GroundSwell, January-February 2009]
Many stores have closed in the last year; they stand empty behind
signs reading "Available", "For lease", or "First
month free". So have many industries, their gates padlocked,
their girders rusting. The capital in them is wasted, poured down a
rat-hole. Multi-million dollar freighters are mothballed, with no
cargos to carry; others sail with unfilled capacity. Vast warehouses
stand half-empty. Fleets of trucks wait for loads that never come.
Redundant McMansions stand waiting for buyers, some advertising Bank-owned.
Freight trains haul too many "empties going back".
This brings us up against a weakness in locally-oriented Georgism,
which emphasizes the benefits of modifying local property taxation to
untax or downtax buildings. Not long ago the Building Industry
Association in my city approached me to help lobby to lower various
fees in lieu of taxes imposed on builders. I could have used the
money, and easily repeated the litany of Georgist arguments against
taxing buildings, when it occurred to me we have too many buildings
already, and better uses for the capital needed to build more.
It looks stony-hearted to read we "have too many buildings"
when there are still poor families crowded into "roach motels",
and outright homeless. However, that is due to maldistribution, and
misdirected investments. Its remedies lie in making jobs, raising wage
rates, untaxing labor, and uptaxing land values. It is the aggregate
of buildings that are a drug on the market, while businesses wither
and die for want of working capital needed to hire workers to fill and
use the buildings.
In the previous Great Depression, as today, America was loaded with
empty buildings and excess capacity.
Once I built a tower to the sun, with bricks and rivets
Once I built a tower, now it's done. Brother, can you spare a dime.
-- Yip Harburg, 1931
Empty subdivided lots, too, went begging; owners abandoned many for
back taxes. The Georgist message, locked into a paradigm from earlier
times, seemed irrelevant and was shunted aside. This time around, we
need to stress how taxes that ?shoot anything that moves? keep things
from moving. We need to show how removing taxes on labor and
production and sales will raise the value of empty buildings and
lands, so property taxes can yield more revenue to replace them.
I seek no quarrel with the many Georgists who give splendid service
to the cause of downtaxing buildings to uptax land values. Their work
is basic, demonstrating again and again, city by city, the feasibility
and good effects of taxing land values separately from buildings and
other capital. For it's not just the capital that's wasting. There is
land under those empty buildings, often more valuable than the
buildings themselves. It might as well be vacant. It's more than the
land literally under the building, too. Even residences have yards,
garages, and driveways; some have palatial grounds, in the choicest
neighborhoods. Retail and wholesale and industrial buildings have vast
parking areas and aprons for employees, customers, and deliveries.
Some have wide yards for open storage. When city planners count up
vacant lots, if they do, they usually see just lots without buildings,
of which there are many, but nowadays there are as many or more
invisible vacant lots under and attached to empty buildings.
We fret about Al Quaeda, and immigrants from Central America, but
these empty spaces and vacant lands might just as well be ceded to the
Taliban, or drowned like Atlantis, for all we use them. Osama bin
Laden's attacks are pinpricks compared with the damage we do ourselves
by mismanaging our economy.
Trivializers tell us that abandoned lands in declining cities are
worthless, noting that the median house in Detroit now sells for only
$35,000 or so. However, that is to misunderstand three important
matters. One is that Detroit not long ago was our fourth biggest and
fastest growing city, home of the assembly line, core of the arsenal
of democracy and the locus of our bellwether industry. Its
location has not worsened, but improved with the St. Lawrence Seaway
opened and global warming lengthening its ice-free season. The second
is that Michigan's leaders can renew Detroit and their whole state any
time by shucking their terrible counterproductive modern tax
system and returning to the system that sparked Michigan's spectacular
growth, as documented in this writer's previous Insights column, "What's
the Matter with Michigan?". The third is that urban renewal in a
free market proceeds from the fringe of a slum in towards the center.
Richard Hurd taught us back in 1903 that land values are marked by
continuity in space, because developers seek to anchor new
neighborhoods to the best of the old. The heart of a slum may be
hopeless, if you try to parachute renewal in there, but the edges are
always renewable, and a market revived by untaxing new buildings can
proceed naturally inwards from there.
So property tax reform remains basic.
However, please consider this. Property tax reform carried more
weight when Henry George wrote because -- the property tax was the
major tax levied by both state and local governments; federal taxes
were light. Also, taxable property included personal (movable)
property as well as real estate, while most states today have exempted
all or part of personal property from the base. Reforming the property
tax then, in George's day, was reforming a major part of the whole tax
So we return to asking what's the use of new buildings when so many
old ones are empty. To be sure, new ones may replace old depreciated
and obsolete buildings, there is always some of that, but many of
these unsold buildings today are brand new themselves. Supply has
outpaced demand, leaving us with a great housing crash. There were
some 2.3 million foreclosure filings in 2008. It's not saying much
that it's the greatest crash of this millennium so far -- 9 short
years -- but going back to the prior millennium it's worse than 1990,
worse than 1975, worse than 1958, many are equating it to 1929, for
like 1929 it has brought the banking system down with it, and the rest
of the world along with it.
Today we have sales taxes, business taxes, personal and corporate
income taxes, payroll taxes for social security and medicare, employer
responsibility for workmen's comp and, in many cases, pensions. We
have an income tax system, federal and state, that has turned
owner-occupied housing into the greatest tax shelter while simple
basic labor bears the brunt of what housing does not pay. On top of
that we have subsidy programs for housing, while no one subsidizes the
overtaxed worker for working. Income from commercial buildings is
mostly untaxed, too, as Hudson and Feder's work for the Levy Institute
has shown. This is done through a combination of accelerated
depreciation, avoiding the capital gains tax, and repeated
tax-depreciation of the same building by sequential owners. Viewing
the tax system in its entirety, it's not buildings per se that are
overtaxed. It is USING the buildings that is overtaxed. That is why we
have more buildings than are being used.
It also helps explain why we have such high unemployment.
Construction makes jobs, yes, but not nearly as many jobs as using the
buildings once constructed. Using buildings, in turn, depends on
entrepreneurs raising funds to hire workers. These come from
commercial loans, lines of credit, and turnover. The greatest of
these, and the least noticed, is turnover.
Turgot perceived in 1767 (flexions) that investing is the
independent force that animates all the work of society. Adam Smith,
who learned his economics from Turgot and his allies the Physiocrats,
added the factor of turnover. He put it this way:
"A capital employed in the home trade will
sometimes make 12 operations, or be sent out and returned 12 times,
before a capital employed in the foreign trade ... has made one."
Wealth of Nations, Republished, 1937, pp. 338, 41, 349.
Adam Smith is using cargo as a metaphor for all capital. For
generating employment, fixed capital frozen in buildings or turnpikes
was so sterile as not to be worth Smith's mentioning: the payback is
too slow. Time has not changed that much. One modern desk worker
occupies about 200 s.f. of floor space. The cost of constructing that
is roughly $100 per s.f., or $20,000 per desk worker. Some 20%-30% of
on-site construction cost is labor, say $5,000 per desk worker. If the
mean desk worker earns only $30,000 a year, and the floor space lasts
60 years, the labor input in using the space comes to $1,800,000, or
360 times the construction labor. It is using floor space, not
building it, that makes most jobs and produces most goods and
services. The greater importance of building is that it gives labor
better access to the location, which might otherwise go unused. In the
absence of working capital, however, as today, even access to land via
floorspace is not enough by itself. There must be working capital,
too. There are two sources of working capital: net new saving, and
turnover (recovery of capital from sales of previously invested
capital). The second item includes bank loans made from repayment of
earlier loans. Most businesses, especially small ones, depend on lines
of credit and commercial loans to finance day-to-day operations, and
these depend mostly on banks? recovering funds they loaned earlier.
Consider retailing. Sales p.s.f. in modern department stores might be
$300 p.s.f. per year -- much more in downtown New York, less in
smaller markets. Over 40 years, thus, sales total $12,000 p.s.f., or
120 times construction cost. The flow of capital through the store -
the throughput - accounts for so many times more jobs and products
than the capital in the store building that a macro-economist can
nearly ignore building construction as a job source.
What did other great economists say about this matter? We have David
Ricardo on our side. His Chapter 31, "On Machinery" in his
Principles makes the same point that Smith makes above. He
draws on the reasoning of his classic Chapter One, "On Value".
Economists rightly venerate Chapter One, but then wrongly disregard "On
Machinery" as an aberration, even though it follows the reasoning
of Chapter One.
John Stuart Mill applied Smith's insight directly to taxation, noting
how a general sales tax would slow down investing. Mill's reasoning,
as always, is subtle, and his expression wordy, but readers who are
interested in the history and evolution of economic thought will be
fascinated. My guess is that that includes most readers, because the
history of economic thought in The Corruption of Economics
(1994) is more popular than anything else I have published in the last
20 years. Others may want to skip directly to the last paragraph; but
here is Mill:
"If there were a tax on all commodities, exactly
proportioned to their value, there would be a disturbance of
values, some falling, others rising, owing to the different
durability of the capital employed in different occupations.
The gross produce of industry consists of two parts; one portion
serving to replace the capital consumed, while the other portion is
profit. Now equal capitals in two branches of production must have
equal expectations of profit; but if a greater portion of the one than
of the other is fixed capital, or if that fixed capital is more
durable, there will be a less consumption of capital in the year, and
less will be required to replace it, so that the profit, if absolutely
the same, will form a greater proportion of the annual returns.
" To derive from a capital of 1000 a profit of 100, the one
producer may have to sell produce to the value of 1100., the other
only to the value of 500. If on these two branches of industry a tax
be imposed of five per cent ad valorem, the last will be charged only
with 25., the first with 55; leaving to the one 75. profit, to the
other only 45.
"To equalize, therefore, their expectation of profit, the one
commodity must rise in price, or the other must fall, or both: commodities
made chiefly by immediate labour must rise in value, as compared
with those which are chiefly made by machinery. Principles,
1848, "Of taxes on commodities". (Emphasis mine.)
Where Mill says "machinery" he clearly means durable
capital of all kinds, including buildings, tunnels, trees, breeding
herds, freighters, wells, highways, airports; you can name a thousand
examples. And where his numerical example contrasting two "branches
of industry" is understated and abstract, let us contrast
buildings with the "commodities made chiefly by immediate labor"
inside the buildings.
A building may last for, say, 50 years, and return the principal of
the capital in it in, on the average, about 2/3 of that time (a little
in the first year, a lot in the last years, according to the standard
formula that lenders and the I.R.S. use to divide level monthly
installments between interest and recovery of principal).
The "immediate labor" of workers inside the building adds
value to materials to be sold in, say, a month, returning capital that
the entrepreneur can reinvest immediately, for a turnover of 12 times
Turnover is the single word that epitomizes Mill's labored
prose, and "loan turnover" expresses its effect on bankers.
Taxes on commodities tax capital each time it turns over. They "disturb
The Force" (as Darth Vader might say), where the market is The
Force, and push capital out of producing commodities "made by
immediate labor", hence more into commodities and services
rendered over long periods by durable capital: capital of slow
After Mill, the baleful influence of J.B. Clark engulfed the
profession like a miasma. In his tortured efforts to conflate land and
capital Clark deleted the turnover of capital from the professional
consciousness. His followers call the new, improved approach "neo-classical
economics". His main objective was to avoid singling out land for
taxation, but a byproduct was to remove capital turnover from
micro-economics, as explained in The Corruption of Economics.
He and his disciple Frank Knight were obsessed with attacking the Austrian
economists who sought to keep capital turnover at the center of
Other economists struggled for a while to fit the Austrian
Bohm-Bawerk's ideas into their neo-classical models from which time
had been largely banished, only to reject or isolate such ideas when
they could not fit them into their static, Clarkian models. From
1870-1920, "much of the economics was" an economic theory of
acapitalistic (note the "a" before (capitalistic)
production. Considerations of capital theory proper "simply
disappear from the picture" (Robbins, 1934). It was Auguste Comte
who wrote that all science consists of relations either of coexistence
or sequence. Clark confined neo-classical economics into a box that
shut out relations of sequence. Not until Keynes did they return, and
then in distorted form.
Keynes picked up on Turgot's insight, but in a twisted sort of way
that loses much of its force. In Keynes, investment is the
autonomous motor of the system, but it means net new investment only.
He takes reinvestment and turnover for granted, as results of consumption,
regardless of what is consumed; it could even be the services of land,
for all he and his followers seem to care. Keynes puts everything in
monetary terms, the ultimate abstraction, with little attention to the
corresponding flows of goods and services, as though their composition
had no effect on the outcome. Thus for him construction is just as
good as tailoring or cooking or delivering mail or waiting on table or
baby-sitting for making jobs, and maybe even better because
construction soaks up the capital invested for long periods, and
Keynes saw capital as being formed in excess of need, quite the
opposite of today's problem when businesses are starving for want of
working capital and commercial loans to finance day-to-day operations.
What we need today is to get rid of taxes on Mill's "commodities
made with immediate labor", and taxes on labor itself. We need to
show that the present system, by seeking to spare property values,
actually depresses them by more than would direct taxes on property,
because of the "Excess Burden" of indirect taxes. As we make
this great shift we should continue to champion focusing the property
tax more on land rather than capital, but as we do so let us give
higher priority to untaxing work and turnover and cash flow and sales
than to untaxing buildings. We already have empty buildings to burn,
with empty chairs at empty tables.