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Distortions
Joseph Stiglitz: October, 2002, interview
The next important step in understanding Georgist
economics is recognition that each factor of production
has its economic price: the price of labor is wages, the
price of capital is interest, and the price of land is
rent. When any of these prices are
unpaid, distortions result in the economic equilibrium
and problems become manifest in other realms of nature
and society. In neoclassical economics
compensation for the use of labor and capital continue to
be important in the formulas and calculations employed to
explain the economy. But for neoclassical economics,
David Ricardo’s “law of rent” is
essentially ignored and has be come for all practical
purposes an artifact in the history of economics. Rent
continues to exist of course; it is simply uncollected,
left in the hands of those who maintain monopoly control
of certain services of nature, adding to their market
value in ways that distort the balance of markets.
Failure to recognize the importance of land rent
(sometimes called economic rent) is for Georgists
critical to an understanding of the problems of
contemporary economies and economic
analysis.14
...
Rent becomes critically important in Georgist economics, because rent is the increment of market gain that accrues to choice land parcels. This insight arose originally in the context of agricultural societies, where differential qualities of land were recognized by varied payment in rent. An individual’s return on investment was represented by his labor — that was his and his alone to keep. So also were whatever capital goods he acquired through the efforts of his past labor. On the other hand, whenever land offered a higher yield separate from whatever the individual’s labor investment might represent, this constituted a windfall gain above and beyond what might be minimally expected. This is land rent, and it exists even if it isn’t collected. Today, as earlier noted, the greatest land rents derive from their location, grown out of nearby social investment. ... Lastly, one must appreciate that the market value of “land” of every sort is entirely rent, as there is no human factor of labor that accounts for its origination. Services of nature have no prior cost to bring them into production existence — the electromagnetic spectrum, for example, exists regardless of human presence on earth and so presumably does time. Ocean fish, fossil fuels, and heavy metals are all found in nature, not the result of human creation. They are, in 19th century classical economics, the fruits not of man’s labor but of God’s. And it is to God, or at least to God’s representative on earth — the lords and kings — that rent was owed, just as much as it was their role to provide reciprocal services to the tenants of the land. That bargain, so well refined in feudal economic arrangements, was an equilibrium balance, disrupted, one might say, by the annulment of rent collection and the exploitation of land without recognition of its price. The practice effectively ended with what in Britain is known as the “enclosure movement” of the early Tudor reign, driving the peasants off the land into cities to provide cheap labor for the early English industrialists.28 But the theory continued long afterwards. Georgists today argue that land rent should be collected from titleholders so that it is not left to render economic distortions. This in turn affects the price of labor and the price of money. Government’s role, whatever else it does, is at the very least responsible for defending the commons, to ascertain titles and to collect rent. Although there are many differences about the proper role, scope and domain of government among Georgist adherents, the collection of rent and the supervision of open markets is central to its tenets. ... Any failure to pay back that increment to society, or of government to recapture it in the form of taxes, constituted not only an injustice to the poor but a distortion of economic equilibrium. He witnessed first hand the perverted configurations of land use that today we know as sprawl development— even in his time it was apparent that urban, high value land parcels were being held off the market for speculative gain by meretricious interests. He witnessed also the boom and bust cycles of the land markets on account of such speculation, effects which spread far wider than just land prices. These inevitable cycles would dislocate labor and capital supply, giving impetus to the impoverishment and suffering which he himself had experienced. He understood that holding the most strategically valuable landsites out of circulation constituted a burden on the economy. He understood that financial resources spent to pay exorbitant land prices had a depressing effect on capital and labor. And because government was taxing labor and capital instead of recovering land rent, it was further restricting the job market and the growth of capital. He realized that people who captured monopoly control of strategically valuable landsites could do so because they were privy to information prior to its public release. It was not by any means his insight alone; it was captured also by George Washington Plunkett writing at the same time:
There’s an honest graft,
and I’m an example of how it works. I might sum up
the whole thing by sayin’: “I seen my
opportunities and I took ‘em.”
Just let me explain by examples. My party’s in power in the city, and it’s goin’ to undertake a lot of public improvements. Well, I’m tipped off, say, that they’re going to lay out a new park in a certain place. I see my opportunity and I take it. I go to that place and I buy up all the land I can in the neighborhood. Then the board of this or that makes its plan public, and there is a rush to get my land, which nobody cared particularly for before. Ain’t it perfectly honest to charge a good price and make a profit on my investment and foresight? Of course, it is. Well, that’s honest graft. 32
32William L. Riordan, Plunkett of Tammany
Hall. New York: Dutton, 1963, p. 3.
All society needed to do was to collect the economic rent from landholders as its rightful due, a solution that became part of the subtitle of his book, “the remedy.” Taxing the land (or, alternatively, collecting the economic rent) was something common citizens could understand. ... During the late 19th century, the burden of various direct taxes was not so large that many common people felt their acute impact. It was, however, a time of extreme disparities between the poor and the wealthy, and the single tax was a means by which to redress some of those disparities. It would also foster the availability of employment by making labor more attractive relative to land and capital investment. In a word, people would more likely have to earn their money. The fruits of land wealth, distributed among people equally in the form of government services, would go far toward both enhancing economic opportunity and correcting inequality. Georgists today adhere to much the same points of view, although there are some significant differences. George himself was an ardent free trader, mainly because he believed that the single tax should supplant tariffs. After Ricardo, he accepted the idea of comparative advantage that arose from trade, but only after land (resource) rents were collected so as to preclude the raping of the natural environments of countries rich in such resources. He also believed that population growth was good — the more the better, and took special pains to refute Malthus. But one should also recall that he was living at a time when the expanse of the American continent was still open to any homesteader who chose to do so. Population growth was not a problem at that time. These elements of George’s thought are inconsequential to his followers today. Yet it is important to note that Georgists are not socialists; they do not subscribe to the view that society should own the means of production. These should remain privately owned by and large (except perhaps as today’s economic theory would call for, i.e., natural monopolies, public goods, and other government instruments). They are, rather, free-marketers in the full sense of the world, even more ardently than many contemporary American conservatives. He believed that removing the accretion of economic rent from landsites would restore self-regulating equilibrium of the marketplace, thus obviating the need for the heavy hand of government controls. ... A tax that is neutral is one that in no way alters the behavior of the markets by its imposition; that is people perform and make choices in the same way as if there was no tax at all.39 Because a tax on “land” broadly defined is inelastic, i.e., has a fixed supply, any tax on this base is completely capitalized in the market price of the land itself. It is, in effect, a tax on the land rent, or a recapture of the land rent by government in the name of society, just as the rent is a creation of that society.
39"The striking result is that a tax on
rent will lead to no distortions or economic
inefficiencies. Why not? Because a tax on pure
economic rent does not change anyone's economic behavior.
Demanders are unaffected because their price is
unchanged. The behavior of suppliers is unaffected
because the supply of land is fixed and cannot react.
Hence, the economy operates after the tax exactly as it
did before the tax--with no distortions or inefficiencies
arising as a result of the land tax." P. Samuelson and W.
D. Nordhaus, Economics, 16th ed., p. 250.
A land tax is efficient because there is no economic distortion of market choices as a consequence of its neutrality. This means that there is no wasted economic behavior in the form of excess burden or deadweight loss typically associated with other tax designs. As an example of the inefficiencies of other taxes, for example, one might consider the altered behavior that occurs in consequence of the presence of the income tax or the sales tax. This deadweight loss in American and British economies has been estimated to be roughly 20% of the national domestic product in each nation. Put differently, were there no deadweight loss as a result of the tax structure, the society would essentially be 20% more productive — and 20% richer in the aggregate.40
40Fred Harrison (Ed.), The Losses of Nations:
Deadweight Politics versus Public Rent Dividends, London:
Othila, 1998, and Dale Jorgenson and Kun-Young Yun,
“The Excess Burden of Taxation in the United
States,” Journal of Accounting, Auditing, and
Finance, fall, 1991. Harrison, et al. calculate that the
deadweight loss of the current tax system of United
States is a trillion dollars annually. Nicolaus Tideman
et al. have modeled “The Avoidable Excess Burden of
U.S. Broadbased Taxes,” in Public Finance Review
(September, 2002), showing a “net gain of about
$10,000 per worker (16% of NDP) in the first year, rising
to $17,800 (23.7% of NDP) after 20 years for the most
productive tax reform, which involves collecting 90% of
the rent of land and using the income tax as a residual
tax. When the sales tax is used as the residual tax, the
gain per worker is about $3,300 less.” This and
other work is summarized in “The Gains from Taxing
Land,” in Geophilos, No.03(1) (Spring, 2003), pp.
56-60. See also Alan Durning notes that “Complying
[with the personal income tax alone] takes Americans 5
billion hours each year. For every dollar raised, U.S.
taxpayers spend nine cents obeying the law. Cheating is
widespread; roughly one-fifth of income goes
unreported.” Alan Durning and Yoram Bauman, Tax
Shift: How to Help the Economy, Improve the Environment,
and Get the Tax Man Off Our Backs, Seattle: Northwest
Environment Watch, April, 1998. p. 17. This is further
corroborated in Donald L. Barlett & James B. Steele,
The Great American Tax Dodge (Boston: Little, Brown &
Co., 2000), where the authors note (p. 23) that the
proportion of U.S. taxpayers deliberately engaged in
cheating on their income taxes now approaches
“between one -third and one-half of the tax-paying
population.”... read the whole
article
Bill Batt: Painless Taxation
Martin Luther King, Jr: Where Do We Go From Here? (1967)
Bill Batt: How the Railroads Got Us On the Wrong Economic Track
The Costs of Poor Taxes Society pays a price for not adopting taxes which follow the principles developed over the centuries. Here I want only to show how the resulting distortions that arose in the use of land ultimately caused the railroads to fail in being able to serve society. While in the short term the railroads certainly saved themselves from having to pay taxes on their vast land holdings the most valuable of which were right around their own investment in tracks and stations they ultimately lost the frequency of traffic which that tax structure would have induced. This is because the population and improvement densities needed to make public transit traffic economically viable did not come about. ... read the whole article Weld Carter: A Clarion Call to Sanity, to Honesty, to Justice (1982)
Thus, the benefits of a tax-supported
public work accrued once more not to the benefit of the
public at large, but to that of a very limited and
narrowly defined class, those who were rich enough to own
land in that location.
There are undoubtedly many other
problems to be resolved before the ills of our society are
cured; but what many do not recognize and understand is the
primacy of the adoption of land value taxation over all
these other corrections. The reason for that can be very
simply stated: If any of these other measures already
adopted have no merit and have only added to the burden of
our problems, then they are disqualified at the outset. On
the other hand, if they are of themselves beneficial, any
benefit from them will be immediately capitalized into land
values and will therefore exacerbate the very problems
which otherwise might be helped toward a cure. Thus it
is that our first step toward any possible remedy for the
awesome plight into which we have been led increasingly
over the recent years must be the adoption of land value
taxation. ... read the
whole essay Weld Carter: An Introduction to Henry George What is the law of human progress? George saw ours alone among the civilizations of the world as still progressing; all others had either petrified or had vanished. And in our civilization he had already detected alarming evidences of corruption and decay. So he sought out the forces that create civilization and the forces that destroy it. He found the incentives to progress to be the desires inherent in human nature, and the motor of progress to be what he called mental power. But the mental power that is available for progress is only what remains after nonprogressive demands have been met. These demands George listed as maintenance and conflict. In his isolated state, primitive man's powers are required simply to maintain existence; only as he begins to associate in communities and to enjoy the resultant economies is mental power set free for higher uses. Hence, association is the first essential of progress: And as the wasteful expenditure of mental power in conflict becomes greater or less as the moral law which accords to each an equality of rights is ignored or is recognized, equality (or justice) is the second essential of progress. Thus association in equality is the law of progress. Association frees mental power for expenditure in improvement, and equality, or justice, or freedom -- for the terms here signify the same thing, the recognition of the moral law -- prevents the dissipation of this power in fruitless struggles. He concluded this phase of his analysis of civilization in these words: "The law of human progress, what is it but the moral law? Just as social adjustments promote justice, just as they acknowledge the equality of right between man and man, just as they insure to each the perfect liberty which is bounded only by the equal liberty of every other, must civilization advance. Just as they fail in this, must advancing civilization come to a halt and recede..." However, as the primary relation of man is to the earth, so must the primary social adjustment concern the relation of man to the earth. Only that social adjustment which affords all mankind equal access to nature and which insures labor its full earnings will promote justice, acknowledge equality of right between man and man, and insure perfect liberty to each. This, according to George, was what the single tax would do. It was why he saw the single tax as not merely a fiscal reform but as the basic reform without which no other reform could, in the long run, avail. This is why he said, "What is inexplicable, if we lose sight of man's absolute and constant dependence upon land, is clear when we recognize it."... read the whole article
Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent
What is Land
Rent?
John Houseman, an actor perhaps most widely known as Professor Kingsfield in the long-running TV series, The Paper Chase, later became the pitchman for Smith Barney. In that advertisement, his tag line was "We make money the old-fashioned way -- we earn it." That we should earn our money rather than live off the efforts of others seems a simple enough moral tenet. But it seems to have lost its cogency in contemporary economic thought. More than a century ago John Stuart Mill noted that
Landlords grow richer in their
sleep without working, risking or economizing. The
increase in the value of land, arising as it does from
the efforts of an entire community, should belong to the
community and not to the individual who might hold
title.(1)
Today, on the other hand, the unearned surplus which classical economists called rent attaches to monopoly titles -- largely the scarce goods and services of nature like locational sites, and has totally disappeared from economic calculus. Yet this is the primary vehicle by which wealth is captured by economic elites. If government recaptured the socially-created economic rent from land sites that comes from the investment of the collective community, we could eliminate other taxes that are both more onerous and create a drag on the economy that makes us all poorer. There are many websites that explain how this can be done, ways that not only beget greater economic efficiency but also bring about economic justice.(2) The surplus economic rent that derives from community effort is its rightful entitlement. Where does economic rent most tend to lodge? In the center of cities where people are. And also proximate to heavy social investments -- such as railroad and metro stations, public and office buildings, hotels and conference centers, and anywhere there is high traffic in personal or market exchanges. The land value in New York City is higher than all the rest of the New York state combined, even though it is only a minute fraction of the area. One 9-acre site south of the United Nations Building was recently sold to a developer intent on building luxury condominiums facing the East River. That site sold for $680 million, and would have been higher had the existing structure, an obsolete power plant, not have to be razed.(3) Land values in any given area tend to rise and fall together, and tend also to form a contour somewhat comparable to a topographical survey map. In a city's center are the highest value locations, analogous to a mountain peak. Once one departs from that center, land values fall in direct proportion to the value of their use, made more or less attractive by whatever social attributes are provided in the proximate areas. Two illustrations from small and medium sized cities in the United States illustrate the point. Case 1: Ithaca, New York: Tompkins County, where the city of Ithaca sits at the center, has land values many times those within a short walk. Dividing the county land parcels into quintiles, the highest fifth have values of $56,000 per acre and above. The lowest fifth have a value of less than $3,000 per acre. The high value area collectively constitutes only a minute proportion of the total number of square miles because most of it is farm or forest land. [see map]
Case 2: Des Moines, Iowa:
Polk County, where Des Moines sits near the center, has
land values even more disparate between urban and rural
locations. The highest quartile there are those $97,400
per acre and above, the single highest parcel of all
worth an astonishing $31.4 million per acre. Yet, the
lowest quartile, a roughly equal number of far larger
parcels, all have a value of less than $30,000 per acre.
[see map]
... The failure to collect site rent leads to a distortion in land use configurations. If patterns unfolded along the lines of both social preference and economic efficiency, high value landsites would tend to have high value buildings, and low value landsites would tend to be vacant or have very modest buildings. Consistent with this, urban centers sites would tend to have office and commercial use, surrounded by lower-value residential land uses, and still further out would be farms and forests. The ratio of building to land value, land to total value (or for that matter any other ratio between buildings, land, and total values) would be relatively constant throughout a region. Instead, the ratio of land value to total value consistently tends to reveal a patchwork of random development. This inefficient settlement of land sites is what we know as sprawl. ... read the whole article |
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