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The Sufficiency of Single Tax Revenue: Rent Resource Taxation Would Affect Expenses and Productivity


Gary B. Buurman


[Reprinted from the American Journal of Economics and Sociology,
Vol. 49, No. 4 (October 1990)]



At the time this paper was published,Gary B. Buurman, M.A., was a senior lecturer in economics, Massey University, Palmerston North, New Zealand. This paper was prepared while the author was on leave at the College of Business and Economics, Western Washington State University.



ABSTRACT. Statements claiming that the single tax would raise insufficient revenue to support modern governments have been damaging to Henry George's proposal to tax the rent of land It is argued that these claims are a misleading way of assessing George's proposal. Firstly, it is shown that estimates of rent usually understate the revenue that would have been raised under the single tax. Secondly, the idea of a counterfactual proposition is used to show that government expenditure would have been lower subsequently had George's proposal been adopted. The conclusion is that there are generally errors of omission in estimating the sufficiency of single tax revenue.

Introduction


A MAJOR CRITICISM of Henry George's economic system is that the single tax would not raise sufficient revenue to support the functions of government. Thus his proposal is dismissed as unworkable as a single tax and the principle of taxing rent is damaged. Claims of insufficient revenue can be approached on two levels; firstly, as to the amount of revenue raised had the tax been imposed when George wanted it adopted, and secondly, whether tax revenue would be adequate to support present day governments ('present day' referring to any time such a claim was made after 1900).
Statements made on the first level need not concern us here. They are due either to error, lack of familiarity with what George meant by rent or unspecified data concerning other countries. There is ample evidence that the single tax would have raised adequate revenue in the United States in George's time. For example, Oser and Blanchfield stated:

497 Single Tax According to the Statistical Abstract of the United States, in 1900 all the privately held land in the United States, excluding subsoil wealth, was worth about 127 billion. If we assume that the land has generated a 6 percent return on its value, the single tax would have produced about $1.6 billion of revenue each year. This is exactly what all levels of government-federal, state and local-were spending per year. The "single tax" would have worked even as late as 1900.[1]

The $1.6 billion is an underestimate of revenue according to George and his followers for reasons mentioned below. Ironically, one criticism of George by contemporaries was that tax revenue would be excessive. Cord reported that conservatives, such as Justice David Dudley Field, estimated that the single tax might produce four times the necessary government expenditure.[2] George mentioned figures estimated by Atkinson (an opponent of the single tax) for 1880 which showed that the tax would raise $700 million when required revenue was $580 million.[3]

This note considers statements made on the second level. Section II surveys recent examples and argues that the criticisms are not based on George's definition of rent. Section III uses the idea of a counterfactual proposition popularized in economic history by Fogel and Conrad among others[4] to illustrate the possible effect on subsequent government expenditure had George's proposal been implemented late in the 19th century. It is interesting that Bruchey, in citing the following passage from George, gives him credit for recognizing the part played by counterfactual propositions in causal explanations.

And although in the domain of political economy [George wrote] we cannot test out theories by artificially produced combinations or conditions, yet we can apply tests no less conclusive, by comparing societies in which different conditions exist, or by, in imagination, separating, combining, adding or eliminating forces or factors of known direction.[5]

Why the Criticisms Underestimate Single Tax Revenue


CLAIMS THAT SINGLE TAX REVENUE would be inadequate to meet government expenditure today occur commonly in the histories of economic thought and in first year university economic principles texts. Examples of the former include works by Schumpeter, Pribram and Heilbroner respectively:

The proposal itself, ... is not economically unsound, except that it involves an unwarranted optimism concerning the yield of such a tax.[6]

It could be easily argued that George had overestimated the share of the landlord in the national dividend, that land rent fulfilled important functions in the organization of agricultural production and in the real estate market and that rents derived from the soil were but a fraction of unearned incomes received in innumerable cases in which a productive factor other than labor was relatively scarce.[7]

And then the rent problem is not so drastic as viewed by Henry George. . . . Suffice it to point out that rental income in the United States has shrunk from 6 percent of the national income in 1929 to less than 2 percent today.[8]

Statements in principles texts reach a wider audience and usually constitute a student's first acquaintance with George's ideas. Examples include the texts by Hailstones and Dodd; by McConnell; and by Gordon and Dawson:

Moreover, it is not probable that the funds from the tax would be sufficient to meet government needs. In today's economy, rental income comprises less than 3 percent of our national income, whereas total government spending is an amount equivalent to more than 20 percent of our national income. In 1963, for example, rental income was only $12.1 billion compared to total government spending of $125.1 billion. A single tax system would have left a large deficit.'

Critics of the single tax on land make these points: First, current levels of government spending are such that a land tax alone would clearly not bring in enough revenue; it cannot be considered realistically as a single tax.[10]

There are a number of obvious shortcomings to George's theory, such as the fact that rent provides less than 1 percent of national income and therefore is inadequate for our government's revenue needs.[11]

These statements are a misleading way of assessing George's proposal because of errors of omission on both the revenue and expenditure sides of the budget. He planned to tax the economic rent of land through the process of assessing land values. Concerning the yield of George's tax, his followers pointed out correctly that the percentage of rental income in national income does not provide an accurate measure of the tax base. Compared to George's idea of rent, the national income figure is overstated by the inclusion of an imputed value for rent on owner-occupied houses, but understated by such serious omissions as the rental value of subsoil assets and the substantial underestimation of rent on land owned by corporations. The latter would be hidden in corporate balance sheets as accounting (not economic) profits, or as an interest payment in the case where a debt is secured by land.

When attempts are made to calculate single tax revenue by estimating total land values - in conformity with George's proposal - various problems are typically encountered. Corporate land may be underassessed for a variety of reasons.[12] Vacant lots might receive a lower unimproved land value assessment than the corresponding component for improved land. A high margin for error exists in estimating the land value of commercial properties (which tends to be the highest valued land). Again, the value of subsoil assets may be overlooked and government-owned land tends to be undervalued. [13] Thus whichever method 499 Single Tax is used to arrive at potential single tax revenue, a lower figure results than the rent which would actually have been collected under George's system.

Further, Andelson has shown that George's theoretical system "does not actually exclude the possibility of other benefit charges should the rent fund prove inadequate to meet such obvious legitimate expenses as the cost of public safety."14 On the other hand, had the single tax yielded excess revenue at its inception, there is the possibility of funds available for investment in human capital with the resulting infrastructure. Not only would this be expected to reduce poverty and unemployment but the infrastructure could be used later to generate additional revenue through user charges where appropriate.[15]


Government Expenditure Under the Single Tax


THE MOST SERIOUS ERROR in the above quoted statements on George is the failure to incorporate the expenditure side of the budget. The fact that the single tax would have raised enough revenue to support the functions of government in 1900 but not in the 1960s is not a relevant comparison. Had the single tax been implemented in 1900 instead of the actual system, it could be argued counter-factually that the subsequent development of government expenditure and of the economy might have been quite different for two main reasons.

Firstly, according to Oser and Blanchfield, George believed that:

In fairness to George it must be granted that he would not admit this simple-minded comparison of single tax revenues and current expenditures as valid. He believed that his fundamental reform would unleash productivity and growth, thereby increasing government revenues and decreasing expenses. Production would increase, poverty would disappear, wages would rise, full employment would be attained, prices of goods would fall, and so on. With a world at peace, military spending could be eliminated and the federal government would have saved $81 billion out of the $166 billion it had spent in 1968. George hoped that his reform would enable us to eliminate welfare expenditures, police, prisons, customs houses, most tax collectors, and so on. Rising wealth and reduced poverty would generate increased government revenues from the tax on rent, and reduced expenditures.[16]

Secondly, as an advocate of laissez-faire, George felt strongly about the excesses of government:

The single tax would destroy this vicious system. It would end the pressure to impose and maintain taxes and would enable us to dismiss a horde of officials and bring the Federal Government to its proper simplicity. What we mainly need a Federal Government for is the performance of general cooperative functions, such as the issuing of money, the carrying of mails, etc. These functions tend to increase, but they bring their own revenues. We have no more need for army and navy and coast defenses than Mr. Atkinson and I have for suits of armor and blunderbusses; no more need for diplomatic and consular services than he and I have for court dresses.[17]

George also despised the corrupting influences on government both by bureaucracies and by institutions in the private sector (the armed forces, railroads, banks, etc.).[18] Collier has argued that:

In many ways the most common argument against the tax-that it would not generate enough revenue for large, expensive governments misses the point. George, who was always individualistic and conservative, was an advocate of laissez-faire. In an important sense it is unreasonable to criticize an advocate of laissez-faire for failing to provide the revenue for a government which violates the principle. More important, he maintained that government would simply have to learn to live within its budget.[19]

Hence it seems likely that had George's system been implemented in 1900, government expenditure would have been lower from that time notwithstanding the problems in constructing counterfactual models to demonstrate subsequent events.

Finally, it should be noted that George did not regard the "singleness" of his proposal to tax rent as its essential feature.[20] The following exchange took place after George's lecture at Oxford University in 1884:

Mr. Robinson (New College) . . . The taxation of the country at the present time, including Imperial and local, amounted to about one hundred millions per annum. Further, the economic and ground rent of this country, which Mr. George proposed to apply, according to the very best estimate they could get was but sixty millions per annum. He wanted Mr. George to tell them how these figures were to be squared?

Mr. George said let them suppose he had been too sanguine; the principle was the same. They would also gain economy of administration. They would not have to keep a cordon of custom officers round their shores, and very many other expenses might be saved.[21]

Thus to George, the question of the sufficiency of single tax revenue did not invalidate his proposal to tax the economic rent of land. The taxation of rent can be viewed as a component of a tax system. This point is invariably omitted in the type of statements considered here.


Conclusion


THE PRECEDING DISCUSSION is not an attempt to show that George's proposal would have resulted in sufficient government revenue in recent times. Rather it is a claim for a fairer or at least fuller treatment of George's system, especially in principles texts. The statements analyzed are biased in that they link the taxation of rent to massive government deficits. Then, despite any praiseworthy comments, the efficacy of George's fundamental reform is damaged by association. The key point is that the single tax would have yielded sufficient revenue in George's time and would have ensured lower government expenditure in subsequent years. Can his system be held responsible for not predicting huge increases in government expenditure in the absence of its adoption?

An interesting line of inquiry would be to compare how principles texts have dealt with George and Marx over time, since Rose claimed that George might have been the most influential and important speaker for the non-Marxist left[22] and the two are linked by the massive increases in expenditure of modern governments.[23] A working hypothesis is that space devoted to Marx is increasing and the treatment is becoming more sympathetic, while less space is being used to discuss George and inaccuracies still abound. For example, Fischer and Dornbusch have stated:

But the modern economies of the United States, Germany, and France, for example, are different from the pure capitalist economies Marx was analyzing. The State has assumed increasing responsibility for economic stability and is playing a bigger role in economic life. The mixed economy is a modern development, and it is the mixed economies that have shown that the Marxist predictions were wrong.[24]

This passage appears to excuse Marx for lack of foresight. Recent principles texts contain the following on George:

He proposed that all existing taxes be abolished and that they be replaced by a single tax on the economic earnings of urban land (but not building or improvements on the land).[25]

Henry George proposed a single tax of 10 percent on land rent on just these grounds.[26]

A fuller treatment of George might force prospective authors to at least become better acquainted with his proposal.

Present day followers of Henry George have not made the Single Tax their goal for more than a half century. The singleness of the tax George advocated they regard (as a matter of fact, as George did) as a false issue. In George's day a land value tax, statisticians agree, could have substituted for all other taxes, federal, state and local. Today the data are not available for a logically compelling finding; but there is no doubt that the revenue from land value taxes could substitute for the worst current taxes. However, since the discussion of the fiscal adequacy of the land value tax is still couched in terms of the single tax, that form of land value tax will be taken as the basis of the present investigation.[27]

Notes


See the original article for notes and references.