JS Mill, rent, and taxation

I found this comment in The Australian by Adam Creighton:

It’s extraordinary how some of the finer distinctions of yesteryear have seeped almost entirely out of modern economic theory, which might explain some of the broader public’s frustration. In the 19th century, liberal economist John Stuart Mill defined “unearned ­income” as that arising “without exertion or sacrifice”, in effect what we would today call capital gains. He thought such income should be taxed more, not less.

Indeed. Quite extraordinary.

Let’s go to the tape:

In England the land-tax has not varied since the early part of the last century. The last act of the legislature in relation to its amount, was to diminish it; and though the subsequent increase in the rental of the country has been immense, not only from agriculture, but from the growth of towns and the increase of buildings, the ascendancy of landholders in the legislature has prevented any tax from being imposed, as it so justly might, upon the very large portion of this increase which was unearned, and, as it were, accidental. For the expectations thus raised, it appears to me that an amply sufficient allowance is made, if the whole increase of income which has accrued during this long period from a mere natural law, without exertion or sacrifice, is held sacred from any peculiar taxation. From the present date, or any subsequent time at which the legislature may think fit to assert the principle, I see no objection to declaring that the future increment of rent should be liable to special taxation; in doing which all injustice to the landlords would be obviated, if the present market-price of their land were secured to them; since that includes the present value of all future expectations. 

Here Mill is talking about so-called rent – the classical economic device to explain away anomalies that arose from employing the labour theory of value as a theory of value. This is also the logic that underpinned the ill-fated mining tax of 2010.

Now this is actually the case with rent. The ordinary progress of a society which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing. What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent, to the highest amount required by financial exigencies?

Unfortunately for JS Mill, he was quite wrong on this point. The fact is that simply growing richer – as it were in their sleep, without working, risking, or economizing – is simply not possible. In his magnificent A farewell to alms economic historian Gregory Clarke includes this graph showing that the national share of rent in the UK had been falling for  100 years before Mill published those words.

The notion of unearned income is also a classical economic fallacy derived from the labour theory of value.

The overall point is that Adam Creighton is undervaluing the importance of secondary markets – it is not the case that they add no value and are purely speculative.

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15 Responses to JS Mill, rent, and taxation

  1. H B Bear

    Assuming the risk of holding land doesn’t cange, one way of eliminating the constant increase in nominal rent on real property would be to slow the seemingly exponential growth in the cost of land. Creighton’s approach would allow the government to have it’s cake and eat it too, strangle the supply and demand for land and then skim off the benefits.

    It would be great to hear an economist talking about government spending instead of increased taxes for a change.

  2. Roger.

    It would be great to hear an economist talking about government spending instead of increased taxes for a change.

    Wouldn’t it just?

    But I note from his Oz bio that Creighton has a “special interest” in tax!

    That he is such an esteemed economics journalist does not give one much cause for hope in that profession.

  3. Rebel with cause

    Classic “heads I win, tails you loose” behaviour. Nobody compensates for losses when the Government regulates your business out of existence, drives power prices up to uncompetitive levels, allows infrastructure to erode to the point you can’t make deliveries and makes Labor costs so high your capital sits idle much of the time.

  4. H B Bear

    Of the economists doubling as j’ismists I find Creighton is generally OK, a bit hit and miss at times. Most are much worse. I heard Shane Wright from Teh Worst talking to Nanna Hutchison on ALPBC radio Perth arguing the case for re-introducing death duties yesterday. Naturally Nanna was all over it.

  5. Driftforge

    Is capital gains the equivalent of unearned income? At first glance it would seem not. In certain circumstances it may be.

    How much is the rent component of the economy? As a general rule, Rent = (Collected Land Rent – In Australia this is typically council rates at 0.5-1% of capital value)+(Increase in Capital Value – which is really only true in a long time frame sense)+(Government Taxation – because all taxation comes out of rent by definition).

    So in total we are looking at somewhere in the order of 40%-60% of the economy. Not exactly small bikkies here.

    But capital gains this is not, except in the long run when applied to land. Capital gains in a company are the inherent result of the capital invested, the rights to which are onsold.

    In many ways this is also what has happened with land. The rights to the increase in the value of the land were sold when those were worth very little, as an inducement to make them worth much more. And for some extended time period, aligning largely with the general availability of underutilised land, that system worked well. As that underutilised land is utilised though, the value generation switches from ‘own effort’ to ‘community effort’. And then we find that the rights to the sovereign portion has been sold, leading the sovereign to collect the portion by other means.

    How to resolve? Well, the sovereign has to buy back the rights. The general notion of Georgists that one can commit legal theft and recover those rights by redistributing the burden of taxation is quite rightfully fraught politically.

    No, the means of recovering those rights is to gradually purchase back the right to the land rent from the private hands it is currently held in. You create a class of land title in for which a substantial proportion of the current annualised value of the land is recovered, and you gradually purchase land into that title form, at the option of the current holder.

    In other words, create a market. And over time, you end up in a position where taxation is collected simply and cost effectively via what is possibly the most non-invasive method there is.

  6. max

    “John Stuart Mill is an epigone of classical liberalism and, especially in his later years, under the influence of his wife, full of feeble compromises. He slips slowly into socialism and is the originator of the thoughtless confounding of liberal and socialist ideas that led to the decline of English liberalism and to the undermining of the living standards of the English people.”
    Ludwig von Mises

    John Stuart Mill was the sort of man who, hearing or reading some view seemingly at utter variance with his own, would say, ‘Yes, there is something in that’, and proceed to incorporate this new inconsistent strand into his capacious and muddled world-view. Hence Mill’s ever expanding intellectual ‘synthesis’ was rather a vast kitchen midden of diverse and contradictory positions. As a result,. Mill has ever since provided a field day for young Ph.D’s caught in the game of publish or perish. Dispute over
    ‘what Mill really believed’ has become an unending cottage industry. Was Mill a laissez-faire liberal? A socialist? A romantic? A classicist? A civil libertarian? A believer in state-coerced morality? The answer is yes, every time. There is endless fodder for dispute because, in his long and prolific life, Mill was all of these and none, an ever-changing kaleidoscope of alteration, transformation and contradiction.

    Murray Rothbard

    “The best tax is always the lightest.” ~ Jean-Baptiste Say
    “There can be no such thing as ‘fairness in taxation.’

    Taxation therefore should be discussed, above all, in terms of limiting the expansion of the state, especially the central government.

    tyrannical governments prefer to tax income.

    The Articles of Confederation (1781) had the correct approach: no taxation of individuals by the national government.

    So, a practical application of biblical civil government is this principle: no concurrent taxation. Each level of civil government above the local must tax only that level of government beneath it.

    A sales tax ( less than 10% ) is much better for both personal privacy and judicial equity: an inherently flat tax. Everyone pays the same. A sales tax also does not tax capital and profits, which in turn spurs investment and economic growth.

  7. Land rents are a small part of economic rents these days. Pretending otherwise is pointless.

  8. Bruce of Newcastle

    Rent is paid for the use of an asset or other possession. In part it is a measure of the risk of supplying that asset or service. That risk remains even if a landholder only inherited the asset from daddy.

    The same applies to shares and dividends.

    South African farmers are presently being taxed in blood for their assets. As were the kulaks of the CCCP, Mao’s China and in Kampuchea.

  9. RobK

    Thanks Sinc,
    An interesting read, including the comments.

  10. ar

    how the hell is CGT unearned? Investment decisions are made and risk is undertaken based on growth prospects. That’s earning.

  11. ar

    I mean CG, not CGT which certainly is unearned.

  12. John Constantine

    Population reform and land reform are linked in Australia.

    The unearned rent the State charges landowners through the Rates system is squandered on endless social engineering for the glory of Stalin.

    The next great leap in land reform will come from fair and just rates being charged by Stalin’s own councils to pay for population reform.

    Ararat shire in vicco tried this, but it was just too soon to get away with doubling the rent the shire charges farmers.

    In poor seasons, the shire charged unearned rent can be a hundred percent of taxable income.

    Comrades.

  13. Jimf

    Creighton normally knows better. “Unearned income”, otherwise known as “investment”.Not only funds business but also implicitly involves a risk on return.Doesn’t matter whether the return was engineered or passive. We’ve now reached peak ignorance in this country and tipped over into normalised (indeed lauded) fantasy-land economics.When the credit reaper arrives here ,he*(she) will leave a mess the likes Barnaby has never seen.

  14. Pyrmonter

    Greg Clarke deserves reading; he has a good neo-Malthusian iTunesU series.

  15. Tel

    The phenomenon of a capital gain is a direct consequence of having property rights. You cannot have either of these without the other. It is necessary to think of them as a package.

    The purpose of property rights is to overcome the “Tragedy of the Commons” situation (i.e. if no one can exclusively benefit from land, then no one would ever make improvements to the land when the effort is concentrated on the few, but the reward is shared amongst everyone). Thus, if you really believe in some sort of social calculus with gain and loss to society as a whole (it’s a questionable concept, but let’s presume it’s real) then you would need to look at how much gain is obtained by providing incentive to improve the land, vs how much is “lost to society” because the individual earns the benefits of that improvement.

    What claim have they, on the general principle of social justice, to this accession of riches? In what would they have been wronged if society had, from the beginning, reserved the right of taxing the spontaneous increase of rent, to the highest amount required by financial exigencies?

    If it were “from the beginning” then of course no one would be wronged, but then also they wouldn’t pay so much for the land in the first place knowing there’s no income to be had from it, and nor would they put effort into building houses, farms, factories, roads or anything else on that land. But there’s the trick, this isn’t about “from the beginning” it’s about firstly making the promise of reward and the AFTER someone puts effort into improvement THEN renegotiating and deciding that it better to redistribute. And yeah, speculative purchase is still contributing to improvements because it has a price discovery function and it provides incentive to those who would do improvements even when the speculator does not.

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