1. A subject frequently talked about in our country (Greece) is tax reform, which is not surprising since the taxes here change faster than seasonal fashions. At the time of writing (winter 2012) the EU and the IMF are insisting on the modernisation of our taxation system. Sadly, they are not insisting on a fundamental tax reform. In reality, calculating tax is very complicated in all areas of economic activity, and it is easy to see how that brings about corruption, bribery, tax avoidance and an overpowering feeling of suppression and injustice. The latter has two aspects: on the one hand, the taxpayer feels that they are paying more than others in that the more one works and the more one earns, the more tax one has to pay, while others work less and pay less tax. On the other hand, the taxpayer feels that the quality of the corresponding public services they receive in exchange for taxes (security, education, healthcare etc) are deficient and inadequate.
Is there an alternative to this state of affairs?
Indeed, there is. There is a simple, effective and just system which significantly constrains the potential injustice, fraud and corruption, if it does not eliminate them outright. It is only partially implemented in some US states, Denmark, New Zealand and elsewhere. This system also provides a significant economic growth stimulus.
2. This system is both simple and effective, because it is founded on the very nature of production, the quintessence of the economy. Let us see what this means.
In any economy, small or large, a public or private business, every good or service produced, including the Gross National Product of the country, contains two values: the first is derived from the labour of the individual, and the other from the existence and progress of society or the nation.
Classic economists such as Alfred Marshall (Principle of Economics,London 1890) and meta-classics such as R. Burgess (Public Revenue without Taxation, London 1993), N. Kazanas (Society with no Taxes, Athens 1996), and others, recognise these two values in their writings. Supporters of Communism, retain the crooked view that Marx referred to the unique value created by workers alone; but Marx did point out in his more mature work Critique of the Gotha Programme(1875) the following: he wrote that labour is not the single source of wealth [i.e. goods and services which men desire to have] and that Nature creates value as well as labour: Nature here implies public value.
3. The value or price of a product or of the whole of the yearly production of a business, has a component which derives from the effort of the worker(s) and another which derives from the existence of society and the services that it provides. The first one is called “private share” (or value) and the second one “public share”. Let us explain what this second one is.
The economist A. Kanellopoulos, minister of Trade in 1974, in the first democratically elected government (led by K. Karamanlis) after the seven-year junta, wrote: “On a particular plot of land, wealth, power, knowledge and culture accumulate… by purchasing a location in the city, one does not merely secure a place to settle… one also purchases a saving in time, as well as access to information, directness and a set of services” (translation and emphasis mine: p.120 in The Economy between Yesterday and Tomorrow, Athens, 1980).
Such is the contribution of society or State: time, information, directness, a wealth of services – including cultural events, specialised technology, public transport, connection to remote areas and foreign lands etc. All these can be found in the capital and less so in large towns, villages and mountain ranges, in decreasing order.
This contribution forms the public share of the value or price of a product or of the yearly gross production of a business.
A rationally planned taxation system will focus on this public share of the total value of a product and not at all on the private one. Since this value stems from the existence of society or the State, returning it whence it came would not be a form of, strictly speaking, taxation but a true “return” which is a form of reward or compensation.
4. The current system of taxation is entirely irrational, haphazard, inefficient, confused and unjust. It is known as “progressive”.
The rationale that everyone must contribute according to their earning power might sound quite democratic or logical, but only to those that do not look deeper than the surface of life and activity.
We all know that the progressive system of taxation allows corruption to become rife: on the one hand we have tax officials who can be bribed and on the other taxpayers that evade their taxes. The situation is so well known that there is no need for anything more to be said.
Moreover, as the lower incomes and low pensions are also taxed, the net income of the recipients diminishes and so does their purchasing power. In practice, all these people, who form the large masses of citizens, stay poor or become poorer, and find themselves in need of government benefits and handouts, which usually are very low-quality charity.
When one examines the twenty year period of 1972-1992, one sees that, despite some increase in wages, especially during the A. Papandreou government where inflated wage rises took place, wages and profits maintain more or less the same level of GDP, as one can see on this graph from the Greek Ministry of Finance:
But, in the long term, an even greater consequence is inflation, since the taxes end up being passed into the prices of goods and services, inflating them.
Workers ask for and receive wage-increases, part of which they lose in the form of tax. These wage-increases eventually end up being passed into the prices of goods and serices, and the vicious circle repeats.
R.G. Holcombe also demonstrated clearly that by transferring taxes and despite the beneficial treatment of lower incomes and the associated handouts, within a period of 25 years, the programmes aiming to redistribute income had little or no effect: the poor remained poor and the rich became richer! ( See p.286-8, Public Sector Economics, 1987, Wandsworth, CA.) R. Burgess shares a similar view: “it is possible that the price rise can go on indefinitely and that inflation could become a chronic persistent state of affairs” (p. 58, Public Revenue without Taxation, Shepheard Walwyn London 1992).
5. Another aspect of the ‘progressive’ system of taxation is limiting and discouraging.
Let us imagine two bookshops or kebab shops or grocers or any similar small business. In each case, one business works normal business hours, remains shut during holidays and always takes part in strikes, marches and protests. The other works 2-3 hours overtime, and whenever possible opens the shop even during a holiday. The latter, unsurprisingly, has a larger income.
What does our taxation system do? It rushes to exact more taxes from the harder-working business. The lazy one gets tax rebates and handouts – funds that have been collected from the conscientious and eefficient businesses.
6. It is strange that conservative or neoliberal, or even socialist and progressive, governments maintain and apply this ineffective, illogical and detestable system of taxation that punishes hard work and limits growth while encouraging corruption and indolence.
Why is this nonsensical system perpetuated? There are three simple reasons:
a) Here, like elsewhere, the powerful effect of inertia is in operation. This is the system we have, this is what we have inherited, this is what holds in other countries – and we know of no better.
b) There is ignorance among the masses of citizens. The millions of people do not have the necessary information and believe that politicians and specialised “scientists” called economists know what they are doing by maintaining the present system (it was first enacted by the British PM Pit in the 1790s and CapodIstria in Greece in 1830: direct income tax at a “progressive” scale of 10-25%).
c) There are powerful lobbies that wish to profiteer at the expense of the state and society. It is not just corrupt tax officials and high-income taxpayers that benefit; all of them have connections with politicians, journalists, unionists and civil servants in other services. A great number of citizens also have undeclared income from activities involving corruption of some sort.
7. Economists of all sorts and academics, in particular, constitute a quite remarkable fraternity with regard to this issue. Because they really know that another, completely different method of taxation exists, indeed, since it is mentioned in almost all Economics textbooks; they occasionally mention it in their talks and lectures but, alas, they do not promote it!
Perhaps they would not be wrong if someone accused them of deception. But it is more probably that they also suffer from inertia or cowardice.
It is also worthy of note that the system of Land Value Taxation was known to some Greek freedom fighters of the War of Independence of 1821 and the central principle was expressed plainly. For example, an issue of the ministry equivalent to the Home Office, dated 6/5/1822 and bearing the title “To the tax officials of Marathonisi and the captains of Mani” makes the following suggestion: “all Turkish owned estates within freed Greek lands are to be considered as owned by the state and laboured by those that were already labouring there; the rent of those estates is to be added to the National Fund”(Greek Independence Records, volume A’, p.408-9).
The economic rent or surplus, is the additional income that is earned by locations of arable land, e.g. cotton or tobacco or wheat, happen to be more fertile or closer to irrigation sources, transport, the markets etc. They therefore earn more when all other things like labour and capital are in equal use. This rent (=surplus above the production of the marginal locations) is the component which was defined as “public share” of the total value of a good/service, which is due to Nature and the existence of the community (see §3, above).
The advantageous lands have a greater value than the others, since their yield is greater. Thus, the value of the land is a reliable and accurate indicator. Lands in the margin of production with the lowest value have the lowest productivity and thus have but a negligible public share. It is the high-value lands which have a naturally higher productivity and a considerable public share/value.
The same can be applied to a nation as a whole. The plots in central locations of cities have immensely higher values compared to rural farmlands, while rocky mountain ranges without irrigation, soil or minerals have no value in the real estate market.
Therefore, the public value and economic rent in remote farmlands is negligible, whereas, as one moves to more fertile lands in the countryside and toward more central plots in cities, the public value increases, skyrocketing in the most central locations of the capital.
This public share/value or economic rent is the only kind of income that should be taxed.
8. Adam Smith and all the classics, as well as some modern economists like Nobel laureates M. Friedman and J. Stiglitz, they all teach that taxing economic rent (or collecting the public value of production) is a particularly advantageous and beneficial form of taxation that does not have any negative effects on the economy (e.g. see H. Speight, The Science of Prices and Incomes, 1965, Methuen, London, p.277). H.E. Daly wrote: “taxing economic rent does not cause any distortion in the ordering of economic funds and is the most effective means of collecting public revenue. To the extent that this replaces other means of taxation, it will increasingly stabilise the most effective allocation of funds” (p. 67,Steady-State Economics, 1992, Earthscan, London).
Simply put, it is not possible for this type of taxation to pass into the prices of goods and services; furthermore, workers will receive higher wages and growth will be stable. Innovation, initiative and hard work will be rewarded appropriately.
Moreover, since the land values are easily known and their knowledge is accessible to everyone, corruption will cease to exist; the ensuing transparency is a most desirable outcome. Tax authorities will require but a small office with very few employees.
One finds the idea stated in the writings of Smith, Ricardo, Mill, Marshall, Friedman, Stiglitz, and many other well-known and not well-known academics. Yet governments do not apply the method.
The reasons why governments are reluctant to apply this system are given above, in section §6.
Land Value Taxation is an efficient, counter-inflationary system of taxation which encourages growth, does not discourage hard work and returns to the state what belongs to it in the first place; i.e. the value generated by the public services and the progress of the community.
I will return.