In this three-part series, I’m going to show how a state can be a pure market actor and not require taxation. The state will still have an income – cynics would call it taxes under any other name – but the key difference is that the income is obtained through market means, based on a state’s USP, and not through coercion by force. This leads to a society where the state does not need to know anybody’s income, wealth, or transactions, leading to the obsolescence of most registers and reporting requirements (including the elimination of a corporate register), and where a “black market” is a contradiction in terms, as the state does not interfere with the market it is a natural part of. It also means an end to victimless crimes by its very nature.

Recap

In part one, we observed that there are different tiers of land ownership, where a higher-tier owner (say, a landlord) has the say over which lower-tier land owners get to believe they own the land – and that the highest-tier land owner are today’s states (countries), which are the only actors capable of repelling other tier-one land owners. Thus, a state is the only actor capable of owning land, and can therefore lease it to lower-tier actors to generate income.

In part two, we see that this proposal leads to a low-friction economy where there are no taxation, reporting, or recording burdens on any transaction, and which therefore is in prime state to maximize the sheer quantity of value-optimizing voluntary transactions, thereby creating wealth better than the economies in competing states. Further, we observe that all taxes – income tax, corporate tax, sales tax, etc – go out the window. In turn, we also see that there is no tax wedge at all which would prevent profitability of division of labor, and therefore, this proposal also enables an efficiency optimization not present anywhere else.

Part Three: How a land lease would work

This leads us to the question of how such land leases would work in practice, since it’s absolutely crucial to get the incentives right. We want to encourage development and land improvement that facilitates additional trade, after all. We also want to facilitate urbanization, as physical proximity of people naturally increase the number of trades taking place. This is therefore a proposal with all its possible flaws for further development.

Absent a tabula rasa state where there is no existing ownership or lease of land plots, a proposal like this must relate to the previous order of things. It is therefore desirable to mimic the current tier-two ownership of land as closely as possible, maybe even to the point of calling the lease a “land ownership tax” under any other name. Economies do not respond well to changes to fundamental frameworks and we want to minimize systemic disruption while optimizing wealth and efficiency potentials.

In particular, we want to ensure that market actors feel secure in investing in their land plots – to make sure that there’s no yearly bidding process or similar where they can be overbid after having spent enormous amounts improving their plot. Therefore, it’s important that a lease lasts until surrendered one way or the other – closely mimicking the way we think of ownership. However, the lease contract can and would typically stipulate that pricing will vary with market conditions – possibly within a limited scope, to reduce risk to land improvement on the plot.

When a lease expires, though – either due to being surrendered or due to serious lapse of payment – the plot can be auctioned off to a new lease for proper price discovery, and this can be weighted in to the general price landscape of the area. More on this later.

Thus, only a very small part of the population would have to deal with the state at all. The rest would have a functioning economy that just needed to feed landlords for their lease costs, and that could work however they please to set up a low-friction economy.

Grandfathering and Initial Pricing

This leads to the question of how you phase in a system like this. Realistically, you’d need a lot of political capital and a desire to move the entire state construct in this direction, so we can safely assume that a lot of the current state expenditure will be cut rather unceremoniously. Regardless, at the end of the day, you’ll have a budget which states an income you desire for this state construct. Let’s call this number X for now – an income which will need to come from land leases, and only from land leases.

I propose this X be divided across all current plots of land by area, weighted by the square root of nearby population density, so that the total leasing price arrives at X plus some safety margin of about 5%. This solves a number of problems and doesn’t solve a few others:

First, leasing the plot price proportional to land area makes sense – that 1 km² costs half of 2 km².

Second, making land significantly more expensive in cities than out on the countryside also makes obvious sense (hence the weighting by “nearby population density” – a number which will be single-digit on the countryside and four- or five-digit in the cities).

Third, why weight by the square root of population density, rather than linearly? This is actually rather important, because if the weighting was linear, you would not gain from trying to stack people more densely together in land improvement. But when weighting logarithmically, by using the square root, we’re creating an enormous incentive to use land in the cities more effectively, to house more people per square meter – essentially a developer getting more rent income at a lower land cost. If the weighting was linear, an increase in people would correspond to a linear increase in land cost, removing this incentive.

What this doesn’t factor in – can’t factor in – are the sparsely populated and hugely expensive areas, akin to the mansion area in Beverly Hills. It also doesn’t factor in resource deposits (a gold mine in the wilderness would be dirt cheap, and this may need adjustment to enter ballpark of reason). But the next section fixes that over time.

In any case, with this weighting, we can set our initial state income from contractual land lease by applying X over the respective plot weights. This assumes, of course, that the existing plot owners choose to agree to those leases – but most plots of land should find a customer, and the 5% safety margin above is to factor in a certain initial healthy vacancy.

Adding market incentives to pricing

After the initial pricing, when leases are terminated by the customer (or the customer defaults on payment), land plots can be auctioned for lease moving forward. This creates a price discovery mechanism for the general area that can be factored in to the nearby plot lease pricing according to some to-be-determined mechanism that’s left as a minor implementation detail.

We’re also creating a secondary market where customers can trade leases directly between themselves, in what was previously buying and selling plots of land in tier-two ownership. This also assists in price discovery and highlights value differentials in the market.

Problems and considerations

With a shift in how you regard a state as large as this proposal, there are a number of problems and questions to consider.

One of the first is whether someone can opt out of the lease entirely and still occupy the land, excluding others from its utility. The answer to that question, under this proposal, would be no. Such a mechanism would create an incentive to let all the border plots of land pay for the military defense of the entire country. It’s noteworthy, that under Land Value Tax philosophy which is similar in implementation but not philosophy, a payment for lease of the land is also a compensation to the community for a right to exclude other people of the same community from said land – after all, land property is of a completely different type than property you can hold in your hand and move physically, like an apple. But this proposal focuses primarily on the state as a fair market actor, rather than justifying a taxation with some obligation to compensate others for exclusion.

Still, in the realm of politics, this proposal takes the state construct 75% of the way toward such an opt-out being possible in the future.

A second good question is whether this isn’t just a reset button on state power, and which would enable the state to slowly grow back over time. This may be true, even if the proposal severely hinders such a growback by getting rid not only of taxation mechanisms, but also of the taxation discovery mechanisms (transaction reporting and recording infrastructure). That said, a hostile takeover could build such structures back over a 20-30 year period. But expressed differently, if you did have a reset button on the state’s ability to commit violence, would you not push it?

A third question that has popped up is the existence of a social safety net. There’s nothing in this proposal that precludes the state from providing civil services. For myself, I’m a warm proponent of Friedrich Hayek’s and Milton Friedman’s proposal of a Universal Basic Income to all citizens, as it does not require any bureaucracy at all for qualification, and allows the recipients to provide price discovery in how such a small basic income is best spent.

Conclusion

A state can be a pure market actor and not require taxation. This enables enormous gains in efficiency, as the tax wedge can be completely eliminated, and enables wealth creation through maximization of the quantity of voluntary trades. Doing so does not preclude civil services or a social safety net. The proposal also allows for the elimination of all state databases except the citizen registry and the land registry, drastically reducing bureaucracy, and eliminates victimless crimes just by its nature of being a market actor.