Tax land, not labour – Dominic Frisby
General Tax, Income Tax
Dominic Frisby is, unusually, a financial writer and comedian. After writing a blog on tax simplification last year he was approached by Ann to write another article. If you want to find out more about Dominic please visit his website or social networks (Twitter and Facebook).
The views expressed here are Dominic’s and do not necessarily reflect those of Ann.
Today we try to bridge the gap between the mundane world of the real and the rather more attractive realms of the ideal. We look at how we are taxed – and at how we should be.
Here is a pie chart, taken from my show ‘Let’s Talk About Tax’, showing government revenue last year.
You can see that 40% of government revenue comes from income tax and National Insurance (which is really just income tax by another name) and another 20% from VAT. The worker pays the vast majority of taxes.
Income tax was introduced in the UK briefly in 1799 to help fund the Napoleonic Wars, but, hugely unpopular, it was then abolished three years later. Prime Minister Robert Peel brought it back in 1841 as a temporary measure, and that temporary measure has, so far, lasted 176 years.
But, across the West, it is only really in the 20th Century that income tax has become payable by everyman.
Jean Baptiste Colbert, finance minister to Louis XIV, famously declared “the art of taxation consist of so plucking the goose as to obtain the most possible feathers with the least hissing.” Income tax, collected at source as it is today, is an easy tax to collect. It involves comparatively little hissing.
I have numerous problems with income tax, but I will focus on two here. First, it penalises productivity. The harder you work, the more productive you tend to be, yet the more tax you end up paying. As a society we should be incentivising productivity not punishing it. Rather than tax the wealth that is earned, we should be looking for ways to tax the wealth that is unearned. Second, income tax exacerbates wealth inequality. Warren Buffet famously lamented that his secretary pays more tax than he does. It’s because income is taxed heavily, while wealth is not.
The way that most seek to better their lot, particularly those who start out with nothing, is through their labour. Yet we tax labour. The wealth of those at the top, meanwhile, does not derive so much from their labour as it does from the appreciation in the value of their assets – their houses, their land, their property, their companies, their stocks, their shares, their fine art. Assets are taxed at much lower rates for the most part. In many cases they are not taxed at all. When one group is taxed more than the other, the gap between the two will inevitably grow.
Meanwhile, the stealth taxes that are inflation, low interest rates and quantitative easing are another attack on the worker, because they devalue money. The worker who relies on his salary sees its value debased, while asset prices are actually pushed up and further out of his reach.
It is because of our tax system that we have created in the UK this culture of rentier-ism. As a society, I argue that we should not be taxing labour, but some thing else – land.
Nobody made the land. Nature gave it to us. By building on it, farming it or mining it, you might be improving it, but the land itself was always there. So this tax ignores what is on the land, and looks only at its unimproved value, which is quite easy to assess.
Not just the land, but the mineral wealth, the airspace, the broadcast spectrums – anything that is there through nature, rather than human endeavour.
If you want the right to occupy a plot of land exclusively, and you want the government to protect your title to that property, then a fee needs to be paid to the community because it is the needs of the community, which give the land value. The value of that land should be shared, not hoarded by a select few. What I’m describing might sound quite Marxist, but the ‘granddaddy’ of right-wing economists, Milton Friedman, described land value tax as “the least bad tax”.
Each parcel of land in the UK is assessed for its potential annual rental value. Remote, rural farmland will have a low rental value. Prime city centre real estate will have a much higher rental value. A tax is then levied based as a percentage of the annual rental value of that land (in its unimproved state). So you would not tax Buckingham Palace, but you would tax the crown on the rental value of the land on which Buckingham Palace sits. That percentage would be determined by how much a government needs for its spending. If this a high-spending government, then the percentage will be high; if it is a low-spender, the percentage payable will be low. One of the beauties of this system is that government spending will be felt directly by the taxpayer. There will be greater transparency.
Setting up this tax would require all the land in the UK to be assessed, which badly needs to happen anyway. According to statistician Kevin Cahill, as much of 50% of land in the UK is still unregistered. Once this has happened it is an easy tax to administer. It does not requite 10m words of tax code.
It is also a hard tax to avoid – the land is here, it is not in the Cayman Islands and you are the owner.
One of the early proponents of land value tax was the 19th century philosopher Henry George. George called land value tax the Single Tax, because it should replace other taxes. In all probability we will eventually see some form of it introduced in addition to other taxes, which is precisely the wrong thing to do. The Mansion Tax, for example, is a bastardization of the idea.
Homeowners instinctively fear LVT because their home is the biggest asset and, having paid so much other taxes through their lives, they don’t want to pay more. However, most people will pay less, particularly if LVT replaces other taxes, as it should.
Who would pay the most tax? Those who own the most valuable land. The Crown, the Grosvenor Estate, Pension funds, the Forestry Commission, the Ministry of Defence, Utilities companies, The Duke of Buccleuch & Queensberry and so on.
If said bodies and others don’t want to pay the tax, they don’t have to. This is a tax, which is voluntary. You simply sell your land to someone who is prepared to pay the tax. Thus the tax will force a much needed redistribution of land in the UK via natural market forces, rather than via the moral minefield that is state re-allocation. It will dis-incentivise land banking – the practice of sitting on land waiting for its value to appreciate – and encourage owners to put their land to good use.
LVT involves a fundamental re-think about the way we do things, a re-gearing of society. It makes me believe that any implementation is unlikely, except in some bastardised form. Politicians tend to get where they are by taking the line of least resistance and not rocking the boat. Those who stand for bold ideas tend not to last long. But when it comes to tax in the UK, the system is so badly in need of reform, we badly need a politician who will rock the boat.
What a brilliantly thought out and well-reasoned approach to taxation. However, we would need to find a use for all those VAT manuals that are lying around!
That’s a very good point and thank you for your comment.
A very relevant article, equally to the fragmented system in the Commonwealth of Australia.
Further complicated here by the three political tiers (Federal, states and local government (councils)).
Especially the division of powers in the Constitution between the states (who currently collect land tax) and the Commonwealth (who collect the income taxes for their use and appropriation; and GST to distribute between the states – another constant battle).
So in Australia I would say this is totally impossible.
Thanks for the comment and for the insight on Australia as I’m not familiar with the system there.
Tax is NOT needed to fund spending. It is one of the instruments available to a sovereign currency-issuing Government to control inflation by restricting (or not) the amount of money in circulation. That said, LVT would be a much better tax – in line with the rest of this blog.
I completely agree, we should TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!
My essay contains 17 aspects of LVT which should all be noted in your work on this subject.
Socially Just Taxation, and Its 17 Effects On Government, Land Owners, Communities and Ethics
A wise and sensible government would recognize that the problem of poverty derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed 136 years ago by Henry George, a (North) American economist. In “Progress and Poverty” 1879. Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords, tax-men and banks, who/which do nothing productive and find that land dominance has its own reward.
17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics
Four Aspects for Better Government:
1. LVT, adds to the national income as do other taxation systems, but it should replace them.
2. The cost of collecting the LVT is less than for all other production-related taxes, since tax avoidance becomes impossible–the various sites are visible to all, and their ownership is public knowledge.
3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the management of national affairs.
4. The speculation in and withholding of unused land is eliminated, see item 7 and the national economy stabilizes. It no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).
Six Aspects Affecting Land Owners:
5. LVT is progressive–owners of the most potentially productive sites pay the most tax. Urban sites provide the most usefulness and resulting tax. Big rural sites have less value and can be farmed appropriately to their ability to provide useful produce.
6. The land owner pays his LVT regardless of how his site is used. A large proportion of the present ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not used).
7. LVT stops speculation in land prices because the withholding of land from proper use is not worthwhile.
8. The introduction of LVT initially reduces the sales price of sites, even though their rental value can still grow over a longer term. As more sites become available, the competition for them is less fierce.
9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below, items 12 and 13).
Three Aspects Regarding Improved Communities:
11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.
Four Aspects About Kinder Ethics:
14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this national extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks– LVT is a natural system of national income-gathering.
15. The previous bribery and corruption for gaining privileged information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
16. The improved use of the more central land of cities reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs because their production costs are reduced. Then untaxed earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly and fully introduced as a single tax, it will eliminate poverty and improve business ethics.
Hi David and thank you for the very detailed comment and essay on LVT. There have been some very good arguments for considering its introduction but it will require a complete overhaul of the current system. This requires brave decision-making which, as Dominic has pointed out, is not an attribute you usually associate with politicians. Therefore Im not sure about the likelihood of this system being implemented any time soon.
It’s too easy to look over an estate wall and encourage jealousy in ‘the workers’. Objectively, how much land in the country is actually held just waiting for it’s value to increase? Is it actually a problem limited to supermarkets and petrol stations, those who want to browbeat planning for permission to overdevelop, or those who are non-domiciles, rather than large landowners per se (who actually provide rural employment), or farmers and foresters who work their own land?
What would the impact be of a more targetted tax?
Would introduction of natural capital into costing create a sustainable future, so goods that are transported a long way pay for the cost of the roads?