Henry George in the 21st Century
Mason Gaffney
[Reprinted from GroundSwell, March-April and
May-June, 2007]
Henry George warned his 1879 readers that mistakes are generally
concealed by the respect paid to authority. He urged them to think for
themselves, and "to follow truth wherever it may lead". In
ten years or less he rocketed from ground level into the lofty orbit
of authority himself, author of several widely-quoted books, beaming
down instruction and inspiration to new forces in politics in several
nations including his own.
What now of respect paid to authority? He continued to urge people to
think for themselves. He did not want you or me to follow him
slavishly or cultishly. So it is with George's advance approval that I
venture to suggest how we might improve on his teaching.
Improve? In whose opinion? This could be an opening for sectarianism
and schism. I abjure them. What unites us is prior to what divides us,
and must always be. We unite in believing, like Moses, that each
member of each succeeding generation has an equal right to the earth,
and this right should be implemented continuously, practicably,
starting now. Beyond that there are matters of explaining our views to
others, of keeping up with changes in circumstances, of aligning with
this or that party or topical -ism: those have always evoked, and
probably always will evoke disputes over different methods of
analysis, rival guru's and ego's, and incompatible personal
preferences. So be it, we must learn to live with the tension, and
achieve unity with diversity: let our motto be e pluribus unum.
To improve on George, in my opinion, we need two big classes of
changes. One is to acknowledge some errors in his original work,
errors that have handicapped his missionaries and exegetes from the
start. The other big class is to adapt his basic idea to modern
conditions.
A. Some Georgist Errors to Discard
1.
Capital and labor. George went too far identifying capital
with labor, on the grounds that labor produces capital. He overlooked
the role of land, plus preexisting capital, in producing new capital.
He neglected the role of saving.
Capital, in a word, is anything produced by mankind, in tandem with
land and other capital, that has not yet "returned to dust",
i.e. that retains some value. George's attempted distinction between
capital proper and "other wealth" (i.e. consumer capital
like housing) is vain and useless at best, a distraction from his
central thesis, an invitation to aimless hairsplitting, and misleading
in that it downgrades both the quantity and productivity of consumer
capital.
2. Capital formation. George as a theorist was insouciant
about the need for market incentives to create and conserve capital.
He wrote (Book I, Chap. 5) that a healthy economy automatically "secretes"
its needed capital. In this respect he superficially resembled Marx
and Keynes, but only in theory. In practice, he saw the role of
taxation in weakening such incentives, and so his policy proposals do
recognize the need for incentives for capital. It is his rationale
that is twisted - he thought that by untaxing capital he was untaxing
labor.
This left a blind spot among some who are not alert to the bias and
distortions involved in untaxing capital while taxing payrolls
directly (Gaffney, 1995). There was no payroll tax in George's day,
and no withholding from wages (we have Milton Friedman to thank for
that). Today the payroll tax alone raises more funds than the
corporate income tax, while the money is spent to lower high-bracket
income-tax rates while the national debt heads for the moon.
It is income less consumption, i.e. saving, that creates capital. The
saving of landowners and capital owners, not just the saving of
laborers, creates capital. Actually most saving today derives from
property income, mainly corporate income.
Once formed, "Capital is kept in existence from age to age by
perpetual reproduction" - J.S. Mill. But if this reproduction
fails, capital dwindles away.
3, Income-creating spending. To reproduce capital, the owners must
reinvest it concurrently as they divest it through sales, in the
normal course of business: for the economy as a whole is a great "going
concern" with reinvestments anticipating and equaling sales. Net
new savings must be invested, too, and normally are - not just
concurrently but even in anticipation of future saving. Investing
generates incomes and jobs. George needlessly belittled the role of
income-creating investing. Again, his policy proposal, to untax
capital, would foster such job creation (a conclusion also reached by
Keynes), but he went out of his way to deny the relationship, which he
regarded as affronting the dignity of labor - a stubborn polemical
reflex from his labor union days.
4, Role of interest rates. Interest is paid because without it,
demand for capital exceeds supply. Why is there demand? Because
capital is productive - not just in biological forms, as George wrote,
but in all forms. Why is there no infinite supply? Because without
interest, prodigals would waste capital away, as we will illustrate.
George had little concept of the role of interest rates in allocating
capital: in saving potential working capital from being sequestered in
"pyramid-building" kinds of projects (whether developmental,
premature, or megalomaniac). He dismissed his contemporary Austrian
economists for what he mistook as merely scientific obscurity, pomp
and pretense, while he missed the valid analysis underlying them
(Gaffney, 1976). He condemned them not for what they were, but for the
attitude of academicians who would quote them to buffalo Americans
who, like George, did not read German.
Interest rates also prevent people from dissipating capital in
profligate consumption. That is because if loans were free of
interest, one could borrow infinitely to build and operate a yacht
longer than a battleship a la Larry Ellison, a private golf course a
la Walter Annenberg, a stable of race horses, residences all over the
world, a few monuments to one's self a la Saddam Hussein or W.A.C.
Bennett of B.C. (his monuments doubled as dams), a million-acre ranch
or two a la Ted Turner, a holy war against the infidels a la Osama bin
Laden, a crusade to control the holy warriors' oil fields a la George
W. Bush, ... all the things we see prodigals and politicians actually
doing today when they have unlimited funds and no constraints. If the
loans ever came due, one could simply borrow again at zero interest -
until there was no more capital to borrow, which would be soon.
George was apparently unaware that his academic nemesis, Professor
J.B. Clark of Columbia University, disliked the Austrians even more
than he did. Ironically, Clark disputed the Austrians as part of his
anti-Georgist campaign: they analyzed how capital turns over (is
formed and dies), distinguishing it clearly from land, which does
neither. Clark was engaged in recasting theory to fuse land with
capital to cleanse theory of ideas basic to understanding Georgist tax
reform; so he had to discredit the Austrians.
In a word, Austrians stressed that a function of interest rates is to
direct capital away from too much "hard path" technology,
reserving it for the "soft-path". The way they saw it,
higher interest rates discourage what we now call "upstream"
production (mining, primary products) in favor of more downstream
production (processing, storing, packaging, distributing, recycling,
etc.), nearer the ultimate consumer. They didn't use those terms.
Rather, they called them "higher" and "lower"
stages of production, but a rose by any other name ... .
Thus, interest rates are friendly to the environment, and the popular
panacea of lower rates leads us from soft to hard technology. (George
in his first book, Our Land and Land Policy (1871) criticizes
the waste of capital in premature railroad building, but he mutes this
in later works.)
B. Needed modern adaptations
Like any great writer's ideas, some of George's are timeless. Others
need adapting to later insights, perceived problems, technologies, and
social organizations.
1.
Green economics. George's paeans to compact settlement, both
rural and urban, comport well with the modern need to discourage
invasion of wilderness areas, wetlands, etc. George would satisfy the
demand for land on the lands best suited for human use, leaving most
of the earth for nature (Gaffney, 1976). It is true that he
understated the high capacity of good lands to meet all human needs
(Gaffney, 1999). In some colorful oratory he overstated frontier
virtues, anticipating Frederick J. Turner. His work on the marginal
productivity theory of wage determination puts too much emphasis on
the farming "margin of cultivation," following Ricardo. In
practice, however, George (like Ricardo) was an urbanist: at times a
seaman, at times a miner, a typesetter and journalist, ever a union
man, he never claimed to be a farmer. He understood full well that the
"margin of production" refers to the last measure of output
one can afford to squeeze from the best land, and not just to toiling
on "that strip of herbage strown, that just divides the desert
from the sown".
In other respects, fully to "green up" Georgism we need to
free it from its exclusive focus on the virtues of a land tax levied
in the form of a property tax (Gaffney, 1998). George himself stated
his central thesis in a more general form: "We must make land
common property". To him, the property tax was simply the most
convenient and practical tool to that end, one directly at hand. It
was also in his day the major source of public revenues.
Now, we need at least two changes. One is to recognize the occasional
virtues of taxes on extracting or withdrawing natural resources from
the earth. (Gaffney, 1967, 1977, 1981, 1982, 1983, 1998). This has
become the most common meaning of "green taxes". An example
is withdrawing water from rivers and aquifers (Gaffney, 1992). A
second example is levying effluent charges on polluters, where that is
feasible (Gaffney, 1965). This proposal harks back at least to A.C.
Pigou (1928), and often bears his name.
Obvious as may be the virtues of such green taxes, polluters have
successfully rallied behind an alternative, the tradable pollution
permit. This idea entered academia through J.H. Dales and Ronald
Coase, who challenged the "polluter pays" principle. It
entails in practice, when nobody is looking, a massive validation of
pollution, making it a kind of property right, based on "ancient
and honorable histories" of pollution. With tragic
predictability, most academic economists favor the Coasian giveaway
system. This is not the place to skewer it as it deserves, but
obviously Georgists should prefer a "polluter pays" system.
A less obvious, but more challenging case is dealing with "non-point"
pollution. Here, simple market-oriented policies are impossible to
apply. Some problems call for systemic changes that make us think
outside the box of the market and its logic. I have offered up a
package of such changes elsewhere (Gaffney, 1987). It is too big a
topic to open here.
A second big change needed is to adapt to the unhappy fact that the
property tax is no longer the mainstay of our tax system. It was when
George wrote. It should be, but it isn't, so sweating bullets to
reform the property tax can be love's labor lost, in those states
where other taxes dwarf it. There was no point in racing our pulses
over the one-time reform in Hawaii, as once we did, for the property
tax rate there was and is too low to matter.
Property tax reform is perilous even in Pennsylvania, where the
legislature any afternoon could cap the rate statewide, as it has
threatened. In Michigan under Gov. John Engler the State in 1995 did
outlaw the local property tax for public schools, replacing it with a
sales tax. (Tragically and predictably, Michigan quickly developed the
second highest unemployment rate in the U.S., after Mississippi, as
hundreds of thousands of jobs leave the State, and thank you, Gov.
Engler.) Even in New Hampshire, where the property tax is substantial,
Federal taxes swamp the effects of local taxes. We need to look into
reforming Federal taxation, even if that means proceeding without
instructions from our great helmsman, Henry George.
2. Taxing "preemptive" capital. Some capital serves
its owner to preempt common lands. An example is a large, fast, noisy,
dangerous, oil-slicking, air-fouling motorboat on a small lake. By
taxing or banning such resource-hogs we would instantly make thousands
of small lakes larger, in terms of satisfying human wants.
More generally, there are one million registered recreational boats
in Florida alone, from dinghies to superyachts. Their moorings and
canals observably preempt prime waterfront space where they compete
with condo's and mansions. Inland Michigan has even more boats than
Florida, while all the coastal states have hundreds of thousands.
Size per boat keeps growing, in waves of sterile emulation, where
money is burned to prove one can afford it without blinking. (Veblen
might be chortling up on his cloud, thinking "I told you so!")
A 40' yacht was once the "ultimate"; then came "superyachts"
of 80'; next, "megayachts", 150'; and now "gigayachts",
up to 525' for the Prince of Dubai, with Larry Ellison in hot pursuit
to be ichiban. 525' is as long as a battleship of the dreadnought
class of W.W. I. It is nearly half as long as the QE II or an oil
supertanker, but it is all for just one owner and his toys. Worldwide,
651 more mega and gigayachts were under construction in 2005. As the
average boat lengthens, Marina's are having to consolidate smaller
slips into longer, wider, deeper ones. Bear in mind that the beam of a
boat rises roughly in step with its length, and draft and height in
significant steps, while maneuverability falls.
A more everyday example is the preemption of space on streets and
highways by vehicles. Georgists for years have recognized parking
meters as applied Georgism. Professor Donald Shoup of UCLA has won
great acclaim with excellent recent works on the rich revenue
potential of such meters, if priced properly. Now we need to grasp
that moving vehicles, too, occupy scarce, valuable public space, and
should pay for it. The moving vehicle actually preempts more space
than the parked one, and needs to be constrained.
How do you catch a moving vehicle to pay a tax or rental? Several
methods are already in place, actually: tax the fuel; tax the car as
personal property; tax the sale of cars; fit cars with transponders,
paid in advance, that register their passing key checkpoints. In
choosing and improving methods, we can do no better than think of
ourselves as applying George's principle that land - space on the
surface of the earth - is common property.
The political nut is tougher to crack. Only a few states (California
is one) tax cars at all as property. In Virginia, Jim Gilmore (R) ran
for Governor in 1997 on a platform plank of taking the property tax
off cars. Voter reaction was so favorable he is now seeking his
Party's nomination for President of the U.S., citing that "success".
You can imagine what his victory would mean for national policies.
Think what that means. In Virginia, the capital in a business
building is taxed, but the capital in the cars on the parking lots
around it is untaxed, creating an obvious bias for parking lots over
buildings. Then when those cars hit the public road and preempt more
space, they are untaxed, even at rush hours when they are jammed for
miles.
To beat the ground traffic we fly the friendly skies. Then we find
that the possession of a small plane, for business or hobby, lets one
person preempt a scarce landing slot ahead of a jumbo jet with 300
passengers packed like sardines inside it, who may get stacked up for
hours.
Off-road vehicles are another obvious example. Part of our great
secular superstition about property is the notion that a piece of
capital equipment is as sacred as, or more sacred than persons
themselves: that the vehicle endows its owner with more rights to
public space than the simple possession of two legs. It makes sense
that everyone has an equal right to a public sidewalk. It does not
make sense that they may bring their Urban Assault Vehicles and
18-wheelers with them. The idea that they can may hark back to
centuries of deference to mounted warriors, but is also encouraged
today by merchants who see motorists as bearing more cash than
pedestrians do. Above all, those who foster this attitude are the
makers and sellers of vehicles, fuels, and paving materials.
The totemic attitude toward polluting vehicles is frozen into law and
public attitudes. Thus, the law condemns the person who takes direct
action against polluting vehicles by "monkeywrenching". This
is vandalism, a crime against property, a felony. But the law condones
the vehicles themselves, and turns the greater felons free, who
vandalize other men and the earth, recklessly.
Surfboards make another example, but once one gets the basic idea,
one can furnish scores of additional examples of preemptive capital.
To tax such capital is, in effect, to tax the grabbing of common lands
by the owners of the capital. Sometimes regulation or banning is the
better choice, depending on particulars, but the principle is
Georgist: recognize land as common property, and take measures to
assert that common ownership.
3. The rural landed gentry. Georgists have focused on urban
land, stressing its towering value p.s.f., and also its high value per
capita. Well and good, those are important points. However, some go on
to favor ignoring rural areas completely, to placate the rural vote,
and the putative empathy of urban Americans with their rural roots,
and the supposed rural preservation of old cultural values.
If those notions ever had merit, they do not today. George himself
did not think they had merit in his day, either: his first book, Our
Land and Land Policy (1871) went into great detail about the
villainies (his word) involved in monopolizing rural land from the
public domain. He later exposed how General Francis A. Walker,
Professor of Economics at M.I.T. and Director of the U.S. Census, was
concealing the growing concentration of ownership of rural land - an
early example of "How to Lie with Statistics". When General
Walker counterattacked, George demolished him. In the process, George
invented what today economists call the Lorenz Curve (did you think
they'd call anything "the George curve"?) George's work
influenced the U.S. Census to begin arranging farm data in a template
based on that curve, and to report on farmland separate from buildings
(which it did until 1940).
Today, more than ever, persons of great wealth have fled the cities
and amassed vast and valuable lands in rustic retreats. To name but a
few, there are San Juan County, Washington; Pitkin County (Aspen), CO;
Vilas and Walworth Counties, WI; Napa and Sonoma and northern Sta.
Barbara Counties, CA; Kenedy County, TX; Barrington, IL; the Hudson
Valley and much of The Adirondacks, NY; Berkshire County, MA;
Nantucket Island, MA; Manchester and Woodstock, VT; Fauquier County,
VA; Bourbon County, KY; and much of the whole State of NM. In addition
there are individual spreads so vast they constitute regions unto
themselves: San Simeon, the Newhall empire, the Bosworth and Chandler
and Tenneco ranches, the King Ranch, Sta. Catalina Island, the Irvine
Company and the O"Neill holdings in Orange County, CA, the
McIlhenny lands in LA, Gardiner's Island, NY, the Georgia-Pacific and
Weyerhaeuser timber holdings, the Scully farms in IL, the timber
empires of northern ME, and so on.
Once known for blood sports, and politically aligned with shooting,
hunting, and fishing associations, owners in these areas now also wrap
themselves in the mantle of environmentalism - a major challenge for
those seeking to reconcile fair taxation with ecological values.
In such regions, land values per capita run high. Vilas County, for
example, an abandoned old "cutover" county centered on Eagle
River, now has the highest land value per capita in Wisconsin, thanks
to its many little lakes, and the high social status of summering
there.
Where farmland is valued for its cash crops, absentee owners hold
much of Iowa and central Illinois, with rents going to Chicago lawyers
and European investors. It is likewise in the oven-like Imperial and
San Joaquin Valleys of California, whose absentee owners are more
likely to live in coastal California, but also have addresses all over
the world - some real, and some in tax havens (Gaffney, 1982).
There is no reason, in equity or efficiency, to exempt all this
personal wealth from taxation. The challenge is to implement policies
to sift out the legitimate contributions to the environment from the
country club and boating and beachy and "trophy" and "privacy"
and "hunt club" and "fin and feather" and "snow-bunny"
qualities that give these lands most of their market value.
Those rustic retreats are only the leading edge of manorial
suburbanization. Inside them we find low-density, high-valued suburbs
like Atherton, Belvedere, Rolling Hills, CA; Sag Harbor, Scarsdale,
NY; Lake Forest, IL; River Hills, WI; North Vancouver and Point Grey,
B.C.; West Palm Beach, FL; and so on. These are communities that fuel
today's booming demand for landscape architects, and turn so many
retired golf professionals into country club designers and real estate
developers.
Here we meet the "homeowner" problem. Georgist campaigners
at the local level often make a campaign issue of how the tax burden
on "homeowners" will fall if the voters will just downtax
buildings and uptax land. Carried to an extreme, this ignores all
differences among "homeowners", melding the landed gentry on
huge lots or vast acreages with the poor in modest hovels on tiny
crowded lots, or parts of lots. It ignores renters in apartment units.
We must prepare for cases where taxing those vast acreages will make
the taxes of richer homeowners rise - and explain why that is a good
thing.
The "homeowner" orientation of some Georgist campaigners
can play into the hands of those who favor income taxation and sales
taxation over property taxation. If the goal is indeed to favor "homeowners"
per se, then we should abandon the property tax altogether in favor of
income and sales taxes. Why? Because the income-tax base exempts
non-cash income, most notably the imputed income of owner-occupied
lands, including homesites, plus lands held for sport and recreation.
The imputed consumption of these lands is also exempt from sales
taxes. So is their purchase and sale, because sales tax laws
everywhere exempt sales of real property.
Alternatively, if we accept the income and sales taxes as "givens",
we must allow that they are both outrageously favorable to
owner-occupants, so there is no overall merit in jiggering the local
property tax the same way. On the contrary, owner-occupied housing is
an unpreempted tax base that localities should seize, to redress the
balance.
Georgist campaigners who focus on gains to "homeowners" are
understating the revolutionary side of their reform, and confusing
their audiences. The original George was more like Johnny Cash's "singer
dressed in black": he sang for those who have nothing, the
landless, the tenants, the young, orphans with nothing to inherit (as
opposed to the mythical orphans who own all the land), the ex-cons
trying to go straight, the damaged vets trying to get clean, the
exploited workers, for everyone the homeowners were before they became
owners. He also sang for the upwardly mobile, the students and
trainees, the innovators and entrepreneurs and adventurers who turn
their capital and turn the wheels of capitalism. He was not so
thrilled by retirees with empty nests they won't let go. Their
buildings, yes, he would exempt. But if those buildings rest on land
of high social utility, they are backing into the role of land
speculators. Call them the "passive-aggressive" type.
It is not that George or his allies are against homeownership.
Georgist tax reform makes it easier for first-time buyers to enter the
market, and tends to raise the number of owner-occupants. However that
sometimes entails inducing passive-aggressive speculators, melded in
among existing homeowners, to let go of excess land they do not need.
That basic point gets lost when campaigners pitch their message solely
to existing homeowners, lumping them all as a class.
Folklore and commercial drama make sympathetic figures of
passive-aggressive speculators. Environmentalists cozy up to landed
gentry as soon as these set aside some land for wildlife, and abate
the bloodlust of their foxhunting. The challenge for educators and
economists is to explain that their role in the land market can be
just as anti-social as those who are more transparently aggressive and
greedy. It is a mighty challenge, I allow; but it is what's out there,
and we must face it, or settle for tokenism that absorbs our lives and
resources while papering over the major issues.
Summary to this point
George would have approved of our seeking to improve on his work,
excellent though it was and is, provided we do so in a constructive
spirit. I have suggested four errors in George, all dealing with
capital, that lead us into blind alleys.
- One is identifying capital with labor;
- two is thinking that untaxing capital achieves the goal of
untaxing labor;
- three is to deny the useful role of investing in employing
labor; and
- four is to dismiss the Austrian and other economists who
analyzed the positive role of interest rates in allocating scarce
capital to the best uses, and in encouraging capital formation by
domestic saving.
Next I have discussed how best to adapt traditional Georgism to bring
it to bear on some leading issues of the 21st Century. First is to "green
it up". One is to shift its emphasis from beating back remote
frontiers to intensifying our use of our internal frontiers. These are
what economists call "the intensive margin of production",
as opposed to the "extensive" margin. A graphic example is
the top story of a high-rise building. In terms of extractive
resources we need to recognize the occasional useful role of taxes or
royalties based on units of production, as opposed to property taxes
alone. When it comes to pollution control, or aquifer regulation, such
taxes are essential.
We need to adjust to the fact that the property tax has shrunk down
to a minor part of the whole tax system, as other taxes have replaced
it. So focusing our efforts on reforming the property tax, while
ignoring new taxes that are even worse than taxes on capital, is not
the best use of our time.
We must grow conscious of how some people use "preemptive
capital" to hog more than their share of open-access resources
like lakes and highways, and to see such capital as a means of
establishing de facto ownership of common land. It is a short step
from that to see the virtue of taxing such capital in various ways,
varying with particulars.
It is time to recognize that great wealth no longer limits itself to
owning land in cities. Our landed gentry has gone rural and sylvan and
holds vast swaths of the countryside for rustic pleasures we used to
associate with obsolete English squires. Many of these owners double
as "homeowners". It is time to drop the idea that LVT is a
boon to homeowners as a class, and raise consciousness of the
differences among homeowners.
In a sequel we will consider more ways to adapt Georgism to the 21st
Century.
******
In the previous issue of Groundswell I wrote of three ways we need to
adapt Georgist ideas to modern conditions. These are:
1. To green up our ideas by focusing more on intensifying
the use of superior lands, and less on the importance of the remote margin
of cultivation that Ricardo and George used as a help in
explaining rent. In addition, greening up entails considering the use
of taxes on extracting natural resources, and attending more to
fighting payroll taxes, which kill more jobs than taxes on buildings
kill.
2. To tax or otherwise constrain the use of kinds of capital,
exemplified by oversized trucks and automobiles and ATVs, that
serve their owners to preempt more than their share of common lands.
3. To include the rural landed gentry in the proposed Georgist tax
base, and recognize that a Georgist tax will and should raise taxes on
many homeowners who play the landed gentry near-in to town.
Here, as promised, we consider more ways to adapt Georgism to the
21st Century.
4. Substituting capital for labor. Some Georgists, misled by
George himself, do not perceive the bias in taxes that over-induce
substituting capital for labor. What blocks their perception is
George's virtually identifying capital with labor. This leads them to
focus their efforts on getting capital exempted from local property
taxes, while ignoring the strong biases in income taxation that favor
capital over labor.
An irony (or inconsistency) about this is that George had included in
Progress and Poverty one lurid passage that might have
inspired Karel Capek to pen his memorable play about Rossum's
Universal Robots. George had raised the specter of the complete
elimination of jobs, as labor-saving technology progressed, and
landowners substituted machinery for labor. His specter was premature,
as market forces tend to foster "appropriate technology",
meaning that as land becomes dear, and labor cheap, technology bends
in the direction of using more labor and less land. However, modern
tax biases have brought the specter back in full force, because the
tax code is now loaded with biases that favor the use of capital and
penalize the use of labor, thus trumping market forces that would do
the opposite (Gaffney, 1984).
5. Adapting to the changing nature of inter-urban and inter-regional
competition. Georgist policies had a good run at the local level in
the days when cities sought to grow by attracting population. New York
City, Cleveland, Toledo, Detroit, Pittsburgh, Chicago, Houston, San
Diego, San Francisco, Seattle, Vancouver, Edmonton, Calgary, and many
smaller cities all had their periods of rapid population growth with
Georgist-leaning leadership (Gaffney, 2001, 2006).
Federal income tax policies have stifled that. By loading the Federal
tax burden on labor, while sparing capital, Congress creates a
universal bias for cities and counties to see purely proletarian labor
as a "fiscal deficit generator", a parasite to repel, while
capital and housing for the rich generate local fiscal surpluses. The
resulting local biases toward selective growth policies are well
known, but most advocates of housing for the poor are merely hacking
at the branches of evil, ignoring the roots in Federal tax policies.
6. Energy-wasting biases. We need to identify and correct tax
biases to both extracting and consuming energy, and other primary
products. The combination raises the total volume of extracting the
primary products, and of course of consequent combustion and
pollution.
The writer has identified many of these biases elsewhere (Gaffney,
1978). It is not just that a commodity like gasoline is subsidized; it
is worse than that. Within the stream of production, subsidies go to
those activities involved in extraction, while taxes fall on
activities downstream that conserve and economize on the primary
product (Gaffney, 1982).
7. Net domestic capital formation. We need to get away from the
disregard many radical reformers show for the incentives for capital
formation, conservation, and maintenance. George was less insouciant
than Marx or Keynes, and he did see the merit of untaxing capital, but
he had no concern about the aggregate supply: by inference, importing
capital was as good as forming it locally, or domestically.
Incentives are needed, not just to import capital, but to form
capital. Besides simply forming new capital, we need incentives NOT to
squander existing capital, in the manner of the notorious Prince of
Brunei who indulges himself with his traveling harem, retinue, yachts
and racehorses; or worse, in the manner of Osama bin Laden who
indulges his passions with the jihad that not only consumes
his own capital, but destroys that of his enemies. Marxists and early
Keynesians seem to see the rich as automatically creating more capital
than can be used. They underrate the capacity of the rich for
self-indulgence, and the tendency of social standards of consumption
to rise with wealth. Many a person today borrows on the rising equity
in his home in order to consume more than he produces.
Marxists and Keynesians also overrate the automaticity of domestic
American capital formation. Many of them still see the U.S.A. as the
overflowing fount of loans for the world. It is a reflex from their
ideology that is 30 years obsolete, for the U.S.A. is now the world's
leading debtor nation - a lead that Presidents Reagan, Bush I and Bush
II have extended beyond all prudence. Those who still see the
forgiveness of international debts as a means of transferring wealth
FROM the U.S.A. should give that fact some prayerful thought.
Modern conservative champions of incentives for capital formation err
also in failing to note that it is important to use any given
aggregate of capital efficiently - as important as to create more
capital. When we speak of "any given aggregate of capital"
we are constructing a temporary mental model in which capital is fixed
in supply, like land. Here, the function of price and the market is to
get that fixed supply allocated optimally, i.e. put to the best use. "Price",
in this case, means the rate of interest.
They err even more egregiously, and tendentiously, in making their
favorite cause the exemption of "capital gains" from
taxation. I put "capital gains" in quotes because most
capital gains are land value gains (Gaffney, 1990). "Capital
gains" is one of those slippery euphemisms that P.R. people come
up with, and the trained dogs of media circulate, to camouflage
unearned increments as functional incentives and rewards for creating
capital, and investing it in income-creating ways. It's a way of
controlling us by corrupting the language.
A tragedy of modern Georgism is how easily its Philadelphia
convention, during the First Bush Administration, was hijacked and
stampeded into memorializing Congress to repeal the capital gains tax
(this repeal was the centerpiece of Bush's domestic program). A
convention of land speculators could have done no worse - it was
pathetic. Most modern Georgists simply did not understand, or care to
understand, how the income tax works. There has been some progress
since then; but still, they need to wake up and smell the coffee.
8. Corporations. George wrote little about the corporate form of
organization. His modern allies are aware that corporations are our
major landholders. That is a most important truth, one neglected by
most other economists and reformers. However, Georgists so far are
mostly content to let it go at that. They do not see the corporate
form itself as a menacing kind of special privilege. In this they are
somewhat behind other reform groups, and are contributing little to
the current stirring of awareness on this matter. They are unaware of
the seminal old work by Georgist lecturer John Z. White on the meaning
of the Dartmouth College Case decision of 1819.
9. Subsidized Territorial Expansion. A big problem is sub-economic
extension of public works and services, subsidized by overcharging or
overtaxing people in central areas. It's called regional
cross-subsidy. George's critique of land speculation came to be
focused on "Speculator Type #1", who withholds good lands
from timely use. Georgists have neglected to condemn the counterpart "Speculator
Type #2", who acquires marginal lands cheaply, and then lobbies
public agencies to extend roads, utilities, military and police
protection, and other public services to them, below cost. Urban
sprawl is the joint product of the two kinds of speculation.
Some Georgists may even see Type #2 speculation as a legitimate way,
and an easier way, to combat the artificial scarcity of land that
Speculator Type #1 causes - a way of perpetuating the "frontier
safety-valve". However, it unbalances development severely: too
much roading, piping, and wiring, with too little use of the land thus
"opened up". Some taxpayer must pay for the roading et al.
If the taxes are activity-based or improvement-based (i.e. anything
but land taxes) they will sterilize marginal land, and lower the
intensity of use of all land.
This is a pervasive, immanent bias in most of our institutions, from
city departments of public works up through state and provincial
public utilities commissions and highway departments, clear to the
Pentagon, World Bank, and CIA. Types #1 and #2, in tandem, create our
form of Imperialism, that perpetual quest for Lebensraum that
is our curse. It is even more the curse of the victims from whom we
take the Lebensraum.
In my political experiences, one collects more cuts and bruises
combating Speculators Type #2 than Type #1. I was, for example, able
to lead the local countywide campaign against Howard Jarvis' "Proposition
13" without being seriously penalized, at least at the time.
However, a few years later when I led the local campaign against
southern California's favorite public water-works boondoggle, the "Peripheral
Canal", the water imperialists reached clear into the University.
Agents of the Metropolitan Water District of Southern California
attended and reported on my lectures. Working through complaisant
administrators, they nearly succeeded in eliminating the whole
economics department (that's the legal way to be rid of a tenured
professor).
Earlier, when I had joined the furor against American imperialism in
Viet Nam (Gaffney, 1971) and the myth of infinite natural resources
(Gaffney, 1972), I became persona non grata at Resources for
the Future, Inc., where I then worked.
In British Columbia, 1975, I learned that the self-styled "socialist"
government under Premier David Barrett was unwilling even to consider
withdrawing any of its expensive cross-subsidies to speculators Type
#2, and resented me for raising the issue. The moose-pastures of
northern B.C. "are a mighty empire", they told me, and the
rich retirees on the Gulf Islands are important constituents who
should have both their subsidized ferry service and their exclusionary
zoning to keep hoi polloi from sharing it. I have war stories,
but the objective point is that the socio-political bias for
territorial expansion is even stronger than the bias against
cultivating, intensifying and renewing our internal frontiers.
The Georgist dream of taxing central rents to finance public services
becomes a nightmare when the public money is dissipated in enriching
Speculators Type #2. This kind of spending not only dissipates rents,
and wastes capital, at the same time it despoils the environment.
Worst of all, as the sub-economic land development proceeds, each new
settlement makes a platform for the next, so there is no end to it
short of the limits of capital and of Earth. It is perhaps fortunate
for Earth that, historically, the limits of capital have been reached
first, at the ends of bursts of territorial overexpansion.
10. Renewal as intensification. George observed land speculation in
California when it was young and raw. Today, an equally or more
baneful aspect of underusing land is found in older blighted slums,
where underuse takes the form of non-renewal. Thus, land of high
capacity is providing only minimal service and employment.
Why do we not get timely renewal? The most obvious reason is that the
sites under old buildings bear low tax valuations, because assessors
mistake the building for the site and overlook its reuse value, or
opportunity cost. Let the owner renew the site, and taxes shoot up:
not only on the new building, but often on the site as well. Result:
nonrenewal. So capital that should go to renew these sites of high
potential migrates outward instead, to where tax rates are lower and
subsidies are higher, wasting capital in duplicating the
infrastructure, and of course also wasting land.
Georgists need to see that a major part of the problem is
underassessment of the land. Land is underassessed when tax-valuers
lapse into using the "building-first, land-residual" method
of separating land from building values. This results in land
valuations so absurdly low that one observes, in many cities and
neighborhoods, most of the joint value of land/building being assigned
to the building in the very year that the owner chooses to demolish
the building, i.e. when the building really no longer has any value at
all. Then the assessor raises the land valuation under the new, or
replacement building - making the land tax in effect an additional tax
on the new building. The correct method is the "land-first,
building-residual" method: value the land as though vacant, and
give the old building the excess, if any, of the joint value over the
land value. Then the land value remains fixed when a new building
arises, and the land tax serves, as it should, as a stimulus to
rebuilding (Gaffney, 2001).
11. Weight of excess burden of most taxes. Some analysts tend
to trivialize the power of tax bias to keep land from its best use.
They have seized upon a conventional micro-economic device, now
generally called the "Harberger Triangle", in recognition of
one Chicago-School expositor. It is based on supply and demand curves,
with no reference to land markets at all. Perhaps these Georgists are
hoping this will help them get through to ordinary economists; but
this device has the effect of minimizing estimates of the economic
losses, or "excess burdens", that bad taxes cause.
The power of tax bias to keep land from its best use is more obvious
by analyzing the economics of using marginal land. Any tax at all will
sterilize such land completely, unless the taxes are so universal that
the mobile factors, labor and capital, cannot escape them by moving.
"Who cares about marginal land?", some may say. The
distorting power of taxes has been demonstrated inadvertently by
Chicago-School economists Gale Johnson and Stephen Cheung. They have
shown that sharecropping, as a private arrangement, creates a bias on
the part of tenants to substitute land for labor and equipment, almost
without limit. This is because extra land costs the cropper nothing,
unless it adds to output, so the cropper's interest is to substitute
land, which is free to him, for his labor and capital, which he pays
for.
Taxes based on gross output affect all landowners the same way the
cropshare lease affects croppers. They make every landowner a cropper
of the state, giving every landowner a motive to substitute land for
labor and capital indefinitely. Private landlords overcome this by
limiting how much land to allow each cropper; but the state has no
such offsetting control. Thus, each landowner's motive to acquire
excess land runs wild.
In conjunction, consider that taxes (other than property taxes) are
based solely on cash flows, thus entirely exempting all the imputed
income from and imputed consumption of the service flows of land - the
"amenities". Government tells the landed gentry, "Hold
land as a totem, an heirloom, a private hunting and riding park, a
dream of future retirement, a speculation, a hedge against inflation,
an entry into high society, a beach access, a protection against
future neighbors, a shooting range, a golf course, a ski hideaway, a
drinking club, a private landing strip
anything private and
narcissistic or exclusionary or snobbish
and your pleasures are
tax exempt. Produce goods and services for others, though, and we will
treat you like a sharecropper - and tax your employees, too".
Now hark back to George's second force holding labor off the better
lands: holding land as a totem. He noted that tendency in an age
before we even had an income tax, or state sales taxes. Our present
tax system magnifies the tendency beyond all reason, resulting in the
relegation of much of our best land to the indulgences of the landed
gentry, old and new.
12. Small is beautiful. George was impressed by economies of
scale. His attitude was "Let them happen, but let them pay taxes
for it on the vast lands they require". George perhaps
underestimated the power of his own reform. Today we have abundant
evidence that land taxation opens up lands to small producers by
fostering subdivision. The settlement of the east side of the San
Joaquin Valley of California, 1900-30, is a graphic case study
(Rhodes). American Graffiti, the Yosemite killer, errant
Congressman Gary Condit, and Scott Peterson may have done little for
the reputation of Modesto, CA, but without Georgism there would be
nothing there but a few vaqueros working minimum wage for absentee
cattle barons. In more subtle and complex ways, the urban development
of the "Jane Jacobs economy" of lower Manhattan (before the
Rockefellers and their PONYA ruined it) makes another example.
13. City and country. Few studies ever hit such a sensitive
nerve as Walter Goldschmidt's (1947) demonstration of the greater
sociological health and wholesomeness of Dinuba, CA, compared with
nearby Arvin. Dinuba is surrounded by small farms in the Alta
Irrigation District, which taxes land values. The District also taxes
land values inside the city itself. Arvin is surrounded by giant
industrial-type farms, "factories in the fields", without
such taxes. The result is sociological health in Dinuba, and squalor
in Arvin.
Goldschmidt's prose was tedious, melding acadamese and bureaucratese
- anything but rabble-rousing. The values he celebrated were square
and middle-class - nothing of Greenwich Village. Yet the substance
resonated radically. The big owners sensed a vital threat. They roared
and threatened and reared up with their political power, and "terminated
with extreme prejudice" the Bureau of Agricultural Economics, the
agency that sponsored the study. That tells us something about its
deep significance and its threat to the landed establishment.
Goldschmidt identified a viable, market-oriented, indigenous American
alternative to gigantic, absentee-owned industrial agriculture
exploiting cheap migrant labor.
No Georgist to my knowledge has yet drawn the Georgist morals from
this great study. Goldschmidt himself was only dimly aware of the role
of land taxation in his story. The facts are there, the documents are
there
only the scholars, so far, are missing.
14. Owner-occupancy and operation. There is considerable
evidence that the result of heavy land-value taxation is to discourage
absentee owners, and induce sales to residents, and operators. Rural
Denmark is one case in point. Urban New Westminster, B.C., is another
- it long boasted the highest rate of resident-ownership in Canada, at
a time when it was the only city in B.C. exempting buildings 100%. On
the east side of the San Joaquin Valley, small farms and small
businesses are related to resident-ownership and owner-operation, both
urban and rural. Another Goldschmidt-type study or two are needed to
establish the relationship definitively, for skeptical scholars.
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