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

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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

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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

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2 thoughts on “Are land rents, collected by the community, enough to replace all other taxes?

  1. A reasonable explanation Fred. However it seems a bit simplified when you say the cook won’t work for less than $25. In your analysis you don’t factor in minimum wage laws (or what would happen without them); you frame minimum wages for mobilising labour as if labour does not need to wages in order to survive, or capital would rather receive no return than a lower return.

    Your analysis involves every dollar taken from the employee is one more dollar the employer must cover, which comes out of of the landlords’ economic rents. This is somewhat misguided. Payroll taxes and company taxes are charged to the employer but really come out of employees’ total wages. Employees’ wages are in fact reduced in nominal terms by those taxes, as well as income tax and GST etc. ATCOR does in fact apply, but from my perspective it manifests in a different order…

    The most fundamental factor is how these economic rents rise and fall as taxes do. It is not so much to do with what capital and labour are willing to accept as a return in order to mobilise; in the industrial revolution peasants were willing to recive barely subsistence wages, since a wage is better than no wage, and some interest is better than no interest. People will work for the best return they can obtain (within their ability) at least until they have covered subsistence; after that they will factor in disincentives to work or accumulate capital for investment.
    Where ATCOR comes in has to do with how much disposable income/purchasing power people/consumers have after they have covered their subsistence. If we reduced income tax, then the beneficiaries would use their increase disposable income to bid up land prices and economic rents (in the long run). When their income is reduced by tax, they have less purchasing power to bid up those prices.

    It is this act of bidding or increase in the demand for land (from an increase in surplus consumer income/purchasing power) which results in higher rents. It works the same way as what an increase in possible mortgage borrowing (credit monetisation) or First Home Vender Grants. By putting more money/purchasing power in the consumers’ pocket, they can bid up prices of fixed assets further and vice versa. It has less to do with what returns people are willing to accept for their labour or capital; most people would rather receive a return than no return.

    • Thanks for taking the time to read and reply.

      Your explanation for ATCOR is probably stronger than mine, and can stand up with less assumptions than mine.

      Although it must be noted, that, given the existence of a welfare system, and in some cases the ability to live with family, people may well be able to decide to take no wage rather than a lower wage. Or in the case of the legal minimum wage, they are barred from taking a lower wage. Also, someone who has money to invest will be unwilling to invest in capital if it offers meager returns, given that they have the ability to ‘invest’/speculate in land.

      But again, your explanation still applies in a completely laissez-faire economy, while mine relies on the existence of the welfare state and minimum wages.

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