19 Jan 2017

Land Taxes

There are three factors of production: land, capital, and labour. Respectively these yield: rent, profit, and wages. Governments raise money by taxing these. But over the years the proportion that each makes to the total has changed. For example a document form the National Archive notes that the contribution from land taxes has fallen dramatically. 

What this means is that for the government to raise taxes it must rely more heavily on taxing profits and wages. Taxing profit is seen as having a negative effect on business, and since business runs government, tax on profits are also dropping. Tax on wages bear the brunt. And wages are squeezed by business so as to maximise profit. The other source of taxation is indirect: such as taxes on spending or inheritance.

Land is special though. One must risk capital and apply labour to it to make profit. Wages are related to working. But land just accumulates value with no risk or effort. Land prices just keep going up. If the council improves your road using tax money, the value of the land goes up without you doing anything, and your contribution through taxes is minimal. Owning land is a way to accumulate wealth with no effort and very low taxes. Indeed the wealthy are adept at avoiding taxes, so the big landowners are getting more wealthy at the cost of everyone else. This in turn means that the demand for land is high and pushes up the price - creating a vicious circle.

So the rational thing to do would be to levy significantly higher land taxes and reduce the taxation on wages and profits; or lower the taxes on spending (VAT). This would cause more money to circulate in the economy. And it would force the wealthy to pay their fair share of taxes - you cannot hide land in an offshore tax haven!

17 Jan 2017

Too Much Finance Hurts Growth

In a brief, but fascinating and accessible article a team of economists look at the relationship between finance (as expressed in credit to GDP ratios) and growth in developed and emerging economies and focus on the EU.
Chong, E.Y. L.,  Mody, A., and  Sandoval, F V. (2017) Finance and growth: The direction of causality. Vox EU. 17 January 2017. http://voxeu.org/article/finance-and-growth-direction-causality
The key finding is that when credit-to-GDP ratios exceed 90% economies slow down. And this is particularly noticeable in the EU. However, the authors also say that as economies slow down beyond this 90% ratio, it leads to more rapid expansion of the finance sector. Causality could point both ways.

The authors conclude:
"One interpretation of the data is that beyond about 90% of GDP, additional credit is largely counterproductive. The evidence certainly supports that inference. Especially after 1990, many advanced economies exceeded the 90% of GDP credit threshold, and more credit beyond that level is associated with lower growth. Also, emerging and developing economies have credit-to-GDP ratios below 90% of GDP and in those countries, more credit has been associated with higher growth."
"The data are, however, also consistent with an alternative interpretation, one in which the causality runs the other way. Emerging and developing economies start from relatively low incomes and have, on average, higher growth potential. As they grow to realise that potential, the demand for finance leads to greater financial development." 

Getting an accurate and trustworthy figure what that the private sector debt in the UK currently is can be difficult because mainstream economists still see it as irrelevant.

12 Jan 2017

Article Alert

Keen, Steve. (2017). The WHO* warns of outbreak of virulent new ‘Economic Reality’ virus. Review of Keynesian Economics. 5(1): 107-111. DOI:http://dx.doi.org/10.4337/roke.2017.01.08

A new virus, known as ‘Reality’, has started to afflict Mainstream Economists, causing them to reject the ‘as if’ arguments they used to use to justify their models. There is no known cure for the virus, and complete avoidance of ‘Reality’ is the only effective strategy to prevent infection.