LVTFan's Blog

The Ultimate Corporate Subsidy: The Unearned Increment

I was listening to Bob Edwards interview Ralph Nader, on the occasion of the latter's publication of a new book, and Nader was talking about things the left and the right might be able to agree on.  I was in traffic, and only half listening, but when Nader spoke of corporate subsidies, it hit me that one of the biggest corporate subsidies, and one which the average person isn't at all conscious of, is the unearned increment, the possession of unearned wealth.

It isn't that some individuals don't get to collect some, too -- particularly those who own land (with or without a building on it) in or near the major coastal cities, but the lion's share goes to corporations, and their shareholders, who tend to be the 1%.

For more about the unearned increment, start here.

"Our plan involves the imposition of no new tax, since we already tax land values in taxing real estate. To carry it out we have only to abolish all taxes save the tax on real estate, and abolish all of that which now falls on buildings or improvements, leaving only that part of it which now falls on the value of the bare land, increasing that so as to take as nearly as may be the whole of economic rent, or what is sometimes styled the "unearned increment of land values." 

Can we get the leaders of the left and right to look at this, or are they owned by the corporations?

"Give and Take"

This appeared in the March 2, 1907 issue of The Public, edited by Louis F. Post:

GIVE AND TAKE.

For The Public

"Why do you come to me?" said the Millionaire. "I am not to blame for what you gave me. Surely you would not be heartless enough to take it away again. And then you must remember that I am a Captain of Industry, while you are only Vox Populi."

"But," said the Citizen, "we make the laws and can do as we please."

"Laws which I do not like are very apt to be unconstitutional," quoth the Captain.

"But certainly we are entitled to a fair share of what we produce," said the Labor Unionist.

"The trouble is you have produced too much," replied the Captain.

"But," said the Single-Taxer, "the value of land is purely social and should belong to society."

"Those who have the supreme pleasure of basking in the sunlight of my society have all the land they need," rejoined the Captain.

"But the whole system is wrong," said the Socialist.

"You are a revolutionist," hissed the Captain.

"All systems are wrong," said the Anarchist.

"The Lord giveth and the Lord taketh away," said the Minister.

ELLIS O. JONES.

Henry Ware Allen: Special Privilege

Special Privilege

BY HENRY WARE ALLEN
from Land and Freedom, 1938

As our time honored political maxims become hackneyed they are very apt to pass into what Grover Cleveland would call innocuous desuetude. We subscribe to the sentiment that "eternal vigilance is the price of liberty" and yet little is done to counteract those aggressive forces which nullify that freedom which we profess to prize so highly. Even the prayer, "Thy Kingdom Come," is repeated as a mere wish that something good would happen rather than with a determination to bring about those righteous conditions which make for a heaven on earth. Possibly the most neglected of all of our national ideals is our professed adherence to that most democratic of all maxims, "Equal rights for all and special privileges for none." For at the present time our country is honeycombed with special privilege that has become so entirely entrenched as to be regarded on all sides as vested right. Special privilege is condoned by force of its familiarity. Like vice it is endured, then pitied, then embraced.

There lived in a Colorado city years ago a housewife who made convenient use of coal cars on the side track across the street from her dwelling with which to replenish her stock of fuel. This she did without any qualm of conscience but as a special privilege which, by the sanctifying touch of time had grown into a vested right. This woman doubtless was punctilious in the ordinary obligations of life and would have hotly resented any statement to the effect that she was stealing coal. She was guided by that all too common kind of honesty which is based upon expediency rather than principle. Not on any account would she have withheld what was due from her to a neighbor who would have suffered by her delinquency, but the advantage to her of getting this coal was so great and the loss to some impersonal owner of same, mine, railroad, or smelter, was relatively so negligible that the argument was all in favor of her acting in her own interest without question. No personal equation was involved and if at first there had been any hesitation on her part of this practice, that was long ago a thing of the past. But the railroad company put a watchman on guard and her supply of fuel was thereby stopped. She then turned to the local charity organization with request for a continuation of the supply which had thus been rudely taken from her and the very righteous indignation with which she told her story was ample proof of entire absence of comprehension on her part that she had been stealing.

This incident, which is a true story, illustrates very nicely the evolution and the nature of that special privilege which eventually becomes a vested right. And if the searchlight of analysis is turned upon our social system we may be surprised to find the presence of special privilege in unexpected places and of a volume that is, in the aggregate, enormous.

As a basis for this inquiry it may be well to state the fundamental truth that property may be secured in three ways only; first, by labor; second, by gift; and third, by theft. If this test is repeatedly kept in mind, the task will become easier. One of the commonest forms of special privilege is that which is provided under ninety-nine year leases on valuable business property sites. These leases convey to the owner of the land a stipulated income after the tenant has paid all taxes and expenses. In the parlance of political economy this revenue consists of what John Stuart Mill defined as unearned increment, a value which is produced by no individual but which is purely the result of population reflected upon desirable locations. For this revenue to be turned over to individuals as is now the unquestioned custom in all of our large cities and to an amount of billions of dollars annually is a procedure which is precisely in the same class as the stealing of coal from the railroad car by the Colorado housewife.

A much larger source of public revenue which is diverted to individuals is that of the rent of valuable property in excess of a fair interest return upon the intrinsic value of improvements on the property. This applies to practically all property located at the center of our large cities and involves enormous revenues. There is a mixture here of legitimate return on capital invested with the unearned increment which belongs absolutely to society but the case is not less clear on that account.

Another prolific source of public revenue which is diverted to individuals is that which comes from the lucky possession of oil wells. This possession frequently gives incomes of thousands of dollars daily to those who have no more claim on such revenue than is involved in the possession of the land upon which the wells were developed. The wealth that has by this means been given to certain sections of the country and certain groups of people has run into the billions of dollars. The Osage tribe of Indians in Oklahoma are said to have been made the richest people in the world due to this special privilege. Such beneficiaries are no more justly entitled to the revenue which they receive than was the Colorado woman justified in stealing coal from the railroad car. It will be said that the oil industry involves a great deal of capital and that many dry wells are paid for before a single producing well is developed. This is true and therefore makes the proposition somewhat more complicated but does not alter the conclusion.

Another source of revenue which diverts public funds into private hands is speculation in land. Purchase of inside property sure to increase in value is the one investment that has been invariably recommended by shrewd financiers. This speculation is far greater than has been generally realized. More than one-half the area of New York City consists in vacant lots which are held out of use for speculative purposes, and the same is true of all our larger cities. Incidentally, this speculation has the effect of enhancing the selling price of desirable land to artificially high figures. When land which is purchased with a hope of subsequent rise in value, the investor practically lays a trap by which he may secure values that rightfully belong to the community. And this process makes an artificial scarcity of land with consequent artificially high cost to those who must use it. This process of securing a profit, of getting something for nothing, is persistently the same in character as that by which the Colorado housewife secured her supply of coal. Here again objection may be interposed to the effect that land frequently has to be sold for less than it cost. This is an objection that was raised by no less an economist than Francis A. Walker, the foremost critic of Henry George during his lifetime. General Walker exclaimed, "Mr. George has much to say about unearned increment: He says nothing, however, about unrequited decrement." Mr. George's rejoinder to this was an expression on his part of his inability to discuss the problem with one who spoke of unrequited decrement in something which originally had no value. In other words, so far as society is concerned its interest is only in the rental value which is produced from year to year and which rises or fall accordingly as population grows or wanes. The important fact is that this increment, whether large or small, belongs to the community which produced it.

The most spectacular form of special privilege which we have to deal with today is that provided by the protective tariff. This protection enables the America manufacturer to secure an artificially high price for his product. The common argument in support of the protective system is that the American standard of living must be maintained by this artificial means, but this argument falls to the ground, if at the same time, we permit any improvement in labor-saving machinery which naturally has far greater effect upon the labor market than is produced by the competition of merchandise imported from abroad. The enormity of special privilege due to the tariff is perhaps more conspicuous in the State of Pennsylvania than elsewhere, a single family in Pittsburgh, the direct beneficiaries of the tariff on aluminum, being reputed to be worth in excess of $2 billion. There will be found that, with a few rare exceptions, the great fortunes of America are based upon special privilege of one kind or another.

Although there are many minor sources of special privilege which are embedded in our political and social institutions, those above enumerated are the principal ones.

The special privileges provided by legislative action at Washington are in a different class from those which have become a regular part of our system of taxation but are none the less to be condemned. The most flagrant of these in recent times was the appropriation by Congress and approved by President Hoover, of $500,000,000 of tax payers' money for the specific purpose of stabilizing or artificially enhancing the price of wheat, cotton, and other farm products. It was presumed by the makers of this law that it would have the effect of giving artificial advantage to the farming class, which would offset in a measure the special privileges which had been given so generously to Eastern interests by means of the protective tariff. The plea for this farm legislation was repeatedly based upon that consideration. It so happened that even the immense waste of money involved by the farm marketing act was negligible as an influence in the world wide markets and that it did not affect in any considerable degree the law of supply and demand upon the prices of the agricultural products which were supposed to be favored. But the very fact that this legislation was put through with little opposition furnished a very good illustration of the fact that special privilege legislation is regarded as perfectly legitimate. And this has been further illustrated in monstrous degree by the New Deal legislation under President Roosevelt.

There is everywhere consciousness of a mysterious force which is responsible for easily acquired fortunes on one hand together with an increase of unemployment and consequent lower incomes on the other hand. Each succeeding census report makes more appalling this undemocratic and unjust condition in our social fabric.

If prosperity is to be secure, there must be an end to special privilege of every kind, and a system of taxation inaugurated in place thereof which shall be based upon justice to all. Henry George has demonstrated how this should be done.

The Land Questions: #38: Mining

38. Mining companies which mine on public lands pay far less to the Federal government than they pay on privately held lands. 

A.  That's fair, because the private landholders are better negotiators

B. That's fair, because the 1872 Mining Act set the price, and it wouldn't be fair to change the business environment after setting the rules.

C. That's fair.  Corporations need subsidies to create jobs.

D. That's unfair, and the federal government should be getting just as much from the miners as the private landholders are getting

E. That's unfair, and not only should the federal government be getting more from the mining companies, but the federal government should be collecting a significant portion of the royalties now privatized by private and corporate landholders, since we're all equally entitled to nature's bounty.  This would permit us to reduce other taxes on wages and production, and perhaps lead to a citizen's dividend, similar to the Alaska Permanent Fund

F. That's unfair, because the 1872 Mining Act was based on old prices and old mining technology.

G. Your reactions?

 

The Land Questions: #32: Crop subsidies

32.  Who should get crop subsidies in America?

A. Landlords of land that is rented to tenant farmers

B. Landlords of land that is not farmed

C. Tenant farmers

D. Big farmers who own their land

E. Absentee farm landlords, but only if they are Americans

F. Absentee farm landlords, but only if they are retired farmers or their widows

G. Absentee farm landlords, but only if their total land holdings are under $500,000 (about 1000 acres in most places).

H. Your suggestions?

The Land Questions: #30 -- Public Lands

30. What should we do with our public lands?

A. Sell them off at the current price, about $5 per acre, per the 1872 Mining Act, even if they contain minerals worth billions of dollars.

B. Sell them off to the highest bidder, as soon as possible

C. Sell them off to any bidder, as soon as possible

D. Lease them for fixed terms, to the highest bidder, with future lease prices to be calculated with an eye to making it profitable for the tenant

E.  Lease them for fixed terms, to the highest bidder, and then repeat the auction in 10 years. Maintain extensive online databases so that the lease descriptions are visible to all, and the lease expirations are well advertised to all who might be interested in bidding.  Make it the landlord's business to get high quality unbiased appraisals of tenant improvements, so that tenants can make sensible improvements and be secure in them.  Use the revenue to reduce other taxes which burden the economy.

F. Lease them out, at market rates, with the proceeds used to generated a citizen's dividend.  If there is a monopoly or oligopoly, break it up so that there is a genuine market.

G. Keep renting them out at whatever price they're now receiving; we don't want to upset anyone's plans or privileges.

H. Your suggestions?

The Land Questions: #28: Coastal Homeowners Insurance

28. Private-sector insurance companies are raising their rates for waterfront or near-waterfront property, or refusing to renew policies in hurricane-prone areas.  States are stepping in to provide insurance of last resort.  How should this be financed?

A. It should be self-financing, with rates designed to cover 100% of the risks.  This might drive down the selling prices of the properties, but that is appropriate given the increased risks involved.

B. Taxpayers all over the state should subsidize the insurance rates, from taxes on wages

C. Taxpayers all over the state should subsidize the insurance rates, from taxes on sales

D. Taxpayers all over the state should subsidize the insurance rates, from taxes on their land values

E. Inland taxpayers should be taxed to pay for the subsidies to coastal propertyowners

F. Hotel and rental-car taxes should be used to pay for the subsidies to coastal homeowners and commercial property owners

G. Collect taxes in proportion to pollution which is producing slower-moving storms, which will have the effect of incentivizing reductions in that pollution

H. Your suggestions?

The Land Questions: #22 -- Infrastructure and Land Values

22.  The creation of a new subway line raises the land values near each of the stations.  Who should reap the benefit?

A. People who own homes there

B. People who own businesses there

C. People who own land there, whether or not there is a highest-and-best-use building on it

D. Corporations who own land there

E. Universities and other private landholders who own land there

F. Foreign corporations and private equity funds who own land there

G. Pension funds and sovereign wealth funds who own land there

H. The community as a whole, since the community paid for it

 

Download Fred Harrison's book, "Wheels of Fortune"

The Land Questions: #21 -- Paying for Transportation Infrastructure

21.  The creation of a new subway line raises the land values near each of the stations.  Who should pay for the building of the subway line?

A. Riders of the new subway line

B. Riders of all subways in the system.

C. Riders of all mass transit in the metro area.

D. Drivers of cars and trucks, all over the metro area, via taxes on their fuel purchases (that is, in proportion to miles driven and the fuel efficiency of their vehicles)

E. Drivers of cars and trucks, all over the metro area, via an annual surcharge on their registration

F. Drivers of cars and trucks, all over the metro area, in proportion to the value of their cars, owned or leased

G. Drivers of cars and trucks, via tolls when they use bridges and tunnels, or HOV lanes, or certain highways

G. The taxpayers, via increased sales taxes on their purchases

H. The tourists and business travelers, via hotel occupancy taxes and taxes on rental cars.

I. Passengers in taxis, via a surcharge on their fares.

J. The homeowners, via taxes on their homes

K. Drivers, commercial and individual, via taxes on fuel purchased within the city

L. Employees all over the metro area, via a payroll tax

M. The tenants of commercial buildings in the heart of the central business district

N. All landholders, paying equally (a parcel tax)

O. All landholders, in proportion to the size of their lots

P.  Landholders, in proportion to the value of the land they hold, without regard to the buildings or their contents.  Those whose land values are raised by their proximity to the new line will see a proportional increase in their share of the tax burden; those far from the new line will not.

Q. Your suggestions?

The Land Questions #19 -- Beaches

19. Storms continue to erode the resort beaches up and down our coasts.  Who should pay for beach restoration every few years?

A. The federal government, from income tax revenues.  (why?)

B. Taxes on pollution should be used to pay for this, on the basis that pollution produces the climatic conditions that make storms slower moving and more destructive.

C. State governments along the coasts.

D. Local governments, town by town, paid for by sales taxes.

E. County governments along the coasts.

F. Local governments, town by town, paid for by taxing wages.

G. Local governments, town by town, paid for by summer parking revenue, hotel bill taxes and taxes on rental properties' revenue;

H. Local governments, town by town, paid for by property taxes, taxing both buildings and land, in proportion to current market value

I. Local governments, town by town, paid for by land value taxation.  Land values close to the beaches rise and fall with the sand, and properties further from the beaches are far less effected by the presence/absence of beach sand than those near the beaches. 

J. Local governments, town by town, paid for by transfer taxes on sold properties, so as not to burden long-time owners who aren't selling.

K. Estate taxes

L. Your suggestions?

 

NYT Invitation to a Dialogue - A National Service Program

Invitation to a Dialogue - A National Service Program - NYTimes.com Published: February 14, 2012

To the Editor:

David Brooks suggested in a recent column that the country needs a national service program to unite the diverging classes in society. He’s right.

Not long ago, we had one that did so very well. It was the draft. Every young man — regrettably, only men — shared a potential obligation to his country.

Any serious discussion of comprehensive national service means talking about a draft. It’s hard to imagine the Supreme Court upholding nondefense conscription, but if civilian service were an alternative to military duty, the prospects would improve.

The all-volunteer military is exemplary for its professionalism, sacrifice, meritocracy and diversity. (I have a son with two college degrees who enlisted.) But the benefits and burdens need to be shared more widely. There have been too many multiple deployments of regulars and reserves, and if draftees were in the mix once again, perhaps there would be no more wars of choice.

Many domestic needs could be served by a comprehensive national service program. Like the Depression’s best idea, the Civilian Conservation Corps, it could involve people from all classes in repairing our parks, roads, bridges and other infrastructure. It could also bring fresh ideas and talent to teaching, law enforcement, social work and other underpaid public services. The benefits to our national character, as Mr. Brooks suggests, would be immense.

There are past and present models of a national service program in more than a dozen other nations. It is time we gave it a try.

MARTIN A. DYCKMAN
Waynesville, N.C., Feb. 14, 2012
The writer is a retired associate editor and columnist for The St. Petersburg Times.

Editors’ Note: We invite readers to respond to this letter for our Sunday Dialogue. We plan to publish responses and Mr. Dyckman’s rejoinder in the Sunday Review. E-mail: [email protected]

LVTfan's observation: Every investment in improved infrastructure creates land value.   Most projects that have value -- education, law enforcement, social work, improved public health -- will also increase land value.

A project is, by definition, worthwhile if it creates more in land value than it costs to do,* and, it could be argued that, when comparing two infrastructure projects that cost the same amount, say, $100 million, if one creates $200 million in land value and the other creates merely $150 million in incremental land value, the $200 million project should probably take priority, all other things being equal.

*which isn't to say that many public spending projects which don't create increased land value aren't worthwhile, too, for other reasons.

These projects, some will say, fall into the category of "pork" spending.

Pork barrel is the appropriation of government spending for localized projects secured solely or primarily to bring money to a representative's district. The usage originated in American English.^[1] In election campaigns, the term is used in derogatory fashion to attack opponents. Scholars, however, use it as a technical term regarding legislative control of local appropriations.^[2]

History

The term pork barrel politics usually refers to spending that is intended to benefit constituents of a politician in return for their political support, either in the form of campaign contributions or votes. In the popular 1863 story "The Children of the Public", Edward Everett Hale used the term pork barrel as a homely metaphor for any form of public spending to the citizenry.^[3] After the American Civil War, however, the term came to be used in a derogatory sense. The Oxford English Dictionary dates the modern sense of the term from 1873.^[4] By the 1870s, references to "pork" were common in Congress, and the term was further popularized by a 1919 article by Chester Collins Maxey in the National Municipal Review, which reported on certain legislative acts known to members of Congress as "pork barrel bills". He claimed that the phrase originated in a pre-Civil War practice of giving slaves a barrel of salt pork as a reward and requiring them to compete among themselves to get their share of the handout.^[5] More generally, a barrel of salt pork was a common larder item in 19th century households, and could be used as a measure of the family's financial well-being. For example, in his 1845 novel The Chainbearer, James Fenimore Cooper wrote, "I hold a family to be in a desperate way, when the mother can see the bottom of the pork barrel."^[6]

Definition

Typically, "pork" involves funding for government programs whose economic or service benefits are concentrated in a particular area but whose costs are spread among all taxpayers. Public works projects, certain national defense spending projects, and agricultural subsidies are the most commonly cited examples.

Citizens Against Government Waste^[7] outlines seven criteria by which spending can be classified as "pork":

1.  
   1. Requested by only one chamber of Congress;
   2. Not specifically authorized;
   3. Not competitively awarded;
   4. Not requested by the President;
   5. Greatly exceeds the President’s budget request or the previous year’s funding;
   6. Not the subject of congressional hearings; or
   7. Serves only a local or special interest.

The last of these seems as if it might be the most important one.

So here's the question: How should we finance these projects, if they are to be done?  How would we pay for a modern CCC? (Ah -- this sounds like The Land Questions ...)

A.  By a local tax on land value.  This would necessitate regular reassessment of the land value in every community in America, say, every 3 years, which could be done for well under $40 per parcel.  It would probably also require some state and/or federal oversight, checking values against transactions to verify that all municipalities or assessing units are doing high-quality market-based assessments. [In Maryland, they're already doing assessments every 3 years.  In Connecticut, assessments every 4 years are required.  In southern Delaware, the assessments are 30+ years old.  In California, the assessments are meaningless, due to Proposition 13.  It would take a few years for some of these entities to update their assessments.]

B. By a state tax on land value. [same issues apply]

C. By a national tax on land value.

D. Let's just use the federal income tax.  It's there.  It's easy.

E. Let's use a national sales tax.

F. Let's use a tax on imports.

G. Let's tax buildings.

H. Let's tax services.

It seems to me that a national service corps of some sort has a lot of merit.  It could promote a lot of highly desirable goals.  It could provide a lot of home-front protection in the event of natural disasters.  It could get some important projects done, including the maintenance of existing infrastructure currently under-maintained,and the provision of services we believe are important (particularly when we are the beneficiaries).

But the financial benefits ought not to fall into private or corporate pockets; they ought to accrue to all of us, and ease the burdens of financing other kinds of federal spending.  Land value taxation strikes me as the answer to so many of our supposedly intractible problems.

 

 

The Land Questions: #4 -- Natural Resources

4. Oil and natural gas are pumped from the Gulf of Mexico and along our ocean coasts by corporations large and small. (Mason Gaffney points out that Harry Truman increased the size of the US by more than any other president by expanding the coastal zone, but that we collect little revenue from the natural resources drawn therefrom.)  How much should the oil companies pay the federal government?

A. Nothing

B. Just the amount negotiated in 1996.  We can't change the rules just because the price of these commodities has risen rapidly.

C. A fixed and trivial percentage of the value of the oil.

D. A rising percentage of the value of the oil and gas, related to the retail prices of the products.

E. An amount that is based both on a percentage of the value of the oil and gas and on the amount of carbon produced by burning the finished product.

F. Your suggestions?

The Opposition to Land Value Taxation

It is frequently pointed out by Georgists that there are no really good rebuttals to land value taxation.

This excerpt from a 1971 letter to my grandfather from a colleague describes where the opposition comes from:

There may be be no "arguments that actually oppose LVT" as Bill says, but there are plenty of people who not only actually but actively oppose it.  These are the people who are making hundreds of millions of dollars a year on the unearned increments land speculation gets as a result of land being so undertaxed that the landowner puts up only a trifling share of the enormous community investment needed to make his land reachable, livable and readily saleable.  Of 7 million-odd New Yorkers I would guess that perhaps 70,000 people profit by today's misapplication of the property tax while 7 million lose by it, but the problem is that the 7 million have no idea of what they are losing while the 70,000 jolly well know that they have a good thing going for them and fight to keep it.

I've been trying for a year to get my friend, J___ C___, past president of the Realtors and Chairman of the Realtors Economic Research Committee to stop fighting LVT, but he keeps coming back to how his father bought some land near San Diego for $20 an acre before 1900 and sold it for $4,000 an acre around 1950 and his father could not have held it all that time if he had had to pay more than a nominal tax.

I don't think anyone should take the equity argument seriously.  Just because the ownership of underused land has been subsidized for years does not entitle its owners to expect the subsidy to be continued forever, and likewise, for those who bought land in the expectation that the subsidy would be permanent.  The equity objection to increasing the tax on land would apply almost equally to any other tax increase.

A week later, another letter includes this:

Just because landowners have had a wonderful subsidy racket going for them in the past should not give them any claim on having that subsidy continue ad infinitum.  I do agree with Lowell that the transition to LVT would raise problems, and in any area with a high tax rat on property I can see that the transition would have to be staggered over a period of years, probably not less than five or more than ten, dpending on how big a tax rate was to be shifted off improvement values onto location values.

In the same file, a copy of a 1969 letter from the same person to Lowell (Harriss):

I don't see how tripling the tax on land could fail to force almost all owners of underused land to get busy and put it to better use.  Conversely, I don't see how taking the equivalent of a 51% sales tax off improvements could fail to be a tremendous stimulant to improvements.  If a 7% Federal tax credit on improvements was so effective, what would wiping out a 50% tax do!

 

Nein nein nein to the 9-9-9 tax plan - Fred Foldvary

by Fred E. Foldvary, Senior Editor, The Progress Report 17 October 2011:

The tax plan being promoted by one of the presidential candidates, Herman Cain, seeks to impose a federal personal and corporate tax rate of 9% and a national sales tax of 9%. The word for "no" in German is "nein." Since the 9-9-9 plan would be neither equitable nor efficient, we can respond in German, "nein, nein, nein!"

The first "nein" is on the 9% business flat-rate income tax. This would impose a tax on gross income minus purchases from US firms, investment in capital goods, and exports. That would be much better for enterprise than the current top income tax rate of 35%. However, recognizing that any taxes on production has an excess burden, the best tax rate of all would be a flat zero.

The second "nein" is on a personal income tax rate of 9% on gross income minus charitable donations. The plan complicates this with special tax rates in "empowerment zones." Such enterprise zones often just shift business away from other areas, and then the land rent in the zone goes up to soak up the locational advantage, so the ultimate gainers are the landowners, especially those who are politically well connected and are able to buy up land in the zones prior to being established.

The poorest workers pay little or no income tax today, or even get cash under the "earned income tax credit". The flat-rate 9% tax would make the poor pay higher taxes. Again, a 9% tax is better for most taxpayers than the current tax rates that go up to 35%, and a flat tax that eliminates real estate deductions and exemptions is also better, but best of all would be a flat wage and profits tax of 0%.

The worst part of the 9-9-9 plan is the 9% national sales tax. While to some extent the effect of the sales tax would be offset by the reduction of income taxes, still, sales taxes get added to the cost of production to increase the price of goods. For companies that were making little profit, they would have paid little income tax, so the tax could end up raising their prices by more than the current tax system. If they employ low-wage labor, those workers would have been paying little or no income tax, and would now have to pay the higher nine-percent income tax, which would further increase costs to those enterprises. The 9-9-9 plan would dramatically increase income inequality at a time when inequality has already been rising rapidly.

The 9-9-9 plan is supposed to be revenue-neutral, but analysts have found that it would generate less revenue than the current system, so the 9-9-9 numbers would probably be raised to 10-10-10 or higher. Once a national sales tax or value added tax is in place, the tax rates could be raised, as they have been in Europe.

It has been pointed out that the tax plan being promoted by Herman Cain is the same as the tax structure in the 2003 video game "SimCity 4". This video game simulates a city, and the default tax rate is 9-9-9. According to some analysts, in this simulation game, the 9% tax rates were not enough to finance the desired public goods.

The favoring of one tax plan implies the rejection of the other systems. The advocacy of a national sales tax implies the rejection of alternatives such as a national land-value tax. So we can ask why a candidate is rejecting a tax on land value in favor of a tax on produced goods.

Herman Cain is correct in saying that the natural state of the economy is prosperity, and that freedom promotes prosperity. He is right in saying that government must get out of the way of production. He is right in saying that production drives the economy. But he does not go to the logical conclusion of the free-market argument: marginal tax rates of zero. To best promote employment, investment, and growth, place no tax on additional production, trade, or consumption.

A land-value tax would best let the economy rise to its natural rate of prosperity. LVT would be levied on the economic rent of all land. Taxing land value is equivalent to taxing its economic rent, also referred to as ground rent or geo-rent. LVT would be based on the most productive use of a plot of land, regardless of current use, and regardless of current rental payments. Thus if a plot of land were not being used as productively as possible, the tax would push landowners to make the best possible use of their lands, or else pay the same as those who do.

LVT would promote equity and greater equality of income and wealth, because it would equalize the benefits from land, and equalize the gains from economic progress as captured by higher rent.

The prices of goods, including wages and interest rates, provide information about their scarcity relative to the desire for those items. Taxes both on production and on goods twist, distort, and skew these numbers, so that the economy is operating on false signals. LVT does not change the market rent, and rather than acting as a tax, it acts to remove a subsidy. Land value gets subsidized as the public goods provided by government, but not paid for by landowners, pumps up rent and land value. If this rent is not collected for public revenue, then it is a gigantic subsidy to land ownership. Thus taxes on goods and on income from production and not on land value end up subsidizing land value and shifting wealth from the poor to the rich.

Thus if the 9-9-9 plan increases wealth, the gains would go to the rich at further expense to the poor. The worst part of the plan is its continuation of the massive subsidy to land value, and even if the plan generates more growth, the benefit will ultimately go to higher rent and land value, generating an even greater real estate boom to be followed by another big crash.

So let's say in German: Nein! Nein! Nein! Let's also say Zero, Zero, Zero! Zero tax on wages, zero tax on goods, zero subsidy to land value. The tax emperor appears to be dressed to the nines, but like in the story of the naked emperor, the cloth is imaginary. -- Fred Foldvary

Copyright 2010 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.