All the issues we face today, inflation, inequality, labour shortages, and high and rising land prices (and rents), have their cause rooted within the land cycle.
A few months ago, I interviewed Warren Mosler, the founder of MMT (Modern Monetary Theory), for Cycles, Trends & Forecasts subscribers. We discuss his views on inflation, the monetary system, and, more importantly, why we should have a ‘property-only tax’!
You can listen to the interview below.
Warren is a smart man.
He is advocating a single tax — similar to the activism of 19th-century political economist Henry George, who wanted all taxes abolished other than a tax on the economic rent of land.
There are sound reasons for doing this, which we discuss in the interview. It was also great to hear that Warren has an acute understating of the need to tax land to prevent a boom/bust cycle.
But it’s unlikely to happen any time soon, simply because just about everything that comes out of the MSM (and many economic textbooks) about tax and inflation is pure fiction.
As it is, the myths surrounding money, tax, and inflation are branded into the minds of the majority to protect the wealthy rent-seekers and confuse the masses.
The mainstream narrative regarding tax revolves around the mistaken premise that we need to raise ‘revenue’ to fund programs like the NDIS.
Equally, there’s no discussion of what we’re losing through mandated tax policies!
Let me explain: It will help you better grasp the drivers behind the land cycle that were not discussed in our interview.
A few years ago, when I was preparing to give the 125th Henry George Dinner Address on taxation costs, I had a conversation with Fred Harrison.
He wrote to me:
‘Catherine, can you get a breakdown of what the taxes are in Australia? Can you get me the full equation of what they are at a state and federal level? Get me the full tax take and we’ll work out the deadweight costs.’
For those unaware, deadweight costs (or excess burden) attempt to put a dollar amount on the productivity losses stemming from 99% of taxation.
Noting that the only tax that doesn’t carry any deadweight loss is a land tax!
This is because a land tax encourages owners to ‘employ’ land into use, increasing building activity (productivity) and lowering the price paid at the margins.
But other taxes are extremely destructive to the economy.
For example, it’s estimated that for every dollar of income tax collected, a dollar is lost in economic activity.
Not just through the discouragement of workers or employees.
But through compliance costs and misappropriated labour (i.e., the number of accountants employed to assist punters in reducing and avoiding taxation).
Various studies have been undertaken in Australia in an attempt to calculate the deadweight losses, but they’re all blind to the role of land.
The costs are, therefore, invariably underestimated.
This was Fred Harrison’s point and thus his request to me.
I’ll come back to it in a moment.
First, let me explain.
It’ll help you understand the cycle at a deeper level.
Take the example of a bookshop.
I’m sitting opposite one now as I write this on Acland St in St Kilda — so this is an easy example for me to pull on.
The bookshop has 10 employees:
- It must pay payroll taxes
- It must pay sales taxes
- It must buy the inputs for its business
- It must employ labour and pay labour taxes
- It must pay rent and rates
- It must frequently update its supplies, etc.
Its costs are quite high, but there’s a market.
Conventional analysis recognises that these taxes are somehow going to be shifted.
The bookseller can’t bear the tax alone.
But if the seller puts up the price of books, fewer books will be sold, and therefore, fewer are produced.
This is the deadweight loss, and this is as far as the covenantal studies go.
But, when you see the land, you must take it one step further.
Let’s go back to the bookseller who’s trying to pass the high tax take onto customers.
We’re in a digital economy now. The bookseller mightn’t be in a situation to pass those taxes on and maintain profits.
There’s a market, but the tax system cripples him.
In the end, the seller shuts down the bookshop.
A gas station moves in and buys the site.
The gas station has self-service tills.
They only need to employ two people (not 20), and they can pass the taxes on because there’s no competition around them.
Most punters still have to put gas in their cars.
But this land use change is the quantum leap missed in the deadweight loss story.
In other words, the tax system pushes smaller industries out of business and rewards monopolists.
We end up with lower land use of prime sites.
It leads to the speculative hoarding of land for gain rather than productive industry.
The deadweight loss of taxation cannot be calculated by any conventional measurement that doesn’t acknowledge land.
Simply:
- Land prices increase due to low taxation
- Productivity suffers through high taxation
This produces a measure of inflation that is completely missed in the conventional ‘basket of goods’ CPI. (Noting that established house prices are omitted from CPI.)
Henry George may not have called it ‘inflation’, but his key understandings were that:
- Tax policies
- Land policies
Work in sync to reduce wages and profits!
‘Deadweight loss inflation’, as I call it, makes up almost half the cost of our goods and services and thus making us uncompetitive as a nation. Not high wages.
Henry George correctly held that wages and profits (from gains in productivity) can only rise in real terms when we keep a lid on land prices.
This is why we have periods of stagflation outside of supply shortages. Rising land and commodity prices with wages falling behind in real terms.
CPI, in comparison, is a poor and pitiful measure of inflation, and rising interest rates can’t do anything to control current inflationary pressures within the economy.
On analysis of the figures, Fred Harrison (in combination with the great, late Mason Gaffney) came back to me with their assessment of deadweight costs in Australia as $320 billion a year.
This was back in 2016 — it would be a lot more now.
Regardless, it’s roughly three times more than the conventional analysis holds.
This is why eventually, the boom must turn to bust, but not yet!
So where to from here?
There are three major rules you need to have front of mind as we progress toward 2026:
- The federal government will do everything it can to protect property values(Note how the first home buyers’ scheme is about to be expanded to allow friends and family members to ‘identify’ as the definition of a ‘couple’ and access government funding. Potentially opening the market up to hundreds of thousands of new buyers. Also, the push to allow record immigration to flood into the country despite record low vacancy rates. The new migrants better bring a tent.)
- Australian property prices will boom into 2026 before a downturn into 2028
- You must have exposure to land or property-related investments in your portfolio to advantage
If you want to learn how to read the markets and invest with the cycle — consider signing up for Cycles, Trends & Forecasts today!
One more thing…
This week I joined Mike Mortlock — managing director of MCG Quantity Surveyors — for his LinkedIn Live to discuss the land cycle and movements in the property market.
It was a great chat — we took a deep dive into a number of topics, including
- Why we’re looking at a solid, sustained turn in the property market
- What data can be utilised to indicate market turns in advance
- Why increases in interest/lending rates don’t always impact median price movements (as many economists expect)
- How policies of state and federal government are affecting the volatility of the cycle
- The history of the land cycle — and why/how it applies to Australia
- What we can expect to happen to market prices through 2023/24 and 2025
- What type of property investors should target to maximise capital gains into the peak
I think as Land Cycle Investor subscriber you’ll really enjoy the content — you can listen in below.
Best Wishes,
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Catherine Cashmore,
Editor, Land Cycle Investor
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