Thursday, 24 September 2015

Wealth and income distribution: New theories needed for a new era

"New theories needed for a new era", say Ravi Kanbur and Joseph Stiglitz, in an article on inequality published for the CEPR here.

I'm not sure why we need new theories when a modicum of common sense applied to Classical Economics does the trick nicely.

What the question really boils down to is can we empirically differentiate between fair inequality and excessive inequality?

In order to answer that question, we must firstly define fair. For something to be efficient, it must maximise wealth and (economic) welfare.

It is therefore axiomatic that for something to be fair it must be also optimally efficient. This is really just restating a banal utilitarian position.   How we measure welfare, which is subjective to each of us, may be problematic, but this has no bearing on the fact that what is fair must also be efficient.

However, applied to (wealth) distribution and Public Finance is where things get interesting.

We know that the taxation of produced factors, Income/Capital is inefficient(deadweight loss) and we know that the value of land capitalised into selling prices is also inefficient(deadweight loss), so;

a fair economic system=fair distribution of Land/Income/Capital=aligned incentives=optimal economic efficiency.

In other words, in a fair and thus efficient economic system,  the exact amount of compensation you owe the community(tax) is rental value of land your property occupies (plus some other negative externalities which are of a minor concern here).

Given the ATCOR principle (all taxes come out of rent), to see if we have fair or excessive inequality today we then only need to compare current taxes paid (% of total tax) to rental value of land (% of total land rent) between households.

We accurately know that the top 1% of households in the UK pay around 14% of total taxes or about 18% of domestic taxation.
Less accurately, because the data on the distribution of land by value is sketchier, they own around 40% of all land by rental value. (based on HMRC, Times Rich List, Pareto distribution).

Therefore they are paying less than half of what they would be under a fair and optimally efficient tax system.

Furthermore, as the value of land has risen faster than the returns to labour and capital, its concentration among the wealthiest percentile is the reason why we’ve seen widening and excessive inequality.

The reason Land does capture a greater return of GDP than Labour and Capital, all else being equal, is covered by David Ricardo and his Law of Rent.

No new theories needed. Wasn’t too hard was it?


Mark Wadsworth said...


Income inequality is a good thing because it encourages people to work harder or focus on doing high-margin stuff.

Land inequality is a bad thing because it just gets worse of its own accord and/or non-rentieres spend too much effort trying to grab a share of it.*

Land inequality in this country (and many others) is far, far greater than income inequality, so let's address this one first, it's the easy one to address and it is the bad one.

* You get stupid grey areas like the rent which film stars and footballers get, so there are too many people wasting too much time trying to become film stars or footballers, but hey, I am sure that the resulting drag on the economy is a percent of a percent.

Mark Wadsworth said...

I hasten to add that while income inequality is a good thing (market signals), having eradicated land inequality, there might be still the issue of absolute poverty to address, which is of course best dealt with by having a Citizen's Income and plenty of low-cost social housing (like in the 60s and 70s).

Lola said...

Essentially, sorting out 'inequality' issinple. Why isn't it sorted? Vested interests.

Ben Jamin' said...


As per my previous post, inequality does in itself create an inefficiency by thinning markets. But, on the other hand and more importantly, we need incentives. Inequality then only becomes excessive (an a net efficiency) if there is an unfair distribution of income/capital/land.

So, we have an optimal amount of inequality if you like. We are way above that level today, as proved above, and observation informs us.

The double decker bus statistic has to be one of the most memorable ever.

Regarding absolute poverty, that is mainly a jobs and a demand for labour problem, with LVT would sort along with removing the perverse incentives of our current benefits system.

@ L

I'm not sure, although vested interests certainly aren't going to help enlighten anyone to the truth.

Point being, that if you were simply interested in sorting out inequality, you'd only ever need to advocate wealth creation as a policy.

Imagine Jeremy Corbyn at PMQs advocating an LVT and the abolition of taxes on output on efficiency grounds only? No mention of inequality at all.

The ground would disintegrate under the Tory party.

How incredibly lucky for the wealthy elite that Socialists are too stupid to realise this.

Only when enough people vote for a genuinely Geo-libertarian party will things structurally change for the good.

Lola said...

BJ. (I was limited by my smart phone...) and yes. Broadly.

In my view we are stuck between to sets of extortionists. On the left we have the Labour party, who use things like Union special privileges to (to bastardise a term beloved of lefties) 'gouge' wages. On the right we have the Tory party who use their special privileges to 'gouge' rents. Where is the party for 'capital'? As in wealth creation? There is, can be, no rent seeking/extortion in free exchanges and wealth creation.

Sackerson said...

Actually Mark, since in our distorted economy we see much malinvestment, I wonder whether you would turn your mind to the question of malemployment? Should be interested to see your analysis of the loss of economic potential because of too many lawyers, estate agents etc.

Ben Jamin' said...

@ S

Deadweight loss from parasitic activities isn't measured as a % GDP. Which is one of the failings of GDP. Breaking windows that gives employment to glazers would go down as economic activity as would kidnap and ransom, if it were legal.

What these activities do is lower net welfare. So, many of those now employed in jobs like accountancy, tax lawyers, HMRC, DWP, estate agents, property management, landlords, bankers and economists that add nothing to welfare, and would as a result of LVT be without a job, could go and do something else instead that does.

Like gardening, looking after children, flipping burgers or engineering some new products etc, etc.

While is theory this change wouldn't add to GDP (although I'm pretty certain it would) it would add to making the World a much nicer place to live in.

Ben Jamin' said...

@ S

BTW, I suppose you could measure or guestimate the welfare gain by the value of the new type of employment these people would be working in.

Let's say 2 million x £20,000 as a low estimate of extra welfare.

We did cover estate agents a while back

Sackerson said...


Thank you; we seem to be thinking along similar lines. "When Adam delved and Eve span, who was then the gentleman?"

Getting the 1% to agree to more than double their annual financial contribution to society is attended by certain practical difficulties. Any solutions?

Ben Jamin' said...

@ S

Just to clarify, because of foreign ownership, trusts, companies etc, the top 1% of UK households are not necessarily the top 1% of landowners. Which is why the ONS figures aren't reliable. As noted by Piketty.

In truth the majority of the top 1% of UK households (270,000) would be better off under a LVT.

We are really talking about a minority within a minority. It's a complicated situation.

Also, although without doubt under a LVT the liabilities of the "top 1%" would increase, many of them wouldn't want or be able to pay it. So they'd sell up and move.

Doesn't matter, as their loss in welfare from no longer occupying such a valuable location is someone else's gain. So, whether they pay for the value they get from that location (LVT) or lose it by selling up, from a societal point of view, it makes no difference.

I don't think the 1% is the problem. The problem is a deeply ingrained belief that an LVT is a "home tax". Owning your own piece of land is the ultimate security blanket. No matter the price we pay is far exceeds those gains.

It's a difficult psychological problem, somewhat like trying to abolish slavery, which most people, including slaves, thought a perfectly normal state of affairs.

I'm sure once people hear the case put forward by those with credentials(people without them just get push back, no matter what/how they say things), and really think it through, then they'll change.

The key is to get young people now, to know this stuff, and hopefully they'll be the ones with credentials in the future.

Only one way to do that IMO, and that's get them signed up to the YPP.

Easier said than done though.

Random said...

BJ, that is interesting. Could you guys do a large scale estimate of the real resources freed up from non-jobs - number of estate agents for example.

Ben Jamin' said...


It would only be a guestimate but, yes I have thought about trying to get some numbers together at some point.

I'd love to see the amount of deadwood we've got in the UK economy. Only a full enaction of the Wadsworth Plan would reveal the full extent.

I suspect it's a lot.