Nick Shaxson ■ On tax credits, economic misunderstandings and the poor
The UK economics writer Chris Dillow has an excellent post making some basic points about tax credits, following a recent speech by the UK’s finance minister (or “Chancellor”) George Osborne, where he says:
“We simply can’t subsidise incomes with ever-higher welfare and tax credit bills the country can’t afford.”
Which begs the question of who “we” and “the country” are.
The first part of Dillow’s response is:
“For a lot of the country, it is not tax credits which are unaffordable, but the cuts in them.”
Quite so. And that is a profound point, related to a point we’ve made on many occasions:
“From a country’s perspective, tax is not a cost but a transfer, from one sector to another.”
Such transfers usually involve winners and losers in the country — and they may also involve something called “deadweight costs” such as the cost of administering a complex tax system (tax havens are thus the creators of all kinds of deadweight costs.) Back to Dillow, on Chancellor Osborne’s statement:
“There’s a related error – what I’ve called the cost bias. The cost of tax credits is NOT the £29.5bn which the government spends on them. This is a transfer. Instead, the costs are the deadweight costs associated with them: for example, the cost of administering a complex system (which is one reason why I prefer a basic income), or the disincentive effects they create – for example, the higher taxes levied on other people to pay tax credits. The latter are, however, moot (pdf): a big purpose of tax credits is to raise in-work income and so incentivize work. Whether tax credits are therefore a cost at all is thus questionable*.”
So one might describe the Chancellor’s statement simply as economic illiteracy. (It’s a bit like all the illiteracy out there about national “competitiveness.”)
But this, of course, isn’t the last word.
“I fear, though, that what we’re seeing here isn’t just a neutral intellectual error. In defining the country and the nation to exclude the low paid, the Tories can create the illusion that the interests of the worst-off are not part of the national interest. This is an old trick of the ruling class.”
We would add that other segments of the British political classes, not just the “Tories” (Conservative Party), have bought into this view of things like tax credits as a ‘cost’ to a country, not a transfer within it.
And we could add, of course, that there are demand-side arguments to be made here. Transferring wealth from the rich to the poor in the current economic environment will tend to have many positive effects. In ways such as this.
The author
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The Most Socially Just Tax
Although many people in government and politics are reluctant to change the tax regime, we should recognize that our present complicated system for taxation is unfair and has many faults. In general terms, the biggest problem with taxation is to arrange it so that it is on a socially just basis. Since many different companies employ their workers in various ways and pay them diversely too, and since these companies may be registered in many countries in various categories, the whole business of determining what makes up a criterion for fixing a truly just tax payment system becomes impossible when one tries to do it on a fair basis of human work-activity. So why try, when there is a far better means available which is really a true and socially just method?
According to Adam Smith, land is one of the 3 factors of production and the usefulness of land is seen in the price that intending tenants are willing to pay as rent, in order to have access to the particular site in question. Land is often thought of as being a form of capital since it is traded in the same way as other durable capital goods items; however it is actually not something which was man-made and thus rightly does not fall under the category of being capital goods. The land was originally a gift of nature for which all men (and women) should be free to share. Its site value does however depend on a man-made effect, which grows and greatly depends on its location, which is usually related to the numbers and densities of the communities in that region, plus any natural resources such as rivers, minerals, animals or plants of specific use or beauty. Consequently, it is seen that most of the land value is created by man within his society and therefore its advantage should logically and ethically be made available for return to the community for public use.
But due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place like many other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used or if it is to be held out of use, until the city grows and the particular site becomes more valuable. Thus speculation in land values is encouraged by the law in treating a site of land as personal property—as if it were an item of capital goods, even though it is not.
Regarding taxation and local community spending, the local or municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without anyone performing work on it, and the landlord must always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Associated with this are the corrupting means of payment for this news, when it is leaked to a would-be speculator in this natural resource. However if land values were taxed instead of the many different kinds of production based activities of workers, such as earnings, purchases, capital gains, company investments, foreign investors, etc., (with all the associated complications, loop-holes and regulations) there would be many advantages. The only kinds of persons ones to lose due to this would be those who have been exploiting the growing values of the land over the past many years, when mere land ownership confers a financial benefit without the owner doing a scrap of work! So it seems to me that for a truly socially just form of taxation to apply there can only be one method–Land-Value Taxation. Let us look again at the general situation.
When a new area of land is being developed or when a settler comes to a virgin site that may be suitable for his/her future settlement, the land is the first consideration. He/she chooses the place having the most useful natural resources. As more settlers arrive they tend to spread around this location because of the greater availability of man-power when they have difficult jobs that involve coordination and help and also for reasons of being sociable. They also are able to begin to specialize and this means that the efficiency in making useful specific produce grows. However, the land being occupied on the boarders of the settlement is further away from the business center and less useful and consequently a range of land values develops with the original settler (now holding the village center) having the greatest site value. Marginal land on the edge of the settled region has almost no value, due to the comparatively high cost for bringing its produce to the central market. We should note that this distribution in land values is created by the community and not by the natural resources. As the city expands certain speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have caused their values to grow and meanwhile there is fierce competition for access to the best sites for both housing and agriculture. This unavailability of useful land means that the payment of high rents by tenants makes their produce becomes more costly to make and the demand for it is reduced, due to less householders being able to afford these goods and also due to unemployment causing wages to be lowered by the monopolists, whose land has already been obtained when it was cheap. This basic structure of the macroeconomics system limits opportunity and creates poverty.
The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access to the land on which work must be done. The useful land is monopolized by a landlord who either holds it out of use (for purposes in speculation in its rising value), or charges the tenant too much for its right of access. In the case when the landlord is also the producer, he/she has a monopolistic control of the produce and charges more for it than what an entrepreneur having greater opportunity normally would.
A wise and sensible government (of which very few seem to exist), would recognize that this problem is of lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed 135 years ago by Henry George, a (North) American economist, but somehow macro-economists seems never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) George proposed the single tax on land values without any other kind of tax on produce, service or wealth item being taken at all!
The land value tax (LVT) has 15 features which benefit everyone in the economy (except for landlords and banks), those who do nothing and expect that their land dominance will be its own reward (and you believed that there is no such thing as a free lunch!)
15 ASPECTS of LAND-VALUE TAXATION affecting Government, Land Owners, Community and Ethics
3 aspects for GOVERNMENT:
1. LVT, adds to the national income just as do other taxation systems.
2. The cost of collecting the LVT is much smaller than for income tax and other production-related taxes.
3. With LVT, the national economy stabilizes and no longer experiences the 18 year business boom and bust cycle, because speculation and over-pricing of land ceases.
6 aspects affecting LAND OWNERS:
4. LVT is progressive, the owners of the most potentially productive sites pay the most tax.
5. The land owner pays his LVT regardless of how the land is used. When the land is leased to tenants most or all of the resulting ground-rent is the tax.
6. LVT stops the speculation in land prices, because any withholding of land from proper use is no longer worthwhile.
7. The introduction of LVT initially reduces the sales price of sites, even though their value (or potential usefulness) may continue to grow. This is because more sites become available and competition for them is less fierce.
8. With LVT, land owners are unable to pass the tax on to their tenant renters, due to the reduced competition for access to the land now in use.
9. With the introduction of LVT, land prices will initially drop. Speculators in land values will tend to foreclose on their mortgages and to withdraw their money for reinvestment. Therefore LVT should be introduced gradually so that it allows investors sufficient time for the speculators to transfer their money to company-shares, where their greater use will meet the increased demand for produce (see below).
3 aspects regarding our COMMUNITY:
10. With LVT, there is an incentive to use land for production or residence, rather than it laying idle or being partly used.
11. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper because entrepreneurs have less difficulty in starting-up and running their businesses. Demand grows, unemployment decreases.
12. As LVT is introduced, investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.
3 aspects about ETHICS
13. The collection of taxes directly from productive effort and commerce is socially unjust. LVT replaces this form of extortion by gathering the surplus rental income, which comes without exertion on the part of the land owner. Consequently LVT is a natural system of money-gathering.
14. Bribery and corruption cease with LVT. Before, this was due to the leaking of news of municipal plans for housing and industrial development.
15. The improved use of the land will reduce the damage being done to the environment due to the sites being held unused being dumping grounds as well as the greater distances needing to be traveled between home and workplace requiring more transportation services and the associated emissions due to unnecessarily fossil fuel use.
TAX LAND NOT PEOPLE; TAX TAKINGS NOT MAKINGS!
Sigh. We have always supported the LVT as part of a progressive tax system, and have written about this on many occasions. But LVT should certainly NOT be the only tax, and we and others believe that those in the LVT campaign who argue for the abolition of all other taxes may be harming the LVT cause. Extreme positions have their place, but not here. LVT is an excellent tax but limited: you can easily escape it by shifting your financial assets overseas.