|
 |
|
Infrastructure on a Bootstrap Budget
by Gavin R. Putland
Thursday March 16, 2006 at 08:22 PM
ABSTRACT: The benefit of a public infrastructure project is manifested as an increase in property values. If the project passes a cost-benefit test, the cost can be covered by recycling a fraction of the benefit through the tax system, leaving the rest of the benefit as a net windfall for property owners. The proposed implementation involves the abolition of property transfer taxes calculated on total property values, in favour of a transfer tax on windfall INCREASES in property values. The partial "recycling" of such windfalls through the tax system ensures that desirable projects actually proceed, so that property owners actually get the windfalls. Any politician who can't sell that policy to property owners should find another career.
Infrastructure on a Bootstrap Budget
March 14, 2006
1. Land values capture benefits
2. Paying costs out of benefits
3. A revenue-neutral transition
4. At what rate?
5. The case of owner-occupied homes
6. Avoiding "retrospectivity"
7. Compensation for "injurious
affection"
8. Further benefits for property
owners
9. Benefits for tenants
10. Benefits for builders and
renovators
11. Benefits for realtors
12. Benefits for workers
13. Benefits for employers
14. Benefits for exporters
15. Benefits for developers
16. Benefits for first home buyers
17. Avoiding recessions
18. Conclusion
Notes
Copyright
If you are to share in the benefit of a public infrastructure
project, such as a new freeway or bus route or state school, you must
reside or do business in the area served by the project. For this
purpose you need access to the real estate in the area. The
price of access to the infrastructure (over and above any fares,
fees, or other "user pays" charges) is the price of access to the
affected real estate. Hence the benefit of the project, as
measured by the market, is the ensuing uplift in property
values in the affected area.
If the infrastructure project is in the public interest, the
benefit exceeds the cost. (Any "user pays" charges cancel out in this
comparison, because both the "benefit" to the public and the "cost" to
the government are net of such charges.) And if the benefit exceeds
the cost, the cost can be covered by reclaiming only part of
the benefit through the tax system, leaving the rest of the benefit is
a net windfall for the owners of property in the affected area,
but without burdening other taxpayers. If the reclaimed part
of the benefit is greater than the cost of the project (but
still less than the total benefit), the project is a net source of
public revenue. This not only ensures that the project goes ahead
— so that the property owners get the ensuing windfalls —
but also allows cuts in other taxes for the benefit of all
taxpayers whether they own property or not.
How should the uplift in property values be recycled through the
tax system? The most obvious method is a capital gains tax
(CGT) on property only — that is, a tax payable on
disposal of a property and equal to a percentage of the increase in
value since acquisition. To ensure that the CGT leaves the property
owner with a net benefit from favourable infrastructure projects, the
taxable capital gain must be real (i.e. must not be due to
inflation) and must not be attributable to any effort of the taxpayer.
To avoid taxing inflation, the value at the time of acquisition must
be adjusted for inflation before it is subtracted from the value at
the time of disposal [1]. To avoid
penalizing the property owner's expenditure on maintenance,
extensions, or renovations — and to avoid rewarding expenditure
that does not add value — the taxable gain should not be the
change in the total property value, but should be the change in
the land value only — that is, the change in the
site value (where a site means a piece of ground or
airspace, including any attached rights to construct buildings
on that ground or into that airspace, but excluding any actual
buildings or other works). Indeed, to the extent that infrastructure
increases "property values" in a certain area, it actually increases
site values in that area, because the value of a site
reflects the value of its location even if no buildings (yet)
occupy the site.
So the required form of "CGT" is a tax payable on disposal of a
property and equal to a percentage of the real increase in the site
value since acquisition [2]. For
brevity, let's call this arrangement a site windfall tax
(SWT).
For property owners, the SWT is an investment rather than a cost,
because it increases their property values by providing infrastructure
that would not otherwise be provided; indeed, it's better than
an investment because the capital isn't paid up until after the profit
comes in! That some infrastructure projects would be funded
even without the SWT is a red herring for three reasons. First, the
SWT allows more projects to be funded. Second, a project that
could have been funded by other taxes still represents a net gain to
property owners if it is funded by the SWT. Third, when projects that
would have been funded by other taxes are instead funded by the SWT,
those "other taxes" can be reduced, and property owners in their
capacity as general taxpayers can expect to share in the benefit of
that reduction.
It is vital to note that our solution to the infrastructure funding
problem does not depend on any pre-emptive increase in total
tax receipts. It requires only that the tax system be modified so
that future expenditures on infrastructure are automatically
accompanied by expansions of the tax base (not to be confused
with increases in tax rates). Consequently the SWT can be
introduced in lieu of other taxes, in a revenue-neutral manner.
When the SWT is in place, the mere announcement of a new
infrastructure project causes the selling prices of properties in the
serviced area to increase. Higher sale prices are duly reflected in
higher site valuations, hence higher SWT receipts from trading in the
property market. The additional SWT receipts cover the cost of any
project whose benefit-cost ratio is sufficiently high. Projects with
still higher benefit-cost ratios yield surplus SWT, which can
be used for subsequent cuts in other taxes.
What existing taxes should be abolished to make room for the
SWT?
As the SWT is payable on transfers of property titles, the obvious
answer is that the SWT should replace all property transfer taxes
hitherto imposed by the same government. These include any
stamp duties on conveyancing, and any existing capital
gains taxes in so far as they apply to property. The official name
given to the SWT in each jurisdiction could well depend on the
displaced taxes; for example, if the jurisdiction already had stamp
duties on conveyancing, the SWT could be promoted as a reform of stamp
duties.
The SWT could also replace taxes imposed in anticipation of
property sales. The affected taxpayers would welcome this change
because the tax would be delayed until the actual sale, which would
provide the cash flow with which to pay the tax. For example, the SWT
could replace any betterment levies payable on rezoning of land
for more intensive use, and any lump-sum infrastructure levies
or development levies payable by property developers in return
for permission to develop (ostensibly to defray the cost of
infrastructure made necessary by the proposed development). It is
argued that such levies are fair because they merely reclaim part of
the uplift in property values caused by rezonings and permissions.
But by that logic, to ensure that the tax reclaims only part of
the uplift and that there is no inconsistency or arbitrariness in the
tax assessments, the tax should be defined as a fixed fraction of the
uplift. The SWT is indeed defined that way; it is what betterment
levies and development/infrastructure levies should have been.
From the viewpoint of the government, the cost of a public project
is an investment and the consequent increase in SWT assessments is the
return on the investment. The higher the marginal SWT rate (or the
fraction of sites subject to SWT), the greater the number of projects
that will pay for themselves through uplifts in site values, hence the
greater the number of projects that will actually proceed — and
the faster the rate at which old taxes can be reduced or abolished,
thanks to the surplus revenue caused by projects whose benefit/cost
ratios are higher than the minimum for a self-funding project.
Very conveniently, property owners also have an interest in
increasing the number of projects that proceed and the number of old
taxes that can be reduced or abolished. Of course there are only so
many projects that would pass a cost-benefit test, and only so many
old taxes to abolish. So, as the SWT rate is increased, there comes a
point beyond which property owners are losing more through higher SWT
than they are gaining through infrastructure and tax cuts. This
confirms that from the viewpoint of property owners, the taxation of
uplifts in land values can be too high. But it can also be
too low, as the current infrastructure crisis clearly shows.
Somewhere in between, there is an "optimum" SWT rate that maximizes
the net return to property owners. This "optimum" could be difficult
to estimate because the world has little experience with this funding
method or with such high levels of infrastructure provision. So
perhaps the safest course is to decide which old taxes should be
immediately abolished for maximum political advantage, and then set
the SWT rate to replace the revenue from those taxes.
When property values rise, home owners can sell their old homes for
higher prices, but must then pay similarly higher prices for their new
homes. And of course they always need somewhere to live. On this
basis it is sometimes argued that ordinary home owners, who own no
properties apart from their homes, do not really gain from a rise in
property values, and that the only real winners from a rise in
property values are those who can sell without buying again — in
other words, investors.
This argument tacitly assumes that the price rise is not
compensated by any improvement in utility, but is due solely to higher
effective demand. The argument is not valid if the price rise
is caused by improved infrastructure, because in that case the rise in
prices of alternative homes is due to improved utility and does not
imply a price rise for alternative homes of given utility.
We are left with the conclusion that ordinary home owners, like
investors, stand to gain from improved infrastructure. But if
owner-occupied homes were exempt from the SWT, the recycling of the
benefits of infrastructure through the tax system would be drastically
reduced, so fewer projects would be self-funding, so fewer projects
would proceed, so the home owner-occupants would get fewer windfalls
gains in the values of their homes. So ordinary home owners, for
their own benefit, must be included in the SWT net.
What of those who still merely aspire to become home owners?
If present owner-occupants can sell their old homes without paying any
tax, they can spend the entire proceeds — including unearned
capital gains — on new homes, and thereby outbid first-time
buyers who have no capital gains to spend. But if all sellers were
liable for SWT, the competitive position of first-time buyers would be
strengthened. Meanwhile the sellers, including both owner-occupants
and investors, would benefit from the infrastructure funded by the
SWT. This benefit would not be at the expense of first-time
buyers, because it would not raise the prices of homes of given
utility.
In summary, if owner-occupants were exempt from SWT, investors and
owner-occupants and those who are yet to become owner-occupants would
all be losers; that is, all would share in the loss of
total economic output caused by the loss of infrastructure.
What about sites owned and occupied by religious, charitable, or
educational institutions that provide services free of charge or on a
cost-recovery basis, and do not simply charge what the market will
bear? Because such institutions have indefinite lifetimes, and
because the SWT is payable only on transfers of titles, the
institutions can avoid SWT by simply remaining where they are —
as they probably always intended to do. For purposes of public
relations, it is probably better for such institutions to be liable
for SWT in the unlikely event that they sell their sites, so that they
are not seen to be receiving special privileges [3].
If properties do not become subject to SWT until the titles are
next transferred (so that the SWT does not become payable until the
transfer after the next), years will pass before most
properties can incur taxable uplifts due to infrastructure. That is,
years will pass before a substantial number of new infrastructure
projects become self-financing. And of course years will pass before
any surplus SWT revenue allows cuts in existing property transfer
taxes, let alone other taxes. These delays would not help anyone,
least of all property owners.
If every site is valued at the time of introduction of the SWT
("D-day"), and if the SWT payable on disposal of the site is
calculated on the real increase in the site value since D-day, then
infrastructure provided after D-day will start producing taxable
uplifts immediately, and the usual turnover in the property market
will ensure that these uplifts are immediately reflected in revenue.
But the early SWT payments will (on average) be small because of the
short times during which taxable uplifts will have accumulated, and
will not yield sufficient revenue for the immediate replacement of
existing property transfer taxes, let alone other taxes. Again, these
delays would not help anyone, least of all property owners.
If every property sold after D-day pays SWT on the real increase in
the site value since acquisition, even if acquisition occurred
before D-day, then the usual turnover in the property market will
cause a steady stream of SWT revenue to start immediately, allowing
the immediate abolition of existing property transfer taxes (and
perhaps other taxes, depending on the SWT rate). The same turnover in
the property market will also ensure that uplifts due to
infrastructure projects are immediately reflected as increases in
revenue. But vendors who have received large uplifts before
D-day will pay more tax on those uplifts than they would have paid
under the old system, and will therefore complain, alleging that the
SWT is retrospective. To avoid such complaints, a taxpayer
disposing of a property acquired before D-day should have the option
of paying tax as if the property had been sold and bought back (at
market price) on the day before D-day. Under this option, any
property vendor who pays more tax than would have been payable under a
continuation of the old system does so solely because the site has
increase in value after D-day. There is nothing
"retrospective" about that. But the existence of this option still
allows the SWT to replace existing property transfer taxes
immediately, and still allows uplifts caused by infrastructure to be
immediately reflected in higher SWT receipts.
The fact that the SWT is payable by the seller, whereas the old
property transfer taxes may have been payable by the buyer, does
not introduce any element of retrospectivity, because it does
not change the final incidence of the tax. If a transfer tax is
payable by the seller, the seller will try to add it to the price. If
it is payable by the buyer, the buyer will try to subtract it from the
price. In the end, the cost of the tax will be shared between the
buyer and the seller in inverse proportion to their bargaining power,
regardless of who actually "pays" the tax to the revenue office. The
real reason for making the tax "payable" by the seller is that
the seller already knows (or should know) the taxable site value at
the time of acquisition, and is therefore able to work out the SWT
bill in advance, without relying on anyone else's honesty.
Moreover, as the SWT will provide the affected taxpayers with net
windfalls that they would not otherwise get, the affected taxpayers
will tend to like it. And if they like it, they will not be motivated
to denounce it as "retrospective".
If the real value of a site falls between acquisition and
disposal, the SWT will be negative. This will give partial
compensation to that minority of property owners whose properties are
devalued by government decisions but not actually acquired by the
government; in law, such devaluations are called injurious
affection. Because such devaluations are exceptional —
especially if site values are being lifted by investment in
infrastructure — it is even possible to provide complete
compensation for injurious affection funded by some of the excess
revenue from the SWT. The present lack of compensation for
reductions in property values is due entirely to the lack of
taxation on increases in property values. By whom can the
losers in the property game be compensated, if not by the winners?
Infrastructure raises site values, allowing property owners to make
capital gains on disposal of their properties. The SWT would pay for
the infrastructure while taking back only a fraction of the capital
gains, ensuring that the property owners make net gains. But to say
only this much is to understate the benefit to property owners,
because infrastructure increases not only the sale prices, but also
the rental values and use-values, of the affected
properties: even before their properties are sold, landlords can
charge higher rents, while business owner-occupants can trade more
profitably and residential owner-occupants enjoy improved
amenities.
The increase in rents due to infrastructure provision does not harm
tenants as a class, because it reflects genuine improvements in the
utility of the rented premises — not higher rents for
premises of given utility. For business tenants, improved
utility means higher business turnover, which compensates for (and
indeed causes) the higher rents. Moreover, because the SWT takes a
fraction of property investors' capital gains but does not take
any of their rents, it shifts the investors' attention away from
capital gains and towards recurrent income, so that they perceive the
benefits of infrastructure primarily in terms of higher rents. Thus
the investors become more inclined to seek tenants, more inclined to
build, extend, and renovate in order to attract tenants, and less
inclined to hold a property vacant so that it can be sold at the most
opportune time (free of any encumbrance that might be caused by a
tenancy contract). These influences would tend to increase the supply
of rental accommodation, strengthening the bargaining position of
renters and making rents more affordable for residential properties of
given utility, and for commercial properties. Meanwhile, the
landlords would gain from higher rents due to improved utility of
properties at given locations.
To say that both landlords and tenants would gain is not a
contradiction; it simply means that both landlords and tenants would
share in the benefits of infrastructure financed through the SWT.
Improving infrastructure is not a zero-sum game; it is analogous to
making a bigger cake so that everyone can have a bigger slice.
Consider the common practice of buying a site, building on it or
renovating the existing building, and then (perhaps after some delay)
selling the site with the building. Under the SWT, the
builder/renovator will pay tax only on the increase in the site value
between the purchase and the sale. The SWT will take only part
of the increase, leaving the rest as a windfall gain. But under a
conventional property transaction tax, the builder/renovator will pay
a substantial tax either on the purchase or on the sale, and there is
nothing to prevent that tax from wiping out, or even exceeding, any
uplift in the site value between the purchase and the sale. Thus the
replacement of property transaction taxes by the SWT would remove a
substantial disincentive to building and renovating, for the benefit
of the construction industry and the various supporting
industries.
A transaction tax on property, such as a conveyancing "stamp
duty" based on the sale price, discourages transactions. In so doing,
it impedes the efficient allocation of assets (and restricts the flow
of commissions for those who facilitate that allocation, namely
realtors). A holding tax on property, e.g. a certain percentage
per annum of the property value or site value, has no such effect.
The SWT has the form of a transaction tax in that the event
triggering the tax payment is a transaction, namely disposal of the
asset. But the SWT has the substance of a holding tax in that
the total tax paid on an asset over the long term is not
proportional to the frequency with which the asset changes hands.
With a true transaction tax, such as a conveyancing stamp duty, a
higher frequency of transactions over the same time frame means a
larger total tax bill. But with the SWT, a higher frequency of
transactions merely divides the taxable capital gain into a larger
number of smaller steps; each transaction realizes an already
accumulated tax liability, but does not create an additional
liability. Thus the SWT does not discourage transactions (and
therefore does not restrict realtors' commissions) to the same degree
as the property transaction taxes that it would replace.
All transaction taxes impede commerce. All taxes on assets
(including holding taxes) either deter production of the assets or
encourage taxpayers to destroy the assets or move them out of the
taxing jurisdiction. These effects hinder production and therefore
raise prices and feed inflation, increasing the so-called natural
rate of unemployment, which is defined as the minimum unemployment
rate that causes sufficient downward pressure on wages to yield stable
inflation. Central banks fight the inflationary tendency by raising
interest rates (or otherwise restricting credit) in order to
discourage consumption and hiring, thus maintaining unemployment at
the dismally-named natural rate.
(Needless to say, those who are unemployed are not engaged in
projects that enhance property values. Neither are they likely to be
bidding up prices at property auctions. Low wages have a similarly
depressing effect on spending power, hence property values.)
The SWT, as we have seen, is not a true transaction tax. And while
it is certainly a tax on assets, the assets in question — namely
sites — cannot be produced or destroyed by the taxpayers or
moved out of the taxing jurisdiction. So the SWT does not hinder
production or raise prices like most other taxes. By raising as much
revenue as possible from the SWT and, by implication, as little as
possible from other taxes, governments can minimize inflationary
tendencies, allowing central banks to minimize unemployment —
that is, to maximize the bargaining power of workers.
Unemployment weakens the bargaining position of employees, driving
down their wages and conditions. Poor prospects in one occupation
drive some employees into other occupations, where they increase
the competitive pressure on employees in those other occupations,
driving down their wages and conditions, and so on. Some
employees or would-be employees try to escape these pressures by
starting businesses in competition with employers, some of whom are
then forced into alternative lines of business, where they increase
the competitive pressure on employers in those other lines of
business, and so on. To keep their employers afloat, salaried
staff must work unpaid overtime, and those who cannot or will not
do so are displaced by those who can and will. Besides, employers
know that higher unemployment means a bigger flood of applications for
every advertised vacancy (with a higher risk of being sued by at least
one unsuccessful applicant), and that anyone who must be fired at a
time of higher unemployment will be less likely to find other
employment and therefore more likely to sue. Thus the unemployment
rate sets a benchmark level of stress that propagates through
the entire economy, afflicting workers and bosses alike.
The SWT, by reducing unemployment, would reduce that benchmark
level of stress, bringing relief to workers and bosses alike.
We have seen that the SWT, unlike most taxes, does not feed into
prices. In particular, it does not feed into prices of exports or of
local products that compete with imports. Hence, by replacing various
existing taxes by the SWT, a state can improve the competitiveness of
its export industries and import-replacement industries.
The most vociferous opponents of future development are the
beneficiaries of past development — that is, the owners of
established properties. These worthies are afraid that their vistas
will be "built out", that the traffic through their suburbs will
increase, and that the new supply of accommodation will increase local
vacancy rates — all of which means reduced property values or at
least reduced growth in property values. But of course they
cannot declare their true motives. So they argue that the proposed
population growth would exceed the capacity of the local
infrastructure — knowing full well that under present
financial arrangements, the required improvements in infrastructure
will not materialize [4].
By solving the infrastructure funding problem, the SWT would
overcome one of the most persuasive objections to development. The
resulting infrastructure would also enhance the objectors' property
values in numerous ways; in particular, improved public transport
would address the traffic problem. To the extent that property
developers would contribute to the cost of infrastructure through the
SWT, the payments in question would be simply calculated,
non-arbitrary, and guaranteed to be less than the associated
uplifts in the developers' site values. The same cannot be said of
existing lump-sum "infrastructure levies" imposed on developers.
Removing barriers to development would of course increase the
supply of accommodation and thereby improve the bargaining position of
tenants and first-time buyers. We have also seen [in Section 5] that the SWT would improve the
competitive position of first-time home buyers relative to "repeat"
buyers (while the latter would still gain in absolute terms because of
improved infrastructure).
As land is a limited natural resource, an increase in total demand
for land cannot be offset by an increase in total supply. And indeed
the effective demand for land tends to increase due to population
growth (which increases the need for sites) and economic growth (which
increases capacity to pay for them). So sites tend to appreciate in
real terms [5]. This causes
speculative demand for sites as individuals and firms buy sites
in the hope of reselling them for higher prices.
In a rational market, the capitalized (or "lump-sum")
value of a site is the discounted present value of the future
rent stream from the site. (That is, the capitalized value is the
lump sum that would yield an interest stream equal to the rent for the
same risk, or the sum of the future rental payments individually
discounted for time and risk.) But speculation tends to make the
market irrational. When people see prices rising, they want to
buy into the market. In so doing, they accelerate the rise in prices,
inducing more people to buy in, and so on, causing a speculative
bubble — that is, a state in which prices are decoupled
from rents and are supported solely by the circular argument that
prices will continue to rise. At some point the illusion becomes
unsustainable and prices stop rising, taking away the alleged
justification for current prices, and so on: the bubble bursts.
This is obviously disastrous for investors who buy at or near the top
of the bubble. But eventually the natural appreciation of land leads
to a new bubble. So the market for land is cyclic.
A bursting bubble in a particular asset market has two
counteracting effects. On the one hand, it drives investors away from
that asset class and, by default, towards some other asset class that
may also be susceptible to bubbles. On the other hand, those who have
invested heavily in the collapsed market must reduce their
expenditure, and some (most likely those who have bought their assets
with borrowed money) become insolvent. As one agent's expenditure is
another's income, and as one agent's debt is another's asset, a
chain reaction ensues, reducing the funds available for
investment in other asset markets, possibly causing them to collapse,
and so on. After an isolated bubble-burst, the former effect
tends to dominate; thus the land burst of the mid 1920s led to a
stock-market bubble [6], and the
stock-market crash of 1987 led to a land bubble. But when that second
bubble bursts, the cumulative belt-tightening and bad debt tend to
cause a recession; thus the stock-market crash of 1929 led to the
Great Depression, and the land burst of 1989 led to the recession of
1990–91. The exceptional size and unique importance of the land
market mean that a bursting land bubble is the most reliable
single predictor of a recession [7]; in particular, the global recessions of
1974–5, 1981–2, and 1990–91 were heralded by
bursting "property" bubbles, i.e. land bubbles [8].
The SWT would impede the inflation of "property bubbles" (i.e. land
bubbles) because investors could neither spend the entire proceeds of
sales on new purchases nor borrow against the entire (appreciated)
values of currently owned sites for new purchases. The SWT would also
reduce the attractiveness of capital gains and, by default, focus
attention on recurrent income; to that extent, it would encourage
production rather than speculation and help to keep property prices
commensurate with rents. Thus the SWT would make property investment
safer in the short term by discouraging bubbles and bursts, but more
lucrative in the long term by encouraging provision of
infrastructure.
To the extent that the SWT would avoid property bubbles, it would
avoid the ensuing bursts and recessions. By inducing public
investment in infrastructure, it would also help to lift the economy
out of recessions — including the one that we're about to have,
courtesy of the biggest global property bubble in history.
The infrastructure funding problem can be solved by means of a site
windfall tax (SWT) — that is, a tax payable on the transfer of a
property and equal to a fraction of the real increase in the site
value since the last transfer.
To avoid retrospectivity, a taxpayer disposing of a property
acquired before the time of introduction of the SWT ("D-day") should
have the option of paying tax as if the property had been sold and
bought back (at market price) on the day before D-day.
The taxes to be abolished on introduction of the SWT should include
(at least) all property transaction taxes, betterment levies, and
development/infrastructure levies hitherto imposed by the same
government. Other old taxes should be phased out as fiscal conditions
permit.
[1] Australia's federal capital gains
tax no longer meets this simple requirement.
[2] On the practicality of assessing
site values, note that: (i) land is valued separately from
buildings in all Australian States; (ii) even in jurisdictions
where governments do not separate land values from building values for
the purpose of taxation, insurance companies manage to do the same
thing for the purposes of setting premiums and assessing losses;
(iii) the valuation of land, unlike that of buildings, is
facilitated by spatial continuity, i.e. the requirement that in
the absence of significant boundaries, the land value per unit area is
a smoothly varying function of position, as is the rate at which the
value per unit area varies over time; and (iv) the mathematical
uncertainties in valuing land are minor compared with the legal
uncertainties in classifying transactions as taxable or non-taxable
under almost any other form of taxation. In some cases an accurate
site value can be calculated from a single transaction. For example,
if a site is sold without improvements (buildings or other
works), the site value is the sale price; and if a site is sold with
improvements which are promptly demolished by the purchaser, the site
value is the sale price plus the anticipated demolition cost. In such
cases the legislature might think it convenient to calculate the
"taxable" site value from the actual sale price. In the case of a
developer who buys a broad-acre estate and sells it in smaller lots,
the initial acquisition cost could be divided among the lots; the
method of division would not greatly matter, because it would not
affect the total SWT paid on the estate. In other cases, one would
use official current site values as assessed by the responsible
government department.
[3] Individuals can gain an advantage
analogous to "indefinite lifetimes" if title transfers due to bequests
are exempt from SWT. If there were no such exemption, people who
expect to inherit property would denounce the SWT as a "death tax".
Apparently they'd rather tax life instead. The objection that SWT
would force the sale of an inherited property is laughable on two
counts. First, it's a lie; the SWT could be paid by borrowing against
a fraction of the property value — a much smaller fraction than
would be needed to buy the property had it not been inherited.
Second, it's selective indignation; tax authorities have always been
able to seize the assets of employers that fall behind in payments of
consumption taxes and PAYE income taxes, notwithstanding that the
workers lose their jobs and are consequently at risk of losing their
homes, most of which were not inherited. Besides, an exemption
for inheritors would shift the burden onto other taxpayers in the form
of a higher SWT rate and/or delayed abolitions of other taxes and/or
less infrastructure, and would therefore amount to a subsidy for
landowners who inherited their property at the expense of landowners
who acquired their property by hard work, and a subsidy for people
with rich dead parents at the expense of people with poor dead
parents. That such an outcome should be regarded as a political
necessity is one of the great ironies of our time, and one of the
great self-serving propaganda triumphs of all time. But, if it is
indeed a political necessity, it can be arranged.
[4] For a case study, see
G.R. Putland, Little people vs. littler people, http://grputland.blogspot.com/2006/01/little-people-vs-littler-people.html.
[5] While one may claim that sites on
the city fringe remain affordable for first-time buyers on typical
incomes, this claim does not refer to a fixed group of sites. As the
city fringe moves outward while any given site remains stationary,
that site tends to become less affordable.
[6] Most corporate shares are
partly backed by site values. Moreover, the slow pace at which
shares are created and destroyed, relative to the speed with which
they can be traded, makes their supply inelastic (like the supply of
land) in the short term. So share prices are susceptible to bubbles
and bursts.
[7] A land bubble tends to be
accompanied by a construction boom (as buyers try to justify the
exorbitant prices paid for sites) and a consumption binge (as owners
borrow against inflated land values to buy goods and services). These
multiplier effects work in reverse when the bubble bursts.
Because of the long transaction times in the land market, a burst is
initially manifested as slower sales rather than lower prices,
allowing sellers and their agents to pretend that the market has
"plateaued" when in fact it has crashed. This state of denial worsens
the liquidity crisis that follows the crash.
[8] Concerning the theory that
recessions are due to high oil prices, suffice it to say that:
(i) there were recessions before there were oil shocks;
(ii) the recession of 1990–91 started before the oil shock
that allegedly caused it; and (iii) in the words of Alan
Greenspan, "we create these elaborate models for policy responses and
we put in oil prices [but] they don't create a recession in the
models" [answer to a question from the International Monetary
Conference (London, June 8, 2004), transcribed by Ashley Seager
and quoted in Fred Harrison, Boom Bust (London: Shepheard-Walwyn, 2005),
p.65].
Copyright © 2006 Gavin R. Putland (http://grputland.com, http://grputland.blogspot.com).
Permission is given to forward, copy, translate, and otherwise publish
this work for non-commercial purposes provided that the work remains
intact and includes this copyright notice.
grputland.blogspot.com
|
|
