|Wealth and Want|
|... because democracy alone is not enough to produce widely shared prosperity.|
|Home||Essential Documents||Themes||All Documents||Authors||Glossary||Links||Contact Us|
H.G. Brown: Significant Paragraphs from Henry George's Progress & Poverty: 10. Effect of Remedy Upon Wealth Production (in the unabridged P&P: Part IX — Effects of the Remedy: Chapter 1 — Of the effect upon the production of wealth)
Mason Gaffney: How to Revive a Dying City
Nor will Georgist taxes leave owners sulking on their land, but the contrary. A 1983 Fortune magazine article calls them "Higher Taxes that Promote Development." The fixed tax is levied on land value, based on opportunity cost. The owner uses land harder and improves it more to meet a fixed tax; or sells, releasing surplus land to those needing more space. Taxes stifle enterprise only if they increase with enterprise. Land tax increases only with opportunity cost, which is independent of the enterprise of the owner. The only activity this tax impairs is withholding land from use.
George's land tax promotes equity toward the landless in at least four ways:
This is supply-side economics with a kick. It works through tax transformation rather than tax reduction; total tax revenue may rise or fall, as a separate issue. We can raise taxes and stimulate supply together; there is no hard choice between them. At the same time, it is demand side economics: untaxing investment raises the marginal after-tax return, which, to demand-siders, is the motor that drives the macro-economy. George's program not only reconciles efficiency and equity, it squares taxes and incentives. What more can we ask of economic policy than to resolve stand-offs that have confused us, and dead-locked constructive action, for generations?
It is an achievement on a par with resolving Evolution and Creation, except George's program is something we can do something about. We can implement it as quickly as we unclog the cerebral arteries and follow thought with action. ... read the whole articleMason Gaffney: George's Economics of Abundance: Replacing dismal choices with practical resolutions and synergies
Introduction: Resolutions vs. trade-offs
1. Equity, Efficiency, and Incentives
a. Equity and efficiency
b. Reconciling progressivity and motivation.
2. Reconciling demand side and supply side economics
a. Aggregate. Consumption and production
b. Investing and Saving
3. Micro "structural" reform coupled with macro reform
4. Local, state, and national applications
5. Relieving labor without burdening capital
6. Urban renewal without subsidizing evictions
7. Contains urban sprawl, improves urban linkages among complementary land uses, without overriding market choices.
a. Taxing land sharpens market incentives via the leverage effect noted earlier.
b. Fosters resident ownership, civic participation
8. Reconciles common rights to land with private tenure
9. Paying the debt while also making jobs
10. Making labor cheaper to hire without lowering wage rates
11. Adding people and capital w/o diluting resource base
12. Fostering economy in government in the very process of raising revenue
13. Enhance evironment and conserve resources while making jobs
A summary of reconciliations
1. Couples equity with efficiency.
2. Couples progressivity with motivation. Abates concentration of wealth and power while widening the scope of productive ambition and enterprise.
3. Makes more jobs without inflation. Raises demand-side and supply-side together, "leveling them upwards."
4. Raises both inducement to invest and inducement to save, at any income level. Also raises saving by raising income level.
5. Couples structural reform and macro reform.
6. May be applied at local, state, and national levels, together or jointly, in small degrees or large.
7. Relieves labor of taxation without burdening capital, and vice versa.
8. Renews cities without subsidizing evictions.
9. Contains urban sprawl, infills and coordinates cities without superimposing planning on the market.
10. Fosters resident ownership and civic participation without laws against absentee ownership, or other use of compulsion, but in the very process of lubricating land markets.
11. Asserts common rights to land while strengthening private tenure. Permits of privatizing without giveaway.
12. Allows paying off public debts while fostering full employment through (true) fiscal stimulus.
13. Makes labor cheaper to hire while raising real wage rates (take-home pay, disposable income). Thus makes jobs without lowering wage rates or "making work."
14. Lets regions, nations, and the world add population and capital without diluting their resource bases.
15. Fosters economy in government in the process of raising revenue.
16. Saves the environment in the process of intensifying land use.
17. Smoothes business cycles without depending solely on contra-cyclical fiscal or monetary policy. Stabilizes and secures financial institutions with only minimal regulation.
18. Effects land reform and redistribution abroad and at home, urban as well as rural, without government expense, and without acreage limitations, working through free markets.
19. Equalizes credit ratings for land buyers without any controls over lenders.
Epilogue: how the public demonstrates its preference for resolutions over dismal choices
... Untaxing buildings obviously draws in outside capital, which is good locally, but is not capital formation to the whole economy. In Keynesian models, higher income leads to higher saving, and does create new capital. Supply-siders today worry more about raising the rate of saving from any given income. In supply-side models it is more important to increase the rate of saving, without depending entirely on the Keynesian effect, where higher income raises saving. Also, from the nationalist viewpoint, it is better to supply investable funds from domestic savings, to minimize foreign ownership.
Land taxation helps here, too. Land taxation, if heavy enough to count, lowers the investment value of land, through "tax capitalization". There is a diminishing marginal utility of savings to any wealth-holder, meaning the more you have, the less you need more. With land devalued, those needing wealth seek substitute assets to replace land in their portfolios. To acquire those additional assets they must save more, and invest the savings in real new capital, rather than land.
Thus, Georgist taxation meets the proper goals of supply-side economics: raising output, and raising saving. It reconciles supply-side economics with taxation by providing a mode of taxation that stimulates instead of dragging down production and employment. 10 .. read the whole article
Mason Gaffney: The Partiality of Indexing Capital Gains
We surely agree with Roberts et al. that domestic capital formation is a crying current need; and the means is to foster saving and investing (but properly defined, as below). We also agree there is a strong, bi-partisan case for raising investment flows of the income-creating, work-activating kind. Here, however, we meet the problem of distinguishing new capital from old assets, especially land.
Land is not formed, like capital, by saving and investment; land is not reproducible. For that very reason land tends to appreciate, and therefore has to be a major source of what are misleadingly called "capital" gains. Again for that very reason, there is no supply-side kick in untaxing gains. Most of them are land gains, and should be called that. To use land as a store of value is macro-economically unproductive at best, and on balance counterproductive and destabilizing (considering its effect on financial institutions like the S&Ls).
To handle this matter we need two semantic distinctions which often are lost in the word-fencing of debate. Walter Heller, whose policies still enjoy bi-partisan support, thought and spoke in a Keynesian framework where "investment" means "investing," an affirmative, job-making action. It is a process, not a store of value; an economic flow, not a fund. It is not the asset held: this "investment" is a noun, macro-economically static and sterile. [Land may appreciate, and one may call this "investment," but the appreciation employs no one and creates no new wealth (although it may reflect the externalities of wealth created by others).]
To signalize these differences I use the present participle "investing," rather than the ambiguous noun "investment." [Webster's 9th New Collegiate defines investment both ways: it is an action, (the Keynesian usage); it is also an asset being held, a store of value. Such a two-faced word is a natural medium for double-talk, and has been so exploited, to the detriment of general understanding.]
Every Keynesian also knew in 1961 that investment means net, positive-sum investing. It does not include buying and selling existing assets like land: these are zero-sum transactions, macro-economically non-functional and barren. [Keynes, although careless of consistency, generally took care to distinguish old and new assets. " ... the competition of a high interest-rate on mortgages may well have had the same effect in retarding the growth of wealth from current investment in newly produced capital-assets as high interest rates on long-term debts ... " [General Theory, 1936, p. 241.] The old macro-economists generally refer to investing in newly produced assets as "income- creating expenditure," which is clear and correct, but too much of a mouthful.]
I use "investing" only in the sense of net, income-creating, job-making spending. [Note the difference between real turnover and mere ownership turnover. Ownership turnover generates no income (except for brokers and M&A personnel) and creates no capital. Real turnover also creates no capital, but does forward supplies of goods to consume, and flows of investing to produce replacement goods. Most of gross investing is reinvesting funds received or anticipated from sales of old capital (including inventories, which turn fast, and "fixed" capital which turns slowly as it depreciates and the funds are reinvested).]
As to borrowing on land, that can be worse than barren when the financial system rises and falls on a land bubble, as it has and is.
Heller and his contemporaries also knew that the incentive driving job-making investing is MRORAT, the Marginal Rate of Return after Taxes. [Economists of the 1960s, following Keynes, called it the MEC, or "Marginal Efficiency of Capital," an awkward phrase now little used. Awkward or not, and intended or not, it had great historical consequence by putting the emphasis where it belongs, on marginal rates of return, excluding rents.]
The marginal idea is pivotal. The Average ROR includes rents; the Marginal ROR is the pure return to new investment, Keynes' "inducement to invest," which is activating and functional.
These Heller ideas were invoked again by supply-siders in early Reagan times. However, policy over the course of the 80s lost the substance of that policy, keeping only the guise. Domestic leaders forgot the usage of "investment" in macro-economics.
They gradually slipped into an illusion that buying and holding and bidding up old assets like non-reproduceable lands and stocks would make jobs and produce goods. They forgot to distinguish old from new assets, and marginal from average returns on investment (average returns, recall, include rents). Both critics and supporters of "supply-side" policies now darken counsel by debating current policies in supply-side terms, when the terms no longer describe the policy at issue.
Along with normal confusion, there is intelligence behind such error. The case for downtaxing gains depends in part on exploiting confusion, in order to pass off rent-raising as an incentive for saving and investing, and so to disguise its non-functionality and eminent taxability. The policy is called "supply side," but isn't.
The litmus test of the sincerity of capital-formation champions is their treatment of irreproduceable land. Raising rents and land prices, and protecting the gains from taxation, is purely distributive, with no power to foster saving and investing. On the contrary, a higher share for rent and/or land purchase must mean a lower share for the investor in new capital.
Ignoring land and its distinctive attributes has the effect of treating land as though it were true, reproduceable capital, to be formed by saving and investing, to be routinely worn out and replaced in the normal course of life and business. It lets advocates of investing and capital formation abuse the legitimate case for macro incentives, exploiting the case to camouflage unearned, nonfunctional rents and increments to land value.[Brookings' major contribution to our subject is Henry Aaron (ed), 1976, Inflation and the Income Tax, with chapters by 15 eminent economists. Land is treated by none and is not in the index. [It is mentioned in passing only by one, George Lent.]] ... read the whole articleMason Gaffney: Neo-classical Economics as a Stratagem Against Henry George
... Voters faced with two candidates, each coached by a neo-classical economist, also face a hard choice. They often appear apathetic and take a third choice, staying home. However, history denies that voters are intrinsically apathetic. They have gotten turned on by candidates who try to lead up and away from dismal trade-offs.Mason Gaffney: Land Rent in a Tax-free Society (Outline of remarks by Mason Gaffney, for use at Moscow Congress, 5/21/96)
In 1980 it was Ronald Reagan. Instead of the dismal Phillips Curve ("choose inflation or unemployment") he offered the happy Laffer Curve: lower tax rates would lead to higher supplies, higher revenues, and lower deficits, he promised. Lowering taxes, said Laffer, would eliminate the "wedge effect." He often cited Henry George in support of his position.4 Thus he would unleash supply, and collect more taxes while applying lower tax rates. The voters were sick of 2nd-generation Keynesians who had been reduced to preaching austerity, so they were game (if not wise) to buy into Reaganomics as advertised.
Unfortunately, the Laffer Curve turned out to be wildly overoptimistic, and Reaganomics partly fraudulent and hypocritical5 in application. The voters again tuned out and seemed apathetic. They are not saying, however, they don't care. They are saying "come back when you have something better, mean what you say, and deliver what you promise." ...
The only shifting of a land tax is negative. By negative shifting I mean that the supply-side effects of taxing land will raise supplies of goods and services, and raise the demand for labor, thus raising the bargaining power of median people in the marketplace, both as consumers and workers. This effect makes the tax doubly progressive: it undercuts the holdout power and bargaining power of landowners vis-a-vis workers, and also vis-a- vis new investors in real capital. This effect also makes the land tax doubly efficient. ... read the whole essay
Rent will become huger yet when you abate taxes presently levied on production and exchange, because these now depress the rent of land. That is, in a tax-free market economy, the benefit of abating present taxes will lodge mainly in land rents. The taxable surplus simply shifts from one form to another.
This is more than a simple shift of a fixed amount. When you substitute land revenues for existing taxes, the surplus actually grows, as if by synergy. You gain more revenue base than you lose, because existing taxes now suppress much latent production. Payroll taxes directly drive workers from taxable jobs to untaxed gains from crime. Abating those taxes will unleash suppressed economic giants, along with all the new surplus values their latent production will generate. "Monetarists" warn you that "there are no free lunches." In fact, however, good policy creates lots of "free lunches." It makes the whole greater than the sum of its parts. Imagine the benefits, alone, of turning people from destructive careers in crime to useful jobs producing goods.
At the same time, the effect of socializing land revenues is to stimulate better land use - the opposite of the effect of existing taxes. Every landowner, to pay the required land charge, is pushed to steer his land to the best use (just as paying interest steers capital to its best use). Thus, the shift to rent-based revenues doubly induces new production: it releases the brake of present taxes, and replaces it with an added push to produce. This is "supply-side economic policy" in the best and truest sense. It generates yet more surplus. You may take all of rent to support government functions, without damaging private market incentives, but only sharpening them.
This policy lets us achieve and reconcile two policies that many now believe are incompatible, viz.: free markets, and common rights in land. It is a kind of miracle, yet simple to understand and implement. Monetarist advisers would bind you in a dilemma: they claim you must choose between private markets and common rights. In fact, you may have both at once. Public revenue is simply the kind of socialization that occurs in a market economy. Socialize the rent of land, and you socialize the net benefits of owning land, even while privatizing the management of land, and gaining the benefits of using free markets.
The combined effect of all this stimulus would be a burst of growth such as few economies have ever shown, except in wartime. We learned in the U.S.A. in World War II the astounding effects of simply taking the brakes off production. U.S. GNP doubled, 1941-43; all willing workers were fully employed. This same miracle can occur in Russia, 1996-98. The natural resources and human talent are here: you only need the right incentive structure to turn labor from idleness and crime to producing goods and services.... read the whole article
Mason Gaffney: Introduction: The Power of Neo-classical Economics (Introduction to The Corruption of Economics, London: Shepheard-Walwyn, 1994)
Georgist tax policy reconciles equity and efficiency. Taxing land is progressive because the ownership of land is so highly concentrated among the most wealthy,18 and because the tax may not be shifted. It is efficient because it is neutral among rival land-use options: the tax is fixed, regardless of land use. This is one favorable point on which many modern economists actually agree, although they keep struggling against it, as we will see.
George showed that a tax can be progressive and pro-incentive at the same time. Think of it! An army of neo-classicalists preach dourly we must sacrifice equity and social justice on the altar of "efficiency." They need that thought to stifle the demand for social justice that runs like a thread through The Bible, The Koran, and other great religious works. George cut that Gordian knot, and so he had to be put down.
The only shifting of a land tax is negative. By negative shifting I mean that the supply-side effects of taxing land will raise supplies of goods and services, and raise the demand for labor, thus raising the bargaining power of median people in the marketplace, both as consumers and workers. This effect makes the tax doubly progressive: it undercuts the holdout power and bargaining power of landowners vis-a-vis workers, and also vis-a- vis new investors in real capital. This effect also makes the land tax doubly efficient. ... Read the whole article
Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent
to email this page to a friend: right click, choose "send"
Wealth and Want
... because democracy alone hasn't yet led to a society in which all can prosper