State of the Union 2014

Edward J. Dodson

[A response to the message delivered by U.S. President Barack Obama on 28 January, 2014. Uploaded to Youtube.com a few days later]

President Obama has delivered his state of the union message, and the Republicans have responded.

Each promises that if their policies and programs are followed, the problems that plague our society - widespread poverty, prolonged unemployment, a skyrocketing national debt, a decaying infrastructure, schools that fail our children, extremely expensive medical care, the seemingly endless commitment of U.S. military forces in foreign lands, and all of the issues relating to protection of our natural environment - will be addressed.

They surely believe they have the answers. They have proven over a very long period of sharing political power that they do not.

In fact, the cause of nearly all of our problems can be traced to the arrival of the first European settlers to North America.

The peoples of Europe who came here brought with them a desire to escape political or religious oppression but also a thirst for access to land to live self-sufficiently. Most were denied access to land back in their home country, except under conditions of serfdom.

And yet, the system of property law and the means by which communities raised public revenue they adopted were nearly exact replicas of the systems under which they had struggled to survive.

The land that eventually became the first thirteen states of the United States was granted to a small number of well-connected British aristocrats, who attempted to add to their personal fortunes by attracting settlers to their colonies. With settlers and a rising population, the value of "their" land would certainly rise.

Those to whom they sold some of their land holdings then did the very same thing.

By the time of the generation of our founding fathers, inherited landed wealth served as the basis for political influence and social position. And, quite consistent with human nature, the landed were extremely adept at securing under the new nation's system of law the privileges they had enjoyed under British rule. Government would have to find other sources of revenue than the value of land they held.

Some recognized the moral injustice of their privileges. Benjamin Franklin had adopted as his own the Physiocratic principle that nature is the common property of all persons and that what political economists described as land rent was the rightful source of public revenue. No less an authority on economic systems and markets than Adam Smith had also said so in his 1776 book, 'Wealth of Nations'.

While George Washington became one of the wealthiest individuals in North America as a result of his speculation in land, the hugeness of the continent and the relative smallness of the population meant that for a long time to come the opportunity to become wealthy by buying, holding and selling land would be available to far more people than was the case under aristocracy in the Old World.

Profiting by land speculation became infused in the DNA of the people as they pushed back the frontier, displaced the tribal peoples, and filled the continent.

When most of the public domain was sold and in private hands, government needed to look to other means of raising revenue. Excise taxes and tariffs were the easiest to impose because they were indirect.

States and local communities eventually began to impose taxes on real estate and personal property. By the twentieth century government at all levels thought little of taxing every sort of asset and every sort of activity or transaction. First in the cities, then from state to state and finally to other countries, businesses left to protect profit margins. Left behind were those without resources to follow the jobs.

Political leaders, economists and citizen groups have argued and debated, lobbied for and against legislation and regulation based on whatever ideology they came to embrace.

Along the way, fundamental principles have become so obscured that rarely is there a debate over the moral distinction between societal and individual wealth, or earned versus privilege-derived income. We heard nothing from the President or the Republicans that comes close to such a debate as the basis for a new direction for the nation.

To Adam Smith, laissez-faire did not mean that government should stay out of the private affairs of individuals. He understood human nature better than to believe that would work. Government is necessary to ensure what a later political economist described as "a fair field with no favors." The starting point, the most important element in establishing a society characterized by equality of opportunity is to deal with landed privilege; and the way to do that, Smith told us, was to require those who held land pay to society the full potential annual rental value of land.

Over the last century, some economists have continued to make the case made by Adam Smith. Their work was stimulated, in part, by an American political economist, Henry George, who greatly expanded on Smith's earlier analysis. These economists include in the definition of land and the rent yielded from land, the value of such natural assets as frequencies on the broadcast spectrum, or the takeoff and landing slots at airports as well as access to the sea floor to exploit mineral and other resources.

How government raises revenue today is neither economically efficient nor consistent with the commitment to protect private property. Much earned income is confiscated. Much unearned income is exempted from taxation. We tax so-called "capital gains" at a lower rate than income earned from wages and salaries, even though actual capital goods - buildings and machinery - never increase in value; they depreciate over time.

Getting from where we are to where we ought to be might seem impossible. Certainly it is beyond the grasp of the two parties that exchange power over us every few years. That the state of our union is in such trouble is not their fault; they inherited a dysfunctional system. At the same time, few among them have demonstrated the intestinal fortitude to abandon failed ideology in a commitment to real progress. Despite their rhetoric, we are on a path leading to systemic failure.

Before it is too late, our political leaders must act. We must pressure them to act. Removing them from office will do little if newly-elected representatives are guided by the same ideological biases.

By a combination of policy changes at all levels of government, the rental value of land must become a primary source of public revenue. Property improvements need to be removed from the tax base because these are legitimately the property of individuals. States and the Federal government can then work with economists who understand land markets on ways to fully collect the land values that are legitimately societal income.

In the meantime, the Federal government can begin to collect rent-derived income by combining tax simplification with true progressivity under the individual income tax system.

All individual income up to the national median should be exempt from taxation. No other exemptions or deductions should be permitted any longer. Above the national median, an increasing rate of taxation should be applied to higher ranges of income, with the rates and ranges established as part of the budget process with the objective of achieving a balanced budget.

Another measure neither main party has ever considered is the possibility of gradually retiring the nation's debt by conversion of maturing government debt into fully amortizing bonds that repay to investors both interest and principle.

The funds required to service the bonds would be factored into the above balanced budget revenue calculations. No doubt, those economists who fully understand where the rent of land exists can provide ideas on how to appropriately ensure these values are captured while lifting the burden of taxation from those who actually produce wealth and provide needed services.

To be honest, even if the above measures were implemented tomorrow, the state of the union in 2015 would still be a great concern. However, finally, at least, the dominoes would be falling in the right direction. Thank you.