Tax Policy
By: Rich Palmer
Tags: Politics, Economics, Taxes, Poverty, Government

Tax Policy

It’s about “what” not “who”

Our tax system is unnecessarily complex and the discussion on policy has devolved to the point of no return. We focus the conversation exclusively on who we tax and how much we take. Our myopic approach to tax policy has led us to a battle between rich and poor. We increases taxes on the rich to fund the institutions needed to support the poor, or we reduce taxes on the wealthy so those less fortunate can benefit from all the jobs and higher salaries that the corporate elite tell us will trickle down to the working class. The Democrats are Robin Hood — the Republicans the Sheriff of Nottingham.

Shifting the narrative from who we tax to what we tax will bring us to a position of productive discourse. Our national well being can be tied to three things: land, labor, and capital. The income derived from each — rent, wages, and interest — comprise our collective wealth and represent the tax base from which we fund our public institutions. For too long this three-factor model and specifically rent, i.e., the locational value or fertility of land, has been absent the minds of those in charge. For if it were included, our present-day tax system would be simple and just. And yes, the term “rent” is not at all intuitive and completely confusing — another fancy term the economists use to make sure us simpletons don’t feel comfortable challenging their ivory tower authority.

The current tax system disproportionately taxes income (wages) and capital, placing an undue burden on all income earners, regardless of class, as well as investors. This ultimately places unnecessary barriers to progress on lower and middle-class wage earners as well as job creators. Those who reap disproportionate benefits from this structure are landowners. Because rent (land) is under taxed, wealth accumulates not through labor or investment, but simply through existence. Land is a finite resource. As populations grow, land inherently appreciates, both agricultural and urban. This appreciation is attributable not to the industriousness of the owner, but to the existence of public institutions that 1) fund investment in physical infrastructure (property in one of our fancy cities has significantly less value without running water and electricity; farm land is fallowed without publicly funded water projects) and 2) establish the trust and social stability that allows economic activity to thrive.

It is readily apparent how a reduction or abolition of income and payroll taxes will benefit employers and laborers, especially the latter who do not own homes. And it is also easy to see how a reduction in the cost of capital (by lowering taxes on interest and capital gains) will support investment and further job creation. But what is most important to a three-factor approach to taxation is that it provides the necessary framework to hold a constructive discussion. Land appreciates in value because of public systems that enable it to do so, but also because of capital improvements. When viewed this way, it is fair to conclude that the value of land net of capital improvements should be at least partially taxed, if not fully taxed. Furthermore, landowners are also income earners, and it may very well be possible to implement a tax that is 1) net neutral to the majority of Americans and 2) allows those most excluded from the economic prosperity of the past three decades, i.e., laborers who do not own land, to take home more of the income they earn as a productive member of society.

Endnote: some of the ideas in this post draws substantially from the thinking and writing of Henry George as well as Mason Gaffney and Fred Harrison. My hope with this work is to encourage productive discourse by bringing together brilliant ideas from larger volumes into a shorter, compelling narrative.