Cannanizing With A Vengeance
Gavin R. Putland
[Reprinted from a Land-Theory online
discussion, 11 October, 2006]
Landowners sabotaged site value taxation by devolving it to the local
level of government. Of course they would have preferred to have no
property taxes at all; but the devolution to local governments was
easier to achieve and far more resistant to subsequent Georgist
reform. This was one of many ways in which landed interests
deliberately conceded a little ground to the Georgists in order to
avoid losing much more. Georgists could learn from these tactics.
1. CANNAN'S LAW
Many Georgists argue that the collection of site rents should be
administered by local governments, and that the expenses of each
higher level of government, if not fully defrayed by economic rents
generated at that level, should be funded by surplus ground rents
passed up from lower levels.
A paper by Mason Gaffney [1] exposes the futility of the bottom-up
approach. Gaffney refers to two works by the British economist Edwin
Cannan (1861-1935), whose argument may be distilled as follows [2]: If
a local government collects site rent (or part thereof) and spends it
on public services that are available to all comers, those services
will attract immigrants from other local government areas (LGAs) due
to freedom of movement within the country. As a result, locational
decisions will be based partly on services instead of productivity,
causing a loss of economic output. Meanwhile, local property owners
will resent paying "taxes" for the benefit of newcomers.
While the newcomers will raise rents and thereby help to defray the
costs of the services they use, not all property owners will receive
the extra rent in cash, and those who do will still complain.
Moreover, some of the newcomers will be day-trippers from outside the
LGA, or employers whose workers commute from outside the LGA, so that
some of the associated uplifts in rent will be outside the LGA. Even
those workers who actually settle in the LGA will tend to be poorer
than the long-time residents and therefore will not drive up rents in
proportion to their numbers. So parochialism will militate against
high taxation of site values.
Gaffney further notes that rents per unit population vary widely from
one LGA to another. If site value taxation is local, property owners
in LGAs with low rent/population ratios will pay higher tax rates for
the same level of service. This fact, quoted in isolation, lends
credence to the otherwise bizarre claim that site value taxation is
regressive. Moreover, rural areas tend to have not only lower
rent/population ratios, but also lower values of LSREV (Land Share of
Real Estate Value), than urban areas. Shifting a NATIONAL property tax
off improvements and onto site values gives some relief to rural LGAs,
whereas the same shift in a LOCAL property tax does not.
Cannan grudgingly concluded that if there must be a tax on site
values, it should be national.
Between the lines, the message for landed interests was clear: If you
want to sabotage site value taxation, consign it to the lowest level
of government, so that (a) the above-mentioned problems limit the
property tax rate AND undermine the case for shifting the tax off
improvements and onto sites, and (b) the existence of a recurrent
property tax at the lowest level of government can be used as an
argument against any similar tax at a higher level. That is roughly
what happened.
2. BACKBURNING TO THE GEORGISTS
As a firefighter facing an advancing front might burn off the grass
on the windward side of a road, so the landed class, perceiving that a
land tax was more dangerous at the national level than at the local
level, and that the boundary between a national land tax and a local
land tax was easier to defend than the boundary between a land tax and
no land tax, made a strategic decision to promote something that they
didn't like: a local property tax. This was not the only such
decision.
Landlords, as high income earners, would regard a progressive income
tax as undesirable in itself. Yet one of their favourite economists,
Edwin R. A. Seligman, championed the progressive national income tax
because it served as a political substitute for something that
landlords feared more: a national land tax. Besides, income tax comes
with a depreciation deduction which, in combination with overstated
building values and understated site values, helps to compensate for
the necessary evil of local property taxes!
Land speculators, as the chief beneficiaries of "capital gains"
(an oxymoron coined by another neoclassical economist, Carl C. Plehn),
would regard capital gains tax (CGT) as undesirable in itself. But CGT
is tolerated because, by catching speculators in the income-tax net,
it reduces the pressure for a much stronger measure against
speculators, namely a holding tax on land values.
By itself, the inclusion of rental income in the income-tax base is
detrimental to landlords. But it is the price of tax-deductibility for
mortgage interest, which for many landlords outweighs the rental
income. Moreover, it short-circuits any arguments for income tax on
IMPUTED rent, which would bring speculators into the net.
By these compromises, any one of which could have been denounced as
treachery, landed interests have secured their heartland and ensured
that all skirmishes with Georgists will be fought over unimportant
territory -- unless, perhaps, the Georgists make some strategic
compromises of their own.
3. LOCALIZING THE GST
The Property Council of Australia thinks infrastructure should be
funded by the GST. In Australia, infrastructure is primarily a State
responsibility, and indeed GST revenue is reserved for the States. But
that doesn't mean the States have anything to gain by actually
spending the GST on infrastructure. By providing infrastructure, a
State may generate more economic activity within its borders and
thereby cause more GST to be collected; but the additional GST will be
collected at the Federal level and distributed to all the States under
a revenue-sharing formula, with the result that only a fraction of it
will come back to the State that financed the infrastructure.
Another consequence of the revenue-sharing arrangement is that the
States are not fiscally independent.
The Federal Parliament can solve both problems as follows:
- Turn the GST into a retail tax. This eliminates input credits,
allowing different tax rates in different States without causing
complications on the input-credit side. It also eliminates
ambiguity as to the State in which the tax is collected; the point
of collection is the point of retail sale.
- Collect GST in each State at a rate to be determined annually
by the Parliament of that State, and return the revenue collected
in each State to the executive government of that State. This does
not amount to Federal discrimination between the States (which
would be unconstitutional in Australia), because any differences
between rates are decided at State level, not Federal level.
Of course it is also desirable to encourage LOCAL governments to
spend more on infrastructure. To this end, the Federal Parliament
could split the retail tax into two components: one for the States (as
above), and one for local governments, the rate in each LGA being set
by the local council, and the revenue collected in that LGA being
given to the responsible State on the condition that the State passes
it on to the LGA (cf. s.96 of the Australian Constitution). Then local
governments would indeed be encouraged to spend more on infrastructure
-- especially of the sort that would attract retailers (e.g. public
transport hubs).
By devolving consumption taxes to local governments, one minimizes
the number of people who share the loss due to tax evasion by any one
of their number, and thereby maximizes the social pressure to pay
one's lawful share of tax.
Localization of consumption taxes also puts downward pressure on the
tax rates, due to tax competition between local governments. That
aspect should be attractive to Georgists, who generally oppose
consumption taxes. Local recycling of the benefits of infrastructure
is also a sound Georgist principle.
Of course we Georgists would rather have no consumption taxes at all.
But, in view of the above, and given that we lack the power to
eliminate consumption taxes altogether, surely the next best thing is
to devolve them to the lowest possible level of government.
4. REMOVING THE FIREBREAKS
If State and local governments could set their own consumption tax
rates, how would they react? At State level, land tax would probably
be retained because only a minority of voters are liable to pay it.
But at the local level, the 2/3 of the voters who own property would
gladly pay somewhat higher prices in order to eliminate their rate
bills. So local governments would inevitably succumb to the temptation
to eliminate rates. And at Federal level, a promise to force this
decision on local governments would be a sure election winner.
So local rates would disappear, clearing the way for collection of
site rent at the FEDERAL level -- the preferred level for Georgist
purposes. And even this could be done in a politically safe manner
(see e.g. http://localhost/working/paper02.htm).
NOTES
- M. Gaffney, "A Cannan
Hits the Mark", AMERICAN JOURNAL OF ECONOMICS AND SOCIOLOGY,
vol.63, no.2 (April 2004), reprinted in R.V. Andelson (ed.),
CRITICS OF HENRY GEORGE (Blackwell Publishing, 2004), vol.2,
ch.21.
- In "distilling" the
argument, I have avoided claims that might be questioned by fellow
Georgists. In particular, the argument that immigration divides
the rent among a larger number of people or "dissipates"
the rent due to a tragedy of the commons is not directly
applicable when the "commons" consists of site rent,
which tends to increase with immigration. The use of examples such
as fisheries and oil revenues highlights the inapplicability to
site rents.
| What follows is a subsequent exchange between
Gavin Putland and Dan Sullivan regarding the above essay.Reprinted
from the Land-Theory Discussion Group, 13 October, 2006 |
GP: It seems that substantial revision is needed. But some criticism
is due to misunderstanding.
DS: While some of the practical objections have merit, I strongly
disagree with the characterization that land value taxes arose locally
because Georgists wanted it that way.
GP: That's not what I said. I wrote: "Many Georgists argue that
the collection of site rents should be administered by local
governments..." Note the present tense.
DS: I also note that, as local taxes go, the cost differential
between land value tax and income tax is greatest in the poor
communities. In the wealthy Pittsburgh suburb of Fox Chapel, there are
about 1400 owner occupants, only about ten renters, and a small amount
of commercial property. Obviously, a shift from income tax to land
value tax would save them very little.
GP: It seems to me that a shift from income tax to land tax must take
place at a level of government that already has an income tax. In
Australia, that means the Federal level only.
GP FROM THE ORIGINAL: Landowners sabotaged site
value taxation by devolving it to the local level of government. Of
course they would have preferred to have no property taxes at all; but
the devolution to local governments was easier to achieve and far more
resistant to subsequent Georgist reform.
DS: That is not what happened. When the Georgist movement was young,
almost all taxing power was already at the local level.
GP: Mea culpa. I shouldn't have used the word "devolved",
because it suggests that the "devolved" power was already
being used at a higher level of government.
GP FROM THE ORIGINAL: As a result, locational
decisions will be based partly on services instead of productivity,
causing a loss of economic output.
DS: That is a very false dichotomy, and using abstract terminology
covers how wrong it is. It begs the question of who will relocate into
the land taxing community, and what the benefits are. For example, if
building taxes are replaced with land value taxes, then both the
quality and the quantity of buildings will improve, which is good for
the local economy. If the income tax is replaced, the community will
not only attract new residents, but will attract higher-income
residents, who will also benefit the local economy.
GP: Yes. And again, in Australia, the income tax can only be replaced
at the Federal level. This must be a common situation because, as you
say, the general taxing power was devolved upward.
Concerning the "loss of economic output", perhaps it is
better to argue in terms of incentives for governments to provide
services. If the recycling of productivity through ground rents is
done on a global basis, services will tend to be provided where they
have the greatest effect on productivity -- whereas if the recycling
takes place within LGAs, the decision of each LGA will be distorted by
the leakage of benefits into adjacent LGAs. That means fewer services,
hence less productivity.
DS: With local tax revenue, the community does what it wants to do,
not whatever the state and federal government deigns to fund. Even the
most casual study of municipal fiscal policy reveals that local
governments will waste state and federal money rather than lose it,
but are far more conservative with locally collected tax revenues.
GP: That's because they pay the political price for the tax. They
still pay the political price even if they only set the local rate of
a tax that is administered centrally and returned to the LGA from
which it is collected.
DS: If we are going to cringe at the prospect of property owners
complaining, we might as well quit trying and talk about football
instead.
GP: Does political feasibility count?
GP FROM THE ORIGINAL: Even those workers who
actually settle in the LGA will tend to be poorer than the long-time
residents and therefore will not drive up rents in proportion to their
numbers.
DS: Both experience and common sense show that this is patently false
unless the services are targetted to the poor. All services increase
rental value, no matter how they are paid for, and it is not the poor
alone who will pay higher rents in order to get more services. The
rich will be the first to pay extra to get better roads, better
schools, better parks, etc.
GP: But not necessarily better public transport or public (as opposed
to private) hospitals. If some services are preferentially used by the
poor while others are used by all, the overall effect still favors the
poor.
GP FROM THE ORIGINAL: Gaffney further notes
that rents per unit population vary widely from one LGA to another. If
site value taxation is local, property owners in LGAs with low
rent/population ratios will pay higher tax rates for the same level of
service.
DS: Higher tax rates, but not higher taxes.
GP: I'm referring to the politics of the situation -- not the logic
of it.
GP FROM THE ORIGINAL: Between the lines, the
message for landed interests was clear: If you want to sabotage site
value taxation, consign it to the lowest level of government,
DS: Which, of course, is not what happened. The landed interests
flat-out lost the battle at the local level, and so used their greater
dominance at the state and national levels to shift the taxing power
to those higher levels, knowing that the higher levels would never
adopt land value tax.
GP: In other words, land tax was consigned to the lowest level of
government, thus ensuring that it would make up only a small fraction
of the total tax collected by all levels. Therein lies the sabotage.
So where's the disagreement?
GP FROM THE ORIGINAL: 2. BACKBURNING TO THE
GEORGISTS
As a firefighter facing an advancing front might burn off the grass
on the windward side of a road, so the landed class, perceiving that a
land tax was more dangerous at the national level than at the local
level, and that the boundary between a national land tax and a local
land tax was easier to defend than the boundary between a land tax and
no land tax, made a strategic decision to promote something that they
didn't like: a local property tax. This was not the only such
decision.
DS: This empty assertion cries out for documentation. When have the
landed interests promoted property taxation at the local level?
GP: Wasn't that Austin Chamberlain's tactic in the UK?
GP: The Property Council of Australia wants a flat property tax of
0.3% per annum. It is not clear whether this is meant to be at the
local level or the State level, but it certainly isn't meant to be
Federal.
GP FROM THE ORIGINAL: ... Yet one of their
favourite economists, Edwin R. A. Seligman, championed the progressive
national income tax because it served as a political substitute for
something that landlords feared more: a national land tax.
DS: That is an entirely different thing. They promoted a national
income tax, not to avoid a national land value tax, but to avoid land
value taxes at any level.
GP: But for fiscal reasons, a national income tax is a more effective
bulwark against a national land tax than against a state or local land
tax. Surely they could see that.
GP FROM THE ORIGINAL: Besides, income tax comes
with a depreciation deduction which, in combination with overstated
building values and understated site values, helps to compensate for
the necessary evil of local property taxes!
DS: This is argument by anacronism. The situation of overstated
building values arose long after Seligman's support of income tax had
faded into history.
GP: I didn't say this particular argument was Seligman's.
DS: Accepting one federal tax over another hypothetical federal tax,
neither of which are land value taxes, has little to do with core
assumption that we would have had fewer problems had we put all of our
energies into a national land value tax.
GP: And at the national level, that's what I'm doing.
GP FROM THE ORIGINAL: By these compromises, any
one of which could have been denounced as treachery,
DS: All of them *were* denounced as treachery by Georgists,
GP: Yes, but I mean by landed interests. Compromises that they might
have regarded as treachery actually served their cause.
DS: The loss of land value tax has come because Georgists were
seduced by delusions of national taxation generally, and particularly
by the delusion that the income tax could somehow serve as a proxy for
land value tax. Even Henry George saw through this, and his
condemnation of income tax gives tragic irony to his son's co-
sponsoring it.
GP: In Australia, the only income tax is at Federal level. If that
income tax were replaced by land value tax, there would be no income
tax in Australia. So where's our disagreement?
GP FROM THE ORIGINAL: The Property Council of
Australia thinks infrastructure should be funded by the GST. In
Australia, infrastructure is primarily a State responsibility, and
indeed GST revenue is reserved for the States. But that doesn't mean
the States have anything to gain by actually spending the GST on
infrastructure. DS: BINGO! And neither would the states have anything
to gain by spending a state land value tax wisely.
GP: If they spend LVT wisely, they'll raise land values and get more
revenue without raising tax rates. That doesn't happen with GST. But
it would happen to some extent if the GST were recycled locally.
GP FROM THE ORIGINAL: By providing
infrastructure, a State may generate more economic activity within its
borders and thereby cause more GST to be collected; but the additional
GST will be collected at the Federal level and distributed to all the
States under a revenue-sharing formula, with the result that only a
fraction of it will come back to the State that financed the
infrastructure.
DS: And the same is true of local governments. Under a state or
federal land value tax, their taxing power will not be determined by
how their own wise spending (on infrastructure or anything else)
raises land values, but on some state or federal formula.
GP: True. The government that gets the tax is the one that has the
associated incentive to invest in infrastructure.
GP FROM THE ORIGINAL: Another consequence of
the revenue-sharing arrangement is that the States are not fiscally
independent.
DS: RIGHT AGAIN! And neither would localities be fiscally independent
under a state or national land value tax.
GP: I never said that a tax whose rate is set by one level of
government can provide fiscal independence for another level.
DS: The retail sales tax was replaced by the GST because retail taxes
are more easily evaded.
GP: Australia's GST replaced the WHOLESALE sales tax. The broad-based
GST was supplemented by a very selective "luxury goods tax",
which is a retail sales tax.
DS: As rates [went] higher, GSTs were replaced by VATS because GSTs
were more easily evaded.
GP: ?!? Australia's "GST" is and always was a VAT. Europe's
VAT replaced turnover taxes. Canada's "GST" is also a VAT
but didn't displace retail sales taxes. What "GST" are you
referring to?
GP FROM THE ORIGINAL: Of course it is also
desirable to encourage LOCAL governments to spend more on
infrastructure. To this end, the Federal Parliament could split the
retail tax into two components: one for the States (as above), and one
for local governments, the rate in each LGA being set by the local
council, and the revenue collected in that LGA being given to the
responsible State on the condition that the State passes it on to the
LGA (cf. s.96 of the Australian Constitution).
DS: This makes no sense. The local government gives sales tax revenue
to the state on the condition that the state pass it on (back, really)
to the local government? Why not just let the local government keep it
in the first place?
GP: Because of two peculiarities of the Australian Constitution: (1)
only the Federal government can impose consumption taxes (which the
High Court regards as excises); and (2) the Federal Parliament can
make conditional grants to the States, but not to local governments
(which are not mentioned in the Constitution). So if the Federal
Government wants to make grants to local governments, it must go
through the formality of making grants to the States on the condition
that the States forward them to local governments. This is done.
The implication is that any de-facto State or local consumption taxes
would have to be administered at the Federal level. This has the
advantage that while the tax rate could vary from one place to
another, the tax BASE could not, so uncertainty and administrative
costs would be minimized.
DS: Retailers will quickly flee from local jurisdictions with high
sales tax rates and flood into jurisdictions with low sales tax rates.
GP: So local jurisdictions have an incentive to minimize the sales
tax rates. Implication: If you don't like sales tax but can't entirely
get rid of it, devolve it to the local level.
DS: Every Philadelphia who has been to Delaware knows what I mean.
Delaware, which has not sales tax and border's Pennsylvania, where the
sales tax is rate 6%, is awash with shopping malls, while Pennsylvania
has almost nothing within 15 miles of the Delaware border.
GP: So Pennsylvania has an incentive to cut its sales tax. Isn't that
good?
GP FROM THE ORIGINAL: But, in view of the
above, and given that we lack the power to eliminate consumption taxes
altogether, surely the next best thing is to devolve them to the
lowest possible level of government.
DS: If you can't eliminate them, you reduce them.
GP: Right. And what better way to reduce them than local tax
competition?
GP FROM THE ORIGINAL: At State level, land tax
would probably be retained because only a minority of voters are
liable to pay it. But at the local level, the 2/3 of the voters who
own property would gladly pay somewhat higher prices in order to
eliminate their rate bills.
DS: OK, so tell me how it can be that 2/3 of the voters in each
locality of a state can own property without 2/3 of the voters in the
state also owning property. Go slowly, in case Einstein is listening
from on high, otherwise you might make his celestial head explode.
GP: In Australia, local rates apply to almost all property owners,
while State land taxes apply to a minority of them (residential
owner-occupants being exempt).
Another possible interpretation of the question is: If 2/3 of the
voters would pay higher consumption taxes to get rid of property rates
at the local level, why would the same 2/3 of voters make the opposite
decision at the national level? Answer: Because the national
government could offer a more attractive quid pro quo, including
- a pay-as-you-go system for property tax, organized through the
banking system or the social security system (both of which, in
Australia, are national responsibilities), minimizing the need for
"rate bills";
- Elimination of the tax that are chiefly responsible for
compliance costs, namely income tax, which Einstein said is the
hardest thing in the world to understand.
GP FROM THE ORIGINAL: So local governments
would inevitably succumb to the temptation to eliminate rates.
DS: And suddenly local control, and a local dedication to
infrastructure, which were so important earlier in this essay, are
gone.
GP: Not entirely, because the locally-fixed consumption tax remains,
as do local fees for service.
Also bear in mind that a national land tax is inherently local in the
sense that, when the government spends money on infrastructure in a
particular area, land values and hence tax receipts from that area
increase. But with a local land tax, this process is disrupted by
arbitrary lines on maps -- namely LGA boundaries.
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