Concluding our discussion of tariffs, as we noted previously there are three badly flawed economic principles which many people hold as absolute, unquestioned dogmas. Two of these flawed principles are general, but applied specifically in the third, regarding tariffs, which we looked at last week. The principles are:
Pope Pius XI
· Oneself Contra Mundum. You are the center of the universe. Everything you do not own or control, and everyone who does not support you, is either a threat or an enemy. What you do own or control, and anyone who supports you, is a tool to be used and discarded once its, his, or her utility is over.
· The Labor or Input Theory of Value. Under the labor or input theory of value, derived from the thought of economist David Ricardo, a thing is worth what it took to produce it, not, as Adam Smith and other classical economists of his school believed, its utility to the consumer or buyer. In common with Marx and Keynes, many people accept Ricardo’s zero-sum approach, and — as revealed in today’s insistence on “deals” — firmly and irrevocably believe you gain only by taking advantage of others, not by engaging in mutually beneficial efforts in which everyone wins.
· Failure to Understand Tariffs. A tariff is a heavily regressive tax imposed by an importing country on its own taxpayers. It makes foreign goods more expensive and discourages international trade. President Trump, however, seems to believe tariffs are paid by the exporting country, and appears to view monies collected by the government of the importing country from its own taxpayers as a return of what was presumably stolen (“ripped off”) by the exporting country from the importing country through bad deals.
Today we will look at what happens when you misunderstand tariffs. Given the current confusion, it should come as no surprise when we discover today’s massively confused tax systems originated in a theory of taxation that, to put it mildly, was promoted by someone who had no idea how taxation or fundamental principles of economics work, and whose thought, moreover, was rooted in a “concept of society . . . utterly foreign to Christian truth.” (Quadragesimo Anno, § 117.)
Henry George
We refer, of course, to the theories of the agrarian socialist Henry George, whose book, Progress and Poverty (1879) — one of the two bestselling socialist books coming out of the United States in the 19th century — inspired the formation of the Fabian Society, the “wolves in sheep’s clothing,” as their emblem acknowledges. If John Maynard Keynes was not a member of the Fabian Society (and there have been strong arguments advanced that he was), his economic policies “coincidentally” could have been dictated by the Fabians.
Primary among Keynes’s tax principles is the tax system is not primarily to raise revenue, but to coerce people to act in ways acceptable to the government. This is not what Henry George advocated, but it does display a fundamental misunderstanding of money, taxation, and economic principle at least equal to George’s own theories and which resembles the thinking about tariffs we see confusing people today.
To explain, there is the fixed idea today that foreign countries pay tariffs. No, as we saw earlier, American consumers pay the tariff. Foreign importers are harmed by selling less of their goods, not by being taxed.
Compare this with Henry George’s idea of the “single tax.” As he stated, more clearly than the current administration in Washington,
What I, therefore, propose, as the simple yet sovereign remedy, which will raise wages, increase the earnings of capital, extirpate pauperism, abolish poverty, give remunerative employment to whoever wishes it, afford free scope to human powers, lessen crime, elevate morals, and taste, and intelligence, purify government and carry civilization to yet nobler heights, is — to appropriate rent by taxation.
In this way the State may become the universal landlord without calling herself so, and without assuming a single new function. In form, the ownership of land would remain just as now. No owner of land need be dispossessed, and no restriction need be placed upon the amount of land any one could hold. For, rent being taken by the State in taxes, land, no matter in whose name it stood, or in what parcels it was held, would be really common property, and every member of the community would participate in the advantages of its ownership. (Henry George, Progress and Poverty. New York: The Robert Schalkenbach Foundation, 1935, 405-406.)
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| Fabian Society Emblem |
Unfortunately, just as some people today are confused as to who pays tariffs, George tended to become a little vague when questioned as to where landlords were to obtain the funds with which to pay the single tax. His proposal was for all rent and profit of land-as-land, whether in its virgin state or fully improved (the same rate for all), to be paid to the government as a single tax. Non-owners of land would be completely free of all taxation whatsoever and receive the full value of what they produce with their labor, labor being the only thing which produces. (Ibid., 328-407, 447-453.) Small landowners who worked their own land would find the value of their land diminished so they would pay very little in tax (ibid.). Large landowners would pay the vast bulk of tax (ibid.).
Here is the difficulty. In his system, George equated paying rent on land-as-land with paying tax. He insisted all land be taxed at the same rate whether it was put to productive use or not. (Henry George and David Dudley Field, “Land and Taxation: A Conversation,” The North American Review, Vol. 141, Issue 344, Jul 1885, 2-6.)
At the same time, George insisted no one who did not own land would pay any tax. Instead, tenants would receive the undiminished product of their labor, with no portion of it whatsoever going to taxation. Paid into a common fund, all rent on land-as-land would be “[n]ot a taking from the people, but a collecting of their legitimate revenues.” (Ibid., 9)
From whom were these “legitimate revenues” to be collected, however? According to George, from the rich. This would result in a more equitable distribution of wealth throughout society, higher wages, and many other benefits. (George, Progress and Poverty, op. cit., 442-443.)
In sum, George proposed non-landowners pay no land rent-tax at all, small landowners pay a miniscule amount, and the major tax burden fall on rich landowners. Because landlords would receive no rent revenue from land-as-land, he theorized the effect would be to redistribute their existing wealth collected as rent-tax through the tax system.
George’s single tax proposal was therefore not a pass-through arrangement, where tenants would continue to pay rent to the landlord, who would then pay it to the government. It was, rather, pure redistribution of existing wealth with virtually everything coming from the wealthy.
In addition, George believed rents for fixtures such as dwellings would fall in response to the anticipated drop in land values, as would the price level in general. This would increase wage earners’ disposable incomes as well as raise wages overall, evidently through a variation of the discredited wage fund doctrine, which we won’t get into here.
In reality, the exact opposite would happen. Just as today when corporations pass through tax and other cost increases to their customers, non-land rents paid by tenants would rise to cover the amount of the land rent-tax they did not pay. Landlords could then make up the shortfall, and possibly a bit more for their trouble. Non-landowners would be worse off than before, as they would assume virtually the whole tax burden, albeit recategorized as non-land rent. Higher prices would result all around.
It works like this. Just for the sake of the example, suppose a farmer is renting a forty-acre establishment for $100 a month, $75 for the land-as-land, and $25 for the fixtures, such as the house, barn, fences, etc. He also pays $10 in taxes on whatever, making total outlay for the farmer $110. The landlord also pays $10 in taxes on whatever. Total cost to the farmer for being a farmer is $110 per month, while total revenue to the landlord is $100 per month.
Under George’s single tax proposal as George envisioned it, the landlord would pay the entire $75 rent of land-as-land to the State as the only tax, reducing his taxes by $10 but increasing them by $75, for a net tax increase of $65. The farmer would only pay the landlord $25 for rent on the fixtures, and nothing in taxes on whatever. Gross tax collections would increase by $55, from $20 to $75.
Furthermore, because this arrangement would — according to George — lower the value of land-as-land, the rent on the fixtures would also drop, say from $25 a month to $20. The savings to the farmer would therefore be $90 a month, while net costs to the landlord would increase by $65 ($75 new tax less $10 old tax) and gross revenue decrease by $80, a net loss each month of $145 ($65 increased costs plus decreased revenue of $80) in place of the former profit after taxes of $90.
Thus — according to George — the single tax would shift $90 from the landlord in the form of lost revenue and increased taxes to the farmer in the form of savings, who (since George considered human labor the only truly productive thing) was the one creating the wealth in the first place, while the landlord was a thief stealing what he had not earned by selling what he did not own.
What would really happen is the landlord would not lower the rent on the fixtures from $25 to $20, which would put him $55 in the hole each month instead of a mere $50 if non-land rent stayed the same. Instead, the landlord would raise non-land rent from $25 to $165 or more to cover the increased taxes and replace lost income (original non-land rent of $25, plus net increased taxes of $65 plus lost revenue of $75). The farmer would “pay no tax” and “zero rent” on land-as-land . . . but increased rent on everything else of at least $165.
The farmer’s cost breakdown would be $25 to cover the original non-land rent, plus $75 to cover the landlord’s net taxes plus his own now paid by the landlord (the single tax of $75, less the landlord’s former $10 tax, plus the farmer’s former $10 tax), plus $75 to cover lost revenue, less his $10 tax savings, which would be paid by the landlord. The entire aggregate tax increase of $55 would not be paid by the landlord in the form of the State taking all rent of land-as-land as a single tax from the landlord, but by the farmer paying increased non-land rent to the landlord, who passed it through to the State as an illusory and deceptive “single tax.”
In short, both George’s single tax and the current ideas about tariffs are based on a complete fantasy about how the world really works and how people really act, not to mention a few critical mistakes about facts. What’s the solution? For starters, adopt the Economic Democracy Act, then we can talk about a rational tax policy that at least does minimal harm by being restricted exclusively to raising revenue in a straightforward and coherent manner.
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