Taxable Rent, More than Enough: after Professor Gaffney
H. William Batt, Ph.D.
[Draft prepared in November, 2011. NOT FOR
ATTRIBUTION]
Abstract - Taxable Rent
Despite frequent arguments about the merits of taxing economic rent
rather than the wages of labor and capital goods, the assertions
largely fall on deaf ears. The reason is that neoclassical economic
theory doesn't regard rent as a significant element in a modern
economy. Conventional treatments view rent either as the yield of
agricultural land alone or else as trivialized and swamped by the
productivity of the other factors of production. Moreover, in most
contemporary analysis, land has been conflated into capital in
two-factor theory, in contrast to formulas of classical economics that
prevailed until the 20th century. Many estimates suggest, however,
that rent as a proportion of social wealth is typically about one
third, but ranges from twenty to over forty percent.
This paper collects what evidence is available in contemporary
economic literature as well as that in historical and cross-cultural
analysis to show that rent continues to be a significant element even
in today's economies. Far from being less than in historical periods
when agricultural economies dominated societies, rent may well be an
even larger component of a society's gross domestic product. The paper
looks at the literature where rent was a recognized phenomenon, and
distinguishes between that understood by David Ricardo and that of
Heinrich von Thünen. It goes on to discuss what today is
recognized as the Henry George Theorem - that the rent generated in a
typical municipality is sufficient if taxed to support all its
necessary services. It further lists resources of nature where the
yields of rent are recognized in theory, even though they are not now
being measured.
One difficulty in calculating socially-produced resource rents stems
part from the fact that taxes on other factors of production - labor
and capital goods - all ultimately come out of rents, and the
deadweight losses that are imposed by these other taxes also come out
of rents. This has been explored and identified with the acronyms
ABCOR and EBCOR. The upshot of available inquiry is that rent is fully
adequate to finance public services were it to supplant other taxes.
The question is of significant moment, and calls for further analysis
of national income and product accounts in order to provide more
definitive answers.
Short Abstract
Several contemporary economists have urged a return to the tradition
of classical theory wherein the basis of taxation is the rent from
natural resources. From all its sources it is likely about a third of
a society's gross product, easily enough to supplant conventional
taxes on wages and capital goods.
Key words: rent, economic rent, ground rent, land rent, Ricardian
rent, von Thünen rent, resource rent, land, Henry George Theorem,
ATCOR, EBCOR, classical economics.
Taxable Rent, More than Enough: After Professor Gaffney
Does Rent Exist?
In December of 2010 Professor Joseph Stiglitz wrote the following:
One of the general principles of taxation is that one
should tax factors that are inelastic in supply, since there are no
adverse supply side effects. Land does not disappear when it is
taxed. Henry George, a great progressive of the late nineteenth
century, argued, partly on this basis, for a land tax. It is ironic
that rather than following this dictum, the United States has been
doing just the opposite through its preferential treatment of
capital gains.
But it is not just land that faces a low elasticity of supply. It
is the case for other depletable natural resources. Subsidies might
encourage the early discovery of some resource, but it does not
increase the supply of the resource; that is largely a matter of
nature. That is why it also makes sense, from an efficiency point of
view, to tax natural resource rents at as close to 100% as
possible.[1]
That this recent Nobel laureate should express his approval of taxing
resource rents is noteworthy, for such full-throated endorsements
today have been rare. But he is far from being the first. Although in
more muted contexts, a good many prominent contemporary economists,
even those most closely identified with the neoclassical tradition,
have made similar avowals. More recently still, in testimony before
the US Senate Finance Committee, Professor James K. Galbraith, posed
this question:
Should we tax capital, labor ? or rent? Is it a good
idea to shift the tax burden from high-income to low-income
Americans, in the guise of shifting the tax burden from capital to
labor, in order to promote "saving and investment"? In
particular, will this create new jobs? History says not: we have
been shifting this burden for decades with no appreciable effect on
savings, investment or jobs.
And there is also no shortage of capital in our economy. As the
economist Mason Gaffney wrote in a paper delivered to the National
Tax Association in 1978: "The key to making jobs is changing
the use and form of capital we already have. Tax preferences for
property income, in their present and proposed forms, bias investors
against using capital to make jobs, doing more harm than good."[3]
Economists from Smith to Ricardo to Mill understood that fixed
investments, however useful, do not generate many permanent jobs. What
creates jobs is the revolving capital that supports payrolls. A tax
policy aimed at supporting employment would shift the tax burden away
from labor, and off of short-term capital, and place it instead on
long-term capital accumulations. If this reduces the investment in
fixed capital that is desired for other reasons ? in particular,
investment with broad public benefits ? then that sort of investment
should be done by public authority, funded by an infrastructure bank.
Thus as a general rule fixed assets -- notably land -- should be
taxed more heavily than income. The tax on property is a good tax,
provided it is designed to fall as heavily as possible on economic
rents. This basic argument, going back to Ricardo, remains sensible,
for it aims to not-interfere where there is, in fact, no public
purpose to interfere with private decision-taking. Payroll taxes and
profits taxes do interfere directly with current business decisions.
Taxes effectively aimed at economic rent, including land rent and
mineral rents, and at "absentee landlords" as Veblen called
them, do not.[4] If these assertions are any surprise, they are due to
the fact that for decades neoclassical economists and contemporary
experts on tax policy have dismissed the idea of taxing resource rents
as not sufficiently worth attention. Why bother, they have argued,
when rent constitutes at most only two percent of the gross domestic
product. Contemporary textbooks for introductory economics are
unanimous in their conclusion that resource rents are
inconsequential.[5] Moreover, of seven texts in the field of Public
Finance only two of them mention rent at all. And they do so only in
the context of rent-seeking or imputed rent (of owner occupied
housing).[6]
In recent book subtitled "A Brief Economic History of the World,"
University of California Davis Professor Gregory Clark writes,
In the modern world, land per person which had
completely dominated income determination before 1800, no longer
matters in economic growth. This is because land rents have fallen
to only a few percent of total output in modern high-income
economies. … Farmland rents, which were 23 percent of national
income in 1760, fell to 0.2 percent by 2000. In part this decrease
was offset by arise in the site rental value of urban land. But by
2000 urban land rents represented only 4 percent of national income,
even in crowded England with its very high housing costs.[7]
A widely read book by Todd Buchholz comes to a similar conclusion.[8]
After giving a nod to 19th century economist Henry George, the most
notable proponent of taxing land rent, he continues,
George fans can proudly point to property taxes as a
source of state and local finance. But they cannot point as
confidently as they could sixty years ago. George overestimated the
future importance of rents and rental income. Governments at every
level have grown tremendously in the last century. Even if
governments could take all rents without rebellion or severe
recession, rents would not come close to covering expenses. In 1929,
property rents accounted for about 6 percent of national income.
The percentage has steadily dropped to well under one percent today.
Where property taxes once provided 65 percent of state and local
budgets, they now supply about 17 percent.
Finally, Paul Krugman was asked about the potential of taxing
economic rent in 2009 by an American journalist who has written for
The Atlantic Monthly, Slate, and the Los Angeles Times. He
recounts the exchange as follows:
[He] came to Berlin in 2008, right when the subprime
crisis had started to rumble, and I asked his opinion of Henry
George. He squinted and tried to remember the name of the book. "Uh
- Progress and Poverty I think is the [main text]?"
"That's right."
"Well, look. Believe it or not, urban economics models
actually do suggest that Georgist taxation would be the right
approach at least to finance city growth. But I would just say: I
don't think you can raise nearly enough money to run a modern
welfare state by taxing land. It's just not a big enough thing."[9]
There are those, however, that have argued that economic rent is at
least a third of an economy, and perhaps far more. Terry Dwyer claims
that economic rent on real estate land alone is about 30 percent of
the Australian GDP, ignoring other resource rents that exist. "The
'bottom line' reinforces the overall conclusion …that land-based
tax revenues are indeed sufficient to allow total abolition of company
and personal income tax. Further, to the extent that some taxes, such
as rates, land tax, resource rent taxes and even part of income tax on
land rents are already capitalized in lower market values for
privately held land, the figures would tend to understate the capacity
of land income to replace existing taxes."[10] Mason Gaffney,
after showing the numerous ways in which rent is consistently
under-represented, argues that rent in a modern economy is an ample
basis of public finance, a claim reflected in his title, "The
Hidden Taxable Capacity of Land: Enough and to Spare,"[11] The
article enumerates in detail some sixteen ways in which economic rent
is undercounted in conventional treatments.
The point at issue then is whether rent has really ceased to be a
significant element of a nation's economy or whether it is simply not
being counted. Michael Hudson argues the latter. In an important paper
he wrote about fifteen years ago, titled "How Rent Gets Buried in
the National Income Accounts," [12] he explains how land rent is
calculated in the US National Income and Product Accounts so as to be
grossly misleading. Since the data is compiled from income tax
filings, it is derived from commercial real estate transactions, and
these favor that industry's purposes. Since the NIPA accounts have no
other sources for their data, the inability to recognize rent except
by this source leads to its trivialization. The data takes no account
of imputed rent of owner-occupied homes, the rent yield from
commercial real estate properties, or indeed the yield from other
(non-realty) natural resource elements of the economy. For the real
estate industry itself, depreciation rates are so generously
calculated that land values actually show a net loss! The upshot is
that the only numbers are for real property rental income, i.e., that
listed for payments by tenants who rent properties - i.e., offices and
households.
Ricardian Rent
If land rent is a factor associated only with agricultural
production, as contemporary neoclassical economics texts or as Clark
and Buchholz both argue, their arguments can be linked largely to the
declining importance of farming as a proportion of modern economies.
This is the dimension of rent that David Ricardo identified and best
explained in the early half of the 19th century.[13] Ricardo's
definition of rent is "that portion of the produce of the earth
which is paid to the landlord for the use of the original and
indestructible powers of the soil." Ricardo's land use model
implies that the intensity of production rises with the demand for
land, as higher levels of economic rent justify the expenditure of
more labor. But with the application of technologies, both of
machinery and of fertilizers, much of the pressure on land has been
relieved and forestalled. It then stands to reason that, even given
the wide expanses of farmland in the US and elsewhere, its
significance, as a proportion of total economic productivity might be
less. As important as agriculture is to the welfare of a society, the
place it holds as a component of GDP (gross domestic product) is far
smaller than two centuries ago. This perception reflects the
inadequacy of our statistical measures, however, more than the
diminution in importance of the agricultural economy. Even if the raw
food supply is a small a part of GDP, one cannot dismiss its pivotal
position in society. A certain eminent statesman/economist once also
trivialized petroleum as inconsequential using the same argument.[14]
Since the concept of economic rent, also known as Ricardian rent,
land rent, and ground rent, has essentially disappeared from our
contemporary vocabulary, it is helpful to look to a time when rent was
a recognizable reality in people's daily lives. From the Middle Ages
of European feudalism, we have many words in contemporary English and
French that build on this root word. To
rend is to remove from a location, to split or tear apart,
often violently; rendition is the forfeiture, cession, or
handing over of something; and to render is to give, interpret or make
available. Rentiers are people who depend and live on the rent
of others. Rent seeking is the "competition for
privilege. The form of government affects the extent of rent seeking
that takes place… in general, whenever personal benefits depend
on decisions made by other people, life can become a quest for
personal favors, and people spend time and effort in rent-seeking
activity."[15] A still more pointed definition is "the use
of resources to get a rent by reducing the welfare of others."[16]
The importance of rent, economically speaking, is its presence in
market value of any resource of nature regardless whether it flows
through nature or is collected and paid by its titleholder. Left fixed
in capitalized form in whichever resource base has commodity value, it
becomes a loss of liquid capital for other use and a distortion of
economic productivity.
The challenge of understanding the economics of the feudal age would
seem to be far less difficult using the framework of classical
economics than for neoclassical economics. Classical economics is
based on a tripartite factor division - land, labor and capital. The
prices of labor and capital are wages and interest respectively, and
any resulting surplus appears as rent yield from the land. This is
something understood from the time of John Locke until the beginning
of the 20th century. With the institutionalization of economics as a
formal discipline, land and the associated rent was conflated into
capital, eventuating in the subsequent creation of two-factor theory.
This was easy to do given land's increasingly permuted and commodified
status. This conceptual transformation has been explored in detail by
a number of historians of economics, most cogently by Mason Gaffney,
in his 1995 book, The Corruption of Economics.[17] Not only
was rent as a tool of analysis essentially eliminated from definitions
and formulas, but the moral basis on which the discourse of political
economy rested was lost as well.
One would need to be exceedingly familiar with the economies of
various medieval societies in order to extrapolate the component of
land rent in their GDPs, and with sufficient confidence to estimate
the proportion of community income it represented. The historical
chronicles are replete with stories, noting in detail the amount paid,
whether in agricultural yields, in money, or in labor service. But
historians seem less interested in or able to make estimates of rent
as a total share of an economy, or even for any given domain (demesne).
There is a further danger of applying a single term to an array of
socio-economic arrangements that only in the collective sense are
called feudalism. The term rent is context dependent. This is made
clear by Keith Tribe:[18]
If we examine manorial accounts of the thirteenth or
fourteenth centuries, the existence of 'rent' and its association
with a named subject and a piece of land is quite clear; but this
rent can undergo some peculiar transformations, and the amount of
rent paid has little or nothing to do with the price of saleable
agricultural produce, or even with the extent of land occupied. This
'feudal rent' is in fact not a rent of land, but is an expression of
the subordination of feudal labour. As a consequence of this, it is
really quite accidental that feudal and capitalist rents can appear
to be variants of a particular category. In order to understand the
nature of this feudal rent, it is necessary to devote some space to
an outline of what can be roughly termed a 'feudal economy.'
The greatest difficulties exist in understanding and putting a value
on various rental payments when they can take many forms. Rents were
paid in the form of labor (corvèe), as a portion of a crop or
other yields, as tribute goods, or in coin. Payment of rent to lords
was as integral a part of the circular flow of their economic systems
as the flow of taxes is today. Quantifying the value of such payments
for socio-historical analysis today remains inherently subjective
especially when, for example, the labor contributed to repair and
maintain fields and hedges or roads and canals served not just a
lord's domain but also the general welfare of the community.[19] Even
if these obligations were perceived as duties solely to lords, they
were essentially communal. There were also payments of a share of crop
yield or tribute gifts. How would one price the gift of one's daughter
to a lord to serve as a minor wife or concubine?
A second challenge arises out of the fact that the strength of
patriarchal rule ebbed and flowed over time. When political rule was
casual, rents were often unpaid; when the nobility was strong rents
were collected.[20] Practices, as a result, did not always follow
formal arrangements and rules, nor were they consistent. In fact the
chronicles and other records that have come down to us show that
payments were often in arrears, and were often adjusted to reflect the
state of economic circumstances. In efforts to cope with such changes,
Immanuel Wallerstein, for example, points to the case of another
economic historian writing about the 16th century.
[One] may assume that at the beginning of the Price
Revolution wage payments represented three-fifths of production
costs… I guess that in 1500 the rent of land may have been
one-fifth of national income in England and France and that, with
the tendency for rising agricultural prices to raise rents and the
infrequent removals of rent contracts to lower them offsetting each
other, rents rose as fast as prices during the Price Revolution.[22]
There are an ample number of archived chronicles where records of
rent payments survive but inferences about its gross level as a
proportion of the gross domestic product are difficult. Even if the
economic systems of the age are identified as being of a single sort,
in a span of roughly seven centuries on a continent of many societies
and nations, generalizations are problematic. One can generalize about
lands "owned" by lords, usually under sufferance of their
kings, but then it gets more complicated. Britnell[23] distinguishes
three arrangements between 1000 and 1500: manorial leases, feudal
tenures, and peasant tenures.
Manorial leases were contractual in character and were
the usual means by which landlords managed their estates. Whole
manors, both the income and services from peasant tenures and the
demesne land under direct seigniorial control, were leased, often
for one or more lives at a fixed rent. Unlike feudal tenures,
receipts from seigniorial leases were geared directly to providing
the household services of the king, bishops, abbots, barons and
other greater landlords. Feudal tenures were those created
originally as contracts to provide for a lord's personal service,
usually of a military kind. They were of many different sizes. At
the top end, from the Conqueror's reign onwards, whole baronies were
held from the crown for the services of a stipulated number of
knights, though the lands of the barony had to maintain the baron
himself as well as his knights. At the lower end of the scale were
individual knights' fiefs (the land given to knights to support
them). Such fiefs were often taken out of the demesne land of a
baron or a wealthy church burdened with military service. A few of
the larger ones became new manors in their own right, though this
was unusual in the eleventh century. Peasant tenures were those held
by the various categories of villager who owned rents and services
at a manor house; they're mostly family holdings of fifty acres or
less and the terms of tenure were all customary in some degree. Most
manors had some tenants of this kind.
References here deal largely with English history due to the
especially rich scholarly examination of its feudal period,[24] but
similar practices can be identified in continental Europe as well. In
the final analysis, we can only depend upon the best guesses from
economic historians of the period as to the amount of rent comprised
in feudal societies. Robert Allen, who has written three books on the
period, argues that the enclosure movement radically increased the
productivity of English society. He concludes, "If rent accounted
for one third of revenues, then enclosure boosted rent by 64 percent."
He continues to work from the premise that rent accounted for a third
of the revenues with the onset of the enclosure movement.[25] The
French Physiocrats estimated rent at about a third, as did Adam Smith
who was deeply influenced by their work.[26] Vestiges of rent payments
in feudal societies also exist in the form of stories and verses that
have come down to us. We all know
Bah, Bah Black Sheep, Have you any Wool? Yes Sir, Yes
Sir, Three Bags full. One for my Master, One for my Dame; One for
the little boy that lives down the lane.[27]
The part for the "Master" was rent. That "one third"
estimate is repeated often. Yet Christopher Dyer, who is just as
steeped in the history of the English Middle Ages and who consulted
with colleagues upon meeting the question, puts the proportion at only
about twelve percent.[28]
It appears that as the feudal system evolved, less of the rent was
paid in a proportion of crop yield or in labor, and more in the form
of hard money. But the terms were always negotiated according to the
leverage that each party could bring to bear, sometimes favoring the
peasants and sometimes the landlords. The full amount of Ricardian
economic rent was never paid to the lord - indeed that is a sum only
discernable by theory or extrapolation. Calculating amounts based on
all the inputs and outputs exceed the capacities of accounting both
then and even now.[29] In efforts to bridge the various meanings of
rent as it was applied, some scholars have elected to include more
than Ricardo's meaning of "original and indestructible powers of
the soil" alone. They add in the use of any capital that the lord
frequently supplied to tenants. Hence, rent was defined as "the
share of the produce taken by the landlord for the use of the soil and
for the equipment of the farm, which we call rent," a meaning
borrowed from earlier scholarship.
Tribe discusses rent and feudal society as described in a number of
scholarly treatises.[30] But he is insistent in pointing out that rent
is not a category that can be applied a priori to other civilizations
and other times. Nonetheless, there is good reason to maintain that
counterparts of feudal societies elsewhere in the world with many of
the same attributes offer equivalents that can be identified as
rent.[31] This is made quite clear, for example by Max Weber. Gerhard
Lenski notes that the Chinese gentry was able at times to collect as
much as 40-50 percent of the land yield as rent and has no
reservations about using the term.[32] This writer's work in Thailand
suggests that land rent for the roughly three centuries of the
Ayutthaya and Bangkok Chakri dynasties until the 20th century was from
20 to 40 percent.[33] This raises the question whether the three
factors of production as employed in classical economic theory tend
typically to equilibrate in a way that they always maintain a constant
proportion in relationship to one another.[34]
Von Thünen Rent
By far the largest single element of land rent today, however, is an
outgrowth of spatial location. For this understanding we owe most to a
German economic geographer named Johann Heinrich von Thünen.[35]
Von Thünen was also a gentleman farmer, and was interested
foremost in the theory of marginal productivity of land as regarded
its relative location for growing crops. He understood that the cost
of a crop yield had to take into account the price of getting it to
market. The most expensive and perishable commodities it made sense to
grow nearest the city centers. The less expensive and less perishable
crops could be allocated to agricultural land in more remote areas.
With this in mind he developed formulas including several variable
factors that would decide the optimal location to grow various crops.
The complete formula is
L = Y(P - C) - YDF, where
- L = Locational rent
- Y = Yield
- P = Market Price of the Crop
- C = Production Cost of the Crop
- D = Distance from the Market
- F = Transport Cost
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