07 May 2009

A fuller explanation of the economic and constitutional principles of "A Creative Solution to Unemployment & Poverty"

2008 by P Meakin and P Bateman.

Constitutional principles

• Arbitrary deprivation of property?
  
  If a tax shift to land is found to be an "arbitrary deprivation of property" as sec 25.1 Bill of Rights then compensation must be paid. This will need to consider that land owners will simultaneously be enriched by the elimination of taxes on their work, other investments and VAT. An arbitrary deprivation of pure land rents presupposes that these are intrinsically personal revenues [like building rents] that are earned and not merely taken from the public revenues of a common heritage. However the amount of compensation is also limited as sec 25.3 by "the extent of direct state investment and subsidy in the acquisition and beneficial capital improvement of the property." This may rule out any payment for land whose value is driven by government infrastructure such as roads, railways, ports, irrigation, electricity and the spectrum. Buildings, fences, dams and pumps as well as orchards and crops are private improvements and will attract compensation, excluding depreciation.
• Mitigating capital losses
  
  Owners can mitigate any capital losses by simply growing, rearing or building things on their unused land. Revenues from this work and the capital deployed become tax free. Higher building rents will prevail because these rents become freed of tax. Higher P/E ratios will also prevail in South Africa once unemployment becomes voluntary. This will increase the capital value of all other investments such as farms, houses, factories offices and shops.
• Compensation considerations IRO of residences
  
  When buying a house the owner-occupier is also buying an imputed rental stream which he or she thinks will be sufficient to redeem the capital cost over [usually] sixteen years. In the event that there are circumstances where a gradual change to the single land tax has a material impact on the livelihood of the owner through no fault of his own then the State could decide to waive the tax for the period that remains of the pay-back period. Alternatively the state can pay the present value of the prevailing land rents for the remaining pay-back period in cash or bonds. Owners will be mindful that land rent and values even today are not cast in stone and are anyway beyond their control. Title deeds of properties in Mozambique were handed back to the Maputo municipality during the civil war there to avoid rates and taxes.
• Single land taxes "fit" the Constitution
  
  It is difficult not to conclude, as sec 25.5 demands, that the single land tax is by far the most "reasonable legislative measure" that the State can take "within its available resources to foster conditions which enable citizens to gain access to land on an equitable basis" where equitable means affordable and therefore free, subject to the land tax which anyway requires less resources than now.
• Discretionary powers of the Minister of Finance
  
  The Minister of Finance has no obligation to continue subsidising land values or bread or anything. An important proportion of the national budget is currently derived from land revenues and the Minister of Finance has long had the discretion to adjust PAYE, property, corporate and VAT rates. Last year he decreased corporate taxes to 28% to "stimulate investment." He therefore has the discretion to confine his budget entirely to land taxes and so also make raw land affordable.
• Bank lending
  
  The banks do not normally lend money to buy vacant land. In developments improvements are funded from monthly draws which are certified by the architect.
• Freehold tenures conflict with other rights.
  
  The right to freedom is can only be asserted if people are able decline employment contracts on the grounds that they can earn an independent living on land which they own. The right to dignity depends on being self-sufficient, not reliant on others including the state. The right to equality is fatally diminished when landowners not the landless, benefit from land price subsidies.
• Halting the larceny which SARS exacts
  
  Land taxes not only reduce the cost of employees, capital and trade but halt the larceny which SARS exacts. Land taxes are not theft but simple user charges which, I paraphrase here, are an "individual benefit principle which links the amount paid to the benefit received by a specific individual" according to SA National Treasury's own 2006 Environmental Fiscal Reform Study.
• Preamble
  
  Finally the justification for using the earth's bounty to pay taxes is found in the Preamble "We believe that South Africa belongs to all of who live here." This means not sub-dividing the country into twelve million stands but using South Africa's natural revenues [those which are not man-made] to fund all taxes.

Economic Principles

• What will happen to house prices?
  
  When land rents are forfeited as taxes that does not mean that houseowners will be worse off as building rents and prices are likely to rise. If not P/E ratios will lengthen. Perhaps both these events will occur. Nevertheless the value of bricks and mortar relentlessly fall because of depreciation and obsolescence. For argument sake the demolition gangs or the renovators will start knocking at the gate when the average house is twenty five years old. Its economic life can of course be extended for centuries but that depends on more capital being regularly applied. Ignoring inflation, the value of bricks and mortar will therefore reduce by an average of �4% each year due to depreciation and obsolescence. So when house prices rise by 10% the land value, if 40% of the total price, will have increased by 30%. When house prices fall by 10% the land price falls by 20%.
• Land rent and taxes depend on natural resources, location, and services.
  
  Land rent, as the Ricardo definition, is the surplus product of land after the costs of wages, profit, interest and supplies have been deducted. For example if identical twins own matching potato farms but only one has water rights then that farm will yield a surplus of potatoes for the same effort. The value of that surplus is the rent. This rent rule also applies to a shop in St Georges St compared to identical premises in Lansdowne Rd or a factory in Epping as opposed to the same structure in Atlantis.
• Land rent also relies on the enforcement of private tenures.
  
  For instance there is no rent when others can appropriate the fruits of ones work. In the December 2006 Farmers Weekly, Mr M Sityebi, a fifth generation rancher from the former Transkei explained that a simple thing like fences are not allowed by his tribal authority so scab and other diseases as well as rustlers, and predators are rife. The lax feudal land tenures in the former homelands date from the time that there was so much land for everyone that no formal rules of private ownership were necessary.
• The capital cost of raw land is a multiple of land rents.
  
  Capital Cost=[[R minus T] divided by C] where R is the annual land rent, C the appropriate cap rate and T the tax rate as a percentage of the annual rent. When the tax rate equals 100% of the rent then the land price becomes zero. This is anticipated in sec 25.5 of the Constitution.
• The supply of unused land increases as land taxes increase.
  
  Taxes on all other wealth reduces supply. The notorious window taxes in the UK during the industrial revolution led to windows being bricked up.
• The cost of capital will decrease when interest and profits are freed from taxes.
  
• Land enjoys perpetual revenues.
  
  On the other hand buildings and machines suffer from depreciation and frequently do not last even a generation before the demolition gangs or the renovator's move on site. This means that when property assets escalate in real terms it is only the land values which increase because the houses, factories, shops and offices are shedding value each year until they are worth only the scrap value.
• In common law raw land rents and values are the property of the community.
  
  The wealth in the land depends on the natural endowment of the soil, weather, views, rivers and oceans, minerals and precious metal deposits and the spectrum as well as community services and facilities. None of these are the fruits of individual human work or capital. It is therefore consistent with common law that raw land values be viewed as the property of the community [the tax payers] and not individual owners. As the Preamble states:- "We, the people of South Africa believe that South Africa belongs to all who live in it." Owners wealth properly lies in tax-free improvements.
• Infrastructure projects increase nearby land values. Land taxes capture this value
  
  The gratuitous transfer of wealth to property owners from public infrastructure is known as a value leakage. It is the easiest way to get rich. The best known South African example is the Gautrain where the R22Bn costs paid by all tax payers have leaked into the pockets of landowners close to the new stations. This phenomena was the subject of "Taken for a Ride" by Don Riley, and published by the Centre for Land Policy Studies, London in 2001. Riley found that land close to the new �3.5bn Jubilee Underground, some of which he owned, increased by some �13bn because of the new line.
• Every property boom in history has been followed by a property slump.
  
  By taxing land property booms are mitigated. This is because investors will turn their back on land investments which yield neither rents nor profits.
• Conventional taxes are known as a "dead-weight" burden on the economy.
  
  This is because of the real cost of collection, avoidance and compliance. In the USA these are reckoned to eat up 10% of GDP annually. On the other hand land taxes are easy to collect, impossible to avoid, and simple to obey. They are like rates and taxes.
• Land taxes are currently a part of property rents.
  
  They will need to be increased from some �3% of GDP in South Africa to 25% by cancelling other taxes. Ministers of Finance are mandated to alter the tax rates of different revenue streams. Minister Manuel changed corporate taxes from 29% to 28% in the 2008 budget. He noted that this will decrease the cost of capital and create more jobs without acknowledging what jobs might be created when the entire 28% corporate tax is ditched.
• Any land theft that occured was actually from future generations not prior ones.
  
  This is because when there are no land taxes, where raw land is brought and sold like any old article of trade, then each new generation of South Africans has to rely on its predecessors to acquire land for them or to pay the social security bills to keep them alive. The cost of this to South Africans in 2008 was 20% of the entire budget.
• A land tax is really not a tax at all but a user charge.
  
  Here is the distinction between taxes and user charges as defined by the SA National Treasury's 2006 Environmental Fiscal Reform Study:- 6.1.1 A tax is defined as a compulsory unrequited payment not proportional to the good or service received in return for that payment. Since the payment made by an individual or firm does not necessarily equal the benefit derived, the general benefit principl applies. 6.1.3 User charges �.can be defined as requited payments for specific goods or services rendered. These payments are based on the individual benefit principle and attempt to link the amount paid to the benefit received by a specific individual.
• Land taxes have been accused of prompting the covert nationalisation of land.
  
  To the contrary a land tax is not an expropriation order; no title deeds are altered. Secondly all improved assets and especially farms will increase in value when relieved of those taxes duties and levies which trigger high input costs. This enrichment will not occur to farms or erven which are unused and may not apply to those which are under utilized. This is because the natural and community benefits of land prevail independently of their use. Land taxes can also be entirely mitigated by bringing land into production. Whether owners do this using the lower costs of capital and inputs which will prevail under a single land tax regime is up to them.
• There are other rewards in restoring the dignity and freedom of South Africans.
  
  The poor are currently dependent on employers or the state because they are unable to sustain themselves on the land. Landless men and women will be free and their dignity secured only when they are in a position NOT to take up a job.
• Land taxes reduce the value of unused land but other property values will rise.
  
  The value of improved houses, farms, factories, offices and shops will be boosted because of their tax free status. They will be further enhanced by the start of a higher price:earnings ratio regime in South Africa once uncertainties about the "land question" have been finally resolved.
• The R88Bn Gautrain windfall profits
  
  Conventional taxes unfairly discriminate against the vast majority of taxpayers; few of them receive any capital benefit from the taxes they pay. For example the tens of millions of taxpayers who do not live near a new Gautrain station will not share in the R88Bn windfall land value increases which the railway is likely to yield.
• House owners do not pay personal taxes
  
  Also land taxes remove the damning stigma that many owners of residential land do not pay personal taxes but merely advance funds to the fisc and await their payback from higher land prices.
• Land subsidies currently amount to four trillion rands
  
  There is another alarming stigma is the State's subsidy of land prices. Land has no production cost but it has a value which relies entirely on nature, location, zoning, infrastructure services and population growth. None of these are in the power of the owner to change yet when these unearned benefits are not paid for, are not taxed, then owners are in the money. My calculations suggest that in capital terms this subsidy currently amounts to two trillion rands. This money is only realisaeable on sale: in Mozambique prices fell to zero during the revolution.
• Five or ten years to re-structure mortgages
  
  Until recently banks did not lend against raw land. If they have bonds over such land then they will have five or ten years to re-structure these. All other assets will likely rise in value due to their tax free status and the higher P/E ratios which will prevail once unemployment becomes voluntary. In fact it is common cause that real farmers, not land speculators, will benefit most from the single tax. If they have vacant lands then they need only grow or rare things on it to mitigate the new losses.
• No tax avoidance or evasion possible
  
  Land taxes remove all grounds for [now at �R20bn pa] and bad debts [R46Bn recently written off].
• Californian School
  
  This principle is not taught in universities, except in the Californian School. Brian Kantor's "Understanding Capitalism: How Economies Work" 1995 excluded land rents entirely. This means that the nationalisation of land rents, not land, and the simultaneous privatisation of private earnings was not up for academic discussion. Some will shiver at even the mention of nationalisation but in this context it is benignly beneficial fair and capitalistic: pay for what you use and pay what anyone else will.
• Cause of recessions and depressions
  
  Note too that the cause of recessions and depressions is not junk bonds, greed, or weak regulations but the failure of government to collect land rents by taxation. Once land prices are retired in this way the temptations of "something for nothing" land price investments will disappear. That is entirely proper and banks are anyway experienced at lending against depreciating assets like cars, plant, equipment and furniture.
• Land taxes can be fixed at 28% of the GDP
  
  For commercial, rent producing land, taxes can be set at 28% of the GDP of each registered land right in South Africa OR its assessed annual value whichever is the higher. GDP of each erf is the value added portion of sales less purchases.
• Substituting the R29.2 billion agricultural imports
  
  Ignoring life-style farming, there is scope for small farmers to help in substituting the R29.2 billion agricultural imports in 2007.