Harnessing monopoly for the common good

All other things being equal, the owners of the earth have a comparative advantage over those in business or earning a wage. With $21 trillion hidden in global tax havens revealed this year (), and Starbucks, Amazon and Google being grilled in the UK Parliament this week, the need for a fairer tax system is growing.

The clamour for the expansion of the GST is at fever pitch here in Australia. What are the motivations behind this?

Few have noted the spree of government reports advocating for a fairer system via the 'transfer of tax bases' - the move from mobile to fixed tax bases. Such a move would wipe out the ease of using tax havens and tax trickery. This is code for saying 'those who own the land must pay for the governing of the land'.

Ken Henry's Australia's Future Tax System, the NSW Lambert report, the ACT's Quinlan Report, the UK's Mirlees Report and the NZ Tax Working Group have all advocated to some extent the need to move to fixed tax bases.

In effect they are discussing the ability of people like Gina Rinehart to make $2 million an hour whether she gets out of bed or not.

In economic parlance, this is a discussion about economic rents – in broad terms the naturally rising value of the earth (or licensed monopolies). Bureaucrats are trying to awaken the people to the fact that the tax system can be used to harness these powers of monopoly for the common good.

But what have been the policy responses?

With austerity pressures blindsiding the people in mass sackings, the IMF has been busy installing the next layer of inequality. The global land bubble has blown the world economy apart but yet the answer has been to hit the consumer with regressive sales taxes. Someone earning $20,000 pays the same amount as someone on $20 million. Sounds great right?

This is the plan set out by far right think tanks such as the Cato Institute and the Heritage Foundation.

Rising sales taxes have occurred in the UK, France, NZ, and Japan to name a few. American consumers experienced 542 increases across jurisdictions in (2010).

However, this won't stop the property speculation that was the catalyst to these problems.

It is only a matter of time until the same bubble mentality takes hold of the most precious asset – our homes. This is in effect what Bernanke's QE3 is trying to trigger – the next land bubble.

Economists have long acknowledged that 'asset bubbles always end in tears'. Why then are we encouraging the same mistakes?

Considerable resources must be spent educating society about the advantages those with monopoly rights have over the rest of the economy. Similar to climate sceptics, property bubble sceptics see nothing wrong with First Home Owners committing to a lifetime of historically high mortgage payments. A blind eye is turned from the $100's of extra dollars fleeing local communities each week and heading towards deep pockets in the banking and real estate industries. The multiplier effect of such behaviour is damaging small local business, our largest employer.

TV shows such as Location, location location feverishly promote the value of prime locations as an investment strategy.

Why then does the economics profession ignore the role of location?

The advantage of living near a new train station or public hospital is delivered in higher land values. These publicly funded advantages result in private windfalls, leading to the deadweight losses of inefficient taxation. The recent Committee of Melbourne's Moving Melbourne report identified the need for 'value capture policy' to finance the infrastructure deficit. Lucy Turnbull has advocated for similar policies in Sydney's Cities Expert Panel.

Meanwhile small business struggles with rising rents, while surrounding them here in Melbourne is a commercial vacancy rate of some 24% (PDF, Appendix C). Such speculative supply kept off the market forces up rents, undermining our export competitiveness.

Treasurer Swan's recent business tax reform initiative asked the corporate community to orchestrate their own tax cuts. They threw in the towel early when competing lobbyists couldn't come to an agreement within the terms of reference. The stalemate was a call out to government to tax those without a strong lobby group – the consumer, with a higher GST. Chris Jordan, the head of this body, has now been appointed the lead of the ATO.

Those locked out of the housing market see some $2.6 billion per year given to negative gearing property investors over the last decade, 92% of which is spent on existing housing. The latest addition to Treasurer Swan's 'price of inequality' is the booming Self Managed Super Fund industry. All other things being equal, those who already own a home are now permitted not just negative gearing write-offs, but a capital gains tax exemption for residential property investments via an SMSF vehicle.

Gen X, Y and Z will soon realise that baby boomers own nearly half of housing wealth. The latest empowerment of SMSF's announced in the MYEFO will only enhanced this generational inequity. Treasurer Swan seemed genuine in his pre-budget moves to remove the capital gains exemptions for SMSF's barely two years after their introduction into the residential sector. Unfortunately the lobbyists cornered him and single mums were hit with the cutbacks instead.

The power of organised oligopoly was dramatically demonstrated in the challenge to pokie reform when PM Julia jumped at the thought of a $20 million campaign across marginal seats by the Australian Hotels Association. The blight on democracy was compounded by the revelation that only $3 million was required for the desired policy outcome.

Lest we forget - the Victorian pokie licence auction, slammed by the auditor general as a $3 billion giveaway.

For the level playing field to truly exist, the power of monopoly must be broken down for all to see. The cheekily titled 'digital dividend' Senator Conroy is proposing could well hold the key. Instead of a fee simple auction of the electromagnetic spectrum's 700 khz bandwidth, an annual lease could be charged for what is described as 'the waterfront real estate' of the EMS. This lease would be based on an annual valuation of the bandwidth's value. The value of these property rights is destined to escalate once iphone 10 allows individuals to holographically transport themselves to the other side of the globe. Over time, government could share in the rising value of the earth, the economic rent, to keep price overheads low as classical economists once championed.

Within this lease could be a caveat that X amount of free airtime be provided to each political party in a campaign year, as New Zealand allows. Politicians would then face less pressure to pawn their principles as they wouldn't have to pay for advertising on the once public airwaves.

The scientific community have been very open in accepting its failure to simplify core messages to the public over climate change, allowing breathing room for climate sceptics to control the debate. Similarly in the economics profession, some responsibility must be taken for the current situation where the global property bubble has been ignored as a catalyst for the credit crisis (falling land prices → bank write downs).

To be a science, economics must relate to reality. Thankfully economists such as Joseph Stiglitz, Michael Hudson and Martin Wolf are raising the flag as we re-frame economics as the essential science, never dismal.

In closing, the pot of gold at the end of each property flip must face closer scrutiny if we are to give equal opportunity to future generations. The tax system must be directed to equalise the opportunities between those who own our common wealth and those who are contributing to the community. Otherwise, rent seeking in the race for the rising value of the Earth will distort both economic and political decision making.

Karl Fitzgerald, Prosper Australia Executive Director will release the Total Resource Rents of Australia report next Tuesday Nov 20th, Melbourne. http://www.prosper.org.au/2012/11/09/total-resource-rents-of-australia/

Watch the locally made documentary Real Estate for Ransom – why does land to cost the earth?

Listen to the Renegade Economist radio show/ podcast each week Wednesday 5:30 PM on 3CR, 855AM on the dial (or via iTunes).