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Shouldn’t taxes be based on ability to pay?

The case for Income Tax, both national and local, is that it is based on ‘Ability to pay”. It is a flawed concept, for it takes little account of how the taxpayer has come by his ability. In any case, present-day taxes supposedly based on ability to pay are frequently unfair or worse.

Direct taxes such as income tax, corporation tax, or capital gains tax, are open to anomalies, avoidance, and evasion. Indirect taxes like customs duties, value added tax, or motor fuel taxes take no account of the financial standing or the obligations of the buyer of the goods affected. It does so happen, however, that landholders are in a perfect position to be able to pay, for they have an asset, land, whose value is derived from and reflects its capacity to produce a return with the appropriate input of labour and capital.

LVT is thus payment for benefits received, compensation to the rest of the community for exclusive use of a particular site. What the landholders achieve thereafter, they are free to enjoy untaxed or, depending on how high the land value levy is set, taxed at a much lower rate. What could be fairer than that?

The benefits received by virtue of paying rent for exclusive use of a plot of land need not always be for purposes of economic exploitation. Land might, for instance, be enjoyed for residential use. Indeed, site value is being paid to-day either in the purchase price of a house or in the rent handed over to its owner. LVT captures the rent of land for public revenue and allows removal of taxes from man-made wealth.

“The amenities provided by natural surroundings, society, and government, make some places so obviously more congenial than others. Justice demands that those who enjoy these amenities should pay for the privilege according to the degree of benefit accruing to the position they occupy” – Sir Kenneth Jupp (“Land & Liberty” magazine, Spring 2000).

Essential government services must obviously be paid for somehow. A tax should be:

  • Equal and equitable in its burden
  • Certain and not arbitrary
  • Convenient as to the time and manner of the levy
  • Economical: inexpensive to collect and not unduly obstructive and discouraging to the taxpayer.

Land value taxation (LVT) meets all of these criteria.

Powerful support for this view is provided from Australia. Brisbane City Council set up a Committee of Inquiry into Valuation and Rating, under the chairmanship of The Hon. Sir Gordon Chalk, K.B.E., LL.D. (Deputy Premier and Treasurer of Queensland, 1965—1976).

The following extracts are from Volume 1 of the Committee’s Report, dated 26th. September 1989:

Should citizens be penalised because they worked hard and applied their skills and labour? If people acquired wealth by anti-social means, this should be remedied by law enforcement agencies… Otherwise, if hard work, energy and enterprise were desirable attributes, and if increased productivity was a desirable goal, an undiscriminating tax on incomes or wealth per se was illogical and not in the public interest.

Within the Committee it was strongly argued that income and corporate taxes and (in a time of structural unemployment, perhaps most of all) payroll taxes were inherently ill-conceived. Logically, revenue-raising should not be concerned with ability to pay… The most logical taxes were:

(a) those which focused on the use or possession of the community’s natural resources (of land, sea and air);
(b) charges for the use of services or facilities provided by the community;
(c) charges, fines or contributions to offset costs imposed upon the community; and
(d) taxes or contributions to offset special benefits conferred upon particular groups or sectors within the community. While many of these contributions to revenue would tend to fall most heavily upon those who had the greatest ability or capacity to pay – because they used more resources or consumed more services – they would do so coincidentally and not because of their ability to pay.

Considerations of equity and efficiency led the Committee to a fundamental and, in its view, logically unassailable decision, namely to prefer the benefit principle rather than ability-to-pay. Thus the Committee sought to avoid equating revenue-raising with simply taxing wealth… The legitimate generation of wealth through labour, skill and enterprise should be encouraged rather than penalised.

Exemplifying the maxim that taxing capital drives it away while taxing land forces it into use, an improved value tax [i.e. one on man-made improvements such as buildings] is not neutral in its effect and operates to discourage development by effectively penalising it.

A tax on unimproved land value was undoubtedly efficient… Ownership or occupation of land was primarily, if not exclusively, a benefit the components of which were its natural attributes and the public works and services available to it, together with the less tangible but nevertheless real benefits of membership of a cohesive organised society.

Land, like air and natural water, is a community resource the exclusive use or occupation of which by individuals should be paid for according to the extent of the benefit they enjoy. If all land in the city were valued frequently and accurately and in accordance with the use of it permitted by the city’s town planning controls, a land value tax should be an accurate reflection of the benefit derived from its use or occupation.

A land value tax… bears most heavily upon those who have the capacity to own the most valuable land. Thus, without being aimed at the wealthy, it automatically (and equitably) also performs a redistributive function and effectively achieves cross-subsidisation.

While tourists and non-residents use or benefit from city services, they contribute in other respects to its prosperity. A share in this prosperity should… properly be recouped for the city through the increased value of rateable land on which, for example, accommodation and entertainment facilities are erected.

The following extracts are from Volume 2 of the Committee’s Report, supporting information: [J D Tucker (Department of Government, University of Queensland, and member of Committee of Inquiry): Some revenue-raising options] [The references to Mathews are to “The Mythology of Taxation”, by Russell Mathews, Reprint Series, Centre for Research on Federal Financial Relations, A.N.U., Canberra, 1984]

According to him [Mathews], it is clear that… income is not a satisfactory measure of ability to pay tax; that because of the opportunities for avoidance and evasion which it presents the income tax ranks low on the overall scale of tax effectiveness and provides differing opportunities for non-compliance for different income classes and groups of taxpayers; that a nominally progressive rate structure does not necessarily make the rich pay more tax than the poor, although it is likely to make wage and salary earners pay more than other groups with comparable abilities to pay tax; that an income tax is consequently a weak instrument for achieving vertical and horizontal equity.

The virtue of rates in terms of their inescapability is… probably underestimated. Mathews underscores this point when he says: The fiction that people pay the tax they are supposed to pay ignores the fact of tax avoidance and evasion. The tax system has generally been designed without any thought to the effectiveness of particular taxes, defined as the relationship of actual collections to nominal or potential collections… If tax reforms are to be effective they must start from the position that we will all avoid taxes to the extent that there are incentives and opportunities to do so; and that many of us will also evade taxes to the maximum extent possible… It follows that tax reforms must have regard to tax effectiveness – the prevention of avoidance and evasion – as a major policy objective in its own right.