According to this ONS report, net investment in the UK is much weaker in comparison to other Organisation for Economic Co-operation and Development (OECD) nations. When we look at non-government expenditure on net investment, the UK is ranked as the lowest of any OECD nation.
Obviously, this is bad news. We keep hearing about the productivity puzzle and how we can solve it. If we can solve this issue of low investment, we can make some progress in achieving the productivity growth that the OBR forecast at the Spring Statement 2018.
Solving the productivity crisis will lead to higher wages and a growing economy. Both of these will help answer other questions such as how can we get more people onto the housing ladder?
So, what can we do, I hear you ask.
Under the Coalition Government, the Treasury cut Corporation Tax. Between 2010 and 2018, Corporation Tax fell from 28 percent to 19 percent, and we expect the Government to continue lowering it to 17 percent by the end of the parliament.
This was a good idea to give us a competitive advantage over other countries and it worked. Corporation Tax revenue increased, partly as a result of these cuts leading to more businesses operating in the UK.
However, we also raised taxes elsewhere on businesses, in particular on businesses that wanted to invest heavily. By doing this, we ensured that we did not reap the full reward of all of these businesses moving to the UK.
To offset some of the lost revenue in the short term, Osborne decided to cut capital allowances. Capital allowances allow companies that invest to write off some of the capital costs of the investment from their tax bill in the same way that they can write off other costs such as office and staff expenses.
According to the Oxford University Centre for Business Taxation the effective marginal tax rate on new investment had risen, despite Corporation Tax being cut. Investing in new equipment or machinery had been disincentivised, which in turn dampened the economic gains from lowering Corporation Tax in the first place.
Whilst capital allowances may not grab the same headlines as Corporation Tax, it is an area that the Liberal Democrats should take ownership of if it wants to boost business in Britain. By extending the capital allowances on offer to business, we can get companies investing in new equipment that will, in turn, boost productivity and wages.
* Collingwood is a Liberal Democrat member in London who is known to the editorial team.
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Guess the combination of Brexit and a potential Marxist govn is not an inspiring one. Also the large disparity between corp tax and income tax must encourage tax avoidance at the lower levels. But great to see that dropping tax rate has increased the tax take (as has dropping the top rate of income tax) which should leave Labour running around like a headless corpse.
Not sure what the future is for UK Inc, the future for the consumer via the internet is to eventually buy directly from the manufacturer, taking out several layers of profit for retailers and distributors… how that boils down to whether the factory should be in China or UK I have no idea. Or whether than ties in with the govn’s idea of free trade.
I wonder what the effect on investment would be of simply banning zero hours contracts. And taxing the likes of Amazon properly. And, on behalf of its users, taxing social media companies for the exploitation of ‘the people’s data’?
With that revenue we could of course do something about capital allowances. But also, via negative income tax, to ensure that we have a full-on campaign against poverty. Your concentration on capital allowances and corporation tax amounts to little more than the old call for ‘trickle down’ measures.
You are either a Tory or a Liberal Democrat. You can’t be both.
“We keep hearing about the productivity puzzle and how we can solve it………….Solving the productivity crisis will lead to higher wages and a growing economy.”
I’ve tried to stake my claim of a “Martin’s Law” which states that nearly everyone gets nearly everything to do with macroeconomics the wrong way around. This is no exception.
Why would an industrialist/capitalist worry about low productivity if wages were also low? Why would it make sense for a garage/service station operator to set up one of those manual car washes we’ve seen springing up in a few places if wages were high? It would make more sense to install an automatic car wash. Or why would a farmer/market gardner invest in a machine to pick strawberries if it’s cheaper to bring in overseas workers and and flout the minimum pay laws by demanding they work for 12 hours for 8 hours minimum wage pay?
There’s really no puzzle about low productivity providing we are looking through the right end of the telescope. Low wages lead to low productivity employment.
The Oxford Centre for Business Taxation? Aren’t these the ultra free marketeers who not that long ago called for the abolition of ALL Corporate Taxes and the creation of new forms of VAT i.e. increased tax on the general public as consumers to make up the shortfall.
productivty is rising. And while I agree with the central point of the article, the impact of technology is a factor not easy to measure, and as the UK has one of the very higheest take ups of e commerce on earth, that may be the reason for the discrepancy.
@ Sean Hyland,
“Aren’t these the ultra free marketeers who not that long ago called for the abolition of ALL Corporate Taxes and the creation of new forms of VAT i.e. increased tax on the general public as consumers to make up the shortfall.”
I’m still thinking about this, I haven’t totally made up my mind but we seem to be in an era where it’s just not possible to tax the multinational corporations effectively. They’ll just move their notional profits from a high taxation jurisdiction to a lower one by the mechanism of transfer pricing and other internal accountancy measures.
So possibly there is a case for giving every multinational company, like Starbucks, Amazon, Ebay etc a zero rate of corporation tax. But on the other hand we impose a turnover tax to make sure we do get at least something out of them.
@Sean Hyland
The OECD labels corporation tax as the most harmful tax to economic growth. They found that over a long period of time, the burden of the tax falls on middle-management and the lowest paid in a company. It’s a very poorly targeted tax. We should move taxation away from income and onto land and consumption.
https://www.oecd.org/tax/tax-policy/41000592.pdf
“This paper investigates the design of tax structures to promote economic growth. It suggests a “tax and growth” ranking of taxes, confirming results from earlier literature but providing a more detailed disaggregation of taxes. Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption. The paper breaks new ground by using data on industrial sectors and individual firms to show how redesigning taxation within each of the broad tax categories could in some cases ensure sizeable efficiency gains. For example, reduced rates of corporate tax for small firms do not seem to enhance growth, and high top marginal rates of personal income tax can reduce productivity growth by reducing entrepreneurial activity. While the paper focuses on how taxes affect growth, it recognises that practical tax reform requires a balance between the aims of efficiency, equity, simplicity and revenue raising.”
If these ultra free marketeers are advocating for the above then I support them wholeheartedly.
Peter Martin this is not my field of knowledge but I understand the basic concept of transfer pricing and fear that the clever internal accountant will just find ways to continue to move whatever taxes put in place if they can. I don’t know what the answer is but I am not hopeful that any government on its own can address this. I am happy to hear your or any others ideas. At the moment looking to increase my knowledge on land value tax etc. Can’t say I’ve come across much on revenue/turnover taxes so will look into and welcome any links etc.
Zak I didn’t specify Corporation Tax i said ALL Corporate Taxes. My understanding is that they are not in favour of ANY taxes on companies only taxes on consumers. If that is correct then are you sure you wholeheartedly support them? Can’t see it being a vote winner for any party. If wrong then happy to be pointed in direction of alternative views from them. Many thanks for the link i will read it asap as keen to increase my knowledge in this area. As said above to Peter Martin it’s not my area of expertise so happy to add to my knowledge.
@ Sean Hyland,
Reforming the company tax laws isn’t something anyone has any real expertise in IMO. If they have they aren’t allowed to put it into practice. The Lib Dem idea seems to be that the Nation State is powerless against the multinationals and so countries need to band together to provide an effective counter to their power.
It sounds a plausible idea but when we look at how it all ‘works’ in the EU we can see that it doesn’t. Ebay UK doesn’t, as eBay users will notice on their invoices, receive any of the fees received from UK customers. Instead they are channelled through EBay Luxembourg where the company has negotiated a favourable tax deal.
https://www.theguardian.com/business/2016/oct/08/ebay-pays-11m-uk-tax-on-revenues-it-told-us-investors-were-11bn
We should take a look at what real powers the Nation State still has after Brexit. We have armies, a police force, tax inspectors, civil servants etc and we can make our own laws. So it’s really down to us to tell eBay just under what terms they will be allowed to do business in the UK. Paying £1 million in tax on a £1 billion worth of revenues is just not acceptable. Either they cough up or we impose flat rate turnover tax to make that more like £100 million in taxes would be my suggestion.
They aren’t going to like it but they aren’t going to leave if they are still making much more than this afterwards.
“Corporation Tax revenue increased, partly as a result of these cuts leading to more businesses operating in the UK.”
What do you mean ‘partly’? So lets suppose tax falls from 28% in UK and France to19% in UK but no change in France. Uk thus loses approx 1/3 of its revenue. However new industry moves to the Uk from France to take advantage, and UK ends up with more revenue than when it started. The equivalent of 50% of the number of companies in the UK before the change, now must move to the Uk from France to just break even on the tax take. Again making an assumption that Uk and france are similar, that means half of all French industry has moved to the UK and their tax take has halved, while ours has not changed,
For the Uk to make a significant gain we need to do better, perhaps attract all the industry from France, and then our tax take would be 1/3 larger than when we began. But then theirs would be zero.
Final result, the combined governments of France and the Uk are getting only 2/3 the tax revenue they did when this began. See the flaw?
@Peter Martin, other examples such as Starbucks UK operations being under license to a Starbucks company in Luxembourg wasn’t it. Funnily enough the license tee varied year by year and was usually near enough the profit of UK operations. Google selling ads etc in UK but contracts apparently signed in Eire. I’m sure their are many more.
I agree with you that a courageous government could take more action but not sure such a thing exists. Apparently we lack a decent Companies House these days and few checks made as per suitability of directors or company activities i.e.money laundering,avoiding vat etc.
@ Tom Purvis,
“Better for Business, Better for Britain”
I don’t believe any party should be anti business per se but at the same time we shouldn’t be a soft touch for the multinationals. If you’ve followed the comments by Sean, David and myself, I think we’re all saying that it doesn’t necessarily follow that what is always “better for business” is better for the residents of Britain. Is it “better for business” if we let the multinationals get away without paying their taxes? It’s better for them but it isn’t better for those UK based businesses who do pay their fair share.
Starbucks, eBay, Amazon, Google, FB etc aren’t the only ones who are flouting the system. But they are probably the better known.
We shouldn’t always be looking for “a competitive advantage”. As David Pearce points out that’s just a race to the bottom. We’ll all end up competing for crumbs if we play that game.
@Sean Hyland
Corporations don’t pay taxes. People pay taxes. When you setup a business a mythical beast doesn’t spawn simultaneously to bear the burden of corporate taxes, no, the people bear that burden, so any tax on a company is a tax on the people. Corporations don’t ever pay taxes, they are transfer entities and the tax burden will be transferred to either capital or labour, mostly to labour anyway.
If you want to tax the wealthy then do so, corporate taxes do not do so. There is a reason why elimination of corporate income taxes enjoys such an enormous consensus among economists.
Income taxes as a whole (personal income taxes and corporation income taxes) are very damaging to economic growth as a whole. You can do 3 things with your money – invest, consume or save (saving is deferred consumption or deferred investment). Income taxes depress all 3 activities while a consumption tax (such as VAT) only hits consumption, and in a world where we’re over-consuming, we should be shifting taxation away from income and onto consumption. It’d ideally be land taxes but that’s very hard because of the politics and the media surrounding it, so VAT is preferred to income taxes, so something like 35% VAT and then to make sure it’s progressive we should offer a rebate to the lowest paid in our communities.
Countries like Germany, Japan and South Korea and so on still had higher rate of investment (as percentage of GDP) than the UK despite having a well over 20% corporate tax. Many other things also matter, such as technical education, scientific base and infrastructure, all of which require government investment, and thus taxes.
Zak, Sean Hyland – Land taxation is great if we can work out how to impose it in practice. But taxes on consumption like VAT will drive voters away.
For top personal tax rate, I prefer to split between two groups: STEM and industrial entrepreneur group, and the rest. The former group might get some preferential tax treatments as long as they use that advantage to invest, but the latter group would have to pay in full. In the long run, for national development, only the STEM and industrial entrepreneurs matter because they drive productivity and technological progress. The rest does not.
Thank you Zak for the link to that OECD report.
It states, “a shift from personal income to consumption taxes would reduce progressivity. Similarly, shifting from corporation to consumption taxation would increase share prices … and wealth inequality as well as increasing income inequality…”
Therefore they conclude any change in taxation away from corporation or income taxes to consumption would reduce equity.
It also states, “few countries manage to raise substantial revenues from property taxes”.
Therefore as liberals we should conclude that while some tinkering around the margins can be done, no huge changes are desirable because of the adverse effects on economic equality and our understanding that large economic inequalities reduce freedoms.
@Thomas
Depends where the investment’s going – Germany, Japan and South Korea are much further ahead of us in manufacturing and there are gains to be made year-on-year when it comes to manufacturing investment. It’s easy to automate work in that sector compared to financial services. Having said that though, we did break tech investment records last year.
https://www.forbes.com/sites/davidprosser/2018/01/05/uk-breaks-tech-investment-records/#4e84719248b3
“New data compiled for London & Partners by the analyst Pitchbook shows that venture capital investment into the UK’s tech sector reached an all-time high in 2017. UK-based firms attracted £2.99bn of new funding – almost twice as much as 2016’s total of £1.63bn.
The figures show that the UK – and London in particular – remain the favourite destination in Europe for technology investors. UK-based firms attracted almost four times more funding in 2017 than Germany, where investment totalled £694m last year, and more than France, Ireland and Sweden combined. London-based technology companies also raised significantly more venture capital investment than those operating in any other European city, including Amsterdam, Berlin and Paris.”
Quick note on corporation tax as well, the headline tax rate (the rate that’s advertised) usually ends up being much different to what companies actually pay (the “effective tax rate”). The article I’m linking here is US-based but mentions all developed economies:
https://www.npr.org/2017/08/07/541797699/fact-check-does-the-u-s-have-the-highest-corporate-tax-rate-in-the-world
“Companies may start at a high corporate tax rate in the U.S., but once they go through all the deductions and credits, they don’t end up paying an unusually high amount compared to companies in other nations.”
Gonna follow-up with a comment on VAT and land value taxes to address you and Michael once I get a break from work (Friday afternoons shouldn’t be this busy!)…
@Zak many thanks for the reply. I get the concept of corporations as non living legal entities as come across before in terms of limited liability etc.
My understanding therefore is this scenario, if wrong happy to be corrected. I have idea for Business so establish corporation with our without others. I contract with suppliers i.e.premises,utilities,raw products,parts,marketeers etc they are other corporations. I employ Labour to produce product which I then hopefully sell for profit. All this obviously depends on nature of corporation or business.
In terms of what you are saying neither I or any other of the corporations in this process should pay any tax on the profit made etc as this is not efficient. The only taxes should be on the incomes of employees and on consumers of the product. Taxes could be paid on land used in the process.
I am therefore to be viewed as an employee of the corporation? As such do we scrap the present ability to take a nominal salary and claim business expenses before taking dividends/profit share/options at a lower tax rate as present? Yes I want a return on investment but is that not just another way of saying income and should be taxed at existing personal tax rates as per other employees? What do we do about ability to carry previous business losses forward to offset against present or future profits? Noted on another post on LDV questions on these kind of matters ‘re expenses etc.
What if the corporation has no land assets i.e.rents, is there then dual taxation on owner and renter? Alternatively if have no land assets as is not manufacturers etc but operate from small office i.e.online only service provider but may have large turnover and profit? Is there an actual consumer for all corporations and if so how do we identify them to tax?If self is only person in corporation how am I taxed?
Thanks to you and others for opening up a fascinating subject to study. So many questions and options to look into. As said before welcome direction/links to other sources of information. Going to be flat on my back in a bit following surgery so amassing reading material to keep me occupied.
@ Zak,
“Income taxes as a whole (personal income taxes and corporation income taxes) are very damaging to economic growth as a whole”
Do you have any data to back up this claim? Income taxes were high from the 50s to the 70s but growth was high too. Even in the USA the top rate of income tax was never below 70%.
“in a world where we’re over-consuming, we should be shifting taxation away from income and onto consumption.”
Regardless of the ethics of capitalism we have to understand how it works. If we want growth then we have to have more consumption. No-one is going to build planes, cars, TVs, computers etc if they aren’t going to sell.
Imposing taxes, whether in terms of income or on consumption generally, will depress the ability of everyone to buy up what is for sale and has been produced. This allows the Government enough fiscal space to do its own spending without causing inflation.
Indirect taxes are neither more nor less virtuous than income taxes in controlling consumption. But you say want ‘economic growth’? And have lower consumption? Come on, you have to choose one or the other!
If we want lower consumption we have to make less stuff. That means we have to work shorter hours and take longer holidays. Or we can deliberately throw the economy into recession/depression have have much higher levels of unemployment.
@Sean Hyland
Not exactly – I’m not in favour of eliminating just corporation tax but also income tax. If you were to keep income tax but get rid of corporation tax then it’d make for a very easy path for tax avoidance. I’m in favour of replacing both with a consumption tax and land value tax, and on the subject of a land value tax, I’d recommend you read this:
https://forward-thinking.org.uk/land-value-tax-reduce-tax-bill/
@Michael BG
Aye, the main issue with a consumption tax is that if it exists as a flat tax then it’s nowhere near as progressive as a progressive income tax. Since that’s the case, it then becomes our job to make the tax progressive and one way to do that would be to substantially increase cash transfers to those not working or those that are being paid below x number of pounds each month. In my mind, you’d get rid of income taxes (both personal income tax and corporate income tax), raise VAT to 35% and then use that tax revenue to substantially boost Universal Credit so while the tax is flat, viewed overall, the tax is progressive because it’s used to increase benefits for the poor. We’re looking for a net gain for the lowest paid in society. We already exempt basic necessities from VAT but we can do more with it while reducing or eliminating other taxes.
Few countries raise little revenue from property taxes because they don’t exist to replace income tax but to live alongside it. In many cases, these countries set their property/land taxes to something really low, usually around or below 1%. I think in the case of Australia they exempt primary homes so only secondary properties are taxed. If you wouldn’t mind then check out the link I mentioned earlier in this comment. The next article I’m linking states that a 5% land value tax would bring in approximately £92bn each year. It’s a very efficient tax and primarily affects the 1% of the population.
https://institute.global/insight/renewing-centre/home-truths-progressive-vision-housing-policy-21st-century
“An LVT tax of five per cent LVT would raise £92 billion each year — three times the council tax revenue. The new revenues would not only be able to fund large-scale investment in housing construction—it could enable a major infrastructure programme to stimulate economic growth and job creation on a much larger scale.”
@Peter Martin
There’s a massive paper on it worked on by the OECD. I linked it earlier in the comments: https://www.oecd.org/tax/tax-policy/41000592.pdf
It’s obviously a long paper but if you get the time, read page 44 and the small paragraph in page 45. The whole paper argues that income taxes create bad distortions and while consumption taxes are distortionary as well, they’re not as bad as income taxes. The best tax is the one on immovable property because land is fixed and inelastic in supply so a tax on land creates little to no distortions.
Also, it’s quite difficult comparing the modern day to the 50s-70s period. We’re probably talking about the greatest period in economic prosperity at least in the past 1.5 millennia and it was all spurred on from R&D military spending done because of WW2. We’ve never seen greater increases in technological innovation and it’s technology which increases productivity and that in turn increases real wage gains.
“Imposing taxes, whether in terms of income or on consumption generally, will depress the ability of everyone to buy up what is for sale and has been produced. This allows the Government enough fiscal space to do its own spending without causing inflation.
Indirect taxes are neither more nor less virtuous than income taxes in controlling consumption. But you say want ‘economic growth’? And have lower consumption? Come on, you have to choose one or the other!
If we want lower consumption we have to make less stuff. That means we have to work shorter hours and take longer holidays. Or we can deliberately throw the economy into recession/depression have have much higher levels of unemployment.”
Ehh, kinda? The biggest thing that grows the economy long-term is investment and that’s entirely different to consumption. Investment, being the accumulation of capital goods, is the biggest driver in increasing living standards and increasing productivity, and The Economist goes so far to say that “PRODUCTIVITY growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour” (https://www.economist.com/node/14844987). All this is done by capital investment. You’re right that income and consumption taxes both depress the ability to buy but at least with a consumption tax I’m not penalised for saving or investing.
@Zak thanks for the link which I will read.interesting figures you supply but by what basis do you come by them? Have these proposals been modelled or analysed to provide these figures?
@Sean Hyland
The figures in the Forward Thinking article are sourced from the ONS. On getting VAT to replace income taxes, I’m going off Paul Kirby’s (used to work at KPMG, was former Head of Policy Unit under the Coalition government) article on VAT.
https://paulkirby.net/tag/vat/
He doesn’t mention land taxes which is what I’d use to improve the system he’s advocating for in his article. But yeah, if you do get the time, read that short Forward Thinking article on land taxes and Kirby’s article on VAT. Both are quite short but were heavy hitting in my eyes and could lay the groundwork for radical but effective policies, something the party’s being criticised of having a lack of.
“Firstly, let’s remove all the exemptions and special rates for VAT and simply charge a flat rate on all consumed goods and services. That would raise another £60bn. If we then increased VAT from 20% to 33%, that would raise another £100bn, giving us a total of £260bn from VAT, compared to the current £100bn. We would have replaced the money lost by our abolition of income tax. Combined with the existing £53bn of specific consumption taxes (eg alcohol), this would mean that just over half of our revenues came from consumption, compared to little more than a quarter at the moment. This is not unheard of in the world – e.g. Mexico has a similar reliance on consumption taxes.
What would be the effects? Too often this discussion is strangled at birth by hysterical claims that consumption taxes are regressive and only income taxes are fair. But this argument ignores the question of what government does with its spending. It looks at only side of the fairness equation – what do people pay in, rather than the balance between what they pay in and what they get out. It’s entirely possible that progressive public spending can more than cancel out the regressive effects of a particular form of taxation.”
@Zak so what you are saying is there are many sides of the argument you can come down on. My first thought is that consumption tax seems regressive in the same way that a flat rate income tax proposal is also seen as a regressive tax in that it falls hardest on lower income earners.
It seems to rely on the willingness or ability of any government to take steps as you indicate to carry out specific measures to balance this unfairness. Also does this not require coming together of various governments as OECD suggests, admittedly only had quick look under the section on consumption taxes and it seems there are yet more reports to read..
@Sean Hyland
Yes, you’re right, the downside is that it relies on the willingness of governments to be proactive in balancing the unfairness as you’ve pointed out. If we can prove it is an effective system however then future governments will come on board with it. Same thing happened with the introduction of the income tax during peace time, the abolition of the Corn Laws etc… Plus, at the end of the day, we can’t be fearful of what future governments will do otherwise we’ll never get anything done.
Zak – people would not like the fact that City financial speculators and bankers are also exempt from corporate and personal income taxes. Some populist campaigns form other parties will kill that issue right away.
And not all rich people deserve tax exempt. Folks like hollywood actors, entertainers, financial speculators, cafe/restaurant owners, land-owners…. contribute nothing to long-run productivity and economic development, they are not actual entrepreneurs. For these groups, I want to tax the hell out of them. The only mid- to high-earning guys who deserve tax cuts are actual entrepreneurs, innovators and inventors and other STEM/industry/manufacturing-related professionals like doctors, engineers or scientists.
And we also want corporates to actually invest tax exempts rather than using it to speculate in markets or to just pay more bonuses and dividends (what actually happened with Reaganomics). Using capital gain tax with a focus on taxing short-term capital would help a bit.
“The biggest thing that grows the economy long-term is investment and that’s entirely different to consumption. Investment, being the accumulation of capital goods, is the biggest driver in increasing living standards and increasing productivity, and The Economist goes so far to say that “PRODUCTIVITY growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour” (https://www.economist.com/node/14844987). All this is done by capital investment” – I agree with Swan-Solow model.
However, this is about physical investment in manufacturing, industry and infranstructures, not “financial investment”.
By reducing consumption and prioritize savings, we also need to press our exports to replace lost domestic demand. In other words, we will have to resort to neo-mercantilist policies, like keeping the pound low and introducing import restrictions of all forms. Oh, why not taxing imported consumption at a higher rate than domestic consumption, as this will also pressure consumers towards buying “made in UK”?
For export promotion, we should think again about international aid. We must increase “aid” in the form of ODA for developing countries, which means we will invest in infrastructure development in their countries but coercing them to buy our inputs and equipment for those projects.
Zak – I have another problem. Here’s some real simple math. A persons earns $1 billion in a year. Assume they spend $100 million on what is defined as “consumption”, ten percent of their income. If the consumption tax is 30% their total tax will be $30 million. Divided by $1 billion this results in a tax rate of 3% on their $1 billion of income. This is ridiculously small compared to current rates even after taking into account tax avoidance and evasion of all kinds. This must vastly shift the burden to other tax payers, the middle- and lower-class.
Besides, the rich normally spend most of their money in buying financial securities, real estates and other stuff like art works or precious metal, most of them are not classified as “consumption”. Do you have any plan to tax these things?
@ Zak,
In general, there is nothing wrong with the introduction of a broader LVT at the National level to replace or reduce other taxes currently levied. However, the design of a workable tax system is quite different than just raising income from the most ‘efficient’ means. Tax is more than just about ‘revenue raising’. Most people tend to forget this or assume otherwise. It is mainly about regulating aggregate demand. But there are other aspects of it too. We impose taxes on the polluters to reduce pollution. We impose taxes on ourselves to stop us smoking and drinking too much.
Aggregate demand is composed of a mixture of public, private and overseas spending. The Government, as a currency issuer, has a responsibility to conduct its fiscal policy in a countercyclical manner. In other words if we all are spending too much the Govt needs to spend less to cool down the economy. And vice versa.
I haven’t seen any analysis provided by Georgists , ie those who favour a LVT as a single, (or nearly single? ) tax to assess the impacts of the changes in non-government spending of such a tax and how this would allow Govt fiscal policy to be adjusted as required to sensibly regulate the economy.
I suspect deliberately so. The Georgist concept has been recently been enthusiastically rediscovered by quite right wing libertarian types who reject the notion of such a role for Government. A concept of overall fairness which leads to a system of ‘progressive taxation’ and which means that those who earn the most pay most taxation doesn’t sit well with them (or you?).
Yet, you do seem to recognise the role of Government in the economy when you say
“Also, it’s quite difficult comparing the modern day to the 50s-70s period. We’re probably talking about the greatest period in economic prosperity at least in the past 1.5 millennia and it was all spurred on from R&D military spending done because of WW2.”
It’s probably not a good idea to rely on wartime spending for our “economic prosperity”. But instead of having wars against each other why not try to recreate the same economic conditions with a war on international poverty and environmental destruction?
@Zak re Paul Kirby, he certainly fits the criteria for radical. Not sure what he’s up to now as the last post is 2016. He certainly thinks outside the box with such proposals as giving away all social housing for free to sitting tenants, the scrapping of libraries/ art galleries/ and the BBC because culturally we can watch commercial tv and buy books or You Tube uploads. His proposals on mental health and trade unions are different as well. Noted on another site that when at no 10 he proposed pretty much selling every service to the private sector and selling every government asset not nailed down. Also re Forward – Thinking i can find an organisation working on middle East peace or a site that has an older post about 15 possible policy proposals with a view to becoming a political party. I do recall seeing the announcement for the publication they put out as the cover is distinctive. I would welcome a more up to date link if you have it.
@Peter Martin
Yes, I’m aware of what you’re talking about – Pigouvian taxes to combat negative externalities, with the most popular ones being carbon taxes and other drug taxes (something I’m definitely in favour of). Almost every tax carries what’s called a deadweight loss and these are economic inefficiencies caused by taxation – corporation tax depresses long-term investments since if a business wants to save money to buy productive goods (otherwise known as investment) in 2-3 years, they’re taxed on their savings each year so sometimes it’s just better for the business to top their CEO up with more money to avoid paying tax. It encourages short-term action instead of long-term savings. A property tax valued on homes each year discourages people from upgrading their homes as they’d be afraid of their tax going up as a result of it. These are the examples that come to mind right now but there’s a ton of other stuff out there. The reason why land value taxation is so popular by economists is because it’s regarded as a tax which has little to no deadweight loss / economic inefficiencies. We don’t talk about the inefficiencies because there’s little to discuss there. In fact, not only does the tax have few downsides to it, it brings many positive benefits (something that can’t be said on any other tax), with my favourite benefit being that it creates tax havens where they need to exist – if a business wants to pay less in land value taxes then the only option it has is to move to a different part of the country where land values are lower and if land values are lower then it means those areas are deprived. Take the North East or Wales for example – forgotten parts of the UK results in low land values. A business is encouraged to setup a branch there vs. setting up another branch in London. More benefits can be found here:
https://i.imgur.com/uP3BoSF.png
@Peter Martin
“It’s probably not a good idea to rely on wartime spending for our “economic prosperity”. But instead of having wars against each other why not try to recreate the same economic conditions with a war on international poverty and environmental destruction?”
WW2 resulted in governments spending absurd amounts on military R&D and neglecting every other part of the economy. This meant that living in Britain in those years were hell even if you were to ignore enemy attacks on national soil. The positives of it though? After WW2, businesses leveraged that military R&D to make huge gains in technological innovation and these innovations increased productivity and the increased productivity brought significant increases in wages and living standards. Not only that, the US carried on with this because of the Cold War. It’d be difficult recreating the same economic conditions when you consider the overall context.
@Sean Hyland
You don’t have to agree with everything the man says to advocate for only one of his positions. I’m a big fan of Hayek and the work he did on markets vs. central planning but I’m not in favour of his ideas of market fundamentalism. Same with Milton Friedman. The Forward Thinking article I linked (https://forward-thinking.org.uk/land-value-tax-reduce-tax-bill/) is still valid and was only written in January last year. Not sure what you mean on this then?
@Thomas
Not only am I in favour of VAT replacing income tax but it absolutely has to be coupled with a high land value tax. A high land value tax destroys the biggest speculative bubble – the property market. Foreign companies are buying up properties in London because they’re guaranteed to increase in value. These properties are no longer owned by people but by companies with the sole aim of making profit on them. With a high land value tax, companies stop sitting on properties because they otherwise have to pay a high annual fee to the state making the whole thing an unprofitable venture.
On your comments on physical investment, income taxes depress this which is why I’m in favour of VAT over a tax on income. I also think you might be slightly exaggerating the effects of doing that by saying we’d turn towards neo-mercantilist policies – you’re forgetting that people will have more of their money to spend/invest because they aren’t seeing £x wiped after each wage slip because of income tax. We’re not prioritising savings here, we’re prioritising productive investments since savings are just deferred consumption or deferred investment. That money’s going to be spent at some point.
On your example of that person earning £1bn and spending £100m on consumption, what is he doing with the other £900m? If he’s investing that then brilliant, I don’t think he should be taxed on it. If he’s saving it then he’s going to invest or consume at some point in the future. If he perpetually holds onto it then that’s an extremely poor idea as money’s inflationary – the value of his savings decrease as time goes on. If he’s going to buy properties or land then he’s going to be taxed on it via a land value tax. You’ll probably find that he buys up property/land since that’s what the 1% end up doing if you check the next 2 images:
https://forward-thinking.org.uk/wp-content/uploads/2016/08/Upper-bounds-of-net-property-wealth-600×337.png
https://forward-thinking.org.uk/wp-content/uploads/2016/08/Comparison-of-property-wealth-and-income-tax-600×337.png
Zak – so what if he spend them to speculate in financial markets, to trade bonds, derivatives and shares (note that you only really invest when you buy primary securities) and forex. These are not real investments. Next, what would you do if corporates turn out to use the tax exempt to pay more dividends rather than making real investments, since this was what actually happened in the US following Reaganomics? They may also hoard stuffs like gold, precious metal, jewellery or art works, how would you tax them?
Besides, politically, the idea the poor and middle class pay more tax overall than the rich is not fine at all. And as I said, not all rich guys participates in real wealth creation. Should a bunch of Hollywood actors or athletes get the same tax exempt as an industrialist or entrepreneur? Among the businesses, should a kebab kiosk get the same treatment as an aircraft maker? (My answer is no).
Besides, when corporates invest and earn profit, how would the government gain revenue from that? Remember that it is the government who provides infrastructures, nationwide education and basic research, all of which are needed by businesses. Besides, should foreign companies, especially non-EU companies, get the same treatment as British firms in this scenario?
@ Zak,
“Absurd amounts” ?? The spending on WW2 was what was necessary at the time. The National Debt in 1939 was higher, at 120%, in GDP terms than it is now. The logical position from a neoliberal standpoint was to say: “we’re broke and therefore we have no choice other than to surrender”. Keynes said otherwise in his paper “how to pay for the war. It didn’t involve having a LVT to “raise the money”. Money wasn’t a problem. Lack of oil, planes, tanks etc was. Just as lack of houses and lack of a commitment to curbing environmental destruction is for us.
The wartime economy didn’t end in 1945 as it did in 1918 after WW1. After WW1 we saw large scale unemployment return even in the 20s. There was no roaring 20s in Britain. The war time economy after WW2 kept going for another 30 years or so as the cold war simmered along. My father, as did many others in my hometown, earned his living making parts for missiles in a factory. So although we weren’t wealthy , we weren’t poor either.
The type of economy we had up to the late 70’s was known as “military Keynesianism”. Government spending, a large part of it military, created the conditions for (almost) full employment. It wasn’t just that businesses ‘leveraged’ on the previous WW2 spending. That had long since been taxed away by Govt. If those missiles hadn’t been ordered by the Government, we very likely would have been in a difficult situation. There would either have been no family income or a much lower income if that job hadn’t existed.
So the challenge is to recreate the benefits of this type of economy without the stupidity of starting a new arms race. There’s really no debt problem attached to it all. The post war generation didn’t suffer unduly having to repay debts. In fact the consensus seems to be that we’ve all done rather too well.
Corporation Tax is a tax on profit. If a company doesn’t make a profit then it doesn’t pay it, and profit is reported after investment costs are taken into account.
In other words, investment doesn’t come out of profit.
There are a couple of problems – the obvious being that profit is a number that can be manipulated, particularly if you are a multi-national, so profit can be reported in a tax haven and the paying of Corporation Tax in the UK can largely be avoided.
The other is that HMRC now earns more from Employer National Insurance Contributions than it does from Corporation Tax, since employer NICs are difficult to avoid unless you can make your workforce “self employed”.
Think about it – our tax system penalises companies for the privilege of employing people, whilst comprehensively failing to extract a fair amount of Corporation Tax from multi-nationals that benefit from the reasonably prosperous UK market.
That can’t be fair. I would like to see Employers NIC replaced with a simple tax on turnover.
Zak, I’d like to bring this discussion back down to earth.
As a VAT-registered trader I’m obliged to work as an unpaid tax collector, which increases my costs. Furthermore, I have to compete against dishonest traders who should be registered but aren’t, or who are registered but don’t declare all of their earnings. It is largely a self-policing system and in my 25+ years of experience there appear to be many small traders at the margins who play the system and get away with it – after all, avoiding a tax of 20 per cent is quite an incentive.
As a consumer, VAT increases the price of virtually all goods and services I might wish to purchase and acts as a disincentive to employ tradespeople and professionals alike.
Income tax is probably much more difficult to avoid than VAT (I’m not sure because I’ve never tried to do either!), and therefore a greater reliance on VAT relative to income tax would likely increase the scale of the black market in goods and services.
If VAT rates were lowered then the revenue received by HMRC would probably not diminish in the same proportion because there would be less incentive to cheat the system.
Therefore, for these very practical reasons I take the opposite view to you, I would far rather see income tax rates increased and VAT rates reduced – it would be fairer, easier and cheaper to police, a more efficient means of raising government revenue, would stimulate economic activity, and might act as an encouragement to honest traders such as me.
@Thomas and Nick Baird
What’s wrong with financial markets? They’re vital to any modern economy. The issuing of shares and bonds are a way to increase capital for the company which they can then use for investment. No company issues out shares/bonds willy-nilly, they do that because they’ve decided to quickly increase capital now vs. saving profits for later investment. Quickly addressing Nick here as this leads onto what he’s saying, corporation tax absolutely hinders long-term investment. If I want to save money to invest 2-3 years down the line as I probably won’t be able to make enough profit to make worthwhile investments (SME-oriented here) then I’m taxed each year on my savings (savings = profit). We’re discouraging savings for investment so companies turn to issuing out shares and bonds for investment instead of profits and this exacerbates the problem people have with ever-encroaching shareholders. You have to look at it in the context of a larger time-frame instead of a snapshot of the year.
I’m not sure why you’re saying the poor and middle class would pay more tax overall than the rich? Did you check out the images I linked to? Here’s the upper bounds of net property wealth (you can see what the top 1% hold):
https://forward-thinking.org.uk/wp-content/uploads/2016/08/Upper-bounds-of-net-property-wealth-600×337.png
And the comparison of property wealth vs. income tax:
https://forward-thinking.org.uk/wp-content/uploads/2016/08/Comparison-of-property-wealth-and-income-tax-600×337.png
“Remember that it is the government who provides infrastructures, nationwide education and basic research, all of which are needed by businesses. Besides, should foreign companies, especially non-EU companies, get the same treatment as British firms in this scenario?”
The land value tax is literally a direct tax on what people and businesses benefit from government infrastructure. You pay directly for the benefits you receive as the benefits you receive are all reflected in the land value of the land you own. Instead of a tax on x, another tax on y and another tax on z, why not lump it all into land value taxation as it taxes the land around you? If you’re a home-owner or a business and an NHS hospital is setup half a mile from where you live/work, your value of land increases. If new work’s being done on your nearest train station or a new station’s being setup then your land value increases.
@Yeovil Yokel
Taxes increase costs for everyone. They’re the biggest expenses of everyone really. Under the system I’m suggesting traders would be on a more equal playing field as you’re not having to avoid a tax of 20 percent and all profits you generate are yours. The downside being that all traders become VAT-registered traders and by removing exemptions from VAT you make VAT-avoidance much, much harder than income tax avoidance. You’d obviously still be able to claim VAT back from your suppliers if the goods you’re buying are business-related (and this is what I mean by ‘investment’).
In theory, replacing income tax and corporation tax with a higher VAT that removes exemptions and a land value tax would be easier and cheaper to police, a more efficient means of raising government revenue, would stimulate economic activity but in the case of the higher VAT, wouldn’t be fairer. This is where the government would have to step in and offer something like a £5k-10k rebate (effectively being UBI), acting as like a personal allowance threshold for VAT. Those that consume more would exceed the £10k rebate so end up paying their own money into government coffers, making sure those that consume more pay more VAT.
@Peter Martin
Sorry, ‘absurd’ was probably the wrong word to use there. I’ll replace it with ‘significant’. The goal would be to recreate the economic conditions of the post-war period without having it all crash down in the 70s and to avoid major inflation which then caused the stagflation we saw in the 60s and 70s. I don’t know if it’s possible to do that so I’d rather rework the system to be fairer and encourage economic activity against changing it all over again. I’m looking for a way to benefit both workers and businesses instead of having it be workers vs. businesses (with workers winning post-war and businesses winning since the 80s) and is why I so strongly believe in changing fiscal policy as taxation, at least today, is the biggest way the government can positively influence businesses while also increasing take-home pay for workers.
Zak has made some very astute observations here. For those interested in finding out more about the Libem approach to Land Value Tax there is a wealth of information at https://libdemsalter.org.uk/en/ and http://www.c4ej.com/
Post-war governments did not have as much freedom to manage the economy as the hoped. The level of the pound was fixed under the Bretton Woods system. Expanding the economy through tax cuts or public-spending increases was soon undermined by a rising trade deficit, producing the so-called ‘stop-go’ cycle. Interest rates were hardly an active tool of policy – they were determined largely by the need to defend the exchange rate or to fund the government’s borrowing.
Europe was able to grow rapidly as it caught up with America by importing its technology and techniques. The steady expansion of world trade opened new markets, while cheap energy kept production costs down. Rapid productivity growth enabled the economy to meet the aspirations of workers for higher living standards and capitalists for higher profits without the need for an inflationary squabble over shares of national output.
In the 1960s, Keynesian policies went a long way to sowing the seeds of their own destruction. Governments around the world tried to boost their economies: Britain ‘dashed for growth’, the US cut taxes and France and Germany took similar measures.
Inflation was accelerating as the 1960s ended, partly because Keynesianism had been applied with much less caution than Keynes would have wished. The nascent problems were exacerbated in the 1970s by an ill-advised loosening of policy by Edward Heath’s government, by a surge in commodity and oil prices and by the floating of the pound.
With globalisation, countries are more open to international trade and capital flows. Policies to boost spending at home leak out into greater demand for cheap foreign imports, and demand for British goods is more dependent on overseas markets.
Land Value Tax offers a stable tax base and a means of moderating the impact of debt fuelled housing and land speculation in the economy – the major source of instability since the 1970s.
@Zak many thanks for the reposted link it initially didn’t work for me and I had to online search hence my mention of two sites with same name. My reference to interesting document is the cover page of their document of people with their heads in the ground.
Recall reading Road to Serfdom some years ago. It wasn’t my cup of tea and maybe i view Hayek as more of a political philosopher than economist even though I know that is what he won his Nobel Prize for. Also didn’t Friedman find much of Hayek wrong?
Yeovil Yokel reminded me of the interesting issue of collection and avoidance of payment of VAT. I think it might be a little simplistic to rely on traders to act as collection agents as not all will be honest and as pointed out it creates a market advantage for the dishonest as no VAT is collected or forwarded. Also what of the issue of online traders as we already have the issues of Amazon etc recently. This is also on top of the issue of the Channel Islands, Gibraltar etc VAT schemes and the separate issue of those who set up specific criminal schemes of VAT avoidance.
I am also unclear why given the backing of OECD etc no country as far as I know has moved to introduce such a system of national taxation. Finally re Peter Kirby i take your point but have found if you already have trouble accepting that an individuals other proposals lack validity to you it colours your view of all they propose and it takes a stronger argument to convince.
@JoeB thanks for the information and links. I had started to look at some of the information on the ALTER site.
@ Zak
Please can you write an article for LDV setting out how in practice your suggestion to increase consumption taxes, abolish income and corporation taxes and increase Universal Credit to compensate the poor for the increase in prices would work?
Also you could use current figures. I found these figures:
Income and Capital taxes £260 billion
National Insurance £137 billion
Indirect £329 billion.
I know the government publishes a document on how much can be raised from increasing certain taxes and how much it would cost to reduce certain taxes. Hopefully you can find that to assist you in writing your article.
In the year ending 2017 the government spent £264 billion on welfare. I would be interested in you finding out how much of this money is spent on items which have VAT on them.
@JoeB
Cheers for your input mate. I know you’ve long been a champion of Georgism and I’ve taken inspiration from your comments on the matter. I wouldn’t advocate for a 100% LVT because of its political in-feasibility so I’d make better use of a consumption tax over income taxes to help make-up the revenue.
@Sean Hyland
Thanks for engaging with me and being understanding (same for everyone else in this thread as well). On a couple of your points, from what I remember, Hayek and Friedman agreed on almost everything apart from the issue of money. Hayek was in favour of extreme decentralisation, probably something similar to what you see with the crypto-currencies of today.
@Michael BG
Paul Kirby’s done the calculations in his article:
https://paulkirby.net/tag/vat/
With the only difference being that instead of having VAT as the central point of taxation, it’d be a combo of both land value tax and VAT. Calculating a high land value tax is more difficult however as it decreases the value of land over-time. A 5% land value tax today for example would generate around £92bn in tax revenue (see: https://institute.global/insight/renewing-centre/home-truths-progressive-vision-housing-policy-21st-century – Control + F for “92 billion” if you want a read) but might generate less a few years down the line although this’d be offset by increases in productive economic activity. Even with the value of land decreasing however, it’d still be a major source of revenue x number of years later. The next paper I’m going to link to was commissioned by Caroline Lucas and written by Andy Wightman (Green MSP):
http://www.andywightman.com/docs/LVT_england_final.pdf
On page 17 it argues a 6% land value tax would raise around £110bn.
@ Zak,
“The next article…. states that a 5% land value tax would bring in approximately £92bn each year. It’s a very efficient tax and primarily affects the 1% of the population.”
Only if we apply the 5% tax and nothing else changes. But , of course everything will change. Why would anyone spend , an amount of money on a area of land? Two reasons. Firstly they may think it will generate an income. 5% wouldn’t be a bad return in the current low inflationary, low interest rate climate. But, apply the tax and the income disappears.
Secondly they might anticipate a capital gain on the land. But why would land appreciate in value if it came with a tax liability too? The tax liability is bound to have an immediate effect.
Nothing every stays the same after something is changed in the economy. To think otherwise, should be considered a very elementary error but it’s the same error that bedevils Economic thinking generally and at Govt level too.
@Peter Martin
Your 2nd point on why a person might buy land is something we want to eliminate really. It’s one of the major contributors to high property prices at the moment – land banking and land speculation is rife and it all contributes nothing to the economy. Your 1st point is something we want to encourage since if a land value tax is applied then land owners have to make sure their land is productive to offset the tax, otherwise land owners can just sit on land and wait for other people to develop the land around them which increases the value of the land even though the landowner’s done no work on his plot. Remember, this is a tax on the unimproved value of the land so we’re only looking at what a block of land would be worth if there’s nothing on it.
@ Zak,
Yes I understand that, and no-one is suggesting there isn’t a place for a sensible LVT, which could lead to the desirable outcomes you advocate, in a mix of other taxes. It’s the question of a LVT as a single tax, or even as a tax which is over relied on, which is at issue.
You can’t unfortunately have a tax system which relies on the 1% as your following comment would wish for: “It’s a very efficient tax and primarily affects the 1% of the population.”
Even though the 1% nominally own 90% of the wealth (or whatever) that wealth it isn’t available to be spent by Govt -even if it was possible for the taxman to get his hands on it. That wealth isn’t contributing to aggregate demand. Consequently, any redistribution is largely a political exercise. The taxman, unfortunately, needs to tax away the spending power of us lesser mortals to ensure that inflation doesn’t get out of hand.
In any case, that wealth, whether it be land, stocks and shares, or property is largely based on valuations. The money simply isn’t there in the economy to match those valuations.
@Peter Martin
What makes you think we should only tax the activities that contribute to aggregate demand? The reason why this tax is loved by economists everywhere is exactly because it doesn’t contribute to it – it doesn’t depress labour or capital activity. Land values aren’t just a bunch of numbers, they’re a reflection of the quality of infrastructure (or lack of infrastructure in some cases). It’s a regional tax. London is taxed more because of how much money gets poured into it, the North East is taxed less because there’s significantly less there with regards to infrastructure. It’s kind of like an income tax based on where you live – if you live in an area which has benefited greatly from public and private infrastructure investments then you pay more. If you don’t then you pay less.
@ Zac,
You ask: “What makes you think we should only tax the activities that contribute to aggregate demand? “
I think we previously agreed there were other reasons for taxation, We discussed, for example, the discouragement of smoking. But, at the National level, the primary reason for taxation is to create a demand for the currency and so give it a value. The regulation of aggregate demand, through adjustments in taxation rates and spending levels, is THE overriding economic consideration of any government. We don’t want too much unemployment or too many bankruptcies , on the one hand, and on the other we don’t want too much inflation.
This doesn’t apply to local or devolved Govts though. As far as the Welsh assembly, for example, are concerned it doesn’t matter how they get their taxation revenues providing they get them. It’s important to realise that the Westminster Govt has a broader consideration with respect to the overall economy.
@Peter Martin
Apart from the sin taxes (e.g. taxes on legal drugs / pollution tax), there are no benefits to the other taxes we have in our tax system. They depress positive economic activity. Yes, we can decrease VAT to increase consumption, we can decrease income tax to increase savings and investments etc. But this can only happen purely because these taxes stifle parts of the economy in the first place. Apart from the sin taxes, these taxes only exist for tax revenue generation. Once you remove that factor you can see there are no benefits to having taxes. Now obviously we need taxes because we need government revenue to fund public services and the overall welfare state so the next question to ask is how do we generate revenue for the state in a way that’s least damaging to markets? Everything then points to land taxes.
@ Zak,
“Now obviously we need taxes because we need government revenue to fund public services and the overall welfare state…….”
What you are saying is perfectly true for local government. You might want to think a bit more about this in connection with National Govt. Where do the pounds come from before they are available in the economy to be collected as taxes?
They are simply created by Govt. Out of thin air some might say. Then they are spent into the economy at the same time as taxes are levied with a demand they are paid in pounds. So why bother demanding, through taxation, what the Government can create at will in any case? The answer is to prevent high inflation.That’s why it matters who the taxes are collected from. They have lesser effect from those who are lower spenders (in % terms of their income, ie the rich) than higher spenders ( the less well off). The rich have a ‘lower propensity to consume’.
This is not to say we shouldn’t tax the rich for political reasons. But neither can we pretend that it doesn’t matter where the money comes from.
@ Zac,
As a continuation of the above the modern theory of money is that it has a value, not because it is linked to Gold (as was assumed in Henry George’s and Marx’s 19th century era), in fact there is no link any longer and money is driven by taxation.
If you’re of a libertarian anti-govt disposition, it’s probably not something that goes down too well! But, like it or not, this is how it is. There are benefits after all.
http://neweconomicperspectives.org/2011/07/mmp-blog-8-taxes-drive-money.html
Peter Martin,
In Henry George’s economic analysis, money is simply a way of facilitating trades, which ultimately are dictated by people trading a certain amount of exertion for what they hope to get in return. Money in Georgist theory is simply the ability to demand exertion from others.
In Progress and Poverty George Wrote:
“Here is a luxurious idler, who does no productive work either with head or hand, but lives, we say, upon wealth which his father left him securely invested in government bonds. Does his subsistence, as a matter of fact, come from wealth accumulated in the past or from the productive labor that is going on around him? On his table are new-laid eggs, butter churned but a few days before, milk which the cow gave this morning, fish which twenty-four hours ago were swimming in the sea, meat which the butcher boy has just brought in time to be cooked, vegetables fresh from the garden, and fruit from the orchard—in short, hardly anything that has not recently left the hand of the productive laborer (for in this category must be included transporters and distributors as well as those who are engaged in the first stages of production), and nothing that has been produced for any considerable length of time, unless it may be some bottles of old wine. What this man inherited from his father, and on which we say he lives, is not actually wealth at all, but only the power of commanding wealth as others produce it. And it is from this contemporaneous production that his subsistence is drawn.” (P&P, Book 1, Ch 4)
George was a Greenbacker. Georgism is not incompatible with Keynesian/MMT theories of fiat currency administration. Avoiding bubbles borne of liquidity preference is desirable, of course, but Georgists would tend to think this less important than the bubbles we have in land cycles.
@Peter Martin
Ahh, I should have caught on earlier that you’re an MMT fan when you were talking about aggregate demand. I’ll admit I haven’t read much on it but I don’t agree with the basic premise that currencies exist to direct economic activity rather than currencies arising to deal with the historical problems of bartering.
Also, I still have no idea why this matters in the perspective of a modern monetary theorist:
“That’s why it matters who the taxes are collected from.”
I have come to this thread late but a few points.
1. It is difficult to say exactly who pays taxes – do I pay my income tax or the consumers of the products I produce (through higher prices) or the shareholders in the company (through getting less return on their capital)?
2. While taxes reduce economic activity by raising prices etc. – that is not the end of the story. If there were no taxes – I would still have to pay for health insurance, state pension, unemployment insurance, road tolls, education for my children, collecting the bins, social care, raise my own army, police force, firefighters etc. etc.
And there are so called “public” goods and services where one person’s consumption does not reduce its availability to another person – one extra car drives on the road – up to the level of congestion, one extra person viewing the BBC. So to say that there were no or less taxes is not say I would be better off.
3. The treasury’s motto seems to be if it moves tax it. And as outlined above each tax has its advantages and disadvantages – so one needs a mixed basket of taxes – and some is designed to change behaviour etc. – as well as of course partly being about redistribution.
4. Personally I am not particularly hang up on corporation tax. It raises a relatively small amount and while it might be howled down there is an argument to decrease corporation tax and increase VAT and have a sales tax on everything which Amazon, Google etc. can’t avoid.
It is not surprising BTW that a tax on profits have increased at a time when profits have returned after the recession.
@ Joe
It depends on what you mean by “Georgism”. In general, many Georgists (including Zac?) who are sympathetic to the “Single Tax” idea, have a presumption that national governments need tax revenue to fund their spending. They don’t look at the wider picture, including the nature of the sectoral balances. Incidentally this is not a ‘theory’. It’s the arithmetic of the national accounts.
Clearly, this is problematic. But there is some scope for considering a LVT proposal once we abandon the link between the tax revenue (rent?) and government spending capacity. The question then arises, once we free ourselves from this neo-liberal link, is whether a LVT has a place in a government policy with seeks to advance full employment, price stability and social justice. Yes, it could. There’s no reason why not.
@ Zac,
The idea of the sectoral balances is indisputable and self evident. The Government’s debt (in pounds) has to equal everyone else’s assets (in pounds) . So no Government debt means no pound based assets. Deficits and and surpluses are just the change in any one time period. Everyone, including Government, has other assets too, cars, antiques, property etc, yes land too, which are valued in pounds. These aren’t included in the accounts. They aren’t included to offset the so-called National Debt. But the pounds don’t actually exist in the economy to support all these valuations.
So it is erroneous of those on the left, and maybe Georgists too, to think that you can fund the NHS, for example, by soaking the rich with some form of property tax or LVT. If significant taxes are applied to the assets they own, they quickly become worthless. So if Socialists want to Nationalise all land, property, shares etc without compensation they could do it, but the NHS would still need to be funded. It would make some difference in that those who previously made a living from collecting rents and dividends would then have to provide their labour to earn their living, and so create an additional resource for the economy. But not as much difference as many socialists, and Georgists believe on the basis of the ££ involved.
There’s a short term equivalence between saving and taxation. Taxation is the Government collecting money and putting it in the digital shredder to remove it from the economy. Saving is an individual removing money from the economy by either buying Govt bonds, National Savings certs, directly or indirectly via a bank or pension fund. So there’s no real difference – in the short term. That’s why taxing someone who would otherwise have saved that money, (or even spent it with someone else who is likely to save it -like buying an expensive artwork for example) has a different short term macroeconomic effect (ie not much) than taxing someone who would have otherwise used that money to buy a car.
@ Zak
I don’t like Paul Kirby’s assumptions – we need to increase savings and decrease consumption. This would cause a recession. He doesn’t understand that savings do not have to equal investment. He doesn’t really consider the effects on individuals of increasing consumption taxes and reducing income taxes. He suggests more payment transfers and increasing National Insurance (which is an income tax!), but doesn’t give any figures.
He seems to ignore that if more is saved less is spend on consumption. He seems to believe that more work will be done to produce less!
He doesn’t use current figures, which I gave.
Surely Zak, you do understand that if the government increases income tax people have less money to spend and this is a method to try to reduce inflation caused by there being too much demand in the economy.
I don’t understand how anyone can believe that governments don’t create money. In the past governments minted coins. Once people started saving their money in banks, the banks were given the ability to create more money. Today the government controls how much money the banks can create.
Peter Martin,
Henry George’s analysis of monetary economics was rudimentary but he had observed that the Union had issued paper currency to finance the civil war with the confederate states and understood that metallic coinage had no intinsic value. There was no fedeal income tax in the US during George’s time (or cental bank). Federal taxes were principally excise duties and local taxes were largely property based.
Land as defined by George relates to any natural resource that is not produced by the effort of labour. That includes not only land utilised for agricultural, forestry, industrial, commercial and residential use but all natural resources such as waterm oil, gas and minerals. Today this would include the radio spectrum, broadband, airport landing slots, patents on discoveries etc.
This income or benefit derived from the explotation or utilisation of natural non-produced resources in economics is defined as rent. It is these rents – the surplus generated over and above the costs of production and a normal return on physically produced capital- that are considered a community generated surplus. They are derived either as a gift of nature or by collective (as opposed to individual) endeavour and can therefore be rightly deployed by a nation state towards the provision of public services.
Economic rents arise whereever there is asymmetric bargaining power between paticipants in the economy. While land is not the only monoply it is the largest in terms of rent and the lions share of those rents are siphoned off in mortgage debt service costs.
A system of taxation that recovers money spent into the economy by the state for public service provision primarily through the clawback of economic rents offers a foundational basis of taxation that incentivises productivity, investment and innovation.
In so doing it mitigates the destructive cycle of Ponzi type financial speculation (primarily in land) that Minsky outlined in his financial instability hypothesis.
@ JoeB,
I’m not sure what point you are trying to make. Sure, it is interesting to read 18th and 19th century economists like Ricardo, Smith, Marx and George. They all have their contributions to make, but we need to understand that they were writing about events of their time. They were the creations of their time. Everyone, especially the more dogmatic Marxists and Georgists, needs to understand that capitalism has moved on and they should do the same.
Even if they had it totally right in the context of their time , which is debatable, and they can’t all have been right, it’s not realistic to think they, any of them, have complete solutions to our 21st century problems.
@ Michael B,
……. savings do not have to equal investment.
That’s an important point. Keynes realised this in the 30s but his explanation wasn’t that clear. Its easy enough if you look at the sectoral balances:
https://www.socialeurope.eu/government-deficits-and-national-accounting-identities
(S-I) + (T-G) = (X-M)
or (S-I) = (G-T) – (M-X) = Government Budget Deficit – Trade Deficit
So S=I , but only when the trade deficit (surplus) is exactly equal to the Government’s deficit (surplus).
If Government wants us to save more it should run a larger budget deficit or a smaller trade deficit. The latter by devaluing the pound.
Peter Martin,
what makes you think that economists today have it totally right, or even half right, in the context of our time or even Keynes for the post-war period?
George was a Philadelphian who went to sea at the age of 15 visiting many of the ports of the British Empire. He ended up in San Francisco as the California gold rush was in full flow. He had the benefit of observing the effects on land prices of prospectors flooding in to the American West followed by pioneers who came to settle there and the coming of the railroads. This gave him some unique insights that are obscured in modern society.
On a visit to New York City, he was struck by the apparent paradox that the poor in that long-established city were much worse off than the poor in less developed California. George argued that a sizeable portion of the wealth created by social and technological advances in a free market economy is possessed by land owners and monopolists via economic rents, and that this concentration of unearned wealth is the main cause of poverty. George considered it a great injustice that private profit was being earned from restricting access to natural resources while productive activity was burdened with heavy taxes, and indicated that such a system was equivalent to slavery—a concept somewhat similar to wage slavery.
It is worth revisiting the debates after the American civil war around a return to the gold standard. The Greenback party https://en.wikipedia.org/wiki/Greenback_Party flourished for a time and much of their agenda was incorporated in George;s treatment of money in his economic analysis.
@ Joe B,
“…….what makes you think that economists today have it totally right, or even half right, in the context of our time or even Keynes for the post-war period?”
Some have it all wrong. That’s why they didn’t see the GFC coming. But others have it mainly right. People like Steve Keen, Stephanie Kelton, Bill Mitchell (the Aussie one, Randall Wray, Paul Krugman (mainly), Joe Stiglitz etc.
Why? Because in the main they make perfect sense and their track record in predicting economic problems is good.
Peter,
Joseph Stiglitz draws heavily on Georgist insights into the fundamental root cause of inequality. His critique of Piketty is focued on the failure of his colleague to correctly distinguish between “wealth”, “capital” (man-made wealth used to further production) and sources of economic rent, chief of which is “land”. He has concluded that Henry George was right all along.
Stiglitz, along with co-author Richard Arnott, realized that one reason locations have value (http://www.jstor.org/stable/1884466?seq=1#page_scan_tab_contents) is because local governments provide “public goods”—things like trains and parks and sewage systems. They showed that if the value of a location comes from public goods, then it makes sense for the city to tax the value of land itself to pay for things like infrastructure. In other words, the people getting the benefit of the public spending that makes a place good to live in should also be the ones paying the costs.
But locations are valuable for another reason. As Paul Krugman showed (http://www.princeton.edu/~pkrugman/aag.) in the 1990s, it makes sense for businesses and their employees to live near each other. Like joining Facebook, the reason to live in a city is because everyone else lives there. So when a bunch of people move to the city—for example, as the result of a tech boom—we should expect their productivity to go up. But some of the fruits of that productivity will be captured by the people who happened to own the location before the boom even began: Landlords. As the boom goes on, rents soar, just like they are soaring now in San Francisco and London. Those high rents keep people out of the city, and prevent productivity from going as high as it could go, thus choking off the boom.Krugman advocates LVT although he does not think it will raise sufficient revenue alone to fund a modern welfare state and will need tobe supplemented by other forms of taxation.
This article from American Affairs magazine has a good discussion of the applicability of LVT in the modern economy https://americanaffairsjournal.org/2018/02/henry-georges-land-value-tax-idea-whose-time-come/
@Michael BG
Savings are deferred consumption or deferred investments. You’re right that it doesn’t have to equal to investment but with a high consumption tax people are more likely to invest over consume. Income taxes depress the ability to invest, save and consume so by replacing it with a high VAT you give a person more choice on what to do with their money as you aren’t taking x amount out of their wage slip before they even see the money. The only downside with a high consumption tax is that it’s not progressive (those who consume less should pay less into the tax), unless if you wanted to use technology to track every purchase by everyone but that’s a pretty large infringement on civil liberties from my point of view. Kirby mentioned cash transfers to improve this, other economists have called for rebates, using the Negative Income Tax as an example. Let’s say that £15,000 is the threshold and if you earn less than that then you’re subsidised by the state at 50% of the threshold. If you earn nothing then you’re given £7,500. If you earn £5,000 then there’s another 10k left until you get to the threshold so with the subsidy set at 50%, you’re given £5,000 as 50% of 10k is 5k. The reason why Kirby (nor me) doesn’t cite exact figures for the cash transfers is because that’s ultimately up to you to decide how much money we should be spending on welfare.
@Michael BG and Peter Martin
I’d try to set a land value tax such that it raises as much as a consumption tax and these 2 taxes should replace income tax, national insurance and other property-related taxes. Using Kirby’s calculations, removing exemptions on VAT and increasing it to 33% would provide £260bn in tax revenue, removing the need for income and capital taxes using your figures. A land value tax of 6% would raise around £110bn according to the paper written by the Green Party that I linked earlier, so I could easily see extending this by a few percentage points to replace National Insurance (£137bn). However, we could easily make land value taxation more central in our fiscal policy (it’s harder to provide exact figures here as I can’t find any papers which are modelled on what a 15%+ land value tax would bring in) using the Henry George Theorem (https://en.wikipedia.org/wiki/Henry_George_theorem), created by Henry George and developed further by Joseph Stigiltz (who’s also a massive Henry George fan). The theory states that investments in public goods done by the state will increase aggregate land rents by at least as much as what the investments cost (George said that it goes even further but let’s stick with Stigiltz’s view on it for now), so using this as the only tax to fund public investments is possible as it becomes self-sustaining.
Peter, the land tax isn’t just a tax to soak the rich with, it’s a tax which directly brings back from citizens the amount of money the government’s put into public services. The reason why it affects the rich more is because they own a lot more land and a lot more property. It’s not meant to punish, it’s asking them and all other citizens to pay directly for the services they benefit from. This tax affects both the poor and the rich but progressively affects the rich more. Now even if you were to take the funding aspect out of it all, a land tax has far, far more benefits to it than any other tax. I don’t agree with Michael’s premise that if we were to decrease income taxes we’d increase inflation because of greater aggregate demand since this presumes that the economy’s at full capacity – I don’t think we’re anywhere near it.
@ Zak,
I don’t think you’ve quite grasped this. Say land, typically, yielded an income of 5% of its capital value. To start with, you apply a 5% LVT and what happens to the price of that land? There’s no reason to own it any longer so it becomes worthless! You are effectively nationalising it without compensation.
That’s perhaps a good tip for the extreme left who actually might want to do this.
So what do you do then? Reduce the tax to 2.5% on the land’s pre-LVT value?
@ Zak
If you put an extra say 20% consumption tax on everything except say food the amount of demand in the economy will be reduced because as you say some people will save rather than spend the extra income they received from not paying income tax. Therefore some people will have to be made redundant and their spending is reduce causing a further reduction in spending so you end up with a recession. The only way to avoid this is to find new methods of taxing those who save and then getting the government to spend it.
I was not talking about a tax cut. I was talking about a tax increase reducing inflationary pressures in the economy. However, by your response you do seem to accept that if the government puts more money into the economy and we are at full capacity this will be inflationary. Therefore you must accept that if the government takes money out of the economy this is deflationary.
While it seems like a good idea to encourage people to save actually it is a bad idea for the whole economy. This is one of the causes of the 2008 recession, people reduced their spending because of the financial crash and banks reduced the amount they lent.
You can’t pick and choose whose figures you use. Increasing VAT to 13% will increase revenue by 13/20 of the amount collected if all of £329 billion was from VAT (which it isn’t) would be only £214 billion.
A 15% land tax should raise £275 billion of which 79% comes from residential land. So most of this is coming from the population who have a home. I am not convinced that having high property taxes on the home someone lives in is a good idea. Andy Wightman helpfully points out that a land tax of 1.83% of its value would provide the amount raised from Council Tax in 2012-13. Therefore to increase it to 15% would mean every person paying Council Tax would have to pay more. On average about 8 times more than today.
If you quote Joseph Stigiltz and the Henry George theorem then you have to fix the rate of the land tax to pay for the public investment and services which increased the land value not fund increase benefit payments from it as these don’t increase land values.
What you need to do is go back to basics. Decide how much extra consumption tax you want say 2.5 % and then calculate how much of this you need to compensate those on benefits and only once you have worked that out would you know how much you can reduce income tax by. And you can hope that such a small change will not be deflationary.
@Peter Martin
How much income a piece of land yields is entirely dependent on how productive you make the piece of land and the land surrounding it. There’s no “land typically yields an income of 5%”. That’d be like saying “a consumer product typically makes a profit of 5%”. You’re ignoring the work a landowner should be doing to make the owned land profitable. The land tax is a tax on the unimproved value of the land so we’re assessing what the piece of land is worth without any improvements on it, such as buildings, landscaping, paths and fences. We’re acting as if that piece of land has absolutely nothing on it so that way we’re ONLY taking into account the value of the surrounding land, and the value of the surrounding land is determined by how much work others have put into it and this is what we want to tax. It’s taxing “unearned wealth” in its most purest form. Here’s a 3 minute video on it:
https://www.youtube.com/watch?v=sTxyNQ0ea-k
What’s the whole purpose of this? We’re forcing landowners to be more productive with their land since otherwise the tax would cause them to make a loss on the land they own. Imagine if a company had to share some of its profits with other companies located nearby? Hardly fair is it?
If landowners are being unproductive with their land then they’re depriving others of using the land and making it productive. Also, land taxation isn’t a leftist concept. It was advocated by Adam Smith, David Ricardo and was at the heart of many classical liberal economists. Marx, arguably the prophet of the left, really did not like Georgism:
https://www.marxists.org/archive/marx/works/1881/letters/81_06_20.htm
Land taxation isn’t a socialist concept.
@Michael BG
Sorry for the late reply, I did intend to comment on Thursday evening but been held back on a few other things…
The effects of some people saving will lead to them either consuming later on or investing later on. No one saves forever. This is what I mean by ‘deferred consumption or investment’. The only situation where this rule doesn’t hold is where people bequeath but even if you were to look at an entire family line’s history of income, you’d see they spend either on investments or consumption the total amount of their income. Now, if people stop consuming and investing then that’s still a very good thing since investments drive productivity. Investments could be as simple as buying new PCs/hardware for your business (you’d claim VAT back on this) or buying shares/bonds to help raise capital for other companies.
“Therefore you must accept that if the government takes money out of the economy this is deflationary.”
I don’t see how this has relevance to what we’re discussing.
“While it seems like a good idea to encourage people to save actually it is a bad idea for the whole economy. This is one of the causes of the 2008 recession, people reduced their spending because of the financial crash and banks reduced the amount they lent.”
The financial crash led to the 08 recession. This led to a reduction in spending. Not the other way around. I’m also not encouraging people to save, I’m encouraging them to invest. As established before, no one saves forever.
On your final point in your 1st post, increasing VAT to 13% won’t increase revenue by 13/20. You’re ignoring the Laffer Curve. If I were to increase VAT to 60% then we wouldn’t raise 3x of what we do now because extreme taxation leads to people behaving differently. It’s also not just increasing VAT to 33% but the removal of all VAT exemptions.
@Michael BG
“I am not convinced that having high property taxes on the home someone lives in is a good idea.”
“Therefore to increase it to 15% would mean every person paying Council Tax would have to pay more. On average about 8 times more than today.”
You’re ignoring that council tax is probably the most regressive tax we have in the tax system. Replacing council tax with a land value tax will shift the burden of taxation from the poor and middle class to the rich. I’ve already supplied the images of net property wealth by income decile earlier but I’ll do so again:
https://forward-thinking.org.uk/wp-content/uploads/2016/08/Upper-bounds-of-net-property-wealth-600×337.png
Combine that with this:
https://forward-thinking.org.uk/wp-content/uploads/2016/08/Comparison-of-property-wealth-and-income-tax-600×337.png
Addressing my first quote, why would you then think that having high taxes on the home is a bad idea? There’d obviously be workarounds for those who suddenly find they can’t pay due to difficult circumstances such as tax deferrals until payment can be made or until death, with the tax payment being taken out of the home via equity release.
“If you quote Joseph Stigiltz and the Henry George theorem then you have to fix the rate of the land tax to pay for the public investment and services which increased the land value not fund increase benefit payments from it as these don’t increase land values.”
We don’t have hypothecated taxes. You could if you wanted to but the money for benefits or for public infrastructure all can come out of one big pot.