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Principles of tax policy - Treasury Contents


Written evidence submitted by the Systemic Fiscal Reform Group

1.  The Systemic Fiscal Reform Group was formed in Cambridge in 2008 by a small group of individuals led by Dr Adrian Wrigley. Operating as a "think tank", we study the systems of taxation, money, subsidy and welfare as they operate in practice as well as the political economy behind them. We develop and advocate reforms we believe can be implemented by governments around the globe to improve living standards while reducing environmental damage.

2.  Dr Adrian Wrigley is an entrepreneur trained in natural, engineering and computer sciences. Now working as a financial trader, he promotes a scientific understanding of the fiscal system as a whole with a view to establishing a new reform agenda. He is the principal author of this evidence.

EXECUTIVE SUMMARY

3.  Historically, tax policy appears to have been based on the principle of serving powerful interest groups at the expense of the public interest. The adverse consequences of this include damage to the economy, political integrity and public well-being. These worsen over time as the private interest embed themselves in the political system expanding their power until serious failures become apparent.

4.  Reform of the tax system has become imperative, moving from the present system of taxation for private interests to one where the public interest is served instead. Achieving this is only possible if the fundamental principles of tax policy and its path to reform are based both on economic and political realities. Most existing components of the tax system are neither necessary, nor fit for serving the public. They should be considered obsolescent and rapidly phased out.

5.  The modern tax system is based around the repayment of privately created debt money. This is transferred through the banking system mainly from economic producers according to the market value of their production or labour. The direct effect of this choice is twofold. Firstly, the suppression of productive economic activity. Secondly, the promotion of the banking interests which operate a cartel setting the terms and conditions for issuing fresh debt money needed for public spending and payment of taxes. Unemployment, poverty, debt bubbles, poor public services and inflation are the follow-on consequences.

6.  Legitimate government spending generally provides infrastructure, services and welfare payments to resident people and businesses. To benefit from this government spending, a person must own or rent a home or operate a business in the area. The monthly amount people pay to occupy their homes is set in the marketplace, based upon location and the value of natural, commercial and government amenities provided. Landlords charge monthly for these location amenities while home sellers charge a lump sum.

7.  Public interest is harmed greatly by two aspects of the tax system. Firstly the granting the power to issue the the money to pay taxes (the medium of taxation) to a private banking cartel. Secondly the collection of the tax according to production contributed rather then benefit conferred to the ultimate beneficiaries, the land/homeowners.

8.  Reform of the tax system will be unsuccessful unless based on sound economics and sound politics. Economics dictates the abandonment of the ill-defined "Ability to Pay" principle in favour of the "Benefit Principle", recognising that the benefits of legitimate government accrue to land/home owners and those controlling natural resources. Politics dictates that proposals creating many obvious losers cannot be implemented

9.  The Systemic Fiscal Reform Group recommends a fundamentally new approach to reforming the tax system - elective reform. Taxpayers should have the right to opt out of the current system into a new system designed around sound principles.

10.  Allowing people to switch out of the harmful tax system for a much sounder, simpler system would allow the economy to recover rapidly solving the toughest financial, human, environmental and economic challenges.

PRINCIPLES OF TAX POLICY ARE ECONOMIC AND POLITICAL

11.  National success can only be sustained with a sound system of taxation. Sound taxation must be based on policy principles thoroughly understood by those empowered to maintain it. These must be based on an understanding of the economic principles underlying taxation. Equally important is an understanding of the political principles behind taxation.

UNDERSTANDING TAXATION

12.  Taxation is central to the interests of every citizen, business and special group. Each group has its own economic interests and perspective foremost when it analyses the economy and promotes a particular viewpoint. Politicians, economists and business people rarely promote analysis which conflicts with their group interests. Clarity and analytical integrity generally work against private interests and are usually absent.

13.  In this response, it is assumed The Committee is seeking to further the public interest, even where this may conflict with the private interests which usually dominate the analysis and debate. This will pose a major challenge to those who have learned their analysis exclusively through channels devoted to promoting private interests, and must "unlearn" erroneous but pervasive assumptions and principles.

WHAT ARE THE ECONOMIC PRINCIPLES OF TAXATION?

14.  Taxation is at the economic core wherever government supplies significant services such as civil and military protection of property rights, infrastructure, education or healthcare. The UK is no exception.

15.  Taxation comprises three fundamental economic parts:

—  Creation of the medium of taxation and issue into the economy

—  Distribution of the medium of taxation through the economy

—  Collection of the medium of taxation

THE MEDIUM OF TAXATION

16.  Over the course of history, the medium of taxation has changed several times. Under the earliest systems, taxation was paid in cattle, later moving to grain - generally rice or wheat (tithe systems) or labour (corvée systems). Whenever payments moved to metal tokens issued by the rulers, a money system was born. These tokens were usually made out of scarce and distinctive metals to prevent counterfeiting - silver, sometimes gold. The tokens would move through the economy through economic exchange, but would be demanded back by the rulers as the means of collecting taxes. Wooden tally sticks were the most successful English tax medium. The public demand of tokens to pay taxation ensures a sustained demand and maintains their exchange value across the economy.

17.  Modern taxation systems are still based around the creation, distribution and collection of tokens, but the tokens now take electronic rather than physical form. These tokens are bookkeeping entries in the banking system. The structure of the taxation system and the economy it controls is determined by the rules under which these electronic bookkeeping tokens are created, distributed and collected. Coins and notes are still issued in small quantity, but are subsidiary to to the banking system's bookkeeping entries.

18.  The economic power of the tax system is determined both by how and where in the economy the medium of taxation is created and where and how the medium is collected.

19.  Contemporary governments grant the exclusive power to issue the medium of taxation to a state sanctioned banking cartel. The banking cartel comprises a central bank and private member banks. The central bank is responsible for price fixing, information sharing, promoting member interests and preventing member defaults. Serving the public interest is not a primary goal of a central bank. The cartel holds the exclusive power to set the price of and issue the medium of taxation. Governments generally prohibit the issue of alternative media for exchange and mandate payments of taxes only in the cartel-issued medium.

20.  The collection of the medium of taxation is under direct government control. Most tax is collected whenever economic production takes place. This places a burden on producers, who must acquire the medium of taxation directly or indirectly from the private banking cartel. The economic effect of taxation is dependent on the rules for calculating the amount of tax which is paid, regardless of who the tax is collected from. Usually, the person from whom the tax is collected can pass the burden of acquiring the medium on to others, generally by paying less for economic inputs, but sometimes by charging more for economic outputs.

21.  The spending power derived from taxation is shared between the government and the private banking cartel. This spending power is transmitted through the economy by banking cartel to their favoured associates, and by the government and their favoured associates. The system is effectively one of dual sovereignty since the sovereign powers of tax collecting and the corresponding issue of money is shared between the government and the banking cartel. This is the most distorting aspect of tax policy.

CHANGE THE MEDIUM OF TAXATION

22.  The spending power derived from taxation should accrue wholly to the government, and not be shared with the private banking cartel. The only satisfactory ways of achieving the involve abandoning the collection of taxes through the medium of money created by fractional reserve lending. Taxation defines and underpins the money system.

23.  Principle: Taxes should only be payable in government issued money:

—  Money should be issued into circulation exclusively by the government when it pays wages, suppliers, pensions and welfare.

—  Money should be withdrawn from circulation by the government when taxpayers pay taxes.

—  Money created by private businesses should no longer be accepted in payment of taxes.

INTRODUCE FREE MARKETS, ABANDON PRODUCTION PENALTIES

24.  Principle: Taxation should not interfere with free markets in labour, goods and services.

25.  The following taxes depend on economic production and therefore act as production penalties: Income Tax, National Insurance, VAT, Corporation Tax, CGT, Stamp Duties.

26.   By design, they impair the free exchange of labour, goods and/or services. They conflict with the above principle. They have no role in any sound tax system, and constitute major distortions in the economy. Harmful and unnecessary, they should be phased out.

CHARGING THE BENEFICIARY

27.  Businesses generally charge each customer a market price for the supply of goods or services which benefit that customer. The market price balances the overall forces of supply and demand. The government should use the same principle for taxation. Understanding the nature of "the customer" is a central issue.

28.  The legitimate "customers" of government activity are the owners of houses and land in the area governed. The owners of houses benefit from nearby roads, schools, hospitals, parks, police, flood defences. The owners are the ultimate beneficiary whether or not the house is owner-occupied or let to tenants. People renting property may receive these amenities, but pay for their value in their rent. Renters should not pay tax towards these amenities in addition to paying rent for them as at present.

29.  Principle: Taxation should only be levied on the ultimate beneficiaries of government, in particular, owners of land and houses.

30.  An alternative principle is sometimes advocated, that of "ability to pay". Superficially attractive, this concept is entirely without merit. The ultimate burden of tax is transmitted through the economy so the suppliers of economic inputs whereupon the ability to pay cannot be measured for taxation. Whenever tax exceeds the ability to pay production is lost or transfers to the black market.

31.  Where the government confers a benefit exceeding the tax paid for the benefit, an implicit subsidy exists. Implicit and explicit private subsidies tend to undermine the public interest goals of tax policy and should to be avoided.

32.  Principle: Taxation should be levied for the full market value of the benefit conferred by government, so avoid implicit subsidies.

WELFARE PAYMENTS MUST BE CONSIDERED WITH TAX

33.  Principle: The welfare system should be fully integrated with tax.

34.  The welfare system functions in ways similar to the tax system, but with the financial flows reversed. While taxes like Income Tax act as production penalties, welfare payments such as Jobseeker's Allowance function as idleness rewards. Means tested welfare payments reward profligacy, penalise saving. There is no role for rewarding idleness in a sound tax and welfare system. Means tests induce fraud and bureaucracy while disempowering citizens.

35.  Principle: Means-tests and employment tests should not be part of policy.

36.  The consequence of excluding means tests and employment tests is that any welfare payments should be made equally to all persons. This concept has been developed by welfare reform advocates who call it a "Citizens' Income", or a "Citizens' Dividend". It is a universal welfare comparable to universal healthcare or universal school education.

37.  Principle: A universal "Citizens' Dividend" should be paid equally to all.

38.  Such a Citizens' Dividend does not distort economic incentives because it is independent of any changes to economic behaviour. It neither rewards nor penalises economic activity, nor does it reward any particular family structure. It empowers ordinary people facilitating their investment in study, business or family life. It improves negotiating power with employers, and eliminates the need for a statutory minimum wage.

39.  A Citizens' Dividend is exactly analogous to the dividends paid to shareholders of a business. In this case, it is the return to citizens as shareholders in society. It is paid for entirely from payments made by the beneficiaries of government amenities and services.

POLITICAL REALITY MUST BE FUNDAMENTAL TO TAX POLICY

40.  Countless efforts at tax reform have been attempted across the globe. Each has been guided by principles and political pragmatics. The result has been a dramatic increase in the complexity of tax and welfare systems to the point where ordinary people cannot understand it. Even top experts consistently fail to predict how tax revenues, welfare payments will develop over time. Individuals generally have mistaken concepts about how much they pay, how much they are entitled to and how proposals would affect them.

41.  Because people are generally mistaken about the impacts of policy changes, any reforms proposals quickly produce anxiety and opposition, while vested interests stoke deliberately confusion and misdirect political opinion.

42.  Proposals like Land Value Taxation (LVT) have been discussed for many decades, but failed to overcome the political difficulties and obstacles presented by the vested interests.

43.  Tax complexity has become a major problem to deal with, but attempts to simplify the system have consistently failed. A new approach to tax and welfare reform is essential.

44.  A tax and welfare system based around the fundamental principles here is very simple. Money is spent into circulation by government for the supply of services to property owners. Money is collected from property owners according to the full monthly amenity value of the site locations. The surplus is distributed as a dividend to citizens on an equal per-capita basis.

45.  Principle: Changes to existing tax policy create instability, confusion, political uncertainty, financial risk and must be minimised.

46.  The transition of the tax system to one based on these fundamental principles must avoid creating economic and financial turbulence. It must avoid giving out big windfalls at public expense. And it must avoid creating losers and people who believe they are losers.

47.  The new principle of tax reform is the creation of a right to opt in to a new system of taxation and welfare. People should not receive a big windfall from the public when they choose to join the new system and leave the old. As people leave the old system, it will become clear to all that the new system is superior, and in consequence the transition can be rapid. This principle overcomes political barriers.

48.  It will not be usually be possible for a person to leave the entirety of the old system in a single step. The transition involves contracting with government not to pay particular types of tax in exchange for accepting an equivalent burden.

49.  Payments from property owners should be regular, index linked to market values and based upon contract law, not on politically determined tax laws. Payments are independent of legal residence or personality. Citizens, corporations, non-domiciles are treated equally, removing a major cause of distortion and complexity. Establishing such payment contracts should be voluntary act which releases the person from defined obligations under the old system.

50.  The Systemic Fiscal Reform Group calls these payment obligations on property "Location Value Covenants" (LVCs), which are legal covenants running with the land. They obligate the owner to pay government a defined perpetual revenue stream.

RECOMMENDATIONS

51.  We recommend the Committee:

—  investigates the principles and implementation of Location Value Covenants;

—  investigates the impact of private money issue in the tax system;

—  investigates the Citizens' Dividend as an alternative to welfare payments;

—  makes public interest the sole determinant of tax principles and rejects the advice of vested interests in the financial, real estate and accounting industries;

—  declares the present tax system to be not fit for purpose and beyond repair; and

—  adopts the principles contained here for transitioning to a new system.

CONCLUSION

52.  Development of the tax system has been constrained by political reality and driven by the demands of vested interests in finance and real estate. The fundamental principles of tax policy should explicitly incorporate the money system and the welfare system. The tax system is not fit for purpose and is beyond repair. It should be replaced by an efficient, neutral and distortion-free system based around clearly defined recurrent payments from owners of land, immovable property and natural resources based on contract law. Means-tested welfare should be replaced by a Citizens' Dividend distributing the financial surpluses of government arising from such reforms.

53.  The transition to a new, principled tax system should be on an "opt-in" basis where people can choose to permanently leave the old system when they can benefit from so doing. The effect of such a transition would be an rapid and dramatic revival in economic performance without battling political headwinds.

54.  The principles outlined here fully meet all the objectives of the OECD tax report and the Mirrlees Review. They meet Smith's canons of taxation and adhere to orthodox and common heterodox academic analysis. They are comprehensible and achievable.

January 2011


 
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Prepared 15 March 2011