LAND
A N D
L I B E R T Y
ECONOMICS • POLITICS • PHILOSOPHY
November/December 1992
(UK)£2.00 (USA)$3.50
RUSSIA: CREATING A MORAL
MARKET
FINANCE: A PRIVATE AFFAIR
ADAPTING
THE POLL TAX
HOUSING: A LAND
MORATORIUM
LAND
AND
E D 8T O R I A I
LIBERTY
Volume
99
No
Established
1160
1894
ggggflggag
EDITORIAL
RUSSIAN LAND BARONS
Fred Harrison
TALKING POLITICS
Lewis L i t d e
4
NEWS BRIEFS
5
FEATURE
FINANCE
Ed Dodson
6
L A N D & L I B E R T Y ESSAY
RUSSIA & T H E F R E E M A R K E T
Fred Harrison
7
B O O K REVIEWS
Ian L a m b e r t :
Carnivals of D e s t r u c t i o n
Peter Poole:
10
T h e L o n g Wave
11
Geoffrey Lee:
Poverty in t h e U S A
12
FRONT PAGE: St. Petersburg's Information Bulletin, a 16-page property
newspaper reporting auction prices.
Editor: Fred Harrison
Editorial Consultant: V.H. Blundell
Picture Editor: Keith Hammett
Art Editor: Nick Dennys
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"my**
MISSION TO
THWART AGE
OF DARKNESS
T H E R U S S I A N R E V O L U T I O N h a s b a r e l y b e g u n . MikhaU G o r b a c h e v w a n t e d
t o p r e s e r v e t h e l e a d i n g r o l e o f t h e C o m m u n i s t Party, b u t h e l e t t h e g e n i e
of individual f r e e d o m o u t of t h e bottle t o o soon. Peking used t h e massacre
o f T i a n a n m e n S q u a r e t o d e m o n s t r a t e t h a t it was n o t m a k i n g t h e s a m e m i s t a k e .
B o r i s Yeltsin was t h e h u m a n c o n d u c t o r f o r t h e f r u s t r a t i o n s o f t h e p a s t
t h r e e g e n e r a t i o n s * b u t h e is n o t p r o v i d i n g t h e i n s p i r a t i o n t h a t will c r e a t e t h e
c h a r a c t e r of t h e n e w R u s s i a n society. T h e p e o p l e o f Russia a r e n o w actively
searching for a new identity.
B u t t h e W e s t n e e d n o t b e c o m p l a c e n t : w e believe t h a t , w i t h t h e b e n e f i t
o f h i s t o r i c a l h i n d s i g h t , t h e 1990s will b e i d e n t i f i e d as t h e d e c a d e t h a t saw
t h e b e g i n n i n g s of a g l o b a l t r a n s f o r m a t i o n .
Peoples are quiedv rebelling.
• I n E u r o p e , t h e n a t i o n - s t a t e s t r i e d to f u s e t h e i r p o w e r i n t o a s u p e r - s t a t e ,
b u t the politicians f o u n d themselves with bloody noses. Now, t h e scramble
is o n t o r e d e f i n e t h e r o l e o f t h e s t a t e itself, t h e l e g i t i m a c y o f w h i c h is likely
t o c o m e u n d e r i n c r e a s i n g q u e s t i o n as p e o p l e d e m a n d a n h o n e s t d e v o l u t i o n
of power to t h e smallest possible practical units.
• I n t h e U n i t e d States, t h e Ross P e r o t p h e n o m e n o n p r o v e d t h a t p e o p l e
h a v e h a d e n o u g h of slick talk a n d p a r t y m a c h i n e s : t h e y w a n t c h a n g e .
C h a n g e is in t h e a i r , b u t f e w p e o p l e u n d e r s t a n d h o w t o creatively h a r n e s s
a n d d i r e c t t h e n e w d i s c o n t e n t T h e r e is a s m u c h c y n i c i s m a b o u t liberal
d e m o c r a c y as a b o u t c o m m u n i s t c o m m a n d . S o is t h e w o r l d c o n d e m n e d t o
a freefall i n t o t h e h a n d s of a silver-tongued d e m a g o g u e ?
C o u l d b e ; it all d e p e n d s o n t h e way in w h i c h f r e s h i d e a s a r e n o w d e v e l o p e d
t h r o u g h p u b l i c d i a l o g u e . A n d , frankly, t h e p a c e m u s t b e set by t h e o n e w o r l d view a r o u n d t o d a y w h i c h c h i m e s with social a n d e c o l o g i c a l i m p e r a t i v e s : t h e
t e n e t s a s s o c i a t e d with A m e r i c a n social r e f o r m e r H e n r y G e o r g e .
T h e G e o r g i s t m o v e m e n t , u n f o r t u n a t e l y , h a s f a i l e d t o d e v e l o p t h e sociological a n d h i s t o r i c a l i m p l i c a t i o n s of its p h i l o s o p h y . F o r d e c a d e s , it h a s s o u g h t
t o k e e p alive t h e i d e a of s h a r i n g t h e v a l u e of n a t u r a l r e s o u r c e s by a d v o c a t i n g
local tax r e f o r m . T h e f u l l g r a n d e u r o f G e o r g i s t p h i l o s o p h y w a s lost in t h e
p r o c e s s , left t o fossilise in its 19th c e n t u r y g a r b , l e a v i n g f r e e all m a n n e r of
i n t e l l e c t u a l c h a r l a t a n s t o s t r u t t h e p l a t f o r m s of t h e w o r l d in t h e 2 0 t h c e n t u r y .
G e o r g i s m is a n a p p l i e d p h i l o s o p h y t h a t n e e d s to b e s c r u t i n i s e d by social
scientists, so t h a t p o l i c y - m a k e r s c a n h a v e c o n f i d e n c e in its r e l e v a n c e as t h e
p r o b l e m - s o l v i n g tool t h e y d e s p e r a t e l y n e e d . E n o u g h , t h e n , of t h e m u n i c i p a l
m e n t a l i t y . H a v e faith in a r a d i c a l vision w h o s e t h e o r e t i c a l e l e g a n c e , m o r a l
credibility a n d a d m i n i s t r a t i v e practicality i d e n t i f i e s it as t h e b e a c o n o f l i g h t
in w h a t is r a p i d l y t u r n i n g i n t o a n Age of D a r k n e s s .
Publisher Land & Liberty International
at the London editorial offices
PAGE
LAND
8c
L I B E R T Y
SEPT/OCT
1992
RUSSIA FOR
THE NEW
LAND BARONS?
T H E C O L D WAR may b e over, b u t
a neuiwar is n o w b e i n g waged against
Russia. T h e stakes a r e h i g h : t h e l a n d
a n d n a t u r a l r e s o u r c e s of t h e largest
unprivatised territory in t h e world, is
ripe f o r t h e Last - a n d Biggest - L a n d
Rush i n history.
Employing blunt instruments,
Western g o v e r n m e n t s a n d their financial a g e n t s a r e trying t o f o r c e t h e
Yeltsin g o v e r n m e n t t o privatise l a n d .
T h e i r c o m p a n i o n s in this ideological
war i n c l u d e western investors, whose
threat is a s i m p l e o n e : w i t h o u t t h e
f r e e h o l d t i d e t o l a n d , they will n o t
invest t e c h n o l o g y a n d h a r d currency.
T h e a r g u m e n t t h a t t h e investors
n e e d t h e security of f r e e h o l d tide t o
land is s p u r i o u s - n o t a single investor
in H o n g K o n g o w n s t h e f r e e h o l d of
t h e sites o n w h i c h h i s skyscrapers a r e
erected!
N o t d e t e r r e d by t h e facts, Swed e n ' s l a n d u s e office h a s even ann o u n c e d t h a t it is p r e p a r i n g a law for
land privatisation, b e c a u s e t h e existing land-use system in Russia is anarchic - a c u r i o u s criticism, given t h e
chaos in western l a n d m a r k e t s !
S o will a n e w b r e e d of land b a r o n s
m o v e in o n Russia? N o t if t h e civic
leaders of towns like t h e o n c e t o p
secret SasnoviyBor ( p o p : 65,000) have
a n y t h i n g t o d o with iL
N O T S O L O N G A G O I would have
b e e n s h o t f o r p o i n t i n g my c a m e r a at
t h e a t o m i c p o w e r station in Sasnoviy
Bor, w h i c h celebrates its 20th anniversary n e x t year.
As Soviet towns go, it is a n attractive s e t d e m e n t , located o n sand-andp i n e a n h o u r ' s train r i d e west of St.
P e t e r s b u r g , a l o n g t h e Gulf of Finland.
Last May, r e s p o n d i n g to P r e s i d e n t
Yeltsin's d e c r e e , t h e city council decided t o sell f r e e h o l d tides to its land.
T h e n Victor Barov, a c o u n c i l official,
a t t e n d e d a s e m i n a r a d d r e s s e d by
LAND
&
LIBERTY
advocates of d i e p h i l o s o p h y of American social r e f o r m e r H e n r y G e o r g e .
They o u d i n e d the dynamic benefits
associated with t h e abolition of all
taxes a n d using land-rents to f i n a n c e
g o v e r n m e n t services.
Barov b r i e f e d his council, which
immediately d e c i d e d t o reverse its
privatisation policy. In f u t u r e , l a n d
leases can be b o u g h t , with a n a n n u a l
r e n t payable to t h e town. But t h e r e
a r e p r o b l e m s in t h e way of this strategy, n o t least t h e d e v e l o p m e n t of a
m a r k e t which can accurately m e a s u r e
t h e value of sites. It is, however, only
a m a t t e r of time b e f o r e t h e m a r k e t
prices a r e established.
SASNOVIYBOR is s u f f e r i n g t h e grief
felt by most towns in Russia today.
Most of the postwar towns w e r e built
a r o u n d a single factory o r t h e exploitation of a natural resource. I n Sasnoviy
"Next year home-owners will
acquire leases and pay rent to
the council"
Bor's case, 6 0 % of e m p l o y m e n t is in,
or associated with, t h e a t o m i c p o w e r
station.
With a fragile ecological h i n t e r land that is n o t suitable f o r agriculture, t h e only o t h e r m o n e y - s p i n n e r
that can be n u r t u r e d is a lively c o n struction industry, which t h e town
plans to break u p a n d privatise.
S o m e privately o w n e d single-family h o u s e s a r e already u n d e r construction: n e x t year t h e h o m e - o w n e r s will
a c q u i r e leases to t h e sites, a n d pay
r e n t to the council.
Meanwhile, however, h o w can t h e
c o u n c i l p l a n f o r t h e f u t u r e ? It is
p e e r i n g into a d a r k void. Its b u d g e t
is 9 0 0 m roubles, a n d t h e town g e n e r a t e s a n i n c o m e of 12bn r o u b l e s , b u t
analysing t h e existing statistics would
SEPT/OCT
1992
be meaningless.
T h i s year, f o r t h e first time, enterprises w e r e obliged by f e d e r a l fciw
t o pay a l a n d tax. T h e c o u n c i l u n d e r t o o k a c r u d e valuation of t h e l a n d ,
a n d h o p e s t o raise 2 5 m roubles
( t h o u g h s o m e of t h e bosses of landrich state e n t e r p r i s e s a r e telling t h e
council to ask Moscow f o r t h e money?).
N e x t year, if t h e s a m e tax applies, t h e
c o u n c i l h o p e s to raise 5 0 m roubles.
T h e c o u n c i l r e g a r d s Yeltsin's l a n d
tax as low, a n d it wants t o s h i f t to a
system u n d e r w h i c h e n t e r p r i s e s pay
r e n t f o r t h e l a n d they o c c u p y , u n d e r
t h e t e r m s of t h e teaseswhich a r e b e i n g
p r e p a r e d . L a n d is n o t in s h o r t supply:
v a c a n t sites a r e available f o r f i r m s t h a t
w a n t t o l o c a t e in t h e town.
E C O L O G Y i s u p p e r m o s t in t h e m i n d s
of t h e citizens of Sasnoviy Bor. T h e y
w a n t t h e i r town to b e s a n c t i o n e d by
t h e f e d e r a l g o v e r n m e n t as t h e c e n t r e
of a n eco-potis, s u p p o r t e d by a Georgist
tax s t r u c t u r e t o attract Job-creating
firms.
But would the rental income
g e n e r a t e d in t h e a r e a b e sufficient t o
f i n a n c e t h e t o w n ' s n e e d s ? W o u l d this
s o c i a l i s e d - r e n t strategy s u p p o r t a n
e n v i r o n m e n t - f r i e n d l y policy? M o r e
q u e s t i o n s t h a n definitive answers: we
h a d t o e x p l a i n t o M a y o r Valeriy
N e k r a s o v t h a t e c o n o m i s t s h a d betrayed t h e m a r k e t e c o n o m i e s , for such
q u e s t i o n s c o u l d n o t even be adequately a n s w e r e d in t h e W e s t For
now, h e h a d to a c c e p t o n g o o d faith
t h a t t h e p r o p o r t i o n of i n c o m e
m o p p e d u p by t h e l a n d m a r k e t in t h e
f o r m of r e n t would, i n d e e d , be suff i c i e n t t o pay f o r necessary social
services.
T h e m a y o r f o u n d this reassuring,
a n d h e m a d e it clear t h a t they would
c o n t i n u e with Georgist ideas for evolvi n g t h e social a n d e c o n o m i c infras t r u c t u r e of t h e town.
PAGE
3
for far more than the allocation of new houses set out
THE construction industry is the weather vane of the
in the structure plans covering the period to 1996. The
economy. Builders would like to build houses. Britain is
difficulty is that much of this land is simply not in places
said to need a programme of 100,000 new houses a year.
where
people want or need to live. My suggested moraYet plant lies idle. Architects, surveyors, skilled craftsmen
torium
on refusal of planning permission for housing
and general labourers would all like to work. Bricks, tiles,
development might offend a few sensibilities, but that is
cement, timber and all manner of fittings and furnishings
no reason to continue to inflict leaky roofs and cold, damp
are to be had for the asking. Yet building activity is quiet,
walls on so many of our fellow-citizens!
which is to say distressed.
There is therefore much that cao be done, even
The wild days of speculation in housing land - and
without a more fundamental approach to the land quesnot just housing land - are over. The slump is with us,
tion. Proponents of the taxation of land values rightly lay
probably for some considerable time. Eventually, though,
stresson the artificiality of the land shortage. Undoubtedly
there will be recovery, signalled not so much by green
a tax on the site value of all land could have an enormously
shoots as by puffs of red brick dust.
beneficial effect by stimulating redevelopment of poorly
Now is a good time to set housing needs in perspective.
used land and bringing
The population of the UK
vacant
and derelict sites to
at the 1981 census was
The
first
step
in
solving
the
housing
crisis
market.
It would also disunder 56m. Let us assume
courage
urban sprawl and
is
to
stop
pretending
there
is
the
slightest
justhey are in families of four,
take
pressure
off land in
so that we have 14m housetification for it.
g r e e n belts. T h e r e is,
h o l d s . L e t us a s s u m e
though, artificial scarcity
houses will be built at a
now, even by the criteria of a society which accepts private
density of just eight to the acre - a much more spacious
appropriation of land r e n t LVT would work best if these
allocation than now. This means that the whole UK
land use planning restrictions were curtailed and applied
population may be comfortably housed on only 1,750,000
sensibly. Bad planning will distort, even in an LVT regime.
acres, or less than 2,750 square miles.
The overall land area, excluding inland water, is over
93,000 square miles. Put slighdy more dramatically, the
N O T IN MY BACK YARD
entire population could be very adequately accommoSITE VALUES reflectand interact with public policy and
dated in not much more than half the land area of
private activity. At present, the NIMBY attitude, though
Northern Ireland, leaving all of the rest of the UK for
understandable u p to a point, is distasteful and selfish.
farms, factories, offices, shops and leisure. Truly, we do
Homeowners who have the ear of local politicians can
not live in crowded, over-populated islands. Our housing
manipulate planning procedures to prevent further
problems are self-contrived.
development and gain residential exclusivity. They see it
The first step in solving the housing crisis is to stop
as protecting their amenities and lifestyle. An artificial ring
pretending there is the slightest justification for it. A
of scarcity is drawn around their desirable residences,
radical programme would make an immediate start by
which acquire thereby a site value reflecting the area's
lifting planning restrictions. There is no shortage of land.
social cachet. Existing residents enjoy this land value not
If a "holiday" were to be declared for the rest of the
only whilst they continue to live there, but even when they
century, and refusal of planning permission prohibited
go,
because they are able to capitalise it and sell it on to
except in a small number of special circumstances, the
the
next buyer of their house.
monopoly, "scarcity" value of land with planning permisThere
is no reason to deny NIMBY people residential
sion would be destroyed. Down would come the cost of
exclusivity. Equally there is no reason the rest of us should
the site as a component in house-building. Very litde new
not be compensated for die loss of amenity. NIMBY
land is actually needed. Most would come from redeveloccupiers expect to pay for exclusive rights to enjoyment
opment as slum landowners panicked at the thought of
of land, but NIMBY landowners (who may or may not be
being left out if whole populations were to drift away from
the same people) should not be allowed to get away with
the areas in which they are now entrapped.
the profits. LVT would take care of this.
The regional planning conference of local authorities
in London and the south-east of England recently proLEWIS LIT tt.€
duced figures to show there was enough land available
PAGE
4
LAND
&
LIBERTY
JULY/AUGUST
1992
Round the world
TAIPEI
Tiger & the lamb
tion parties.
Wang earned his reputation as "the small steel
cannon" for his tough and
clean image. Last May he
was named Asia's Finance
Minister of the Year by a
Hong Kong magazine. None
of this was enough to save
his political career. Business
leaders opposed his plan to
cool the land market, even
though analysts say that
unaffordable land prices are
one of the primary reasons
why the profits of capitalintensive industries have
been damaged.
The politicians, fearing
Wang's land tax reform
would injure their electoral
prospects, decided he had
to go.
A VARIETY of land taxes to prevent the landlords
hoarding and speculating In
land - played a significant
role In turning Taiwan Into
one of Asia's tigers. But
because the fiscal philosophy was imperfect - a significant share of land-rents
was left in private hands prosperity nurtured the
seeds of an economic crisis.
Today, land prices on
Taiwan are ai unaffordable
levels. But the new speculators - businessmen who
have learnt how to reap large
capital gains without creating wealth - now caU the
shots in the political system.
Cheaper in China
And their first sacrificial
• Since 1987 Taiwan's
lamb is finance- minister
entrepreneurs have Invested
Wang Chien-Shien. He has
$3bn in factories on mainjus* resigned to help the
land China, where they can
rulfog Nationalist Party in the
lease land at much lower
December par Momentary
prices than on Taiwan.
•lection.
The
party
feared heavy lossesbecause
Wang wanted to curb land SAO PAULO
speculation.
Food first
Wang proposed a tend
transaction tax (with a elidWHILE tens of thousands of
ing scale of taxes based on
fertile acres of food-growing
the real value of the transland stand idle on the rich
action). Land transactions
haciendas, hungry people have
are currently taxed on the
begun rioting in Brazil's two
officially assessed value of
major cities. Now acting presithe land, which are almost
dent I Lamar Franco is preparalways far below market
ing a £100m emergency food
values. The need tor correcdistribution programme.
tive action has followed five
About 1,5m families will receive
years of escalating land
food parcels, in a bid to conprices. A recent survey retain the urban violence which
vealed that a middle-class
sociologists claim is the public
worker would never be able
expression of a 20-year trend
to afford to buy an aparttowards social breakdown.
ment In Taipei, even If he
saved his entire life's income.
WASHINGTON
Wang's reform was
Ranchettes
endorsed by 700 university
professors, but that was not
MID-SIZE farmers continue
enough to save him from the
to abandon their land, acheavy fire from the specucording to the US Agricullators and legislators from
ture Department. But at the
both the ruling and opposisame time, mini-farms and i
LAND
&
LIBERTY
SEPT/OC
T
"ranchettes" are sprouting
In the suburbs. But this Is
not a sign of economic crisis, insists the USDA; It
reflects the Increasing productivity of farms. The data
also shows a continuing
concentration of land ownersh ip, with the average size
of the US farm growing from
427 acres in 1982 to 468
acres In 1992.
LONDON
Boom boon!
THE London Business School
predicts that recession in Britain will continue for another
six months, with only a slight
upturn - at best - in 1993.
But a new report by Professor Gordon Pepper - published by the Institute of Economic Affairs - attacks the LBS
forecasts as "not worth the
paper they are written o n "
because they lake too little
account of abnormal levels of
debt. The professor's criticism
is also levelled at the Treasury
and the National Institute of
Economic and Social Research.
Private sector debtis based
on what analystscall the "credit
boom" - which was, in fact,
generated by the latest round
of speculation in land values.
People borrowed heavily on the
collateral of rising land prices,
which turned into a financial
trap for both themselves and
the banks.
How this turned the UK
economy lopsided - by skewing
investment behaviour - is illustrated by the statistics. Bank
lending to wealth-creating
businesses made up almost 70%
of bank loans in 1980, a figure
which dropped to 52% in 1989.
As the decade wore on, money
was redirected to land speculation. The Thatcher government regarded the house price
boom as a boon - evidence of
a "property-owning democracy" prosperity.
Then the bubble burst,
The policy-makers (and their
1992
economic gurus) knew not
what hit them. According to
Prof. Pepper, they still don't.
Council Tax
• Premier John Major's
"council tax", which comes in to
effect next April, could prove
as politically fatal as the poll
tax was to the Thatcher Administration. Estimates of the average council tax bill are soaring
to u600, but the government
is resisdng political pressure to
find money to keep the average below this figure.
TOKYO
Rebirth quake
A MAJOR earthquake could
c o m e at any time, ctabaseiemologistsk E c M s m i i t t at a
J a p a n e s e bank calculate
that a major shock, in which
30% of Tokyo's buildings
would b e destroyed, would
cut capital outflowand drive
up US interest rates. The na»
tion'sgrowthrate would turn
negative, but would rebound
to 12% a year. And the demand tor bnports to rebuild
Japan would g w a a strong
boost to the wot Id economy.
ATHENS
The pointless peach
COMMON MARKET subsidies
have encouraged Greek peach
farmers to triple production m
the last 10 years, with new
orchards planted on terraces
cut higher into the hillsides
around Skydra, the centre of
peach-growing in Greece.
P r o d u c t i o n will reach
650,000 tonnes this year - up
from 480,000 tonnes in 1991 but processing capacity is limited to 250,000 tones. So over
half the crop is being trucked
from the orchards to a barren
valley, where a bulldozer works
round the clock to crush the
crop.
PAGE
WHETHER GOVERNMENT is in the
hands of a monarchy, an oligarchy, a
representative body or a bureaucratic
state, one consistent behaviour is the
propensity to spend more than is
received in revenue. Governments
have always willingly spent to build
monuments to themselves with public
money. And, all too often, the public
is required to pay for adventuristic
wars or colonialism, which enrich the
few at the expense of the many.
A considerable part of the problem in the United States can be traced
to legislative and administrative laws
that went far beyond the powers
granted to the federal government
under the Constitution. Although the
Constitution permits the government
to borrow money, the original definition of money as gold and silver coinage has been subverted by the issuance of Federal Reserve notes as legal
tender for all government debts.
Not since the early years of the
Bank of Amsterdam in the sixteenth
century has any society experienced
the benefits of sound money and
honest banking. Within a few decades
after its creation, the Bank's directors
discovered t h e s h o r t - r u n p r o f i t
maximisation system of fractional
reserves. Every banking system subsequently established has followed the
Bank down this disastrous course.
Today, when the United States
government wants to borrow legal
tender from private investors, the
Treasury Department offers government securities for sale which, in effect,
are claims against future tax revenue
(and, more frequendy, against the
revenue raised by the issuance of more
securities). The Federal Reserve Banks
have no reserve requirements in terms
of gold or silver or any other commodities to which the redemption of
their Notes is tied. So, based on some
monetaristic model of the nation's
aggregate need for legal tender and
credit, they raise or lower the rate of
interest charged to member commercial banks for whatever borrowing
these commercial banks require to
meet demands for credit beyond the
deposits of legal tender .
If the Federal government's need
for revenue is sufficiently high, the
funds borrowed by commercial banks
from the Federal Reserve might very
well be reinvested in the securities
issued by the Treasury Department.
PAGE
6
F I 1i A r1 c E
A Private Affair
by EdDodson
The stability of the financial system has often been described as dependent on confidence. By permitting government to deficit spend as
normal practice, the USA is facing a
$4 trillion national debt, or about
$40,000 for every household. Assuming an 8% average annual cost of funds,
the tax revenue required to service
this debt comes to$520 billion. Before
the governmentcan spend one dollar
on programs that maintain or improve
our physical or intellectual infrastructure, each household must be taxed
some $3,200 on average. As almost
16% of all households receive incomes
insufficient to pay Federal income
taxes, the average tax payment required of the remaining 79 million
households is over $4,000.
In no country today is serious
consideration given to retirement of
national debt. Economists generally
seem to be either silent on the seriousness of this problem or argue that
the debt is not a real drain on economies so long as the debt is not increasing as a percentage of gross domestic
product. Perhaps. We will, of course,
discover in due course whether this
economic principle holds true over
the short run, the medium run or the
long run (the long run taking us out
to the time when most current taxpayers have died and the problem is
handed to the next generation).
We must introduce measures to
rein in the ability of government to
spend without direct permission from
the electorate. The first step is to
prohibit by constitutional amendmen t
the self-creation of credit. The revenue of all current expenditures must
come from taxation. Physical infrastructure - highways, mass transit,
bridges, public facilities - ought to be
financed by fully amortizing gold and
silver securities issued for periods tied
to the anticipated life of the improvements constructed. The annual budget
LAND
&
LIBERTY
would then include taxes sufficient to
cover all interest and principle payments.
Getting the Federal Reserve Banks
out of the business of issuing legal
tender can be accomplished by the
creation of a competitive system based
on the chartering of banks of deposit.
These banks would have n o tending
powers; rather, they would take in legal
tender and purchase a basket of precious metals, establishing for members a credit line against which electronic purchases could be made from
other members. Over time, a network
of these banks would link producers
and consumers together in a system
dial automatically debits and credits
member accounts when transactions
between members occur. Losses for
bad debts become a thing of the past.
Eventually, vendors could condition con tracts with government agencies on their membership in the system. The banks of deposit would earn
fees charged to each member. Many
existing commercial banks would
become members sis well, out of selfinterest, wi th the result that their ability
to create credit on the basis of fractional reserves would be checked.
With a global system established,
Gresham's Law is made to work in
reverse: good money drives out bad.
Over time, legal tender will circulate
at increasingly deep discounts. A wise
decision on the part of the citizenry
would be to press for legislation (or
a constitutional amendment) prohibiting the Federal government from
creating its own bank of deposit, although there is no reason why the
Federal Reserve Banks should not be
permitted to do so as a means of
systematically retiring outstanding
Federal Reserve notes. As for transactions of nominal amounts, the U.S.
Mint could be contracted by the Banks
to produce gold and silver coins of a
standard metallic content.
JULY/AUGUST
1992
CENTRE
FOR
INCENTIVE
TAXATION
ECONOMIC
INTELLIGENCE
EI/35 NOVEMBER 1992
A LIFEBOAT TO SINK RECOVERY
INVESTORS in Britain searching for a
medium term strategy must now accept
that deflation will continue for the next
year (unless there are more major U-turns
in Downing Street). The government's
strategy - the quest for low inflation - is
a sham that conceals a policy vacuum
which will persist until the Chancellor is
told to prime the pump (and thereby
generate inflation) few the 1996 election.
Premier John Major, backed into a
corner by the hostile public reaction to
his plan to kill 304)00 mining jobs, may
say that he is now planning a "strategy
for growth"; but he does not have a single
viable idea how to achieve this goal.
The same gloomy prognosis applies
globally. Policy-makers have still not
learnt that cons tractive action can be taken
to correct the economic malaise. So next
year we will see a repeat of the Lifeboat
Operation which, in 1974, swung into
action to save the financial system. This
time, however, the cost will be greater,
and will be attempted on the back of a
global economy that is haemorrhaging
badly. Banks may stay afloat, but more
taxpayers will sink under the burden of
taxation and high interest rates.
In the United States, taxpayers will
have to begin funding a SlOObn bail-out
of the thousands of failing banks which
have been crippled by reckless loans to
land speculators. Similar pressure is
mounting in Japan, where the government is being urged to relieve the banks
by buying 4m units of vacant housing.
Land prices are at the root of the
problem.The boom began oncue in 1985,
followed by south-bound prices leading
the way into depression, as illustrated by
the Bank of International Settlement
in the graph. The banks cashed-in on the
craze, and now want to be rescued. In
Japan, the Federation of Bankers' Association is finalising plans to create a
corporation that would buy from banks
the land which is being held as collateral
Property price index adjusted for consumer price inflation. Log scale. 1982 = 100
300
r
""*"
Residential
300
Commercial
260
Japan
60 I
i
1982
i
i
84
i
i• i
86
88
i
i
90
i
i I
92
Source: Bank lor International Settlements. Annual report. 1992
60 I
1 |
1982
|
84
I
e6
I i
i
88
i
i
90
i
|
92
for non-performing loans. These nonperforming loans are estimated at up to
Y50,000bn. Unlike Japan, however,
which has at least introduced a tax on land
prices to accelerate the recovery (see EI/
34), other governments are studiously
ignoring the land market for policymaking purposes.
True, Britain's Chancellor of the
Exchequer, Norman Lamont, now acknowledges that he is monitoring the price
of housing as one of the measures that
would guide decisions in the "battle"
against inflation (sic). But that illustrates
how governments have cornered themselves into an impossible situation. In
Europe, governments need to reduce
interest rates, to encourage investment in
capital equipment and new jobs. But by
reducing interest rates they would buoy
up expectations about renewed growth in
the price of land. And that does not make
sense, given current conditions and policies. For if the market is to be left to itself,
land prices will have to come down further
before we see new growth.
This dilemma is highlighted in a new
study by EI reader Andrew Tylccote, an
economics lecturer at the University of
Sheffield. The snag with lower interest
rates, he notes, is that they encourage the
speculative hoarding of land.
The solution, in his view, is the
introduction of a tax on land values - a
tax, indeed, which he regards as setting
the standard for Fiscal policy in general:
"look for taxes which, besides raising
revenue, improve both the distribution of
income and the allocation of resources in
the economy". Tylecote emphasises the
virtuous impact of the land-value tax:
"One kind of wealth tax, however,
has no distorting effect, because it is
practically impossible to avoid whatever
you do: the tax on the value of land...Land
taxation indeed offers much more than
B >
® Continued on Page 2, col. 3
BRITAIN'S Chancellor of the Exchequer, Norman Lamont, told a House of
Commons committee on October 12 that
he does not believe in "kick-starting the
economy by artificial stimulus". That was
an honest appraisal, for his alleged antiinflation strategy - if it is a policy at all
- was designed to kick the last traces of
life out of the economy. That policy has
now had grafted onto it an, as yet, undefined strategy for growth.
We are invited to rely on the chancellor's judgment on how he will respond
to monetary aggregates. Secretiveness
characterises that process, but we are told
that he will now look closely at "asset
prices", and particularly the rate at which
house prices rise or fall. Does this suggest
that the government has learned something from the policy failures of the past?
Gone are the days when soaring house
prices were welcomed as a sign of an
"economic miracle." The new fear is that
they signal deep-seated fault lines within
the UK economy.
The faults rupture the economy by
encouraging financial institutions and
fiscal policies to create an imbalance
between spending and saving. The outcrops of these faults are the debtoverhang
in the personal and company sectors, the
"bad debt" overhang in the financial
sector, and the large voluem of unsaleable/unlettable properties.
But what is John Major's Government going to do about it? Nothing of
substance, as evidenced by the way the
go vernment reacted when it saw the pound
heading for the buffers in the ERM: it was
too paralysed with fright to act, because
"all necessary measures" to defend the
pound - those which it had promised to
take - were too damaging to the rest the
economy. When the defensive measures
were not taken, the foreign exchange
markets knew that they were on to a oneway-bet by selling sterling.
But the government need not suffer
paralysis about changes in house prices.
Keeping them steady does not require a
chainsaw massacre of producers and
consumers through loosing artificially
high interest rates upon them. It simply
requires a surgical trimming of growth
in land prices through the use of a specific
tax on land rents. Land rents are - in the
words of Adam Smith - "the species of
revenue which can best bear to have a
peculiar tax imposed upon them."
A TAX upon land rents is sure in its effect
upon land prices. The effect is described
SURGICAL STRIKE OR
CHAINSAW MASSACRE
by the tax capitalisation equation:
PL =
(I - G + T)
Where:
PL = Land price
R = Rent
I = Interest rate
G = Growth rate (anticipated)
T = Tax rate on land
land rents would prevent (or minimise)
the violent amplitudes in land prices which
are the major cause of economic instability. Not only need there be no wealth
losses as a result of the policy, the security of property owners at existing levels
would actually be increased.
Preventing land prices from rising
would switch the economy into a production-led mode, and away from an asset
price-led mode. The attack on inflation
would be through the strengthening of the
economy, not by weakening it via high
interest rates. Adopting ano-growth target
for land prices, and acting to achieve it,
would deal a mortal blow to inflationary
expectations and remove the need for the
chainsaw treatment which Mr Lamont is
inflicting on the economy.
The tricky variable in this equation is the
anticipated growth rate, but the governmcntcan setit at zero by making a constant
aggregate land price its target, and taxing
land rent accordingly. Land prices need
not be at the mercy of "events - dear boy."
Not only would the target be hittable:
hitting it would also control the institutional behaviour and fiscal policies that
C o n t i n u e d f r o m p a g e 1.
cause the frictions within the economy
aharmless way of raising money. It would
which weaken the currency and produce
be highly redistributive in most
inflation.
countries...And since it would make
Stabilized land prices would remove
speculative hoarding of land prohibitively
the "escalator to riches" route to conexpensive, it would make for much more
sumption that by-passes the need to work. efficient use of scarce urban land: less
"Trading up" the housing ladder has
dereliction of unused properties, more
allowed widespread access to this esca- construction jobs available in the inner
lator. Rising land prices and erosion of
cities, less suburban sprawl.
the value of the related debts by inflation
"A side-effect would be a reduction
have raised personal and company net
in house prices and thus in consumer
worth, and reduced the need to save. The
borrowing out of capital gains anticipated
high borrowing and spending level that
by the owners. The mild deflationary
has resulted has further stoked up inflaeffect of this would be amply compention. The debilitating "stop-go" pattern
sated by the reduction in the debt burden
of growth, and widespread dependency
to which it would lead, and it would free
on inflation, have been the results.
governments to reduce interest rates."*
It is the land under buildings that
But housing markets are now seroller-coasters in price, and provides the
verely depressed, because negligent
basis for credit booms and inflation. This governments failed to work the land
roller-coaster is controllable by governmarket into their expectations. In Britain,
ment, and 1993 would be a propitious
over lm families own homes worth less
moment for this fiscal reform. There is
than their mortgages. So the land-value
no speculative stuffing to be knocked out tax will have to be phased in as the
of land prices: there will, therefore, be
cornerstone of an investment/export-led
no need for fortunes to be lost in property
recovery. EI elaborates on this strategy
values when the policy is announced.
on pages 2-4.
Neither need property prices fall in
the future: the important thing in this first
* Andrew Tylecot, The Long Wave in the
phase of tax reform would be to prevent
World Economy, London: Routledge, (reprices from rising to unaffordable levels viewed in Land & Liberty, Nov. 1992, p.15).
in the future. The criterion of the new
economic strategy could be that the land
price aggregate will neither rise nor fall.
Correctly pitched, the stabilisation tax on
TURNING ROUND THE COUNCIL TAX
THE POLL TAX helped to wreck Margaret Thatcher's admin- page 2 is related to land price, not rent. A 2.8% tax on land
istration. Unless her successor, John Major, places the new price would tax the effective base - land rent - at 35%, given
council tax at the heart of his economic strategy - and acts to an interest rate of 8%. Strictly, the equation applies to a land
neutralise its damaging blows to the economy - he may suffer tax alone, whereas the council tax is partly a buildings tax.
a similar fate.
However, the tax on buildings will be passed on to land through
Handled correctly, the politically embarrassing council tax
a drop in the £40bn market rent, which will have the same effect
could be converted into the pillar for the new economic strategy on land prices.)
the Government has been seeking since the "strong pound" fell
Taking the real interest rate or yield (rent as a percentage
by the wayside. This would be achieved by transforming the of price) on housing land as 8% at present, it will need to fall
tax into the means for lowering interest rates.
to 5% to counter the effect of the council tax on land prices.
As things stand, the council tax will prolong the depression, Mortgage rates will, therefore, need to fall by at least 3 perif the bills fall on homeowners' doormats before real interest centage points. The Government may effectively accomplish
rates have been reduced to levels that help torevivethe economy. that by lowering the Bank of England base rate.
This is because the extra burden on household budgets, which
This fiscal insurance policy against rising land prices makes
will be tied to homeownership, will bear down on bouse prices. possible lower interest rates, which wouldchannelrisingdemand
The prospect may already be contributing to a negative effect towards capital formation and the creation of jobs. Lower
on house prices, which have dipped since details were an- interest costs, and sterling at a natural level, would raise export
nounced in mid-'91 (seechart).
competitiveness. The assault
Falling house prices
Annual % change In Halifax house price
on the depression would have
(more accurately, land prices)
index (all houses)
begun.
exert downward pressure on
consumer spending. This is
the "reverse-wealth effect".
WHITHER MITR?
Rising real incomes are being
Mortgage interest tax relief
devoted to paying off debts
(MITR) is caught in a tug of
rather than servicing new
war between those who wish
borrowing, so the personal
to extend it to revive the
sector savings ratio is still
housing market, those who
rising. As consumer spending
wish merely to redirect it to
forms over two-thirds of agfirst-time buyers to produce a
gregate demand, this is holdcostless stimulus, and those
ing back recovery.
who believe it should be reduced as a far-sighted way of
The introduction of the
tackling the structural budget
council tax in April, however,
deficit, as the government
could be used as a platform for
"goes for growth".
launching the climb out of
recession. This is how:
The first proposal stores up obvious longterm difficulties;
The tax, which is levied on the value of domestic property, the housing market will inevitably overshoot, but parliament
must be assigned primacy in the government's fight against will find it impossible to take back the concession.
inflation. It may be proclaimed as the first weapon in place
The second takes away with one hand from existing
to meet the Government's new target of zero aggregate land
mortgagors what it offers with the other, in terms of more
price growth. To convince the markets, it should be set within
buyers.
a wider framework of measures to meet the target, which would
The third does the same for the housing market as a whole,
include a supplementary "land price stabilisation tax" (which
exchanging the hope of lower interest rates for lower tax relief.
will be discussed in Economic Intelligence, Jan. 1993). HarOnly the first of these proposals addresses the immediate
nessing the council tax within a clear anti-inflationary frame- need of the market. Allied with the strategy set out in this
work would allow the base rate to be reduced without unleashing bulletin, it might appear in a different light House prices would
a falling pound and rising prices.
stabilise, but not rise - the land stabilisation tax on land-rent
The council tax is due to raise about £14bn, before rebates would take care of that It would also recoup the cost to the
(which is what matters to the land market - rebates will reduce exchequer.
net revenue by about one-third). That will all be at the expense
Remember: MITR only became a market distortion beof housing land rent (about £40bn), which represents a 35%
cause taxes on imputed rents were removed.
rate of tax on land rent.
Land prices will fall by 35% as a consequence. However,
FOOTNOTE: a first-time buyer who paid a 5% deposit
if real interest rates are reduced by 35%, the effect on land prices for his house in the south-east at the beginning of this year has
may be cancelled. We can assume that land price growth
now had his capital wiped out.
expectations are negligible at present, and therefore will not
change if the Government's target is believed.
(NOTE that the tax rate in the capitalisation equation on
RE-EMPLOYMENT WITHOUT INFLATION
BYNEUTRALISING the land-route-to-riches, direct saving
out of income will be more desirable than in the past, and
borrowing less desirable. This would raise the savings
ratios, and pull down interest rates.
The permanent removal of the escalator will involve
tax changes which will also provide supply-side benefits
for the economy. The switch from the poll tax to the
council tax is the first such change. The cash outgoing
will encourage some homeowners to economize on space,
and make the occupancy of the housing stock more fluid.
But in terms of the supply side, this is a very small step.
Both the council tax, and the tax on commercial property,
need to be improved. Their supply-side benefits would be
vasdy increased by exempting buildings from the tax base,
and extending its coverage to all land, whether occupied
or n o t
The supplementary tax on all land rents to prevent
land prices rising would allow tax reductions elsewhere.
These should be chosen for their contribution to the
assault on inflation. The greater the incentives for production, the less chance will there be for rising aggregate
demand to run upagainst domestic production constraints.
Tax reductions cannot be chosen on efficiency grounds
alone, however. Profits and employmentlevels would benefit
by reducing employers' national insurance contributions
and corporation tax. But taxes on business make good
politics, as businesses as such do not have votes. (VAT
changes are likely to be circumscribed by the European
Community.)
Tax reductions for those who will bear the tax burden
on land rents (the owners of equity in land) may be a
political necessity. For although their net worth would not
be eroded, their net incomes would be reduced (the cash
flow of mortgagors, of course, would be protected by lower
interest rates). To moderate the effect on land owners,
income tax and employees' national insurance contributions should be cut.
Having chosen these taxes on equity grounds, the way
they are reduced may be decided on efficiency grounds.
Both equity and efficiency are, in fact, promoted by
concentrating the cuts at the bottom end of the income
scale. Thatwould have the effect of diminishing the poverty
and unemployment "traps". It would increase the take-up
of lower paid jobs, reduce unemployment and extend the
margins of production.
Making significant inroads into these traps is expensive. And there are efficiency trade-offs. Increasing the
proportions of additions to earned income that may be
kept as disposable income (i.e., reducing marginal tax
rates) at the bottom end of the scale raises marginal tax
rates (reducing incentives) further up the scale.
The Labour Par ty in its shadow budge t this year devoted
a billion pounds to raising the income tax threshold by
10% instead of the statutory inflation-determined 4.5%.
That would have taken 740,000 taxpayers out of income
tax. But the political impact appeared to be outweighed
by the fact that the reform was financed by higher income
tax on the top 10% of incomes.
Such a reform could instead be funded by a tax spread
out over perhaps 16m landowners, many of whom would
simultaneously benefit from lower debt service costs.
Assume that the council tax is in place, but land rents
are rising at 3% per annum. The land price stabilisation
tax would be set to prevent those changes feeding through
into land prices. Before the changes, the tax capitalisation
equation with zero land price change built into expectations would look like this:
Land price =
annual land rent
interest rate + tax rate on price
[That is, using approximate aggregate data (in billions of
pounds)]
500=
40
.052 + .028
The council tax would be at an effective rate of 2.8% on
land prices. T o keep the changes in check, the equation
would have to look like this:
500=
4JLg
.052 + .028 + .0024
That is, a supplementary one-quarter of 1% (0.0024) on
land prices, equivalent to 2.9% (1.2/41.2) cm land rents,
would have to be added to the taxation of housing land.
This alone would raise £1.2bn, more than enough to fund
a proposal like that from Labour's shadow b u d g e t Commercial and industrial land would also be subject to the
supplementary tax.
The land stabilisation tax, like the council tax, should
enable interest rates to be lowered, because it would lower
the risk of inflation in the long term. Assume that interest
rates are shading down, at a rate of 3% per annum, but
land rents are not rising. The previous equation becomes:
500 =
40
.05044 + .028 + .00156
The supplementary tax needed in this case is 0.00156,
raising £780m., equivalent to a 1.95% tax on housing land
rents.
In practice, both these influences would be present
If they were as in the examples, housing land alone would
raise £2bn., to be used to raise the thresholds of income
tax and national insurance contributions. The object of
this, of course, is to make more attractive the lower paid
jobs, which at present are avoided by people receiving the
dole.
Published by the Centre for Incentive Taxation,
177 Vauxhall Bridge Rd, London, SW1V 1EU. Tel: 081 943 1379
*
T H E L A N D & L I B E R T Y ESSAY
*
byDavidRichards
RUSSIA:
after the cold war
- how to win the peace!
From the ashes of communism could spring the first
rent-as-public-revenue society. But the Russians don't yet realise what
a potent tool is about to fall into their hands, writes FRED
HARRISON
HE PEOPLE appear stunned,
trauma tised by the loss of faith,
still needing someone to give
them commands, the few livewires
trying to wheel-and-deal in a commercial vacuum.
Ii» just 70 years, the Russian
people have suffered a civil war
(StaKnised by their own leaders), a
world war (terrorised by the Nazis)
and the Cold War (materially drained
by the fight against a spectre).
For 70 years there waa no fun, no
Camaby Street colour, n o period of
joyful abandon, n o relief from heavyhanded pressure, so now the trauma
will be protracted;and then there will
be the post-traumatic stress, before
they recover composure and creativity.
For 70 years, social relationships
were ruptured and remoulded into
the vision of a Brave New World that
offended biology and psychology, a
vision doomed to fail when they could
take no more.
A collective therapy is needed,
and I perceive it in the Russian love
of their land. They are releaming
how to characterise land in the most
loving terms, and relating that love
to the need to restore human relationships.
"Land is feminine, soil ploughing is an act of love; tilling the land
is love," wrote Geoigi Gachev. "How
to plough and cultivate the Russian
land, how to treat it and live with it
is tantamount to how a Russian man
should love a Russian woman, how he
should treat her and live with her." 1
T
THEY WERE NOT tender with
LAND
&
LIBERTY
the land, these last 70 years. Taught
to believe that nature had no value
- that all value came from labour - the
Politburo gang-banged the land to
death. Today, the rivers are chemical
sewers, almost a sixth of the country
is unfit for human habitation, only
15% of the air that city dwellers
breathe is pollution-free, over 20% of
drinking water does not achieve
Russia's (lax) standards. 2
And yet, awakening in the people is an awareness that, if Russia is
to recover, something special needs
to be done about the land. President
Yeltsin's decree that land should be
privatised has caused offence; the
bureaucratic inertia to his law is tantamount to civil disobedience which,
in normal times, would be treated as
a declaration of war on the federal
government
It is as if the administrators and
politicians in the cities of Russia are
grasping at an idea, barely expressed,
that western nostrums about land
rights just won't meet their needs.
How Russia finally resolves her
relationship with the land will define
the wholesomeness of her society.
But what should she do? Are there
any historical models to guide her
decisions? The devastation in Russia
is equal to the scale of damage in
defeated Germany and Japan, whose
economies were rebuilt in 10 years.
But today there is no Marshall Plan,
no General MacArthur, to wrench
Russia outof the depths. She will have
to rely almost entirely on her own
inner strengths. But there is hope, if
we compare Russia today with Japan
in 1870.
SEPT/OCT
1992
WHEN Commodore Perry's American gunboat dropped anchor and
threatened a feudal society, the Japanese knew they had no choice but to
industrialise. If they were to retain
their i n d e p e n d e n c e , and not be
pushed into the depths of what we
today call Third World status, they
had to transform their agrarian
economy. And they had to do so
without foreign aid. How that miracle was performed, between 1870and
1890, ought to inspire the Russians.
The emperor Meiji and his advisers chose land-rent a» t h e revenue
to finance the public expenditures to
support the transformation of their
society. At one point, ewer 70%'of
public expenditure was financed out
of land-rents. Taxes on wages and
profits were so insignificant, they did
not distort the creative efforts of
labour and capital.
Alas, the landlords captured the
Diet (parliament) in 1890, with the
proclaimed aim of shifting the tax
burden off rent. That'swhen the slide
began, but the land-value tax had
done its job: the institutions and
industrial relations that were to transform Japan into a world economic
power were established in 20 short
formative years.
Russia, although she may not
know it, is on the verge of repeating
that success today.
SERGEI SAY is deputy head of the
l a n d r e f o r m c o m m i t t e e in St.
Petersburg. His committee is a federal agency; there are 600 of them,
scattered around Russia, all of them
struggling to make sense of how to
PAGE
*
T H E L A N D & L I B E R T Y ESSAY
*
RUSSIAN RENT
use land in a free society.
the land is worth; which is not surthose two ingredients that Russia
When he took up his job, he
prising, because r e n t was never
needs most: private enterprise and
sought to formulate an approach on
measured before, and today there is
capital formation. Premier Yegor
the basis of what he called "a Russian
barely a wealth-producing economy
Gaidar has already had to give assurmechanism". But before Russia can
capable ofgenerating surplus income
ances on tax reforms to the managers
define that mechanism, her techno(rent). But that is going to change:
of the big state-owned enterprises. At
crats need to understand what they
the economy will take off. And if
an emergency meeting with their
are dealing with. T h e process of
Russia's Parliament refuses to alien"centrist" p a r l i a m e n t a r i a n s , last
registering people's claims to land
ate the freehold rights to land to
month, he announced concessions
has barely begun, but of one thing
existing holders, the nation will find
which move him in the correct direcMr Say was sure: today, in Russia, no
itself enriched beyond imagination
tion. From January, profits ploughed
person or organisation has legal tide
by the flow of rent into the public
back into capital investment will be
to land. All they can claim is the right
coffers.
free from tax.
to occupy the land. The land, in fact,
The federal government curBut such concessions will not be
belongs to the State.
rently relies on traditional western
enough if Gaidar's administration is
President Yeltsin created a chalforms of wealth-destroying taxes (see
to survive. People are beginning to
lenging problem when
support some unholy
he signed a decree oralliances
as an expresRUSSIAN FEDERATION BUDGET REVENUES
dering that people
sion
of
their
frustration.
1st q u a r t e r 1992
should pay a tax on
One
of
these
is a coaliBillion
land. The municipalition
of
the
extreme
roubles
ties had no idea what
right
and
left:
a meetVAT
140.8
28.2
land was worth, so the
ing of nationalists and
Profit tax
67.0
13.4
land reform commitcommunists on OctoExcise duties
19.3
3.9
tees prepared crude
ber 25 was held beneath
Income tax
19.2
3.8
zoning maps based on
the crossed banners of
Taxes on natural resources
0.8
0.2
the existing use of land,
the Soviet Union and
Revenue earned from activities abroad
228.0
45.6
and distributed the tax
the Tsarist government!
Other income
24.3
jk9
accordingly.
There has been a
499.4
100.0
catastrophic
collapse of
"Everybody used
production,
hyper-ireland in an inefficient
Source: G. Kipermann and A. Belyalov, Taxation of Companies
flation and a drop in
way, because it was
and Citizens in the Russian Federation, Moscow, 1992.
living standards for 80%
'free'," said Mr Say.
of the population. Discontent is easy
"That's why many industrial entertable) - such as a 28% VAT. It would
to ferment, so Yeltsin's federal govprises don' t use it properly, and there
be easy to condemn that tax struce r n m e n t will have to bolster the
was a lot of wasteland. There's a lot
ture, but we have to realise that the
market reforms with the announceof vacant land, used badly, according
transformation of the command
ment of a rational, easily-understood
to satellite photographs. Enterprises
economy has to be financed. In the
programme of reinforcing measures.
had the majority of the land, and
transitional void, the expenses of
There is one solution only at his
don't pay for it, and were not intergovernment have to be covered.
disposal. He will have to banish the
ested in rational land use.
There is no land market; no payment
de terren t taxes, bu t in favour ofwhat?
of rent for holding land. So where
"That's why the first step is to
Well - if land is retained in publish
else does the government raise its
identify everyone who has land plots.
ownership - it will discover thatt there
revenue? See the table.
The land-tax also has to be collected,
will be no need for ANY taxes, for
for this one year, to show them that
But force of circumstances is
rental revenue will smoothly offset
land is valuable and they have to pay."
leading, even now, to the creation of
the reduction of VAT, excise duties
Yeltsin's land-tax applies for just
a land market. State enterprises are
and
the rest of the plunder on private
one year. Thereafter, as far as the
sub-letting property and pocketting
incomes
which is inflicted on wealthcities are concerned, the users of land
the money - in other words, they are
producers
and consumers everywhere
have to pay a rent to the owners of
privately appropriating land-rent
else.
that land - the federal and the muwhich is not only a socially-created
nicipal governments. Existing users
will not necessarily be dispossessed of
their sites; but they have to enter into
leasingagreements, underwhich they
would pay rent for the land.
Right now, no-one knows what
PAGE
8
income, but also happens to be the
legal income of the state! However,
as the system settles down there will
be no excuse for this to continue.
And nor will there be any excuse
to continue to levy taxes that suppress
LAND
&
LIBERTY
Supplemented by user charges,
federal and local governments will
wake up one day to discover that the
simple act of recovering rental income is sufficientt to meet all public
expenses!
JULY/AUGUST
1992
*
T H E L A N D & L I B E R T Y ESSAY
*
Til* Estonian teat estate newspaper used by speculators to promote their properties
Already, 40% of federal revenue
is rental income: the "revenue earned
from activities abroad" is mainly the
extraction of rent from the export of
natural resources such as petroleum
and diamonds. All that Russia's economic policy-makers n e e d to understand is that - like J a p a n (1870-90) financing public expenditure out of
rent leads to the swiftest reconstruction of the economy.
But that strategy also has another
major implication. Unearned income
would n o t fall into private hands - an
income which, when capitalised, is
traded in the western economies, and
becomes the primary source of instability (ask financiers why so many
banks have gone bust, or are technically b a n k r u p t Answer: rotten loans
to land speculators!). By treating rent
as its principal source of public revenue, Russia would be creatinga truly
"Russian mechanism": a moral market economy, the likes of which we
have not seen in modern history.
PRIVATISATION is now under way.
In St. Petersburg, Anatoli Peibo reassuringly impressive in beard and
herringbone suit - presides over the
process in St. Petersburg, where he
LAND
&
LIBERTY
is Deputy General Director of the city
council's Fund of Property. His j o b
is to identify enterprises ripe for hiving
off, and prepare the legal documentation for the Property Foundation
which stages the auctions. T h u s are
enterprises placed in the hands of
citizens. The new entrepreneurs bid
sums for leases to the land (lease
periods are not more than 50 years),
and they also agree to pay an annual
rent for occupying the sites, which
can be revised every five years. This
provision is even superior to the
arrangements in H o n g Kong, where
all land is leased from the Crown.
What did Mr. Peibo think of the
President's decree on land ownership? He offered me the S t Pe tersbu rg
interpretation: "Though they declare
the opportunity to sell land in the
federal law, we think it is not effective
a n d sensible to sell land in St.
Petersburg. In S t Petersburg, the sale
of land is not allowed y e t "
T h e Russians are still trying to
define the legal status of land, a
process that will take some time. As
Mr Peibo pointed o u t "It took weste m countries many years to work out
their legal base, and we are just starting it."
N O V / D E C
199 2
RUSSIAN RENT
IN SEPTEMBER, President Yeltsin
signedadecree that gave a small town
an hour's drive from Moscow the right
to sell the freehold of its land. This
was passed off as an experiment, but
political observers treated the decree
as a provocative act aimed at challenging parliament to pass a law on
land ownership.
That law, which will seal Russia's
fate, will be passed next year. There
is, then, the great prospect that Russia
will retain land in public ownership,
and lease it to users. This lease/rent
a p p r o a c h reflects the practice in
Hong Kong, that most successful of
capitalist economies where not one
acre of land is held freehold.
In other words, Russia retains the
option of adopting the fiscal strategy
r e c o m m e n d e d by die Physiocrats and
Henry George - defraying the costs
of the community out of t h e rent of
land. That option, unfortunately, is
n o longer possible for the East European and Bal tic countries: they have
rushed to restore the right o£ freehold ownership of land, thereby
denying future gerteraboa^aa equal
share in the value of the resawcces of
nature.
In Estonia, December 51 i» the
government's deadline for the assessm e n t of the value of the whole country. The assessment process has already begun, helped to an extent by
the black market in land values (which
are being traded, even though the
law does not yet permit the private
ownership of land).
Henn Helmut, head of the land
management department at the Estonian Agricultural University, reports that the tax on land values will
be very low, but there are provisions
to try and deter people from speculating in land.
But as we all know, once there
is private appropriation of land-rent,
laws d o not deter (they merely aggravate) the business of speculation; in
doing so, however, they further distort an already destabilised economy.
Real estate agencies have sprung
u p all over Estonia, to help the owners
of buildings cash-in on the new property market. Technically, they cannot
PAGE
9
sell the land, but property owners are
not mugs. As Mr. Helmut noted: "Selling land is banned, and you can only
sell buildings. But if we sell the
building the price includes the price
of the land!"
He cited the example of the sale
of two identical buildings: the inner
city building achieved a price three
times as great as the similar one on
the city's fringe! That is the lesson
that Russia has to learn: ultimately,
the letter of the law does not matter
one iota, if the community fails to
recover the full market rent for land
for the public's benefit
Initially, rents will be underestimated. Such mistakes won't matter,
if Russia retains the legal right to
correct them at an early opportunity.
An immediate task is to get the land
and buildings into the hands of users,
to kick-start the economy, while reserving the legal right of the community to revise the rent charges in line
with economic growth.
If the Russians handle that challenge correcdy, they will develop
something that is not available in any
other country: a smoothly operating
land market. Such a market can exist
only if it is free of the rent-appropriators, who are the biggest drag on the
wealth-creators in the other market
economies. It also guarantees every
citizen a direct stake in the riches of
nature through the social expenditure of r e n t
This is a prospect of what has
been characterised as a Single Tax
society envisaged by American social
reformer Henry George which every
trading country in the world should
fear. For it would give Russia an enormous price advantage on the export
markets (rents, unlike taxes, are not
reflected in the prices of goods and
services). Having lost the Cold War,
Russia would be on the path to win. ning the peace.
REFERENCES
1 'Tilling the Land is Love," Socium,
No.5 (17), 1992, Moscow, p.21.
2 David Hearst, "Portrait revealed of
a Russia that is killing itself," The
Guardian, London, Oct. 8, 1992.
3 Fred Harrison, The Power in the
Land, London: Shepheard
Walwyn, 1983, p.158.
PAGE
10
CARNIVALS OF DESTRUCTION
The Culture of Contentment,
J.K. Galbraith,
New York: Houghton Mifflin.
THIS ESSAYis Professor Galbraith's attempt to jolt the American middle class,
and economics profession, out of its complacency. His analysis is particularly,
though not peculiarly, about America; similar trends are to be seen in Britain
and elsewhere. (Galbraith claims to explain the unanticipated victory of the
Conservative party, led by J o h n Major, in the recent general election.)
Galbraith's thesis is simple. America is gripped by a contented electoral
majority, who will tend to vote against any major encroachment on the politicoeconomic system that supports their comfortable way of life. Thus has America
reached the position dreaded by political philosophers for centuries (in
America by Tocqueville and Thoreau) - the tyranny of the majority. This is
not what they hoped for from democracy, but it is perhaps inevitable, as Henry
George foresaw, when democracy is grafted on to a politico-economic system
that promotes and perpetuates great inequalities of wealth.
This is a society which pleads the social philosophy of utilitarianism in
defence of the present politico-economic system. When first advanced by
Bentham, and Mill, utilitarianism sought to satisfy the needs and aspirations
of the many poor at the expense of the few rich. Now utilitarianism has been
turned on its head, and the many who are comparatively rich are further
enriched at the expense of the minority who are poor. Moral populism has
descended upon us, and we are corrupted into thinking that the test of morality
is endorsement by a popular majority. Thus has the contented electoral
majority become in its own eyes the moral majority. Such is the bankruptcy,
moral, political and now economic, into which America has sunk.
Galbraith's essay is not a philosophical or historical work. It is more of
a report "from the front", and a guarded prediction for the future. In less
than two hundred pages, it paints a broad panorama of the political economy
of America in the aftermath of the 1980s. When the dust has finally settled,
it could prove one of the most timely and important books of the 1990s.
This culture of contentment is not opposed to government interference
in the economy. Far from i t It endorses big government, seeking subsidies
for its members, from agriculture to defence. It seeks lax cuts for the rich,
on the basis that more money will encourage them to produce more, while
seeking cuts in benefits for the poor, on the basis that more money will only
encourage them to live off the state. It seeks greater and more costly regulation
of industries, to strengthen their position against potential competitors (domestic or foreign). It has privatised gain and socialised loss, for example
through deregulation of the banking and finance industries but with the
retention of federal deposit insurance; their speculative activities, therefore,
result in profits to them and losses borne by the federal government (i.e. the
American tax-paying public). It encourages the government to fund its expenditures not by taxing the rich but by rewarding the rich with interest on
a national debt of awesome proportions.
And the consequences? The most immediate and important is the creation
of a functional underclass, different from past lower classes in one important
respect: there is now little prospect of escape from the ghetto. First generation
immigrants may be content with their lot as an improvement on conditions
in the societies from which they have escaped; but second and third generations
seek a better life and become restive when they see no way of attaining it,
other than through crime - from drug dealing to racketeering to simple fraud.
It is a bleak message. Galbraith was heralded as a prophet when the riots
in Los Angeles erupted, only weeks after the publication of this seminal essay.
But how much greater was the prophet of San Francisco more than a
century ago. Henry George could have had no advance warning of what was
to come in the 20th century other than what he could read in the troubles
of his own time. In 1879 he foretold of a century of unparallelled bloodshed
and social disintegration:
LAND
&
LIBERTY
JULY/AUGUST
1992
BOOK REVIEWS
"Strong, unscrupulous men, rising u p upon occasion, will become
the exponents of blind popular
desires or fierce popular passions,
and dash aside forms that have lost
their vitality. The sword will again be
mightier than the pen, and in carnivals of destruction brute force and
wild frenzy will alternate with the
lethargy of a declining civilisation....
....Whence shall come the new
barbarians? Go through the squalid
quarters of great cities, and you may
see, even now their gathering hords!
flow shall learning perish? Men will
cease to read, and books will kindle
fires and be turned into cartridges!"
Galbraith's prognosis in the
1990s is similar- In his view the age
of contentment will only end when
the contented are sufficiently disturbed in their contentment, which
he conjectures could happen in
three wa^s: widespread economic disaster; adverse military action that is
associated with military misadventure; o r e r u p t i o n of a n angry
underclass. In the absense of these,
the likely prognosis is that the American will drift into greater decline,
and the middle class will steadily be
reduced to a working class lifestyle.
It is what George described as "the
lethargy of a declining civilisation".
It is brilliant analysis and compulsory reading, but, although the
disease is well diagnosed, few cures
are put forward. Galbraith advocates
a reduced military, the abolition of
subsidies for the well protected, the
increase of taxes on the rich and the
increase of welfare spending. The
message is little different from that
peddled in Britain and America in
the '60s and early '70s. It certainly
does not appeal to the culture of
contentment (which Galbraith freely
admits), but nor does it appeal to
the intellectually discontented. They
are surely looking for something
more radical than this "milk and
water socialism" of a generation
past?
REVIEW TITLE?
The Long Wave in the World
Economy,
Andrew Tylecote, London:
Routledge, £40.
THIS excellent attempt to picture
the grand sweep of trends in the
industrial economy offers detailed
analysis of the components of a
dynamic system which, alas, has failed
to evolve a stabilising mechanism.
Growth proceeds in fits and starts;
a system whose logic is allocative
efficiency-which supposedly abhors
waste - periodically inflicts on itself
waste on a gigantic scale!
Tylecote, an economics lecturer
at the University of Sheffield, stresses
the waves of technological innovation. He seeks to synthesise technological trends with demographic,
climatic and the other variables which
make life so seemingly unpredictable - for the individual - yet cyclical
(and therefore predictable) for the
system.
What distinguishes this book
from the other attemptsateconomic
analysis in recent years is the recognition that land tenure-and-tax policies can damage society and the
environment. For example, Tylecote
explains hhow landlessness in Brazil
- where "millions of hectares lie
uncultivated, or undercultivated, on
the great estates" - encourages peasant farmers to exploit the rainforest
The perplexed governments of
today could do no better than to
examine Tylecote's discussion on
"The way to the next upswing".
Naturally, we all want lower interest
rates; the snag, notesTylecote, is that
this would encourage the speculative hoarding of land.
The solution, in his view, is the
introduction of a tax on land values
- a tax which he regards as setting
the standard for fiscal policy in
general: "look for taxes which, besides raising revenue, improve both
the distribution of income and the
a l l o c a t i o n of r e s o u r c e s in the
economy". There are precious few of
them, apart from the land^value tax,
the virtues of which are emphasised:
"One kind of wealth tax, however, has n o distorting effect, because it is practically impossible to
avoid whatever you do: the lax on the
value of land. Such a tax is already
in use in (among other places)
Pennsylvania and New South Wales.
Land taxation indeed offers much
more than a harmless way of raising
m o n e y . It w o u l d b e h i g h l y
r('distributive in most countries. It
would much reduce the incentive
for a corrupt relationship between
property developers and those administering planning control (and
zoning systems), since it would cut,
even perhaps eliminate, the gain to
the owner f r o m permission for
change of use. And since it would
make speculative hoarding of land
prohibitively expensive, it would
make for much more efficient use
of scarce urban land: less dereliction
of unused properties, more construction jobs available in the inner cities,
less suburban sprawl. A side-effect
would be a reduction in house prices
and thus in consumer borrowing out
of capital gains anticipated by the
owners."
The primacy placed by Tylecote
on the importance of technology as
the causal mechanism for changes
in trends requires much more investigation. I strongly suspect, for example, that he will discover that development of much of the technology
of the early years of the industrial
revolution was (directly orindirectly)
influenced by prevailing economic
conditions as shaped by the landand-tax system of the time.
If this is correct, we need not
fatalistically assume that booms and
slumps are with us forever.
—
LAND
&
LIBERTY
N O V / D E C
1992
PACE
11
REVIEW TITLE?
NEW
From Poverty to Prosperity by 2000.
Edited by Walter Rybeck,
Center for Public Dialogue, 10615 Brunswick Av,
Kensington, Maryland 20895, USA. $12.50.
This report is subtitled "Prospect for reviving West Virginia's Economy" and grew outof the Prospects for Appalachia
Conference held in Charleston, West Virginia, in 1990.
Appalachia is often viewed as a kind of Third World
problem area in the midst of the USA. Indeed West Virginia
ranks almost at the bottom, 49th among 50 states, in
personal income. Why a state so richly endowed with
natural and human resources is so economically depressed
was the quesdon tackled by 70 participants along with 20
national experts. This report is the conclusion of their
deliberations.
O n e example put forward for the state to emulate
showed how a poverty stricken Third World nation -Taiwan
- became a thriving, powerful country in a single generation. Taiwan, which is half the size of West Virginia, is
equally mountainous. Close examination showed just how
remarkable its transformation was. Possessing neither oil
nor mineral wealth it raised its GNP of $1.2bn in 1951 to
$150bn in 1989, making it 19th in the world GNP ranking.
It is no surprise to learn that land reform was a key factor
in this remarkable expansion. The Taiwan constitution is
quite specific about land and Article 143 says:
1. Privately owned land shall be liable to taxation
according to its value.
2. Government may buy such land according to its value.
3. If the value of a piece of land is increased not through
the exertion of labour or the employment of capital, the
state shall levy its own increment tax, the proceeds ofwhich
shall be enjoyed by the people in common.
Item 22 is the Catch 22 of the policy, because the land
tax is levied on a self-assessed value and the government
has the right to purchase your land at your declared price.
Clearly you won't undervalue it nor, since the amount you
pay is based on this price, will you overvalue it.
The experts at the conference made no effort to arrive
at a consensus, but were in near unanimity on most of the
major points given in the report. An urgent task, they felt,
was to close loopholes that have let large land holdings
of absentee resource owners escape fair taxation. Land and
buildings should be appraised separately and revenues
f r o m taxes on land values should be used to reduce taxes
on wages and taxes on goods - particularly those on
necessities such as medicines, food and shelter.
It will be interesting to see what in reality follows from
this report. Will West Virginia become the Taiwan of the
USA? The example is there for its citizens to see. But, as
one speaker at the conference said, "to change our being
like a Third World country will take a collective will". Do
they have that will?
J,:,:.
PAGE
12
GEOFFREY LEE
LAND
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Now the Synthesis
Capitalism, Socialism
& the N e w Social Contract
Richard Noyes (editor)
The collapse of communism provides an
opportunity to reappraise our economic
thinking. The authors suggest that capitalism and communism are the thesis and
antithesis of a philosophical dialectic of
which the ideas of American social reformer Henry George are the synthesis.
Published in Britain by ShepheardWalwyn Ltd., London price £14.95, and in
the USA by Holmes & Meier, N e w York,
price $29.95. Hardback.
Commons
Without
Tragedy
R.V. Andelson
(editor)
An international group of scholars examines the impact of population on the
economy and environment, arguing for a
reappraisal of property rights to ensure
that:
* the entrepreneur is adequately rewarded
for opening up the last commons (oceans
and space);
* everyone shares in the greater prosperity; and
* the environment is protected for future
generations.
Published: Shepheard-Walwyn Ltd., London, England (£13.95) and in the USA by
Barnes & Noble, of Savage, MD ($34.50).
LIBERTY
JULY/AUGUST
1992