Land Value Taxation Campaign

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Land rent for public revenue

How our Economy really works

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BOOK REVIEW How our Economy really works – A radical reappraisal by Brian Hodgkinson.

The author, is, unusually for a supporter of land value taxation and free trade, a graduate in economics, having gained a first class honours degree in Politics, Philosophy and Economics at the University of Oxford. This puts him in the advantageous position of being able to apply a critique of mainstream economics in its own terms, something which most of us are unable to do.

Most supporters come to land value taxation through a study of economics within the mainstream classical tradition as it was developed by the French Physiocrats, Smith, Ricardo and Henry George. As was explained in ‘The Corruption of Economics’ by Mason Gaffney, and is referred to briefly in this book, the classical tradition of economic thinking was re-worked about 120 years ago, with the conflation of land and capital, the former being regarded as a sub-species of the latter. For those who have studied in one of the few institutions which has continued to teach economics in the classical tradition, this volume is a useful compendium, relating classical theory to the main issues which are currently a matter of public concern, and which politicians are chronically unable to address with effective policies. Counter-productive policies are commonly imposed and then surprise is expressed when they do not work. Armed with a knowledge of basic classical principles such as Ricardo’s Law of Rent, failure could have been predicted. If you are familiar with the supporting body of theory, this volume is therefore an invaluable resource and will keep the readers’ thinking up-to-date and relevant.

Unfortunately, for anyone who does not have a grounding in classical economics theory, the book will probably seem incomprehensible, as so much of what is said is counter-intuitive. Ricardo’s Law, which is foundational to the arguments presented, is covered only briefly. Most readers unfamiliar with it would need it to be explained more fully so that they grasped its full significance. The widepread state of ignorance of Ricardo’s Law has become particularly evident in discussions on the changes that will occur following the departure of the UK from the European Union – such as the possible end of farm subsidies and import tariffs. For this reason, this volume is not something that could be handed to anyone in the expectation that it would enlighten them; to that extent, it does nor really live up to its title. It would, on the other hand, be useful as a text book for a course on the subject, where students had the opportunity to pose questions, with a tutor on hand to explain the ideas that they found difficult to grasp.

As a bonus, Hodgkinson clears up a confusion which has always been a difficulty in the theoretical work of Henry George: the notion that interest is the return to capital. Hodgkinson regards capital as an input to production, no different in principle from other inputs such as labour and components which are a product of labour. On that analysis, interest is merely the price of the credit needed to purchase the capital. This view has the advantage of dividing the products of wealth creation into just two streams instead of three: rent and wages, accruing respectively to land and labour.

How our Economy Really Works – A Radical Reappraisal by Brian Hodgkinson. Published by Shepheard-Walwyn (Publishers) Ltd · 107 Parkway House · Sheen Lane London · SW14 8LS

ISBN: 9780856835292 - Paperback £9.95


What could the Chancellor do this month?

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Followers of this website will know that we consder the entire UK tax system to be dysfunctional and damaging, but that would take at least five years to fix. For now, judicious juggling is needed, to begin to set it in the right direction. VAT is a dangerous brake on the economy and needs to be phased out. Because of the churning, deadweight losses and abstraction from other taxable revenues, the net yield from VAT is nowhere near the headline figure. A cut to around 12% straight away would be beneficial and have important symbolic value now that the UK is no longer in the EU. 

Although UK property taxation is in need of a comprehensive review, in the short term there is scope for increasing revenue from the Council Tax and UBR as they stand. The Council Tax ratio between top band and bottom band properties could be increased from the present 3:1, reflecting the fact that the actual values are in the ratio of at least 6:1. The additional amount payable could be national. This too could be applied straight away. It would pick up useful amounts of additional revenue, especially from high value residential properties in London.

If the problems with the present system were sorted out, additional revenue could also be raised from the UBR. In principle, the tax should be payable by freeholders. It should apply to vacant sites and to all new leases as the present ones expire and are renewed. This would open the way to increasing the tax without driving businesses to the wall. Before the next valuations take place, it should be established that buildings and improvements should be ignored in the valuations, which would open the possibility of charging the rates on vacant but developable land.

As we have always argued, there is a longer-term need to reduce dependence on other damaging taxes, in particular, PAYE Income Tax and National Insurance. These effectively operate as payroll taxes and are an important factor in persistent unemployment, with consequential losses to the economy, and welfare costs.

On the positive side,, importing of food from the low-cost suppliers whose products filled the shops before 1973 will give a boost to real wages and save government from having to increase index-linked pensions, welfare benefits and and public sector pay.


Digital tax EU fail

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President Trump is stepping in to the dispute over EU proposals for digital taxes. That raises important questions. What do the US tech giants owe to foreign governments that they do not already pay through existing taxes? How exactly do these obligations and liabilities arise?

If existing taxes do not cover the obligations and liabilities owed to governments, the shortfalls are not just from the US tech companies but must also be owed by other companies operating in foreign territories generally - companies with property portfolios, for example. It indicates the need for a broad-based review of taxation based on sound principles. Sound principles are not being followed by EU measures such as General Anti-Avoidance Rules, which flout several of the basic foundations of good law, and other steps the EU has taken to crack down on offshore companies - which are bound to fail.

The proposal for a digital tax illustrates the cluelessness of the EU Commissioners. There is a real issue, but they come up with a gut reaction which plays to a certain gallery and fails to look at underlying principles. In the words of Adam Smith,

"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state." In other words, tax paid should be related to benefits received." Ability to pay arises from those benefits.

As regards digital taxes, there are many ways of capturing revenue, based on sound economic principles, which are worth exploring. Digital businesses require physical offices and plant, and use physical resources in physical locations - radio spectrum and cable wayleaves, for example, which in economics are classified as 'land'. The taxable value of these businesses can be captured through leasing of radio spectrum, which already happens through a system of auctions, and the taxation of wayleaves, which is also feasible through a leasing system. Revenue might also be generated from domain names, since these have some of the characteristics of land. Names with just a few letters, or are easily remembered, are not in unlimited supply and are effectively trade marks. A digital tax would cut into the potential revenue from these sources. It is a pity that politicians, especially EU politicians, are not on the ball when it comes to land and other natural resources.


Cracking down on low pay.

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A new report from the Resolution Foundation Companies says that employers who fail to pay the minimum wage should be punished more harshly in an effort to crack down on low pay. Oh dear.

Wages are the least that someone will accept to do a job. If the demand for labour is buoyant, then stingy employers will not attract and retain the workers they need. A lack of demand for labour cannot be legislated away. The authors of this report ought to know that.

It is also the case that employment will not occur if the value added by a worker is less than the GROSS LABOUR COST to the employer. The tax system is the villain. Gross Labour costs to employers are around 60% higher than real purchasing power of wages.


Flybe in trouble

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The UK regional airline Flybe is in financial difficulties and is asking for the government to reduce or scrap air passenger duty. Against them is the green lobby which is arguing that air travel should be reduced; we do not have a view on the latter. However, this highlights the need to review the way in which the aviation industry is taxed. Flight paths are ‘land’ and a public resource. They are managed by a private-public partnership company, National Air Traffic Control Services NTCS), which was set up to distance air traffic control from the Civil Aviation Authority (the CAA), which is responsible for overall regulation. Applying the principles on which land value taxation is based, we might say that air traffic should be limited by decisions about the number of flight paths that are permitted. These flight paths can then be allocated through the leasing by auction of landing and take-off slots. Under such a regime, the government would get rid of duties and surcharges, which are a complex and clumsy way of rationing air space which is, of its nature, limited. If the present duties and surcharges are phased out, the landing slots will be worth more and the government will get its revenue anyway.


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