In The Shadow Of Knight

Kris Feder

[1994]

Henry George suspected that the emerging neo-classical school of economics was designed to silence the single tax movement by crippling the language of the land question. [George, 1898: 200-209] As Mason Gaffney documents in an earlier chapter, George was at least partly correct. [Gaffney, 1994] Moreover, the "neoclassical stratagem" of suppression continued to be pursued many years after George's death. [Ibid.; see also Feder, forthcoming (FH's title)]

Lest the reader suppose that Gaffney has rewritten history to boost Henry George -- or, that economists today have finally put aside politically-motivated resentments, and are prepared to face and defeat the Georgists with unassailable logic -- consider a recent attack published by The Free Market Foundation of Johannesburg. [Grant, 1994] Referring to the current dialogue in South Africa regarding the use of taxation as a tool of land reform, [see Franzsen and Heyns, 1992; others, FH?] Richard Grant disparages the Georgist proposal as merely another dangerous scheme to nationalize land. The "single tax on land rent," [51] he warns, is unjust and confiscatory; it flagrantly disregards legitimate property rights; it compels arbitrariness in assessments, inviting collusion and corruption in government. Worst of all, it is inconsistent with the operation of a market system, and leads inevitably to socialism.

Grant reinforces his position with frequent appeals to the authority of Frank Knight, the Chicago School economist who, according to Gaffney, "probably produced more NCEism and NCEism than anyone in history." [Gaffney, p90]

As Gaffney observes, Knight's treatment of the land question "reads like a caricature of Chicago." [Gaffney, this volume, my 91] Grant's assault, in turn, reads like a caricature of Frank Knigh -- like a silly spoof of the neo-classical paradigm. Grant has assembled two dozen of the most transparent single-tax fallacies, throwing in a couple more of his own devising. What is frightening is that uninformed readers, concluding that the single tax is a hoax, may give it no further consideration.

Some, though not all, of the efficiency advantages of taxes on rent or land value are widely recognized by mainstream economists. According to Grant, however, the single tax is as inefficient as it is as inequitable. A tax on rent, he believes, is just like any other tax: All have unfortunate consequences for economic incentives; they should be applied at low rates, and only as necessary to raise revenue. There is nothing "magical" about a special tax collecting all of land rent. On the contrary, if applied at rates approaching 100%, as single-tax advocates insist, it would cripple land markets, paralyzing their inherent tendency to allocate land to its most productive uses.

Grant opens with the assertion that "the distinction between man-made and natural factors of production-that is, between capital and land ... is irrelevant when discussing intervention and taxation: the consequences will be the same for any asset." [51] Nothing could be further from the truth. Taxes are, or ought to be, predictable long-term arrangements; so the long-run supply conditions of productive factors are critical to the effects of taxes upon them. A tax on the ownership of capital will, in the long run, discourage the production of new capital. A tax on the ownership of nonproduced land has no such disincentive effect.

Grant does not consider this, however; he takes a different angle. "Rent," he writes, "is a general phenomenon that applies to all assets, not only land." [52] The implicit suggestion is that one can refute George by redefining terms -- the standard neo-classical stratagem.

Henry George followed Ricardo in defining rent as the amount by which the product of a land parcel exceeds that of the best available no-rent land. Rent, in other words, is the minimum amount which a prospective user would have to pay, in a competitive market, to outbid all others for the use of land. As we now say, rent is the opportunity cost of land use.

Grant, however, defines "economic rent" as "the difference between the return to one asset and the return to the poorest asset being used for the same purpose." Thus, presumably, the rent of a car used in transportation is equal to the difference between its return and that of the least efficient bicycle, or pair of feet, used for the "same purpose" -- however narrowly or broadly that phrase may be interpreted.

The definition given any term is neither right nor wrong; it is simply more or less useful in facilitating thought. Now, George's classical definition of rent is intelligible and eminently useful, particularly for analysis of the issue at hand. Grant's definition, by contrast, is plagued by ambiguity, and serves little function in economic inquiry. It matters not that Grant's definition of "economic rent" differs subtly from the usual, equally problematic, neo-classical definition, because he takes it nowhere. It is as though economists have redefined "rent" in a manner calculated to dispose of the term altogether.

Grant's next argument is, I think, novel. He says that a 100% tax on rent would, through tax capitalization, "make the price of land the same everywhere, regardless of location or quality." True enough -- the selling price of all unimproved land will be zero. But Grant draws the surprising conclusion that "this artificial leveling of relative prices" would "leave no differential rent for purposes of economic calculation," "blinding" the land market "with respect to quality." [52]

Grant seems to mean that, since all land bears the same (zero) price, users are indifferent among land parcels of different qualities. Plainly, however, if all items of a kind are priced equally, buyers will hardly be blinded to quality; quite the contrary, they will choose among them on the basis of qualitative and locational differences alone. Just as obviously, a uniform (zero) price for title to land does not mean that the cost of land to buyers is the same for all land. The high or low purchase prices paid for good or poor land are simply commuted into high or low annual rent payments. Rents continue to perform their function of allocating scarce land to its highest-yielding uses. If bidders for land have different preferences for land consumption and/or different comparative advantages in production, land subject to rent taxation will also be allocated efficiently among users.

In fact, as Georgists have shown, a high tax on rent causes land markets to operate more fluidly, competitively, and efficiently. By slashing start-up costs, the tax makes easier for productive users to acquire land. It improves efficiency by bypassing the distortions introduced by inherently Imperfect capital markets. The annual tax also functions far better than once-for-all prices to signal landowners of the current opportunity cost of holding possession. [Gaffney, 1992]

The source of Grant's confusion emerges in his next two paragraphs. He interprets the Georgist position to mean that "any benefit that a landowner derives from land that is better than the worst land in use is to be taxed away." [52] He asks, "What good are title deeds if the government takes all the net income [i.e., if income is expropriated]?" [53] Grant evidently supposes that the tax assessment on a particular parcel of land would depend upon how productively the current owner is putting it to use -- so that the harder and smarter he works, the higher go his taxes, leaving him no reward for superior effort.

This does not describe the Georgist tax on land rent, which is a market-determined measure of the annual opportunity cost of land possession, i.e., of its potential productivity as estimated by market participants. The true Georgist tax is a fixed charge from the point of view of the individual title-holder; it leaves to the owner the full wages and interest of the labor and capital which he contributes to production, plus any entrepreneurial profit or loss. Economic incentives are channeled in the right direction. Ironically, Grant's criticism correctly applies, not to the Georgist proposal, but instead to traditional taxes based on income or production.

A second error is operative here. "How long would you want to hold an asset from which the income is expropriated?" In other words: How long would you want to hold an asset for which you must pay the opportunity cost on an annual basis? The answer is: As long as the value of the asset to you continues to meet or exceed the value of the asset to others. The point holds no mystery for anyone who has ever leased a car, rented an apartment, or borrowed money at interest.

Turning next to the issue of land speculation, Grant objects to the single tax on several ethical and efficiency grounds. He fumes:

By what standard do the Georgists and other interventionists label someone an "idle hoarder" or "speculator"? And by what right would they penalise these people? Doing so would require some standard superior to the market, but they cannot demonstrate what that is. [53]

Quoting Frank Knight, Grant observes that in competitive markets, buyers pay, in the purchase price of land, the entire present value of expected potential future net land income. Land speculation is risky and expensive; speculators do not, on average earn undue profits. Moreover, if society proposes to confiscate the gains of the winners, it ought to compensate the losses of the losers-not only to meet the demands of Justice, but also to preserve entrepreneurial incentives.

Yes, it ought! And it does, automatically, under the single tax. When land values rise, so do taxes -- and symmetrically, when land values fall, taxes fall proportionately. The risk of appreciation or depreciation caused by events outside the landowners's control are borne by society as a whole, not by individual landowners. Pooled, the risks decline. Gains and losses resulting from private entrepreneurial activity, on the other hand, are untaxed.

On the subject of economic efficiency, Grant works both sides of the street, arguing inconsistently that it is undesirable to use rent taxation to discourage speculation since speculators "provide a valuable service" -- but that, anyway, the tax will not succeed in forcing marginal land into use. [54-55]

The Georgist position on land speculation may be summarized as follows. When neighborhood land uses are changing, it is occasionally efficient to postpone land development or redevelopment until a new use becomes remunerative. This occurs when no potential interim use can be expected to yield revenues sufficient to amortize sunk capital before the optimal time of redevelopment. A tax on land rent or land value does not disturb such efficient land speculation, since the owner can reduce only his net income -- not his fixed tax burden -- by developing the land prematurely. [Feder, 1993] Thus, insofar as speculators do "provide a valuable service," rent taxation will not disturb their choices. Marginal land bears no tax, so will not be forced into use, just as Grant says. With respect to efficient land use, rent taxation is neutral.

On the other hand, there are a host of reasons why inefficient land speculation frequently occurs. I noted above that rent taxation corrects inefficiencies arising from capital market imperfections, and that the annual charge reminds inattentive owners of the income forgone when land is underused. Georgists have shown that rent taxation systematically penalizes at least some forms of inefficient speculation, thus intensifying market pressures to use land productively. [Brown, 1927; Gaffney, 1992; Feder, "Speculation," FH?] One writer calls this characteristic of rent taxation "superneutrality." [Dwyer, 1981: 128ff]

In short, the standard to which Georgists hold the speculator is the standard of social efficiency. The single tax does not necessitate "some standard superior to the market": It makes the market operate better, closer to the competitive ideal. Nor is the single tax motivated by envy, a scheme to strip successful businessmen of their hard-earned wealth. The aim of the single tax is to distribute the value of natural and social resources fairly among all, while leaving producers the full earnings of their labor and capital, untaxed.

Henry George wrote, "We must make land common property," [George, 1879: 328] and erected a lightning rod which has attracted unending criticism. Few terms have engendered more confusion in economics than the phrase, "common property." It is no surprise that Grant manages to muddle the issues as thoroughly here as elsewhere.

The Georgists have apparently forgotten that we are no longer a hunter-gatherer society. …Even though all land may once have been common "property," this does not give to every newborn today a share in everyone else's property. The whole meaning, and practical virtue, of private property is that it is privately owned and controlled. ...The collective farms of the old Soviet Union prove this. ...A drive through the tribal land of (the now former) Lebowa is very instructive on the issue of common property. ...The grass has been overgrazed and the trees are steadily disappearing. …It is in those regions where property rights are suppressed or undeveloped that no one laughs at Malthus. [55-56]

Grant nowhere explains what Soviet collectives and Lebowan tribal commons have to do with the single tax; he trusts the reader to thoughtlessly accept the implicit analogy. It is false. The subterfuge relies on the merging of three distinct concepts.

Soviet collectives were state-owned and state-controlled government property, not common property. With no exclusive rights of tenure, workers had little incentive to concern themselves with productivity.

Lands (also air, water, or biological species) that are freely accessible to all comers, with no regulatory mechanism to ration their use, are not common property (res communis) but "nobody's property" (res nullius). When human populations are relatively large, such a resource is characterized by overexploitation and depletion. Users have no direct stake, individually, in maintaining the asset value of the resource, since they possess only rights of extraction and use, not exclusive rights of ownership. Trees left standing, or fish left swimming, are resources ceded to competitors.

All of this was recognized by Henry George. The function of the single tax is to strengthen, not weaken, the legitimate property claims of labor and capital -- while guaranteeing the equal right of every person to the use of the primary, nonproduced resources necessary for all production. Without access to natural opportunities, after all, the celebrated right to enjoy the product of one's own labor, thrift, and ingenuity becomes a cruel joke.

I have never heard anyone openly reject the ethical proposition that all human beings ought to be accorded equal opportunity to avail themselves of what nature provides. Even Grant falls short of this; he twists away by pretending that the Georgist ethical premise implies a free-for-all. This, indeed, is the puzzle: How can equal rights to land be assured in an industrial and service economy, where an equal physical division of land among individuals would be hopelessly inefficient?

Those unfamiliar with Georgist thought typically accept the existing system of fee simple land tenure despite its evident inequities, presuming that land cannot be made common property without creating economic and political chaos. The core contribution of Henry George lies here: In a monetary market economy with democratic political institutions, natural resources can be fairly shared by the device of collecting rent -- all of it -- by taxation, using the revenue (along with that from other user charges and taxes) for the support of government. (Part of the rent could be simply paid out as an equal cash dividend to each citizen. The dividend would operate like the personal exemption credited to taxpayers in the U.S. personal income tax system -- except that it would be enjoyed even by those with little or no taxable income.)

The tax upon land values falls upon those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking by the community, for the use of the community, of the value that is the creation of the community. It is the application of the common property to common uses. [Henry George, 1879: 421]

The genius of the single tax is that it allows rents to be shared without disturbing the system of private, exclusive land use which is indispensable for harnessing productive incentives and exploiting the advantages of specialization and scale economies. Society need not alienate the common property to individual ownership in fee simple to enjoy the benefits of a market system. Equity need not be compromised in the name of efficiency, nor efficiency compromised for the sake of equity. We can have both, [* footnote: Ayn Rand liked to say that when good compromises with evil, evil wins and good loses.]

Under the Georgist system, everyone willing to pay its opportunity cost to society can get title to as much land as he likes; and he may, within reasonable bounds, do with it what he will. If government expenditures are optimal, then an individual who happens to take title to his equal value -- share of land will receive, in the cost of public goods and transfers enjoyed, an amount exactly equal to the rent he pays to the community for his land title. An individual who takes more than his equal share of land will, on balance, just compensate the community for encroaching upon others' shares. An individual who chooses not to own any land still receives his equal share of rent, in consideration of the fact that his abstention leaves all the more land for others to use. Under the single tax, everyone is a rent-taker. Ultimately, of course, everyone also pays for the productive contribution of natural resources in proportion to his consumption, since the prices of consumer goods and services reflect land, as well as labor and capital, costs.

The value of land expresses in exact and tangible form the right of the community to land held by an individual; and rent expresses the exact amount which the individual should pay to the community to satisfy the equal rights of all other members of the community. [Ibid.: 344]

The value of a plot of land reflects not only the value of the natural resources it contains, but also its location with respect to markets, people, jobs, schools, recreational areas, and all manner of public goods and services, such as police and fire protection, schools, and infrastructure.

When private activities incidentally enhance or depress neighboring land values, economists speak of positive or negative spatial externalities. If I plant a cool orchard where once bare terrain burned under the sun and eroded in the rains, my neighbor's land rises in value; if I erect a noisy, smoky factory, my neighbor's land value falls. Similarly, the benefits of access to local public goods lodge in land values. For example, many families prefer to live in communities where the public schools have a good reputation; so the demand for -- and price of -- land in these districts is higher than elsewhere, ceteris paribus.

Ideally, perhaps, individuals should be compensated for emitting positive externalities and penalized for emitting negative ones. A set of so-called Pigouvlan taxes and subsidies could, in principle, "internalize" externalities to achieve efficiency, essentially by creating quasi-markets. Economists love these. They are, of course, just Georgist taxes on rent, applied to fluid (air and water) resources which had been previously treated more or less as res nullius.

Unfortunately, for most everyday spatial externalities, it is prohibitively expensive, if not impossible, for a tax assessor to measure the aggregate net external impact of any one individual's activities. Without this information, the theoretically optimal tax for that individual cannot be found, and supply incentives £or externalities will fall short of ideal.

Fortunately, however, markets can, on the demand side, effectively ration scarce access to spatial externalities and public goods. The rationing mechanism is rent, and it works fairly well even when land is subject to private property in fee simple. It will work magnificently under the single tax, designed to include effluent fees and related environmental-use charges where feasible.

Georgists have said the single tax is best conceived a "user charge." Grant disparages the phrase, but its rationale is easy to see. Taxes proper are involuntary payments, owed by virtue of residence in a given geographically-defined political jurisdiction. The taxpayer enjoys the benefits of public expenditure, of course, but he has no choice (except as one voter among many) about the level of taxes; anyway, there is little correlation between the amount of his tax and the value to him of the benefits he receives. User charges, by contrast, are prices, paid voluntarily in exchange for benefits received.

There can be little doubt, then, that taxes on the rents arising from government expenditure are equivalent to user charges. If the Georgist ethical principle is accepted, and natural resources and privately-generated (but unattributed) externalities are treated as common property, then all rent taxes (in a society with just and democratic political institutions) may be conceived as user charges.

Grant strays from the point with several remarkable complaints. First, he writes that a tax on land rent "lower[s] returns to all capital and labour used on that property." Surely it is plain that taxes on capital and labor, which Georgist yearn to abolish, are considerably more likely than land taxes to lower the returns to labor and capital! The fact is, tax capitalization, which Grant elsewhere accepts, implies that a tax on pure rent does not lower the returns to labor and capital.

Incredibly, he next uses the notion of spatial externality to argue that a rent tax is really a tax on labor and capital -- since "whenever they tax one person's property, they are in fact taxing everyone else's labour and capital that have contributed to its value." [58] It does not take an economist to see that the persons responsible for emitting externalities which affect a given property do not pay the land tax on that property, directly or indirectly. The person who benefits from their activities, by virtue of his possession of well-situated land, pays the tax, ensuring that private individuals do not receive windfall gains or suffer windfall losses merely by virtue of their location with respect to external influences out of their control.

Quoting a pair of single-taxers who make much of the distinction between men and Mankind, Grant goes on to accuse Georgists of "methodological collectivism. ...They fail to see that their 'community' is an abstraction, not an acting entity that can create value." [57] I trust I have said enough to show that the community is not a vacant abstraction but a collection of real individuals, institutions, and capital.

Though he is shooting blanks, Grant has no shortage of ammunition. His next angle is to argue that rent takers receive no unearned income because they pay for the land which yields them rent! Again he quotes Frank Knight: "[T]he value alleged to be socially created is always paid for before it is received -- as far as the parties most interested are able to predict its arising." [57, from Knight, 1953: 809] There is no denial, only neglect, of the fact that market expectations of the future are frequently and understandably wrong, so windfall gains and losses accrue to landowners. The benefits of government projects are particularly difficult to foresee many years in advance. The question is: Should the land gains resulting from proximity to government services and other community activities accrue to private landowners individually, or should they be pooled, and used for the support of the government and the citizenry?

Grant's confusion, inherited from Knight, runs deeper than the convenient fiction of perfect foresight. Because land has an opportunity cost to the firm or household, they deny that rent constitutes a social dividend. Their fallacy of composition has been exposed by Mason Gaffney, in this volume:

In treating rent, Knight totally fuses the individual and the social viewpoints. ...Competition is the key, it can justify anything. ...Knight wrote that land yields no unearned surplus so long as competition keeps the returns to individuals at market levels. A "run of free income" ... ceases being a surplus to Knight as soon as someone buys it from someone else. ...The origins of property are of no concern, only the trade in property. [Gaffney, this volume: my pp 90-92]

Wages are the earnings of human effort in production. Interest is the reward for thrift and foresight in accumulating and employing capital. Rent is the payment for the use of land, with consideration for the value of natural resources, government services, and net private externalities (insofar as these cannot be internalized in markets or quasi-markets). For economic efficiency, rent must be paid by users to allocate scarce land among competing demands. But there is no efficiency requirement for rent to be paid to landowners; they do not produce land. Efficiency is achieved as well - better -- when rent is collected by the community.

Grant's next argument is that the separate values of land and improvements cannot be measured, since "economic rent is an abstract concept that does not appear separately in the market." [58] It is true enough that rent seldom "appears separately." Neither do wages: Most products result from the commingled input of several factors of production. Yet markets do value factors separately, according to the familiar principle of marginal productivity. Tax assessments follow the market (assisted by computer-generated cadastral maps, which plot sales and interpolate surrounding values). Land values are easier to assess than incomes, which can be concealed, and also easier to assess than building values, which require on-site inspection. "Several South African municipalities already practice the art of valuing land for tax assessment, and enjoy a considerable world reputation." [Gaffney, 1992: 112]

But Grant has a further, and novel, reason for insisting that land rents cannot be measured. The very imposition of the single tax itself, he says, destabilizes the land market: "Any buyer knows that the more he pays for any property, the more rent he will be forced to pay." [59] Since the present value of his future taxes rises in lockstep with the price he pays for the land, a potential land buyer is indifferent about the price Agreed upon.

However, the Georgist tax on rent is assessed on the basis of current market valuation, not the historical price of the parcel under consideration. An individual's bids for land influence future assessed land values only indirectly and marginally, as one bit of market data among many. Unless regional land markets are characterized by significant monopoly power (which Grant would surely deny), an individual would ignore, as negligible, the influence of his own revealed demand upon his future land taxes. There is neither evidence nor theoretical justification for Grant's startling claim that "[t]he formal land market would largely break down." [59]

Can it be that, of Richard Grant's many objections to the use of rent as the primary source of public revenue, not one withstands inspection? After all, plenty of genuinely unsettled questions and difficulties do remain in the economic theory of land and rent. If he truly wished to educate himself and others on the issue, Grant could have found them.

One of his comments does carry real weight: The puzzling thing is that he makes little of it. His readers will have noticed the point, however, so a few words are due. I refer to the following passage:

At the time of its imposition, there is no escape from the tax. The owner at that time will suffer a once-off capital loss on the property value and there is unlikely to be much shifting of ownership. [53]

I suspect that the reason he has not emphasized the point is that Grant believes, erroneously, that only part of the burden of the rent tax falls on current owners, and that future workers, capitalists, and landowners also bear a large part. In truth, the theory of tax capitalization suggests that all of a rent tax (or tax increase) on land rent falls directly on those who own land at the moment the tax (increase) is announced: Other things equal, the selling price of a plot land falls by the full present value of all future taxes on that land. Afterward, a new buyer of the plot gets a reduced stream of after-tax rent, but pays a proportionately reduced land price, so that the rate of return is unchanged, and equal to the unchanged rate of return on other assets. This is the property responsible for the celebrated neutrality of land taxation. It is precisely because landowners can do nothing to escape it that the rent tax does not "distort" markets. Ironically, the very efficiency of the land tax raises the problems of distributive equity and political acceptability -- though only during the period of transition to the new tax structure. Inefficient taxes are popular in part because, through tax shifting, their burden is spread around in invisible and untraceable ways. Why should current landowners, whether they inherited their holdings or bought then yesterday at premium prices, be forced to bear the whole burden of the single tax?

There are good answers, answers which do not depend upon painting innocent investors as sociopathic criminals.

First, not even the most impatient of Georgists suggests that the single tax system should be imposed all at once. Tax rates should be altered gradually, according to an agreed schedule. This allows individuals time to adjust their land holdings and their investment plans in order to take best advantage of the reform. In addition, the more gradually a rent tax increase is introduced once it is announced (the further in the future is the anticipated tax increase), the lower is the present value of future land taxes at the date of announcement, so the smaller is the decline in after-tax rents, and the smaller is the burden on current landowners. In effect, the burden of tax reform is shared among all taxpayers, who are compelled to endure the preexisting system of distortionary taxation so much longer.

Second, the accompanying reduction or elimination of taxes on labor, capital, and exchange offsets the increase in the rent tax, in the aggregate -- more than offsets it, in fact, since the excess burden of taxation is reduced as the overall efficiency of the tax system is improved. The average household is better off, on balance.

The significance of this is not merely that most landowners are also capitalists and wage earners too, and thus enjoy direct tax cuts. It is a fundamental point of tax theory that taxes on production and wealth are generally shifted forward to consumers insofar as demand is relatively inelastic, and/or shifted backward to owners of resources insofar as factor supplies are relatively inelastic. In a small economy like that of South Africa, where real wages approach subsistence and can be forced no lower, both labor and capital are highly elastically supplied -- so, most kinds of taxes on production are ultimately shifted largely to immobile land, which can neither starve nor flee. The converse of this is that when these taxes are lightened, the primary result of tax un-shifting is an increase in the gross rent of land. A moderate dose of single tax therapy will, in all likelihood, actually increase net (after-tax) rents received by landowners. As the rent tax rate approaches 100%, the effect of the increase in the rent tax must eventually overtake the contrary effect of the decrease in other taxes; land prices will approach zero. Still, if the single tax program is installed gradually, there is no undue burden on current landowners.

Third, some degree of shifting of the rent tax onto capital may occur after all, although only as the result of healthy, growth-producing wealth and liquidity effects, not from any distortionary tax "wedge." As Henry George emphasized and as Mason Gaffney has rigorously shown, [for a review, see Gaffney: 1992] by reducing land prices and bypassing credit markets, the single tax makes it easier for cash-poor new producers to acquire land. At the same time, by raising holding costs, the tax makes it harder for unproductive hoarders to hold their savings in idle land, anticipating so-called "capital" gains and confident that any reversal in the upward trend of land prices can only be temporary. The consequence is an increase in the intensity with which land is used, which necessarily raises the demand for labor and capital.

Even if credit markets were perfect, the single tax would stimulate capital formation. A rent tax reduces or eliminates private savers' option of holding land as an asset: The asset value of land (or some proportion of it) is now public property. Savings are thus redirected from land into produced capital, stimulating investment and (depending on the supply elasticity of capital) possibly lowering the marginal rate of return to capital. Furthermore, wages again tend to rise, not fall, as workers are employed to produce and use the new capital. All this, of course, is to the good. [Feldstein, 1977; Gaffney, 1092]

Grant's foremost charge against the single tax is his most desperate and far-fetched, but also the one which promises the greatest shock to conservative readers. This is the charge that Georgism is really a dangerous formula for repressive socialism, masquerading as benign free-market economics.

In adopting the term "user charge", [Georgists] seem to have been ... taken in by the Marxist approach, which holds that the state is the true owner of the land. [61]

I have noted that Grant confuses the concepts of government property, res communis, and res nullius. In the Georgist approach, natural resources are owned, not by the state, but by all the people in common. True, some public authority -- a government -- must collect and distribute the rent. But land is held in private title; markets operate freely; individuals manage their own affairs.

Society would thus approach the ideal of Jeffersonian democracy, ... the abolition of government ... as a directing and repressive power. ...We should reach the [egalitarian] ideal of the socialist, but not through government repression. Government would change its character, and would become the administration of a great co-operative society. It would become merely the agency by which the common property was administered for the common benefit. [George, 1879: 455-457]

But Grant's accusation of single-tax socialism is more than a matter of philosophical language. "Professor Knight," he writes, "puts it bluntly:" [62]

To collect such rent, the government would in practice have to compel the owner actually to use the land in the best way, hence to prescribe its use in some detail. [Knight, 1953: 809; quoted in Grant: 62]

Now, in a single-tax world, rational individuals who bid successfully for title to land are generally able to pay the 100% rent tax and still earn a market rate of return on their labor and capital. If no one volunteers to take a certain land parcel and pay the assessed tax, this constitutes direct and publicly-available evidence that the assessment on that parcel is too high; it overestimates the value of the land.

Why, then, would a tax on rent entail central planning? Knight's only explanation is that "some official, some 'bureaucrat' with power, would have to appraise it," [Knight, 1953: 809] an observation which does not set rent taxation apart from many other, apparently unobjectionable taxes. Grant's marvelous rationale cannot fairly be credited to Knight:

Georgists are aware of the "supply side" effects on all the other tax bases, but why would the famous Laffer Curve not also apply to their single tax? As a tax rate approaches 100% of any tax base, revenues will approach zero in the long run. This tax on rent is not compatible with a market economy because it would eliminate any incentive for landlords to charge rent that would be captured by the government. ...To obtain revenue, government assessors would have to set the level of tax arbitrarily, thereby placing virtual control of the land in the hands of the state. [61-62]

The Laffer Curve, which reflects the excess burden of taxation caused by substitution effects, does indeed apply to all taxes conditioned on productive activity. It applies, for example, to a tax on land income, Just as it does to a tax on labor income (wages), or interest, or exports, or beer purchases. However, neither the market-estimated potential income of land, i.e., rent, nor its capitalized value (based on discounted future rents) is subject to the discretion of the title-holder. From his viewpoint, as I have explained, these taxes are lump-sum charges; the landowner cannot reduce his tax burden by decreasing output and income, by selling land, or by any other means. Without the Laffer Curve, however, Grant's dire prediction of market collapse, land nationalization and Socialist tyranny has no foundation whatsoever.

It is hard to imagine bow anyone sufficiently familiar with both mainstream and Georgist economics to put his opinions into print can have analyzed the case for the single tax so perfectly wrongly -- unless his intent is to pre-empt debate by portraying the Georgist proposal as dangerous nonsense, discouraging readers from ever investigating the question for themselves. I have to conclude that Richard Grant aims to deprive the people of South Africa of an informed choice. Though he laughs at the Georgists' suspicion "of some conspiracy of silence,n [59] his own example confirms that the shadow of Knight still obscures the fundamental issue of resource rights.

"Economists," Grant tells us, "have utterly refuted much of what George had to say about the "single tax'." [60] The proposal enjoys a wave of popularity every generation or so, but economists time and again "expose its faults." [51] Today, boasts Grant, Georgists are "in retreat," as evidenced by the fact that they will now accept a tax rate somewhat less than 100% -- say, 80% -- in quiet and partial recognition of the distortions which a high rent tax would cause. [62] If a rate of 80% is acceptable, he reasons, why not 50%, or 12%, or 2%? "[O]nce the mystical character of the tax is broken, a tax on land rent becomes a tax like any other." [62]

In truth, Georgists are on the advance, as evidenced not only by an explosion of theoretical developments within academia, [Feder, 1993] but also by political developments in South Africa, Russia, the United States, and elsewhere. And despite the impressive success of the neo-classical stratagem, a not inconsiderable number of well-known and distinguished economists, Nobel Prize winners among them, eagerly support the principle of public collection of resource rents. [Tideman, 1991] As alternative solutions fade like enticing mirages in the desert, the world is discovering anew that the Georgist paradigm offers a sober, peaceful, and civilized path to genuine reform.

REFERENCES

Brown, Harry Gunnison 1927
"Land Speculation and Land Value Taxation." Journal of Political Economy 35: 390-402.

Dwyer, Terence Michael 1981
A History of the Theory of Land Value Taxation. Ph.D. dissertation, Harvard University.

Feder, Kris 1993
Issues in the Theory of Land Value Taxation. Ph.D. dissertation, Temple University.

Feder, Kris forthcoming
" NEW TITLE FOR "HG: A FOOTNOTE...?"

Feldstein, Martin S. 1977
"The Surprising Incidence of a Tax on Pure Rent: A New Answer to an Old Question." Journal of Political Economy 85: 349-360.

Franzsen, RCD, and Heynes, CH, eds. 1992
A Land Tax for the New South Africa? Pretoria: Centre for Human Rights, University of Pretoria

Gaffney, Mason 1992
"Land Reform Through Tax Reform," in Franzsen and Heynes: 111-126.

George, Henry 1879
Progress and Poverty. New York: R. Schalkenbach Foundation, 1971.

George, Henry 1898
Science of Political Economy. New York: Robert Schalkenbach Foundation.

Grant, Richard 1994
"Mysteries of the Land," in Nationalization; How Governments Control You. Johannesburg: The Free Market Foundation.

Knight, Frank 1953
"The Fallacies in the Single Tax." The Freeman: 809-811.

Tideman, Nicolaus 1991
"Open Letter to Mikhail Gorbachev." In Noyes, Richard, ed., Now the Synthesis: Capitalism, Socialism, and the New Social Contract: 225-230. New York: Holmes & Meier. With William Baumol, Robert Dorfman, Mason Gaffney, Franco Modigliani, Richard Musgrave, Robert Solow, James Tobin, William Vickrey, etc.