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Friday Jul 27, 2012

'Once and for all' sale of property a burden on SA

(The article "Land reform can be achieved cheaply and legally" in Business Report, July 17, refers.)

The Free Market Foundation (FMF) has an obsession with freehold tenures, the code for land transactions that are settled by a one-off capital payment. The result is high taxes and high land prices.

In Claremont we have experienced land price increases of an average 15 times to R2.5 million over the past 24 years, which is quadruple the cumulative consumer price inflation rate.

These are unearned profits, a state subsidy of landowners! The cause is the undertaxation of land (including all natural assets below and above the earth's surface) and the overtaxation of labour (wages and salaries), capital (profits and interest) and consumption (VAT). The latter are also known as dead-weight taxes as they slow economic growth by raising the cost of living to satisfy demands of the SA Revenue Service.

As a car can be powered by petrol which pollutes the air or by sun-charged batteries which do not, so the national budget can be funded entirely from beneficial land revenues, excluding improvements.

These are "jumbo" rates and taxes charges. An average monthly R5 000 extra rates bill levied on the 11 million formal house and flat owners will equal the R650 billion budgeted by the National Treasury in 2012 for personal income tax and VAT.

There is a different ratio for the corporate taxes of R190bn. These figures need auditing but illustrate the point that whatever income taxes and VAT might be, a land rates system can match them.

One of the average South African suburbs in terms of land value is Southfield, Cape Town, at R485 000 a plot. Using a big-bang assumption, all Southfielders would pay R5 000 more in monthly rates next year and save the same amount on their income taxes and VAT.

But the landless and unemployed will find enormous relief because the change to a land-based tax system will likely generate 5 million new, unskilled, jobs in the farming and building sectors, many self-employed. This is because the holding cost of land in Southfield will reduce from R485 000 to R5 000 a month and in the country an entry level arable small-holding costing R20 000 a hectare will become R200 a month. This can be rendered in produce if need be.

There is no compensation for there will be no expropriation, or change in title deeds. Recompense for any loss of land value lies in the gain which all other tax free assets will enjoy.

Owners will therefore quickly put these hectares to use to avoid the higher holding costs and so employ more people, especially in prime farming areas, or they will literally abandon them for others to employ themselves. There are 27 million hectares of unused arable land in the country, according to Frost and Sullivan.

On each hectare, according to quantity surveyors' estimates, anyone can become a millionaire in a few years by hand-building a mansion and wine estate using the earth's materials and the housing subsidy.

This person can grow all the food for four on an arable hectare using simple tools and low-input methods, according to professor Miguel Altieri of the University of California at Berkeley. The proceeds could be in the region of R10 000 a month. Or he could produce champagne.

Another very compelling reason land should not be sold "once and for all" is that there would not be toxic mortgages, credit crunches and unemployment if land revenues were recovered by the state as rates and taxes. If land and house prices are separated, like in Hong Kong, the bankers will immediately cease betting on house prices because bricks and mortar continuously depreciate.

The FMF has gone to great lengths to explain that there is no difference between land and man-made assets, as Leon Louw, the foundation's director, argues in his May 2, 2001, article titled "A neutral tax structure shows respect for the consumer": "The legitimacy and sense of taxing one activity, not taxing another, and subsidising a third is hardly questioned. Yet it is only common sense that you get less of what you tax and more of what you subsidise."

This is a bloody falsehood. South Africa will not shrink if land is taxed nor enlarge if subsidised. That applies only to man-made goods. He goes on: "The only way to minimise distortion is by applying a so-called neutral tax. This is easier to define in principle than in detail, but the critical point is that it should apply to 'all things' equally, so as to neither encourage nor discourage any particular activity."

What about activities that don't just encourage land to be used but punish it if it remains idle?

Some claim that a single tax, such as on land, income, transactions, consumption or currency holdings (the "inflation tax"), would be easiest to administer, but clearly that would maximise distortion.

What we have shown here contradicts this assertion for these distortions result from not taxing land only.

Richard Grant, a previous director of research at the FMF, wrote in his 1994 publication Nationalisation: how governments control you: "The distinction between man-made and natural factors of production, that is, between capital and land... is irrelevant when discussing intervention and taxation: the consequences will be the same for any asset."

This is a very bold lie too because the state can collect 100 percent of all land rents without South Africa losing a square metre. But there would be a rush to drive tractors across the borders if it taxed all the earnings of man-made assets. Even China forswear this.

Is the FMF reading its own recommended text books? Margaret Thatcher held that "No generation has a freehold on this earth. All we have is a life tenancy - with a full repairing lease."

Robert Solow, the 1987 Nobel economics laureate, wrote: "The user of land should not be allowed to acquire rights of indefinite duration for single payments. For efficiency, for adequate revenue and for justice, every user of land should be required to make an annual payment to government equal to the current rental value of the land that he or she prevents others from using."

Milton Friedman, the 1976 laureate, said: "There's a sense in which all taxes are antagonistic to free enterprise - and yet we need taxes... So the question is, which are the least bad taxes? In my opinion the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago. 'Land should be taxed as much as possible and improvements as little as possible'."

The final spike in the FMF's coffin is that their vaunted flexible labour market (read even lower wages) collapses when workers have the chance to become millionaires instead, or live like them. Then wage contracts can only be concluded willingly by both sides.

That will signal the end of the landless proletariat as the constitution specifically demands: "The state must take reasonable legislative and other measures, within its available resources, to foster conditions which enable citizens to gain access to land on an equitable basis."

Peter Meakin, member of the SA Institute of Valuers and chairman of the South African Constitutional Property Rights Foundation.

Business Report

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