Sunday, 20 May 2012

Tax reform

Yesterday's post explained why it made sense to replace the overlapping systems of means-tested benefits, contributory benefits and subsidies to land ownership with a flat rate Citizen's Income. This of course raises the question of how this would be funded (the cost of the core functions of government - law and order, defence, refuse collection and road repairs is minimal - costing barely 5% of GDP).

1. Over the past century or two it has become majority opinion that taxes should be raised by taxing earned income and output:
2. The bulk of government revenues used to be raised from the rental value of land, to eliminate the inbuilt subsidies to land ownership. Nowadays, less than a tenth of government revenues are from the rental value of land, leaving land owners to collect the subsidies, i.e. the rent they can charge - or the benefits they can enjoy without paying for them - thanks to the efforts of everybody in the productive economy and the income tax revenues spent on improvements which then push up the rental value of land etc:
3. Somebody starting out in life therefore has to pay two layers of tax - direct tax on his income, which is used to pay for the core functions of the state and other things which push up rental values; and then the rent he has to pay privately in order to be able to live somewhere - if he moves to an area with higher wages to try and earn more, nearly all the extra wages are soaked up in income tax or the higher rents in high wage areas:
4. Taxes on earned income are not only morally questionable but have huge dead weight costs. The average rate of tax on incomes, taking income tax, VAT, National Insurance, corporation tax and Working Tax Credit withdrawal into account is about fifty per cent, and this depresses the size of the economy by something like ten or twenty per cent. Taxes on the rental value of land - to claw back the inbuilt subsidies - do not have dead weight costs, so replacing taxes on income with taxes on land would allow the economy to grow by ten or twenty per cent within a few years:
5. So instead of paying two layers of tax (one publicly collected, and one privately collected), workers and businesses would only pay one layer - being the rent (which would then be clawed back from the land owner as tax). For most owner-occupier households or businesses, the tax they would pay on the land they occupy would be much the same as the tax they currently pay on their earned income. After paying for the cost of the core functions of government, the rest of the tax revenues would be repaid to everybody as a flat rate Citizen's Income (or vouchers for merit goods such as education or health) and so the median household in a median home would be a net zero taxpayer: the Citizen's Income it receives would be equal and opposite to the land value tax it has to pay:
6. So who 'loses out'? Those people who currently derive the bulk of their income (whether in cash or non-cash) from the rental value of land. They will have to return to the productive economy or accept a more modest lifestyle. Further, the purchase price of land would be significantly reduced, and ultimately, there is no reason why the purchase price of any plot of land (after deducting the cost/value of improvements thereon for which the owner has paid) should be any more than its cost of production, which is of course more or less £nil:

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