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

 

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:

Home
Top of page
Essential Documents
Themes
to email this page to a friend: right click, choose "send"
   
Wealth and Want
www.wealthandwant.com
   
... because democracy alone hasn't yet led to a society in which all can prosper