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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