Radical Centrism and the Return of Ricardo

I’ve had a tough time codifying my political ideology into an economic policy. Lately, I’ve argued the minutiae of why we should borrow more and take unemployment as a short-run phenomenon more seriously. But the conceit of any writer is to think his ideas a) matter and b) are to some extent novel.

While things like a nationally guaranteed and regulated local currency fits the bill, it is conspicuously narrow in its mandate. Scott Sumner has argued that a nominal income target would be the “end of macroeconomic history”. I don’t have any such ideas, but I’m going to try something sufficiently more grand than my normal blog post – articulate a set of principles that should drive our tax policy.

I will ignore the spending side, as this is generally a far more politically tenuous subject. But economists are also (generally) pretty clear about how we should spend our money. Investment in education, basic research, infrastructure, and technology are all part of a supply-side program that is limited only by potential tax revenue.

A note on semantics

This is “radically centrist” because it breaks from almost all deeply-held positions of liberals and conservatives. A complete nationalization of the resource extraction industry coupled with the abolishment of all labor taxes. An almost Marxist stand on land coupled with a relaxation on any impediments to capital formation. Centrism for its own sake is never good, and can even be disastrous. This is ideologically, but not politically, in the middle. With a large expansion of government, it is firmly in “Democratic” territory. But principally it serves the free market with a seated belief in the ideas of classical liberalism. A larger government is but inevitable, this is the best way to get there.

Here are the principles from which I derive a system:

  • Income inequality is bad only to the extent it a) asphyxiates potential growth, b) engenders a despondence among the lower classes, or c) decreases social mobility
  • A competitive market is one which favors small businesses but also one which favors new businesses.
  • Markets are good.
  • Taxes are (usually) evil.
  • Inequality of land ownership is even more evil.

These range from broad – a very strong prior that markets are efficient – to specific – land inequality is unconscionable. I will avoid discussion of Pigovian taxes (aside from carbon) except as a stopgap. First, it is important to understand how much revenue we will need. The Tax Policy Center estimates, under current law, federal revenue to equal almost 20% of total output. 

I’m going to aim for a long-run average of 24% for the following reasons:

  • Defense, education, healthcare and social security – fields of government focus and competitive advantage – are quite a bit more inflationary than accounted by the GDP deflator. This means that over the next fifty years, if government spending remains constant, its real output will fall. This is not a “slippery slope” but submission to a structural change given an older and thereby sicker population.
  • It is of unimpeachable importance that the USA pay down its debt in the long-run.
  • Relative surplus during good times will allow for stricter stimulus when necessary.
  • My proposed 24% will be less distortionary than our current 18%.

This amounts to (app.) nominally $50 trillion over the next decade and $4 trillion in 2014. How can we collect this much while abolishing income taxes? It’s actually not hard.

Nationalize Oil & Gas Companies: 8% 

Market liberals generally oppose severe government regulation, let alone ownership, of any industry on grounds of philosophical liberty and economic efficiency. Both arguments are blatantly inapplicable to natural resources. No one considers Qatar to be a “smart” economy, or its citizens to be “productive”. Silicon Valley and New York City are far more respected as centers of innovation, talent, and cultural value than Doha. And yet, Qatar’s per capita national income is at $102,000 – well above America’s $50,000. Quite frankly, there’s nothing brilliant about converting natural capital into a cash flow and disguising it as income.

But it is not our right to use up the country’s resources and let the rents fall into the hands of a select few. Random, relatively unproductive, citizens of North Dakota have no more a right to oil under their feet than the lab scientist in Cambridge. And yet the former walks away with a killing and the latter a pittance. David Ricardo first, gloomily, spoke the evils of land inequality (from The Lives, Times, and Ideas of the Great Economic Thinkers):

It was from this difference in costs [between productive and unproductive land] that rent springs. For if the demand is high enough to warrant tilling the soil on the less productive farm, it will certainly be profitable to raise grain on the more productive farm. The greater the difference, the greater the rent. 

So as the population expanded and wages accrued by industrial workers grew, the cost of wheat would be in perpetual ascent. And as wheat is homogenous, those who owned fertile land earned heavy “rents”. Indeed such estates were the provenance of old nobility and wealth, and hence non-market forces created an unfair distribution of income.

Just like a river flowing through my yard is not “property”, neither is crude under my lawn. To this end, there is no philosophical liberty attached to scouring the earth of its natural capital, and hence no immorality in nationalizing the forces that enable such.

But the efficiency argument, too, is deeply flawed. When the marginal social cost exceeds the marginal social benefit, welfare gains are maximized when either demand falls or cost of production increases. An excise tax is just that. If nationalization results in the all feared x-inefficiency, we are the better off with less pollution and global warming. 

If profits were nationalized the government would earn over a trillion dollars in the decade up to 2023. In 2012 such profits were at $120 billion, and are expected to grow significantly as global demand soars and new domestic sources are found aplenty. My figure doesn’t account for inflation, relative price increases, or the huge export market. And yet it meets almost 8% of necessary revenue.

And to environmentalists, most importantly, regulation of this highly dangerous industry can be acutely enforced by the EPA. There would be tensions within the government bureaucracy thereof, but it is not a long shot to assume the terrible oil spills we’ve experienced might have been avoided under harsher rules. It is vitally important, too, that carbon and other such taxes price oil at its environmental cost. Monopoly will move towards this end.

Of course, the corporate nature of the structure should not be tampered with, to incentivize worker and land productivity too severely. State capitalism should be oil’s future in America.

Carbon Taxes: 7%

Economists – except those who are on Republican party payrolls – accept that human stubbornness and ignorance can’t overcome nature. In 2011, the CBO suggested a carbon pricing plan that many analyses hence have employed. From the Tax Policy Center:

The emissions cap would be set so that allowances would trade at $20 per ton of carbon in the first year and then rise at a nominal rate of 5.6 percent annually (about 3.6 percent annually in real terms, given CBO’s long run projected inflation rate of 2 percent).

CBO estimated that this policy would raise about $1.2 trillion over the decade 2012 to 2021, the standard congressional budget window at the time; for simplicity, we assume that it would raise the same annual amounts, starting a year later, for a tax beginning in 2013 and continuing through 2022. That figure reflects the direct revenues from the carbon tax and a partially offsetting reduction in income and payroll taxes.

The TPC and CBO are afraid of the distributional effects of a carbon tax, and hence judged a pretty small $20 per ton. I would price carbon significantly higher, earning far more revenue, and curbing emissions aggressively.

Site Value Taxes: 75%

Real estate value property taxes are as dumb as they are easy. As William Vickrey said:

The property tax is, economically speaking, a combination of one of the worst taxes—the part that is assessed on real estate improvements. . . and one of the best taxes—the tax on land or site value.

Advocates of a land value tax (LVT) know that land is perfectly inelastic, and there are no costs to future “formation” from taxation. But what’s on a land is not. Severe property taxes, of course, disincentivize capitalists from making land more productive, there by increasing the net present value of all future rents and hence the value added. Therefore improvements should be taxed at a capital gains tax rate hence, in my proposition, not at all.

Indeed the idea behind land value taxation is a logical extension of my proposal to nationalize oil and gas production. The distortionary effects are relatively negligible to, say, a capital taxation. I also take land inequality, ideologically, a priori evil. Hence I would support any move that more equitably distributes the only “god given” resource while incentivizing good, productive work and entrepreneurship by cutting capital gains taxation. Milton Friedman, of course, calls this the “least bad” tax.

Noting the considerable left-wing impetus towards redistribution and the right-wing adherence to free markets, it is surprising that land taxation plays such a small role in national conversation.

Public finance tells us the same end can be achieved through either a taxation on the annual rent, or a levy on the land value itself. The equivalence may be captured as:

t_land = t_rent*i / (1-t_rent) or

t_rent = t_land / (t_land+i),

where t_land is the tax rate on land value, i is the natural interest rate, and t_rent is the tax on rents. At a 4% real interest rate – a fair long-run prediction from the CBO – a 20% LVT (t_land) taxes 83% of all rents (t_rent). As explained by Fred Foldavary:

There are several methods of assessing land value or rent. One way is to calculate the replacement value of the existing improvements (unless they are historic), and then subtract the depreciation of the buildings. Then subtract the building value from the total property value. What is left is land value. For commercial property, one also can take the net income and subtract the return on the improvements (using some interest rate), the remainder being land rent. In some places there is vacant or bare land that has a market price, and sometimes there are separate owners for the land and the improvements, for which data can be derived from leases and sales. The assessors then smooth out the neighborhood land values, using computerized maps. It is not necessary to individually assess the values of most of the buildings in a neighborhood, since most lots in a locality will have a similar value per lot.

It’s an important point that historic and national landmarks be excluded from taxation. He goes on to discuss the complexities of taxing other land – minerals, oil, and gas – which this plan simply overcomes through absolute nationalization.

Historically, land rents had towards the end of the 1980s been about 20% of American national income (see Steven Cord). Australia has shown similar dynamics:

unearned

The costs of taxing earned income are hard to ascertain. Conservative estimates exceed $1 trillion. I’m not persuaded by the common explanation that labor taxes incentivize laziness. But they do, comparatively, seem more immoral. And land taxation properly adjusted for improvements and depreciation inflicts no welfare loss. Further the welfare gain from relaxing growth-inhibiting labor and capital taxes will be manifest in higher rent growth rates. Although the rent captured by the top percentiles will fall, the total rent will not. Therefore free land markets are not a Pareto-superior to my proposal.

Land rent redistribution would also give us the chance to end a possibly detrimental home ownership program. Some economists have long suspected that large home equity investments ossify the labor market by decreasing national mobility. If all Americans can benefit from increases in land rents, the “American dream” would no longer be tethered to ownership. A deeper and more liquid labor market would let families “move to North Dakota” and create a more competitive system. The supply-side benefits are not trivial.

Progressive Consumption Taxes: 10%

The long-run benefits of consumption taxes are well understood, and would encourage higher savings among middle and middle-high income Americans. It is not too surprising that low earners don’t save much, but the high propensity to consume among the “mass affluent” is shocking. A tax on business cash flow and wages would decrease immediate consumption without significantly distorting employment. A graduated levy on wages need not even affect lower income earners, thereby maintaining fairness in the regime. This component of tax revenue can be relaxed in favor of deficit financing as an when needed during a recession.

Notice…

There is no corporate, income, capital or sales tax. April 15th will loose all significance as Americans no longer pay taxes individually. Many millions spent on tax lawyers and accountants will be gone. Payroll taxes can be exempted from new or small companies, maintaining contestability in America’s business environment.

Poll after poll tell us that Americans hate not how much they pay in taxes, but the complexity and time spent thereof. We hate thinking that a better lawyer can save us money. The forms are irritating. And everything is so much worse for large corporations. Without doubt, this broad reform would bring the United States back to the top of World Bank’s “Ease of Doing Business Index”. American profits abroad can be repatriated and invested for free, and foreigners would immediately flood American capital markets with taxes on capital gains at zero.

Supply-side policy has earned a bad rap from its association with modern Republicans whose only goal is to starve the government. But America’s problems today were presciently felt by older political economists from Adam Smith to David Ricardo to Henry George. Indeed, European class hierarchy was so intimately tied with nobility and land ownership that this kind of reform could never have passed. America – on the other hand – should lead the way to free capital and labor markets.

Today high-skilled wages are almost at parity in India and China. And even if they’re not they will be soon. Scientists and engineers are disproportionately affected by a tax system more critical on human capital than land ownership, a fixed quantity.

My estimates for each component are highly conservative, not accounting for the huge boom in shale gas production, and excluding all coal/mineral profits from the sum. Indeed, small government conservatives should pay heed to this reform: the total revenue is up for debate, but the principle behind resource taxation is what’s important.

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27 comments
  1. “Noting the considerable left-wing impetus towards redistribution and the right-wing adherence to free markets, it is surprising that land taxation plays such a small role in national conversation.”

    That puts it mildly. In my experience, land taxers face obstacles on a theoretical front, and practical front. On the theoretical front, you face socialists and capitalists, each of which treat you like an enemy of the opposing tribe. On the practical front, the main problem is that so many people have so much money tied up in land. Sure, they’ll be better off in the long run under an LVT, but it’s tough to convince them of that.

    • The value we have “tied up” in capital and labor is also quite high! I think convincing people in general will not be all too difficult, especially noting the relaxation on all other forms of taxation.

      It depends what you mean by “socialists and capitalists”. I think a good number of the classical political economists (in the tradition of Adam Smith) would have thought this is better than our imposing tax system. The less radical socialists might also see it as the lesser of two evils. (With state ownership of the means of production as ideal, of course).

  2. Ronald Calitri said:

    Get this book, find ‘miri’ there is debate but …

    The Arab World
    Preferred Citation: Barakat, Halim.
    The Arab World: Society, Culture, and
    State.
    Berkeley: Univeristy of California Press, c1993 1993. http://ark.cdlib.org/
    ark:/13030/ft7d5nb4ss/

    • Thanks for the suggestion, seems interesting, checked it out. If I might ask, what’s the direct relevance to this post?

      • Ronald Calitri said:

        Well, this old-fashioned perspective, that the state owns everything, provided a natural avenue for the type of taxation you suggest. I’m not really expert, and while seeking this out found some debate over whether the system was as pure as Barakat makes out. Polities subordinate to the sovereign would get pieces of the _usufruct_; but that seems the historical term your essay harkens toward. Under “Barakatian” miri, so long as you farmed the land, you kept it. Other sources suggest a rule usually breached that after 10 years of non-cultivation land would revert.
        I gather that in the ‘west’ such grants were more or less permanent, treason the only bar; and so, the chain of leases, rentals, collateralizations et alia embedded ‘modern’ ‘property’ in the political economy. The old story of Humpty Dumpty comes to mind; so if you’re serious about this, it will have to come with a Pareto-neutral transition path to gather the pieces together. My favorite position in this regard is Paul Davidson’s who has argued that our economy is “monetary/legal,” with contracts as important as bargaining. \
        So, we have a ‘goal’ problem of subdividing the polity, and the ‘transition’ problem of unwinding contracts, plus the ‘old fashioned’ idea of the divine sovereign few people still believe in..Just, my point really is this is an ancient debate; and national legal systems differ over it. In the US we have mineral rights, in Poland, state ownership of everything below a meter of soil. For developing countries with the latter system, provided the govt. is Aristotelian (honest), this works fine. Iraq owned all its natural resources in successive constitutions, up to the present one, but the issue was always problematic, the revenues not always used for the public good, etc.
        So neither solution really works; and we are left with marginal reforms in either case.

  3. Bill Ellis said:

    Righteous. In a great way.

  4. Good post, but how might your land tax affect land in areas where land is already scarce and expensive? If you want to end the compulsion for Americans to buy houses as a means of investment, wouldn’t this create an environment where the American dream becomes completely tethered to suburbanism?

      • Alright I got it. I’m not a student of economics, but I am interested in the subject so a lot of this information was new to me. I initially read your argument to mean that the tax burden will shift on those who make more extensive use of their land.

  5. “engenders a despondence among the lower classes,”

    nope doesn’t matter. that just encourages lower classes to feel despondent.

    Inequality is measured CATEGORICALLY in time series.

    How long does it take the lower classes to get the technology benefits that the rich have.

    if it takes 20 years to diffuse technology vs. 5 years – in EVERY situation the 5 year society has less inequality.

    Nominal wealth has nothing to do with it. How fast do the poor get new tech?

    This should help you rethink your assumptions – it change show you structure society.

    If anything you do slows down tech development or diffusion, it is bad news.

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  7. Basically crystallized everything I think about taxation into one page here. Great job. But I have had my doubts over the consumption tax in the form of a payroll tax (obviously normal consumption tax would be too regressive so cannot be levied) because of the fact that too many people would subvert the process through capital gains like the PE guys do right now. Opinion? And are you saying that apart from oil, you would also nationalize all minerals and raw metals/ores?

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