GREAT E-MAIL FROM TAE LISTENER RON ROSENBERGER
Recently, TAE listener Ron Rosenberger contributed this profound e-mail regarding the current state of the economy:
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I'm not an entrepreneur but listen to your show periodically because it is serious, relevant, and you have a variety of topics.
What intrigues me is over the years you have had many discussions regarding business, economy, politics, taxation, borrowing, and spending but I never heard any resentment against the land owning sector of the economy.
Basically, you have 3 factors of production: labor (mind and hands) applied to land (natural environment) which was the initial economy for many years until we humans became automated and technical making labor so efficient we now have excess labor (capital).
Kind of like a fisherman with a rod or spear, then a net, then a canoe with a net, then a fleet of boats, employees, and a lot of excess fish. Lets not forget the subsistence to barter to money to bytes and chips to replace the value of the fish and pay the employees.
The point is it all boils down to land, labor, and capital. In fact we had just land and labor up to around the 17th century. It is not more complicated then this and I defy any think tank economist to disagree.
Today, land in the US is worth trillions as in Japan and other places. I ask what productive activity do landlords do to gather this wealth? I suspect the folks involved in labor and capital are fronting this operation. Who does all the battling and arguing? Of course, labor and capital. I think Marx started it and we're still at odds.
Oh, the 65 dollar question. Who gets taxed in our current economy? That is correct. Capital and labor pay up. The property tax is almost all on improvements (capital). Very little is on land value. Every other tax is on capital and labor (productive human effort).
What is funny, the Republicans always want to lower taxes on capital and put it on wage and sales while the Democrats are the opposite. When one comprehends why they are both wrong we may move forward.
One example, of what I'm getting at. The techno-brains (labor) and investors (capital) went to the silicon valley and created immense wealth but land values also went up astronomically. There were all kind of stories about some 3 bedroom 1 car Garage home selling for 300,000 or more. A lot of wealth was made by folks who did nothing to create it.
You continually, along with your quests, bring up all these levies on industrious people. Why do people leave Pa? Why do the politicos want to crush entrepreneurship? I'm with you and have the same concerns.
I say draw the rental value from land by taxing land values. Land value is a community derived value. We the taxpayer provide all the amenities (police, schools, roads, bridges, sewers, etc.) that determine the value of land. The landlord reaps the benefit.
Taxing land promotes entrepreneurship because it puts idle land to productive use. No incentive to speculate.
If we taxed land this current mortgage crises would be less severe. (topic for another day)
Taxing land has a neutral effect on the economy where as all the other taxes create problems and are a disincentive like jobs/people running from sales/income/corporate taxes.
The property tax is misunderstood by most people. It is composed of two taxes. One levy on land and the other on improvements. The levy on land is good while the levy on improvements is bad. Taxing improvements means punishing those who want to improve their structures. When you tax land the land cannot run away. It is not a detriment to the economy.
Land is easier to assess then improvements.
States with high property taxes do better then those taxing income and sales.
The fix is easy, just move the millage off improvements and shift it on land value. However, those who disagree think land is capital or property which is impossible. No human created the natural environment. Once you mix your hands with the land the result can then be called property.
By the way, people are not defined as just landlords or laborers or capitalists. Usually we are a combination of all three or two and there are those who rent and own little. I refer to these categories as sectors in the factors of production.
I'm not advocating Communism (govt landlord) nor complete privatization (corporate landlords). Just a recognition there is an obvious community property like the minerals, land, airwaves, water, that no human created. The community deserves a piece of the action as royalties or dividends upon extraction. And, there is an obvious private ownership of property created from nature by entrepreneurs, and they deserve their piece of the action.
Conclusion: Governments should tap the non-productive sector before attempting theft of labor and capital. Spreading taxes on productive human effort while ignoring the non-productive land ownership sector is unjust. Keep in mind a very few own large disproportionate shares of the Earth including here in the USA.
Ron Morris
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Reader Comments (4)
Last week you read an email from a writer who proposed that property taxes be based solely on the amount of land owned rather than on the use of the land or on any structures on the land. He said he did not want to sound like a Communist. However, it appears that is exactly what he would be getting.
Consider the scenario. Taxes would be raised on all vacant land on, say, a per acre basis. This would include that vacant lot you own next door, your wooded acreage in the mountains, the small plot you keep for timber, or the family farm. Most property owners would not be able to afford those new taxes for long. The land would not be saleable because all potential buyers would be aware of the high taxes. Thus the government would soon find itself the owner of vast parcels of vacant or underutilized land. The land would be even more unproductive under government ownership and would be producing zero revenue. The government could not find buyers for the land because of the high taxes. The way for the government to unload this land would be to give the land to those "who always wanted to own land but could not afford it" (in exchange for votes). Another way for the government to divest of the land would be to give it to large organizations who promised to use it to "create good paying jobs" (in exchange for support in the next election).
The only way to reduce property taxes is to reduce the size and appetite of the governmental and quasi-governmental operations that feed from those taxes. No one seems willing to do this.
Dave from the South Hills
Secondly, land would be rented according to the highest bid (with a smoothing function built in, to prevent ornery people with money to burn from bidding up the land of someone they dislike). In this way, the only land that would go unoccupied is land that no one currently needs. Its price would then be extremely low, and even the homeless would be able to homestead it.
Finally, and here's something Mr. Rosenberger did not mention, the rent for the use of such natural resources could pay not only for the valid functions of government, but could provide a guaranteed minimum income for all adult citizens, similar to the ~$1000 per year that Alaskans get from the oil revenues of their "Permanent Fund."
Dave from the South Hills may in knee-jerk fashion call that communism, but it's merely the best way of sharing the earth's natural resource value equally among all citizens. That's the only way to make the earth (or each country's share of it) an economically level playing field.
The proposal to put taxes on land value is not as Dave described, for there would not be more taxes merely on vacant land, but on all land, and there would be lower taxes on everything else. Land values would be derived from assessing market value, as they are now in the property tax. The essential difference is that buildings would be exempt.
Shifting to land value tax, at least from property tax, has been endorsed by many Nobel economists, including Milton Friedman, James Buchanan and Paul Samuelson, who are quite conservative. It has also been endorsed by icons of conservatism and libertarianism throughout history, including John Locke, the French (Laissez Faire) Physiocrats, Adam Smith, William Blackstone, Richard Cobden, John Stuart Mill, Herbert Spencer, William Penn, Thomas Jefferson, Benjamin Franklin, Thomas Paine, Mark Twain, Sun Yat Sen and Chang Kai Shek.
Under the Articles of Confederation, the United States was funded entirely from a tax on each state in proportion to the value of its privately held land. This was offensive to great landed interests, but cherished by the American people. The Whiskey Rebellion was as much about the failure to tax land speculators as it was about taxing Whiskey.
Today, the three countries that score highest on indices of economic freedom also have the highest share of government revenue coming from taxes on landholding. They are Hong Kong, Singapore and Taiwan.
New Hampshire, chosen as the freest state in the country by the Free State Project, gets 2/3 of all its state and local revenue from real estate taxes, a higher share than any other state. There has been a massive migration from northern Massachusetts, where property taxes were curtailed but where income and sales taxes are high, to southern New Hampshire, where there are no general sales or income taxes at all.
The state with the most unaffordable housing in the country is California, which set off a terrible real estate boom by curtailing property taxes with Proposition 13 in 1978. (Foreign interests acquired more California land in the 18 months following Prop 13 than they had accumulated in the entire history of that state.) California is about to become the number one state for real estate foreclosures.
Land value tax is an inherently good local tax, because land does not leave the jurisdiction to escape taxation. It is a key to decentralizing government. It costs ordinary home owners less (over their lifetimes) than any other tax. It keeps real estate prices stable by keeping idle speculators out of the real estate market. It allows for a strong economy by replacing taxes on productivity and by preventing the price of land from being bid up beyond what entrepreneurs would be willing to pay.
Assessing land value requires no data other than demographics and records of real estate transactions. It is the only tax based entirely on public information. It is therefore the only tax that does not require the taxpayer to testify against himself or prove himself innocent. It and property tax are the only taxes that can be enforced without threatening the taxpayer with incarceration for non-compliance.
The core distinction that libertarians (or classical liberals) made was between wealth and privilege. Marxists and reactionary anti-Marxists alike have obliterated that distinction. Wealth is produced by labor and privilege is granted by the state at the expense of others. Marxists want to confiscate wealth, but classical liberals merely wanted people to pay for the privileges they enjoy at the expense of others.
Land value tax charges people from taking up so much land that they deprive others of access to land. More than any other government charge (except, perhaps, Alaska's royalties on oil), it is a charge against privilege. the proposal to tax land values sounds left-wing to those from the right who defend wealth and privilege alike, and sounds right-wing to those from the left who attack wealth and privilege alike.
Such is the nature of our polarized society that ideologues neutralize each other with opposite half-truths, and end up letting amoral bureaucrats and plutocrats broker out compromises based on total untruth.
-ds
The originators of "Laissez Faire" concluded a "ground rent", or "Land Value Tax", was the best remedy for France. Adam Smith reached the same conclusion.
However, the landed gentry in France won out and the King never adopted the Physiocrat's proposal. The blood bath soon followed.
Incidentally, Ben Franklin, Thomas Paine, and Thomas Jefferson all spent time in France and like Adam Smith were convinced of the merits of Land Value Tax.
This concept of Land Value Tax was rooted in the beginnings of capitalism, not communism. It was sidetracked by land owning interests along the way for good reason. Large landowners reap the reward of those who produce.
Where Dave of South Hills might have reasonable concern, is the actual implementation of Land Value Tax. Even though shifting the millage is a simple process, off building to land value, it should not be done overnight. To be fair to current land owners the shift should be done over a period of 10 years or so.