Resource rents - a counter revolution

Well, there was David Cameron transitioning into number 10 without so much as a suitcase in sight.

And wasn’t the new found camaraderie between him and Nick Clegg pleasantly agreeable to behold? You’ve got to wish them both “good luck” in dealing with the UK’s horrible financial plight that almost went missing during the election.

No, you’ve got to wish them more than luck. You’ve got to wish they discover the fantastic potential of public rent-capture, if the UK is ever to resolve its dire economic situation satisfactorily.

If the Cameron-Clegg team doesn’t discover rent, it also will be thrown upon the scrap heap of history to which the UK public consigned Gordon Brown.

Brown was gracious, almost statesmanlike, during the handover but, regardless of his claim to being one of Britain’s great Chancellors for the Exchequer, Gordon Brown amounted to a political failure, a mere snake oil salesman for 20th century junk economics, a period in world economies that US professor of economics Michael Hudson describes as “The Counter-Enlightenment”.

“Counter Enlightenment”: that is indeed descriptive of the economics that has been permitted to seize us by the “user pays” throat because, where classical economic reform had advocated taxing away land rent, modern neo-liberal economics has promoted its privatisation through rent-seeking in real estate and mineral resources, converting freeways into tollways (and similarly privatising other natural monopolies), and numerous forms of price-gouging - with the results we now see all about us. It’s not coincidental. It’s been a devastating period of false, non-scientific economics. And that's the way economics is taught in our universities!

In Australia late last year, Hudson said:

Yet I have heard no public discussion here of holding down real estate prices and mortgage debt by increasing the land tax. Politicians avoid this because voters react negatively to any kind of a tax rise. The distinction between efficient and inefficient taxes has been lost from public discussion. A revenue-neutral tax shift - lowering sales and income taxes on wages by the amount that property taxes are raised - would not take in any more tax revenue than now. But it would levy taxes in a way that holds down property prices. And it would leave less revenue available for banks to capitalize into interest charges. Holding down housing and real estate prices - and debt - would lower the cost of living and doing business. This would make the economy lower cost. That should be the aim of every economy - to minimize the cost of living and doing business.

We've effectively allowed the rent the community creates - and which represents the community - to be stolen by carpet-baggers. As a result, a sense of community has disappeared as rent-seeking by greedy “investors” replaced productivity and real wealth creation.

Halleluja!

The new Conservative/Lib-Dem coalition could take a lead from Australia.

It wasn’t until I took a few days off interstate with my wife, that the enormity of some of Ken Henry’s recommendations for “Australia’s Future Tax System” really sunk home. While away, I was able to see them in a broader perspective.

Henry’s panel actually came out in favour of slashing taxes and capturing Australia's economic rents:

Efficient land and resource taxation.

The returns to immobile factors of production constitute an efficient tax base. A rent-based tax would ensure the right levels of exploration and extraction and provide sufficient encouragement for private sector participation. A tax on high-value resource rents would on average over time likely raise higher revenues than existing output-based royalties. There are several alternative mechanisms for applying a rent-based tax, and transitional arrangements are critical.

A land tax is efficient if it is broadly based. Existing land taxes are quite inefficient because they are not broadly based, and rates vary according to land use and landholding aggregation rules. An efficient land tax would apply equally to all land uses and aggregate holdings, but could have a threshold and different rates based on the value per square metre of land. In practice this could mean that most land in lower-value use (including most agricultural land) would not face a land tax liability and the tax would apply moderate rates to most other land. Transitional rules will be critical in changing the basis of land taxes, to smooth valuation effects and to allow ample time for those affected to make adjustments to their investments in land.

I wondered to what extent the efforts of Michael Hudson, my colleagues or me may have influenced the panel’s decision, or maybe they arrived at their conclusions quite independently? I guess we’ll never know. It doesn’t really matter.

What does matter is that Australia has taken the first hesitant steps to become the hub of a counter revolution in economics, and the Henry Review should be heartily congratulated for the part it has played in the process.

Now to convince timorous politicians, whether in Australia, the UK, or elsewhere to play their historical part in this counter revolution.

It would be nice to see Messrs Rudd, Cameron, Clegg and Obama leave office having problem-solved in the great classical tradition of David Ricardo, Adam Smith, John Stuart Mill and Henry George, rather than departing the political scene defeated, still clinging tenaciously to the dismal economics that has served Margaret Thatcher, Ronald Reagan and Gordon Brown so poorly.