TP8. What’s Wrong with our Taxes

They are costly to collect and penalise productivity!

A big gap can exist between what the taxpayer shells out and what the government gets. The more complex the tax – the more rules and exceptions – the bigger the gap!

Compliance costs add to the burden.

The complexity of current taxes and exemptions compels people to pay professional accountants to reckon their liability. A sizeable company must employ special staff to sort out not only the firm’s own tax liability, but the staff’s PAYE and National Insurance. Correspondence with the tax office adds still more to a company’s tax bill.

Damage by Direct Taxes

They eliminate jobs. Consider an employer who wants a job done and a potential employee who is willing to do the job for an agreed take-home-pay. The take-home-pay is not the sole cost to the employer. In addition to the take-home-pay, the employer must also supply the income tax on that wage.

The illusion is that the employer is collecting the employee’s income tax and putting it in a separate account called PAYE. But the reality is that the employer must find that tax in his cash flow and provide it on top of his worker’s wage. In practice PAYE functions as a ‘payroll tax’, making it more expensive for the employer to take on workers .

Next there’s National Insurance. The employer again pays twice: he is required to pay his firm’s percentage of National Insurance, but also to find the percentage which seems to be paid by his worker. Both PAYE and National Insurance widen the gap between what the employer must pay and what the employee receives.

So a businessman who toys with the idea of expanding his business and would be prepared to take on extra workers and pay them what they want for their work very often shies away  from creating these jobs because of the gap between the employees’ wages and the full cost to himself. The result? Unemployment and thwarted productivity.

Damage by Indirect taxes

If direct taxes (like Income Tax and Corporation Tax, and quasi-taxes like National Insurance) are damaging to employer and employee alike, indirect taxes (like VAT and customs duties) are just as bad. Their addition to prices is especially burdensome to the poor, and they restrict economic activity.

For instance, a householder wants a room decorated and can just afford the cost of materials and labour which an artisan requires to do the job, but he can’t afford the extra 17.5% VAT. So the room remains shabby – the decorator is out of a job. More unemployment!

Alternatively, the householder does a deal with the decorator for cash. VAT is avoided. Both parties are breaking the law, of course – but it’s between that and the dole!

This illustrates how the fibre of the nation is weakened by the measures taken to alleviate the plight of the unemployed. The entrepreneur is forking out National Insurance – in order to meet the cost of Unemployment Benefit – to keep unemployed people in idleness while possible work remains undone. A tradition of freeloading on the state has evolved with a bit of fiddling on the side.

Avoidance and Decadence

The moral consequences of this taxation system are pernicious. Taxation is widely scorned as heavy and arbitrary, with major taxes alleviated by various exceptions and exemptions. The rich and powerful pay lawyers and accountants to find and exploit the loopholes. Mega-firms devise off-shore ownerships and tax havens, including the Internet. The delinquency spreads as companies fiddle the books to enhance their balance sheets. Ingenuity becomes the agent of moral decline. Ordinary folk are tempted to use dodges which, in other dealings, would be called dishonest. There is such a culture of tax avoidance among people of all classes, that your next-door neighbours will take advantage of the black economy without a qualm.

Trace current taxes to their roots and it will be seen that the entrepreneur is required, ultimately, to meet all of them as an extra burden on production. Thus

they discourage enterprise and inhibit production.

Is there an alternative?

Is there a large stash of wealth that could be tapped?

Turn your attention to the amazing rise and fall in the cycle of land values. Who creates that value? The landowner? Does he actually create that value? Is he entitled to it? Could land values be collected to provide government revenue? Would that be unfair to the landowner? Would it be harmful or beneficial? Who would lose – who would gain? Would the loser be ill used?

Since World War 2 we have experienced three cycles of boom and bust. Land prices escalated to such a peak that the entrepreneur could not contract for its use and run a viable business. Land prices collapsed. Negative equity was visited upon over-mortgaged homeowners. These land price rises and falls coincide with prosperity and recession.

Then, the third boom came. Once again landowners were collecting wealth created by the imagination, drive, skills and labour of others. Coolly examined, it becomes clear that, because access to land is vital to production, those in control of it had the power to syphon off the gains in productivity without contributing to the work of production themselves. The landowner was ostensibly collecting a ransom for access to vital sites from the people who contributed the productive effort; the entrepreneur with his capital and organising ability and the worker with his manual or mental effort.

Let’s examine one humble case. In 1974 a lucky man bought his rented London flat for £12,000 when the land market had bottomed out and he was in work and could get a mortgage. After that he was out of work living on Welfare and savings for 15 years. In 1989 he sold his flat for £185,000 and was able to buy a small house in a country village and invest in an annuity which left him comfortably off for the rest of his life. During those 15 years he produced no wealth in the flat he owned, indeed he was a burden on the State, yet he was able to garner a £173,000 claim on the wealth that the nation had produced! In the short street where he lived, the value that accrued to similar flats, it totalled £9 million in that 15 year period. Consider the millions that accrued to all the streets of London during that era – and to all the land in Britain – with the urban land increasing most in value. None of the garnered wealth was actually created by the incumbent landowners.Eventually a flat in that area is valued at £400,000. Then in 2008, came another crash.

When, at last, we get out of the present slump, we need to think of a way of simultaneously avoiding another boom-slump cycle and collecting the unearned income that comes from the control of valuable locations and natural resources. It’s a mouth-watering prospect! With the businessman relieved of his current burden of taxes, enterprise and trade would blossom, competition for employees would raise the level of earnings, and people would have much less need of the Welfare State. The curse of the housing ladder and land specula­tion would also wither away. They gnaw at the nation’s morals and morale. The country that ends taxation on production and collects the annual value of land will shoot ahead of every other nation in its rate of production.

To introduce this change, the ownership of all the nation’s land must be recorded and its value assessed. This survey would assess the bare site excluding any improvements like buildings, machinery, crops with which the landowner or a predecessor has enhanced it. Its value will be deter­mined by its location in the country and the amenities it enjoys: like roads, rivers, ports, nearness to other commu­nities and nations. When the site value has been assessed, an annual rent proportionate to that value will be collected from the owner, accompanied by the happy elimination of some ofl the taxes that currently bedevil our economy.

Historic validation of land Value Taxation

As long ago as 1776, the great Scottish economist and philoso­pher Adam Smith laid down four principles which he said a tax ought to satisfy:

Taxpayers should pay in proportion to benefit received.

Land is something which no human being has created. Anybody owning land derives benefit from that ownership, and the benefit he derives is propor­tional to the value of the land.

The liability of a taxpayer should be certain, not arbi­trary.

A taxpayer’s liability for LVT is related exclusively to the value of his land. The value ofa site can readily be assessed by any valuer.

The tax should be levied in the way most convenient for the taxpayer.

A regular tax of this kind can be collected in the form, and at the intervals, which suit the taxpayer.

A tax should take as little as possible from the taxpayer in excess of what the State requires.

Because the value of land is so easy and, cheap to assess, the cost of that assess­ment and subsequent collection is low by comparison with the revenue received.

Book list

Douglas, Roy: Taxation in Britain since 1660. Macmillan, Basingstoke 1999.

George, Henry: Progress and Poverty. This is available in many editions. A recent       edition, edited and abridged by Bob Darke, Robert Schalkenbach Foundation, New York 2010

George, Henry: Protection or Free Trade

George, Henry: Science of Political Economy (abridged) Robert Schalkenbach       Foundation, New York 2004

Harrison, Fred: The silver bullet. International Union for Land Value Taxation, London       2008

Jupp, Kenneth: Stealing the Land: the law and taxation. Vindex, London 1997.

Sabine, B.E.V.: A history of Income Tax. George Allen and Unwin, London 1946