How will the government raise money when land sales revenues collapse?

To put it simply, in terms of monthly accumulative value, in the month of 2/3/4 in 2022, the annual growth rate of local government land sales revenue was -29.5%, -27.4% and -29.8% respectively. If nothing else, May’s figures could be similar or worse.

How should the government raise money when land sales revenue drops sharply?

Furthermore, if the decline in land revenue is not a short-term phenomenon, but a long-term trend, what changes may the government makes in fiscal and tax policies? What is the difference between them?

A similar situation happened to the federal government of the United States around 1840.

From 1835 to 1836, land sales accounted for nearly half of the federal government’s revenue. Relying on land sales, the federal government has almost completely repaid its debt and is more than able to cover its expenses.

According to the Constitution of the United States, the federal government has the independent power of taxation, and the states will transfer import duties to the federal government, as the main revenue of the federal government. In addition, the federal government can impose indirect taxes such as liquor taxes, while state governments mainly impose direct taxes such as property taxes and poll taxes.

In the United States at the beginning of independence, tariff revenue accounted for more than 80 percent of the federal government’s fiscal revenue. Until, around 1833, the rise of land finance (the sharp decline in tariff revenue between 1812 and 1815 was due to the Second Anglo-American War, which led to the British naval blockade of the American coast).

When the fiscal revenue of land decreased sharply (1837-1847), the major financial expenditure of the United States was the military expenditure of the navy and the army, which were basically rigid (in the figure below, the revenue and expenditure decreased simultaneously in 1843, because the federal government changed the fiscal year of the previous calendar year to July 1 to June 30 of the next year, so only half a year’s data were available). It doesn’t change much from year to year.

Since expenditure was rigid, the US government had to choose to issue national debt again in the face of the sharp decline in revenue, which also led to a large increase in the scale of the US debt. The previous spike in 1812 to 1815 and the subsequent spike in 1861 were all due to the war, which was the first non-war spike in the history of the US (see chart below).

Along with the privatization of land and the continuous arrival of European immigrants, the United States after 1850 saw a substantial increase in tariff revenue. The federal government’s income was basically guaranteed. It did not need to increase more debt, and the United States government could basically cover its expenses.

However, with the advent of the American Civil War in 1861, spending grew rapidly, and money became scarce. Almost every means by which the government could raise money was put to use, starting with the rapid increase in the federal government’s borrowing.

Before 1860, the federal government’s debt peaked at around $100 million. After the war broke out, the federal debt exploded to 2.7 billion dollars in just five years, a 27-fold increase. The federal debt has not fallen below $1.5 billion since.

The Civil War was the most brutal war ever fought on American soil. The North and South nearly exhausted their own strength against each other’s effective forces. In just five years, more than 10 percent of northern men between the ages of 20 and 45 were killed, while more than 30 percent of southern men were killed. Such death rates, even in the context of the world’s wars, would be chilling.

The victory was followed by a brutal sweep of the South by the Union army, which also imposed a strict military rule on the South after the war.

As soon as such a brutal war began, the federal government, with the approval of Congress to finance the war, imposed a three percent income tax on individuals making more than $800 a year. This was the first direct tax on income in the United States.

In 1862, the individual income Tax law was changed, raising the tax rate to 5 percent for individuals making more than $10,000 a year, so that the individual income tax became progressive.

In 1863, according to the Constitution of the United States, in addition to raising the tariff, the federal government quickly imposed taxes on liquor, beverage, tobacco, manufacturing, franchise, sales, etc., or increased the original tax rate.

Remember, for 70 years before the Civil War, the federal government in the United States was very small. The federal government’s combined domestic and foreign spending amounts to about $2 million, excluding the debt from the two wars, the military spending of the Navy and the Army (including veterans), and the salaries of all government officials.

In this case, the overall level of taxes on the United States government was always very low, and customs duties and land sales were enough to cover everything. There were no corporate taxes, and there were no personal taxes — but the Civil War changed everything. The federal government was taxed, and the United States became a highly taxed country.

To pay for the American Civil War, the federal government even came up with the extraordinary technique of printing money directly, which became known as the “greenback.”

In February 1862, the Lincoln administration enacted the Fiat Money Act, which authorized the Treasury Department to issue 150 million notes that were not backed by gold. The note is called a “Greenback” because it is green on the back. According to the Act, except for non-payment of customs duties and interest on national debt, greenbacks can pay all public and private debts, including other government taxes; it could be used to pay the soldiers.

Because the war was so tight, the government issued two more greenbacks of $150 million in 1862 and 1863, for a total of $450 million during the war.

The issue of unsecured paper money was not without cost — $450 million of greenback paper was issued out of thin air, accounting for half of all the money in circulation at the time. It caused a serious inflation problem. From 1861 to 1864, prices in the North as a whole rose by 74%.

With the help of a series of “money-making” measures, such as issuing bonds, raising taxes and printing money, the fiscal revenue of the US federal government began to surge from the level of tens of millions of dollars. By the end of the war, in 1866, federal revenues had reached a staggering $560 million.

1865 The Civil War ended with the victory of the Union government.

With the end of the war, taxes on property and income soon aroused fierce opposition among the people. So, in 1872, Congress passed an act to eliminate the personal income tax, the franchise tax, the sales and gross receipts tax, and the estate tax.

But, taken as a whole, once the power of the state is expanded, it is extremely difficult to shrink, and once the revenue of the state is increased, it is very difficult to decrease. The scope and rates of the 1861 expansion of the domestic consumption tax were largely retained, resulting in a historic decline in the importance of tariff revenue to the United States in the federal revenue system, which for a long time accounted for about 50 percent of federal revenue.

The Civil War not only affected the American tax system, but also profoundly affected the system of issuing dollars.

Before the Civil War, except for gold and silver coins in circulation, all dollar notes were issued by individual banks based on their own gold and silver reserves, with varying standards.

In 1863, in the heat of the war, Lincoln signed the National Bank Act to guarantee the issuance of green paper and national debt. The Act authorized government-approved national banks to issue dollar notes, a standard bank note, and to hold government bonds, not just gold, as reserves for dollar notes.

 

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