Individualists Unite

Max B. Sawicky*

I am sympathetic to Michael Lind’s objective in The Smallholder Society.1 It is nice to have property. Property provides security against economic, social, and political adversity. When widely and evenly dispersed, it promotes social solidarity and general well-being. But his focus on the tax system as the primary tool for encouraging savings and wide-spread property ownership is misplaced.

Schemes to encourage saving do not change lifetime income. If we take the year of birth as the reference point, lifetime income is the present discounted value of all income from labor, inheritance, and gifts. Discounting income is a way of comparing lifetime income among persons when the timing of receipts differs. If you can borrow and lend at, say, ten percent, $1.10 earned next year is worth a dollar today: $1.10/(1+.10). If you received money two years hence, you would discount it by 1.1 squared, and so on. Alternatively, if we take the year of death as the reference point, we would ‘gross up’ these same income flows with that same ten percent rate of return.

Returns to savings are not accounted for separately in lifetime income because they are already included in the definition. If you save that dollar, it is worth $1.10 next year. The purpose of the measure is to abstract from individuals’ savings decisions. Two workers with the same earnings facing the same interest rates but different savings have the same lifetime income, even though one might spend every penny upon receipt, and the other might be frugal and die rich.

Saving might make somebody better off by forcing him to be more responsible. But this is not a general solution to the problem raised by Lind. What we need are policies that increase returns to labor and provide more favorable credit market conditions, to enable the individual to accumulate more if she so chooses.

A more progressive tax system certainly qualifies as a plausible remedy. The most salient change noted by Lind is to make all capital income – capital gains, dividends, etc. – fully taxable.2 I also support Lind’s call to reduce dependence on the property tax.3 There is some collision here with federalism. It is more difficult for local governments to tax more mobile tax bases. A solution that some states have moved towards is uniform statewide taxation with exemptions for low-income persons and revenue sharing for benighted local jurisdictions.4 But, while praiseworthy, these are not novel ideas.

The idea of facilitating self-employment and entrepreneurship through the tax system is appealing, but it has pitfalls. Tax advantages are already available to entrepreneurs, and proprietors and the self-employed cheat on their taxes more than anybody, but still many people start businesses and go bust. It would be surprising at this point if there was a ‘small business’ tax break that the Congress had not already thought of. One possibly fruitful area is to move the estate tax in the direction of encouraging more fragmentation of estates. So is a wealth tax, another possible solution Lind raises.5 Lind goes too far I think in ruling out revenue sources. Along with property and payroll, he moves on to making household “investment” deductible.6 There are already opportunities to do this in the income tax which happen to be routinely abused.

Lind’s larger-scale proposal in pursuit of his smallholder society is a shift to the value-added tax (VAT), and, more generally, progressive consumption taxation.7 I am also sympathetic to this line of thought. But, as with the income tax, the way to promote smallholdings is not to fiddle with the VAT base in the interests of favoring and discouraging different things. Such micromanagement promotes a minefield of complexity and political chicanery. The best VAT is one with no exemptions at all. Ultimately, though, a consumption tax would in all likelihood be no more progressive than the current system, which makes it pointless in light of Lind’s project.

Another way that government policies could facilitate smallholdings is the regulation of large, predatory business firms that work to stifle competition and concentrate markets. For example, our system of patents and copyrights strongly promotes the concentration of wealth and intellectual property in a few large industry players. The use of government-subsidized research to generate many of the protected ideas makes these policies especially perverse. Putting more proprietary information in the public domain could help business start-ups. Government purchasing policies could also be altered to help the spread of new technologies. Imagine if the Federal government made Linux the official, mandatory operating system for all Federal agencies.

In considering risk, Lind’s praise for entrepreneurship and criticism of social insurance is weakened. Social insurance is progressive with respect to lifetime income, in naked dollar terms. Moreover, it is insurance. If it takes the language of property rights to protect social insurance from small-government fanatics, that is a small price to pay. Social insurance may diminish property ownership in favor of entitlement benefits, but that could be a plus for individual economic security. Of course, anything can be carried too far, but the U.S. system is a relatively thin one, compared to the European programs.
One pillar of the U.S. system’s political support is the payroll tax – the idea of a general quid pro quo. What you get depends on what you have paid. I would go halfway with Lind’s approach – use income tax revenue to relieve any future shortfalls in Social Security and Medicare. Getting rid of the tax altogether could endanger the entire program.

Generally speaking, Lind is on a righteous mission that deserves further attention. But he exaggerates the novelty and impact of his proposals, and he neglects some associated problems. Above all, I think he misidentifies the obstacles to economic independence. They are less in the policies he discusses than in the fundamental evolution of modern capitalism. Incentives are important to address, but so are the sources of power in our society. Workers are not paid the value of what they produce. If they were, opportunities to break out of wage slavery would expand. Remedies for this are not hard to imagine, but they are politically difficult to implement.

The old-time populists that Lind praises saw the same mix of collective and individualist solutions. They stood for property ownership and autonomy, but they also put hope in collective mechanisms. Lind highlights a neglected topic, but he himself glosses over some equally important, long-standing areas of legitimate struggle.

* Max B. Sawicky is an economist at the Economic Policy Institute.
[1] Michael Lind, The Smallholder Society, 1 HARV. L. & POL’Y REV. 143 (2007).
[2] Id. at 158.
[3] Id. at 159.
[5] Lind, supra note 1, at 159.
[6] Id. at 157.
[7] Id. at 159.

Old Paper by