of additional revenue emanates from other sources; for example, from registration fees that are levied on every owner of a motor vehicle that is intended to be used on public roads. Note that such a fee is independent of the purchase price of the motor vehicle and is independent of the annual earnings of the owner.

Concerning wealth that is earned, there are two major taxes; namely,

  • Corporate Income Tax: this is levied at the rate of 30 cents for every $ of nett income, and
  • Personal Income Tax: this is levied at four different rates depending on the level of annual income earned; for example, the maximum rate is 45 cents for every dollar earned above $180,000 per annum but no tax is levied on the first $6,000 of annual income.

Payroll tax is also applied; this is a tax paid by an employer and is based on the total wages and salaries paid to his/her employees. All of these taxes are often termed “Direct” taxes.

Concerning wealth that is exchanged, there are two major classifications; namely,

  • Goods and Services Tax (GST): this is levied at the rate of 10% of the selling price of most goods and services; there are – however – several exceptions; for example, uncooked foods, and
  • Excises: these are levied at different percentages of the selling price of alcohol-containing drinks, oil-based fuels and tobacco and tobacco-containing products.

There are also stamp-duties applied when motor vehicles and real estate are sold and tariffs applied when goods are imported; different rates are applied to the selling prices of the goods concerned. All of these taxes are often termed “Indirect” taxes.

Consider the following:-
If the rate at which a direct tax is levied RISES, earners will have LESS money available to spend and/or to save. When less money is spent, fewer goods and services are purchased thus unemployment must rise and this will require increased present Social Service Benefits. And when less money is saved, there will be an increased need for future Social Service Benefits.

Conversely, if the rate at which a direct tax is levied FALLS, earners will have MORE money available to spend or to save. When more money is spent, more goods and services will be purchased thus unemployment must fall and this will require reduced Social Service Benefits. And when more money is saved, there will be a reduced need for future Social Service Benefits.

Exactly similar arguments apply when investigating changes in the rate of indirect taxes. As indirect taxes RISE, prices of goods and services will RISE so there will be reduced sales and/or savings. Unemployment will, therefore, increase thus there will be INCREASED need for Social Service Benefits, both present and future.

Conversely, as indirect taxes FALL, prices of goods and services will FALL so there will be increased sales and/or savings. Unemployment will, therefore, reduce thus there will be REDUCED need for Social Service Benefits, both present and future.

In summary, therefore, both direct and indirect taxes lead to unemployment and, therefore, increased need for Social Service Benefits, both present and future.

Yet earning wealth implies the production of the goods and services that humans want thus leading directly to a higher standard of living. And exchanging wealth implies exchanging goods and services with other humans – which, itself, implies co-operation – and this reduces human conflict. However, most regrettably, present taxes discourage both of these very desirable features of communal life.

And there appears to be no doubt that increased unemployment is the major cause of:-

  • drug abuse, which leads to
  • anti-social – and, sometimes, criminal – behavior, which leads to
  • increased domestic violence, which leads to
  • family breakdown thus perpetuating the problem across human generations.

It is evident, therefore, that the major present sources of public revenue embody horrific social costs.

And – due to the ever-increasing complexity of the legislation that defines these multiple, ever-proliferating, direct and indirect taxes – they also embody wasteful financial costs. Every income earner must – at least annually – send masses of information to the Australian Taxation Office (ATO) – this is often a very costly exercise – and staff at the ATO must investigate this information then initiate legal proceedings against those who understate income and/or overstate expenditure.

Likewise, most businesses that sell goods and/or services must – usually at least quarterly – send more masses of information to the ATO – another very costly exercise – and staff at the ATO must investigate this information then institute legal proceedings against those who fail to account fully for GST and other taxes based on the value of sales … and fail to pass nett GST collected to the ATO.

Yet there is no doubt that public revenue is required to build then maintain the infrastructure and the services that all members of the community demand be provided at no direct cost to themselves; for example, the provision of roadways and railways that facilitate the efficient movement of goods and people and of defence and police forces that are intended to protect citizens from all threats to themselves and to their property, whether of domestic or of foreign origin.

The question then is, “On what basis should this revenue be raised?”

Proposed Future Method of Raising Public Revenue

The answer to the question posed above is simply this:-

Every person – natural or corporate – granted exclusive occupancy rights to a natural resource – the title-holder – must make periodic rental payments to the community in exchange for that occupancy right, the rental payments being decided upon by the community at large.

Refer to explanatory note (a) below

In other words, a Federal Land-Value Tax must be applied to all natural resources to which exclusive occupancy rights have been granted. An explanation of the benefits of this method of raising public revenue follows:-

1. A Federal Land-Value Tax is scrupulously fair to all and perfectly embodies “user pays” principles.

The reasons for this assertion are:-

  • The community receives from the title-holder – an individual or a corporation – periodic rental payments equal to the community’s perception of the value of the natural resource; and
  • The title-holder receives – in exchange – a guarantee from the community that the title-holder has continuing exclusive occupancy rights to the natural resource – which may be used in accordance with zoning regulations decided upon by the community – so long as the requisite periodic rental payments are made.

NOTE that ALL nett income derived from the natural resource – that is, gross income less payments for goods and services provided by others – remains with the title-holder as there are NO direct and indirect taxes payable.

Refer to explanatory note (b) below

2. The proposed system is simple and, therefore, easy to understand.

Periodically, publicly-employed valuers would review all natural resources to which exclusive occupancy rights had been granted and would update those values having taken into account changes in infrastructure in the vicinity and changes in population density. For example, if a swimming pool had been built in a particular locality, the value of all sites nearby would rise as living – and doing business – in that locality would now be more attractive. As another example, if a new bridge had been erected over a river, the value of all sites in that locality would rise – regardless of zoning – because all such sites would be more easily – and, therefore, economically – accessed. Conversely, if a school had been closed, values of sites would fall as that locality is now less attractive for residential purposes thus fewer people would need the residences and businesses in that locality.

Refer to explanatory note (c) below

3. The proposed system is extremely easy to administer; compliance costs are negligible.

The required machinery is in existence because all local governments already have data defining the value of natural resources within their boundaries because local government rates are based, at least to some extent, on site values which are, of course, the values of natural resources. In some instances – principally, those sites which are exclusively occupied by those who have been exempted from the payment of rates; for example, religious bodies – no valuations have ever been made. There will be little difficulty in overcoming this problem.

Rate notices are presently sent annually to title-holders; that practice will, of course, be continued. All that will remain is to adjust the rate which must be applied such that the collection of public revenue from this source renders all existing taxes superfluous. Costs of compliance will be almost non-existent, it being necessary only to make periodic payments similar to current rates payments thus considerable business overhead costs will disappear. This will lead directly to lower prices for goods and services and, therefore, a higher standard of living for all.

4. The proposed system is impossible to avoid.

Natural resources cannot be hidden nor can they be re-located. The individual or corporation that has exclusive occupancy rights to a natural resource is registered as the title-holder. Should the required periodic payments not be received, the community knows exactly who to approach and exactly the level of the debt that is owing. The community may then take whatever steps appear most appropriate after taking all relevant factors into account. For example, in cases of extreme financial hardship, the debt may be waived but at the opposite extreme, the title-holder may be evicted from the natural resource thus making the natural resource available to another who is prepared – and able – to make the required periodic rental payments. In this latter instance, the incoming title-holder must pay to the previous title-holder the value of the improvements on the natural resource.

5. The proposed system offers maximum privacy to all title-holders.

Because all taxes based on income and exchanges of wealth have been eliminated, there will be no need for individuals or corporations to disclose such private information as:-

  • salaries paid to employees,
  • total income earned, and
  • expenses paid in earning income.

The only information which must be made public is the definition of each natural resource to which exclusive occupancy rights have been granted and the periodical rental that must be paid for continuing exclusive occupancy.

Information concerning natural resources is not private because the community has the responsibility to maintain all natural resources in good condition for the benefit of itself and for future generations. This is best achieved by ensuring that those who have exclusive occupancy rights must use those natural resources in their most effective manner – as permitted by the community at large via zoning regulations – or suffer financially.

6. The proposed system completely eliminates land speculation.

With periodic payments charged to the title-holders of all natural resources to which exclusive occupancy rights have been granted, those natural resources must be put to effective use – as permitted by their zoning – otherwise they will not generate income sufficient to enable the periodic exclusive occupancy payments to be made. This will, therefore, end the extremely wasteful practice of land speculation where far too many natural resources remain unused and are eventually sold – usually for some very large “windfall” profit that the title-holders have done nothing to deserve – only when increased population has driven the prices of them way beyond the prices that were paid to secure them many years previously. Meanwhile, use of these natural resources has been withheld from the community at large!

Refer to explanatory note (d) below

In summary, these benefits will encourage all adult citizens – except for those who are mentally and/or physically handicapped … and for those who have no desire to earn further income because they have already accumulated sufficient wealth – to earn income in ways attractive to themselves and will enable those citizens to freely exchange goods and services with others. Involuntary unemployment will be completely eliminated and co-operation among citizens increased such that anti-social and criminal activity is dramatically reduced.

For the sake of our successors – our children and their children – we must work towards the attainment of this goal!

Explanatory Notes

(a) Rental payments decided upon by the community at large.

Presently, local governments employ valuers who maintain up-to-date valuations of all natural resources – generally sites – on which annual rates are payable. There are two components; namely,

Site Value (SV); that is, the value of the natural resource, any improvements – such as a building – being ignored, and

Capital Improved Value (CIV); that is, the value of the natural resource including existing improvements.

Of course, the value of the improvements on a site is equal to CIV – SV.

Presently, SV is expressed as an outright purchase price and the local government sets a rate – or a number of different rates – such that some desired annual total will be raised. If this method of raising public revenue were implemented, SV would be expressed, instead, as an annual rental and, initially, would be set at 5% of the outright purchase price.

As natural resources pass from one title-holder to another, valuers update the valuations of these natural resources – and the improvements, if any, on them – and that of others in the near vicinity. A detailed description of this process is beyond the scope of this paper but it should be sufficient to state that the valuers are simply summarising the market-prices that are set by the community at large when transfers occur.

Refer to note (c) below

(b) Zoning regulations decided by the community.

Members of the community – via their elected representatives – decide how certain natural resources may be utilised. For example, much land is zoned “Agricultural”; that is, it may be used only for farming. Such land cannot generate large quantities of annual income per hectare thus its outright purchase price – or annual rental – would be relatively low.

As population rises, the zoning of such land may be changed to “Residential”; that is, it may be used for housing people in self-contained homes or in collections of self-contained apartments. If the zoning regulations permitted only ground-floor buildings, that land would not be so valuable as identical land zoned to permit multi-level buildings, the reason being that more people can be housed – per hectare – in multi-level buildings than in ground-floor-only buildings.

And if land were to be zoned as “Commercial” or “Industrial”, its value – per hectare – would be still higher because such land may be used for business operations that would generate far more annual income than identical land used for ground-floor-only residences.

(c) Rental payments updated by valuers

Naturally, some title-holders will want to move from one natural resource to another as their life-style or their business changes. When they choose to do so, they will want to sell to the incoming title-holder any improvements on the natural resource that they do not wish to – or cannot – take to another natural resource.

If the improvements are sold to the incoming title-holder at a price higher than the present valuation of them, this implies that the natural resource is more attractive than it was previously so a somewhat higher rental is justified for that natural resource and for others in the vicinity.

Conversely, if the improvements are sold to the incoming title-holder at a price lower than the present valuation of them, this implies that the natural resource is not as attractive as it was previously so only a somewhat lower rental is justified for that natural resource and for others in the vicinity.

If no incoming title-holder can be found, the community must pay to the outgoing title-holder the value of the improvements that remain and this natural resource reverts to “communal ownership”.

(d) An example of land speculation

Less than half a kilometre from my home in Noble Park – an outer south-eastern Melbourne suburb – there is an unused block of land of about one acre. Since I’ve lived in Noble Park the only occupant has been a very large bull, an effective “lawn mower”. In 1962 – when I purchased the “quarter acre” block on which my wife and I still reside – residential land in Noble Park cost about 5,000 pounds per acre; that is, about $10,000. In 2009 – less than a kilometre from the vacant one-acre block, a half-acre block – with an apparently dilapidated, small, timber-clad house – was sold for $720,000, equivalent to over $1,400,000 per acre … assuming that the house was worthless. (In fact, the house was almost immediately demolished and several brick-clad, single-level home-units now occupy that site.) So – during the 47-year period from 1962 to 2009, residential land price in Noble Park has escalated by a factor of 140 to 1! That represents a compounded rate of increase of 11.1 % annually, a rate that very greatly exceeds the average rate of inflation over that 47-year period.

Another measure of the price increase is to investigate the movement of wages over that same period. In 1962, I was a recently-graduated engineer and was paid about 1,250 pounds – $2,500 – annually thus the cost of one acre of land in Noble Park was equivalent to the wages of a recently-graduated engineer for 48 months. But in 2009, a recently-graduated engineer was paid about $50,000 annually thus the cost of one acre of land in Noble Park had escalated to the wages of a recently-graduated engineer for 336 months! That represents an increase of seven (7) times in terms of labour costs! That explains why it is now so difficult – in fact, almost impossible! – for young adults to purchase their own residence in a capital city!

The owner of that one-acre site has been partly responsible for that escalation in price. People – by their desire to live in that locality – have competed to buy residential – and other – land, hence the increase in land price. But the speculator has withheld usable land from the market thus causing an artificial scarcity of it! The speculator is, therefore, a parasite, becoming richer at others’ expense!

 

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