The Trickle Up Economics of Privatized Land Rents

Assessing the impact of privatized land rent on economic growth

by Serban V.C. Enache

A new study from Prosper Australia Research Institute investigates the relationship of the land rent as share of GDP with the rate of economic growth. Since WW2, there has been a negative correlation between Australia’s total land price and the rate of economic growth. The public narrative focuses on labour’s income flowing to capital. The study demonstrates how rapidly rising land prices have squeezed both labour and capital. Land reform is the key component to a fairer and smoother rate of growth, one where those at the lower end of the economic spectrum become key drivers of the economy. Australia’s valuation of land as a separate asset class is globally unique. Because of this, the impact of land prices on the economic cycle is often underplayed. With land becoming increasingly commodified, the findings of the report are timely.

The Summary reads as follows:

The economic rent of land (rental value plus smoothed realized capital gains) has increased from 2% of GDP in the early 1950s to more than 20% of GDP in 2017.

The Global Financial Crisis and the recession of the early 1990s were preceded by notable shrinkage of the percentage of GDP accruing to labour and capital, as distinct from land.

An increase in land rent of 1% of GDP corresponds to a loss of 0.124% per annum in GDP growth.

According to these correlations, the gains of landowners do not “trickle down” to labour and capital. On the contrary, there is a “trickle up” effect. When labour and capital get a greater fraction of GDP, growth is faster, and the cumulative effect of that growth will eventually make landowners better off in absolute terms, although not in relative terms.

Since 2003, the economic rent of land has consistently exceeded 15% of GDP. Private rent extraction is a drain on the capacity of workers and employers to invest in future growth.

Taxes that improve the competitive position of tenants and land buyers relative to landlords and sellers — such as land-value taxes, and vacancy taxes (applicable to both bare land and vacant accommodation) — have negative deadweight.

In order to maximize growth, we must minimize rent extraction by maximizing the bargaining power of labour and capital relative to land.

The excessively wide scope of “capital” tends to overstate the share of GDP accruing to the active factors of production (labour and capital). This tendency is partly offset by failing to allow for the incidental capture of land rents and capital gains through the income-tax system, which cuts into the share of GDP taken by land. The degree of “incidental capture” is less than would be suggested by nominal rates of income tax, for three reasons:

a)Imputed rents are not explicitly assessed and are taxable only to the extent that they are realized or disguised as assessable income. b)Capital gains on owner-occupied residential land, and on all assets acquired before 1985, are exempt. c)Capital gains on assets acquired by individuals after 1985 have always received concessional treatment (5-year “averaging” before 1999, and discounting thereafter).

Considering only that the economic rent of land is not a cost of production, one would conclude that a tax on that economic rent has zero deadweight. If there is a further mechanism by which the tax induces productive activity, the deadweight becomes negative. This is the case, for example, with a land-value tax, which induces owners to seek tenants in order to cover the tax liability. It is also the case with any tax on uplifts in land values (e.g. due to infrastructure), insofar as the prospective revenue motivates the government to invest in infrastructure, which in turn reduces transaction costs, leading to gains from trade. [My comment: The motivation for the National Government to invest in infrastructure should be determined by idle resources and physical outcomes, desired objectives, not by its impact on tax revenue]

Except at a few isolated times in the distant past, the fraction of GDP flowing to land is grotesquely understated in economic texts. Contrary to some beliefs, that fraction tends to grow over time. If Australia were to replace all existing taxes by taxing the economic rent of land, the adequacy of the final tax base would depend on some of the forgone revenue (from the abolished taxes) being converted into additional rent. Theory and history provide confidence that the necessary conversion would occur. Confidence is increased because the theory applies not only to the abolished taxes but also to their deadweight costs. If the category “land” is expanded to include land-like assets other than terra firma, it is no longer clear that any conversion is needed (cf. Fitzgerald 2013).

Now if we can only get activists, policy makers, and more importantly, the general public to understand all this. The present way of doing business is inequitable and inefficient. More to the point, there’s a better way to do it – tax economic rent and untax labour, consumption, and production (man-made goods and improvements to the land). It is economically efficient and morally just to do so.

Serban V.C. Enache is a Romanian journalist and indie author. Though interested in history, politics, and economics, his true passion is for medieval fantasy fiction. He can be reached over Twitter.

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