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Socialism by Individual Choice

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    SOCIALISM BY INDIVIDUAL CHOICE How to socialize the economy s commanding heights without opposition Gavin R. Putland Version 2006.10.06 SUMMARY What assets
    Message 1 of 1 , Oct 6, 2006
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      SOCIALISM BY INDIVIDUAL CHOICE
      How to socialize the economy's commanding heights without opposition

      Gavin R. Putland

      Version 2006.10.06

      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

      DECLARATION

      NOTES

      --------------------------------------------------------------------

      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 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 certain assets, those
      rents must also grow as the economy grows; that is, the assets must
      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, as the proposed tax reform would discourage
      private production of the assets while failing to yield revenue for
      their public production, 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 are borderline cases in that the associated
      monopoly rights are created by governments but also require some
      prior effort from the (private) recipients. Describing these rights
      as "rentable" is problematic in the sense that there is usually not
      an observable rental market for them; and if there were, full public
      collection of the rent would deter the private effort that patents
      and copyrights are meant to encourage. The obvious solution is to
      exclude these assets from the category of "rentable assets" and
      exclude the present taxes on such assets from the reforms -- in
      other words, to leave intellectual property under the old regime.
      (This of course does not mean that the taxation of intellectual
      property cannot be reformed in some other way at some other time,
      but only that such reform is not part of the present proposal.)

      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 corporate profits are presently taxed in
      the hands of shareholders, the shareholders must be treated as
      initial owners for the purpose of the exemption. But if the present
      taxation of listed companies is at source, the companies must be
      treated as the initial 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 "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"

      If it is impractical to "rent" certain types of assets from the
      government, the income from those assets must be excluded from the
      income tax exemption in order to prevent a leakage of revenue; in
      other words, the present taxation of that income must continue.
      This has already been explained in connection with patents and
      copyrights.

      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 it.

      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

      So far in this essay, references to the class struggle have been
      conspicuously lacking. 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:

      * 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 soften them up 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 are subjected to none of 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 reduced to a form of capital, so Georgism was 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 the 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 Commonwealth 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 Commonwealth gets none of the benefit -- that is, you
      get it all.


      DECLARATION

      This essay is an attempt to determine the biggest dose of socialism
      that can be implemented without compulsion. The same author in an
      earlier essay [12] attempted to determine the nearest thing to
      Georgism that can be implemented without compulsion. The proposals
      in the two essays are almost identical (the only differences being
      due to terminology, and a slight evolution in the author's thinking
      on patents and copyrights).


      NOTES

      [1] Henry George, PROGRESS AND POVERTY (1879);
      http://www.schalkenbach.org/library/george.henry/ppcont.html
      (complete); http://www.henrygeorge.org/pplink.htm (abridged);
      http://www.wealthandwant.com/HG/PP/Brown_Sig_Paragraphs.htm
      (excerpts).

      [2] "The property in the soil is the original source of all wealth,
      and has become the great problem upon the solution of which depends
      the future of the working class.... The nationalization of land will
      work a complete change in the relations between labour and
      capital..." --- Marx, "The Nationalization of the Land",
      INTERNATIONAL HERALD, No. 11 (June 15, 1872),
      www.marxists.org/archive/marx/works/1872/04/nationalisation-land.htm .

      [3] "In present-day society, the instruments of labor are the
      monopoly of the landowners (the monopoly of property in land is even
      the basis of the monopoly of capital) and the capitalists." ---
      Marx, CRITIQUE OF THE GOTHA PROGRAM, 1875, ch. 1,
      http://marxists.org/archive/marx/works/1875/gotha/ch01.htm .

      [4] "[T]he monstrous power wielded by landed property, when united
      hand in hand with industrial capital, enables it to be used against
      labourers engaged in their wage struggle as a means of practically
      expelling them from the earth as a dwelling-place. One part of
      society thus exacts tribute from another for the permission to
      inhabit the earth, as landed property in general assigns the
      landlord the privilege of exploiting the terrestrial body, the
      bowels of the earth, the air, and thereby the maintenance and
      development of life. Not only the population increase and with it
      the growing demand for shelter, but also the development of fixed
      capital, which is either incorporated in land, or takes root in it
      and is based upon it, such as all industrial buildings, railways,
      warehouses, factory buildings, docks, etc., necessarily increase the
      building rent.... [I]t is the ground-rent, and not the house, which
      forms the actual object of building speculation..." --- Marx,
      CAPITAL, vol.3, ch.46,
      http://marxists.org/archive/marx/works/1894-c3/ch46.htm .

      [5] "But America has outgrown this early stage. The boundless
      backwoods have disappeared, and the still more boundless prairies
      are fast and faster passing from the hands of the Nation and the
      States into those of private owners. The great safety-valve against
      the formation of a permanent proletarian class has practically
      ceased to act. A class of life-long and even hereditary proletarians
      exists at this hour in America." --- Engels, Appendix to the
      American Edition of THE CONDITION OF THE WORKING CLASS IN ENGLAND,
      1886, http://marxists.org/archive/marx/works/1886/02/25.htm .

      [6] "It is quite true that the land monopoly is not the only
      monopoly which exists, but it is by far the greatest of monopolies;
      it is a perpetual monopoly, and it is the mother of all other forms
      of monopoly." --- Winston Churchill, speech delivered at the King's
      Theatre (Edinburgh) on July 17, 1909, reported by THE TIMES and
      reprinted in LIBERALISM AND THE SOCIAL PROBLEM (Hodder & Stoughton,
      1909; http://pge.rastko.net/dirs/1/8/4/1/18419/18419-h/18419-h.htm)
      and THE PEOPLE'S RIGHTS (Hodder & Stoughton, 1910).

      [7] "The proper application of the Georgean taxation of land values
      is a tax upon the mentality of a people... not ten per cent of whom
      have learned to read. They can't understand it. They can only
      understand socialism at present. Some day, with a higher average of
      intelligence, we may adopt the taxation of land values and enjoy
      economic freedom, but not now." --- Lenin, quoted by Raymond Robins,
      reported by the GLOBE DEMOCRAT (St Louis, Jan.27, 1934).

      [8] Refs. [2] to [5] are owed to Fred Harrison, "Gronlund and Other
      Marxists", AMERICAN JOURNAL OF ECONOMICS AND SOCIOLOGY, vol.62, no.5
      (Nov. 2003), reprinted as ch.14 of Robert V. Andelson (ed.), CRITICS
      OF HENRY GEORGE, 2nd. Ed. (Blackwell Publishing, 2003), vol.1.

      [9] Because sites are the archetypal "rentable assets", the author
      has elsewhere referred to such assets as "land-like" or "site-like"
      assets.

      [10] M. Gaffney, "Neo-classical Economics as a Stratagem against
      Henry George" (http://homepage.ntlworld.com/janusg/coe/!index.htm)
      in M. Gaffney, F. Harrison, K. Feder, THE CORRUPTION OF ECONOMICS
      (London: Shepheard-Walwyn, http://shepheard-walwyn.co.uk , 1994).

      [11] "In England, the capitalist is usually not even the owner of
      the land on which his factory stands." --- Marx, CRITIQUE OF THE
      GOTHA PROGRAM, 1875, ch. 1,
      http://marxists.org/archive/marx/works/1875/gotha/ch01.htm .

      [12] See http://grputland.com/working/paper01.htm .

      --------------------------------------------------------------------

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