tax models

[Fred Foldvary]

On Tue, 30 May 2000, Francois-Rene Rideau wrote:

> Actually, that's the old debate of the 18th century physiocrats.
> They, like you, believed that nature should be taxed, not men.
> Political Economics finally rejected these physiocratic theses.

There is no "Political Economics".  There are various schools of thought
having different theories and policy prescriptions.  Some schools and
individual economists agree with the physiocrats that using rent for
public finance has the least excess burden on the economy.  I have never
read any argument against this proposition; every attempt to rebut it has
distorted the theory or the facts.  The Ramsey principle of using
inelastic sources for public revenue is well established theory.

> Although the physiocratic prejudice is still present in some of
> Turgot's work, even Turgot has a good letter about values and money
> where he shows a more modern view of value.

But Turgot favored the physiocratic public finance policy.
 
> I think that Bastiat's chapter of the Economic Harmonies on Value
> is great, as it shows that Value is born in human work,
> and that gift of natures count nothing in it,
> except as an initial reward for people discovering new techniques.

It's great, but incorrect.

> In addition to what Bastiat says, my main contention
> about the physiocratic conception of riches
> is that it is impossible for an external observer to separate
> the part of nature from the part of men, in a way that be both
> just and applicable through law.

It is indeed impossible in theory, but is done in practice.  This shows
the power of the market in being able to do what is theoretically
impossible.  Insurance companies, for example, routinely assess real
estate to estimate the land value and the improvement value separately
because they only wish to insure the improvements against damage.
Condominiums achieve this by setting a percentage interest in each unit,
which is also its percentage of the assessments, achieving the
physiocratic aim of a zero tax on marginal product.  Real-estate assessors
have several techniques to estimate land and improvements, such as using
the replacement value of construction, subtracting depreciation, and using
computerized maps to smooth out values in a neighborhood.  What theory
says is impossible, human ingenuity makes possible.  Human action is
superior to our theories.

> For instance, If I find out in the nature a diamond (or a lost piece of
> art);  should I be taxed according to its market value? 

Yes, a tax on natural resources is based on the market value.  A piece of
art is, however, not a natural resource.

> If I create it? If I buy it from the one who created it?

Human creations are not a natural resource.  Why do you mention these?

> If I inherit it? What if everyone thought it was a very valuable item,
> but actually it was not worth much? What in the contrary case?

Then the market value would be low.

> In each case, how much did "nature" bring into the riches,
> and how much are you going to tax whom?

The title holder gets taxed, in some proportion to market value.
One good feature of taxing land is that the title holder may be anonymous.
So long as the rent tax is paid, the government would not concern itself
with the identity of the owner.  There are no tax audits.

> And if something was found in the nature, then who are you to tax it?

"You" is the government.  If you want to get rid of government, I have no
quarrel with you.  But that still leaves open the issue of financing
collective goods.

> And who was the owner to claim ownership?

When land rent is taxed, the morality behind it is that the title holder
has rights of possession conditional on paying the rent to some community,
the community having the moral right to the rent.  The government is a
a collection agent and possibly the provider of collective goods.

> > Taxes on the rent of natural-resource riches does not punish people,
> > while taxes on the products of human action does punish people.

> Yes, they do punish people, like all taxes (= the cost of governement).

What is your argument?

> Which is why taxes in general they should be kept as low as possible.

The issue at hand is the best source of taxes, not the amount.
My view is that the best amount of taxes is zero, but this conversation
is not about that, but on which taxes are least worst.

> > What is fair about penalizing transactions that benefit the public and
> > imposing an excess burden on the economy?

> The fact that this transaction, being officially recognized by government,
> covers expected governmental expenses to protect such transaction against
> potential fraud, etc.

I prefer that my transactions be my private affair and not monitored or
supervised and taxed by government.  I can buy insurance and other
protection from fraud (that's what courts are for).  Why should
transaction taxes cover government expenses that have nothing to do with
that particular transaction?
 
> Moreover, what else is there to tax upon without being iniquitous?

Pollution and land rent.

Fred Foldvary