The world according to GRP — Wednesday, January 24, 2007:

Socialism by individual choice

How to socialize the economy's commanding heights without opposition

by a Non-Socialist

Version 2007.01.24

Summary

What assets constitute the "commanding heights" of the economy? What would happen if every individual or firm that neither owns any such assets, nor leases any such assets unless they are owned by the federal government and leased for full market rent, were exempt from most federal taxes? Answer: If the "commanding heights" are defined as assets that taxpayers can neither create nor bring into the federal taxing jurisdiction, the proposed tax exemption would induce all rational taxpayers to sell their "commanding heights" to the federal government (and in most cases lease them back), because for every such asset there would be a range of prices and conditions for which the sale would be beneficial to both the taxpayer and the government. Thus the commanding heights would be socialized without a fight — in the name of choice and tax relief!

Contents

1.  Benefits of social ownership

1.1  Ownership vs. operation
1.2  Tax vs. rent
1.3  Compliance costs and deadweight costs

2.  Social acquisition of rentable assets

2.1  Impractical proposals
2.2  Rent rights for tax rights

3.  Details

3.1  Enabling legislation
3.2  Protecting revenue
3.3  What are the "commanding heights" of the economy?
3.4  Meaning of "rentable assets"
3.5  Meaning of "listed federal taxes"
3.6  Meaning of "exempt"
3.7  Meaning of "market rents"

4.  A few technicalities

4.1  All taxes fall on (economic) rent
4.2  Implications for sale prices
4.3  Further notes on protecting revenue

5.  Historical inevitability

5.1  Advantages for individuals
5.2  Advantages for enterprises
5.3  Advantages for nation-states
5.4  Political feasibility
5.5  Choice and tax relief vs. the class struggle

6.  Conclusion

Appendix: Mutually acceptable prices for leaseback deals

Author's declaration

Notes

Revision history

1.  Benefits of social ownership

1.1  Ownership vs. operation

The owner of a "means of production" can either (a) operate it himself or (b) let it to the highest bidder and collect the rent. For the owner, option (b) is preferable on three counts. First, it's easier. Second, the competition between potential operators tends to give higher net returns. Third, those returns come in the form that is most easily converted to other forms: cash. So if the owner happens to be the State, option (b) yields greater socialization of benefits as the State spends the rent for the public good or otherwise distributes it among the people.

Implication: The benefits of social ownership of the means of production are just that — benefits of social ownership, not benefits of social operation.

Moreover, if socially owned assets are let to private operators who pay rent, the rent can be used for public revenue in lieu of taxes.

1.2  Tax vs. rent

Indirect taxes obviously feed into prices. Income taxes, although usually called direct, are costs of production and will prevent production unless recovered through prices. So both types of taxes raise prices and therefore increase inflationary pressures, which the central bank counteracts by raising interest rates or otherwise tightening the money supply, causing unemployment, insecure employment, and the associated economic exclusion and inequality.

But the use of rent for public revenue has no such ill effects, because it does nothing to raise prices; the State simply becomes the recipient of some of the prices that already exist in the economy.

1.3  Compliance costs and deadweight costs

In this age of "self-assessment", most taxes impose substantial compliance burdens on the entities (individuals or firms) that pay and/or collect the tax. Both the taxes and their compliance burdens reduce the returns on economic activities, causing some otherwise viable activities to become unviable. The net cost of these lost opportunities is the so-called deadweight cost of taxation.

[Are compliance costs part of deadweight? From the viewpoint of a single taxpaying entity, compliance costs are uncompensated losses. But from the viewpoint of society, compliance costs incurred in cash are part of the income of other entities and are therefore not a net loss (although they still cause a net loss). For this reason, not all compliance burdens can be classified as deadweight, although all are causes of deadweight. This essay treats deadweight as being net of compliance burdens, so that, from the viewpoint of a single entity, deadweight costs and compliance costs are additive.]

The use of rent for public revenue involves no compliance cost, because the payment can be automated and because, even without automation, it is no more difficult to pay rent to the State than to pay rent or mortgage installments to some other entity. Neither does it involve any deadweight cost, because (as already noted) it has no effect on price signals.

2.  Social acquisition of rentable assets

In view of the superiority of rent over taxes, how should the State acquire assets for the purpose of collecting the rent?

2.1  Impractical proposals

The Communist method of acquisition was to seize the assets without compensation. Even if one ignores or rejects the moral arguments against this procedure and considers only the practicalities, one must concede that the intention to exercise power in this way tends to provoke well-funded opposition, which reduces one's chances of obtaining the necessary power in the first place.

The words "without compensation" are not strictly applicable to the case in which the State would charge rent in lieu of taxes, because the total annualized value of the expropriated assets would be the total rent, which would indeed be compensated by the total tax cut. But the tax cuts for individual taxpayers would tend to overcompensate the asset-poor and undercompensate the asset-rich. So the asset-rich would be hostile. And they would prevail — as the land-rich prevailed in every country against the movement founded by the American economist Henry George (1839-1897), who held that the State should collect the rental value of land in lieu of taxation, without formally expropriating the land titles [1].

If, instead, the State were to purchase the assets at fair market prices, the rents at best would only cover the interest on the purchase prices, so that the continuation of government services would require continuation of the old taxes; the desired substitution of rent for taxes would not occur.

2.2  Rent rights for tax rights

Note, however, that the "fair market prices" need not be paid solely as lump-sums. If the rents from the acquired assets only compensate the State for the tax cuts, the surrendered taxing rights should have the same total market value as the acquired assets, in which case the State should be able to buy one for the other. Moreover, by eliminating compliance costs and deadweight, such an exchange would yield a net benefit which could be divided between the State and the taxpayers, giving both parties enough incentive to clinch the deal; no compulsion would be necessary.

The above reasoning equates the total values, and hence the average values, of the surrendered taxing rights and acquired assets; the transactions with individual taxpayers would still require lump-sums to account for deviations from the averages.

Note that the lack of compulsion depends on the elimination of compliance costs and deadweight, and hence on the substitution of rent for taxes.

3.  Details

3.1  Enabling legislation

Suppose legislation is enacted to the following effect:

Every entity that neither owns any rentable assets nor leases any rentable assets not owned by the federal government shall be exempt from the listed federal taxes, provided that the entity pays full market rents for all rentable assets that it leases.

The meanings of "rentable assets", "exempt", "listed federal taxes", and "market rents" will be refined in due course. For convenience, the exemption from the listed federal taxes under this arrangement will be called simply the exemption.

As the "legislation" implies, a tax-paying entity can qualify for the exemption by selling all its rentable assets to the federal government and leasing them back. It is easily proven (see the Appendix) that there is a range of sale prices over which such a deal would be beneficial to both the taxpayer and the government.

The government's share of the benefit means that each leaseback deal will be revenue-positive, so that there will be no damage to the federal budget. A separate macroeconomic calculation demonstrating that the budget figures "add up" is neither necessary nor possible, because all the "adding up" is done on the microeconomic scale, one transaction at a time.

Equally well, the taxpayer's share of the benefit means that the government's fiscal gain does not come at the expense of the taxpayer, but is a dividend from greater economic growth.

Because such leaseback deals, at the right prices, will be mutually beneficial, they will proceed voluntarily.

3.2  Protecting revenue

Tax revenues and demands for public expenditure tend to grow as the economy grows. Therefore, if the government surrenders certain taxing rights in exchange for the rents of "rentable" assets, those rents also need to grow as the economy grows; that is, the assets need to appreciate. If taxpayers can produce assets of a certain type or bring such assets into the taxing jurisdiction, any increase in demand for such assets will induce an increase in supply, so that the rents of individual assets will not grow with the overall economy. Admittedly, if such assets were classified as "rentable", the proposed tax reform would discourage private production of the assets, so that the increase in supply might not materialize; but in that case economic growth itself would be constrained. Moreover, as we shall see, assets that can be produced or moved by private agents not only fail to appreciate, but tend to depreciate due to wear and tear, perishability, or obsolescence. The possibility of dishonesty compounds the problem: if taxpayers can produce or import certain assets, they may be able to do so in secret while wrongly claiming the exemption, in which case the government will lose revenue not only through false exemptions but also through reduced rent for its own (competing) assets.

So, to avoid a creeping shortfall in revenue, the category of "rentable assets" referred to in the "legislation" must be restricted to assets that taxpayers can neither produce nor bring into the taxing jurisdiction.

But must it include all such assets? Yes; otherwise there would be a class of assets in limited supply (let's call it class X) that one could own or rent from private owners while qualifying for the exemption, in which case the owners of other assets in limited supply could sell them to the government, qualify for the exemption, move into businesses using assets of class X, and keep the exemption. The result would be higher rents for tax-free assets in class X and lower rents for assets owned by the government, hence a loss of public revenue.

The same logic would apply if "class X" consisted of otherwise "rentable" assets located outside the taxing jurisdiction. So the definition of "rentable assets" must not discriminate according to location.

3.3  What are the "commanding heights" of the economy?

The commanding heights of a landscape would not be so commanding if competitors could create or import mountain ranges of similar heights. Likewise, the owner of a productive asset (a "means of production") is not greatly privileged as long as competitors are free to produce or import similar assets, because any cause that increases the return on the asset also increases the production or importation of similar assets, and the resulting competition then reduces the return on any single asset of the same type. But if an asset is of a kind that cannot be produced or imported by private agents — just as mountains cannot be created or imported by competitors — the return on the asset can remain high indefinitely.

So the economic assets analogous to "commanding heights" are those that cannot be produced or imported by private agents — in other words, assets that taxpayers can neither create nor bring into the taxing jurisdiction. The most obvious example is land, whose economic significance has been well understood by both socialists and liberals [2–8].

3.4  Meaning of "rentable assets"

Whether the aim is to protect revenue or to socialize the commanding heights, the conclusion is the same: rentable assets must mean assets that taxpayers can neither create nor bring into the taxing jurisdiction — all such assets, and only such assets. The net return on such assets is called economic rent. Thus the term "rentable assets" is self-explanatory if "rent" is understood as economic rent.

Given the need to protect revenue, no other definition of "rentable assets" is compatible with the substitution of rent for taxes, which is necessary not only for the desired economic benefits but also for the purely voluntary socialization of such assets, which is the key to political feasibility. If the assets socialized in this manner are to be the "commanding heights" of the economy, the same definition is required.

But what specific assets fit the definition?

The most obvious example is land. Governments (but not taxpayers) can confer additional value on "land" by increasing building height limits or otherwise allowing the land to be used for more lucrative purposes. To allow for this, the category of "land" can be widened to sites, where a site is a piece of ground or airspace, including any attached rights to build on that ground or into that airspace or to use the ground or airspace for particular purposes [9], but excluding any actual buildings (because buildings can be created by taxpayers).

Consider taxi licences, also known as plates. In Australia, taxi plates are issued by State governments and are usable only within their respective States. They cannot be created by taxpayers or moved between States, let alone imported into Australia. So at the federal level they meet the definition of rentable assets.

Other examples include gaming licenses, electromagnetic spectrum assignments, airport and seaport time slots and other rights of way, pollution rights, water rights, fishing rights, forestry rights, patents, and copyrights. Because patents and copyrights, although ultimately created by governments, are awarded in response to some prior effort by the recipients, and because most patents and copyrights yield little or no return, one would not classify such an asset as "rentable" until the returns exceeded a reasonable threshold. In the case of a patent, obviously the assessable returns should be net of the cost of obtaining and defending the patent.

Another borderline case is that of corporate shares, which resemble rentable assets in that their supply is inelastic in the short term. This suggests a compromise: in order to qualify for the exemption, an entity would need to "sell" only a fraction of the value of its share portfolio to the government. In practice, this would mean that the "rent" payable to the government would be assessed on a fraction of the market value of the shares, which would remain tradeable; in other words, the "rent" would resemble a conventional recurrent property tax. If distributed profits are presently taxed in the hands of shareholders, the shareholders must be treated as owners of the shares for the purpose of the exemption. But if the present taxation of dividends is entirely at source, the companies must be treated as the share owners, and shareholders joining the new system would therefore not incur any compliance costs due to buying and selling of shares or fluctuating share values. If this causes political pressure from shareholders to reform the old income tax so that corporate profits are taxed at source, so be it.

Of course a corporation, in order to qualify for the exemption, would need to sell its tangible rentable assets (to the government, if the intention is to lease them back). In particular, if part of the corporation's business is by nature a monopoly, that part satisfies the definition of a rentable asset, and would have to be sold to the government before the share owner(s) could qualify for the exemption. The rent payable on a fraction of the share value would still be needed, not only because of the short-term inelasticity in the supply of shares, but also because not all corporate-owned "rentable assets" (including de-facto monopolies and near-monopolies) are necessarily tangible.

What of a multinational company (MNC) with domestic and foreign rentable assets? If the MNC's operations within the country were devolved to a separate company, that company could easily arrange its affairs so as to qualify for the exemption. If this opportunity encourages a voluntary break-up of multinational companies into smaller companies with stronger national loyalties, so be it.

But for most taxpayers, especially individuals and small businesses, the only relevant "rentable assets" would be sites.

Notice that the assets enumerated above cannot be hidden from the revenue collectors. Land and airspace cannot be hidden from the government that protects the titles thereto. Licences and statutory monopolies cannot be hidden from the government that issues them. Publicly listed shares cannot be hidden from anyone; and if they are taxed at source, there is no need to trace the holders of individual shares.

Also notice that the assets enumerated above tend to appreciate due to increasing effective demand. The assets that are conspicuously absent from the above discussion include buildings, machinery, tools, equipment, and stock in trade, all of which depreciate due to (e.g.) wear and tear or obsolescence. Ownership of the latter assets would be permitted under the exemption.

3.5  Meaning of "listed federal taxes"

Some taxes, known as sumptuary taxes, are intended primarily to discourage undesirable behaviour, and only incidentally to raise revenue. Any attempt to abolish such taxes would be controversial — whereas those who wish to socialize the commanding heights of the economy without opposition must obviously avoid controversy. Accordingly, the "listed federal taxes" subject to the exemption should exclude sumptuary taxes such as excises on tobacco, liquor, and fossil fuels. Under this interpretation, businesses that presently remit sumptuary taxes would continue to do so even under the "exemption", while their customers, whether "exempt" or not, would continue to pay sumptuary taxes hidden in prices.

Because sumptuary taxes tend to be remitted at wholesale level or further upstream, the number of businesses that incur compliance costs through the retention of such taxes should be small. Even these businesses, by accepting leaseback deals, would be able to rid themselves of the compliance costs and deadweight costs of other federal taxes.

3.6  Meaning of "exempt"

Obviously the "exemption" applies only to taxes imposed by the government offering the "exemption" — in this case, the federal government. So entities qualifying for the "exemption" would not pay federal income or property taxes, and would not remit VAT/GST or federal sales taxes. But they would still bear any indirect taxes hidden in prices that they pay (although those hidden taxes would be reduced as other entities gained exemptions from remitting indirect taxes), and would still remit personal income tax on behalf of any employees who are not themselves exempt.

In the case of VAT/GST, a business qualifying for the exemption would neither remit tax on its sales nor claim tax credits on its purchases, and would therefore avoid all compliance burdens. In other words, the business would be "exempt" from VAT/GST under the internationally accepted terminology, or "input-taxed" under the Australian terminology. Non-exempt enterprises would interact with the exempt enterprises according to the existing rules.

3.7  Meaning of "market rents"

Consider the following three cases, each of which qualifies you for the exemption if you hold no other rentable assets:

(a) You rent your premises (a site and a building) from the government;

(b) You own your building but rent the site from the government;

(c) You rent your premises from a private "landlord" who owns the building but rents the site from the government.

In cases (a) and (c), you enter into a tenancy contract like any other, and the rent is decided by the usual market forces under the usual contract laws and tenancy laws.

But how is the site rent determined in cases (b) and (c)? It is not sufficient to say "by market forces" or even "by periodic auctions", because the higher the rent that is payable on the site, the lower the price that potential buyers will be willing to pay for the building. Who divides the spoils between the lessor of the site and the seller of the building? One solution is to set the site rent by a periodic official valuation of the site, and let the buyer and seller negotiate as usual over the price of the building. If the site valuation process is trusted, the negotiated price of the building will reflect its depreciated replacement value. To minimize the perceived risk of overvaluation of the site and consequent depression of the sale price of the building, the site valuation should be accompanied by a building valuation which should constitute an offer by the government to buy the building at the stated value. But perhaps the best safeguard against overvaluation of sites is politics: the government wants the votes of its site-tenants.

If you do a leaseback deal with the government in order to qualify for the exemption, the choice between cases (a) and (b) should be yours; the availability of both options would maximize the popularity of the leaseback deals.

An entity that presently occupies federal land for a peppercorn rent would not qualify for the exemption unless it started paying market rent. This could be arranged through a "leaseback" deal in which the government, instead of buying the land outright, would buy out the remainder of the peppercorn lease.

4.  A few technicalities

4.1  All taxes fall on (economic) rent

If there is a tax advantage in renting federal assets, the resulting demand will drive up the rents of federal assets until the rent premium cancels the tax advantage (including the avoidance of compliance costs and deadweight). This "rent premium" is the difference between the rent of federal assets and the rent (or interest on the purchase price) of comparable non-federal assets. Because "rentable assets" by definition are in fixed supply, the increase in effective demand due to the exemption cannot be offset by increased supply. Moreover, every economic entity needs access to at least one rentable asset — a place to work or a place to live, if nothing else. Therefore the increase in spending power conferred by the exemption will tend to be competed away in the rents of federally owned rentable assets; the "rent premium" will be expressed as a rise in rents of federal assets, not a fall in rents of non-federal assets.

It follows that the federal taxes paid by users of rentable assets, together with their compliance costs and deadweight, are simply deductions from the rents that the asset owners could otherwise get. In the special case in which the users are also the owners, the tax costs are deductions from the imputed rent (as is obvious because the imputed rent is simply the net value of owner-operation).

4.2  Implications for sale prices

On average, the tax savings for renters of federal assets would raise the rents. But deviations from the average tax saving would not be expressed in rents, because the rent of each asset would be determined by competition among many potential renters seeking many different tax savings. Rather, deviations from the average would be expressed in sale prices of rentable assets: the greater the tax burden you are trying to avoid, the lower you will be willing to reduce your sale price in order to avoid that tax burden.

As the total tax saving will compensate for (and indeed cause) the total rent rise, the total sale price will compensate for the total initial rent of the surrendered assets; that is, the total sale price will be roughly the total market value of the assets under the old system. But individual sale prices will generally differ from market values because individual tax savings will vary.

The implication is that the government will pay out a substantial lump-sum to acquire the rentable assets. Does that mean there will be an increase in borrowing, hence a rise in interest rates? No. If a socialist were to allege that privatization of public utilities raises interest rates because the private sector borrows in order to buy shares, the defenders of privatization would immediately answer that the rise in the private borrowing requirement would be offset by a fall in the public borrowing requirement. The same argument applies (in reverse) to public acquisition of assets. Moreover, under the present proposal, the one-off fall in private ownership of rentable assets would cause a subsequent reduction in turnover, hence a long-term reduction in demand for credit.

4.3  Further notes on protecting revenue

If the exemption were available to an entity that leases rentable assets from the federal government while owning other rentable assets or leasing such assets from parties other than the federal government, the returns on the non-federal assets would not be taxed, and the revenue lost in this way would not be fully recovered through the rents of federal assets; the increase in spending power caused by the avoided tax would be reflected in rents, but the effect would not be confined to federal assets. Neither is it practical to tax such an entity in respect of its operations with non-federal assets only, because this would cause a proliferation of schemes for imputing otherwise taxable cash flows to non-taxable assets. Accordingly, if an entity is to qualify for the exemption, its use of rentable assets must be confined to federal assets.

However, under the wording of the proposed legislation, entities that own buildings or lease buildings from parties other than the federal government can qualify for the exemption as long as those buildings are on federal land. So, if you are a landlord, and if you sell all your land to the government and lease it back while retaining ownership of the associated building(s), both you and your prospective tenants can qualify for the exemption. This does not cause a leakage of federal revenue, because the tax advantage for your tenants feeds into the market rent of airspace in your building(s), and this in turn feeds into the total market rent of the site(s), which you pay to the government.

Nothing in the proposed legislation obliges taxpayers to sell their rentable assets. Equally well, nothing in the legislation obliges the government to buy them. The leaseback deals would be contracts voluntarily entered into by both parties. The legislation need not foresee every issue that may arise for entities seeking the exemption, because any relevant questions left open by the legislation can be resolved in the contracts. Presumably the benefits of experience gained from early contracts would appear in later contracts — and far sooner than they could appear in any legislative amendments. In particular, the legislation need not include exhaustive anti-avoidance measures; if the revenue office smells a rat, it simply won't accept the deal.

5.  Historical inevitability

5.1  Advantages for individuals

If you qualify for the exemption as an individual, your employer need not deduct income tax on your behalf, and can more easily reward you for good performance because income tax will not eat into any raise in your wages or salary. Thus you minimize compliance costs for prospective employers, increase your opportunities to improve your lot by hard work, and send a signal to prospective employers that you are keen to maximize your performance.

5.2  Advantages for enterprises

If your enterprise qualifies for the exemption, you avoid substantial compliance costs and deadweight costs. Most taxes and some compliance costs are marginal costs (that is, they increase with turnover), and therefore must be recovered through prices if your business is to grow. This is obviously an impediment to growth — that is, a cause of deadweight. In contrast, rent is a fixed cost (that is, independent of turnover). So, if you qualify for the exemption by renting your business site from the government, thus replacing a marginal cost (tax) with a fixed cost (rent), you gain an advantage in the contest for market share.

Moreover, enterprises that rent their premises tend to grow faster than those that own their premises. The reason should be obvious: an enterprise that owns its premises has chosen to direct part of its capital away from its core business and into real estate, which is not advantageous unless the real or imputed return on the real estate is higher than that on the core business, in which case the enterprise would do better to sell out of the "core" activity and concentrate entirely on real estate! Owning the premises does not make sense even as a diversification strategy, because if the core business is adversely affected by any cause related to location, the value of the premises will be reduced by the same cause.

For these reasons, if a government offers the exemption, enterprises that accept the offer will tend to grow and survive at the expense of those that do not. If one enterprise arranges its affairs so as to claim the exemption, others will do likewise in order to compete.

5.3  Advantages for nation-states

When taxes feed into prices, they feed into prices of exports and import replacements, damaging international competitiveness. While some indirect taxes purportedly do not apply to exports, the related compliance costs still affect export prices. Furthermore, all indirect taxes, by raising the cost of living, affect wage outcomes and consequently export prices.

Thus, if one country implements the exemption, it will gain an advantage in international trade, so that other countries will do likewise in order to compete.

5.4  Political feasibility

For the reasons just given, if one country legislates to offer the exemption, "socialism by individual choice" will spread from entity to entity within that country, and thence from country to country.

Moreover, the necessary legislation could hardly be more innocuous. It says merely that those who satisfy certain criteria shall be exempt from certain federal taxes. Tax exemptions are normally seen as politically attractive. The attraction is presumably greater when everyone has the opportunity to qualify for the exemption, greater again when there is more than one way to qualify (sell the building or keep it), and greater again when the exemption does not cause a loss of revenue that must be made up by other taxpayers (who also vote). The legislation would not impose the exemption on anyone. In contrast, any opponents of the legislation would have to explain why they want to impose the status quo and deprive the people of choice. Getting an electoral mandate to enact the legislation should therefore not be difficult.

But why would an electoral mandate be necessary? The legislation lets individual taxpayers choose between the present arrangement and an alternative. In a free country, you don't need a mandate to give the people choices. Any incumbent government that has the numbers to enact the legislation should just do it.

5.5  Choice and tax relief vs. the class struggle

The three factors of production recognized by the classical economists were

• land (or, more generally, what are here called rentable assets),
• capital (other productive assets), and
• labour.

These respectively gave rise to three classes of men:

• landlords (or, more generally, receivers of economic rent),
• capitalists (owners of capital), and
• workers.

But of course a man can be a member of more than one class, in which case he is susceptible to reactionary propaganda suggesting that his interests as member of a more advantaged class outweigh his interests as a member of a less advantaged class. Worse, the forces of reaction have systematically pursued policies that turned as many workers as possible into petty landlords or petty capitalists, in order to prepare them for precisely that sort of propaganda.

In the times when the overwhelming majority of men were workers and only workers, it was easy to regard the triumph of the working class as historically inevitable. The landlords and capitalists clearly had much to fear from the socialists, who stirred up the workers against the other two classes. From 1879 onward, the landlords had even more to fear from the Georgists [1], who sought to unite workers and capitalists against the landlords, and whose agenda, being more modest than that of the socialists, was seemingly more achievable.

The reaction to Georgism was the American pseudo-science of neo-classical economics, in which land was treated as a form of capital [10], notwithstanding that capital (as previously defined) can be produced by private effort while land cannot. This removed the theoretical foundation for a class struggle by capitalists against landlords, and enabled landlords to misappropriate the strongest economic argument against taxation or socialization of capital, namely that it reduces the incentive to produce capital. This argument is clearly inapplicable to land and other rentable assets, which cannot be produced by private effort and therefore do not need any incentive for their production. Thus began one of the enduring frauds of the political Right: the portrayal of "tax relief" and subsidies as "incentives" to do something when they are not contingent on actually doing it. Even today, the owners of rentable assets bypass the "mutual obligation" hoops that welfare recipients are required to jump through, although the person who lives on economic rent is as much a transferee as the one who lives on the dole — but richer.

As land was wrongly reduced to a form of capital, so Georgism was wrongly reduced to a brand of socialism — and was often the real target of arguments purportedly directed against socialism in general. In this way the socialists received publicity from their enemies while the Georgists did not; in the new witchcraft that displaced the old science of political economy, Henry George became He Who Must Not Be Named except by the initiated to the initiated.

It was perhaps inevitable that the Georgist movement would start in America, where, for the first time in the industrial era, the process by which workers are reduced from prosperity to poverty was played out before the eyes of political economists: the hoarding of all the land by some men denies other men the opportunity to employ themselves, forcing them to bid against each other for the right to work for a living [5]. But even if the movement had started elsewhere, the reaction — that is, the neo-classical conflation of land with capital — might still have started in America, where men were most accustomed to the idea that one buys and sells land just as one buys and sells stock, and where capitalists were therefore most likely to be landlords and vice versa [11].

After the neo-classical paradigm came the deliberate encouragement of home ownership, which created a large class of workers who are both landlords and tenants of their own homes, but do not know that their interests as workers outweigh their interests as landlords, or that whatever they gain in their capacity as landlords they usually lose in their capacity as tenants, and who therefore vote as if they were landlords only. As soon as they gain title to the land beneath their beds, thus becoming slaves to the bank instead of slaves to the absentee landlord, they can be made to believe that they have thrown in their lot with the Astors.

Furthermore, in those countries in which compulsory superannuation contributions are invested in private asset markets, the values of workers' savings rise and fall in synchronism with the assets of the super-rich, so that any plan to tax or socialize any assets of the super-rich can be portrayed as an attack on workers.

The only workers who are immune to such propaganda — and therefore the only workers who can be reliably stirred up by appeals to class consciousness — are those who own no real estate and have no savings invested directly or indirectly in asset markets. But these have been reduced to a powerless minority.

Accordingly, this essay eschews class rhetoric and takes up the weapons that the Right has been kindly sharpening over the last several decades: choice and tax relief.

6.  Conclusion

The "commanding heights" of the economy are the assets that taxpayers can neither create nor bring into the taxing jurisdiction. If entities that neither own such assets, nor lease such assets other than federally-owned assets for which full market rent is paid, were exempt from a list of federal taxes, both taxpayers and the government would find it attractive to make deals whereby the taxpayers sell their rentable assets to the government, lease them back, and thereafter pay rent instead of tax. The damaging effects of taxation on the economy would fall in synchronism with the number of entities remaining in the old tax system. Thereafter, the government would fund most of its expenditure not from taxes, but from rents on assets, which the government would have purchased in part by surrendering rights of taxation.

Appendix: Mutually acceptable prices for leaseback deals

The conditions under which "you" (a taxpayer) would willingly sell your rentable assets to the federal government and lease them back are best explained by a little algebra.

Let R be the total rental value of your rentable assets, G the expected capital gain to be forgone, T the tax bill that you stand to avoid, C the compliance cost that you stand to avoid, and D the deadweight cost that you stand to avoid — all expressed per annum. Let P be the sale price and i the discounting rate (real interest rate).

The deal is attractive to you provided that the benefit exceeds the cost — i.e. provided that

T + C + D + iP > R + G ,

(1)

where iP is the annualized equivalent of the lump-sum payment (i.e. the real interest earned or saved thereon). The same deal is attractive to the government provided that

R + G > T + iP ,

(2)

where, again, the benefits are written on the left and the costs on the right, but from the government's point of view. Combining (1) and (2), we obtain

0 < R + G − T − iP < C + D ,

(3)

where the middle expression (R+G−T−iP) is the net benefit to the government [compare (2)], while the right-hand expression (C+D) is the total benefit shared between the parties (avoided compliance costs and deadweight).

Now notice that there is a range of values of P that satisfies (3). At the minimum value of P, condition (3) becomes

0 < R + G − T − iP = C + D ,

(4)

so that the government gets the whole benefit (C+D). At the maximum value of P, condition (3) becomes

0 = R + G − T − iP < C + D ,

(5)

so that the government gets none of the benefit — that is, you get it all.

It might seem that the above analysis fails to account for the increase in rent that occurs when your assets pass into public ownership [see section 4.1]. But in that case, the increase would need to be added to your cost on the right-hand side of (1) and to the government's benefit on the left-hand side of (2), and in both places it would be added to R. So if we simply define R as the new rental value, all is well. This is consistent with the statement [in section 4.2] that the purchase price P compensates for the old value while the tax saving T compensates for the increase in the rental value.

Author's declaration

This essay is an attempt to determine the biggest dose of socialism that can be implemented without compulsion. In an earlier essay [12] I attempted to determine the nearest thing to Georgism that can be implemented without compulsion. The proposals in the two essays are the same, apart from terminology.

Notes

Revision history

First published October 6, 2006. Corrected October 8, 2006. Converted to HTML, revised (for clarity) and permalinked January 24, 2007. Reformatted June 15, 2007 (for new blog template).

 

Copyright © Gavin R. Putland except as otherwise attributed. Posted at The world according to GRP under the title Socialism by individual choice. You may republish this item verbatim on your website or blog provided that you include this notice (with hyperlinks).

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