Yt = rRt + wLt + iKt

National income (Y) consists of aggregating the returns to land (R), labour (L) and capital (K). For a given time period (t) the respective factor incomes are rent (r), wages (w) and interest (i).

Transposing the unearned profit rent from nature (land) to the left hand side of the equation we get:

Yt – rRt = wLt + iKt

That is to say, if we were to take the rent of land for revenue, it is unnecessary to tax the earned incomes of labour and capital.  Land rent (including mining, spectrum, fishing and forestry licence rents) is easy to collect and cannot be avoided.

What’s wrong with that? There must be something wrong, because inquiries into tax reform studiously endeavour to ignore this logic, temporising by alternating the emphasis between direct and indirect taxes on labour and capital, then calling these repetitive long-term swings “tax reform”, and barely troubling the increasing numbers of rent-seekers who compromise our national productivity.

Not enough rent, perhaps? Nope, there’s plenty. Karl Fitzgerald and Gavin Putland have independently demonstrated the point by assessing Australia’s rent here and here.

Private rent-seeking, as evidenced by the capitalisation of rent into land price bubbles (instead of its capture for public purposes), is clearly bringing world economies to a halt.  The FIRE sector has run amok – at the expense of the productivity of labour and capital.

Why don’t we remedy the morass into which we’ve sunk by capturing rents and abolishing taxes?

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