VAT urgently needs to be replaced with AGR/LVT

Roger Sandilands
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.

Over one third of our socially produced surplus is privatized and needs to be reclaimed

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.

It really is time for Holyrood to understand Deadweight Losses

Roger Sandilands
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.

 

ECHR Property Rights fatally flawed

The European Convention on Human Rights (ECHR) suggests the right of ‘property’ (land) is a universal human right. But the logic of this clause is destroyed when it is revealed the ‘universal right’ extends only to those who happen to already own land.

What may be honestly classed, then, as Property? Our wages for one thing. So why is government confiscation of wages not forbidden in the ECHR treaty?

Wealth Extractors manipulated the form of words to permit their continuing raid on wealth created by others (Wealth Creators). They devised Income Taxes at Westminster which allowed them to pocket the previous and legitimate state revenue stream: site rental values, which are generated by the efforts of society as a whole.

Site rental values are the returns on our taxes when they are invested in the amenities which bestow on each site its value. Site owners do nothing to produce these sums. Yet they are enjoyed as free unearned capital gains by just one subset of society. What Adam Smith called the [Annual] Ground Rent of each site needs to be collected and recycled to properly fund our public services. And taxes on wages and trade ditched.

AGR/LVT please.

Scotland and Scotsmen, Henry George’s speech in Glasgow City Hall

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.

Our government chooses to destroy Scottish enterprises

Abandoned high streets are a highly visible cost we all pay for allowing our government to not collect Economic Rent. Less visible are the thousands of enterprises absent from areas away from the economic centres. Arbitrary taxation has destroyed not only the enterprises that should be in existence at the margin, but also the commumities and cultures those missing enterprises would have supported. In their place, our government has created rural and urban decay, a sub-class of social outcasts with no share in the value they help create (Economic Rent), an ousted rural population on the move to cities or abroad, poverty and inequality. The cost to the UK of all these ‘deadweight losses’ — which would be completely avoided with AGR (Adam Smith) — is between £0.5 and £1 trillion a year of lost economic activity (Martin Feldstein). Scotland’s share of those losses is between £36 and £72 billion a year. And that is by government CHOICE. And no other factor.

It’s Government that’s shutting down our High Streets

If society collected the Annual Ground Rent (i.e. LVT) our high streets would be fully occupied, because the site rental value is the amount a business can afford to pay — its full surplus. Arbitrary taxation demands more and so kills the businesses.

Desolate high streets are just one devastating result of the Government choice not to collect socially-generated Annual Ground Rent.

Site rental values are the Net Income of the country that can be collected IN FULL without any requirement to repress wealth-creating enterprises with taxes on employment or profits (Income Taxes, VAT, Corporation Tax etc).

 

Post-election thoughts for Nicola

The SNP manifesto came out just in time to read before the election. In it are the commitments to sustain and enhance the lives of citizens one expects to find — all competing for limited state revenue.

Is there any more the Scottish Government could do to enlarge the community chest without harming citizens and services?

A lot more!

The SLRG attempts to promote awareness of the importance of how revenue is collected. Sad to say, the way we do it today is ultimately responsible for the poverty and inequality that surrounds us.

Three of the four main UK parties are beginning to see this and included in their 2017 manifestos expression of intent to either enact or seriously consider enacting a ‘Land Value Tax’. The fourth manifesto, that of the SNP, was the only exception. The SNP would appear to be the last party to identify the way out of the fiscal stone age, in which Scotland is doomed to perpetual deficits.

A tax or a charge?

Land Value Tax is, unlike other taxes, benign. Which is why we use Adam Smith’s better description: Annual Ground Rent. It is a levy on site rental values that are provided by society or nature. A charge for the services associated with the location we each choose to monopolise by ownership.

The levy is the exact value of the services in each location because the amount to be collected is decided in a free market; not by the Government.

The Net Income of Scotland

It may come as a surprise, Nicola, that the Net Income of Scotland and the UK is not something your economic departments or HMRC are interested in! They have never sought to compute the taxable surplus of the country, the surplus wealth generated that could be collected without having to repress employment, incomes and enterprises by taxing them.

We refer to the unearned incomes currently pocketed by the owners of sites without any labour or effort: wealth that is generated by others but that is collected by them. Wealth that governments still choose not to tax because of the historical prevalence of such beneficiaries inside governments.

Encourage wealth creators or wealth extractors?

We would encourage you, Nicola, to observe how Scotland’s (and the UK’s) economy is occupied by two groups:

1. Wealth Creators
2. Wealth Extractors

In order to encourage the creation of wealth in Scotland, would the obvious goal not be, Nicola, to remove tax burdens from Group 1, who create the wealth?

Unfortunately, your current tax policy, Nicola, is to exclusively tax Group 1, the Wealth Creators, leaving Group 2, the Wealth Extractors with untaxed, unearned incomes composed of wealth created by the taxed productivity of Group 1.

This is, of course, a state of affairs you have inherited rather than invented Nicola. But because Group 2 has succeeded in organising a free ride for itself, we are as a consequence surrounded by poverty and inequality. In Scotland it is YOUR government, Nicola, that is sustaining the policy that causes our economic and social difficulties. Not to mention the starving of the public services which you state you wish to support in your manifesto.

It is Government that chooses

Can you see, Nicola, that the problem is one of Government choice and not some effect of uncontrollable ‘markets’?

On p 15 of your manifesto you state,

“We will back tax proposals that promote fairness, while raising the revenues required to protect the public services we rely on.”

Here is one we have been pointing out for nearly a year:

It is now nearly one year since you could have initiated the replacement of 10p of Income Tax with locally-collected AGR.

The effect would have been to start transfering the tax burden from repressed enterprises that produce wealth (losing at least £1 of economic activity for each £1 raised) to the recipients of unearned income extracted from society. Those unearned incomes are currently untaxed, Nicola. But collecting them would cause no economic distortion (Adam Smith).

THE NET EFFECT IS £BILLIONS FOR SCOTLAND, NICOLA.

Manifesto difficulties

Two illustrations from your manifesto illustrate the problem:

Page 21: “The Scottish Government is already lifting more than half of all premises out of business rates altogether.”

This sounds good. But what happens is this: the rents of half of all business premises rise immediately by the exact amount of the rates exemption, pouring public funds into the untaxed pockets of Group 2, Scotland’s Wealth Extractors.

Page 22: Infrastructure. You point out that £1.4bn has been invested in the Queensferry Crossing and £742m in the Glasgow–Edinburgh railway line.

As revealed following London’s Jubilee Line extension, such public expenditures are fantastic investments, providing four-fold returns over the sums invested. But who pockets the £billions under your tax regime, Nicola? Not society, who funded the projects, but untaxed Group 2, who own the benefiting sites whose rental values spiral.

Scottish society collecting what it creates — IS FAIR

Nicola, Annual Ground Rent allows Scottish society to collect the value IT creates — Scotland’s Net Income — without having to resort to measures that place wealth-creating Group 1 in its current tax straitjacket, dooming Scotland to perpetual deficits.

The AGR is different everywhere Nicola. Biggest in the most desirable locations for trade. Since 1707 the burgeoning sums sucked relentlessly from Scotland to London and the Southeast by the machinations of Group 2 are beyond reckoning. You can call a halt by getting under way with the collection of the Economic Rent we all generate collectively — for equal distribution — and free up Scotland’s wealth creators to start building the Scotland we all want. One in which life chances are equalised by AGR.

Note

For an unbiased discussion on the far-reaching positive consequences of collecting Economic Rent as revenue, please consult your retained Nobel Laureate Economic Adviser, Professor Joseph Stiglitz.

Ian Kirkwood
Scottish Land Revenue Group