Burden on the Economy

We typically say that taxes are a burden on the economy. But this is not universally true. There is one form of taxation which does not burden the economy in the least, though it does disadvantage a class of people who are currently given a peculiar privilege: the right to collect economic rent on land. One might think that this class is so large that there is nothing wrong with this form of privilege. One might think that since 70% of us ostensibly belong to this class, it really isn't a problem. This is a major cause of many of our most serious social and economic and justice problems, and were we to reach a point where a significant minority of us fully understood the ramifications, we would be on our way to solving those problems.

And the disadvantage that falls on that class is something like the disadvantage that fell on southern slaveholders when chattel slavery was ended. Should we concern ourselves with that?

Much of the economic value of land is in our central business districts, and ownership of those sites is concentrated in relatively few portfolios.

Henry George: The Condition of Labor — An Open Letter to Pope Leo XIII in response to Rerum Novarum (1891)

Nor do we hesitate to say that this way of securing the equal right to the bounty of the Creator and the exclusive right to the products of labor is the way intended by God for raising public revenues. For we are not atheists, who deny God; nor semi-atheists, who deny that he has any concern in politics and legislation.

It is true as you say — a salutary truth too often forgotten — that “man is older than the state, and he holds the right of providing for the life of his body prior to the formation of any state.” Yet, as you too perceive, it is also true that the state is in the divinely appointed order. For He who foresaw all things and provided for all things, foresaw and provided that with the increase of population and the development of industry the organization of human society into states or governments would become both expedient and necessary.

No sooner does the state arise than, as we all know, it needs revenues. This need for revenues is small at first, while population is sparse, industry rude and the functions of the state few and simple. But with growth of population and advance of civilization the functions of the state increase and larger and larger revenues are needed.

Now, He that made the world and placed man in it, He that pre-ordained civilization as the means whereby man might rise to higher powers and become more and more conscious of the works of his Creator, must have foreseen this increasing need for state revenues and have made provision for it. That is to say: The increasing need for public revenues with social advance, being a natural, God-ordained need, there must be a right way of raising them — some way that we can truly say is the way intended by God. It is clear that this right way of raising public revenues must accord with the moral law.

Hence:

It must not take from individuals what rightfully belongs to individuals.

It must not give some an advantage over others, as by increasing the prices of what some have to sell and others must buy.

It must not lead men into temptation, by requiring trivial oaths, by making it profitable to lie, to swear falsely, to bribe or to take bribes.

It must not confuse the distinctions of right and wrong, and weaken the sanctions of religion and the state by creating crimes that are not sins, and punishing men for doing what in itself they have an undoubted right to do.

It must not repress industry. It must not check commerce. It must not punish thrift. It must offer no impediment to the largest production and the fairest division of wealth.

Let me ask your Holiness to consider the taxes on the processes and products of industry by which through the civilized world public revenues are collected — the octroi duties that surround Italian cities with barriers; the monstrous customs duties that hamper intercourse between so-called Christian states; the taxes on occupations, on earnings, on investments, on the building of houses, on the cultivation of fields, on industry and thrift in all forms. Can these be the ways God has intended that governments should raise the means they need? Have any of them the characteristics indispensable in any plan we can deem a right one?

All these taxes violate the moral law. They take by force what belongs to the individual alone; they give to the unscrupulous an advantage over the scrupulous; they have the effect, nay are largely intended, to increase the price of what some have to sell and others must buy; they corrupt government; they make oaths a mockery; they shackle commerce; they fine industry and thrift; they lessen the wealth that men might enjoy, and enrich some by impoverishing others.

Yet what most strikingly shows how opposed to Christianity is this system of raising public revenues is its influence on thought.

Christianity teaches us that all men are brethren; that their true interests are harmonious, not antagonistic. It gives us, as the golden rule of life, that we should do to others as we would have others do to us. But out of the system of taxing the products and processes of labor, and out of its effects in increasing the price of what some have to sell and others must buy, has grown the theory of “protection,” which denies this gospel, which holds Christ ignorant of political economy and proclaims laws of national well-being utterly at variance with his teaching. This theory sanctifies national hatreds; it inculcates a universal war of hostile tariffs; it teaches peoples that their prosperity lies in imposing on the productions of other peoples restrictions they do not wish imposed on their own; and instead of the Christian doctrine of man’s brotherhood it makes injury of foreigners a civic virtue.

“By their fruits ye shall know them.” Can anything more clearly show that to tax the products and processes of industry is not the way God intended public revenues to be raised?

But to consider what we propose — the raising of public revenues by a single tax on the value of land irrespective of improvements — is to see that in all respects this does conform to the moral law.

Let me ask your Holiness to keep in mind that the value we propose to tax, the value of land irrespective of improvements, does not come from any exertion of labor or investment of capital on or in it — the values produced in this way being values of improvement which we would exempt. The value of land irrespective of improvement is the value that attaches to land by reason of increasing population and social progress. This is a value that always goes to the owner as owner, and never does and never can go to the user; for if the user be a different person from the owner he must always pay the owner for it in rent or in purchase-money; while if the user be also the owner, it is as owner, not as user, that he receives it, and by selling or renting the land he can, as owner, continue to receive it after he ceases to be a user.

Thus, taxes on land irrespective of improvement cannot lessen the rewards of industry, nor add to prices,* nor in any way take from the individual what belongs to the individual. They can take only the value that attaches to land by the growth of the community, and which therefore belongs to the community as a whole.

* As to this point it may be well to add that all economists are agreed that taxes on land values irrespective of improvement or use — or what in the terminology of political economy is styled rent, a term distinguished from the ordinary use of the word rent by being applied solely to payments for the use of land itself — must be paid by the owner and cannot be shifted by him on the user. To explain in another way the reason given in the text: Price is not determined by the will of the seller or the will of the buyer, but by the equation of demand and supply, and therefore as to things constantly demanded and constantly produced rests at a point determined by the cost of production — whatever tends to increase the cost of bringing fresh quantities of such articles to the consumer increasing price by checking supply, and whatever tends to reduce such cost decreasing price by increasing supply. Thus taxes on wheat or tobacco or cloth add to the price that the consumer must pay, and thus the cheapening in the cost of producing steel which improved processes have made in recent years has greatly reduced the price of steel. But land has no cost of production, since it is created by God, not produced by man. Its price therefore is fixed —

1 (monopoly rent), where land is held in close monopoly, by what the owners can extract from the users under penalty of deprivation and consequently of starvation, and amounts to all that common labor can earn on it beyond what is necessary to life;
2 (economic rent proper), where there is no special monopoly, by what the particular land will yield to common labor over and above what may be had by like expenditure and exertion on land having no special advantage and for which no rent is paid; and,
3 (speculative rent, which is a species of monopoly rent, telling particularly in selling price), by the expectation of future increase of value from social growth and improvement, which expectation causing landowners to withhold land at present prices has the same effect as combination.

Taxes on land values or economic rent can therefore never be shifted by the landowner to the land-user, since they in no wise increase the demand for land or enable landowners to check supply by withholding land from use. Where rent depends on mere monopolization, a case I mention because rent may in this way be demanded for the use of land even before economic or natural rent arises, the taking by taxation of what the landowners were able to extort from labor could not enable them to extort any more, since laborers, if not left enough to live on, will die. So, in the case of economic rent proper, to take from the landowners the premiums they receive, would in no way increase the superiority of their land and the demand for it. While, so far as price is affected by speculative rent, to compel the landowners to pay taxes on the value of land whether they were getting any income from it or not, would make it more difficult for them to withhold land from use; and to tax the full value would not merely destroy the power but the desire to do so.

To take land values for the state, abolishing all taxes on the products of labor, would therefore leave to the laborer the full produce of labor; to the individual all that rightfully belongs to the individual. It would impose no burden on industry, no check on commerce, no punishment on thrift; it would secure the largest production and the fairest distribution of wealth, by leaving men free to produce and to exchange as they please, without any artificial enhancement of prices; and by taking for public purposes a value that cannot be carried off, that cannot be hidden, that of all values is most easily ascertained and most certainly and cheaply collected, it would enormously lessen the number of officials, dispense with oaths, do away with temptations to bribery and evasion, and abolish man-made crimes in themselves innocent.

But, further: That God has intended the state to obtain the revenues it needs by the taxation of land values is shown by the same order and degree of evidence that shows that God has intended the milk of the mother for the nourishment of the babe.

See how close is the analogy. In that primitive condition ere the need for the state arises there are no land values. The products of labor have value, but in the sparsity of population no value as yet attaches to land itself. But as increasing density of population and increasing elaboration of industry necessitate the organization of the state, with its need for revenues, value begins to attach to land. As population still increases and industry grows more elaborate, so the needs for public revenues increase. And at the same time and from the same causes land values increase. The connection is invariable. The value of things produced by labor tends to decline with social development, since the larger scale of production and the improvement of processes tend steadily to reduce their cost. But the value of land on which population centers goes up and up. Take Rome or Paris or London or New York or Melbourne. Consider the enormous value of land in such cities as compared with the value of land in sparsely settled parts of the same countries. To what is this due? Is it not due to the density and activity of the populations of those cities — to the very causes that require great public expenditure for streets, drains, public buildings, and all the many things needed for the health, convenience and safety of such great cities? See how with the growth of such cities the one thing that steadily increases in value is land; how the opening of roads, the building of railways, the making of any public improvement, adds to the value of land. Is it not clear that here is a natural law — that is to say a tendency willed by the Creator? Can it mean anything else than that He who ordained the state with its needs has in the values which attach to land provided the means to meet those needs? ... read the whole letter

Charles B. Fillebrown: A Catechism of Natural Taxation, from Principles of Natural Taxation (1917)

Q22. What is privilege?
A. Strictly defined, privilege is, according to the Century Dictionary, "a special and exclusive power conferred by law on particular persons or classes of persons and ordinarily in derogation of the common right."

Q23. What is today the popular conception of privilege?
A. That it is the law-given power of one man to profit at another man's expense.

Q24. What are the principal forms of privilege?
A. The appropriation by individuals, or by public service corporations, of the net rent of land created by the growth and activity of the community without payment for the same. Also, the less important privileges connected with patents, tariff, and the currency.

Q25. Where in does privilege differ from capital?
A. Capital is a material thing, a product of labor, stored-up wages; an instrument of production paid for in human labor, and destined to wear out. Capital is the natural ally of labor, and is harmless except as allied to privilege. Privilege is none of these, but is an intangible statutory power, an unpaid-for and perpetual lien upon the future labor of this and succeeding generations. Capital is paid for and ephemeral. Privilege is unpaid for and eternal. A man accumulated in his profession $5,000 capital, which he invested in land in Canada. Ten years later he sold the same land for $200,000. Here is an instance of $5,000 capital allied with $195,000 privilege. This illustrates that privilege and not capital is the real enemy of labor.

Q26. How may franchises be treated?
A. Franchise privileges may be abated, or gradually abolished by lower rates, or by taxation, or by both, in the interest of the community.

Q27. Why should privilege be especially taxed?
A. Because such payment is fairly due from grantee to the grantor of privilege and also because a tax upon privilege can never be a burden upon industry or commerce, nor can it ever operate to reduce the wages of labor or increase prices to the consumer.

Q28. How are landlords privileged?
A. Because, in so far as their land tax is an "old" tax, it is a burdenless tax, and because their buildings' tax is shifted upon their tenants; most landlords who let land and also the tenement houses and business blocks thereon avoid all share in the tax burden.

Q29. How does privilege affect the distribution of wealth?
A. Wealth as produced is now distributed substantially in but two channels, privilege and wages. The abolition of privilege would leave but the one proper channel, viz., wages of capital, hand, and brain.

... read the whole article

Peter Barnes: Capitalism 3.0 — Chapter 7: Universal Birthrights (pages 101-116)

The Idea of Birthrights

John Locke’s response to royalty’s claim of divine right was the idea of everyone’s inherent right to life, liberty, and property. Thomas Jefferson, in drafting America’s Declaration of Independence, changed Locke’s trinity to life, liberty, and the pursuit of happiness. These, Jefferson and his collaborators agreed, are gifts from the creator that can’t be taken away. Put slightly differently, they’re universal birthrights.

The Constitution and its amendments added meat to these elegant bones. They guaranteed such birthrights as free speech, due process, habeas corpus, speedy public trials, and secure homes and property. Wisely, the Ninth Amendment affirmed that “the enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.” In that spirit, others have since been added.

If we were to analyze the expansion of American birthrights, we’d see a series of waves. The first wave consisted of rights against the state. The second included rights against unequal treatment based on race, nationality, gender, or sexual orientation. The third wave — which, historically speaking, is just beginning — consists of rights not against things, but for things — free public education, collective bargaining for wages, security in old age. They can be thought of as rights necessary for the pursuit of happiness.

What makes this latest wave of birthrights strengthen community is their universality. If some Americans could enjoy free public education while others couldn’t, the resulting inequities would divide rather than unite us as a nation. The universality of these rights puts everyone in the same boat. It spreads risk, responsibility, opportunity, and reward across race, gender, economic classes, and generations. It makes us a nation rather than a collection of isolated individuals.

Universality is also what distinguishes the commons sector from the corporate sector. The starting condition for the corporate sector, as we’ve seen, is that the top 5 percent owns more shares than everyone else. The starting condition for the commons sector, by contrast, is one person, one share.

The standard argument against third wave universal birthrights is that, while they might be nice in theory, in practice they are too expensive. They impose an unbearable burden on “the economy” — that is, on the winners in unfettered markets. Much better, therefore, to let everyone — including poor children and the sick — fend for themselves. In fact, the opposite is often true: universal birthrights, as we’ll see, can be cheaper and more efficient than individual acquisition. Moreover, they are always fairer.

How far we might go down the path of extending universal birthrights is anyone’s guess, but we’re now at the point where, economically speaking, we can afford to go farther. Without great difficulty, we could add three birthrights to our economic operating system: one would pay everyone a regular dividend, the second would give every child a start-up stake, and the third would reduce and share medical costs. Whether we add these birthrights or not isn’t a matter of economic ability, but of attitude and politics.

Why attitude? Americans suffer from a number of confusions. We think it’s “wrong” to give people “something for nothing,” despite the fact that corporations take common wealth for nothing all the time. We believe the poor are poor and the rich are rich because they deserve to be, but don’t consider that millions of Americans work two or three jobs and still can’t make ends meet. Plus, we think tinkering with the “natural” distribution of income is “socialism,” or “big government,” or some other manifestation of evil, despite the fact that our current distribution of income isn’t “natural” at all, but rigged from the get-go by maldistributed property.

The late John Rawls, one of America’s leading philosophers, distinguished between pre distribution of property and re distribution of income. Under income re distribution, money is taken from “winners” and transferred to “losers.” Understandably, this isn’t popular with winners, who tend to control government and the media. Under property pre distribution, by contrast, the playing field is leveled by spreading property ownership before income is generated. After that, there’s no need for income redistribution; property itself distributes income to all. According to Rawls, while income re distribution creates dependency, property predistribution empowers.

But how can we spread property ownership without taking property from some and giving it to others? The answer lies in the commons — wealth that already belongs to everyone. By propertizing (without privatizing) some of that wealth, we can make everyone a property owner.

What’s interesting is that, for purely ecological reasons, we need to propertize (without privatizing) some natural wealth now. This twenty-first century necessity means we have a chance to save the planet, and as a bonus, add a universal birthright. ... read the whole chapter

Peter Barnes: Capitalism 3.0 — Chapter 9: Building the Commons Sector (pages 135-154)

According to a near-unanimous consensus of scientists, the world is very close to a tipping point on atmospheric carbon: we must drastically curtail our carbon burning or climate hell will soon break loose. This means every nation must install economy-wide valves for reducing their carbon use. I described earlier how America might do this using a carbon, or sky trust. Since we can’t halt global warming by ourselves, however, the necessary complement to such an American trust is a global trust.

A global carbon trust would require national governments to recognize that, just as they can, and should, delegate internal trusteeship duties to trusts, so should they delegate global trusteeship duties. The alternative, I’d argue, is paralysis in the face of clear and present danger.

Consider the long and tortuous climate negotiations that began in the early 1990s. They produced, first, a toothless pledge by all nations — the Rio Convention of 1992 — to voluntarily reduce their greenhouse gas emissions to the 1990 level by 2010. Five years later, they produced a slightly toothier protocol in Kyoto, which took another five years to ratify and translate into operational rules. An equally prolonged negotiation now looms for the successor to Kyoto, which expires in 2012.

No doubt these negotiations could move faster if the current U.S. administration weren’t so obstinately opposed to them. But the deeper problem is that nearly two hundred sovereign nations are trying to negotiate a deal that satisfies everyone. The process is inherently cumbersome, and not surprisingly, the results fall far short of what scientists say is necessary. Perhaps, therefore, it’s time to delegate. I can imagine a global atmosphere trust working something like this. It would be governed by a smallish board of trustees and a general membership consisting of all signatory nations. The general membership would appoint the trustees. There might be, as in the U.N. Security Council, a number of seats reserved for “great powers” (in this case, large emitters) and another number set aside for regions. However, once trustees are appointed, their loyalty would shift from individual nations or regions to future generations. This is critical.

The trustees would decide, based on peer-reviewed scientific evidence, where to set a global cap on carbon emissions. Each year, they’d issue tradeable carbon emission permits up to that year’s limit. A portion of these permits (initially, a majority) would be distributed at no cost to participating nations based on a pre-agreed formula. The remainder would be auctioned by the trust, with the revenue used to remediate damage caused by climate change and aid the inevitable victims. The trust would determine on a yearly basis how many permits were needed for these purposes, and how the remediation funds would be spent.

The trustees would make decisions by majority vote, with no vetoes. Like a court, they’d explain their decisions in writing, showing exactly how they protect future generations. The general membership could override a trustee decision by, say, a two-thirds majority. In this way, signatory nations could put short-term interests over long-term ones, but they’d have to do so explicitly, and implicitly admit to stealing or borrowing from future generations.

The knotty question is, What formula should be used to distribute carbon emission permits among nations? The key to crafting such a formula, given the disparate interests of so many nations, is to ground it on some universal principle of equity. The Kyoto Protocol didn’t do this; it was a hodgepodge of deals and escape hatches aimed at pleasing the United States, which in the end didn’t ratify anyway. The next international regime, however, must appeal to the poor and the up-and-coming, as well as to the United States and other developed countries. Without an organizing principle based on equity, it’s hard to see how any deal can be reached.

Fortunately, an equitable organizing principle has been advanced: it’s known as contract and converge. Here’s how it would work.

First, an overall reduction schedule would be agreed to; this is the contract part of the equation. Then, rights to the global atmospheric commons would be divided among nations in proportion to their populations — in other words, one person, one share.

However, absolute proportionality wouldn’t kick in for a decade or two, during which time the allocation formula would converge toward proportionality. The rate of convergence would be a topic for negotiation; the goal of per capita equity would be accepted at the outset.

Before and after convergence, poor and populous countries with more permits than emissions could sell their excess permits to rich and relatively underpopulated countries that are short on them. In this way, nations could pollute at different levels, with overusers of the atmosphere paying underusers for the privilege. Americans could, in other words, extend our present level of carbon use for another decade or so, but we’d have to pay poor countries to do so.

Would a global atmospheric trust be too great a surrender of national sovereignty? I think not. We’re not talking about world government here. We’re talking about a trust to manage a specific worldwide commons. The one and only job of that trust would be to set and enforce limits on certain emissions into that commons. Some loss of sovereignty is involved, but less than we’ve already yielded to the World Trade Organization. Compared to the benefit we and all nations would gain — a stabilized climate — our loss of sovereignty would be small potatoes.

If a global atmosphere trust could be established, it would be a watershed twenty-first-century event. Geopolitically, it could lay the foundation for a harmonious century, much as the Versailles Treaty paved the way for a disharmonious one in the twentieth. It would also help the world deal gracefully with the decline in global oil production that experts say is imminent.

Economically, a global atmosphere trust would spur some important changes. Corporations the world over would immediately pour money into energy efficiency and noncarbon energy infrastructure. There’d be a rush to deploy new technologies. Economies — including ours — would boom, not despite higher carbon prices, but because of them.

Why would this happen? The simplest reason is that a global atmosphere trust would remove an enormous cloud of uncertainty. Businesses would see the future of carbon burning, and be more confident that a price shock — more damaging than a gradual rise — wouldn’t derail their plans. Such a trust would also remove a major source of international tension — the scramble for declining oil supplies — that could easily lead to war. In addition, the flow of money to poor countries (from sales of emission permits to rich countries) would lift their economies and wages, help U.S. exports and slow U.S. job loss. All these things would ensure that while high-carbon activity declines, low-carbon activity rises at a comparable rate.

But growth in aggregate economic activity isn’t the only benefit we’d see; qualitative improvements would also occur. Thus, as long-distance transport costs rose, manufacturers would shift from global to local production. Farmers would return to practices they used before cheap petrochemicals became available. They’d grow more food organically and sell more through farmers’ markets and urban buying clubs, cutting out middlemen and keeping more of their products’ value. For nonperishables, consumers would shop more on the Internet and less at drive-and-haul malls. Thanks to eBay, Craigslist, and similar services, they’d also buy more secondhand goods and dump fewer into landfills. More workers would ride bikes, jitneys, and trains, and work online from home. Cities would favor footpower, suburbs would reorganize around transit hubs, and new forms of co-housing would spread. All these changes would be profitable and even exciting. And they’d proceed with relative smoothness if we placed the global atmosphere in trust.

On the other hand, if we leave our atmosphere as an unmanaged waste dump, our glorious industrial party will abruptly end, brought to its knees by oil price shocks, climate disasters, or a monetary panic. After that, no one can know what will happen. That’s the stark choice we face. ... read the whole chapter