By Ian Kirkwood
Life at the UK margin, including much of Scotland, is blotted out by taxes on wages and trade. It’s why enterprises and jobs hardly exist at Scotland’s more remote or otherwise marginal locations. But this imbalance can be addressed: by instead collecting the site values we all generate together. Because site rental values are high at the economic centre and low at the margin. If these were treated as state revenue, everyone would pay their surplus and no more: life would be revived and enterprises reborn at the margin.
Wages and trade taxes are jealously guarded at Westminster with ‘good’ reason: Taxes invested in London and the southeast automatically boost site values by 400% (e.g. site values were multiplied by a factor of four to five on completion of the Jubilee Line extension).
But those returns belong to tax payers, including those attempting to live at the geographic and economic periphery. The UK Idea could and would serve all its citizens – even at the margin – if the returns on invested taxes were fairly shared. But only site owners get them (and in outrageous disproportion at the economic centres), despite the fact that they do nothing to earn the £millions they pocket largely tax free. It is unearned wealth extracted form its producers (…you and me!). Hence underfunded public services, widespread social dislocation and rampant inequality.
It’s time to replace damaging VAT and income taxes with AGR/LVT. Holyrood now has devolved power to cancel one third of the annual Westminster damage (1/3 of up to £72bn/year in Scotland) by replacing a large slice of Income Tax with locally collected AGR/LVT.
What will Holyrood do?
“Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents, and the ordinary rent of land, are, therefore, perhaps, the species of revenue which can best bear to have a peculiar tax imposed upon them.”
The Wealth of Nations, Adam Smith, 1776:Bk.V: 370.
Following the SLC request for submissions on Land Value Tax, our tax expert Mark Wadsworth has prepared a document outlining how MSPs can use devolved tax-varying powers today to boost the Scottish economy by over 9% without collecting any extra revenue.
Scotland’s Path to Prosperity
Scotland’s Path to Prosperity (link to pdf) is published today. Our detailed and fully costed document is a prescription for turning around the perpetual Scottish deficit that is currently the sole future offered to Scots by pundits.
The document not only includes detailed costings but also fully explains the method of assessment and collection of a locally collected levy on site rental values (which we prefer to call Annual Ground Rent, after Adam Smith) to replace a proportion of devolved Income Tax.
The positive outcomes of such a bold move by MSPs would be many. The stream of value generated in Scotland by the combined efforts of society is found in the rental value of all land. Today site owners pocket this wealth, despite wide recognition that they do not generate it.
Adam Smith described how collecting [Annual] Ground Rent (aka LVT) would mean that people would be as well off after its collection as before. Mark Wadsworth shows in figures how and why Adam Smith was right! The reason is that the AGR/LVT levy is immune to deadweight losses (devastating economic damage inflicted by taxes on wages and trade).
We now present that option before MSPs – and all Scots – in a clearly written and fully explained but brief report. Please read it, place it in the hands of your MSP and demand that this policy option be fully debated at Holyrood.
MSPs, it is the duty of government to collect as revenue the surplus produced by society that is the rent of land. Devolved powers allow you to immediately migrate to collecting about one third of that surplus. By collecting that revenue directly from economic rent instead of indirectly by existing taxes, you will undo about one third of the economic and social damage inflicted on Scots by Westminster taxes. Please look carefully at the option before you to turn Scotland around. Our economists and tax experts are keen to explain further and face to face. Please contact us at email@example.com.
Emeritus Professor of Economics, University of Strathclyde
VAT is not just a tax on consumption. It hampers and destroys wealth producing enterprises. Producers have to cover their costs otherwise they go out of business. VAT forces some of them out of business; the survivors were/are able to pass on the VAT to consumers, rich and poor alike. VAT is thus a regressive tax.
But, in line with the ATCOR principle (All Taxes Come Out of Rent) VAT, like all other taxes on wages and trade, depresses business and so depresses rent too. It is not just a matter of the Laffer Curve effect on revenues, but also of the deadweight effects on GDP.)
For this reason, the recorded size of AGR/LVT, in the national accounts, is a relatively very small proportion of GDP. This false accounting is compounded by the statisticians’ practice of conflating land with capital and hence recording business “profits” as a return on “capital investment”, whereas much of it is actually land rent.
Critics of ‘LVT’ commonly cite this as a reason why it is not possible to finance a modern state in which government spending is, say, 40% of GDP.
The reduction of taxes in favour of AGR/LVT will reveal the true size of actual rents. And not only that. It will also increase them. This makes possible not only a full and fair financing of the functions of state, but also increased economic activity. This yields, year on year, an even greater potential volume of rent available to the state, to spend on behalf of the community that creates it as the social surplus.
Land owners at Westminster designed the current UK fiscal arrangement by which over one third of our socially produced surplus (the red slice) is reserved for site owners. Not only does this explain our starved public services, but also inequality, social exclusion/disintegration, cultural damage and premature deaths at the margin.
The mechanism by which this monstrous theft from the public purse can be recovered is Annual Ground Rent (less well described as Land Value Tax).
Holyrood can make a start now by swapping devolved Income Tax for a locally collected Annual Ground Rent, which would also replace the Council Tax, Business rates and LBBT.
Emeritus Professor of Economics, University of Strathclyde
Last December, finance secretary Derek Mackay admitted he had never heard of the famous Laffer Curve that points to potential loss of fiscal revenues when tax rates are increased. From this year’s budget speech it seems he is still no wiser. In particular, he seems unaware that even if a rise in tax rates does produce more revenue this can still inflict great harm. For example, a two percent rise in the rate will increase revenues if the resultant fall in GDP is “only” one percent.
Thus, alongside the Laffer Curve, one also needs the concept of deadweight loss. This relates to an “optimal tax rule” made famous by a brilliant Cambridge economist, Frank Ramsey, in 1928. The rule is that a tax on an object or activity should minimise the elasticities of supply and demand. The rule is violated when a tax discourages work and enterprise, or distorts expenditure patterns.
The rule applies best to land. As Adam Smith and David Ricardo famously agreed, there are no adverse supply-side effects from raising public revenue from land’s annual ground rent (AGR). This is a socially created surplus that owners enjoy and renters pay for land’s natural fertility, mineral riches, proximity to social amenities, or local job opportunities and planning consents. Market-based rent differentials cannot be eliminated by moving land from a low- to a high-rent location, or by hiding it, or by adding to its (fixed) supply. Demand for land is also highly inelastic. Deadweight losses from taxation are therefore near zero. In this it differs from the response to price differentials on goods and services, wages or profits where arbitrage and supply shifts apply.
Public revenue from AGR is more commonly known as land-value taxation. This is misleading. Taxes are paid by individuals regardless of any benefit the individual may obtain in return. By contrast, AGR is an annual value created by our community and enjoyed by its users. The community therefore has a strong ethical claim on it. It is not theft. No such ethical principle attaches to imposts on earned incomes.
If Derek Mackay and the SNP are serious about equity, efficiency, growth and stability they need a radical fiscal rethink.
Speech: Scotland and Scotsmen
Henry George’s speech in Glasgow City Hall started a process culminating in the 1909 People’s Budget. Lloyd George and Winston Churchill passed a measure through the House of Commons to collect a levy on the rental value of land. But their plans were frustrated by the House of Lords. The shameless throttling of the democratic mandate sparked the Constitutional Crisis and hastened the path to war. To paint a picture of the UK today – had the reform succeeded – would have been a gratifying survey of shared prosperity extending to all corners of the country.
Holyrood should look to what the First Minister names “some form of land value based tax” instead of Income Tax for revenue. Ian Kirkwood delivered the SLRG recipe for increasing state revenue at Portcullis House, Westminster, on 18th October 2017. Here is his talk in pdf format.
Fred Harrison here attempts to help us understand the damaging effects of ill-thought-out taxes on Scotland’s economy. What makes it worth getting to grips with is his claim that the massive losses are entirely avoidable by collecting something called Economic Rent that society itself generates…