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Income Taxes

How do we divide the fruits of production? Take a look at http://www.henrygeorge.org/isms.htm for four graphics which illustrate clearly the "left-wing," "right-wing," and "middle-of-the-road" approaches, and the Georgist proposal.

Why would we ever want to place our taxes on wages? If taxes on land value — urban land in particular, but also valuable natural resources and other like things (see "land includes") — are insufficient to meet all our revenue needs, then perhaps we must supplement taxes on land value with taxes on wages, but we shouldn't employ that second choice until we've completely exhausted the better choice of tax base.

An income tax is a clumsy tool for collecting economic rent; it vacuums up many other kinds of income which ought not to be taxed, and, as we use it now, fails to collect economic rent (e.g., through such provisions as excluding a significant chunk of so-called "capital" gains -- mostly gains on land value -- from taxation, or through 1031 exchanges, to cite two examples).


Henry George: The Condition of Labor — An Open Letter to Pope Leo XIII in response to Rerum Novarum (1891)

As to the right of ownership, we hold: That —

Being created individuals, with individual wants and powers, men are individually entitled (subject of course to the moral obligations that arise from such relations as that of the family) to the use of their own powers and the enjoyment of the results. There thus arises, anterior to human law, and deriving its validity from the law of God, a right of private ownership in things produced by labor — a right that the possessor may transfer, but of which to deprive him without his will is theft.

This right of property, originating in the right of the individual to himself, is the only full and complete right of property. It attaches to things produced by labor, but cannot attach to things created by God.

Thus, if a man take a fish from the ocean he acquires a right of property in that fish, which exclusive right he may transfer by sale or gift. But he cannot obtain a similar right of property in the ocean, so that he may sell it or give it or forbid others to use it.

Or, if he set up a windmill he acquires a right of property in the things such use of wind enables him to produce. But he cannot claim a right of property in the wind itself, so that he may sell it or forbid others to use it.

Or, if he cultivate grain he acquires a right of property in the grain his labor brings forth. But he cannot obtain a similar right of property in the sun which ripened it or the soil on which it grew. For these things are of the continuing gifts of God to all generations of men, which all may use, but none may claim as his alone.

To attach to things created by God the same right of private ownership that justly attaches to things produced by labor is to impair and deny the true rights of property. For a man who out of the proceeds of his labor is obliged to pay another man for the use of ocean or air or sunshine or soil, all of which are to men involved in the single term land, is in this deprived of his rightful property and thus robbed. ... read the whole letter

Fred E. Foldvary — The Ultimate Tax Reform: Public Revenue from Land Rent

The U.S. tax system is widely perceived as too complex, too intrusive, and too demanding of workers’ paychecks. Taxes today claim a greater share of the average family’s budget than food, clothing, housing, and transportation combined.1 In 2005, the average American had to work 107 days just to pay taxes, compared to 44 days in 1930.2

Tax reform proposals, not surprisingly, are popular among voters and the politicians who represent them. President George W. Bush created an advisory panel on tax reform. Some economists and institutes have proposed reforms to flatten and simplify the income tax, or to replace it entirely with a national sales or consumption tax or value-added tax.

These would be an improvement, but if we seek to reform taxes, we should consider all the possibilities and choose, as Milton Friedman puts it, the “least bad” tax.

Even a relatively flat income tax imposes what economists call a “deadweight loss” or “excess burden” on society. Taxes on productive activity increase the price of labor or goods beyond economic costs, and so reduce the quantity provided. This reduction in production, income, and investment is a misallocation of resources. Resources are wasted because they do not go to where they are most wanted. We can reduce this excess burden by reducing taxes, but changing the type of tax can also reduce this deadweight loss. Economists recognize that if we tap for public revenue a resource whose quantity is fixed, the excess burden disappears. The tax does not reduce the supply and does not increase prices. ...

It is widely understood that when something is taxed, we get less of it. As discussed above, this reduction in labor, production, and investment is called the “excess burden” or “deadweight loss” of taxation. Income taxation discourages work, sales and value-added taxes discourage consumption, capital gains taxes discourage investment, and real property taxes discourage building and improving property. Those taxes make the asset or activity more costly, which then reduces the quantity bought of the thing being taxed.

What makes land different is that its supply is fixed, and it is independent of human action. When land value or rent is tapped for public revenue, the land does not shrink, flee, or hide. ...

Income taxes impose on the economy a large administrative cost by government and a cost to payers of filling out forms, paying lawyers and accountants, and trying to comprehend the complex requirements. The compliance cost of lost time in the U.S. is 5 billion hours per year, the equivalent of two million people working full time just to process the income tax. In dollar terms, the compliance cost is estimated to be more than $200 billion per year.29

Reformers who want to impose a national retail sales tax are well aware of the substantial impact taxes have on human behavior. That, indeed, is often why such reforms are proposed: The reformer wishes to discourage borrowing, reduce consumption, or encourage savings, for example. But moving to a national retail sales tax results in little improvement.

Most people use their wage income to pay for goods and services and sales taxes. Switching from an income to a sales tax is like taxing you when you leave a room instead of when you enter the room.

Income taxes punish savings, but sales taxes punish borrowing. If you borrow $10,000 to buy a car and there is a 20 percent sales tax, you need to borrow an extra $2,000 to pay the tax. Some folks might decide to not buy the car, spending the $10,000 on something else, without borrowing $2,000. ...

Consider the effect of abolishing income taxes and sales taxes, replacing them with a land value tax. There would no longer be any tax audits. There would be no record-keeping for taxes. You, the landowner, would instead get a monthly bill, like you get for utilities. You would simply pay the bill or have it automatically deducted from some financial account. At the same time, government would avoid the high cost of processing complex accounts and keeping individual tax records. It would only need to keep real estate records and assess the land values, both of which it already does for property tax purposes.

Those who are retired or temporarily have little cash income would be able to defer taxes by accumulating liens on the real estate until they die or sell the property, as is commonly done today with real estate taxes.

If you thought the assessment of the land value was too high, you could appeal, as one can today’s real estate taxes. The land value assessments would be public records available on the Internet, unlike income tax records, which are quite properly hidden from public view. You could easily compare your assessment with those of your neighbors. If the appeals board rejected your claim, the assessment could be appealed to a jury, if you were willing to pay the cost of the jury’s decision.

Nobody would be sent to prison for tax evasion, because there would be no tax evasion. A non-payer would lose title to his land or lose the protective services of government, depending on the local enforcement practice. Property taxes are already being assessed and collected by counties in the U.S. A complete shift to the taxation of land values would not increase these costs, but would eliminate the expenses involved in collecting sales and income taxes. ...

The national rent in the United Kingdom has been estimated at 22 percent of national income, which exceeds the amount raised in that  country by the income tax.41 Steven Cord42 estimated the annual economic rent of land in the U.S. in 1986 at $680 billion, 20 percent of national income, while Mike Miles (1990) arrived at a similar figure using data from the Bureau of Economic Analysis.43 The totals include government lands but do not include the increase in geo-rent that would occur with the elimination of market-hampering taxes.

Making up about one-fifth of national income, land value taxation would provide about 60 percent of current U.S. federal, state, and local government revenue, which would be more than adequate for government spending if it did not include transfer payments. The taxable value of the land in the economy would increase over time for two reasons. ...

An ideal public revenue policy respects a person’s right to privacy, does not discourage work or savings, and does not induce dishonesty. While income, sales, and value-added taxes fall woefully short of this ideal, land value taxation meets each requirement.

Imagine the increased prosperity and opportunities for advancement that would exist if people could keep all of the money they earn; if billions of dollars wasted on efforts to avoid high income taxes were suddenly turned to productive endeavors; and if the growth of government were constrained by a tax system that would raise only enough to pay for services actually provided. ...

Impact on behavior

Income taxes impose on the economy a large administrative cost by government and a cost to payers of filling out forms, paying lawyers and accountants, and trying to comprehend the complex requirements. The compliance cost of lost time in the U.S. is 5 billion hours per year, the equivalent of two million people working full time just to process the income tax. In dollar terms, the compliance cost is estimated to be more than $200 billion per year.29

Reformers who want to impose a national retail sales tax are well aware of the substantial impact taxes have on human behavior. That, indeed, is often why such reforms are proposed: The reformer wishes to discourage borrowing, reduce consumption, or encourage savings, for example. But moving to a national retail sales tax results in little improvement.

Most people use their wage income to pay for goods and services and sales taxes. Switching from an income to a sales tax is like taxing you when you leave a room instead of when you enter the room.

Income taxes punish savings, but sales taxes punish borrowing. If you borrow $10,000 to buy a car and there is a 20 percent sales tax, you need to borrow an extra $2,000 to pay the tax. Some folks might decide to not buy the car, spending the $10,000 on something else, without borrowing $2,000.

There is no good economic reason to tax-punish consumption or borrowing. The purpose of production is consumption! If we punish consumption, we punish production. Consumption is not an evil to be thwarted, but the very benefit we get from the economy. We may as well also tax fun and joy! Those seeking to tax consumption act as though they have a Puritan streak that considers enjoying goods to be evil and working and saving to be good for their own sake. ... read the whole document

Alanna Hartzok: Who Would Jesus Tax? The Saga of Susan Pace Hamill's Alabama Tax Crusade

A University of Alabama School of Law Professor has asked God's forgiveness for the years she lived in the sin of ignorance about tax injustice. Susan Pace Hamill, a tax expert, business consultant, and dedicated United Methodist church goer, thought there was a misprint when she first read that personal incomes as low as $4,600 for a family of four were being taxed by the state, while timber owners holding 71% of the land of Alabama were paying less than $1 per acre in property taxes. Two hours later she found out there had been no mistake and that Alabama has the most regressive tax code in the country. Her righteous rage spawned a tax crusade that has reverberated onto the national scene.

"As somebody who knows a lot about taxes, I could not have imagined a design of a tax structure this bad," she said in a Tuscaloosa Newsstory last February. "The state's tax code is really horribly unjust and has no moral, ethical leg to stand on. Period."

Alabamians with incomes under $13,000 pay 10.9 percent of their incomes in state and local taxes while those who make over $229,000 pay just 4.1 percent. Commercial property owners pay more than 50 percent of property taxes, with homes approaching one-third. Alabama's sales taxes are among the highest in the nation, up to 10 percent in some areas, and do not exempt even the most basic necessities such as food. The state's 1901 constitution was written primarily by large landholders to secure their economic interests, consequently property taxes are extremely light on their holdings. ... read the whole article

 

 

Nic Tideman: A Bill of Economic Rights and Obligations

Article 1: Each person has the right to decide whether and how to use his or her talents. Those who are self-employed have a right to the full economic product of their efforts. Those who are employed by others have a right to the full amount of the compensation that their employers agree to pay them. Thus Congress and state legislatures shall levy no tax on wages or interest or spending.

 

 

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