Thursday, 17 January 2013

X. Semi-literate Faux Libertarian arguments

When I say "semi-literate" what I mean is that they have read stuff but not understood it. I use the expression Faux Libertarian to mean people who don't believe in economic liberty; they grasp that it's not good if 'the state' takes half your earnings in tax, but don't understand that land ownership and the nation-state are synonymous, you cannot have one without the other. So any money you pay to rent or buy land is in fact a privately collected tax.

• Even Karl Marx said that LVT wouldn’t work (skip to article)
• Karl Marx later conceded that LVT would work (skip to article)
• Ricardo's law only applies to agricultural economies

 (skip to article)
• We are no longer a land-based economy (skip to article)
• With the internet, locations are no longer so important (skip to article)
• All taxes are equally bad. Private individuals spend money more efficiently than the government. (skip to article)

1. "Even Karl Marx said that LVT wouldn’t work"

This much is true, see here: "{land Value Tax] is a frank expression of the hatred which the industrial capitalist dedicates to the landed proprietor, who seems to him a useless and superfluous element in the general total of bourgeois production.”

Which is a fair summary, apart from the fact that the landed proprietor is useless and superfluous from the point of view of the worker as well, the interests of employee ('worker') and employer ('industrial capitalist') are very closely aligned, there is no absolute dividing line between the two (UK pension funds hold a lot of shares, so to a large extent albeit very indirectly, UK businesses are worker-owned. It's just that the people in the City of London are paying themselves handsomely to shuffle bits of paper round.

Nonetheless, the Faux Lib's like to misinterpret this to imply that even Marx thought that LVT was going too far, i.e. that LVT is even worse than Marxism (whatever that is).

2. "Karl Marx later conceded that LVT would work"

Rather embarrassingly for all concerned, Marx later dropped some of his antagonism towards the "industrial capitalist" (recognising that in a free market his profits would be competed away) and said that actually it was only landowners who had unearned or undeserved gains.

In which case the Faux Lib's will trumpet - you see! Karl Marx thought it LVT was a good idea, therefore LVT is Marxist and therefore bad!

3. "Ricardo's law only applies to agricultural economies"



You can read up on Ricardo's Law of Rent at Wiki.

a) It is usually explained in terms of farmland, because that is easiest to understand, although Ricardo himself used the law to explain rent differentials for urban/developed land.

b) The average wages of a landless worker will tend to be much the same anywhere in the country because there is free movement within the country so wage differentials quickly get competed away. Those wages will tend towards just enough to pay for the bare minimum, any lower and workers would revolt, turn to crime, starve or emigrate. Let's call it £10 per year. Assuming one worker per field (to save faffing about with units), if a field will produce £11's worth of crops, the landowner keeps £1 for himself. If the field will produce £12's worth of crops, the landowner keeps £2 for himself and so on.

c) If a worker wants to become self-employed and rent his own field, the rent which the landowner charges will be the same as the net value he could keep from employing somebody. So the rent for a field which will produce £11's worth of crops is £1, the rent for a field which will produce £12's worth is £2 and so on.

So far so good.

d) Ricardo (and Adam Smith when he was still radical) both concluded that if the rental value is taxed, it does not deter production and does not depress wages. From the point of view of the self-employed worker, it makes no difference whether he pays £1 in rent or £1 in tax, that is just money that goes up to the higher authority. If the owner of a field yielding £13 per acre has to pay £3 tax, then he cannot leave the field fallow and he cannot demand a rent that is higher than £3, because that would push the self-employed worker's income down to less than £10 and he would go elsewhere, starve, emigrate etc.

e) We know perfectly well that we have had towns and cities for thousands of years, and the great cities of the past were either administrative centres, wherever the king or emperor or pharoah happened to live, and also trading hubs. And we know that land was much more expensive in cities than out in the countryside because buildings are packed much more tightly together and plot sizes are much smaller. A Roman nobleman in the countryside would have a villa surrounded by a huge garden; a Roman nobleman in Rome would probably have a villa with a small courtyard. So rental values were always higher in urban centres than in the countryside and Ricardo and Adam Smith knew that as well. Adam Smith made it quite clear that the rental value of urban land was the most suitable subject for taxation, and he appeared to be in two minds about taxing farm land.

4. "We are no longer a land-based economy"

(They sometimes phrase this as: "We do not understand your obsession with land, land isn't important in a modern economy, therefore what's the point in taxing rental values?". This is the same mistake as Karl Marx originally made (see above), and equal and opposite to the Homey arguments in Section O, which are that the selling price of land represents real wealth or capital and that taxing it would destroy wealth or capital. As usual, both arguments are wrong and cancel each other out anyway.)

Wrong.

a) We are not an agricultural economy (even though the UK is or could be more or less self-sufficient in food), less than one per cent of the population are in farming; farm gate prices only amount to less than one per cent of GDP and the total rental value of all UK farmland/buildings is less than one per cent of the total rental value of urban/developed land and buildings. Those are just facts.

b) But everything is land-based, we use land for houses, roads, offices, shops, radio transmitter masts etc. Some people live in house boats, but these still have to be moored somewhere, they still need land/location, and all that separates them from the land is a few feet of water. We are just as much a land-based economy as we ever were and always will be (until we all live in hot air balloons or spaceships or something).

c) Ricardo's law of rent is still easily observable today. There are differentials between average incomes (before housing costs) in different parts of the UK (or any other country for that matter) but most or all of the differential goes into higher rents, even The Daily Mail reports this regularly. A typical private sector worker (hairdresser, receptionist, bus driver, shop worker) can increase his or her income before rent by (say) £5,000 moving from a low wage area to London, but will end up paying £5,000 more in rent. So after housing costs (actual or notional), net household incomes are pretty much the same everywhere in the country, I refer to another article in The Daily Mail which reports exactly this effect.

d) So the analogy with farming is this: if the "yield" from a job in a low-yield area is £11, then the rent is £1, and if the yield is £15 in a high-yield area, then the rent is £5, and true net wages after housing costs are more or less the same everywhere. In a roundabout sort of way, Ricardo's Law of Rent is exactly the same as the estate agent's mantra: "Location, location, location".

e0 The countervailing force which prevents 100% of any growth in the economy going into higher rents is that over time, people also have a higher expectation of what the basic minimum is; if they get less than that they will not exactly starve, but they will revolt, strike, emigrate or turn to crime. So with the farming example, if some new technique is invented which increases the yield of all fields by ten percent, then wages (or the net profit of a self-employed worker) will creep up a bit, from £10 to £11, but mathematically, rents will still take a slightly larger slice of the whole cake.

5. "With the internet, locations are no longer so important"

a) People sometimes show how little they understand by throwing this into the mix. The internet is merely a great way of communicating, but you could have said the same thing when they invented writing and the messenger boy or the carrier pigeon, or the telegraph, radio, telephone or fax. The differentials in rental values between the city centre, the suburbs and farm land; between nice and grotty areas; between high wage and low wage areas; between plots with restrictive and with less restrictive planning permission will always be there.

b) Whatever you do over the internet, it still requires land to hold the cables (or the WiFi transmitters), goods sold over eBay and Amazon still have to be manufactured somewhere and delivered from warehouses somewhere to shops or homes somewhere else. We can safely assume that the Internet increases our productive capacity and therefore the total rental value of UK land. Houses with broadband sell or rent for more than houses with only sporadic 3G reception; and those sell or rent for more than ones without either, or without even a telephone line. Conversely, rents on the High Street might have fallen a bit because a lot of people shop online. But the rents for factories and warehouses are unaffected.

c) At this stage, the Faux Lib's like to throw in a diagonal comparison and say: "But with LVT, a best-selling author would be able to live in a remote croft, email his books to his publisher, and not pay any tax; he'll pay less tax than the printer with a printing shop in an urban area who prints his books." Well yes of course, but that's his good fortune and a stupid comparison. Surely it is more relevant to compare a best-selling author in a remote croft with one in a swanky mansion? Or compare a printer with a good site on the high street (with lots of passing trade and extra customers) with one in a back street or out of town industrial estate who has to spend more money on advertising and marketing?

Also please note...

The traditional system of taxing profits and transactions doesn't really work with internet based businesses. They can circumvent many of the old rules and concepts dictating what will be taxed in which country, which gives them an unfair advantage over. So to level that particular playing field, taxes on output and profits and so on have to be reduced for all businesses.

But internet businesses need land the same as anybody else. Amazon and other internet retailers have their warehouses and delivery depots. Google, Facebook and Microsoft have massive offices, usually in expensive central locations. All their employees, directors and shareholders have to live somewhere. So the more that business takes place over the internet, the more important is is to collect revenue from the rental value of land instead of trying to collect taxes from turnover and profits in a most haphazard and damaging fashion.

6. "All taxes are equally bad. Private individuals spend money more efficiently than the government."

(LVT is demonstrably a much better tax than any other, because it has no dead weight costs, keeps land prices low and stable, cheap to assess and collect, is morally justifiable and so on, but glossing over all that...)

Well let's assume they are, that's the whole point, but first you have to understand what taxes are.

a) All money which changes hands with regards to land (be that rent, mortgage interest or selling prices) is, from the point of view of the payer, absolutely no different to a tax; and LVT is absolutely no different in its impact on the "owner" than is a 100%, interest-only, non-payable, non-recourse mortgage.

b) It is all just money paid up to a higher authority in exchange for exclusive possession of land (protected by the nation-state). If we cut out the land owning middleman (who in turn can only claim ownership with the protection of the nation-state) and a local council rents somewhere to the occupant, then it makes no difference whether we call that payment "rent" or "LVT".

c) Let's assume a kleptocratic government which collects LVT and spends nearly all of it on keeping itself in luxury; how is that any different from a landlord or banker collecting rent and half the mortgage mortgage interest (the other half goes to depositors) and living in luxury? And as terribly wasteful as the UK government is (about a third of our tax money is stolen), well at least two-thirds is spent on things which benefit the general public. How much does a landlord spend on things which benefit the public? Clearly a negative amount, as the subsidies he receives exceed the tax he pays; the net balance is his rent. This is the same as the observation that public sector workers don't actually pay income tax; whether they have a headline wage of £25,000 with £6,000 PAYE deducted, or get paid £19,000 tax-free makes absolutely no difference to anything.

d) So there is a bare irreducible minimum of taxes which will always be collected or enjoyed or consumed privately. Intellectually, it is an easy exercise to get rid of taxes on earnings and cut public spending accordingly, but all that happens is that a larger share would go in privately collected taxes i.e. rents, which is only of benefit to a minority. So if you really are a low tax person, the absolute bare minimum tax is a 100% tax rate on rental values; we get more benefit out of taxing rents than we do by not taxing them at all. For while individuals are best at spending money on themselves (smaller scale stuff), it is the whole nation which best decides how to spend national wealth on the whole nation (via some messy democratic compromise, and most people will always disagree with many items of public spending, as indeed do I).

e) And yes, on the whole and with small-scale things, of course people spend their own money more wisely than the government, because they know exactly what they want and they shop around. Which doesn't answer the question of how public goods (the core functions of the state: law and order, defence, roads, refuse collection etc) would be paid for without an element of compulsion.

f) Now, as long as people are spending their own earnings on themselves, that is fine (because the harder money is to earn, the more carefully you spend it). But common sense tells us that a government which collects rents will pay for the core functions first, and then spend it on merit goods (health, education) and pensions and welfare payments (which is nothing more than a tax rebate) and then spend some on itself. But if they get too greedy, at least we can kick them out (in theory rather than in practice).

g) But if you allow private individuals to collect the rents, then they will spend all of it on themselves, so the government then has to introduce taxes on earnings to cover the cost of the core functions; this damages the economy and causes poverty, so they have to increase the rates to pay for a welfare system and so on and so forth.

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