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COMPENSATION POSSIBILITIES
DURING CHANGEOVER
TO GEORGISM
Part 2 and Conclusion of
THE IMPLEMENTATION OF AND COMPENSATION FOR LAND TAXATION (1996)

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By MIKE LYNCH
Transport Consultant, Perth, WA.
Currently completing an MA in Science and Technology Policy at Murdoch University

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From Progress, official organ of Tax Reform Australia, Melbourne, Victoria, November-December 1996, pp 11-12

Last issue, Mike talked about whether the Georgist remedy should be implemented with or without compensation. These categories were discussed: - gradual implementation, immediate implementation with no compensation, immediate implementation with limited compensation, or immediate implementation with universal compensation. Following on from there, here is the remainder of the article.

Governments

The Federal Government would need to be in control of the change at least in the initial period. It would have a number of paramount functions, particularly the need to control or encourage economic activity. Employment, foreign reserves and inflation would continue to need monitoring. The essence of the change I propose is that the redistribution that currently occurs between the commonwealth and the states will now occur via adjustments to household and business incomes. As I detail below, federal taxes will be redistributed as compensation for the new "community charges" of the states. As the compensation packages are redeemed, there would be a steady decline in federal taxation. The Federal Government, consistent with Georgist theory, could let the throttle off. Depending mainly on the external account, federal taxes would move to their own share of Georgist finance well within a decade."

Local government currently charge some unimproved rates but the reforms would see these used universally for rating. It would need to provide increases sufficient to cover the other half of their income needs that currently come in the form of grants from federal and state governments.

Individuals and households

Households with realty, income and no mortgage
These households would find themselves paying both the state community charge and federal income tax. A system of bonds where the federal government is paying out with one hand and collecting income tax with the other hand could be implemented. A simpler system might see the discounting of income taxes to reclaim the unimproved value for the community. Households would have time to make arrangements to ensure their community charges are paid on their expected property requirements after they retire.

Households with realty, income and a mortgage
New home owners, or owners still mortgaged because they have upgraded their housing, would pay the state community charge.

Here the procedure I suggest may seem a little roundabout. It entails the valuing of the unimproved land component of the realty which would be identified, depending on amount owing, with the mortgage. The mortgagor would continue to pay the financial institution, but would gain income tax relief from the federal government, that would eventually acquire the land component of the realty. This would seem to be a less complicated procedure that issuing bonds or attempting to compensate the financial institution. Other alternatives may be preferred. What is important is that the adjustment leaves nobody seriously worse off.

Individuals without realty, with income and no mortgage
Workers living in rented dwellings illustrate how disruptive to the nation a total, uncompensated and immediate implementation of land reform could be. Many of this group are heavily into consumption rather than saving and the reform would remove even their contribution to national saving through taxation. With a long lead in, this shift of fiscal responsibility might be matched by more saving oriented young people, but immediate implementation could be especially disastrous for Australia's foreign debt. They have a direct political incentive to support a Georgist remedy. There would be a dramatic reduction in the price of the first home they would buy because the land component in new or resold properties would be removed from day one of the reforms.

Corporation and other businesses

Small business, including farms, would manifest similar positions and could be dealt with in a similar way to the household examples.

Investing corporations like investment funds, trusts and corporations should be compensated for unimproved land value previously held. This could be done through both the company tax system and bonds. While the dividends may be less than speculative expectations they will be government guaranteed. The companies would need to find new outlets if they had relied on the activities of land monopolisation and speculation as land would immediately attract a state community charge. A more positive investment attitude will be necessary on their part which would enhance their returns and the performance of the economy generally.

Financial Institutions' lending portfolios would not be much effected if the compensation for mortgages is paid to mortgagors rather than mortgagees. In the case of banks, insurers, major property trust or companies, any bonds issued would not be readily redeemed or transferred. This would allow the federal government and Reserve Bank to exercise control over the money supply and credit in the early period of the transition.

Conclusion

My purpose in this paper was to argue how a century after George's death, a majority of families in western democracies have something to lose and many would suffer severe hardship from Georgist reforms without compensation. I further argue, that even those readily identified as receiving unjustified benefits from the current system would best be compensated on the practical grounds of not making intractable, powerful enemies and easing the anarchic dislocation of what is enormous change.

The likelihood of rapid change to land-based taxation is slim and so the compensation option is unlikely to be necessary. However, without a plausible system of compensation, the normal argument of Georgists that rapid change is desirable is fraught with injustice and would lead to economic chaos.

NOTES

5. In footnote 1, I pointed out the large surplus that would exist between the return on government-backed bonds and the size of community charge based on the expected returns of speculative land dealings. It follows that both a reasonable interest rate could be paid and the unimproved value resumed within a manageable transition period. A simple example would be where the community charge is 10%, an individual's unimproved !and is $100,000. A 20-year bond issued at 5% would only provide half the necessary funds for the community charge each year and so a $5,000 lien on the unimproved value would be excised by the government. At the end of 20 years, the dividend would end and the unimproved value of the land would be wholly government owned.

6. The rate of return from the bonds would be about that of a bank account. For many retirees and conservative trustees, they will be an ideal investment. If the bond has not been resumed through unpaid community charges after 20 years, the Government could have established funds sufficient to buy them out or may reissue them as, say, infrastructure bonds. They would always be seen to be underwritten by the asset of the unimproved land.