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• DOI: http://doi.org/10.1111/ajes.12082_4
• Published date: 01 October 2014
• Date: 01 October 2014

The AMERICAN JOURNAL of

ECONOMICS and SOCIOLOGY

Published QUARTERLY in the interest of constructive

synthesis in the social sciences, under grants from the FRANCIS

NEILSON Fund and the ROBERT SCHALKENBACH FOUNDATION.

Founded in 1941

Volume 73 October 2014 Number 4

Editor’s Introduction

An element of confusion entered the modern understanding of taxa-

tion in the late 19th century and continues to confuse even the wisest

of our professors and pundits. As long as that confusion distorts our

thoughts, leaders of all ideological persuasions will try dozens of tax

“reforms,” but none will achieve the desired results. What is missing

is not some special technique. Rather, what has been lost is the

wisdom about the nature of taxation that the French Physiocrats and

their student, Adam Smith, carried over from the medieval view of

society as an organism. This work by Dr. Terence Dwyer enables us

to share in that wisdom.

Adam Smith is often regarded as the first philosopher of capitalism,

an advocate of a free enterprise system in which private ownership

and unfettered exchange would unleash the potential for innovation

and production that is latent in every society. However, Adam Smith

would not have favored any of the tax plans proposed by economists

or politicians since World War II, neither from progressives nor

conservatives. He disagreed with the conservative ideology that taxes

should fall on consumption items and on the wages of working

people, leaving the rich untaxed for the purpose of promoting capital

formation. He also disagreed with progressives who want to raise

taxes on the rich by taxing top-income earners.

American Journal of Economics and Sociology, Vol. 73, No. 4 (October, 2014).

DOI: 10.1111/ajes.12082

© 2014 American Journal of Economics and Sociology, Inc.

Adam Smith’s view was based on a medieval system that regarded

taxation as evil, but sometimes necessary. A tax in the medieval

lexicon meant a slice taken out of wages or an additional charge on

a daily commodity such as beer or salt. It was, in short, a payment

made out of ordinary income by common people. We have grown so

accustomed to fees of that sort that we cannot imagine government

financed in any other way.

How is it possible to pay the expenses of government without

taxes? It is really quite simple: the government owns natural

resources, leases them, and uses the revenue to finance its opera-

tions. That is how it worked in the Middle Ages. The governing

institutions—the aristocracy and the Church—owned all the land, and

their operating costs were financed by land rents. In effect, the

decentralized governments of the time owned the land in public trust,

leased it to private farmers, mill operators, and shopkeepers, then

used the lease fees to pay public costs, including support of the poor.

Instead of a commoner paying rent to a landlord and taxes to the

government, only one payment was required, which covered both

functions. In the early modern period, this system broke down. Land

became private property, held without reciprocal obligations, and

new taxes for government were instituted on top of the lease fees that

commoners had to pay landowners to occupy land. Land-holding in

the feudal era could be justified in relation to the common good

because being a landholder meant taking on responsibilities. In the

modern era, freehold landownership without tax obligations required

a new justification, but it was not supplied by the earliest architects

of capitalism, who still regarded land rents as the basis of financing

government.

Adam Smith in Wealth of Nations (BK V, Ch. 1, ¶230; Ch. 2, ¶14)

pointed out that landrent had always been the basis of government:

The rent of land, however, is, according to some, the sole fund, and,

according to others, the principal fund, from which, in all great monar-

chies, the exigencies of the state must be ultimately supplied. . . . Land is

a fund of a more stable and permanent nature; and the rent of public lands,

accordingly, has been the principal source of the public revenue of many

a great nation .... From the produce or rent of the public lands, the

ancient republics of Greece and Italy derived, for a long time, the greater

part of that revenue which defrayed the necessary expenses of the

628 The American Journal of Economics and Sociology

commonwealth. The rent of the crown lands constituted for a long time the

greater part of the revenue of the ancient sovereigns of Europe.

Smith realized that, in his own day, the incompetent management of

public lands by government officials would not yield enough revenue

to supply the peacetime needs of nations. However, the land still held

the potential for state finance. Thus, when he described the taxes that

the modern state must levy on top of the leasing of public lands, he

began with “taxes upon the rent of land.”

The property tax remains one of the last vestiges of the archaic

system of financing government and one of the few that taxes wealth.

We can see one element of that history in the term “real estate,” where

the word “real” once meant “royal,” referring to the idea that the king

or queen owned all the land and then leased it out through a hierarchy

of retainers to the populace. The monarch was the personification of

the nation, a symbol of society as a whole. Thus, in a more democratic

era, some constitutions still recognize that the people, via the state,

collectively own the land and other natural resources within that

jurisdiction and that nominal owners hold their titles in trust. That is

why private ownership of land always comes with restrictions. It also

demonstrates that the feudal logic of using gifts of nature on behalf of

the entire populace is still present in our society, but lying dormant.

In this work, Dr. Dwyer provides the tools to enable us to question

the assumptions behind the modern management of the economy.

Although he recognizes Adam Smith’s intellectual debt to medieval

thought, Dwyer certainly does not propose to revert to the feudal

system, not even to restore public ownership of land, forests, fisheries,

petroleum, or any other natural source of economic value. All that is

required is to shift, over a period of time, from taxes on labor and

capital to taxes on land and resources. There is no need to disturb the

market process, which serves as an efficient method of allocating

goods and services to where they are in greatest demand.

What is required is a major change in our thinking about private

property. Recognizing that economies produce a surplus, we need to

ask why everyone is not a beneficiary. Knowing that the means exist

to share the surplus among the entire population, how is it that only

a lucky or ruthless few have managed to claim it for themselves as

private property? In short, the central question is how we can make

Editor’s Introduction 629