Faux Libertarian Fun

One of the more radical ideas put forward by the Faux Libertarians is that the (UK) government should simply default on all its public sector debt; this would ensure that nobody would ever lend to the government again, i.e. that the government would not be able to spend more than it collects in taxes, and also that publicly collected taxes on incomes and production - the proceeds of which are used to service the existing debt - could be cut accordingly, probably by about £100 billion a year.

Ho hum, like most propaganda, this has some superficial appeal, but we have to remember that the Faux Libertarians, making common cause with the Home-Owner-Ists, are also the first to cry 'foul' if you propose shifting taxation from incomes and production to taxation of land values. They say that this somehow amounts to an attack on private assets or private capital. Although the Faux Libertarians pay lip service to the idea that state-protected monopolies are A Bad Thing, calling for a default on government debt while opposing the taxation of land values betrays a wilful lack of understanding of the history and economics of all this (and that's putting it charitably).

1. Crudely put, back in feudal times (whether in Anglo-Saxon times or from 1066 up to the Magna Carta), the King only had one source of income, namely ground rents. With the Magna Carta, the barons decided they were no longer going to play along and told the King that he was on his own; they'd rather keep all the ground rents for themselves (thus first creating the separate class of 'landowners' who have rights without responsibilities) and it was up to the King to find his own source of income for his pampered lifestyle, running the country, fighting wars etc.

2. Kings being kings, they always loved invading other countries, which is an expensive (and futile) exercise, so they had to raise extra money quickly. The drip-drip of the ground rents that they still collected from the land that was still under the King's control wasn't enough, so what they did was sell off bits of land 'freehold', i.e. the purchaser paid a lump sum equivalent to all the future ground rents, which the King could merrily squander on this that and the other.

3. So what they did, in economic terms, was commute future ground rent (i.e. tax) revenues into lump sum payments. By a miracle of Faux Libertarian double think; the ground rents you pay to the King (or the State) in exchange for protection of exclusive possession count as tax (which is, in their terms, A Bad Thing); but once the 'freehold' has passed into private ownership, the money a future tenant or purchaser pays to the private owner (in exchange for the protection of exclusive possession, which by definition can only be guaranteed by the State) magically cease to be a tax and become a 'return on investment' or 'return on capital'. The truth of the matter is, the ground rents merely cease to be a publicly collected tax and become a privately collected tax instead.

4. Of course, there's only so much land you can sell off, so the Kings then invented a whole series of other taxes - which all boil down to taxes on income or production - to raise even more money. And then they invented 'the Treasury' and the whole system of banking and finance became a bit more sophisticated (sure, this took a few centuries, but the pattern is recognisable).

5. Now, as we see from 3, a King can commute future revenues to a single lump sum payment by a private individual. So now they had another regular source of income (income tax), they had something else to sell off to private individuals. A private individual is pretty indifferent whether he gives the King money up front in exchange for being able to collect future ground rents privately; or whether he gives the Treasury money up front to be repaid out of future income tax revenues.

6. As rental values tend to increase over time, but we have monetary inflation, those people who paid for the right to collect future ground rents have historically done much better than people who paid for the right to be repaid out of future income tax receipts, but that is a separate topic.

7. To cut a long story short, as far as the involvement of the State is concerned, private individuals have two kinds of 'assets' - land or government bonds.

a) I use the word 'asset' loosely - a government bond is a liability to the taxpayer, but an 'asset' to whomever holds it from time to time; the two net off to nothing. If the state had never raised the money by issuing bonds (and probably spent it on something wasteful), then you would not immediately consider the absence of bonds to be an 'asset', but in relative terms, the less public sector debt there is, the better it is for the income taxpayer.

b) Similarly, the value of privately owned land to the 'owner' is merely the flip side of the future liability of tenants or purchasers to pay a privately collected tax to the current or previous 'owner' (or to the bank that provides the mortgage finance). The two net off to nothing. Assuming that 'everything belongs to somebody', in the absence of private landownership, land would be owned by the State (or 'by the King' or 'by the Crown' or 'by the people' or 'by the income taxpayer', depending on your political leanings). If the absence of a public sector debt is an 'asset' to the income tax payer, then state-owned land must also be an 'asset' from the point of view of the income taxpayer (the more rents that Crown Estates and social housing providers can collect, the less the income tax has to be paid, for a given amount of government spending).

c) To cut a long story short, if the Kings in feudal times hadn't been so profligate with fighting foreign wars (which weakened him vis a vis the barons, which enabled a lot of land to be privatised from under his nose) there would be neither private land ownership nor income tax. And if modern governments hadn't been so profligate with spending on quangocracy (and fighting foreign wars) there wouldn't be any government bonds either (and still no income tax, of course).

8. It strikes me as completely hypocritical to say that

a) one class of people (who either descend from the Normans who originally stole the land) or who have given the government (or the previous landowner) lump sums in exchange for the right to collect ground rents privately (i.e. what was originally, and by its very nature, the natural source of revenues for a State) are privileged; but

b) another class of people, who have given the government lump sums to be repaid out of future income tax revenues (admittedly a rather less natural source of revenue for the state) can be treated like dirt.

9. In summary, defaulting on (or inflating away) public sector debts and taxing land values are not opposites, they are very similar.

a) I don't like the idea of cancelling actual land titles or 'dispossessing' landowners any more than the idea of simply defaulting on public sector debts, I'm old fashioned about things like that, and we can rule that out as a serious proposal.

b) Most people are simultaneously income taxpayers and homeowners, simply shifting taxation from incomes to land values does not have much overall impact (don't bother me with tales of The Poor Old Widow In A Mansion, I have dealt with that issue a dozen times already), apart from reducing the deadweight costs of taxation.

c) The chances are, that the people who have the highest net land 'wealth' (i.e. value of house minus mortgage) are by and large the people with the biggest personal interest in the 'asset' side of the national debt (if we take that as the sum total of government bonds owned by pension funds, as well as future public sector or state pensions which have to be paid out of taxation, however raised), so there is a rather pleasing symmetry to this.

10. To hold up a debt-default as some kind of libertarian ideal, while decrying the taxation of land values as theft is somewhere on a sliding scale between propaganda, rank hypocrisy, one-sided economics or plain stupidity.

Here endeth today's lesson.