Economic Rent
Herman E. Daly
[A letter addressed to the Russian Duma; December 18,
1998]
This short statement from the renowned
environmentalist Prof. Herman Daly, Univ. of MD, seems to mark
him clearly with the stigmata of Henry George. It was just
published in Russian by the Duma, in a volume along with papers
by Gwartney, Tideman, myself, Harrison, Roskoshnaya, Titova,
Lvov, Ramsey Clark, Zvolinsky, and scads of Russians. The volume
is ed. by Zvolinsky, and called *Natural Resources - the
National Wealth of Russia*. [Mason Gaffney, University of
California, Riverside]
|
To: Mr. Vyachislav Zvolinsky, and
Other Honorable Members of the Russian Duma
Committee on Natural Resources
SubCommittee on Land and Ecology
Esteemed Representatives:
I am honored to be asked to comment as a part of your deliberations
on Valuation of Natural Resources and Tax Reform. Since I have no
first-hand knowledge of current realities in Russia I will confine
my remarks to some general principles for pricing resources in the
service of community, the environment, and a just and sustainable
future.
While it is true that land and natural resources exist
independently of man. and therefore have no cost of production, it
does not follow that no price should be charged for their use. The
reason is that there is an opportunity cost involved in using a
resource for one purpose rather than another, as a result of
scarcity of the resource, even if no one produced it. The
opportunity cost is the best forgone alternative use. If a price
equal to the value of the opportunity cost is not charged to the
user, the result will be inefficient allocation and waste of the
resource--low priority uses will be satisfied while high priority
uses are not. Efficiency requires only that the price be paid by the
user of these =B3free gifts of nature=B2 --but for efficiency it
does not matter to whom the price is paid. For equity it matters a
great deal to whom the price is paid, but not for efficiency.
To whom, then, should the price be paid? To the owner, of course.
But who is the owner? Ideally ownership of land and resources should
be communal since there is no cost of production to justify
individual private ownership.
Each citizen has as much right to the free gifts of nature as any
other citizen. By capturing the necessary payment for public
purposes one serves both efficiency and equity. We minimize the need
to take away from people by taxation the fruits of their own labor
and investment. We minimize the ability of a fortunate few private
land and resource owners to reap a part of the fruits of the labor
and enterprise of others. Land and resource rents (unearned income)
are ideal sources of public revenue. In economic theory rent is
defined as payment in excess of necessary supply price. Since the
supply price for land is zero, any payment for land is rent--if we
paid no rent the land would not disappear. If the government owns
land and resources it can both measure and capture the appropriate
rents by auctioning use to those who wish to use it.
But what if land and resources are already privatized?
For one thing, they might be repurchased by the government. But if
that is not feasible, or if one doubts that the competence and
honesty of the government is sufficient to handle the auction
system, then one could leave ownership in private hands and try to
capture the unearned rents for social purposes by taxation. This is
the usual case. Taxes should be shifted away from value added (labor
and capital) and on to that to which value is added (natural
resources and land). If we tax away rent, land and natural resources
will not disappear. But if we tax wages and profits too heavily then
the some of the value added to natural resources and land by labor
and capital will indeed disappear. The natural resource throughput
begins with depletion and, after production and consumption, ends
with pollution. Putting the tax at the beginning of the resource
flow through the economy (throughput) is better than putting it at
the end. A resource tax at the point of depletion induces greater
efficiency in production, consumption, and in waste disposal.
Not only is land and resource rent the best thing to tax from the
point of view of efficiency and equity in a well functioning market,
such taxes are also a means for improving the functioning of the
market itself by internalizing external costs and benefits. Economic
theory says we should tax external costs and subsidize external
benefits. Since there are significant external costs from depletion
and pollution, taxing this resource flow (even above the level that
captures rent) helps to internalize these external costs, in
addition to capturing internal rents generated by the market. Since
there are significant external benefits from increasing employment
and capital accumulation, ceasing to tax (if not actually
subsidizing) these socially desirable activities is a further
correction of the market=B9s ability to reflect true social benefits
accurately. The resource tax at the point of depletion can reflect
external costs of depletion and pollution, in addition to capturing
rent. Higher resource prices force production technologies to use
the resources more efficiently, and also force more frugal and
efficient patterns of consumption. Recycling of wastes is stimulated
because the alternative of new extraction is now more expensive.
Such recycling reduces pollution as well as depletion. If sufficient
revenue had been raised previously by taxing labor and capital, then
as we replace labor and capital taxes by resource taxes we encourage
(cease to discourage) employment, capital accumulation and
enterprise.
The above are very basic principles, and lest you think I am being
condescending in suggesting them to you, let me assure you that
these same principleshave not yet been understood by the US
Congress, and that I eagerly make these very same suggestions to the
government of my own country. The Primakov tax reform bill described
in your letter of 16 December seems to be a good step toward
applying these principles. I believe that The Netherlands and Sweden
are ahead of both the US and Russia in this regard.
With all good wishes for your important deliberations,
Herman E. Daly, Professor
|