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From:
[log in to unmask] (Fred Foldvary)
Date:
Wed, 03 Sep 2008 17:20:48 -0000
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Mason Gaffney wrote:

> A better way, I now realize, is to treat excise and
> most taxes as being shifted into land rents, i.e.
> taken out of land rents.

Properly understood, the conventional deadweight loss
analysis does this.  In a competitive industry, the
"producer surplus" is actually land rent, since
competitive labor has the same wage and competitive
capital goods sell at the same price; the long-run
upward sloping supply curve is caused by differences
in locational productivity, giving rise to
differential land rent.  Since landowners do not
produce land, it should really be called the
"non-producer surplus" (so labeled in my paper on
"Geo-Rent"
http://www.econjournalwatch.org/pdf/FoldvaryIntellectualTyrannyApril2005.pdf)

Furthermore, the portion of consumption funded from
land rent is the consumer surplus that is also at the
expense of rent.  Hence, much of the social surplus
that goes to taxes is at the expense of land rent.

> So, I think that instead of Harberger's itty-bitty
> triangles, to remove bad taxes would result in
> QUANTUM LEAPS of land from lower to higher uses.

Of course the size of the triangle depends on how you
draw the supply and demand curves.  One can put in a
large tax wedge with elastic curves and have a
relatively large triangle.  The quantum leap effect is
indeed also needed, where the supply curve is
horizontal due to a global market that leaves a firm
with little pricing power; a gross receipts tax leaves
the economic profit negative, and the firm disappears.
 But that can be done within the DWL framework with a
highly elastic demand curve, so that a slight increase
in price reduces quantity to near zero.

Fred Foldvary



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