The Howard government’s industrial relations agenda is supposedly about job-creation, as if the cost of labour — including wages and salaries, penalty rates and other perks, and the difficulty of reversing bad hiring decisions — were the last remaining barrier to full employment.

Sorry that we have to state the bleeding obvious, but:

* Jobs cannot be created unless the employer can pay the rent or mortgage on the business premises out of the proceeds of the business; and

* Jobs cannot be created unless the workers can pay the rent or mortgage on housing within commuting distance of those jobs, out of wages that the employer can pay out of the proceeds of the business.

So, if job-creation is the aim, why is the Government so concerned about the cost of labour and so unconcerned about the cost of accommodation? Why is it bad news when wages blow out, but good news when housing prices blow out? Why is the Government willing to force down labour costs by freeing up the supply of labour — e.g. by requiring more disabled people to seek work — but not willing to force down accommodation costs by freeing up the supply of accommodation — e.g. by taxing vacant land so that the owners have to build on it, and taxing unoccupied premises so that the owners have to seek buyers or tenants?

The only possible explanation is that the unearned profits of property speculators are considered more important than the earned wages of workers. In other words, the property market is privileged while the labour market is not.

SPIN: Negative gearing deductibility helps renters and first home buyers by encouraging property investors to “supply accommodation”; the larger the supply, the lower the rents and prices.

FACT: The only investors who actually add to the supply of accommodation are those who build new accommodation. Therefore, if negative gearing deductibility were really intended to maximize the supply of accommodation, it would be allowed only for new construction — not for future purchases of established properties. But in fact the negative gearing rules fail to distinguish between new and established properties, giving no incentive to build rather than buy. So the supply of accommodation is lower than it could be, and rents and prices are consequently higher than they could be. That’s good for current owners of rental properties, but bad for renters and first home buyers.

VERDICT: Negative gearing deductibility could help renters and first home buyers if it were done properly. But it isn’t. It’s done so that established property investors get a tax break at the expense of other taxpayers plus higher rents and prices at the expense of renters and first home buyers.

1. If workers in firms with less than 100 employees have lost their protection against unfair dismissal (not to be confused with unlawful dismissal), and if all other workers have lost their protection against unfair dismissal as long as their employers can claim “operational requirements”, how will this effect workers’ ability to get home loans? And how will that affect the value of your home?

2. If workers’ wages become more dependent on the workers’ own bargaining power, which workers will lose more: those with more bargaining power, or those with less? In the past, have these workers been comparatively well-paid or poorly-paid? Are they more likely to be home owners or renters? How will this affect the rents received by mum-and-dad property investors, and the values of their investments?

3. If small employers initially become more profitable, how will this affect their ability to pay rent for commercial premises? And how will that affect commercial rents, and prices of commercial property?

4. Will commercial landlord be winners or losers? What about residential landlords? So will the winners tend to be bigger or smaller than the losers?

There — that wasn’t hard, was it?

FACT: More precisely, the FHOG helps first-time buyers to compete with other buyers who can use the equity in their old homes to bid up prices. But by increasing bids from first-time buyers, the FHOG also raises prices, especially at the bottom of the market where first-time buyers are concentrated. Thus the FHOG partly defeats its own purpose. Moreover, the FHOG only helps people who are rich enough to be contemplating home ownership; it does nothing for life-long renters.

SOLUTION: Make the grant available only for new homes in order to encourage construction, so that the increase in demand is offset by the greatest possible increase in supply. Then make the grant available to investors as well as intending owner-occupants, so that the increase in supply extends to rental accommodation. But keep the grant in the form of a fixed sum per dwelling, so that investors have an incentive to build a larger number of cheaper dwellings rather than a smaller number of more expensive ones; that maximizes the supply at the affordable end of the market. In short, turn the FHOG into a New Home Builder’s Grant.

Because new homes and “first homes” historically account for similar fractions of turnover in the housing market, this reform would be roughly budget-neutral. But more of the outlay would be spent on increasing the supply of housing for the benefit of renters and first-time buyers, not pumping up prices for the benefit of established investors.

Fortunately this is bunk. In fact the attractiveness of the tax system to investors has more to do with the type of tax than with the amount of tax collected. “Taxes ain’t taxes!”

Consider land tax — that is, a holding tax of a certain percentage per annum on the value of land, excluding buildings. Clearly the land can’t flee overseas to escape the tax. As land is a limited natural resource and has no cost of production, its price is determined simply by what people are willing to pay for it. A holding tax on land reduces what buyers are willing to pay and encourages selling, and therefore reduces land prices. More importantly, it drives speculators out of the market, further reducing prices for the benefit of productive investors. So productive investors actually find it easier to acquire land. Similarly, land tax does not discourage investors from renting land for productive purposes; on the contrary, it forces landlords to offer their properties at affordable rents in order to attract tenants and cover the tax liability. Neither does it discourage building on the land, because that is another way to earn income to cover the tax, and because the tax does not apply to the buildings themselves.

So land tax can raise revenue without discouraging productive investment. To replace existing taxes by land tax is to go straight to the bottom as far as investors are concerned, but requires no sacrifice of revenue or essential services.

FACT: If home buyers don’t have to pay land tax, they can afford higher mortgage repayments, hence higher prices. While the price of a house is limited by the cost of construction and by competition among builders, a home is not just a house; it also includes land, which is a limited natural resource, and whose price is therefore determined by what people are willing and able to pay for it. So there is nothing to stop higher land prices from absorbing the entire benefit of the tax “exemption”, in which case the buyer still pays the tax — to the seller instead of the government!

SPIN: The Family Home is exempt from capital gains tax. (And all the people shall say: Amen.)

FACT: If you don’t have to pay capital gains tax on your old home, you can afford to pay more for the new one. So you do!

SPIN: The Family Home gets concessional treatment in assets tests on welfare payments. (And all the people shall say: Amen.)

FACT: The “concessional” treatment of the home increases the attractiveness of investing in the home and therefore increases its price. The benefit to incumbent owners comes at the expense of first-time buyers.

SPIN THIS IF YOU CAN: When you go bankrupt, why are your creditors allowed to take your home but not your superannuation? Because the tax and welfare systems treat your home more “generously” than your super! If your creditors could take your super, they’d be taking some of it from the government through the effect on your tax liabilities and welfare entitlements; but when they take your home, they’re taking nearly all of it from you. If your home were less “protected” from the government, the government would be more inclined to protect it from your creditors!

A holding tax is a tax of so many percent of the value of an asset per year, payable by the owner of the asset. If income tax were replaced by holding taxes, the top marginal rate of income tax would be zero. Beat that! And if those holding taxes were confined to assets that taxpayers can neither create nor destroy nor move out of the taxing jurisdiction — assets such as land and monopolies — the taxes would cause zero reduction in the stock of assets and zero discouragement to the production of new assets. That takes care of wealth creation.

What about tax minimization? With holding taxes on assets that can’t be destroyed or moved, the only way to reduce your tax is to sell assets to other taxpayers who are more willing to pay the taxes, or to the government, which can then charge rent for use of the assets (”rent” in lieu of “tax”). So your desire to minimize your individual tax bill does not cause an overall loss of revenue, but reallocates resources to those who can most easily pay the taxes or rents on them — in other words, to those who would use the resources most productively, leading to even more wealth creation.

(As for tax evasion — that is, outright fraud — you can’t hide land from the government that has sovereignty over it, and you can’t hide a monopoly from the government that grants it or regulates it.)

So, if the politicians are really concerned about wealth creation and tax minimization, why are they fiddling with income tax rates instead of replacing income taxes with holding taxes? Could it be that they’re not telling us their true motives?

If a project confers a benefit on a limited area, you can’t share in the benefit unless you live or do business in the area; and for that purpose you need access to real estate in the area. Therefore the market value of the benefit is manifested as uplifts in land values in the affected area. If the project satisfies a cost-benefit test, the total uplift will exceed the cost, so the project can be funded by clawing back only a fraction of the uplift through the tax system, leaving the rest of the uplift as an unearned windfall for owners of property in the affected area — and without burdening the taxpayers outside that area.

This funding mechanism can be set up in a revenue-neutral manner by increasing marginal land tax rates and abolishing or reducing other taxes. Then, when a certain project increases land values in a certain area, the land tax assessments automatically rise only in that area, even if the government funding the project is responsible for a much larger area, such as the State or the Commonwealth. The affected property owners can only gain, because their tax bills don’t increase unless their land values do, and their land values don’t increase unless, in the judgment of the market, the owners are better off in spite of the tax implication. Moreover, the higher the marginal rate of land tax, the greater the range of projects that become self-funding through the ensuing uplifts in land values, hence the greater the number of projects that actually proceed, delivering windfalls to property owners — and the greater the range of other taxes that can be scrapped when the new system is introduced.

In short, when a public project passes a cost-benefit test, and when its benefit is confined to a specific area and measurable in economic terms, there is “never ever” any excuse for failing to fund the project, and “never ever” any need to draw funding from outside the affected area. Voters should therefore punish any politician who claims that the government can’t afford a much-needed project in their area, or who promises to spend their taxes for the economic benefit of any other area!

But of course such reforms would make the tax system less progressive — a “progressive” tax being a tax that takes a higher fraction of income as income increases.

Well, it so happens that the more income people earn, the higher the fraction of their annual income that they tend to have tied up in assets. This fraction rises very rapidly with income; for example, if you can barely pay the mortgage on your home, you probably know of people who own numerous properties but whose salary is only slightly higher than yours.

So a pure flat tax on asset values — that is, a certain small percentage of the value per year, with no tax-free threshold — is highly progressive because “progressiveness” is defined in terms of income, not assets. With no threshold, there is no possibility of juggling assets to claim multiple thresholds. What if your income was high in the past but is now low — e.g. because you have retired — leaving you asset-rich but income-poor? No problem: you can defer the tax until you sell or bequeath the asset; deferral takes the place of thresholds. If the flat asset tax is confined to assets that taxpayers can neither create nor destroy nor move out of the taxing jurisdiction — assets such as land and monopolies — taxpayers’ efforts to minimize their tax by rationalizing their asset holdings do not affect the total stock of assets and therefore do not cause any overall loss of revenue. So all the advantages claimed for a pure flat (income) tax are retained.

We don’t have to choose between flat taxation and progressive taxation. By taxing assets instead of income, we can have a tax that is both flat and progressive!

The Howard government’s industrial relations agenda attacks the wages and conditions of workers as if this were the only way to reduce the cost of hiring. What about the administrative costs imposed by government? For example:

* If you become an employer, you must also become a tax collector and tax agent, deducting and remitting pay-as-you-earn income tax from employees, and issuing group certificates.

* If you become an employer, you must also become a superannuation agent, paying 9 percent of your employees’ wages into personal superannuation funds. You may even have to give a choice of funds — just like the independent brokers, except that you don’t get any commission!

Why should all this be done by employers? Why not by banks and other financial institutions? After all, financial institutions ought to have more knowledge of tax and super than most employers, and could do this work with greater economies of scale than even the largest employers. And unlike employers, financial institutions charge fees for their services!

So instead of deducting tax from a worker’s wages, the employer could simply deposit the gross wages into the nominated bank account, and the bank would deduct tax from all deposits made by the employer. And instead of making a super contribution on top of the worker’s wages, the employer could roll the super contribution into the gross wages, and the bank would deduct the super contribution.

If you have more than one employer, the simplification would be even greater. Instead of claiming the tax-free threshold from one employer, letting the others deduct tax at the top marginal rate, and sorting out the mess at the end of the financial year, you would tell all your employers to deposit your wages into a common bank account, and the bank would deduct tax and super from the total deposits made by those employers.

So prospective employers would no longer be deterred by the complexities of personal tax and superannuation.