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Free Liberal: Coordinating towards higher values

Free Liberal

Coordinating towards higher values

Who really ends up the bailout tax dollars?

Landowners Indulged with Trillion-Dollar Subsidy

by Fred E. Foldvary

If there were ever any doubt that government is instituted by the landowners for the landowners and of the landowners, the trillion dollar subsidy being granted to landowners should confirm the proposition. It should show this, but it will not. People don’t learn from history, and when they do, they learn the wrong lessons.

Having already stepped in with hundreds of billions of dollars to save firms such as AIG and to ease the losses of landowners, the US federal government is about to spend another $700 billion to buy delinquent mortgages, to bail out the lenders and some of the borrowers. The wrong lesson that politicians, government chiefs, and even economists are learning is that there was insufficient regulation. We hear from candidates and Congressional chiefs that the free market failed, that a lack of regulations resulted in markets gone wild.

The thinking is wrong because first of all the vocabulary is misleading. The central issue is not regulation, but intervention. This linguistic confusion is deliberate. You will never hear a politician say that there was too little government intervention.

Intervention includes taxation, subsidies, and restrictions on peaceful and honest human action. The politicians who cry that there was no regulation seem to think that the Securities and Exchange Commission, the Federal Reserve, the Treasury Department, the Department of Housing, and the state agencies that regulate insurance companies, all do not exist.

The bigger interventions are punitive taxes and giveaway subsidies. Taxes on labor, enterprise, and goods create a social waste called an “excess burden” or “deadweight loss.” Subsidies also create a deadweight loss because the tax cost is always greater than the gain in well being. By reducing the cost of an item, the subsidy gets folks to buy or use it who would not obtain it at the higher market price, so resources become misallocated, going from more valued to less valued uses.

World-wide, the greatest government intervention is on land value. It is mostly an implicit subsidy, in the form of civic goods and services that make land more valuable. Most of taxation today ultimately falls on wages. A sales tax paid from wages is a tax on wages. The tenant-worker gets double billed, paying both a tax and higher rent. The landowner gets subsidized.

The business cycle is caused by the real estate cycle. During a speculative land boom, rising land values choke off investment in construction and durable goods, which creates unemployment and recession. The only way to eliminate the real estate and business cycles is to eliminate the land-value subsidy. Do that by tapping most of the site values or land rent for public revenue, while replacing punitive taxation.

But you will seldom, if ever, see any editorial in a major newspaper or magazine, or even any article in academic journals (other than the American Journal of Economics and Sociology) that explains how the land subsidy creates financial panics and economic recessions. “Free market” publications, other than Georgist or geoist, have also refused to publish such articles, as they don’t wish to irritate their landed sponsors. There is intellectual dishonesty and willful ignorance in the mass media and even among scholars about the role of land in the economy.

Professor Mason Gaffney uncovered the cause of this refusal to recognize the land problem in his chapter “Neo-classical Economics as a Stratagem against Henry George” in The Corruption of Economics. The corruption in economic thinking is so strong that no economic textbook mentions the capitalization of civic goods into land value. The use of site rents or land value for public revenue is usually ignored, and when it is mentioned, it is almost always criticized as impractical and insufficient. The role of land or real estate in business cycles is never mentioned.

And so not just the public and politicians but also scholars will not learn the lesson that the subsidy of land values, combined with financial manipulation by monetary authorities, creates a boom-bust cycle. The $700 billion mortgage rescue, on top of several hundred billion spent to bail out financial and real estate interests, is in essence another subsidy to landowners. They borrowed heavily to buy land, hoping that the land value would rise and make them rich, and now that land values have fallen instead, the taxpayers will take the loss.

The economy will recover and land values will rise again, just as they always have after each collapse. The 18-year cycle will continue, and the next financial waterfall will occur in 2026. The difference is that by 2020 the US government debt will be so sky-high that T-bills will no longer be super-safe, and in the financial panic of 2026, the government will suspend paying interest on its debt.

The gigantic subsidy to real estate is ultimately based on the unlimited borrowing power of the government. When borrowing power disappears, landowners will finally be left in ruins. But the previous landowners will have had the biggest party in global history.

This article first appeared in the Progress Report, www.progress.org. Reprinted with permission.

Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.


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Comments

Your logic holds if the mortgage holders are considered the true land owners, rather than the tenants paying the mortgage.

I am also unclear as to where the bailout money is coming from. Will it be appropriated or printed? If it is merely printed, eventually those who lend money to the United States will take notice and devalue the currency further.

In 2026, there may not be any national debt - then again, there may not be a separate American nation. It will either be sold at a fire sale by then or subsumed into a larger Allied federal state.

In a bit more than two years, the tax cuts enacted in 2001 reducing tax rates and the dividend rate ruts of 2003 will expire. Frankly, I am surprised that given the political landscape, George W. Bush did not work out a compromise tax bill. Over the next two years, something will be enacted, even if only voted for by Democrats - although it is likely there will be some compromise in both Congress and (if McCain is elected) from the White House. Regardless of how you feel about the equity or effects on the economy of this situation, it will reduce the deficit and eventually eliminate the debt. It would take a lot for the same snake oil that Reagan and Bush II used to be viable again, especially after this year.

Income taxes are easy to collect, despite any of the economic effects you posit in "deadweight loss" while an LVT that requires that a check be written may not be so easy to collect. Those who hold a mortgage will be easier to collect from, but I suspect that the vast majority of landholders do not fall into that category, at least not the ones targeted by the tax. Please explain how the LVT will not invite resistence. Further, an LVT may function like a sin tax - the rate will be set to bring in revenue but never high enough to extract the full value - just as sin taxes will never be high enough to drive distribution of tobacco and alcohol underground (note that they will never be successful in eliminating their use - although hypothetically if they did it would have the same effect on tax revenue - elimination).

There are tax reform possibilities that will likely come forth in the next year - however, I do not believe that an LVT will be one of them. Likely the preferred method will be a VAT with a residual income tax on income over $50K (or possibly $100K - with $100K as either the family levy or the individual levy with no family aggregation (meaning if your spouse does not make over a certain amount, you do not pay taxes on that income). Tax benefits that redistribute to families (EITC, VAT prebate) will come out of either payroll taxes or a business income tax replacing them and some of the lower rate income taxes proposed by others. One option is to broaden the base of the corporate income tax to have all forms of ownership pay and to include wages as a taxable item (since for 80% of workers they won't be taxed - therefore the deduction does not make sense). This tax would fund any health care tax credit or levy (covering both a refundable tax credit to buy insurance and or a medical savings account or to fund single payer insurance, as well as a mortgage deducion or capped credit, as well as credits for charitable contributions, which can be expanded to privatize education, corrections/mental health and adult remedial education - with stipends). The latter deduction would be taken on state business income taxes, rather than the federal portion. The tax rate could be set so that no employer actually pays it - but instead pays a living wage, provides no interest mortgages and health care, as well as funding contributions to private providers of social welfare services rather than the state. ASSUMING that such a business income tax would be enacted but not collected, where would the deadweight be? Granted, you may not like that certain costs are mandated to be paid by employers, however given the assymetric nature of most employment contracts and the alternative that government provide these services from land value (which mimics a feudal benefice from vassal to lord - and on up the line to the king), I think what I propose has a lot to go for it.

# posted at by Xianleftist_Michael [TypeKey Profile Page]

Xianleftist_Michael,
Your post is a compendium of straw men, faulty generalizations, false analogies, and incomprehensible ramblings.
First off,
When did Dr. Foldvary argue that the land value tax would "not invite resistance"? All taxes invite resistance from those paying them, and I've never heard Dr. Foldvary deny it.
Second,
You argue that income taxes are "easy to collect". Easier, it would seem, than land taxes. How so? Even when people do not try to evade income taxes, the cost of complying with them (in terms of paperwork, IRS operating expenses, and the not inconsiderable deadweight losses) equal over a third of the revenue actually collected. This is not efficient, and a VAT would be inefficient for similar reasons.
Third, and most egregiously,
You compare the LVT to a feudal benefice. To be perfectly, one can level the charge of "feudal" at most taxes. The income tax has an early ancestor in the French Vintigniemes
and one of the earlier European death taxes was usually collected by German princes. These comparisons, of course, say nothiing about the relative merits of these systems of taxation for revenue collection, which is why your red herring about feudal benefices is irrelevant.


# posted at by engineer

"Where would the deadweight be"
The government costs imposed by taxation would still exist, even if they were paid implicitly through conforming to government mandates rather than explicitly through taxes, and would thus be reflected in the incentives of businesses and individuals to save and invest.

# posted at by economist

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