Wealth and Want
... because democracy alone is not enough to produce widely shared prosperity.
Home Essential Documents Themes All Documents Authors Glossary Links Contact Us



Fred Foldvary:  Well being and being well off
I see three ways in which one can define "well off." First, one is better or worse off relative to the distribution of wealth or income in a particular society. ...
Secondly, being well off can be thought of as relative to the typical person in the economy. ...
Third, one can define "well off" in absolute terms. ...

Being absolutely well off means,

  • first, that one is able to rise substantially above subsistence through peaceful and honest means, whether from one's labor, from one's rightful share of natural and contractual benefits, or from gifts.
  • Secondly, to be absolutely well off requires complete liberty, so that the only legal restriction is the prohibition of coercive harm to others. Liberty includes security against attack, either by government or by private persons, since one is not really free if one is under substantial threats of death and theft against which one is helpless. ...
The economic policy of liberty has four rules:
  1. To the creator belongs the creation.
  2. The profit of nature's creation belongs equally to all.
  3. The benefit of what is created by government belongs to all the people in its jurisdiction.
  4. When the initial distribution is just, the outcomes of free exchange are just and should not be hampered  ... Read the whole article

Ted Gwartney:  Estimating Land Values

Adam Smith, in The Wealth of Nations, suggested that any "tax" should be a charge for services which benefit all people and are more efficiently preformed by a single cooperative effort. He postulated four principles of taxation which any source of revenue should meet:

1. Light on the production of wealth, and does not impede or reduce production;

2. Cheap to collect, requiring few collectors, and easy to understand;

3. Certain; can't be avoided, little opportunity for corruption, and provides adequate revenue;

4. Equitable and fair, payment for benefits received, impartial, and just.

Collecting public revenue from land rent is the only revenue source, or "tax", that meets these criteria. ...

While the major argument for raising public revenue from land rent and natural resources is because it is equitable and fair, it is also the most efficient method of raising the revenue which is needed for public facilities and services. Land is visible, can't be hidden and its valuation is less intrusive than valuations of income and sales. Taxes on labor and capital cause people to consider alternative options, including working with less effort, which produces less real goods. For example, a tax on wages will reduce after-tax net wages and weaken the incentive to work. A person might be willing to work hard for a wage of $20 per hour, but decide to drop out if the taxes take $8 and the net wage is only $12 per hour. Economists claim that present taxes account for a 25% loss in production in the United States. Production and consumption would be greatly improved if public revenue came primarily from land rather than a wage tax. The same would occur when buildings and machinery are taxed. The tax on building reduces the quantity and quality of buildings produced. A tax on sales, commerce or value added reduces consumption, production and net wealth. Sales tax evasion in the United States has exceeded 30% in recent years.

As new inventions and more efficient ways of producing goods are discovered, people's economic well-being is not improved, because they have lost access to land and must pay both rent and taxes. (5) Instead of rent being used to provide community services, capital and wages must be depleted, which obstructs private enterprise.

When the rent of land is taken for public purposes production and distribution are not held back. This is because the same amount of rent would otherwise have been taken by some private individual. The rent would be the same, the difference is how it is utilized. There is evidence that communities who raise their revenue from land, rather than from labor and capital, are more prosperous, many increasing productivity by more than 25%... Read the whole article

Maurie Fabrikant: An Open Letter to Wayne Swan
The "Great Australian Dream" now - as in preceding years - has been to own your own home. From their earliest years of adulthood, most citizens have attempted to purchase "a roof over their head." It used to be - no more than two human generations ago - "a three-bedroom weatherboard - or brick veneer, if you could afford it! - on a quarter-acre block in the suburbs." Most citizens - then - succeeded in realising that dream; at least they started repaying a loan that was large compared with their earnings. Nowadays, it's quite impossible for most. Why? Simply because land-price has escalated out of the reach of most. Allow me to give you a specific instance:-

In 1962, my wife-to-be and I signed a contract to purchase a block of land in Noble Park, a suburb 27 km south east from Melbourne's CBD. It was a bit less than a quarter acre, quite large even by the standards of the time. (Nowadays, it's considered enormous!) It cost us 1,200 pounds; that is, $2,400. At that time, I was employed as a Class 1 Engineer; the lowest level of engineer having a tertiary-level qualification. My wife was a full-time housewife and mother earning a little from some hairdressing work at home. My wife and I still occupy the home that was built on that block in 1965 then extended in 1974 and again in 1980. There are almost no vacant blocks left in Noble Park now but I have been informed - by local real-estate agents - that our block would bring at least $160,000 if unimproved because it is large enough for four single-level home-units! A comparison in $ terms conveys very little information due to inflation and changes in taxation but the following should overcome that difficulty:-

The price we paid for the block back in 1962 was exactly equal to my gross pay during that year; in other words, the block of land cost the same as the services of a Class 1 Engineer for one year. (The income tax I paid that year - I still have a copy of the income tax return! - was almost exactly 150 pounds; that is, 12.5% of my gross pay. It's interesting to note that the highest rate of income tax that applied then was 13/4 - thirteen shillings and fourpence - in the pound; that is, 66.67% of gross pay.) Nowadays, a Class 1 Engineer receives a starting salary of about $40,000 per year. Given that the same block of land would now cost $160,000 - that is, four years' gross pay! - it's not surprising that most couples are finding it increasingly difficult to own their own residence.  Even the cheapest blocks in "suburbs" like Pakenham - about 60 km south east of Melbourne's CBD - cost around $60,000. (Please note that the income tax payable nowadays on $40,000 is about $9,460; that is, 23.65% of gross pay yet the maximum rate at which income tax is now levied is only 48.5%. Additionally, way back in 1962, sales tax was applied to a very narrow range of goods and to no services. Nowadays, GST applies to a very wide range of both goods and services. Clearly, citizens are far more taxed now than they were.)

As you can very clearly see, it now costs couples - or singles - a great deal more to own a residence. Naturally, if they don't own their own residence, they must
  • pay rent to somebody else ... or
  • live in a caravan park or
  • share a home with relatives or friends or
  • have no place to call "home". 
None of these alternatives lead to a high quality lifestyle and undoubtedly are potent factors in separation and divorce and reliance on drug abuse which, itself, leads to anti-social - even criminal - behaviour. We also know to our great regret that these aberrations are becoming increasingly prevalent. So is there a solution? And if so, what is it?

In my opinion, there certainly is a solution ... but, seemingly, very few want to know it. Judging by your article, I think you do. Here it is:- ... read the entire article

Nic Tideman:  Applications of Land Value Taxation to Problems of Environmental Protection, Congestion, Efficient Resource Use, Population, and Economic Growth
VII. Economic Growth

Recognition of the equal rights of all to natural opportunities, through land value taxation and its extension to charges for the use of other resources, is not only just and efficient, but has the capacity to make a major contribution to economic growth. This occurs through a variety of paths.

The most important path is that public collection of the value of exclusive use of natural opportunities provides revenue that makes it possible to remove taxes from the earnings of labor and capital. When people are taxed less, they earn more. Using data that emerged from changes in U.S. tax rates, Feldstein has estimated that the elasticity of earnings with respect to the fraction of income not taken at the margin by federal taxes is at least 1.0 (and more for workers in higher tax brackets).6 When the entity that removes a tax on labor is less than global, this action also attract labor to the region.

When taxes are removed from capital, the effect is even more powerful, as long as the entity removing the tax is less than global. Capital is extremely mobile in response to regional changes in net returns. It is highly counterproductive for any locality or nation to tax capital, because there will be virtually no effect on the return to capital after taxes. Capital will merely be driven from the taxed region until the return after taxes matches what can be obtained elsewhere. If the whole world removes taxes from capital, the resulting increase in the rate of return to capital will increase the rate of saving, but the adjustment will occur over some years.

Taxing land has an additional effect that increases the stock of capital. A tax on land represents a redistribution from living adults to the young and unborn, who will now be born with rights to land. Unless there is a perfectly offsetting reduction in the desire to accumulate assets to transfer to the next generation, this redistribution will induce the living, who now have fewer assets, to accumulate at a more rapid rate than they would otherwise do. That is, saving and capital accumulation will increase.

Taxing land also increases the efficiency with which land is used. This occurs through three paths.

  • First, a tax on land reduces the return to land speculation, and therefore reduces the quantity of land speculation.
  • Second, as taxes on land are capitalized into the selling price of land, the result is the substitution of a recurring cost (the annual tax) for a one-time cost (the purchase price). This makes land relatively more attractive to bidders with high discount rates and relatively less attractive to bidders with low discount rates. To the extent that the former are more entrepreneurial and the latter more passive investors, land will tend to flow into the hands of persons who will choose to use it more intensively.
  • The third path by which a tax on land increases the efficiency with which land is used is that, for those who are using land inefficiently, it substitutes an explicit cost (the tax) for an implicit one (the income foregone by inefficient use).

Psychologically, explicit costs tend to be more effective in motivating efficient behavior than implicit ones.

VIII. An Estimate of the Magnitudes of the Consequences of Taxing Land

For all of the above reasons, the substitution of tax on land for taxes on labor and capital will increase the efficiency of an economy. To estimate the magnitudes of these consequences, one needs a model of the economy. Consider the following model. There is a three-factor CES (constant elasticity of substitution) production function:

Q = (aTà + bLà + cKà)(1/à). (1)

where Q is output, T is the quantity of land, L is the quantity of labor, K is the quantity of capital, a, b and c are coefficients, and à is related to the elasticity of substitution, å, by à = 1 - 1/å. Land has a completely fixed supply. Labor is assumed to have an elasticity of supply of 0.8 (adjusting Feldstein's number for the fact that he was considering only federal income taxes. Capital is assumed to be supplied perfectly elastically. Taking the ratio of compensation of employees to Net Domestic Product in National Income and Product Accounts, I assume that labor receives two thirds of output. Somewhat arbitrarily, I assume that the remaining third is divided equally between land and capital. I estimate that the marginal tax rate on labor is 43% (28% for the federal income tax, 12% for the combination of state income taxes indirect taxes, and 3% for the Medicare tax--I treat social security as having benefits equal to its costs, and therefore not a tax.) I estimate the marginal tax rate on land and capital at 50% (28% for the federal income tax, 12% for the combination of state income taxes and indirect taxes, plus 10% for profits taxes). The elasticity of substitution is a parameter that I am very unsure of. But Feldstein has estimated that the marginal welfare cost of taxation is 1.65, and I get that result with a å of 0.68, so I assume that å = 0.68.

I have a spreadsheet that takes parameters such as the ones named and determines what would happen (in a comparative static framework) if all taxes were removed from labor and capital, and 100% of the rent of land were taxed. Here are the results:

  • The quantity of labor would increase by 55%.
  • The quantity of capital would increase by 145%.
  • Output would increase by 53%.
  • The wage before taxes would fall by 1.7%, but the wage after taxes would increase by 72%.
  • The rent of land would increase by 87%, and would provide more than enough revenue for all existing expenditures of all levels of government in the U.S., other than social security.
  • The aggregate improvement in well-being of citizens would be about 12.6% of output, or about $1 trillion per year. ... Read the entire article

Mason Gaffney: Geoism, Recession and Control of Monopolies
Recessions (and depressions) may occur when there are massive shocks to the system (e.g., the OPEC producers withholding supplies and doubling and tripling prices of a commodity that could not be readily substituted for). Recessions may also be prolonged and accelerated by unwise public policy choices made by people who have no idea of the consequences of their actions or inactions. Now, in the activist area where I am working, there is still a strong cry for a Constitutional amendment to balance the U.S. Federal budget. Some of the economists in and out of government are saying this would be a disaster, using the same sort of "if GDP is growing, don't worry be happy" pronouncement you refer to above. When GDP is adjusted for the dollars spent on the criminal justice system and clean-up costs for preventable environmental disasters, then I might have some faith in this as a bellwether of wellbeing.

As for the coming "boom," I simply repeat my observation that there is no U.S. economy; there are only regional economies competing with one another as well as with other nations. We have the beginnings of speculative booms in some places, stability in others, and continuing recessions in others. People who cannot sell their houses because they owe more on them than they are worth cannot take their services elsewhere to seek employment. So much for the mobility of the labour force. This is one of the unfortunate sides of the American dream of home ownership; when a lease expires, one simply does not renew.

Only around 25-30% of households own their own homes. By good fortune, I just read something that helps resolve the difficulty. It seems that a great deal of anti-trust legislation from the Progressive Era had been aimed at monopoly in the flicks, which had started with Thomas A. Edison, who was as much a patent-litigation bully as he was a pure inventor. Much of this legislation became unravelled under President - guess who? - Ronald Reagan, spawn of the "entertainment" industry, and political voice for same. Vertical integration and media mergers and monopolization then ran wild. Disney under Eisner, of course, has played a role in this. Disney as real estate developer throws its heavy weight around brutally.

This question arose in connection with Georgist taxation, and what it would do about Mr. Eisner, and overpaid CEOs like him. The answer, I think, is that "Georgism" involves more than taxation. It also involves promoting competitive markets and smiting or breaking up mergers, monopolies, and restraints of trade, by various means. It was, after all, part of first the Populist, and later the Progressive Movements.

"Georgism" may be construed narrowly as a limited fiscal reform. Some of its votaries present it that way. As such, it is rightly suspected of being a bit cranky, and too limited. I see it as a broad front program to limit centralized monopoly control of industry, and promote free entry and free competition with proper regard for both consumers and workers.
Some free market purists may look askance at anti-trust actions. Consider, however, that we are dealing with people who hold patents, which are inherently anticompetitive, especially when used as clubs in the Edison manner. Consider also we are dealing with corporations, which are inherently combinations of capital made possible by the device of limited liability. When government gives an anticompetitive privilege, it seems fitting that government should limit the resulting abuses of power. read the entire article

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. ...

Taxing Land is Better Than Neutral
The analysis above explained how a tax on land can be ‘neutral’, that is, how such a tax can have no excess burden.  In fact, taxing land is better than neutral; it improves economic efficiency compared to the no-tax situation.  This section explains how.

First, a land tax can be used to take account of positive and negative externalities associa­ted with land use.  The typical example of a negative externality is pollution.  If labor and capital were perfectly mobile, then the effect of pollution on near-by locations would be reflected entirely in land values.  Thus one might say that a polluter ‘uses’ surrounding land and should pay for that use in the form of a ‘land tax’ equal to the reduction in the rental value of land that results from his activities.  Such a land tax would not only raise govern­ment revenue, but would also improve efficiency by ensuring that people would engage in activities that pro­duced pollution only when the benefits of those activities exceeded the costs.

Because labor and capital are not perfectly mobile, pollution affects not only land values, but also the value of structures and the net well-being that people experience from the opportunity to continue to live in accustomed places.  Efficient management of pollution would charge polluters for these costs as well.

When there is traffic congestion on city streets or on highways, bridges, or tunnels, one might say that there is a problem caused by people not being charged adequately for the use of particu­larly valuable space.  If there is a congestion charge (land tax) that reflects the extent to which any one user of streets and highways imposes costs on other users in the form of increased travel times, then that congestion charge improves efficiency while also raising government revenue. ...

The index of consumption is not an index of well-being, because it does not take account of the additional saving that people do.  To obtain a measure of the annual improvement in the well-being of citizens that comes from shifting as much tax as possible to land, I take the increase in saving and add or subtract the amount necessary to compensate for the change in the consumption index.  The result is a concept known in economics as the “Hicks equivalent variation.”  It reveals the amount of money that people would need to be given to make them as well off as under a contemplated change.  This is shown if Figure 10.  In the closed economy, the net gain per worker from shifting as much tax as possible to land starts out at about $10,200 per year and rises to about $19,000 per year after 25 years.  In the open economy it starts out at about $12,500 per year and rises to $40,400 per year after 25 years. ...  Read the whole article


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

Rawls manages to retain the primacy of egalitarianism without destroying all incentives to be productive by the maximin rule: Laws should be designed to maximize the well-being of the least advantaged person. This formulation, however, generates such anomalies as the following: If there are three persons, and the choice is either a distribution of $10,000, $12,000 and $50,0000, or a distribution of $10,001, $10,002 and $80,000, the maximin rule will select the latter, despite the fact that it makes the middle income person, who is already relatively poor, even poorer while making the richest person noticeably richer. In Rawls's particular formulation there is a further difficulty. He makes the maximin rule lexically subordinate to the rule that all persons should have the maximum individual liberty that all can have. However, he does not deal with the following problem: My individual liberty will be unnecessarily restricted if I am not allowed to sing you a song in exchange for a haircut (without being taxed), but if I am allowed to do so without being taxed, the maximin rule is not satisfied. If Rawls really does mean to put individual liberty lexically first, no redistributive income taxes would be permitted. ... read the whole article


Nic Tideman: The Morality of Taxation: The Local Case

Consider first the question of adequacy of revenue. There is a theorem in economics, known as the Henry George Theorem, that addresses this question (Arnott and Stiglitz, 1979). One of the simpler versions of this theorem is:

If the following three conditions are met:

1. Public expenditures provide benefits only over a limited area,
2. People can move costlessly, and
3. The number of persons who value a public service as highly as anyone does exceeds the number of persons who can live in the area where the service provides benefits,
then for any public service that is worth at least as much as it costs to those who receive it, the increase in the rental value of land that results from providing the service exceeds the net cost of the service.

The Henry George Theorem is true because people who can move costlessly will bid up the rental value of land to reflect the value of public services that are not available elsewhere. The assumption that the number of bidders exceeds the number of people who can benefit from the public service guarantees that the upward movement of rents will not end until all the benefits of the public service are reflected in these rents. If some people who receive a public service value it more highly than others, then they will receive a surplus in addition to the rent they pay for land, and some worthwhile increments of public services will not add quite enough to rent to pay for themselves (Tideman 1993). But rent increments will go a very long way toward paying for worthwhile local public services.

With some local public services, such as weather reports that are broadcasted by radio at a specified wattage, there is no social cost of having another person within the reception area use the service. With others, such as distribution of water, the extra cost of one additional user will be noticeable, but still a relatively small fraction of the average cost of the service. For public services to provide the greatest possible net value, users must be charged the costs of additional use (what economists call marginal cost). If they are charged less than marginal cost, self-interest will motivate them to use the service wastefully. And if they are charged more than marginal cost, self-interest will motivate them to economize inefficiently on the service.

Thus local public services are financed efficiently when users are required to pay marginal costs, and the component of total cost that is not covered by marginal cost charges is financed by levies on land that collect the increases in rental value of land that result from provision of the service. If all citizens in a locality valued the service equally, then every increment in the level of the service that was worthwhile would have a cost that was less than or equal to the sum of the revenue that could be raised from charges for use equal to marginal cost and the increase in the rental value of land in the community that resulted from the availability of the service. When people value the service differently, the increase in the rental value of land that results from the provision of a service will be less than the value of the service to those who receive it. By a criterion of maximizing the real incomes of residents, the best outcome that covers the full cost of a service will involve a level of service somewhat lower than that for which marginal cost is equal to the sum of marginal benefits, along with charges that exceed somewhat the marginal cost of providing the service to additional persons. Still, in general, the combination of user fees approximately equal to marginal cost and taxes on land to finance the remainder of costs is capable of providing financing for local public services that is adequate and reasonably efficient.

Next consider fairness. The fairness of such financing is the fairness of incremental decisions in an environment in which the initial allocation is fair. (It does not provide special opportunities for disadvantaged persons. They would need to be provided for by insurance that operated independently of the provision of public goods.) A person who is treated fairly in the absence of public goods cannot reasonably complain about being required to pay for a service according to its marginal cost, or about have to pay the value that is added to his land by the availability of a public service.

In the latter case, there is an argument that must be answered. A person may say, "It is true that the provision of this public service adds as much to the rental value of my land as I am being taxed, but that is what the service is worth to someone else who might use my land. It's not worth that to me. In fact, the 'service' reduces my well-being."

Here we have a difficulty. We have no way of identifying the value of a service that is provided to a person without his request. If we express a willingness to respond to such statements, people will have a motive for faking a lack of interest in the service in order to reduce their tax bills. If a person can point to some characteristic of his circumstances that would tend to support the claim that he does not value the service (for example, if the service is concerts in the park and the person is deaf, or if the services is a sewer line and the person just put in a new septic system), then we may have an obligation to compensate the person for raising his taxes to pay for something that he does not value. But when the person can point to no such special circumstances, he should bear the cost. People should understand that one of the risks of moving into a community is that their fellow citizens may decide to provide a local public service that most people value but they do not. At worst, the aggrieved person will have to bear the costs of moving (including the psychological costs). Thus if any compensation is offered to people who have characteristics that suggest that they do not value a public service that raises the value of their land, the compensation that they receive should have an upper limit of the loss in the value of things attached to the land (the septic system) plus the financial and psychological costs of moving. While we need to watch out for fakers, these are real costs, and a public service is only worthwhile if its benefits exceed its full costs, including losses in the value of capital and in the human satisfaction of those who did not want change.

The fairness of such a tax system might also be questioned from another perspective. If people are required to pay the costs of the public services that they use, then who will pay for schools?

There are two possible answers.

  • One possibility is that people will agree on the value of living in a community where children are well educated, whether they have children or not, and they will find the presence of another child in the community to be a benefit for which the cost of educating the child is not too high a price to pay. In this case, educational expenditures add to the value of land throughout the community, and education can be financed efficiently by land taxes, without requiring students or their parents to pay. Those who pay will be receiving benefits that are equal to what they pay.
  • The second possibility is that there will be a consensus that, whether anyone wants to pay or not, education is a birthright of all children. In this case, the birthright can be financed efficiently by a tax on land, since land does not leave town or work less hard when it is taxed.

But is such a tax fair? Consider first a case in which everyone has the same number of children. ... read the whole article


To share this page with a friend: right click, choose "send," and add your comments.

Red links have not been visited; .
Green links are pages you've seen

Essential Documents pertinent to this theme:

Top of page
Essential Documents
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper