austerity taxes spending prosperity


intervention capacity land value

Austerity is a War on Prosperity

by Fred E. Foldvary, Senior Editor, 15 April 2013

“Austerity” is a policy of reducing beneficial government spending and raising harmful taxes. The taxes that have been increased in the name of austerity have been on goods, wages, value added, and the profits of entrepreneurs. The spending cuts are often on the infrastructure that make the economy more productive, or on the services that the poor depend on: education, medical services, housing, and food aid.

As the higher taxes and lower spending reduce production and consumption, they can perversely reduce taxes, and so the government resorts to even greater cuts and higher tax rates. Austerity can thus create a downward spiral towards ever less prosperity and greater poverty, as happened, for example, in Greece.

Barriers to prosperity include taxes, subsidies, and regulations. Excessive regulations impose a cost that is in effect a tax. Price subsidies on goods hamper the economy because the tax cost of providing a lower price to consumers is greater than the extra benefit from the lower price. Asset subsidies backfire as they raise the price of the asset, providing no benefit to new buyers. For example, subsidies to the owners of farms raise the rent and site values of farms, so farmers seeking to expand get no benefit.

Conservatives say there is a “war on prosperity” from higher taxes, while welfare-state liberals say there is a “war on prosperity” from cuts in government spending. They are both right, but neither wing proposes an effective remedy. The conservatives call for less spending, and the statist liberals call for higher taxes.

Prosperity comes from individuals seeking to improve their lives. A truly free market will automatically move towards prosperity unless stopped by the force of governmental intervention. Government can do two things to promote prosperity instead of austerity: remove the barriers that stifle enterprise, and boost enterprise by taxing the capacity to produce instead of the actual production.

If you want a person to work, you should not reduce the reward from labor. Beyond removing taxes and restrictions on labor, we can get even more labor by taxing the absence of labor. Some of the British colonies that became U.S. states had a tax on the capacity to earn wages, the faculties of skill that enable workers to obtain an income. Even if a merchant or doctor or farmer is not currently working, the faculty tax is based on his potential earnings. The tax pushes them to work to their potential.

Taxes push people to move from taxed things to non-taxed things. A tax on wages pushes people to retire early, avoid a second job, and not work overtime. Taxes on wages include the removal of government-provided benefits from not working. The faculty tax does the opposite; it makes people pay taxes for indulging in leisure, so they move away from leisure towards labor, when there is no tax on actual labor.

I’m not recommending a faculty tax on potential wages, since it amounts to forced labor. People have a natural right to freely choose whether to indulge in leisure or engage in labor. But that concept of pushing employment can be applied to non-labor also.

If government taxes savings by taxing interest, we get less savings and less investment from savings. If instead government taxed the lack of savings, we would get more savings. If government taxes the production of capital goods, we get fewer goods. If government were to tax the lack of capital goods, that would push a greater production or importation of capital goods. Government does something like that with an investment tax credit. But I’m not recommending that, because it can promote an artificial replacement of taxed labor with not-taxed machines.

The best way to apply the concept of taxing non-production is to tax the non-use of land. A land value tax is based on the rent or value of land when put to its most productive use. A parking lot in the center of a city would have the same tax as the tall building next to it. Land value taxation pushes the title holders to maximize the rent of their land. That spurs production and employment, since productive land implies the production of goods (including services) and the employment of workers to produce the goods.

Some critics claim that land value taxation pushes landowners to excessive construction: too many buildings, too large, too crowded. Parks would be replaced by factories, shops, and residences. Open space would disappear.

But parks and wilderness have social benefits that also generate rent. If people want a park, the government can pay the rent on that park. A backyard is not a waste, because people enjoy their gardens. Also, entrepreneurs will not engage in more construction unless they get tenants. The potential rent is that for which there are tenants paying what the market will bear, and not more. Optimal development would be generated from the removal of taxes on production and the removal of the subsidy to land value that comes from public goods paid for by taxes on wages.

Austerity is a war on prosperity, but greater government spending creates unsustainable debt that ends in a future austerity. The effective sustainable remedy is the “prosperity tax shift.” There are two obstacles to this shift: 1) the reduction of land value that would follow the removal of subsidies; 2) the economic ignorance of the public and of politicians. Compensation can overcome the vested interests of landowners and their financial backers. So ultimately, austerity comes from a lack of economic knowledge. If only we could tax ignorance!

-- Fred Foldvary

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Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.

Also see:

Long-stalled Land Tax Bill Back in Discussion
http://www.progress.org/2012/framing.htm

Occupy & Tea Party Join Forces to Protest NDAA
http://www.progress.org/2012/dadavis.htm

Bankers Gone Global -- Should Others Catch Up?
http://www.progress.org/2012/mansachs.htm

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