Tax
Reform
What passes today for discussion of "tax reform" is really quite
narrow. Most of it is confined to a very small box -- the income
tax box -- and could reasonably be compared to rearranging the deck
chairs on the Titanic in order to get a better view of the musicians.
The income tax box is a small box, and it is the wrong box. Income
taxes take from workers that which they worked to create! We have to get outside
that box.
A national sales tax is clearly not the answer. Different box, but
still the wrong box. We need to get outside that one, too
After we've looked at all the illogical proposals, I hope we'll move toward
the one that is logical and just and will promote widespread prosperity:
land value taxation. If we begin collecting the annual value of land, in
all its forms, and the revenue is insufficient to supply all our revenue
needs, then we may need to rely on sales taxes or income taxes, or estate
taxes (which today are one of the few ways to capture a portion of the appreciation
of land, but only from the top 2% of the population).
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. ...
... This might seem too good to be true, but in fact, such a resource exists
everywhere and is indispensable for human action. That resource is land.
The supply is
fixed, immobile, and inherently visible. If land value is taxed, the land
will not flee, shrink, or hide. A tax on land value has no deadweight loss.
If the
purpose of tax reform is to reduce the extra costs imposed on the economy,
a tax on land value does this
far better than any tax on income or goods. ...
...The use of land value or land rent for public revenue thus has
proponents today, but their voices have not been widely heard in the
debate over tax reform, and there are also opponents. The purpose of
this report is to give greater voice to land value taxation and to
better inform those interested in tax reform about this alternative.
We can best judge among options when we consider the whole range of
possibilities. ...
An idea widely held,
yet little known!
Land value taxation is often ignored in policy discussions. For example,
the publication Towards
Fundamental Tax Reform, analyzing various proposals to reform the
U.S. tax system, discusses taxes on income, sales, and value added.
The editors recognize “Government should seek to raise sufficient funds
to finance the desired level of spending in a manner that does the least amount
of damage possible, while distributing the tax burden
equitably.”21 Yet the book has no mention of taxes on land value or
rent, even though, as argued in this study, land value taxation best fits
those criteria
and resolves the alleged trade-off between
efficiency and equity. ...
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....
... Even if land value taxation does not yield the revenue that is desired,
this is no argument against shifting as much public revenue as possible
to rent-based sources. Public revenue from land values is the most
complete application of “supply-side” economic policy. Supply-side
policy attempts to increase production and the supply of goods by decreasing
costs, such as by lowering taxes and eliminating excessive regulations and
barriers to trade. A complete tax shift, away from taxing production to taxing
land values,
is the ultimate supply-side policy, since it removes the excess economic
burden of taxation. The
public collection of land rent is thus the ultimate in tax reform.
Land value taxation would also result in a substantial reduction in the cost
of government. The administrative cost of land value taxes would be less
than that of existing property taxes (which require a greater inspection
of buildings
and improvements), and the cost of enforcing income and sales taxes would
be eliminated. By improving economic growth and allowing workers to keep
all the
money they earn, land value taxation would result in higher incomes, reducing
the demand for government welfare programs. Decentralization, privatization,
and the elimination of wasteful government programs would further reduce
the amount needed to fund government. ...
Critics of land value taxation claim that over time, there would be popular
pressure to bring back the income and sales taxes. It is true that those owning
valuable commercial land will always seek to lower the tax on land and shift
taxes to labor and capital. It is also true that governments can ignore constitutional
rules, and governments get overthrown. By this argument, the slaves should
never have been freed, because slavery can always be restored. Women should
not have been given the opportunity to vote, because that could be reversed.
This is an argument against any reform and indeed against any action to improve
your condition. (Why bother to work? You might lose your money, and it will
have been for nothing.) This is ultimately a philosophical argument for the
futility of any human action.
But the fact is that there was a shift in public attitude about slavery,
and most folks now believe it was morally wrong. It would be politically
difficult
today to reverse the equal rights of women to vote. Similarly, once there
is a shift in public attitudes about taxing wages, the view that it is morally
wrong to tax labor could be just as
irreversible. ...
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.
Land value taxation is central to the political philosophy of the founding
fathers of the United States. Far from being a new idea, or the idea of a
small group
of thinkers, it is a concept embraced by many of the most important figures
from our history: John Locke, Adam Smith, Thomas Paine, Thomas Jefferson,
and today, Milton Friedman. Land value
taxation is part of America’s proud and distinguished tradition of political
philosophy. Surely it belongs in the national debate over how best to reform
the nation’s tax system.
The shift from taxing productive human action to collecting the economic
rent generated by nature and communities is more than a fiscal reform. There
is a
philosophical and even spiritual side to this reform. ...
Public revenue from land rent is a necessary element of true free trade and
a genuinely free market. Even a small and flat income tax, sales tax, or tariff
grants government the power to intrude into transactions, adding friction that
reduces the flexibility of an economy. The elimination of this friction and
deadweight loss is made
possible by land value taxation.
The obstacles to land value taxation are political. The current system benefits
certain vested interests that will resist reform. But since the public at
large will benefit from a shift to land value taxation, and since they greatly
outnumber
those obtaining privileges from the current system, the greater reason why
this tax reform has not taken place is that the public has not been informed.
Once
citizens, taxpayers, consumers, and voters understand the option of obtaining
public revenue from land value or rent, then the logic of getting both greater
efficiency and greater justice may well prevail. ...
... 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.
Land value taxation is central to the political philosophy of the founding
fathers of the United States. Far from being a new idea, or the idea of a
small group of thinkers, it is a concept embraced by many of the most important
figures from our history: John Locke, Adam Smith, Thomas Paine, Thomas Jefferson,
and today, Milton Friedman. Land value taxation is part of America’s
proud and distinguished tradition of political philosophy. Surely it belongs
in the national debate over how best to reform the nation’s tax system.
The shift from taxing productive human action to collecting the economic
rent generated by nature and communities is more than a fiscal reform. There
is a philosophical and even spiritual side to this reform.
One of the ongoing problems of social philosophy is the relationship of
the individual to society. In conventional tax policy, there is an inherent
conflict between the individual and government as the agent of society. Individuals
want to benefit from the collective services provided by government, but
the mechanisms for financing those services typically have used force against
individuals and invaded their private lives.
The collection of land rent for public revenue reconciles the individual
and the community. The community and its government no longer intrude into
the individual’s private life and stifle his or her pursuit of economic
well being. The tax on land value is not a tax in substance, but only in
the form of payments to government. In substance, the payment is a sharing
of the benefits provided by community and nature, and a payment for the services
that generate the value of the land. If this payment is not made by the landholder,
the services become a subsidy, producing a value not returned to the community.
The public collection of land rent can induce an efficient use of land.
Land value taxation gives land a “carrying cost,” inducing title
holders to put their land to its most productive current use, rather than
hold it awaiting higher prices. With the price of land thus kept low, banks
would lend for productive investments rather than to buy land.
Public revenue from land rent is a necessary element of true free trade
and a genuinely free market. Even a small and flat income tax, sales tax,
or tariff grants government the power to intrude into transactions, adding
friction that reduces the flexibility of an economy. The elimination of this
friction and deadweight loss is made possible by land value taxation.
The obstacles to land value taxation are political. The current system benefits
certain vested interests that will resist reform. But since the public at
large will benefit from a shift to land value taxation, and since they greatly
outnumber those obtaining privileges from the current system, the greater
reason why this tax reform has not taken place is that the public has not
been informed. Once citizens, taxpayers, consumers, and voters understand
the option of obtaining public revenue from land value or rent, then the
logic of getting both greater efficiency and greater justice may well prevail.
... read
the whole document
Nic Tideman: Improving
Efficiency and Preventing
Exploitation in Taxing and Spending Decisions
Fundamental tax reform is on the
agenda these days. There are a
variety of proposals for a flatter federal income tax. There are
proposals to replace the federal income tax with a national sales
tax. I would like to suggest that discussion of fundamental tax
reform should be preceded by a discussion of what constitutes a good
system of taxing and spending. When principles of good taxing and
spending have been examined, what emerges as attractive is greater
reliance on local decision-making and, for federal revenue, an
allocation of financial obligation to states rather than direct
federal taxation of individuals or corporations. ... ... Read
the whole article
Nic Tideman: Basic Tenets of the
Incentive Taxation Philosophy
Creating a More
Productive Economy
The ideas we espouse are
attractive not only for their embodiment
of principles of justice, but also because they can be expected to
lead to a more productive economy.
Economists agree that the
imposition of taxes generally retards an
economy. The reason for this is that with almost all taxes, it is
possible for a tax payer to reduce total tax collections by doing
less of whatever is taxed--work less, spend less, save less, etc.
This means that taxes generate an incentive to be less
productive.
With fees for the use of
government-assigned opportunities, on the
other hand, the only thing that a person can do to reduce the amount
of money that he or she pays is to use fewer of these opportunities.
But then the opportunities can be used by someone else, who will pay
the fees, and total public revenue will be unchanged. There is no
possibility reducing total government revenue by being less
productive. Thus these fees can be collected without dragging down
the economy in the way that existing taxes do.
Our ideas provide for the natural
financing of any worthwhile
public expenditure that makes a particular area more attractive or
productive--parks, freeways, subways, sewer systems, etc. These
public expenditures raise the rental value of land in their vicinity,
and thereby raise the fees that can be collected for using the land.
If the activity is worthwhile, the increase in rental values will be
sufficient to pay for the activity.
Another way in which our ideas
promote a more efficient economy is
by eliminating the opportunity grow rich by having government promote
one's own interest at the expense of others. Such distortions of the
political process can occur either by persuading a government agency
to spend money in a way that raises the value of land that one owns
while others foot the bill, or by persuading a government agency to
prohibit others from doing what one is permitted to do. In both kinds
of cases, the person who promotes his or her own interest has no
reason to take account of the costs that are thereby imposed on
others, and typically these costs to others are greater than the
self-seeking benefits. This makes the economy less productive.
Furthermore, the very possibility
of growing rich by manipulating
government action draws talented people into the effort to manipulate
government decisions, when they could be employed doing something
useful.... Read the whole article
Fred Foldvary: The Rent,
the Whole Rent, and Nothing but the Rent
The use of rent for public revenues therefore has no excess burden, no
burden on society or the economy. Taxes on income, goods, and
transactions do have an excess burden, since by raising the price and
reducing the quantity of goods, resources do not get allocated to where
the people most want them. Taxes on labor and goods raise prices, while
rent-based payments do not affect the rent, and they lower the price of
land rather than raise it.
Rent is therefore the ideal
source of
general public and community revenue. Tax reform should
therefore shift to rent as the primary source of general funds.
Pollution charges can supplement the rent, and indeed can be considered
a rental charge for using and abusing the atmosphere, land, soil, and
other forms of land. There could also be user fees for services
specific to users, fines for violating traffic rules, and profits from
enterprises.
The economic rent from
minerals,
water, and oil would be natural resource royalties that could be paid
by bidding for the rights to extract, from payments based on the amount
of mining, and the profits from the operations, depending on the
circumstances. ...
The public and community collection of rent puts
land at its most productive use, maximizing the wages of workers while
minimizing sprawl as well as boom/bust cycles. We need to understand
rent to fully understand the market process and the cause and remedy of
many of today's social problems.
Read the
whole article
Ted Gwartney: A Free
Market Strategy to Reduce Sprawl
- Unused land is far more abundant than we realize.
- End the Public Subsidy of Land Speculation and Sprawl
- Counterproductive growth limitations and regulations
should be abolished.
- A Strategy for Urban Renewal
- A Strategy for Economic Development
- Public Finance by Self-Financing
Unused
land is far more abundant than we realize.
We utilize less than 5% of the total land area in the United
States for urban purposes, including housing, commerce, and
manufacturing. As you fly across the country all you see is farm,
timber, desert and an occasional small community. While less than 5%
of our nation's land area is needed for urban purposes, much vacant
land within existing cities is bypassed because it is cheaper to
build further out than pay the high prices demanded for the more
efficient, better located, land. The result is urban sprawl.
- Why do
we choose to utilize land distant from employment, social, and civic
needs while bypassing superior land?
- Why do many of us choose to
spend two hours each day commuting to work?
- Why do our older cities
fail to renew or rebuild obsolete buildings?
Sprawl is not just about
the density of land use. In many cities only one half of the land is
devoted to housing and commercial uses while the other half is vacant
or under-improved. Could it be that there are inefficient
requirements built into some public policies? Smart growth should not
be constrained by archaic patterns that impede or misappropriate free
and open urban land usage. Local ordinances and practices within
cities that force accelerated suburban sprawl should be abolished. We
don't need more regulation, we need greater freedom to act
responsibly. Individuals should have the opportunity to decide
whether they want to live in the suburbs or in the city. This should
not be a coerced decision because of a public policy that impedes
growth within the city. Simple tax reform can help to achieve some of
the goals and objectives of smart growth without government
intervention and wasteful subsidies.... Read the
whole article
Maurie Fabrikant: An
Open Letter to Wayne Swan
Modern
conventional wisdom is that increasing land price signifies a healthy
economy. Exactly the reverse is true! Increasing land price
demonstrates that much money is being invested in real estate and that
necessarily means that less money is being invested in productive
ventures. Increasing land price causes increasing rents ... because the
land owner must derive sufficient income to pay the interest charged on
the loan needed to buy the land and its improvements. This makes it
increasingly difficult for businesses to trade profitably ...
especially when there is a plethora of complicated taxes that cause
extremely high compliance costs. It's no wonder that more and more
goods are now imported as local manufacturers choose to close their
operations. In many places in Australia, land lies relatively idle. For
example, in Melbourne's CBD, several large blocks have been idle for
years and in the suburbs, shops remain empty for months, even years.
Yet government-released figures on unemployment - the reality may well
be much worse! - admit that unemployment exceeds 6%. The old adage, "Idle lands cause idle hands" is
clearly demonstrated in Australia ... and elsewhere.
The
only possible "winners" in this
"game" are those who presently own land; the more they own, the more
they have the potential to "win". Land owners enjoy enormous increase
in the price of land they own simply because they were able to purchase
it when its price was comparatively low. They do not - in their role as
owners - contribute in any way to the prosperity of the nation. Indeed,
because they grow wealthier without producing, they are, in fact,
parasites! That sounds incredible but it is true nonetheless. How so?
Simply because those owners receive part of the wealth earned by all
citizens; at least some of that wealth is used to push up land prices
but only owners enjoy those increased prices. Tenants certainly do not!
All who labour - and this includes land owners who perform labour! -
are thereby effectively robbed of some of their earnings. (Please note
that I do not blame landowners personally; most would - I'm certain -
be horrified to think that they are parasites. The fault lies
in the
parliamentary enactments that permit such a situation to prevail.)
Difficult as the situation is
now, it
will be worse still in another two
human generations' time. How so? Because the same forces that
have been exerted in the past continue unabated. In fact, these forces
appear to be intensifying! Taxation is continuing to escalate as
pressure groups clamour ever louder for financial assistance. The
average rate at which personal income tax is levied is increasing -
even though the maximum rate levied is falling - and sales taxes and
the like are being applied to a widening range of goods and services.
The wealthy continue to derive benefit from the tax-minimisation
experts they employ - because they save more tax than they pay to those
experts - leaving the relatively poorly-paid employees to carry most of
the burden. Unless, of course,
steps are taken to change these tendencies, Australia will become an
increasingly unpleasant country in which to live. That's definitely not
the future I want for my 3 children and
7 grandchildren. And I'm sure you don't, either!
The solution to this conundrum
is,
perhaps amazingly, incredibly simple; namely, require all owners of
land - in fact, all natural resources, including intangibles such as
broadcast bands, to pay to all Australians, via the government, an
annual rental in exchange for exclusive ownership rights to those
natural resources. What could be fairer? If a citizen has exclusive
ownership rights to a natural resource, that obviously means that all
others have no rights to it whatsoever. Therefore, that citizen must
pay compensation - in the form of a periodic rent - to all others. Now
that's a perfect manifestation of "user pays." How big is this periodic
rent? That's simply answered, too. It's what the citizens, generally,
think that natural resource is worth! And that's easily - and
accurately - determined by valuers, individuals who have great
experience because they simply note the prices at which similar natural
resources in the vicinity - both in space and in time - are sold then
use those prices to predict that of a similar resource.
This would constitute real tax reform and - when implemented -
would
obviate the need for income taxes and sales taxes. How is this? When a
continuing rent is charged for ownership rights to a natural resource,
that natural resource will have little or no purchase price. Setting up a
business or residence will be much cheaper first up as only the
improvements must be paid for initially. Money that presently
must be borrowed to pay for access to natural resources will become
available for productive purposes. Because rents will be payable on all
natural resources that are privately owned - whether or not they are in
use - those natural resources will become used or will return to the
nation as public land. Speculation in natural resources will be
immediately terminated thus eliminating a major factor in escalating
price. The converse of the old adage quoted earlier is apposite:- Far less idle land will translate into far
fewer idle hands! That will
translate into a reduced need for
social security expenditure. Additionally, lower levels of
unemployment will cause reduced anti-social and criminal activity with
consequent savings in law enforcement, punishment and rehabilitation.
And elimination of most of our taxation regulations will cause
compliance costs to all but disappear. The brakes that presently retard
Australia's productivity will not merely be released; they will be
discarded! ... read
the entire article
Bill Batt: Painless Taxation
Abstract
Real tax reform could do away with those taxes that are resented by
the large proportion of our population. We could replace all taxes on wages and
on interest
by instead taxing economic rent. Rent is windfall income; it is income that
arises not from the efforts of any person or corporation; it comes about as
a surplus gain from common social enterprise. There is ample moral warrant
for society to lay claim to that which it has created, as well as to that which
no individual or party has earned. Analysis increasingly makes clear that economic
rent in all its forms is far larger than official government figures indicate;
in fact it is likely sufficient to supplant all current taxes on labor and
capital (wages and interest) which are acknowledged to have so many negative
effects. Recovering economic rent in all its manifestations by taxing its various
bases actually can foster economic performance and yield other benefits that
make it the natural source of revenue for governments. Such a tax is essentially
painless. ... read the whole article
Fred Foldvary: Geo-Rent: A Plea to Public
Economists
Most of the literature on
taxation, in textbooks and articles, is
confined to studying existing forms of taxes, namely income, payroll,
sales, excise, tariff, value-added, estate and property taxes.
Consider the article by David Altig et al in the American Economic Review
(2001) entitled "Simulating Fundamental Tax Reform in the United
States." The authors examine "fundamental alternatives" to the U.S.
federal income tax. "Fundamental", they explain, means "the
simplification and integration of the tax code by eliminating tax
preferences and taxing all sources of capital income at the same rate"
(574). It is important to analyze such reforms, but the reforms
simulated are not what I would call fundamental. They are only a
restructuring of the existing income-tax code.
Here, I plead for more attention to truly fundamental reform.
The idea
is to tax the market value of land, exclusive of the value of
improvements.
... Read
the entire article
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