Lukewarm support from where we would most expect it
The strange case of Tax Justice Network
Most advocates of Land Value Taxation have arrived at their conclusion because, amongst other things, they regard the present tax system as unjust. We would expect that an organisation going by the name “Tax Justice Network” (TJN) would be actively campaigning in the same direction as ourselves.
TJN has specialised in drawing attention to tax avoidance and tax havens, issues which LVT deals with directly. What TJN calls the “tax gap” – up to 25% of the amount owed, could be completely closed by a switch to LVT. Yet TJN’s attitude to LVT has been at best lukewarm and sometimes hostile, falsely attributing to us the idea that we regard LVT as a panacea. More recently, however, and encouragingly, TJN has shifted its position, expressing the view that, “We believe a land value tax is important” and it devoted an entire issue of “Tax Justice”, its regular publication to the subject. The pity is that TJN, having successfully gained press coverage, neglects to mention the role that LVT – or even a shift to property-based taxation – could play in dealing with the problem.
This half-heartedness comes across in TJN’s repeated assertion that “We think it (LVT) is one of the many taxes we need to finance our public sector, redistribute wealth, raise representation, help balance fiscal policy and correct market mispricing of externalities. It cannot do those things by itself. So we argue for a balanced approach and believe that is the basis for long term progress economically and politically.”
This shows a fundamental failure in understanding. A high rate of LVT – over 90% of annual rental value, including pure location value and minerals, is both reasonable and fair, even if politically impossible for the forseeable future. But what then would be the point in retaining Income Tax, Corporation Tax and VAT? All of these taxes cut into the LVT tax base and reduce the potential yield.
The point of the “balance of taxes” that TJN argues for is never made clear. In the process of raising necessary public revenue, taxes like Income Tax, VAT, Corporation Tax, Stamp Duty are almost entirely harmful. There is no balance to be struck.
Why are many different taxes needed? Each one has its own set-up and administrative, enforcement and compliance costs before anything at all is collected. So from that point of view alone, the fewer taxes the better. Some taxes – “sin taxes” on fags and booze – may be desirable to discourage excess. But it is not a good thing if they are too successful in their aim since they leave the state in the position of living on – relying on – the wages of sin!
WHAT IS TAX JUSTICE?
What, then, is tax justice? Consider the actual exchange of goods and services that takes place behind the monetary transactions that economists and the tax authorities concern themselves with.
For the sake of illustration, let us be sexist. Andy, the plumber, services Betty’s boiler. Betty, in exchange, knits a sweater and gives it to Andy as payment. Both are satisfied with the deal. If, on the other hand, Andy fixes Betty’s boiler for £50 he must charge her £60 (includes VAT) and he gets to keep, say, £40. Andy pays Betty £50 for the sweater and she keeps £40. This leaves Betty £20 out of pocket, since Andy was happy to accept £40 for the job.
That is the reality of taxation today. Where is the justice? How is the duty to pay tax to the state incurred in the course of this transaction?
Worse still, is that it is almost impossible to determine where the true incidence of tax falls. In the public sector, and in relation to welfare benefits, there is a vast amount of “churning”. Payments from the government are promptly returned in the form of PAYE and National Insurance remittances nominally paid by the public sector employees. Welfare benefits have to include the element of VAT that recipients pay in the cost of their goods and services. Apart from the savings in administrative costs, it would make little difference if public sector employees were paid net wages and given tax credits instead.
In the private sector, labour related taxes are, in effect, payroll taxes. They must either be built into prices or absorbed by the business, in which case they are ultimately passed on to landlords as their effect is to reduce the rents they can afford to pay.
At the margin, labour-related taxes are seriously damaging and lock people out of work, since they give rise to the tax wedge, that is, the difference between take-home pay and gross labour costs. Employees are put in the position of having to pay what, from their point of view, are marginal tax rates of over 100% as they move from welfare benefits into employment. From the employers’ point of view, the situation is that they must incur gross labour costs of over 80% more than benefit levels in order to tempt people into work.
Wicked and stupid people on the political right are now using this argument as a reason to reduce benefits to penury levels, but the real culprit is the low threshold for taxation, including national insurance.
AVOIDING AVOIDANCE
A big concern of TJN – and rightly so – is tax avoidance by multi-national corporations through the use of transfer pricing. LVT would stem the loss, but it is easily dealt with even under the present system. Corporation tax could quite simply be phased out and the same amount raised from the UBR. What exactly is the objection to that? TJN never answers this or any other question when it is put.
TJN is also sceptical about how much revenue LVT could raise. Such scepticism indicates that the point has been missed. Public expenditure is much higher than it would need to be if it was not necessary to devote so much to the alleviation of poverty caused by the tax system itself. The expenditure consists of transfer payments. It provides no services and results in no investment. Given the effect of the present tax system in locking out of work those with little skills or little to offer in the labour market, this expenditure can be looked on as mitigation of the collateral damage caused by the tax system. If this deadweight cost was stripped away and existing taxes were replaced by LVT, there is no reason to suppose that governments would be short of revenue. Furthermore, as was argued more than 200 years ago, taxation is at the expense of land rental value, which is why the retention of other taxes would cut into the LVT tax base and reduce the amount that could be raised from this source. But if TJN is arguing that a multiplicity of taxes is needed in addition to LVT, it should explain precisely why.
The sad thing here is that when pressed, TJN just withdraws from debate with comments like this “I live in the real world of what is possible. Theory for theories sake which has no chance of happening, let alone delivering social justice, is of no real interest to me. It is why I reject neoclassical economics and all the harm it has caused. It is why I reject your posturing too. I’d rather go for the real thing than fantasise about a false perception of what might deliver social justice on a blackboard but never will in reality.“
TJN is right in arguing that LVT has no chance of being implemented in the UK in the foreseeable future. But what is the point of arguing for policies which, like the anti-money laundering legislation which makes life difficult for ordinary people, will just add to bureaucracy whilst doing next to nothing to solve the problem?