"It's Our Money!" Not!

H. William Batt

[An unpublished essay, October 2010]

In recent years and especially during the past election, we are used to hearing the question, "Who's money is it anyway?" And the expected rejoinder, "It's not the government's money; it's OUR money!"

People who make this claim are half right and half wrong. To the extent that they are right, our tax system has lost its legitimacy. And this is in good part the foundation of Tea Party claims. But in many instances they are wrong, especially if one looks historically at the history of the idea of property and ownership. It would not be difficult for our political leaders to correct the problems our current tax regime faces, especially to the extent that it got off on the wrong foot a century ago.

The first concern should be upon what base to impose a tax — not about taxing whom but taxing what. There are only three possibilities, as all revenue streams necessarily come from one of three factors of economic production —1) upon resources found raw in nature (what was classically called land), 2) upon our labor, or 3) upon things created by human hands or minds (capital). No other source exists; every possible tax must be on one or some combination of these parts. Each of these factors has its price: the price of land is counted in economic rent; the price of labor is in wages, and the price of capital (its liquid form) is in interest.

Historically speaking, especially in the writing of British philosopher John Locke, things over which we had "dominion" (or ownership) were our own: our bodies and things issuing from our brain or brawn. Since they were rightfully ours, society had no rightful claim on them. On the other hand, property value due to the inherent productivity of nature, "land," was rightfully society's (or else was the gift of God). Man himself owned only that with which he "mixed his labor." Other classical philosophers as well as other societies held similar positions; only in very recent times have resources of the earth come to be regarded as commodities to be bought, sold, and possessed as private property.

Equally so, elements of nature owe their market value not to what any particular individual owner does to them; rather they have a price resulting from what the society deems their market worth to be. A titleholder might be far away, might not even be alive, or exist only on paper, exerting no influence upon an item or parcel, and its market value could go up or down according to forces unseen and unknown. Classical economists understood that the price of such elements was a function of rent, sometimes also called economic rent, ground, rent or land rent. Rent is a flow, a function of the common economic vitality of the society, and is acknowledged as socially created value. Society arguably has a moral claim on this value far more than does any individual titleholder.

In contrast, where society, or government in its name, captures any part of our labor, or the products of our labor, its claim is questionable, if not illegitimate. This is value created by our own efforts. The groundswell of resentment about society's taxing part of our labor, or the goods that emanate from that labor, is at the root of the challenge. This view is not likely to subside until we get our tax philosophy in order.

Students of public finance have long recognized certain principles of sound tax theory. An ideal tax is neutral and efficient with respect to markets and progressive in so far as those who have fewer resources will pay less. A soundly based land tax is also easily administered, simple to understand, and provides a stable and reliable revenue stream. It is certain in the face of attempts at evasion. One hears it frequently argued that all tax regimes have downside effects and that there is no perfect tax. But this is very much open to challenge, particularly among those proponents of taxation that subscribe to the economics prior to the 20th century who held the view that socially created rent was the best source of tax revenue. Economics since that time has trivialized and even dismissed the idea of economic rent, with little understanding of what value society has a moral claim on and what value is rightfully one's own. One needs to go back to classical economics to understand where its students took a wrong turn.

Henry George was the last great defender of the classical tradition. He maintained that a "single tax" on resource rents would not only comport with all the venerable principles of sound taxation, it would also be sufficient to provide for all the necessary services of government. Nobel laureates William Vickrey and Joseph Stiglitz (among others) have now demonstrated this as the Henry George Theorem. It would not be difficult for governments to phase in a shift of tax regimes off labor and goods and onto land rents in all their various forms. Several states and nations are already doing this and others, most recently Britain, are debating it avidly. Adam Smith in 1776 understood very well, that “Groundrents and the ordinary rent of land are … the species of revenue which can best bear to have a peculiar tax imposed on them." He was right.