Land Monopoly and Income Polarisation in Australia 1950 to 2000

By Tony O’Brien

This essay examines the causes of and offers a just and equitable solution to the inequities inherent in the income gap between rich and poor, which has continued to expand in Australia over the last half century. It is based on an earlier essay, “The Pathology of Income Maldistribution – An index of the Wealth Poverty Gap in Australia” (1951 – 2000) which appeared in the autumn 2000 issue of the British journal Geophilos.

The late Tony O’Brien was Research Coordinator for the Land Values Research Group. The LVRG, which was established in 1943, is a privately funded, non-political body. The Group works to develop and promote new insights into the nature of taxation and alternative approaches to the just and equitable sourcing of government revenues. LVRG studies over the last two decades have shown the benefits of drawing revenues from the unimproved value of land and resources, in place of taxes upon wages, production and trade.

Note. At the time of writing (Sept 2001), exchange rates to US and UK currencies were approximately: $A1.00 = $US 0.50 = £0.35

Australia – a wealthy country

Australia is a very wealthy country. Net private sector wealth (of which dwelling assets make up 53%) currently stands at over $3.05 trillion – equivalent to $159,400 per person or $429,600 per household. The last half-century has seen unprecedented growth in production, albeit it at a high environmental cost. (The cost of repair of land degradation alone has been estimated by the CSIRO at $37 billion. ) It is undeniable that GDPs both in Australia and across the developed and developing world continue to rise. This economic growth has led to a relatively high standard of living for many, though by no means all, citizens of the western industrialised countries. Industrial development both here and abroad has given us a multitude of products: cars, TVs, air conditioning, videos, computers, and a host of other electronic devices all of which enhance, or at least increase the comfort of our daily lives. Those gains were due in all cases to our innate inventiveness enabling us to produce more wealth with less effort – the unambiguous goal of all technological developments from the digging stick to the micro chip. While we are right to enjoy these benefits, we don’t need to look very far around us to see that all’s not right with our system, especially in regard to the distribution of wealth and the ramifications of that distribution. Our lives are considerably easier now, certainly in the physical sense, than that of our parents, and yet, and yet…we still seem to be struggling. Where is the reward for all that labour? Shouldn’t things be getting easier? Shouldn’t we be under less, not more pressure?

At the dawn of the new millennium, many ‘old-millennium’ problems remain unresolved, and seemingly insoluble. Unemployment resolutely refuses to drop much below five percent; jobs become scarcer as workforces are ‘downsized’ and what were once secure full-time jobs are casualised; stress levels increase; our community utilities and assets are dumped at fire-sale prices by increasingly desperate governments. Inflation, we are told, has largely been tamed, though not without a generous application of statistical sleight of hand. If this turmoil; this constant, nagging, psychologically damaging fear and uncertainty is the price we must pay for our relative affluence, is the gain worth the pain?

Threaded through all these developments over the last half century and longer, and steadfastly refusing to be ignored no matter how we attempt to manipulate or massage the statistics, is the ever-expanding gap between the rich and the poor, and hovering above it, that intractable paradox which is as old as organised society itself; If our productive power has increased so massively, while the returns to labour have to all intents and purposes remained static, where have the gains gone? No socio-economic phenomenon has received more superficial (and costly) attention and less scientific study than has this creeping malignancy. If present trends continue, there is no reason to expect that this polarisation of wealth will not become even more extreme, further exacerbating an increasingly unstable and dangerous condition.

The fact that there is, and has been since the distant past, such a thing as a wealth poverty gap is to most of us axiomatic. We don’t question it. In fact, we hardly think about it. We take it as part of the natural order; which belief we hope, neatly and comfortingly absolves us from any responsibility for such inequities. Is the gap a natural phenomenon, or does it arise because of the perversion or suppression of some fundamental economic principle?

Economics, that much maligned science whose subject matter is the production and distribution of wealth, is in fact the link between these political, social and distribution problems. It is more than that. It is the foundation upon which our social and political life depends. As F.. McEachran wrote in Freedom – The Only End:

“All sciences are abstractions from the one reality before us, and no single science exhausts reality. But some sciences, ontologically, in the hierarchy of being, are more significant than others…[S]ince, practically speaking, the economic aspect of life is the one in which social life is reached, it is the one that should be put right in its entirety as a basis for all others. After all, we all want to be generous and give, but unless we are in possession of wealth we cannot exercise, this virtue. It is in this sense that economics comes first.”

E B Donohue in Rescuing the Economy…1984, reiterates this view. He sees the economy as a ‘natural organism’.

“What must be recognised is that the economy is society considered from the aspect of its productive activities – the production of wealth – whose circulation, so to speak, is the life-blood of society. And just as society is a natural phenomenon so the economy is a natural organism growing out of the natural inclination of its members to associate through market exchanges for mutual benefit.…The economy therefore, like every natural phenomenon is governed by the laws of its nature and does not have to be and indeed cannot be planned by human will. It was the economy and not political planners that put Man on the moon! It emerges as a natural growth wherever people engage in social co-production…. Nowadays society is at the mercy of all kinds of would-be specialists, economists, businessmen, political commentators, even theologians, all contributing to the general chaos of thought, not unlike the proliferation of quacks on the fringe of medicine, without real knowledge of how the economy works naturally if left to itself.”

Defining the gap

Before we can identify possible explanations for this growing income disparity, it may be worthwhile reflecting on the performance of a range of economic indicators in Australia over the last half century.

Table 1 shows the changes, in real terms, in a number of economic indicators during the last 50 years. All dollar values on which percentage changes in these tables are calculated were converted to year-2000 values using the Australian Bureau of Statistics Long-term CPI series as a deflator. Inflation was of the order of 1500% over the half century to the year 2000. Average annual percentage changes shown in table 1 are real compound changes.

One of the most striking contrasts revealed by the data in Table 1 is the huge, over 2,000 % increase in aggregate land value over the last half century, soaring at a rate of 6.4 % per year, – i.e. virtually doubling every eleven years – compared with average wages, which have increased by little more than 1% per year over the last thirty years. Even discounting this rise by the population increase over the same period still shows an approximate 800% increase above inflation. Incredibly, the minimum wage has risen by a mere ¾ % per year in real terms over almost a century, while the last forty years has seen GDP per worker rise at almost three times that rate!

In the last half century, our productive capacity has escalated beyond the wildest dreams of our grandparents, and yet, as is shown by the wages index in table 1, the returns to labour have all but stood still. In terms of job-satisfaction and quality of life, in fact, the returns, in the reckoning of many, would have actually declined. The contrast between wages and trends in the land market is truly astonishing. Land values in Australia in 1950 stood at around $44 billion in today’s dollars; fifty years later that value had exploded to over $950 billion.

The figures for estimated site rents, although collated over a shorter span, reflect a similar tendency for values in the land market to eclipse increases in other indices. The contrast between the real annual land value increase – virtually doubling every eleven years – and that of the house construction cost index highlights the fallacy in one of our most sacred economic shibboleths; that “house prices are constantly on the rise”; or “the safest investment is in bricks and mortar”; or “the family home is the most reliable hedge against inflation.” The value of buildings, like the value of all man-made objects, naturally diminishes as the component parts decay. “Rust never sleeps,” sang the keening voice of Neil Young; and he was right. A building requires constant and regular capital infusions to maintain value. This contrasts with land and other resources, the values of which rise with no injection of capital at all. Figure 2 below shows, among other things, the divergence between house construction or replacement costs and land values.

While we’re quietly sipping a beer at the pub on Sunday, or roaring for Collingwood at the MCG, the land on which our “castle” sits is becoming more valuable and the rent, or imputed rent, is rising inexorably. It will be higher when we get home than it was when we left, regardless of whether Collingwood won or lost.

Table 1 Real Percentage change in selected economic indicators 1950 to 2000

Economic Indicator

Series span

Total Period

Overall change

Av. annual compound change

From

to

years

%

%

LAND

Capital value of land adjusted for inflation

1950

00

50

2088

6.37

 

Capital value of land adjusted for inflation & population

1950

00

50

835

4.57

 

Estimated site rent

1972

99

28

516

6.71

ASSETS

Dwelling assets adjusted for inflation & population

1960

00

40

321

3.66

 

House construction costs (labour& materials)

1950

85

35

44

1.05

 

Business assets adjusted for inflation & population

1960

00

40

280

3.39

TAXATION

Total taxes fees and fines

1950

00

50

937

4.79

 

Taxes per capita of whole population

1950

00

50

343

3.00

PRODUCTION

GDP

1951

00

49

563

3.94

 

GDP per capita of whole population

1951

99

48

193

2.27

 

GDP per labour hour index

1978

00

22

44

1.68

 

GDP per capita of working population

1960

99

39

120

2.04

LABOUR

Employed persons part time

1979

00

21

154

4.53

 

Employed persons full time

1979

00

21

29

1.23

 

Employed persons Total

1979

00

21

48

1.90

 

Aggregate weekly hours worked

1978

99

21

47

1.86

 

Total hours full and part time workers

1988

00

12

17

1.32

INCOMES

Household disposable income adjusted for population

1960

00

40

117

1.96

 

Average annual earnings all employees

1969

99

30

43

1.20

 

Minimum wage

1907

00

93

102

0.76

Other indicators in Table 1, the economic as well as the social implications of which deserve close scrutiny, are the labour and GDP figures:

  • GDP per capita has shown a steady average increase of close to 3 % per annum.
  • The large increase in insecure part time jobs at the expense of secure long-term full time employment.

The increase in part time work (predominantly casual) at the expense of full time employment (mostly permanent, with holiday pay, superannuation, sick leave, etc), exposes the real impact of casualisation on job security, the hidden cost of which includes personal stress, despair, social breakdown, and increasing demands on an already creaking, unwieldy and innately inefficient welfare system.

Figure 1 Real percentage changes in selected economic indicators, Australia, 1950 to 2000

Figure 2 Real per capita percentage changes of selected economic indicators, Australia 1950 to 2000

The distribution of wealth in Australia

As far back as 1996, the total value of privately held wealth in Australia, including land, exceeded $2 trillion. Table 2 shows the breakdown in the distribution of this wealth ‘cake’. The total value of assets owned was divided among seven million households which had either; purchased (40%) or were purchasing (25%) their homes, owners of commercial or agricultural sites, and approximately 2.2 million households representing close to 6 million people – one third of the population – who owned zero assets.

Most of the broad ‘economic’ middle band of the population, that is the 40% referred to in the third row of table 2, had as their sole asset the family home, the average value of which at the time was $132,000. (In 1998, the median value of dwellings for capital cities was $164,000, and the national median $145,200.) The wealthiest 11% of the population owned a healthy 50% of the nation’s assets, while the poorest 30%, owned none. That is a wealth-poverty gap of significant proportions!

Table 2 Net Wealth distribution in Australia (1996) at current values

Percent of population 1996

Number of individuals

Average wealth per capita ($)

Percent of total wealth

Total value of assets owned ($ billion)

1

183,000

2,355,190

20

431

10

1,830,000

353,550

30

647

40

7,320,000

131,150

45

960

19

3,477,000

29,050

5

108

30

5,490,000

0

0

0

100

18,300,000

117,267

100

2,146

The gap gets even larger at the extremes, as Travers and Richardson, in their book Living Decently, point out: “The richest 1% of the adult population owns about 20% of private wealth; the richest 10% own half the wealth and the poorest 30% have no net wealth, although they may own consumer durables including a car.”Amongst those who held no land at all, and whose asset wealth was zero, was a substantial number of people whose incomes hovered at the lower end of the mean minimum wage; that is, those receiving around $250 per week. Below them were those on the dole, pension or some other welfare payment, with young single people receiving just $163 per week or a youth allowance of $133 per week. Single pensions are currently $183 per week.

Poverty rates among the Aboriginal people are around three times the average for the non-indigenous community. You can’t get poorer than that without dying; and a disproportionately large number of Aboriginal people, both young and old, male and female, in town and country, are doing just that – right now as I write. They are being tortured and killed by poverty.

The special report into poverty cited above states:

“The overall poverty rate was broadly constant at around 10% in the decade up to 1981-82. Over this period, poverty declined … among single people but increased among couples, with and without children. … This period also saw a substantial reversal of the earlier decline in poverty among single people, whose poverty rate almost doubled from 10.7% to 20.4%. One of the factors underlying the increase in poverty after 1981-82 is the fact that the poverty line itself increased in real terms by 1.2% a year between then and 1989-90 – corresponding to a total real increase of just over 10%. However, this is to be expected of a relative poverty line in a period when real community incomes are rising. The real annual increase in the poverty line in the 1980s is actually lower than between 1972-73 and 1979-80, when [it] was adjusted in line with average weekly earnings.”

In a 1998 report in Business Review Weekly, Ed Shann wrote: “The very rich have certainly become richer, and the number of millionaires is multiplying…In the six years since 1993, the number of millionaires in Australia went from 71,700 to 208,000. Their share of the wealth has gone from 11.1% in 1993 to 23% in 1998. From 1993 to 1998 the total wealth of millionaires rose $288 billion and of the 19.1 million non-millionaires by $329 billion”.

In the same journal, (BRW) a spokesman for Access Economics quoted from their own research as follows:

“There are now about 9.4 million ‘income units’ in Australia, 2.6% of which are millionaires. There are about 250,000 people with assets between $900,000 and $1 million, and Access believes that the number of Australian millionaires could double over the next 12 months. Increases have occurred for high-income and low-income earners: between 1982 and 1994, incomes in the two lowest income groups increased 6% and 7%, and income in the two highest income groups rose 12% and 3%. Income growth at the lower levels has been spurred by increases in social security that have occurred despite tighter fiscal management.”

The reference to government taxation transfers in the form of welfare payments is significant. These were not the main source but the sole source of any income rise in the lower socio-economic groups. Without this government intervention, the gap would have been significantly wider, and the pain of “taxation reform” much less bearable. Nevertheless, even such costly and administratively cumbersome infusions have not enabled low incomes to keep up with real increases in the CPI.

A recent special report on income inequality in The Australian newspaper confirms the persistence of the income polarisation trend. “Economic research conducted … by NATSEM – the National Centre for Social and Economic Modelling – shows that in the 15 years to 1996-97, the number of middle-income earners shrank from 45 % to 37 % [of all income earners]. …The median earnings figure – the latest of which, for August last year [1999], was $552 a week – is the level at which half the work force earns more and half less. The earnings of full-time employees on less than half median earnings fell by an average of 2 % in real terms over the 15 years to 1996-97, while earnings for those on more than 175 % of the median rose by 18 %. That meant a fall of $4 a week at the bottom and a rise of $229 at the top, with the gap widening even more for women”

A briefing paper prepared for Parliament late last year, (2000), entitled “Are Incomes Becoming More Unequal? Are Real Incomes Increasing?” disclosed some very disturbing figures. The report found that for all income groups measured against the highest quintile (the top 20% of income units) in the decade and a half up to 1998, income inequality increased by an average 10%. The author found that over the survey period, the highest quintile increased their share of total income to something approaching 49%, while the lowest quintile, representing 2 million ‘income units’ – this represents approximately 4 million people – experienced a decrease in their share from 4.6% to 3.8%. The report concluded:

“Perhaps the most that can be said is that the proportions with incomes less than 100 per cent and less than 75 per cent of the mean were apparently still lower in 1997-98 than they were in 1981-82, indicating less inequality, but for the lowest income sub-group-those with incomes less than 50 per cent of the mean-the movement from 1996-97 to 1997-98 indicates a marked deterioration in their position and a marked increase in inequality, both recently and over the whole period.

“In a separate study conducted by the OECD for the period 1975-76 to 1993-94 there appears to be conclusive evidence that inequalities in incomes had increased in Australia. The Gini Index (Co-efficient) had increased overall, and the proportion of disposable income going to the three lowest deciles had declined.

“Changes in income inequality are not easy to quantify. Popular perceptions that inequality may be increasing, because for example there have been massive increases in senior executive salaries, are not automatically accurate. However analyses of the measures of income dispersion available from 1981-82 and used in this paper appear to indicate that income inequality has increased overall and for most groups in Australia since then. This situation may have been ‘offset’ by targeting of government social security transfer payments, which appear to have ensured that real incomes, especially of those with the lowest incomes, have generally been at least maintained. Thus on the data analysed the apparent increases in income inequalities have been mollified to a sufficient degree [by Social Security transfer payments] that it is likely that the extent of poverty has not increased.”

The closing sentence offers a very chilling affirmation of the general acceptance of this horrifying and pathological condition of ever increasing income inequality. We – whether led by or in fact ‘poll-driving’ our political representatives – are invited by the author of the report to at least be thankful that welfare payments have shored up the crumbling walls of our economic and social system – for the time being! Will we require ever-increasing taxation revenue to continue to merely maintain the current level of inequality? If so, and if we take such a proposition to its absurd conclusion, will we be ultimately faced with PAYE taxation at 90 % and half of the workforce on a permanent dole in order to do no more than maintain the same income inequality with which we are currently afflicted? If western European taxation patterns are any indication of Australia’s future in this area, then that is exactly where we and they are heading.

Defining wealth and poverty

Before we move on to identify strategies that might lead to the elimination of this gross and widening inequity, we need to clarify some key concepts.

Wealth, in strictly economic terms may be defined as the product of labour and capital applied to land. In the context of this discussion however, it is a measure of disposable income that is surplus to what is required to achieve a minimum socially acceptable standard of shelter and sustenance. These standards will vary according to the cultural context.

Poverty may be measured on similar criteria; in other words poverty is the lack of sufficient income to provide what society considers a minimum standard of shelter, nutrition, education and general well being. A special report in the Australian YearBook of 1996 suggests, as a definition: “In rich countries like Australia, poverty is conceived in relative rather than absolute terms. This implies that poverty is defined not in terms of a lack of sufficient resources to meet basic needs, but rather as lacking the resources required to be able to participate in the lifestyle and consumption patterns enjoyed by other Australians. To be relatively poor is thus to be forced to live on the margins of society, to be excluded from the normal spheres of consumption and activity, which together define social participation and national identity.”

In the mid 1960s the first attempt to quantify the extent of poverty in Australia was undertaken by a Melbourne University research team headed by Professor R F Henderson, which established a poverty benchmark known as the Henderson Line. This measure was superceded in 1981 by the use of Household Disposable Income per Capita, the latter measure “being more comprehensive in scope but also preferable because it incorporates changes in personal tax payments.”

The definition and quantification of poverty continues to be hotly debated by theorists and statisticians. But from a subjective point of view, although we may not be able to define its pathology with clinical precision, it is a condition that we would all recognise immediately if we were personally afflicted by it. Those who have experienced its embrace would immediately recognise its distinctive taste and smell, and the spirit-destroying shroud in which it slowly wraps its victims. Its impact on individuals shows itself in a wide variety of symptoms. It causes many to, at first, abandon their self respect by being forced to submit to private or government charity; then often, in an attempt to achieve immunity from further shame, to turn to drink or drugs; to wife and child abuse; to succumb to physical and mental illness; chronic depression; to develop criminal perversions; and ultimately, if driven to extremes, to suicide as a personal response or collectively, at least among bolder souls, to bloody revolution.

In an address to a public health conference in September 1999, Michael Raper, president of the Australian Council of Social Services, spoke on the social and more particularly, the health implications of poverty:

“Poverty means hardship and personal distress for those affected. Behind the raw figures stand … individuals and families hurting, day in and day out, for lack of a job, lack of money for essential costs – worrying about how to buy food for the children or pay the rent the next day.

“Poverty and inequality can reinforce inequality of opportunity. Australians have long held the view that a “fair go” is important. There is emerging evidence of a trend to greater inequality of opportunity in a number of areas…

“Growing poverty and inequality undermine social cohesion and community life by decreasing shared values and experiences. Current trends give rise to two major concerns:

“Firstly, a sense of anger felt by low to middle income families (the ‘battlers’). They struggle to maintain living standards and are angry with those… who have received most of the benefit from economic change. At the same time, they are angry with those earning less than them, who they see as not working as hard as them, yet receiving assistance which is denied to them.

“Secondly, people on high incomes increasingly have lives and choices significantly different from the rest. Often these people are the decision-makers, but they are becoming an “overclass” and making decisions with a lack of understanding.”

Henry George, the nineteenth century American political economist and social reformer, on the subject of growing inequity between the haves and the have-nots and its often abstruse and misleading definition and quantification, noted: “… the struggle for existence has become more and more intense. People who want to prove the contrary get up masses of statistics to show that the condition of the working classes is improving. Improvement that you have to take a statistical microscope to discover does not amount to anything.”

More studies, more reports, more investigations

All of the studies carried out so far; all of the investigations; all of the World Bank and UN and OECD reports have come to nothing; for years, for decades. Why? Simply this: They will not address the fundamental question; what is the cause of poverty? Is it any wonder that their searches – whether by cynical design or ignorance – have been one hundred percent, gold medal, blue-ribbon failures?

The World Bank’s World Development Report 2000/2001 “Attacking Poverty”, suggests that, major reductions in poverty in developing countries are possible. But the noble bankers now believe that solutions are not so simple as at first might have appeared. It goes without saying of course, that any mention of the elimination of poverty would be howled down in their oak-panelled New York boardroom. The Bank feels that achieving any reductions will now require a more comprehensive approach that directly addresses the needs of poor people in three key areas: “opportunity, empowerment, and security”. Not a mention of access for the poor to the means of livelihood; we must first educate and empower them! The new study also finds that economic growth is crucial but often not sufficient to create conditions in which the world’s poorest people can improve their lives.

It is of course, totally self-serving of the Bank to spuriously expand the definition of poverty to include education, health, etc, as if the absence of these things led to rather than resulted from poverty. Such a blatant ploy simply diverts attention from the real issue – the private monopolisation of land and resources. This cynical multiplication of targets by the Bank allows measurable achievements to be recorded in health and education for example, and selected efforts to appear successful, but will do nothing to eliminate the cause of poverty, since the cause is simply not acknowledged, let alone targeted.

A few extracts from the Report demonstrate how misguided, if not willfully blind, are its authors – or perhaps more precisely, their employers – and even more, how a clear case of gross inequity can be so obfuscated with futile and directionless analyses. In chapter 1, section 6 of the Report we are told: “The Report begins, therefore, with a discussion of the concept of poverty and its measurement. The next chapter takes up the causal story, leading to our proposed framework for action.” The reference to the ‘causal story’ is hardly enlightening. Why a ‘causal story’ and not simply a cause? Some more darkness is subsequently shed on this promise in chapter 2 of the report.

Further, in 1.6: “A broadening of the dimensions of poverty from income to education and health immediately led to a broader causal framework” The plot thickens.

Chapter 2 is titled “The Causes of Poverty and a Framework for Action.” It goes on “This chapter begins with a discussion of causality and ends with a proposed framework of action to attack poverty in the 21st century.” The authors do indeed go on to discuss causality, whatever that is, but they abandon altogether, at this early stage, the search for the cause. They proceed to confuse poverty with, and partly attribute it to, lack of education and lack of access to health care. The existence of uneducated millionaires across the globe, and of poverty in countries with a free health care system – such as our own fair land – exposes such canards.

In 2.38, we read the following bold but totally unfounded statement; “We are now ready to move from the causes of poverty…” But we haven’t learned what these causes are yet! Nowhere in the whole long document were any causes highlighted or explained. The authors examined a multitude of effects, but did not even begin to look for the cause. How can we hope to cure this disease if we can’t or won’t look for the actual cause?

A recent UN report shows how successful such investigations into poverty have been. “Since 1971, the number of countries categorised by the UN as extremely poor has risen from 25 to 48. During that period, only one country, Botswana, has graduated from the list” – and why? They simply told the IMF and the World Bank, “No thanks!”. The World Bank report cited above certainly won’t improve that pitiful score.

If the World Development Report is anything to go by, then it does lend weight to the view of those cynics who suggest that the primary functions of the World Bank are simply to: subsidise exports from the industrialised nations to the debtor nations; facilitate Third World debt repayment to the IMF and the World Bank itself, and in so doing; to perpetuate if not exacerbate the current appalling inequities both within the indebted countries and between those countries and the ‘lending’ nations.

Poverty is our problem and we will not even begin to eliminate it if we refuse to recognise its cause, or far worse, in recognising it, insist on denying it; that would be a crime against humanity for which there can be no absolution.

It should be no surprise to anyone to find that the situation regarding increasing inequality of incomes is even more pronounced in the United States – where we are confronted with even greater extremes of wealth and poverty – than here in Australia, as the following extracts from “Shifting Fortunes – the Perils of the American Wealth Gap” reveal:

“Wealth in the United States is now as maldistributed as it was in 1929. Financial assets like stocks and bonds remain concentrated in relatively few hands, with the richest 10% of the population owning 88% of stocks and 90% of bonds. The personal wealth of Bill Gates alone exceeds the combined holdings of 40% of the U.S. population. Consequently, when the stock market climbs, a relatively few wealthy households reap most of the gains.

“Even among the top 10%, wealth is highly concentrated. A mere 1% of households, each with at least $2.4 million in net worth (assets minus debts), now own 40% of the nation’s wealth, twice the share they claimed two decades ago. According to economist Edward Wolff of New York University, the concentration of wealth is even more dizzying if home equity is taken out of the equation (wealth in housing is the most widely-dispersed of assets). Excluding equity in homes, the richest ½ of 1% together (about 450,000 households) now own 42% of the nation’s financial wealth.

“Thanks to a combination of rising profits, high real interest rates, skyrocketing CEO pay, and a booming stock market, the inflation-adjusted net worth of the richest 1% swelled by 17%, between 1983 and 1995. While the rich racked up gains measured in the millions, the 40% at the bottom saw their average net worth shrink from $4,400 to a meager $900. And despite endless media cheerleading about the rising Dow making millionaires of the middle-class, the middle fifth of American households have actually lost 11% of their net worth since 1983.

“Behind the wealth gap lurks the wage gap, the fact that wages have fallen short of inflation for the past two decades. Although wages rose in 1997 and 1998, real weekly earnings for average workers are still lower than they were in the 1970s…. Households are [now] borrowing heavily to make up for stagnant wages. The U.S. savings rate — the percentage of personal income not spent each year — is less than zero, meaning that the typical U.S. household spends more than it earns. Debt service now eats up 17% of consumer income, a heavy and potentially insupportable burden. As a result, nearly one in five households has negative net worth, and bankruptcy filings have doubled since 1990.”

Reports, studies, investigations abound. Government and semi government authorities and a multitude of academic projects, thrive and are handsomely supported in examining this age-old issue. And yet they are all, without exception, obstructed by some invisible barrier which, for whatever reason, self-serving or otherwise, totally deflects even the faintest beam of light from falling on the malignant tumor itself.

Examining the wealth – poverty gap

We read the headlines reporting the results of yet another survey revealing the continuing and relentless widening of the wealth poverty gap; it never contracts. Many of the articles are written in a tone of surprise; as if, after the latest efforts – be they the expansion or imposition of so-called ‘free’ trade – though if it were truly free it would hardly need regulating; arbitrated minimum wages, increased welfare expenditure, programs to boost employment in depressed regions, successful trade union campaigns – the result is always the same; not sometimes – always! The gap widens! What possible conclusion can be drawn from this other than that wages, or lack of them, are not the cause of the problem, they are a symptom of a more deep-seated condition.

Paul Kelly, a senior journalist, commenting in the Australian newspaper on the latest findings of a comprehensive survey on income inequality, which essentially showed up the same inequities that plague all advanced economies writes:

“… Inequality in Australia today is a serious social issue but it is rarely discussed as such – more often it is a rhetorical weapon deployed by special interests to argue for a special deal.

“There are three main conclusions in the research [by NATSEM, referred to above]: income inequality is being driven by a more market-oriented economy; government policy has resisted the market such that overall income inequality remained much the same from 1982 to 1996; and there is a rising concentration of wealth in Australia. The popular debate about equity has confused the generation of income and wealth with its distribution. …[the NATSEM] research highlights the potent concentration of wealth and notes that the growing inequality of wealth was particularly notable. It shows that in 1996-97 the top 10 per cent of Australians received 49 per cent of all income from assets (interest, rent, and dividends) – an increase from 39 per cent in 1982. …But these figures understate the wealth concentration because they exclude the family home, the greatest single source of wealth.

“The latest estimates from Access Economics in January document the growing wealth concentration in the 1990s. They show the top 50 per cent of Australians owning 94 per cent of total wealth (the same figure as 1993); the top 10 per cent own 49 per cent of wealth (a lift from 44 per cent in 1993); and the top 1 per cent own 16 per cent of total wealth (a strong rise of one-third from 12 per cent in 1993).

“How far might these trends run before being addressed by government? Is the community tolerant of such growing concentration of wealth? Is the agitation about equity as conveyed almost endlessly by pollsters, media and social theorists genuine or fake? If it is genuine, then why hasn’t the political system responded?

“The political system, in fact, has moved the other way – the Howard Government has halved the capital gains tax rate with the prompt support of the Labor Party. This is not the action of a political class that takes wealth accumulation as an issue that needs to be addressed.”

Paul Kelly’s analysis, like most others, offers no real clue as to what might be just and permanent solutions. The options seem to be; continue with the current hobbled and distorted version of a market economy, with its deregulation, globalisation and rule by corporations; or revert to the welfare ‘nanny’ state with all of its cumbersome and costly and ultimately ineffectual wealth-transfer mechanisms.

In Britain, Tony Blair’s New Labour raised people’s expectations by embarking on a programme of poverty alleviation after the election of May 1997. The results, unsurprisingly, were not encouraging. According to a report in the Independent newspaper: “The income gap between rich and poor has widened to its highest level since Margaret Thatcher was in office, official figures show. …The figures from the Office of National Statistics (ONS) revealed that in the 1998-99 financial year, Britain’s highest earners enjoyed their biggest share of the national-income cake since inequality peaked in 1988. …According to the ONS, the top fifth of earners in 1998-99 took a 45% share of the money people have to spend after paying taxes and receiving benefits. This was up from a low of 43 % in 1995-96. …In contrast, 6 % of disposable incomes went to the poorest fifth of earners in 1998-99 – down from 7 % in 1995-96, and 10 % in 1978.”

No one could doubt the Blair government’s desire, even if merely politically motivated, to improve the situation for the swelling ranks of the poor in the UK. But their schemes have failed and any such schemes will continue to fail because the architects of these schemes have refused to investigate, or have been blind to, the cause of poverty. They assume, defiantly falling back on the ignorance of pre-Enlightenment society, that poverty and inequality are somehow preordained or worse – though they would be loath to admit it – result from some deviant, as yet unrecognised micro-organic saboteur back-stroking around in our ancestral gene pool, responsible for the creation of a whole sub-species of poor people. How long might it be before we see these blind social scientists stumbling back into eugenics in their never-ending , government funded quests?

Every government attempts to tackle this ever-pressing problem. Each new leadership aspirant, either prior to or soon after winning office, mobilises a band of experts to plan an attack, either cynically or genuinely, on this remorselessly expanding gap.

But they have all failed. Those responsible for designing such experiments in poverty ‘alleviation’ – the ‘fiscal analysts’ – the rightful standard bearers of the ‘dismal science’ flag – are the ones who have given the noble study of economics such a bad name. Shouldn’t we, rather than relying on the appallingly unscientific methods of the “let’s-close-our-eyes, try-this-and-see-if-it-works” school of economic blunders, start by, at the very least, defining the correct question? What is the root cause of poverty?

The search for solutions

The search for solutions goes on. It takes different forms, and is undertaken with varying degrees of dedication and good faith around the world. The common thread linking all the searches though seems to be the almost universal agreement among those charged with finding solutions to not look for a cause or causes!

Sad to say, the challenge to economists thrown down by Thorold Rogers in his monumental work on the history of English labour, has not yet been even acknowledged, let alone heeded. In Six Centuries of Work and Wages, he states: “A science which detects a disease has its use if it can point out how the disease has arisen, and thus can check the development of that which would make the malady continuous and permanent. That science, however, takes a far higher place, which is not only accurate in its diagnosis but skilled in the proper therapeutics. But the discoverer of true causes has travelled a long way on the road to the remedy. And this, if it be rightly taken, is what the historical economist may effect, but the theoretical economist has mistaken.”

Our historical perspective allows us to survey the many remedies that have been applied in attempts to halt the continuing expansion of this insidious gulf between the haves and the have-nots. We can see that the solutions so far attempted – and just about everything has been tried – have been to little or no avail.

The list of a century of attempts is long and dismal; it includes: price controls, manufacturing subsidies, export assistance and preferential tariffs, wage controls, wage subsidies, arbitrated wage-fixing systems, tax write-offs, appeals for corporations to develop social consciences, work-for-the-dole schemes, enterprise start-up assistance packages, re-training schemes and closer corporate involvement/interference in the design of education curriculums, tax summits, community consultations and endless study tours around the globe.

The vast array of potential solutions seems inexhaustible. Yet not one has succeeded in achieving anything but the most marginal and short-lived impact. Policy makers seem to have somehow overlooked or ignored some fundamental element in the economic equation. Have we focused so intently and exclusively on symptoms that we were blind to the gnawing cancer that was slowly consuming its host?

In order to understand the pathology of this great and growing world epidemic of poverty, wouldn’t the wise scientist, in attempting to develop a workable theory, first try to isolate, identify and define the elements to be examined? In the case of an economic theory, the elements are those which are critical to production and exchange. Having identified them, the next step would be to test the theory. If these tests failed to produce a satisfactory result, the investigator may – as our governments and corporation-funded think tanks have indeed done – try again. And if the results still fail to satisfy the predictions or expectations, then I suppose we can continue trying until the cows come home or the world consumes itself. At some stage, however, our intrepid scientists might shake the dust from their collective heads and say to themselves: “Rather than continuing to dream-up and apply endless variations of our theory, perhaps we might re-examine, test and verify our primary assumptions?”

As logical and as rational as that conclusion seems to be, it is not the rule that guides economic analysis or related policy-making. For the last century both neo-classical and Marxist economics have confounded any attempt at a logical analysis by melding land in the term ‘capital’ and economic rent either in the term ‘interest’ or ‘profit’ or both. “Modern economics confuses land with capital and, from that point on, things become a shambles. The greatest paradox in economics is why advances in productivity and technology do not benefit the ‘average person’. Trying to account for this without understanding the role of land is like trying to explain planetary movements while believing that the earth is the centre of the universe…Until government collects the rental from land to use as public revenue we will continue to have involuntary unemployment and poverty.”

Land is a four-letter word politely avoided in the conversations of neo-classical economists who still insist, in defiance of all logic, that land is capital, and that its role as an essential and distinct element is redundant in the complexities of modern economics. Any attempt to revive the centrality of land in economic analysis is shouted down as “belonging to an agrarian economy, and no longer as important as it may have been”. Whereas, even the internet billionaires and the currency speculators are as totally dependant on land as the source of their wealth as is the poorest dirt farmer.

From the evidence assembled, the conclusion must be inescapable, and irrefutable – that land, in both a physical and economic sense, is absolutely fundamental to the operation of the economy, and that if the raw unimproved value of land is privately monopolised by only a small part the population, there will be a substantial negative impact on the overall distribution of wealth and, inevitably, on the incidence unemployment and of poverty. J.S. Mill emphasises this very point, highlighting the ultimate power of land monopoly, in his Principles of Political Economy when he writes:

“The requisites of production being labour, capital, and natural agents [land and resources]; the only person, besides the labourer and the capitalist, whose consent is necessary to production, and who can claim a share of the produce as the price of that consent, is the person who, by the arrangements of society, possesses exclusive power over some natural agent. The land is the principal of the natural agents which are capable of being appropriated, and the consideration paid for its use is called rent…It is at once evident, that rent is the effect of a monopoly; though the monopoly is a natural one, which may be regulated, which may even be held as a trust for the community generally, but which cannot be prevented from existing. The reason why landowners are able to require rent for their land, is that it is a commodity which many want, and which no one can obtain but from them.”

What are the lessons here for those charged with designing remedial policies? Adam Smith’s contention in the dawning light of the Industrial Age would still appear to have much merit. After discussing the subject of government revenue and the methods by which it may best be collected, he points to two types of taxation which he believed best fitted his famous criteria – that the ‘ideal’ tax should be: predictable, equitable, unavoidable, non-transferable and cheap to administer – a tax on luxury goods and a tax on ground-rents (the annual value of land). On the subject of ground rents, he wrote:

“Both ground rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before…. Ground rents seem, in this respect, a more proper subject of peculiar taxation than even the ordinary rent of land. The ordinary rent of land is, in many cases, owing partly, at least to the attention and good management of the landlord. A very heavy tax might discourage too, much this attention and good management. Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people, or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon; or to make to its owner so much more than compensation for the loss which he might sustain by this use of it. Nothing can be more reasonable than that a fund which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.”

Land is as essential to the economy as is labour and capital; but it is, by any logical analysis, a distinct and unique element. Unless we recognise this fact; unless we abandon the current grimly-held but erroneous conceit of conflating land into capital, we will never remedy the individual and social problems that stem from the pathological maldistribution of wealth in which we now participate. Unless we are able to distinguish the essential economic difference between land and capital, the underlying cause of the grotesque imbalance in the distribution of wealth portrayed in Table 1 will not only remain hidden but will continue to inject its poison into our already tottering social system.

By treating land as a separate element, however, we immediately shed light on the paradox. We can now offer fresh perspectives on such questions as: Why do advances in technology and productivity hardly benefit the ordinary wage earner at all? And: how does a highly productive society continue to exclude over one fifth of its population by pushing them down to income levels that are either barely above, and more often well below, the poverty line?

J S Mill articulated the increasing complexity of this now classic liberal-democratic dilemma, which he foresaw would require a sophisticated solution, when he wrote: “The social problem of the future we considered to be, how to unite the greatest individual liberty of action, with a common ownership in the raw material of the globe, and an equal participation of all in the benefits of combined labour. We had not the presumption to suppose that we could already foresee, by what precise form of institutions these objects could most effectually be attained, or at how near or how distant a period they would become practicable.”

Henry George, had the courage and insight to identify, with great clarity and precision, a policy that would indeed harmonise public and private interests: “Material progress makes land more valuable, and when this increasing value is left to private owners, land must pass from the ownership of the poor into the ownership of the rich…There is only one way…in which …working people may be secured a share in the land of their country…– the taking of the profits of land ownership for the community.”

The cause of poverty

Now to return to the question posed at the outset. If our productive power has increased so massively, and yet the returns to labour have to all intents and purposes stood still, where have the gains gone? Where else but land price? Surely it is this which ultimately defines and drives the Wealth-Poverty Gap. It is the gap between those holding privately monopolised land and resources and those on the lowest incomes. More precisely, it is the gap between privately confiscated economic rent and the incomes – made up of subsistence wages and or welfare top-ups – of those living on or below the poverty line.

The cause of poverty is the private monopolisation of land and resources. The solution; the only way to eradicate involuntary poverty, is to cease taxing labour and production and to levy on land and resources a ‘tax’ or Rent equal to their annual value minus the value of improvements, regardless of current usage. In other words, what we now pay in Rent into private hands would go to government as revenue, and what we now pay as tax would stay in our pockets, to be disposed of at our leisure. Such a system, by rendering the speculative withholding of land and resources unprofitable, would allow equal access to land for all, and, since wages would rise by the amount previously confiscated through taxation, would lead to increased demand for goods and services and therefore employment. This in turn would lead rapidly to the elimination of involuntary poverty. Such a system also would seem to be the only basis upon which true free trade, unencumbered by national or multinational monopolies, could operate.

Diverting attention from the real villain – the private confiscation of the publicly created Rent – simply allows the continuation of a system whose injustice has led, directly or indirectly, to over one hundred million deaths due to avoidable wars and starvation in the last century alone.

The author of An Irish Commonwealth, writing in the first decade of the twentieth century saw the mechanism which ultimately, over a long period, relegates the majority of people to the ever swelling ranks of the poor. He wrote:

“A people robbed of their rights in the land must remain impoverished; the more they struggle, the tighter do their bonds become. They huddle together in slums and underground cellars to escape rent, and the more they overcrowd, the higher do rents rise against them. As they try to advance along the road of industrial progress, the higher becomes the toll levied upon them by monopoly. If they increase their productive power, the larger becomes the tribute demanded for the use of the sole source of production, the land and the stores which it contains. While that source is monopolised and the people denied access to it, the growth of population, which under free conditions would bring increased wealth to all, strengthens the power of the landlord to extort high rents and provides the capitalist with an overflowing supply of cheap labour.”

The same mechanism to which the author above refers is at work in every country which recognises and protects the legal but unjust rights of private individuals to confiscate the public Rent – the common wealth.

Perhaps the root of our problem is that the solution is not buried, awaiting revelation, in some as yet undiscovered and complex economic equation, it is right under our feet! If land and resource monopoly is the problem, then where does it fit in the economic scheme of things? Does it effect the distribution of wealth? Does it contribute to the incidence and continuing existence of poverty in our society, and if so, what measures should we consider in order to address it, and preferably to eliminate it?

Remedial measures; is taxation the answer?

The Secretary-General of the OECD, Donald J. Johnston, reviewing the role of taxation, insists that free trade, one of the cornerstones of economic rationalism, has not yet had a chance for its blessings to trickle down on the lower orders. He fails to see that what he, along with all Western leaders, calls free trade is an abuse of the term; it is not free at all. It is not a blessing, it is a curse. It is simply another weapon in the armory of transnational monopolies, protected and mandated by the wealthy industrialised countries enforcing their power to drive the poorer, World Bank and IMF-dependant trading nations even further into debt. It is in fact attacking and undermining basic freedoms by accelerating the transfer of wealth from the poorer to the wealthier countries. So called free trade agreements such as the recent US push to include all of the Americas in one ‘free trade’ block has been accurately likened to an agreement between a shark and a school of sardines. Johnston writes:

“Taxation should be seen as a building block of society, provided it has the necessary attributes of transparency and fairness.

“Since my arrival at the OECD I have sought to emphasise the importance of the triangular paradigm of social progress. That means keeping economic growth, social cohesion and good governance in balance with each other. Without any one of these elements social progress risks being arrested, or at least retarded. “The broadly supported agenda of free trade and investment is an extremely effective engine of economic growth. Its ability to create wealth is virtually irrefutable. Yet there are many increasingly articulate constituencies who resist globalisation. … They see riches on Wall Street, but not necessarily on Main Street. Gains will come… but if we are to maintain the momentum in liberalisation of markets worldwide, those gains must be felt by all. How? There is no simple answer, but education, training, and social programmes that facilitate adjustment will all contribute [emphasis added] And most of them will be financed through taxation. However, taxation is not an easy area to get right. It never has been and it probably never will. But when collected judiciously and deployed effectively, tax acts as a tool of good governance, allowing economies to grow while helping to improve society as a whole.

“Taxation is no longer simply the territory of individual governments. The removal of capital controls and the continuing liberalisation of the financial markets …have accelerated the pace of integration of national economies. They have increased the cross-border mobility of capital and investment and also encouraged large corporations and financial institutions to develop global strategies….

“The mobility of national tax bases has meant that international considerations have to be taken on board when shaping national tax policies. Inevitably therefore, governments of both developed and developing countries have begun seeking greater international co-operation to ensure that their domestic tax systems work as they are intended to work.

“It is not possible to implement sound economic policy without having appropriate tax rules and the capacity to apply those rules in practice. Otherwise our triangular paradigm will lose its balance.

“But the collection of taxes is only one vitally important part of the fiscal conundrum. The other is how to spend the tax income among the competing needs of modern democracies in a way that assures and enhances the conditions of wealth creation without intervening in the process of wealth creation itself. That is probably the most daunting challenge for governments as we enter the 21st century.”

Johnston claims that “There is no simple answer” to poverty. He knows that governments have been applying “solutions” for over a century now, without success. His views are, by and large, shared by most world leaders and most mainstream economists. He proposes solutions to a problem whose causes neither he nor they even acknowledge, let alone understand! He then expresses the belief that a solution will probably never be found anyway. He is essentially saying, and echoing the views of all the Western powers: “We have a bottomless bag full of possible solutions to a problem, the cause of which we can’t (or won’t) define; and we predict that these answers will fail to have any meaningful impact on poverty anyway other than perhaps, in some small measure to ‘facilitate adjustment’! In the meantime, since we can come up with no better solutions we will stick with taxation, and some meagre and horrendously inefficient form of tax transfer regime to ameliorate the damage and to mollify the poor and the left-behind.” In other words, “from here on, in terms of equity, it’s downhill all the way!” This is the counsel of despair. What a grim future it offers to the swelling ranks of the world’s population gnawed at and ground down by poverty.

Mason Gaffney, Professor of Economics at the University of California, in his paper “Opportunities for International Financial Centres in the 21st Century”, challenges the OECD views on both the efficacy of taxation in encouraging growth and the OECD’s irrational fear of the tax-avoidance opportunities available to the ever increasing mobility of capital. He cites California’s spectacular growth between 1900 and the late 1970’s as an example of how their tax regime, built primarily on property taxes, still managed to fund the best and most modern infrastructure in the USA. It was this physical, civil and social infrastructure, he argues, which attracted the mobile capital from elsewhere, which fuelled California’s phenomenal growth during that period. That growth was only finally throttled back in 1978 with the advent of the infamous ‘Proposition 13’, which capped property tax rates at about 30% of their previous level. Professor Gaffney writes:

“The OECD says a “harmful tax regime” is one that “attracts mobile activities.” … That view is too simple by far. Mexico, for example, has very low taxes, but repels both capital and labor anyway. A nation may also attract mobile activities and factors in two other ways. One is by offering superior public service [as did California]… The other is by a tax structure that favors mobile activities without stinting on public services.

“The extraordinary growth of California from about 1900 to 1978 shook and recast the economy of the U.S.A., and parts of the whole world. It was not done with low taxes and skimpy public services. It was in part the product of a tax structure that was Magnetic (compared with other states). California’s natural advantages (a mixed bag) did not promote much growth after the 1849 Gold Rush and the Civil War, when California growth lagged badly for 20 years or more. Neither did the transcontinental rail connection, completed in 1867, promote much growth. Eventually, though, INTERNAL growth-oriented forces prevailed. California provided superior public services of many kinds: water supply, schools and free public universities, health services, transportation, parks and recreation, and others. It held down utility rates by regulation, coupled with resisting the temptation to overtax utilities.

“That all required tax revenues. California had oil, but did not tax severing it, and still doesn’t. Its wine industry went virtually untaxed. There was and is hardly any tax on its magnificent redwood timber, either for cutting it or letting it stand. There was no charge for using falling water for power, or withdrawing water to irrigate its deserts. Most of those are good ideas, but they are not what California did.

“Its main tax source was another kind of immobile resource: ordinary real estate. Its tax valuers focused their attention on the most immobile part of that, the land, such that by 1918, land value comprised 72% of the property tax base – and on top of that there were special assessments on land.
People and capital flooded in, for they are mobile in response to opportunities. California became the largest state, and a major or the largest producer of many things, from farm products up to the “tertiary” services of banking, finance and insurance….”Was this tax competition harmful?”

Taxation, far from being the answer is in fact a major part of the problem of the continued existence of a wealth poverty gap. By confiscating over fifty percent of wages in Australia and a lesser though still large percentage of returns to capital, taxation substantially reduces aggregate disposable income; this in turn reduces demand for goods and services, leading ultimately and inevitably, as we can see by looking around us, to a permanent pool of long term unemployed and under-employed, and still more poverty.

The ‘trial’ solution to income inequity currently applied in many western economies, including Australia, has been and still is to tax labour and enterprise, and to use the revenue from these taxes to alleviate poverty by transferring this revenue in the form of welfare payments in one form or another to those on low or no incomes. This ‘solution’ when looked at in the light of the heavy dead weight losses associated with taxation of labour and enterprise and its flow-on effects is quite perverse to say the least.

The impact of tax transfers on disposable incomes

For lower income earners in Australia, tax transfers have barely, if at all, succeeded in maintaining real incomes, let alone contributed to any real gain, despite some extremely large increases.

Table 3 shows the disposable income of the poorest 10% of families actually declining between 1982 and 1994, despite an increase of 51% in tax transfers.

Table 3 Average annual net impact of income tax and tax transfers on working families with dependant children, by private family income decile, 1982 to 1994 (in 1993–94 dollars)

 

1981 – 82

 

1993 – 94

Private Family Income Decile

Private Income ($)

Disposable Income ($)

Impact of tax transfers

 

Private Income ($)

Disposable Income ($)

Impact of tax transfers

($)

% change

($)

% change

1 (bottom)

13,036

14,847

1,821

14

 

9,672

14,590

4,918

51

2

24,481

23,481

-2,002

-8

 

22,902

23,910

1,008

4

3

30,771

27,042

-3,731

-12

 

29,802

27,352

-2,450

-8

4

35,195

30,275

-4,919

-14

 

36,208

31,228

-4,980

-14

5

39,469

33,015

-6,454

-16

 

42,494

35,310

-7,184

-17

6

44,091

35,973

-8,118

-18

 

48,648

39,421

-9,227

-19

7

,49,660

39,821

-9,839

-20

 

55,180

43,734

-11,447

-21

8

56,569

44,168

-12,401

-22

 

62,591

48,334

-14,257

-23

9

66,853

50,796

-16,059

-24

 

75,054

55,899

-19,155

-26

10 (top)

102,203

70,036

-32,168

-31

 

121,616

83,831

-40,785

-33

Average

46,346

36,954

-9,394

-30

 

50,757

40,385

-10,372

-20

Such transfers are in truth wage subsidies, which tend to obscure the increasing prevalence of sub-standard wages This, ultimately, is a government subsidy to landowners; for the savings made by employers or sole producers are translated into higher actual or imputed rents. For the statistical proof of that classical economic equation, look again at Table 1 and its accompanying charts.Table 3 highlights an overall increase in income inequality despite the determined efforts of government. Whereas in 1982 the gap between the lowest and highest deciles was 4.7 times, a decade later it had climbed to 5.75 times, and must inevitably continue to climb until and unless the cause of that inequity is identified and remedied.

Looking ahead

If the trends suggested in Table 1 continue, by 2020 we could see a further real 300 % increase in land price and a 100 % rise in taxes, yet wages barely rising at all in real terms. Again, if current government fiscal practices continue, tax transfers to those on welfare must increase, placing an even greater burden on wage earners. How long will it be before this burden becomes absolutely insupportable?

Given the critical significance of the economic rent of land and natural resources in the economy, any plans or predictions that fail to recognise and account for the uniqueness of these economic factors will be fatally flawed. Government policies, which rely on such flawed predictions, will be, at best, inadequate and inevitably regressive in terms of the incidence of taxation. As difficult as any economic forecasting is, if we omit land and resources from the calculations, we are playing blind-man’s-bluff. We are frittering away crucial time, let alone massive amounts of taxpayers’ money. Look around at the evidence.

None of these long-term trends will change unless we have the boldness to look at the evidence and the honesty to challenge the prevailing economic “wisdom” that has held governments in thrall, and millions in poverty for centuries.

It is essential that our analysis be free of preconceived cultural and commercial notions that ignore natural and common sense distinctions; blurring land, resources and man-made wealth into the vague and unscientific terms property or capital. The currently dominant “free market” economics is neither free nor is it economics; it is numerology; its currency is blind faith, not reason, and its bitter social harvest surrounds us; shames us; and will surely consume us.

A new approach to an old problem

What might be a logical and common sense approach to solving this perennial problem of the increasingly gross inequity in the distribution of wealth? What if, for argument’s sake, the sum we now pay in taxes – currently around $180 billion per year – were left to fatten our pay packets, (Note that even welfare recipients lose approximately 43% of incomes to indirect taxes and compliance costs..) and what we are now paying in economic rent into private hands – currently estimated at around $150 billion – were paid as “taxes”? Would wages climb on a gradient similar to the historic trend, illustrated in figure 1 that tracked land values? Wouldn’t disposable incomes at least double? Is that such an outrageous notion?

Wouldn’t we see a consequent increase in demand for goods and services, and therefore a very substantial boost to demand for labour? Is that such an outrageous notion – that if our present productive capacity and energy were unburdened of taxes, we could all actually receive the full benefits of our own individual and our communities’ labour, and not the pittance we currently manage to cling to?

In such a scenario government revenue would at least maintain something approaching its present levels while administrative costs would plummet. This must result in an increased capacity of government to fund infrastructure. The increase in demand for goods and services stemming from such a change would boost the economy, and begin the process of reducing and finally eliminating the increasingly destructive and socially divisive wealth-poverty gap.

Figure 3 Projections to 2020 (real percentage changes) of selected Australian economic trends

Curiously enough however, there appears to exist a subtler impediment to our ready acceptance of such a rational but seemingly radical proposition. Many of us; confronted by the promise that we might receive as a wage the full return for our labour, feel instinctively that it would be too good to be true; that there must be a hidden trap; that we don’t really deserve it anyway! There must be something in our cultural inheritance, mixed up with the protestant ‘work ethic’ that causes us to baulk at the notion that we should by right receive the full 100% of what we earn. Henry George, in Social Problems defended this fundamental right of a worker to his/her wages thus:

“Now, using the words [Rich and Poor – in the context of prevailing local conditions]…I join issue with those who say that we cannot all be rich; with those who declare that in human society the poor must always exist. I do not, of course, mean …in the magnificence of our houses, [etc]…. That would be a contradiction in terms. What I mean is, that we all might have leisure, comfort and abundance, not merely of the necessaries, but even of …the elegancies and luxuries of life. I do not mean to say that absolute equality could be had, or would be desirable. I do not mean to say that we could all have, or would want, the same quantity of all the different forms of wealth. But I do mean to say that we might all have enough wealth to satisfy reasonable desires; that we might all have so much of the material things we now struggle for, that no one would want to rob or swindle his neighbor; that no one would worry all day, or lie awake at nights, fearing he might be brought to poverty, or thinking how he might acquire wealth. …Does this seem an utopian dream?

“…The fear of poverty makes us admire great wealth; and so habits of greed are formed, and we behold the pitiable spectacle of men who have already more than they can by any possibility use, toiling, striving, grasping to add to their store up to the very verge of the grave”

We have somehow been conditioned to expect that a large part of our individual earnings somehow belongs to the community, and it is only fair that the Government relieves us of it and redistributes it to the ‘less well off’. Whereas, as has been pointed out in the preceding paragraphs, the rightful source of community revenue – the community’s wage as it were – is the unimproved site values created by the community – the economic rent. We could indeed all be richer if that simple change were to occur. Not only that, but we should feel quite justified in claiming such a return since as individuals, we produce our own wages anyway, and as a ‘biological’ part of the community organism, contribute our share, by our mere presence and participation, to the community generated economic rent.

Dr Dmitry Lvov, Academician-Secretary of the Economics Department of the Russian Academy of Sciences, who is attempting with others to chart a ‘third way’ for the currently embattled Russian economic system, put forward his vision of a rent-sharing Russian community as follows;

“Another dangerous aspect of current taxation is that it makes it easy for our monopolists to accumulate and move abroad a huge part of rental income. That’s why when we talk about contradictions between the current tax system and business we mean mainly small business and enterprise. They are the ones that are most overloaded with taxes. Of course taxation also has a restrictive impact on big business, including our natural monopolies. But those that export receive considerable compensation from the state in the form of untaxed rent.

“It is fundamentally impossible to improve that system by passing amendments and additions to the present laws. That’s what our law- makers try to do today. We must consider as wasted the time and huge resources spent on the creation of a new tax code. It is necessary to change the basic principles of taxation. Governmental efforts should be aimed not at moving the tax burden from one tax to another but at the correction of contradictions within the tax system. This correction is the shift of the tax burden from wages onto rent.

“Government must understand that the socialisation of rent is both a real opportunity to provide sustainable public revenue and a condition for Russia to remain an independent geopolitical unit and competitive participant in the modern world. To a great extent the solution of that problem depends on whether the population manages to maintain the spirit of participation. This spirit should preserve not only state and political integrity, but also (this is even more important) the unification of the social space that is composed of the territory, economy, culture, history, spirituality and morality.

“Society must be declared to be the highest legal entity that owns territorial and natural resources. Such a constitutional innovation would create an operational basis for providing each member of society with equal rights of access to territorial and other natural resources. This would be a substantial addition to the principle of equal starting conditions for everybody. Without this principle we cannot achieve social harmony and the perception of common interests shared by all social groups.

“Using rent as the source of public revenue can be the material realisation of the highest rights of society to territorial and natural resources.

“Thus rent becomes the basis for the constitutional development of society and of the state. The socialisation of rent could serve as a uniting force that provides a worthy future for Russia.”

We could do far worse than to adopt Dr. Lvov’s vision and to apply the same principles to our own much more buoyant economy and stable institutions.

Now, to return to our current situation. If we compare the average annual real land value increase of 6.4 % referred to in table 1, to the average annual percentage growth in total taxation of 4.8%, could we not assume that the increase in land values only, let alone that of resources, as a tax base would, as time goes on, far outstrip projected revenue demand? Doesn’t this conclusion also mean that notwithstanding substantial cost savings in compliance, administration, duplication etc, that the economic rent from land alone would more than satisfy revenue demand? Even further; could we see the day when the total revenue of economic rent from land and resources would actually exceed that required to maintain and augment infrastructure, and in addition to that, be left with a handsome surplus to be distributed on an equal per capita basis as a ‘Citizens Dividend’? Why not? This is done in a limited way with oil revenues in Alaska.

The first step in moving towards such a system is to acknowledge that the inherent value of all sites and resources – their raw unimproved value – is the product not of individual labour but of the presence and collective economic activity of the whole population. It is the communities who create, build and maintain the civil, social and physical infrastructure. It is these things which make a site desirable to live, work or play on and gives it a dollar value. This value is the public wealth – the common wealth. This value – which was produced by the community, should not be allowed to be confiscated by individuals but should be returned as legitimate revenue to the community as a whole. If such an amount sufficed to fund public infrastructure, then it would enable us to abandon the punitive taxes which currently severely discourage and hobble the essential economic activities of production and exchange.

The Site and Resource Rent or Site Rent is another name for what economists call the “economic rent”. It is the current annual value of a site or location exclusive of any improvements such as buildings, fences etc. In a Site and Resource Rent Revenue system, improvements would not be taxed. For example; if the current unimproved capitalised value of a home site was $100,000, the Site Rent – the site’s annual rentable value – would, on current yields, be equivalent to around 7%, or $7,000, regardless of the value of the improvements. We would pay no other direct or indirect taxes.

Implementing a Site and Resource Rent Revenue System.

Property rating systems are the current means by which local Councils in Australia – the third tier of government, imposes and collects revenue to cover the cost of local infrastructure such as community welfare, capital works and maintenance of footpaths, refuse collection, storm-water drainage, and suchlike. Revenue to fund this work is levied from property owners in the form of rates based on the value of either land plus improvements, often called ‘capital improved values’, or on ‘unimproved land value’, i.e. the value of the site minus all improvements. The latter is preferable in that it does not ‘fine’ householders or commercial property owners for improving their properties. A common residential rate might be calculated or ‘struck’ at say 0.7 cents in the dollar of unimproved land value; for example, a site worth $100,000 would have a rate of $700.

Without for a moment underestimating the power of the potential opposition to such a reform from the very substantial vested interests of the monopolies, which have much to gain by maintaining the status quo, how easy it would be to simply increase the local government rate from 0.7 or 0.8 cents in the dollar of capitalised value to 100% of the annual unimproved site value; to have it paid monthly, quarterly or annually by cheque or card; and that would be that as far as all the paper work, compliance etc goes.

Compare such a Site Rent charge to the minimum 43% of income even the poorest of us pay in taxes and compliance costs, not to mention the enormous administrative burden the cost of which we all share, albeit quite inequitably. Could such a simple but radical change be brought about? Could it be that simple? Why not? Apart from those already alluded to, the proposed system would deliver many other benefits:

  • It would allow the government to abandon the existing punitive taxation system which, in the greatest of all paradoxes, not merely discourages but actually penalises thrift, enterprise and employment by taxing them to the last gasp. The rule is ‘extract the maximum short of causing the activity to grind to a halt.’
  • It would be unavoidable, since one can’t hide sites or move sites and resources offshore;
  • Existing patterns of occupation, security of tenure and the right to transfer or bequeath would be totally unaffected;
  • Personal compliance costs would amount to the price of a cheque, a stamp and an envelope;
  • Implementation costs would be minimal in that it would use already established regular valuation procedures and would require relatively straightforward enabling legislation.
  • It would be the most progressive and equitable revenue system conceivable, since its level is determined solely by the public infrastructure benefits that the occupier of the location enjoys. It is not “user pays” it is “beneficiary pays”.
  • It would render the “cash economy” redundant. If there are no taxes on income or exchange, there is no advantage in such under-the-table transactions. It will therefore make policing – an extremely costly function – virtually unnecessary.
  • It would have a positive impact on production; stimulating a resurgence in industrial and commercial activity;
  • It would make land speculation impossible. Since land would no longer have a selling price, merely an annual rentable value, it would no longer be possible for speculators to profit from increases in land price – this increase would go instead to the community at large, through government infrastructure expenditure.
  • It would be immune to cyberspace profit-shifting and currency manipulations or shady transfers;
  • It would force unused or poorly-utilised land, currently hoarded by speculators, onto the market, thereby increasing its availability to those who wish to use it for residential, commercial, industrial or agricultural purposes.
  • It could not be passed on in higher prices, lower wages or higher rents. Competition makes it impossible for a business producing goods on a valuable site to charge more per item than one producing similar goods on less valuable land. Producers and traders at different locations are paying different rents to landlords now, yet like goods generally sell for much the same price and employers pay their workers comparable wages. The tax cannot therefore effectively be passed on to a tenant who is already paying the full market rent.

The economic rent belongs to the people as a whole. It is the people’s wealth – the common wealth. Its full annual value should be assessed and collected – as now happens to a limited degree with local government rates – and used by government as its sole source of revenue, leaving all, not just part, of our earnings in our pockets and purses.

Would the Site and Resource Rent revenue in fact be sufficient to fund government services?

There is ample evidence to suggest that it would. Current research and previously published studies by the Land Values Research Group indicate a potential residential, commercial and rural site rent revenue for 1999 of around $115 billion, sub soil assets adding $18 billion, with conservative estimates of other ‘non dirt’ resource rents, including spectrum rent having a potential revenue value of some 15% of that, giving a total revenue for 1999 of conservatively $150 billion, with minimal costs of compliance and administration.

According to the Federal Budget 1999 – 2000, current revenue requirement for all levels of government is just under $182 billion. Again, LVRG research estimates ‘dead-weight’ losses at something in the order of 25%, which would reduce the ‘post-dead-weight-losses’ revenue requirement to around $137 billion.

It is important to remember that, unlike the present system – where taxes are levied on individuals or legal entities such as corporations, companies, trusts and business partnerships – under the Site and Resource Rent system the number of income-earners living in a house, or businesses operating from one site is irrelevant. The Site and Resource Rent remains the same because it is based on the site or resource exclusively occupied or made use of, not on what the occupants earn.

The introduction of a site rent system would allow – in fact would be contingent upon – the simultaneous removal of all taxes, duties and imposts. With land and resource monopoly no longer possible, government need only collect the annual Site and Resource rent as its sole source of revenue. This would allow labour and enterprise to fully develop and employ their various talents, confident that they would retain the full value of their production, and not the pittance now left them by the twin evils of land and resource monopoly and taxation.

Only then will we achieve real justice and start to repair the damage wrought by this age-old violation of our elementary right of equal access to our common heritage and an equitable share in the common wealth. There is no other just and sustainable solution to the insidious polarisation of incomes that we have witnessed over the last five and more decades.

We must call a halt to the continuing confiscation and diversion of the community-generated economic rent into private hands. We must reclaim the common wealth and return it to those who, by their very presence and combined economic activity, produced it.

© A. O’Brien 2001

Anyone interested in this analysis should also read Fred Harrison’s “Ricardo’s Law” – available at our bookshop

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