Taxes: What Are They Good For?
We have seen that the key to a remedy for society’s economic ills lies in making the proper choices about what belongs to individuals and what belongs to the community. Taxation is the foremost means by which communities to gather resources for public use. Therefore — as unlikely as it may seem at first glance — our discussion of “the remedy” must be about tax policy. People usually do not like taxes. Often, governments can become so corrupt and misdirected that people revolt against paying taxes at all. Nevertheless, most recognize the basic need for some public services, funded by some sort of taxation.
The free market is good at allocating goods and services that producers compete with each other to supply. Things are not allocated well when monopoly disrupts the process. But there are some things, real benefits to the entire community, which cannot be had without monopoly; they are monopolies by their very nature. Consider roads, for example. A highway is generally built along the most direct route available – what incentive is there to build another road to compete with it? If the highway were privately owned, the owner could charge “whatever the traffic would bear” for its use. Rather than award individuals such a huge privilege, most communities build roads collectively, financing them through taxation.
Henry George believed that businesses that are monopolies by nature should be run by the government, not left in private hands. It was George’s conviction that the primary function of government is to secure the rights of its citizens – including labor’s right to the wealth it produces.
The Canons of Taxation
Adam Smith, in Wealth of Nations, famously outlined four criteria of a good tax.
Taxation should bear as lightly as possible on production. The very word “tax” suggests a burdensome load. Taxation is an allocation of wealth, which is produced by labor, to the needs of the community; nobody benefits if taxation inhibits production!
It should be easy and cheap to collect, and fall directly on the ultimate payer. If great resources must be devoted to the collection of taxes, they are simply wasted! Indirect taxes (such as sales taxes, and tariffs) are imposed on sellers and importers, yet ultimately paid by consumers. Not only are such taxes unwieldy and cumbersome; they also tend to be regressive – weighing heavier on those with lower incomes.
It should be certain. The more complex the rules of taxation are, the more they can be subverted and evaded. As the tax code becomes a hieroglyphic that can be understood only by specialists, only those who can afford to pay the specialists can take advantage of its loopholes!
Also, the production of wealth fluctuates from year to year, so if production is taxed, the amount of revenue cannot be predicted with certainty. Revenue shortfalls have to be met by means of public borrowing.
It should bear equally, so as to give no individual an advantage. We have seen how regressive sales taxes fail in this regard. The conventional standard of tax fairness is “ability to pay.” People with higher incomes are able to pay a greater part of the tax burden. The progressive income tax, for example, is based on ability to pay; in fact taxes are called “progressive” if they bear more heavily on those with higher incomes. But is the “ability to pay” principle really fair? No – because it makes no distinction between earned and unearned income. If individuals are more wealthy because they are efficient and honest producers, then taxing them according to their ability to pay burdens production, violating rule number one! A truly equitable public revenue system will not confiscate the legitimately produced wealth of some while allowing others to collect unearned incomes. The alternative principle of “benefits received” achieves fairness by levying taxes according to the value of the opportunities people have been given.
Broad-Based Taxation vs. the Single Tax
The favored public revenue strategy today is to make taxation as “broad-based” as possible – that is, to spread it out over as many different sources as are available. The reasons for this political as well as theoretical. The more different tax sources there are, the more they can be played against each other to favor special interests. Local taxes can be played against federal subsidies, property taxes against sales taxes, taxes on consumption against taxes on production; an endless variety of deductions, abatements, tariffs or subsidies can be applied to reward particular constituents.
This vintage Single-tax cartoon shows how economic rent (captured by the tax on “Real Estate”), is diminished by all other taxes: “When the trunk is tapped, each branch is drawn upon for its proportion of sap.”
The theoretical reason is that taxation is considered to be a burden on all economic activity. When such things as wages, sales, interest, etc. are taxed, it makes goods and services cost more, thus lowering demand – and demand is what stimulates production. So if all taxes are a burden on production, then they should be spread over as wide an area as possible to minimize the load on individual producers.
But there is one thing in the economy that can be taxed very heavily – to the full extent of its value, in fact – without decreasing the demand for goods and services. A tax on the rental value of land cannot diminish production, because land is not produced. A land value tax cannot increase the price of goods because those prices include the cost of land in any case, whether the rent is paid to a landowner or to the community.
The “broad-based” tax idea, failing to recognize the distinctive character of land as a factor of production, seeks to spread out the tax burden. In so doing, broad-based taxes – whether by accident or by design – provide all manner of opportunities for special interests to influence tax policies in their favor, at the expense of fairness and accountability. Land value taxation, on the other hand, is merely the collection by the community of the very fund that the community has created.
Can a Tax on Land Values Be Shifted?
Taxes on commodities are usually passed on to the consumer in higher prices. What is to stop landowners from doing the same thing? That is, can a landowner increase the rent charged to tenants so as to pay the land value tax and still collect the same net rent as before?
Remember: land is not produced by labor. It is fixed in quantity and its price is a monopoly price (all the traffic will bear). A tax on labor products increases the cost of those products and this is reflected in the price. If the new price meets consumer resistance, the supply of that product is checked.
But a tax on land does not affect either its cost of production (it is not produced) or its supply (which is fixed). Thus its price is not increased (for it is already all the traffic will bear), and the tax falls directly on the owner. The rent of land is determined by the margin of production and it is a certain amount whether taxed or untaxed. A tax on land is simply a division of the rent between the owner and the community.