Debate: Which tax would you axe? (Part 1)
25 September 2018
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Tax doesn’t have to be taxing, as those jolly HMRC adverts would have us believe. But given the length (10 million words and counting), and extraordinary complexity of Britain’s tax code, it inevitably does.
In practice, poorly-designed taxes can depress economic activity and exacerbate social problems. They can distort human behaviour and business decisions in perverse and unforeseen ways. In some cases, growth-stunting taxes end up reducing the overall tax take, on top of their other harmful side-effects.
Many would agree that our tax system is in need of radical simplification, but where to begin?
On our debate blog this week, a group of free-marketeers give their pick of the most harmful taxes in contemporary policy. If you were in charge of the Treasury for the day, which tax would you axe?
Reform property taxes, says the IEA’s Head of Health and Welfare Dr Kristian Niemietz
The UK’s system of property taxation is extremely complex, distortionary, arbitrary and inefficient. For a start, there are simply too many property-related taxes: Council Tax, Business Rates, Stamp Duty, and insofar as they relate to property wealth, Capital Gains Tax and Inheritance Tax. They should all be rolled into one, in a revenue-neutral way.
More importantly, they all tax a package. They (clumsily) tax the value of land, but they also tax improvements to that land, buildings, and the activity that takes place on it. Only the unimproved value of the land should be taxed, because this is the part of the package that a landowner cannot influence, which means that taxing it does not change their behaviour. Whether they leave their land derelict, or put it to the best possible use – their tax bill would be the same.
The revenue from this Land Value Tax (LVT) should be retained locally, and local authorities should be given much greater autonomy over their infrastructure policies and the provision of local public goods and services.
This would radically improve incentives. It would lead to a more efficient use of land, more and better housing development, a more efficient use of the existing housing stock, more business investment, and greater accountability in local politics. What’s not to like?
Catherine McBride, Senior Economist for the IEA’s International Trade and Competition Unit, would axe the Bank Corporation Tax surcharge
At a time when all other UK industries are seeing their corporation tax rate lowered to just 19%, the UK has decided to increase taxes to 27% on one of its largest and most profitable sectors. Indeed, it is the only G7 economy that targets banks in this way.
The Bank Corporation Tax surcharge was introduced in 2016, and imposes an additional tax of 8% on banking profits above £25 million. This applies to all banks, building societies and controlled foreign companies, and has increased the total amount of corporate tax paid by banks last year by 23% – from £4.8 billion to just under £6 billion (plus a further £3 billion for the Bank Levy, which is a tax on UK banks’ balance sheets).
The surcharge has harmful repercussions. It pushes profitable UK banks into a higher tax rate than many other EU countries, including Luxembourg, Ireland and the Netherlands, countries, incidentally, where many London based banks are establishing EU offices so they can operate post-Brexit in the event of a ‘No Deal’ outcome. With the 8% surcharge, a profitable bank in the UK could be paying more than double the Irish corporate tax rate. It would be an extraordinary own goal by the government if banks decided to stay in Ireland for tax reasons, even if the UK and EU reach a deal.
What’s more, the main prize in bank taxation is not in the corporate taxes but the PAYE taxes which came in at a whopping £18.4 billion last year, more than 3 times the corporate and surcharge taxes. Why would anyone risk losing these payments for the sake of an additional £1.1billion?
While many see extra taxes on the financial sector as justified by the bank bailouts in 2008, it simply cannot make sense to tax profitable companies more in order to pay for propping up those that are badly-run. Since 2007, the banking sector has paid over £220 billion in taxes including £14.5 billion for the Bank Levy and £3.4 billion in a one-off tax on bonuses in 2010.
The four banks bailed out by the government in 2007/8: RBS, Lloyds, Northern Rock and Bradford and Bingley (B&B), are already repaying the support they received; Lloyds completely, while B&B and Northern Rock have repaid 76% of the government loans so far. Even RBS is finally making a profit.
But the many new banks that have started since the 2008 crisis, under a much stricter regulatory regime, as well as the banks that did not require government assistance during the crisis, should not be penalised with this surcharge. Though the surcharge only applies to profits above £25m, it still hits many small, innovator and/or disruptor banks in a sector where the UK has excelled in recent years.
HMRC should be encouraging more competition in the financial markets – not discouraging it with additional taxes.
Scrap Inheritance Tax, argues James Price, Campaign Manager at the Taxpayers’ Alliance
Like most, if not all, taxes, inheritance tax (IHT) has distortionary effects and unpleasant unintended consequences. However, it also has the dubious honour of being the most unpopular tax in the UK.
Firstly, those negative side-effects. Various exemptions, for example on heritage assets or agricultural property, provide incentives to prompt people to buy, sell or otherwise act to avoid paying tax, to the detriment of other considerations about sound investments.
Similarly, a higher threshold on primary residential properties encourages people to invest in their house rather than other assets, adding to the inflationary pressures on the housing market. Of course, all of this is largely only relevant to those who can afford financial advice; such tax planning means that those who end up paying IHT are those who don’t feel they could afford such advice, or those who have suffered a sudden and unexpected bereavement.
But the reason IHT is the most unpopular tax isn’t because the rich can get around it with clever tax wheezes, or even because of the inefficiencies it causes. Saving up to pass on something to the next generation of one’s family is the most natural feeling there is for many people. Of course, socialists see supporting one’s family as good only up to a point, after which it becomes nepotistic and at the expense of equality in wider society.
But most Brits (59% according to a 2015 YouGov poll) deeply reject these arguments for ‘progressive’ taxation when it comes to IHT. Perhaps this is because, seeing a greedy Treasury imposing a fresh levy on a grieving family, using the source of their grief as a pretext, people see the hunger of big government for what it is; a leviathan that even death will not stop.
Read Part 2 here…
In practice, poorly-designed taxes can depress economic activity and exacerbate social problems. They can distort human behaviour and business decisions in perverse and unforeseen ways. In some cases, growth-stunting taxes end up reducing the overall tax take, on top of their other harmful side-effects.
Many would agree that our tax system is in need of radical simplification, but where to begin?
On our debate blog this week, a group of free-marketeers give their pick of the most harmful taxes in contemporary policy. If you were in charge of the Treasury for the day, which tax would you axe?
Reform property taxes, says the IEA’s Head of Health and Welfare Dr Kristian Niemietz
The UK’s system of property taxation is extremely complex, distortionary, arbitrary and inefficient. For a start, there are simply too many property-related taxes: Council Tax, Business Rates, Stamp Duty, and insofar as they relate to property wealth, Capital Gains Tax and Inheritance Tax. They should all be rolled into one, in a revenue-neutral way.
More importantly, they all tax a package. They (clumsily) tax the value of land, but they also tax improvements to that land, buildings, and the activity that takes place on it. Only the unimproved value of the land should be taxed, because this is the part of the package that a landowner cannot influence, which means that taxing it does not change their behaviour. Whether they leave their land derelict, or put it to the best possible use – their tax bill would be the same.
The revenue from this Land Value Tax (LVT) should be retained locally, and local authorities should be given much greater autonomy over their infrastructure policies and the provision of local public goods and services.
This would radically improve incentives. It would lead to a more efficient use of land, more and better housing development, a more efficient use of the existing housing stock, more business investment, and greater accountability in local politics. What’s not to like?
Catherine McBride, Senior Economist for the IEA’s International Trade and Competition Unit, would axe the Bank Corporation Tax surcharge
At a time when all other UK industries are seeing their corporation tax rate lowered to just 19%, the UK has decided to increase taxes to 27% on one of its largest and most profitable sectors. Indeed, it is the only G7 economy that targets banks in this way.
The Bank Corporation Tax surcharge was introduced in 2016, and imposes an additional tax of 8% on banking profits above £25 million. This applies to all banks, building societies and controlled foreign companies, and has increased the total amount of corporate tax paid by banks last year by 23% – from £4.8 billion to just under £6 billion (plus a further £3 billion for the Bank Levy, which is a tax on UK banks’ balance sheets).
The surcharge has harmful repercussions. It pushes profitable UK banks into a higher tax rate than many other EU countries, including Luxembourg, Ireland and the Netherlands, countries, incidentally, where many London based banks are establishing EU offices so they can operate post-Brexit in the event of a ‘No Deal’ outcome. With the 8% surcharge, a profitable bank in the UK could be paying more than double the Irish corporate tax rate. It would be an extraordinary own goal by the government if banks decided to stay in Ireland for tax reasons, even if the UK and EU reach a deal.
What’s more, the main prize in bank taxation is not in the corporate taxes but the PAYE taxes which came in at a whopping £18.4 billion last year, more than 3 times the corporate and surcharge taxes. Why would anyone risk losing these payments for the sake of an additional £1.1billion?
While many see extra taxes on the financial sector as justified by the bank bailouts in 2008, it simply cannot make sense to tax profitable companies more in order to pay for propping up those that are badly-run. Since 2007, the banking sector has paid over £220 billion in taxes including £14.5 billion for the Bank Levy and £3.4 billion in a one-off tax on bonuses in 2010.
The four banks bailed out by the government in 2007/8: RBS, Lloyds, Northern Rock and Bradford and Bingley (B&B), are already repaying the support they received; Lloyds completely, while B&B and Northern Rock have repaid 76% of the government loans so far. Even RBS is finally making a profit.
But the many new banks that have started since the 2008 crisis, under a much stricter regulatory regime, as well as the banks that did not require government assistance during the crisis, should not be penalised with this surcharge. Though the surcharge only applies to profits above £25m, it still hits many small, innovator and/or disruptor banks in a sector where the UK has excelled in recent years.
HMRC should be encouraging more competition in the financial markets – not discouraging it with additional taxes.
Scrap Inheritance Tax, argues James Price, Campaign Manager at the Taxpayers’ Alliance
Like most, if not all, taxes, inheritance tax (IHT) has distortionary effects and unpleasant unintended consequences. However, it also has the dubious honour of being the most unpopular tax in the UK.
Firstly, those negative side-effects. Various exemptions, for example on heritage assets or agricultural property, provide incentives to prompt people to buy, sell or otherwise act to avoid paying tax, to the detriment of other considerations about sound investments.
Similarly, a higher threshold on primary residential properties encourages people to invest in their house rather than other assets, adding to the inflationary pressures on the housing market. Of course, all of this is largely only relevant to those who can afford financial advice; such tax planning means that those who end up paying IHT are those who don’t feel they could afford such advice, or those who have suffered a sudden and unexpected bereavement.
But the reason IHT is the most unpopular tax isn’t because the rich can get around it with clever tax wheezes, or even because of the inefficiencies it causes. Saving up to pass on something to the next generation of one’s family is the most natural feeling there is for many people. Of course, socialists see supporting one’s family as good only up to a point, after which it becomes nepotistic and at the expense of equality in wider society.
But most Brits (59% according to a 2015 YouGov poll) deeply reject these arguments for ‘progressive’ taxation when it comes to IHT. Perhaps this is because, seeing a greedy Treasury imposing a fresh levy on a grieving family, using the source of their grief as a pretext, people see the hunger of big government for what it is; a leviathan that even death will not stop.
Read Part 2 here…
4 thoughts on “Debate: Which tax would you axe? (Part 1)”
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I would axe IR35 false self employed tax regulation.
The unitended consequences of this regulation are:
A boom in employment agencies adding an average of 10% to the cost of labour for contractors.
It caused a fall in apprenticeships since agency workers cannot employ apprentices, self employed can.
It has created the need for worker certification schemes like the construction skills certification scheme. Contractors who employ via agencies don’t know the skills and abilities of their labour therefore have to cover their HSE liability with these worker certification schemes. Just like government occupational licensure worker certification puts a cost burden on entry to an occupation creating labour shortages, increasing the cost of labour and disadvantages the poorest the most.
For the new self employed gig economy worker IR35 is a huge problem. It needs to go!
So long as we all pay what we owe each other for the loss of opportunity/harm we inflict, a Poll Tax is the only fair and necessary way to fund the services the state provides.
As such, the scarcity value of all natural resources, Pigou Taxes, royalties and other user fees should be collected and paid out as an equal share via a Citizens Dividend. The responsibility of which can be handled by a non-governmental body.
The total dividend paid would be approximately twice as high as the amount the state needs to cover spending on the services it provides, which could then be funded by a Poll Tax.
Not only would this radically simply the tax code, but would optimise the economy for growth while eliminating excessive inequalities in society. It means that we all pay exactly the same amount, no matter the level of income or wealth we enjoy.
Non-citizens would not receive the dividend, but would not have to pay the Poll Tax, thus being tax free. For those that think all taxes are theft, the option to go tax free would simply mean rescinding ones citizenship, though this would of course be a counter-productive thing to do.
Taxing incomes, capital and transactions is an unnecessary evil, that only panders to the vested interests and prejudices of those that support the main political parties. All those that worry about economic justice and wealth creation should be planning how best to get rid of them as soon as possible.
The explanation of Dr Kristian Niemietz does not go far enough in supporting the claims of LVT. Below is my essay, which provides a more detailed yet summarized explanation.
Socially Just Taxation and Its Effects (17 listed)
Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?
Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors of production (the other 2 being labor and durable capital goods). The usefulness of land is in the price that tenants pay as rent, for access rights to the particular site in question. Land is often considered as being a form of capital, since it is traded similarly to other durable capital goods items. However it is not actually man-made, so rightly it does not fall within this category. The land was originally a gift of nature (if not of God) for which all people should be free to share in its use. But its site-value greatly depends on location and is related to the community density in that region, as well as the natural resources such as rivers, minerals, animals or plants of specific use or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).
However, due to our existing laws, land is owned and formally registered and its value is traded, even though it can’t be moved to another place, like other kinds of capital goods. This right of ownership gives the landlord a big advantage over the rest of the community because he determines how it may be used, or if it is to be held out of use, until the city grows and the site becomes more valuable. Thus speculation in land values is encouraged by the law, in treating a site of land as personal or private property—as if it were an item of capital goods, although it is not (see Mason Gaffney and Fred Harrison: “The Corruption of Economics”, 2005).
Regarding taxation and local community spending, the municipal taxes we pay are partly used for improving the infrastructure. This means that the land becomes more useful and valuable without the landlord doing anything—he/she will always benefit from our present tax regime. This also applies when the status of unused land is upgraded and it becomes fit for community development. Then when this news is leaked, after landlords and banks corruptly pay for this information, speculation in land values is rife. There are many advantages if the land values were taxed instead of the many different kinds of production-based activities such as earnings, purchases, capital gains, home and foreign company investments, etc., (with all their regulations, complications and loop-holes). The only people due to lose from this are those who exploit the growing values of the land over the past years, when “mere” land ownership confers a financial benefit, without the owner doing a scrap of work. Consequently, for a truly socially just kind of taxation to apply there can only be one method–Land-Value Taxation.
Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land values is created by the community, after an initial difficult start and not by the natural resources. As the village and city expand, speculators in land values will deliberately hold potentially useful sites out of use, until planning and development have permitted their site-values to grow. Meanwhile there is fierce competition for access to the most suitable sites for housing, agriculture and manufacturing industries. The limited availability of useful land means that the high rents paid being by tenants make their residences more costly and the provision of goods and services more expensive. It also creates unemployment, causing wages to be lowered by the monopolists, who control the big producing organizations, and whose land was previously obtained when it was cheap. Consequently this basic structure of our current macroeconomics system, works to limit opportunity and to create poverty, see above reference.
The most basic cause of our continuing poverty is the lack of properly paid work and the reason for this is the lack of opportunity of access rights to the land on which the work must be done. The useful land is monopolized by a landlord who either holds it out of use (for speculation in its rising value), or charges the tenant heavily for its access. In the case when the landlord is also the producer, he/she has a monopolistic control of the land and of the produce too, and can charge more for this right than what an entrepreneur, who seeks greater opportunity, normally would be able to afford.
A wise and sensible government would recognize that this problem derives from lack of opportunity to work and earn. It can be solved by the use of a tax system which encourages the proper use of land and which stops penalizing everything and everybody else. Such a tax system was proposed almost 140 years ago by Henry George, a (North) American economist, but somehow most macro-economists seem never to have heard of him, in common with a whole lot of other experts. (I would guess that they don’t want to know, which is worse!) In “Progress and Poverty” 1879, Henry George proposed a single tax on land values without other kinds of tax on produce, services, capital gains, etc. This regime of land value tax (LVT) has 17 features which benefit almost everyone in the economy, except for landlords and banks, who/which do nothing productive and wrongly find that land dominance has its own reward.
17 Aspects of LVT Affecting Government, Land Owners, Communities and Ethics
Four Aspects for Government:
1. LVT, adds to the national income as do all other taxation systems, but it can and should replace them.
2. The cost of collecting the LVT is less than for all of the production-related taxes—then tax avoidance becomes impossible because the sites being taxed are visible to all.
3. Consumers pay less for their purchases due to lower production costs (see below). This creates greater satisfaction with the government’s management of national affairs.
4. The national economy stabilizes—it no longer experiences the 18 year business boom/bust cycle, due to periodic speculation in land values (see below).
Six Aspects Affecting Land Owners:
5. LVT is progressive–owners of the most potentially productive sites pay the most tax.
6. The land owner pays his LVT regardless of how his site is used. When fully developed, a large proportion of the ground-rent from tenants becomes the LVT, with the result that land has less sales-value but a significant “rental”-value (even when it is not being used).
7. LVT stops the speculation in land prices and any withholding of land from proper use is not worthwhile.
8. The introduction of LVT initially reduces the sales price of sites, (even though their rental value can still grow over long-term use). As more sites become available, the competition for them becomes less fierce so entrepreneurs are more active.
9. With LVT, land owners are unable to pass the tax on to their tenants as rent hikes, due to the reduced competition for access to the additional sites that come into use.
10. With LVT, land prices will initially drop. Speculators in land values will want to foreclose on their mortgages and withdraw their money for reinvestment. Therefore LVT should be introduced gradually, to allow these speculators sufficient time to transfer their money to company-shares etc., and simultaneously to meet the increased demand for produce (see below).
Three Aspects Regarding Communities:
11. With LVT, there is an incentive to use land for production or residence, rather than it being unused.
12. With LVT, greater working opportunities exist due to cheaper land and a greater number of available sites. Consumer goods become cheaper too, because entrepreneurs have less difficulty in starting-up their businesses and because they pay less ground-rent–demand grows, unemployment decreases.
13. Investment money is withdrawn from land and placed in durable capital goods. This means more advances in technology and cheaper goods too.
Four Aspects About Ethics:
14. The collection of taxes from productive effort and commerce is socially unjust. LVT replaces this extortion by gathering the surplus rental income, which comes without any exertion from the land owner or by the banks–LVT is a natural system of national income-gathering.
15. Bribery and corruption on information about land cease. Before, this was due to the leaking of news of municipal plans for housing and industrial development, causing shock-waves in local land prices (and municipal workers’ and lawyers’ bank balances).
16. The improved and proper use of the more central land reduces the environmental damage due to a) unused sites being dumping-grounds, and b) the smaller amount of fossil-fuel use, when traveling between home and workplace.
17. Because the LVT eliminates the advantage that landlords currently hold over our society, LVT provides a greater equality of opportunity to earn a living. Entrepreneurs can operate in a natural way– to provide more jobs. Then earnings will correspond to the value that the labor puts into the product or service. Consequently, after LVT has been properly introduced it will eliminate poverty and improve business ethics.
An invaluable, and long overdue, analysis of the principles of site value taxation that have been overlooked by so-called tax experts, mainstream economists and treasury tax-gatherers for far too long. For this sin of omission the country is paying a terrible price – just look around you!
Listen to Mr Chester!