Some Economic Facts

Carl F. Shaw

[ GroundSwell, November 2011]

No human created this earth.

The concept of fairness is usually the primary consideration in human social interaction. The 1978 USDA land ownership survey showed that 4% of our population owned 95% of the privately owned land. There is nothing fair about this. In fairness we are all entitled to a space on the earth in order to earn our living.

Any land of value is worth so much rent per year. Land’s rent is the product of all the population and our economic activities.

When land is taxed it is the rent which gets publicly collected. All land rent is a public product and in fairness should be shared by all of our population. The products of labor and capital are wages and interest. Taxing wages and interest is a punishment for having produced wealth. Laborers and capitalists can easily provide for themselves when they have access to land.

When all the annual rent of land is publicly taxed land will no longer have a sale price. God told us three times in the Holy Bible NEVER to sell the land. Humans in some locations have in recent centuries been forced to pay money (or equivalent) in order to obtain the right to live on the earth. No animals, wild or domestic, are forced to buy the land in order to live on this earth.

In recent years land values have reached record high levels, because of low land taxation and low interest rates. Land in 2007 was far too expensive for labor and capital to afford. All production of wealth begins on land, using natural resources. When labor and capital can not afford land they are unemployed, poor, and the economy suffers.

Here is the actual sequence of production—suppose Carl Shaw grew a large tomato crop. I would need help to grow and harvest. We would put the fruit in baskets, then into a truck, to be taken to a processing plant. Such a plant would have various equipment, staffed by workers. When the tomatoes are processed and canned they are put in boxes, loaded onto trucks, taken to a warehouse. Such warehouse employs a staff who stacks canned fruit on pallet skids, for storage until purchased by a retail vendor. In time a buyer from a grocery store comes to purchase those tomatoes, loads them onto a truck, drives them to the store, where another staff displays fruit on shelves for sale. All this equipment, containers, vehicles, buildings, etc had to be manufactured by workers, staffed by other workers, who live in houses, wear clothing, eat food, have children. Granted there are several other types of earth based resources which are also being exploited by other workers, such as oil and gas, animal grazing, timbering, mining, fishing, grain growing, etc. If Carl Shaw did not grow tomatoes, and none of the other earth based resource activities were exploited, then none of the listed economic activities would have happened. All economic activity begins on the land.

We are told to spend—BUT we can’t eat catsup until a farmer grows tomatoes. We can’t have steel until a miner digs up iron and coal. Then all the laborers and capitalists who turn raw materials into finished products need houses to live in, food to eat, clothing to wear, vehicles to transport to their jobs, education, entertainment, medical care, education, etc. The rest of the economy supplies these needs.

If none of this activity happened there would be little to no economy. True, only a few workers are actually employed on land based jobs. But if these folks did not produce land based products no one else would have any type of work! Our situation today is that there is too little land based production, due to the high cost of land.

Despite modern mass produced wealth tomatoes are still grown on land, timber is still derived from fallen trees, etc. The economy does not begin with government spending programs, bank loans, or customers buying autos, computers, and appliances. The economy begins with production on the land (food, timber, cattle, oil and gas, fishing, mining, ) This is how the economy has worked ever since there have been humans.

People must learn about basic Political Economy. They must decide to act on land ownership and tax reform–toward the concept of justice.

The Fundamental Math of Real Estate.

Here’s how to calculate the rent of land. Find the current appraised land value, Multiply that by the current interest rate to get a product, Add to this product the present annual land tax amount. The result is the current annual land rent. Typical center city land rent is $3.00 per square foot per year. The rent of rural areas is more like $40 per acre! All the Land Rent should be the only source of government revenue.

Land sale price is the result of capitalizing the net rent after land taxation. Suppose the gross land rent is $1,000 per year, and $100 gets taxed. The net rent is therefore $900. $900 represents Income. Let’s say that the interest rate is 5%.

Here is the capitalization process. I means Income, R means interest Rate, V means Value. I ÷ R = V. Income divided by the Interest rate equals Value. $900 ÷ 5% = $18,000.

There is a simple way to reduce and later eliminate the $18,000 sale price of land. It’s called taxing the rent of land. For example $1,000. rent minus a tax of $1,000 = zero net income. Zero income ÷ 5% = Zero value.

Everyone then could afford land, without down payments, interest or a generation of mortgage payments.

Our state tax code can be changed to permit the full taxation of land rent. Currently only about 10% of the land rent is taxed in WV–one of the lowest in America. This tax code can also be changed to stop the unfair taxation of labor and capital.

There are only three factors in the production of wealth, or three subjects which can be taxed — Land, Labor and Capital —- nobody else is left! Higher Land taxation encourages owners to put their land to highest and best use, by hiring labor and capital (capitalism) in order to bring in enough income to pay the higher land tax.

Those who discuss taxation might analyze the economic effects of the 3 sources of revenue. People don’t work harder because they are taxed. Taxing the rent of land on the other hand encourages the better use of land. These changes can and should be phased in over several years.

Numerous taxing jurisdictions around the world have taken steps as described above. For instance – 900 cities in Australia and New Zealand do not tax buildings. Altoona, PA after a 10 year phase-out stopped taxing buildings this year. Denmark taxes about 50% of the rent, which encourages production.

Land owners usually not only oppose land reform, but will do everything to thwart reform. They enjoy leasing God’s earth to the rest of us, rather than producing wealth via their own efforts. This is a question of Justice. Justice must prevail –- not unemployment-poverty-out migration-slums-war-homelessness-divorce.

This economic principle has been known of since 1752. when Dr. Cadwalater Colden, Lt. Gov. of New York, proposed taxing only the land. The French Physiocrats proposed essentially the same reform beginning in 1758. Henry George made a whole social philosophy of this concept. Land ownership means social and economic control. If I own “Your” land, I own you. We should all have equal control.

Maynard Keynes book, “The General Theory of Employment, Interest, and Money” published 1935, is 332 pages long, uses the word “Land” for the first time on page 326, to point out that land is a limited resource, and so owners can charge rent for its use. He never points out that the economy begins with land, or discusses the significance of limited land ownership, or the effects of land taxation on the economy. When genuine Economists discuss relationships between all the factors of production, land usually plays a key role. The European immigrants who came here in the 1600?s were not financed by government spending, or banks. They learned to grow food from the Natives, on free land. By 1700 American’s wages were the World’s highest. Land can be made free again.

There is no shortage of land. 300,000,000 Americans could live on the 300,000,000 acres represented by fewer than 9 US states the size of Illinois (of course many of those acres would have to be industrialized). WV has enough land so that every resident could have 8 1/2 acres. How many West Virginians do you know who own 8 1/2 acres? Some have many times 8 1/2 , while others are lucky to own the shirt on their back.

The “Occupy” movement knows of our economic injustice. But they don’t know it’s reason–or what to do about it, in order to bring equality. They could make real progress toward equality if they were to campaign for land reform via land rent taxation. Economic equality is more fundamental than political equality.

TAX THE LAND—-NOT LABOR AND CAPITAL

(Carl Shaw is a former State Tax Dept. real estate appraiser.)