Transcript Powerpoint slides to accompany "The Hidden

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I aim to show that by ending taxes on wages and
enterprise and instead financing the state via land
rents, we can significantly boost Scotland’s economic
performance.
To see why this is so, we need to grasp the meaning of
rent and its quantitative significance.
The starting point is the Scottish Enlightenment
Land and natural resource rents in classical economic thought
(i) The influence on Adam Smith of the French “économistes”
and the “impôt unique” or “single tax” on Land
“The landlord loves to reap where he has not sown.”
But…
The Nature and Source of Economic Rent
(ii) David Ricardo’s Law of Rent (1817):
On the least favourable land in use, labour and capital can produce
just enough to pay the competitive rates of wages and profits, leaving
nothing for the landlord to extract as rent.
This is “marginal” or “no-rent” land.
Contrast “intra-marginal” land: There, labour and capital are more
productive.
But the extra output goes not to the producers but to the owners of
superior land as RENT.
Ricardo: Land commands a Rent even though it’s a
“Free Gift of Nature”.
Thus Rent is a pure surplus: land’s annual price exceeds its cost of
production. Hence Rent is a monopoly price:
- we can’t produce more to
reduce its price to its (zero) cost.
Because supply is fixed, price is entirely demand-driven.
Price is just a rationing device or transfer payment between owners.
It does not use up real resources.
So, if the state collects rents by imposing user fees this simply
causes rents to be transfered to the community.
There are no “deadweight losses” or “excess burdens”.
Contrast the taxation of productive activity.
However, land does have an opportunity cost.
A site could be used for many different uses.
So its price (rent) is needed as a rationing device, to
encourage its best use.
The only question then is: who should get this rent?
The Adequacy of Rents
The National Accounts fail to reveal the true extent of rents
This is how the accounts reported UK GDP in 2011 at market prices
(£1,537bn) by category of income:
Total gross operating surplus:
“Mixed” incomes (of the self-employed):
Employee compensation
Taxes less subsidies on products and imports:
£436bn 28.4%
£ 85bn
5.5%
£820bn 53.4%
£190bn 12.5%
The 2011 accounts estimate that property income
totalling £483 billion accrued to individuals in the following ways
(i) interest: £210bn
(ii) distributed incomes of corporations £72bn
(iii) reinvested earnings on direct foreign investment: £130bn
(iv) “property income attributed to insurance policy holders” –
presumably the owners of buildings: £71bn
(v) rent on land: £0.417bn [includes only the explicit payments
for land qua land alone, hence a relatively trivial sum]
=> Land’s disappearing act
The hidden rents: a list
• Rents that should be imputed as part of services of buildings
of all kinds: houses, factories, shops, offices, theatres
• The radio spectrum
• The rental value of subsoil and submarine mineral resources
(oil, coal, copper, etc)
• Parking lots and road licences
• Agricultural land rent (currently exempted)
Plus, most important of all,
Rents hidden by taxation
Hidden Rents and the Incidence of
Taxation
Adam Smith and ATCOR – “All Taxes Come Out of Rent”
Why? Because they add to the cost of labour and capital
At the no-rent margin, labour and capital cannot justify the going wage
and profit rates. They are priced out of production.
On intra-marginal land, rents are squeezed to prevent net wages and
profits from falling. The cost of taxes are borne out of rent
This explains why a tax on rent cannot be passed on to
labour and capital.
-- The going wage and profit rates do not contain a surplus that
can be squeezed for long.
If rents are taxed according to land’s optimum permitted use, the
tax encourages fuller use of land – in contrast to taxes on labour
and capital whose supply is elastic and mobile
Adam Smith again:
“Ground rents are a still more proper subject of taxation than
the rent of the houses.
“A tax upon ground rents would not raise the rent of the
houses.
“It would fall altogether upon the owner of the ground rent,
who acts always as a monopolist, and exacts the greatest rent
which can be got for the use of his ground…”
Another policy implication
If we reduce the taxation from labour and capital, more
will be employed and more land demanded.
=> Rents would transparently increase
=> a greater pool for the government to collect.
If not all is collected, there may even be more left for
the landlords than they had before! (Martin Feldstein)
Furthermore,
• By removing taxes from production and on to rent, national income
increases. And this increases the size of the market.
=> Smith’s most important aphorism: “The division of labour is
limited by the size of the market.”
• And increased specialisation was the main source of the increase of the
Wealth of Nations.
• Hence the gains are cumulative and self-sustaining.
• This implies that “deadweight losses” of taxation are far greater than
commonly realised. By depressing the growth of the market, the losses
are compounded over time.
• I estimate that by replacing taxes with land rents – and so
removing deadweight losses – we can conservatively
reckon that annual economic growth would increase by two
percentage points, cumulatively. More on this shortly.
• But if the Scottish government seizes the opportunity now
being given it to slash income taxes and replace them with
land rent revenues, this could expand the Scottish economy
by £60bn over the
The buoyancy of rents
• But how ‘buoyant’ are they?
• Very buoyant, as rev eal ed by thes ec u
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HOUSE PRICE BOOM, 1969-2011
Source: D Bell & D Eiser (2014)
House prices for first-time buyers have massively inflated between 1969 and
2012. Not only have prices increased, but they have become more
unaffordable. In 1969 the average home cost just over £4,000, against an
average buyers' wage of £1,600 (price: 2.5 times income). By 2012, the price
had increased to almost £182,000 against a buyers' wage of just under
£45,000 (price: 4 times income). The following graph shows the same data
between 1978-2012, adjusted for inflation using 2012 as the basis.
A list of deadweight losses and excess burdens
from taxation of labour, capital and products
• Unemployment and underemployment of labour and capital –
and land too
• Distorted relative prices of productive factors => inefficiency
• Unaffordable housing
• Speculative purchase and holding of land
• Boom-bust cycles
• Poverty and inequality => conflict, crime and drugs
• Reduced market size => less specialisation
• Reduced specialisation reduces growth, cumulatively
Quantitative estimates of the Losses of Nations from forfeiting a postulated
two percentage point increase in GDP growth
•
•
•
•
•
1970 real UK GDP: £575,736 bn. Population 55.6 million.
Income per head £10,555.
1970-2012: UK average growth rate = 2.52% (2.2% per capita)
=> 2012 GDP = £1,414,821 bn. Population now 63.7 million.
Income per head doubles to £22,211.
Now assume, conservatively, that our fiscal reforms had
boosted the average annual growth rate to 4.52%
=> 2012 GDP = £3,768,398 bn. Income per head, instead of
doubling, would have risen nearly six-fold, to £59,158.
The difference (£59, 158 - £22,211) is £36,947 per head.
The Hidden Potential of Rents – The Scottish Example
In 1970 the average income in Scotland was £9,166 (in 2011
prices).
By 2013, this had increased by 133% to £21,378, an increase of
£12,212 per person.
Had Scotland had a fiscal system based on Land Value Rating, the
annual growth rate could have been boosted to 4.1%, and the
2013 average income would have been 463% higher at £51,589.
This is an increase of £30,211 per person. This is the scale of past
losses and the scale of Scotland’s future opportunities.
Conclusion
• We have seen the magical power of compound
interest, or the self-sustaining nature of growth.
• This justifies every effort to grasp the nettle of
reform that would boost the rate of growth.
So, end taxes on wages and enterprise: Fund
government with land rents instead.
Let’s keep what we make, and pay
for what we take