Thursday, February 27, 2014

Rumplestatskin — All taxes come out of rents

Mason Gaffney has for years been describing the nature of economic rents and its relation to taxation. His key idea, which would have been uncontroversial prior to the rise of the neoclassical school, is that all taxes come out of rents (ATCOR). This means that a single tax on the rents earned from ownership of natural resources can always provide sufficient taxation revenue.
This post shows how a land tax works, based on the work of Henry George.

Michael Hudson has been pounding on this forever, too. Tax economic rents, not productive contributions. Doh.

Warren Mosler has said that in his view a land tax would be sufficient to control inflation using functional finance. Taxes do not fund government. 

Michael Hudson would also tax away monopoly, oligopoly and monopsony rents, as well as financial rents, too, in order to discourage them, since they disrupt markets and lead to social dissonance. Generally such rents can only be collected with either favor government policy, often from capture of the political process, or at least government inaction to preserve a level playing field.

The hidden agenda of neoclassical economics from the get-go was to exclude economic rent from consideration after it had been featured in classical economics. This has been a roaring success and any attempt to address economic rent is now denounced as anti-free market, socialism, class warfare, and Marxism. So most economists, even heterodox economists other than Marxists and Marxians avoid mentioning economic rent, just as they avoid mentioning class structure and power structure. All these go hand it hand.

Rumplestatskin provides a very simple explanation of how conflating land and capital as "capital," as neoclasssical models do, obscures the role of land rent.
For example, when we whittle our way through the production chain down to the landowner, who has one input, land, the neoclassical framing say that this owner rents their land inputs, which are compensated at their marginal contribution to production. Okay. So she rents off another person who owns the land, who we then model as renting from another person, and so on.
The buck never stops. [This involves the informal logical fallacy of reductio ad infinitum, or infinite regress, also called "turtles all the way down."]
That’s what happens when you conflate land and capital into a single input. They nee[d] to be treated differently because land is not an output of any production process, unlike capital.
When you allow the buck to stop at ownership of land and natural resources, you get a very different picture of the economy. One in which the taxation capacity of rents is not limited their current value. As Gaffney points out, when we “lower other taxes, the revenue base is not lost, but shifted to land rents and values, which can then yield more taxes”.

Henry George made this argument concisely a mere 130 years ago when writing in 1881 about the fund from which taxation is drawn
All taxes come out of rents


Dan Kervick said...

How do you prevent the rentiers from just passing the full cost of the tax onto the renters?

Tom Hickey said...

That's the same argument as not taxing capital since it will reduce investment, and not taxing profits since firms will pass it through.

There's a limit to pass through in that one can only pass taxes through if higher prices stick and there is a thing called price resistance. Competition is supposed to reduce the ability to pass through. The way around it monopoly pricing and gains from monopoly are economics rents and fully taxable.

But in the end, capitalism is ultimately unworkable for many reasons, and a big one is rent-seeking and rent-extraction. Better to just change the rules of the game and put people (workers) in front of capital (money and machines).

David said...

Henry George explains:
"The rent of land represents a return to ownership over and above the return which is sufficient to induce use — it is a premium paid for permission to use. To take, in taxation, a part or the whole of this premium in no way affects the incentive to use or the return to use; in no way diminishes the amount of land there is to use, or makes it more difficult to obtain it for use. Thus there is no way in which a tax upon rent or Land Values can be transferred to the user. Whatever the State may demand of this premium simply diminishes the net amount which ownership can get for the use of land, or the price it can demand as purchase money, which is, of course, rent or the expectation of rent, capitalized.
Here, for instance, is a piece of land that has a value — let it be where it may. Its rent, or value, is the highest price that anyone will give for it — it is a bonus which the man who wants to use the land must pay to the man who owns the land for permission to use it. Nor, if a tax be levied on that rent or value, this in no wise adds to the willingness of anyone to pay more for the land than before; nor does it in any way add to the ability of the owner to demand more. To suppose, in fact, that such a tax could be thrown by landowners upon tenants is to suppose that the owners of land do not now get for their land all it will bring; is to suppose that, whenever they want to, they can put up prices as they please.
This is, of course, absurd. There could be no limit whatever to prices did the fixing of them rest entirely with the seller. To the price which will be given and received for anything, two wants or wills must concur — the want or the will of the buyer, and the want or will of the seller. The one wants to give as little as he can, the other to get as much as he can, and the point at which the exchange will take place is the point where these two desires come to a balance or effect a compromise. In other words, price is determined by the equation of supply and demand. And, evidently, taxation cannot affect price unless it affects the relative power of one or other of the elements of this equation. The mere wish of the seller to get more, the mere wish of the buyer to pay less, can neither raise nor lower prices. Nothing will raise prices unless it either decreases supply or increases demand. Nothing will lower prices unless it either increases supply or decreases demand. Now, the Taxation of Land Values, which is simply the taking by the State of a part of the premium which the landowner can get for the permission to use land, neither increases the demand for land nor decreases the supply of land, and therefore cannot increase the price that the landowner can get from the user. Thus it is impossible for landowners to throw such taxation on land users by raising rents. Other things being unaltered, rents would be no higher than before, while the selling price of land, which is determined by net rents, would be much diminished. Whoever purchased land outright would have to pay less to the seller, because he would thereafter be called on to pay more to the State.
But while the Taxation of Land Values cannot raise rents, it would, especially in a country like this, where there is so much valuable land unused, tend strongly to lower them. In all our cities, and through all the country, there is much land which is not used, or not put to its best use, because it is held at high prices by men who do not want to, or who cannot, use it themselves, but who are holding it in expectation of profiting by the increased value which the growth of population will give to it in the future. Now the effect of the Taxation of Land Values would be to compel these men to seek tenants or purchasers. Land upon which there is no taxation even a poor man can easily hold for higher prices, for land eats nothing."

Matt Franko said...

Dan good Q Ive thought that same thing at times... what I think would happen is the renters would have to sell as it may become "cheaper to own rather than rent" .... if we are talking about property... we are sort of in this situation right now as today it is often cheaper to build new rather than rent or over-pay for what the banks have the vacant property listed to rent for.... so today you see a lot of empty space but yet you see new construction too, this is because the rentiers are asking too much so they are going to have to sell....
you see a lot of signs that say "For Lease/Sale".... before the GFC you never saw the "Sale" option on the signs...

If you own and occupied the asset you wouldnt face the same tax on "passive income" as the rentiers would face if they just passively rented out the property...


Roger Erickson said...

"Warren Mosler has said that in his view a land tax would be sufficient to control inflation using functional finance."

Perfect. That would be great harmony between MMT & LRT (land-reform-taxation)

Please provide a link to Mosler's statement. It'll be useful for showing this alignment between micro/macro operational features of sovereign fiscal/taxation systems.

Roger Erickson said...
This comment has been removed by the author.
Roger Erickson said...

Dan K "How do you prevent the rentiers from just passing the full cost of the tax onto the renters?"

You don't need to PREVENT them from TRYING, Dan. You just need to prevent them from SUCCEEDING in starving out the laborers [using tilted tax policies], before they themselves are forced to liquidate all or part of the land holdings.

i.e., it's always a question of which can hold out the longest, the host or the parasites or the host/parasite in some uneasy collaboration.

That's basic biology. All extant species are complex symbionts [i.e., recombinants of multiple hosts/parasites/other-symbionts].

In human cultures, that includes our own self-symbionts [i.e., our spectrum of Innocent-Outright Frauds, plus their "prey" - the cooperative segments of the population].

Tom Hickey said...

Please provide a link to Mosler's statement.

I asked him about taxing away economic rent once and he said that land rent would be sufficient.