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Fiscal Federalism

Mason Gaffney: Cannan's Law

One way to act globally (or at least nationally) is through a national land tax, or some reasonable facsimile thereof, coupled with a national citizens' dividend. The income tax act of 1894 did include land income in the tax base, thanks to the persistence of a handful of single-tax Congressmen -- yes, really, there once were such men. The U.S.S.C. struck it down for that reason, (22) but Congress and the voters came back with the 16th Amendment, adopted in 1913, that did include land income in the tax base. When Congress, led by single-taxer Warren Worth Bailey, first implemented the amendment it virtually exempted wages and salaries by exempting incomes below a high cutoff point.(23) The brunt of federal taxation fell on property income, much of it land income, and it was enough to finance World War I.

Since then the income tax has evolved, step by step, into its present anti-labor form, with most property income exempt de facto, and high rates on earned income. (24) It is legal to reverse that trend, and would be good, but here we will focus on the cognate matter of "fiscal federalism."

To enable basic tax reform at the local level we must deal with local particularism. To do that, in turn, we must deal with "fiscal federalism." How are central governments to distribute funds from their so-called "surplus": to people (social dividend), or to local governments representing landowners? When we wake up to smell this coffee, we will find that a lot of economists have gotten up first. Many of these deal with LAND RENT, defined as Ricardo would. (25)

The reason it is so hard to sell growth policies -- like land-value taxation -- at the local level today is that fiscal federalism, as practiced today, is perverse. Central governments, imbued with the anti-personnel spirit of Austen Chamberlain, tax people as people, while handing out subventions to landowners as such, and to local governments as such. The landowners can get the subventions without having people, so who needs people? That's our problem in a nutshell. Persons as such become fiscal pollutants, from the local view. After the T-Men have plucked their feathers, working persons are less able to pay local taxes; while Federal grants relieve local landowners from needing population to share public costs.(26)

Perverse fiscal federalism is DEsocialization of rent -- creating new private rents using public monies wrung from workers. This is inherent in grants for capital spending, e.g. for sewerage; and tax exemption of muni bonds. These are given to municipalities as such. That is only a step away from returning dollars to landowners as such, because municipalities are defined as areas of land, a group of local landowners. Desocialization is inherent in farm subsidies, e.g. payments to fallow land, using tax money from workers. It is inherent in preferential assessment of farmland, e.g. California's Williamson Act, where the state pays localities for their lost tax revenues from underutilizing lands. It is inherent in the use of property-tax exemptions to subsidize many underutilizations of land and hobbies of the rich, like redundant airports for private jets, cemeteries, golf courses, campuses, church parking lots, conservation easements, timber, etc. Some of these may foster socially defensible uses, but note it is the lands, not the personnel, that are tax-exempted.

Canada's classic Carter Commission Report (27) led the right way, but Canada's actual equalization program leads the wrong way.(28) Equalization grants from Ottawa to the provinces are lower to provinces whose taxable capacity per head is higher, and of course vice versa, according to a detailed formula. So far, so good, but the devil is in the definition of "taxable capacity." Canada specifically excludes land value from measures of taxable capacity. (29) Buildings are included as part of the potential tax base; a hardworking productive population is included; a thriving commerce is included; but land value is quietly excluded. Thus a province wherein vast and valuable lands are underused is considered a charity case, eligible for alms from Ottawa; while another province that makes productive use of meager lands is liable to pay more taxes, but will get less relief. That helps explain why Ontario and Quebec, despite their great urban and locational advantages, still rank below the provincial average in measured taxable capacity.(30) It is not the capacity that is lacking, but the measurement of it. The tilt is patent; it could hardly be an accident. If any of the many brilliant economists, politicians, and bureaucrats who publish on equalization payments, horizontal fiscal federalism, and Canada's Representative Tax System (RTS) have even peeped on this vital matter, I am not aware of it. Their consciousness has fallen below the threshold of perception, and needs desperately to rise.  ... read the whole article

Mason Gaffney: Canada's System of Revenue Sharing

It seems to me therefore that we need to face up to the question that is known in my trade as Fiscal Federalism, that is, how is money going to be distributed by the federal government out of its so-called surplus, either to people or the States, or localities?

When we look at this issue, which is definitely a Georgist issue, we'll find interestingly enough that a lot of economists have gotten there first. Many of these are Canadian economists, and without exception they talk about rent. They talk about rich provinces and poor provinces., and the rich provinces are those that have resource rents. And when they say rent they are not talking about Frank Sinatra's voice, or Bridget Bardot's figure. They're talking about the income of natural resources. Now it's not just a question of distribution here… but a whole question of whether a growth oriented policy will sell at the local level. ... 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