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

MacroBusiness
All taxes come out of rents
Rumplestatskin