Value Capture for Perth Airport Link: Kill (At Least) Three Birds with One Stone

airporttrainThe Western Australian Government has announced that it intends to build an underground rail link to Perth Airport, as well as Forrestfield, a suburb to the east of the airport. This will involve 8 km of tunnel (the line will be built entirely underground), and cost about $2 billion.
It is encouraging to see this railway line proposed. Public transport usage in Perth is increasing, and there is sure to be travel demand from both visitors and residents for a railway to the airport. There will be many benefits from this rail line, as it will become easier to access Perth’s airport, but how are the benefits distributed.
Travellers will save money on taxis and parking, and potentially save time as well.
But the main beneficiaries will be owners of large plots of prime land near stations. The newspaper article about this proposal in The West Australian even has the headline, ‘Landowners Eye Airport Rail Bonanza’

“A 250ha pocket of semirural and light industrial land in High Wycombe is set to leap in value when the Barnett Government announces the terminus station for its airport rail link.

The Forrestfield station is next to a strategic pocket of land bounded by Maida Vale Road, Dundas Road and Roe Highway.
The land is certain to be rezoned for higher density mixed-use residential and commercial – a windfall for dozens of landowners.”

There is a fundamental disconnect, when infrastructure is paid for by the public purse, and yet huge benefits flow to private landowners, whose contribution to this project may barely have been greater than that of a low-income earner struggling to make ends meet, and who rarely goes to the airport.
What is effectively a transfer of wealth from the government to the lucky few who own prime land would be bad enough at any time, but this comes at a time when the WA government is under severe financial pressure. Concerns have been mounting over the rising level of state government debt, especially last September when the state government lost its AAA credit rating. According to Premier Colin Barnett:

“The only thing I can say is maybe we’re guilty of trying to do too much too quickly, maybe we need to slow down a little bit.”

Election promises for huge infrastructure spends had to be scrapped, with the MAX light rail system shelved, and the Airport line deferred (although it was originally proposed to be completed by 2018, the current completion year is 2020).
Making matters worse for Barnett’s government, the Federal government simply refuses to fund urban rail. On the campaign trail last year, Tony Abbott said:

“We have no history of funding urban rail and I think it’s important that we stick to our knitting. And the Commonwealth’s knitting when it comes to funding infrastructure is roads.”

The WA government is putting its budget position on the line to build a $2 billion Airport rail link, and yet huge benefits are flowing to a select few owners of land near stations.
If this increase in land values was captured using substantial land value taxation (WA has a small land tax, but it is insignificant in terms of the gains possible for lucky landowners), the WA government could build a rail line to the Airport that was self-funding. In fact it could build light rail as well, and could build many infrastructure projects, without the need for unsustainable debt. The government spends money on the rail line, but they will get a return on their investment from increased land value tax revenue.
More generally, increased land value capture would also help reduce the WA government’s debt, and could replace stamp duty, an inefficient tax that punishes households for moving to homes better located for their needs, even though this is already a costly inconvenience. Treasurer Mike Nahan claims that Stamp Duty is a ‘dumb’ tax, but sees no alternative.

“Our largest tax base, besides pay roll, is stamp duty on housing transactions which is actually a tax on people moving house – about as dumb as you can get,” Dr Nahan said.

“It’s a bad tax but it’s a very important tax to us and we have no alternative.”

If Dr Mike Nahan could implement an increased land value tax, he could kill (at least) three birds with one stone – fund infrastructure such as the Airport Rail Link, reduce the WA government’s debt, and replace Stamp Duty.

The Effects of Economic Rent When Private and When Common

Economic rents are unearned income. They are not in return for exertion, like wages given for labour, and they are not in return for bringing capital to the market, like capital yield/interest*. Rents come from owning a finite resource, usually a natural resource.

Rents, unlike wages and capital yields, do not serve to incentivise economic activity. On the contrary, they tend to discourage it.

When a worker receives pay in return for work, they are incentivised to work. Ceteris paribus (all other things being equal), a worker who works more will be paid more, and a worker who works less is paid less. As a result, people are encouraged to contribute their labour to production.

Labour can be combined with natural resources (‘land’ as a factor of production) to produce goods and services for consumers or to produce capital. Consumer products directly satisfy the wants and needs of consumers, while capital products are themselves used for further production. Some products can be both consumer and capital goods, such as computers or vehicles. Laptops can directly satisfy the wants of households, or can be used by businesses in the process of production to generate wealth.

Since all capital is produced by labour and land, manufacturers of products obviously must charge prices sufficient to pay wages and rent (inventory costs consist of both wages and rent) to stay in business. Consumers will pay for products that they want, but capitalists are in business, and must recoup their costs. Therefore, they must receive a return to their capital (capital yield/interest) sufficient at least to cover the costs of purchasing, and also maintaining, capital. This is one justification for interest.

In addition, when an owner of capital receives capital yield or interest on their capital, they are encouraged to bring capital to the market. Someone who has saved $100 000 could stash it under their bed or floorboards (hoarding), which slows economic activity. Alternatively, they could use it to buy capital, such as a commercial vehicle or small shop, that facilitates economic activity. They could also pool their resources with others to buy more expensive capital goods, or lend their money to someone who needs it to purchase capital, likely an entrepreneur. Interest incentivises people to use their savings in a way that is beneficial to the economy. In summary, capital yield and interest pay for the costs of capital and encourage capital to be produced and brought to the market.

On the other hand, land has no production cost and can’t be produced. As a result, when a land owner leasing his or her land receives rent … nothing in particular happens. The land owner has done very little, probably no labour, as real estate agents, for example, can be paid a small fee for property management. They are not driven to produce more land, as land generally cannot be produced. Land reclamation is used only in extreme cases, and reduces the area of a body of water. While higher land prices and rents may encourage owners holding land vacant to release land, this is more than counteracted by the trend of rising land prices encouraging land owners to hold land vacant with the intention of selling for a higher price in the future.

This land speculation is destructive to the economy. When valuable locations are kept out of use, it means workers cannot produce wealth at those locations, and so are denied opportunities to make a living. They must accept other work, and since opportunities to work have been limited, wages are lower. In addition, they must set aside some of their already smaller income to meet rising housing costs. Workers may have no choice but to work under someone fortunate enough to possess some capital. Remember that since workers have less money, few people can afford capital. Since a small number of people have capital, they are able to force workers to work for low wages.

But capitalists do not have it all lucky. They too must forego good land, and put capital on inferior land, where lower capital yields are made. They too must pay rent to landlords. Landlords gain massively, workers lose massively, and capitalists are in between.

Unearned rents are the perfect source of government funding. Raising revenue from rent-based sources, far from inhibiting economic activity, increases economic activity. Not only will workers and capitalists no longer have to pay rents, but taxes on incomes, sales, profits and similar sources will no longer have to be levied. The productive parts of the economy will gain enormously.

Government revenue from rents is likely to exceed government spending. Social welfare programs designed to help those denied reasonably paying work will no longer be required. Stress and health problems will be reduced from less demanding lifestyles, reducing health costs. Infrastructure costs will be reduced, as the cause of urban sprawl, prime locations going unused, will be removed. The excess revenue may be distributed to every citizen via a basic income grant. Every citizen unconditionally receives a certain sum of money on a regular basis, to spend on whatever they like. Some may take care of family members, further their education, undertake creative endeavours, or even start a business. I have previously written about this topic in more detail here. Even land owners may be better off than they
would otherwise be, if economic growth is particularly fast, and the basic income exceeds what they would otherwise receive  from their land.

In conclusion, while it is very beneficial to the economy for wages and interest/capital yields to be kept private, privatised economic rent is harmful to the economy. On the other hand, rents captured for purposes of government revenue may be a force for good.

*Here I use the terms ‘interest’ and ‘capital yield’ interchangeably. Both refer to the wealth distributed to owners of capital. Capital yield is a more precise term for my purposes, as interest can refer to returns on any loans or securities, which can be used to purchase land. Interest, however, is a more commonly used term to describe the return to capital.

Geoism and Natural Ability

Worker/Boss conflict - "They're fighting the wrong person - Landlords get all the money

Economics in Six Minutes (Source: twoplustwoequalsfor.tumblr.com)

The Geoist economic system is designed to promote equality. By recovering land rents for the use of the whole community, rather than a few individuals, it closes avenues for one person to become wealthy without working, while others work hard and receive very little money. One’s wealth consists of what they produce, nothing more and nothing less. This is reasonable and just, and preserves incentives to work hard.

But what about people who have more natural ability to produce, or people who produce more wealth with the same amount of exertion. When working, they would receive more wealth for the same amount of labour. In other words, they receive more return to their labour. While it is justified that those who add more to the economy should receive more from the economy, an element of injustice could also be seen, where two people could put in the same effort and get unequal reward.

If we take two computer programmers to serve as an example, who put the same amount of effort into their jobs, the first programmer, who had better programming ability, might produce twice as much good software code as the second programmer. If they were paid according to how much they produce, the first programmer would receive more. But they both put in the same effort! Why should one get more out of luck to be born with better ability?

If we redistributed income from the better programmer to the other programmer, then that would constitute a taking of the fruits of an individual’s labour. This is not to be advised, as it increases the size of government and throws the door open to more income redistribution, such as that which outright breaks the link between effort and reward, eroding incentives to work hard. Geoism can solve this quandary through income pre-distribution, rather than income redistribution.

Labourers who receive more return to their labour would be smart to seek to produce at the best quality locations. This would multiply their natural abilities, allowing them to fulfil their impulses to seek the most money under the market economy. In turn, good capitalists and entrepreneurs who own capital in good locations would seek the best workers, as this would maximise their capital yields.

Smart owners of superior land would seek the most productive enterprises (those with the best workers providing highest capital yields), as this would allow them to extract the most rent, as long as land taxes are based on assessed land values, not actual rents.

While at first this would increase the gap between the naturally able rich and the poor who contribute equal labour to the economy, let some time pass. As those with the most natural ability tend, through market forces, to work on the most productive land, ground rents would be calculated on the assumption that that land would be used by the highest quality workers, as the tendency mentioned in the previous paragraph spreads to all landowners, and increases.

The increased yield of labour that some workers have over other workers would be taken in rents for the locations on which they work. The increased rents that landowners receive would be accounted for in land value assessments, and collected for the good of all. Those who have less natural ability would still receive the same reward for labour, once rents are taken into account.

The same mechanism could be used to sort out capital of varying quality, without having to contend with the higher investments sometimes required for higher yield options that might impede the market solution of more investment money flowing towards the highest yielding capital, or to complement that market mechanism. The highest yielding capital would tend towards land with the highest rent, while the lower yielding capital would tend to land with the lowest rent.

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A Basic Income Guarantee Doesn’t Need Coercive Redistribution

In the last few weeks a lot has been said about Libertarianism and the Basic Income Guarantee (BIG). This includes Matt Zwolinki’s column piece ‘The Libertarian Case for a Basic Income’, Ash Navibi’s critical response, and John Danaher’s 3 part series on ‘Libertarianism and the Basic Income’ (Part 1, 2, and 3), and many other articles quickly accessible via Google search. However, a recurring basic assumption through many of these writings are that a BIG requires coercive redistribution. This is never challenged. However, a BIG can be provided without coercive redistribution, if the right revenue streams are tapped.

What is a Basic Income Guarantee?

A basic income guarantee provides to every citizen an unconditional income. Everyone, rich or poor, full-time worker, part-timer or unemployed, is provided with a regular stream of money. This can provide for, or help provide, for the necessities of life, and helps people who are unemployed, have to care for others, or wish to take a risk on an entrepreneurial venture. Even if one cannot receive sufficient income from work, they are still given enough to meet the needs of life. Those left jobless are not forced into homelessness.

A BIG holds advantages over conventional social welfare programs. Since there it is universal, without means testing, there is no disincentive to work harder and earn more income, where that might otherwise push an individual’s income beyond the means test. There are no cases where it is not worthwhile to work due to welfare, and people become dependent on the hard work of others. There is also no stigma behind receiving the BIG to meet your needs, as everyone receives it.

If a BIG did require forced income redistribution, I would find it difficult to reconcile with a libertarian viewpoint. Libertarians believe in the free market, and in low taxes, and raising income taxes to fund a basic income would be a very difficult proposition. But we need not raise income taxes. We simply need to tap unearned income.

Scarce Nature

Abiotic nature, including all of its resources, services and opportunities, are scarce, and we cannot expand or increase them. Nature was not created by humans through labour; it existed before us, and we came from it. We cannot create more of nature. To use land, probably the most significant aspect of nature,as an example, land reclamation projects simply take from the seas and oceans to create more buildable land, and are economically viable in very few situations. No nature can be added by humans.

Living organisms, such as plants and animals, are not fixed in size since they reproduce. Plants and animals whose reproduction we can control may be considered capital, as they are taken care of through human labour and other capital. What I call nature is usually referred to as the economic factor of land, which includes much more than the common notion of land as the dry surface of the earth.For the sake of simplicity, when I refer to nature, I do not include organisms we breed.

As a result of the scarcity of nature, the value of nature rises immensely, in line with economic activity. For example, as the population and economy of a settlement grows, as the settlement becomes a large city, land values rise immensely. A small block of land in a city such as New York is worth much more than an enormous plot of farmland in the interior of a country.

Rents (Unearned Income)

When individuals are given rights to the gain in land value, heavily guarded as ‘private property’, we have given them unearned income, also known as economic rent (as opposed to wages for labour, interest/capital yield for capital, and profit for enterprise).

There is no basis for property rights in that which cannot be created through labour. The purpose of private property is to protect that which an individual has made through their own effort and hard work, and provide incentives to produce. When Alice is paid $20 an hour for their work, this is what her employer judges to be the value of her work to them in the market. They may use that money to buy an amount of goods and services equivalent to the goods they produce or services they provide (taxation complicates this).

Since individuals do not create land through labour, and can’t be incentivised to do so, property rights to land values are not justified. All that is needed is the possession of land, the exclusive right to land, protection against others intruding in your land, and the right to the wealth produced on that land, in return for a charge based on the value of that land.

Rent Capture

What I have just suggested is often called ‘land value taxation’, or simply a ‘land tax’. However, these names are inaccurate, as a tax usually refers to a forced payment made to the government, without any particular good or service in return (government services received are rarely in proportion to taxes paid). However, a charge based on land value, is a trade, a purchase of the exclusive rights to land in exchange for a fee. If you do not wish to pay the charge on your land, based on its value, you may give it to others. Land not in prime locations that is excess to economic needs, which nobody competes for, has no value, and so it may be used for free, without the payment of any charges whatsoever. This revenue tool may be more accurately called ‘land value capture’.

Other than land value capture, revenue tools that capture nature’s rents rather than hard work include a carbon price for using the atmosphere to dispose of carbon (as well as similar charges for other pollutants). Whether or not global warming is real, caused by humans, and worth fighting, it is worthwhile to charge a price for the earth’s services when the atmosphere is used to dispose of pollutants.

Mining and extraction companies should also be charged royalties or severance taxes equal to the value of minerals in the ground, which is equal to a normal profit rate subtracted from profits of mining companies. Most companies buy at a price, add value, and sell as a higher price, but companies that extract minerals, oil and gas do not pay a price for their products, which they sell for a considerable profit. Mining companies deserve the value they add to minerals by taking them out of the ground and making them usable, and a return to their capital, but not unearned income from natural resources.

There are also numerous smaller rents, such as water rights charges, fishery license charges, and so on. Altogether, these rents likely have enough value to fund a fairly-sized BIG, and remove all taxes on labour and capital as well. This provides more incentives to work, overcoming any discouragement to work that a BIG would bring. This double bonus of a basic income and no taxes would dramatically increase economic growth and wealth, and entrepreneurialism, as we will see later.

Managing Rents

Those on earth, including the human race, as well as other animals and plants, have a common right to the value of nature. We are created from nature, a part of nature, so we have the rights to the fruits of nature. Since, we are the most advanced and intelligent race on this planet, humans have a duty to administer the rights to nature. The fruits and value of nature are to be used to benefit all people, rich or poor, elderly, young or yet to be born for a hundred years, as well as other species inhabiting the earth.

An organisation or organisations representing all people should take care of rights to nature. It would administer nature’s resources, services and opportunities, and revenues from trades for the above three fruits of nature. These organisations might be democratic governments that truly represent their populations, or trusts with a duty to manage nature, whichever is more achievable and suitable.

Remember that the enforcement of property rights requires a governing body, just as a BIG does. A basic income funded from nature’s revenues is no less laissez-faire than letting owners of nature become rich off unearned income. Both require government action, and in both cases the income is not from work. The only difference is that a BIG benefits all, while leaving unearned income to owners of nature benefits only a select few. A BIG is not income redistribution, it is just distribution.

The term ‘predistribution’ is sometimes used, referring to an economic system that prevents the privatisation of unearned income, and ensures a fair wealth distribution in the first place. This means that individual incomes vary only as individual labour contributed to the economy varies. This is much more efficient than redistributing income, which entails greater adminstrative costs.

The Basic Income Grant Helps Entrepreneurs

In fact, a basic income promotes libertarianism and the free market more, as it encourages entrepreneurialism. To start a business requires a significant amount of starting capital. If Bob can use a BIG to meet their daily needs, then the money he gets from working can be saved. Enough money can be saved for Bob to start a business. Had there been no BIG, Bob would likely still be working for someone else, simply trying to make ends meet, without enough money to realise any entrepreneurial aspirations. Rather than creating jobs, he would have taken a job.

Income during the early stages of a business is often small. The Bob’s income may be too small for him to survive, or live in reasonable comfort. A BIG supplements a small business owner’s income, allowing and encouraging entrepreneurs such as Bob to stick by small businesses, and allow them to grow.

An entrepreneur takes on risk. They risk failure. With a BIG, the failure of a business is no catastrophe. If an unsuccessful business leaves Bob without income, a basic income can help him survive, while he finds a job. Bob may start another business, likely a more successful one, since he has had the opportunity to learn from his mistakes.

In any case, there is plenty of justification to support entrepreneurs with a BIG. Entrepreneurs obviously create jobs. While people will no longer have to work with a BIG, the sheer abundance of jobs that will result will likely encourage many people to work anyway. After all, human wants are unlimited. But when a business fails, this provides information on what works and what doesn’t for a business. To use the language of Nicholas Nassim Taleb’s book Antifragility, fragile units (businesses) make for an antifragile whole (economy). ‘The fragility of every startup is necessary for the economy as a whole to be antifragile, and that’s what makes, among other things, entrepreneurship work: the fragility of individual entrepreneurs and their necessary high failure rate.’ Mistakes made in business help the economy run smoother. The economy improves with individual failure.

However, the benefits of mistakes do not always flow to the same people who made those mistakes. A entrepreneur starting a business may look at past businesses similar to theirs that failed, to know what not to do. That person has benefited from the errors of another person. This happens more if a failed entrepreneur can’t start another, more successful business, having learned from past mistakes. A BIG allows entrepreneurs who have made mistakes to get back on their feet, and create new, better businesses. It also compensates those who have failed for the benefits their mistakes have on others.

Conclusion

A Basic Income Guarantee does not need coercive redistribution. It is very much compatible with libertarianism, if funded from capturing unearned incomes. It helps the free market function better and promotes entrepreneurialism, economic growth, wealth generation and job creation.

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