Are land rents, collected by the community, enough to replace all other taxes?

It-is-in-vain-in-a

Note: An unfinished version of this article was briefly online earlier today. I was trying to revert to a previous revision.

Also, apologies for the lack of posts over the last few months, I’ve been really busy with school and I’ve been lacking in inspiration.

On this blog, I have stated numerous times the benefits of collecting land rents for the community. Land speculation is curtailed, making desirable plots of land that were previously hoarded available for production, resulting in higher outputs and incomes. Equality increases, as money flows less to a select few owners of prime land, and more to the majority of people who work to produce goods and services. Even better, if the government collects land rent, it no longer has to levy taxes, such as those on incomes, sales, profits etc. levied in Australia and in other modern economies, freeing the economy from the deadweight loss of taxation. Land rents can cover government spending, and if there is any money left over, it can be distributed to every citizen via a Citizens’ Dividend (previously referred to as a Basic Income), further reducing inequality and minimising the pain of the automation of jobs.

But there is some doubt as to whether land values are really enough to replace all existing taxes, let alone pay for a Citizen’s Dividend. However, it can in fact be proven that the potential revenue from land rents exceeds the current revenue from the taxes that we levy. First we need to look at how income is distributed, and who really pays tax, to prove that All Taxes Come Out Of Rent (ATCOR).

When goods and services are produced and sold, this generates income that is then distributed to pay for the resources involved in production. According to the three-factor model, the factors of production are land, labour and capital, and in most cases all are required to produce a product. From the income generated by selling a profit, wages must be paid for labour, interest must be paid for capital, and rent* must be paid for land. Therefore:

Product (Income) = Wages + Interest + Rent

Sufficient wages must be paid to motivate workers to go to work.  However, the minimum possible wage is paid, because to pay higher wages than necessary would increase costs. If wages were made any lower, people would not go to work.

Sufficient interest must be paid to pay for the cost of purchasing and maintaining capital. However, the minimum possible rate is paid, because any more would increase cost, and any less would not be a sufficient motivation to bring capital to the market.

If wages are kept to a minimum, and interest is kept to a minimum, then what is left over is rent. While revenue that is not spent on wages and interest may be thought to be profit, since land is necessary and scarce, those who own valuable land have the power to take virtually all excess profit, beyond that which can be accounted for through (minimal) interest (for providing capital) or wages (for adminstrative work). The landlord takes what is left after labour and capital are paid, and so rent is a residual.

If a tax is levied on, say, worker’s incomes, this must be factored into the distribution of product income.

Consider, for example, a cook working in a restaurant. The cook will only work for at least $20 per hour. Less than $20 per hour would be insufficient encouragement, and the cook would not work for such a wage. If, in an hour of work, the food cooked results in $60 of revenue, and $20 is required to pay for the capital involved (as well as other costs, such as wages received by co-workers, as well as the owner for the work they do in managing the restaurant), $20 is left to pay for rent:

$60 = $20 + $20 + Rent

Rent = $20

If the restaurant pays a wage of $20 to the cook, and there is no taxation, the cook receives $20 and is happy. But if there is an income tax of 20%, even if the restaurant pays a $20 wage, the cook only receives $16, which is, in the cook’s view, not enough. The cook will not work unless $20 per hour is received. If there is a 20% tax, the restaurant owner must then pay $25 per hour, of which the cook only sees $20 per hour. Now there is only $15 remaining to pay rent:

$60 = $20 + $25 + Rent

Rent = $15

When $5 is collected in tax, rent is reduced by $5. In this way, All Taxes Come Out Of Rent. Although income tax is the most significant tax in Australia, this principle applies equally to other taxes, which must also come at the expense of rent.

GST (Goods and Services Tax) is levied at a rate of 10%. For $60 of restaurant meals, since GST is already included in the price, $5.45 would have to be paid**. Since wages and interest are already at a minimum, this $5.45 must come at the expense of rent.

Since All Taxes Come Out Of Rent, every dollar of tax currently collected by government means a dollar less of land rent. If all taxes are removed and replaced with the collection of land rents, every dollar of tax revenue lost will be matched by a dollar gained in land rents. Therefore, land rents are a far larger revenue source for government than our current tax bases.

Potential land rent revenues = current land rents + current tax revenues

image

Source: The Australian Government the Treasury

But that’s not it. Our current taxes also have deadweight losses (or excess burdens) associated with them. If the aforementioned restaurant owner has to pay $25 per hour for cooks, less cooks will be hired, and, as a result, less food will be produced. When production is taxed, production is reduced. If all taxes on production are eliminated, production will increase, and the income obtained from production also increases. As a result, rent may also increase. So:

Potential land rent revenues = current land rents + current tax revenues + increase in land rents from removal of the deadweight loss of taxation

In conclusion, land rents are enough to replace all other taxes by a very large margin. They can fund both not only spending on public services, but a pretty decent Citizen’s Dividend. Even better, removing other taxes means a weight is lifted off of production, resulting in higher incomes, through wages, interest and Citizen’s Dividends.

*Here rent refers to payment for land, a natural resource fixed in quantity. The everyday payment referred to as rent includes payment for buildings, which is technically interest, in addition to rent.

**My working out:
GST = 10% of (price – GST)

GST = 0.1 (price – GST)

10 x GST = price – GST

11 x GST = price

GST = price/11

GST = $60/11

GST = $5.45

Advertisements

Value Capture for Perth Airport Link: Kill (At Least) Three Birds with One Stone

airporttrainThe Western Australian Government has announced that it intends to build an underground rail link to Perth Airport, as well as Forrestfield, a suburb to the east of the airport. This will involve 8 km of tunnel (the line will be built entirely underground), and cost about $2 billion.
It is encouraging to see this railway line proposed. Public transport usage in Perth is increasing, and there is sure to be travel demand from both visitors and residents for a railway to the airport. There will be many benefits from this rail line, as it will become easier to access Perth’s airport, but how are the benefits distributed.
Travellers will save money on taxis and parking, and potentially save time as well.
But the main beneficiaries will be owners of large plots of prime land near stations. The newspaper article about this proposal in The West Australian even has the headline, ‘Landowners Eye Airport Rail Bonanza’

“A 250ha pocket of semirural and light industrial land in High Wycombe is set to leap in value when the Barnett Government announces the terminus station for its airport rail link.

The Forrestfield station is next to a strategic pocket of land bounded by Maida Vale Road, Dundas Road and Roe Highway.
The land is certain to be rezoned for higher density mixed-use residential and commercial – a windfall for dozens of landowners.”

There is a fundamental disconnect, when infrastructure is paid for by the public purse, and yet huge benefits flow to private landowners, whose contribution to this project may barely have been greater than that of a low-income earner struggling to make ends meet, and who rarely goes to the airport.
What is effectively a transfer of wealth from the government to the lucky few who own prime land would be bad enough at any time, but this comes at a time when the WA government is under severe financial pressure. Concerns have been mounting over the rising level of state government debt, especially last September when the state government lost its AAA credit rating. According to Premier Colin Barnett:

“The only thing I can say is maybe we’re guilty of trying to do too much too quickly, maybe we need to slow down a little bit.”

Election promises for huge infrastructure spends had to be scrapped, with the MAX light rail system shelved, and the Airport line deferred (although it was originally proposed to be completed by 2018, the current completion year is 2020).
Making matters worse for Barnett’s government, the Federal government simply refuses to fund urban rail. On the campaign trail last year, Tony Abbott said:

“We have no history of funding urban rail and I think it’s important that we stick to our knitting. And the Commonwealth’s knitting when it comes to funding infrastructure is roads.”

The WA government is putting its budget position on the line to build a $2 billion Airport rail link, and yet huge benefits are flowing to a select few owners of land near stations.
If this increase in land values was captured using substantial land value taxation (WA has a small land tax, but it is insignificant in terms of the gains possible for lucky landowners), the WA government could build a rail line to the Airport that was self-funding. In fact it could build light rail as well, and could build many infrastructure projects, without the need for unsustainable debt. The government spends money on the rail line, but they will get a return on their investment from increased land value tax revenue.
More generally, increased land value capture would also help reduce the WA government’s debt, and could replace stamp duty, an inefficient tax that punishes households for moving to homes better located for their needs, even though this is already a costly inconvenience. Treasurer Mike Nahan claims that Stamp Duty is a ‘dumb’ tax, but sees no alternative.

“Our largest tax base, besides pay roll, is stamp duty on housing transactions which is actually a tax on people moving house – about as dumb as you can get,” Dr Nahan said.

“It’s a bad tax but it’s a very important tax to us and we have no alternative.”

If Dr Mike Nahan could implement an increased land value tax, he could kill (at least) three birds with one stone – fund infrastructure such as the Airport Rail Link, reduce the WA government’s debt, and replace Stamp Duty.

Jobs, Automation and the Leisure Society

We say we want jobs. If a politician promises to ‘create jobs’, he or she will receive more votes. If a company says that it will ‘create Image
jobs’, than it can be expected to see political and community support, no matter what it does to in order to create those jobs. If a proposed legislation for environmental protection is said to ‘destroy jobs’ then that law is considered bad and should not be supported, no matter what good it does to the environment. We hear all the time about automation and other technological advances, such as self-serve checkouts, ‘taking jobs’, giving the impression that the use of technology in the economy should be limited.

But why? Why do we want jobs so much? Aren’t we also sick and tired of work? Don’t we long for the weekend? Aren’t labour-saving devices for domestic work such as washing machines and dishwashers considered great technological achievements that have increased living standards and equality in many countries? Don’t we hope to retire one day, taking cruises around the world, putting the days of working behind us?

THE LEISURE SOCIETY 

Automation technology is already quite advanced, and will advance further. Technology has the power to remove the need for much of the labour currently used in the economy, paving the way to a leisure society, where most of the population works only a few hours a week and has plenty of leisure time. Yet technology is also painted as a job-killer that will increase inequality, displace the middle class and leave many in unemployment and poverty. Why is labour saving technology seen as an undesirable thing?

In the past, we have always dreamed of a leisure society, in which the human race is freed from the tyranny of work. For example, John Maynard Keynes wrote in Economic Possibilities for our Grandchildren in 1930, that the economic advancement of the last 250 years should continue, with the Great Depression caused by technology reducing the need for labour faster than the economy can find new ways to employ labour. Keynes suggests that in the future, we may only work three hours a day, or fifteen hours a week, and we will be freed from the drive of money, and the resultant greed and avarice, and become more virtuous and fair. If in 1930 a work week of 15 hours was predicted in the future, why do we still work 40 hours a week and upwards? Do we desire leisure or working?

WHY DO WE STILL WORK SO MUCH THEN?

The truth is, we do not actually desire jobs themselves, but what they provide and represent.

At the individual level, a job provides an income. A job and an income are nearly synonymous for most people of working age in non-subsistence-economy countries. A job also represents self-reliance, and ‘earning’ money. Australia and most other developed countries provide welfare, in giving payments and housing to the unemployed. People still want jobs though, because working for money feels fairer and more just, the right thing to do. There is a stigma attached to receiving welfare payments funded by taxpayer dollars, as working people are unhappy that the money they earn go to the pockets of others.

In addition to these individual motivations, there are reasons job growth is desired by society as a whole. Since a very large proportion of a country’s population is in the labour market, creating more jobs will spread wealth more evenly amongst the population, and reduce income inequality. More jobs would give the otherwise unemployed money through wages, and make labour more scarce, increases wages for existing workers. It is said that automation technology that reduces the amount of labour, on the other hand, will increase the share of an economy’s income going to owners of capital, and reduce the share of wealth going to agents of labour. Since ownership of capital is concentrated among a certain ‘One Percent’ of society, increasing the share of income going to capital at the expense of labour will increase income and wealth inequality.

To summarise, we want jobs not because we want to exert labour, but because we want more wealth distributed relatively evenly in a form that all people feel is fair and does not carry a stigma. Is there any way to distribute wealth to large numbers in a fair manner other than through jobs? A way that will accept the increasing role of labour-saving technology in the economy, rather than allowing it to be demonised as currently?

A CITIZENS DIVIDEND

How about a Citizen’s Dividend – a Basic Income scheme funded from the natural commons, such as land values, distributed equally to every citizen on an unconditional basis? If everybody can receive enough income to cover living expenses, then a job becomes not a necessity, but simply a way of earning extra income, on top of the Citizens Dividend, if one desires extra income. And since a job is no longer considered a necessity, there should be little resistance to labour-saving technology that ‘kills jobs’. In fact, automation technology should be hailed as reducing work and increasing leisure time for workers.

WHO BENEFITS FROM AUTOMATION?

It is not necessary for capital to come under control of the state in order to share the benefits of labour-saving technology to all. This is because, ultimately the fruits of increased technology flows to owners of land rather than owners of capital.

The process of wealth generation involves labour acting upon land, aided by capital and entrepreneurship. Labour, capital and enterprise collectively represent producers, and producers require land. There cannot be a factory, office or creative studio without land to put it on. Therefore producers must rent or purchase a block of land to place capital (such as buildings) on. Different producers compete to use one block of land, based on the advantages that land has to production, such as proximity to suppliers, customers, road and rail links, and so on. This competition allows landowners to charge a fee for producers to access land, increasing fees up to the greatest amount a producer will pay.

What a producer will pay depends on what they can produce on that land. The law of rent states that a producer will only pay the advantage of the extra wealth they can create on a given superior piece of land compared to the wealth they can create on marginal land, land which is free (because no other producers are competing for it). When there is no free land, producers will pay the amount of land rent that will leave enough left over to maintain and motivate the different producers. This means sufficient wages to pay the living expenses of workers and motivate workers to work, a sufficient return on capital to pay for the costs of maintaining capital and motivate investors to invest in capital, and a sufficient return on entrepreneurship to meet the living costs of and motivate entrepreneurs.

When labour-saving technology advances, producers’ productivity increases, as more units of output can be produced per unit of input. A given amount of wealth can be produced with a given amount of labour, capital and entrepreneurship, or a given amount of labour, capital and enterprise can produce more wealth.

Labour-saving technology increases the amount of wealth producers can create, allowing land owners to increase the fees they charge to access land. Hence, the benefits of labour-saving automation technology predominantly go not to agents of labour or capital but to owners of land.

The large-scale ownership of land is concentrated among the wealthiest portion of society, so under our current economic set-up, technology that reduces the need for work mostly benefits owners of land to the exclusion of others.

This can be changed, however. If the value of land is captured for all, by a government or trust administering the common ownership of all to land, then the benefits of advancements in technology will be shared, and will increase the living standards of all. If only we shared ‘The Natural Commonwealth’, we could grow collectively into the leisure society we have always dreamed of.

Watch out for the addendum I plan to post shortly, in which I explore Keynes’ explanation for the Great Depression, mentioned in passing earlier in this post as labour being saved faster than new ways to employ labour are found.

Economic Analogy 1: The Brick Wall of Land Rent

When governments allow the unearned value of land to flow to private hands, this acts as a barrier to economic activity, health and growth.

Land values generally rise over time, as a result of population and economic growth. When there is an expectation that land values will continuously rise, land buyers become willing to pay more than the real value of land, so that they have the opportunity to make gains from future land price rises. This is known as the speculative premium on land prices, and forms the difference between land value and land price. Land value is what land is worth, in terms of its productive capacity and locational advantages, while land prices are what people are willing to pay for land.

Every dollar of the speculative premium on land prices is a dollar that workers and businesses must pay for homes and commercial premises. This land speculation acts like a brick wall in front of economic activity. Land speculation causes land bubbles (often referred to as ‘housing’ or ‘property’ bubbles), as land prices rise far beyond the value of land.

In addition to increased land costs, when land value gains are allowed to flow into landowner’s hands, rather than be used as government revenue, workers and businesses must pay taxes on their incomes, further acting as a brick wall to economic growth.

Rising productivity and good economic growth in an economy will just cause an economy with privatized land rent to run into the brick wall faster. Eventually, the economy crashes into the brick wall – land prices just become too much of a drag on the economy. This is the root cause of the business cycle, of economic booms and economic recessions and depressions.

Equality of Opportunity as a Fig Leaf

Don’t get me wrong, I fully support equality of opportunity. Everyone in society, no matter where and in what circumstances they are born, should have every opportunity to succeed. All men are born equal.

However, neoliberals, whose policies promote inequality, have used the idea of ‘equality of opportunity’ as a fig leaf, to hide the fact that they really won’t do anything to combat, and don’t even care about, inequality.

In the US, Paul Ryan, of the Republican Party, said the following:

These actions starkly highlight the difference between the two parties that lies at the heart of the matter: Whether we are a nation that still believes in equality of opportunity, or whether we are moving away from that, and towards an insistence on equality of outcome.

Policies that ignore the rent-seeking ‘free lunches’ that, more often than not, are what the richest members of society got their wealth from, and defund public services and impoverish less fortunate members of society, increase income and wealth inequality dramatically. Fully aware of this, the majority of people would not vote for politicians who support such policies, as they would be better off for not doing so. Therefore, neoliberals must offer a carrot to voters. They offer the ‘opportunity’ to become a part of the elite.

A casino analogy is apt to describe the neoliberal concept of ‘opportunity’. The casino operators represent (and might be in reality) those rich off unearned income. The gamblers represent the rest of the population. Gamblers are encouraged to play the game by the possibility of a windfall gain. In practice, the gamblers usually lose, and the casino operators become rich from the gamblers. Hence, this can be called casino capitalism.

But people’s livelihoods shouldn’t be part of a game. Offering people a chance to become a part of the elite normalizes massive gaps in terms of incomes and wealth between the rich and the poor.

How can this happen? Because our economies are already sufficiently unequal, the wealthiest people have enough of a share of an economy’s wealth to use it as a carrot to manipulate less wealthier citizens. The super-rich can fund parties and candidates that do not represent the interests of the majority of voters, so much so that those parties and candidates are consistently in power.

Henry George predicted this, all the way back in 1879:

… political equality — when coexisting with an increasing tendency toward unequal distribution of wealth — will ultimately beget either tyranny or anarchy.

A representative government may become a dictatorship without formally changing its constitution or abandoning popular elections. Forms are nothing when substance has gone. And the forms of popular government are those from which the substance of freedom may go most easily. For there despotism advances in the name of the people. Once that single source of power is secured, everything is secured. An aristocracy of wealth will never struggle while it can bribe a tyrant.

When the disparity of condition increases, democratic elections make it easy to seize the source of power. Many feel no connection with the conduct of government. Embittered by poverty, they are ready to sell their votes to the highest bidder or follow the most blatant demagogue. One class has become too rich to be stripped of its luxuries, no matter how public affairs are administered. Another class is so poor that promises of a few dollars will outweigh abstract considerations on election day. A few roll in wealth, while the many seethe with discontent at things they don’t know how to remedy.

Where there is anything close to equal distribution of wealth, the more democratic government is, the better it will be. Where there is gross inequality in the distribution of wealth, the opposite is true. The more democratic government is, the worse it will be. To give the vote to people who must beg or steal or starve, to whom the chance to work is a favor — this is to invoke destruction. To put political power in hands embittered and degraded by poverty is to wreak havoc.

Hereditary succession (or even selection by lot) may, by accident, occasionally place the wise and just in power. But in a corrupt democracy, the tendency is always to give power to the worst. Honesty and patriotism are a handicap, while dishonesty brings success. The best sink to the bottom, the worst float to the top. The vile are ousted only by the viler.

National character gradually absorbs the qualities that win power. In the long panorama of history, we see over and over that this transforms free people into slaves. A corrupt democratic government must finally corrupt the people. And when the people become corrupt, there is no resurrection. Life is gone, only the carcass remains. It is left but for the plowshares of fate to bury it out of sight.

Unequal distribution of wealth inevitably transforms popular government into despotism. This is not a thing of the far future. It has already begun in the United States, and is proceeding rapidly before our very eyes. Men of the highest ability and character avoid politics. The technique of handlers and hacks counts more than the reputations of statesmen. The power of money is increasing, while voting is done recklessly. Political differences are no longer differences of principle. Political parties are passing into the control of what might be considered oligarchies and dictatorships.

Modern growth is typified by the great city. Here we find the greatest wealth and the deepest poverty. And here popular government has most clearly broken down. In all the great American cities of today, a ruling class is defined as clearly as in the most aristocratic countries. Its members have whole wards in their pockets, select slates for nominating conventions, and distribute offices as they bargain together. “They toil not, neither do they spin,”* yet they wear the finest of raiment and spend money lavishly. They are men of power, whose favor the ambitious must court, and whose vengeance they must avoid.

Who are these men? The wise, the learned, the good? No. They are gamblers, fighters, or worse. Men who have made a trade of controlling votes, and buying and selling offices and legislation. Through these men, rich corporations and powerful financial interests pack the Senate and the courts with their lackeys. In many places today, a Washington, a Franklin, or a Jefferson could not even get into the state legislature. Their very character would be an insurmountable disqualification.

Progress and Poverty, Chapter 42 (Modern Edition)

Rather than giving people the ruse of ‘equality’, how about some real equality. Capture unearned economic rent, such as gains in a landowner’s property caused by an enterprising community and government-funded infrastructure and services, to block off this free lunch for a select few. Use this captured rent to sustain all, through a Basic Income scheme. This gives people a safety net to take on risky and  volatile ventures such as starting a business or writing a book, and pay for the costs of living while people undergo education and training.

Give people an equal grant to start themselves off, and allow people to earn more money only through hard work, and true equality of opportunity will appear.

Political liber…

Political liberty, when the equal right to land is denied, becomes, as population increases and invention goes on, merely the liberty to compete for employment at starvation wages. This is the truth that we have ignored. And so there come beggars in our streets and tramps on our roads; and poverty enslaves men who we boast are political sovereigns; and want breeds ignorance that our schools cannot enlighten; and citizens vote as their masters dictate; and the demagogue usurps the part of the statesman; and gold weighs in the scales of justice; and in high places sit those who do not pay to civic virtue even the compliment of hypocrisy; and the pillars of the republic that we thought so strong already bend under an increasing strain.

– Henry George, Progress and Poverty, 1879

The Effects of Economic Rent When Private and When Common

Economic rents are unearned income. They are not in return for exertion, like wages given for labour, and they are not in return for bringing capital to the market, like capital yield/interest*. Rents come from owning a finite resource, usually a natural resource.

Rents, unlike wages and capital yields, do not serve to incentivise economic activity. On the contrary, they tend to discourage it.

When a worker receives pay in return for work, they are incentivised to work. Ceteris paribus (all other things being equal), a worker who works more will be paid more, and a worker who works less is paid less. As a result, people are encouraged to contribute their labour to production.

Labour can be combined with natural resources (‘land’ as a factor of production) to produce goods and services for consumers or to produce capital. Consumer products directly satisfy the wants and needs of consumers, while capital products are themselves used for further production. Some products can be both consumer and capital goods, such as computers or vehicles. Laptops can directly satisfy the wants of households, or can be used by businesses in the process of production to generate wealth.

Since all capital is produced by labour and land, manufacturers of products obviously must charge prices sufficient to pay wages and rent (inventory costs consist of both wages and rent) to stay in business. Consumers will pay for products that they want, but capitalists are in business, and must recoup their costs. Therefore, they must receive a return to their capital (capital yield/interest) sufficient at least to cover the costs of purchasing, and also maintaining, capital. This is one justification for interest.

In addition, when an owner of capital receives capital yield or interest on their capital, they are encouraged to bring capital to the market. Someone who has saved $100 000 could stash it under their bed or floorboards (hoarding), which slows economic activity. Alternatively, they could use it to buy capital, such as a commercial vehicle or small shop, that facilitates economic activity. They could also pool their resources with others to buy more expensive capital goods, or lend their money to someone who needs it to purchase capital, likely an entrepreneur. Interest incentivises people to use their savings in a way that is beneficial to the economy. In summary, capital yield and interest pay for the costs of capital and encourage capital to be produced and brought to the market.

On the other hand, land has no production cost and can’t be produced. As a result, when a land owner leasing his or her land receives rent … nothing in particular happens. The land owner has done very little, probably no labour, as real estate agents, for example, can be paid a small fee for property management. They are not driven to produce more land, as land generally cannot be produced. Land reclamation is used only in extreme cases, and reduces the area of a body of water. While higher land prices and rents may encourage owners holding land vacant to release land, this is more than counteracted by the trend of rising land prices encouraging land owners to hold land vacant with the intention of selling for a higher price in the future.

This land speculation is destructive to the economy. When valuable locations are kept out of use, it means workers cannot produce wealth at those locations, and so are denied opportunities to make a living. They must accept other work, and since opportunities to work have been limited, wages are lower. In addition, they must set aside some of their already smaller income to meet rising housing costs. Workers may have no choice but to work under someone fortunate enough to possess some capital. Remember that since workers have less money, few people can afford capital. Since a small number of people have capital, they are able to force workers to work for low wages.

But capitalists do not have it all lucky. They too must forego good land, and put capital on inferior land, where lower capital yields are made. They too must pay rent to landlords. Landlords gain massively, workers lose massively, and capitalists are in between.

Unearned rents are the perfect source of government funding. Raising revenue from rent-based sources, far from inhibiting economic activity, increases economic activity. Not only will workers and capitalists no longer have to pay rents, but taxes on incomes, sales, profits and similar sources will no longer have to be levied. The productive parts of the economy will gain enormously.

Government revenue from rents is likely to exceed government spending. Social welfare programs designed to help those denied reasonably paying work will no longer be required. Stress and health problems will be reduced from less demanding lifestyles, reducing health costs. Infrastructure costs will be reduced, as the cause of urban sprawl, prime locations going unused, will be removed. The excess revenue may be distributed to every citizen via a basic income grant. Every citizen unconditionally receives a certain sum of money on a regular basis, to spend on whatever they like. Some may take care of family members, further their education, undertake creative endeavours, or even start a business. I have previously written about this topic in more detail here. Even land owners may be better off than they
would otherwise be, if economic growth is particularly fast, and the basic income exceeds what they would otherwise receive  from their land.

In conclusion, while it is very beneficial to the economy for wages and interest/capital yields to be kept private, privatised economic rent is harmful to the economy. On the other hand, rents captured for purposes of government revenue may be a force for good.

*Here I use the terms ‘interest’ and ‘capital yield’ interchangeably. Both refer to the wealth distributed to owners of capital. Capital yield is a more precise term for my purposes, as interest can refer to returns on any loans or securities, which can be used to purchase land. Interest, however, is a more commonly used term to describe the return to capital.

Geoism and Natural Ability

Worker/Boss conflict - "They're fighting the wrong person - Landlords get all the money

Economics in Six Minutes (Source: twoplustwoequalsfor.tumblr.com)

The Geoist economic system is designed to promote equality. By recovering land rents for the use of the whole community, rather than a few individuals, it closes avenues for one person to become wealthy without working, while others work hard and receive very little money. One’s wealth consists of what they produce, nothing more and nothing less. This is reasonable and just, and preserves incentives to work hard.

But what about people who have more natural ability to produce, or people who produce more wealth with the same amount of exertion. When working, they would receive more wealth for the same amount of labour. In other words, they receive more return to their labour. While it is justified that those who add more to the economy should receive more from the economy, an element of injustice could also be seen, where two people could put in the same effort and get unequal reward.

If we take two computer programmers to serve as an example, who put the same amount of effort into their jobs, the first programmer, who had better programming ability, might produce twice as much good software code as the second programmer. If they were paid according to how much they produce, the first programmer would receive more. But they both put in the same effort! Why should one get more out of luck to be born with better ability?

If we redistributed income from the better programmer to the other programmer, then that would constitute a taking of the fruits of an individual’s labour. This is not to be advised, as it increases the size of government and throws the door open to more income redistribution, such as that which outright breaks the link between effort and reward, eroding incentives to work hard. Geoism can solve this quandary through income pre-distribution, rather than income redistribution.

Labourers who receive more return to their labour would be smart to seek to produce at the best quality locations. This would multiply their natural abilities, allowing them to fulfil their impulses to seek the most money under the market economy. In turn, good capitalists and entrepreneurs who own capital in good locations would seek the best workers, as this would maximise their capital yields.

Smart owners of superior land would seek the most productive enterprises (those with the best workers providing highest capital yields), as this would allow them to extract the most rent, as long as land taxes are based on assessed land values, not actual rents.

While at first this would increase the gap between the naturally able rich and the poor who contribute equal labour to the economy, let some time pass. As those with the most natural ability tend, through market forces, to work on the most productive land, ground rents would be calculated on the assumption that that land would be used by the highest quality workers, as the tendency mentioned in the previous paragraph spreads to all landowners, and increases.

The increased yield of labour that some workers have over other workers would be taken in rents for the locations on which they work. The increased rents that landowners receive would be accounted for in land value assessments, and collected for the good of all. Those who have less natural ability would still receive the same reward for labour, once rents are taken into account.

The same mechanism could be used to sort out capital of varying quality, without having to contend with the higher investments sometimes required for higher yield options that might impede the market solution of more investment money flowing towards the highest yielding capital, or to complement that market mechanism. The highest yielding capital would tend towards land with the highest rent, while the lower yielding capital would tend to land with the lowest rent.

Feedback Form
Enhanced by Zemanta

A Basic Income Guarantee Doesn’t Need Coercive Redistribution

In the last few weeks a lot has been said about Libertarianism and the Basic Income Guarantee (BIG). This includes Matt Zwolinki’s column piece ‘The Libertarian Case for a Basic Income’, Ash Navibi’s critical response, and John Danaher’s 3 part series on ‘Libertarianism and the Basic Income’ (Part 1, 2, and 3), and many other articles quickly accessible via Google search. However, a recurring basic assumption through many of these writings are that a BIG requires coercive redistribution. This is never challenged. However, a BIG can be provided without coercive redistribution, if the right revenue streams are tapped.

What is a Basic Income Guarantee?

A basic income guarantee provides to every citizen an unconditional income. Everyone, rich or poor, full-time worker, part-timer or unemployed, is provided with a regular stream of money. This can provide for, or help provide, for the necessities of life, and helps people who are unemployed, have to care for others, or wish to take a risk on an entrepreneurial venture. Even if one cannot receive sufficient income from work, they are still given enough to meet the needs of life. Those left jobless are not forced into homelessness.

A BIG holds advantages over conventional social welfare programs. Since there it is universal, without means testing, there is no disincentive to work harder and earn more income, where that might otherwise push an individual’s income beyond the means test. There are no cases where it is not worthwhile to work due to welfare, and people become dependent on the hard work of others. There is also no stigma behind receiving the BIG to meet your needs, as everyone receives it.

If a BIG did require forced income redistribution, I would find it difficult to reconcile with a libertarian viewpoint. Libertarians believe in the free market, and in low taxes, and raising income taxes to fund a basic income would be a very difficult proposition. But we need not raise income taxes. We simply need to tap unearned income.

Scarce Nature

Abiotic nature, including all of its resources, services and opportunities, are scarce, and we cannot expand or increase them. Nature was not created by humans through labour; it existed before us, and we came from it. We cannot create more of nature. To use land, probably the most significant aspect of nature,as an example, land reclamation projects simply take from the seas and oceans to create more buildable land, and are economically viable in very few situations. No nature can be added by humans.

Living organisms, such as plants and animals, are not fixed in size since they reproduce. Plants and animals whose reproduction we can control may be considered capital, as they are taken care of through human labour and other capital. What I call nature is usually referred to as the economic factor of land, which includes much more than the common notion of land as the dry surface of the earth.For the sake of simplicity, when I refer to nature, I do not include organisms we breed.

As a result of the scarcity of nature, the value of nature rises immensely, in line with economic activity. For example, as the population and economy of a settlement grows, as the settlement becomes a large city, land values rise immensely. A small block of land in a city such as New York is worth much more than an enormous plot of farmland in the interior of a country.

Rents (Unearned Income)

When individuals are given rights to the gain in land value, heavily guarded as ‘private property’, we have given them unearned income, also known as economic rent (as opposed to wages for labour, interest/capital yield for capital, and profit for enterprise).

There is no basis for property rights in that which cannot be created through labour. The purpose of private property is to protect that which an individual has made through their own effort and hard work, and provide incentives to produce. When Alice is paid $20 an hour for their work, this is what her employer judges to be the value of her work to them in the market. They may use that money to buy an amount of goods and services equivalent to the goods they produce or services they provide (taxation complicates this).

Since individuals do not create land through labour, and can’t be incentivised to do so, property rights to land values are not justified. All that is needed is the possession of land, the exclusive right to land, protection against others intruding in your land, and the right to the wealth produced on that land, in return for a charge based on the value of that land.

Rent Capture

What I have just suggested is often called ‘land value taxation’, or simply a ‘land tax’. However, these names are inaccurate, as a tax usually refers to a forced payment made to the government, without any particular good or service in return (government services received are rarely in proportion to taxes paid). However, a charge based on land value, is a trade, a purchase of the exclusive rights to land in exchange for a fee. If you do not wish to pay the charge on your land, based on its value, you may give it to others. Land not in prime locations that is excess to economic needs, which nobody competes for, has no value, and so it may be used for free, without the payment of any charges whatsoever. This revenue tool may be more accurately called ‘land value capture’.

Other than land value capture, revenue tools that capture nature’s rents rather than hard work include a carbon price for using the atmosphere to dispose of carbon (as well as similar charges for other pollutants). Whether or not global warming is real, caused by humans, and worth fighting, it is worthwhile to charge a price for the earth’s services when the atmosphere is used to dispose of pollutants.

Mining and extraction companies should also be charged royalties or severance taxes equal to the value of minerals in the ground, which is equal to a normal profit rate subtracted from profits of mining companies. Most companies buy at a price, add value, and sell as a higher price, but companies that extract minerals, oil and gas do not pay a price for their products, which they sell for a considerable profit. Mining companies deserve the value they add to minerals by taking them out of the ground and making them usable, and a return to their capital, but not unearned income from natural resources.

There are also numerous smaller rents, such as water rights charges, fishery license charges, and so on. Altogether, these rents likely have enough value to fund a fairly-sized BIG, and remove all taxes on labour and capital as well. This provides more incentives to work, overcoming any discouragement to work that a BIG would bring. This double bonus of a basic income and no taxes would dramatically increase economic growth and wealth, and entrepreneurialism, as we will see later.

Managing Rents

Those on earth, including the human race, as well as other animals and plants, have a common right to the value of nature. We are created from nature, a part of nature, so we have the rights to the fruits of nature. Since, we are the most advanced and intelligent race on this planet, humans have a duty to administer the rights to nature. The fruits and value of nature are to be used to benefit all people, rich or poor, elderly, young or yet to be born for a hundred years, as well as other species inhabiting the earth.

An organisation or organisations representing all people should take care of rights to nature. It would administer nature’s resources, services and opportunities, and revenues from trades for the above three fruits of nature. These organisations might be democratic governments that truly represent their populations, or trusts with a duty to manage nature, whichever is more achievable and suitable.

Remember that the enforcement of property rights requires a governing body, just as a BIG does. A basic income funded from nature’s revenues is no less laissez-faire than letting owners of nature become rich off unearned income. Both require government action, and in both cases the income is not from work. The only difference is that a BIG benefits all, while leaving unearned income to owners of nature benefits only a select few. A BIG is not income redistribution, it is just distribution.

The term ‘predistribution’ is sometimes used, referring to an economic system that prevents the privatisation of unearned income, and ensures a fair wealth distribution in the first place. This means that individual incomes vary only as individual labour contributed to the economy varies. This is much more efficient than redistributing income, which entails greater adminstrative costs.

The Basic Income Grant Helps Entrepreneurs

In fact, a basic income promotes libertarianism and the free market more, as it encourages entrepreneurialism. To start a business requires a significant amount of starting capital. If Bob can use a BIG to meet their daily needs, then the money he gets from working can be saved. Enough money can be saved for Bob to start a business. Had there been no BIG, Bob would likely still be working for someone else, simply trying to make ends meet, without enough money to realise any entrepreneurial aspirations. Rather than creating jobs, he would have taken a job.

Income during the early stages of a business is often small. The Bob’s income may be too small for him to survive, or live in reasonable comfort. A BIG supplements a small business owner’s income, allowing and encouraging entrepreneurs such as Bob to stick by small businesses, and allow them to grow.

An entrepreneur takes on risk. They risk failure. With a BIG, the failure of a business is no catastrophe. If an unsuccessful business leaves Bob without income, a basic income can help him survive, while he finds a job. Bob may start another business, likely a more successful one, since he has had the opportunity to learn from his mistakes.

In any case, there is plenty of justification to support entrepreneurs with a BIG. Entrepreneurs obviously create jobs. While people will no longer have to work with a BIG, the sheer abundance of jobs that will result will likely encourage many people to work anyway. After all, human wants are unlimited. But when a business fails, this provides information on what works and what doesn’t for a business. To use the language of Nicholas Nassim Taleb’s book Antifragility, fragile units (businesses) make for an antifragile whole (economy). ‘The fragility of every startup is necessary for the economy as a whole to be antifragile, and that’s what makes, among other things, entrepreneurship work: the fragility of individual entrepreneurs and their necessary high failure rate.’ Mistakes made in business help the economy run smoother. The economy improves with individual failure.

However, the benefits of mistakes do not always flow to the same people who made those mistakes. A entrepreneur starting a business may look at past businesses similar to theirs that failed, to know what not to do. That person has benefited from the errors of another person. This happens more if a failed entrepreneur can’t start another, more successful business, having learned from past mistakes. A BIG allows entrepreneurs who have made mistakes to get back on their feet, and create new, better businesses. It also compensates those who have failed for the benefits their mistakes have on others.

Conclusion

A Basic Income Guarantee does not need coercive redistribution. It is very much compatible with libertarianism, if funded from capturing unearned incomes. It helps the free market function better and promotes entrepreneurialism, economic growth, wealth generation and job creation.

Feedback Form