By Akhil Patel
It has become popular to suggest a Universal Basic Income (UBI) as a solution to growing inequity. But in its current form UBI will be a total failure. Not because the idea is a bad one, but because it ignores the law of economic rent.
The idea of a UBI has a much longer provenance and is in fact the perfect counterpart to the land value tax. Actually, “counterpart” is the wrong word. It is an inevitable consequence.
Henry George made this very point at the end of the 19th century when he was asked the following question about the land value tax:
To what purpose do you contemplate that the money raised by your scheme of taxation should be applied?
George’s response was as follows (as reported in the North American Review, July 1885, emphasis added):
To the ordinary expenses of government … and, I am inclined to think, to the payment of a fixed sum to every citizen when he came to a certain age… if it were to appear that further extension of the functions of government would involve demoralisation, then the surplus revenue might be divided per capita.
For him, citizenship in a civilised county entitled everyone so born to a share in its natural wealth. He thought that the rent paid for government expenditure – but that if people decided that such expenditure was not adding further value, it should be returned to the people. Collection of the economic rent in effect sets limits to what government can and should do.
In a country where the rent is collected on behalf of the community, UBI becomes everyone’s birth right. You see echoes of this in places like Norway and Alaska which collect oil rents on behalf of the community and hold them in trust in perpetuity, and can afford to pay citizens an annual dividend.
Under our present system of land monopoly capitalism, UBI will simply raise the price of land everywhere. So what is gained in income is lost through higher rents. In fact, a UBI will ultimately end up being a massive transfer of wealth from taxpayers to landowners.
This is how muddled our thinking has become about issues of such importance to so many people. And how sensible solutions seem so out of reach.
In its purest form a land value tax would be levied as the annual charge on the value of location in its best permitted (ie, under local planning regulations) use. This means that the levy would only reflect locational value and not the quality of the building sitting on it.
This would stop people being penalised for investing in upgrading their properties. It would also mean that those owners who were holding land out of use or underutilising the land would need to put it to use immediately.
At the same time, the levy on locational value would have to be accompanied by an abolition of other taxation (income, corporation, VAT, etc.). The point of a levy is not to raise additional revenue per se but to shift the tax base. Actually, the main point is to ensure that publicly generated value is returned to the public (i.e, from providing infrastructure, clean and safe streets, parks, cultural attractions, etc) and privately generated value (from people engaging in economic activity) is kept private.
There are a number of issues that would need to be worked out in transitioning from one system to another, which need not concern us here. This is not to dismiss their importance, and they would need careful consideration. The main point I wanted to make is to show you how much better the economy could work.
Akhil Patel writes for “Cycles, Trends and Forecasts”
This was my initial reaction to basic income. I have been promoting it recently though because at least keeps people talking. Getting people thinking, of course, is a bigger challenge.
“Under our present system of land monopoly capitalism, UBI will simply raise the price of land everywhere.”
This is incorrect. Rents arise due to differences in average incomes from one location compared to another.
The UBI, in and of itself, doesn’t change those differences, so even if it were funded 100% by a rich foreign benefactor, it would not increase rents.
However, as all taxes, except a Poll Tax, are incident to some degree or another on land, then any extra spending needed to pay for the UBI will lower land prices.`
It might be helpful to note that as a UBI and Poll Tax cancel each other out, then the former cannot be incident upon land either.
Hi Benjamin,
Do you mean to say contract rents (i.e. the money I give my landlord every week) or economic rents?
The value of location is determined by a number of factors, but mostly productivity and scarcity. To take an example from Melbourne, contract rents have not risen as fast as land prices. This is because, here as in other places in the OECD, wages have stagnated and contract rents are determined by incomes. Land price inflation is more about the expansion of cheap mortgage lending, and the capacity of landowners to make a capital gain when they sell.
Increasing everyone’s capacity pay with a UBI will flow into land rents, because, as you point out, land will eventually take the gain. A key consideration is what Patel refers to as “land monopoly capitalism”: not everyone is a landowner, yet everyone needs access to land. The land market is an entry monopoly. If I now have $100 more per week to spend (thanks to a UBI), I can now borrow more money to buy land. My additional capacity to pay can be asked by an existing landowner (depending on supply-side factors).
It’s also worth noting that increased incomes can raise aggregate demand, meaning I am now competing at auctions by others who also receive the UBI. Everyone vying at the auction will use their UBI as leverage to bid up the price. This demand-side dynamcic would also apply to contract rents.
In the absence of the public collection of a high percentage of the rent of land (i.e., the potential annual rental value of all locations), a widespread increase in the nominal income of individuals will be capitalized into higher land (and, therefore, residential property) prices and apartment rents.
So, in the absence of doing what is needed most, communities need to subsidize the construction of affordable housing. Hopefully, communities will have undeveloped land that can be devoted to new housing. If not, then the community will have to use tax revenue to purchase land from land owners.