Keep the Gravy Train Coming?


D. J. Webb

I’m a great supporter of lower taxation, and so the report released on Sunday evening by the 2020 Tax Commission, supported by the Taxpayers’ Alliance under the chairmanship of Allister Heath, attracted my attention. Of course, as a libertarian, I would prefer to see the state spend around one-third of GDP, as recommended in the report, which would be an improvement on the current level of around 50%. But the report struck me as incredibly unambitious. Why should the state even spend as much as one-third of GDP? In Hong Kong, the figure is closer to one-fifth. The conclusions of this report are therefore a long way from libertarianism, amounting to a proposal that would keep the gravy train coming for the bloated public sector. A glance at the image below shows that the proposals in this tax reform report are far from amounting to a genuine closing down of the public-sector sinecures. All the income streams indicated below are required to keep the state show on the road:

Tax Commission's tax proposal

The following passage in the Commission’s summary of its report indicates that its proposals would allow for repeated taxation of income streams in a way that amounts to a total top marginal tax rate of 73%!:

Many streams of income are currently taxed repeatedly to such an extent that the total top marginal tax rate on income earned, saved, invested in a company and passed on to children is nearly 95 per cent—and that is before taxes on consumption such as Value Added Tax. Incentives for entrepreneurs would improve substantially with the abolition of Corporation Tax, Capital Gains Tax and Inheritance Tax, and their replacement with a single tax on capital income. The top total marginal tax rate on income earned, saved, invested in a company and passed on to children would fall, under the 2020 Tax Commission proposals, to 73 per cent.

Income and capital taxes at 30%

Let us look at detailed tax proposals in the report. The personal allowance would rise to £10,000 a year; national insurance would be abolished; and a single tax rate of 30% would be brought in. This would mean that someone on the average wage of around £25,000 would pay tax at 30% on £15,000, handing £4,500 over to the state, and taking home £21,500. This is a little better than the situation that currently obtains, where someone on £25,000 pays £3,505 in tax and £2,132.64 in national insurance and takes home £19,362.36. The proposals amount to a reduction in taxation, but not a sea change in the relationship between an individual on average earnings and the state. At present, employers also pay £2,474.06 in employers’ national insurance for each employee on £25,000, and one of the Tax Commission’s better proposals is to do away with employers’ national insurance, thus eliminating the deterrent to taking on staff.

The current range of income tax bands, extending up to 45%, with national insurance taking the effective highest band up to 47%, penalises entrepreneurs, and so there would be many positive economic effects from establishing a single 30% rate of taxation. This would be an improvement compared with the status quo, but a 30% rate of taxation remains exorbitant. As a conservative, I cannot see why personal income tax exists at all: it is simply none of the state’s business how much I earn, and to that extent I would object to a 1% tax rate, let alone a 30% one.

I would welcome the abolition of capital gains tax called for in the report, as this is merely a tax on investment. But for the same reasons libertarians oppose income taxes, we must oppose the Tax Commission’s recommendation that a 30% be imposed on “capital income”, in the form of dividends, interest and rent.

Land and rent

The Tax Commission’s definition of “rent” as “capital income” is worth analysing, because rent is not the same thing as capital at all, and land should be considered separate from capital. A glance at the history of taxation in England—and indeed many other countries—shows that taxation originated in possession of land. Allodial title to land was held by the Crown under the feudal system, with freehold title developing out of tenancy in fee simple. Simply put, ownership of land has never been absolute, but has carried obligations with it. This makes sense, as land is a social resource that is not being produced (other than by occasional sea reclamation), and the value of a particular land site is enhanced by social activity, including public provision of infrastructure and population movements.

For this reason, from a libertarian perspective, it is land that ought to be the source of a smallish revenue stream for what services need to be provided by the state, not wages or capital. This analysis is supported by the classical economists, who drew a three-way distinction between capital, labour and land (or profits, wages and rent), rather than the two-way distinction apparently being employed by the Tax Commission in its recent report.

Whereas the Crown has ultimate title to land, and therefore the right to impose a levy on land, the Crown has no constitutional or logical right to impose levies on labour or capital. Yet the Tax Commission wants to see the state permanently carrying off 30% of our wages, and fails to call for a levy on land. The report argues that transaction, wealth and inheritance taxes should be abolished, and includes an abolition of the stamp duty on property in its prescriptions. The result is to allow the current fixation on speculation in property to continue. There should be no stamp duty, they argue, and any increase in site location values that pushes up property values should be passed on as a legacy to the next generation, without inheritance tax.

Yet speculation in property is what landed the UK in its financial mess in the first place. Libertarians would, of course, support the abolition of inheritance tax: where someone’s estate derives from productive activity, it is nothing less than an abuse of power for the state to commandeer a percentage of that during probate proceedings. But where the estate comprises property, whose value has increased over time owing to both government policies that have boosted the housing market and infrastructure developments, this is another thing entirely. Passively benefiting from an increase in property prices is not the same thing as investment at all. The Tax Commission’s proposals, including the abolition of stamp duty, would amount to an attempt to pump the housing market once again.

Council tax

The report also argues that local authorities should raise half of their expenditure from local taxes, including sales taxes and local income taxes. While the report lamely argues that councils would be prevented from “abusing” this, I see it as inevitable that such a proposal would lead to a large increase in taxation by pompous council bureaucrats who would see the advantages to themselves of yet more empire-building at local taxpayers’ expense. Worse, this proposal amounts to an admission by the Tax Commission that income tax would not actually be kept at 30%. If local governments were permitted to add on their income taxes and central government funding for local governments were halved, we could see effective tax rates much closer to 40%. Where is the radicalism in this tax report?

It is probably a good idea for central government funding for local authorities to cease, but income tax surcharges are not the way to go. For a start, many people get few services they need from the local council. I would prefer legislation to lay down a final and complete list of things local governments can spend money on, with expenditure on further items rendered illegal. Education services and rubbish disposal could be privatised. Other than sweeping the roads, providing streetlighting and policing, I am at a loss to know what local governments could be spending money on. There is nothing genuinely decentralised about giving financial autonomy to councils: the real decentralisation is to allow people to spend their own money on what they want, which means they buy in the services they need and are not forced to fund council services they don’t need.

The Commission claims that its proposals would not lead to a sharp fall in spending by local government, as “many academic studies have found that competitionbetween local authorities leads to lower spending but not a race to the bottom”. But a “race to the bottom” in public-sector spending means a rebalancing towards private consumption. Why is less fraud and less embezzlement via the tax system “a race to the bottom”?

Paying for a bloated public sector

The Tax Commission argues for a large state in these terms:

Academic research has found that the level of spending that maximises performance on the Human Development Index is around 30 to 35 per cent of national income. But the optimal level to promote economic growth, and therefore long term prosperity, is lower than that.

While admitting that long-term prosperity would be enhanced by lower levels of taxation than this, the report states that the maximum justifiable size of the state is 35% of GDP. The reference to the Human Development Index requires analysis: the United Nations’ Human Development Index includes weightings for public expenditure on health and education, as well as for social inequality, and so it follows that a country whose health and education systems were privatised would score badly for the Human Development Index. Similarly, a society without welfarism is “less equal”, and so scores poorly. Greenhouse gas emissions per capita and other indicators included in the index also show that the index is politically inspired, amounting to an index for technocratic rule on the Western model.

From a libertarian perspective, the ideal rate of tax is not that at which the maximum in taxation can be extracted without overly deterring productive activity, as taxation of income and profits is always a deterrent to productive activity. Rather, the ideal rate of taxation is that where the state performs only the activities that logically need to be done by the state, and people get to keep their own profits and incomes. What little needs to be done by the state can be financed by land value levies and sales taxes or excise duties. It is quite apparent that a small state cannot be arrived at overnight—as our cultural policies have fostered family breakdown, which has left many millions looking to the state for support, where they might once have relied on family members—but there is no reason why the state should not be reduced over time to 15% or 10% of GDP. This report amounts to a step in the right direction, but would still keep the state’s gravy train coming, allowing the technocracy to continue to direct our lives.

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9 responses to “Keep the Gravy Train Coming?

  1. Does one “passively benefit” from an increase in the value of land? Isn’t the increase just because the value of money (being merely fiat paper) has decreased? Has the value of land increased in terms of, say, gold?
    Even if there is such a passive increase (and I merely pose the question as to whether that is true) how can that increase be taxed without selling the asset? The state forcing an individual to sell an asset is hardly libertarian.

  2. Yes, people do passively benefit from site value increases. It is not because the value of money has decreased, because over time (before the financial crisis) the increase in property value regularly outstripped price inflation and wage inflation. Gold is a commodity whose value is more volatile than that of land. What you are missing is that the property and debt fuelled model of the economy has us all running on the treadmill – most of our money goes in tax or mortgages.

    Site value levies are not dependent on forcing the sale of a property. Is the council tax dependent on forcing householders to move? I am talking about getting rid of personal taxation entirely, so the levy would be on non-creatable resources like land – and many properties are not lived in by residential owners. These can pay an annual levy. Residential owners who are asset rich but income poor could have the entire increase in the site value levied upon their deaths.

    Take a house that costs £100,000 to rebuild in a certain year. The property value is £300,000. We can assume the site value is £200,000. Ten years later, the government (we, the taxpayers) have built a tube station nearby and schools and things – and the area is now much more desirable. The property rebuild value, now that a conservatory has been added on and with inflation of building materials prices, is now £160,000. But the property value is now £600,000. The site value has gone up to £440,000.

    Of course improvements to the building and the inflation of build materials should be reflected in the higher rebuild value – and the householder who has added a conservatory on is right to expect a more valuable asset. But the £240,000 increase in the site value is not the result of the householder’s investment: it is a parasitical coasting on the wings of the state. We can reduce it for inflation – and if the inflation-adjusted increase i n the site value is £200,000, then that increment is levied in probate as a site value adjustment levy. The other £400,000 can go to the person’s heirs.

    This is only one way: another way is to force all freeholders to pay a site levy annually and take out financial vehicles to cover it, payable from the eventual sale of the house. You will have spotted straightaway that this system would not allow property prices to soar away in the way they have been (and so in the example above the site value might not rise so much), with more of our income going on consumption and less to the financial services industry. This also encourages efficient land use. There would be many other effects – a full study would be good, but google “land value tax”. I would like to see the Queen pay the land value tax/levy on the lands that were not her ancestral patrimony owing to the Glorious Revolution…

  3. djwebb2010

    See http://goo.gl/81uQK for Prosper Australia’s excellent submission to the Australian Treasury on the LVT

  4. djwebb2010

    I was struck by the claim that libertarians can’t support a land tax! John Stuart Mill in his Principles of Political Economy said:

    “All taxes must be condemned which throw obstacles in the way of the sale of land, or other instruments of production. Such sales tend naturally to render the property more productive. The seller, whether moved by necessity or choice, is probably some one who is either without the means, or without the capacity, to make the most advantageous use of the property for productive purposes; while the buyer, on the other hand, is at any rate not needy, and is frequently both inclined and able to improve the property, since, as it is worth more to such a person than to any other, he is likely to offer the highest price for it. All taxes, therefore, and all difficulties and expenses, annexed to such contracts, are decidedly detrimental; especially in the case of land, the source of subsistence, and the original foundation of all wealth, on the improvement of which, therefore, so much depends. Too great facilities cannot be given to enable land to pass into the hands, and assume the modes of aggregation or division, most conducive to its productiveness. If landed properties are too large, alienation should be free, in order that they may be subdivided; if too small, in order that they may be united. All taxes on the transfer of landed property should be abolished; but, as the landlords have no claim to be relieved from any reservation which the state has hitherto made in its own favour from the amount of their rent, an annual impost equivalent to the average produce of these taxes should be distributed over the land generally, in the form of a land-tax.”

    See V.5.5 at http://www.econlib.org/library/Mill/mlP67.html#Bk.V,Ch.V

  5. djwebb2010

    Also see Merryn Somerset Webb’s explanation at Moneyweek: http://www.moneyweek.com/blog/scrap-income-tax-introduce-location-tax-57801

  6. I don’t deny for a moment that the property/debt “model” we currently “enjoy” is, to say the least, malign in its effects.
    However, I remain unconvinced on the passive benefit assertion-for that is what you have made. The mere fact that a value has risen but cannot be realised is not a benefit-in fact it is a positive disbenefit. Meat must be killed to be eaten!
    Everyone has to live somewhere. Suppose one buys a house in a quiet area. That area becomes fashionable-values rise. That is precisely the opposite of what was desired. You are then taxing that person on the disbenefit-hardly right! Agricultural land has risen in value-that is not a benefit to farmers who cannot buy more because the returns won’t support the value. They cannot develop the land because they are not allowed to, they cannot sell without CGT taking out so much the capital sum won’t allow investment in something else. How have they benefited?
    You say that let property will be able to bear the annual levy-but this i effectively personal taxation again-precisely what you wish to abolish! And yes, of course, Council Tax can force the sale of a property-e.g. the house mentioned above, now worth so much more (and therefore Council tax greater) and the Council Tax unaffordable.
    A land tax will, in any event, lead to a general wealth tax (just see what happens with Osbornes incipient Mansion Tax)-when what should be encouraged is the creation and retention of wealth.

  7. Hi I don’t want to get into a silly argument with someone who claims a rise in the value of someone’s home is undesirable to that person. The difference between the land value tax and income tax and profit taxes is that income and profit taxes exert deadweight effects, whereas the LVT does not create deadweight economic effects. There is no deterrence to generating income and profits. You **clearly** have not read the links I linked to above including the 177-page explanation in PDF by Prosper Australia. You like to jump in and argue about someone without having read the background material – but then you don’t know the contours of the debate. I don’t have time to summarise a 177 page PDF here – please read it yourself.

  8. Well, I stand corrected. I was however trying to make valid points-apparently not.

  9. djwebb2010

    True, the points were not valid! Look, examples abound. I was reading this article today: http://www.telegraph.co.uk/finance/personalfinance/consumertips/9285284/Zero-interest-rate-can-Britains-consumers-learn-from-Japan.html, where, talking of the demographic ageing of Japan, it says:

    “And while elderly holding the bulk of the nation’s wealth, some $20trillion (£13.2trillion), the young are likely to have to cover massive pension and care bills.”

    It is simply nonsense to say that those young enough to be in work (the 16-65 year olds) must pay higher and higher and higher taxes on income and profits in order to pay for older generations sitting on the vast majority of a nation’s wealth!

    I don’t know where to start in telling you how wrong that is! Income and profits need to be freed in order to allow maximum economic growth – it is the “dead wealth” held in property, monopolised by the older generations, who still expect subsidies from those in work, that has to be tapped for ballooning social programmes (there is a good argument for axeing much of the welfare state, but queries over the timing and feasibility).

    There’s nothing libertarian about putting huge impositions on income and profits to fund older generations who benefited hugely by buying property at low prices decades ago and are sitting on much more wealth than the people who are being looked to to finance their healthcare, care homes and all the rest.

    Take a look at http://www.ukpublicspending.co.uk/ – the pie chart shows that pensions are 19% of government spending – much larger than the 15% for “welfare”. And much of the spending on welfare and healthcare is devoted to older people – they are probably taking up most of the health spending. This is the reason why it is difficult to cut expenditure too much – 30% or more is going on older people (who possess the bulk of the wealth).

    I don’t know how to be more articulate in explaining this to you? We are getting demands for income tax, NI, council tax etc up the wazoo in order to fund previous generations who are asset-rich? We read every day how people with half a million pound properties want the taxpayer to fund their care homes, despite the fact they’ll never live in their properties again – just so they can pass those homes on as a legacy to their children!

    The one good thing about the worldwide economic crisis is that things will not be able to carry on in the old way, and so reforms will be forced on government. Bring it on!