The UK’s Financial Times: Tax Down Bubbles
|August 4, 2014||Posted by Staff under Editorials|
This 2014 excerpt of the Financial Times, Jly 25, is by Adair Turner, senior fellow at the Institute for New Economic Thinking and former chairman of the UK Financial Services Authority.
Thomas Piketty’s book, Capital in the Twenty-First Century, illustrates rising wealth-to-income ratios in all advanced economies. They are primarily explained by one factor: rising property prices. And the rises mainly reflect not new investment in housing stock but the rising value of the land on which existing housing sits. As the lucky ones grow richer, they spend an increasing share of their income on competing to own homes in desirable locations.
Technological progress drives down the price of many goods and services but up the value of the oldest and most physical thing of all – land.
By 2010, more than 70 per cent of all advanced-economy bank lending was against property. The more credit is available, the more prices rise. Credit-driven price rises encourage borrowers to demand more credit and banks to supply it – until land soaks up so much money that the cycle goes into reverse. Property booms and busts have been central to all recent financial crises.
Between 2010 and 2011 Sweden’s Riksbank raised interest rates by 1.75 per cent in the hope of slowing a Stockholm property boom. The boom continued unabated, but the economy fell into slow growth. Interest rates cannot be the sole policy lever.
More construction is no panacea: Ireland’s relaxed planning rules did not prevent a devastating property boom and bust.
In the Netherlands, mortgage interest relief has helped drive a house price boom that has turned to bust.
Increased property taxes, on higher-priced properties in particular, could help reduce the bias towards property investment and encourage more efficient use of the existing housing stock.
Ed. Notes: The author is half right. If you’re going to increase the property tax, increase only the half on land, not the half on buildings. Taxing buildings creates slums. But taxing land — or instituting land dues — spurs owners to put their sites to highest and best use.
Further, neither the location nor its value is generated by the owner. While land is not made by any of us, its value at least is the product of all of us in society. It is the perfect common wealth.
Better still, as government recovers socially-generated land values, it can lose counterproductive taxes. If government were to disburse the revenue as a dividend, sort of what Singapore does, then it could get rid of many wasteful programs. Imagine that: nearly no taxes nor subsidies, along with affordable housing and a conserved environment. Such is the power in geonomics.