By Tony O’Brien
Table 1. Potential Value of Site and Resource Rents 1999 – 2000.
|The value of all privately held land and buildings as at 30th June 1998 was $1,716.35 billion, with estimated unimproved site values being $1,115.63 billion. Allowing for official estimates of resource-value increases of 6.2% to 2000, site rents averaged at 7.32% of unimproved values, would currently yield:||$86.7 billion|
|Minerals, oil, coal & gas||$10.0 billion|
|Waveband spectrum: Radio, TV & telecommunications services||$9.0 billion|
|Emissions/ pollution charges: this estimate covers all industry-generated pollution||$10.0 billion|
|All commercial operations which require exclusive use of part of a natural resource should pay an annual rental in exchange for that exclusive right. Some of these resources are listed below:
|Estimated total Resource Rent yield from above additional resources||$14.0 billion|
|Add 6.2% p.a. to resource rents to cover inflation and asset value increases over the four years to 2000||$11.7 billion|
|Estimated total Site and Resource Rent yield for 1999 – 2000||$146.8 billion|
- Calculations used are derived from figures from The Australian System of National Accounts 30th June 1998, Australian Bureau of Statistics (ABS) Catalogue 5204.0. I have extrapolated the 6.2% increase in resource values a further year up to June 2000 from June 1998. I have estimated the unimproved site value as being 65% of Capital Improved Values. Most valuers accept this ratio as a reasonable average over all sectors. This is supported by projections based on Commonwealth Grants Commission figures for 1996. Percentage figure of 7.3% used for site rent calculations is averaged over the three sectors. Approximate sector breakdown of site rent yields; Residential $57.76 billion, Commercial/Industrial $19.9 billion, Rural $9.12 billion, Total $86.72 billion. See also; Housing Occupancy and Costs Australia 1995 – 96, ABS Catalogue 4130.0 below. Some would suggest that government itself should pay site rent on land it exclusively occupies. This is debatable. It would not, in any case, add a significant amount to the total, with estimated yields based on current values of sites occupied or held by government agencies and departments of around $1.5 billion.
- ABS Catalogue 8401.0. See also list of rent-yielding resources in the appendix to The Losses of Nations, Ed. F. Harrison. Othila Press Ltd, UK 1998
- ABS Catalogue 8680.0.Total income for spectrum license holders was approx. $4.5 billion in 1996-7.
US estimates put the true spectrum rent value at around 45% of revenues. See also ABS Catalogue 8145.0, which shows 1996-97 revenue for telecommunication carriers was $20 billion. A large part of these recent ‘windfall’ profits was in fact rent in disguise. A truer estimate of the potential rent yield would be more like 35% of revenue. In Losses of Nations, Professor Mason Gaffney [Dept of Economics, UC Riverside] on the subject of rent-yielding resources, points to the rapid evolution of communications, and the parallel rise in the value of the radio spectrum. Radio, TV, cellular phones, telephones satellite linkages, fax, e-mail, Internet all require the exclusive use of part of a vast, virtually untapped public resource. He suggests that licenses for the newly developing Personal Communication Services low power cellular mobile phones for the masses will go for $100 to $150 per potential customer. That’s a very small part of the spectrum, and its potential return in Australia could be in the region of $1.8 to $2.5 billion per annum! He states, “…of the satellites that direct and relay signals through the spectrum – each satellite requires a spectrum assignment… One minor American entrepreneur, Craig McCaw, collected a bundle of spectrum rights for cell phones, and a few years ago sold them to AT&T for $12 billion. Then Mr. McCaw went partners with Bill Gates, …, in a firm called Teledesic, to launch hundreds of satellites and amass radio spectrum rights around the entire world.”
- Toxic emissions in effect monopolise part of a community resource, ie. air, water, etc, making that resource unsuitable, or less suitable for human use. To charge for the exclusive use (or abuse) of part of a public resource is therefore not a “punitive tax” as such – although its effect will be to encourage and reward cleaner industry – but is clearly a resource rent. The presence of most pollutants can now be accurately measured and valued using recently developed formulas. These formulas essentially evaluate the cost of restoring the damaged resource to something approaching its pre-polluted state, so that the producer, and ultimately the consumer of that product, pays for what up to now has been socialised ‘down-stream’. According to the UN Development Report 1998 the social cost of pollution in Europe is estimated at 4% of GDP, and in the USA at anywhere from 2 to 12%. Estimating Australia’s at even 2% would give a cost in 1998 of around $10 billion.In fact, a recent CSIRO study (Media Release 17 March 1998 Ref 98/55) on air pollution alone suggests that the cost to the health budget of air pollution is a staggering $12 billion per annum. It suggests that poor air quality in Australia’s homes, offices, factories and buildings may be costing the nation as much as $12 billion a year due to ill-health and lost production.In a typical office or home, Australians could be constantly breathing in a potent cocktail of volatile organic compounds (VOCs) emitted by building materials, paint, carpets, furnishings, office equipment and consumer products, as well as gaseous and particulate pollutants from indoor sources.
- The CSIRO has developed a national facility of dynamic environmental chambers, capable to detecting chemicals in concentrations as low as one microgram per cubic metre of air. This is developing the basis for clear national indoor air standards and the testing of new, healthier products and processes for Australian industry.
- Most resources are greatly undervalued. Royalties currently paid are minuscule, and often negated anyway by being accounted as tax deductions. The collection of these rents by the community would add significantly to public revenue.
- The use by industry and agriculture of water for cooling, flushing and irrigation purposes places a huge demand on water resources in this country. Examples abound. Aquifer demand by the uranium mine at Roxby Downs seriously threatens the sustainability of that scarce and valuable resource. The water taken from the Murray-Darling river system has caused massive environmental and ecological damage through increased salinisation and land degradation alone, rendering millions of hectares of once productive land barren and poisoned. The water used is paid for in the form of license fees and such, but the total of these represents only a tiny proportion of its true cost. If the real cost of this resource usage was borne by the producers and reflected in the prices of their products, then consumers would in most cases abandon those products in favour of cheaper or more envirnomentally benign alternatives. This would cause the producer to either change their method of production accordingly, or to cease trading. Cotton production is a case in point. If the true cost of resource use by that industry were borne by the producers and reflected in the price of their product, they would be forced to cease operations overnight. Whereas, as things stand now, a large part of the cost of cotton production is borne by farmers on adjoining properties in the form of pesticide damage, and by all commercial and private users of the Murray-Darling river system right down to its barely trickling outlet in south Australia.
- As an example of one minute part of the potential rent yield in cities and provincial towns alone, one only need look at the parking and parking penalty revenues collected by city councils, to get some idea of the size of this potential Site and Resource Rent revenue. Parking spaces are a private and exclusive use of a public resource. Rent from them and from other places which allow exclusive occupation and so deny public access, is a legitimate and largely overlooked source of public revenue.
- In the appendix to Losses of Nations, referred to above, Professor Gaffney puts forward in some detail a list of rent yielding resources, on which the list I have presented is largely, but not exclusively, based. As an example the potential of, and our unwillingness or inability to capture resource rents he cites fisheries; “Fisheries are another source of value. In the past most nations have let this rent be “dissipated” by overfishing. In recent years the U.S. and Canada have in effect “privatised” fishing in their offshore waters by limiting the number of licenses and boats. This limitation was needed and desirable, overall. It created large rents, where previously there were little or none, by preventing overfishing and the great waste of duplicate, triplicate, and even quintuplicate fishing effort. That is a good example of husbanding and guarding rent, which is necessary before you can collect it.”
- This assumes an increase in value between 1999 and 2000 consistent with the official rate (6.2%) of the previous three years.
Potential savings from the introduction of a Site and Resource Rent system and the removal of all other taxes could be extremely large, approaching one third of total current government outlays.
Many of the following expenses would be greatly reduced or in some cases eliminated:
- the cost of assessing, collecting and endeavouring to prevent the evasion of existing taxes
- the cost of relieving involuntary unemployment and poverty which will decline and disappear as employment revives
- the use by governments of tax concession and other privileges as “sweeteners” to solicit or hold large
- the cost of land acquisition for public purposes.
In addition to the above, substantial reductions in many other areas would be possible as detailed in the following table.
Table 2. Potential Savings in Government Expenditure
expenditure ($ m)
|Suggested revised outlays ($m)|
|General public service [includes admin. of: tax office, legislative and executive affairs, finance, foreign affairs, research services, Govt. superannuation benefits.]||6,778||30||4,744|
|Public order and safety [inc. police, courts, prisons]||999||30||699|
|Social security and welfare||64,337||30||45,036|
|Housing and community amenities||1,245||30||872|
|Recreation and culture||1,337||100|
|Fuel and energy||626||626|
|Agriculture, forestry, fishing and hunting||2,227||70||668|
|Mining, manufacturing, construction etc. (prospecting, development, research, manufacturing activities, activities assoc. with building and construction industry)||2,623||80||525|
|Transport and communications||1,102||50||551|
|Other economic affairs [includes storage yards, markets, tourism and area promotion, labour and employment affairs]||3,990||70||1,197|
|Other purposes [includes, transfers to states and local government, disaster relief, contingency reserves and public debt interest (as at 1998, $8.4 billion per annum)]||27,499||30||19,249|
|Totals (and averaged percentage savings)(see||155,272||25.9%||115,094|
- Derived from Federal Budget 1999 – 2000, Treasury Statements, Statement 5, Expenditure.
The estimates of potential savings are loosely modelled on those suggested by Ronald Banks in Losses of Nations Ed. Fred Harrison. In chapter 5 The People’s Stake: Resource-rents and the UK Budget. the author states; “In a carefully planned and controlled transition [to a site/resource rent system] public sector responsibility for education, health, social security and housing could be severely reduced, perhaps by…half. Expenditure on recreation, cultural affairs, agriculture, etc. and mining could be almost eliminated. …[Many previously privately funded] services were [over the last century] driven into the public sector largely because…too many people were excluded from earning the income to buy these services themselves.…But although self-esteem suffered, [from this dependency on government welfare provision] at least there was hope of banishing material shortcomings. …In a thriving economy the whole population…would be able to make private decisions over the disposal of their incomes. …The welfare state emerged because of the injustice of legal and institutional constraints which prevented many from earning enough to pay for all their basic needs, such as health, education, pensions etc.. Given a …socially just economic system, government expenditure on welfare would most likely be required only for those in dire need resulting from personal tragedy, and given a thriving economy, the provision for those people could be very generous indeed.”
As can be seen from the table above, the shedding of superfluous government functions in 1998 would have left a revenue requirement of around $115 billion. Site and Resource Rent collections for that year, extrapolated back from the current period to approx $138 billion, would have produced a surplus of approximately $23 billion – which could have been applied to one or more of the following or any number of other worthy causes:
- the rapid reduction, and before long the elimination of our national debt,
- environmental restoration programs
- improving education infrastructure
- dividing amongst all member of the community as a citizens’ dividend, ($1200 per person)
- dividing amongst the poorest 10% of the adult population as a business or house building start-up fund, ($19,000 per person)
In succeeding years, decreasing demand for welfare, crime prevention, and other services whose functions are to cope with the effects of poverty and deprivation, would reduce public expenditure yet further, allowing an even greater fund would could be redistributed on an equal per capita basis as a Citizens Dividend, or if we chose, it could be used to endow schools, universities, libraries, medical research and such. Infrastructure costs, stretched by current urban sprawl, would also reduce since commercial activity would tend to centralise, maximising use of city space. “Ribbon development”, and “leapfrogging”, just two of the many resource-devouring side effects of land speculation, ceasing in favour of much more rational and organic urban consolidation.
It should be noted that at the present time (February 2000) after two years of devoted asset shedding by the Federal Government – during which time many previously owned and built, income-generating, commonwealth infrastructure was indiscriminately auctioned off, often at sweetheart prices, to the private sector in an effort to balance the current budget at the expense of longer term income – their current expenditure estimates for the 1999 – 2000 financial year were $157 billion, with taxation revenue expected to be $163 billion. Applying the suggested 30% reduction to expected expenses under a Site Rent scheme to the projected 99 –2000 revenue would therefore result in demand for only $110 billion for government expenditure, leaving a surplus of Site and Resource Rent revenue of approximately $36 billion.
- See Federal Budget
1999 – 2000, Treasury Statement 6, Revenue, and Statement 5, Expenditure.
How would we fare under a Site and Resource Rent system?
Tables 3a, 3b and 3c. Comparing disposable incomes
So, how would the average person fare under a such a system? Compare the effects of the two systems – the taxed on the one hand and the Site Rent or “untaxed” system on the other.
|PRIVATE RENTER of $120,000 property. (Building value at 40% = $48,000. Site value at 60% = $72,000. (Equates to public renter figures if government subsidy is allowed for)||Existing Tax System
|SRR System ($ p.a)|
|Combined Household Pre-tax income||30,000||30,000|
|Taxes and compliance costs @ 53% (Welfare recipients would deduct
|Housing costs $148 per week (excluding repairs and maintenance)||7,696||2,704|
|Site Rent @ 7% of unimproved site value||4,992|
|OWNER-OCCUPIER with mortgage. Property value (Capital Improved Value or CIV) $165,000 (Building value at 40%of CIV = $66,000. Site value at 60% = $99,000)||Existing Tax System
|Combined Household Pre-tax income||55,558||55,558|
|Taxes and compliance costs @ 53% (Welfare recipients would deduct 42%.)||29,445|
|Housing costs $203 per week (excluding repairs and maintenance)||10,556||30,556|
|Site Rent @ 7% of unimproved site value||6,861|
|OWNER-OCCUPIER with mortgage paid off. Property value (CIV) $165,000 (Building value at 40% = $66,000. Site value at 60% = $99,000)||Existing Tax System
|Combined Household Pre-tax income||36,400||36,400|
|Taxes and compliance costs @ 53% (Welfare recipients would deduct 42%.)||19,292|
|Housing costs $21 per week (rates only) (excluding repairs and maintenance)||1,092|
|Site Rent @ 7% of unimproved site value (former rates are absorbed into this cost)||6,861|
- Source; Housing Occupancy and Costs, Australia 1995 – 96, ABS Catalogue 4130.0 and ABS media release Oct. 29. 1997, 138/97.titled, Australia’s Housing Costs.
The ratio of site value to combined house/land value or “Capital Improved Value” or “CIV”, is higher – up to 80% in wealthier areas, and as low as 25% in poorer, less populous districts, reflecting the desirability of the locations. Council rates notices will often show unimproved site value separate from capital improved value. The percentage figure of 65% used in the estimates of total potential Site and Resource Rent yields on page 3 is a mean percentage, generally accepted by valuers, of commercial, rural and residential properties across Australia. In table 3 showing the comparison between the two systems, I have used 60%.as the percentage of residential land value to CIV; ie a site to house ratio of 60:40. The potential Site and Resource Rent in each example however, due to the 80% to 25% variation referred to above, could be higher than those shown in the table by up to 30% in the more desirable locations, and lower by as much as 60% in the less desirable or more outlying areas. Nevertheless, even at the higher end of the scale, it will be seen that the ‘bottom lines’ in the potential Site and Resource Rent system are still overwhelmingly attractive.
- Compensation of property-owners and mortgagors: Part of existing mortgage or rental cost obviously covers the site on which the house sits. Until existing loans are discharged, the mortgagors would be paying the value of the potential Site and Resource Rent back to the lender as well as to the government. So, should mortgagors be temporarily exempted or compensated for this apparent inequity? And what of those who have already paid for their sites? This question may be answered in two ways.Mortgagors, like any other borrower, have taken on a debt, which in one instance may be only recently entered into, and in another may be all but fully discharged after many years. Neither of these suffers any loss for which compensation could fairly be claimed, any more than does the long time renter, who has been paying out for years probably an equivalent amount without gaining any material equity. Each of these, and all other citizens for that matter would have paid, or would have undertaken to pay out roughly equivalent amounts commensurate with the value of the sites they occupied leading up to the change. None therefore has any just claim to compensation at all.
Another way of looking at the question is to recognise that a buyer of land has essentially paid for stolen property, since at some stage in the past the land was either taken by force or simply occupied and claimed as private property. So, in fact, the only justifiable claim for compensation would be one made against land owners by the people as a whole from whom, or from whose ancestors, the land was stolen or alienated in the first place. For that reason, landowners would do well to stifle their calls for compensation. The practice of selling and purchasing land, although sanctioned – in fact almost sanctified – by law and custom, is in justice no different than selling and receiving stolen goods
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 occupied or made use of, not on what the occupants earn.
The Site and Resource Rent system would amply fund the government while leaving all of our actual earnings in our pockets. The implementation of such a rational system would energise the economy, leading rapidly to full employment, which in turn would begin to open all the doors to the sort of society for which we and our forebears have laboured. 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. The realisation of this fundamental, truly just reform is possible. It is attainable if we really want it.
Author: Tony O’Brien