Many people grumble about “unfair” commercial practices among foreign competitors. Business men are worried about cheap production, and organised labour often’complains about sweatshop wages in some oriental countries. Yet many of Britain’s most effective international competitors are in countries where control of objectionable practices is as strong as in Britain, and in some case incomes and living standards are higher than they are here.
Low tax regimes have the edge in trade.
If a foreign competitor enjoys a more favourable tax climate, the British producer will have a tough time competing. The effects are obvious in the rapid decline of our manufacturing industry. Consider just one example. A woman checks the price tag on a dress in a British High Street. She puts it back on the rack because the dress is out of her price range. If the cost had been lower, she might have bought the dress and the retailer would have rung up a sale. The Value Added Tax of 17.5%% puts it out of reach.
Taxes inhibit sales. American and Canadian visitors to the UK are amazed at the high cost of clothing. In the United States sales taxes vary from place to place but hover around 5%. These taxes curb sales in the same way as ours do, but the lower tax gives that vital competitive advantage. A few years ago, there was an outcry over the enormous gap between car prices in Britain and Europe. One of the main reasons was the larger tax bite in Britain. Not only VAT but other indirect taxes, such as customs and excise duties, impinge on sales.
Consumers try to find ways of meeting the extra cost that taxes add to their bills. If they are employees, they press for higher wages. If the wage demand succeeds. the employer must again raise his prices for goods or services, giving another twist to the spiral.
On top of these taxes which burden enterprise indirectly, there are direct taxes like Income Tax and Corporation Tax, all of which force up prices and reduce competitiveness. Private enterprise also has to bear the tax bills of public enterprise. Government employees pay taxes and National Insurance too. Thus the taxes on productive enterprise must cover the salaries of people working in or for government, such as MPs and civil servants. The taxes which fall on businesses and on the ordinary citizen must also cover the taxes and National Insurance which these people are required to pay. So not only government wages but its taxes too must come from … taxes. Businesses and government departments alike must limit productive staff in order to hire an extra echelon of accountants – just to administer taxes.
The impact of our taxes on raising the cost of labour has other effects. Many potential enterprises never see the light of day because, when costs are weighed against income, the risks are too high. Manufacturers are reluctant to employ any but the most productive labour. Youth unemployment is high because employers cannot afford the cost of low production while people learn “on the job”. and at any sign of an employee slowing down in late middle age an employer will seek to persuade him to take early retirement.
These young or elderly unemployed will need Unemployment Benefit, which provides no wealth in return. It is paid for by the quasi-tax National Insurance – another burden on production. The government tries to counter these problems with subsidies. As well as Unemployment Benefits, subsidised Training & Enterprise Councils, Depreciation Allowances, Venture Capital Incentives, Youth Training and Work Experience must be paid for out of taxation on the entrepreneur.
A different tax.
This absurd state of affairs, which is doing so much damage to production in Britain, can be remedied by a different kind of taxation system which does not fall as a burden on production. Existing taxes, such as Income Tax, Corporation Tax, VAT and Customs Duties should gradually be replaced by a different kind of tax, a tax on Land Values.
First, all pieces of land in the country must be valued. This valuation would consider the value of the site alone, and would exclude the value of man-made “improvements” on the site, such as buildings, machinery or growing crops. Then a Land Value Tax (LVT) would be collected on the basis of that valuation. It would probably be low at first, but would gradually increase. As LVT increased, other taxes would be progressively increased. Like other taxes, LVT would require periodic (probably annual) reassessment as land values fluctuated.
One of the many merits of LVT is that it is no kind of burden on production. Nobody would find himself paying more LVT if they produced a lot of things, or less LVT if he did not produce things.
Has LVT been tried?
Yes. Although nobody yet applies the full LVT which we would like to see, a good many countries apply a measure of LVT, always with beneficial results. It constitutes a large proportion of the revenue of Taiwan and Singapore, where it is used to apy for investment in public infrastructure. It is used to raise local government revenue in many Commonwealth countries and in parts of the United States. In those places it is proving a positive stimulus to the economy because the owner of land needs to use that land efficiently in order to defray the tax which will fall on him in any event.
In other Topic Papers in this series, we show that the value of a piece of land discounting, of course, the “improvements” – owes little or nothing to what the landowner has done, but everything either to nature or to the presence and activities of the community. LVT is therefore not only a sensible tax to apply from an economic point of view because it does not discourage production, but it is also a fair tax. Surely it is fairer to tax people on the basis of the value which they enjoy but have not created, rather than on the basis of value, which they have created by their own efforts, physical or mental!
Our present taxes undermine production, crippling the economy. Conversely, switching taxes to land values actually helps production by inducing the owners of idle or under-used land to bring it into productive use.
Henry George, Progress and Poverty; 1st edition Appleton, New York, 1879
George Charles, Elementary Economics; Henry George Foundation (Australia), 1991
ISBN 0 909713 057
Fred Harrison, Boom and Bust; House prices, Banking and the Depression of 2010;