It seems that modern economists tend to make their study of human action either overly complex or overly simple. For example, this simple diagram indicates the flow of income in the modern private sector:
People work for corporations, get salaries... which they spend to buy the goods made by the corporations. Quite simple. So, when the question arises: How do we raise money for public revenue? The simple conclusion arrived at is: We either tax income or we tax sales, or both.
Of course, whenever the government enters the income stream, it creates a drag on the economy. People have to work harder, or make do with less, whichever side of income is taxed.
The major difference between a sales tax and an income tax is the implementation. It is much easier for the federal government to "spot" work going on, than it is to spot a taxable transaction. So, the federal government would much rather rely on wage taxation. Although a national sales tax would be much simpler, it is too easily avoided (especially considering the emergence of the internet as a commercial marketplace).
Since government is inherently less efficient than the private sector, the more money it takes, the higher the rate of unemployment, even as it attempts to provide more services. Europe has grown accustomed to double-digit unemployment, and the USA has grown accustomed to 5% unemployment, because of the size and nature of the diversion of money from the private income stream to the government.
Most people accept the burden of income tax, and just hope that taxes will be kept "livable" for them. After all, they can always vote out the "really bad" politicians. But like the frog who was slowly boiled, the people have come to accept higher and higher levels of total taxation. Reform movements come and go with the personalities and personal fortunes of the reformers.
An Investor's Business Daily guest columnist recently argued that it makes no difference where the government enters the income stream to divert public revenue. And there is some truth in that, assuming that government takes about the same amount of income in either case.
But all this acquiesence to the status quo assumes that some "reasonable" amount will be taken, which does not distort the economy. And it assumes that there is no other practical way to support a government. Let us first explore the side-effects of an income tax, and then propose an entirely different means to raise public revenue.
If there were a 90% or 100% income tax, the households (and the corporations) would not be able to keep the private sector income stream going, except by "underground" means. The size of the underground economy would become directly proportionate to the high tax rate on labor, as it has done in every western nation that has experimented with high tax rates. High taxes on labor have always distorted the economy, shrunk the national pie, and typically have been abandoned within in the last two decades.
But it doesn't take exorbitant taxation on labor to cause distortions. Whatever the tax rate on labor, it creates disrespect for the law. Since every citizen is required to "voluntarily" testify against himself every April 15, the greatest taxes fall on the over-reporters and the honest reporters, and lesser taxes fall on the dishonest "tax cheats."
The income tax directly encourages dishonesty, since the reward for successful cheating is equivalent to a great deal of expended-labor. There is a constant incentive to under-report income or to over-report deductions, whether the rate is 90% or 28% or 15%. Instead of abiding by the simple virtue of honesty, people rationally conclude that dishonesty is OK "as long as you can get away with it." Thus, the income tax gradually undermines the moral virtues that hold a free society together.
The government takes notice of the rampant cheating that its laws have inspired, and realizes that it must attempt to "make people more honest." So, it raises the penalty for cheating, and it grants to its agents a great deal of discretion in how to scare people into filing "honest" tax-returns -- whether they are cheaters or not. IRS agents are incentivized to get people to PAY UP. Whether they really owe money or not becomes a secondary concern. The result is highly predictable: the government tramples all over some people, to "set an example" for the rest of us.
Thus, the income tax undermines the constitutional protections of privacy, due process and innocence until proven guilty.
Recently, Congress opened up an investigation into the abusive tactics of the 110,000 IRS agents that it had turned loose on the nation. It found ruined businesses, broken marriages, bankruptcies, suicides -- you know, whatever it takes to induce income tax-compliance. Oh my! The senators were shocked at the stories that they heard! And they actually wrote some new "taxpayer-protection" laws. But all they have really done is to outfit the iron-fist of income taxation with a velvet glove.
As long as a "voluntary-compliance" system of income tax exists (which has become primarily a tax on labor wages), the government must attempt to scare people into compliance -- at great cost to the constitutional liberties -- or it must abandon revenue to "cheaters."
While the pendulum has temporarily swung against the Treasury Department, due to unexpectedly lower federal deficits, the government knows where its bread is buttered. Income tax provides the bulk of federal revenues. As long as the income tax exists, American citizens have every reason to fear their government, and to worry about the destruction of their Constitution and Bill of Rights.
Is there a better way?
Yes, there is. It is not necessary to directly enter the income stream, and steal the wages of labor in order to finance government. If Thomas Jefferson were alive, he would be appalled at such a system of direct taxation on a free people.
You see, all corporations and households utilize land, natural resources and other natural opportunities (such as the airwaves) to some extent, as a part of modern economic life. Due to market demand, there is a rental value for all such sites. Further, the sites which comprise the surface (and atmosphere) of this planet were not created by anyone. They were provided either by God or by Nature. People have occupied these sites, and improved them -- but we did not create them. The planet earth, which nurtures us biologically, remains the common heritage of mankind. The land mass of the United States belongs, in a very real sense, to the American People in toto.
But we cannot live in a socialist dream-world. If we have learned ANYTHING from the travails of the 20th Century, it is that we need a system of well-defined, universally acknowledged private property rights in order to enjoy the benefits of the free market.
Knowing what we now know about the folly of central economic planning, and of the potential environmental excesses of unfettered capitalism, let us re-evaluate the wisdom of John Locke (who preceded both):
1. You, and your body, and that which you create--your labor and your capital--belongs to you;
2. The natural world belongs to all of us.
Let us leave to labor its wages and to capital its interest, and thereby encourage MORE labor and MORE capital investment.
Let us free up the income-stream, and return to a true full- employment economy.
Let us derive needed public income from the title deeds granted for the exclusive use of the natural world. [This has the added benefit of encouraging the conservation of minerals and oil; and the conservation of land itself].
In order to replace the insidious and tyrannical income tax, all we need to do is borrow a page from the Founding Fathers, and to collect the rent of land and of other "sites" from those private entities which wish to use them exclusively. Of course, the collection of land-rent would exclude improvements -- such as houses, shops and factories -- as these are man-made, and are rightly privatized.
The rent for the use of the American land-mass and of its natural resources and air-waves would be more than sufficient to finance a strong Constitutional government, and to provide ample public goods. It would be beneficial to the economy, to the environment, and to the moral virtue of the American People.
Al Date - December 1, 1997
Here's what folks have been saying:
Well done, Al. I'm going to use it just as I do a lot of your stuff.
Art Scholbe <email@example.com>
Cahokia, IL USA - Thursday, December 04, 1997 at 13:41:59 (EST)
Great graphics, Lindy. Right up front ! Good attention grabber.
Al Date <firstname.lastname@example.org>
Santa Clara, CA USA - Thursday, December 04, 1997 at 16:33:05 (EST)
Look. I don't like income tax either. But if I get a good tax advisor, I can be ahead of the game. But I own a house here. I have a mortgage on it. I want to sell it one day, maybe. Who know what this "alternative" will do to me! Forget it. Phooey.
Max Schmoo <email@example.com>
Brooklyn, - Saturday, December 06, 1997 at 18:02:49 (EST)
I do hope you plan on giving more detailed/reasoned responses to Chris Toto than merely sending him to seek his private answers elsewhere. I would add the following: How is land to be assessed? And how often? This process looks like a great place to hide the inequites. There is also the interaction with other laws--e.g. rent control. Taxes are also a means of providing incentives for resource use. I don't see land resources as being sufficiently inclusive. What of Band Width resources (of the electromagnetic spectrum, currently controlled by media conglomerates and even less intuitively ownable than land. And do we still want to give tax breaks for students, parents, contributers to charity, [your favorite interest group here]
ny, ny ny - Wednesday, December 10, 1997 at 15:12:07 (EST)
Welcome, jimb! It's an honor.
I might say that the whole rest of this site exists to provide those detailed answers; that's what we're here for. However, I can add a few quick points:
Assessment should be done early and often. Once a year at least. But there are two reasons why this could be much more easily and equitably done than it is at present. One, we'd only be dealing with land. Improvements are much more troublesome to accurately assess. Two, technology could be brought to bear that would re-assess whenever new sales or other factors were recorded. Using Geo Information Systems (GIS), assessment could be just about continual.
Real estate values are customarily assessed with great accuracy by people in the real estate business, and very sloppily by municipal assessors. But under land value taxation, the entire community would be in the real estate business, and the incentive would be to assess accurately.
Now quickly to your two other points: Remember that almost all the weird incentives in our economy (rent control is a prime example) are responses to the underlying distortions caused by our twisted land tenure and tax systems. George's remedy proposes to attack these problems at their root. If it did indeed work, it would remove the need for rent control, and many other such uneconomic adjustments.
As far as bandwidth and other "land-like" resources: whenever their value had the character of rent, because their supply is fixed, they are land, economically. This is true of the electromagnetic spectrum when exclusive licenses are granted and, I argue, of the publicly-created value of the internet. Land is properly defined as the entire material universe, except people and their projects. The community gives value to natural opportunities, so the community should collect that value.
- Thursday, December 11, 1997 at 09:43:56 (EST)
To: Al Date I see you've taken your tax theory to the cyberstreets - BIGTIME! Good for you, Al. This is a very well-written piece. I'm going to print it out and show it to my husband (Mr. Capitalist!) and get his opinion. I bet he'll like what you wrote. But I'm curious - how and who determines the rate of tax on difeerent parcels of land? Is every piece to be taxed at a flat and equal rate? And how about the land holdings of entities that, heetofore, have not been taxed at all - like the Catholic Church (one of the largest landholders in the country.) I've just started exploring your site, so don't bother answering my questions if the answers are available here. I'll dig 'em out on my own (eventually!) I always thought you were an excellent writer, especially when it came to expressing your opinions. I'm happy to see you've found a larger audience online to which you can vent!
jacqui kinghorn <firstname.lastname@example.org>
- Sunday, December 14, 1997 at 22:44:03 (EST)
Max, Certainly a shift of taxation onto land and off of labor/capital will have its share of short-term winners and losers. But if you are a working man/homeowner, you already pay income tax (including capital gains taxes) and property taxes (including land taxes). If we assume that you and I represent the general case, and that govt does not shrink, whatever we saved in income tax would be paid out in land tax. That is the short term simple analysis. But the longterm analysis is that people will do MORE WORK, on LESS LAND. That translates into economic efficiency and vitality, which benefits everyone. --Al Date
Al Date <email@example.com>
Santa Clara, CA USA - Wednesday, December 17, 1997 at 15:40:23 (EST)
Does the land tax have any inherent protections of the biosphere? Does it make it economically less feasible to hold land for speculation? Are there any bills now pending the house or the senate that will advance the purposes of the land tax? If the land tax were a politically non-viable bill (at least in the "near" future) then how about revising the mining act of 1812 and declaring Federal lands only to be under this new bill. This would free up lands for people form sustainable lifestyles. Does the land tax impact mineral, lumber or water rights. I hope so.
Robert J. Gornik <firstname.lastname@example.org>
Los Angeles, Ca USA - Monday, December 22, 1997 at 14:25:15 (EST)
Your questions, Robert, are so apt that I want to reproduce them:
Does the land tax have any inherent protections of the biosphere? In a way, this depends on how you define it. The correct economic definition of land, we hold, includes all natural opportunities. I would say that this implies the continuity of natural opportunities in the future, and so, yes, it is an inherent part of what we're calling "the land tax" -- but we must remember the full implications of that definition.
Does it make it economically less feasible to hold land for speculation? Yes.
Are there any bills now pending the house or the senate that will advance the purposes of the land tax? In fact, the reverse is true. It is evident that a significant part of the income that is normally called "capital gains" is actually derived from land value gains. So, moves to lower that tax actually move in the wrong direction from a Georgist point of view.
If the land tax were a politically non-viable bill (at least in the "near" future) then how about revising the mining act of 1812 and declaring Federal lands only to be under this new bill. This would free up lands for people form sustainable lifestyles. This would be a wonderful first step. (It doesn't seem to be close to happening, though. But it could be a viable strategy, I think.
Does the land tax impact
mineral, lumber or water rights. I hope so. Again, it should,
if it is properly understood. I hope so too!
I am replying to a note from Lindy Davies, Ta for the letter and booklet. I too did enjoy the course at Millfield and when retired (98 perhaps) still plan to do an Economics degree. Pleased to hear that you have a family and look forward to receiving the booklet. Am certainly interested in the Understanding Economics if I haven't already done it at Millfield but it will have to wait until R-day. All the best for 98.
Peter Cockburn <PeterC31@aol.com>
Bracknell, England - Sunday, January 04, 1998 at 08:05:06 (EST)