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Taxing position, position, position

By Nicholas Gruen - posted Tuesday, 12 April 2005


Lady Bracknell is the most memorable character Oscar Wilde invented - except for Oscar himself of course. In Wilde’s play The Importance of Being Earnest, she sizes up Jack as a potential son-in-law and grills him about many things, including the number of his house in Belgrave Square.

Alas, she observes on hearing the number, it’s the unfashionable side. Still, she consoles herself, “that can be changed”. Jack wonders whether she’s talking about changing the side of the square he lives on or the fashion itself. Lady Bracknell replies with stern surprise. “Both, if necessary, I presume”.

That exchange contains plenty of economics that the good citizens of Brisbane might reflect upon as they receive their new, invariably higher land valuations and pay the higher rates and land taxes that go with them.

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Though it’s sometimes unfashionable to admit it, most of us are like Lady Bracknell. We prefer the fashionable side of the square. More trees, less noise, better view. Who knows, it might be nearer the river?

Unlike Lady Bracknell, most of us lack the means let alone the hubris to change the fashion. The flat topography of Belgrave Square is one thing but rerouting the Brisbane River is quite another!

However Jack’s quest for fashionable real estate raises the dilemma of what economists call “positional” or “status” goods. If I buy bread, you don’t go without yours. The baker just makes more. But with “positional” goods, one person’s enjoyment of them is - by definition - another’s abstinence. There’s only so much river-frontage, so one person’s “absolute river-front” becomes another’s “water glimpses”.

Something similar goes for “status” goods like Mercedes cars and “designer” accessories. They’re usually high quality. But most of their price premium is for their status value. Supply must be constrained to retain this exclusivity. So rising demand often just raises prices, just as it does on Brisbane’s waterfront. Though Chinese “knock offs” of similar quality cost $200 odd, Hermes sells “Kelly bags” for $7,000 plus. They enhance their exclusivity further by holding back supply to create waiting lists. It’s tough at the top!

And we’re becoming more like Lady Bracknell.

According to one estimate the unimproved capital value of the land underneath new homes - that’s the “positional” component - has gone from 20 per cent of its price to around 60 per cent!

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In the last three years of the housing boom Brisbane’s river-front unit prices rose by 8.4 per cent per year compared with a 5.8 per cent for the rest. Remember, they were already more expensive. So the extra price rises measure the growing importance of position. Like they say - position, position, position.

It’s really a kind of “arms race” and it’s just as economically inefficient.

Military rivals escalate their spending just to maintain parity when they could achieve the same by both spending nothing. Likewise we can scale back the arms race in positional goods by taxing them more heavily. There will be no less water-front than before but the revenue can be re-circulated as tax cuts elsewhere.

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Article edited by Alan Skilbeck.
If you'd like to be a volunteer editor too, click here.

First published on March 30, 2005 in the The Courier-Mail as “Cream of the Land”.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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