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.

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.