Fat fools call for new taxes on rent and mortgages [update 2]

Everyone’s got a favourite tax they want to slap on someone to stop the exchange rate exploding and the housing bubble happening again.

Brian Fallow is the latest alleged economist to weigh in with a new tax burden to fix things.”Time to add GST to rents and mortgages,”says the Fat Man.  No Brian, it’s time you and your tax-hungry buddies stuck your head down a toilet and pressed flush. 

It’s not an answer to say that this would be “revenue-neutral.”  What rot. What serious student of politics would seriously expect any commensurate drop in income and company taxes to match the new ones. And what serious economist would want the serious dislocations that would happen when a tax on rents and mortgages was slapped on – not to mention the serious injustice of raising taxes on one group, even if you did drop them elsewhere.

Apparently it’s too much like rocket science to figure out what’s really wrong and to fix it.  Better instead to flap about strangling the residents while their house is burning down. 

Because it’s not rocket science to fix things. Here you go, let’s fix them:

1. Fix the building regulations and the land controls that are still ramping up supply-side costs (even when demand has dropped), and
2. stop the Reserve Bank inflating the economy with counterfeit capital. 

Do those two things and the problem disappears – and you don’t need to hand Bill English all the arguments he needs to put his hand even further into everyone’s pocket. Look at those two points in turn:

•  The problem with building regulations and land controls is obvious.  All it takes to fix that is courage and clear-thinking. (Such a shame that both are in such short supply.) 
• The problem with the Reserve Bank is only slightly less obvious, but only because all the mainstream economists are still blinded by the failed macroeconomic ideas that caused the worldwide financial collapse.

You see, the Reserve Bankers and their shallow, fallow supporters still maintain that the Reserve bank’s primary job is to set interest rates, print money, and allow banks to issue credit. They think this is a good thing (and some of then even labour under the illusion that an economic dictator setting interest rates and printing money is somehow a free market!)

And they think that the Reserve Bank is fighting inflation, when if they weren’t so blinded it would be obvious the Reserve Bank is actually creating it.*

Essentially you see, what happens when the Reserve Bank sets interest rates is that banks issue enough debt to balance out the supply-and-demand at that interest rate level. And under our fractional-reserve banking system that debt is then monetised (what Charles Holt Carroll called the Organization of Debt into Currency).  Under this arrangement for easy credit expansion, NZ’s M2 money supply had been increasing at a year-on-year rate of around 20% at the height of the boom, and was still increasing at a year-on-year rate at May this year of 10.7%. 

This is literally new money, created out of thin air.  And guess what happens when more money is chasing the same number of goods? (That’s right Virginia, you get what the mainstreamers call inflation. And the poor fools think the Reserve Bank is fighting it!) 

And guess where the lion’s share of that all that new money goes?  That’s right again, – although the mainstreamers are too blinded by their theories to see it, (mostly because they’re still thinking in the Keynesian aggregates that conceal most of the real economic facts), the lion’s share of that new money goes to people who borrow it.

You know.  People like home-buyers. Remember them?  Folk who get first use that new money and, when things start taking off, want to use it quick as they can before prices do the same.

This is what feeds the bubble. As Thorstein Polleit points out,

It is an inflationary regime. The relentless rise in the money stock necessarily reduces the purchasing power of money to below the level that would prevail had the money supply not been increased. Early receivers of the new money benefit at the expense of those receiving it later.

And that’s why it’s so easy to stop another housing bubble being inflated.  if you seriously want to stop it, then just stop inflating the money supply. 

Stop diluting it with new paper. 

Stop printing more of it. 

Stop creating credit out of thin air, and stop it with the nonsensical idea that a new tax will solve the problems that government itself has created.

Just stop it with the Reserve Bank Act’s inflation-mongering altogether, and leave us taxpayers alone.

We’re already over-burdened.

* * * *

* Inflation is what mainstreamers call it when prices rises across the board, right? But what they don’t even realise is that it’s the Reserve Bank who promotes general price rises across the board.

Ironic, huh?

Price rises, say the blind fools, are caused by wage-push, or cost-push, or demand-pull or some other failed excuse for not looking at the whole picture.  Because if you do look at the whole picture you understand that the only way you can get price rises across the board is if the money supply increases.  If some costs go up and the money supply doesn’t, then there must be a corresponding drop in prices elsewhere. If some wages go up and the money supply doesn’t, then there must be a corresponding drop in prices elsewhere. If demand goes up in one area and the money supply doesn’t, then there must be a corresponding drop in prices elsewhere to match the price rises due to demand.

The only way you can get price rises across the board is if the money supply increases.  And look who’s in charge of that.

Ironically, to squelch the price inflation that they themselves set off, the Reserve Bank then tries to squelch it all. And to do that, they do everything necessary to ramp up the exchange rate. 

But this Scylla and Charybdis of high finance isn’t inevitable – that is, is is not inevitable unless you refuse to take off your mainstream blinders and see things as they really are.  And in this context, that’s to realise that inflation is not essentially a measure of rising prices but of the rising money supply that causes them.

UPDATE 1:  The Visible Hand confirms that it’s never seen a tax it doesn’t like.  “Excellent” it calls Fallow’s disgraceful call for the IRD to put their hand in renters’ pockets.

UPDATE 2:  Great comment on this by Mark Hubbard in the comments section at Rates Blog:

    Well, I’ve not read the article, don’t have time to do so [don’t worry, you’re missing nothing], but from this I would say it’s not going to affect domestic rental investment, because I would assume that type of investment will no longer be a GST exempt activity, thus, landlords will be able to claim the GST on the interest back, plus will add GST to existing rentals to be returned. No difference to them.
    So who loses?
    Tenants, because they will have a 12.5% rent rise.
    Every house owner, especially low income house holders who will incur dramatically higher interest rates via the GST component, which they won’t be able to claim back, some of whom will thus be forced into rented ghettos, paying rents they can’t afford for the same reason.
    Another brain dead idea by a NZ mainstream economist who only seems to find ’solutions’ that include increasing the cost of living for kiwis by the likes of this, or further taxes. Why not advocate reducing the size of the State so the people that would be so badly affected by this ludicrous proposal could be given tax cuts - that aren’t simply to compensate for higher taxation elsewhere - and get on with their lives with the least amount of government, and economist, interference.
    PS: Matt, do you see a government implementing any new tax, and then cutting another tax.
    It doesn’t happen.

Exactly right.