Taxation policy has gone backwards since the 1920s in the USA and a little later in Australia. The transition was from taxing unearned land values to far greater emphasis on the taxing of earned incomes.
How was this obviously detrimental change able to be accomplished?
It was done by the popularisation of two lies.
The first was that there is no significant difference between the earned return to man-made capital and the unearned income flowing to land titles. The late great Mason Gaffney documented John Bates Clark to have been the main proponent of this fantasy. JB Clark had been given a job to do: to lay waste to the popular ideas of Henry George. Clark’s errant nonsense was quickly taken up in academia, mainly because George had no formal qualification in economics. However, it took troubled times: WWI in the USA, and WWII in Australia, for governments to be able to sell this mess of pottage to their citizens. And, oh yes, it was “a temporary measure”!
The second lie was that there is now insufficient rent for capitalism to tax land values. From John Locke to Mason Gaffney, it has been understood that all taxes come out of rent (ATCOR) – so this was no small fib. Nonetheless, even though a Prosper Australia study showed economic rent to be 50% of the economy, economists are still to be found who propose a miserably tiny figure for rent. Here are six:-
“The percentage [of property rent in the economy] has dropped to well under one percent today”, New Ideas from Dead Economists: an introduction to modern economic thought, Todd G Buchholz, Plume, 2007, p.86.
“But by 2000 urban land rents represented only four percent of national income”, A Farewell to Alms, Gregory Clark, Princeton University Press, 2007, p.198.
“Rent is one percent of the US income in 2004”, Economics, Paul Krugman and Robin Wells, Worth Publishers, 2006, p.283.
“Rental income was 4.7 billion, or 0.079% of GDP in 1992”, Economics (Third Edition), Karl Case and Ray Fair, Prentice Hall, 1994, p.559.
“Rental income is $7.9 billion of a total GNP of $5,234 billion, or 1.5 percent”, Economics: Principles and Policy, Fifth Edition, William J Baumol and Alan S Blinder, Harcourt Brace, 1991, p.137.
“… land rent forms such a small percentage of national income: that 2% is nothing compared to the present tax percentages which is around 30”, Income Distribution, Jan Pen, Pelican, 1974, p.210.
The study of economics continues to spout such nonsense, seemingly for much the same reason of ‘austerity’ to which Ronald Reagan had fled in his first inauguration address: “In this present crisis, government is not the solution to our problems; government is the problem.”
Governments as ‘different’ as those of Margaret Thatcher in Britain and Bob Hawke and Paul Keating in Australia accepted the premise that government had become too costly. Prime Minister Keating believed that pensions were going to become unaffordable in Australia, so it was necessary to set up private superannuation funds in order to reduce government retirement income expenditures. That this would act to reduce the cost of wages, already held down by a wages accord with the unions, was all to the good. Business would do well out of such ‘reforms’ and save the country from ‘big government’.
People have now come to see these Ayn Randian ‘reforms’ as misguided, that there is indeed a positive role for government, and that its spending can actually provide the private sector with economic stimulus.
It went unnoticed, however, that the taxing of earned incomes and under-taxing of land values shifted the scales to such an extent that people found they’re able to create more money for themselves by inflating land prices than by working. A burgeoning parade of property touts makes a pretty good case to the uninitiated to this effect .
Unfortunately, we’re about to pay a big price for all that, and for the lies that have sent us down this socio-economically devastating path. No doubt, however, we’re going to be told it was COVID-19 that brought about the financial catastrophe. It certainly didn’t help things, but for how long will we avoid taking the cure for pumping up totally extractive land prices? Especially when unlike capital, land has zero cost of production.