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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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.

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