‘At the end of the nineteenth century’, wrote the former Governor of the Bank of England, (The British Tax System, Mervyn King and John Kay, OUP, 1990 5th ed.) ‘a movement led by Henry George argued, vigorously, that … land should be the principal tax base. This tradition still survives, although it is apparent that the total economic rents, of all kinds, is not now a sufficiently large proportion of national income for this to be a practicable means of obtaining the resources needed to finance a modern State.’ This is a commonly held idea, even by those who are sympathetic to the idea of taxing economic rent. The authors began their next sentence with: ‘But the underlying intellectual argument for seeking to tax economic rent retains its force’.
Having been convinced of the efficiency and justice inherent in Henry George’s proposal for a Land Value Tax (LVT) to capture the economic rent, the author of No Debt High Growth Low Tax sought to find an example of where it was put into practice. As a frequent visitor to Hong Kong over many years, he became aware that its thriving economy, which had had to cope with housing millions of immigrants fleeing mainland China, was based on a system of leasehold, rather than freehold, land tenure. This means that a substantial part of government revenue is in fact raised from economic rent.
Just how substantial that is, is indicated by the fact that the Hong Kong government is able to fund major infrastructure projects, such as its underground railway and new airport, and education (free from 6-16, with subsidies for Nursery Schools, and higher education through a system of loans/grants for those who cannot afford it) without incurring the high levels of debt burdening most modern economies.
The curious thing, the author points out, is that very few people are aware of how it works, least of all those people who reside there and live with the consequences. The particular form of raising such revenue in Hong Kong is neither a complete system, having been introduced over the years in an ad hoc manner, nor one which has eliminated high levels of inequality.
However, what the system demonstrates is that economic rent is an enormous source of public revenue only partly tapped by the government, which only collects 3% of the rent on an ongoing basis, although it collects more in up front premiums for lease modifications, and new leases. The author outlines some of the features of the system in Singapore which also enjoys/relies on economic rent for a considerable part of its revenue and has no debt.
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The case for taxing land has been raised in a number of articles recently. For example, The Economist leader (4th April) argued that ‘governments should impose higher taxes on the value of land’, pointing out that ‘land taxes are efficient’ and ‘difficult to dodge’. It also noted the important distinction between property taxes, such as the Council Tax, which values the building and the land on which it stands, whereas a land-value tax values the land only. The former discourages investment because it would push up the tax payable. A land-value tax does not have that negative effect, on the contrary a land-value tax ‘creates an incentive to develop unused sites’. A land-value tax is also a means of automatically recovering for the public purse expenditure on infrastructure through the uplift in land values consequent upon the investment.
In the June issue of Prospect, Philip Collins argues that ‘the UK taxes labour and endeavour too much, and land and property too little’. He suggests that ‘the compulsory seizure of money [by the taxman] deserves a more principled defence … The best principle for taxation can be found in Herbert Asquith’s Budget of 1907’ which were then ‘embodied in David Lloyd George’s “People’s Budget” of 1909’. He concludes that this shift is ‘no small measure, either. A tax of 1 per cent on the £5tn of British land would raise £50bn. That would be enough to cut income tax by a third or abolish corporation tax entirely.’
The term ‘land’ to most people tends to convey the idea of green fields, but the authors of Our Land, Our Rent, Our Jobs point out that a land-value tax would raise far more revenue from urban than rural land (a square metre of land in the financial centre of Johannesburg is worth about one million times more than a square metre of the poorest grazing land). Thus, the burden of current taxation would be lifted off rural areas, making these sub-marginal areas viable again, reducing the pressure to migrate to the shanty towns of the big cities in search of work.
The high concentration of land ownership in the hands of the white population, who now comprise less than 10% of the population, is a sensitive political issue, but the concentration of landownership is not confined to South Africa. The New Statesman (24th June) pointed out that ‘with the exception of Spain, Britain has the most unequal concentration of land ownership in Europe … 69% of the 60 million acres in the UK are owned by 0.6% of the population’. The article points out that the Scottish National Party has resurrected the issue of land reform and urges the other political parties to do so as well. ‘In 2010, when he first stood for the Labour leadership, Andy Burham advocated a land value tax and the Liberal Democrats proposed the same in their general election manifesto. As both parties seek to resolve their crises, they should make land reform a defining cause once again.’ Read full article.
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“How do 52 million South Africans share equitably in their 122 million hectares, especially when those hectares vary so enormously in value?” asks the Johannesburg Star.
The danger of not getting the answer right was revealed in the Mail and Guardian in an open letter to Richard Branson from Andile Mngxitama, the Economic Freedom Fighters’ (EFF’s) commissar for land and agrarian revolution. He accuses Branson of having bought stolen property: “The consequence of your witting or unwitting participation in this illegal transaction is that the EFF policy of land expropriation without compensation may, in the near future, affect your investment adversely”. Read the full article here.
In their new book, Our Land, Our Rent, Our Jobs, Stephen Meintjes and the late Michael Jacques show how a reform of taxation can lead to a more equitable distribution of land, while at the same time stimulating the economy and job growth.
As the veteran anti-apartheid campaigner, Peter Hain, comments, it provides “Lateral ideas on tax raising to generate social justice for all South Africans whilst maintaining international investor confidence”.
In the Foreword, Nobantu Mbeki writes “This book is, in a sense, immediate and topical and in another, universal and timeless”.
Our Land, Our Rent, Our Jobs will be published in July 2015.
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Shepheard-Walwyn will be participating in the Book Fair at the annual Rethinking Economics Conference at Greenwich University in London on the 27th-28th of June. This is the third annual conference that aims to inspire people to rethink the future of economics in academia, media and policy-making. For more details click here.
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A recent article (4th April) in The Economist stated that ‘The history of economics has been, among other things, a story of learning to care less about land’. Though not intended as such, this exposes a blind spot among current economists which accounts for the instability and inequitable distribution of income and wealth in the capitalist system.
In his Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith recognised three factors of production that combined to create wealth: land, labour and capital. At the time of writing, the economy was still largely rural so that the relevance of land was obvious, but with the advent of the Industrial Revolution, the provision of capital assumed much greater importance. The area of land required for a factory, office or bank was much smaller in relation to the wealth created than in agriculture. This created the impression that land was no longer such an important aspect of the economy and both Marxist economists and neo-classical economists largely thought in terms of a two factor economy of labour and capital, whose interests seem diametrically opposed, the situation we have today.
However, this is to misunderstand the role of land in the creation of wealth which has not changed and cannot change. How we use land changes over time, it is true, but no wealth can be created without land. To understand why, we need to appreciate that, in the context of wealth creation, land means everything nature provides free for the use of humanity: the earth’s surface, the minerals below the surface, the fish in the sea and today the electromagnetic spectrum. Without this resource, no wealth can be created. A measure of the importance of land is the high price paid for prime locations: a square metre of land in the City of London costs more than a hectare of prime agricultural land because it is scarcer and more productive.
The failure of modern economists to acknowledge the vital role of land in the wealth creation process lies at the root of the instability of the capitalist system and the great disparity in income and wealth distribution. It was the genius of Henry George to recognise that a tax, graded according to the market value of bare land, his land value tax, could not only resolve these weaknesses, but also provide the government with a secure source of income without needing to resort to a plethora of taxes which hamper wealth creation.
Conditions have changed since Henry George wrote Progress and Poverty in 1879, but the laws of economics have not. Several of the titles in the Shepheard-Walwyn Ethical Economics list explore how Henry George’s ‘remedy’ could be applied in the modern context. A New Model of the Economy explores the relevance to both macro- and micro-economic analysis of spatial location which gives rise to economic, or Ricardian, rent.
Instead of making supply and demand the starting point, The Science of Economics begins with the simple observation that all material wealth is ultimately derived from land, and, where goods are exchanged, the first requirement is trust, or a system of credit. From this starting point the major characteristics of the modern economy, such as banking, companies or corporations, international trade, taxation and trade cycles, are examined in terms of the conditions that govern how and why they evolved and how they operate today.
Public Revenue without Taxation shows how ‘the development of Keynes’ general theory of employment leads to the conclusion that an open trading economy is likely to be most competitive, and therefore most prosperous, only when taxation is abolished’. To explain how government can be funded without taxation the author refines Alfred Marshall‘s distinction between the public and private value of property to reveal an alternative, peculiarly public source of revenue.
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It was a pleasant surprise to find the first title in our Ethical Economics list being praised in a newspaper article in Malaysia over thirty years after its publication. The article in the Malaysian Daily Express was reporting on a presentation in Kota Kinabalu by an estate agent on investing in Australian property. The speaker told his audience “I wish I had known about the book entitled, The Power in the Land by Fred Harrison 10 years ago”. He went on to relate that in the book Harrison had explained the workings of a remarkably regular 18-year property cycle. Knowing the timing of the cycle could make all the difference between successful or disastrous property investment.
Based on his understanding of the property cycle, Fred Harrison accurately predicted In The Power in the Land, published in 1983, the timing of the 1990s crash from which Japan has still not fully recovered.
Armed with this knowledge, Harrison warned the incoming Labour government under Tony Blair in 1997 of the danger of a property crash in 2007/08. No notice was taken of this and Gordon Brown boasted at every budget, even in April 2007, that “we will never return to the old boom and bust”.
In Boom Bust: House Prices, Banking and the Depression of 2010, published in April 2005, Harrison again warned of a looming crash unless a tax reform were introduced. No action was taken and the inevitable followed and we are still suffering the consequences.
A third book in our list, The Secret Life of Real Estate and Banking, looks at the link between banking crises and property cycles in America over the last 200 years.
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The Church Times in London have made a selection of the 100 Best Christian Books. The editor writes: ‘Human progress involves assimilating the wisdom of past generations, and building on it.’
One of Shepheard-Walwyn’s titles, Christianity and Social Order, has been ranked 35th. This classic, published as a Penguin Special in 1942 and republished by Shepheard-Walwyn in 1978 with a Foreword by Edward Heath, Prime Minister of the United Kingdom 1970-1974, gives lucid and forceful expression to the views of the Archbishop of Canterbury, known as the ‘People’s Archbishop’ for the radical but constructive way he challenged the established orders. Discussing how to achieve a proper balance between the profit motive and service to the community, and between the power of the state and of the individual, he wrote: ‘The art of government in fact is the art of so ordering life that self-interest prompts what justice demands’.
‘It brings home to everyone of us the continuing importance of being able to rely on a body of principle by which our plans and our actions can be both motivated and judged. ‘
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On 25th September 2014 the Financial Times carried a leader, entitled ‘A British property tax that is fit for purpose’, commenting on the proposal for a ‘mansion tax’ proposed at the party conferences of both the Liberal and Labour Parties. It suggests ‘a more comprehensive solution would be to replace all these taxes with a levy on the value of land, remitted to local authorities. This longstanding idea is the preferred reform of the Mirrlees Review, a root-and-branch analysis of the UK tax system.’ To see more, click here.
The same issue carried a full page article by Robin Harding ‘Land of opportunity’, describing recent ambivalent evidence from America, and quoting from Winston Churchill’s speech during the 1909 election campaign after the House of Lords had thrown out Lloyd George’s People’s Budget which was an early attempt to introduce such a tax in Britain:
“Roads are made, streets are made, services are improved, electric light turns night into day … and all the while the landlord sits still … He renders no service to the community, he contributes nothing to the general welfare, he contributes nothing to the process from which his own enrichment is derived.”
This tax reform is more than a tax reform. As Henry George explained in Progress and Poverty it is a means of tackling the mal-distribution of wealth and ending the property fueled booms and busts.
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On 4th August The Daily Telegraph carried an article by Andrew Sentance, a senior economic adviser to PwC and a former member of the Bank of England Monetary Policy Committee, arguing for a reform because ‘businesses and individuals are struggling to deal with an increasingly anachronistic and disjointed tax system’. The article concludes with a statement that ‘PwC is interested in the views of the public and business on the future of the tax system’.
In 1993 Shepheard-Walwyn published Public Revenue without Taxation which was written specifically to explore how a country could transition from the present outdated, unfair and inefficient tax system to one where energy and enterprise were rewarded.
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Over the weekend 28th-29th June a conference on ‘Rethinking Economics’ is being held at University College London. For programme and speakers see rethinkingeconomicslondon.org
Rethinking Economics is an international network of students campaigning for pluralism within economics, particularly the economics curriculum, which is, at present, heavily biased towards the methods of the neoclassical school. Rethinking Economics was launched with the 2013 conference, and brought together a number of smaller groups advocating changes to economics. Together, those groups, along with many others, produced the ISIPE open letter, calling for an overhaul of the way economics is taught.
Writing in the Real World Economics Association’s blog, Edward Fulbrook comments: ‘It is not only the world economy that is in crisis. The teaching of economics is in crisis too, and this crisis has consequences far beyond the university walls. What is taught shapes the minds of the next generation of policymakers, and therefore shapes the societies we live in.’
In 1994 Shepheard-Walwyn published The Corruption of Economics in which Professor Mason Gaffney charged his colleagues with using a theoretical apparatus that is fatally flawed. He accused the founders of neoclassical economics of acting in bad faith, bending the science of economics to protect vested interests. In this they succeeded, but in debasing their discipline, economists deprived themselves of the ability to diagnose problems, forecast trends and prescribe solutions.
The fact that ‘nobody saw it [2008 crash] coming’ suggests the accuracy of that charge. As long ago as 1983 Shepheard-Walwyn published The Power in the Land in which Fred Harrison, on the basis of a different economic model, warned of the 1990 crash and recession. Again in 2005 in Boom Bust: House Prices, Banking and the Depression of 2010, he warned of the 2008 crash which led to the ‘Great Recession’. The Depression was avoided by bank bailouts and quantitative easing, shifting the burden onto the taxpayer.
To avoid a repetition of these economic disasters, the students are to be congratulated for their initiative. We hope they will find food for thought in our Ethical Economics list.
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