Scenarios for George's “Interest on Capital”
What Henry George Meant by “Interest on Capital”
July 25, 2020
Rick DiMare

In his 2008 paper entitled "Henry George’s Political Critics," Professor Michael Hudson states on pages 14-15:

"When confronted with criticisms of monopoly capital or finance capital, George replied that this was not what he meant by capital. His point of reference was small businessmen working with their own tools and savings. Claiming that to tax capital would discourage the incentive to invest in productive activity, he viewed capital as aiming to produce wealth, not to aggrandize itself by predatory, exploitative practices (apart from monopolies)."

Because there’s so much confusion over what Henry George meant by “capital” and “interest on capital,” and because many libertarian groups are misrepresenting George as advocating for the non-taxation of corporate profits and dividends, I’d like to present three scenarios under which “capitalists” deploy or use capital to increase the production of a hypothetical farm with five workers (land users), a hypothetical farm that generates $100K in income, before wages or taxes are paid.

Scenario #1: Small business, not incorporated, acting in equal partnership together, or as a workers’ cooperative. Result: No tax on anyones wages, and no tax on their “interest on capital.”

Each of the five land users are entitled to $20K, and no tax should fall on anyone’s wage, no tax should fall on any increased production resulting from the use of capital (their savings used in production), and no tax should fall on capital goods (farm machinery, buildings, tools, land improvements, etc.). The entire $100K is not to be taxed because it would “discourage the incentive to invest in productive activity,” as Hudson states above.

Scenario #2: A pre-Civil War plantation owner purchases four slaves. Result: No tax on the landowner’s wage and “interest on capital,” but a heavy tax on net profits.

Here, the owner of the plantation is using his land ownership/monopoly powers to exploit his slaves, paying them no wages, but simply paying for their living expenses. And since the plantation owner also actively manages the land, he is also a land user, like his four slaves. Under a Georgist analysis/accounting, the plantation owner (as user) might be entitled to about $20K in managerial wages and “interest” for using “capital,” will pay for food and shelter of the slaves (assume around $20K), and be left with $60K net income, which net income is all (fully taxable) unearned economic rent, not “interest on capital.” Of course, before the 16th Amendment was ratified in 1913, the $60K was considered as belonging to the landowner, and any tax on it would’ve been considered to be a direct property tax on the land.

Scenario #3: Modern corporation, where landowner employs four people, and manages/works with them. Result: No tax on the landowner’s managerial wage, which was enhanced by “interest on capital,” no tax on employees wages, but a heavy tax on net corporate income.

All are land users, but the landowner "as owner" is using his land ownership/monopoly powers to underpay the four employees. The landowner takes a wage, and “interest on capital” of about $20K, pays each of the four workers $10K, and has net profit of $40K, which again is (fully taxable) economic rent or unearned income, not "interest on capital." Because the corporate form of doing business sets up a separate taxpaying legal entity, any wage or "interest on capital" must be negotiated before arriving at the corporate person’s net income, so no corporate profits (or any dividends paid out of those profits) are earned.

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Rick DiMare

Rick is a self employed attorney from Boston, Massachusetts. He graduated from Boston College and studied law at the Massachusetts School of Law at Andover. He also administers the Facebook group called Common Wealth Tax, which seeks to explore the (currently obscure) link between modern income tax laws and the Land Value Tax (LVT) advocated by political economist and “Greenbacker” Henry George (1839-1897).