Saturday, December 11, 2010

Question From a Reader

A reader asks a question:

"I have started reading The Wealth of Nations. I read on your website that you do not subscribe to Stiger's idea of an invisible hand theory. That appealed to me.

What of Smith's call for Public Education and his call to tax lands?

I'd like Ireland to tax land rents as Smith says "Both ground- rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them." Book5 Ch2 On taxes

Do you agree that ground rent should be taxed and is this a good way of funding education?"


Smith's attitudes to landlords was based on its historical origins in Feudalism and before that in war lords after the fall of Rome in the 5th century. From the spread of primogeniture - inheritance of all by the eldest male heir - and the spread of entail - no part of an estate can be sold except as an integral part of the whole estate - this led to locked-in lands, in time beyond the capacity of the heirs to farm and manage productively (each generation's land acquisitios automatically were entailed. Capital in land was wasted if the lands were not productive, and capital was diverted into land ownership and the prestige accorded to it in 18th-century society (Ireland and Britain has much experience of absentee landlords).

Hence, to raise revenue - there was no income tax in his day - he looked for other sources, and he recognised, with regret, that customs duties were inevitable, and with them tariffs, which prevented free trade (he called it 'utopian' to expect free trade to be instituted in Britain on such a narrow tax base).

His stance on taxes must be understood in that context.

Thank you for your question and your interest in Lost Legacy.


On the use of such land-based taxes for education, I make two observations.

1 The range of taxes has spread widely either side of land taxes, which plus borrowing is quite a different (much larger) burden on a national economy, as both Ireland and Britain now know to our cost.

2 On what or whether any new sources of taxation should be spent on any particular heading is a political choice and choice is a (divisive) problem of priorities.

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Blogger Vilhelmo said...

Economic rent is unearned income (income derived not from work but from privilege), the excess of market price over intrinsic cost.

Regarding land rents "the part of the produce that accrues to the owners of land (or other natural capabilities) by virtue of ownership" and as "the share of wealth given to landowners because they have an exclusive right to the use of those natural capabilities." - George

Land Rent is the distribution paid to freeholders for "allowing" production on the land they control.

"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land ...." - Adam Smith: The Wealth of Nations

It was Smith who first rigorously analyzed the effects of a land value tax, pointing out how it would not hurt economic activity, and how it would not raise land rents.

" Ground-rents are a still more proper subject of taxation than the rent of houses. A tax upon ground-rents would not raise the rents of houses. It would fall altogether upon the owner of the ground-rent, who acts always as a monopolist, and exacts the greatest rent which can be got for the use of his ground. More or less can be got for it according as the competitors happen to be richer or poorer, or can afford to gratify their fancy for a particular spot of ground at a greater or smaller expense. In every country the greatest number of rich competitors is in the capital, and it is there accordingly that the highest ground-rents are always to be found. As the wealth of those competitors would in no respect be increased by a tax upon ground-rents, they would not probably be disposed to pay more for the use of the ground. Whether the tax was to be advanced by the inhabitant, or by the owner of the ground, would be of little importance. The more the inhabitant was obliged to pay for the tax, the less he would incline to pay for the ground; so that the final payment of the tax would fall altogether upon the owner of the ground-rent." - Adam Smith , The Wealth of Nations, Book V, Chapter 2, Article I: Taxes upon the Rent of Houses

This is why he advocated a land value tax. He recognized that a tax on the rent of land (& economic rents in general) was the most efficient form of taxation that would not distort economic activities, adding to price as all other taxes do. In fact, it can actually help keep prices down & inline with the cost of production.

9:36 pm  

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