Silvio Gesell: The Natural Economic Order
Part 1: Distribution


The influence of legislation on the distribution of the product of labour among rent-receivers and workers is manifold and far-reaching. It has often been said that politics consist, in the main, of attacks on wages and rent, and in the corresponding defensive measures. As a rule action is here dictated by instinct. The interplay of forces is not fully understood, or if it is understood it is politic to conceal the truth. The advocates of the measures proposed with so much passion are not greatly concerned about the scientific proof of their efficacy. Politics and science are uneasy bedfellows; very often indeed the aim of politics is to prevent, or at least retard, the recognition of some scientific discovery. What curious things have been said, for example, about wheat-duties ! "They protect and encourage agriculture", say those who pocket the immediate advantages; "they are bread-usury and theft", say those who become aware of the duty in the smallness of the loaf. "The duties are paid by the foreigner", say some, to which others retort that the duties are all borne by the consumers. Thus the wrangle proceeds, as it has proceeded for fifty years, over a purely human transaction open to all to see; and still the disputants are none the wiser. It is therefore well worth investigating the influence of legislation, for example the taxation of land, on the distribution of the product of labour.

When a merchant orders a shipment of tobacco knowing that at the frontier he will have to pay a duty of $100 per bale, it will be admitted that the merchant must be assured of recouping this expenditure, plus the interest on the capital invested, and plus his own profit, in the price of the tobacco when sold. The import-duty is, for the merchant, an integral part of the merchandise, and is entered by him in his inventory on the credit side, just like any other item such as chests, sacks and bales: -

100 Tons Java tobacco$50000
Freight and import-duty 10000
10% expected profit 6000
Capital $66000

That is how the merchant deals with import-duties. Why cannot our landowner deal similarly with the sum which the State collects from him in the form of a tax on land ? It is often asserted that he does so. Landowners themselves will tell you that they intend to charge every tax, with interest and profit added, to the tenant, so that in the long run the land-tax will be deducted from the scanty wages of the farm-labourers. If such is the case, these landowners will argue, is it not preferable to convert the land-tax at once into a poll-tax, a wage-tax or an income-tax ? The labourers would then at least save the interest and profit that the landlord adds to the taxes.

In order to examine this problem more closely it is indispensable to answer a question raised by Ernst Frankfurth in his illuminating little book on unearned income, namely: What becomes of the proceeds of the land-tax ? For it surely cannot be immaterial for the fate of the land-tax whether the State employs the revenue from it to construct new roads through the landlord's estate, and to reduce the education rate for the children of his tenants, or, say, to pay an import premium on foreign grain. If we do not know this we cannot determine who, ultimately, pays the land-tax. So says Ernst Frankfurth.

There are landowners who do not wait for the State to tax them and with the proceeds to build the roads necessary for exploitation of their estates. They construct the roads themselves. The costs form a capital investment, like clearing, draining, and so forth. The landowners expect advantages from the roads which will balance the interest on the capital to be invested. If, nevertheless, it is, as a rule, the State that constructs the roads, while taxing the landlords for the expenditure, this is simply because the roads usually cross the land of many owners with conflicting interests and therefore necessitate powers of expropriation which are exclusively the domain of the State. But even if the State builds the roads, the land-tax levied for the purpose is a capital investment, the interest on which the landlord expects to recover to the last farthing. And this is the real nature of almost every tax. If the State levies a tax to protect the frontier from the inroads of barbarians, the landlord saves the amount of this tax from the insurance which would otherwise be necessary against the invasion of Cossacks and Yankees (Russian and American wheat! ).

So if the State employs the revenue from the land-taxes for the benefit of the landlords, these taxes must be looked upon as capital investments. They are the remuneration of the State for services rendered. The landowner may enter these taxes where he enters the wages of his labourers. If he leases the land to tenants he will add the tax to the farm rent, recovering it if the State works cheaply and well, and even making a profit if the State displays the shrewdness of a clever contractor.

But what if the State taxes the landowners in order to relieve the tenant or the labourers, say from the education-rate ? Is it still possible for the landlord to consider the land-tax as a profitable investment ? Let us suppose that such is not the case, that the landlord cannot charge the tenant with the amount of the education-rate saved by the latter nor reduce the wages of the labourers. Tenant and labourers would then have their labour-proceeds increased by the amount of the education-rate remitted. But why should the landlord raise the labour-proceeds of the tenants and labourers? Because he is himself taxed? That is no reason since the labour-proceeds of the tenant and labourer are determined by the labour-proceeds on freeland of the first, second and third classes. If the revenue from the land-tax is employed to benefit the freeland-farmer of the third class likewise, say also in the shape of a reduction of the education-rate, then, indeed, the equilibrium between the labour-proceeds of the wage-earners and tenants and those of the freeland-farmers is not disturbed, and it is impossible for the landowner to transfer the burden of the land-tax to his tenants and labourers. Otherwise he says to the tenant: "To the other advantages which my farm offers you, free education for your children is added. Rich loamy soil, a healthy climate, a fine view of the lake, a situation close to the market, free schools - sum total - you have got to pay me $10 an acre". And to his farm labourer the landowner says: "If you do not consent to a reduction of wages you may go. Calculate whether with the wages I offer you, together with free schools for your children, and other social institutions, you are not as well off as if you decide to cultivate freeland of the first, second or third class. Think it over before you go".

It is clear that the whole burden of the land-tax is transferable as long as its yield does not benefit freeland farmers, more particularly those of the third class. If, on the other hand, the revenue of the land-tax is made to benefit, in some form or other, intensive cultivation, the increase of the labour-proceeds of freeland-farmers of the third class is passed on to the farm labourers engaged in extensive cultivation, and the land-tax, in this case, far from being transferable, hits farm rents doubly, first by the full amount of the tax and secondly in the form of higher wages demanded by the farm-labourers.

This shows how right Frankfurth was to enquire first about what is done with the yield of the tax, and how futile it is to attempt to answer the question as to whether the burden of the land-tax can be shifted or not, without first establishing the necessary premises. It also leads us to suspect how often the measures proposed by social reformers must fail, or have the opposite to the desired effect. And it shows us how greatly the distribution of the labour-product is influenced by the power of the State.


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