Taxing people who collect rents "in their sleep"

Yesterday we published Tax Justice Focus on the theme of taxing natural rents. Edited by Carol Wilcox, this edition explores how a land value tax (LVT) on land rental values can raise significant public revenues without causing economic distortions. By coincidence, a commentator on Martin Wolf's Financial Times blog yesterday picked up on the same theme. We hope this commentator won't mind if we re-publish his comment in full below, since we particulalry agree with the view that matters of fundamental interest to classical economists have been submerged (suppressed?) for many decades.

Rent is the elephant in the room. You described in an FT column not so long ago the compelling case to tax rental income. Personally, this is not a choice, but a moral necessity, since rent naturally belongs to everyone, and yet is collected by private rentiers "in their sleep" (as JS Mill observed). But at present there are reasons of economic expediency to begin this as a means of avoiding sovereign and, frankly, social collapse. The failure to tax rent is at the root of economic crisis, not to mention the awful misery that continues in the "good times" largely unnoticed.

While rent is at its heart, as I will argue below, the proximate cause of this last episode is our byzantine and utterly dysfunctional monetary / banking system. The paradox of banks lending assets they do not own has receive much criticism over the ages. It evolved into this form because without taxing rent, society has been unable to establish a risk-free asset class (short of hoarding goods) that is suitable for savers. If, instead, rent were taxed and distributed socially, savers could purchase future rent receivables from those seeking liquid purchasing power to finance capital or big ticket acquisitions (like housing wealth); this would go a long way towards preserving savers' future real purchasing power, secured under social contract, and discovering the real rate of interest as negotiated according to supply of and demand for real surpluses.

Besides having to tax everything else in sight, one consequence of the state's failure to tax rent is a deficit in risk-free assets available. In its place, savers have placed a premium on liquid assets (especially money) as a defence against real volatility. To meet savings demand far in excess of the basic transactional requirement for liquidity, the financial system has been permitted to evolve in such a way that it can simply supply money on demand: as we know, bank liabilities are designed to circulate as money, with the state all but guaranteeing the face value of these claims. Increasing the quantity of money either increases prices, distorting production, or reduces the velocity of money, which creates the potential for major volatility in prices and market dislocation. In any event, the sovereign's last recourse is to pump out new base money, with all the feared consequences.

There are further reasons (besides suppressing a natural risk-free rental asset) why failing to tax rent causes such an outcome: (1) Privatised rent becomes the key collateral for banks to lend on; indeed, acquiring collateral has become the key reason for borrowing, which introduces extra volatility in the price of collateral. It also means capital finance (surplus labour) is (mis)allocated via haphazard and chaotic transactions unrelated to the rate of interest; the result is that productivity has not received the full capital boost on offer from real surpluses, with much simply squandered. (2) The reliance on debt creates a systemic imbalance: the purpose of markets is to signal demand and supply by changes in prices, and yet one half of this -falling prices- is toxic to the financial system. This is because falling prices, when feared as signs of secular deflation, raise the real burden of debt to debtors (if not to society as a whole). The banking system (and thence the state) is exposed to debtor stress in the form of incurring massive nominal losses, which forces the sovereign to debase its currency, creating inflation, moral hazard etc. One reason falling prices can quickly become deflation is that, unless liquidity is suitably taxed, falling prices encourage consumption to be deferred, depressing demand below its 'really-desired' level in anticipation of better terms in the future. Such a response is highly correlated; moreover, it runs the additional risk of inducing a contraction in production, further damaging livelihoods and sovereign health (see http://wealthoflabour.wordpress.com under Tax Liquidity of Fall into Its Trap).

These are a handful of arguments, all premised on the unalienable rights of freedom and justice. Landownership tramples on both, but its costs are not only borne by the dispossessed - the entire economic system is forever paying for this original sin. I accept that moving towards full socialisation of rent is not straightforward, but the debate is rarely heard, with flimsy counter-arguments successfully quashing debate before it even enters mainstream thinking. I accept that calling for a tax on what people mistakenly regard as natural rights to the land -the acquisition of which may have come at significant personal cost- may be instinctively opposed by many; but then again so was chattel slavery in times of yore. Moreover, why should other hardworking people have to make sacrifices out of their hard-earned income to subsidise what landowners earn "in their sleep"? Finally, once people realise that they would all earn a stake in rent collected, it should eventually find democratic support. The fact that the evils of rentier society and merits of land taxes are so far off the political agenda, even in the midst of a fiscal crisis that encourages learned scholars like Simon Schama to fear apocalpyse and the Great and the Good to consider taxing finance outright, suggests to me that significant and concerted academic and political capital has been spent, over the years, suppressing an idea that originated from the great classical economists.