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Think of the economy as a car

Written on . Posted in Taxation.

This comment turned up recently in response to the blog Tax Haven Explosion (below) on the website of Tax Justice Network. TJN is running a campaign against tax avoidance, in particular against tax havens. Now the obvious solution is to switch as much taxation as possible onto property charges, preferably on the rental value of land. That puts a stop on the whole thing at the outset. Any other approach is like that of a householder with leaky plumbing, searching for better buckets and mops to try to keep the floor dry, when the answer is to fix the leaks. When the suggestion is put that the solution to what they are complaining about is to replace taxes with a land rental charge, the response that always comes back is that “Land value taxes are something we have always supported – but only as part of a comprehensive tax system. To argue that land value tax should be the only tax is simply not workable.”

This reply put the case elegantly.

The obvious rate of Land Value Tax (LVT) is 100%. This has been advocated by many over the centuries. Is this what TJN supports? Or is this what it declares to be “not workable”?

With 100% LVT, any government but the very worst would be running big surpluses (Hong Kong has had chronic surpluses through collecting land rents).

How could TJN justify collecting things like Income Tax, VAT or Corporation Tax while running such huge surpluses? It doesn’t even make sense when the net yield from such taxes would be negative (reducing LVT by more that the amount collected)!

Full LVT may be “simply not workable” as you say. Taxes with negative net yields might be a good idea (to ensure the “comprehensive” system you call for). But I have seen neither viewpoint justified on this blog. In fact, your blog seems to convincingly show that (for example) Corporation Tax is simply not workable as transfer pricing, off-shoring and havens are exploited by the rulers and their backers. Shouldn’t this be removed from your “comprehensive” system?

Think of the economy as like a car. The only place you need friction is between the tyres and the road! A “comprehensive” system of deliberate engine friction, gearbox friction, transmission friction would be engineering lunacy. So it is with tax frictions in the economy.