Rent Tax - A Conceivability or a Fantasy

In reading on various tax systems and their effects (including our current Federal/state/income/consumption tax system which Jimmy Carter himself called a humiliation to mankind), I stumbled on a set of literature which any individual with an interest in macroeconomic policy would find interesting:
http://www.wealthandwant.com/themes/Deadweight_Loss.html
To give one a sense of the matter without requiring a thorough read, the literature above suggests ideas parallel to the following:
“The use of rent for public revenues therefore has no excess burden, no burden on society or the economy. Taxes on income, goods, and transactions do have an excess burden, since by raising the price and reducing the quantity of goods, resources do not get allocated to where the people most want them. Taxes on labor and goods raise prices, while rent-based payments do not affect the rent, and they lower the price of land rather than raise it.
Rent is therefore the ideal source of general public and community revenue. Tax reform should therefore shift to rent as the primary source of general funds. Pollution charges can supplement the rent, and indeed can be considered a rental charge for using and abusing the atmosphere, land, soil, and other forms of land. There could also be user fees for services specific to users, fines for violating traffic rules, and profits from enterprises.”
My particular interest regarding the matter at hand is economic efficiency. In hearing on any tax plan or modifications of existing tax plans, one necessarily encounters two key implications: incentives and deadweight loss. My interest today is the latter.
For anyone unfamiliar with the term, deadweight loss may adequately be defined as the costs to society created by an inefficiency in the market. Empirical research has proven that a tax on any goods or services with an elastic market supply curve (regardless of the degree of elasticity) necessarily incurs some deadweight loss. This is obviously a bad thing for society. A tax system that collects revenues while incurring 0 additional cost to society resulting from any disincentives is indeed conceivable as the literature indexed above may suggest. However, a necessary condition of this possibility is that the good or service produced have a perfectly inelastic supply curve (meaning the supply for the good or service is fixed). And where in the market can we find such an instance? That's right, you thought of it and your landlord may fight it routinely in city-planning hearings: housing.
It appears that a tax on rent creates 0 dead weight loss. A causal reason given in support of this observational finding is that landlords do not earn the money they collect. It is hard to argue even for the conceivability of the preceding idea as the truth, as landlords must tend to maintenance issues and initially accumulate enough capital to purchase the units which they later offer for rent. All of this, of course, would qualify as some sort of work. Nevertheless, even if it were somehow argued that landlords really do not work, it is hard if not impossible to find a consequent 0DWL to society from tax on rent solely because of landlords' not earning their income. Simply put, the antecedent mentioned above does nothing to resolve the paradox.
A better reason given in support of the finding concerns the nature of the good's (housing's) supply. Simply put, since housing is fixed, any amount of taxation that still gives room for total revenues to exceed total costs will have landlords producing (or renting out) the same number of units.

For those unfamiliar and still feeling alienated with the concepts discussed above, the diagrams above help depict the concepts more clearly. The diagram above depicts the supply and demand relationship of a typical good with an elastic supply curve. The tax drives down the demand as indicated and creates a DWL indicated by the orange shaded geometric region. The diagram below depicts a market with a fixed supply such as housing. As can be illustrated in the diagram, no DWL results from a tax.

An Anti-Normative Approach to Economics

The ultimate goal of all positive sciences is correct prediction concerning phenomena not yet observed.

-Milton Friedman

Purpose

The subject of this analysis regards the theoretical progress of a discipline which has grabbed my attention for some time now: economics. What I will attempt to do is set forth a number of arguments and considerations for and against an exclusively positivist approach to the development of theoretical economics.

The Dichotomy

In order to gain maximal insight into a positivist approach to economics, one must first understand the positive-normative dichotomy. This separation hardly remains exclusive to economics – but rather branches through ethics, epistemology, and permeates several other social science and humanities disciplines. However, for the purposes of our analysis, we will limit its scope to economics.

But what exactly does each position advocate? Simply put, a normative approach considers what 'ought to be,' whereas a positive approach simply describes 'what is the case.' (Martin & McIntyre, 1994) Consequently, each serves its own purpose. As one can imagine, a purely normative approach may entail presuppositions which may or may not be true of the society to which the set of propositions are prescribed. On the other hand, a purely positive approach will supply facts with inexact direction. One can think of a positive approach, in itself, as a strong servant but a weak master.

And why on God's green Earth would we care about all this? Acceptance of what I will go on for the next few pages advocating would help account for current underlying inexactitudes in economic theory while giving predictive powers that merit the discipline credibility. Before setting out to complete this arduous task, let us clear some ground on which we may build the foundations of our argument.

The Relationship

The first issue we must address, which is a big one indeed, concerns the possible coexistence of normativity and positivity with respect to economics. Many would agree that a normative and a positive approach are conceivable as mutually exclusive elements. However, a number of arguments have been set forth to disprove this possibility. Let us visit and evaluate each of these considerations in light of our intended purpose.

Inconceivable Coexistence Argument 1

Many economists must cater to the needs of policy-makers and offer goal recommendations. Therefore, whether these economists like it or not, they must conform to conventions of normativity. (Machlup, 1969)

The suppressed premise in this argument is the link between offering goal recommendations and giving normative prescriptions which is indeed a connection we can make intuitively without much trouble. However, our concern in particular is not ridding the entirety of economics of possible prescription, but rather ridding theoretical economics of such actions. In other words, applied economics can make use of a value based prescriptive system as need be. Our concern, however, is directed towards theoretical economics, whose rate of development will be optimized (for reasons discussed shortly) by normative abstinence.

Inconceivable Coexistence Argument 2

Economic “science” is a human activity, and like all human activities it is governed by values. (Mongin, 2006)

What this argument entails, insofar as it tries to demerit the possibility of coexistence, is a clear instance of equivocation. Facts of values do not constitute as a prescriptive set of propositions based on values. I can truthfully claim 'My roommate loves eating chocolate' which makes a factual assertion of a person's value. However, saying 'My roommate loves eating chocolate' is in no way logically equivalent to saying 'My roommate should or should not eat chocolate.'

Inconceivable Coexistence Argument 3

People's views of what is right and wrong are, as a matter of fact, at least in part based on their beliefs of others' behaviors. (Marwell & Ames ,1981)

This probably is true of a great number of theories postulated at one point or another. However, it can hardly be said that this is true of most or all economic theories. Going through each potentially problematic axiom of economics would be too arduous of a task. However, let it be known that any value based economic theory (which will necessarily not hold as absolutely true) may easily be corrected in light of disconfirming observational data.

Examples

Up until now, we've been speaking in abstractions. But what problems particularly merit the defense that a purely positive approach can offer? A great deal indeed. For the purposes of our analysis, however, we will lay out two of the most fundamental tenets found at the heart of mainstream economic theory, which are attacked time and time again for their oversimplifications and impossible or improbable idealizations. The theories in question are rationality and utilitarian theory.

Indeed such theories have been demerited by critics for their gross oversimplifications. Rationality holds the position that all individuals in any given market seek to maximize their own best interest and will choose consumption bundles accordingly. What follows (at least in economists' models) is a trade-off pattern that assumes a consistent set of values for each and every consumer – adjusted for identical incomes. However, we know that in the real world this is not the case. Each individual may relate (and often does) a different set of values to the same set of goods, which will essentially factor in on their choice of the quantity of that given purchase. Therefore, notions of rationality may be based on a set of values making them inconsistent from one individual to the next.

The same case is made with utilitarian theory, as relevant to economics. Utility refers to the capacity of a commodity to satisfy some human need. Conceptually, most would agree that utilitarian theory makes good sense. However, the theory has little to offer beyond this conceptualization. Economists speak of utility in arbitrary quantified units for purposes of their analysis. The fact remains that there is no reliable indicator of utility; in other words, utility cannot be quantified. This renders the theory as limited, since most explanations of utility attempt to suggest a comparative bundle as numerically greater. In the real world, however, no such comparisons can be made.

Logical Form

But what have we really said up until now? Rest assured, the point is to be made soon. We've identified two questionable and fundamental assumptions of mainstream economic theories. Using this analysis, we will come to show that denial of these assumptions will not necessarily lead one to conclude the denial of the conclusion. A key assumption, by definition is an unstated premise that is intended to link any premise disparate terms or ideas to disparate terms or ideas in the conclusion. For instance, we have the argument

All men are mortal.

Therefore, Socrates is mortal.

The key assumption in the simple argument above is that Socrates is a man.

Denying that Socrates is a man will not lead us to validly conclude that he is not a mortal. He can be an alien which by definition would also constitute as a mortal, insofar as mortal is defined as any being subject to death. However, one would necessarily commit themselves to a logical fallacy if he or she believed that the denial of what is sufficient to bring about an effect would result in the denial of the effect itself. Formally, this argumentative fallacy is called 'False Denial of the Antecedent.'

Let us suppose now, that instead of our Socrates-Mortal argument, we had an Economic Argument that encapsulated everything mainstream economics has to offer today. This would indeed be a gross oversimplification. Additionally, if it were possible to sum up all mainstream economic theories in one stand-alone argument, books beyond books would be needed for thorough articulation. For our purposes, however, let us suppose we can see this argument in the form of two premises and a conclusion. Imagine further that the premises would act as the collection of axioms up until the present, whereas the conclusion would be a prediction of what future economic trends will result based on the presupposed theorems and the current state. In such a case, what we would have is an argument similar to the following form:

Axioms (Laws & Theorems): If A then B.

Current state: A.

Conclusion (Prediction): Therefore, B.

Now this is where our positive approach can potentially work wonders. Economics by nature is not empirical much like most of the natural sciences, but is rather observational much like astronomy. Data is collected and interpreted, only to be reinterpreted in light of new evidence until a fully functional theoretical framework, which can account for all collected data, is reached. Critics of oversimplifying theorems, such as our two mentioned conjectures above, often make a good point. And let us assume that considerations set forth against Rational Theory or Utilitarianism, like those mentioned above, were completely true and the two theories were fully discredited. In such a case, our Economic Argument above would take a negation of the first Axiom Premise. So instead of 'If A then B,' we would have something more like 'If A then not necessarily B,' which is logically equivalent to 'Some A are followed by not B's.'

Indeed this does weaken the argument as a whole. And if economics were a purely rational study, much like philosophy, we would not be able to know definitively whether or not the conclusion still holds. However, we can still know if our conclusion still holds by merely presenting facts which either contradict or confirm the prediction (our conclusion). Doing so would, of course, require a positive approach.

What if the critics are wrong and we had simply been deceived by an extremely appealing argument and were falsely lead to believe that our perfectly sound argument was in fact false? Furthermore, suppose the conclusion of an argument posited by a critic is false. A positive approach would still help with any such possible instance. We can be certain that a premise or axiom of economics is proficient in its explanatory powers only if it makes consistently accurate predictions. In other words, if an economic tenet does not make accurate predictions, then we can deem it critically problematic for our theoretical purposes. Given this criteria, a basic economic tenet (such as Utilitarianism or Rationalism) need not be consistent with all facets of worldly truths as relevant to their domain. As long as they serve their theoretical role of offering correct predictions, we can make good use of them and ignore any objections offered by critics in applications. Nevertheless, confirmation of predictive ability heavily utilizes, and even requires, a positive approach.

Income Differential Paradox (I really do think about these things in my spared time)

I'd like to discuss, and possibly stimulate concern for, an economic paradox which has grabbed my attention for some time now. In talking to an elder just recently, I was reminded of the heightening trend in household income differentials. Through casual conversation, one may already be aware of an increasing variance in household income. However, in pursuit of intellectual curiousity, one may wonder what exactly those figures have been overtime. The chart on the right will shed some light on that.
To be honest, it doesn't appear quite as disturbing as most political scientists or historians make out. However, there does seem to be a trend nevertheless – most obviated by the 10th and 20th percentiles' constancy over the last 40 year period and the 95th percentiles' near 160% increase. However, this is not the crux of what I wanted to talk about today.
What I wanted to talk about concerns a resolution to this matter. What should be done? This question assumes, of course, that widening income disparities are malicious to society in some way. Indeed countries with wider gaps in income are those highly correlated with high crime, inflation, often guerilla warfare, governmental corruption or disorder on some levels, and many more civil disfunctions of the sort. The relationship between the two remains unresolved – meaning is it the higher income disparity that causes social disorder, social disorder that causes high income disparity, or are both an effect of a third unaccounted factor? Some have tried finding good in the recent financial mess, claiming that a recession of the sort is needed to re-synthesize different socioeconomic classes, much like the Great Depression of the 1930s did. Economists such as Armine Yalnizyan have disagreed with such a notion claiming that “Income polarization always gets worse during recessions.” Nevertheless, for the purposes and scope of our argument, we will rid ourselves of the responsibility of answering these often difficult and irresolute questions and assume (crossing our fingers justifiably so) that most social scientists are right in claiming that widening trends in household income is indeed disturbing.
So once again, to reiterate our concern: what must be done to reverse the growing and seemingly irreversible trend in household income differentials? Most economists agree that redistribution initiated by some form of government intervention is necessary. However, any society that values civil liberties will necessarily avoid any form of forceful government intervention. Ayn Rand once held, for instance, that a government can be the most dangerous threat to man's rights: it holds a legal monopoly on the use of physical force against legally disarmed victims. And indeed she had a point. People who hold the position of these economists – namely those who favor forceful redistribution – must commit to a position that violates libertarian principles entailed by Western political philosophies. Additionally, such redistribution can eliminate incentives for economic productivity.
We arrive at a second possible resolution: differential tax rates varying with respective socioeconomic positions. Such resolutions may or may not work. Legislators may want to avoid what mathematicians would call piecewise functions. If for instance, tax rates were a function of income (say increasing as income increased, or decreasing as income decreased), then any corner solutions may once again encounter the same problem as the previous: elimination of economic productivity. What exactly does this mean? For instance, suppose a doctor and lawyer couple collectively make $260,000 annually in household income. Now suppose tax law has it such that those households making over $250,000 will pay 50% income tax annually (meaning $130,000 for our doctor-lawyer couple) and those below $250,000 will pay less than or equal to 25% of their income. Suppose now the lawyer makes $80,000 annually – meaning if she were not to work, the couple would earn $180,000 annually and qualify for the under $250,000 income bracket. It follows that the lawyer's quitting becomes economically profitable for the household by $5,000; since tax on $260,000 would be $130,000 and tax on $180,000 would be $135,000. An economy will clearly be disadvantaged by the lawyer's quitting his or her job. Nevertheless, the lawyer can kick up his feet everyday, not work, and expect his or her house to rack in an additional $5,000 annually. Such economic paradoxes implied by certain tax schemes exist, and indeed hold potential to create what economists would call dead weight loss, or unfulfilled economic potential. Nevertheless, such tax schemes are far from perfect in exclusively resolving our problem at hand: increasing income differentials.
This is where I personally return to the drawing board. What can be done to exclusively remedy this trend without causing unintended havoc? To this day, no one (to the best of my knowledge) has succeeded in answering this preceding question.