Answering the Tax Revolt
H. William Batt
[25 January, 2008]
The American tax revolt has now fully spread to New York. At the
local level we are seeing a growing revolt against property taxes.
David Cay Johnston, the New York Times tax reporter, has just
written his second book describing the almost total breakdown in the
income tax. A GOP presidential candidate proposes to substitute this
with a tax on sales, at a rate that could be as high as 35 percent.
The venerable Senator Russell Long from Louisiana once put it well
saying, "Don't tax you, don't tax me, tax that man behind the
The increasing shift of taxes onto wage labor and off any forms of
capital is an injustice that is not well understood. Taking the long
view, it is only in the past two hundred years that most revenue has
been based on anything other than the productive value of land. From
time immemorial land has always been the source of public finance. But
in what historians often now refer to as "the great
transformation," especially in the nascent "New World,"
land came to be regarded as a commodity. That momentous shift soon
prompted totally new economic theories to justify a landowner revolt
against taxes. Classical economic theory divided factors of production
into land, labor, and capital, the last meaning essentially tools. But
the founders of the neo-classical school conflated land into capital,
thereby making for two-factor theory and effectively hiding from view
the productivity of land. Nature is trivialized. Critics of this
contemporary school are becoming legion; it even violates the laws of
Adam Smith, one should note, was quite clear in his support for
taxing a portion of the land's bounty. "Ground-rents and the
ordinary rent of land are . . . the species of revenue which can best
bear to have a peculiar tax imposed upon them." He understood, as
some economists still do, that all taxes are ultimately at the expense
of rent, and the failure to recapture the socially created rent that
comes from our common enterprise simply becomes a windfall gain for
the titleholders of land. He also saw that taxing land's yield, today
called resource rents, comports most fully with all the principles of
sound revenue theory.
To this day, even in a post-industrial economy, there is more
financial return from land than any other investment. Despite this,
however, we have witnessed an ever-greater portion of public revenue
levied on wage labor, and a lower portion drawn from natural resources
and investment capital. This, when resources have expanded greatly
both in definition and in market share. Today it means not just plots
of earth but oil and mineral resources, pollution rights, the
electromagnetic spectrum, satellite orbits, airport landing time
slots, and many other elements. Rents are far more than classical
economist David Ricardo ever dreamed of, and are easily enough to fund
all the services of government. Where the numbers are more responsibly
kept, as in Australia, rent is upwards of thirty percent of GDP.
American economics textbooks, in contrast, put the total at about 1
percent, the error explained by the disinterest or unwillingness of
our government to focus on this area seriously.
Our national economy is increasingly characterized by finance
capitalism rather than industrial capitalism, but wage labor carries
the tax load. The sectors of the economy that receive windfall gains,
directly or indirectly from rents, are being given ever-greater
preferential tax treatment. Yet locations are more important than
ever: one acre in Manhattan just sold for one billion dollars!
Everyone seeks to get in on the land speculation game: homeowners,
about two thirds of all households, cash out the gain from their home
investment and protest against the payment of property taxes to boot!
Yet the house portion of a residence depreciates about 1.5 percent
annually, only offset by the gain in land value that is double or even
triple the rate of inflation. After a lifetime of homeownership, the
house is essentially depreciated and the value is almost all
capitalized economic rent, all due to socially created enterprise, and
not from any effort of a titleholder. Yet people view this gain as
their just due, every bit as much as the hard-earned income of labor.
By shifting tax burdens onto labor, the efficiency of the economy is
reduced as well - Harvard's Martin Feldstein says by 30 to 50 percent
of revenue! The result is more than enormous unfairness; it's also the
so-called "excess burden." If we're really going to have an
economy that can compete on a world stage, we have to reward
productivity and stop supporting windfall privilege.
John Houseman, as Professor Kingsfield in the long-running TV series,
The Paper Chase, later became the pitchman for Smith Barney. In that
advertisement, his tag line was "We make money the old-fashioned
way -- we earn it." That we should earn our money rather than
live off the efforts of others seems a simple enough moral tenet. But
the "free lunch" of rent seem to have lost its cogency in
contemporary economic thought. More than a century ago John Stuart
Mill noted that, "Landlords grow richer in their sleep without
working, risking or economizing. The increase in the value of land,
arising as it does from the efforts of an entire community, should
belong to the community and not to the individual who might hold
title." We should be so wise.