Principles of tax policy - Treasury Contents

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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