Taxing More from the Rich Is Difficult. This Is How to Do It.

By Polly Cleveland

In the March 1 UK Prospect, economist James Galbraith offers the Brits, and us, two proposals to repair a broken economy. The first, unsurprisingly, is a heavy tax on estates, with a high exemption. Not inheritances, but estates, because that encourages philanthropy, which creates jobs. A highly progressive income tax, though desirable, still misses a lot of income, notably unrealized capital gains. But an annual tax on personal wealth, as touted by Elizabeth Warren and some prominent economists, would be “a full employment scheme for appraisers, consultants, money laundries and tax lawyers.”

Galbraith’s second proposal is a land tax. Yes! This was the preferred tax of the classical economists, the one Adam Smith called “the most equitable of all taxes.” This tax—at the extraordinary rate of 4 shillings to the pound or 20%—launched the British Empire in 1692, by funding the British fleet. (The tax was eventually wiped out by inflation.)

A land tax is part of the ordinary tax on property, the part of property value that makes owners “grow richer in their sleep,” and that blows up in a bubble and then collapses. Some cities in Pennsylvania tax mostly land and not buildings; many Australian cities, including Sydney, tax only land, as do California irrigation districts. But Galbraith says, along with land we should tax “other publicly created property rights, such as mineral rights, parts of the electromagnetic spectrum, corporate charters, licenses, patents, copyrights and rights of way.” The One Percent own the bulk of all these valuable rights, either directly or through corporate shares.

Galbraith says, “Unlike financial wealth, land value can be measured, appraised and taxed each year on its market value. The result is efficient use of land and other rights, and abundant funds for urban reconstruction, development and maintenance—a virtuous cycle of public investment, land value and public purpose. Exceptions can be made for historic preservation and for elderly homeowners, with the taxes deferred until properties change hands.”

If land taxation is so good, why does it get so little support and attention? As Galbraith understates, “landowners, anciently the most reactionary of all social classes, do not like it.” That means you, Charles Koch.

Galbraith told me that in circulating this, I should acknowledge his debt to “the late, great Mase” Gaffney. I deserve some credit too, for introducing them some twenty years ago.

From Germany to America: A Dialog on Inequality

By Polly Cleveland

At a coffee break between sessions at the annual History of Economics Society meeting, I chatted with D___, a tall, blond young woman, a professor of political science at a German university. On hearing that I work on inequality, she immediately challenged me.

D: “I don’t believe in equality. Inequality is just a statistic, a side effect. What’s relevant is how people actually live. What matters are policies to improve citizen’s wellbeing, like health or education, not policies to reduce inequality.

P: But aren’t those statistics useful in identifying those societies that are or are not doing a good job providing those services? After all, there are many statistical studies showing that more equal societies have grown faster and have a higher GDP per capita.”

D: No. Inequality statistics are just an artifact. They don’t mean anything. We could all be perfectly equal in extreme poverty, like we were in East Germany. [Obviously before she was born.] Is that what you want?”

P: In the United States, our Congress just passed a new tax law reducing income taxes for the rich and for large corporations.  That will surely lead to reduced services and other benefits to poorer people.

D: Well, what do you want? A flat tax? The same tax on each person? That would be a perfectly equal tax.

P: A flat tax would be regressive because it would take a higher percent of the income of poor people—if they could pay it at all. How about a flat percentage tax on wealth? Since wealth is much more unequal than income, that would be more progressive even than an ideal progressive income tax.

D: That’s not the point. We need to focus on ordinary citizens’ wellbeing. If we do that, the rest will take care of itself.

P: OK, how about a basic income grant, that is, the same sum paid monthly to every citizen of a country, man woman and child, rich and poor. A large enough sum to provide a modest living. That idea has become very popular lately. It is being promoted by some Silicon Valley tech entrepreneurs.

D: No, I don’t think that’s a good idea. People should contribute to society. Basic income would give people bad incentives. They would take it easy.

P: Wait a moment, there’s a difference between basic income with no strings attached, and public assistance money. Here and I assume in Germany, public assistance is phased out as people earn more income. What’s amazing is that some people who receive assistance keep on working even though they lose income. The dignity of holding a job is very important.

D: Well you may be right about that, especially in Germany.

P: In the 1970s there was a guaranteed minimum income experiment run for five years in Manitoba, Canada. Recipients received additional income which—as with public assistance—was phased out as they earned more. A few years back Evelyn Forget, who’s here at the conference, analyzed the data. She found that only new mothers and teenagers worked substantially less. The teenagers became more likely to finish school, presumably due to less pressure to support their families. New mothers and school age teenagers are just the people you’d want to stay home. Remember, this was not a fixed basic income, but a guaranteed minimum with a sharp phase-out at 50% or more effective tax.

D: Still, you have to make a choice. Do you want equality of opportunity or equality of outcome? You can’t have both.

P: Actually, I think you can, sort of. A basic income grant, plus the public services we expect in a modern society—health, education, pensions, security, justice –including protection from unfair practices like monopolies—those should guarantee a rough equality of opportunity. Above that, it should be OK for people to earn high incomes by hard work, talent, or even luck. But you need progressive taxes to finance the system.

Whoops, just as I was getting to the punch line, the elevator arrived to take us downstairs to the next sessions. I would have said that as Adam Smith wrote in the Wealth of Nations (1776), taxes should be proportional to benefits received—a notion more radical than any proposed by today’s leftists. Chief among benefits received, Smith included government protection of title to land, in an era when some 2% owned most of the land in England. The tax he favored was a tax on the value of that land, a tax that would capture the “rent” or unearned income England’s “great proprietors” gained from the mere title to land granted and protected by the king. England had a land tax, but at low rates and poorly administered. The French “Philosophe” reformers whom Smith visited in Paris is 1766 advocated land taxes, as did the next generation of economists such as David Ricardo.

A hundred years later, in 1879, the American economist and radical reformer Henry George took Smith’s idea and ran with it. In his world-wide bestseller Progress and Poverty, George argued that all taxes should be replaced with taxes on land values only, and the revenues used for public purposes like schools and infrastructure (including public bath houses!). This was a perfectly practical proposal: property taxes then and now are assessed on land and buildings valued separately. In the heyday of George’s influence in the late 19th and early 20th century, assessors just left out the buildings and raised the rate on land to make up the difference.

Now almost 140 years later, as support for basic income has grown, some advocates have made the obvious connection: why not finance basic income with a land tax? That squares the circle, doesn’t it? Equality of opportunity at the bottom via a basic income grant, financed by a tax that limits inequality of outcome at the top.

That might be too theoretical for my pragmatic German acquaintance. She’s right, though, that we need to be more specific in talking about inequality.