Wedge
The term "wedge" is used in at least two ways in the documents
on this website. George speaks of an immense wedge early in Progress & Poverty:
It is as though an immense wedge
were being forced, not underneath society, but through society. Those
who are above the point of separation are elevated, but those who are below
are crushed
down.
(One is led to question whether our efforts should be devoted to moving
a few million more people from below the wedge to above it, or whether our
efforts should be devoted to causing the wedge to be removed. This site argues
the latter, of course! See fences and small
bandages.)
Mark Twain, in Archimedes,
speaks of a great screw, which, as you might recall from grade school science,
is a related "simple
machine." (Perhaps this is a better explanation for how the word entered
the vernacular in one of its popular uses!)
I know of a mechanical force more powerful than anything the vaunting engineer
of Syracuse ever dreamed of. It is the force of land monopoly; it is a screw
and lever all in one; it will screw the last penny out of a man's pocket, and
bend everything on earth to its own despotic will. Give me the
private ownership of all the land, and will I move the earth? No; but I
will do more. I will
undertake to make slaves of all the human beings on the face of it. Not chattel
slaves exactly, but slaves nevertheless. What an idiot I would be to make chattel
slaves of them. I would have to find them salts and senna when they were sick,
and whip them to work when they were lazy.
Nic Tideman writes of a different kind of wedge when describing why most other
taxes are far less desirable than a tax on land values:
A tax creates a difference, a ‘wedge’, between the price
that a
buyer
pays and the price that the seller receives. Sometimes the wedge
generated by a tax is enough to inhibit a transaction that would
otherwise occur.
Fred Foldvary writes relatedly:
Taxes on wages create a wedge between
the cost of labor to employers and the take-home pay of the worker. More
costly labor results in less
employment. Taxes on the income from capital goods and on the sale of
goods has the same effect. There are unemployment taxes, disability taxes, and
payroll taxes that increase the tax wedge. On top of that, there are minimum-wage
laws that prevent the least productive workers from getting hired. There are
permits, zoning, and other rules and costs that also prevent some workers from
becoming self-employed.
and Mason Gaffney:
Georgist policy improves the structure of
the economy in at least five ways.
a. It erases the "wedge effect" of indirect taxes,
while maintaining tax revenues. This might be called a "True Laffer
Curve effect" - what Laffer and Reagan promised in 1980, but Reagan
could not deliver. The wedge effect is both warping, and, in the
aggregate, anti-incentive.
b. It actually lubricates the
land market in the very process of extracting more tax revenues from
it. It is better than "neutral" (lacking in wedge effects).
It subjects landowners to a cash drain that is more potent than mere "opportunity
cost" in prompting landowners to put land to its "highest and best
use," i.e. to allocate it optimally in the manner prescribed
by economic theory. ...
None of these wedges are desirable — and each can be remedied by
the same reform.
Henry George: Progress & Poverty: Introductory:
The Problem
Now, however, we are coming into collision with facts which there can be
no mistaking. From all parts of the civilized world come
complaints;
- of industrial depression;
- of labor condemned to involuntary idleness;
- of capital massed and wasting;
- of pecuniary distress among business men;
- of want and suffering and anxiety among the working classes.
All the dull, deadening pain, all the keen, maddening anguish, that to great
masses of men are involved in the words "hard times," afflict the world today. This
state of things, common to communities differing so widely in situation, in
political institutions, in fiscal and financial systems, in density of population
and in social organization can hardly be accounted for by local causes.
- There is distress where large standing armies are maintained, but there
is also distress where the standing armies are nominal;
- there is distress where protective tariffs stupidly and wastefully hamper
trade, but there is also distress where trade is nearly free;
- there is distress where autocratic government yet prevails, but there
is also distress where political power is wholly in the hands of the people;
- in countries where paper is money, and
- in countries where gold and silver are the only currency.
Evidently, beneath all such things as these, we must infer a common cause.
That there is a common cause, and that it is either what we call material
progress or something closely connected with material progress, becomes more
than an inference when it is noted that the phenomena we class together and
speak of as industrial depression, are but intensifications of phenomena
which always accompany material progress, and which show themselves more
clearly and strongly as material progress goes on. Where the conditions
to which material progress everywhere tends are most fully realized--that
is to say, where population is densest, wealth greatest, and the machinery
of production and exchange most highly developed--we find the deepest poverty,
the sharpest struggle for existence, and the most enforced idleness.
It is to the newer countries--that is, to the countries where material progress
is yet in its earlier stages--that laborers emigrate in search of higher wages,
and capital flows in search of higher interest. It is in the older countries--that
is to say, the countries where material progress has reached later stages--that
widespread destitution is found in the midst of the greatest abundance. Go
into one of the new communities where Anglo-Saxon vigor is just beginning the
race of progress;
- where the machinery of production and exchange is yet rude and inefficient;
- where the increment of wealth is not yet great enough to enable any class
to live in ease and luxury;
- where the best house is but a cabin of logs or a cloth and paper shanty,
and the richest man is forced to daily work
and though you will find an absence of wealth and all its concomitants, you
will find no beggars. There is no luxury, but there is no destitution. No one
makes an easy living, nor a very good living; but every one can make a living,
and no one able and willing to work is oppressed by the fear of want.
But just as such a community realizes the conditions which all civilized
communities are striving for, and advances in the scale of material progress--just
as closer settlement and a more intimate connection with the rest of the
world, and greater utilization of labor-saving machinery, make possible greater
economies in production and exchange, and wealth in consequence increases,
not merely in the aggregate, but in proportion to population--so does
poverty take a darker aspect. Some get an infinitely better and
easier living, but others find it hard to get a living at. The "tramp" comes
with the locomotive, and alms houses and prisons areas surely the marks of "material
progress" as are costly dwellings, rich warehouses, and magnificent churches.
Upon streets lighted with gas and controlled by uniformed policemen, beggars
wait for the passer-by, and in the shadow of college, and library, and
museum, are gathering the more hideous Huns and fiercer Vandals of whom
Macaulay
prophesied.
This fact--the great fact that poverty and all its concomitants show themselves
in communities just as they develop into the conditions towards which material
progress tends--proves that the social difficulties existing wherever a certain
stage of progress has been reached, do not arise from local circumstances,
but are, in some way or another, engendered by progress itself.
And, unpleasant as it may be to admit it, it is at last becoming evident that the
enormous increase in productive power which has marked the present century
and is still going on with accelerating ratio, has no tendency to extirpate
poverty or to lighten the burdens of those compelled to toil. It simply
widens the gulf between Dives
and Lazarus, and makes the struggle for existence more intense. The march
of invention has clothed mankind with powers of which a century ago the boldest
imagination could not have dreamed. But
- in factories where labor-saving machinery has reached its most wonderful
development, little children are at work;
- wherever the new forces are anything like fully utilized, large classes
are maintained by charity or live on the verge of recourse to it;
- amid the greatest accumulations of wealth, men die of starvation, and
puny infant suckle dry breasts;
- while everywhere the greed of gain, the worship of wealth, shows the
force of the fear of want.
The promised land flies before us like the mirage. The fruit of the tree of
knowledge turn as we grasp them to apples of Sodom that crumble at the touch.
It is true that wealth has been greatly increased, and that the average of
comfort, leisure, and refinement has been raised; but these gains are not general.
In them the lowest class do not share.* I do not mean that the condition of
the
lowest class has nowhere nor in anything been improved; but that there is nowhere
any improvement which can be credited to increased productive power. I mean
that the tendency of what we call material progress is in no wise to improve
the condition of the lowest class in the essentials of healthy, happy human
life. Nay, more, that it is to still further depress the condition of the
lowest class. The new forces, elevating in their nature though they be,
do not act upon the social fabric from underneath, as was for a long time hoped
and believed, but strike it at a point intermediate between top and bottom. It
is as though an immense wedge were being forced, not underneath society, but
through society. Those who are above the point of separation are elevated,
but those who are below are crushed down.
[* It is true that the poorest may now in certain
ways enjoy what the richest a century ago could not have commanded, but
this does not show improvement of condition so long as the ability to obtain
the necessaries of life is not increased. The beggar in a great city may
enjoy many things from which the backwoods farmer is debarred, but that
does not prove the condition of the city beggar better than that of the
independent farmer.]
This depressing effect is not generally realized, for it is not apparent where
there has long existed a class just able to live. Where the lowest class barely
lives, as has been the case for a long time in many parts of Europe, it is
impossible for it to get any lower, for the next lowest step is out of existence,
and no tendency to further depression can readily show itself. But in the
progress of new settlements to the conditions of older communities it may clearly
be seen that material progress does not merely fail to relieve poverty--it
actually produces it. In the United States it is clear that squalor and misery,
and the vices and crimes that spring from them, everywhere increase as the
village grows to the city, and the march of development brings the advantages
of the improved methods of production and exchange. It is in the older
and richer sections of the Union that pauperism and distress among the working
classes are becoming most painfully apparent. If there is less deep poverty
in San Francisco than in New York, is it not because San Francisco is yet behind
New York in all that both cities are striving for? When San Francisco reaches
the point where New York now is, who can doubt that there will also be ragged
and barefooted children on her streets? ... read
the entire chapter
Henry George: The Condition of
Labor — An Open Letter to Pope Leo XIII in response to Rerum Novarum (1891)
That it does mean this and nothing else is confirmed if we look deeper still,
and inquire not merely as to the intent, but as to the purpose of the intent.
If we do so we may see in this natural law by which land values increase
with the growth of society not only such a perfectly adapted provision for
the needs of society as gratifies our intellectual perceptions by showing
us the wisdom of the Creator, but a purpose with regard to the individual
that gratifies our moral perceptions by opening to us a glimpse of his beneficence.
Consider: Here is a natural law by which as society advances the one thing
that increases in value is land — a natural law by virtue of which
all growth of population, all advance of the arts, all general improvements
of whatever kind, add to a fund that both the commands of justice and the
dictates of expediency prompt us to take for the common uses of society.
Now, since increase in the fund available for the common uses of
society is increase in the gain that goes equally to each member of society,
is it
not clear that the law by which land values increase with social advance
while the value of the products of labor does not increase, tends with the
advance of civilization to make the share that goes equally to each member
of society more and more important as compared with what goes to him from
his individual earnings, and thus to make the advance of civilization lessen
relatively the differences that in a ruder social state must exist between
the strong and the weak, the fortunate and the unfortunate? Does it not show
the purpose of the Creator to be that the advance of man in civilization
should be an advance not merely to larger powers but to a greater and greater
equality, instead of what we, by our ignoring of his intent, are making it,
an advance toward a more and more monstrous inequality? ... read the whole letter
Nic Tideman: The Case
for Taxing Land
I. Taxing Land as Ethics
and Efficiency
II. What is Land?
III. The simple efficiency argument for taxing land
IV. Taxing Land is Better Than Neutral
V. Measuring the Economic Gains from Shifting Taxes to Land
VI. The Ethical Case for Taxing Land
VII. Answer to Arguments against Taxing Land
There is a case for taxing land based on ethical principles and
a case
for taxing land based on efficiency principles. As a matter of
logic, these two cases are separate. Ethical conclusions
follow from ethical premises and efficiency conclusions from efficiency
principles. However, it is natural for human minds to conflate
the two cases. It is easier to believe that something is good if
one knows that it is efficient, and it is easier to see that something
is efficient if one believes that it is good. Therefore it is
important for a discussion of land taxation to address both question of
efficiency and questions of ethics.
This monograph will first address the efficiency case for taxing land,
because that is the less controversial case. The efficiency case
for taxing land has two main parts. ...
To estimate the magnitudes of the impacts that additional taxes
on land
would have on an economy, one must have a model of the economy. I
report on estimates of the magnitudes of impacts on the U.S. economy of
shifting taxes to land, based on a mathematical model that is outlined
in the Appendix.
The ethical case for
taxing land is based on two ethical premises: ...
The ethical case for taxing land ends with a discussion of the
reasons
why recognition of the equal rights of all to land may be essential for
world peace.
After developing the efficiency argument and the ethical
argument for
taxing land, I consider a variety of counter-arguments that have been
offered against taxing land. For a given level of other taxes, a
rise in the rate at which land is taxed causes a fall in the selling
price of land. It is sometimes argued that only modest taxes on
land are therefore feasible, because as the rate of taxation on land
increases and the selling price of land falls, market transactions
become increasingly less reliable as indicators of the value of
land. ...
Another basis on which it is argued that greatly increased taxes
on
land are infeasible is that if land values were to fall precipitously,
the financial system would collapse. ...
Apart from questions of feasibility, it is sometimes argued that
erosion of land values from taxing land would harm economic efficiency,
because it would reduce opportunities for entrepreneurs to use land as
collateral for loans to finance their ideas. ...
.
Another ethical argument that is made against taxing land is
that the
return to unusual ability is “rent” just as the return to land is
rent. ...
But before developing any of these arguments, I must discuss
what land
is. ...
The simple efficiency
argument for taxing land
A tax creates a difference, a ‘wedge’, between the price that a
buyer
pays and the price that the seller receives. Sometimes the wedge
generated by a tax is enough to inhibit a transaction that would
otherwise occur. If the tax that must be paid on a transaction is
greater than the gains from trade that would accrue in the absence of a
tax, then the tax precludes any mutually advantageous trade. Thus
taxes often reduce economic efficiency. ... Read the
whole article
Fred Foldvary: Underprivileged
or Rights-Deprived?
Poor folk are often labeled
"underprivileged" and richer folk
are called "privileged." For example, there is a book titled "One Nation, Underprivileged: Why American
Poverty Affects Us All."
But "privileged" and "underprivileged" are confused and misleading
expressions. If you think the poor are "underprivileged," then you
don't really understand poverty.
What is a "privilege?" The term originally meant "private law."
A
privilege is a special advantage or prerogative or immunity or benefit
given only to some people only because they have power or are favored
by those with power. If everyone is entitled to something, like freedom
of expression, or if everyone may obtain an item such as a passport
with the same rules applying to all, then it is not a privilege but a
right.
Whether a rich person is "privileged" depends on how he got the
money. ...
So if a person is poor, it is not because he is lacking in
special
protections, subsidies, and other privileges. A person is usually poor
because he has been deprived of the natural right to work. Governments
world-wide impose barriers between labor and productive resources,
keeping some workers deprived of labor and others who do work deprived
of their earnings from labor.
Taxes on wages create a wedge
between the cost of labor to employers
and the take-home pay of the worker. More costly labor results in less
employment. Taxes on the income from capital goods and on the
sale of
goods has the same effect. There are unemployment taxes, disability
taxes, and payroll taxes that increase the tax wedge. On top of that,
there are minimum-wage laws that prevent the least productive workers
from getting hired. There are permits, zoning, and other rules and
costs that also prevent some workers from becoming self-employed.
Deprived of the full natural right to peaceful enterprise and
labor,
and the natural right to fully keep one's earnings, the poor have
little or no income, and depend on charity and governmental assistance.
To call them "underprivileged" is a lie. The rights-deprived poor do
not need privileges. They just need government to stop interfering with
their right to work and save!
The biggest privilege world-wide is subsidies to
landowners. ...
There has been confusion about what is a right and what is a
privilege.
...
Some consider a patent a privilege, but it too is a right. ...
Some also consider a corporation to be a privilege, since the
firm has
a charter from a government. ...
Real privileges are favors arbitrarily given to some groups and
not
others. ...
The really underprivileged folks are all consumers, taxpayers
and those
who are restricted from peaceful and honest practices or have to pay
extra to the government while others are unrestricted and non-taxed.
These people lack privileges which others have. The proper remedy is
not to expand privileges, but to eliminate all governmental privileges.
That is why libertarians and geoists alike have the motto: "Equal
rights for all; privileges for none!" Read the whole
article
Kris Feder: Progress and
Poverty Today
As this book was written, the
Industrial Revolution was
transforming America and Europe at a breathless pace. In just a
century, an economy that worked on wind, water, and muscular effort
had become supercharged by steam, coal, and electricity. Canals,
railroads, steamships and the telegraph were linking regional
economies into a national and global network of exchange. The United
States had stretched from coast to coast; the western frontier was
evaporating.
American journalist and editor
Henry George marveled at the
stunning advance of technology, yet was alarmed by ominous trends.
Why had not this unprecedented increase in productivity banished want
and starvation from civilized countries, and lifted the working
classes from poverty to prosperity? Instead, George saw that the
division of labor, the widening of markets, and rapid urbanization
had increased the dependence of the working poor upon forces
beyond their control. The working poor were always, of course, the
most vulnerable in depressions, and last to recover from them.
Unemployment and pauperism had appeared in America, and indeed, were
more prevalent in the developed East than in the aspiring West. It
was "as though a great wedge were being forced, not underneath
society, but through society. Those who are above the point of
separation are elevated, but those who are below are crushed down."
This, the "great enigma of our times," was the problem George set out
to solve in Progress and Poverty.
Read the whole article
Mason Gaffney: Introduction:
The Power of Neo-classical Economics (Introduction to The
Corruption of Economics, London: Shepheard-Walwyn, 1994)
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.
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."3 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." ...
A state, provincial, or local government can finance generous
public services without driving away business or population. The formula is simple: tax land, which cannot
migrate, instead of capital and people, which can. By eliminating
the destructive "Wedge Effect," the land tax lets us support schools and
parks and libraries and water purification and police and fire protection,
etc., as generously as you please, without suppressing or distorting useful
work, and without taxing investors in real capital. ... Read the whole article
Mason Gaffney: George's
Economics of Abundance: Replacing dismal choices with practical
resolutions and synergies
Micro
"structural" reform coupled with macro reform
A weakness of Keynesian policy is its scorn for structural
reform,
e.g. combating monopolies and sticky markets. It relies solely on
Federal fiscal policy. Its focus is so narrow that even monetary
policy, which seems so closely allied in spirit, is regarded as rival
rather than complementary. Thus, when inflation pricked the
Keynesian bubble, there was little left to offer except the dismal
Phillips Curve trade-off.
Georgist policy improves the
structure of the economy in at least
five ways.
a. It erases the "wedge
effect" of indirect taxes, while maintaining tax revenues. This
might be called a "True Laffer Curve effect" - what Laffer and Reagan
promised in 1980, but Reagan could not deliver. The wedge effect is
both warping, and, in the aggregate, anti-incentive.
b. It actually lubricates
the
land market in the very process of extracting more tax revenues from
it. It is better than "neutral" (lacking in wedge effects). It
subjects landowners to a cash drain that is more potent than mere
"opportunity cost" in prompting landowners to put land to its "highest
and best use," i.e. to allocate it optimally in the manner prescribed
by economic theory. The writer has developed this point elsewhere.
c. It combats monopoly
restriction of
output by making it costlier to withhold land from use. Likewise, it
combats monopsonistic exploitation of workers.
d. It unlocks urban land
markets
that are frozen up by the tendency of firms to buy and hold land for
possible future expansion. This is a form of vertical
integration which, like all withholding actions, is self-reinforcing
and self-validating, hence cumulative in its impact. That is, if A and
B are tying up surplus land for their possible future needs, that
forces C, D, and E to do the same because they cannot rely on the open
market to supply the land when and if needed. A fortiori,
speculative preemptors who hold key parcels to profit from others
attempts to assemble buildable parcels, or to compete in key markets,
force others to do likewise in self-defense. The pooling function of
the free market is impaired. Conversely, the gains from correcting such
market failures are also self-reinforcing and cumulative, providing us
with many "free lunches."
e. It makes landownership
more
available to small business, and new businesses, by lowering the market
price of land. It substitutes a deferred annual charge for a
high price up front. This has the same effect as extending credit to
all market agents on identical terms, thus offsetting the otherwise
overpowering bias of credit rationing and discrimination in lending.
Large surpluses of land are released to the market as the tax cost of
withholding land forces it to be sold.
It should be apparent that each
of those effects helps markets
work they way competitive theory says they should. Their aggregate
effect is overwhelming.
Some Georgists have made their
case on structural grounds alone. We
have seen, however, that these are in addition to the macro
effects. ...
10. Making labor
cheaper to hire without lowering wage rates
Georgist policy removes the many
big tax wedges between worker and
employer, and employer and customer, and worker and consumable goods.
Thus labor can cost the employer less, while the worker gets more
disposable income after-tax. Many economists inveigh against the
minimum wage, claiming it overprices labor. It is a matter of
suspicion that they are then silent on the deadly effects of the
payroll tax, which affects workers at all levels. Sales taxes, too,
cut into real wages, yet many of these same economists would raise
sales taxes and introduce VAT. President and Mrs. Clinton now speak
seriously of raising payroll taxes even more, to finance the new
health plan.
There is a high elasticity of
demand for labor. This may be
observed in farming, for example, where landowners have avoided union
wage rates simply by shifting their land from fresh fruits and
vegetables to labor-sparing uses like small grains or cotton.
Conversely, removing the payroll tax burden will move owners to shift
land back into labor-using enterprises.... read the whole article
Mason Gaffney: Rent, Taxation, Dissipation and
Federalism
Dissipating
rent via public spending
A. Taxes
and lease provisions need not twist incentives.
1. At worst taxes destroy incentives only at the
margins:
the "wedge effect."
2. Taxes may be structured to zero in on taxable surplus
while
sparing the margins. An obvious and well-discussed case is a tax based
on land value, or putative rent, imposed as a flat charge unaffected by
landowner production.
3. Taxes in excess of benefits received have positive
incentive
effects on landowners.
a. The wealth effect
b. The liquidity or cash-drain effect.
c. The effect of offsetting credit discrimination and
rationing (land is cheaper to buy, hence less credit is needed, and
taxes are or may be non-discriminatory among potential owners.)
So it is not taxation per se that dissipates rent, even
though
ill-structured taxes do destroy some rent. ...
Read
the whole article
|
To
share this page with a friend: right click, choose "send," and
add your comments.
|
|
Red
links have not been visited; .
Green
links are pages you've seen |
Essential Documents
pertinent to this theme:
|
|