Joseph Stiglitz: October,
2002, interview
Q: Your academic work led you to formulate what you called "The
Henry George Theorem." This demonstrated that public spending — where
this was efficient — generated additional rental value that surfaced
in the land market. Other distinguished scholars, such as the late Nobel
prize winner, William Vickrey, confirmed your findings. You also noted
in one of your books, co-written with Anthony Atkinson, that the Henry
George Theorem was attractive both because it was the revenue-raiser
that did not distort private incentives and because "it is the 'single
tax' required to finance the public good." [Anthony B. Atkinson & Joseph
E. Stiglitz, Lectures on Public Economics, London: McGraw-Hill, 1980,
p. 525] Now, public investment, unless of the wasteful kind designed
to serve the privileged interests of rent seekers (the classic type being
a land speculator), should be viewed as working in partnership with the
private sector and not a drain on the community. How can the reputation
of publicly provided services and investments be rescued?
JES: That's a very good question. What we did when I was at the Council
of Economic Advisors was some studies to try to show what the social
returns would be to public investment in R&D, etc. And we became
convinced that the rates of return of those investments are very high.
So you ask the question, "what can we do to restore confidence in
public investment?" We need to realize how much we depend on them.
I keep telling people, "The Internet." That's one example.
It was publicly funded. It's now a public-private partnership. The government
did the basic research, and the private sector ran off with it. But,
arguably, we would never have had the Internet if it were not for government
expenditure. So I think a major industry in the United States — biotech — is
based on NIH (National Institutes of Health). NIH does all the basic
research. ... read the entire interview
Fred E. Foldvary — The
Ultimate Tax Reform:
Public Revenue from Land Rent
The tax reform presented here is not new. It has been working to some
degree in many cities and countries around the world. The idea probably
obtained its greatest popularity in the U.S. in the late 1800s, when the
economist Henry George analyzed taxing land value and untaxing labor and
capital in his book, Progress and Poverty.
Many economists have since then expanded on
George’s writing, examining
both the theory and the evidence. There is even a “Henry George Theorem,” which
proves that in a community with optimal population, the land rent equals
the value of the community’s public goods. Modern economics thus
affirms George’s theory in a more comprehensive and more
rigorous form, although the empirical question of how much revenue
could be
obtained from rent would benefit from more research. ... read
the whole document
Nic Tideman: The Morality of Taxation:
The Local Case
From a moral perspective, taxation
is dubious or worse. We tell
our fellow citizens that if they do not pay taxes that we say they
owe, their property will be seized or they will be sent to prison.
Why do we treat people this way? Is there a justification?
The dubiousness of taxation
increases when we consider its
origins. Government seems to have originated as roving bandits who
learned that total destruction was less profitable than protecting
their victims from other bandits and allowing them to keep a fraction
of what they produced (Olson, 1993). In time, scheduled partial
plunder evolved into taxation. Over the centuries, regimes that
started as tyrannies evolved into democracies. The public sector
evolved from an apparatus for implementing the will of despots into a
mechanism for carrying out democratic decisions. But public finance
continues to rely on the power of tax collectors, developed under
early tyrants, to coerce citizen to pay taxes. The wrath that
citizens feel toward tax collectors is probably the strongest
antagonistic feeling that citizens have toward a governmental
institution. Why do we allow ourselves to do this to one another?
There is a gentler side of
taxation that provides some explanation
of our tolerance of this coercion. Taxation can be the way that
people achieve their common purposes. People may agree to be taxed so
that there will be money to pay for public services that they want.
From this perspective, taxation may be considered no more than the
dues for belonging to a club that provides people with things that
they would rather pay their share of than do without. However, to
make this "voluntary exchange" theory of taxation relevant, people
must be able to choose freely whether or not to "join the club," to
be a citizen of the taxing jurisdiction. With all land claimed by
some taxing jurisdiction, the choice isn't exactly free.
The problem of morality in
taxation is the following:
- How do we
retain the possibility of people pooling their contributions to the
cost of services that they agree are worthwhile, while eliminating
the possibility of citizens treating their fellow citizens as targets
of plunder?
- What are the limits of obligations that we can justly
impose on our fellow citizens?
- And how do we set up a structure of
government that will ensure that these limits are observed? ...
we would probably have a much
more efficient public sector if
every public expenditure required two-thirds approval in legislative
bodies.
But to make taxation truly
voluntary, the option to leave must be
viable. If people could move costlessly from one jurisdiction to
another, taking all of their belongings with them, then competition
among jurisdictions would tend to eliminate oppressive taxation. This
would leave only the fees that people were prepared to pay to have
public services (Tiebout, 1956).
Of course, moving will always have
some costs, so the ideal will
not be attainable. But what can be imagined is a system in which all
taxes were local taxes. Then people would not have to move nearly as
far to escape from taxes that they regarded as oppressive. Higher
levels of government would not need to disappear; if the services
that they provide are desired, they could be financed by levies on
lower levels of government. ...
...Thus communities would not be
able to raise much revenue from income
tax or taxes on capital before they would drive residents and
investment away. It might seem that there would be no way that
localities could finance themselves.
Such a conclusion would be
unwarranted, because there is a very
significant source of public revenue that can survive when localities
compete for mobile residents. This source is land. When people are
taxed in proportion to the land they possess, no land moves to
another locality where taxes are lower. Thus two questions arise:
- Would taxes on land be sufficient to finance the public
activities
that ought to be undertaken, and
- would such a system be fair?
Consider first the question of adequacy of revenue. There is
a
theorem in economics, known as the
Henry George Theorem, that
addresses this question (Arnott and Stiglitz, 1979). One of the
simpler versions of this theorem is:
If the following three conditions
are met:
1. Public expenditures
provide benefits only over a limited area,
2. People can move costlessly, and
3. The number of persons who value a public service as highly as anyone
does exceeds the number of persons who can live in the area where the
service provides benefits,
then for any public service that
is worth at least as much as it costs to those who receive it, the
increase in the rental value of land that results from providing the
service exceeds the net cost of the service.
The Henry George Theorem is true because people who can move
costlessly will bid up the rental value of land to reflect the value
of public services that are not available elsewhere. The assumption
that the number of bidders exceeds the number of people who can
benefit from the public service guarantees that the upward movement
of rents will not end until all the benefits of the public service
are reflected in these rents. If some people who receive a public
service value it more highly than others, then they will receive a
surplus in addition to the rent they pay for land, and some
worthwhile increments of public services will not add quite enough to
rent to pay for themselves (Tideman 1993). But rent increments will
go a very long way toward paying for worthwhile local public
services.
...Read the whole article
Fred Foldvary: Geo-Rent: A Plea to Public
Economists
Textbooks in public finance and
urban economics sometimes contain a
topic known as the “Henry George Theorem.” It states that the public
revenue that provides for the collective goods of an optimally-sized
community equals the land rent of that community. As presented in
Atkinson and Stiglitz (1987, 523-5), the representative agent’s utility
function is U(G,X), where G is a collective and X a private good.
Output Y is a function of N workers:
Y = f(N) = XN + G.
X = {f(N)-G} / N
The wage is the marginal product of labor:
∂f/∂N = X
Therefore,
∂f/∂N = {(f(N)-G)/N}
G = f(N) - Nf’(N)
With land and labor the ultimate and original factors of
production,
rent (R) is the difference between total product Y and total wages:
R = f(N) - Nf'(N)
Therefore,
R = G.
The Henry George Theorem is so
named because it echoes Henry George's
(1879) single-tax proposal, that not only should land rent be the only
general tax, but that it will be adequate to finance public goods. The
theorem is accepted in public finance, but it is not applied. In
upper-level public-economics textbooks such as Atkinson and Stiglitz
(1987), it is presented, yet not invoked in policy discussions, and it
is ignored in scholarly treatments of optimal taxation, tax reform, and
public policy.
Edwin Mills (1998) goes further and constructs a comparative
static
model of a metropolis using a Cobb-Douglas production function with
three factors, the third being land, which is a refreshing change from
the usual two-factor analysis that tucks land into capital and then
forgets that it’s there. One theorem of the model is that a land-value
tax has no effect on resource allocation. Yet he concludes (47) that
despite is theoretical attractiveness a significant taxing of geo-rent
would deprive the owners of their beneficial uses, and would require
compensation, leaving the tax “practically almost worthless” (47, 41).
Thomas Nechyba (1998) also has a model with land, calibrated to
U.S.
parameters. He shows that replacing taxes on capital with taxes on land
can actually increase land values, despite the downward capitalization
caused by the tax, because of the greater increase in capital and rent.
According to the model (p. 196), with an elasticity of substitution
between capital and land of 0.5, which is within the estimated range, a
revenue-neutral tax shift to land value increases capital goods by 122
percent and raises output by 89 percent. Read the entire article
Richard Arnott, Kenneth Arrow, Anthony B. Atkinson and Jacques H.
Dreze, editors, Public Economics: Selected Papers by William
Vickrey.
Cambridge University Press, 1994.
from the introduction to the section on Urban
Economics, p. 336.
"One of the most celebrated results in
urban economics is the Henry George Theorem. The best-known variant
of the Theorem states that in
a city of optimal population size, where the source of agglomeration
is a localized pure public good, urban (differential) land rents
equal expenditure on the public good. Thus, a confiscatory tax on land
rents
is the single tax necessary to finance the public good. The explanation
for the result is as follows: In a city of optimal population size,
the average social cost of providing residents with a given level
of utility is minimized. At the point of minimum average cost, there
are
locally constant returns to scale so that the product exhaustion
theorem holds. With marginal-cost pricing, the profits generated from
the decreasing
returns to scale activities equal the losses fro mthe increasing
returns to scale activities. In the current contect, the profits take
the form
of land rents and the loss is the expenditure on the local public
good. The Henry George Theorem was discovered independently by Serck-Hansen
(1969), Starrett (1974), Flatters, Henderson and Mieszkowski (1974),
and Vickrey. Vickrey delayed publication and was the last into
print.
Unfortunately, therefore, his 1977 paper on the Theorem, "The
City as a Firm" (chapter 17), has not received the recognition it deserves.
In any event, the paper provides an elegant formulation of a variant
of the Theorem and an insightful explanation and discussion of
it."
the Summary to Vickrey's "The City as a Firm"
"While it is dangerous to extrapolate too freely from admittedly
oversimplified and even caricatured models (such as the above) to
the complexities of the real world, it seems not too rash to draw
the conclution that urban land rents are, fundamentally, a reflection
of the economies of scale of the activites that are carried on within
the city, and that efficient organization of a city, or even of the
urban life of a nation as a whole, requires that these land rents,
or their equivalent, be devoted primarily to the finacing of the
intramarginal residues that represent the difference between revenues
derived from prices set at marginal cost and the total cost of the
activites characterized by increasing returns. This means that revenues
derived from these rents must defray not only those overhead costs
of government and public services that are not marginally attributable
to specific outputs, but also the intramarginal elements of most
public utility costs, as well as thoser of a considerable range of
activities ordinarily thought of as belonging to the private sector.
Such a subsidy is especially crucial for mass transit and for other
forms of transportation where economies of scale are significant,
given the special relationship existing between transportation and
land values.
Use of land rents, or, at least, of a major fraction of them, for
public purposes is therefore not merely an ethical imperative, derived
from categorization of these retns as an unearned income derived
from private appropriation of publicly created values, but is, even
more importantly, a fundamental requirement for economic efficiency.
Cities that take the lead in such public use of land rents may find
that in the long run the subsidy is self-financing through the enhancement
in land values that results, while cities that lag may find that
in the long run they are unable to compete in national or world markets
with the cities that manage to organize themselves more efficiently
through the use of land rents to cover intramarginal residues. There
will, of course, be many an agonizing slip between abstract economic
analysis and cold political and economic reality. Lack of comprehension,
political intervention, strategic recalcitrance, and the inertia
associated with heavy commitments of fixed capital in what the French
so aptly term immeubles may slow the processes involved
to a glacial pace. But the fundamental tendencies and requirements
inherent in the very nature of the city can be ignored only at great
peril to its economic health."
Henry George: The Condition
of Labor — An Open Letter to Pope Leo XIII in response to Rerum
Novarum (1891)
God’s laws do not change. Though their applications may
alter with altering conditions, the same principles of right and
wrong that hold when men are few and industry is rude also hold
amid teeming populations and complex industries. In our cities
of millions and our states of scores of millions, in a civilization
where the division of labor has gone so far that large numbers
are hardly conscious that they are land-users, it still remains
true that we are all land animals and can live only on land, and
that land is God’s bounty to all, of which no one can be
deprived without being murdered, and for which no one can be compelled
to pay another without being robbed. But even in a state of society
where the elaboration of industry and the increase of permanent
improvements have made the need for private possession of land
wide-spread, there is no difficulty in conforming individual possession
with the equal right to land. For as soon as any piece of land
will yield to the possessor a larger return than is had by similar
labor on other land a value attaches to it which is shown when
it is sold or rented. Thus, the value of the land itself, irrespective
of the value of any improvements in or on it, always indicates
the precise value of the benefit to which all are entitled in its
use, as distinguished from the value which, as producer or successor
of a producer, belongs to the possessor in individual right.
To combine the advantages of private possession with the justice
of common ownership it is only necessary therefore to take for
common uses what value attaches to land irrespective of any exertion
of labor on it. The principle is the same as in the case referred
to, where a human father leaves equally to his children things
not susceptible of specific division or common use. In that case
such things would be sold or rented and the value equally applied.
It is on this common-sense principle that we, who term ourselves
single-tax men, would have the community act.
We do not propose to assert equal rights to land by keeping land
common, letting any one use any part of it at any time. We do not
propose the task, impossible in the present state of society, of
dividing land in equal shares; still less the yet more impossible
task of keeping it so divided.
We propose — leaving land in the private possession of individuals,
with full liberty on their part to give, sell or bequeath it — simply
to levy on it for public uses a tax that shall equal the annual
value of the land itself, irrespective of the use made of it or
the improvements on it. And since this would provide amply
for the need of public revenues, we would accompany this tax on
land
values with the repeal of all taxes now levied on the products
and processes of industry — which taxes, since they take
from the earnings of labor, we hold to be infringements of the
right of property.
This we propose, not as a cunning device of human ingenuity, but
as a conforming of human regulations to the will of God.
God cannot contradict himself nor impose on his creatures laws
that clash.
If it be God’s command to men that they should not steal — that
is to say, that they should respect the right of property which
each one has in the fruits of his labor;
And if he be also the Father of all men, who in his common bounty
has intended all to have equal opportunities for sharing;
Then, in any possible stage of civilization, however elaborate,
there must be some way in which the exclusive right to the products
of industry may be reconciled with the equal right to land.
If the Almighty be consistent with himself, it cannot be, as say
those socialists referred to by you, that in order to secure the
equal participation of men in the opportunities of life and labor
we must ignore the right of private property. Nor yet can it be,
as you yourself in the Encyclical seem to argue, that to secure
the right of private property we must ignore the equality of right
in the opportunities of life and labor. To say the one thing or
the other is equally to deny the harmony of God’s laws.
But, the private possession of land, subject to the payment to
the community of the value of any special advantage thus given
to the individual, satisfies both laws, securing to all equal participation
in the bounty of the Creator and to each the full ownership of
the products of his labor.
... read the whole
letter
Nic Tideman: The Structure of
an Inquiry into the Attractiveness of A Social Order Inspired by the
Ideas of Henry George
I. Ethical
Principles
A. People own
themselves and therefore own what
they produce.
B. People have obligations to share equally the opportunities that
are provided by nature.
C. People are free to interact with other competent adults on
whatever terms are mutually agreed.
D. People have obligations to pay the costs that their intrusive
behaviors impose on others.
II. Ethical
Questions
A. What is
the relationship between justice (as
embodied in the ethical principles) and community (or peace or
harmony)?
B. How are the weak to be provided for?
C. How should natural opportunities be shared?
D. Who should be included in the group among whom rent should be
shared equally?
E. Is there an obligation to compensate those whose presently
recognized titles to land and other exclusive natural opportunities
will lose value when rent is shared equally?
F. Can a person who is occupying a per capita share of land
reasonably ask to be left undisturbed indefinitely on that land?
G. What is the moral status of "intellectual property?"
H. What standards of environmental respect can people reasonably
require of others?
I. What forms of land use control are consistent with the philosophy
of Henry George?
III.
Efficiency Questions
A. Would public
collection of the rent of land
provide enough revenue for an appropriate public sector?
B. How much revenue could public collection of rent raise?
C. Is it possible to assess land with sufficient accuracy?
D. How much growth can a community expect if it shifts taxes from
improvements to land?
E. To what extent does the benefit that one community receives from
shifting taxes from buildings to land come at the expense of other
communities?
F. What is the impact of land taxes on land speculation?
G. How, if at all, does the impact of shifting the source of public
revenue to land change if it is a whole nation rather than just a
community that makes the shift?
H. Is there a danger that the application of Henry George's ideas
would lead to a world of over-development?
I. How would natural resources be managed appropriately if
they were
regarded as the common heritage of humanity?
Read the whole article
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