How can China avoid the “Western financial disease” – a real
estate bubble followed by defaults and foreclosures? The U.S. and
European economies originally sought to avoid this fate by taxing
the location’s site value. A rent tax was the focus of Progressive
Era reforms.
Enacting a rent tax remains China’s main challenge to accompany
its privatization of real estate and natural resources. If land
rent were fully taxed, it would not be paid to banks as interest
for rising mortgage loans – and governments would not have to tax
income and sales. Holding down housing debt will reduce labor’s
cost of living, but not its living standards.
While Western economies shrink in response to debt deflation and
fiscal austerity, China continues its unprecedented 30-year growth.
Many Western forecasters warn that it must suffer a Western-style
financial crash, as if this is a universal path. But China has been
industrializing and raising living standards by public credit and
infrastructure investment similar to the mixed private/public
balance that raised America, Germany and France to world powers as
their Industrial Revolutions gained momentum in the late 19th
century. Its keys are active public investment in infrastructure,
subsidized education and urbanization, rising wage levels and
progressive taxation.
Neoliberal economists have a blind spot that blocks them from
understanding why their own nations succeeded so well – and hence,
how the U.S. and European economies have veered away from the
policies that powered their industrial takeoff. The classical ideal
was to free production and consumption from economic overhead
remaining from the medieval and colonialist conquest of the land,
and the subsequent privatization of banking and money creation.
By the time Mao’s Revolution gave way to the last generation’s
reforms, China had largely freed itself from the post-feudal
rentier classes that survived in non-Communist countries. Western
critics warn that rising wages will erode its competitive position.
But higher living standards are a precondition for raising labor
productivity, and help China to support its domestic market while
Western economies are contracting.
There is no inherent need for China to suffer a Western-style
decline. In fact, the West’s own financial and real estate bubble
was not inevitable. It is the result of financial and tax policies
that reversed the progressive tax system that powered American and
European prosperity before 1980, so the financial sector and
bankers have obtained the lion’s share of gains over the past
thirty years. China’s greatest challenge is to remain free of these
financial and real estate dynamics that have plunged the Western
and post-Soviet economies into debt and created a rentier
over-class receiving income simply for ownership privileges, not
for playing a productive economic role.
Real estate’s policy challenge: To tax land rent, or let it be paid
as interest to the bankers
Classical and Progressive Era policies aimed to prevent this fate
by taxing land rent, natural resource rent and monopoly rent. This
led the rentier interests to mount a counter-revolution that has
gained power over the past century, especially since 1980.
Neoliberalism has blocked what the West’s its classical ideologists
of industrial capitalism and free markets promoted: taxation of
unearned income, that is, “economic rent” and the “unearned
increment” of rising land prices that should be the natural tax
base.
If land’s site value – the rent-of-location – is not taxed, it will
be “free” to be pledged to banks to obtain mortgages. Larger loans
support higher housing prices, because a property is worth whatever
a bank will lend purchasers to buy it. In the United States the
motto of real estate investors (and homeowners) is that “Rent is
for paying interest.” When buyers bid against one another for
housing or other property, the winner is whoever is first to pledge
the entire flow of rental revenue to the bank in exchange for a
mortgage to buy the property. Much of the financial and real estate
bubble stems from rising land prices financed by going deeper into
debt. “Democratizing home ownership” on credit has enabled banks to
end up with the land rent that hitherto went to a landlord
class.
Now that rentier property ownership is developing in many ways like
the West, the task of the coming generation is to make sure that
China remains free of the real estate and financial bubble that has
left entire Western economies in debt peonage and negative
equity.
China thus is facing a universal problem of how to steer its
economic surplus into new capital investment (including public
infrastructure) and rising living standards to create a thriving
domestic market. Its challenge will be to avoid repeating this
fatal path that the United States and Europe have taken since the
1980s. The aim is to prevent the economic surplus from being
absorbed by rising land rents, prices for monopoly goods and
services (roads, commercial privileges, communications and the
like), and banking charges for interest and fees.
Over the next twenty years China will have to cope with the same
problems of urbanization, rising housing and land prices that
Western economies experience. The most important way to view these
universal problems is to ask who is to receive the economic
surplus: the government as taxes, individual property owners as
rent, or banks as interest? This is the basic trade-off. Whatever
“free” rent-of-location the tax collector relinquishes is available
(“free”) to be pledged to banks as interest....
http://michael-hudson.com/2013/07/china-avoid-the-wests-debt-overhead-a-land-tax-is-needed-to-hold-down-housing-prices/
