http://www.progress.org/2011/fold713.htmThe Failed Explanationby Fred E. Foldvary, Senior Editor
The Progress Report
18 April 2011
Weekly “alternative” newspapers throughout the USA on 13 April 2011 published an article by David Cay Johnson on “The failed experiment” (SF Bay Guardian) or “Tax the Rich!” (East Bay Express) or “9 Things The Rich Don't Want You To Know About Taxes” (Willamette Week; To see the whole article,
click here).
The author claims that “misplaced faith in tax cuts” and other “economic myths” are destroying the economy of the USA. He is correct that the economy of the USA, and other countries also, are being destroyed, but this not because of tax cuts. What has caused wreckage and will cause future economic catastrophes are huge subsidies to land value. But this economic reality is not obviously observable, and understanding it requires a knowledge of economic theory that very few journalists have.
The author claims that the US government has conducted an economic experiment in “supply-side economics.” He describes this policy as tax cuts that stimulate investment and growth, which then generates more tax revenue than before. But real supply-side economics only proposes that a reduction in the cost of production results in more production. Supply-side theory cannot claim whether tax revenues will increase or decrease, since that is an empirical result that has to be found from application.
There is indeed a revenue curve theorized by the Arab economist Abu Said ibn Khaldun (1332-1406), popularized by economist Arthur Laffer. The Khaldun or Laffer curve says that at very high tax rates, there will be less tax revenue than at lower rates, because if almost all income gets taxed away, there is less production. If tax rates are low, then higher tax rates do generate more tax revenue. But where the US economy is or has been on the Khaldun curve is an empirical matter; supply-side theory cannot provide any particular maximum-revenue tax rate.
Actually, tax revenues did rise substantially after tax cuts. There were tax cuts during the administrations of presidents Kennedy in the 1960s, Reagan in the 1980s, and GW Bush during the 2000s, and all resulted in more economic growth and lower unemployment. The problem was not the tax cuts, but that the economic growth got misdirected into speculative real estate booms. The misdirection was caused by massive subsidies to land values.
The author talks about the rich and the poor without differentiating or examining where the money comes from. He does say that “Big real-estate investors enjoy tax-free living” because they can deduct “paper losses like depreciation” against income. But the author does not mention the greatest subsidy of all, the generation of land rental from public works and civic services, paid for mostly from taxes on labor. Worker-tenants pay twice for public goods, once in higher rental, and again in taxes. Landowners get subsidized by getting higher land value, along with low tax rates on real estate, legal-fiction depreciation, tax-free property sales, and tax-deductible mortgages and property taxes.
The author complains about the rich who pay no taxes, but does not provide the most effective remedy: tap land value for public revenue. Advocating higher income taxes on the rich ignores the fact that many of the rich get the funds back via the government subsidy to their land value. The alleged purpose of the income tax was to get the rich to pay most of the taxes, and the rich do pay much of the income taxes, but there are other taxes such as on goods that the poor pay, and the rich will have the political clout to obtain tax deductions, credits, and exemptions.
The remedy is a constitutional provision that requires the collection of the economic rent of all land. Unlike income and financial capital, land does not hide, flee, or shrink when taxed. The real estate assessments would be a public record for all to see.
Supply-side economists are correct in saying that lower tax rates on labor and enterprise will generate more production, investment, and growth. They usually avoid taking the concept to its logical conclusion: have no taxes on labor and capital yields, but do tap the full economic rent of land. Taxing or tapping land value promotes the most productive use of land, since it is based on the rent paid when land is optimally used, regardless of current use or current tenant payments. But the author is evidently unaware of, or else ignores, land-value taxation.
The author states that the incomes of most Americans have stayed about the same, while the income of the very rich rose substantially. But there is no examination of the cause: much of the gains from economic growth is captured by higher rent. That is why the few who own much of the valuable real estate, such as commercial land, get rich, while most folks break even. When wages do go up, the increase is eaten up by higher payments for housing. Some middle-class homeowners thought they were benefitting from rising real estate prices, only to suffer great losses from the inevitable Crash of 2008.
The author finishes by advocating “a tax system that benefits the vast majority,” but does not say what that would be. Unfortunately, readers are left with the impression that the remedy is to hike up income tax rates. But if high tax rates are so good, Kennedy would not have advocated the tax reduction that created prosperity during the 1960s, until the country got infected by the Vietnam war, higher inflation, and a real estate boom that crashed in 1973.
An opportunity to provide real economic education was missed. “The failed experiment” was a failed explanation. Interestingly, the fact that the author, a writer for the web site tax.com, did not explicitly advocate higher income tax rates, indicates that perhaps he may be conflicted, perhaps knowing the truth, but not daring to exclaim it.
