The Most Socially Just Tax?

Should taxes be levied on basic essentials or luxuries?

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. The biggest problem with taxation is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely too, and since these companies may be registered in different countries in a number of categories, the whole business of determining what makes up a criterion for a truly just tax payment system becomes impossible, particularly if based on a fair measure 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 classical economist Adam Smith (Ref.1), land is one of the 3 factors of production and the usefulness of land is seen in the price that tenants are willing to pay as rent, for 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 not actually man-made and thus rightly does not fall under the category of capital goods. The land was originally a gift of nature for which all men (and women) should be free to share. However, its site value does depend on human effect, which grows and greatly depends on its location and is usually related to the numbers of the communities in that region plus natural resources such as rivers, minerals, animals or plants of specific use or beauty. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for public use, as explained by Martin Adams (Ref. 2).

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 (see Ref.3).

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 by itself, and the landlord will 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 restricted item of news, when it is leaked to a would-be land value speculator. However, if land values were taxed instead of the many different kinds of production based activities of workers, such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all the associated regulations, their complications and loop-holes) there would be many advantages. The only persons due to lose from 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! Consequently, 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 an explorer discovers a prospect that may be suitable for his/her settlement, (or when a new site is being developed), the land is the first consideration. He/she chooses the place having the most beneficial natural resources. As more settlers arrive they tend to spread around this location. This is 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. Then they can begin to specialize and this means a growing efficiency in producing specific goods. However, the land being occupied on the boarders of the settlement is further away from the business-center and is less useful. 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 settlement 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 permitted their values to grow and meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. This unavailability of useful land means that the payment of high rents by tenants makes both their residence more costly and the provision of their goods and services more expensive. It also creates unemployment, causing wages to be lowered by the monopolists, whose land has already been obtained when it was cheap. Consequently this basic structure of the macroeconomics system is working to limit opportunity and to create poverty (Ref.3).

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 would recognize that this problem derives from 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 136 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!) In Ref. 4, George proposed a single tax on land values without other kinds of tax on produce, services, capital gains etc. This regime of land value tax (LVT) has 16 features which benefit almost everyone in the economy, except for landlords and banks, who do nothing productive and expect that their land dominance will be its own reward, and believe in having a free lunch!

16 Aspects of LVT Affecting Government, Land Owners, Community and Ethics

Three 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.

Six 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 that will be 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).

Three 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.

Four 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.

16. Because the LVT takes away the advantage that landlords hold over other members of our society, it provides us all with a much greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way to help provide full employment and this means that earnings will correspond to the rise in the value that the labor or effort has put into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty.

References:

  1. Adam Smith: “The Wealth of Nations”, 1776.
  2. Martin Adams: “LAND– A New Paradigm for a Thriving World”, North Atlantic Books, California, 2015.
  3. Mason Gaffney and Fred Harrison: “The Corruption of Economics”, Shepheard-Walyn, London, 2005.
  4. Henry George: “Progress and Poverty” 1897, reprinted by Schalkenbach Foundation, NY, 1978.

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