The bylaws of the Libertarian Party of Marion County as well as those of the Libertarian Party of Indiana include the statement that, “the voluntary and unrestricted exchange of goods and services is fundamental to a peaceful and harmonious society”. This statement can be applied to a multitude of issues, but with regard to financing government, it condemns income and sales taxes, as well as most regulatory and licensing fees.
It seems strange that, even among Libertarians and other free-market advocates, there is so little discussion of methods of funding government services that do not bear most heavily on commerce. These methods largely consist of taxing profits due to monopoly. Monopolistic profits may be a result of social organization, legal privilege, or both. Monopolistic profits are not the legitimate earnings of physical or intellectual labor (wages), nor are they the legitimate return for capital used as an agent of production (interest).
The eighteenth-century French Physiocrats (including libertarian laissez-faire economists Quesnay and Turgot) began to recognize one source of monopolistic profit, and suggested it as the preferred source of government revenue. Thomas Paine, who, along with Thomas Jefferson and Benjamin Franklin, may well have been influenced by the French Physiocrats, wrote, “Every proprietor, therefore, of cultivated lands, owes to the community a ground-rent (for I know of no better term to express the idea) for the land which he holds ...”
In Wealth of Nations, Adam Smith wrote, “The rent of land...is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.”
Further, Smith stated, “Ground-rents...are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them.”
In Agrarian Justice, Paine continued, “Nothing could be more unjust than agrarian law in a country improved by cultivation; for though every man, as an inhabitant of the earth, is a joint proprietor of it in its natural state, it does not follow that he is a joint proprietor of cultivated earth. The additional value made by cultivation, after the system was admitted, became the property of those who did it, or who inherited it from them, or who purchased it. It had originally no owner. While, therefore, I advocate the right, and interest myself in the hard case of all those who have been thrown out of their natural inheritance by the introduction of the system of landed property, I equally defend the right of the possessor to the part which is his.”
John Stuart Mill, in Principals of Political Economy, wrote, “...land-tax...ought not to be regarded as a tax, but as a rent-charge in favour of the public...”
By the late nineteenth-century, Henry George, in Progress and Poverty, supported the use of a single tax on land value as the sole source of public funding. George was an ardent supporter of individual rights, liberty, and free-market economics. He was adamant that individuals receive the full wages for their labors and and the full return in interest for the use of capital in production. His investigation into why increased poverty accompanied the progress of civilizations led him to the conclusion that the exclusive ownership of land (the natural resources to which applied human labor created wealth) took, in the form of rent, an increasing portion of wealth that should have rightfully returned to labor and capital.
Most people understand that wealth is produced by the application of labor, assisted by the investment of capital, to land. The factors of production are land, labor, and capital. The return to each factor of production is rent, wages, and interest, respectively. George pointed out that, in arithmetic form:
Production = Rent + Wages + Interest
Production – Rent = Wages + Interest.
The law of rent, often referred to as Ricardo's Law (named after English economist David Ricardo), states that economic rent of land is determined by its excess production over that which the same application can secure from the least productive land in use. That means labor and capital can receive only as much as they would from the least productive land in use. The excess goes to rent. Therefore, increased production will not benefit labor or capital as long as rent keeps pace with the power of production. With rare exception, rent grows faster than the productive capability, leaving an even smaller percentage of the overall wealth of a community to distribute between wages and interest.
With exclusive ownership of land, that rent is received by landowners, with the remainder divided between those who provide labor and capital. But those who merely own land have provided nothing, since land is provided by nature. Yet, it is the owners of land who benefit most from the productive effort of labor and capital. The greater the productive power of labor and capital, the more the owners of land receive. That is how George explained the increasing depths of poverty even as societies seemed to progress. Advancing technology, higher education, and even effective government would only work to benefit the owners of land as long as land was subject to exclusive ownership.
But, what is the alternative? Even though a gift of nature, land cannot be equitably distributed among all of mankind. Even in the most rudimentary society, equitable distribution of land is problematic. Wars are fought over the most valuable land. Conquest, in fact, was the origin of exclusive ownership of land, along with slavery. The exclusive ownership in land has more in common with slavery than its origin. Both allow the few to control or benefit from the labor of the many.
But George offered a solution to the dilemma of equal distribution as well. Equal division of the land was unnecessary, as long as the wealth derived purely from its possession benefitted the community rather than the individual. The individual had complete ownership rights to any and all improvements resulting from their labor, but had no claim on the value of the land itself. Secure possession of land would continue as long as the possessor paid the community the value of its rent. The value of land, unlike the value of any improvements, was derived from the growth of the community.