For all economists: An excellent piece of common sense.
My more mundane but practical assessment of the deadweight/excess burden* of taxation in Australia can be found here. (*It’s massive!)
Donald Trump is the encapsulation, a cartoon, or caricature, of the US having fallen out of love with its party political system. However, without real economic solutions, President Trump will prove to be a matter of ‘out of the frying pan and into the fire’.
The Democrats couldn’t quite bring themselves to turn to Bernie Sanders as their presidential candidate, though—because he’s a socialist—and in ‘the land of the free and the home of the brave’ any form of socialism is seen as a curse. And Bernie was saying all the typical things socialists say, except what he really needed to say.
US capitalism has not evolved from the sort of imperialism that seeks to capture other nations’ natural resources (viz, Middle East oil) by still seeking to install friendly governments, so isn’t it beyond time that it did so? Is it not also time for the US and capitalism to recognize that nations have a right to their own natural resources?
This can be done quite simply, by properly recognizing the mechanism that US capitalism uses, both to dispossess overseas nationals and the poor and middle class within the USA itself.
Yes, the very mechanism that capitalism now employs to impoverish and dispossess people further from their land and natural resources. Where this has been attempted to be rectified, such as in Chile, Venezuela, Iraq, Libya, Iran, Syria, that’s where government must be undermined, or the country invaded, because their resources must be made ‘free’ for capitalist companies to ‘own’.
We don’t need to socialize land or privatize natural resources, but we do need to socialize their rents which rightfully belong—equally—in the US to all the people of the USA, and to the people of all other countries. Capitalism, and the USA, need to be kept in check in this regard.
The economic rent of natural resources is the only thing that needs to be socialized.
For the sake of justice, and to put an end to economic imperialism, the USA must come to acknowledge the need for the public capture of economic rent. It would also bring banking, rent-seeking private companies and tax havens to heel. That capitalism has now morphed completely into the creation of money for rent-seekers needs to be addressed and remedied urgently. Not to do so will certainly send increasingly crippled economies further into Donald Trump’s swamp.
It would be nice if longstanding and effective socialist critics of the ills of capitalism—such as Noam Chomsky, and Chris Hedges, et al—were to focus on the one thing that does need to be socialized. Michael Hudson has done so, and Max Keiser has been open-minded enough to acknowledge the point by appreciating Hudson’s approach, and having other anti-rent-seeking folk on his program, The Keiser Report.
We need to capture the economic rent of our natural resources in order finally to put paid to this incredibly counter-productive period of economic retrogression.
In his paper American Government Finance in the Long Run: 1790 to 1990 (Journal of Economic Perspectives, Vol 14, Number 1) John Joseph Wallis demonstrates that US government finance experienced three separate phases:-
Asset Finance Phase
Property Tax Phase
Income and Sales Tax Phase
Wallis’ paper is well researched and engaging. I’d recommend a read by those who’ve come to see the federal income tax as the natural state of things – and this may very well include the writer himself. Remarkably, Wallis regards the reason for the rise of personal and corporate income taxes to have been “the most active level of government was the one with the access to the lowest cost revenue source.” With much reason and support, property tax aficionados will dispute this conclusion.
Although Wallis doesn’t regale us with the achievements of the property tax, particularly during what became known as the Progressive Era (1890s to 1920) when ‘single tax’ mayors progressed their cities to success and prosperity, Mason Gaffney does draw this history to our attention in his recommendations for a means of lifting New Orleans from the aftermath of Hurricane Katrina.
Of course, anybody who has followed this blog will know that I see the income and sales tax period as one of worsening economic failure. As income and sales taxes came to replace efficient and fair charges upon property values (so well depicted in Wallis’ Figure 1 above), the US has come to witness a series of larger and larger speculative bubbles (similar to those I’ve shown for Australia) which are relentlessly delivering us into another economic depression. (Interestingly, the introduction of Australia’s federal income tax was a WWII measure.)
“The Paradise Papers” prove once again that income tax remains largely voluntary for the super rich and, along with escalating land prices, is driving wage earners into hopeless debt and penury.
There are well-meaning academics and policy-makers who believe we may remedy income and company tax avoidance. We cannot.
LEADING AMERICAN ECONOMISTS RESPOND TO AMERICAN ASSOCIATION FOR SCIENTIFIC TAXATION
15 Park Row, New York City (pre-1930)
FRANK D GRAHAM
Professor of Economics, Princeton University
The phrase “unearned income” is quite generally used
in a loose and ambiguous way and has consequently
lost much of its real significance. No income is
unearned which is received in payment for such
economic services as would not be rendered in adequate
degree except on that condition.
The real unearned income is that which accrues to an
individual without his having done anything which
contributes to production. Of the several types of such
income the most important is that which issues from the
site-value of land. The recipient of such an income
does nothing to earn it; he merely sits tight while
the growth of the community about the land to which he
holds title brings him an unmerited gain. This gain is
at the expense of all true producers whether they be
labourers, enterprisers or investors in industrial
equipment. The taxation of this gain can do nothing to
deprive the community of any service since the donee
is rendering none. The land will be there for the use
of society whether the return from it is taxed or
free. Society creates the value and should secure it
The approach to scientific taxation involves a
shifting of the burden from productive industry, where
it now lies, to such incomes as these which are in
truth unearned. Like many other reforms this must be
accomplished only step by step but the path along
which we ought to move lies clearly within our sight.
GLENN E HOOVER
Assistant Professor of Economics and Sociology,
The site-value of land is so obviously a socially
created value that few, if any, theoretical economists
worthy of consideration will deny it. Unfortunately,
for reasons which appear utterly inconclusive, many of
them oppose any effort to single out this value as a
special object of taxation. They object that the
right to privately appropriate it has been purchased in
good faith with money which we must presume to have
been earned. The claim of these purchasers is indeed
entitled to consideration, but why it should serve to
perpetuate among future generations, a system which is
as unethical as it is unsound economically, is beyond
me. This claim would but justify, at most, a bit of
gradualness in our programme.
Professor of Economics, Harvard University
I favour a special tax on land values insofaras
these values are the result of location rather than of
fertility. Fertility may be easily exhausted, it is
difficult to conserve, and still more difficult to
restore when once exhausted. The farmer must he left with an
adequate motive for conserving fertility. Therefore I
should treat fertility as I would ditches and other
improvements. Location value, however, is a different
thing. It seems to me to be a good subject for special
Professor of Economics, Yale University
I cannot agree that land value should be the sole
source of public revenue. Nevertheless, premising
that so important a change should not be made
abruptly, I favour the gradual reduction so far as
possible of taxes on the products of labour and taking
instead the economic rent of bare land.
JOHN R COMMONS
Professor of Economics, University of Wisconsin
The present general property tax is unjust to farmers
and uneconomic from the public standpoint, because it
places high taxes on the farmers’ fertility,
improvements, timber and personal property. This
portion of his taxes should be greatly reduced and
even abolished, on the part amounting to more than 60
per cent. of agricultural values; but the bare land
value, amounting to 40 per cent. or less, should he
taxed at higher rates. By no possible effort or
expense can he, as an individual, increase his bare
land values. These are increased by the labour,
management and thrift of other taxpayers and other
industries in the form of highways, railways, schools
and profitable markets.
Farmers’ bare land value for solely agricultural
purposes, distinguished from its speculative value
near cities, scarcely runs as high as 100 dollars per
acre, but urban bare land values run as high as
several million dollars per acre, while bare
water-power values are becoming fabulous. Bare land
values, including the value of mere waterpower, are
due solely to scarcity, while the values of fertility,
improvements, machinery and personal property are due
mainly to thrift, good management and labour.
RAYMOND T BYE
Professor of Economics, University of Pennsylvania
I believe that we should increase the taxation of
land, exclusive of improvements, at the same time that
we decrease the taxation of the improvements thereon.
Such taxation of land should be increased gradually,
not suddenly; and if extended over a long enough
period of time, it would not be unwise to raise the
tax to the point where it would appropriate to the
State the greater part, if not the whole of, the
economic rent. I do not believe however, in the Single
Tax doctrine that such a land tax should be completely
substituted for an other taxes.
H I DAVENPORT
Professor of Economics, Cornell University
It is obvious that the bare land with its contents and
the waters that flow through and about it constitute
the nature-provided environment of human beings and
are rightly the subject of their equal claims. Also
that the value-for-use of these natural resources is
conditioned on population. It follows population as
its shadow. It appears with the people and disappears
when they go. This value, therefore, should. by the
best of titles, be retained by the community as its
most excellent source of public revenue.
The more the community draws upon this vast
community-conditioned fund the less will be the forced
contributions from capital and labour. This means
that the greater and better distributed will be the
purchasing power of the people.
Nor is the fiscal retention of bare-land rent to be
regarded as a tax; being the rightful collection of
revenue from the social estate, it is therefore not
taxation, but, to its extent, displaces and avoids
I do not however regard as implicit in the principle
of the social retention of land rent, the requirement
that economic rent should constitute the sole source
of public income. Never is any good revenue method
rightly discredited by any other.
WILLIAM H DINKINS
Dean, and Instructor in Accounting & Economics Selma University, Alabama
I believe that the taxation now levied upon industry
and consumption by our national, state and local
governments should be removed completely and at once,
and that the land-values of the country should be
taxed to raise the revenues for the different branches
of government. The land-value, which is a periodically
accruing value, is the only measure of both community
benefits and community ability to pay public revenues.
When we tax land-values we take, not the labour
product of individuals, but a community product. to
pay community expense.
The single tax on land-values is the only tax that
collects from the people money in proportion to
benefits received and ability to pay. It is the only
tax that will cause reafforestation of our lands and
thus the control of our rivers; the only tax that will
put a check upon oppressive bureaucracy and oppressive
captainship of industry; the only elastic tax whose
elasticity is in direct relation to community needs
and to community ability to pay. “Community” is used
in both the local and the widest senses.
TJ ANDERSON Jr
Associate Professor of Economics, Kansas State Agricultural College
I believe that one improvement in taxation policy
could be made by increasing, gradually, the tax burden
on bare land value and, correspondingly, lowering the
burden on the improvements “in” and “on” the land.
Such a plan would take taxes to a greater degree from
the socially-created portion of the property value and
to a lesser degree from that portion of the value due
to the work and thrift of the owner. Therefore, it
would encourage work, thrift and wise investment.
In conclusion, I wish to say that 1 think the complete
and scientific reform of the American Tax System is
one of the most pressing present,day problems.
Not so sub-titlist, with “Cains”. 🙂
Life would be greatly improved for a vast number of Australians if they were able to keep themselves out of unnecessary debt.
Land prices are unnecessary. Title for exclusive possession of a home and land could be given on payment of a sum for the house and any other improvements, on the basis of an agreement to continue to pay the annual rent for the site. This would be on the reciprocal arrangement that the purchaser(s) were not to pay income tax, GST, nor any other form of tax, as long as the annual site rent is paid into the public coffers after sale of the property. The federal government would pay the site’s value to a vendor as they sold off their property to a purchaser who signed such a commitment.
The average residential site currently comprises some 75% of the total price of a property in Australia, therefore, as people took up the option—which is not to be forced, as they could continue to pay the land price to vendors and existing taxes if they chose to do so—Australia’s land prices would decline substantially and remain ‘flat’.
As capital prices of homes and debt levels declined, the productive side of the economy would resurrect, and wages would increase.
The best time to introduce such a home owner’s option is, of course, when the present real estate bubble and land prices collapse and mortgage debt has been written back to market anyway (as President Obama promised, but failed, to do in the USA in 2008). Politicians and banks, currently wed to a perceived need to keep land prices inflated because “banks are too big to fail”, would be less resistant to this home-owners’ policy initiative in the scenario of a collapsed market.
Potential benefits for Australia would be extraordinary: banking would assume its role as a servant of people and the economy, instead of their master; real estate speculative activity would decline, and; real wealth-creating productivity must increase as a result.
Threats? Well, the 0.1% who currently have both sides of the political spectrum protecting them at the moment, together with a rampant banking and real estate sector invested in inflating land prices at the expense of the community and productivity. Rent-seeking interests have been “dividing and ruling” the political system and the economy as people have increasingly become debt-slaves to them.
Do I speak of new world in which publicly-generated land rent is captured publicly – thereby bringing people together instead of continuing to divide them? Yes, I do.
CAPTURE LAND RENT
They want to keep middle-class rates high to save their subsidy.
Republicans had hoped to mute opposition to their tax blueprint by preserving the deduction for mortgage interest, but no bad policy goes unpunished. The Realtors are still howling that the reform will hurt homeowners, and they’re trying to take a central element of reform as a political hostage.
One goal of the GOP framework is to simplify the tax code by eliminating preferences that distort economic behavior. Most itemized deductions other than mortgage interest and charitable contributions would be nixed. But the individual standard deduction would increase to $12,000 from $6,350 ($24,000 for married couples) to reduce taxes for most Americans.
The Realtors are upset because they say this middle-class tax cut would make fewer taxpayers use the mortgage-interest deduction. The National Association of Realtors trashed the framework in a statement, saying it “would all but nullify the incentive to purchase a home for most, amounting to a de facto tax increase” and ensure “that only the top 5 percent of Americans have the opportunity to benefit from the mortgage interest deduction.”
Where to begin? The brokers are right that the reforms would reduce the utility of the mortgage-interest deduction for many middle-income earners who currently itemize. But this is a virtue, not a bug. While only those with large mortgages and charitable contributions would likely continue to benefit from the break, this doesn’t mean other homeowners would be worse off.
Two-thirds of all income-tax filers already take the standard deduction. Increasing it to $12,000 would mainly affect homeowners earning between $50,000 and $100,000 who on average itemize $7,000 in mortgage interest and $6,342 in local and state taxes. Some of these middle-income itemizers—particularly those with smaller mortgages who live in lower-tax states—would instead take the standard deduction. But if their overall tax liability is reduced, they’re still better off. The Realtors want to keep taxes higher on all Americans so they can keep their subsidy.
The well-to-do with large mortgages could still itemize deductions—the average mortgage-interest deduction for those earning more than $250,000 is $15,500—but the subsidy’s value would diminish due to a decline in marginal tax rates. But that is also the point of reform—to lower rates across the board rather than subsidize one form of economic or social behavior (like owning a home) over another.
The Realtors say the GOP framework would reduce the incentive to buy and own homes. This is highly doubtful. Home-ownership is higher in countries with no deduction such as Canada (69%) and the United Kingdom (71%) than in the U.S. (64%). The U.S. also heavily subsidizes housing in other ways, such as the low-income housing tax credit and Fannie Mae and Federal Housing Administration loan guarantees.
The subsidies get baked into higher home prices, thereby making ownership less affordable for lower- and middle-income earners. California, Washington, D.C., New York and Hawaii have among the largest mortgage-interest tax deduction claims per return but the lowest home-ownership rates. On the other hand, taxpayers in Southern and Midwestern states with high home-ownership derive less benefit from the deduction.
Taxpayers in coastal states that benefit most from the state and local tax break also reap some of the biggest gains from the mortgage-interest deduction. Many of these states have higher home prices due to scarcity of land and restrictive zoning. Homes in California’s coastal metros are four to five times more expensive than in most of the rest of the country, but the disparity in rents is about half as large.
This is another way of saying that the mortgage-interest deduction subsidizes housing consumption for the upper and upper-middle class. Republicans could help tax fairness if they reduced the current $1 million cap on the size of a deductible loan to $500,000. The Tax Foundation estimates this would raise about $300 billion in revenue over 10 years, which could be used to lower tax rates. GOP tax writers should do this if the Realtors insist on partially restoring the state and local tax deduction.
Like other carve-outs, the mortgage-interest deduction favors some taxpayers over others and distorts economic decisions. Tax reform would benefit all Americans in lower rates and faster economic growth, and Republicans should hold fast against the housing lobby’s self-serving tax flimflam.
Appeared in the October 18, 2017, print edition.