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 tree."

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 physics!

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.