Thesis Number: #4 (Page 4 of 8)
ATCOR: the Taxing Math
More than 300 years ago, English philosopher John Locke explained in Some Considerations of the Lowering of Interest and the Raising the Value of Money (1691) that it would be “in vain” for a country to lay taxes on anything other than land, for “there at least it will terminate”. The merchant won’t bear taxes, and the labourer cannot bear it. So they pass taxes on in higher prices. But someone must pay: who? Locke was emphatic: taxes ultimately come out of a nation’s rents (Locke’s reasoning appears in full in Harrison 2012: 184).
- Taxes, when added to wages and profits, reduce what is left: the net income is then paid as rent.
- The reciprocal relationship between rent and the tax burden does not diminish rent; rather, a proportion of total rent is disguised.
Land owning patricians and gentry who controlled tax policy in the parliaments of old did not welcome Locke’s insight. They wanted to believe that, by cutting the rate of Land Tax and imposing new taxes (such as the one on salt), they could reduce the share of rent paid to the State. And so they could. But, at the same time, the amount of rent they could extract from tenants was diminished, in the process causing social chaos (Box 2).
Box 2
The Elizabethan Poor Law
When Henry VIII and his successors began to negate common rights to land, the dispossessed took to the English lanes as vagabonds. To ameliorate the trauma, the Poor Law was introduced in 1572. This was a charge on land. Instead of allowing people to work for their incomes, land owners preferred to dole out subsistence charity at the expense of “their” rents.
This manipulation of the public’s finances inflicted grotesque distortions on the economy. Example: people channel energy into dodging taxes that ought to be devoted to serving their customers.
Today, Locke’s thesis is most thoroughly documented by Mason Gaffney, the American professor who devoted a lifetime’s teaching to exposing renegade economists who brought shame on their discipline. Gaffney deployed an acronym for the Lockean thesis: ATCOR. All taxes come out of rent (see Addendum).
The first step in calculating a nation’s rents is to establish the amount people pay through the 101 “taxes” levied by government. In 2013, revenue collected by all levels of the US governing system was $5.3tn (GDP: $16.2tn). Using the ATCOR formula, we may conclude that, if America was a tax-free zone, this revenue would revert back to rent.
To sustain the injustice of a bygone age, in which aristocracies hijacked the public’s finances, about one-third of US income is painfully converted from rent into “wages” and “profits” via convoluted, anti-democratic political and bureaucratic channels.
But if revenue collected by government is ultimately out of rent, why fuss about the need to collect that revenue directly? One answer is obvious: this would raise the productive capacity of the working population. Economists admit that taxes inflict “deadweight losses”. They decline to compute those losses in language that people can understand.
If rent revenue is collected in a direct way, productivity is raised by a significant margin. This means (for example) that people could choose to maintain current levels of income while taking the additional benefits as leisure time.