The Need for Radical Tax Reform – article by Duncan Pickard

This brief article neatly summarises the case for Land Value Taxation. It was prepared for Reform Scotland by Duncan Pickard

The governments of most countries have budget deficits and increasing national debts. The taxes they currently collect are unable to meet the costs of health and welfare provision of their older people and for the care and education of their young ones. The majority of tax revenues are imposed on earned incomes and trade (Income Taxes and VAT). Trying to obtain more revenue by increasing the rates of these taxes is futile because they have severe negative impacts (deadweight losses) on employment and trade. Income taxes cost the national economy about £2 for every £1 collected and VAT costs about £3. When the percentage of these taxes reach about 40% of earned incomes the amount of revenue received begins to decline and would reach zero if a government tried to collect 100% of earnings. Cutting public services and increasing the rates of taxes on earnings can never achieve recovery from recessions. It is perverse to tax employment and trade.

We need more of both so that more Wealth can be created. Adam Smith described Wealth as that which is produced by Labour and Capital using Land (Natural Resources). He said that Wealth is distributed as Wages to Labour, Interest to Capital and Rent to Land. Rent is the Wealth which remains after Labour and Capital have received their just returns for their contributions to its creation. Our current tax system favours those who own landed property and take an unfair proportion of the Wealth which others have created. Most of what is described as ECONOMICS in universities is advanced mathematics and only those who are talented in mathematics are deemed suitable to be called economists. The complicated algorithms used are worse than useless in understanding how the economy should function. Economic history is barely mentioned and Political Economy, which is the study of the creation and distribution of Wealth, gets no mention.

Those who promote Natural Capital as a new concept in economics are only adding more confusion. Natural Capitalists are like Neo-Classical Economists in believing that Land is just another form of capital and therefore Rent is irrelevant. Every student should read Progress and Poverty, written by Henry George in 1879. He and other Classical Economists such as Smith, Ogilvie, Ricardo and Mill described their theories without mathematical equations or meaningless jargon. They all agreed that the main source of government revenue should be the unearned Annual Ground Rent (AGR), not taxes on employment and trade. I challenge anyone seeking a new system for providing the funds for the necessary functions of government to produce one which is worse than the one we have now.

The four tenets which a new system should have are :-

1. It should not hinder employment and trade and so reduce the total fund from which the tax or charge should be paid.
2. For fairness the amount of tax or charge levied should be related to the ability to pay and for justice, earned incomes should not be taxed whilst unearned rental incomes are left untaxed.
3. A tax or charge should be cheaply and easily collected so that the costs of administration are as low as possible.
4. There should be no opportunity for avoidance or evasion.

The collection of Annual Ground Rent is the only fiscal charge which complies with these four tenets. An important feature of AGR is the encouragement of employment and trade by removing their burden of taxation and reducing the costs of creating Wealth.

The history of taxation clearly records that the laws pertaining to taxation were made by landowners. Once they gained control of government from the monarchy, they began to shed their responsibility for providing the funds for government from the land they owned and shifted the burden of taxation onto the earnings of working people. The “Law of the Land” that we have should be called the “Law of the Landowners”.

Some critics of our present tax system propose the retention of most of the existing taxes but at lower rates of charge, with the introduction of a tax on wealth to make up for the reduction of revenue. The problem with this idea is that the deadweight losses of existing taxes and their high costs of administration both for the tax collectors and those who have to pay, will still remain. A broad based tax system is supposed to be more acceptable to tax payers but most tax payers do not understand the present system. It is so complicated that even chartered accountants are unable to understand it. In a recent report on the reform of local taxation in Scotland it was claimed that a majority of those responding to a survey said that they understood Income Tax. This is very unlikely to be true and their responses were probably based on their familiarity with Income Tax. Everybody has heard of Income Tax. Most people believe that Income Taxes are progressive but in reality they are not. The rich have many ways of avoiding Income Tax such as investment in provision for pensions and the very rich often use the option of registering their riches offshore. The ability to avoid Inheritance Tax on the landed property they own means that this tax has become a voluntary tax for the rich. VAT is the worst of all the harmful taxes. It is the largest of the indirect taxes and affects poor people much more than the rich. The poorest fifth pay 31% of their take- home pay in indirect tax, the richest fifth pay 13%. Because the subject of taxation and its impact on all aspects of peoples’ lives is absent from almost academic courses in economics, it is seldom debated in most public media. The principles of Political Economy are unknown to the majority of the population.

When speaking about tax reform and the benefits to the economy of taxing wealth instead of earnings, a definition of wealth is rarely given, but it is implied that landed property should be the target for taxation. Using the classical definition of wealth, it is wrong to tax wealth because the creation of Wealth should be encouraged, not discouraged by tax. Many have increased their riches more from the increase in the price of their houses than from working but most of the increase in the market price of houses is the increase in the price of the land they are built on, not the price of the house itself. Land is not Wealth. Wealth is created by Labour and Capital, using Land (which includes all natural resources). This leads to the conclusion that the main source of government revenue should not be Wealth but the Annual Rental Value of Land and Natural Resources, most of which is obtained, unearned, by those of us who own landed property.

The need for tax reform is greater in Scotland than in the rest of the UK because its population is, on average, older and the proportion of those of working age is becoming smaller. The Scottish government has had sufficient powers for several years to reform the tax system but has never made significant use of them. It could have replaced Council Tax and Business Rates with AGR, which would have dramatically improved the funding of local government, which has been recommended by its own Commission on Justice and Fairness. Since 2016 it has had the power to abolish Income Tax but refuses to listen to those of us who have made the case for replacing it with AGR. The Scottish government is focused on independence but political independence will not lead to economic independence for the people of Scotland without radical tax reform. Any government’s economic policy which is based on continuous borrowing to make up for its budget deficits will devalue the currency through inflation and widen the gap in inequality. A radically reformed system for obtaining government revenue will obviate the need for government borrowing.

One major obstacle to radical tax reform is the vested interest of the rich who benefit from the present system. They wish to become even richer and have little regard for those who become poorer. There is no chance of reform without the subject of Taxation becoming part of the curriculum in all schools, colleges and universities. People have been kept in ignorance of the principles of Political Economy and are unable to challenge politicians who are influenced much more by the financial support they get from the rich than by the plight of the poor. The scourges of financial and health inequality will not be removed without radical tax reform. 

Dr. Duncan Pickard, a member of the Scottish Land Revenue Group. He is a landowning farmer.