Why we can't have nice things: Rent
The Georgists are right
This is the first of what will hopefully be an occasional series investigating key causes of our seeming lack of state capacity compared to the past, or more simply: our lack of ability to ‘do’ things as a country.
In a time of growing wealth we are faced with a decreased ability for people to purchase their own home. An increasing proportion of Australian homes are owned by property investors or foreigners. We are met with the strange paradox of being told that things are getting better while the lived reality of what we face - the death of the Australian ideal of a property-holding democracy - seems to prove that things are getting worse.
This is something that Henry George would’ve recognised. The American economist was born in 1839. By the time of his death in 1897 he was one of the most famous men in the English-speaking world and his book Progress and Poverty sold more copies in the 1890s than any other book except for the Bible.
His claim to fame was extending the analysis of the classical economists (particularly Smith and Ricardo) around the role of land rent and popularising it in a time when the rapidly industrialising West was confronting the ‘social question’ - the movement of large sections of the population from largely self-sufficient, traditional social configurations (mostly removed from cash exchange) to the role of an urban proletariat, often in conditions that were harsh, cruel and precarious.
George’s central insight was that most of the ills identified by social reformers were a result of the production factor of ‘land’ (mainly land in the general sense but also any nature-given, scarce economic resource such as water and minerals) acting as a residual claimant of unearned economic proceeds, or, as economists refer to it, rent. Increased economic activity was not just something that manifested in national accounts. There was a spatial component - industrial activity occurs somewhere and, as economic activity in an area increased, it drove up land prices and rents in the area. Landholders gained through no merit of their own. Despite the level of wealth in the community increasing, the reward for productive work seemed to be decreasing.
Geroge’s proposed remedy? A tax on the unimproved value of land equal to its rental yield which would replace all other taxes. Tax on ‘goods’ - work, thrift, entrepreneurship - would be removed, while public expenditure would be funded by a tax on economic rent.
Due to land’s almost perfectly inelastic supply there would be no dead-weight loss, no reduction in economic activity due to reduced work incentives. In fact, it would likely drive an improvement in economic output by putting an end to land-hoarding and property speculation.
Why didn’t the Single Tax movement catch on in Australia? In its late 19th Century / early 20th Century heyday, Henry George had a substantial following in Australia. There was a substantial component of ‘single-taxers’ in the early Labor Party and amongst the free-trading Liberals. This suggests there should’ve been a good chance of making Land Value Taxation (LVT) a component of the Australian Settlement.
“Discussion of this issue in Labor circles was dominated by the single-tax theory of Henry George, whose visit to Australia in 1890 gave a considerable boost to the existing popularity of his economic panacea… From the late 1880s onwards the demand for a ‘tax upon unimproved land values’ became a standard plank in Labor platforms”.1
A federal land tax was implemented in 1910, but that was arguably the peak of Georgist influence in Australian political economy. The income tax only continued to grow in relative prominence from that point. The dogmatic Georgist insistence on free trade as an indispensable part of the Georgist program, along with the Land Value Tax, caused it to fall into biggest contemporary metapolitical faultline in early 20th century Australian politics: Free Trade vs Protection. The Georgists picked the wrong side. To this Georgist-inflected observer, it would’ve made more sense to compromise on the Free Trade component of Georgism as peripheral to the core task of ensuring the fiscal basis of the state was primarily based on the LVT, even if it meant there were still some tariffs. But one suspects that this may have been at odds with the Messianic, all-or-nothing character of the Georgist movement, without which it may never have come to such a position of influence in the first place.
By mid-century, the Georgist idea of raising the majority of state revenues on land value taxation had been placed in the ‘nice but unrealistic’ bucket. That said, the Georgist influence remains:
“George's ideas have left a mark on Australian policies on land and tax--notably, in the incorporation of leasehold tenure in the constitution of the Australian Capital Territory; in the widespread adoption of unimproved value as the basis for rates and taxes on land for local and state government; and in attempts to impose betterment levies and developer contributions in urban development.”2
Despite the post-WWI diminution, the theories of George continue to haunt the economic policy world. As Georgists love to point out, many of the most prominent economists (such as Milton Friedman) backed the LVT as one of the best sources of taxation. In 1990, 30 Western economists petitioned Mikhail Gorbachev to transition the taxation base of the Soviet Union to land - there are BIG names on there that any student of economics would recognise. In Australia, one of the main recommendations of the 2010 Henry Tax Review (no relation) was shifting the basis of taxation more towards land and natural resource rent. Moving from professional consensus to policy implementation has proven difficult though.
Starting in earnest in the 1990s, we have tied up immense amounts of our national economic output in capitalised property rents, collateralised as our banks’ primary assets, creating something close to a caste system with property-holders on top and renters at the bottom, with access to business lending now increasingly predicated on already being on the property ladder and access to that ladder increasingly impossible for those not already endowed with wealth.
With little in the way outside of mining exports as far as productive economic activity goes, there’s now an immense effort to maintain the Ponzi by jamming in as many immigrants as possible (as the ungrateful proletarianised Australians have gone on a baby-strike in response to not being able to find homes).
Our obsession with property, and the surrounding property-supporting policy settings, is a major reason why, despite being a wealthy country, we don’t seem to be able to ‘do’ as much as we did decades ago. We have built a property altar on which we increasingly sacrifice our entire national wealth. We are like the homeowner who has massively invested in renovations of dubious value, running up a mortgage that has now started to exceed our ability to service it without letting out rooms in what is meant to be the family home.
The silver lining is that there is immense upside potential for Australia if we can inject even a bit of Henry George-ism into our political economy. A shift away from taxes on productive activity and toward land and natural resources would rebalance our economy away from unproductive rent-seeking and towards productive activity. The same goes for the rest of the Anglosphere, where a similar property-mania prevails.
We won’t be able to reach the ideal of LVT being the ‘single tax’, but we can substantially improve the overall tax balance and in doing so, help revamp our political economy to stop the diversion of all our wealth into the property idol.
Georgism in Australia today is politically tied to the liberal left (the Sustainable Australia Party advocate for a Georgist-style shift towards land/resource taxation), although with the growing recognition of the interconnected nature of multiple issues of concern to the national-conservative/postliberal right - housing affordability, falling birth rates, mass immigration, sluggish ‘real’ economic activity - a cross-party alliance might be able to get the camel’s nose in the policy tent. In particular, the continued reduction in home-ownership rates of Australian citizens opens the door to a revenue-neutral Georgist tax shift tied to a deal on immigration and citizenship. The mainstream right may even be dragged along to a Georgist solution in order to head off the more thoroughly socialistic response to our housing crisis that will inevitably arise. A tax that allows us to reduce income tax, reduce income inequality, increase growth and increase rates of home ownership with the incidence falling disproportionately on foreigners? Surely that can be made to work!
Labor and the Money Power: Australian Labor Populism, 1890-1950, pg 28
Very insightful!