Sunday, July 7, 2013

The Economist Calls for More Taxes on Land

They are a bit late getting to the party, this discussion has been pursued in relation to the means of production for years and as far as our little corner of the www goes we made mention of the FT Alphaville commentary back in 2012's "The Road to Serfdom: Where the Robots Are Taking Us":
Not Hayek's "The Road to Serfdom". Rather this is a journey back to medieval society where all income is subject to taxation by the Church or the manor or both. At least in the current case it is freehold rent which is paid in cash rather than the labor rent that villeins and serfs owed their liege.

Let me explain.
On Satuday Worthwhile Canadian Initiative had a post "Capital-biased technical change vs low interest rates?" about the flow of income from productivity gains accruing to capital in larger and expanding proportion rather than to labor:
Paul Krugman says that recent technical change has been capital-biased. That robot story sounds plausible to me too. But if so, why are real interest rates so low? (Yes I know there's a global recession on, but real interest rates were falling even before the recession). Maybe we are forgetting a third factor, land, and land rents are rising?
Suppose there were a new technology that caused both wages and interest rates to fall. Why wouldn't capitalists and workers say "Stuff that, let's go back to the old technology!"? Any individual firm, or group of firms, that went back to the old technology, while borrowing at the new low interest rates and paying the new low wages, would make super-normal profits. And all the other firms would eventually choose to, or have to, follow it back....MORE
One of his commenters made a very sharp observation:
This is right (and krugman is right). Asymptotically, when robots do all the work including the development and manufacturing of robots, all rents will flow to the owners of land just like a few hundred years ago. At that point the prescriptions of Henry George will be self evidently true. Until then a great deal of rents will flow to the owners of non-land capital. Watch for ever broadening, ever lengthening IP protections, and continuing income polarization.
Posted by: K | December 08, 2012 at 03:25 PM
That's where I went all medieval on folks around me.
The story was advanced by Izabella Kaminska yesterday. From FT Alphaville:
The robot economy and the new rentier class
It seems more top-tier economists are coming around to the idea that robots and technology could be having a greater influence on the economy (and this crisis in particular) than previously appreciated. Paul Krugman being the latest.

But first a quick backgrounder on the debate so far (as tracked by us)....MORE
See also this FT opinion piece from 2011.

Here's the Economist's Free Exchange blog:
Levying the land
Governments should make more use of property taxes
TAXES on property go back a long way. Ancient civilisations from Greece to China had levies on land. In 11th-century England the Domesday Book, a record of who owned what land, documented William the Conqueror’s tax base. Britain had a window tax in the late 17th century, well before it introduced an income tax. In America local governments have raised money from property taxes since the colonial era; the federal income tax has been in place only since 1913.
But property taxes are much less prominent than they once were. To fund rising government spending, far more cash is raised from other sources, particularly income taxes, payroll taxes and value-added taxes (see left-hand chart). A new study by John Norregaard of the International Monetary Fund suggests that the average rich country, including all levels of government, raises under 5% of total tax revenue from annual levies on land or the buildings on it. The norm in middle-income emerging economies is lower still, at around 2% of all tax revenue (see right-hand chart). Including property-transaction taxes like stamp duty raises the total a bit but not by much....MORE
...Taxing land and property is one of the most efficient and least distorting ways for governments to raise money. A pure land tax, one without regard to how land is used or what is built on it, is the best sort. Since the amount of land is fixed, taxing it cannot distort supply in the way that taxing work or saving might discourage effort or thrift. Instead a land tax encourages efficient land use. Property developers, for instance, would be less inclined to hoard undeveloped land if they had to pay an annual levy on it....
HT: naked capitalism

It’s Time to Levy the Land
Yves here. While some of the concerns in this post are specific to Australia, they can be readily translated to other property regimes. The part that is missing, however, is that the US relies on “real estate taxes” which includes the value of the buildings on the land. Michael Hudson has advocated taxing land much more heavily, since unlike taxing capital or labor, it does not burden the economy with higher costs . As he explains in a 2009 interview:
Our tax system favors debt rather than equity financing. By encouraging debt it has prompted a tax shift onto the “real” economy’s labor and capital. The resulting interest charge and tax shift mean that we’re not as efficient and low-cost producers as we used to be. This makes it hard to work out way out of our foreign debt.

You want to phase out the “tollbooth” economy that adds unnecessary charges to the cost of living and doing business – charges that have no counterpart in actual necessary cost of production....MORE
The theory and practice of taxation has attracted some sharp minds and sharper comments.
Two of my favorites are Jean Baptiste Colbert, Controller General of Finances under the Sun King:
 “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing
And Senator Russell Long (D) LA, chairman of the Senate Finance Committee
"Don't tax you, don't tax me, tax that fellow behind the tree!"