Scots should place their hope in fiscal reform

Rather than place our hope in the EU or the UK, Scotland should choose a future in which the socially produced surplus is shared with its producers – and demonstrate to the world what can be achieved.

Calling a halt to social exclusion and unequal life chances which today characterise the EU and the UK, Scotland could be different.

In zones such as Hong Kong and Singapore, low taxes on wages and trade allow enterprise to thrive. Instead they collect site rents via leases. Scotland can collect site rents via a Land Value Tax, better described by Adam Smith as an (Annual) Ground Rent (AGR).

With Income Tax, National Insurance and VAT drastically reduced or zeroed, Scotland’s enterprises would thrive not only at the economic centres, but for the first time at the economic periphery. No longer would wealth production be inhibited by an artificially imposed government cap. And the sums people willingly devote to occupying sites (minus the value of improvements) would be returned to where it belongs: the currently starved Public Purse.

Yes: UK Austerity and inequality are government choices.

This wealth is the natural source of state revenue. A statement confirmed by at least two members of Holyrood’s retained Council of Economic Advisers: Nobel Laureates Professors Joseph Stiglitz and the late Sir James Mirrlees. Site rental values have no cost of production. They are provided free by nature or reflect exactly the investments made by society in amenities and services enjoyed by each site. The values freely placed on sites by their users represent not only an accurate cost of the services the occupier chooses to use, but also the Net Income of Scotland – the sum produced over and above wages, profits and the costs of doing business – which can be collected by government without harming enterprise or confiscating the legitimate hard-earned wages and profits of work and innovation.

In the UK the rent of land and natural resources accounts for over half the annual wealth produced (the gross income) in a voluntarily repressed economy. Current taxes collect about one third of the gross income. Our troubles have arisen when our society has negligently permitted persons to succeed in directing these Common resources away from the Public Purse into their private pockets.

The remedy is to untax earned income and tax away all unearned income.

A Scotland built on the inclusive and egalitarian rent-as-revenue model would be a society not only experiencing boosted prosperity, but that prosperity would be shared.

Currently, as a member of the UK Idea, people and resources are sucked out of Scotland by distorting tax arrangements designed at Westminster to favour site owners. People involuntarily on the move are sucked, whether they will or no, towards London and the South East.

The effects of the inherited skewed tax regime are astonishing. As site values rise in line with investment in amenities (our taxes being spent) site owners at the economic centre receive unearned wealth exceeding their tax bills.

Please read that again.

It means those of us not counted among the privileged site owners must not only supply them all with a comfortable free life, but that we must also bear the entire costs of running the state!

You really have to salute the cynical ingenuity of those landlords in historic control at Westminster for shaping the fiscal policy of Britain so far to their advantage – and for somehow, to this day, getting away with it!

But it is not just Scotland that suffers.

‘The North’ is an abandoned English zone. Most peripheral UK economic locations are the same. Neither they, nor Scots, are equal partners in the UK Idea. Nor have they been since its inception. Within the skewed tax regime projects like HS2, far from being tools to share prosperity, are unmasked as schemes to facilitate further ‘Rentseeking’ by ensuring the continued flow of servants into the economic centre (London) so that site rental values there are not threatened by shortages. And remember – the full net costs are to be borne by those not owning the prime London sites.

Now Scotland can be different, leading Scots into a future of boosted and shared prosperity. And if Scotland acts, you can be sure that The North will be queuing at the door, eager to join the Scottish Idea.The UK and Europe too, when they see what can be achieved.

Even with devolved powers, Holyrood can make a start. By restructuring tax, Holyrood can boost economic activity in Scotland by 9% without increasing the sums collected. See our fully costed policy option, ‘Scotland’s Path to Prosperity’ at http://slrg.scot/…/uplo…/2018/02/pathtoprosperity.web_-1.pdf

The ‘free lunch’ comes in the form of cancelled ‘deadweight losses’ integral to taxes on jobs and trade.

By Ian Kirkwood

Figures used to justify subsidising Scottish agriculture are worthless

I retired from a secure, well-paid job as a lecturer at the University of Leeds and began farming full-time. After 26 years of farming in Fife I am supposed to pretend that our farm business is so unprofitable that we are dependent on subsidy income support and make less than the minimum hourly wage and that therefore I am a fool.

The truth is that our farm business is profitable and does not depend on subsidies.

Non-farmers know this instinctively when they estimate the value of the content of car parks adjacent to farmers’ meetings.

FBI

The official statistics of farm incomes, presented as average Farm Business Income (FBI) for 2016- 2017, show that in Scotland it was £26,400 including an average subsidy of £41,300, which means that without subsidy, the average FBI was minus £14,900.

The definition of FBI says that “it represents the financial return to all unpaid labour on their capital invested in the farm business, including land and buildings”. The rate of return on investments used to calculate FBI is 5%.

Taking a 500 acre farm as an example, with livestock and machinery worth £750,000 and requiring a 5% return on capital, means that £37,500 is deducted from taxable income (profit) when calculating its FBI.

The average rent for farms with arable land and under secure tenancies is £85 per acre which equals £42,500 per year. To calculate FBI this sum is deducted from taxable income.

About 70% of farms in Scotland are owner- occupied, they pay no rent and many have no money borrowed. For these farms the true earnings would be £26,400 + £37,500 +£42,500= £106,400 per year. Deducting the average subsidy of£41,300 leaves an FBI of £65,100.

Farmers cannot expect to make a 5% return on the value of their assets. There is either a wage OR there is a return on investment. Seldom is there both.

Farmers who have bought land costing £8,000 per acre cannot hope to make a return of 5%. When they deduct the cost of their investment from their profit, it is no surprise that they are making a loss. The only way to make a profit from land bought at this price is to sell it to someone else for more (land banking).

The average Net Worth (assets- liabilities) of farm businesses in Scotland is £1.3m. Specialist sheep farm businesses in Less Favoured Areas have an average Net Worth of £795,200.

What if it was suggested that income support should be given to everyone with a net worth of less than £750,000?

Most farmers are not as poor as they are made out to be. The figures used to suggest otherwise are worthless.

What both farmers and taxpayers alike really need is a radical restructuring of taxation away from taxes responsible for repressing Scottish wages and trade and which artificially boost land values harvested by land speculators, towards collecting annual ground rents (aka LVT) as state revenue.

Duncan Pickard
Farmer, Fife.

AGR includes natural resource rents such as those deposited in Norway’s $1tn oil fund

When considering AGR, do bear in mind that the $1tn Norweigian Oil Fund is composed of AGR in the form of oil rents. Just one strand of Annual Ground Rent, the equivalent of which has been sucked out of Scotland to London and the South East within the toxic mechanism called the UK Idea.

https://www.thisismoney.co.uk/money/markets/article-4900670/Fund-Norway-richer-hits-1-trillion.html

That mechanism could be mended: an AGR/LVT version of the UK would be one in which each member nation or location (e.g. The North) was treated equally. In such a union the returns on investments from each region (taxes invested in amenities) would be returned to their producers.

Such is not the case in the UK today; instead people and resources are sucked out of the periphery and deposited at the economic centre (London and the South East). This socially corrosive process, by which wealth that is produced by others is extracted, unearned, is called Rent Seeking.

To be clear, what happens today to £1 of tax contributed at the UK margin and invested in a London amenity is this: the benefiting site value is increased by up to 5 times (e.g. sites that benefited from Crossrail). But the £4 returns on the investment do not go back to the margin as would happen in a VALID ‘UK Idea’. The returns are instead pocketed by London site owners.

The devastating compound effects of the malignant UK tax mechanism, from decades and centuries spent draining wealth form the economic periphery, can be seen all around the UK margin in 2019.

Had Clause IX of the Treaty of Union been maintained and enhanced (the Land Tax), we would already be living in a just and properly functioning union. Surplus wealth, shared over the intervening centuries, would have produced a prosperous Scotland and UK.

Instead we inhabit a UK with a prosperous London and a periphery where communities wither and populations die up to an average 20 years prematurely. They die because arbitrary taxes cannot be afforded at the margin. The enterprises that would, with AGR/LVT, be the employers at the margin, simply do not exist! The annual value of such ‘deadweight losses’ inflicted by government choice on the UK is at least £500bn (Fred Harrison​).

Until such time as the UK is reformed, Scotland would be better off going it alone. But only if Scotland itself embraces AGR/LVT, so that it can achieve viability and escape otherwise perpetual annual deficits.

Land Tax best for farmers – and everyone else too

In his letter published in this week’s Scottish Farmer, Fife farmer and economist, Duncan Pickard, highlights misconceptions in Reading University’s report to the Scottish Land Commission on Land Value Tax, and explains why land rent as state revenue makes sense at all levels. He writes:

The most notable feature of recent comments about Land Value Taxation (SF. Dec. 15) is the failure to appreciate that AGR/LVT is not an additional tax. It will replace existing taxes.

The multitude of taxes which Sarah-Jane Laing (Scottish Land & Estates) says that landowners currently pay will be simplified to an annual charge based on the rental value of land; Council Tax, Business Rates and Land and Buildings Transaction Tax will go and other taxes could be abolished if politicians have the courage to do so.

The team from Reading and their “panel of LVT experts” were keen to emphasise in their recent report to the Scottish Land Commission, the potential difficulties with adopting LVT; but were reluctant to point out the disadvantages of the current taxes (e.g. £500bn+ UK deadweight losses and moribund marginal communities).

They seemed keen to protect the interests of the construction industry. Why did they claim that one of the main detrimental effects of LVT will arise because those who own land will “make windfall losses” when they are no longer able to make windfall gains from the ever- increasing price of land?

The impression is given that the main impact of LVT will be in rural areas; but the value of rural land is only about 10% of the total value of land. The owners of urban land will contribute about 90% of the LVT even though urban land is only about 10% of the total area. See SLRG’s report to the SLC, Scotland’s Path to Prosperity.

Many years ago the whole of the costs of government were collected from land owners but when they took control of government in parliament they gradually shifted the tax burden onto wage earners.

For the last 30 years investment in landed property has been very profitable, having been given a large stimulus by the sale of social housing at giveaway prices in the 1980s. The imposition of VAT on goods and services as a national tax was begun by France in 1954. Germany was persuaded to adopt it and as other countries joined the EEC, which became the EU, they had to have VAT, which is the most detrimental to employment and trade of all the taxes. Income taxes are bad but VAT is worse. It should be the aim of all who seek national economic prosperity to maximise the standard of living of the people and minimise the costs of doing business. This aim is incompatible with the current tax system.

Although the early advocates of LVT, including Adam Smith and Winston Churchill, limited its scope to the ground on which we stand, the modern interpretation of “Land” extends to all natural resources such as the electromagnetic spectrum (under-collected and therefore capitalised into the profits of communications giants), fossil fuel and mineral reserves. The total amount of taxable revenue available from all natural resources is sufficient to provide for the whole of the national budget and would allow the taxes which inhibit employment and trade to be gradually reduced and then abolished.

There are two countries, Singapore and Hong Kong, which derive most of the money needed for government from ground rent (HK Income Tax as low as 2% https://www.guidemehongkong.com/business-guides/staffing-your-business/hong-kong-salaries-tax-guide). They have few natural resources, but have no annual budget deficit and high levels of economic prosperity.

Neither country was examined in the Reading report.

Instead of concentrating on the potential difficulties associated with LVT, all of which have been addressed in numerous scholarly publications, the Reading group should have highlighted the reasons why LVT is not in use everywhere. The main reason is the failure to overcome the claims of those with vested interests in retaining the existing taxes which they have found effective ways to avoid or evade, who are a minority of the population but who possess the loudest, most strident and well-funded voices…to the severe detriment of the rest of the population.

The economic case for LVT is invincible. I fully agree with the view that for LVT to be adopted, people need to be better informed about the failings of the present system of taxation and become acquainted with the advantages of LVT. The subject of taxation should be included in the curriculum of all schools.

Duncan Pickard, Straiton Farm, Balmullo.

People’s Budget No. 3 Insanity at HM Treasury

Nick Macpherson (now Lord Macpherson) came out as a proponent of the land tax (AGR/LVT) at a Resolution Foundation conference in London in October 2018. But his advocacy of the policy over three decades at HM Treasury, where he was latterly the chief civil servant, was met by his colleagues with universal derision.

Which explains why Blair and Brown were never going to investigate counter-cyclical policy options pre-2008. Their preference was for the damage to be borne by the British people: they would be condemned to suffer austerity …still on-going a decade later!

And who, exactly, will bear responsibility for the next devastating bust post-2026?

 

A proper Christmas present please

Allowing land speculation is what makes homes unaffordable.

It’s a choice.

One much favoured by those keen to continue extracting socially produced wealth at the expense of those who do not own sites.

For Christ’s sake let’s get AGR/LVT up the political agenda in 2019.

People’s Budget No. 2: The Scottish Budget

peoplesbudget2.web

The distortions affecting society and the economy from Wednesday’s Scottish budget are considerable and avoidable.

What is the public pricing mechanism that would render budgetary expenditures self-funding, so that the money does not have to be added to the tax burden of people working in Scotland?

In pursuing land reform, the Scottish government required The Scottish Land Commission to investigate the effectiveness of LVT around the world. Unfortunately the report by experts at the University of Reading is seriously flawed.

In People’s Budget No. 2 economist Fred Harrison explains why.

SLRG’s Professor Roger Sandilands talks to Scottish Government economists on AGR/LVT

SLRG’s Professor Roger Sandilands’ presentation on AGR/LVT to Scottish Government employees on 19 October went well.

Here is Professor Sandilands’s 29-slide Powerpoint presentation. Edinburgh powerpoint presentation (r), Oct 2018

70 Scot Gov economists and other employees attended at the Victoria Quay building, with additional live streaming to two rooms in St Andrews House and a Glasgow venue.

It is hoped that the potential of AGR/LVT (economic rent as state revenue in place of taxes on wages and trade which repress wealth creation) to positively transform Scotland and share boosted prosperity, is now a little more widely understood.

Thanks to the event organisers, Spencer Thompson and Exploring Economics, an initiative in the Scottish Government aiming to promote a pluralistic approach to economics and to improve the understanding of economics among non-economists.