Taxing question: Getting Britain moving with a fairer tax regime
Morning Star : August 18, 2004 : Jerry Jones
Reproduced here by kind permission of Morning Star.
Nobody likes paying taxes. But, leaving aside imperialistic wars of aggression dressed up as defence, and provided it is fair and seen to be so, people generally accept the need for governments to collect revenue for the provision of services from which they benefit – and which otherwise might scarcely exist.
However, different taxes have different economic impacts, some tending to enhance economic activity, thus extending employment and higher earnings, and therefore improved social welfare, while others have the opposite effect.
A graphic example is the apocryphal story told by Henry George. When Muhammad Ali, the Ottoman ruler of Egypt 1805-48, imposed a tax on date palms, the peasant farmers responded by uprooting them.
But replacing it with a tax on land of twice the amount produced no such result. Indeed, the farmers had the incentive to grow more palms to raise the revenue to pay the tax.
In today’s terms, it is the difference between imposing a tax on the development of land – as proposed in the Barker Review on housing supply, and as practised by previous labour governments – and a tax on the land itself.
The first acts as a disincentive to build houses or invest in other productive activities on the land.
The latter, on the other hand, encourages this, because not making optimal use of the land is penalised – the more so if taxed according to the land’s value, determined by its quality and location, and planning regulations.
Such a tax would stimulate the development of so-called brownfield sites – underutilised or derelict sites in towns – thus reducing the demand for land for building on the edge of towns, which adds to urban sprawl.
It would also encourage into use the 300,000 long-term empty homes that exist in Britain.
Income tax, which accounts for 27 per cent of UK government revenue, should also be regarded as a bad tax because it tends to penalise enterprise and economic activity.
Here, it should be noted that the incidence or burden of a tax does not necessarily fall on those nominally paying it.
In the case of income tax, it will depend on workers’ relative bargaining positions – determined, among other things, by the overall level of unemployment, how much in demand are particular skills, and how well organised workers are.
When workers are in a stronger bargaining position, the tax burden will fall more on the employer, because for a given take-home pay, they will have to spend more on wages than they would if there were no income tax.
This will tend to reduce the incentive to employ more workers, and would be at the expense of investment.
If more of the burden fell on workers, the incentive to work beyond a certain amount would be less because of higher tax rates on additional earnings.
Whatever the case, income tax gives rise to a “deadweight loss”, whereby the overall loss of income due to tax is not compensated by any economic gain in the rest of the economy.
It is analogous to road congestion – the inconvenience and costs of congestion to one driver are not matched by their reduction for another.
Other taxes, including corporation tax, VAT, and council taxes give rise to similar deadweight losses.
In the early 1990s, Nicolaus Tideman and Florenz Plassmann, economists at the Virginia Polytechnic Institute and State University, estimated that the British economy was achieving only 55 per cent of its potential due to such deadweight losses.
It was on this basis, updating the figures to 2001, that Ron Banks, in his booklet, Double-cross (Centre for Land Policy Studies, 2002), calculated that every year, Gordon Brown “deprives each man, woman and child in Britain of £15,000 … on TOP of the taxes he collects from us”.
However, neither of these studies took into account the offsetting knock-on effects derived from governments spending the tax revenues.
Thus, whether spent on wages or capital goods for the public sector, it creates new economic demand. This stimulates investment and employment in the production and supply of goods and services to meet that demand, which, in turn, leads to further growth of economic demand, and so on.
Second, they ignore the welfare gains arising from the existence of public services and social security that should be part of any civilised society, and which depend on government revenues from taxation.
Nevertheless, the studies do beg the question whether alternative sources of revenue, that do not carry deadweight losses, would not be more appropriate.
For example, various studies, including that of Banks, have estimated that a land value tax in Britain could raise as much as £190 billion a year.
That is more than the current revenue from income tax, corporation tax, capital gains tax, inheritance tax, stamp duties, insurance premium tax and all council taxes and business rates combined.
Moreover, as already argued, a land value tax would tend to stimulate economic activity rather than hold it back.
Furthermore, it is inherently a fair tax, because the value of a site upon which the tax would be based is determined not by the owner or occupier, but by the provisions of nature, which should be shared by all, and by investments in economic activities, employment and services in the locality by the community at large.
In addition, it provides automatic compensation for those sites that are disadvantaged in some way as a result of other developments, such as proximity to a busy road, a rubbish dump, or whatever.
And, unlike income tax and business taxes, where tax avoidance experts are in great demand, and the “shadow economy” flourishes to evade tax, land value tax is practically impossible to avoid – you cannot siphon land out into an offshore tax haven!
In short, a system of land value taxation is a strong candidate for becoming the core source of funding for public services in place of income tax, council taxes and business rates.
Proposals for a new, fairer Tax Policy in Britain
- Abolish income tax, council taxes and business rates, which currently account for around half of government revenue, and replace with a system of land value taxation.
- Retain an income tax or surtax for very high earners, such as footballers, pop stars, actors, opera singers, high court judges, or top managers, because, as argued previously, such high earnings, like land value, are a form of economic rent derived from the rest of society, and it is only fair that society should benefit.
- Recurrent expenditure on pensions, healthcare and education to continue
to be financed through deductions from people’s earnings, perhaps
topped up by employers’ contributions.
These contributions should be ring-fenced and paid into a National Pension Fund, a National Health Fund and a National Education Fund, respectively, which would be statutory authorities under democratic control, independent of the government.
People could then be sure that the money that they are paying out is actually going into those areas, and it recognises the fact that such contributions are a part of people’s wages or salaries that are deferred until they retire, or until they or their families need healthcare, education, or further training.
- Retain a profits tax – i.e. corporation tax – beyond a certain
threshold, and, indeed, raise the rate to 50 per cent.
This recognises the fact that even in an economy based on common ownership, some productive activities are inherently more profitable than others, yet are dependent on less profitable or unprofitable areas, so that higher profits, in effect, are again a form of economic rent derived from the rest of society, and therefore should be taxed accordingly.
It also recognises that under capitalism, the bulk of firms’ profits derive from surplus labour appropriated from employees and from customers and suppliers, which is another argument that society as a whole should gain some benefit.
In addition, all exemptions and allowances, which firms can use to set against tax, and which are subject to so much abuse, should be abolished.
A recent investigation by the Financial Times, for example, found that several major corporations in Britain, including some foreign banks, are currently paying almost no tax. They achieve this by arranging for most of the profits to be made by foreign subsidiaries, often based in offshore tax havens – for instance, by taking out large loans from their subsidiaries, and setting the interest payments off against tax, or through transfer pricing.
- Retain sales taxes, embracing existing VAT and excise duties – which currently account for 30 per cent of government revenues – and extend to all products, but at varying rates according to the product. Apart from raising revenue, the object would be to encourage restraint on excessive consumption of the world’s natural resources.
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