Thesis Number: #4 (Page 5 of 8)

Rents in Private Pockets

The next question relates to the proportion of a nation’s revenue that is visible as rent. This is rent that is not collected by government. Economists have no idea of how much rent is circulating. There is a huge hole in national income statistics.

For current practical purposes, the prudent estimate is that rents in private pockets amount to about 20% of national income.

  • In the UK, researchers found that rent was 22% of national income in 1985, rising to 29% in 1989 (Banks 1989: 40, Table 2:II). But 1989 was a peak year in the property cycle, just before the bust of 1992. Allowing for the distortions caused by land speculation, the “normal” year estimate for the UK would be for 1987: 21.8%.
  • In Australia, researchers – armed with one of the best official data sets in the world – calculated that rent in private hands in 2012 was 26% of GDP (Putland 2013; Fitzgerald 2013). Rents in that year were inflated by abnormally high urban and commodity prices (one of the ripple effects of the China connection).

If we cautiously assume that privately collected rents are around 20% of national income, what would be a robust estimate for the value of all rents generated by the mature industrial economies of the West today?

Adding up the “Rents”

If we take a random selection of 10 rich nations, ranging from Australia through the US to Sweden, Germany and Japan, the average tax-take as a percent of GDP is 37%. In ATCOR terms, most of this is rent in its disguised form (collected as if they were “wages” and “profits”). If we add to this the rent that is not collected by government, of around 20%, we find that rent exceeds 50% of national income. This first approximation of rent needs to be adjusted for several reasons.

  1. Taxes distort aggregate income. They encourage the under-use of urban land (which artificially raises rents). Taxes also motivate behaviour that damages the environment, as when polluters are not obliged to pay for dumping waste into the atmosphere (which artificially reduces rents).
  1. A small part of tax revenue may actually fall on wage earners, rather than being shifted (ultimately) onto rent. People with no bargaining power, those at the economic “margin”, are particularly vulnerable (which is why the Poor Law had to be invented).

Such considerations add to, and subtract from, rent. Further assessment is required, but the outcome would not significantly modify the conservative conclusion that rent is about 50% of total income. This is more than sufficient to cover existing government financial commitments. And we need to bear in mind that welfare subsidies for low-income and unemployed people would rapidly decline in a rationally funded system of governance.

The gains from untaxing wages and collecting rents would have a positively enormous impact on people’s lives. Nicolaus Tideman, a professor at Virginia Tech and State University, estimates that, five years into the reform, the average American family would be better off by $6,300 (Tideman 2013).

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