Should some of us subsidize others? Under what circumstances? Should the wealthy subsidize the poor? More important, is it right for the poor to subsidize the wealthy?

Is there a difference between subsidizing those who can't meet their own needs (because of health or developmental problems, for example) and subsidizing those who have managed to gain some advantage over the rest of us (because of their ownership of land or natural resources, for example)?

John Dewey: Steps to Economic Recovery

You have heard much about various steps that should be taken to promote economic recovery. I propose this evening to concentrate attention upon one step, a step absolutely fundamental to permanent recovery of the sick patient, as distinct from remedies that dope the patient into a temporary hectic burst of activity; a step so simple and so basic as to be generally neglected.

The one thing uppermost in the minds of everybody today is the appalling existence of want in the midst of plenty, of millions of unemployed in the midst of idle billions of hoarded money and unused credit, as well as factories and mills deteriorating for lack of use, of hunger while farmers are burning grain for fuel.

No wonder people are asking what sort of a crazy economic system we have when at a time when millions are short of adequate food, when babies are going without the milk necessary for their growth, the best remedy that experts can think of and that the Federal Government can recommend is to pay a premium to farmers to grow less grain with which to make flour to feed the hungry, and pay a premium to dairymen to send less milk to market.

Henry George called attention to this situation over fifty years ago. The contradiction between increasing plenty, increase of potential security — and actual want and insecurity is stated in the title of his chief work, Progress and Poverty. That is what his book is about. It is a record of the fact that as the means and appliances of civilization increase, poverty and insecurity also increase. It is an exploration of why millionaires and tramps multiply together. It is a prediction of why this state of affairs will continue; it is a prediction of the plight in which the nation finds itself to-day. At the same time it is the explanation of why this condition is artificial, man-made, unnecessary, and how it can be remedied. So I suggest that as a beginning of the first steps to permanent recovery there be a nationwide revival of interest in the writings and teachings of Henry George and that there be such an enlightenment of public opinion that our representatives in legislatures and public places be compelled to adopt the changes he urged. ... read the whole speech

Charles T. Root — Not a Single Tax! (1925)

An illustration has already been given of the case of a piece of farm land. Let us take an example in a large city. Let us take a corner lot centrally located in New York City, the title to which lot is held by, say, Mr. John William Rhinelastor. This lot was a part of an old Dutch farm, and is an heirloom. It did not cost the present owner anything, nor his father nor his grandfather. There is a little old building on it, which has always been rented at a figure ten times as large as the taxes imposed, so that the owner has been handsomely subsidized each year for storing his title-deeds during a period of the city's growth in which the increase in population and the expenditure of public money in that neighborhood have raised the value of this corner location to, say, two hundred times its early value.

About now, Mr. Rhinelastor decides that he will go abroad to live, and can't be bothered with this piece of property. But knowing that the pressure of population is sure to increase and that the expenditure of public money to the benefit of this land must continue, he will not sell it. So he gives a twenty-one year lease to the corner for, say, $20,000 a year net, with a privilege to the lessee of renewals at advancing figures. The lessee agrees to pay all taxes.

Now what is this net $20,000 a year, which will be regularly remitted to Mr. Rhinelastor, in Europe or wherever he may be, given in payment for? Not for the old building — the first thing the lessee does is to pull it down. Not for the land itself — it is all rock, which has got to be blasted out as part of its improvement.

Clearly it is paid for a location or site value, which the community, and the community only, has built up and paid for. In other words, the present $20,000 rental, and the larger one which that location will command in later years, is strictly a community product, and as such belongs to the community and not to Mr. Rhinelastor.

That the latter has no good right to it is at once evident when we remember that "When one man gets something for nothing somebody else has got to give something for nothing." Here are $20,000 that some men and women have got to work to earn every year to hand over to a man who does not render, and does not feel any obligation to render, one dollar's worth of public or private service in return. Such is the wild travesty of justice which we call law. It is not comical only because it is frankly tragic in its social results.

Now suppose this $20,000 and all the rest of this same community product — i.e., the site or location rent of its ground — were paid every year to its rightful owner, the treasurer of New York City, what would become of taxation, with its inseparable retinue, Fraud, Evasion, Perjury, Inequality, and an all-pervading public sense of injustice? ... read the whole article

Mason Gaffney: Land as a Distinctive Factor of Production

Wearing pajamas outdoors in the winter, one wouldn’t expect to retain body heat. Yet, people do try to sustain community while hemorrhaging its commonwealth. Losing it, residents must work more than necessary.

When residents import food and energy, they deprive others in the community of income. Yet, the loss pales when compared to paying mortgages and [income] taxes. A recent study of Oakland, CA found torrents of dollars pumped out of town headed for the treasuries of distant capitols and the bank vaults of distant lenders.

While mortgages and interest elevate an elite elsewhere, they keep debtors on a treadmill at home. To those anxious over every next payment, how appealing is an economy no longer expanding its girth? In addition, what’s their debt for? Credit? The total savings of all members of a community should suffice. Local bank "used to" be the norm.

The other major drain, taxes, at about 40% of the average worker’s income, usually total more than the value of government services received. And who receives them? Corporate loggers, miners, factory farms, and tractor trailers. Lose such subsidies, leveling the playing field, and local recyclers, family farmers, and freight haulers could compete. Their success would plug the visible leaks - imported food, energy, and materials. ...  Read the whole article

Jeff Smith: Subsidies at Their Worst: Privileges

a. direct cash outlays, such as cash to corporations for advertising overseas,

b. lucrative contracts, such as with weaponeers et al campaign contributors, and

c. tax breaks that burden would-be competitors, such as tariffs that protect GM and Ford but not autoworkers. Even if we were to abolish subsidies (a) and taxes, eliminating the advantage of tax breaks (c), and negotiate responsible contracts (b), that'd still leave in place

d. seven subtle privileges, mere pieces of paper that government grants its customers at nowhere near market value, positioning the privileged to claim all the surplus value of society.

1. The corporate charter's salient feature is to limit the liability of those choosing to profit by putting others at risk. ...

2. Pollution permits, performance waivers, land use exemptions -- whether granted by bureaucracies, legislatures, or courts - are worth much more than however much government charges and business pays. ...

3. Patents protect the basement inventor, right? Wrong....

4. Utility franchises create monopolies in exchange for some public service, such as providing electricity, phone communication, etc. ...

5. Communication licenses for TV, radio, cell phones, and the like are given away for free or for far less than market value, turning recipients into "instant billionaires" (the business press gleefully notes). ...

6. Resource leases for public oil, minerals, forests, and grazing land, are often let at "fire-sale" prices. ...

7. Land titles do protect the average homeowners but because they cost virtually nothing (a paltry filing fee often about $2.00), they also protect enormously wealthy absentee landlords. ... 

Land titles are the granddaddy of all privileges. Historically, titles preceded all others and created a class of elite owners with the power to win the six other indirect subsidies, along with the more direct ones – grants, contracts, and tax favors. To undo and reverse this history, it's necessary to collect and share the natural rents from all seven inconspicuous privileges.

For these pieces of paper, government should charge full market value. ...

Getting a Citizens Dividend would not only eliminate poverty, it'd also erase any rationale for subsidies - direct or indirect - to the poor or to the privileged. Repealing the free ride of privileges would be like repealing capitalism. Without those subtle detours imposed upon public revenue, owners would have to work to amass a fortune, and work is one of the worst ways known to strike it rich.

What you can do: Dry up the milkmaid state. Dispense with the notion that the state must meddle in enterprise. Dispense the notion from others, too. Focus government on its lone raison d'etre - defend rights. Demand your right to a fair share of natural revenue. ...  Read the whole article

Fred Foldvary: Geo-Rent: A Plea to Public Economists

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

The rental value of oil, minerals, and water is more complex. Government often subsidizes water, especially to agriculture, selling below cost, whereas efficient provision would base the price on the market price, often above cost, the extra amount being rent. Offshore oil leases are commonly bid on by companies, and the bids are basically the rent they pay for the leases. There can also be extraction fees that take the rent as the raw material is taken out. Such fees can be paid for taking natural resources such as timber and wildlife. ...

How to make the transition

The switch to land value taxation will affect most significantly those who own land at the time of the transition. These are the persons who have been subsidized, receiving site rental and land value from civic works paid for mostly by taxes on wages when earned or spent. But even many landowners would not see their total tax burden rise. Their wages, profits, interest, and consumption would all become untaxed, and taxes on their buildings and other improvements would be eliminated. ...

The collection of land rent for public revenue reconciles the individual and the community. The community and its government no longer intrude into the individual’s private life and stifle his or her pursuit of economic well being. The tax on land value is not a tax in substance, but only in the form of payments to government. In substance, the payment is a sharing of the benefits provided by community and nature, and a payment for the services that generate the value of the land. If this payment is not made by the landholder, the services become a subsidy, producing a value not returned to the community. ... read the whole document

Fred Foldvary: Underprivileged or Rights-Deprived?

In British Columbia, people move around a good deal by car-ferry, because of the terrain. The Provincial Government ("The Crown Provincial") runs the system. There are many lovely little islands in the Straits of Georgia, between Vancouver Island and the mainland, favored by the wealthy, the exclusive and reclusive. Being more sybaritic than Henry D. Thoreau, and politically puissant, they have demanded and received car-ferry service. This service costs about $10 for every $1 in revenue. The resulting deficit is covered by raising rates on the main plebeian line, Victoria-Vancouver. Naturally, these cheap ferries attract new visitors to the islands, and new demand for land there. ...

They want the government to buy some of it, paying the high prices created by the ferry subsidy, to keep it from use by people who might use the ferries. Thus the government would pay twice: to subsidize the ferries, and then to retire the land at the high prices made possible by the ferries. Failing that, they want the Crown to downzone most of it. The landowners are not charged when the ferries raise their asking prices, but demand compensation when downzoned.

Here, in microcosm, is the American problem with sprawl and habitat. Multiply that ferry subsidy a thousand times, and you have the Great American System of Public Works and Services for Private Gain. First the public pays to bring urban demand to remote lands; now the landowners, the spoiled children of the national family, demand to be paid again for downzoning or selling that same land to preserve habitat. They demand payment not to cash in on the opportunities we just gave them free.

• I'll repeat: go with the flow of cutting public spending by cutting down subsidies to urban sprawl. They are a major source of the problem. We'll never win the environmental fight until those subsidies are withdrawn.
• A second proactive solution is to motivate and help the owners of good land to sell or develop it. To help them, make infilling a positive goal. If you put impost fees on new buildings, do so only in outlying areas that require new public services, not on new buildings that help renew places like South Central L.A. If you ration sewer hookups, save them for central land with street improvements already in place.

Those are the carrots. A good stick is also needed. We have seen how leapfrogging results from the scattered locations of motivated sellers. We can motivate sellers near-in, and in compact increments as we expand spatially, by raising land taxes there. Proposition 13 makes this difficult, but not impossible: many special assessments have the essential motivating quality of land taxes, with a different legal form, that exempts them from Proposition 13.

I could wax rhapsodic about the results to expect from such taxation, but have done so elsewhere and will leave it with a word: visit Sydney, Adelaide, Brisbane, Copenhagen, or Johannesburg, which have made use of this principle to excellent effect.... read the whole article

Wrong! You can even control his hunting and fishing there, and apply police power. As to pumping, it depends on whether he owns what is under his land.

If it is oil, we all know mineral rights are routinely severed from surface rights by sale, reservation or lease. Water can be subject to constraints, too.

Limits on pumping water are not as common or severe as Huey Johnson and I think they should be, but they do exist. In coastal areas, pumping is limited and/or taxed to stop salt water intrusion.

Further inland, pumping can be stopped to control movement of toxic plumes that destroy valuable aquifers: this is done in the Bunker Hill aquifer under the Santa Ana River, threatened with fouling by toxins from Norton Air Force Base, San Bernardino.

Pumping is routinely stopped to prevent 'export' of water from lands overlying an aquifer: California calls that the 'correlative rights' doctrine. It is not always well observed, and not often well-advised, but very well established.

If that does not suffice to stop overdraft, pumping is controlled to prorate water among surface owners, and shorten pump lifts.

Also, pumping wells near streams can be stopped to prevent the indirect diversion of surface water. This happens on the alluvial fans that are so common in the west.

A simple solution to half our tractable water problems would be a severance tax on water withdrawals. If you can regulate it you can tax it.

A tax can be viewed as nothing more than an economic price charged by the owner of water (the state) for using its property.

If Chicago-School (and Rand Corporation) economists were more consistent in their ardor for the price system, and less consistent in their anarchistic mistrust of legislatures, they would seize upon this obvious application of the price system and boost it with all the considerable influence they wield.

Whether one chooses taxation regulation, we must control pumping in some manner if any system of surface control is to work.

While California rations and conserves surface water, landowners in the arid San Joaquin Valley just punch more and more wells into the aquifers and pump up free water the State keeps recharging at high cost.

Thus they play out their destined role in The Great Water Treadmill: subsidized water supply followed by overdraft followed by State rescue projects followed by new overdrafts, etc. ad bankruptcy.

This treadmill got well started in 1913 when Los Angeles tapped the Owens Valley waters to supply free water in the San Fernando Valley.

The lands there were timely pre-purchased by insiders, giving a clue to the forces behind the premature seizures and diversion of water.

The episode was dramatized in the film Chinatown, so the scenario is often now labelled 'the Chinatown syndrome' although the key names like Mulholland, Otis and Chandler sound distinctly occidental.

It is not just history; it is the present and near future: the Great Treadmill keeps turning. The Metropolitan Water District of Southern California (MWD) now presides over our destinies.

The MWD presses for more water sources, preaches domestic conservation, imposes rationing on its old customers -- and annexes new desert lands to water.

"French Equity" (Equity in Kind)

Under the Code Napoleon, a French testator must divide real estate equally among all children. Money cannot substitute for land; the Code requires equity in kind. The resulting fine subdivision is called morcellement, and the Code demands it without regard for efficiency.

Each heir, in fact, must get an equal share of land of each quality: meadow, woodland, etc.

Today we approach French Equity indirectly, and expensively. We distribute land haphazardly, but seek to make every parcel equally good by extending utilities and roads to all parcels on the same terms, regardless of cost or location.

Economists call such schemes "postage stamp pricing," because postal rates do not vary with delivery costs. Manhattan has 64,000 residents per square mile; Montana has 5.4. It costs a lot more to collect or deliver mail in Montana. The reason postal rates rise is that the U.S. urban population is spreading out more like Montana and less like Manhattan (which once had over 100,000 per square mile). Here are five other examples:

• The British Columbia Ferry Service. This socialized system has two urban lines that make money, but the whole system hardly breaks even, because lesser lines serve remote areas. The worst costs $12 for every dollar of revenue.
• British Columbia Hydro. This socialized power system charges uniform rates throughout the Province. Users living in high-density Vancouver are cheap to serve. A few live on the Yukon border, where (I surmise) it costs hundreds of dollars to earn a dollar of revenue.
• Water and sewer service in Milwaukee County, Wisconsin. City investments have been captured, controlled, and milked by suburban land development interests, helped by state legislators.
• State university campuses. The legislative ethic demands a prize, such as a university campus, in every electoral district. Most of the eight UC campuses have excess land; some have excess floor space. Sacramento solves rising enrollment not with more intensive use of existing campuses, but with the costly creation of new ones, each to enrich influential land speculators.
• Water supply in California. The high real cost of serving new settlements is passed on to older settled areas through an accounting device called "melding," stirring all the accounts in the same pot. Melding passes through several levels: a state wholesaler serves the metropolitan district, which serves local districts, which serve cities. At the end of the line, in Riverside, it costs society $1800 to serve the marginal acre-foot (a unit of water) selling for $20. This subsidy is worth fortunes to developers; the cost is spread so others won't notice.

• Equity achieved by regional cross-subsidy is not interpersonal, but interregional. It is like U.S. "foreign aid" programs, which tax the poor in rich countries to aid the rich in poor countries. Some who hold speculative land and enjoy subsidies are among the world's richest people and cor-porations. Equity is not served by milking middle-class neighborhoods to further enrich wealthy owners. "Public works for private gain" is bad enough, but worse when profiteers are already rich.
• How about waste? Subsidy creates waste in the amount of the subsidy, almost by definition. The New York Regional Plan Association estimates the social cost of creating a new lot on the urban fringe at four times the lot's price (probably an underestimate). Why develop a lot worth only one quarter of its cost? Because other people pay the other three quarters. This process transfers ground rent from areas of overcharge to areas of undercharge, but it destroys much of the ground rent. To spread the surplus, we lose much of it.

Has French Equity any merit? It passed for a way to create jobs when Keynes actually urged waste as a route to full employment. Those ideas are now dormant, but we still do not understand the problem. If we had to fire teachers or policemen each time a city extended utilities to a campaign donor's raw acres, we would better sense the true cost of public works for private profit.  ... read the whole article

One major feature of the subsidy benefit pattern -- unintended but predictable -- is the capitalization of land values. The value of land will increase when the benefits, chiefly money income, are enhanced by government subsidization. When the land is sold, the benefit of a subsidy which seems likely to continue will be captured by the seller. Thereafter, tax funds that continue to subsidize a program will not fully benefit those for whom they were presumably intended, but the seller will have made a capital gain.

A classicc example can be drawn from the experience of federal farm programs. Taxpayers and consumers have been spending billions annual to aid some farmers. In practice, of course, these programs have often -- and intentionally -- reduced farm output and raised consumer prices. The consumer-taxpayer is thus dealth a double blow, in effect subsidizing an increase in his own food prices. Yet the operating farmer, burdened with a higher land price, fails to get the full benefits of the programs established for his welfare.

In farm programs, as in some other subsidy programs, the expected annual benefits are capitalized into higher land prices. Then, after land prices have gone up to reflect these benefits, the annual payments to farm operators in effect support the higher land prices. In effect, the seller of land realizes the benefits of government subsidy into perpetuity. A somewhat similar pattern is to be expected in other public spending programs, including those concerned with urban renewal, where benefits are localized. The pattern shows that farm programs do not raise wages of low-paid farm labor, that urban projects do not rid cities of slums, and that the taxpayer-consumer bears the burden of both.

This volume explores, and at least attempts to define, the extent to which land values tend to capture the benefits of subsidies and other government spending through capitalization. It includes papers by proponents as well as critics. The contributors, who include some of the nation's leading economists, discuss the nature and effects of farm and housing programs, commodity price supports, transportation outlays, land preservation projects, water resource development, and urban renewal programs. Their work will be of more than routine interest to economists, political scientists, lawyers, political officeholders and government officials, planners, and all others who seek to unravel the complex fabric of multi-billion-dollar government spending programs.

• polluting air and water,
• wasting water,
• cutting timber whose value is less than the cost of logging, or
• populating remote regions whose costs exceed the benefits derived.

• Unused land is far more abundant than we realize.
• End the Public Subsidy of Land Speculation and Sprawl
• Counterproductive growth limitations and regulations should be abolished.
• A Strategy for Urban Renewal
• A Strategy for Economic Development
• Public Finance by Self-Financing

One example that I know is that of a friend who bought land within the city but did nothing with it. I asked him why he put good money into an investment that had no visible return? He replied that, by holding the land for future sale or development, his long term return, in capital gains would exceed 18% annually. If he built a building on the site now, his long term return would only be 12% annually, including both net income plus capital gains. Why should he use his land now when it would be more profitable for him to not use it, but to hold it for a larger future gain?

Most major cities have a substantial amount of fully serviced but unused or underused land sites. It is estimated that 38% of the land area in Los Angeles is unused, 30% in New York City and 25% in Washington, D.C. Intercity sites are bypassed because land speculators receive a greater benefit by ignoring the highest and best use of land sites. A greater profit is made when development is delayed and the land price increases to higher levels. But building within existing developed areas uses the existing and underused infrastructure, roads, transit, public facilities, and services. Sprawl requires new expenditures on public goods and services, more government, more taxes, more dislocation. ... Read the whole article

Peter Barnes: Capitalism 3.0 — Chapter 4: The Limits of Privatization (pages 49-63)

Free Market Environmentalism
One other version of privatism is worth considering. Its premise is that nature can be preserved, and pollution reduced, by expanding private property rights. This line of thought is called free market environmentalism, and it’s favored by libertarian think tanks such as the Cato Institute.

The origins of free market environmentalism go back to an influential paper by University of Chicago economist Ronald Coase. Writing in 1960, Coase challenged the then-prevailing orthodoxy that government regulation is the only way to protect nature. In fact, he argued, nature can be protected through property rights, provided they’re clearly defined and the cost of enforcing them is low.

In Coase’s model, pollution is a two-sided problem involving a polluter and a pollutee. If one side has clear property rights (for instance, if the polluter has a right to emit, or the pollutee has a right not to be emitted upon), and transaction costs are low, the two sides will come to a deal that reduces pollution.

How will this happen? Let’s say the pollutee has a right to clean air. He could, under common law, sue the polluter for damages. To avoid such potential losses, the polluter is willing to pay the pollutee a sum of money up front. The pollutee is willing to accept compensation for the inconvenience and discomfort caused by the pollution. They agree on a level of pollution and a payment that’s satisfactory to both.

It works the other way, too. If the polluter has the right to pollute, the pollutee offers him money to pollute less, and the same deal is reached. This pollution level — which is greater than zero but less than the polluter would emit if pollution were free — is, in the language of economists, optimal. (Whether it’s best for nature is another matter.) It’s arrived at because the polluter’s externalities have been internalized.

For fans of privatism, Coase’s theorem was an intellectual breakthrough. It gave theoretical credence to the idea that the marketplace, not government, is the place to tackle pollution. Instead of burdening business with page after page of regulations, all government has to do is assign property rights and let markets handle the rest.

There’s much that’s attractive in free market environmentalism. Anything that makes the lives of business managers simpler is, to my mind, a good thing — not just for business, but for nature and society as a whole. It’s good because things that are simple for managers to do will get done, and often quickly, while things that are complicated may never get done. Right now, we need to get our economic activity in harmony with nature. We need to do that quickly, and at the lowest possible cost. If it’s easiest for managers to act when they have prices, then let’s give them prices, not regulations and exhortations.

At the same time, there are critical pieces missing in free market environmentalism. First and foremost, it lacks a solid rationale for how property rights to nature should be assigned. Coase argued that pollution levels will be the same no matter how those rights are apportioned. Although this may be true in the world of theory, it makes a big difference to people’s pocketbooks whether pollutees pay polluters, or vice versa.

Most free marketers seem to think pollution rights should be given free to polluters. In their view, the citizen’s right to be free of pollution is trumped by the polluter’s right to pollute. Taking the opposite tack, Robert F. Kennedy Jr., an attorney for the Natural Resources Defense Council, argues that polluters have long been trespassing on common property and that this trespass is a form of subsidy that ought to end.

The question for me is, what’s the best way to assign property rights when our goal is to protect a birthright shared by everyone? It turns out this is a complicated matter, but one we need to explore. There’s no textbook way to “propertize” nature. (When I say to propertize, I mean to treat an aspect of nature as property, thus making it ownable. Privatization goes further and assigns that property to corporate owners.) In fact, there are different ways to propertize nature, with dramatically different consequences. And since we’ll be living with these new property rights — and paying rent to their owners — for a long time, it behooves us to get them right. ... read the whole chapter