David Cay Johnston is a good journalist and a good writer, and I think he has both a good mind and a fine intellect, and a love for his fellow human beings. He is well read, a good researcher, and shares what he finds with his readers. But I have come to think that he has, at minimum, a blind spot. (I’d hate to think that it was blinders producing what I’ll describe below.)

This come from an interview DCJ did with Whoopi Goldberg, published in 3 parts on a website called www.wowowow.com. It starts at http://www.wowowow.com/conversation/whoopi-decoder-finds-out-why-we-get-taxed-behind wherein he says:

DAVID: If you only tax one thing – let’s say the only thing we taxed was your income, or the only thing we taxed was the house you live in, then people would find a way to get around that one tax. So you have to have an approach that taxes multiple things.

WHOOPI: So you’re telling me that basically the idea is people think people are going to cheat anyway, so we might as well just make sure they don’t have any money to cheat with?

DAVID: No, it doesn’t even involve cheating. It’s that people will simply organize their lives to get around a single tax. If there was only one tax it wouldn’t be hard to get around it.

As my late mother would have put it, his education has been neglected. This is not his fault – most Americans don’t know any better on this particular topic, and few of our academics in economics seem to have focused on it – to our general detriment.

There IS a tax that cannot be avoided and which CAN be collected from all who owe it, and which would be far more just than collecting a tax on one’s income, or on the house one lives in – both of which are things that one can be said to have created through one’s labor or purchased from someone in a string of people who can say he created it through his labor – and therefore should not be taxed, or at least should not be taxed UNTIL we have exhausted the tax bases of which the same cannot be said. And interestingly, at one time it was known as the “single tax.” And it is the least distorting tax available to us. To quote Milton Friedman,

“The free market is the only mechanism that has ever been discovered for achieving participatory democracy.” — quote in NYT obituary, online November 16, 2006.

“Yes, there are taxes I like. For example, the gasoline tax, which pays for highways. You have a user tax. The property tax is one of the least bad taxes, because it’s levied on something that cannot be produced — that part that is levied on the land. So some taxes are worse than others, but all taxes are bad.” — interview, San Jose Mercury News, Nov 5, 2006

The tax to which I refer is a whole group of taxes on what the classical economists categorized as LAND – that which none of us has created, but on which all of us depend: land in the sense of location; including natural resources, broadcast spectrum, parking privileges, airport landing slots, geosynchronous orbits, water rights, rights to pollute, etc. The list is long, but you get the idea. Most of these things are currently treated as private or corporate property, on which individuals, trusts, pension funds, endowments, philanthropies, REITs, corporations become rich, while those of us who just live here both pay them for the privilege and then pay taxes on wages and sales and houses and other things which legitimately should NOT be taxed at all!

Each of these things is a rather steady and unhidable tax base. The city lot cannot leave town in the middle of the night, or be moved offshore. Its ownership can be hidden, and in some states one doesn’t even know the price at which that ownership changes hands – but the tax due can be collected nonetheless. There is a one-acre site in midtown Manhattan which has been rumored to be on the market as a teardown, and estimates for its selling price range from $400 million to over $1 billion. (Its offshore owners say they are quite satisfied with an annual profit of $20 to $30 million on its current use, which I find very puzzling. Perhaps it qualifies as a “taxpayer” – a temporary use for an underused property held for speculation.)

Jed Clampett and Exxon-Mobil privatize what should be paid into the federal and local commons to provide the pork and the services that make particular sites extremely valuable. This value should be recycled, for the common good. Doing so would allow us to reduce or eliminate the taxes which burden our economy. As DCJ reminds us,

the art of taxation is plucking the goose while not killing it and getting the maximum with the least amount of hissing from the goose.

Rich constituents hiss louder than middle-class constituents, and their elected representatives hear them more clearly than they hear middle-class constituents, as DCJ very astutely pointed out in a 2004 interview:

After finishing the book, I got off a plane and shared a taxi with a former state senator who is personally very comfortable. He told me that I was being overly kind to politicians in my analysis. He said, “Every year that I was in office I knew who my 10 biggest donors were. I knew that I had to show them that I was working for what they wanted or they would just take their money and go to the other guy. And, you know, I don’t think I ever once looked in the mirror and said, ‘What am I doing for the average person in my district?’”

(And if you doubt how they can afford to make themselves heard, take a look at Table 2, Line 1 at http://www.wealthandwant.com/issues/wealth/50-40-5-4-1.htm and then at the corresponding cells in Table 7. See also Line 29, Income, of Table 7. See also DCJ’s excellent book, Perfectly Legal.)

We would not be killing any golden goose if we taxed land value, natural resources, broadcast spectrum, pollution rights, etc. – and taxed them heavily. In fact, we would be providing the goose the means by which to continue to lay golden eggs for society at large, not just for the rich.

DCJ makes some excellent observations in the interview with respect to Social Security and savings, though I’m not sure he’s got the mechanism right. (I think a case could be made that the larger problem is rapidly increasing housing prices, particularly in the good school districts, as described in Warren & Tyagi’s The Two Income Trap.) And he’s quite right about the national debt. But he’s missing another big component of a typical family’s spending. One of their largest expenses every month is their mortgage and related property taxes. What percentage of that payment is a payment for land value?

Many people tend to think that land represents about 25% of the value of their property. And there may have been a time when this was true: when the house itself was new. But the fact is that land represents quite a bit more of the value of most people’s homes than 25%, and, since the vast majority of homes are not new when they were last purchased or refinanced, most of the value is in land. Many homeowners might be surprised to learn that houses depreciate. A 2006 Federal Reserve Board study pegs annual depreciation at 1.5%. That same FRB study provides data on the average share of the value of single family homes in various metropolitan markets in 2004 that is land value (Tables 6c through 6g). The average was 50.9% – a bit more than twice the 25% many of us think of! Here are the values for a few of the 46 metro areas for 2004 – and I’d bet most of them are still above those percentages:

  • San Francisco: 88.5%
  • San Diego: 81.1%
  • Los Angeles: 78.7%
  • Boston: 75.7%
  • New York City: 67.4%
  • Washington, DC: 67.4%
  • Seattle: 62.6%
  • Portland: 57.9%
  • Charlotte: 56.5%
  • Phoenix: 55.8%
  • Chicago: 52.1%
  • Average of 46 metros 50.9%
  • Tampa: 48.9%
  • New Orleans: 46.6%
  • Detroit: 32.5%
  • Memphis: 40.5%
  • Houston: 31.2%
  • St. Louis: 30.0%
  • Buffalo: 28.7%
  • Average for the Remainder of the US: 27% – in 2000
  • Pittsburgh: 26.0%
  • Oklahoma City: 23.3%

DCJ also provides an interesting quote from Andrew Mellon, when he was Treasury Secretary in 1924:

“The fairness of taxing more lightly income from wages, salaries or from investments is beyond question. In the first case, the income is uncertain and limited in duration; sickness or death destroys it and old age diminishes it. In the other, the source of income continues; the income may be disposed of during a man’s life and it descends to his heirs. Surely we can afford to make a distinction between the people whose only capital is their mental and physical energy and the people whose income is derived from investments. Such a distinction would mean much to millions of American workers and would be an added inspiration to the man who must provide a competence during his few productive years to care for himself and his family when his earnings capacity is at an end.”

Mellon conflates investments in capital and investments in land. They are fundamentally different, and we ought to treat them entirely differently. Returns to true capital are not all that high; what gets the large – and growing – returns is land. [And I’ve not been able to verify this quote – I found it online, but suspect that the first sentence is not quite right. Could it have said, “The fairness of taxing more lightly income from wages or salaries than income from investments …”?] The quote brings to mind a passage from The Condition of Labor:

In language almost identical with yours it was asked, “Here is a poor man who has worked hard, lived sparingly, and invested his savings in a few slaves. Would you rob him of his earnings by liberating those slaves?” Or it was said: “Here is a poor widow; all her husband has been able to leave her is a few negroes, the earnings of his hard toil. Would you rob the widow and the orphan by freeing these negroes?” And because of this perversion of reason, this confounding of unjust property rights with just property rights, this acceptance of man’s law as though it were God’s law, there came on our nation a judgment of fire and blood.

I digress.

In the final part of the three-part interview, DCJ says this:

DAVID: Right. Whoopi, what gave birth to democracy 2500 years ago?

WHOOPI: No taxation without representation.

DAVID: No, no, no. That’s not what gave birth to it. Ancient Athens had an absolute head tax. Everybody paid the same amount, rich or poor. And for 80 percent of Athenians it was a horrible burden. And it led to all sorts of misbehavior and stuff. But if you didn’t pay the tax they literally took you to the city gates and sent you away, which was a death sentence.

WHOOPI: Right.

DAVID: And then they devised this … this moral principal: the greater your economic gain because you live in Athens, since there’s no gain if you don’t live in Athens, the greater the burden of tax you should bear to maintain Athens. And when they invented that idea they invented democracy. And yet you’ll hear all sorts of politicians tell you, “Progressive income tax is a Communist idea. It was the second plank of the Communist Manifesto.” Adam Smith was in favor of this before Karl Marx was a gleam in his daddy’s eye.

I concur with the moral principle – but it shouldn’t be levied as a tax on income! Athenian landlords, like landlords everywhere, are already collecting what needs to be collected. The problem is that Athens didn’t – and we still don’t – require the landlords to remit to the commons most of that value in the form of taxes on the land value! Instead, the landlords got – and continue to get – to keep the high land rent, and then the tenants were and are taxed on their wages and purchases to support the common spending which helped make Athens a desirable place to live! Dumb and dumber – no wonder wealth concentrates! It goes to the landed gentry, and impoverishes the landless and owners of inferior land on the fringes. Tenants pay 30% of their wages, often more, just for the privilege of living in a particular place – and most of that is for the location, not for the building and other improvements.

As Mark Twain and Will Rogers and others have pointed out, “Buy land – they aren’t making any more of it.” And this mechanism is why it matters so much. He who owns good land can command the labor of others. Does the word latifundia ring a bell?

I’ll return to DCJ’s words – which follow the quote above, but which I think are missing the point:

So we have to get back to people understanding that they’ve been sold a bill of goods here. And I’ll do a little commercial. I mean, the reason I wrote Perfectly Legal and Free Lunch was to get people to see how the system really works.

Adam Smith provided us with the canons of taxation – the criteria on which we should judge the various ways we might tax ourselves. And the income tax – even a progressive income tax – measures up rather poorly on most of those criteria. What tax measures up well? Only one: Land Value Taxation.

A better way to pluck the goose, without killing it. A way to inspire the goose to produce golden eggs for all of us, not just for the well-off few. The golden egg is a healthy economy, with rewards for those who produce and create, and none for those whose “contribution” is “supplying” land.

I think DCJ has the native intelligence and the intellectual curiosity to “get” what the classical economists sought to tell us. And, unlike many other commentators and journalists, he is not burdened with economics degrees blessed by economists trained by the neoclassical economists. I predict that he will come to see the forest, and not just the trees, and I eagerly await the book he’ll write when he has that “aha!” moment.

He might start wandering around this blog, and around www.answersanswers.com and www.wealthandwant.com and read the best-selling book ever on political economy, Progress and Poverty

Iapplaud and encourage DCJ’s thinking about the linkages between democracy and economic justice. I think he’s asking the right questions – which is an important first step – and hope he will get others to look beyond the easy answers, to the answers that will benefit us all.

Free Lunch? Take a look at The Lies of the Land