WealthandWant theme: Tax Reform

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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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related themes:

land different from capital

financing infrastructure

land monopoly

land monopoly capitalism

economic growth

two-factor economics

three-factor economics

land value taxation not a tax on land

special interests

necessity of taking rent

effect of taxing land value

indirect taxation

effects of not collecting site value

sources of rent

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Essential Documents pertinent to this theme:

The Fallacy of the "Three-Legged Stool" Metaphor

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