Memorandum: AI, UBI, and LVT

Introduction.

The concepts of artificial intelligence (AI) and universal basic income (UBI) are almost certainly familiar to the reader. Furthermore, the reader is likely familiar with arguments about the connection between the two concepts and may have opinions on the matter. However, the reader is much less likely to be familiar with land value taxation (LVT) and how it relates to AI and UBI. The purpose of this memorandum is to being laying out those connections.

  • To quell the riotous inclinations of the masses.
  • To ensure political and social stability.
  • To eradicate poverty.
  • To promote the health and well being of populations.
  • To provide a “linen shirt” to all citizens to ensure their ability to participate in society and in the market.
  • To provide a social safety net in order to reduce the risks of entrepreneurship, research, development, and invention.
  • To provide economic empowerment to those on the margins of society or who have historically and systematically been marginalized.
  • To simplify the welfare state.
  • To decrease income and wealth inequality.
  • The compensate those whose work is not compensated by the market (the primary example given being raising children and taking care of older relatives).
  • To provide for those who have been dislocated and displaced by transitions in the economy.

Artificial Intelligence.

In some ways, AI is like the last reason for UBI cited above.

The significance of the last two sentences cannot be overstated: of all the reasons for UBI, AI is different in kind because after AI there will be fewer jobs than there were before and we will enter a “post-capitalism” era.

Interestingly, and perhaps encouragingly, UBI has gained attention and some initial support from various corners of the political and economic spectrums. Labor leaders and business executives have spoken approvingly of it. However, virtually all of these discussions and supportive statements end with the same question: how to fund such a massive undertaking.

Taxation.

There are four ultimate sources from which public revenue may be obtained.

  • The returns to capital, which are called profits.
  • The returns to land, which are called rents.
  • The existing accumulation of wages, profits, and rents, which are called wealth.

Examples include: “We need a tax cut.” “Taxes are too high.“ “We need to raise taxes on the wealthy.” “Warren Buffett pays a lower tax rate than his secretary.”

However, from an economic and analytical standpoint, the questions of what we tax and how we tax it are far more important. History is replete with examples of poorly devised tax policies that failed or had significant negative impacts not because of how much they taxed, but because of what and how they taxed.

Option 1: taxing capital/profits.

The easiest shift in the tax base for people to contemplate will likely be onto capital/profits. This shift is relatively easy to imagine because it is most similar to our current tax base on labor/wages and because we already do it in some ways (the clearest examples being capital gains and corporate income taxes). However, it is important to remember that this will not be a marginal increase in existing taxation on capital/profits, but an increase to the tune of trillions of dollars. If such a shift were to occur, it would certainly trigger concerns of disincentivizing investment, research, and development and would reverse the policy that profits should receive preferential treatment in order to promote economic growth. But there are at least three concerns that are even more fundamental.

Issue 1: volatility of revenue.

First, tax revenues would plummet during recessions. While recessions are generally accompanied by a decrease in tax revenue due to layoffs and pay cuts, a shift in the tax base to capital/profits would greatly exacerbate this problem. The amount of capital that remains idle or unprofitable during a recession far exceeds the quantity of labor that becomes unemployed.

Issue 2: inhibiting innovation and progress.

Second, the shifting of the tax base onto capital/profits would occur precisely at the same time as AI is implemented throughout the economy, becomes a dominant industry, and becomes the most productive form of capital. Taxing this capital would be ill advised and would significantly inhibit progress at the very least. Try to imagine what the world might look like today if the tax base had been shifted to capital/profits at the emergence of the internet age. Would we have Google, Facebook, Amazon, Apple, and Microsoft today? If so, what would they look like? Would we be on the verge of an AI revolution today?

Issue 3: mobility.

Finally, capital is the easiest tax base to move to “more friendly” jurisdictions. Heavy taxation of capital inevitably leads to capital fleeing that jurisdiction for a neighboring jurisdiction where it can do the same work and earn the same profits without being subject to heavy taxation. Labor can move jurisdictions as well, but such changes tend to be limited and gradual because the decision to relocated labor is personal and subject to all sorts of other considerations; relocating capital is merely a business decision. Shifting the tax base from labor/wages to capital/profit would inevitably be accompanied by a giant sucking noise as capital moves to more hospitable jurisdictions. To even consider a sustainable tax on capital/profits would likely require a global tax treaty requiring an unprecedented level of coordination, cooperation, and loss of sovereignty.

Option 2: taxing wealth.

For these reasons, shifting trillions of dollars of taxes from labor/wages to capital/profits is ill advised at best and likely completely unsustainable. Next, we turn to wealth. Wealth is different from labor/wages, capital/profits, and land/rent in that it is merely the accumulated sum of unused wages, profits, and rents. Thus wealth can actually be traced back to its origin in wages, profits, and/or rents and dealt with in the analysis of each of these tax bases. However, some additional observations are helpful.

Option 3: taxing land.

What is land?

This leaves one viable basis of taxation: land. Perhaps it is best to begin this discussion with a statement of what a tax on land would be and what it would not be since the use of land as a tax base is virtually unknown in the United States.

Land and capital are (very) different.

It is very common, even amongst professional economists, to confuse land and capital. To see the benefits of shifting the tax base to land, it is essential to carefully differentiate between land and capital.

The philosophical and legal basis of property.

Another source of the confusion between land and capital is that we use the word “property” to refer to both land and capital. However, just as land and capital behave very differently economically, they have distinct philosophical and legal bases.

The creation of value in land.

It is clear where the value in labor and capital come from and who that value belongs to. Wages are what are necessary to convince an individual to perform labor — to perform a massage or fix your car. Profit is what is necessary to convince an individual to part with their property, whether on a temporary or permanent basis — to lease you a truck or to sell you a piece of equipment. Without wages, you would not get any labor and without profit you would not get any capital.

Ownership versus exclusive use.

This model fits perfectly with the cultural, legal, historical, and religious norms that land is the inheritance of and belongs to all mankind and is for the benefit and provision of all mankind. Under the model, all of mankind has inherited the earth (and creates the value in the earth) and merely leases out individual plots to individuals, who in turn compensate mankind and the community with a periodic rent.

What are the consequences of private ownership of land?

When land is privately owned (or, more precisely, when individuals are able to reap all the benefits of ownership of land without compensating the rest of society for that right), the owners are freeriders on society: reaping the benefits created by the rest of society without contributing anything in return. This, in and of itself, is an injustice. However, it creates a cascade of economic problems: poverty, income and wealth inequality, unemployment, and recessions.

Poverty and inequality.

To understand why these phenomena are naturally the result of private ownership of land, it is necessary to understand one of the foundational laws of of economics: Ricardo’s Law of Rent.

Ricardo’s Law of Rent states that the rent on land is equal to the productive value of that land minus the productive value of the most productive free land available. This is precisely what we have intuited and derived.

But what did the landowner do to deserve their 40 coconuts in rent? Did they invent or build anything? Not a thing. Did they contribute any labor? They didn’t so much as raise a finger. The legal system on the island simply recognizes their exclusive rights to the land without any corresponding obligation to compensate society; they are a free rider.

Thus, Ricardo’s Law of Rent says that when there is no longer any free land available, the rent on land becomes the productive value of the land minus the least amount anyone in the society is willing to work for.

What has happened on our island? Now that there is no free land available, rents on land have skyrocketed and wages have collapsed to their bare minimum. Poverty has emerged and dramatic income and wealth inequalities have emerged.

Recessions and unemployment.

We have seen how the structure of ownership of land leads to poverty and wealth and income inequality. How does it connect to recessions and unemployment? A result of Ricardo’s Law of Rent is that land becomes more valuable every time society becomes more productive. This occurs without the owner of the land having to do anything. As such, land is a very good “investment.”

Competition.

One further consequence of the private ownership of land is worth noting. In agricultural societies, it is quite easy to see the use of land, the value of the land, the power that ownership of land yields, and the economic consequences of the ownership of land. Today, in a modern industrial and commercial society, many casually state that the value and importance of land is greatly diminished. But nothing could be further from the truth. The value of land is greater than ever; it is simply harder to see because its value is “mixed up” in countless businesses and activities.

What are the consequences of taxing the ownership of land?

This all may sound like an argument for the confiscation and collectivization of land; it is not. As discussed earlier, there is an important distinction between the ownership and the use of land. We want the users of land to rest assured that they have the exclusive right to the use of land, that they will continue in that right as long as they so desire, and that they will be able to reap all the fruits of their labor on the land. Without that assurance, people will not plant, build structures, or conduct business.

A brief history.

Economists stretching back to Adam Smith have recognized the fact that land is the ideal base of taxation. As discussed earlier, David Ricardo, who came shortly after Adam Smith, presented a thorough analysis of land and similarly recognized the benefits of taxing land over all other bases of taxation. John Stuart Mill in turn wrote about the benefits of taxing land.Twentieth century economists have widely made the unfortunate mistake of thinking of land and capital as being the same factor of production, which has obscured their analysis of the benefits of taxing land. Nevertheless, there is wide recognition amongst economists, including Nobel laureates, that land is particularly well suited for taxation.

Canons of Taxation.

Adam Smith introduced the ideas of canons of taxation: principles by which various tax systems can be compared and contrasted.

No deadweight loss.

A tax on anything acts to increase the cost of that thing, which in turn results in lower demand and supply for that item. This is called deadweight loss by economists. Sometimes we tax things for the explicit purpose of having less of it in society — alcohol and tobacco being the most common examples.

A land value tax cannot be passed on.

A land value tax is also the only tax that cannot be passed on from the individual on whom it is imposed. It is well known and commonly stated that businesses just pass their taxes on to end consumers: a tax on gas companies will be passed on to consumers at the pump; a tax imposed on employers based on the number of employees they have will be passed on to employees in the form of lower wages or lower employment. The same is not true of land. The easiest way to see this is to remember that the supply of land is fixed. The mechanism by which taxes are passed on to consumers is by an artificial lowering of the supply, which raises the price of the item. However, the supply of land is fixed, so this cannot occur with a land tax.

Calling land into its highest and best use.

In fact, taxing land has the opposite effect in some ways: taxing land increases the supply of land available for actual use. This occurs in two ways. First, valuable land that is held completely out of production for speculative reasons will be taxed based on its actual value, which will mean that it will no longer be sustainable for it to be held out of production — forcing the owner to offer it up to production. Second, the owner of land that is being used productively but in an inefficient or suboptimal way will be forced to be put the land into its highest and best use in order to generate sufficient revenue to pay the tax bill based on the value of the land.

Formerly unviable land becomes viable.

When the tax base is shifted onto land, land that was not formerly viable for productive use becomes viable. Under the current system, a business must pay for the land that they are situated on plus a whole host of other taxes (property taxes, sales taxes, payroll taxes, business taxes, and income taxes). This results in a burden that renders some pieces of land (even in urban areas) unviable since not enough revenue can be generated to cover all these expenses and make the endeavor worthwhile. However, under a land tax system all these other expenses are eliminated and only the cost of the land must be covered (in the form of a land value tax to a public entity, instead of in the form of rent to a landlord).

Eliminate unemployment and raise wages.

A tax on the value of land has the potential to end unemployment. This may appear to be a radical statement, but a simple mental game demonstrates the importance of land to employment. In the period after the Louisiana purchase when free land was available on the frontier, what were unemployment levels? Zero. Anyone was willing and able to work had the ability to work. Based on the previous comments on the ability of a land tax to call land into production and into its highest and best use, it is easy to see how taxing land “creates new land” by making it available and by incentivizing economic activity on that land. A sixty story building in an urban core provides a lot more opportunities for employment than a parking lot does.

An end to speculation in land and recessions.

As hinted at in the previous point, a land tax prevents speculation in land. However, the way in which it does this is even more radical than merely forcing owners of land to put the land into productive use. A land tax actually makes it impossible to profit from the mere ownership of land because the value of land will be zero since rents from land can no longer be collected and a profit can therefore no longer be made from mere ownership. Thus, there is no reason to speculate in land any longer.

Free up credit for productive uses, lower interest rates, and end inflation.

Currently, massive amount of credit are used to buy and speculate in land. This is wasted credit because buying and owning land has no productive value; the land is just as productive before as after. Because a land value tax would drive the value of land to zero, no credit would be necessary to gain access to land. Instead, credit would be devoted exclusive to productive uses such as building buildings, buying equipment, and engaging in research and development. Because land would no longer be competing for credit, this would drive down interest rates.

Eliminate barrier of entry to business and promote true competition.

As has already been fleshed out, a land tax calls land into its highest and best use, making formerly unviable land viable, and eliminates numerous costs of doing business. All of this increases the ease and reduces the costs of starting businesses. Further, as discussed earlier, existing companies will no longer have the advantage of early entry into the land market over later entrants or businesses that have to rent. Thus true competition will finally exist between businesses. It cannot be overstated how much opportunity this will create for individuals far and wide and for businesses small and large.

Self funding infrastructure.

It is well known that massive investments in infrastructure are currently needed in the United States. Moreover, continual investment, not just one time investment, is needed. However, the question of how to fund this investment is incredibly contentious. And it should be contentious because anytime there is investment in infrastructure, it constitutes a massive transfer of wealth from society to the private owners of land. Infrastructure virtually always makes land more valuable and therefore acts to make the owners of land more wealthy while crowding out those who do not own land. There are countless examples of new railways, bridges, campuses, and parks making landowners quite rich at no cost to themselves. A land value tax solves this problem by collecting the rental value of the land, which will capture the increased value created by the infrastructure, which in turn will act to self fund the infrastructure investment.

An end to NIMBYism.

To the extent that owners of land who complain about public projects decreasing the value of their land are correct, a land tax will perfectly compensate them by an accompanying decrease in their land value tax. This is merely the flip side of self funding infrastructure.

A stable and sustainable tax base.

As discussed earlier, land is the one basis of taxation that cannot flee a jurisdiction. In an era of increasing mobility of labor and capital, land is the last basis of taxation that jurisdictions will have available. Fortunately, land will stay put even when taxed and provides countless other benefits.

Environmental benefits.

Volumes could be written on the environmental benefits of shifting taxes onto land. As outlined above, a land value tax would result in more compact, efficient use of land and all the environmental benefits that would come along with such use instead of the sprawl caused by land speculation and underutilization of land.

Under which system do you think we will be more likely to develop a culture and legal system that protests and conserves the environment?

AI, UBI, and LVT.

This memorandum has largely been focused on how to fund a UBI. The outlines of the argument are simple.

  • At the same time, if AI decreases the need for labor, we will experience a decrease in tax revenue from the income tax.
  • Shifting taxation to capital is undesirable for reasons of competitiveness, innovation, and capital flight.
  • Land is the final option on which to shift taxation.
  • Taxation of land is not only viable, it is highly desirable.

In fact, this is the realization of the vision that the earth is the common inheritance of all mankind for the provision of all of mankind. All would be provided with a basic income from the provision of the earth.

BS Math & Masters in Public Policy, Cal Poly. JD, Georgetown. Minimalism, digital nomadism, reading, eating well, exercise, good coffee and conversation, LVT.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store