Sunday, May 16, 2010

Radical Tax Reform - Henry and beyond

above: Australian Treasury Secretary, Ken Henry

Lev Lafayette calls for a radical review of taxation in the wake of the Henry Review into the Australian taxation system.

BTW also - next week we publish a wide ranging essay on Ecological Socialism - be certain to check back here next Sunday!

Governments and Taxes

As long as there are humans, we will form societies. As a result of those societies there will be governments [1], and in all probability these governments will require a source of human energy. This may be achieved through some fairly blunt means, such as slavery, corvée, a portion of a crop to more abstract methods through the monetary system which generally come in the form of taxes on transactions, taxes on production, taxes on consumption). Almost invariably the people who are required to pay taxes dislike the experience and some aggressively so, claiming that tax is a form of theft or slavery [2]. Others will debate on the proportion that should raised as a function of the total income of a country, or they will argue the relationship of the tax on income (progressive, proportional, regressive), the source of the tax, the most efficient ways of collecting it, and, quite importantly, where the money is going to be spent.

Volumes could be spent on each of these topics, and indeed already have. As a result, the following is only a sketch. But the core premise is for a tax that isn't a tax, nor a form of theft or slavery by any definition, that is a source of public income whose collection is extremely efficient, that spurs productivity rather than acts as a deadweight [3], and a means of expenditure that provides both welfare without corruption. Everyone from the most ardent socialist, to the Austrian-school capitalist should support it. How could such a thing exist? Economics, as a social inquiry, must begin differently to physical sciences. In the social world normative values alter positive values, rather than the other way around. As such, we begin on a normative basis - political-economy.

The Gifts of Providence

Political economy combines the moral justifications of types of property ownership along with the effects of the same. Alas, in contemporary economics it has become a sadly neglected field. Both the neocalssical economists, who prefered not to deal with such troubling concerns like moral justifications, and vulgar Marxists, who lumped all property and property-owners into the same class, led to serious studies in political economy to fall out of favour in the twentieth century. But just because a subject doesn't receive the attention it deserves, this does not mean it has no effect. Rather it means that some older sources must be sought.

Classical economists, including the physiocrats, Adam Smith, David Ricardo, Karl Marx, Léon Walras and John Stuart Mill, all recognised the distinction between the factors of production (land, labour and capital), the respective sources of income derived from each of these factors (rent, wages and interest) and the respective economic classes (landlord, worker and capitalist). An individual can be a member of multiple classes simultaneously and proportional to the way their income is derived. These terms are specific and carefully defined. "Land" includes all natural resources in their unimproved state. "Labour" refers to physical and mental activity including entrepreneurship. "Capital" refer to all products that result from economic activity, both simple and complex, including both commodities and the tools of production. Money itself is not capital, but rather a representation of the value of capital.

Now the various political economists have a diversity of views on the justified income to the various classes. Marx, for example, evocatively argued that "Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks" [3]. Others were a little more generous towards the owners of capital, arguing that the capitalist's return was morally justified because they engaged in risk. But across the board, none of the political economists - following the footprints of John Locke - could find a justification for the income of rent derived by the landlord. "Land" was a gift of Providence, something that belonged to "nobody" but whose fruits were to be equally shared and holding it was in usufruct. Land ownership was considered a feudal privilege, not a capitalist property right, which can be noted in the title "Real Estate" (i.e., "King's Estate").

The classical economists were also quick to recognise the effects of land ownership. Adam Smith saw it reducing the wages of workers and indeed, laid the foundations for a theory of wage-slavery, also noting that any tax on land could not be passed onto renters in a competitive market [4]. David Ricardo was even more blunt, on how the interests of landlords was always opposite to that of both capitalist and worker [5]. John Stuart Mill was a pains to describe how the 'sacredness of property' did not apply to landed property, and railed against how "landlords grow rich in their sleep without working, risking or economising" [6]. Following Smith, Thomas Paine provided a practical solution: the creation of a common welfare fund, derived from ground-rents. [7]

Some Experiences, Some Theory

Economic theory and practice has not been entirely asleep since the nineteenth century however. Whilst there have been plenty of wars fought over those who sought monopoly profits through resource holdings [8], there have been a handful of isolated cases where natural resources have been used as a source of public income - and with remarkably successful results. Botswana is one such example; whereas nearby African countries have extremely high levels of impoverishment, violence, instability and poor education, Botswana has the highest GDP per capita in the region (despite having one of the lowest at the time of independence), a stable constitutional democracy, lower levels of crime etc. What does Botswana do differently? The public receives most of the monies from diamond mines and other land follows a more tribal, communal distribution - freehold is considered somewhat of a colonial relic [9].

This is not an isolated case. When the Chinese Nationalists retreated to the island of Formosa, they implemented the tax policies of Sun Yat-sen. Whatever one may think of the rest of their politics, the Nationalists did tax land according to its value. Whereas previously, the country was effectively owned by twenty families with widespread hunger, the new tax policy meant that landowners sold off their excess at prices peasants could afford, and for twenty years Taiwan consistently had GDP growth rates of over 10%. Denmark experimented with the policy for three years in the 1960s with remarkable success, followed by equally remarkable failure when they abandoned it [10]. In Hong Kong, the government through leasing land and land taxes, raises over 35% of its public revenue and as a result has very low income taxes.

On a smaller scale, cities like Harrisburg and Pittsburgh, assessed rates on land several times higher than improvements. It should come to no surprise that vacant land or land with dilapidated buildings became quite abnormal. Melbourne, Australia has had the interesting experience of having different councils adopt different rating systems, some based on site-value, some on land and buildings. Again, those which adopted site-rating systems through most of their history have higher standards of living, better buildings, and improved infrastructure [11].

By the second half of the twentieth century, nearly every economist in the world, whether liberal, conservative or radical, agreed that public finances should be largely derived from taxes on resources use rather than labour, productive investments or transactions. People like Milton Friedman, Herbert Simon, William Vickery, Robert Solow, Paul Samuelson, John Kenneth Galbraith, James Tobin, James Buchanan and Franco Modigliani, for example, all spoken strongly in favour of such a policy - and every single one (bar Galbraith) of the just referenced economists are winners of the Nobel Memorial Prize in economics. You may be forgiven for thinking they have some knowledge on the subject.

The opinion of said economists is that land tax is the only tax that does not distort market relations - indeed it returns them to a free market equilibrium as it removes the speculative component of rent-seeking. The tax is Pareto optimal by ensuring allocative efficiency. In stark contrast to all other levies, the payment of site rental retards neither productive activity, nor the supply or demand of resources. It is considered just, as the burden falls entirely on the user of the resources. Because "unimproved" also means "undamaged", it can incorporate ecological tax reform - and by itself it ensures that there is strong motivation to keep the aggregate human footprint on the environment as small as possible. It is arguably not even a tax, for the word itself implies something that is onerous on activity, "a taxing burden". Indeed, it liberates, providing the opportunity for a guaranteed minimum income for all, and for all to receive the fruits of the labour without the government "stealing" their earned income.

Practical Tasks and the Henry Review in Australia

If the empirical evidence consistently shows that this public finance policy works, and almost all economists say that the theory is right, then the practical task is to implement it. This means changing the tax system raising 100% of public revenue from economic land, and 0% from the improvements of labour, capital. There is no suggestion however to introduce such a scheme "overnight", even if the significance of the change can truly be considered "revolutionary", insofar that an entire parasitic economic class would no longer have the systematic foundation to exist. Of course, there are a small number of people who are "asset rich and income poor", often those who have retired from the workforce. Opportunity must be provided for such individuals to shift their investment base.

Ken Henry, Secretary of the Department of Treasury in Australia since 2001, has recently released a major review of the taxation system in that country [12]. Apart from including an increase in superannuation, the development of a infrastructure fund and significant depreciation concessions for small business there are two very major components which affect this discussion. Firstly, there is a 40 per cent resource rent on mining companies receiving above normal profits. Secondly, there was the proposal of removing state stamp duties on homes purchases with a federal land tax. The Federal Labor government has approved the resource rent, and rejected the federal land tax.

Undeniably, the resource tax is a good thing; it means that the mining industry will need to become more competitive, more productive, and it will ensure that the population at large will finally receive a fairer share of what naturally belongs to them anyway. The decision on the stamp duties and the federal land tax is, however, bizarre. Stamp duties punish both buyer and seller by increasing the price of a property, reducing the number of sales. It was the Labor Party which for over sixty years had a federal land tax as part of its platform. When the Menzies government abolished the federal land tax in 1953, the Labor leader of the opposition stated: "We of the Australian Labor Party have always believed that the land is the patrimony of the people and that nobody has a complete and absolute title to it ... The land belongs to the people, and its use must be safeguarded and protected at all times ... We have always believed in the land tax, and when happy days come again we shall restore the measure imposing the tax to the statute book of this country." [13]

What can be done about the Labor government's refusal to implement a Federal land tax? Firstly, an organisation called Prosper Australia has established a petition calling for a review on the effect of land prices on home ownership and the ability and effects of the establishment of a Federal Land tax - even if you don't agree with the proposal to establish such a public finance policy, surely a review is worthwhile. Secondly a mailing list entitled "Land and Labor" has been established with the express purpose to lobby Labor politicians to reintroduce the Party's old commitment for the socialisation of land values for the public benefit [14].

Despite all the evidence on how effective, efficient, fair and transforming such a policy can be, the pessimistic words of Clarence Darrow [15] still echo

The single tax is so simple, so fundamental, and so easy to carry into effect that I have no doubt that it will be about the last land reform the world will ever get.

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[1] This is not necessarily the equivalent of the State, famously defined as the body with a "monopoly on the legitimate use of physical force within a given territory". Max Weber, Politics as a Vocation, 1919.

[2] Murray Rothbard, The Ethics of Liberty, 1982. Rothbard argued that because taxation was theft, it was therefore morally legitimate to resist paying it.

[3] Karl Marx, Capital Volume I, Chapter 10, FP 1867

[4] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter 8 and Book V, Chapter 2., FP 1776

[5] David Ricardo, On The Principles of Political Economy and Taxation, 1817. Ricardo may have been wrong on this point as people can be members of multiple classes simultaneously. War for resource exploitation invariably come from a alliance between economic landlords and some capitalists.

[6] John Stuart Mill, Political Economy, Book II, Chapter 2, and Book V, Chapter 2, 1848

[7] Thomas Paine, Agrarian Justice, FP 1797

[8] Macartan Humphreys, Jeffrey D. Sachs, Joseph E. Stiglitz (eds), Escaping the Resource Curse, 2007

[9] Fred Harrison, The Silver Bullet, Chapter 2, 2008

[10] "Big Lesson from A Small Country", New York Times, Oct 1960

[11] Phil Anderson, "Victoria's Muncipal Rating System", Australian Institute of Urban Studies, Victorian Division, 1996

[12] Australia's Future Tax System. Available at:

[13] Arthur Calwell, in Hansard of the Australian House of Representatives, Vol 221, pp 165-170

[14] Petition at: Land and Labor at

[15] Clarence Darrow, How to Abolish Unfair Taxation, 1913

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