A budget for the people

No. 3 January 2019

Why did HM Treasury treat this man as if he was insane? Because, for 30 years, he championed the economics of a fair and efficient fiscal policy: “ It worries me…that we don’t have a land tax. In a sane world, we would have a proper land tax. Sadly the only person to try it was Lloyd George and he ended up having to pay every single penny back.” Lord Macpherson to HM Treasury (2005-2016) Irresponsible governance

OME RECESSIONS are random Sevents. Others are written into NICK MACPHERSON the DNA of the economic system, which is why they are repetitive. Who’s insane? But despite Macpherson’s inter- And predictable. ventions, his political masters refused History teaches us that a recession Nick Macpherson was one of HM to listen when he explained the need strikes mid-way through the 18-year Treasury’s most talented economists. for “a sensible property tax system”. business cycle. The last one was the counter-cyclical action to save Britain He had one problem: a social And when he tried to engage dot.com boom/bust of 2000-2001 from the dot.com crisis of 2000 or the conscience. them in a discussion on the land tax, (driven by speculation in the rents banking crisis of 2008. The price was paid During his 30 years at the centre of “everybody just looked at me as if I of the electromagnetic spectrum, by the people in the form of a decade- fiscal policy-making he tried to explain was insane” (RF 2018). without which the business models long austerity from which the UK has yet that a tax on transactions (such as VAT He was eventually elevated to the of corporations like Amazon would be to recover. on the sale of goods) was “pointless” by , worthless). At the end of that last cycle (2010), (his word). So was taxing capital: where he now sits as a cross-bencher. That crisis could have been avoided. it was possible to forecast that a its mobility meant that owners could Macpherson’s insight into the In 1997, the Treasury’s two top policy- downturn would strike in 2019. escape their fiscal obligations. attitudes that prevailed within the makers – Gordon Brown (Chancellor) A responsible government had eight Taxes on transactions and on the Treasury affirms the suspicion that and Alistair Darling (First Secretary) – years to construct defensive barricades ownership of capital deprive the public the UK cannot rely on Whitehall for were alerted to the boom/bust cycle against a mid-cycle recession. purse of revenue. They also damage leadership in the realm of fiscal policy. that would terminate in 2010. A briefing The UK is poised at the point of a productivity. Economists have a term The treatment of the Permanent paper to Brown, dated November 1, downturn (Graph 1). So are the other for that effect:deadweight . economies. According to the IMF, the Secretary – the top civil servant – as explained: As the UK’s productivity slid in the last global indicators now point to a recession if he was insane is an indictment that “ Under existing strategies, there will be decades of the 20th century, and the a mini boom/bust in the lifetime of this within the next 12 months (Graph 2). needs to be forensically interrogated real value of take-home pay faltered for Parliament…followed by the cyclical Big Understanding how this could have been by the House of Commons Treasury the majority of people, remedial action One after the next general election… avoided provides an insight into how to Select Committee. there is nothing in the policies of New ought to have been a priority. avoid future recessions. It explains the failures of governance Labour that would obviate this “This country is crying out for tax during the years of Tony Blair’s experi- outcome.” reform,” Macpherson declared at a Graph 1. Where are we in the 18 year land-led cycle? ment in Third Way economics. A failure A warning in similar terms Resolution Foundation seminar on for which there can be no excuses. was written to Darling on October 24, 2018. November 13 (Harrison 2010: 9-10). As the UK swept through the cycle, Brown kept promising Parliament: “There will be no People’s Budget No. 3 more boom/busts”. Explosive Recession LAND PRICES © Land Research Trust January 2019 We now know, based on Mid-cycle Phase Phase www.landresearchtrust.org the testimony from Lord Recovery Dip Editor: Fred Harrison Macpherson, that the Treasury Phase Design: Ian Kirkwood www.ik-design.co.uk would not countenance YEARS 1–7 YEARS 8–14 YEARS 15–18 1 Graph 2. Slowing down (IMF) social grief. The impacts from serving Graph 3. Property tax revenues After rapid growth in 2017, industrial production and trade have slowed, the national interest would have been as % of GDP (OECD) and business confidence has fallen. many and varied. To cite just two (percent change, difference from 50 for PMI) 5 UK outcomes: OECD average

4 6 Industrial production accelerated house construction, 5.5 World trade volumes to remedy the deficit in the 3 5 Manufacturing PMI: new orders property market: rents would 4.5 have adjusted to affordable 2 4 levels; 1 3.5 1970 1980 1990 2000 2010 3 forestall the rise in land values, 2.5 avoiding the speculation in In reality, property is the most 2 property that triggers the mid- cosseted of all assets. This explains 1.5 cycle recession. why, no matter how many houses are 1 constructed, affordability will remain a 0.5 problem for the bottom half of income 0 The tax burden earners. But to establish the facts, we 2015 2016 2017 2018 This plan for a post-crisis recovery is cannot rely on the advice of even the based on a revenue neutral approach most high-profile economists. People Such strategic thinking runs counter 2009: as the alternative to to the public’s finances, an approach like Arthur Laffer. to the culture of HM Treasury. “austerity”, renegotiate terms of opposed by those who claim that the A plan to ring-fence the UK against sub-prime mortgages, to secure tax-take is excessive. This is one of the the explosion of the financial sector families in their homes; false doctrines that shape the guidance The Laffer offered to government ministers by the Curve could have been constructed under the 2010: launch new fiscal strategy, Treasury. guidance of Nick Macpherson, who by beginning with He drew his curve then had been promoted to top civil According to the Taxpayers Alliance, on the back of a • transforming the residential servant in the Treasury. That would the tax burden in Britain has reached a serviette for Ronald property tax to one based on the have fulfilled the Treasury’s purpose as near 50-year high, having increased to Reagan. Arthur annual rental value of land; and ARTHUR LAFFER steward of the nation’s finances. 34.6% of GDP for 2018-19. The bottom Laffer, an academic That this did not happen ought to • initiate the revaluation of 10% of earners pays 49.5% of income in in California, had read a book called be the subject of investigation by the commercial property locations. tax (TPA 2018). Progress and Poverty by Henry George, House of Commons Treasury Select 2012: Halve the rate of VAT, to These fiscal outcomes rest on crude a 19th century social reformer. And he Committee. raise real value of lowest incomes; doctrines about the public’s finances. seized every opportunity to explain to It didn’t happen, but the lost replacing revenue with a reformed What matters is not how much, politicians that bad taxes were a brake opportunity needs to be brainstormed charge on commercial location on productivity. as a learning exercise in how to avoid values. but how, the revenue is collected His curve was meant to demonstrate future recessions. The elements of a 2014: Halve national insurance How the revenue is raised determines this fact for the Hollywood actor turned president of the United States. coherent strategy would include the charges which damage employment, (i) whether people are receiving the But there was one problem with the following reforms: and raise revenue from an increase services they need, for which they advice Laffer offered:he remained silent 2008: bank seizure: a rescue in the rate of the Annual Ground are willing to pay, and Rent. on the correct way to raise revenue. operation that accepted them (ii) whether government is supporting Henry George had emphasised a into public ownership, to Such a programme would have or burdening the population… theory that was solidly established in safeguard depositors but penalise required all-party consensus. A political As evidence of over-taxation, critics the literature: that the optimum way shareholders who profited from coalition around this rescue operation compare the UK’s property tax with the to fund public services was out of the sub-prime mortgage speculation. would have relieved the UK of immense OECD average (see Graph 3). rent of land. 2 3 Laffer understood During the A conspiracy? need to avoid accountability must, this, but he chose presidential election out of self-preservation, impose limits not to say so at his of 1980, Reagan Economists like Arthur Laffer, who on information available to their private lobbying was accused of choose to remain silent about the electorates. meetings with employing “voodoo optimal tax policy, contribute to the Who, for example, should be held policy-makers, or economics” by zeitgeist that lends itself to conspiracy responsible for the coming recession? theories. Are there sinister forces at HENRY GEORGE from the public George H.W. Bush. RONALD REAGAN That question is difficult to answer if podium. Not in the The US paid a work to manipulate fiscal policy? the policy-making footprints have been 1980s, and not now, as an adviser to heavy price for its There is no need to indulge in camouflaged by finance ministers who arch land speculator-turned President misaligned fiscal conspiracy theories. The explanation treat their informed advisers as if they Donald Trump (Moore and Laffer 2018). policy. During the is mundane. Rent-seeking doctrines were insane. Reagan presidency, dominate policy-making in the realm of The Laffer Curve while the top economics, especially the discourse on marginal rate of tax taxation. This explains why the data on Revolution GEORGE H W BUSH which to reshape policy is fatally flawed. 100 A fell from 70% to Sources C For example, for good governance 31% (see Graph 4), the national debt Bellini, James (1981), Rule Britannia, people need to know both London: Jonathan Cape. Conflict grew from $997 billion to $2.85 trillion. The U.S. moved from being the world’s the rate at which deadweight Harrison, Fred (2010), 2010 The Inquest. Tax E largest international creditor to the Pdf from https://www.sharetherents.org/ rate taxes deplete national assets, and wp-content/uploads/2013/09/2010-The- % world’s largest debtor nation. the impact of sovereign debt on Inquest-FINAL.pdf IMF (2018) Graph 4. Average tax rates for the the net wealth of the nation. https://blogs.imf.org/2018/10/23/chart- D Anarchy highest-income taxpayers, 1945-2009 According to the IMF, filling the of-the-week-government-debt-is-not-the- 0 B whole-story-look-at-the-assets/?utm_ Source: James Bellini (1981:49) 60 gaps in government data is “doable”. medium=email&utm_source=govdelivery Revenues Governments, it declares: Moore, Stephen, and Arthur Laffer (2018), 50 “…should start by bringing data together Trumponomics: Inside the America First Plan to Revive Our Economy, NY: Macmillan. So the Laffer Curve entered the 40 to come up with a rough estimate of % public sector assets, liabilities, and RF (2018) textbooks as a cute way to justify the tps://www.resolutionfoundation.org/events/ wealth. Over time, better accounting reduction in revenue from bad taxes. 30 light-at-the-end-of-the-tunnel-will-it-be-an- Top 0.01% and statistical collections can improve end-of-austerity-budget/ President Reagan bought into the idea Top 0.1% 20 the accuracy of these estimates. TPA (2018) Big Time. He liked the narrative. 1950 1960 1970 1980 1990 2000 2010 Governments can use them to do basic https://www.taxpayersalliance.com/ balance sheet risk and policy analysis... tax_burden_at_a_50_year_high_finds_ If the tax-take was too low, there Once governments complete this exercise taxpayers_alliance?mc_cid=77efebd795&mc_ was anarchy. David Stockman, Ronald Reagan’s they will be able to show their citizens eid=6b3cd606b5 If the tax-take was too great, there budget director during his first the full extent of what they own and owe, was conflict. administration, maintained that the and better use public wealth to meet society’s economic and social goals.” Pitch the tax-take at the right level Laffer curve was not to be taken literally. The Triumph of Politics (IMF 2018) (at point E in the graph above), In , he wrote: and all was well. “[T]he whole California gang had There is a risk with assembling such taken [the Laffer curve] literally (and information, however. It eventually But because Laffer failed to stress that primitively). The way they talked, they leads enquiring minds to ask: Is there an the balanced – sustainable – strategy seemed to expect that once the supply- alternative to deadweight taxes? was a shift away from taxes on earned side tax cut was in effect, additional Democracy is debased when incomes, and raising revenue from the revenue would start to fall, manna-like, decisions are made without full rents of land, the rich got richer from from the heavens”. transparency. But governments which tax cuts. Inevitably, the poor got poorer. Donald Trump revived that delusion. 4 5 Democracy Depleted #1 to determine the nature of the property tax. Democracy was depleted. The rent- seeking culture triumphed. Following New the re-organisation of local government, the number of municipalities raising revenue from land value rating was Zealand reduced from 90% to 73%, and the database was degraded. The outcome: housing markets suffered soaring prices, creating the largest boom in NZ history. Homeowners and speculators reaped fabulous riches. It all terminated with the recession of the early 1990s. OLONIAL settlers had no choice: Attempts at reviving the direct if they wanted modern infra- C collection of revenue from rent have structure, they had to fund such been repressed. Outcome: investments out of the rents which they created. It was by this means since 2010, the price of residential that a modern European nation was and commercial premises has constructed in New Zealand. reached unaffordable levels. The 150-year NZ history of land As in countries like the UK, problems valuation and rent collection provides linked to property are glibly analysed a remarkable record of the economic in terms of blaming the town planners, strengths of collecting public revenue and/or the need to increase the supply direct from a nation’s taxable income, of dwellings. Meanwhile, urban sprawl and the vulnerability of democracy to continues to blight the countryside. the culture of rent-seeking. Remnants of the history of rent-as- By 1982, 90% of municipalities had public-revenue may still be found in adopted land value rating, raising 80% of some municipal rating systems, but a local government revenue. This outcome more radical approach is needed to was the will of the people: “[W]herever restore the country’s foundation fiscal land-value rating applies, it has been philosophy, according to two lecturers adopted by poll of ratepayers”.1 at the University of Auckland.2 Political sabotage came in the form 1 Robert Keall (2000), “New Zealand”, in R.V. Andelson, Land-value of the Rate Payers Act (1988-89). It Taxation Around the World, 3rd edn., Oxford: Blackwell, p.427. 2 https://www.nzherald.co.nz/business/news/article.cfm?c_ withdrew people’s right to hold a poll id=3&objectid=11543819

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