Embedded inequality, subsistence wages, impoverished public services, unsustainable debt, land speculation, forced economic migration and homelessness can be history…IF we so choose.
Is it any wonder our public revenue is inadequate? The owners of rent-yielding assets extract one fifth of the gross UK income for doing…nothing. That equates to a staggering 40% of what should be flowing into the UK public purse by collecting AGR/LVT.
But if we fail to recognise the problem is ‘Rent-seeking’ we will make little progress.
It is wrong to believe that we should revert to live as we did before the pandemic. The statistics of its incidence show that the poorest people have suffered far more than the rich and a mindless quest to ‘return to normality’ will result in further widening of the gap in health and welfare between rich and poor.
Our antiquated, complicated and unfair tax system is responsible for inequality. The rich minority are given generous tax concessions whilst the poor are obliged to pay the biggest proportion of incomes in VAT, the most regressive of all the taxes.
The government needs money to pay for goods and services such as education, the police, the NHS, and pensions. Current taxes, collected mostly from Income Tax, NIC and VAT, are insufficient to avoid budget deficits and increases in the national debt. It is impossible to increase these taxes without causing more reductions in employment and trade. Sufficient funds could be provided without economic and social harm if the tax system is radically reformed.
Income Tax, NIC and VAT are charged on what people have earned for the work they do. But there is a large potential source of revenue which goes to a minority of the population that they do not earn.
That is the annual rental value of the land they own, known as Annual Ground Rent or Land Value Tax. (AGR/LVT) The most valuable land is in urban areas because that is where most people want to live and work. Most house owners do not realise that they are landowners.
The large increase in the price of houses over the last four decades is in the price of the land on which they are built, not the price of the houses themselves.
The increases in land prices are not produced by those who own their houses, they come from the demands of those who need somewhere to live and the services provided locally, such as schools, public parks and hospitals.
The total annual ground rental value of the land and other natural resources in the UK is sufficient to provide all the funds for the necessary functions of government.
Instead of encouraging investment in landed property with subsidies and exemptions from tax, a responsible government would gradually rebalance the economy towards productive enterprise by removing the burdens of taxation from earned incomes and increasing them on unearned incomes.
Houses will never become affordable to young people by building more houses. No matter how fast you build, banks can create new credit even faster. Their fractional reserve facility allows them to create money from nothing to meet the demand from house buyers.
AGR/LVT will enable economic prosperity to occur and inequality to be reduced by allowing people to keep all they earn. There will be no need to continue seeking increases in GDP, which is a poor indicator of economic well- being and encourages the wasteful use of scarce resources.
Duncan Pickard SLRG, June 2020.
Common Weal has published Resilience Economics: An Economic Model for Scotland’s Economy.
The authors present an overview of the current and historic problems Scotland has endured and a call for a better future using a wide range of economic ideas to build a Scotland that serves its people. It is a long document tracing the history of economic ideas and many of their flaws; but seeking to show how alternative ideas promise to help form a resilient Scotland.
Searching the document for specific proposed measures, there are none. A subsequent document is promised for these.
The attack on Neoliberalism is relentless, correct and fully argued, that cynical ideology being based, as the author mentions, “on a partial reading of Adam Smith”.
A gap in understanding is however demonstrated in the authors’ parallel and unqualified attack on the idea of the free market. That Smith revealed how the free market must be rendered benign by directing the economic rent to the community is not even discussed. The absence of any discussion of ‘Rent-seeking’, the poison lying hidden at the roots of each of the many Scottish problems listed, renders the paper deeply flawed.
Sad to say then, that despite an otherwise comprehensive discussion of many of the Scottish problems derived from 20th century economic thought, the notion that Neoclassical economics was devised with the single purpose of hiding rent extraction by a privileged minority, is not mentioned. Such a glaring oversight will, sadly, be cause for a huge sigh of relief from the free-riding, rent-seeking fraternity.
Here, SLRG’s Roger Sandilands, Emeritus Professor of Economics, Strathclyde University, reflects on the Common Weal document, ‘Resilience Economics: An Economic Model for Scotland’s Economy’:
“Apart from Adam Smith’s espousal of rent as a desirable, special, ‘peculiar’ “tax” to fund the government’s proper (though rightly limited) role in the economy and society, his other great motivation in writing The Wealth of Nations was to promote competition and eliminate artificial restraints on trade. He condemned monopoly, collusion, fraud and other unjustifiable barriers to entry into a business, whether as entrepreneur or employee.
The main message was not so much “laissez faire” in a passive sense, but rather in the active sense of (i) promoting competition by stamping out obstacles to free domestic and international trade and (ii) encouraging the mobility of labour and capital.
Producers have a vested interest in protecting their current market share. There was nothing wrong per se in trying to make a profit. Why else go into business? But the Common Weal document rails against profit as a filthy word, always associated with exploitation of workers and the environment.
This is just emotional class and ideological prejudice. Certainly it is the duty (as Adam Smith emphasised) of government to intervene to curb excess profiteering through unjustified restriction on the entry of other producers capable of offering goods and services at lower cost and price, and/or higher quality.
“Neoliberalism” is used in a very loose sense by Common Weal to caricature the mixed economy, with its elements of both private and public participation in the economy. To the extent there is a private sector seeking to maximise profit, the opponents of private profits dub the economy as immorally ‘neoliberal’, with the government accused of defending a free-for-all that harms the vulnerable and the environment.
But if we condemn all profit-seeking, even where profits are needed to compensate entrepreneurs and investors for the opportunity cost of their time and money, business disappears unless the government steps in to run it instead. Carried to excess, we should know where that leads.
Until and unless Common Weal distinguishes competitive profit-seeking from monopoly profits, and in particular until it recognises unconditional land ownership as the Mother of All Monopolies, theirs is an ill-informed agenda.
Replacing private with public enterprise across the board is not what Adam Smith espoused. Common Weal is effectively libelling Smith. He was adamant that it was the duty of government to protect the consumer not the producer. Smith’s Wealth of Nations was a tract against the prevailing philosophy of mercantilism. By focusing instead on consumers’ interests there would be much greater pressure on producers to follow consumers’ interests through increased efficiency, reduced costs and prices, and better quality, service and choice. This was enlightened, non-exploitative self-interest.
The Common Weal document appears to me to be too prejudiced against “consumerism”. Which of us does not aspire to a higher income? Why do we do that? In order to hoard money under the mattress or in a bank? Of course not. It’s to improve our own standard of living. And in the process (abstracting from consumption that significantly harms our health or the environment) we benefit our fellow citizens through the extension of the market, in directions which conform to our own freely expressed preferences and priorities. That means (as again Smith emphasised) more jobs, more income for others, more specialisation within and between firms, hence more innovation and a more dynamic economy.
However, all of this is contingent
(i) on the promotion of competition between firms and the geographical and occupational mobility of capital and workers; and
(ii) ensuring that the (increasing) rent of land is returned to society in general that has created those rents. They should be our primordial community value, upon which all other community values rest. Only thus can we create a more equitable and dynamic economy and society, thus truly creating a more sustainable and resilient common weal.”
Writer Bill Paterson calls for the revenue reform desperately needed in Scotland:
You’d need a good reason to consider moving tax from wages to site rents. The good reason is the avoidable DEADWEIGHT LOSS of at least £500 billion a year suffered by the UK.
Scotland’s share of those annual losses is at least £38 billion, of which some £12.8bn can be cancelled by Holyrood using existing devolved powers to replace Income Tax with AGR/LVT.
The progressive justice and fairness of Annual Ground Rent (aka LVT) is avoided like the plague by vested interests in control at Westminster. But why should Holyrood follow like a lapdog, sticking with the harmful taxes that work against the interests of Scots?
And could we not use an extra £12.8bn/yr of SHARED prosperity right now?
MSPs could add £12.8bn to Scotland’s economy today with a tax reform that would nut embedded inequality, fairly.
That additional £12.8 billion would be shared each year between Scotland’s public and private sectors.
Social unrest may be expected in the wake of C19. Not because we were hit by a disaster not of our making; but because the wilful starvation of public services, leading to poor pandemic precautions, will be repeated if there is no root and branch change to the way in which public services are funded.
Our call for the functions of state to be funded out of the rents of land and natural resources (AGR/LVT) is criticised for being too radical. How could you possibly even think of replacing income taxes?
Question: What would it take for a country like Scotland to take seriously a change of revenue from taxes that repress wealth production and privilege a minority, to a levy which dismantles privilege, boosts prosperity and shares the country’s net income with all of its producers?
Events such as the Coronavirus pandemic may at last focus the minds of politicians. Or the looming avoidable depression of 2028? The UK and Scotland have been hit unexpectedly by a tragedy requiring state intervention on a massive scale. MMT suggests money be produced by governments to pay for it all. But what about when the limits of credibility in the currency are reached? Money production can only go as far as a country’s real potential production.
Today Scotland has taxes on wages and on trade. The tax rates are already set as high as they can be without repressing the tax base by an unacceptable level. Production is already repressed by at least £500bn/yr (UK). But more money is needed to make good the anticipated government Coronavirus spending.
Austerity will not be acceptable and if forced will produce social unrest. What is the way then for current unfortunate events to be faced up, challenged and pushed aside?
It is time for Holyrood to take seriously the SLRG proposals to start funding government functions with AGR/LVT and to cancel as much as possible of Scotland’s wage and enterprise imposts. This will collect a significantly larger sum into Scotland’s Public purse – all from UNEARNED income – and at the same time boost and share Scottish prosperity.
Everyone will be a winner except the parasites who expect to grow rich from by extracting wealth produced by the efforts of others. Yet even they will share the opportunities to invest in new productive enterprises germinating across the new Scotland. And they will also receive their full share of newly expanded and at last properly funded Scottish public services.
By Roger Sandilands, Emeritus Professor of Economics, Strathclyde.
How can the claim be justified that Rent, the product of society and nature, is about half of GDP, when the text books put it at about 5%?
The national income accountants (who are accountants rather than what we would define as economists) look only at the surface phenomena. They look at income and basically allocate it between only two very broad categories: wages and ‘profits’ (or ‘operating surplus’).
I gave some figures for 2011 in my 2015 SLRG conference paper, The Hidden Potential of Rents. I reproduce the Appendix below showing basic figures for 2011.
Rent is camouflaged
There you see that there is no explicit mention of ‘rent’. It is bundled up in an aggregate of gross operating profits, as also defined in the Appendix. “Rental income” is any money paid for buildings, including land. No separate figures are given for land rent except where rent is paid for bare land and this is a very small fraction of all ‘rental income’.
We know that much of what is income from ownership of buildings is actually land rent.
Accountancy approach problematic
But the more important problem with this accountancy approach to the distribution of income is that it takes no account of the way that the taxation of earned incomes (including income from man-made capital – buildings, machinery, equipment etc) ultimately falls on (squeezes) the rents that can be charged on land qua land. This again is the ATCOR principle: All Taxes Come Out of Rent.
Rent is half the national income
Once this is recognised and accepted then you can indeed justify the claim that rent is about half of national income. But otherwise people will scoff and refer you to the textbooks that state that rent in the modern urbanised economy is only about 5% or less of GDP, and hence totally insufficient to finance a modern state’s public spending (about 40% of GDP).
Remember that our aim is to replace taxes on earned incomes and trade. As those taxes fall, so the annual value of unearned land and natural resource rents increases. This large underlying annual ground rent (AGR/LVT) thus becomes transparent and available to finance the modern state. And in the process would breathe greater life, health and fairness into our sclerotic economy and society.
Appendix (extracted from The Hidden Potential of Rents)
Table 8.2 of the UK National Income Accounts gives GDP in 2011 at market prices (£1,537bn) by category of income and by its percentage composition, thus:
Total gross operating surplus: £436bn (28.4%)
“Mixed” incomes (of the self-employed): £ 85bn (5.5%)
Employee compensation £820bn (53.4%)
Taxes less subsidies on products and imports: £190bn (12.5%)
Gross operating surplus is gross value added (GVA) minus labour costs paid by producers. It is the sum of (i) gross trading profits and (ii) “income earned through the ownership of buildings (rental income).” But separate figures are not easy to find for (i) and (ii); and nor is “rental income” calculated separately for land and buildings.
The opportunity for shared prosperity to be greatly boosted across Scotland is detailed in The Hidden Potential of Rents. Once the proportion of the national income composed of rent is understood, the question must be asked, who gets it?
In this radio programme Neil MacGregor examines the great Indus Valley civilisation. 4,500 years ago a state thrived in which it appears each contributor was valued equally.
The evolution of the science of economics featured the thinking of numerous philosophers, starting in the recent era with the French Physiocrats. These predecessors and teachers of Adam Smith knew that if the French Revolution was to be avoided there had to be a way to include all members of society in the fruits they all helped to produce.
Classical economics discovered that equality of opportunity could be achieved in societies where the net income is shared amongst the participants. Its thinkers realised that the rent of land and other natural resources had to be shared between its producers. Otherwise a two-tier society would emerge:
Tier 1: A privileged elite of site and resource owners.
Tier 2: An underclass consisting of those who received none of the net income.
How did the sustainable single tier version of society work?
To the classical economists ‘justice’ dictated that wealth belonged to its producers. They observed that labour and capital produced wages and profits. And that land produced rent. The latter was gathered freely from nature or from amenities funded by society as a whole. It was no great leap from there to work out to whom the rent (the net income) belonged:
If a viable and sustainable society was to be maintained – as seems to have happened in the Indus Valley civilisation – the net income had to be shared out between all participants in the joint social project that was ‘society’. Thus, those who monopolised a part of the commons had to compensate the community accordingly – with Ground Rent.
How else to explain a society in which all homes were of a decent size and the absence of any evidence of violence or conflagration? A sustainable society can exist today too which does not find itself constantly in danger of implosion, or where privilege must be ‘protected’ by strong ‘policing’.
The Physiocrats lost the argument just prior to the French Revolution when Marie Antoinette’s advisers threw out Turgot and his ideas. The inevitable social implosion found heads a-rolling…
When the simple observation that rent belonged to everyone was expounded and amplified by Henry George at the end of the 19th century in his famous book ‘Progress and Poverty’, those in unjust receipt of the net income were roused to action.
‘Georgists’ today (such as the SLRG) continue to promote the concept that a society will thrive if taxes are removed from wages and trade and revenue collected instead from the rent of a country’s land and resources – the compensation that should logically and fairly be given to the community by those using any and all of its resources.
When farming first arrived in prehistory, the very first enclosed field was removed from the commons. How was society to be sustained? What if ALL the commons was eventually to be privately owned? Adam Smith’s Annual Ground Rent is the answer: the means by which a society is rendered sustainable, peaceful and prosperous. Like the Indus Valley society.
The evolution of the economic philosophy dominating our 21st century world is decidedly NOT like the justice-based philosophy of the Physiocrats or Adam Smith or the Indus Valley. ‘Neo-classical economics’ has no notion of economic justice. The history of its cynical founding by vested US landed interests in the early 20th century is documented in Professor Mason Gaffney’s ‘The Corruption of Economics’… a hair raising tale of mercenary academics in the employ of wolves.
In the new economics fiscal justice is replaced by something called ‘utility’. ‘Land’ as a separate factor of production is conveniently absent. Which renders the activities of rent extractors hidden. Result? A two-tier society in which the net income is first camouflaged and then extracted unseen, creating an unsustainable society composed of the haves and the have-nots. At the heart of the new economics is the desperate goal to sustain the unjust privileges of an elite – the owners of land. And to keep for that minority group as much as can be achieved of the net income that has been produced by everyone.
Neoclassical economics laughs at the social schisms threatening human existence. Schisms that are the product of Neo-classical economics. Instead, the mission is to guard the concept of private property in land – even with special ‘human rights’ declarations, to remove all levies on land entirely and replace them with taxes on productive workers and traders.
In this way the cream of the socially produced rent of land (the net income of each country) can be extracted by a privileged minority of social parasites for producing and doing nothing in return.
Shall we put up with it any longer?