by Lindy Davies
In recent months we have seen a number of positive references to rent-as-revenue in the news. These recommendations haven’t made “page one,” of course; the first-string media in this day and age is all caught up in the modern madness of “the news cycle” — beating all the other outlets to the same item (often enough, the latest antics of Sheen or Lohan). Not so far under the surface, though, unmistakable currents of common sense are rising.
The issue of US government debt has certainly been on the front burner. At this writing, Republicans in Congress are threatening a government shutdown over the debt-and-spending issue. More sensibly, however, Nobel Laureate Joseph Stiglitz has issued a paper on deficit reduction, published by the Roosevelt Institute, outlining a strategy that incorporates (as any sensible strategy would) a healthy dose of land value taxation. Stiglitz begins by setting two essential policy conditions: 1) that only deficit-reduction proposals that increase equity and efficiency should be considered, and 2) the long-term national debt is far more important than the short- term deficit. These two conditions depend on each other, because in a deep recession, a sharp drop in government spending can have very bad economic consequences (can reduce equity and efficiency, in other words), despite the fact that revenues are down.
The basic principles that Stiglitz sets down for debt reduction are music to progressive ears, and not at all disharmonious to Georgists. He writes that we need “public investments that increase tax revenues by more than enough to pay back the principle plus interest [to] reduce long-run deficits,” and “It is better to tax bad things (like pollution) than good things (like work).” He affirms the connection between economic recovery and environmental sustainability, and notes that putting an end to corporate welfare, and ending the regressive Bush tax cuts, would be steps in the right direction. He also observes that give-aways of public assets, and privatization of public services, can offer only meager reductions in short-term deficits, while in many cases increasing long-term debt.
Turning to the revenue side, Stiglitz condemns “supply-side” tax cuts for the wealthy and for corporations, and has no praise for the “fair tax” (a proposed national sales or value-added tax). Instead, he recommends tax reform utilizing the “generalized Henry George principle” to discourage real estate speculation:
One of the general principles of taxation is that one should tax factors that are inelastic in supply, since there are no adverse supply side effects. Land does not disappear when it is taxed. Henry George, a great progressive of the late nineteenth century argued, partly on this basis, for a land tax. It is ironic that rather than following this dictum, the United States has been doing just the opposite through its preferential treatment of capital gains.
Going even further, Stiglitz notes that utilizing the “polluter-pays principle” yields a result that is better than neutral, because it discourages actions that yield negative externalities. (He could have said the same thing about LVT, but we’ll forgive him that omission.)
After discussing a number of rather technical fixes that could improve efficiency and cut into the rent-seeking of financial institutions, Stiglitz reminds us of the outlandishly high level of resources devoted to the US military: “America could obtain more security at lower cost. Even the Defense Department has recognized that there can be significant reductions in defense expenditures.” In the final analysis, Stiglitz urges us not to isolate the issue of “deficit reduction,” but rather to pursue policies that reduce the long-term debt by creating a healthier economy.
Another prominent economist, James K. Galbraith, said some highly sensible things in his March 8th appearance before the US Senate’s Finance Committee hearing on efficient tax reform. He began by heartily agreeing with Stiglitz’s assessment of the short-term deficit, saying that it is “an economic outcome, not a policy choice. So long as the economy faces high unemployment, there is no fiscal formula — no combination of tax increases and spending cuts — that can make it go away.”
Although Galbraith praised the tax code simplification that was accomplished in the Reagan-era Tax Reform Act, he noted that the Act had two huge consequences that led up to our current financial mess. First, by reducing rates on corporate executive pay, it allowed companies to drastically increase executive salaries, leading to the absurd levels of executive pay that we see today. And, by disallowing tax deductibility for all interest payments except those on mortgages, it greatly encouraged the collateralization of real estate values, which led to the many opportunistic rent-grabs that we have seen unravel in the last few years.
Galbraith criticized both the sharp increase, in 1983, of the payroll tax — which penalized job creation — and the campaign against the estate tax. Relatively high taxes on large inheritances have led, among other things, to a robust nonprofit sector in the US that provides 8% of all employment.
The thing Georgists are standing up and cheering about, however, is Galbraith’s contention that we really ought to start taxing rent. He cites with approval Mason Gaffney’s analysis of the financial crisis, quoting Gaffney, “The key to making jobs is changing the use and form of capital we already have. Tax preferences for property income, in their present and proposed forms, bias investors against using capital to make jobs, doing more harm than good.” That’s hard to argue with, and indeed Galbraith expands on it:
[A]s a general rule fixed assets — notably land — should be taxed more heavily than income. The tax on property is a good tax, provided it is designed to fall as heavily as possible on economic rents. This basic argument, going back to Ricardo, remains sensible, for it aims to not- interfere where there is, in fact, no public purpose to interfere with private decision-taking. Payroll taxes and profits taxes do interfere directly with current business decisions. Taxes effectively aimed at economic rent, including land rent and mineral rents, and at “absentee landlords” as Veblen called them, do not.
Beyond these blockbusters, there have been a few more quite significant mentions in the recent press. Our own Dan Sullivan was interviewed by the Pittsburgh Post-Gazette on public transit issues, and his online essay, “Private Railroads and Plunder” was referenced and linked. Scott Baker notes that University of Illinois economist Michael Pagano weighs in, in a New York Times debate on March 28th, to recommend LVT as a remedy for urban blight.
Finally, in addition to Garrison Keillor’s engagingly accurate description of the true history of Monopoly in his Writer’s Almanac, Cecil Adams’s popular syndicated column, The Straight Dope, offered a more irreverent version of the same story on March 18th, and Edward Tenner offered yet another version, titled “Monopoly’s Open-Source Heritage” in The Atlantic on March 21st.