Revenue.

We hear a lot about revenue these days. The federal government needs it to pay for its services to the nation such as protection from enemies and management of federal lands. State and local governments need it to maintain roads and support good schools. Businesses need it to pay for supplies, equipment, and salaries. Individuals need revenue from employment or investments in order to pay for the necessities of life.

The word revenue in French means "return." When the government taxes its citizens and businesses it is seeking the return of some of the money it has put into circulation in the economy. Corporations and business owners seek a return on their investment in education, raw materials, transport, machinery, salaries and wages. Individuals are looking for a return on their time, effort, loyalty and expertise.

Do you notice a common denominator in this return concept? It has to do with the circulation of goods and assets in the economy. When the government needs revenue it typically seeks to grab a slice from somewhere in that circulation. It might tax the sale of goods, income from services, payment of dividends, import or export of goods, inheritance of property, value added, or ownership of land. It might (and does) spread the load by employing several of these forms of taxation.

Those who are taxed often complain about double taxation, as when businesses are taxed on profits and then the investors are taxed again on dividend income. The truth is that taxation is a never-ending series of snips taken out of the circulating dollar. If the rate of circulation increases, as it does in good economic times, the government gets more frequent snips and more income. Our current tax malaise, the deficit, is often attributed to a tax rate that is too low but it could just as well be blamed on sluggish circulation that makes tax events less frequent. To increase tax revenue it makes as much sense to stimulate the economy as it does to raise tax rates or devise new forms of taxation. If tax cuts actually act as a stimulus they might in fact increase revenue. Unfortunately, history does not support this particular theory.

An economist friend of mine, Daniel Farkas, argues persuasively that all federal revenue should be derived from a tax on land ownership. This would be an annual tax; thus in any year there would be no double taxation at the federal level. The rate of circulation of value in the economy would not matter, but developing the land would increase its value and thus the tax on it. Taxing only land value is a simple idea that would eliminate much of the partisan infighting about tax rates and their effect on the economy. Perhaps both sides in the current negotiation to avoid the fiscal cliff are focusing on the wrong variables.