Tax Reform for a Better, Fairer Economy
|January 9, 2007||Posted by Staff under Progress Report, The Progress Report|
Sensible, Much-Needed Improvements to Tax and Monetary Systems
Two Reforms That Will Solve Virtually All Our Economic Problems
The Progress Report is pleased to welcome its newest writer, Todd Altman.
This is the first part of a two-part article in which Altman explores our most-needed reforms. The article will conclude next week.
by Todd Altman
In December 2002, the U.S. unemployment rate stands at 6%, the highest it has been in over eight years. With a labor force of roughly 140 million, that means well over 8 million Americans are unemployed — over 9 million of you count the more than 1 million “discouraged workers” who’ve given up looking for employment. Given the productive capacity of the American workforce, it is clear that there is something seriously wrong with the federal government’s economic policies. How can we turn this around?
I’m convinced that 99% of our economic problems would vanish if we instituted a land-based tax system and a debt-free money system. Unfortunately, there are many in positions of power and influence who routinely deflect calls for meaningful reform by arguing that, despite our economic struggles, America is still a prosperous country, implying that — save for mild tinkering with the status quo — no such reforms are needed. This is misguided at best. While the U.S. is still relatively prosperous overall, it is obvious our economy is not moving in the right direction, and hasn’t for many years. For instance:
In When Corporations Rule the World (p. 298), David Korten reveals that, “From 1973 to 1998 productivity in the United States increased by 33 percent, but the wage of the worker in the middle of the heap — the median wage — declined in constant dollars.”
In 1998, when the so-called economic “boom” of the 90s was at its peak, bankruptcies reached an all-time high.
In 1999, while federal politicians and national media pundits were still insisting we had never had it better, the U.S. Conference of Mayors reported that the demand for emergency food and shelter was on the rise in America’s cities — the growth in the demand for emergency food assistance being the highest it had been in seven years, the growth in demand for emergency housing the highest it had been in five.
In 2000, the Economic Policy Institute and the Center for Budget and Policy Priorities published a joint report called Pulling Apart: A State-by-State Analysis of Income Trends. According to this report, between 1977 and 1999 the after-tax household income of the top 1% rose at least 89.4%, while that of the bottom two-fifths actually fell — the lowest fifth falling at least 7%, the next-lowest fifth falling at least 0.6%.
In 2000, sociologist Lisa A. Keister’s ground-breaking book, Wealth in America: Trends in Wealth Inequality, was published. After an exhaustive analysis, Keister concludes that “inequality of wealth ownership is much more extreme than income inequality.” Specifically, when it comes to net worth, the top 1% of wealth owners own about 40% of all wealth, while the bottom 40% own a mere 0.2%.
In early 2001, a scholastic study was published by the Policy Press entitled, Child Well-Being, Child Poverty and Child Policy in Modern Nations, in which it was revealed that the U.S. has the highest child poverty rate in the industrialized world.
The National Low Income Housing Coalition, which examines housing data each year to determine the extent of the rental housing affordability gap, states at its web site that: “Since 1999, we have examined this gap in every jurisdiction in the country. With discouraging consistency, we learn that the gap widens each year….America’s rental housing crisis for poor families is not new. What is striking in this year’s Out of Reach, however, is that the gap between wages and rents has continued to broaden and deepen. This gap has continued to grow through times of economic expansion as well as recession, in rural areas as well as metropolitan counties, and in all regions of the nation.”
And finally, throughout the late 90s, the largest private employer in the U.S. wasn’t General Motors, AT&T, or even Wal-Mart; it was Manpower Inc. — a temp agency.
Thus, even when the economy was considered the strongest it had been in decades, the U.S. had the highest child poverty rate in the industrialized world; the bottom two fifths were still making less income than they were in 1977 (despite working longer and harder hours); the concentration of wealth and income was higher than ever; more people were going bankrupt than ever; and job insecurity (as measured by the explosion of “temp” jobs) was higher than ever. Of course, now that the economy is weak, this will only get worse.
At the root of all of these economic problems are (1) a corrupt tax system, and (2) an equally corrupt money system.
The Tax System
Our current tax system is primarily responsible for the alarming wealth disparity. To understand why, we first must realize that the three factors of wealth-production are land, labor and capital, and that the returns to these factors are rent, wages and interest. Land refers to the entire material universe excluding humans and their products. Labor refers to the combination of physical and mental talents that human beings contribute to production. Capital refers to wealth used to produce more wealth, i.e., to physical objects such as buildings, tools and machinery.
With those fundamentals in mind, we next must realize that the current tax burden falls primarily on the value of labor and capital and very little on the value of land. This imposes unjust hardships on millions of working men and women in three ways.
First, by falling primarily on labor and capital, it penalizes people the more they put land to productive use, resulting in less jobs and lower wages.
Second, by taxing land values very little, the current system encourages land speculation, a process whereby speculators hold well-situated land out of use in hopes of exacting a ransom price from future developers — hence the unused sites one so often sees in towns and cities. When we consider how many jobs would be created if these sites were put to productive use, we see that these unused sites actually represent a silent form of economic destruction destruction directly attributable to a backwards tax system that penalizes producers the more they put land to productive use, and rewards speculators they more they hold land out of use.
The third way is less obvious, because it involves artificially extending what some economists call the margin of production. The margin of production simply refers to the least productive land currently in use. (Lower quality land beyond the margin is thus “submarginal.”) By encouraging land speculation, the current system produces an artificial scarcity of land. This artificial scarcity drives up land prices to the point of forcing developers to “leap-frog” into the urban fringes where land is still affordable — hence the runaway sprawl that plagues heavily populated areas. In that way, land speculation forces the margin of production to inferior land, thus reducing it to an artificially low level. And since the amount of wages received at the margin of production tends to determine the amount of wages received everywhere else, the more this margin is prematurely extended to submarginal land, the more wages are driven down.
Summarized, the current tax system causes an unjust wealth disparity because it allows landholders to grow rich without working by extracting rental payments from wage-earners — not in exchange for services rendered — but in exchange for mere access to the earth on which all humans must live, yet which none produced; and because it oppresses wage-earners still further by taxing away a crippling percentage of what little income they have left after paying land rent, and by discouraging the very job-creating activities that make it possible for them to earn an income in the first place.
How can we revserse this trend? By shifting the tax burden off labor and capital and onto land rent. To what extent would such a shift boost the economy? In The Losses of Nations (p. 147), economist Nicolaus Tideman estimates that:
“…a shift to public collection of rent as the principal source of public revenue in the U.S. in 1993 would have increased the output of the U.S. economy by $1,602 billion above its actual level for 1993, implying that the U.S. economy is producing only 77 percent of what it could produce with a better tax policy.”
In other words, virtually all the unemployment in the U.S. economy is utterly unnecessary, and could be drastically reduced (if not eliminated) by implementing a land-based tax system.
Some object to this on the grounds that a tax on land rent would simply be shifted by the owners of land to the users of land. Others object that it would penalize production. But economists throughout history, from Adam Smith to Nobel laureate Paul A. Samuelson, have concluded that a tax on land rent does neither of these things:
“A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground.” — Adam Smith, The Wealth of Nations, Bk. 5, Ch. 2, Pt. 2, Art. 1
“Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry….Ground-rents and the ordinary rent of land are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them.” [Emphasis mine] Adam Smith, The Wealth of Nations, Bk. 5, Ch. 2, Pt. 2, Art. 1
“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 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.” [Emphasis original] Paul A. Samuelson, Economics, 16th ed., p. 250
What is even more “striking” is that Samuelson’s remarks are only half true. Not only will a tax on rent lead to no distortions or economic inefficiencies, it will actually stimulate the economy by (1) lowering the entrance barrier into the market place (the entrance barrier being speculative land prices), and (2) encouraging much more efficient use of land within that market place (since the more one put land to productive use, the more one’s tax burden would go down instead of up). A well-documented case in point is the overall success of the “split rate” property tax in over a dozen localities throughout Pennsylvania.
Still others object that the revenue capacity of land is insufficient. In chapter 2 of The Losses of Nations, economist Fred Harrison reveals that this objection is based on the myth that land rent makes up only 2% of the national income. According to a ground-breaking study by Wall Street economist Michael Hudson, Harrison explains, the revenue capacity of land is actually about 14% of the national income, or what in 2002 would amount to over $1.1 trillion in annual revenue.
What’s more, economists throughout history have observed that, when taxes on labor and capital are lowered, land values tend to rise proportionately. Why? For the simple and obvious reason that, the more people can afford to pay for access to a fixed quantity of land, the more titleholders tend to charge higher rents. If, for instance, the payroll tax were abolished, most of the resultant increase in take home pay would be absorbed by higher rents. It therefore follows that the more the tax burden on labor and capital is reduced, the more the revenue capacity of land is raised by a comparable amount. Thus, once this tax shift was fully implemented, the revenue capacity of land would likely double to well over $2 trillion — hardly an “insufficient” amount.
To learn more about both the moral and economic basis for a land-based tax system, read Henry Georges Progress and Poverty, Robert De Fremerys Rights vs. Privileges, and Fred Harrisons The Losses of Nations.
Todd Altman is an Air Force veteran, has a bachelors degree from the University of Maryland, and is the author of the Geolibertarian FAQ.
Next week: PART TWO, The Money System
What’s your reaction? Tell your views to The Progress Report!