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Land, Taxation and the Economic Crisis

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Michael Jacques

Joined: 08 Dec 2008
Posts: 2
Location: Johannesburg, South Africa

PostPosted: Sun Dec 14, 2008 6:23 pm    Post subject: Land, Taxation and the Economic Crisis Reply with quote

Land, Taxation and the Economic Crisis – What’s it all about, Alfie?
As a new boy to the Economics Forum I have studied most of the postings and the replies to them and found the discussions very interesting. However, what comes strongly to mind is a remark made by the director of the Free Market Foundation regarding economic and political discussions in the Foundation. He used an apt but rather vulgar term I won’t repeat here, but what he meant was that the discussions they had in the FMF were very stimulating, but would have zero effect on public policy. I fear the same may apply to the discussions in the Economics Forum.
What I am extremely grateful for is the teaching I received in the School’s economic courses and the simplicity of the terms used. For example: Wealth is labour on land using capital to produce goods and services needed or wanted by others. Money is not wealth, but is a claim on wealth. We talk about “wealthy” people when we mean people with lots of claims on wealth. If everybody in the world stopped working for say two weeks, the body count at the end of that time would be at least 50% of the global population, wealthy people included.
There’s a lot of talk in the forum about Germany in the 1920s and Zimbabwe now, regarding inflation. The big difference is this: in 1920 the German people were still working hard producing wealth; the problem was that most of that wealth was sent to other countries as war reparations. In Zimbabwe, wealth creation virtually ceased when most of the productive farms were closed down. Ordinary people could keep going for a while because friends and relatives who had fled the country sent pounds, dollars and rands home and they could buy imported goods with this money; the ruling politicians and their cronies were fine because they had access to plenty of foreign currency. The local currency was worthless because there was no wealth backing it. (Latest news: a new Zim$500 million note has just been issued, = US$10)
All of this is very relevant to the current crisis. Bankers in the US attempted to create claims on wealth based on mortgages on land at inflated values, taken out by people who couldn’t service these debts on the meagre wealth they were able to create. So already we have two or three layers of claims on wealth built on very flimsy foundations. Then the bankers created another layer: the credit default swap (CDS), a sort of insurance on the already dicey toxic mortgages. In addition to this we had people with good jobs and up-to-date mortgages, re-financing their loans based on some flimsy evidence that the value of their house (land) had gone up. Not only that, but because the banks believed the values would rise even more, they gave these homeowners loans of up 135% of the current (inflated) value.
All debt has to be serviced and ultimately repaid from the creation of wealth: we all know that. So debt rests on the steady creation of wealth, but banks prefer to rely on the flimsy illusion of land values, not only the so-called present values, but also values they believe will materialise in some hoped-for future.
These then are the foundations on which debt is based:
First, real wealth created by work on land using capital;
Secondly, illusory land values based on increasing wealth;
Thirdly, packaged mortgages (collateralised debt obligations) containing some good, some moderate and some poor sold on to other banks and hedge funds, the proceeds being used to grant yet more mortgages on increasingly dicey land values (vide Northern Rock);
Fourthly, the infamous CDS, based on the CDO and created like confetti to many times the value of the CDOs and traded “over-the-counter” (i.e. beyond the regulation of stock exchanges) by hedge and investment fund managers.
When the creation of wealth started to falter, partly because of the increasing weight of interest it had to bear on its debt, this whole pack of cards crumbled. It was based on an illusion that could not be sustained for ever, or, as some wag has said, “When the tide went out, we could see who was swimming without trunks”.
Sadly, the rescue packages are also based on an illusion: where else can the money come from but from taxing the creation of wealth? But because a sudden increase in taxation may cause the creation of wealth to falter, governments defer the pain by borrowing the money and gradually increasing taxation over the years. So the pain of servicing the massive weight of corporate and personal debt is now compounded by a massive increase in government debt that ultimately has to be borne by the same corporations and individuals.
Who or what is to blame for this gargantuan mess? Many blame ‘greedy bankers’ or governments for not applying sufficient oversight or regulation on these bankers and their exotic derivatives. But bankers are in business to make money and if it is legal to lend money based on the value of land values, even if the person who has to service the debt is suspect, then why not go for it. After all, “house prices never come down” (Alan Greenspan), and many governments encouraged such lending, even creating structures such as Fannie Mae that implicitly guaranteed such loans. To make money people will go down paths that are open to them and it is pointless to apply (with hindsight) moralistic condemnation of their actions. They did what they were allowed to do at the time, and if you or I had been in their position, we probably would have done the same.
The villain, in my book, is the system of taxation. Because it robs individuals of a goodly chunk of their productive enterprise, they become obsessive about ‘saving’ some of their wealth in assets that can be ring-fenced from taxation. This can be in investments in off-shore tax havens, in shares and exotic investments such as derivatives, but best of all, in land. Of course governments have got wise to these avoidance schemes and have applied taxes such as capital gains tax, as well as exchange controls to stop people sending their money to little islands that are beyond the taxman’s grasp.
For years we have touted the undoubted benefits of land value taxation (LVT) to very little avail. All it seems to do is give us the opportunity to discuss and debate some future nirvana, but the issue I am raising is the present system of taxation. I equate this with the three major injustices that the world has had to grapple with in the last two centuries: slavery, and racial and gender discrimination. These have largely been overcome, certainly to the point where no reasonable person would attempt to justify any of these practices.
While nearly everyone who is subjected to taxation may hate the system, I sometimes think I am the only one who equates it with a form of slavery, or at least as a form of social and economic discrimination that needs to be abolished. First, we need to go back to the origins of the modern system.
In 1776 there were two momentous events: the American Declaration of Independence and the publication of The Wealth of Nations. Adam Smith’s book was received with great acclaim, but did anyone read it? When Britain introduced the first income tax some thirty years after its publication and set out the principles that are still followed today, they did the exact opposite of what Smith advocated. Why did they do this? There are two possible reasons.
The first (but unlikely) reason is that they did not understand Adam Smith and thought that he was advocating taxes on profits, wages, consumption and personal wealth (e.g. death duties). His advocacy for a tax on ground rents was possibly treated as a throw-away suggestion not to be taken seriously.
The second and more likely reason is that the legislators at the time were mainly wealthy land owners, lawyers, bankers and merchants, and they would not have tolerated an assault on the very foundation of their wealth and power: land. A century later their descendants in the House of Lords vetoed the Liberal Party’s ‘Peoples’ Budget’ that introduced a land tax. In fact, if one examines the relationship between land ownership and taxation in any major economy, one can detect the quiet but all-powerful influence of land owners in the determination of tax policy.
Today taxation seems to protect the wealthy by avoiding any tax that would seriously challenge their control of the land and the power it gives them; pacify the middle classes by appearing to give them generous tax breaks, but at the same time increasing their taxes through increasingly complex tax codes; and punishing the poor by allowing taxes to accumulate like a sediment in the price of goods which increase as one moves further from the urban centres. (In South Africa with large numbers of generally poor people living in rural areas far from the cities, the price of basic household necessities can be 30% to 40% more than prices in the cities. One of the reasons for this is the accumulation of taxes on fuel, transport, payroll, road toll fees and so on built into the final price of these goods.)
Let’s be brutal about this: taxation is nothing more than extortion, sanctified by legislation and often enforced (if you don’t pay within the specified time-limit) with a harshness that almost matches mobster tactics. It has no foundation in natural justice or law, and becomes unnecessarily complex because tax legislators think they can match a degree of fairness and objectivity with the need to close all possible loopholes. This, of course, is an impossible task.
Nevertheless, the chance of any government moving away from their present tax system is almost zero. Even if a president or prime minister were to be persuaded by the arguments for a land tax, he or she would not be able to implement it because of the powerful lobby of land owners, treasury officials and tax consultants that would oppose any change threatening their interests.
What is needed is a ground-swell of public opinion, hopefully non-violent, against the tax system. Already there is a huge under-current of dissatisfaction with the global economic system, but their demands are often rather vague (e.g. globalisation or third-world poverty) and are either ignored or met with promises that are difficult to monitor. Where their demands are more specific and obvious, such as global warming, action has been taken, even if reluctantly by some countries.
Developed economies like the US and UK would have difficulty getting rid of their present tax systems; they are too hidebound and complex and the span of a political party’s rule is generally too short to see such a long-term project through. In a developing country like South Africa it could be considerably easier. One problem is they don’t have the confidence to tackle something like this on their own: what other countries are doing becomes the benchmark, without too much thinking about it.
What we need then, are strong country-specific movements backed by global anti-tax movements. When the tipping point comes and a government is prepared to make the change, we will have the answers: goodness knows, we have been working on them long enough.
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Peter Bowman

Joined: 02 Nov 2008
Posts: 27
Location: London, UK

PostPosted: Sun Dec 21, 2008 5:21 pm    Post subject: Reply with quote

Thanks for your post Michael and opening up this topic.

I wholeheartedly agree with the essence of your posting that the present system of taxation is an important factor contributing to the present sate of injustice and in need of examination.

But could I suggest in response to your post that before the opportunity can be established of offering "answers" as to how the system of taxation can be changed (given a democratic political environment, or at least aspiration to this) a preliminary step that needs to be taken which is that a debate needs to undertaken in order to first open up what the issues are that underly the problems with the present system such as the one's that you raise?

The subject of taxation is not a popular one and the subject of "the philosophy of taxation", which considers the underlying assumptions upon which systems of tax are based is probably even less popular. How often are these basic assumptions even enunciated, let alone questioned?

What are the foundations upon which the present system is based? In practice it has grown up historically by a series of expedients based as much on political as economic considerations but according to the scholars at present the generally accepted basis of taxation is that is should be based on 'ability to pay'. A little examination soon calls this into question. Although it sounds fair in practice the establishment of exactly what any individual's or organisation's ability to pay is very difficult. The complexity of the steps taken to achieve this is matched only by the complexity of the corresponding steps taken in response to minimise or avoid payment.
What are the alternatives?

Site or "Land"- based taxation is based on a different principle. Before advocating this as an alternative method, should not the principle upon which it rest first be established, or at least recognition gained that it is based on a different principle? Is not the idea here that each holder of the property rites to a piece of land pays not according to his 'ability to pay' but according to the value of the public benefits he receives? These may be "protective" as in the legal and defense systems or "empowering" as in access to natural resources, provision of infrastruture and access to markets.

This is a wholly different approach towards Government revenue and one that is much more in accord with a market based economy. Here goods and services are generally bought and sold at market prices. They are not generally dispensed in exchange for arbitrarily imposed levies, independent of whether the goods are received or not.

Another fundamental question in relation to taxation is what its purpose is. In addition to the obvious one of supplying Government revenue another generally accepted role is in the "redistribution of wealth." In the UK quite a large proportion of revenue is used for this purpose. Again, rather than accepting this as fair and justice should the question not be raised: If wealth needs to be redistributed does that not imply that the original distribution was unjust?.........
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Michael Jacques

Joined: 08 Dec 2008
Posts: 2
Location: Johannesburg, South Africa

PostPosted: Tue Dec 23, 2008 4:10 pm    Post subject: Land, Taxation and the Economic Crisis Reply with quote

Thank you, Peter, for your reply to my post on the subject of taxation.
You raise the subject of a debate to open up the need for more general awareness of the issues involved. My colleague Stephen Meintjes have been working on this for a number of years and have written a policy proposal related to the situation in South Africa. We then gave a presentation to an audience at the School of Practical Philosophy (SofES) in Johannesburg and raised the possibility of changing the system in SA from the present extortionist and complex system to one based on ‘resource rentals’. A member of the audience was/is an employee of the South African Revenue Service and was completely gobsmacked that anyone could propose anything so outrageous. We are now attempting to arrange a debate with him and possibly other members of the SA Revenue Service. Will keep this website posted on developments.
Peter mentions that the current system is based on ‘ability to pay’. This of course, comes from Adam Smith’s first maxim of taxation: “The subjects of every state ought to contribute towards the support of the government…in proportion to their respective abilities; that is, in proportion to the revenue they respectively enjoy under the protection of the state.” (Wealth of Nations, Book V, Part II, Of Taxes) As I pointed out in my initial post, this is where the original tax architects stopped reading. They seemed to think that ‘revenue’ means rent, interest, profits, and wages, and then squeezed in by sleight of hand, other taxes such as consumption, customs and excise duties and death duties.
A close reading of Adam Smith shows that what he meant by ‘ability to pay’ was in fact the rent of the land occupied by the owner/tenant; he rejected all the other taxes mentioned above. This ‘tax’ or resource rental is based on the real ‘ability to pay’; if the land owner feels that his business or personal situation cannot meet this rental, then he is at liberty to move to a site where the rental more suits his business or personal means.
Another good question raised by Peter is the subject of redistribution of wealth, but I think we will leave that to another time.
Seasons greetings and/or happy Christmas to all readers of this website.
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Peter Bowman

Joined: 02 Nov 2008
Posts: 27
Location: London, UK

PostPosted: Sun Dec 28, 2008 5:34 pm    Post subject: Reply with quote

Michael, Thank you for your reply and so furthering the discussion. The efforts of Stephen and yourself in working for reform in South Africa carry my utmost admiration.

I appreciate your point of interpreting Adam Smith's canons of taxation as associating ability to pay with having command over rental income. That was very helpful. However I feel that there is an aspect of using land rent as the basis of public revenue that is easily overlooked, and that is the connection it provides between what is paid and the benefits received in return. In a system of taxation as arbitrary levy there is no such connection, almost by definition.

When I mentioned the word debate previously what was in mind was the academic debate in addition to the political one. One of the most influential recent academic contributions to the philosophy of taxation is Murphy and Nagel's "The Myth of Ownership: Taxes and justice" (2002).

These two American philosophers have raised some useful questions about the relationship between property rights and taxation. Although they restricted their consideration to income tax in the US the ramifications go well beyond this and could be very usefully applied to landed property, (although their application to resource rents may be more limited).

The view of taxation which they sought to question was that of what they call the "libertarians" who, they suggest, feel strongly that they have a basic right to their gross income as it is their private property. On this basis taxation amounts to little more than legalised theft by the state.

M & N argue against this on the grounds that in order to have the conditions in which the gross income can be earned the state provisions of law and order, defence and infrastructure must first be in place. Hence the full entitlement to the gross income is called into question. A portion of it is cannot justifiably be the individual's. It is rightfully due to the state which supplied these basic necessary provisione that are the prequisites to the income being earned.

The argument would be at least as strong if it were applied to landed property income instead of earned income since here the disaggregation of into a "private" part associated with what is put on the land and a "public" part (what we would call the "economic rent of the land") due to public provision and location, is more clear cut.

Behind any question of the justice of taxation lurks the issue of property, i.e. private property and associated property rights. The useful service Murphy and Nagel have done is to call into question the assumption that property rights are independent of the requirement to pay tax.

They helpfully point out that property rights rest upon a framework that is sustained by Government and funded by taxation and so assert that in any just system property rights and taxation must always be considered together.

Could this provide a basis on which to argue for using the economic rent of land as a basis of Government revenue in the context of the current academic debate?
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