What Gets Taxed Matters As Much As How Much
by Fred E. Foldvary
Several U.S. states are depleted of funds, and are not paying their bills. They are delaying paying back tax refunds. Over 40 of the states have deficits and are unable to pay their bills promptly. In some states, cutbacks on staff are contributing to delays.
The delays are not just a problem for those who are waiting for their refunds. Many of the states have to pay interest on late refunds after the closing date. But paying wages and debt service take priority over the refunds. Taxpayers are last in line.
The U.S. and state income tax day, April 15, is coming up, and many taxpayers who overpaid in the past will be anxious about their money, since the state now has their money. Many workers, seeing that they overpaid and are not being repaid promptly, will reduce their tax withholding for this year, making the state deficits that much larger.
The states are in fiscal problem for several reasons. First, with the depressed economy, they are getting less tax revenues, and secondly, they did not previously save money for the rainy days that are now here. It is a good financial practice for a household to save funds so that in case of need, they will have the savings. But many governments fail to have a reserve account. The political pressure is to spend all they money they get, and then spend some more.
The main reason for the fiscal problems of the states as well as the federal government is that the entire public finance system has been erected on a faulty foundation. The fiscal house has been built on sand instead of rock. When the rains come down and the floods come up, the wise man who has built on rock will see his house stand firm, while the foolish man who builds on sand will see his house come tumbling down.
The rock is land. The sand is human action. Build your tax house on the backs of human actions, and many actors will flee, hide, and shrink. Which would you do if the taxman came after you flicking a whip? Some folks are masochists who seemingly enjoy the pain of being fleeced, while others have learned to love big brother. But most folks are pain averse.
Despite high taxes, some folks stay rich, because government also gives money back. Some of this giveback is visible, such as for example, farm subsidies. But most of the giveback is implicit. It is not in the form of money, but of asset value. I’m talking about land. The public goods and services provided by government, the ones that folks like, make locations more productive and attractive, so the demand to be there goes up. And so does rent and land value.
Government returns trillions of dollars per year to landowners as land rent and site value generated by its services as well as by economic progress. Speculators jump in to capture the increase, and they make land prices go up even more, until they rise too high, and collapse.
If we want to build our fiscal house upon the rock, you must tax most of the land rent or land value. Private communities such as condominiums, homeowner associations, and mobile home parks, collect the rent contractually, as they operate in the market and cannot impose taxes on goods and incomes. But governments are empowered to use force, and where they see money moving, they recognize an “ability to pay,” and so they extract some of it.
When the tax is on land value, the land will not run away. It cannot hide. And land will not shrink when the rent is tapped. Rent is a pure surplus, the free lunch that some economists claim cannot exist. Rather than shrink, tapping the land rent for public revenue actually makes the rent grow, as the tax is based on the best use of land, and those who waste land will have to pay as though they were maximizing the rent.
When rent is tapped for public revenue, the blessings will come down as the rent goes up. Because labor, enterprise, and goods are free of taxes, the economy will flourish, rent will gush up, and the state will be embarrassed in being flooded with too much revenue. Folks will want the money given to them directly as rent dividends. Resident dividends will compete with public services, pushing the government to be efficient. There need be no more budget deficits, and there will not be any tax rebates. If a landowner thinks his tax bill is too high, he can appeal, and then if he wins, he only pays what is due, no more.
The delays by the states in paying back the tax refunds are a sign of fiscal sickness, and the source of the fiscal disease is the taxation of human action rather than mother nature’s rent surplus. Little children learn in Sunday school to build their house upon the rock, but adults forget this and keep electing governments that build their fiscal house upon the sand. The houses are now tumbling down. Why are so many people still acting like the foolish man?
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.