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LVRG ScrapbookThursday, February 28, 2008:

Alternative Economic Review  No. 5: The myth of progressive taxation

The global economic crisis
from a non-neoclassical viewpoint

Final Edition — February 2008


The myth of progressive taxation

By “progressive” income taxation and “means-tested” welfare, governments make a great show of taking from the rich and giving to the poor. Of course this pretense conveniently ignores such things as “business” deductions, concessional taxation of capital gains, and (in the USA) the capping of the personal component of payroll tax. But most importantly it ignores the fact that the spending of taxpayers' money on infrastructure, together with general economic growth and population growth, adds value to land, which is preferentially owned by the rich, and for which the rest of us must either pay increasing rent as tenants or go deeper into debt as first-time buyers.

The financing of infrastructure out of “general taxation” is particularly obnoxious because the rich pay minimal taxes on the ensuing unearned uplifts in their land values, while the rest of us, on account of the same uplifts in land values, pay for the infrastructure a second time though higher rents and home prices. (The right way to pay for infrastructure, as I explained in last month's editorial, is to recycle part of the uplifts in land values caused by, inter alia, the same infrastructure.)

As these uplifts in land values are unearned, they are transfers — just like the dole. Thus rising land values constitute welfare for the rich and taxes on the poor — the very reverse of the official tax-transfer system — and a trickle-up effect taking back the benefits that the poor supposedly get from economic growth.

Fred Harrison describes the system as The Great Tax Clawback Scam. In the following video, which runs for less than 8 minutes, he explains how we got into this mess and how we can get out of it.

The video promotes Harrison's book Ricardo's Law: House Prices and the Great Tax Clawback Scam (London: Shepheard-Walwyn, 2006). I highly recommend the book. So do my sponsors. But if you lack the time to read the book or simply don't respond to shameless plugs, it's all the more necessary that you watch 7m40s of video. (Please contact me if the video link breaks.)


Two authors comment on the U.S. Economic Stimulus Act of 2008. Mortgage Broker Chris Goulart, at Real Estate Money Matters, considers how the stimulus package could impact the housing market and the broader economy. He welcomes the increase in the permitted size of conforming loans (that is, loans that the lenders can sell on to Freddie Mac and Fannie Mae) as rekindling demand for both conforming and non-conforming loans on the secondary market. This will support home prices (or rather “bubble” prices of land) by increasing the availability of home loans and hence the effective demand from buyers. So the essence of the argument is “Avoid the hangover: stay drunk!” But the article is notable for the housing-finance insider's perspective on the parlous state of the U.S. housing market and the wider economy, and for mentioning not only the ‘R’-word, but also the ‘D’-word. Adam Pieniazek, while no more optimistic about the economy, is less impressed by the stimulus package. In “Economics Battle: President Bush versus Facebook Users”, he argues that what America needs is not more spending by consumers, but more spending by governments within the country.

Logan Flatt, CFA, being a graduate of the Southern Methodist University, is unsympathetic to the policy of avoiding hangovers by staying drunk. He correctly predicted the Fed's recent loosening of monetary policy in “Let's Be Frank, Barney: The Federal Reserve Hurts We The People”, posted at PowerWealth.com.

Why is it increasingly respectable for home “owners” with negative equity to walk away from their loans and their homes? Part of the answer is surely the behavior by which mortgage lenders and brokers contributed to the present crisis. Such behavior is targeted by the British firm Personal Finance Claims. But the same firm is also concerned with exorbitant account fees, saying “Stop Being Fleeced By Your Bank, File Your Claim Today” — not because your claim will necessarily succeed or even get past the logjam in the courts, but because “The piled up cases are like an explosives dump ground and all that is needed is a single victory that will act as the spark, putting an end to the ever-growing greed of these banking behemoths.” On the other side of the Atlantic, Sarah Strauss explains how banks order transactions to maximize overdraft fees in “The Biggest Scam Your Bank Gets Away With Everyday”, posted at Truthful Lending dot Com. John Crenshaw, a Loan Officer in California and founder of Truthful Lending, says: “This little-known scam accounts for a huge portion of fees paid to banks every year and is going on right under your nose. The worst part is, it's completely legal.”

Those who have been up to their necks in property speculation or subprime lending will of course want to attribute the incipient recession to the high price of crude oil. But is this fair? Jessica Hupp at CurrencyTrading.net (a site that seems to have a preoccupation with lists) explains “20 Surprising Ways High Oil Prices Affect the Global Economy”. See how much they surprise you. Now let's put that $100/barrel price in perspective. If the price of crude oil fell to zero, by what percentage would gasoline prices fall at the pump? Figures collected by Charlie Wilson imply an answer just slightly over 50%. For details and further implications, see his article “Cost of Gas: Where the Money Goes” at the About Politics blog. Then, if you're still convinced that recessions are due to high oil prices, note three things. First, there were recessions before there were oil shocks. Second, the recession of 1990–91 started before the oil shock that allegedly caused it. Third, appearing via satellite at the International Monetary Conference in London on June 8, 2004, Alan Greenspan was asked whether there was a causal link between oil prices and economic growth. In reply, he complained that:

The impact of oil prices on an economy is difficult to infer and there's no automatic policy response. We found that despite the fact that most of the recessions of the last 40 years have been preceded by an oil price spike, the problem is that we create these elaborate models for policy responses and we put in oil prices [but] they don't create a recession in the models.

The quote is found on p.65 of Fred Harrison's earlier book, Boom Bust: House Prices, Banking, and the Depression of 2010 (London: Shepheard-Walwyn, 2005).

Thank you

Here endeth the experiment. Alternative Economic Review, which I believe to be the world's first Georgist blog carnival, never reached its nominal target of 10 usable submissions, let alone overtly Georgist submissions. I will of course keep publishing, but not in the form of a regular blog carnival. I thank the contributors who kept this carnival going for five editions.

Gavin R. Putland.

[First published at grputland.blogspot.com. Edited Feb.28, 2008. Relocated Nov.13, 2009.]

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