Tax

Collective Efforts

In his recent post, Too quick to take the credit? Morgan Godfery argues that it was a “crass” move by the Māori Party to put out a statement taking credit for the $790 million hardship package included in this years Budget. His key argument was that there were others who shifted political thinking such as Matua Hone Harawira with his Feed the Kids Bill and various advocacy groups, and as such that credit lies with those people not the Māori Party. It’s not that I don’t think others have been strong advocates on poverty. I absolutely do and of course agree they all deserve credit for their advocacy. But I think it’s unfair to discount the efforts of Dr Pita Sharples and Dame Tariana Turia and the continued efforts of Matua Te Ururoa Flavell and Whaea Marama Fox, as well as the party’s previous MP’s, parliamentary staff and members and supporters who have advanced the issue of poverty within the party and in their respective communities for the past decade.

Godfery writes that:

[C]laiming the credit for forcing the government to act seems a little, well, crass. Much of the credit belongs to Hone Harawira. It was Hone who did more than anyone else to help put child poverty on the Parliamentary agenda with his Feed the Kids campaign

Firstly, if you have had an opportunity to listen to Flavell’s Budget Speech, you will note that he said the Māori Party pulled it over the line…with a little help from National. After all, no Budget measures can take effect unless the government agree to it. The Māori Party have been strong advocates for poverty since entering Parliament, and the evidence is readily available in their policy manifesto’s. [Discussed further below].

Secondly, I completely agree that Harawira has been an outstanding advocate on issues of poverty and social justice. He certainly put child poverty on the media agenda but the claim he put it on the parliamentary agenda is bold. It’s worth noting that despite his advocacy in the media, Harawira had 2 years to put his Feed the Kids Bill before the house, yet withdrew and delayed on numerous occasions. It was only put forth following the 2014 Election, by NZ Greens Co-Leader Metiria Turei. Also note, the Māori Party voted in favour of that bill.

I also wholeheartedly agree that Campbell Live, Action Station, Child Poverty Action Group, and Auckland Action Against Poverty among other groups have been at the forefront of many community led initiatives to get the government to address poverty in Aotearoa. That doesn’t mean in order to recognise their strong advocacy that we need devolve into adversarialism. To allege misattribution by the Māori Party and essentially accuse them of riding on the coattails of the work of others is itself a misplaced attribution. The collective efforts and the varying roles each of the organisations have in policy development were not dismissed by the Māori Party. But in my view, they have every reason to say we pulled it over the line, since it is the Māori Party who through their relationship accord were able to directly influence that budget decision and absolutely the public pressure from these groups played a vital role in the Māori Party being able to secure that funding for poverty.

Action Station have expressed their tautoko of the Party in the fight against poverty:

And have acknowledged Fox for receiving the Action Station petition at Parliament on 20 May 2015.

On the above it is only fair then that we also take a brief look at the Party’s history of poverty advocacy.

In 2008, the Māori Party entered their first relationship accord with the National Party. At that time, Harawira was an elected MP for the Māori Party under the leadership of Turia and Sharples. The 2008 Policy programme that the Māori Party campaigned on included Ending Child Poverty by 2020. Part of that policy programme included:

  • Rais[ing] core benefit levels
  • Establishing an Every Child Matters fund
  • Investigating the reintroduction of a Universal Child Benefit

In 2011, the Māori Party entered a second relationship accord. At this time Harawira had left and formed his own Mana Party. The 2011 Confidence and Supply Agreement included:

  1. Supporting the ongoing implementation of Whānau Ora
  2. Establishing a Ministerial Committee on Poverty
  3. Urgently addressing the effects of poverty through health and home initiatives

See also: 2011 Maori Party policy package.

In 2014, addressing the effects of poverty was weaved through critical areas of the Party’s policy platform: Whānau Ora, Health, Education, Economic Development, Homes, Family Violence, Enabling Good Lives and so on. The goals stated were to build on the objectives and the progress made since 2008.

For the Party to be reproached for being proud of their contributions, that is, seeing the materialisation of the work their MP’s and the kaimahi behind the scenes have put in to the relationship accord over the past 7 years, is awfully undermining of their efforts.

I do agree with Godfery where he states:

Improving even one life is a positive step, but we can’t claim success until we begin changing the system which reproduces Maori disadvantage generation after generation. Budget gains may help stop the slide, but they won’t reverse it.

However, to my knowledge the Party haven’t claimed success on the “reversal” of poverty – they’ve indicated that the budget gains are a start to improving the lives of our most vulnerable whānau.

Haere rā homeownership

The Landlords Game (the original Monopoly) used to explain Henry George’s theory. See also: http://harpers.org/blog/2012/10/monopoly-is-theft/

As housing prices in Auckland continue to rise at unprecedented rates, the dream of home ownership, especially for many younger Aucklander’s slips away. Well, more accurately put, it is obliterated. Why? Government inaction and a refusal by policymakers to consider different approaches that might actually address the issue. Land Value Tax (LVT) anyone?!

This time last year, Jesse Colombo warned of an economic crisis for New Zealand. He argued 12 points which you can find more detail on here. With regard to the housing bubble he warned interest rates, overvalued land and demand were key indicators.

Colombo was ridiculed by Economic Development Minister Steven Joyce, as an  alarmist and a bubble-ologist. As the NBR point out, this is despite the endorsement Colombo is given through publishing on one of the US’s most influential business websites.

But here we are. On the downward spiral to that bubble popping. The demographic I’m referring to are those of us who have had or have to borrow for post-secondary school education. Most of us will never own our own home. We will pay rent to a landlord for the rest of our lives. We will continue to pay sizeable taxes on our incomes but we will pay for our own retirements.

I’ve banged on about LVT for the past couple of years. Deirdre Kent & Phil Stevens of the New Economics Party have been writing on it for even longer. The idea derives from the work of Henry George who wrote his seminal work Progress and Poverty in 1879, that makes the case for taxing land and untaxing labour. Oh, and a factoid for fun, Henry George began the original weekly newspaper ‘The Standard’ in 1887.

Some Georgists/Geoists prefer not to use the phrase LVT, and consider land rents or similar as a more accurate description. I’m down with that, after all, the intentions and theory behind it are pretty much the same. I’ve written a few posts on Georgism, so to avoid re-writing, you can read them here.

We are constantly told if we just build more houses the market will cool, well, clearly we can’t really build at a rate sufficient to meet the total demand it seems. If we raise interest rates, then fewer people will buy. But this means lower-middle income earners are priced out. These approaches have done nothing. And all the while the government itself has contributed to the skyrocketing prices, for example, by banking a section of land intended for social housing for over 11 years, which is now being sold off privately at market prices. So perhaps Minister Joyce might want to reconsider his views on Colombo.

My suggestion is why not an LVT? Even if it is something applied solely to Auckland in the interim to incentivise the competition necessary to drive prices down and then rolled out across the country? I’m not saying I have a model ready and available. All I’m suggesting is that we start talking about alternative approaches to housing affordability especially if they have the potential to simultaneously address other issues that are suffocating low-income families and younger generations (X, Y, Z)

The thing about an LVT is it changes the nature of property rights that we currently know. Rather than individual ownership rights, they become use rights where the land is of the commons and the occupant pays a rent to the community for the privilege of taking the land out of the use of the commons. One comment that remains firmly etched in my mind is this by Nate Blair:

The problem with Georgism is not the idea, which is basically flawless.  The problem with this idea is that it seems both radical and inherently moderate to anyone understanding it.  The revolutionary aspect of Georgism threatens the predators of caricature “capitalism” and angers the conservatives. The justice and honesty threatens communist revolutionaries and angers armchair progressives, who are fine with paying a bit more but not with giving up their privilege.

I hear heaps of people online referring to themselves as ‘progressives’, yet comparatively few advance any alternative ideas, to existing failed models. It makes me wonder how much of that is about a reluctance to part with certain privileges. So since many of y’all liked Piketty’s book, here is a video where Joseph Stiglitz & Thomas Piketty gave a presentation on inequality. Toward the end Stiglitz exposes his own Georgism:

If further interested have a look at the LVT tab up top of this page for some documentaries/clips and websites that talk more about LVT. I personally recommend “The Taxing Question of Land” and “Real Estate 4 Ran$ome”.

Death Duties

I was reading Martyn Bradbury’s post Generation X have been betrayed by neoliberalism and baby boomers.

I agree with many of the points he makes including some of the points made in the article he cites, insofar as economic inequality is a massive issue.

But I do not agree that we can attribute the cause of economic inequality to a birth cohort. The focus on generation ignores or at least treats as ancillary, an obvious cause, namely, speculation or rentseeking. It is not the fact of being born between 1946 and 1964 that destroyed free education, a robust welfare system and affordable housing in NZ. It is the speculative rentseeking behaviour of those – many born within that particular cohort, some before and some after – who were already privileged enough to participate in the speculative markets that created widespread economic inequality and preserved it through the 1980-1990 economic reforms through to today.

But I want to focus on the last statement Bradbury makes at the end of his post:

“A progressive Government coming into challenge this intergenerational theft should first consider reapplying death duties to redistribute all that boomer good luck to other generations”

The argument it stems from is more or less this: Baby Boomer’s (BB) were born into and lived through a unique economic boom that created many opportunities such as affordable housing (really it was cheap land), a robust welfare system and free education. This implies that during and as a result of the economic boom, BB’s were the recipients of the benefits that flowed from those opportunities without the struggle of repaying student loan debt and being priced out of the housing market unlike the generations following the BB’s. Therefore, BB’s should compensate future generations for the loss of opportunities by paying a tax on their death.

I understand why people romanticise about taxing the BB’s on their death (as morose as it is), because when faced with communities living in poverty, there is a whole generation to blame because we are told that BB’s had everything sweet.  In doing so, we neglect the highly unjust tax and monetary system.

Often missing from the debate also is that death duties will likely incentivise the wealthy BB’s (those these arguments usually target) to shift the funds of their estate to offshore tax havens.

So, in my view, changing the tax system to capture unearned income (during the lifetime of the individual) and targeting speculative behaviour is better than waiting for people to die.

An objection also worth noting (although highly unlikely and very slippery slope) is that wealthy BB’s may become targets of vigilante groups in extremely tough economic times, on the perception that they are worth more to society dead than alive [I don’t seriously think this is an issue, but its not an impossibility either].

The idea of death duties, in my opinion, is flawed for three key reasons (although this isn’t an exhaustive list).

Firstly, it is inefficient to (re)introduce another tax into an already complex tax machine.

Secondly, there is a simpler, more efficient and effective tax that could deal with speculative behaviour/rentseeking – land value tax (LVT).

Thirdly, death duties are hardly hallmarks of a progressive government, unless what we view as progressive is retro politics. Death duties were introduced in the 19th Century in NZ and by the mid-1950’s were (mostly) abandoned [see Michael Littlewood’s History of Death Duties and Gift Duty in NZ].

On the first point, I consider death duties inefficient for many reasons, including  that it is difficult to determine (even approximate) how much revenue will be raised in any given year and so that makes planning/budgeting on how to redistribute those funds uncertain. Also, no-one mentions how these funds might be redistributed back to society e.g. citizens dividend? or just paid into the states general fund? There is also the issue that the argument for death tax is intended to assist future generations, yet these are usually the direct beneficiaries of inheritance, so the tax takes from those generations. Although the suggestion is, it is fairer because it redistributes back to all. However, by putting back into the general fund, means that living BB’s still benefit from the deaths of their birth cohort, while the direct recipients have their inheritance taxed.

The uncertainty of fund levels also impacts on administrative costs such as staffing, office space, office equipment – noting that some of the revenue collected would be redistributed back into administrative costs, reducing the pool of funds available for social redistribution.  And the tax itself adds to the growing number of taxes (increasing bureaucracy) the government expects individuals to pay thereby increasing the reach of the state from the life of the individual into their death.

On the second point, the level of tax paid by the community is already excessive. Most people agree we need to reduce the tax burden not amplify it. The focus should not be on how many other taxes we can use to collect the revenue necessary to provide public services. I maintain my position that LVT and abolishing or significantly reducing all other productive taxes appears to be the fairest and most efficient way to deliver public services, alleviate poverty, disincentivise speculative behaviour and incentivise innovation and entrepreneurship.

So discussions on economic inequality ought to focus on how we can collect revenue efficiently and effectively while reducing the tax burden. Without reiterating previous posts, I have written on LVT  here and here and you can also view the LVT page of resources by clicking on the tab at the top of this page.

[Note: There are many Georgists/LVT proponents who do support inheritance taxes, so this post isn’t intended as a reflection of the broad church of Georgism/Geoism]

The third point is that NZ has had death duties in the past and they were abandoned. Calling a government progressive for reintroducing them is like saying a Beatles Tribute band is progressive. Death duties are retro politics. Admittedly, the same claim might be levied against LVT; however, LVT has not existed as a single tax and is currently being researched around the globe as economists and political and non-political groups look for ways to tame the speculative beast and ensure prosperity for all.

I’ll also point out, that some BB’s actually saved their earned income to pass on to their children. They may have struggled through their life for this specific purpose. Are their earnings something that we can justifiably tax? I’m not convinced it is at all.

I absolutely agree that we need to deal with economic inequality – and fast.  I also support the idea of redistribution, provided it is done in a manner that minimises hierarchy rather than reinforces it.  But if we unpack the phrase ‘death duties’ we see that it grants the state a ‘right’ to collect revenue from individuals on their death, since  individuals (would) have a correlative duty to pay the state on their death. Death duties are effectively a death tax, and taxes are collected through enforcement measures exercised through state hierarchy. So, death taxes reinforce state hierarchy through a perverse strategy for managing economic inequality by ‘waiting for people to die’ so that the state can ‘benefit from their death’.

I suspect many readers will disagree with me about death duties; however, my question is what does it say about humanity if there is not even freedom from the reach of the state in death?

FATCA – NZ’s Insidious Future

Earlier this week Mark Hubbard (Laissez Faire Capitalist) wrote about the monstrosity of the Foreign Account Tax Compliance Act (FATCA). In it, he queried why those on the Left who staunchly opposed the GCSB legislation were appallingly silent on FATCA – an equally (if not more) intrusive piece of legislation passed by the U.S. government that implicates NZ.

I think its a fair claim made by him, and I will attempt to give a position from my point of view as a Left identifying person, noting that this is my personal opinion and not intended as a reflection of general left wing thought in NZ.

My view is that FATCA is undeniably intrusive and a threat to the privacy of New Zealander’s and in fact all persons who are citizens of OECD countries because Officials in NZ have indicated a willingness for FATCA to be emulated internationally as part of an OECD/G20 initiative and that all OECD countries have entered into negotiations with the U.S. regarding FATCA.

I’ve spent a bit of time lately researching the territorial rights of States, and it occurred to me that FATCA is not only intuitively inconsistent with standard conceptions of territorial jurisdiction but is also technically inconsistent.

Territorial jurisdiction is usually understood as applying to bounded geographical areas and it applies to any persons who find themselves within a States territory. Although the boundaries need not be fixed, jurisdiction is not considered as capable of extending into the boundaries of another sovereign State. In fact, its considered a fundamental breach of international law to do so except in very extreme circumstances – usually on humanitarian grounds.

Putting FATCA in context of jurisdiction – the U.S. cannot exert jurisdiction over the territory of NZ, so the U.S. is arguably in breach of this very fundamental principle of international law through the specific provisions in FATCA that implicate foreign finance institutions (FFI’s). In my view, FATCA impacts jurisdictionally on NZ despite assertions from Officials who claim that FATCA does not breach NZ’s sovereignty because:

…entering into the [intergovernmental agreement] and enacting legislation that enables financial institutions to comply with its terms  is in the best interests of New Zealand

FATCA is clearly obnoxiously coercive and should be opposed.

What exactly is FATCA?

The US enacted FATCA in March 2010. Its purported aim is to reduce tax evasion by U.S. citizens and green card holders living within U.S. territory or abroad. Hence it being a citizenship based tax model and extra-territorial legislation.

FATCA requires third party reporting, i.e. FFI’s must identify U.S. account holders and share information with the U.S. Internal Revenue Service (IRS).

If these FFI’s  do not both register with the IRS and agree to report specific information to the IRS, they risk a 30% withholding tax on every $USD transaction that goes through their institutions. Noting, that some FFI’s are exempt, such as government institutions and certain NGO’s.

However, there are leniencies if the FFI home State enters into an Intergovernmental Agreement (IGA) with the U.S as opposed to the FFI entering into a separate agreement. The purpose of the IGA’s  is to ensure that a partner government will legislate to require FFI’s to comply with FATCA.

In NZ, the IRD insist that the IGA is necessary because if NZ financial institutions (NZFI’s) enter into separate agreements with the IRS they are unlikely to be able to comply with FATCA because of NZ’s current legislative framework. That means NZFI’s would be subject to the penalties contained within FATCA. The IRD has recommended that NZFI’s instead refrain from registering with the IRS website as NZ is currently negotiating an IGA with the U.S.

The Policy & Strategy, Treasury and IRD published a report responding to submissions on the Taxation (Annual Rates, Employee  Allowances, and Remedial Matters) Bill that deals with FATCA.

The report states that it is in NZ’s best interests to proceed with negotiating an IGA because not doing so would involve ‘severe reputational risk’ since ‘all OECD countries have either signed or are negotiating, IGAs with the United States in respect of FATCA’.

This is a weak justification for allowing the U.S. to exercise a kind of quasi-jurisdiction over NZFI’s. It’s also insidious that the report portrays FATCA as consistent with the sovereign rights of NZ despite the legislative changes required to comply.

I do agree in principle, that it’s inappropriate for the NZ government to comment on the U.S. citizenship based tax model, since its part of the U.S. domestic legal system. However, I also think criticism is appropriate in the circumstances given the purpose of FATCA is to coerce domestic law changes in sovereign States so that the U.S. can access information it would otherwise not be privy to.

I do worry about the impact of the IGA’s, since international law is often created through custom, which can derive from treaties and agreements. Custom is established through widespread and consistent State practice and opinio juris (what the States believe).

These IGA’s are arguably evidence that the States who enter into them accept as a practice that intergovernmental information sharing through relaxation of domestic privacy laws is a developing norm. Additionally, that those States conceive of coercing private institutions to share private information about those who have accounts with them as acceptable State behaviour.

The only way for a State to avoid being bound by customary international law is to express a statement to the contrary of a particular practice prior to taking any action that might suggest otherwise. Arguably, signing an IGA is evidence in favour of the norm development. Other commentary of State belief may also bolster any claims of custom in future.

Speaking of future,  the report notes that :

…under the IGA and any OECD/G20 model that may be devised in the future, New Zealand will also be the recipient of information in respect of New Zealand  tax residents that have undeclared offshore bank accounts. This information will assist in ensuring that all New Zealanders also pay the correct amount of tax on their worldwide income

This statement clearly suggests that the Officials are anticipating a FATCA-like regime in NZ (and other OECD countries) in future. As the report points out, the only way for U.S citizens to avoid being captured by FATCA is to renounce their citizenship, and this is probably the only way for NZ citizens to avoid this kind of regime too.

The report also insists that intergovernmental information sharing and citizenship based tax models are pertinent to becoming a ‘good international citizen’ and has dual benefits to NZ i.e. both fiscal and reputational.

Hubbard writes that:

a faceless official who can read your financial transactions, can read your life, plus worse, this official owns your income

While his post rails against the Left in a mocking and often offensive way, the substance regarding FATCA is worth consideration irrespective of  political affiliations. If you value privacy, then you are unlikely to support FATCA.

The IGA being negotiated between NZ and the U.S will compel NZFI’s to collect and share information that is not currently collected and shared but the report considers this intrusion on privacy to be outweighed by other public interest considerations. Inferentially, NZ’s reputation and future fiscal advantages through the ability to coerce information from FFI’s in order to tax NZ citizens abroad.

For all the reasons above, I oppose FATCA and I encourage those who oppose the GCSB legislation to consider the implications of global information sharing based on an individuals citizenship and access to their financial accounts. You may buy into the ‘it targets the 1% who cares’ narrative, but FATCA is not about class. It is about privacy. It signifies the unacceptable encroachment of the State into the lives of every citizen. That is the dystopia we are heading for with FATCA.

Xenophobia is ugly and embarrassing

The concern over home ownership in New Zealand is valid, especially since statistics indicate that home ownership in New Zealand has fallen below 50% – the lowest since records began. House prices are simply too high and the necessary wages to finance a mortgage too low. Something has failed.

However, instead of turning to our failed tax and monetary system and looking for disincentives to land speculation, we resort to blaming foreigners. At which point accusations of xenophobia come into play.

I refer to this piece by Duncan Garner: LOOK AT THIS! THIS IS WHY HOME OWNERSHIP IS LOW

Garner claims that:

12% of all homes in Auckland are being bought by people living overseas

This is misleading. It does not necessarily mean that homes are being bought up by ‘foreigners’. How much of the 12% are NZ citizens living abroad? Without defining ‘peple living overseas’ its difficult to attribute the 12% simply to foreigners. Additionally, it means that around 88% of homes are owned by New Zealanders. Thats a significant majority.

Garner goes on to insist that:

we desperately need decent and reliable statistics to show just how many houses in NZ are sold to overseas speculators.

Again, ‘overseas’ is not indicative of ‘foreigner’. The conflation astounds me.

Agreed, speculation is undesirable and particularly harmful in widening economic inequality. However, speculation should be the target, not ‘foreigners’. Even if the 12 % of homes owned by people living overseas are owned by foreign speculators, it does not mean domestic speculators have an insignificant effect on housing prices. We need statistics on speculators in the market, irrespective of their nationality.

Jamie Whyte criticises Labour’s economic policy as failing to discourage ‘rentseeking’ (speculation) and ‘crony capitalism’. The argument in short: if a government causes losses to accrue to the wealthy, it has to compensate for those losses with taxpayer money. Labour are not alone here. National also have the system set up so that tax revenue is redistributed upwards just using different kinds of subsidies.

Of note, Labour (and the Greens) advocate for a capital gains tax (CGT), yet appear to wilfully ignore that this device was in place in other countries and did not prevent the GFC in 2008 that was largely the result of a property boom.  To extend on Whyte’s point – taxing capital gains creates obligations between the government and the parties subject to that particular tax – in order to ensure gains aren’t moved offshore or that investors don’t stop investing here, those subject to the particular tax will need incentives, usually in monetary or ‘regulatory’ forms.

My point is that if any political party is serious about tackling speculative behaviours that affect housing affordability then land value tax (as a single not an additional tax) must at least be up for consideration. We need innovative solutions. David Cunliffe (Labour Party) stipulated that in his economic upgrade speech yet offers only a CGT.

But moving on, Garner’s boldest claim is to:

ban foreigners from buying old stock, build new houses if you want to invest here – that’s what happens in Australia. It’s time to stop the madness

Garner’s effectively suggests that we signal to foreigners that we in New Zealand don’t think they should buy homes where we want to live, they should instead build homes where we don’t want to live.

All those accusations of Māori separatism, come home to roost in the suburbs of the middle class.

A further problem is that xenophobic policy is dangerous for diplomacy. New Zealand has adopted declarations that create obligations to avoid discrimination and to uphold human rights. These declarations may only amount to soft law (not legally binding), but our actions do indicate our commitment to shared principles across the globe. They speak to our moral character. Xenophobic policies damage our international character.

There are strong arguments [from cosmopolitanists] for principles of distributive justice to apply at a global level. In context of this post, if we consider how we did not create the land, our claims on {absolute) ownership are questionable. Arguably, our only legitimate entitlement to it, is to share in its wealth. It might follow then, that those not born in NZ or who don’t fit the legal requirements for the arbitrary notion of ‘citizenship’ should still have every right to purchase land in New Zealand. Afterall, our birth place is contingent.

In my view, any governance model, must ensure that the communities affected by land ownership are properly compensated for that resource being taken out of the commons.

I  appreciate that some Māori might be uncomfortable with supporting policies that give foreigners access to land, particularly, if there are no safeguards around land that might be in dispute or customary land. Disputed and or customary land is a different case, they are about just possessory claims and ought to be dealt with separately from the general residential housing market.

Garner concludes that banning foreigners from buying homes in New Zealand is:

…not racist. It’s common sense. Let’s put New Zealanders at the front of the queue and help them, before it’s all too late.

If we want to make it easier for New Zealanders to buy homes in the areas they want to live, then tax the land and untax productive incomes.  The mere suggestion of banning foreigners is both ugly and embarrassing,  does not resolve the pricing issue and is most certainly not common sense.

Musings on the Taxpayers Union

When the Taxpayers Union (TU) first formed, I did find it amusing that its typically right wing founders used a generically left wing term to name their product.

The key objective of the TU is a ‘fair and efficient tax system’. Who can argue with that? Currently our tax system is highly inefficient and hugely unfair. It taxes productive incomes earned through our efforts and rewards rent-seeking behaviour by not taxing unearned economic rent.

The question on the minds of many is whether the TU is a non-partisan group? Recent comments in the NZH by TU co-founder Jordan Williams might suggest not despite the non-partisanship noted on the TU website.

 When asked about deaf MP Mojo Mathers’ taxpayer-funded trip to be interviewed on a small provincial radio station, Williams made the following comments:

 It’s amazing that she has so little to do with her time to actually travel to a community radio that probably has as many listeners as you can count on your hand

The only silver lining is that the time spent travelling to go on the station in the middle of nowhere is less time spent dreaming up new ways to spend tax payers money

Williams’ comments leave the impression that he sees this particular instance as ‘government waste’. Either that, or his comments were purposively partisan.

Here are the issues as I see them:

  1. Are Williams comments ableist, is he suggesting that disabled MP’s ‘dream up new ways to spend tax payers money’ on wasteful expeditions that reach only a ‘handful’ of people; or
  2. Is Williams commenting on Mathers position as a Green MP – noting the Greens are largely attacked by ‘right wing partisans’ for overtaxing and overspending.

On point 1, if Williams sees taxpayer funding for disability as ‘wasteful government spending’ then he is hardly promoting a ‘fair’ tax system. Fairness is not simply about who is taxed but also about how any revenue collected is then redistributed back to society.

On point 2, if Williams was making partisan comments, then he has spoken out of step with the TU, since the TU acknowledges that:

Individual members have their own political involvements, but as an organisation the Taxpayers’ Union will be vigorously independent in promoting the interests of New Zealand taxpayer.

What about the NZH for even raising this as news?

As @lmfbs points out its unclear whether the TU approached NZH with this story or vice versa. How does it change the story? Arguably, it changes the context and the motivation behind the reported comments.

Additionally, while the NZH story indicates the author was seeking the view of the TU on whether Mathers trip was value for taxpayer money, its unclear if they interviewed Williams in his personal capacity or as a member of the TU. Yes, they refer to Williams as a Director, but was that on the assumption he was speaking in his capacity as a TU member or in his personal capacity?

For many, the answer probably doesn’t matter, because as @ColeyTangerina points out:

There is a genuine disdain for the TU because of those involved in founding it and their very public political partisanship. The sentiment conjured up by Williams’ comments,  irrespective of whether or not they were misreported, adds weight to the scepticism about the the true nature of the TU. However, as a critic of the NZ tax system, I’m not against the establishment of the TU in principle,  I’m just not convinced it won’t devlove into some partisan right wing think tank. Although, others probably think it already is.

Like the TU, I do think that central government exerts too much control over society, and in my view many functions such as education and health could be dealt with at the local level. Obviously, these are topics for future posts, but I think its worth thinking about how we reduce the size and power of central government without destroying vital public services. Local governance creates local opportunities and allows communities to participate in the issues that affect them.

Taxes captured through a central body reinforce a centralised state and therefore central state planning. The TU appear to promote reducing the size of government, providing tax cuts for business and opposing progressive taxation, but at this stage it offers no innovative alternatives. Perhaps, it just means another tax movement needs to be established to challenge these orthodox approaches to economics and taxation.

#Herecomesthesun: The Greens Solar Home project

Firstly, there is some magic in using a Beatles song as a hashtag to promote your policy on solar energy. On one hand, it will resonate with the diehard Green voter given that its a criticism of corporate life. On the other hand, one can’t help but smile when listening along given its folky beat. And its The Beatles, well, more correctly George Harrison. Maybe its just me, I don’t know. But I think that its use is some political psychology gold.

Secondly, the Greens Solar Home project is the kind of radical policy that the Greens need to reinvigorate their voting constituency. Its a bold move amid their neolibral-lite policies, to encourage consumers to ‘take the power back’. Another pun from a band also likely to resonate with the diehard Green voter and anti-state renegades. But pertinent since it implies that the consumer has the power both in terms of their energy source (no more bills to Mr Deep-pockets) and their choice on how best to manage their energy needs (self-determination).

BUT there is a ‘but’ when considering the specifics of this policy and I’m hoping my critique doesn’t minimise the clout of the overall message.

The thing about political parties is that they seem to abhor revision. In the face of criticism, parties often dig in their heels – even if that means advocating bad policy. I hope the Greens can internalise the feedback from Green voters and even non-Green voters and use it to show that they are open to revision where necessary, which is in itself conducive to participatory democracy, and in line with the underlying message of solar project – self-determination.

For ease of reference the Greens policy document can be located here.

In it you will see, that the Greens offer low interest loans to homeowners to install solar panels. The repayments are made through the homeowners council rates. That is, the loan is to be repaid at $900 per year on top of their rates. The interest on the loans is said to be about 4.1% p.a, although this interest figure is subject to change.

The Greens envision a savings of $100 per year for homeowners. Given interest must also be paid on that loan per year, its unclear if the Greens will require the interest on top of the $900 repayment, in which case, the savings figure of $100 is false. Or if the interest is included in the $900 per year, which means the term of the loan is longer.

Some argue that at least the repayments aren’t going to a foreign-owned company. But the loans are made through a foreign bank and provided to the consumer via the government. So in effect, the repayments go to the worst of them all. The Bankers.

What about the effect on homeowners? Its true that some homeowners will benefit from solar power, particularly those who live in the homes they own. Depending on social preferences, house prices may rise if solar is viewed as an improvement to the property. Which is fine for those who tenant their won properties.

What about the renters? landlords may decide to install solar to improve the value of their properties. The effect, is likely to see the rent increase for two reasons: the market rate for solar homes will increase if there is demand for solar powered homes, and the landlord will need to repay the loan for the installation of the solar panels. So for low income renters, this may be a negative, since renting can already place a large burden on those individuals or families. If landlords are prevented from passing on the costs of the loan to install solar, then fewer rental properties will have solar, which affects a large proportion of the lower socio-economic demographic who are the people who need access to soalr the most. Also, it diminishes the purpose of the Greens policy.

Also, the idea that excess power generated could provide a return to the homeowner is a bit disingenuous. If the uptake is significant then power prices will fall. This means that the price at which you can sell your excess power is probably negligible. In addition, the Greens NZ Power policy, intends to drive down the price of power!

This article by  George Monbiot  (h/t to @gtiso) suggests that solar panel installation ‘is the ideal modern status symbol, which signifies both wealth and moral superiority’ [in the middle class], ‘even if it’s perfectly useless’. The suggestion is that the policy either intentionally or inadvertently operates as a wealth transfer to the middle class. Similar could be said of the Greens policy.

What about disposal? It was pointed out that solar panels are difficult to dispose of because they contain toxic materials. Solar panels are estimated to have a life span of about 25 years. The policy is unclear on how the Greens intend to dispose of the panels at the end of their life spans. If they will create landfills in NZ, then there are additional costs involved in setting up a land fill for this purpose, not to mention issues with dumping toxic materials into NZ soils. The alternative is to export the waste material and have some other community deal with the effects of solar panel pollution. Admittedly, I’m not very clued up on how to dispose of toxic materials or the extent of the toxicity in solar panels, so this worry of mine could be completely unfounded.

So I have outlined my gripes, so let me just reiterate that I wholeheartedly support initiatives to address climate change and moves towards decentralisation and clean energy. So  one way I see for improving the policy is implementing the combination of LVT and UBI (see my post on the benefits of UBI here).

LVT as mentioned multiple times in previous posts, brings land (broadly defined to include all natural phenomena not produced through human exertion) into common ownership – distinct from collective or private ownership. The economic rent collected is pooled and can be redistributed via a UBI. Income taxes are abolished (or significantly reduced during the transition) giving workers and non-workers (due to UBI) the ability to invest in their choice of clean energy (if that’s what they desire).  It might even be that communities decide to reduce the UBI for each person and use the remaining amount to invest in infrastructure and clean energy. Who knows. But that is self-determination. It extends this policy and makes it fair for all.

Reviving Georgism: George was a root hacker not a branch wriggler

Universal Basic Income vs Minimum/Living Wage

Bryce Edwards compiled a round-up of the inequality debates regarding NZ’s 2014 Election. I suppose, whether the motivation to focus on inequality is well-intentioned or a vote grabbing exercise is yet to be determined.

My issue with the inequality debate is that it is most often framed in terms of whether we should (a) increase the minimum wage, (b) legislate for a living wage, or (c) target assistance through wages subsidies like Working for Families. Not really root hacking stuff.

The presumption from those advocating increasing the minimum wage or having a living wage is that it will improve outcomes for the working poor.

Minimum or Living wage (MLW)[1] proponents also tend to argue that it is unfair that government subsidises businesses through the various welfare packages made available to low-income earners absolving businesses of the responsibility to pay fair wages to its workers.

In fact, I have made this argument myself and while I have revised my views on MLW strategies, I do think it has some merit. But whether MLW strategies address the issue of economic inequality is a different story.  In my view, part of the remedy to overcoming economic inequality is to implement a Universal Basic Income (UBI).[2]

I have posted this particular piece in my Reviving Georgism series because like many Georgists,[3] I think UBI and Land Value Tax (or land rent, land fees etc) are complementary policies for tackling inequality.

I do not necessarily oppose a MLW, in fact, a living wage is precisely what I advocate. I’m just not convinced that state regulating private enterprise to pay a particular minimum amount will necessarily have the effects intended. I think that UBI is a better goal because it benefits all society, not just one group, i.e. low skilled, low-income ‘workers’.

I also think we overlook that a MLW is a legal privilege that favours business and is therefore out of step with the objectives of the Unions and campaigns who typically lobby for MLW. I set out my argument below.

MLW as legal privilege

A MLW is a legal privilege weighted in favour of business because it removes the negotiating power of the worker to obtain a higher wage. It does this by legally entitling businesses to pay workers less (the minimum) than they might otherwise be willing to pay. Moreover, businesses are likely to choose to pay the legal minimum required simply because the law says they can.

Robert J Murphy adds another dimension where he argues that:

“Raising the minimum wage might represent a drastic harm to the most vulnerable and desperate workers…What could happen is that the higher wage would attract new workers into the labor pool, allowing firms to become pickier and, thus, to overlook the least-productive workers, who would remain unemployed or lose their jobs to more-highly-skilled workers”

I agree that MLW increases could represent a harm to low-income earners and I think that Murphy’s point reinforces my argument about privileging business. Additionally, MLW strategies might attract those who are unemployed but looking for work, to take on low skilled jobs in the interim, thereby potentially increasing unemployment for low skilled workers – an unintended consequence.

I’m not ignoring the fact that in non-minimum wage societies businesses can (and do) exploit workers.  My criticism is not that MLW strategies are inherently bad for all workers, indeed they probably do have some positive short-term effects for some but as Fred Foldvary points out [Henry] George would argue that minimum wage simply treats the effects [of poverty] not the symptoms, and that it distracts and appeases to avoid confronting the remedy.

Wages increase when rent decreases

George argues that ‘the line of rent is the necessary measure of the line of wages’.[4] He thinks that under free conditions, no-one would work for someone else if they could make the same amount working for themselves.[5] He argues its only when land is monopolised that individuals are forced to compete for work.[6]

George’s theory argues that wages are determined by what is left after rent is taken out.[7] Rent being that which is paid for using land.[8] He further argues that:[9]

“No matter how much they might actually produce, they receive only what they could get on land available without rent—on the least productive land in use. Landowners take everything else. Hence, no matter how much productive power increases, neither wages nor interest can rise if the increase in rent keeps pace with it”

He also proposes that:[10]

“Where land is subject to ownership and rent arises, wages will be fixed by what labor could secure from the highest natural opportunities open to it without paying rent (i.e., the margin of production). Where all natural opportunities are monopolized, wages may be forced by competition among laborers to the minimum at which they will consent to reproduce. Clearly, the margin cannot fall below the point of survival”

At first glance, this quote seems to support having a MLW, but in context George would say MLW is not conducive to solving inequality – it simply ‘appeases’ the workers to avoid dealing with the free lunch income enjoyed by land owners at the expense of workers who are forced to compete for a minimum wage. Noting, a minimum wage could never be lower than the margin or landowners would risk an uprising that could threaten their privilege. So even without a MLW setting, landowners will always have a minimum at which they can charge rent, and businesses would have a minimum at which workers would consent to work or they risk workplace strikes.

On this basis, I think a MLW plays right into the hands of the landowners and businesses to the detriment of the most vulnerable members of our society because it provides a sense of certainty around rents i.e. a MLW provides a legally specified minimum wage that must be paid to workers (by businesses)  on which land owners can base their rents.

Importantly, as Nate Blair points out minimum wages in the long-run can only shift economic rent to different locations or decrease aggregate wages. And while a minimum wage can benefit labour in the short-run, including labourers who also happen to be landlords,  the long term impact on real wages is negligible.

Arguably, UBI is no different than MLW because it too provides everyone with a specified minimum amount of income. However, this is why I think in order for UBI to be effective it must be accompanied by a LVT and because it focuses on long term outcomes.

Another benefit of UBI is that it provides a mechanism for recognising and rewarding our currently economically invisible members i.e. those who carry out valuable but unpaid work such as stay at home parents, or volunteers.

The UBI and LVT combination also provides a foundation for setting up a participatory democracy framework which would enable individuals to voluntarily take part in public decision-making forums (e.g. multi-body sortition etc) without the stress of having no income. But that is a discussion for another post.

To conclude, if the politicians aren’t going to address the root of inequality by looking at tax evolution and a UBI, then we deserve an answer as to why. This is what I believe we ought to challenge our politicians on this year to determine if their policies are simply vote grabbing or genuine. How we decide the amount, or the age, or the frequency at which individuals receive a UBI (or the rate or measure for determining LVT) is beyond the scope of this particular post but I think what we should be focusing on (as the title of this post suggests), is hacking at the roots instead of simply wriggling the branches of the failed system we have inherited.

UPDATE:

Its been brought to my attention that I have probably been a bit presumptuous in assuming that readers would take into account the current wage subsidies and welfare packages already available in NZ.

Its important because this is the context within which I base my argument. Here are a few sites to help get your head around NZ minimum wage and the government transfers available:

In NZ there are two predominant broad views about how to improve poverty. The first broadly subscribes to the Scandinavian model – progressive taxation and increasing the top marginal rate to increase revenue to provide free core public services. Critics of the welfare system and of those advocating for a Scandinavian model in NZ argue that welfare creates dependency and this dependency causes the poverty and wage gaps we see in our country.  The critics are the second group who typically subscribe to the neoliberal model – lower taxes, privatisation, user pays services, the free market. Scandinavian model advocates usually argue that if the wealthy paid more taxes on their productive incomes that we could afford to provide core public services to those most in need.

There is a strong tension between these two groups. As a relatively recent subscriber to Georgism, I think that both models are flawed because unlike Georgism, they ignore the role that speculative behaviour plays in creating inequalities.

In this post, I tried to clarify that I didn’t think a MLW was inherently bad, just that UBI with LVT was better overall.

The reason most often cited for pursuing a MW is ‘fair pay for a fair days work’ and I agree with the sentiment. However, I don’t think ‘fair pay’ and ‘minimum wage’ are the same, but this is how MW proponents often frame their arguments.

In fact, MW’s often aren’t ‘fair’ for the work carried out. If they were then government transfers i.e wage subsidies wouldn’t be necessary. No matter how little a worker is paid by their employer, the wage subsidies supplement those incomes enough so that supplemented income makes working more attractive than just receiving jobseeker support (a welfare payment).

So if we had no MW (in NZ), and some workers were to receive less from an employer than they might currently get those low-income earners would have their incomes supplemented by wage subsidies.

Additionally, no business could pay below the maximum someone could get on welfare because most workers would choose not to work for less than what they could get for not working. This would apply in any country who has a welfare system. In effect, even if there was no legally specified MW there is actually already a minimum in place i.e. more than a worker could receive as their maximum on welfare. Admittedly, in NZ this rate would probably change depending on the region a person lives, because the accommodation supplement is location based.

Aside from the arguments set out in this post, MW also has the effect of forcing workers to compete for jobs, which gives business the upper hand to choose the person willing to accept the least amount in wages i.e. the minimum legal amount.

I reiterate, I don’t disagree that MW’s can have short term benefits. However, I think that focusing on MLW prolongs getting to the real remedy because it appeases workers, which means the more vulnerable members of our society – those who are unable to work for whatever reason, only receive welfare payments, which are necessarily less than those who earn any productive wage with additional government transfers (wage subsidies). A UBI and LVT combo would iron out this inequality and ensure even those who were unable to work had access to a living wage, not a bare minimum.


[1] For ease of reference, I use MLW to include those who advocate:

  1. a minimum wage; and or
  2. increasing the minimum wage; and or
  3. a living wage.

[2] Others refer to this is Guaranteed Minimum Income or Guaranteed Basic Income.

[3] I have resolved to use the term ‘Georgism’ (as the title of each post suggests) to reinvigorate interest in Henry George’s economic theory. However, in doing so I think I may have inadvertently neglected the preferences of some who prefer ‘Geoism’ and others who reject describing themselves under an ‘-ism’, such as Martin Adam’s who writes at Land, A Humaniteer Project. Adam’s proposes that while Henry George’s economic theory is traditionally understood as Georgism, a more accurate term is ‘Geoism’ because it ‘contains the prefix Geo, from the Greek word γαια, meaning ground or earth’ and because George’s philosophy advocates the sharing of nature. Please note that I use the term ‘Georgism’ broadly to include any persons who share in advocating the fundamentals of George’s economic theory.

[4] Henry George and B. Drake (ed.) Progress and Poverty (2006, Robert Schalkenbach Foundation, New York) available online: http://www.henrygeorge.org/pdfs/PandP_Drake.pdf  at 117.

[5] Ibid at 116.

[6] Ibid.

[7] Ibid at 93.

[8] Ibid at 89.

[9] Ibid at 93.

[10] Ibid at 116.

Credit for the title of this post belongs to Adam John Monroe

Thanks to all those in the LVT Facebook group that helped me get my head around this and directed me to relevant chapters!

Reviving Georgism: How the Greens could improve their taxation policy

Previously, I wrote that I would vote according tax reform policy because I consider tax reform as fundamental in resolving economic equality in NZ and abroad. It’s also no secret that my voting preferences are best understood in a left-wing framework, but this does not presuppose I would vote for a NZ Left party if their tax policy had worse outcomes.  Anyhow, I was reading the Greens taxation policy and decided this was a good time to write the third installment of Reviving Georgism and discuss how the Greens could improve their taxation policy to address the unrelenting economic inequality smothering NZ.

(Obviously, I am critiquing from a non-economist perspective but in light of Henry George’s economic theory)

Summary of Greens Taxation policy

The Greens state that they envision a tax system that ‘supports communities and the environment, encouraging sustainable behaviour while providing sufficient revenue for the effective operation of Government’.

They insist that a tax system should be broad based to avoid excessive reliance on personal and business income taxes, and that the tax base should include: Personal & Business Income Taxes, Consumption & Expenditure Taxes, Targeted Environmental Taxes, and Taxes that acknowledge the value of common property (Resource Rents).

The Greens also advocate Ecological Taxes (ET), a Capital Gains Tax (CGT), and a Christchurch Earthquake Levy (CEL) as part of their policy proposal. In addition, they recommend setting up an ecological tax commission, increasing the top marginal personal income tax rate, altering the progressive tax scale, and introducing a universal tax free threshold for the first $10,000 of income.

The Greens support exempting the family home from CGT, restricting foreign purchases of local assets, and treating investment income equally for tax purposes.

This taxation policy is intended to ‘shift taxes off work and enterprise, and onto waste, pollution and scarce resources’. The Greens insist under their taxation policy ‘clean business pays less and everyone pays less income tax’.

Note, I will not be discussing The Greens monetary policy included in the taxation scheme, in this post, except to point out that if productive income tax is abolished, individuals would receive their full wage and this is likely to be spent back into the economy, increasing the money supply in circulation without having to artificially create more money or print more money.

Why tax at all?

Most of us probably agree that under current economic conditions we need to fund public services for the most vulnerable members in our communities and for other community needs. And generally, tax is considered acceptable for this purpose. The question for now then is not whether we should tax, but rather what should we tax.

Of course, hard leaning right libertarians will probably dispute the use of taxation altogether, but for the purposes of this post, I will not explore that particular argument.

As pointed out in my previous posts on Reviving Georgism here and here, I explain how Henry George proposed targeting what we take not what we make and he saw this is as fundamental to eradicating poverty and instrumental in advancing progress.  I think that the Greens vision could be highly compatible with Georgism if more radical changes were made to their taxation policy  and if they simplified rather than complicated the tax system because their vision is not too dissimilar from George.

Analysing the Greens under a Georgist lens

Currently, the Greens taxation policy is not the fairest way to draw revenue for public services because it places a large tax burden on the productive earnings of individuals and businesses and burdens them with further costs attributable to an array of other taxes (existing and new).  But it does at least feature land and resource rents, which are not only relevant to Georgism but probably the most important component of an efficient and effective tax system.

I find the Greens phrase  ‘funding the effective operation of Government’ problematic, because it’s so general in nature it ignores that the tax system must be simple or efficient if we want effective government. As pointed out in the Taxing Question of Land ‘complex tax systems allow for avoidance, evasion and expensive administration costs to both the public and private purse’. So it is really a matter of fiscal responsibility to implement a simple tax system. The Greens seem to presume that the introduction of CGT counters the avoidance issues, but they ignore the cost it takes to administer further taxes and to enforce payment, and the fact that individuals and businesses may still be able to hide that revenue in offshore tax havens.   Unfortunately, the Greens policy does not simplify the monstrosity of a tax system we currently endure, it introduces a raft of new taxes without abolishing any existing taxes, and effectively feeds the monster.

The Greens also insist that a broad base tax system is necessary to reduce the burden on income earners, but seem to equate ‘broad base’ with many taxes. Broad base just means not restricting to narrow sources, and as the Land Value Tax Campaign argue land itself is the broadest base of all from which to draw public revenue since it’s the hub of basically all economic activity. The Greens seem to overlook the practical role of land and natural resources in this sense.

The Greens insist that their taxation policy lowers income taxes but it doesn’t. It raises the top PAYE rate to 39% for those that earn over $80,001.00. The Greens retain a tax-free threshold which is intended to offset the land and resource rents that form part of their ecological taxes. In addition, there is no reward for clean business, there is simply an exemption from paying the maximum rate.

In order to understand the alleged benefits of the Greens income taxation, I carried out a comparison between the current PAYE scheme and the Greens PAYE scheme. The table below shows the current thresholds and tax rates against the Greens taxation proposals. It also provides two examples illustrating that the Greens are wrong to say that ‘everyone pays less income tax’.

Current PAYE 
Tax rate
 
Greens PAYE
Tax rate
Up to 14,000
14,001 to 48000
48,001 to 70,000
70,001+
10.5%
17.5%
30%
33%
Up to 10,000
10,001 to 42,500
42,501 to 80,000
80,001+
0%
19%
33%
39%
(Note: all comparisons exclude all other levy's/taxes)
Example A: XX earns $90,000 per annum
AA under PAYE
$90,000
AA under Greens PAYE
$90,000
$14,000  - 10.5%
$34,000  - 17.5%
$22,000  - 30%
$20,000  - 33%
$1,470
$5,950
$6,600
$6,600
$10,000  - 0%
$32,500  - 19%
$37,500  - 33%
$10,000  - 39%
0
$6,175
$12,375
$3,900
TOTAL
$20,620
TOTAL
$22,450

Example A shows that someone who earns $90,000 p.a pays an extra $1,380 p.a under the Greens taxation scheme.

Example B: XY earns $48,000 per annum
XY under PAYE
$48,000
XY under Greens PAYE
$48,000
$14,000 - 10.5%
$34,000 - 17.5%
$1,470
$5,950
$10,000  - 0%
$32,500  - 19%
$5,500   - 33%
$0
$6175
$1,815
TOTAL
$7,420
TOTAL
$7,990

Example B shows that someone who earns $48,000 p.a pays an extra $570 p.a under the Greens taxation scheme.

So despite the Greens universal subsidy for the first $10,000 earned, no real benefit accrues to the income earner. The use of progressive taxation nullifies the intended effect of a tax-free threshold. It’s probably why Labour dropped it and why National have argued against it.

LVT avoids issues inherent in progressive taxation

Supporters for progressive taxation schemes typically argue that the most well off members in society should pay more than the least well off members. I agree to an extent, except I don’t think ‘well-off’ should have any bearing on actual income earned – such income goes to the income earner in exchange for their labour. I’d argue that well-off is those with the privilege of holding land, that is, those whose increases in wealth occur through the State sanctioned legal privilege of land holding (*NB, I do understand that there are persons who are asset rich and cash poor which needs special attention when implementing a tax reform such as LVT).

Other issues that concern me with progressive taxation are:

  1. self-employed earners may opt to work for cash jobs to avoid paying the higher tax rate, thereby reducing the amount of revenue collected for public services/effective operation of Government
  2. it could discourage individuals and businesses from acting charitably because of the increase in tax from their productive earnings, thereby reducing the funds that might otherwise be invested or directed toward charitable causes
  3. by having the income tax rate so high and introduction of resource taxes on top along with a raft of other taxes without removing any pre-existing taxes, may in fact drive down wages or employers may choose to employ fewer people to maximize their profits

Avoiding xenophobia allegations

I do worry about the restrictions on asset purchases targeted at foreign purchasers. Restricting foreign purchases of local assets suggests xenophobic attitudes, whether intended or not. However, if land rents are implemented, there is no need for the restrictions because the landowner becomes liable to pay the land tax. The rents accumulated are then redistributed back to the community whose efforts created the unimproved value of the land. This unimproved value is also why I think the Greens are wrong to exclude the family home as a source of tax revenue. Homeowners can simply hold their properties without making any improvements yet the land value increases through the efforts of others but the benefit of that unearned increment goes straight to the land title holder.

Greens compatibility with Georgism

In reference to my earlier posts on Georgism, I do think The Greens are right to argue that ‘work and enterprise should be encouraged and speculative investment in non-productive assets discouraged’, and I also agree that ‘the taxation burden should be reallocated away from income and towards resource use, waste, and pollution’, which is why I think the Greens policies could be highly compatible with Georgist economic theory.

If the Greens explored the fundamentals of Georgism, I think they could create a sound tax system that fits their vision while simultaneously addressing the economic inequality smothering NZ.

I think the best way to improve the outcomes of our most disadvantaged members is by abolishing income tax altogether.  This does not mean abandoning social security. The LVT is an effective precursor to introducing a UBI, and subsequently the dismantling of an overreaching State by reducing the need for many of the services the State provides. It is simple and  efficient.

In my opinion, The Greens are in a favourable position. Without the support of the Greens, Labour probably wont be able to govern. This means that instead of the Greens having to resort to incrementalism (after all, Labour have that covered) they can use their influence as part of a coalition to push more radical policy that is less State centred while trying fresh ideas to revitalise the Left and broaden their appeal across the political spectrum.

In summary, The Greens could improve their taxation policy by abolishing taxes on productive earnings and focusing on taxing land and resources. This would simplify the tax system, work toward reducing the size of government and act as a precursor to implementing a UBI.

 

FYI – Over the next week or so, I will be updating my blogshelf to include a page designated to Land Value Taxation. Please email me: ellipsister.blog@gmail.com  if you have a blog or website and want to make sure I include it! Thanks. 

Reviving Georgism: What is Land Value Tax

Firstly, I recommend watching either or both of the following clips before or after reading through this post (whichever you prefer):

There are some much longer documentaries on this topic, but the above two give a basic rundown and hopefully get you curious!

Land Value Tax (LVT) is a tax (or levy) on the unimproved value of land. LVT aims to reduce the value of land to make housing affordable by discouraging land speculation (unproductive behaviour) and to encourage entrepreneurship in business through abolishing taxes on productive behaviour. LVT is not intended as an additional tax, rather as a replacement of all other taxes.

Some prefer to call LVT a groundrent and not a tax because it reflects the rent paid for the use of property rights in land which is distinguishable from the ownership-use rights in buildings and other capital improvements.

[Note: I will discuss how LVT could be implemented in a later post and will address the differing views on what to call the LVT, as I’ve noticed some friendly contention among Georgists on terminology]

Henry George recognised that land obtains it value through its location and  demand. He noted that a vacant lot can increase in value without the landowner having made any improvements. He called the increase in the unimproved land value ‘unearned income’ (i.e. there is no cost in producing land because land is itself not produced by labour – although as pointed out in The New Statesman recently, some landowners have in fact produced land, e.g. the Palm Jumeirah).

Similarly, Professor Michael Hudson writes that:

Classical economists developed the labour theory of value to isolate economic rent, which they defined as the excess of market price and income over the socially necessary cost of production (value ultimately reducible to the cost of labour). A free market was one free of such “unearned” income – a market in which prices reflected actual necessary costs of production or, in the case of public services and basic infrastructure, would be subsidized in order to make economies more competitive. Most reformers accordingly urged – and expected – land, monopolies and banking privileges to be nationalized, or at least to have their free-lunch income taxed away.

[emphasis added]

George argued that unearned income from land should be taxed because:

If land were taxed more heavily, the quantity available would not decline, as with other goods; nor would demand decline because of land’s productive uses. By taxing the whole of the value of unimproved land, the government would drive the price of land to zero 

[emphasis added]

So why drive the price of land to zero?

In a nutshell: there is no cost in producing land since (predominantly) no-one produced or created it. Land is a natural resource (like air, water etc) that we rely on for survival. However, because our current system does not take into account the community efforts that give land its value, it is treated as a commodity allowing land speculators, homeowners and those employed in the FIRE (Finance, Insurance and Real Estate) sector to profit from the efforts of others simply by holding and selling land and obtaining the ‘free lunch’ or unearned income.

Reducing the land value to zero would mean that future homeowners would only need to borrow money for the improved value of the land and not the unimproved value and could mean that some future homeowners would not have to borrow at all from a lending institution, thereby making home buying much more affordable.  It also encourages those sitting on vacant lots (i.e. land speculators and property developers) to develop the site or sell it to someone who will develop it (i.e. putting it to productive use), because the land owner would still be required to pay the LVT whether or not any improvements were made. This would also address concerns about foreign ownership of land in NZ, because foreign owners would also be required to pay  LVT.

LVT is preferable to productive income taxes, because there is a fixed amount of land, so any rent could easily be collected. This means we could simplify the tax system and address avoidance issues, as people cannot shift land offshore to a tax haven. In addition, it means that workers and businesses can retain their full productive earnings thereby encouraging productivity (entrepreneurship, research and development etc) which will improve economic outcomes and assist in bringing about equality.

Matt Nolan (TVHE and Infometrics) states that:

If you tax land, the price of land will fall, but the amount of land being used will not change.  In contrast, a tax on labour income will lead to some people working less, and a tax on capital will lead to lower levels of investment in New Zealand.  This attribute of a land tax means that it is more “efficient” than other taxes, implying that for any given amount of revenue the government wants to raise this tax will do it for a lower cost to the rest of us.

Nolan also notes that while the introduction of a land tax would have ‘adverse implications for those who own a significant amount of land or those who own land but have a variable income year to year, that changes in wealth as a result of the imposition of a land tax will only happen once, so it would be possible for the government to compensate the immediate losers of the changes through lump-sum payments if it deems the adjustment to the new tax unfair’.

The fairness argument is a significant component of Georgism and its unsurprising that land owners including Mum and Dad homeowners and the FIRE sector resist the introduction or dismiss the idea of a LVT system given the intent to reduce land values. But Georgists and many other renowned economists argue that LVT is fair and in fact is the fairest tax system because it penalises unproductive behaviour rather than productive behaviour. The Land Value Taxation Campaign set the fairness argument out as follows:

Land (unlike goods and services) has no cost of production. If an ample supply of land of equal desirability were available everywhere, there would be nothing to pay for its use. In reality land acquires a scarcity value owing to the competing needs of the community for living, working and leisure space. Thus land value owes nothing to individual effort and everything to the community at large. It belongs justly and uniquely to the community. Conversely, the reward for individual effort can belong only to the one who earns it, to spend, save or give away as he or she may see fit.

Because of differences in positional advantages, fertility or natural resources, some locations are more desirable than others. Demand for access to these features gives land its rental value. Land Value Taxation, being assessed on these values, is fair in its incidence.

Georgism is not immune from criticism, but  Nate Blair argues that:

The problem with Georgism is not the idea, which is basically flawless.  The problem with this idea is that it seems both radical and inherently moderate to anyone understanding it.  The revolutionary aspect of Georgism threatens the predators of caricature “capitalism” and angers the conservatives. The justice and honesty threatens communist revolutionaries and angers armchair progressives, who are fine with paying a bit more but not with giving up their privilege.

[emphasis added]

My current view (which may change as I come to understand Georgism and LVT a bit more) is that LVT as a single tax is insufficient for capturing other forms of unearned income, and given George was writing in a time when technology and global networks were not nearly as sophisticated as they are today, perhaps he may have considered a tax system that captured all unearned income. However, some Georgist’s suggest that LVT would capture most unearned income, since it derives from land holding in some way.

In concluding, it is important to note that LVT is not an end in itself but it is the most equitable way for bringing about progress and eliminating economic inequality. And who knows what will follow, but in my view we should at least be trying to set the right foundations.