The Democratic Imperative
PART TWO

Edward J. Dodson

[A Response by Joseph Bast, President, Heartland Institute. Joseph Bast is the president of The Heartland Institute, a nonprofit and nonpartisan research institute based in Palatine, Illinois. He is the coauthor of several books, including Eco-Sanity: A Common-Sense Guide to Environmentalism (1994).]

INTRODUCTION

I commend Mr. Dodson for producing an ambitious paper covering many of the most controversial topics of the day. I most appreciated his frequent calls for further research and more debate. If there were simple answers to the problems that afflict western civilization in the Twentieth Century, we would have found them by now. Such problems persevere precisely because their solutions are difficult to find and possibly complex.

I should warn the reader that I am not a "Georgist," at least not as I have come to understand the term. I have read quite a lot of Henry George and admire his insights and the rigor of his analysis. Most economists today would agree with much of what Mr. George wrote, even though many haven't read him, and those that have are loath to admit it. I have yet to meet a practicing economist who didn't think that taxing land values is superior, in many ways, to taxing improvements in real estate, income, or other tax bases. How far one can take this insight, however, is where most of us part company with "Georgism."

I counted eight distinct topic areas covered by Mr. Dodson, starting with ways to expand citizen participation in the government process and ending with comments on credit and banking. In the comments that follow, I address only two of his topics: the relationship between government and business, and optimal tax policies. Had I attempted to address more than this, my comments would have been longer than Mr. Dodson's essay. As it is, I see they rival his in length.

Relationship Between Government and Business

Mr. Dodson asks us to ponder ". . . what sort of principles ought to govern the activities of businesses, particularly those that adopt the corporate form of ownership." He proposes that government's role vis a vis business be as follows:

The function of government ought to be two-fold: (I) to protect the health and safety of all citizens; and (ii) to prevent the formation of monopolies, contrived shortages and/or price fixing among producers.

I believe that Mr. Dodson, in making this statement, does not intend to put forward a new fundamental theory of government, but is describing only the tasks that government ought to perform concerning businesses. In other places in his paper, Mr. Dodson seems to support a government of limited powers, though with a few notable exceptions. Be this as it may, his statement of government's functions seems to me to be incorrect and open to mischief.

The first proposed function could be read to give government a license to interfere with and regulate many aspects of our lives. In the name of protecting our health and safety, government could ban the manufacture and sale of foods containing too much fat, sugar, or salt. It could ban automobiles that can travel faster than 55 miles per hour (or even 15 miles per hour). It could require businesses to begin each day with a mandatory program of calisthenics for employees.

Common sense says each of us, individually, is responsible for our own health and safety. Most of what affects our health and safety is directly under our own control: what we eat and how much, whether or not we smoke and how often, whether we engage in risky activities such as skydiving or downhill skiing, and so forth. Who better to judge the costs and benefits than the person committing the act? Government is too distant from our day-to-day living to be a reliable watchdog of our health and safety.

Government does have responsibilities in the areas of health and safety, but they are incidental to government's real function, which is to protect us from the use of force and fraud by others. Government protects us from imposed or invisible risks that might be beyond our own ability to anticipate or avoid when it prosecutes false advertising, and when it holds companies liable for injuries caused by defective products, negligence, pollution of common resources, etc.

Mr. Dodson and I probably agree on the value of regulations pertaining to these activities, but our disagreement is more than one of semantics. It is not a function of government vis a vis businesses to protect the health and safety of consumers and workers. Rather, government should do only what is necessary to protect us from the use of force and fraud by others. Protection of health and safety, when it occurs, is only the consequence of government fulfilling that one true function.

Monopolies and Price Fixing

The second function of government proposed by Mr. Dodson ignores the fact that government itself historically has been the source of "monopolies, contrived shortages and/or price fixing among producers." In his classic essay, "Is Government the Source of Monopoly?" Yale Brozen described how government policies created monopolies (actually cartels) in trucking, aeronautics, steamships, railroads, taxicabs, sugar production, textiles . . . well, you get the picture. And it was government regulation of oil prices that created the so-called "energy crisis" of the 1970s. When deregulation was enacted in the 1980s, prices fell and waiting lines disappeared.

It is grim testimony of the pervasiveness of anti-business propaganda that so many Americans believe business is becoming increasingly concentrated and non-competitive over time. In fact, the trend in most industries is the opposite. New technologies, the decline of international trade barriers, and the simple expansion of the size of markets have all contributed to a decentralization of the marketplace. More opportunities exist for new products and new businesses than ever before. As a result, we are witnessing a burst of entrepreneurship as "plain folks" step in to fill new consumer needs or past needs more efficiently.

As was the case with health and safety, government's duty with regard to monopolies and instances of price fixing should be limited to preventing the use of force and fraud. So long as consumers are not forced to buy goods from a particular producer, and so long as force is not used to prevent potential competitors from entering a market, monopolies and cartels will always and everywhere be short-lived. The best policy for government to pursue, then, is to remove regulatory and tax barriers to business start-ups and allow competition to flourish.

Public Goods and Services

So far I have suggested replacing Mr. Dodson's two functions of government vis a vis businesses with the single fundamental task of preventing the use of force and fraud. To this I would add a second function that Mr. Dodson overlooks: In a small number of areas, government performs a valuable function by providing goods or services that the market, because of high transaction costs or free-rider problems, will not produce or produces only at a much higher cost.

The theory of such "public goods" seems to be quite sound, though it suffers an embarrassing lack of bona fide examples in the real world. For example, most light houses, roads, parks, and even urban sanitary systems and traffic lights were privately financed and owned prior to the expansion of government power around the turn of the century. Markets have been amazingly creative at solving problems now deemed to be the exclusive province of government.

Nonetheless, it would be useful, following Mr. Dodson's lead, to propose some principles concerning government's role in the area of public goods. I propose four:

(a) Governments should attempt to turn public goods into private goods by reducing transactions costs or using its police powers to discourage free riders. For example, a local government might be well positioned to help bring together neighborhood residents and businesses to discuss and solve community problems such as parking, parks, or mass transit, without creating a government entity with the power to provide such amenities.

(b) Governments should provide only such goods as services as can be used by or would benefit everyone in a community. In the absence of such a rule, general tax revenues are used to finance projects benefiting only special interest groups, leading other groups to lobby for new projects that would benefit only them.

(c) Governments should provide but not necessarily produce public goods and services. The actual production of a good or service can be contracted out to private companies or nonprofit groups, with government retaining the power to set standards and competitively bid the contracts.

(d) All arrangements to provide public goods and services should have sunset provisions as a way to return (or advance) to private provision sometime in the future. The fact that public provision seems necessary today is no guarantee that a new technology or organizational innovation won't make privatization possible tomorrow. Without sunset clauses, government agencies often attain a kind of institutional immortality.

The reader may think that, since I disagree so thoroughly with Mr. Dodson's premises, that I will also disagree with most of what he says regarding the relationship between government and business. Surprisingly, that is not the case.

Although Mr. Dodson finds much to criticize about the modern corporation (some of it on target, some I think is exaggerated), he is careful to limit his policy prescriptions to the voluntary adoption of cooperative ownership models and ways to improve education systems and job retraining programs. He concludes, and I agree, that "this approach to more responsible corporate behavior is far more desirable than relying on government to adopt intrusive, regulatory or social legislation." Much as I like this conclusion, though, it seems to follow more readily from my notions of the appropriate role of government than from Mr. Dodson's.

How Should the State Raise Revenues?

Mr. Dodson does a fine job summarizing the Georgist approach to taxation. Since "our birthright as human beings is the right of equal access to the earth," it necessarily follows that "titles to nature and forms of other licenses that restrict equal access create unnatural forms of property, privileges that are inherently monopolistic." "Justice," he goes on to write, "demands that the individual compensate all others in society for the privilege of monopolizing access," and therefore "taxation of property or of income derived from the use of property" is justified.

Henry George himself might add that land has characteristics making it unlike any other kind of property, such as finite supply, its creation by God rather than man, and its permanence, making land an unlikely candidate for private ownership. Mr. George also saw (and on this most modern economists would agree) that land is easier to tax than other things because it cannot be moved or hidden, and a tax on land values would have less effect on incentives to work and invest than taxes on income or production. Finally, anticipating such contemporary economists as Ronald Coase and Armen Alchian, Mr. George saw ownership of land as a "bundle" of rights that could be broken up, separately assigned, sold or retained by the state, and taxed.

Replacing the current tax system with a tax on land values, as Mr. George proposed and Mr. Dodson implicitly endorses, may indeed create the "enormous increase in production" that Mr. George wrote about in Social Problems and elsewhere. But I have some reservations.

Georgism and Technological Change

Widely noted advances in technology make location increasingly irrelevant to the process of wealth creation. What Alvin Toffler calls the "second wave" -- the transition from a manufacturing to a service economy -- was already occurring during Mr. George's time, and it was reducing the significance of land and location relative to labor and capital. Mr. Toffler says we are now in a "third wave" when information technologies make land and even capital unimportant. We read, for example, about "virtual companies" that exist only as people connected by phone and computer modems, moving information and money around the world electronically.

Are Georgists proposing to tax a factor of production that is no longer a significant part of the economy's most profitable businesses? If such a tax is imposed, its major impact would be felt on occupations and industries that cannot "go virtual," such as agriculture and private homes. The result would be not less income inequality, as Mr. George had hoped, but more.

Attempting to tax land values in downtown business districts would quickly push the newly mobile information managers out to the suburbs, rural communities, or even to other countries where they can work just as easily. The result would be more urban sprawl and more empty space in business districts, once again just the opposite of Mr. George's predictions.

As little as 18 months from now, according to Burton Pines of National Empowerment Television, interactive television will be in a majority of homes in America. It will dramatically push forward the trend toward shopping, working, and being entertained at home. It will revolutionize retailing as well as the information processes that are now the core of our service economy. In this brave new world, where is the relevance of land and location? Why should we tax these things when they now have little to do with wealth, the creation of wealth, or justice?

I don't know the answers to these questions. There may be, however, an alternative interpretation of the relationship between Georgism and technological change. Henry George said land values are the only just source of revenues for the state. Land values associated with manufacturing and wealth creation are about to fall thanks to "third wave" technologies. But the "third wave" also creates less need for government-provided goods and services. Mr. George, in short, may have had his finger on the way to make government "wither away": As government becomes less necessary, its only just source of funding contracts. De facto defunding! The reason we have too much government today, then, may be because we failed to heed Mr. George's advice a hundred years ago!

What Does Taxing Land Leave Out?

A theory of just taxation that competes with the Georgist paradigm is that taxes are the price paid for public services. In the U.S., local property taxes most closely reflect this rule, being high in communities wishing to purchase high-quality schools and parks or public services, and lower when such amenities are not publicly provided.

Should all communities be required to provide only such amenities as can be supported by the income generated from local land values? Or could that budget be supplemented by fees based on actual use of public facilities or general assessments? It's easy to say "yes, of course each community can do as it chooses." But such an answer contradicts Henry George, who said "Any recognition of the equal right to life and liberty which would deny the right to property - the right of a man to his labor and to the full fruits of his labor - would be a mockery." (Social Problems, p. 96, emphasis added.)

Mr. George thought he had a complete theory of just taxation: nothing beyond taxation of land values is compatible with our rights to life and liberty. Contemporary Georgists who seek to "mix and match" the land tax with user fees are seeking to capture an element of justice -- in this case, taxes are the price willingly paid for public services -- that they perceive to be missing from Georgism. They may be right, but this opens the door to alternative theories of just taxation, including social contract theories ("people can vote to tax themselves") and even Marxist puffery ("from each according to his ability . . . . "). This, it seems to me, is more than a mere quibble.

Progressive Income Taxation

Mr. Dodson and I apparently agree that Georgism comes up short of a complete theory of justice taxation, since he supports progressive income taxation as a way to raise public funds if revenues from a land tax are insufficient. Mr. Dodson writes, the "ability to pay ought to be given the highest consideration." Mr. Dodson doesn't tell us why. Does he believe those who produce the most value in society should be penalized to prevent others from emulating them, lest we grow too fast? Or perhaps punitive taxation is necessary to humble the lucky and the talented? How would this benefit society?

The prospect of trial lawyers and stockbrokers making millions of dollars a year telecommuting from their homes and paying not one penny in land taxes might also have occurred to Mr. Dodson. Certainly, the income tax he proposes would prevent these greedy "virtual entrepreneurs" from keeping "the full fruits" of their labor.

I believe Mr. Dodson's concern, and his proposal, are ill-considered and decidedly un-Georgist. Like Mr. George, I strenuously oppose income taxation. I especially abhor graduated income taxation -- whereby persons of higher income not only pay more, but disproportionately more, of their earnings to the state -- which is based entirely on envy rather than justice. Graduated income taxes have the most corrosive effects imaginable on productivity, social mobility, and the efficiency of tax collection.

Mr. Dodson tries to excuse his proposal for a graduated income tax by saying, "to be sure, there is confiscation associated with this supplemental means of raising public revenue; however, the depth of confiscation is moderate . . . ." Sir, rape is rape even if only partial penetration is achieved.

Conclusion

What is the correct relationship between government and business, and how ought government be financed? Political philosophers as far back as Plato grappled with these issues. Isn't it extraordinary that the same questions dominate the political scene today? Should the Justice Department have prevented Microsoft from acquiring Intuit, Inc? Should the federal income tax be replaced with a flat tax or a national sales tax?

Georgists should be playing a high-profile role in these debates. Henry George had a profound insight into how taxes on production and income stifle economic growth and perpetuate inequality. He was an eloquent defender not only of the right to equal access to land, but of all the natural rights appearing in the great English liberal tradition. Those rights always need strong voices raised in their defense.

I have not kept pace with recent Georgist scholarship, so I do not know if the concerns expressed above have been raised and resolved by other writers. I look forward to talking with Mr. Dodson and others to find the answers.

Return to PART ONE