Written evidence submitted by Transforming
Communities
1. Transforming Communities is a small
consultancy concerned with the collection of natural resource
rents as a sustainable and fair method of taxation. The Director
is Dave Wetzel (former Vice-Chair of Transport for London, former
Chair of the Greater London Council's Transport Committee and
a former Leader of Hounslow Council) and Heather Wetzel has recently
joined Transforming Communities as a researcher and has a BA (hons)
in Economics.
2. Executive Summary
2.1 If the UK were to start a tax system from
new, it is unlikely it would resemble the complex, expensive and
avoidable system currently in place.
2.2 The Government's desire to simplify the tax
system offers the opportunity to consider how a good tax system
should be structured and managed to benefit society as a whole
and be an aid for Government to maintain a sustainable and fair
economy.
2.3 The Government should not shy away from making
changes that may appear to disbenefit individuals or sections
of society simply because they make up a strong lobby opposed
to changes that benefit the majority of society and which improve
our economy as well as protect our natural resources and environment
for the good of all today and tomorrow.
2.4 This submission proposes that the key elements
for a good tax must include:
2.4.1 It must not discriminate unfairly against
one section of society unless it is to right a fundamental economic
or social wrong;
2.4.2 It must be transparent, clearly understood,
simple and easy to administer both by the collector and the payer;
2.4.3 It must not be detrimental to the environment
and should act as an incentive to protect natural resources for
future use and to reduce all forms of environmental damage including
carbon emissions; waste and misuse of natural resources including
land, minerals, water and fossil fuels;
2.4.4 Any exemptions should be minimised and
must be for a specific purpose and not become a loophole for avoidance
of payment;
2.4.5 Any benefit paid to an individual or a
business should not be reduced or cancelled out by any tax imposed
to the same.
2.5 The Treasury Committee, in its deliberations,
should also take time to consider what wealth is, how wealth is
created and to whom surplus wealth—after costs of production
and a "normal" rate of profit—currently goes.
The ownership and control of our natural resources including land
should also be examined and considered in this review.
2.6 Because our natural resources are not produced
by humans, this paper asserts it is fundamentally wrong for anyone
to benefit economically because they claim to own a part of nature.
2.7 All goods and services are produced through
the efforts of humans using natural resources—whether it
is a factory producing machinery, a hospital caring for sick people,
a bank lending to a new business, a farmer producing food or a
scientist working to create a cure for cancer, all of these activities
involve human effort using tools and equipment of some sort that
have been created by other humans using natural resources.
2.8 When contemplating production in the UK's
mixed economy, the economic return to the human effort and to
the capital is clear—wages and profit. However, there is
a third beneficiary rarely considered—namely the owners
of land and natural resources.
2.9 As land and natural resources are essential
to production, their owners can charge a premium to allow production
to proceed. This premium (economic rent) is derived from the excess
surplus of production as firms and individuals compete for sites
and scarce natural resources.
2.10 There is no cost in producing land and natural
resources—they are free gifts of nature to us all.
2.11 The rental value of land is not created
by any individual land owner but by the collective activities
of all of us.
2.12 This rental value increases with the growth
of civilisation and the greater efficiencies derived from combined
human effort.
2.13 There are good economic as well as social
and moral reasons for utilising this rental value to pay for public
services that are otherwise funded from taxes that fall on producers
(both labour and capital) and have a detrimental effect on the
whole economy.
3. Overview
3.1 Taxes provide local and national Government
with the income they need to finance public services.
3.2 A good tax system should be geared to impact
on all individuals, businesses and society as a whole and not
favour or penalise any individuals or groups unfairly unless there
is a good reason such as to reduce damaging behaviour that cause
high levels of carbon emissions.
3.3 A good tax system must be considered in conjunction
with the benefits of the services provided. For example, if a
new public service adds to the income or capital value of a citizen
or company by chance, then it is incumbent upon the tax authority
to create a tax system which directly collects this unearned bonus
for the benefit of all taxpayers and citizens. (eg the HS2 high
speed train will increase land values in Birmingham and the other
cities it will serve).
3.4 As well as providing a sustainable source
of income to local and national Government, taxes should also
be used to support and encourage economic growth whilst reducing
or eliminating behaviour that is damaging to individuals, to the
environment, to the economy and to society as a whole.
3.5 There are three factors involved in the public
and private production of goods and services—labour
(mental and physical), capital (tools, machinery, infrastructure
and buildings etc) and natural resources (economically
termed as land) and each receives an economic return in our market
economy—wages to labour, profit to capital and rent to natural
resources.
3.6 However, because natural resources are not
created by human effort, the income their use generates (economic
rent) goes as unearned income to their "owners".
3.7 In the UK's current tax system, there are
specific taxes applied to labour and capital but there is not
a clear natural resource wealth tax.
3.8 This paper argues that taxes on labour and
capital are negative, distortionate and the greater they are taxed
the more damaging the impact is on the production of wealth.
3.9 Whereas a tax on the annual rental value
of all natural resources such as oil, gas, airwaves etc and an
annual Land Value Tax on all land will not only enable the Government
to protect our land and natural resources from waste but will
also provide a sustainable source of income to pay for public
services that captures at least a part of the unearned economic
benefit which is reflected in land values.
4. What are the key principles which should
underlie tax policy?
4.1 Local and national Government taxation should
(i) provide a source of income to pay for good quality, efficient,
affordable and accessible public services that benefit society;
(ii) be a mechanism that stimulates a productive and efficient
economy and (iii) also acts as a tool to curb our misuse of natural
resources whilst collecting the full cost of pollution and environmental
damage caused in the production and consumption of goods and services.
4.2 A good tax policy is one where all taxes
levied are unavoidable; transparent; fair; easily understood by
those being taxed; simple to administer; keep the impact of social
and economic costs to a minimum; help control and limit the use
of natural resources; cause environmental damage to be reduced
and the full cost of environmental damage to be recovered; act
as an incentive to encourage the growth of beneficial private
and public goods and services; are used as a tool to redistribute
income fairly to individuals and regions; do not cancel out the
benefits of increased beneficial investment or increased work
input or welfare benefits and do not distort business or trade
unfairly amongst individuals, sectors, regions or nations.
5. How can tax policy best support growth?
5.1 Current business taxes distort business activity
and are often one reason for a business closing or not expanding
to its full potential. For example, Value Added Tax (VAT) is unfair
to small businesses that reach the threshold and are then taxed
on all income they generate including the part they were previously
exempted on, this can often be a barrier to growth. Many businesses
will evade paying VAT either illegally through hiding income and
expenditure or legally by stopping their trade in quiet periods
such as is seen with businesses dependent on seasonal tourism
but who could afford to operate in the quieter periods if there
were no VAT.
5.2 Good business taxes should act as an incentive
to encourage investment in worthwhile business in all regions
of the UK. Good infrastructure and good public services are essential
to good business—well educated and trained workforces; good
accessible and affordable transport networks; good schools and
excellent health care are all essential ingredients to a prosperous
society. If investors are unable to profit from land speculation,
they will invest in companies and businesses that create worthwhile
products and services. This will in turn help create more employment.
5.3 New and existing infrastructure adds to land
values. For example the Jubilee Line Extension on the London Underground
system added £13 billion to land values in the catchment
area.
5.4 Where sites remain derelict, unused or underused—because
of land speculation or inefficiency—the owners still gain
financially from the increased land values that our public services
provide to their site's location even though those owners pay
little or no taxes towards the cost of the public services from
which they benefit.
5.5 Under the present system businesses pay twice.
They pay the full economic rental value of the location of their
premises and taxes to the Government. If, instead of this rental
value being collected by private land owners, the Government collects
it as a tax applied to the annual rental value of each site according
to its optimum permitted use, the Government could use this land
value tax (LVT) income to reduce or replace existing taxes that
hit business badly. Thus allowing businesses to pay once—not
twice.
5.6 With LVT the land owner is given a financial
incentive to bring their site into its full permitted use and
the user of the site will pay the land owner un-inflated rental
value of the buildings they occupy. Premises will be let or sold
at their market value and not lay empty because of over-inflated
prices due to property speculation. By increasing the supply of
affordable premises, more businesses will be able to continue
to exist and grow and new businesses will be able to afford to
start producing thus benefitting the economy, local communities
and the environment.
6. To what extent should the tax system be
structured to support other specific policy goals?
6.1 Grants or subsidies given to support or develop
businesses must go to the business intended and not be allowed
to be diverted into land wealth and therefore go as unearned income
to land owners. For example, the European Common Agricultural
Policy payments to farmers increase farm rents and farm prices
so that CAP is paid to farmers but ultimately benefits farm land
owners not the farmers unless they own the freehold.
6.2 Similarly if a policy is for local authorities
to purchase land on which to build affordable homes, that new
demand for land will inevitably increase the buying price that
local authorities will eventually pay. The result is either fewer
homes get built or local authorities will have to spend more to
provide the new homes in order to pay the land owner the asking
price. If an annual Land Value Tax were applied to all land, land
hoarding and property speculation could be eliminated and, because
more land would then be made available for good use, the price
could not be inflated soaking up the intended benefit for those
needing to buy/rent homes in the relevant areas.
7. How much account should be taken of the
ease and efficiency with which a particular tax can be imposed
and collected?
7.1 A great deal of consideration must be given
to how a tax is imposed and collected on the grounds of minimising
the cost to the collector and the payer; overall efficiency; transparency
and accountability; its relationship with the benefits systems;
unavoidability and fairness to individuals and organisations.
To have resources invested in collecting negative taxes is a lost
opportunity for the money and the skills and talents of the workers
involved being used alternatively to benefit society. The more
simple a system is, the more transparent it is and the less cost
there is in administering it both by the tax collecting body concerned
and by the business or organisation being taxed. For example,
VAT, PAYE & Employers National Insurance demand specific calculations
and returns be made by businesses—an extra financial burden
for businesses, particularly for self-employed people and small
businesses.
7.2 A good tax should not be avoidable or evadable
as is the case with most current taxes particularly income tax,
national insurance, corporation tax, capital gains tax, inheritance
tax and VAT. Keeping a tax simple helps avoid loopholes that a
clever accountant or solicitor will maximise for the benefit of
their clients. The full cost of collecting and policing of taxes
together with the cost to the person or organisation being taxed
should be fully calculated in any cost benefit analysis of a tax
imposed.
8. Are there aspects of the current tax system
which are particularly distorting?
8.1 By taxing incomes and profits without taxing
the use of natural resources, there is an inbuilt distortion in
our tax system. These taxes increase the cost of production or
retail prices thus reducing output, reducing labour input and
diverting investment. For example, VAT particularly discriminates
against smaller businesses; as the threshold is reached the tax
is applied to all income for the business. The tax is added to
the costs of the business and discriminates against them. To avoid
paying VAT, businesses can limit their trading to below the threshold
level or evade paying it by dishonest accounting; this behaviour
can be found in areas dependent on seasonal trading and with self-employed
or small businesses.
8.2 As taxes collected are spent on maintaining
and improving public services, the demand for businesses and homes
in the catchment areas of those services reflects back into land
values and therefore land prices which create an unearned income
or capital gain to land owners who contribute nothing to the economy.
8.3 Because land is not taxed on its annual rental
value, taxes collected and provided as grants and subsidies to
assist businesses (eg subsidies paid to farmers through the Common
Agricultural Policy) increase the surplus income over production
costs and therefore actually become subsumed in the price of land
and therefore go to the land owner and not the intended beneficiary.
8.4 There are many examples of land values funding
public services overseas but in the UK the City of London collects
land rent from its tenants to fund services (City Cash) and charities
(the Bridge House Fund); the previous Government auctioned the
spectrum for 3G mobile phone use on a twenty year lease and we
should be collecting the rental value of landing slots at airports.
8.5 Currently, land owners pay no tax on empty
sites. This encourages land hoarding and speculation creating
an artificial shortage of land where occupation is most desirable.
Many sites are kept empty for decades. The consequences are not
only higher land prices and location rents but people requiring
homes and businesses have to locate farther afield thus creating
urban sprawl into the countryside. Not only does this incur all
the extra infrastructure and other costs but families are disrupted
as time spent commuting is increased, road deaths and injuries
are increased and Co2 emissions are increased.
9. Conclusion
9.1 The introduction of an annual Land Value
Tax will produce the following benefits:
9.1.1 A sustainable and rising source of Government
income that is transparent, unavoidable and easy to collect—land
cannot be taken to a tax haven.
9.1.2 Recognition that it is our demand for homes,
public and private businesses and services which create land values.
9.1.3 It will bring about a real redistribution
of wealth on an individual and regional basis. Regions that are
depressed have lower land values and therefore will have lower
LVT contributions becoming almost like a "tax haven"
attracting new investment and enterprises.
9.1.4 A more efficient use of land as idle and
underused sites are brought into use.
9.1.5 Efficiencies of conglomeration as urban
sprawl and unnecessary commuting are reduced because town and
city sites and empty buildings are better used.
9.1.6 Fairness, as land is a free gift of nature
and all of us through our work, enterprise, social and economic
activities create land values, but currently these only benefit
land owners.
9.1.7 LVT will ensure all land owners, who receive
an unearned benefit from society, will contribute their fair share
of taxation to the exchequer in future.
9.1.8 The land wealth created by infrastructure
investment will be recouped for future investment.
9.1.9 The reduction in other taxes in order to
encourage enterprise in the economy.
9.1.10 With more land in use, more jobs would
be created and more affordable homes built.
9.1.11 Investment would not be wasted on sterile
land speculation that produces no real wealth; investors will
seek real investment in firms and companies providing worthwhile
goods and services.
9.1.12 Because the payment reduces with lower
land values, LVT would provide automatic compensation for the
owners of those sites which fall in value when they are disadvantaged
by a new development such as noise from traffic or a nuclear power
station.
9.1.13 LVT will rid communities of derelict sites
and buildings that encourage anti-social behaviour.
January 2011
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