Ongoing spat with Tax Justice Network

This is ongoing… please join in discussion here!

As regular readers of the LVTC website know, the Tax Justice Network (TJN) has been running a campaign against tax havens for some while now. One might have expected it to have come out in active support for LVT but they seem to have a blind spot about it. TJN takes the view that the tax system just needs to be tightened up – a bit more regulation and exchange, and all will be well. It is unwilling to accept that there is anything fundamentally wrong with the tax system itself. I posted this comment on their blog site…

The problem with the tax system is that it is essentially a structure of perverse incentives. Successful, honest and legal, above the board activity, and thrift, are punished, whilst idleness, fecklessness, and dishonest and illegal activity, are rewarded. That is the nature of the tax system.

The effect is that the GNP is about 12% less than it would otherwise be due to the deadweight effect of taxes – that is wealth which would have been created were it not for the tax system.

Governments know this and mitigate with ad hoc concessions. These make the system ever more complex and incomprehensible, but they also create loopholes. The fat cats are best placed to pay for the professional advice to search out the loopholes and exploit them.

There is not and cannot be such a thing as an international tax system. To prevent tax avoidance at that level would require collaboration in the implementation of draconian and authoritarian measures.

It is up to national tax jurisdictions to safeguard their own revenue through proper design of their tax systems, bearing in mind the fundamental point that people and capital are mobile, whilst companies can exist in many locations simultaneously and can shift their cash flows around internally to exploit differences in tax in different jurisdictions.

I received this in response…

Nonsense. Read more here, or here, or here,

My response was.

Those texts do not answer the fundamental critique that tax as we have it today is a structure of perverse incentives – that if you work honestly and successfully, the fruits of your labour are confiscated.

Nor do they address the deadweight cost of the system, the arms race generated by introducing loopholes or the fact that is would take draconian measures of control to plug the leaks.

Taking the points from the first of the links, you mention the four “Rs”.

The first “R” is Revenue. Taxes raise money to pay for health, roads and education, or for more indirect things like good regulation and administration.

The tax system is incapable of raising anywhere near the amount of revenue needed for these purposes. It also ties up vast sums of money in welfare payments to alleviate the problems of poverty caused by the system itself.

The second “R” is Redistribution: taxation can help reduce poverty and inequality, and spread the benefits of development more widely. Different taxes have different effects.

Too true. Under our so-called progressive tax system based on the taxation of gross pay, for someone on the minimum wage, gross labour costs to the employer are 75% over and above the net purchasing power of the wage. This puts employers under inordinate pressure to reduce their total labour bill, and so they employ as few people as possible and often less than they need and would do if gross labour costs were more closely aligned to net wages. This is especially so in the care and public services sectors.

Who suffers? Young and low-skill workers, leading ultimately to the three-generation unemployed family. The tax system as we know it really is an engine for keeping the poor down. It creates, sustains and reinforces inequality.

The third “R” is Repricing. Taxes (and subsidies) can be used to change people’s behaviour: taxing tobacco, pollution or carbon-based energy, for example, is accepted by many people as a way to curb potentially harmful activities, particularly “externalities” that represent failures in free markets or other forms of social organisation.

Yes! This gets to the core of the issue. All taxes affect behaviour. Taxes on windows led to bricked-up windows. And it is precisely why taxes on labour lead to idleness. Taxes should not be tolerated without regard to their effects on people’s actions. And people should pay the cost of externalities, both costs incurred and benefits received. Thus, it would be reasonable to levy taxes on packaging both to cover the cost of disposal and to signal to the customer that there is such a cost.

The biggest externality relates to the costs and benefits enjoyed by landowners, as reflected in the rental value of land, which ought to be collected as public revenue but in practice are ignored.

The fourth “R” is Representation. Historians are familiar with this function, but many of us have forgotten it. American colonists who were being taxed under British colonial rule famously demanded “no taxation without representation.” This is not just an oddity of history, however, but a much more general rule: citizens who are taxed tend to demand accountability and representation in exchange from their rulers. People want to influence how their hard-earned money is spent; as a result, taxation helps keep governments on their toes. As a result of this bargaining between rulers and their subjects, taxation strengthens and protects channels of political representation.

Where is the evidence for this? Sixty years of PAYE income tax does not seem to have done much for British democracy. We are still stuck with being run by an incompetent and mildly corrupt political class who offer substantially the same flawed policies – cyclic boom-busts, persistent high unemployment and an intractable housing problem – with the odd war to divert attention and spice things up. We haven’ẗ even managed to get rid of the evil “first past the post” electoral system.

The economic burden of income taxes falls on employers and the idea that individuals pay this tax is a consequence of the “gross pay” delusion. How can there be a healthy connection between taxation and representation when the whole thing is based on a deception?

Tax competition is generally harmful, for several reasons. It short-circuits democratic (or other) domestic or local processes by which governments set their tax policies. It results in the tax burden within countries being shifted away from corporate taxation in particular and towards other forms of tax whose burden falls disproportionately on the poor and the middle classes.

Tax competition is only harmful if those who lose in the competition fail to get the message. People want, quite reasonably, to keep as much as possible of what they legitimately earn. If taxes on labour and production are low, this will be attractive.

But competition between countries is not just about keeping taxes on earnings as low as possible. Economic activity demands good infrastructure in the broadest possible sense. The quality of this infrastructure will also be reflected in land values, which will either be pocketed by landowers or can be used as the public revenue base to pay for the supporting infrastructure.

In a situation of tax competition, rotten and dysfunctional tax systems like Britain’s will be weeded out and, if the government is smart enough to get the message, replaced by better ones.

Bring it on!

Do you actually believe this stuff that you are writing? Land value taxes – OK, there’s a place for them as we’ve remarked, ad nauseam, but simply to deny the “no taxation without representation” argument and to say that taxes are all about raising revenue and nothing else – forget all taxes except land value taxes – well you you won’t find many sympathisers. If you’re going to respond further, could we perhaps have some more interesting arguments this time?

You asked “where’s the evidence?” Here’s something you might want to read – a book on this subject.See here

Yes, thanks, I looked at the review of that book too. I entirely agree. Taxation is the fiscal expression of the relationship between the individual or perhaps the householder, and the state.

It explains a great deal. Since the incidence of employment-related taxes falls on employers, it is only to be expected that governments are more and more in the pockets of the bankers and the big corporations.

No wonder democracy is failing. We ought to refrain from claiming that our harmful tax system is something that third-world countries should adopt.

Where is the evidence that income taxes promote democracy?

You haven’t fallen for old that tax incidence canard as well, have you? Really. Take a look here, and the associated links.
http://taxjustice.blogspot.com/2008/06/incidence-brigade.html

I am running the argument in precisely the opposite direction. The incidence of labour-related tax falls on employers. That people imagine otherwise is a consequence of the “gross pay” delusion.

Where the public sector is involved, the effect is that the cost of public services is about 40% higher than than the net cost, since all the NICS and PAYE so-called deductions are promptly remitted to the government in a massive churning operation. But the effect is to destroy employment at the bottom end of the labour market and to leave the streets unswept and the hospitals under-staffed on the non-medical side, so MRSA can get a good hold in the dust under the beds.

Whose side are you on, anyway? You appear to be against the sharks exploiting weaknesses in the system, but when arguments are put for changes which would most help those at the bottom of the economic pile, you resist and ridicule.’

Henry. You were indeed running the argument in the other direction. But that’s not to say that the argument is right. As Martin Wolf puts it: tax dollars don’t just go up in smoke. They pay for useful things. That’s the essence of tax. That’s why, if you think about it, it makes no sense to treat tax as a “cost.” Read more here. http://www.guardian.co.uk/commentisfree/2007/nov/07/comment.ethicalbusiness

I was running the argument about incidence of tax the other way because the current shift towards the Total Control state run for the benefit of bankers, big business, politicians and the Mandarinate reflects the fact that the true incidence of labour related taxes falls on business. Political influence does indeed follow the realities of taxation, which would help to explain the sad state of British democracy. There isn’t much public participation. People have just got angry and depressed about their feelings of powerlessness.

Martin Wolf leaves much unsaid. Of course money collected in taxation does not go into a black hole, though there are huge inefficiencies, since so many of the best brains in the country are the accountants and lawyers who are paid to help their clients minimise their liabilities, and the cost of administration is substantial – about 6% of the take, if I recall correctly.

Further waste arises because of the disincentive effect of the tax system, a deadweight cost as a result of which the GNP is reduced by about 12%.

From the point of view of an employer, taxation is a cost, a charge on the balance sheet. The bulk of this cost never appears on the balance sheet as such because it is concealed under the headings of “Gross Pay” and NI contributions, but they are costs which serve as a deterrent to employment.

The result is that the government is having to provide for people that which they might reasonably be able to provide for themselves. They can’t, because under the present system of taxation, they are priced out of work or have no alternative but to work for a pittance.

Corporation tax is a separate issue. There are genuine difficulties in assigning revenue where companies operate in various tax jurisdictions.

An easy short-term fix for the problem would be to phase out company taxation and collect the same amount through existing property taxes eg the UBR. That way the tax liability cannot be shifted out of the country at all. Such a change would need to be accompanied by a legislative clause which nullified the effect of upwards-only rent revision clauses and gave business tenants an entitlement to request rent reviews.

Incidentally, whilst on the subject of business rate, you might like to follow up the tax avoidance currently going on through “constructive demolition”.

Robin

You still seem to be avoiding Henry’s question with ad hominem and straw man reasoning and references. Is this the way to conduct a public forum that is seeking credibility I wonder? Will that approach deliver more truth or less?

Are you going to provide evidence supporting your case. I’m sure Henry would be just as delighted for you to prove him wrong but you have yet to do it. Why is this when all stand to gain from it?

The question seems to be why does TJN support taxing the production of wealth?

It seems he is saying taxing production is very stupid because it means people will make less wealth as a result. And they will then justly try to avoid paying it too. And he gives plenty of well reasoned evidence. The evidence you provide is just “telling” people it is so, without reason. Why dont you have another think about what he’s said and respond with your usual humility.

Please remind us which of Henry’s many points you are referring to that need answering. This discussion, as Henry notes, is getting hard to navigate. If it’s “why does TJN support taxing the production of wealth?” then take a look at the TJN comment on whether or not tax should be treated a cost. Perhaps you’d like to point to the ad hominem attack too. We will continue to use references in answer.

This blogger hasn’t heard of your 6% and 12% figures- not saying I doubt them – but am interested to get any hard references on that from you. Perhaps John knows, but he’s away.

My response

I dealt with the issues one by one but they were answered with fresh ones each time.

The key issues to be dealt with but have still not been answered except with shaky references are

1) The economic damage and poverty resulting from our existing tax system.

2) The amount of government expenditure consumed in putting it right.

3) That the system is inherently vulnerable to abuse legal or otherwise.

4) That incidence of the taxes does not fall on those from whom it is formally collected.

5) That there is indeed a connection between taxation and representation and due to (4) above, it is killing off democracy.

The deadweight cost of taxation was estimated in this UK study but the phenomenon is well know world-wide.
http://www.iea.org.uk/record.jsp?ID=320&type=news

As to compliance and administrative costs, the figure I was given was £25 billion about five years ago.

This extract from the obituary of Professor Cedric Sandford, public-finance economist specialising in taxation, and founding pillar of Bath University mentions the issue in The Independent of Thursday, 18 March 2004

“Cedric Sandford was a public-finance economist. His chosen field was taxation. He applied economic principles to analyse issues of tax incidence, fairness and efficiency and took pains to find out how these principles actually operated in practice, thus linking tax theory to tax administration. Clarity of exposition and relevance of content made his work widely accessible. His extensive published work illuminated issues of tax policy and tax reform, and provided guidance for a generation of politicians, students, thinkers and reformers.

“Sandford was the leading UK researcher in the field of tax-compliance costs (the costs in time and money which taxpayers incur when dealing with their tax affairs) and probably the leading researcher in this field worldwide. Using extensive taxpayer surveys, he found that UK tax-compliance costs were larger than the Government’s own tax-administration costs. Moreover they were regressive (proportionately more onerous for those on lower incomes) and a disincentive for small businesses, in the sense of diverting their scarce resources to unproductive uses.”

Remember that most of the accountancy profession and a sizeable chunk of the legal profession is taken up with tax matters. It is a huge drain on the economy.

This thread has been going on a long time. At a max of one minute per answer:
Robin. On corporations and no taxation without representation – see a few comments further up. on the meaning of wealth – take a look at this book. it’s not a TJN book but it’s interesting.
http://www.google.com/books?id=eUoolrxSFy0C&dq=the+origin+of+wealth&printsec=frontcover&source=bn
Whether tax is or is not a cost – that’s been answered above already with the link. here it is again
http://www.guardian.co.uk/commentisfree/2007/nov/07/comment.ethicalbusiness

1) The economic damage and poverty resulting from our existing tax system. Looks like we share the same concerns then Henry

2) The amount of government expenditure consumed in putting it right. Ditto.

3) That the system is inherently vulnerable to abuse legal or otherwise. Ditto.

4) That incidence of the taxes does not fall on those from whom it is formally collected.That’s been answered already – take a look at the incidence bit, already noted above.

5) That there is indeed a connection between taxation and representation and due to (4) above, it is killing off democracy. That’s also been answered above. The incidence argument, as should be obvious to anyone who thinks about it – is entirely bogus. And even more bogus by virtue of being a mix of false logic with elements of the truth.

TJN – we both want the same things and that is why LVT supporters want you on-side with us and vocal on the subject. The taxation of labour is fundamentally unjust.LVT has a long history – the present movement can be traced back to the French physiocrats. It was the latter who worked out that all taxation was ultimately at the expense of land rent and there was no point attempting to collect public revenue except through a tax on land rent. This was the basis of Quesnay’s proposal for the impôt unique, which was then supported by Turgot later in the 18th century. Sadly vested interests got in the way, the French economy deteriorated and the result was the disaster of the French Revolution and the trail of events from which Europe is only just beginning to recover.

The land value taxation campaign has some figures on the incidence of labour related taxes here and here

As for a definition of wealth, this is the best one I have come across

“natural products that have been secured, moved, combined, separated, or in other ways modified by human exertion, so as to fit them for the satisfaction of human desires”

henry “we both want the same things and that is why LVT supporters want you on-side with us and vocal on the subject.”

We do indeed seem to share a lot of goals. The key difference is that we believe in a range of kinds of taxes – enabling democratic leaders to mould and shape a tax system to their will – while you seem to favour only one tax. Which leads you into a fatal mistake – the logic of your argument leads you into what looks like an unholy alliance with the anti=tax brigade – those who think that if we cut government down to the size where it is small enough to drown in a bathtub. embrace a range of taxes, Henry, including LVT, and it seems to me we are then on the same side again.

what is more, we do pay attention to LVT – here’s our last piece http://taxjustice.blogspot.com/2009/03/parliament-seminar-on-land-value-tax.html

 The taxation and representation link can be traced to a slogan that originated at the time when America was governed from Westminster but had no direct representation in the British parliament.It appears to have mutated in various directions, in particular the principle became inverted to become “no representation without taxation”. This lay behind the Thatcherite Poll Tax, which is the logical conclusion of the notion and seems to underly TJNs assertion that direct taxes such as income tax serve to promote democracy. But since the true incidence of income tax falls on employers, the whole proposition is dubious.

In any event, where is the evidence to support the claim? In the UK, there is little real democratic choice since government remains in the hands of a political class devoted to manipulation of the electoral system and media in order to remain in power, aided and abetted by a self-perpetuating establishment mandarinate, both heavily influenced by corporate interests, to an extent that is beginning to astonish and disgust the public to the point that they regard those involved in the system with contempt.

If there is a link between taxation and government, the present state of democracy in the UK is no advertisement for the country’s tax system.

I favour a minimum number of taxes. They should not be allowed to proliferate, not least because each one has its own set-up and running costs. There is no necessary connection between size of government and LVT, since LVT is capable of raising at least as much revenue as all existing taxes put together.

But under the present tax system so much government expenditure goes on the the relief of poverty which would simply not exist under a system in which most public revenue came from LVT.

That is what is wrong with having a package of taxes. All taxes reduce that which is taxed eg window taxes promote bricked-up windows, whilst taxes on tobacco and alcohol discourage smoking and drinking. The latter two might be acceptable but taxes on work – which is what most of our taxes are, one way or another – promote idleness. Is that what you are in favour of?

LVT can be used to support a cradle-to-grave socialist type welfare state or it can be used to run a minimum government state, with the surplus used to provide a universal benefit or national dividend – a reverse Poll Tax, which would indeed promote keen democratic debate.

Personally I don’t have a view on the subject. There is much to be said for expensive Scandinavian style public services. But the British are not Scandinavians and are probably not capable of delivering efficient and good quality services through public agencies, and in that case the “small government” model might be better. But if poverty is abolished, which is what substantial LVT would do, then everyone is a position to make genuine choices.

I am pleased to see that you promoted the LVT seminar but did you send anyone and did you write it up afterwards? By virtually ignoring LVT your campaign is depriving itself of its most powerful weapon.

Really I don’t understand this.