Free Liberal

Coordinating towards higher values

Predistribution Awaits Our Use

Redistribution -- an Unnecessary Evil

by Fred E. Foldvary

Almost everybody now favors the redistribution of income and wealth by the state. Even most free-market libertarians are in favor of implicit redistribution, the increase in land rent and land value due to state-provided public goods not paid for by the landowners, amounting to a forced redistribution of wealth from tenant-workers to landowners.

Redistribution takes place when the state forcibly takes wealth from one group of persons and transfers the wealth to another group. If we look around the world today, the main activity and justification for state governments is redistribution.

The concept of redistributing wealth from the rich to the poor is rather recent in history. In ancient times, poverty was regarded as an unavoidable fact. The ancients did not have the concept of a moral duty to redistribute wealth to the poor. Charity was favored as a means to avoid social unrest, and as an act of kindness, but not by any right by the poor to the wealth of the rich. The poor were often regarded as deserving to be an underclass due to their laziness, lack of ability, birth in a low caste or class, or from conquest.

The book A Short History of Distributive Justice by Samuel Fleischacker credits Adam Smith with changing social attitudes about poverty. Smith’s landmark book The Wealth of Nations is usually thought of as advocating a free market, which benefits the rich, but in fact Fleischacker points out that the work also was revolutionary in regarding poverty as an evil that should be eradicated.

The American economist and social philosopher Henry George later agreed that, as he says in Social Problems, “There is in nature no reason for poverty.” Contrary to the conservative view that poverty is the natural condition of humanity, George argued that wealth is the natural condition if everybody equally shares the benefits of nature. Poverty is caused by first depriving people of their share of natural benefits, and then forcibly taking away much of their gains from labor.

Smith advocated the elimination of restrictions on labor and enterprise as well as the taxation of ground rent. Taxing ground rent is both efficient and equitable, as paying back the land value created by governmental public goods. Since most land value is held by the rich, taxing land rent reduces the inequality of wealth.

Free-market advocates look to Smith for free trade, but they ignore his call for the use of ground rent for public revenue. Welfare-state “liberals” today also ignore the call by Smith and George to use ground rent for public revenue. Taxing land rent or land value is not redistribution. Henry George added a moral dimension to Smith’s argument for land-value taxation. As George argued, the benefits of natural resources belong to humanity in equal shares. Thus the taxation of land value is not redistribution but the proper initial distribution.

Today all governments engage in a double redistribution. First, they redistribute wealth from relatively poor workers and tenants by taxing their wages and providing public goods that pump up the land rent and land value of the rich. Fred Harrison in his video “Ricardo's Law: The Great Tax Clawback Scam” shows how the taxes paid by the rich are given back to them in the form of rent and land value. A “clawback” means getting back what was taken.

This double redistribution -- transferring wealth from the rich to the poor by taxation, and then transferring the wealth back via land rent -- creates a colossal excess burden on the economy. If the land rent is directly taxed, there is no deadweight loss, because land cannot hide, shrink, or flee when taxed. But by taxing profits, wages, and goods which can hide, shrink, and flee, taxation creates a misallocation of resources, reducing production and growth. Because of taxation, goods become more expensive and profits are reduced. It is a disturbance in the economic space-time continuum! The distortions show up as inflation, unemployment, depressions, pollution, and poverty.

Redistribution would not be necessary if we had the proper initial distribution of income in the first place. Because we do not have the proper distribution, we have redistribution, which is evil first by forcibly taking away wages that properly belong to the worker, secondly by perpetuating unnecessary poverty, and third by depriving people of their share of the natural bounty.

The political trend now is towards ever greater redistribution, such as in the USA with the movement towards greater governmental provision of medical services. The coming high inflation will redistribute wealth from creditors to borrowers, and politics in general redistributes from the general public to special interests such as lawyers, unions, and the chiefs of corporations. Redistribution amounts to massive theft, as various groups steal wealth from one another. Redistribution is evil, unnecessary, and will ultimately be the death of civilization.

This article first appeared in the Progress Report, 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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Why not simply tax consumption rather than land? The so-called "Fair Tax", or some derivative of it, is a progressive tax on the consumption of goods and services. The proposed Fair Tax, as it stands, will also provide a built in buffer against poverty by providing EVERYONE with a "prebate" or credit from the federal government up to the "poverty level" to be used to buy basic necessities like food. Even better, tourists and "illegal" residents of this country will also pay our taxes for us because the tax is based upon consumption. Face it, the truly "wealthy" by-and-large, don't even have high incomes (i.e. taxable income vulnerable to payroll taxes). The truly wealthy will, however, pay their "fair share" taxes if they want to buy large boats and expensive gimcracks and doodads to support a wealth lifestyle...the tax is on consumption. AND, here's the key there is nothing forced or redistributive about it...if you want something you pay taxes on it, if you don't want to pay taxes, don't buy it. You know, FREEDOM OF CHOICE.

# posted at by Norbert

Norbert asks, why not tax consumption. Read my article again. By making godos more expensive, taxing consumption creates a deadweight loss, a waste and misalllocation of resources. Taxing land value has no deadweight loss. If one is forced to pay a tax to buy goods, it violates free trade, and the public goods paid for by taxes subsidizes landowners. Why prefer a tax with a DWL to one that has not DWL?

I agree with shifting taxation from labor, capital, and trade, to LVT and Pigovian taxes, but since the elderly tend to hold more land value than the young (and tend to vote in much greater numbers), what would be the best way to accomplish such a shift with the minimum amount of fuss? With those actually earning income, shifting income taxes to land value taxes is probably easier than telling someone on Social Security that they now have to pay higher taxes on a valuable lot they bought in the 1960's.

Moving the vast majority of taxes from improvements to land (something like in Harrisburg, PA, where land is taxed at a higher rate than improvements) would get the tax code partway there, and it should be fairly straightforward to have land value withholding taken out of paychecks like we do with income taxes (while shifting taxation from income to land in the process), but there is still a gap with a vocal group of voters on pensions and fixed incomes, as well as those who speculate or "invest" in land.

Finally, at what rate do we tax land? We don't want it abandoned, and it might be difficult to tax it at 100% of rental value, so 90%? 95%? Some other figure?

# posted at by Michael

I'm against increasing the costs of godos as much as the next guy. We should nevr forget how we taxed their less mobile cousin the dodo right out of existence.

But there are practical problems with a land tax that are not easy to overcome. How does one value land when there is no market to determine its price? Land is often held for long periods of time and its value is seldom comparable even to a lot it borders.

Appraising by government agents is at best a rough approximation. History has already proven that it is a process readily open to corruption and abuse. It is in fact almost impossible to appraise land without the local political structure applying pressure, even if it is just perceived or implied.

There is an attachment to land that has remained within families for generations since the founding of the country. Are we ready to force these families to sell to the wealthy who can afford the increased costs of holding land? I'm not sure about where you live, but up here in Appalachia there is going to have to be forced evictions with gunfire and people being killed on their own land.

We can also consult Roman History as to what happens when land is concentrated in the hands of the wealthy. After the Punic Wars slaughtered the yeoman farmers who served in the Legions, and bankrupted the others who were off at war instead of tending to their farms, the wealthy built up huge tracts of land and forced most Roman citizens into either becoming tenants or landless poor.

The wealthy did what comes natural which is to use their power over government to reduce and eliminate taxation on themselves, leaving the burden on the less powerful.

The impoverished mob than became a potent weapon to be bought off and used in the various endless intrigues of one wealthy family or another.

This is a story that has been repeated over and over throughout history.

I applaud any effort that first of all reduces taxation, but secondly shifts the tax burden onto the wealthy and off of the productive. I also acknowledge that every form of taxation has serious implementation problems. But I would be hesitant to support a land tax unless a great deal of consideration had gone into the total costs of the plan including its effects on land ownership, citizenship and the long term prognosis for Liberty.

# posted at by Anonymous

I never post anonymously. I'm not sure why the above post didn't have my name on it. Maybe something to do with my one year old helping me format.

# posted at by Morgan

Most Free Market Libertarians favor Taxes? Did I read that right? I guess most pro-lifers support abortion rights, most Christians are Jewish *and* Atheist, and Most Females have Y

The author probably meant Most Formerly Free-Market Libertarians. If so, pray-tell, and name-names! :)

Also, the author is correct that Adam Smith was not an anarchist, but saying that Smith's belief that free-trade was responsible for the wealth of nations (and thus, for the amelioration of the povery of their inhabitants) doesn't make him a Kennedy.

# posted at by Z