Chapter XV: Taxes, Economic Rent, and Externalities

What Should We Tax?

We began our examination of government by looking first at proposals to reform the tax system and noting their deficiencies. We then looked at both the purpose and cost of government and noted that government has exceeded its legitimate purposes and hence its reasonable costs. We can now return to the question of tax reform, and determine how this should be done, because at the heart of governmental reform is tax reform. It is evident by now that the “starve the beast” strategy was a failure; under this strange diet, government “bulked-up” rather than “slimming-down.” Only by identifying the proper sources of public revenue, and insisting that government stay within these limits, can we hope to achieve any real reform. So the central question is, “What should we tax?”

There is a bromide about taxes that goes, “If you want less of something, tax it.” Currently, the burden of taxation falls on capital and labor. Now, I can't think of any reason why we would want less less labor or less capital; therefore, the fairest and best tax on labor and capital is a flat-tax of zero percent, with some notable exceptions, discussed below. But if we eliminate taxes on labor and capital, is there anything left? Is there anything in the economic universe that we want less of? I believe there is. In fact there are two things that can be taxed, one with no impact on economic development, and the other with the deliberate goal of limiting adverse impacts. The first thing is economic rent and the second is taxes on externalities.

Ground Rent

I repeat here our discussion of economic rent from Chapter X: Economic rent is an amount paid to a factor of production that is more than necessary to keep that factor in production in its current use. It is the very essence of economic inefficiency. For example, the price of steel must be enough to pay for the raw materials in the steel and to compensate the labor and capital that went into making it. If, however, the price rises very much above this amount, then steel claims an economic rent. This rent acts like a tax on all users of the steel, a tax that really doesn't buy anything, but only transfers money from one group (the consumers) to another (the owners). In the case of elastic, reproducible commodities (like steel), this is only a short-term problem, since (in competitive markets) the higher prices attract more labor and capital, the supply is increased, the prices fall, and the economic rent disappears. In the short-term, and for normal commodities, economic rent serves a purpose.

But this does not happen in the case of land; there, the rent is chronic and distorts the returns to both capital and labor. Recall the discussion of the law of ground rents from Chapter IX. Ground rent has the first claim on all incomes, and returns to labor and capital (“the wage line”) can only be paid after ground rent is satisfied. Moreover, this ground rent represents unearned income. Property increases in value because of the growth of population, improvements in technology, or off-site improvements. None of these things are attributable to the land owner; he merely reaps where he did not sow. All ground rent is economic rent. Land costs nothing to keep it in production. Capital and labor are consumed in the process of production and must be replaced; the land endures.

Consider a case where a landowner leases out a piece of property to an entrepreneur to build a factory. The factory lasts, say, thirty years, and at the end of the time it is “used up.” It is torn down and hauled away. But the land remains and is ready for the next use. All this time, the landlord has been receiving an income, and all the while the property has been increasing in value (assuming an increase in population and advances in technology). Yet the landlord did nothing to earn this income; it is strictly a reward for owning the property, not for using it. The income is due to the community, and by rights should go to the community.

Note that we are speaking of taxing only the ground rent; the improvements would not be taxed at all. The improvements to the property represent capital and labor, and their work should not be taxed. Only the ground rent, the portion provided by the community, would be taken, and taken at something close to 100% of its value. This is not a new idea. It was the form of taxation favored by economists from Adam Smith to Milton Friedman. It was most famously popularized by Henry George, a name that is forgotten today, although he was the most well-known and popular of the economists of the late 19th and early 20th centuries. Some measure of his popularity can be gathered from the fact that at his death, 100,000 people filed past his coffin, and thousands of others waited outside and could not get in to pay their last respects. Can you imagine the general public lining up to for the funeral of any other economist?

George's theory is often called a “single-tax” theory, because it reduces all taxes to ground rent alone. However, this is a misnomer, since it should be called a “no-tax” theory. A tax is a cost added to a price or subtracted from an income. A sales tax is added to the price, an income tax deducted from the income. And these taxes tend to get passed along to the final consumer. But the Georgist “tax” simply appropriates the income of the rentier, the person who lives off other people's work. Nor can this “tax” be passed along. Ground rent already tends to absorb all values over the margin of production; the price cannot be increased beyond this.

The major question is whether such taxes are just, whether the major burden of taxation should fall entirely on the rentier. Two points are important here: One is that the value of ground rent is due to the community, not the owner (Chapter IX). It is but justice that the community be funded from its own natural revenues. The second point is that ground rent always represents wealth without work, the primary source of both economic inefficiency and economic injustice. Wherever one person gets wealth without work, another must provide work without wealth. Clearly this is unjust, but it is also inefficient. The maldistribution of incomes affects such technical measures as the velocity of money and the incentives to invest, and thereby destabilizes the economy. But further, it leaves the community without a source of revenue for public purposes; the community therefore has no choice but to go after the returns to labor and capital, which negatively impacts both. Taking the ground rents impacts neither—any further than rent does, anyway. Therefore, we can assert that ground rent is the natural income of a community. Rent derives its power strictly from a legal claim to property; that is to say, it is a creation of government power, a power that recognizes no limits to property. But property, like any other natural thing, has natural limits. And the natural limit to property is that one should profit from its use and not from mere ownership.

Taking ground rent would have profound macroeconomic consequences. For one thing, land speculation would be unprofitable. The only way to make money off of land would be to use it, to employ it in providing a useful good or service to one's neighbors. The whole problem with the speculative rent line and the resulting land bubbles and subsequent contractions would disappear. The economy would be far more stable. For another thing, wages and investment would get their full return; both are now burdened by both rents and taxes. Without taxes on either, the work and investment climate would be very much improved.

But is it Enough?

Although many economists generally concede the superiority of ground rents, they also doubt that it is adequate, especially when the total government expenditures come to $5 trillion. In this critique, they are absolutely correct. It is unlikely that ground rents could support a government establishment that takes one-third of GDP, an amount that is growing, especially during this current crisis. But that is not so much a critique of the land tax as one of its greatest advantages. Under a land tax, the public revenues would be fixed and known. Government at all levels would be confined within the limits of their funding. But how much would that funding be, and is it adequate to a reasonable level of government?

Empirical studies are hard to come by, since local taxing authorities are not overly concerned with separating the price of the land from the price of the improvements. The best studies suggest that ground rent revenue would come to about 20% of GDP, or about 60% of funding at all levels of government.1 This would certainly leave a big hole in the current level of government, but this might not be as big a problem as it appears at first glance. It would force government to consider what should be funded from general revenues, and what should come from user fees. We have already discussed how the highway system is the obvious example of an expense that can be moved from general revenues to tolls. But there are many items in the budget that are in fact services to particular clientèles. For example, the Food and Drug Administration is a service to the pharmaceutical firms, among others, and its entire budget should come from user fees. By cutting the bloated defense budget, going to debt-free money, eliminating useless departments such as education, charging public works to the properties that benefit from them, and such like measures, the federal budget could easily be cut by 40% without compromising any current services.

I suspect that the same rules would apply to state and local governments. The lion's share of these budgets are consumed by an ever-more-expensive education system. However, while it is certainly a duty of government to ensure that every child has the same opportunities to get an education, there is no reason for the state to actually run any schools, a task which they do not do well. A system of vouchers to parents would likely bring both great diversity and great economies to the educational system, while allowing the public to recoup their investment by selling the schools and putting the land back on the land-tax rolls. Support for education should also include some modest support for home-schooling.

Political Effects

Political power tends to flow to the greatest funding source. When the Federal Government gained the power to tax incomes, power naturally flowed upward, so that today senators and presidents routinely handle matters that are best left to the town council or the statehouse. A land tax, however, is most efficiently collected at the local level. The apparatus for doing so is already in place, since localities collect property taxes, though under widely varying rules and rates. The rules and methods would have to be standardized across the nation. But a land tax would entirely change the nature of government in the United States. With taxes collected at the local level, and divided in a fixed proportion among local, state, and federal authorities, we can expect that power will begin to flow back to the states and cities. And with a fixed budget, it will be easier to confine the federal government within its constitutional limits.

I suspect that the two great debates in a land-tax system will be how to split the revenues and which programs should be funded or subsidized from general revenues and which should be funded by user fees. As matters currently stand, states and cities have an incentive to “kick problems upstairs” to the federal government, where the money is. Relying on the federal budget allows local entities to claim a bigger share of the income taxes their citizens pay, and to isolate the local tax base from these responsibilities. But a land tax reverses these incentives; since the tax base is the same for all levels of government, only the division of the revenues is at issue. Local entities therefore have an incentive to accept greater responsibility and hence claim a greater share of the revenue.

Further, they have an iron-clad argument when dealing with the federal government; they merely need to ask about any particular program, “Where in the Constitution is this authorized?” Of course, they have that argument today, but they are not inclined to use it because the funding argument will always trump the Constitutional one. Under a land tax, both arguments will work in favor of the local entities. The land tax will therefore advance the distribution of power which is an essential part of distributism. It will also encourage leaders at all levels of government to offload as many programs as possible from general revenues to fee-based services.

The Land Tax and Distributism

In advocating the land tax, I am not advocating something without historical precedent or current practice. In fact, the majority of tax systems before the modern age were based on land. The English feudal system was essentially a land-tax system. And in the modern world, highly successful states like Singapore, British Hong Kong, and Taiwan are “Georgist” land-tax states. However, these states also indicate the problem with the land tax. In theory, the value of land should be easy for the authorities to calculate, since there is always an active market in land. And this is true, so long as there are no tax implications in separating the price of land and the value of the improvements. Two problems arise: One is that since improvements are not taxed, there is an incentive to attribute as much value as possible to the improvements and as little as possible to the land. The second is that when land ownership or control is concentrated, the landowners exercise considerable influence in setting the rules. Thus, a “pure” land-tax system has been difficult to establish or maintain over time. It tends to degenerate into a mere property tax which is insufficient to fund the state and becomes supplemented by income and other taxes (although usually at a much lower rate than in non-Georgist states). Large landowners like to see other taxes, because these are easier to avoid or to pass on to the final consumer.

The land tax works best where ownership is well divided and property not concentrated into large estates or tracts; in other words, in a distributist state. With land well distributed, political power is also well distributed, and the incentives to “off-load” the taxes from land to labor are decreased. On the other hand, a distributist state needs the land tax to prevent property from re-aggregating; without a land tax, the distributist state tends to degenerate into a capitalist state, and no one is better off. Therefore, a Georgist polity needs distributism for its implementation; distributism needs Georgism to maintain itself.

Other Forms of Economic Rent

Land rent is not the only form of economic rent, even if it is the most obvious and important one. Other rents arise from monopoly or oligopoly control of economic resources, from patents, from control of scarce commodities, and from occupying positions of power with large institutions, mainly the corporation. This rent manifests itself in various ways, but the most obvious way is suspiciously high returns to capital. To deal with these other forms of rent, I suggest that the corporate income tax be maintained, but only assessed when the return to capital gets to be outsized. I suggest that we adopt some figure as a “normal” return to capital, say 8%, and start a modest tax when double that return is reached (16%), a high tax when it is tripled (24%), and a punitive tax when it is quadrupled (32%).

This would not impact the willingness to invest. While in general high returns attract investment, such returns, like every other economic quantity, have a “marginal utility.” That is, at some point, higher returns do not attract additional capital, and at a higher rate, the returns actually act as a perverse incentive to discourage further investment. This is especially true in monopolies or oligopolies. When returns are so high, why invest to increase the supply and thereby lower the returns?

In the same vein, high-level executives often collect an economic rent in the form of perversely high salaries and bonuses. These salaries seem to be paid whether or not the enterprise is successful, and indeed some of the highest bonuses are paid for failure, such as when a CEO with a “golden parachute” is fired. These bonuses come out of the rewards that rightfully belong to the workers or the investors. One or two generations ago, a CEO would typically make 20 to 40 times what the line worker made; now CEO salaries run 300 to 500 times that of the line worker. The simplest solution is to require corporations to pay a tax penalty for such salaries. When a salary reaches some multiple of the line worker's salary, say 40 times, the company would pay at least a modest tax, a tax that at some point, say 200 times the average, becomes punitive, in the 75-90% range. Note that this tax would be on the company, not the executive. It would entirely change the nature of the negotiation with that executive, would be certain, and would be easier to collect.

Externalities

Aside from wealth without work (economic rent), the other great economic evil is forcing some portion of the costs of a transaction on some third persons who are not a party to the transaction. Firms, and especially large corporations, do their best to externalize as many of their costs as possible. The obvious example of an externality is pollution, by which a company will treat the common air, streams, and ground as a free sewer. This sewer will have no cost to the company, but surrounding communities will pay the cost in declining health, increased medical expenses, and shortened lifespans.

Externalities take many forms. One common form is subsidized infrastructures. The “free” transportation systems, for example, are actually subsidies to businesses that depend on wide distribution and supply networks. These subsidies work to the disadvantage of local businesses and suppliers, because they unfairly lower the transportation costs of national and international competitors. “Big-box” stores like Wal-Mart could likely not survive if their transportation costs were not subsidized. This is especially true since the greatest amount of damage to roadbeds is done by large trucks. If there were weight-based tolls for using the roads, it is likely that the Wal-Mart model would simply be uncompetitive with local and regional producers and retailers.

Externalities distort the price system and give companies that can externalize their costs a competitive advantage over those who cannot. As it works out in the real world, it is large, international companies that can more easily take advantage of externalized costs, leaving small and local competitors at a disadvantage.

Aside from going to fee-based services, like tolls, government should use its taxing power to force companies to internalize all of their costs. The current “big idea” for controlling pollution is “cap-and-trade” systems. But such systems convert pollution into a property right, and then give the right to the wrong people, to the polluters rather than those harmed by the pollution. Clearly, if you want more of a thing, turn it into a “right,” especially a marketable right. You may take it for granted that the producers can produce more forms of pollution, and therefore more property rights, faster than you can print the new deeds. The best method is a scale of taxes on pollution that increase over time so as to “encourage” a firm to internalize all of its costs.

In general, government should be vigilant to detect and eliminate externalities. No price system can function properly if firms are freely allowed to externalize their costs either to government budgets or to the public “commons.”

But Should We Cut the Budget?

We have assumed throughout this discussion that cutting government expenditures and eliminating economic rent and externalities are good things. The reality, however, is a bit more complex. The current industrial system actually depends on large government expenditures, economic rent, and the ability to externalize costs. So while cutting the budget in the abstract would be a good thing, in reality it would destroy the current system of industrial production and global trade.

So before we take our scalpel in hand to perform surgery on the budget, we need to understand what we are doing and where we are going. We need to couple fiscal reform with a reform of the industrial system itself. Otherwise, our surgery may be successful but the patient will die. What a new industrial system could look like, one not dependent on government largesse, is the subject of the next chapter.

1Fred Foldvary, “Intellectual Tyranny of the Status Quo,” http://www.econjournalwatch.org/pdf/FoldvaryIntellectualTyrannyApril2005.pdf.

20 comments:

Paleocrat Saturday, January 17, 2009 at 11:53:00 AM CST  

Great chapter, John. I was just reading Belloc's ideas on this very subject as laid out in his "Essay on the Restoration of Property." I will be talking about it on Monday night's program. I will make sure to talk about this as well.

Once again, excellent chapter.

Unknown Saturday, January 17, 2009 at 1:33:00 PM CST  

This is a very well written chapter, and I will look to find and read the others. But one quibble: I aver that there is indeed sufficient rent available as a tax base. Terry Dwyer's research in Australia puts the rent on (real estate) land alone at about 29% of GDP. And Mason Gaffney's recent article titled “Hidden Revenue Capacity of Land”, in the summer issue of the International Journal of Social Economics, argues that there is easily enough rent to support public services. Lastly, several theoretical articles on the "Henry George Theorem," one by Stiglitz, argue that available rent is adequate.

Anonymous,  Saturday, January 17, 2009 at 1:57:00 PM CST  

John, I would like to comment, but need access to the older chapters, and do not see them listed on the blog. Where to look?

My quick suggestion is to use less abstraction and more examples.

John Médaille Saturday, January 17, 2009 at 2:47:00 PM CST  

Anon, at the bottom of the article, see the tag "The Political Economy of Distributism" and click on that; all the other chapters will be displayed.

hwbatt, thanks for the leads; I will check them out. Actually, I think it an advantage if the receipts are lower, but I suspect they are higher; I want to be as conservative as possible.

Anonymous,  Saturday, January 17, 2009 at 6:37:00 PM CST  

I've always had an interest in Distributism so I'm pleased to see a modern economics book on it. Am just wondering if this book will be published and if so, when?

John Médaille Sunday, January 18, 2009 at 8:31:00 AM CST  

rj, I hope to have the book out by early summer.

Anonymous,  Sunday, January 18, 2009 at 4:49:00 PM CST  

I hope to get into this in more detail at some point. Keep in mind that I'm someone sympathetic with distributism. I may expand one of these into a full blown post at some point, but I thought I would touch on them here.

1) Land use taxing certainly has a role to play in any taxing scheme. It is my favorite tax in fact. There are two (at least) other considerations.
a) a place like the Sears Tower, Trump Tower, or the WTC has an impact far greater than its land foot print. In the case of the bookends, freeways were reconfigured to specifically provide the capacity needed for vehicular traffic to those buildings. Added to this is the ability to pay. I would speculate that the 14 acre site of the WTC accounted for at a minimum basis points of GDP. Your typical 14 acre plot would account for fractions of a pip of GDP. Admittedly, the NYC land will be more valued instrinically, but this will not come close to approximating the differential in economic activity, because we aren't considering it directly.
b) At the other end of the spectrum we have many parcels of land whose development places great burdens upon others. Think for example of all the houses now exposed when Western fires come. Another example would be land destruction through pasture being converted to crop land. Added to this, and one of the bigger deficits I see, is that there seems to be no concept of public land. I'm not aware of any literature - doesn't mean it doesn't exist - arguing that all things being equal private land is better at allocating resources than public land. Hong Kong, IIRC, owns all its land and leases it. One of the bigger issues distributists have had is that they have tended to deny the greater expense (lesser efficiency) of small farming versus corporate farming. (Often boutique farms are compared to try and even the playing field.) Yes, there are interventions that advantage bigger farms. If we are to encourage small farms, it is going to need to be a deliberate policy choice. France is one country that has chosen to do this.
2) This complaint may surprise you, but I have to completely disagree with you about vouchers. I think they first theorized by Friedman. Foundational to the theory seems to be the idea that things can't be worse, but the evidence in Milwaukee says they can be. There have been several private schools that have been closed by the State already because of corruption of the private schools. There hasn't been a whole lot of improvement in the public schools, and the traditional private schools haven't changed a whole lot. The idea of the voucher isn't a unique funding structure. It is simply a variation on the capitation tax. Where we've had the most experience with this is the fed programs for college. College costs have grown exponentially under this scheme. In Canada and many other places, schools including parochial ones receive money by being a taxing authority themselves. Typically they tax property.

John Médaille Sunday, January 18, 2009 at 5:59:00 PM CST  

M. Z., Very thoughtful comments, and the kind of question that frequently comes up.

1. a. If you build a replica of the WTC in Dallas, it would not command a fifth of the rent. Since the buildings are identical, the difference must be in the ground rent. THIS IS NOT CONTROVERSIAL. Economists of all stripes, from Milton Friedman to Joseph Stiglitz agree on this point. Even the economists who opposed Henry George rarely did so on the facts of the case, which are fairly well-known and not usually disputed.
1.b. Removing the subsidies would address this problem. You only build in those areas because you don't believe that you will pay the cost of fire protection, and you will not pay the full cost of transportation. Bad development decisions are made when the costs do not show up in the price, but are externalized on some third party.

2. The operative part of your comment is that the corrupt schools were closed; the Milwaukee School system, otoh, is still open. It is easier to withdraw funding from a variety of private schools than it is from a large monopoly of them (whether public or private.) I am not quite sure I understand the relationship of land tax to a capitation tax, or its influence on college tuition. Maybe you could elaborate on that point for me.

You are correct about Hong Kong; the gov't, even under the British, owned all the land and leased out the development rights. What this amounts to is that ownership is socialized while use is privatised, sort of an elegant solution to the "public/private" argument over land. The same is true of Singapore, which owns 77% of its land. Note the success of these states, way out of proportion to their size.

As for farming, the question is, "If large scale farming is so efficient, why does it require such huge subsidies?" In fact, it is not efficient (as Adam Smith noted in The Wealth of Nations). Generally, it conserves labor, but wastes capital, as the agri-business farm tends to be over-capitalized. See http://www.mcleveland.org/working_papers/Equality_Productivity_and_Growth.pdf

I will be dealing with this question of how the subsidies distort the price mechanism in the next chapter. For now, you cannot even compare the efficiencies unless you account for the subsidies.

Anonymous,  Sunday, January 18, 2009 at 6:47:00 PM CST  

John, trying to fish out and follow your book chapters finally clarified for my why I dislike blogs: they not only chuck out the venerable book invention of the Table of Contents, and force to reader to go back to scrolls; then the reader must read the scroll backwards. What were they thinking!?
----------
What I don't understand is this: geonomics keeps saying that under Land Dues, each landowner would be motivated to develop. But that's not the world I want! I want parks and greenbelts and urban gardens and farms. How would that work?

Vera

Anonymous,  Sunday, January 18, 2009 at 10:22:00 PM CST  

That was a very interesting paper.

To address a few things:
1a) At the scale of a WTC you start speaking of virtual communities. IIRC, there were some 50,000 workers in the WTC. Like the factory, the reason the land has value is what is produced upon it. A Georgist recognizes the value of proximity as he values the land closer to market higher than that of land farther from the market. The remedy would seem to be to consider square footage at some point if we are to stick to strictly Georgist principles. For example the value of the 50th floor is less than that of the 5th floor. It seems easier to do that than to say the land of the WTC has exceptional value and therefore the tall structures (now lost) are capital investments commesurate with the land value. Perhaps we are misunderstanding each other. Would you say the land value of WTC is the same of the equivalent parcel across the street in Manhattan? If so, then the WTC wouldn't be taxed in proportion to its economic value.
1b) The easiest way to eliminate subsidy is to proscribe the practice rather than attempt to extract equal compensation. In Alaska and remote Canada, they simply won't grant a building permit. In many cases they won't even grant title and instead they will offer x-year concession for the purpose of pasture, crop, or forestry.

Capitation tax is another word for per user, poll tax, etc. Whether it is Uncle Ernie paying the tuition, or government issuing the check, if we are paying for education by the student, then it will act as such. In Europe, the higher education model is for tuition to be a very small portion of the revenue. Part of the difference is that I think Europeans see education as a benefit to the community as only incidental to the individual whereas it is the opposite for us. You also see this is Asia. Whereas we are graduating economics majors, arts majors, and finance majors, our Asian counterparts are educating engineers and scientists.

As for agriculture, we have other considerations. The Salinas Valley produces a large quantity of our produce. Leaving aside the question of how things are accounted (for example, many small farms are the equivalent of 1099 employees), I think we would agree that we wouldn't see the productivity out of the Salinas Valley without the infrastructure to distribute the produce. Lacking that infrastructure (where we see a lot of the subsidy) the Salinas Valley may be more productive, but at the cost of moving a lot of the land out of production. Don't get me wrong, on the whole I think this would be a good thing. I agree with the French that regions should feed and provide water for themselves and trade for those goods they can't provide. And perhaps, this should be revisited when I see your next chapter.

Jeremy VanGelder Sunday, January 18, 2009 at 11:44:00 PM CST  

Hello Mr. Medaille,

This is the first I have heard of this kind of taxation. It was a very enlightening read. However, I have long held to the idea of a flat fee tax. This comes from the theory that a government which provides the same level of services to everyone should have an equal claim on every citizen's support. If someone breaks into my house, a law enforcement officer should be as quick to my defense as he is to anyone else's. When I am dragged into court, I expect the judge to decide between me and my accuser with justice. When my representative goes to DC, I expect him to represent my interest's just as much as he represents the interests of the large corporations in my state. Alas, in a system where income is taxed on a percentage basis, (whether progressively or at a flat rate) the government inevitably pays more attention to individuals or corporations with larger incomes. We have designed a perversity, where the poor are carried by the rich. And the rich are free to carry the poor wherever they wish. Originally, this system was designed to, "soak the rich." This system does not interest me at all. I want to keep the rich from contributing a cent more to my government than I do.

Unknown Monday, January 19, 2009 at 9:04:00 AM CST  

Colleagues, I sense some of those offering comments aren't familiar with the many websites that answer some of the questions being posed. There are many, normally accessible using the Georgist search engine www.askhenry.com. In a few cases the search engine employed cannot access a server, as for www.wealthandwant.com, which is one of the best collection of articles. I offer this contribution for those just tuning in.

John Médaille Monday, January 19, 2009 at 9:39:00 AM CST  

MZ, land is not priced by what is produced on it, but by what can be produced on it, the highest and best use. On a theoretical level, the plot accross the street from WTC costs the same as the WTC. In practice it doesn't because it likely could not get a permit to build that high. but whatever can be built will determine the price.

Again, the Law of Rents is not contentious. Few economists and no real estate experts would disagree.

I agree about the infrastructure being necessary to the productivity; the question is who pays? In general, there should be no subsidies from the public to the particular, and doing so always distorts the price system.

I agree that education is, at least in part, a common good to be funded in large part from the common purse. I am still not quite sure how this relates to a capitation tax.

John Médaille Monday, January 19, 2009 at 9:43:00 AM CST  

Jeremy, I don't think the gov't does provide the same level of service. I think we can test this by imagining police or fire protection as a "private" service. Will they charge the same for a $50,000 house as they do for a $5,000,000 house? I doubt it.

But the real issue is how to pay for it. The answer can only be from the revenue of labor or of rent. That's it. There are no other choices. The value of ground rent comes from the community, and forms the communities natural income. That income should serve the common good and fill the public purse. It should not be diverted to private use because it is not the result of private effort. Those things that are the result of private effort, the fruits of labor and capital should not be taxed at all, other than fees for actual services, such as tolls.

Anonymous,  Monday, January 19, 2009 at 12:19:00 PM CST  

John -

As a Catholic Royalist Distributist Freeholder with 2 advanced degrees, I should be about as sympathetic an audience as you might want.

However, reading this chapter (and Chapt. X) I am puzzled by what *assumptions* you are making that would impact policy rather than justify economic theory.

Two assumptions that I detect (and wonder at) are:
1. All land a priori belongs to the state.
2. Land is a "commodity" (forgive my imprecise use of the term here) that can/will/must be exchanged for the most productive use.

Regarding #1
a. The reference to Feudal England is imprecise (there are very distinct era's of Feudalism) and highly selective. But the implication somehow that the Government/State/King had prior rights to the land in a feudal society is simply inaccurate. It requires the the distinctly un-feudal mechanisms of the modern state to even contemplate such a violation. There is more here, but I merely point this out as a proof point that you gloss over that does not really prove your point.
b. Using Hong Kong and Singapore and Taiwan as further proof of #1 may be correct, but it is hardly persuasive. All of these states fundamentally validate the assumption that the modern State owns the land, and we simply rent from the state. Such might indeed be a "pragamatic" assessment of 21st century reality, but it hardly seems morally defensible as a Catholic or a distributist.

Regarding #2
a. What, if any, is the value of such intangibles as stability, family, community, and/or a "living" that comes with property or specifically, land?
b. What happens when the economic rent of a property eclipses the tangible "living" of a property?
c. It is all well and good when we are sticking it to "The Man" like the Kennedy's or the Bush's... but what happens when you become The Man?
d. The examples you cite here touch almost exclusively on the economic practices of Cities and Suburbs, and in that environment of transience, temporary rentals and fantastic opportunity (and real wealth) the policy aspects are seemingly negligible (or at least consistent with existing practices). How then does this impact the other 80% of America from a policy perspective?

To use our old distributist friends, the Butcher, Baker and Candlestick Maker; how would an increasing economic rent incommensurate with the growth of the "living" impact their ability to provide for their families?

If I understand the principles correctly, the rational butcher would have to sell the land to a more productive user (or invest more to make it more productive himself)... in Manhattan this might be business as usual... but why endorse a policy that places the state in the role of "arbiter of the use of property"?

The same can be said of pastoral and/or agricultural "livings." It is demonstrably incorrect to assume that "local" municipalities take decisions to grow and add services according to consensus or even a majority vote. The economic rent of property can change value rapidly and without commensurate benefit for existing owners - except in-so-far as they liquidate their property.

Outside of Manhattan, it is common practice for businesses to own both the property and the improvements.

My question here, is this: If we grant that the State is the a priori owner of all land ("real property") and that land will be taxed at its *Theoretical* Economic Rent, would this not unjustly force viable "livings" to sell and move (or expand against their will/skill-set)?

From a policy perspective, does not this liquid property approach run contrary to other non-economic goods?

Do you see any key mitigating factors in some sort of real implementation? Perhaps only resetting the Economic Rent when the property changes hands?

I'm willing to admit that I'm completely wrong from a pure Economic Theory assessment; but as I note above, I am as sympathetic a reader (actually building a local distributive business) as you could find... and while I may be wrong, it is safe to say that what you have written leaves me completely unpersuaded... and I suspect for your mission, this is even worse.

Anonymous,  Monday, January 19, 2009 at 1:06:00 PM CST  

Marchmaine,

While property may not belong to the State, the conception of property as a total right to use and disposition is also a modern construct, tending to envision our forefathers as libertarians. In the development of rights, the structure enjoyed absolute ownership and from there rights accrued that weren't necessarily ownership. England prior to enclosure had tracts of land members had a right to farm but did not own.

If Mr. Medaille is to be faulted for focusing on cities and suburbs, it is largely because the idea of living on a plot is a modern one. The romanticization of 40 acres in the country is just that. Without modern transport, it is a wicked existence. I forget where I say the stat, but I read somewhere that the typical 3rd world farm is the size of a typical housing lot here in the States.

Dr. Medaille,
Tuition is a capitation tax. If we replace government with Uncle Henry, this becomes clear. Why it is significant is that tuition distorts real demand for education. Rather than local businesses and communities deciding what education is needed in their communities, schools respond to the demands of uninformed students about what they think the community demands. The process of making schools funded by tuition is what makes the market dumb. That the initial tuition is collected by Uncle Sam in a different way to be distributed still makes it dumb money.

John Médaille Monday, January 19, 2009 at 1:49:00 PM CST  

Lord Marchmaine (I assume you are of a noble family, like Waugh's Marchmaines), I am somewhat perplexed that you ascribe to me two things I did not say, both of which I have explicitly denied.

1. I have never said the state owns all of the land, although I have pointed to instances where this was the case: the Feudal system and several georgist states. What I have said is that ground rent is due to the community and is the community's natural income. But in these cases, the state does not "own" the land as a freeholder does; it is only the ground rents that socialized, not the actual produce of the land.

2. I cannot see how you got, from a chapter titled "Fictitious Commodities: Land" that I thought land was a real commodity. I was a great pains to show that land could never be a real commodity because the supply is fixed and not regulated by the price, which is what happens with real commodities.

But it is precisely to contribute to what you call "intangibles" and what I call "the entire purpose of an economic system" that we introduce the subject of land, because land is the most basic of economic relationships. All other economic outcomes will depend on the laws of property, which vary widely from culture to culture.

In our culture and system, the owner of the land appropriates the ground rent, while the state appropriates a portion of the fruits of human labor. This is backwards, and contributes to the instability of the "intangibles" you speak of. Without the unearned wealth of capital gains in land, we would not have the urban sprawl, the extensive suburbanization, and the threat to the farmland on the periphery.

It is merely factual to point out that the king of England did "own" all the land, but not the use of the land; that was held in fief from the king, in tenancy. This is technically true even today; titles in land are "fee simple," that is, in fief. Although the terminology has long since diverged from the actual usage. Still, it is curious that we do not have a pure allodial deed, even though the allodium is the norm.

Wherever you have a free market in land, the Law of Rents will operate. The only way around it is to prevent a market in land. This was part of English law until the 12th century, although they got around it by sub-infeudation, a sort of quasi-market in land. And in ancient Hebrew law, the land could not be sold, but only leased until the next Sabbath year. "You shall not sell the land in perpetuity, for the land is mine, says the Lord; with me you are but aliens and tenants." (Deuteronomy, I forget where). But here we encounter a contradiction: in order to prevent the law of rents from operating, you would have to turn over control of the land market to the state. In other words, in order to avoid socializing some income stream, you would have to socialize the market itself, and have the gov't allocate land. I don't want to go there.

You point to the practical problem of the person who has a holding in a village, and vast city grows up around him. In such a case, the ground rent will force him to develop the property or to sell. However, this is a prudential problem with prudential solutions. For example, the tax may be deferred until the land is sold, at which time the capital gains will go to the community, which is the author of the gains. In fact, we do something like this in Texas. Whether it is actually a good idea, or a good idea in all cases, is a prudential question and depends on specific circumstances.

I suspect that you are most concerned with the city gobbling up rural land and small farms. But this is what happens today. It is the fact that city land can be profitably held off the market that leaves so much city land under- and un-developed and forces developers to the periphery. When this unearned profit is removed, the only way to profit from land is to use it, and land that cannot be used by its owner will be abandoned or sold to someone who can. This takes the pressure off the periphery.

I hope this addresses your concerns.

John Médaille Monday, January 19, 2009 at 1:56:00 PM CST  

Mr. Forrest. It is "Mr." Médaille, not "Dr.," or maybe "Master Médaille," since that is what my degree is. I like the latter, since it has a vaguely kinky and threatening air about it, although I doubt I could get my wife to use that title towards me.

I confess I am not at all clear how tuition misdirects education, or even that the student (which often means his parents) is unaware of where the real opportunities are. Of course, this is more about training then education. Maybe you could give me some example of an alternative system?

Anonymous,  Monday, January 19, 2009 at 2:25:00 PM CST  

Master Medaille sounds like you should be cutting your next rap album. ;-)

The examples I would give would be American education before public bussing, Canada, and much of Europe. These systems pay/paid for their schools through property taxes, including the parochial ones in many cases. Even in the case of parish and other church schools, they were predominantly paid for out of a quasi-income tax, the tithe. IIRC, prior to the modern era education in Asia was considered primarily a private good. Yes, some Europeans have moved to a per student subsidy (tuition by any other name, just a matter of who pays.)

Perhaps an analogy would help. Many people argue that the EITC is good for the same reason that you believe a tuition voucher would be good: it allows people to afford what they otherwise couldn't. In the long run, the EITC and other public aid is no longer helpful because costs have risen. Perhaps it is people living in places they should have left long ago. Whatever the reason, a market distortion is created that eventually consumes the subsidy. I would expect the same thing to happen with tuition vouchers. This has happened with higher education and its grant and loan programs. I don't know why we wouldn't expect it to happen to elementary or secondary education.

Fundamentally though, I believe it confuses a public good with a private good. Education certainly provides personal enrichment, but its value is in its improvement to society. A low cost education available to the masses is a great benefit to society, allowing the poor to rise to their proletarian peer's level.

John Médaille Monday, January 19, 2009 at 10:17:00 PM CST  

I think a distributist rap group would be super-cool, except that I don't look good in baggy pants.

I completely agree that education is a common good to be funded from the public purse. Indeed, one of the reasons that night is coming is that the education system is completely dysfunctional, and that applies to Harvard as much as to the inner-city schools.

But I don't understand why you think that people controlling the schools would lead to bad choices.

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