|January 5, 2014||Posted by Fred Foldvary under Editorials|
Geoism begins with the three “factors,” categories of inputs: land as natural resources, labor meaning human exertion that creates value, and produced wealth or capital goods. Land yields rent, labor earns wages, and capital goods have a capital yield. Taxes on labor, interest, the profits of enterprise, and produced goods all have an excess burden on society beyond that of the taxpayers, as they increase prices, reduce output and income, and reduce growth. But a tax on land rent or land value does not have an excess burden or “deadweight” loss, because land does not hide, shrink, or flee when tapped for public revenue. A tax on the rent does not change the rent, but it does reduce the purchase price of land, because the title holders keep less rent.
Land rent arises from two sources. First, imagine an agricultural territory with one crop, corn, and lands of various productivity. Let us at first leave out capital goods, and image that all the workers have the same skill and labor hours. When the best land is available for free, all the output goes to wages. When the best land is fully claimed and worked on, new workers go to the next best free land, which is called the “margin of production.” The wage at the margin is the total output, but now, there is rent in the better land. Because workers can move, the wage at the margin becomes the wage at the better land, and the rest of the output becomes rent. The rent of a plot of land equals its output minus the normal costs of labor and capital goods, relative to the output at the margin of production.
The other source of rent is the greater productivity that arises from population density, along with its commerce, which increases the demand to use land there. With economic activity most intense in a city center, rents are highest there, because those at the fringes have to pay transit costs to obtain the same income. We can now put in the capital goods: better technology as well as more public works (streets, highways, transit, parks) and civic services (security, fire protection, street sweeping and lighting) make those locations more productive and attractive, which generates higher rentals and real estate prices.
When government provides such public goods, this generates higher rentals. Much of the gains from economic growth are captured by higher land rent. If the financing for public goods comes from taxes on labor, enterprise, and goods, the effect is that landowners receive a subsidy as higher rent and property value, while workers are double billed, paying both a higher rental and taxes. A tax on the site values pays back the value received by the land owners, preventing the subsidy.
Governments today subsidize land value in two ways: first with fiscal subsidies, taxes that are much lower than the extra rent generated by public goods, and secondly with monetary subsidies, when central banks expand the money supply to push down borrowing rates. These subsidies not only redistribute wealth from the poor to the rich, but also induce real estate speculation that becomes a bubble and then crashes into a steep recession, as happened in 2008.
The moral aspect of geoism is based on human equality. Because we are equal as human beings, each person fully owns his own life, body, and time. That implies the full ownership of one’s labor, wages, and the products one produces. Just as theft is morally evil, it is morally wrong for government to forcibly take away one’s wage by taxation. So taxes on labor, enterprise, and goods are not only economically damaging, they are morally wrong.
Since self-ownership does not extend to natural resources, human equality implies there should be an equal benefit from natural resources. That benefit is measured by land rent. Thus we can leave land possession and titles as is, because it is sufficient for justice for the rent to be collected and distributed to the people in equal shares, either in cash or in desired public services.
That rent that comes from population and commerce should be distributed to that local population in equal shares. The rentals that are generated by public goods should be paid to the providers, whether governmental or else to a private-sector producer by contract.
Professional appraisers and assessors have techniques to estimate land rent and land value, apart from the value of buildings and other improvements. Economists have estimated that the total land rent is about a third of national income, which should be sufficient to pay for the public goods. There is even a theory in public finance called the “Henry George theorem” that concludes that with the optimal provision of public goods, the cost of the goods equals the land rent. Payments for the use of land include pollution charges for dumping toxic waste into land such as rivers, the oceans, and the atmosphere.
A “prosperity tax shift” replaces the taxes that have an excess burden with public revenue from voluntary user fees, land rent, and pollution charges. This tax shift would reduce poverty and equalize income while also increasing productivity and economic growth, and preventing real estate bubbles. There are, of course, complexities in implementing geoism, but the actual practice of this policy in Taiwan, Denmark, and many localities has been successful. Geoism offers the best way to overcome poverty, unemployment, and other economic deprivations. With higher wages and no taxes, and an equal share of the land rent, families are better able to afford to pay for their medical services and retirement, reducing dependence on government.
Geoist tax policy also eliminates tax evasion and tax audits. Even a landowner benefits after the transition in paying much less for land, as the tax payment just replaces the mortgage payment. The payment of rent can also help solve territorial conflicts, as the party holding land compensates the other party by paying rent. Geoism offers hope for a better world, for it shows that today’s social problems have realistic solutions.