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Land Value Taxation and Monetary Reform
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Richard Glover

Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Sun Nov 09, 2008 9:26 pm    Post subject: Interest Reply with quote

For a particular loan, the borrower agrees in advance the repayment terms, and that repayment is normally considered as principle and interest. The interest component is believed (by some) to be the inflationary component, and this could be seen in many ways, but just 2 are considered here:
- It may be based on compound interest
- It may be based on a management fee and risk premium, but not compound interest
However, in either case, if this is conducted in the marketplace and there is any restrictive practise or monopoly lurking in the background, then the "interest" payment could well increase.
The fact is that the borrower is bound to pay this "interest" and it really does not matter how the amount is analysed. It will be the same overall amount in a given "un-free" situation.

If banks could be persuaded to charge a lower amount for the "interest", rents would rise. This is in accordance with the island diagram analysis.

This suggests that any excess in the "interest", charged by the banks due to their monopoly situation or some otheer restrictive practice, is in fact rent diverted from the landlord to the banks.

I suspect that such would be the case even if location-value, in the ordinary sense, was taxed. This would remain whilst the banks enjoyed certain privilege.

Scripture bans usury; usury seems to be a fee for the use of money. This is arguably the excess over any management fee or risk premuim. This is an exact analogue of the rent situation. Any landlord's charge over and above a management fee and insurance premium is a misappropriation of the rent.

The conclusion reached here is that the rent must be paid to the community; that is either excess land-rent or excess interest. The excess arises from some restrictive practice (eg property right).

How can the banks be pursuaded to pay any rent they find themselves receiving? I think there are 3 ways, and a chancy 4th:
1) Remove any property right / restrictive practice so that market forces can work
2) Find some means of levying a fee on the banks that extracts this excess interest
3) Periodically re-allocate licenses to the banks every 11 years or so; use an auction as per 3G spectrum allocation.
4) Sort the location-value taxation properly, and hope that it will remove any restrictive practises anywhere.
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John D Allen

Joined: 08 Nov 2008
Posts: 3
Location: London UK

PostPosted: Tue Nov 11, 2008 10:04 am    Post subject: Inflationary borrowing Reply with quote

In preparation for my first contribution to the Economics Forum, I have
been reading the contributions so far posted under this heading.

As an Economics student of some years standing, I have often wondered
how it comes about that a wealthy and powerful nation such as Great
Britain should be so much in debt, unable fully to fund the business of
government from tax revenues.

Indeed, the same question applies to the even more powerful economy of the United States of America.

On Monday the 10th the Daily Mail put the situation graphically in its leader column:

“Next year, Britain’s budget deficit is predicted to top £100 billion.

“This means the Government will have to borrow ONE HUNDRED
THOUSAND MILLION POUNDS just to pay its annual bills – an average
of more than £2,000 for every taxpayer.

“Eventually the money will have to be paid back – with interest – and that can only be done by increasing taxes.

“Based on pure economics, the decision to borrow yet more to fund cosmetic tax cuts therefore seems insane.”

At 3 per cent on government bonds this would cost around £3 billion a year in
interest payments, perhaps a cumulative total of £30 billion if the debts were repaid at 10 years maturity, only to be funded by further borrowing

The answer in broad terms is that the relatively narrow tax base in the United Kingdom is too small to carry the burden, as it has been for more than a century past.

What does this mean, too narrow to carry the burden? Almost the whole weight of current taxation falls on wages and profits. For example, income tax and National Insurance inflates employment costs, charges which have to be passed on to the customer in prices.

This is one potent cause of inflation. Another is so-called value added tax which inflates the price of so many commodities and services. Taxation on fuel inflates the cost of transport, increasing in its weight as the areas in which people buy petrol and diesel become more distant from the centres of economic activity.

What has been so noticeable in the current financial crisis is that on one side there is an immediate loss of revenue as industry contracts; at the same time industry appeals for tax cuts because the burden can no longer be sustained. As unemployment increases, revenue declines and the burden on the public purse increases.

Surely we should look for a more stable tax base than that. The Government and the Bank of England want to curb the rate of inflation. What could be more contrary to monetary policy than enormous inflation of the national debt?

This is a theme to which I would like to return. The classical economists warned against heavy taxation on wages and profits. Now the economic regime which fails in times of crisis is being exposed as destructive of prosperity and enterprise. Rational economics would seek to promote something more productive than this.
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Richard Glover

Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Tue Nov 11, 2008 11:53 pm    Post subject: Aspects of Inflation Reply with quote


Your post certainly spells out the awful state that we have got into. Prices and costs have been inflated by taxation levied on effort. Even the so-called untaxed items such as food bear a significant proportion of tax, creeping in with the labour costs of bringing the bread to the table.

I would like to ask about inflation; your post is suggesting to me that there are probably 2 aspects to it, and I find it easy to confuse them. They are:
1) Static; the price of that loaf of bread in money terms is much higher than it would be if taxation did not bear on it.
2) Dynamic; the price year on year rises (usually); this is the headline use of the term inflation.

The cause of static inflation seems to be quite clear. Although at the time of imposing the tax there will be the (dynamic inflation) rise in price of bread, if the tax stays constant it seems likely that the price will remain steady, in the state of static inflation.

The causes of dynamic inflation would seem to be many.
- Costs can rise, especially as explotation approaches the margins around the world
- Currency could be mismanaged, leading to a lessening of the trust in money
- There could be an increase in taxation levied on effort as mentioned above

I am sure several other causes can be added, but the real quest here is to determine if certain factors are or are not causes of dynamic inflation. These include:
- Interest; some claim that compound interest, or usury is inflationary (I am taking this to mean dynamically inflationary); is it?
- Taxation; is a steady tax levied on effort the cause of dynamic inflation?
- Misappropriation of the rent in any form; if this is a static situation, does it lead to dynamic inflation?
Again there could be others, but I suspect the principle will be carried in these.

I believe (at present) that none of these 3 lead to what has been described as dynamic inflation, but all 3 will participate in static inflation.

Is this distinction between dynamic and static inflation helpful in clarifying our understanding, or is it merely introducing further confusion?
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John D Allen

Joined: 08 Nov 2008
Posts: 3
Location: London UK

PostPosted: Wed Nov 19, 2008 2:43 pm    Post subject: Inflationary trends Reply with quote

Richard Glover is right: there are many aspects to inflation which is one of the principal concerns of present day economics. In a classic case such as Germany in the 1920s, the government goes on printing paper money when there is no certainty that the currency is backed by the value it claims to represent.

As in Zimbabwe today, the kind of rampant inflation where the currency is shorn of value by corruption of the money supply makes normal business impossible. Everyone is impoverished and a recurrence of this kind of disaster is greatly feared. This is one reason why the Bank of England and other central banks keep a close watch on trends in inflation.

But the concept of inflation in London today is quite different from that generated by events in 1920s Berlin and present day Harare. Inflation here is measured by the rise and fall of prices and charges and corresponding movements in the money supply within a margin of two per cent.

A recent dispatch from Zimbabwe underscores the difference: “The local currency is worthless and cannot be used for ordinary transactions any more.....Food supplies have run out and everywhere people are desperately looking for whatever food is available.”

That sort of inflationary disaster has not been a concern in the United Kingdom because the Bank of England’s centuries old tradition of managing the money supply has ensured that we continue to get value for the money in our pockets and purses. But anyone can see from recent experience how quickly people can be robbed of their savings when their investments become worthless.

What in fact is a banknote? It is simply a promise to pay the bearer on demand what the note says it is worth. Our willingness to accept such notes as payment demonstrates our trust in the currency and the values it represents.

Trust of course must prevail on both sides. A bank will lend you money to buy a house based on evidence of your means, the value of the property to be purchased and your reputation for reliable conduct in financial matters. A good credit rating may allow you to incur unsecured loans on presentation of a credit card, or help in obtaining a loan against collateral security to purchase something the lender knows is beyond your means.

As we have discovered in recent months, credit is absolutely fundamental to the working of the economy. When credit is diminished by fraud, folly and ignorance then we all suffer. Credit in fact lies at the base of prosperity and economic expansion.

The current watch on inflationary trends in the United Kingdom is determined by the government’s ruling that fluctuations in the money supply should be limited to two per cent either way. When the volume of business activity is expanding the money supply will expand with it. That has been the usual inflationary concern in recent times, though such growth is mostly a natural response keeping pace with economic growth.

If the money supply is simply keeping pace with growth, that is not inherently inflationary. However, government borrowing to increase the money supply in anticipation of growth that doesn’t follow from its strategy may well prove inflationary if not matched by a corresponding revival in activity

When economic expansion threatens to push the money supply through the two per cent barrier, the Bank of England’s Monetary Policy Committee is required to restrain the pace of that growth, the principal means being higher interest rates. Its counterpart in a downturn is to reduce interest rates by direction when the economy shows signs of contraction.

But what no-one seems to notice is that raising interest rates adds to inflationary pressures. Let us take an example where inflation of the money supply in a growing economy signals according to current doctrine the need for a rise in interest rates. The Bank then announces that bank rate is raised from 5 per cent to 5½ per cent.

Since all the banks must immediately comply, every business or household financed on an overdraft is now liable to pay 10 per cent more interest. Ten per cent? Surely only half per cent more? Why be concerned about that?

But what is the actual rate of increase between 5 and 5½? Ten per cent. Simple mathematics, except when applied to economics!

That ten per cent increase in the interest firms have to pay on their borrowing is often greater than the rate of inflation it is being levied to suppress. Thus inflation is piled on inflation which for the most part represents the natural increase in the volume of money generated by an expanding economy.

Indeed rising volumes of business in the High Street are met by warnings from financial commentators that interest rates will have to rise to curb these inflationary trends.

In good times of course suppliers simply raise their prices to cover the additional costs, and when business is booming and incomes are rising people accept higher prices as evidence of the inflationary trends the Government and the Bank are worried about.

When the money supply is contracting in a deflationary direction, the downward shift in interest rates such as recently ordered by the Bank of England is much larger in its effect. But the banks so pleased with the licence to raise their rates when the money supply is increasing are not so pleased at a heavy cut in their principal sources of income.

Such a direction bears the stamp of government policy to reduce mortgage and other debt payments. But its cuts straight across the banks’ valuation of their assets. They don’t like the smack of political interference in their business.

The cut back is severe. From 4½ to 3 per cent sounds like a welcome reduction of 1½ per cent but in fact the ratio between the two rates is 9 as to 6. That’s about 30 per cent devaluation, roughly matched by the devaluation of the £ that followed this financial decree. It also raises new inflationary issues for people travelling to European and American destinations who are now faced with higher costs for their business journeys and holiday expenses.

Imported goods become more expensive, though it may improve returns on export business if in the keenly competitive atmosphere of global recession prices hold up.

So one can see that inflation is a complex and difficult subject to deal with. In reply to Mr.Glover I would say that introducing further complexity such as static and dynamic factors in inflation only make this subject more complex and difficult to comprehend.

Measures introduced by the U.K. Government to reduce the pressure of taxation on earnings and expenditure may soon demonstrate that taxation has become dynamic while prices are static!

John Allen
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Ian Mason

Joined: 12 Aug 2008
Posts: 3
Location: South West London, UK

PostPosted: Wed Nov 19, 2008 7:58 pm    Post subject: Reply with quote

It is a little daunting to intervene in this extended and fascinating discussion, but I would like to suggest a couple of things which might be principles.
First, money is not wealth. Wealth is what we buy with money - food, clothing, shelter, services and so on. Money simply rtepresents a claim on these things which is why it ceases to be worth anything if no one will respond to the claim, or there is no wealth to support it - as is the case at present in Zimbabwe.

Monetary reform is therefore only reform of the way we create claims on wealth. It matters because money is also the most efficient means of exchange and is absolutely essential to any sophisticated economy. If there is no means of exchange, we have no chonce but to barter.

Secondly, land cannot be money because it does not represent a claim on anything. Rights over land may result in a claim to the wealth produced on land, but rights are not land either, they are legal constructions.

In theory it would be possible to use rights over land as a form of money but that is likely to be a bit clumsy since, if that were the system, land would change hands whenever we bought a kilo of tomatoes. [ To repond to Jorge's point, with only three big buyers to choose form, the Colombian farmers are caught in an exploitative ologopoly, not a market. The theoretical answer is to redeploy into commodities in which there is a competitive market - a solution which is also well known in many parts of South America, including Colombia].

Thirdly, the difficulties of the present time are compounded by the fact that the debt-based money system is heavily dependent on mortgages for house purchases. The easy availability of money, by way of mortgage, brought about the massive escalation of house prices which went on until wage increases could no longer keep pace. When people stopped buying houses, the system was bound to collapse and it duly did. The first step towards a more sane system would therefore be to separate money creation from the property market. That would mean finding an alternative to the present universal debt based system.

This would not end the property cycle, although it should make it less severe. So long as it is possible to speculate on land values, the property cycle will continue and will continue to have deeply adverse effects.

Collection of the Economic Rent of Land would remove the speculative element and that ought to bring about Gordon's Nirvana.

The general attitude in British politics seems to be that dealing with this issue is even less politically acceptable than dealing with the consequences of golbal economic collapse.

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Leonie Humphreys

Joined: 23 Sep 2008
Posts: 221
Location: West Dorset, UK

PostPosted: Thu Apr 09, 2009 3:58 am    Post subject: A succinct approach? Reply with quote

Ian wrote:

Collection of the Economic Rent of Land would remove the speculative element and that ought to bring about Gordon's Nirvana.

The general attitude in British politics seems to be that dealing with this issue is even less politically acceptable than dealing with the consequences of golbal economic collapse.

When things get 'stuck' like this what is the way through it I wonder?

It is the strangest phenomenon that even in spite of this really quite dreadful crisis still there seems an incapacity for real alternatives/reforms that could be transformative to the situation and benefit everyone, to be taken seriously. The realm of ideas may be one problem, they get so set and rigid that it is not possible to break through without a kind of ‘re-programming’ of the mind-set. Also panic has set in and that is not conducive to a considered approach. What may help is a succinct summary of the issues concerning land and monetary reform. Even here there is a communication problem since the real issue is really tax and monetary reform - isn’t it?!

Any offers for a succinct offering of the ideas presented under this topic of LVT and monetary reform that would be suitable for politicians today?

Alternatively or as well as the above, it may help to put forward some suggestions for remedial solutions that could be useful for those working in the political reality of the current crisis.
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