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Excess Burden

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

... Even a relatively flat income tax imposes what economists call a “deadweight loss” or “excess burden” on society. Taxes on productive activity increase the price of labor or goods beyond economic costs, and so reduce the quantity provided. This reduction in production, income, and investment is a misallocation of resources. Resources are wasted because they do not go to where they are most wanted. We can reduce this excess burden by reducing taxes, but changing the type of tax can also reduce this deadweight loss. Economists recognize that if we tap for public revenue a resource whose quantity is fixed, the excess burden disappears. The tax does not reduce the supply and does not increase prices. ...

In Progress and Poverty (1879), his most important book, Henry George contended the ideal tax would most closely conform to the following conditions, similar to those of Smith:

1. That the tax bears as lightly as possible upon production, minimizing the excess burden or deadweight loss.
2. That the revenues be easily and cheaply collected, and fall as directly as may be upon the ultimate payers — so as to take from the people as little as possible in addition to what it yields the government.
3. That it be certain and visible, so as to give the least opportunity for tyranny or corruption on the part of officials, and the least temptation to lawbreaking and evasion on the part of the taxpayers.
4. That it be equitable, giving no citizen an arbitrary advantage or privilege, and in being consistent with moral principles. ...

Impact on production

It is widely understood that when something is taxed, we get less of it. As discussed above, this reduction in labor, production, and investment is called the “excess burden” or “deadweight loss” of taxation. Income taxation discourages work, sales and value-added taxes discourage consumption, capital gains taxes discourage investment, and real property taxes discourage building and improving property. Those taxes make the asset or activity more costly, which then reduces the quantity bought of the thing being taxed.

What makes land different is that its supply is fixed, and it is independent of human action. When land value or rent is tapped for public revenue, the land does not shrink, flee, or hide. ... read the whole document


Fred Foldvary:  The Rent, the Whole Rent, and Nothing but the Rent

The use of rent for public revenues therefore has no excess burden, no burden on society or the economy. Taxes on income, goods, and transactions do have an excess burden, since by raising the price and reducing the quantity of goods, resources do not get allocated to where the people most want them. Taxes on labor and goods raise prices, while rent-based payments do not affect the rent, and they lower the price of land rather than raise it.

Rent is therefore the ideal source of general public and community revenue. Tax reform should therefore shift to rent as the primary source of general funds. Pollution charges can supplement the rent, and indeed can be considered a rental charge for using and abusing the atmosphere, land, soil, and other forms of land. There could also be user fees for services specific to users, fines for violating traffic rules, and profits from enterprises.

The economic rent from minerals, water, and oil would be natural resource royalties that could be paid by bidding for the rights to extract, from payments based on the amount of mining, and the profits from the operations, depending on the circumstances.

Nic Tideman:   The Case for Taxing Land
I.  Taxing Land as Ethics and Efficiency
II.  What is Land?
III.  The simple efficiency argument for taxing land
IV.  Taxing Land is Better Than Neutral
V.  Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land

There is a case for taxing land based on ethical principles and a case for taxing land based on efficiency principles.  As a matter of logic, these two cases are separate.  Ethical conclu­sions follow from ethical premises and efficiency conclusions from efficiency principles.  However, it is natural for human minds to conflate the two cases.  It is easier to believe that something is good if one knows that it is efficient, and it is easier to see that something is efficient if one believes that it is good.  Therefore it is important for a discussion of land taxation to address both question of efficiency and questions of ethics.

This monograph will first address the efficiency case for taxing land, because that is the less controversial case.  The efficiency case for taxing land has two main parts. ...

To estimate the magnitudes of the impacts that additional taxes on land would have on an economy, one must have a model of the economy.  I report on estimates of the magnitudes of impacts on the U.S. economy of shifting taxes to land, based on a mathematical model that is outlined in the Appendix.

The ethical case for taxing land is based on two ethical premises:  ...

The ethical case for taxing land ends with a discussion of the reasons why recognition of the equal rights of all to land may be essential for world peace.

After developing the efficiency argument and the ethical argument for taxing land, I consider a variety of counter-arguments that have been offered against taxing land.  For a given level of other taxes, a rise in the rate at which land is taxed causes a fall in the selling price of land.  It is sometimes argued that only modest taxes on land are therefore feasible, because as the rate of taxation on land increases and the selling price of land falls, market transactions become increasingly less reliable as indicators of the value of land.   ...

Another basis on which it is argued that greatly increased taxes on land are infeasible is that if land values were to fall precipitously, the financial system would collapse.   ...

Apart from questions of feasibility, it is sometimes argued that erosion of land values from taxing land would harm economic efficiency, because it would reduce opportunities for entrepreneurs to use land as collateral for loans to finance their ideas.  ...
Another ethical argument that is made against taxing land is that the return to unusual ability is “rent” just as the return to land is rent.  ...

But before developing any of these arguments, I must discuss what land is. ...

When there is more than one tax in an economy, one must take account of the fact that the second tax will generally reduce the excess burden of the first tax.  This is because when you tax a good, say apples, people buy other things instead, say bananas.  If you then tax bananas, some of the expenditure that no longer goes to bananas will go back to apples, thereby reducing the magnitude of the tax-induced shrinkage of the market for apples.  If it were possible to tax ‘everything’ at the same rate, then people would pay the same total amount in taxes no matter what they did, and there would be no excess burden of taxes.

What makes it impossible to tax everything at the same rate is that one of the things that would need to be taxed is leisure.  Taxing authorities have not yet devised ways to maintain people’s tax obligations when they decide to earn and spend less money.  Thus all systems that tax people according to what they receive (from working or saving), or spend, generate excess burdens.  They do this by making the incentive to work less than the value of what people produce and the incentive to save less than the productivity of investments financed by saving.  Still, systems of ‘broad-based’ taxes (e.g., sales taxes, income taxes and value added taxes) generally have lower excess burdens than tax systems in which a variety of individual goods and services are taxed at different rates.  Actual broad-based taxes generally have exceptions and non-uniformities, and these generally increase the excess burdens that the taxes cause.  Still, one way in which a departure from uniformity in taxation can promote efficiency is that, if there are some goods and services that are particularly likely to be purchased in greater quantity when people consume more leisure, then a somewhat higher tax on these can serve as a partial substitute for taxing leisure.

In addition to discouraging work, most tax systems discourage saving by taxing the proceeds of people’s savings.  This results in less saving and investment.  With the passage of time, this can cause a very large reduction in the amount of capital in an economy.  And a reduced stock of capital generally means that labor will be less productive and wages will be lower.  A tax system that taxed only consumption and not saving would not have this com­ponent of excess burden. However, raising a given amount of revenue in a tax system that did not tax saving would require a greater distor­tion of the labor/leisure decision than in a tax system that did tax saving
Consider how the above analysis of excess burden changes when land is taxed.  Elemen­tary economics texts often offer the analysis shown in Figure 2.  The supply of land is said to be perfectly inelastic, vertical.  Thus when a tax introduces a wedge between the price paid by buyers of land services and the price received by seller, the quantity remains unchanged.  The triangle disappears.  Thus there is no excess burden of a tax on land.  A tax on land is ‘neutral’. ...

To summarize: If land is subject to a tax or combination of taxes with a present value that is independent of how the land is used, and if potential investors are confident that the magnitude of the tax will not exceed the value of using the land over the life of potential invest­ments, then a tax on land has no excess burden; it is neutral. ...  Read the whole article

Bill Batt: Painless Taxation

Real tax reform could do away with those taxes that are resented by the large proportion of our population. We could replace all taxes on wages and on interest by instead taxing economic rent. Rent is windfall income; it is income that arises not from the efforts of any person or corporation; it comes about as a surplus gain from common social enterprise. There is ample moral warrant for society to lay claim to that which it has created, as well as to that which no individual or party has earned. Analysis increasingly makes clear that economic rent in all its forms is far larger than official government figures indicate; in fact it is likely sufficient to supplant all current taxes on labor and capital (wages and interest) which are acknowledged to have so many negative effects. Recovering economic rent in all its manifestations by taxing its various bases actually can foster economic performance and yield other benefits that make it the natural source of revenue for governments. Such a tax is essentially painless. ...

Tax Principles

The starting points should be the lessons that have been learned over the course of the past three hundred and more years about what is a good tax. Most basic textbooks in public finance enumerate them in very clear form, and they constitute benchmarks against which to measure the soundness of any particular tax. They are listed as few as three or as many as eight such principles but little disagreement exists as to their substance, regardless of ideology or government. Most commonly enumerated are neutrality, efficiency, equity, administrability, simplicity, stability, sufficiency.[3] Tax theorists typically measure revenue structures according to any or all of these criteria: ...

Tax efficiency is much like tax neutrality, and is the measure of how much shifting of behavior it imposes, resulting in what is called "excess burden," or "deadweight loss" on the economy. Tax economists usually hold that the best taxes are those that are shifted little if at all. Because the elasticities (a technical word for the slope of supply and demand curves) of each are very different, a tax on land values and a tax on improvement values have very contrastive effects on economic choices. Using a tax base that has little or zero elasticity is the best way of assuring that taxes are not shifted. Zero elasticity is another way of saying fixed supply. ... read the whole article

Nic Tideman:  Applications of Land Value Taxation to Problems of Environmental Protection, Congestion, Efficient Resource Use, Population, and Economic Growth
I. Justifications of Land Value TaxationLand value taxation is sometimes justified on the ground that, unlike almost all other sources of public revenue, a tax on land value does not impose an excess burden on an economy. This argument can be found in the writings of the Physiocrats, Adam Smith, David Ricardo, and numerous modern writers. It is based on the fact that, with a properly administered tax on land value (unlike other taxes), it is not possible for a person to lower the tax that is due by being unproductive. ... Read the entire article

Nic Tideman:  Improving Efficiency and Preventing Exploitation in Taxing and Spending Decisions

There is a proposal that tax increases be allowed only with a two-thirds majority of both houses of Congress. That has some merit, but it carries a risk of excessive deficits. It also allows the existing level of taxation to go unquestioned. It would probably be better to have a rule that every spending proposal must be approved by a two-thirds majority of both houses of Congress to be enacted. Maybe three-fourths. If spending is truly worthwhile, then, as Wicksell said, there is a way of financing it that will secure the approval of nearly everyone.

The current trend toward returning functions to the states is a step in the right direction. But it encounters understandable objections that poor states cannot afford to do what they ought to do. Some form of revenue sharing is needed. But it is important to have the right definition of which states are rich and which are poor. The level of well-being in a state is determined in part by the wisdom of its public policies. States should not be penalized for adopting productive policies. Revenue sharing should equalize per capita levels of natural opportunities (mineral revenues, fishing rights, pre-development land rents, etc.) Replacing the personal and corporate income taxes with either a flat income tax or a national sales or value added tax would greatly reduce the excess burden of federal taxes. (Excess burden is roughly proportional to the square of the typical marginal tax rate.) But almost all the gains go to the rich. Perhaps the flat tax could be combined with a guaranteed income.  ...  Read the whole article

Bill Batt: The Merits of Site Value Taxation

Tax efficiency is much like tax neutrality, and measures how much shifting of behavior it imposes, resulting in what is called "excess burden," or "deadweight loss" on the economy. Tax economists usually hold that the best taxes are those that are shifted little if at all. Because the elasticities (a technical word for the slope of supply and demand curves) of each differ, a tax on items that have little or zero elasticity is the best way of assuring that taxes are not shifted. Zero elasticity is another way of saying fixed supply, such as, for example, land.14
14 Hence Will Rogers advised people to "Buy land, because they ain't makin' any more of it."

... In assessing the value of a tax it is also important, of course, to understand its potential to bring in revenue for the purposes of government, usually deemed revenue sufficiency. Income, sales and property taxes, along with corporation taxes to a lesser extent, have come to be regarded as the workhorses of the American revenue structure. But, as anti-tax politicians are quick to note, the higher these taxes are, the more they impose a drag on the economy. One recent study calculates that the deadweight loss due to taxes in the American economy is equal to $1 trillion every year, about a sixth of the total GDP.17 This is why one should ponder whether to consider raising taxes which have demonstrable distorting effects.
17Fred Harrison (Ed.), The Losses of Nations: Deadweight Politics versus Public Rent Dividends. London: Othila, 1998. See also Dale Jorgenson and Kun-Young Yun, "The Excess Burden of Taxation in the United States," Journal of Accounting, Auditing, and Finance, fall, 1991. ... Read the whole piece

Bill Batt: The Nexus of Transportation, Economic Rent, and Land Use
This means that taxing away land rent more relieves it from circulating through labor and capital, allowing those factors in turn to be more productive. Significantly, perhaps most importantly, the collection of land rent, on account of its inelasticity, incurs no deadweight loss like tax levies on labor and capital. The economy thus functions more efficiently -- i.e. with less drag and friction.

Lest one believe that this excess burden, or so-called deadweight loss, is a negligible drag on the economy, studies show just the opposite. One study calculates that it was equal to about 20 percent of the total US economy in the mid-1990s, annually at least one trillion dollars in lost output.(23) Put another way, a well designed efficient revenue structure would allow productivity to rise by that amount and effectively make our income that much higher. For Great Britain, the comparable figure was shown to be £400 billion annually.

Deadweight loss is a concept understood by economists but not by the general public. But this is likely to change as discussion about the merit of various taxation approaches is presented to the public. Nations in the European Community are now required to publish their calculations about the deadweight loss of the various tax schemes being reviewed, precisely because of the recognition of its importance as a factor of production.(24) ...... read the whole article

Bill Batt: The Fallacy of the "Three-Legged Stool" Metaphor

Taking first the argument that spreading the tax burden over as wide a base of sources as possible, it is best to begin by noting that revenue streams can be drawn from only three elements of the economy: 
  • Land,
  • Labor, and/or
  • Capital. 
Standard textbooks for Economics 101 typically start with recognition of these factors, even if they usually give insufficient attention to Land as a component.  Classical economics, culminating particularly in the tradition of Henry George, includes in the idea of Land any and all components of value not created by human hands or minds.  It therefore means not just locational sites on the earth's surface that might be bought and sold as real estate, but other elements of so-called "natural capital" as well: 
  • the electromagnetic spectrum,
  • air,
  • water,
  • fish in the ocean,
  • mineral wealth,
  • airport time slots, and so on. 
Those elements have a market price, and can be -- indeed are -- often subject to taxation.  It is important to note, however, that taxes on such Land are capitalized in the market value of their worth; they cannot be passed forward or backward because their supply is essentially inelastic. 

This is important, as will be noted below, because imposing such taxes incurs no excess burden on their use or upon the general economy.  Taxing such bases is totally neutral and completely efficient.  Indeed, it is the failure to tax Land as stated that leads to economic distortions and causes an economy to function at a sub-optimal level.  Land, whatever its form, has a market value only to the extent that a human presence exists to make use of it, and it acquires that value due to the accretion of economic rent, the return that comes to rest on such factors.  

Taxes on Labor and Capital, in contrast, are always shifted.  Studies of so-called tax incidence seldom trace the flow of tax burdens beyond the first or second step of the shift.  Textbooks and research studies will note that particular burdens -- for instance, a tax on the sale of goods -- will be partly borne by the vendor and partly also by the consumer.  The vendor in turn sees that tax incorporated into the price he pays for the product at the wholesale level; the consumer sees his burden reflected in the relative cost of living of his tax jurisdiction -- which in turn affects the price of his home and his wages.  The shift in taxes, as economic theory makes clear, are ultimately converted to rent, and that rent, as capitalized in land prices, is its final resting place.  It is a truism of classical economics as carried through in the present day tradition of Georgist economics that all taxes come out of rent -- an adage that has come to be abbreviated as ATCOR.4
4 See Mason Gaffney, "The Philosophy of Public Finance," especially, pp. 188-192, in Fred Harrison (ed.), The Losses of Nations: Deadweight Politics versus Public Rent Dividends. London: Othila Press, 1988.

What this insight means is that all taxes not first imposed on Land and collected from the rent that rests thereon are instead passed through the economy from one party to another until they ultimately come to rest on Land, thereby increasing the price of real estate.  The passing along of tax burdens not only creates distortions in economic transactions; it also constitutes an excess burden and an inefficiency that handicaps economic performance. 
  • Taxing any form of Capital makes it more expensive and leads to less saving and investment;
  • taxing Labor, in the same way, depresses wages and discourages enterprise. 
Contemporary economists and conventional tax theorists well recognize that taxing Labor and Capital is detrimental to economic vitality -- politicians thrive on repeating this ad nauseam.  Currently the Republican party candidates seem best able to exploit resentment about the negative impact of taxes.  But they are not alone in failing to appreciate the nature of tax shifting.  What all fail to realize is that there are notable exceptions to the rule that taxes are oppressive: any tax imposed on an inelastic base -- that is, any form of Land -- constitutes no distortion or excess burden whatsoever.

Far from spreading the burden of distribution over a wide array of  tax bases, the ideal tax, then, should be imposed solely on those factors of production that form an inelastic base, i.e., that constitute forms of Land -- whether they be locational sites, natural resources, the spectrum, time slots, or others as they may arise in the future.  Land, in any of its forms, is totally inelastic.  Will Rogers in his pithy way said it well, "Buy land.  They ain't making any more of the stuff."  Mark Twain said it too. ...

Tax efficiency is much like tax neutrality, and is the measure of how much shifting of behavior it imposes, resulting in what is called "excess burden," or "deadweight loss" on the economy. Tax economists usually hold that the best taxes are those that are shifted little if at all. Because the elasticities (a technical word for the slope of supply and demand curves) of each are very different, a tax on land values and a tax on improvement values have very contrastive effects on economic choices. Using a tax base that has little or zero elasticity is the best way of assuring that taxes are not shifted.  Zero elasticity is another way of saying fixed supply. ... Read the whole article

Bill Batt: The Compatibility of Georgist Economics and Ecological Economics

A tax that is neutral is one that in no way alters the behavior of the markets by its imposition; that is people perform and make choices in the same way as if there was no tax at all.39 Because a tax on “land” broadly defined is inelastic, i.e., has a fixed supply, any tax on this base is completely capitalized in the market price of the land itself. It is, in effect, a tax on the land rent, or a recapture of the land rent by government in the name of society, just as the rent is a creation of that society.
39"The striking result is that a tax on rent will lead to no distortions or economic inefficiencies. Why not?  Because a tax on pure economic rent does not change anyone's economic behavior. Demanders are unaffected because their price is unchanged. The behavior of suppliers is unaffected because the supply of land is fixed and cannot react. Hence, the economy operates after the tax exactly as it did before the tax--with no distortions or inefficiencies arising as a result of the land tax." P. Samuelson and W. D. Nordhaus, Economics, 16th ed., p. 250.

A land tax is efficient because there is no economic distortion of market choices as a consequence of its neutrality. This means that there is no wasted economic behavior in the form of excess burden or deadweight loss typically associated with other tax designs. As an example of the inefficiencies of other taxes, for example, one might consider the altered behavior that occurs in consequence of the presence of the income tax or the sales tax. This deadweight loss in American and British economies has been estimated to be roughly 20% of the national domestic product in each nation. Put differently, were there no deadweight loss as a result of the tax structure, the society would essentially be 20% more productive — and 20% richer in the aggregate.40
40Fred Harrison (Ed.), The Losses of Nations: Deadweight Politics versus Public Rent Dividends, London: Othila, 1998, and Dale Jorgenson and Kun-Young Yun, “The Excess Burden of Taxation in the United States,” Journal of Accounting, Auditing, and Finance, fall, 1991. Harrison, et al. calculate that the deadweight loss of the current tax system of United States is a trillion dollars annually. Nicolaus Tideman et al. have modeled “The Avoidable Excess Burden of U.S. Broadbased Taxes,” in Public Finance Review (September, 2002), showing a “net gain of about $10,000 per worker (16% of NDP) in the first year, rising to $17,800 (23.7% of NDP) after 20 years for the most productive tax reform, which involves collecting 90% of the rent of land and using the income tax as a residual tax. When the sales tax is used as the residual tax, the gain per worker is about $3,300 less.” This and other work is summarized in “The Gains from Taxing Land,” in Geophilos, No.03(1) (Spring, 2003), pp. 56-60. See also Alan Durning notes that “Complying [with the personal income tax alone] takes Americans 5 billion hours each year. For every dollar raised, U.S. taxpayers spend nine cents obeying the law. Cheating is widespread; roughly one-fifth of income goes unreported.” Alan Durning and Yoram Bauman, Tax Shift: How to Help the Economy, Improve the Environment, and Get the Tax Man Off Our Backs, Seattle: Northwest Environment Watch, April, 1998. p. 17. This is further corroborated in Donald L. Barlett & James B. Steele, The Great American Tax Dodge (Boston: Little, Brown & Co., 2000), where the authors note (p. 23) that the proportion of U.S. taxpayers deliberately engaged in cheating on their income taxes now approaches “between one -third and one-half of the tax-paying population.”... read the whole article

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Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper