An Abomination of Public Finance

This article was written by Nate Blair and posted on the LVT facebook page. We thank him for allowing us to reproduce it here.

There are three sources of public revenue: fees, fines, and taxes. Fines are pretty well understood, but the Georgist example would be a Pigovian “tax” on environmental damage. A fee is when the state charges $10 for a licence; charging $100 for the licence would be mostly a tax. Land value “tax” (LVT) is actually a user-fee, not a tax, just as a Pigovian “tax” is a fine, not a tax.  LVT is the price landowners should pay for the privilege of excluding others from the value of locations in nature that the community is giving value to.

Society currently donates the value of locational privilege to landowners mostly free of charge—in fact, we even pay them with *negative* LVT for agricultural land (subsidies and grants) and with public investment projects that enhance land value.  Government donates all that to landowners, mostly the wealthy, and pays for that expense with real tax on our labour and productive enterprise.  What makes payroll and sales taxes actual taxes is that they are arbitrary costs added onto normal, beneficial activities that we would otherwise want to encourage.  When states charge employers to hire labour, the state is not directly offering any reciprocal benefit/service.  Nothing is created; value is simply extracted and then used in ways that may or may not later benefit the people who paid the tax.

Together we can save our community

We can, but not like this. Ricardo’s “Law of Rent” makes that impossible in the long-run.

Even though that seems bad, it gets worse, because then labourers and businesses are taxed again, this time by the very landowners we just donated to!  Labourers are obliged to pay a private toll to access the very same benefits their hard work and taxes just created.  So ground-rent being captured by private location monopolists is analogous to a tax, since the landowner arbitrarily demands a portion of the produce of labour without creating anything that contributes to the productive process.  In that sense, private land privilege, or any other monopoly for that matter, technically qualifies as a private tax.

LVT simply reclaims our donations to landowners by charging monopolisers of location for the annual market value of the privilege they are receiving from the community.  Ground rent captured by LVT is directly subtracted from the “capitalized” price of land.  That changes the form of land payments but never increases its cost.  A 100% tax of land rent would equate to a sale price of land approaching zero.  Following through with the private tax analogy, it is clear that every land purchaser already pays what he/she expects to be a full LVT, whether as an up-front cash payment or over time as mortgage payments to a bank.

That revenue could instead be used to remove taxes on things that we want more of (labour) and to provide more of the social services/investments that enhance quality of life (and location).  The best way to think of it is that instead of paying rent and taxes, people would only pay rent, but we would pay that rent back to ourselves, to the community instead of monopolists.

This is exactly the same method shopping malls use to finance the provision and maintenance of restrooms and security.  Malls do not tax vendors a percentage of sales or for each employee hired—but what if they did?  Imagine if the malls also allowed speculators to hoard perpetual, rent/fee-free titles to vendor-locations, preventing actual businesses from using the locations, increasing costs and making the mall look and operate badly.  Location monopolists would also capture the value of improvements for themselves, so that each time businesses worked harder, the economy improved, or the mall enhanced its services, rent seekers would increase the private tax extracted for access to mall locations.  THAT WOULD BE CRAZY!

The tragic truth is that what we are doing is much crazier.  This has *deadly* consequences.  Every time you read about the need for austerity or that there is not enough money for nice things, it is a lie: nice things increase land value in proportion to their niceness.  What we are actually saying is that the power of parking lot owners is so great that we willingly condemn vast numbers of people to poverty, death of the mind, body, and spirit.

Population, economic growth and the environment

3CRIs economic growth pushing us over environmental limits and beyond the carrying capacity of our planet? What do present day Georgists have to say on the issue? Its a question that often comes up and is answered in a discussion between renegade economist Karl Fitzgerald and Lindy Davies of the Henry George School in New York. Listen to the podcast here:

The land market is key to solving the housing crisis

An excellent piece by Toby Lloyd titled “Understanding and adapting the land market is the key to solving our housing crisis” appeared recently on the LSE website. Its a “must read” for anyone interested in getting to the bottom of the issue of housing affordability. Lloyd’s analysis is in essence a Georgist one. Toby LloydHe states that understanding the economic fundamentals of how the land market works is essential if we are to come up with effective solutions. Take this passage for example, which concerns The Viability Trap. Every District Councillor or local body planner dealing with residential development needs to understand this:

“When you [a developer] are trying to work out how much to offer the landowner, if you make a sensible estimate of where house prices will be in three years you’re likely to be outbid by someone who makes a more bullish estimate. If you assume you’ll have to follow local planning policy and provide, say, 30% affordable housing, your offer will be trumped by a rival who reckons he can screw the planners down to 20%.

The result of the land auction process is that the worst scheme, the one that offers the least to the community, the poorest quality homes, and charges the most for them, is generally the one that will happen, because this is the one that offers the most cash up front to the landowner. As a result, development is always already at the margins of viability.”

Lloyd stresses that any attempts to make housing more affordable by pumping public money into the sector will simply result in further rising land values thereby making housing more expensive while lining the landowners’ pocket. We can see this effect of George Osborne’s Help to Buy scheme right now.

Land prices are a one-way ratchet: they rise when the economy is booming but they don’t fall (at least not very much) during economic slumps as land owners face no costs of holding land out of productive use. They are content to play a waiting game, holding derelict land for decades if necessary, until the economy rises once more.

The only way to tackle this is to impose costs on the withholding of land from use. In effect this means implementing a policy of “use it or loose it.” Failure to grasp this nettle will condemn us to a housing affordability crisis without end.

Two Cow Economics

GEORGISM: You have 2 cows. They are both yours, ALL YOURS! However the land they are standing on isn’t.2 cows

(Inspired by “A Tale of Two Cows“)

The left and an anti-rentier agenda

In a series of articles appearing on Salon last year Michael Lind argued that left and right alike are confused by a failure to distinguish productive businesses that sell innovative goods and services from “rentier” interests — landlords, lenders, copyright holders and others — which use their natural or artificial monopoly power to extract Boxing cartoonexcessive tolls, fees and other recurrent payments from the rest of society, including productive businesses. Lind made the case that the fees or rents extracted by these interests constitute a kind of “private taxation” and that this is the greatest threat facing the productive economy.

This line of thinking is essentially a Georgist one and it doesn’t sit easily on the tired old left-right spectrum that dominates mainstream political discourse today. Many who identify with the left, worried that growing wealth inequality is leading to complete domination of society by big moneyed interests, denounce “capitalism” and reach for socialist answers. Take for example the following policy statement from the newly formed LeftUnity Party in the UK:

We are socialist because our aim is to end capitalism. We will pursue a society where the meeting of human needs is paramount, not one which is driven by the quest for private profit and the enrichment of a few. The natural wealth, and the means of production, distribution and exchangeCapitalism isnt working will be owned in common and democratically run by and for the people as a whole, rather than being owned and controlled by a small minority to enrich themselves.”

This approach is born out of a flawed understanding of fundamental economic principles, namely the conflation of land with capital and the mistaken belief that privilege stems from ownership of the latter rather than the former. There is nothing wrong with wealth per se – after all we all want it! A top footballer or movie star who earns astronomical amounts by virtue of their unique talent isn’t preventing anyone else from prospering, so good luck to them I say! Similarly, creative go-getting entrepreneurs who make their money satisfying others needs in the market place should be free to enjoy the wealth they have created. Stealing their income and redistributing it to others smacks of envy.

The problem with wealth arises when it is possible to use it to buy monopoly privilege including control of natural resources, thus depriving others of access to the opportunities they need to get ahead unless they meet the payment terms of the owner. So in the aforementioned examples, the movie star and the entrepreneur who go on to invest their wealth in speculative real estate or shares in an exploitative oil company have crossed the line from wealth creator to parasite. In essence the Georgist solution is to cut off this possibility in a very simple and efficient way, leaving the economy to function as a true free market that benefits all.

I believe the best way to undermine the powerful elite vested interests that exploit the wealth of society and the planet is to drive a wedge between them and genuine wealth creators i.e. the industrious hardworking people that actually provide the goods and services in the economy. This includes lowly wage workers as well as high flying individuals who should actually be allies in this struggle. It certainly won’t be achieved with socialist rhetoric which unhelpfully perpetuates the sterile socialist-capitalist dichotomy and precludes the possibility of a broader anti-rentier agenda from taking shape. This plays into the hands of establishment interests that want to maintain the status quo, leaving them free to laugh all the way to the bank. Clearly much needs to be done to reshape the political debate in order to form a genuine coalition for change that works for everyone. Georgist education of economic principles has an absolutely vital role to play in this process of realignment.

How to Abolish Unfair Taxation

This speech given by famous American progressive era lawyer Clarence Darrow in 1913 is entirely relevant to the situation we find ourselves in a century later:

Darrow

Everybody nowadays is anxious to help do something for the poor, especially they who are on the backs of the poor; they will do anything that is not fundamental. Nobody ever dreams of giving the poor a chance to help themselves. The reformers in this state have passed a law prohibiting women from working more than eight hours in one day in certain industries — so much do women love to work that they must be stopped by law. If any benevolent heathen see fit to come here and do work, we send them to gaol or send them back where they came from.

All these prohibitory laws are froth. You can only cure effects by curing the cause. Every sin and every wrong that exists in the world is the product of law, and you cannot cure it without curing the cause. Lawyers, as a class, are very stupid. What would you think of a doctor, who, finding a case of malaria, instead of draining the swamp, would send the patient to gaol, and leave the swamp where it is? We are seeking to improve conditions of life by improving symptoms
.

Land Basic

No man created the earth, but to a large extent all take from the earth a portion of it and mould it into useful things for the use of man. Without land man cannot live; without access to it man cannot labour. First of all, he must have the earth, and this he cannot have access to until the single tax [on land value] is applied. It has been proven by the history of the human race that the single tax does work, and that it will work as its advocates claim. For instance, man turned from Europe, filled with a population of the poor, and discovered the great continent of America. Here, when he could not get profitable employment, he went on the free land and worked for himself, and in those early days there were no problems of poverty, no wonderfully rich and no extremely poor — because there was cheap land. Men could go to work for themselves, and thus take the surplus off the labour market. There were no beggars in the early days. It was only when the landlord got in his work — when the earth monopoly was complete — that the great mass of men had to look to a boss for a job.

All the remedial laws on earth can scarcely help the poor when the earth is monopolized. Men must live from the earth, they must till the soil, dig the coal and iron and cut down the forest. Wise men know it, and cunning men know it, and so a few have reached out their hands and grasped the earth; and they say, “These mines of coal and iron, which it took nature ages and ages to store, belong to me; and no man can touch them until he sees fit to pay the tribute I demand.”

Pirates Demand Tribute

Nature prepared the earth for ages to make a mine of iron ore, which is so useful in civilized life. It was here before man came, and will be here after he is gone, and yet a plundering, soulless, conscienceless band of pirates, called the steel trust, have taken possession of all the iron in America, and they say to every man who will use it: “You must pay us tribute.” And every time two dollars is paid for their product one dollar goes to labour, and one dollar is taken as plunder pure and simple, because of the foolish laws of man. They can take from the farmer and labourer all that they earn except enough to keep them alive still to toil for the monopolist.

You may make eight-hour laws, you may make laws regulating sweat shops and factories, but so long as a few rich men own the earth, there will be a few rich and many millions of helpless poor. As population becomes more dense, the proportion of poor will increase.

Unions

The labouring man takes no account of fundamentals. Millions of working men have organized themselves into great unions to protect themselves, to force up their side to counteract the forcing up by the other side. These millions have organized for a most impossible purpose. They seek to change the social life in an impossible way. Their higher wages will be handed back to monopoly in higher prices. If a small fraction of the energy and money that has been given by the working men to support labour unions had been spent to change fundamental conditions, there would be no need of a labour union in the world today. Everywhere about us we can see that the conditions cannot change while land monopoly continues.

Most of our laws were made by the dead, and the dead have no right to legislate for the living. The present generation has no right to bind its legislation upon the generation still unborn. When one generation is dead, it ought to stay dead and not reach out its dead hand to bind the living. We have no right to fix terms and conditions for those yet unborn; it is for each generation to fix the rules and regulations for itself. The earth should be owned by all men, the coal mines should belong to the people who live here, so they can take what they want while they live, as when they are dead they won’t need coal — they will be warm enough without it — and they should not have the power to say who shall have it when they are gone. Carnegie and Morgan cannot use or withhold it much longer, as they will soon be gone — that is one consolation.

Eminent Domain

Fundamentally, all law recognizes the right to eminent domain, to take the portion of any human being for the welfare of the public — that no man’s claim to any portion of the earth shall stand in the way of the common good. This is a common law, but in practice it only applies where a rich railroad wants to get the land of some poor widow.

Everybody who works is poor; nobody would work if they were not poor, and nobody can get rich working. I never tried it, but I have seen others try it. The land boomer comes along and gets good car service to this poor man’s home, and then charges him ten dollars per month instead of five. A lot of reformers are trying to get parks laid out in the slums, which only make the poor move, for they cannot pay the increased rent. The greater the population, the less the worker gets. As the land becomes valuable, more and more goes to rent. The bigger the city, the deeper the poverty; the bigger the city the more degradation, there are the almshouses and gaols filled to overflowing. It is better for the men who own the earth to have big cities — but for no one else. Every man, woman, and child adds to the wealth of the land owner; the others must secure land upon which to live, and they must bid with each other for the right to live.

Surplus to the Monopolist

Beyond a living all surplus goes to the monopolist, and it does go to him. You talk about a city of a million in 1915 — who would be benefited? Not the workingman; he would be far worse off than at present, for the greater the city the greater the poverty.

Taxes on goods are added to the price of goods and passed on to the consumer. There is only one kind of tax that is not a curse, and that is the land tax. If you tax a pair of shoes a dollar, the manufacturer will add that to the price of the shoes, and thus diminish the number of shoes the people can buy. The higher you tax the land the more land is thrown on the market and the easier it is to secure, and it is the only thing that increases by taxation.

The higher the tax on land the more it comes into use, and so “single tax” is a positive blessing. It is the only tax that does not come out of labour, it comes out of the monopolist; it stays right there, and that fact compels them to put the land to some use, and that employs labour.

Natural Fund

The single tax theory is that the public should take all the value of land, as it was made by the public. Land value goes up because of population, and not because of the owner of the title deed, and the value should be taken by the community, and thus create a natural fund from which to make improvements for the comfort of all, and thus make life easier. It would abolish poverty, that crime of the century, which has always come with civilization; inequality of wealth, which comes as the world grows older, and which we have never been able to cure, because man wants to hold what he cannot use, and pass on to future generations what they will not use.

The personal property tax always was a delusion, a humbug, and a snare; it never could be administered justly. The conscientious man, the widow and the orphans (whose fund is in trust) pay in full while the rich get off. It is unscientific, it is bad as a fiscal measure. What we are after is the earth, and it can be had in an easy, simple, direct way.

Every right-of-way of every railroad should be owned by the people; all public franchises, every mine and every forest, all should belong to the community itself. Then we would not need the repressive laws we have today.

Men love peace, and if not antagonized, they will behave, and until justice is done in that good time to come, all the gaols on earth cannot make them behave. It never did, and it never will.

The “single tax” is so simple, so fundamental, and so easy to carry into effect that I have no doubt it will be about the last reform the world will ever get. People in this world are not often logical; in fact, there is never any considerable number of them that are logical. I am pretty sure the people will never get started in the right direction; they will go a long way around.

Economics doesn’t have to be the dismal science

Monopoly pictureEconomics has been called “The Dismal Science.” But it’s also been called “the science of how people get a living.” Our daily lives are beset with economic questions! Why is it so hard to buy a home? Why does the cost of going to university rise so fast? Why are willing, able workers unable to find jobs?

What about us the citizens — is basic economic literacy out of our reach? We are told, we need to ask the experts. But the experts tell us, “It’s more complicated than that!” Referring to obscure formulas and charts, they pitch their arguments at each other.

The Henry George Institute offers online courses that cast a light on today’s baffling economic problems and whats more the first course is absolutely free! No longer must you PAY US$25 and WAIT for a teacher to be assigned. But, you do still have to read stuff – that can’t be helped. It’s great stuff, though. 

People in the group share a basic insight. The course explores this insight from all relevant vantage points, from its roots in classical economics to its capacity to resolve the crippling contradictions of modern “autistic” economics. But be warned, this course will change the way you think and feel about society!

There’s not a darn thing to lose. Do sign up! Click here to find out more.

Taking Mirrlees Forward

JulianThe leading tax experts who conducted the Mirrlees Review came to the conclusion that Land Value Taxation is such a powerful idea, and one that has been so comprehensively ignored by governments, that the case for a thorough official effort to design a workable solution seems to be overwhelming. In particular, the report noted, significant adjustment costs would be merited if the inefficient and iniquitous system of business rates could be swept away and replaced by an LVT (James Mirrlees et al 2011, p. 377).

Taking his cue from this Henry George Society of Devon member Julian Pratt has written a paper for the consideration of Treasury which sets out a compelling case for the replacement of Business Rates with revenue raising based on Land Value. The paper notes that the current regime of National Non-Domestic (Business) Rates (NNDR) encourages the under-use and under-development of non-domestic land and penalizes businesses that invest in buildings and other improvements, reducing their profitability and competitiveness. Replacing NNDR with Land Value Taxation (LVT) would provide more than £3 billion a year in economic stimulus as the dead weight loss of taxation under the current system was lifted. Moreover it would benefit businesses that invest in their property, reduce under-use and dereliction of land, increase business profitability and international competitiveness, regenerate deprived areas, have a counter-cyclical impact on the economy, permit infrastructure to become self-funding and reduce tax avoidance and evasion.

The paper advocates a two-stage switch over and calls on Treasury to carry out a feasibility study to further explore mechanisms for valuation, revaluation, transition and piloting.

The paper can be accessed here: Business rates reform proposal

The Resources of Africa

A number of months ago I blogged about the Land of Africa as a response to a BBC piece about the path to prosperity for African nations. Just to be clear, land in the broad economic sense means all of the natural world, those things not made by people i.e. natural resources. I recently came across the following interview with Paul Collier in which he eloquently identifies the key issue at the heart of combating poverty, be it in developing nations or those already developed for that matter. It’s a must share!

Paul Collier is Professor of Economics and Public Policy at the Blavatnik School of Government and Director for the Centre for the Study of African Economies at the University of Oxford.

The Cargo Cult of Money

CargoCultIn responding to the financial crisis of 2008 and the failings of our so-called capitalist system the good folk over at Positive Money have done excellent work highlighting how banks have the ability “to create money out of thin air as debt”, giving those institutions an economic privilege i.e. an advantage over others down stream that don’t have that ability. There is a lot of truth in what they say however to claim that reforming the money system alone will solve the problems of inequality and poverty goes too far. Economic analysis exclusively fixated on money has something akin to a cargo cult – that is to say an attempt to recreate successful outcomes by replicating circumstances associated with those outcomes, although those circumstances are either unrelated to the causes of outcomes or insufficient to produce them by themselves.

When trying to explain the economic thesis of Henry George to some people this fixation with money tends to get in the way. Therefore  to understand Georgism it helps to switch off the “money button” in the brain and adopt the assumption (temporarily at least) that money is a benign factor in the economy which simply facilitates the exchange of goods, services, wages, capital and access to land . It makes all of these things fungible so that the market – the invisible hand of supply and demand – can do its work.

By temporarily abandoning monetary explanations one can then try then to understand how wealth (goods and services) produced in our economy ends up being unequally distributed. Why is it that some can compel others to work for them on their terms and appropriate a big chunk of the fruits of their labour? What gives some the whip hand to repress others? The Georgist answer to these questions is that private ownership of the resources of the Earth (LAND in its broadest economic sense) enables owners to claim larger and larger shares of increasing economic productivity. This private ownership is a monopoly privilege. It allows those who own the most valuable land to extract and pocket huge amounts of rent. In short, no economic production can take place without access to the natural opportunities of the Earth but those who must live from labour alone are forced to pay a toll charge for this access.

The film RealEstate4Ransom opens with the quote “if you had all the money in the world and I had all the land, what would I charge you for your first night’s rent?” The point being that when it boils down to it ownership of land will trump ownership of money every time. Land asset bubbles are commonly identified as a symptom of financial excess, but could it be that they are actually the cause? Ultimately rent is the fuel supply the financial system runs on.

In the end reform of our current flawed economy and the building of a fair and crony-free system is likely to require both monetary measures on the one hand and measures that facilitate the sharing of natural opportunities on the other. On the third hand lets throw a universal citizens income into the mix too. Give and take among heterodox economists is needed to move this agenda forward. From time to time this requires the suspension of ones long held assumptions. We need to start with an open mind in order to be receptive of new ideas.

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