Topic: Taxation
Is There A Just Tax? A look into the means Government uses to raise revenue.by Gene DeNardo
(centrist liberal libertarian)
Thursday, November 6, 2008
Unless you subscribe to a government based on volunteers and unpaid public servants, there can be no government without taxes. If you reside in the upper corner of the dizzying Libertarian heights of the Nolan Chart, peering down at the less intelligent masses below, perhaps you believe there is no justification for even minimal government. Or, maybe you dwell in the deepest recesses of the Statist corner of the chart, you may believe in total control by the state, again with no need for taxes. Everything is funneled by and through the state, making taxes redundant and incomplete. Kidding aside, if either of these positions describe your views, I respect your opinions, but you will have no need for the following conversation.
If you believe some form of government is necessary, whether just large enough to provide protection from outside threats {this is my biased view of the smallest government, only because I believe history has shown a completely unprotected people would be swallowed up or colonized by a more organized and/or aggressive group} or massive enough to control and direct most all of the activities of its citizens, and meddle in the affairs of other nation's citizens, then we can talk about taxes. However you look at taxes, the government for its existence, needs revenue of some kind.
A basic premise of any tax system is that it should be fair. By that I mean not only the type but the application. It must be fair and just in nature and it must be applied without special exemptions or discounts. And distribution of the revenue must be done in the most efficient way, in a manner that fulfills the intent of the tax in the first place. I am in no way debating the size of the tax in proportion to the means of the society. That would be an entirely separate discussion and would determine the type of government not the fairness of the tax, although that could be debated. If you get my drift, we are not debating Socialism versus Totalitarianism, etc.; we are only discussing government revenue.
Income tax is probably the most common form of tax. That said it makes absolutely no sense to tax what a person earns from their labor. The logic is obvious, if you want people to work, you don't take their wages. In effect, it is a pay cut, although hopefully there is some return for it, but certainly the tax is not justified.
However, income is more than payment for labor. What about income from interest or capital gains? In its simplest form, interest is payment for the use of money. Money is used to capitalize and drive the economy and that shouldn't be hindered, but in our world, interest can also be a signal of excessive wealth. What I mean by that is not a reference to a Marxist idea, rather in a true, completely efficient free market, excess capital would be much harder item to come by. Capital amounts would be smaller and more directly invested, rather than lent. Without going into great detail, I say this because I think in a truly free, efficient economy, inflation would be virtually non-existent. In this scenario, there would be little incentive to "hold" anything for future value, including capital. Its best use obviously would then be use.
In the world as we know it, it might make sense to tax interest which resulted from excessive capital, as opposed to interest which was payment for working Capital, but the web has been weaved so intricately by those profiting from this system, it is difficult to separate the two. It would be better to prevent its accumulation by allowing the freedom of the markets to prevent unbalanced concentration of wealth.
The other enemy of efficient Capital is our money supply. It is impossible for Capital to find its natural course when so much "false" capital is created at will. This excess makes possible large profits from the mere exchange of "paper" capital. What benefit to the economy and Society is the exchange of capital represented by paper, between two parties that doesn't result in any positive change to the economy other than the exchange itself? It wouldn't go far enough to tax this, it should be eliminated.
Another common tax is sales tax. Actually, what tax isn't common these days? Sales taxes are all based on the idea of taxing transactions. When any good or commodity or any sort of item exchanges hands, there is a possibility of taxation. Taxes on services could be classified under income taxes although a service could include both if there is an exchange of something physical. Most commonly sales tax takes place on the wholesale or the retail level. This could be beneficial in our society, to reduce consumption, but this would be treating the symptom instead of the cause. Overconsumption and pointless accumulation is more a sign that the markets are not working properly for reasons that benefit a few but not the majority. A sales tax can raise a lot of revenue quickly, but it always discourages exchange by its nature and the less fortunate always pay a larger percentage of their worth, even tho in theory the rich usually pay more in volumn because they can afford more in quantity.
Property tax is an immense form of revenue for governments. When we say property tax, we actually are talking about two taxes, that of personal property and that of land. Taxing one's personal property is a retrogressive form of sales tax. The item is taxed, usually yearly, after it is purchased. It borders on the absurd. You are taxing ownership, or taking the worth of the item back in installments. There is some logic to the progressive nature of it, the rich own more, etc. but if that is the idea, then go with a luxury tax and call it a day.
When it comes to taxing a house or building, you a taking from what is a "good" in society. A structure represents a combination of labor and materials that improves or adds to society and is a functional part of the economy. So to reward this, you take back part of the value? And can anybody explain the following to me? If building taxation is based on value [mill levy], why isn't the tax divided up by ownership? In other words, you have 20% equity and the bank has 80%, when tax time arrives, why doesn't the bank chip in eight dollars for every two of yours? I have a feeling mortgage backed securities wouldn't have been such a hot item if this were the case!
That leaves us with the land portion. Land is also taxed by value. But is this justified? The value of land comes from society. There is no individual action or effort that we can perform that changes this. You might think about something like converting barren land to an orchard, but that would be an "improvement" and come under personal property which has been covered.
Location, location, location. Where the parcel is in relation to the rest of the society and the condition of that society and its economy determines its underlying value. A quarter acre in the middle of Kansas and a quarter acre in Manhatten is measured the same way. What society and all of us have accomplished around that parcel is what determines its value. Possession of title is irrelevant to value.
The tax or land "fee" would be a percentage of value. It would represent a return of value that was created by Society back to everyone thru the government. That's was government is suppose to do in its best light. Because it is based on the value of land, a fundamental building block of the economy, the tax amount, would directly reflect the state of the economy and society and not detract in a significant way for the workings of a free economy. The rate, or percentage of value, would be based on the type of government and the amount or size of government. In other words, small government, low rate, big government, big rate. You can see the benefits of this, small government needs less revenue and their economies need low taxes and big governments and societies have the opposite needs.
A much related tax would be an extraction tax. All resources, minerals, timber, energy sources, emanate from the earth. In the same sense, they are not the result of any individual's work, resources were here long before us. Their value comes from their abundance or lack of it and their use to everyone. This tax would be in two layers, the basic land fee for the use of the land and the value of the extraction. What would be tricky to calculate would be the "loss" of value to the land after the extraction is completed. I think this is mainly due to a lack of stability in our medium of exchange, money. How can a "loss" be accurately calculated when the supply of currency is never ending? We are creating "false" profits on our balance sheets by substituting funny money for losses.
How this preferred method of taxation would change our world and how it reinforces the values of a "free" society are topics for future articles. Henry George, a contemporary of Ben Franklin's, wrote extensively about this and many of his ideas are as fresh today as they were back then. Taxation should do as little harm as possible and return as much good as possible. We all know the present system doesn't work, the existence of an entire industry built upon evasion of taxes is sufficient evidence. When we feel taxation is an investment in the good of all rather than a burden to all, we will know we are in the right place. Until that time, democracy and freedom are just a dream.
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Thank you for this article, it was an enjoyable read.
You make a lot of good conclusions, and I only wish that real governments could think through these points as well.
I will enjoy thinking about the implications of your conclusions about taxing land and the resources you get from it ... Would the extration tax apply to fish harvested from the ocean too? I always wonder how that should be handled.
One thing that pops to mind about taxing land is that if the government can tax land at 5% of its value, then it can tax it at 95% ... can the government take the land away?
Would the government be more honest just to claim ownership and rent on the land? (Of course that might make lead us to the very worst of govenment 'management'.)
Thanks again, as I said, I will have fun thinking about this for a while.
Of course. Some of history's clearest thinking individuals have argued the case for collecting 'rents' (i.e., location rental values) as a, or the, source of revenue to pay for public goods and services. Landed interests have thus far prevailed. The moral and economic efficiency issues are clearly in favor of collecting rents, but the political will to achieve this measure has never materialized because of the power of the opposition.
Sean, thanks for taking the time to read the article. Any "resource" would need to be included to have a fair tax and avoid subsidy. How high the tax is per value would determine the "type" of government. In other words, smaller governments would have low tax and more "Statist" governments would have a high tax. Who decides that, of course, is the big question! My guess is government could "record" title based on fee, but it is kind of an arbitrary point as long as rights are the same. For instance, in our country it is preferable for corporations to "use" land when possible, rather than own it, so to avoid taxes. Logging corporations and the forest service land is a good example. When that isn't possible, they seek tax "exemptions", which means those without exemptions pay more. The land tax is a concept to bring fairness to situations like these.
That's kind of why I couldn't understand why there was a big push to lower the gasoline tax when gas prices were high. If it pays for the roads by taxing those who use them the most, and not for other government services, it made sense to keep them the way they were. Road usage diminished when fuel prices went up. The road still need to be maintained, and paid for.
Likewise when there was an assessment for deepening the drainage creek behind my house, it made sense that those deriving the most benefit shouldered most of the tax for the improvement. The county engineer's report was well researched and the bids seemed fair.
If taxes are kept to a minimum to cover necessary expenses, and nothing more, there wouldn't be the outcry for ever lower taxes. Having the county dredge the creek helped keep property values high for those in the flood plain, and it was more efficient, in this case, than having each homeowner along the course pay for a backhoe.
Thanks for your article expressing a geolibertarian point of view. You may be aware that there are formal (and informal) courses offered about Henry George's ideas. They are cheap or free, and you might enjoy taking one. See henrygeorge.org, henrygeorgschool.org, hgchicago.org.
Hi Maria, Great question! I think the "clinical" definition is any capital that isn't at it's highest use[whatever that is!], like a bank holding more than the required 10% reserves. I was referring to Capital or more descriptively, money that is created on paper, usually due to the FED gushing funds into the economy, and a profit is made by the transfer of securities, etc, without any increase in real value. Selling mortgages is an example, when would that be feasible or profitable if there wasn't too much currency in the market? It would mean the original mortgage holder had not attained full value for the mortgage in the first place and was selling it to the second party who would profit on the difference. A good deal of paper transfers that show profit are due to the FED policies and wild fluctuations in interest rates as a result of or part of these policies. But, like I mentioned in the same paragraph and like you mention who would determine what is excess and what is not, and how it would be determined is a really tough question. I don't know if it could be done at all.
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