“By (Henry) George, Real Estate is the Source of All Our Troubles”

foldvary.net/works/freefest09.html

Fred Foldvary

FreedomFest, Las Vegas, July 10, 2009

Palace 1,2; 4-4:50 PM


Good afternoon!


My name is Fred Foldvary.

I teach economics at Santa Clara University.

I spoke at FreedomFest in 2007 on why there would be a depression in 2008.


I originally entitled my presentation this year,

"How I accurately predicted the Crash of 2008,

and why civilization will collapse in 2026."

That’s the title under my photo in the roster of speakers.


Later, Mark Skousen and I had a discussion about land-value taxation,

and he suggested that I should talk about why

free-market advocates should be in favor taxing land

rather than income or sales, as proposed by the economist Henry George.

So I’ll talk about both topics, since they are related.


First of all, if you are an anarchist, you oppose all taxation.

I have no quarrel with anarchists.

If you are in favor of having no imposed government, I’m on your side.


My tax argument is directed at those who favor free markets

and also believe that some limited government is needed,

in which case it has to be paid for somehow.


Some libertarians are minarchists, favoring a government,

but they also oppose taxation,

so they propose voluntary ways to finance the state.

Some minarchists think that voluntary donations

can pay for services such as national defense.

If that worked, that would be fine,

but the problem is that there is no guarantee

that the donations would be sufficient.


I doubt it, since in economics,

there is a concept called the “free rider,”

who benefits from a service without paying for it,

and without being somebody’s paid guest.


The philosopher Ayn Rand proposed a contract fee,

which people pay to have their contracts enforced.

The problem there is calculating

how much the fee should be for various contracts,

and also, people would minimize the fee with umbrella contracts

that cover everything.


Also, a contract fee would impose a cost greater

than the actual cost of enforcing the contract,

which would distort enterprise.

I think it’s just impractical.


In the freedom movement,

the three tax reform proposals most talked about are the flat-rate income tax,

a consumption tax, and a national sales tax.


The problem with taxation is what economists call

the “deadweight loss” or “excess burden.”

Punitive taxes have to be paid on top of the cost of production,

which raises the price of goods.

I call these taxes “punitive”

because by imposing an extra cost,

they punish people for working, producing, and investing.


Economists who have measured the deadweight loss estimate

that it is over $1.5 trillion a year of economic waste.


The deadweight loss also reduces economic growth.

Our per-capita income today would be twice as big

if the economy had been allowed to grow

tax free during past 35 years.


By the law of demand, higher prices reduce purchases,

and so punitive taxes reduce production and employment.

The deadweight loss is a misallocation of resources.

The loss to the economy is greater than the gain to the government.

Punitive taxation not only wastes resources,

but it distorts the price and profit signals

that markets use to efficiently allocate resources.


As they might say in Star Trek,

punitive taxation creates a disturbance in the economic space-time continuum!


The excess burden is greater the higher the tax.

In the USA and most other countries and states,

the income tax is graduated, higher incomes paying higher tax rates.

The economic impact depends on the marginal tax rate,

the tax on extra income.


So some free-market tax reformers propose

a flat-rate income tax

to replace the graduated income tax,

one tax rate for all income, with few deductions or credits.


I agree that a flat tax is better than a graduated tax,

but the flat-rate income tax still has a deadweight loss.

And being an income tax,

it intrudes into privacy, induces tax evasion,

and taxpayers still have to keep records, fill out forms, and get audited.


There is also a moral problem with any general income tax.

Natural-rights philosophers such as John Locke

explained that human beings are properly equal self-owners.

You are the proper owner of your life, your body, and your time,

and therefore you fully own your labor and the products of labor.

Any tax on your labor violates your self-ownership.

A tax on labor makes you a slave of government.


Other reformers propose a consumption tax.

They want to exempt savings from the income tax,

and only tax the income spent for consumption.

But first of all,

what business is it of government

to decide what you do with your own earned income?


If government punishes consumption and promotes savings,

this too is a distortion, and creates a deadweight loss.

The purpose of the economy is consumption.

If we punish consumption, we punish production and investment.

We should not punish savings and investment,

but punishing consumption is no better.


Then there are those who propose a national sales tax,

which they call a “fair tax.”

With today’s level of government spending,

and with all state income taxes replaced by state sales taxes,

the tax rate on goods and services would have to be

fifty percent of the cost of production

to pay for all of government.


If a pair of shoes costs $100 to produce,

the sales tax of $50 would make the total $150,

so one third of the total payment would be the tax,

since government spends about a third of national income.


Do I have to explain the deadweight loss of such a high sales tax?

Is there any doubt that there would be massive tax evasion?

The government would respond with strict enforcement.


You would need to keep receipts of all purchases to prove you paid the tax.

There would be inspections of packages you receive.

They might enter your house to inspect the goods you have.

Services would be taxed also.


The historical record of high sales taxes is not promising.

Every government that imposed high sales taxes has committed political suicide. That includes Great Britain’s taxation of the American colonies,

the French and Russian empires prior to their revolutions,

and the Confederate States during the Civil War.


There is also a generational problem.

Retired folks have paid high income taxes all their lives,

and are now living on savings or pensions.

Now the sales taxers want a heavy tax on their spending?

Any politician who proposes to tax punish our seniors

commits political suicide.


The problem with those advocating

a flat income tax or a national sales tax

is that they ignore the third option,

which is to stop taxing people

and let mother nature pay the taxes.


Mother nature is willing to finance the government,

yet most people reject her offer

and instead want to tax our labor and entrepreneurship!

Why do you reject mother nature’s offer?


There is a natural surplus in the economy

that can provide all the public revenue needed

to provide us with desired public goods.

That natural surplus is land rent.


In economics, land means all natural resources.

Spatial land, the three-dimensional space we live in, was created by nature.

The space around the earth and within any boundary line is fixed in supply.

Therefore, a tax on the rent of land has no deadweight loss, no excess burden.


Economists have estimated

that the total land rent in the US economy

is about a fifth of national income.

So if most of the rent is used for public revenue,

it could pay for all the public goods provided by government.

If we eliminated transfer payments such as social security,

land rent supplemented by user fees could pay for all of government.


The price of land depends on the rent of land,

so taxing land value is the same as taxing the rent.

This would be a property tax only on the land,

excluding the value of the buildings or any improvements.


A tax on land value cannot be passed on to tenants.

If landlords raise the rent, some tenants would move out,

and the landlords would have to lower the rent to eliminate the vacancies.


A tax on a produced good raises its price,

but since land has no cost of production,

a tax on land value reduces the purchase price of land.

Therefore, the tax burden

is entirely on those who own land at the time the tax is implemented.


After the transition,

a tax on land rent or land value

is not a burden even to landowners,

because they buy land at lower prices.


What they have to pay in the land tax,

they save in not having to pay mortgage interest.

The tax replaces the interest, so the landowner has no burden.


That is because land rent is a pure surplus.

Some economists say that there is no free lunch,

but actually there is a free lunch, namely,

the surplus that is land rent.

Land rent is a gift to us from mother nature

so that labor and enterprise can be tax free,

but we have rejected her kind gift!


In fact, a tax on land value can even benefit an economy

by promoting the most productive use of land.


What about the justice or equity of a land-value tax?

If the taxes are on wages, business, or goods,

then landowners get subsidized.


Public goods such as streets and security increase land rent and land value.

So those who are workers and tenants get double billed.

A tenant pays higher rent to be located there,

and he also pays the taxes.


The landowner gets higher rent and land value

without doing anything,

so landowners receive an implicit subsidy.

It is a redistribution of wealth

from workers and business owners to landowners.


A tax on land value or rent prevents this subsidy and double billing.

Landowners pay back value received.


So, why do I say that real estate is the source of all our troubles?

First of all, if the government rejects mother nature’s offer

to provide public revenue from the land rent surplus,

government instead imposes punitive taxation on labor, enterprise, and trade.


But second of all,

the huge governmental subsidy to land value

promotes the real estate booms

that create a business cycle and depressions.

Every major recession or depression or financial panic

has been preceded by a real estate boom.


During an economic expansion, as real estate prices rise,

speculators jump in to gain from the rise in land values.

The speculative demand adds to the demand to use space,

escalating the price increase.

With the false sense of security of rising prices,

banks loosen their lending standards,

and we get the zero-down and interest-only mortgages.


We get the securitization of these mortgages

and all the derivatives we have heard about during past couple of years.


The real estate boom is unsustainable,

as speculation drives prices above what is affordable by households

and what is profitable for business.

Land values peak out, construction and other investments halt,

and the economy falls into a recession.


The fall in real estate prices

causes a collapse in the financial institutions

such as banks, AIG, and Fannie Mae.

The financial crash then feeds back into the real economy

as credit for enterprise freezes up.


The elimination of the boom-bust cycle

requires the elimination of the speculative real estate boom,

and the only way to do that is to tax most of the land rent.


A high tax on the land value

will bring the price of land down to near zero.

It eliminates the government subsidy to land speculation,

 and so eliminates the business cycle.

 No more recessions and depressions.


The real estate cycles in the US have had an average period of 18 years.

In 1997 I wrote an article on the business cycle

in which I predicted

that the next severe recession would occur in 2008,

18 years after the previous recession of 1990.


In 2007 I wrote a booklet called

The Depression of 2008, which I sold at FreedomFest.


The economy will recover from the current depression,

and there will be another real estate boom, and another crash.

The next crash will occur 18 years from 2008, so around 2026.

The next crash and depression

will be much worse than the one we are going through now.

That is because the federal government will be all tapped out.


The federal deficit doubled from 2000 to 2008,

from $5 to $10 trillion, and with today’s huge deficits,

the federal debt will double again by 2016, and then, by 2026,

it could be $40 trillion, not counting the trillions of unfunded liabilities.


So in the next financial crisis, around 2026,

the government will not be able to bail out

the financial and real estate interests.

Not only will most people lose all their savings and investments,

but there will be massive business failures and shut downs,

and massive unemployment,

and no government help, since the government will be bankrupt too.


That is why say that civilization will collapse in 2026

if we don’t fix the problem now.


The only way to get the economy to grow rapidly

to avoid the deficits and the next depression

is by a complete shift to land value taxation.


Replace all state and federal taxes with a tax on land value.

That will eliminate the deadweight loss, cure poverty,

promote maximum growth, and eliminate the deficits.


It’s a radical change, but if we don’t do it,

we will be facing the end of civilization in 2026.

By George, we need land value taxation now more than ever before.


Thank you, and I’ll be pleased to answer any questions.