Land Value Taxation Campaign

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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

 

Employers’ Burden - update 2019

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employersburden 2019

Our tax system is so misguided that it doubles the cost of employment and government spending, as the bar chart shows. The topmost bar is for those with a nominal salary of £10,000 per year; the division is into percentages. For each line of gross salary the length of the line is the total cost to the employer, including employers’ National Insurance contributions. The blue portion of each line is the amount received by the employee, minus indirect taxes, such as VAT; it represents real wages. The effects are capricious. Those with salaries of £25,000 are affected hard, as again are those with slaries of £50,000 and more. Top managers and executives are also a heavy cost to their employers.

Direct taxes are calculated from tax tables. Indirect taxes are taken from an ONS paper “The effects of taxes and benefits on household incomes 2016/17 table 16”. Some judgement has been used to match the two sets of figures. 

Here are some suggestions as to the possible real effects of this situation

  1. There is a sharp distinction of the view of wages from the points of view of employers and employees.
  2. There is constant impulse to replace people by machines.
  3. Unemployment is a constant factor in the economy.
  4. The effect of taxation at the margin is to kill off economic activity which might otherwise have been viable, leading to increases in tax so as to mitigate those effects. This maintains a vicious cycle.
  5. In the cycle of production, employment based taxation rolls up until it is paid by the final consumer. The consumers’ gross pay has to be has to be sufficient to pay the taxes and leave enough to live on.
  6. Government expenditure is mostly wages, and is thus doubled under the same rules.
  7. In order to cover the cost, an employee has to be able to add value to an amount twice what is needed to live on.
  8. Those who cannot meet this criteria will likely find their jobs at risk, if, indeed they can find any employment at all.

Although the UK is by no means the worst example (Sweden is probably at the bottom of the league) the disadvantages suffered in comparison to countries that do not tax wages so highly must be huge. It is, in fact, a 100% tax on wages!

This information was prepared by Tommas Graves and originally appeared in the Autumn 2019 edition of “Land and Liberty”

 

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.

 

Business rates and their effects

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In view of the announcement of Business Rate reform in the Queen’s Speech, a potted summary of the imact of the tax on business property is presented here.

Business rates concessions are only of temporary help, and only to existing tenants. The value of the concession will be captured by the landlord at the next rent review, and new tenancies will be agreed at rents which reflect the value of the concession.In granting this concession, the government is giving up a stable and reliable source of revenue, with little benefit to the group of people it is intended to help.

The effects of the business rate and any other property taxes are best understood in the light of Ricardo’s Law of Rent.

  • Regardless of who is nominally responsible for payment, the incidence of the tax is ultimately on the owner of the land. However, this effect may be subject to a time lag. In the case of new lettings, the entire incidence of the property tax is on the landlord, as the rent that can be charged is directly affected by the amount of the tax payable by a tenant, whose concern is with total occupation costs.
  • In the case of existing tenants, there is a time lag. An increase in the property tax is borne by the tenant until the end of the lease or until rents are reviewed. Conversely, the benefit enjoyed by a tenant from a reduction in property tax is temporary and is clawed back by the landlord when the rent is reviewed or the lease renewed.
  • If the property tax exceeds the gross annual rental site value, the site cannot be put to sustainable economic use; ie it is sub-marginal.

The following implications arise from the above points.

  • Unless valuations are up to date, it is possible that if rental values are falling – for example, due to changed trading conditions. The tax can then tip land into sub-marginality.
  • Because valuations are based on land plus improvements, the tax payable may exceed the land value of the site. This situation can arise where sites of low land value are developed with valuable plant; examples are Nissan in Sunderland, chemical plant in locations such as Teeside and Runcorn, and steel manufacturers in Scunthorpe and South Wales. This damages the long term prospects of these locations as viable manufacturing sites.

REFERENCE The effect of the ten year ‘rates holiday’ in the Enterprise Zones established in 1981 is analysed in the report of this study commissioned by HM government after the conclusion of the scheme. This confirms the prediction of Ricardo’s Law, that the incidence of property taxes is on the landlord and that any concessions are captured through rent increases.

http://webarchive.nationalarchives.gov.uk/20090211195642/http://www.hmrc.gov.uk/research/report42.pdf

 

Daylight robbery

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Order your signed copy of Dominic Frisby’s book here.

 
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