We hear of businesses that can't compete against products from abroad, or of firms which are dropping their UK suppliers. Business men point to low tax régimes abroad, and organised labour sometimes bemoans the sweatshop wages of the Far East. But a closer look shows that our competitors in Singapore, the USA or even Germany often have a higher quality of life or higher incomes than we do in Britain. How can this be?
Consider just one example. It is common to see a woman looking at the price tag on an item of clothing in the high street. There have been many stages in its production. The garment is made of cloth which has been woven and stitched. The components in their turn have been spun from basic material such as wool, cotton or synthetic fibres. Such fibres are the product of even more processes from basic ingredients such as oil. At every step in the chain there is added value which governments tax through Value Added Tax (VAT). If the 17.5% level of VAT in the UK is higher than the 15% rate in Germany (1999 levels) the cost of processing in Germany will have a VAT advantage over processing in Britain. If other costs and efficiency are comparable, UK manufacturing will not be competitive and German manufacture may displace British. This may even happen in the domestic British market; it will almost certainly happen in third markets where the two are in competition.
But this is not the only effect of VAT on competitiveness. The price-tag on the garment includes the sum of all the VAT charged at every stage of production and marketing. The purchaser has to pay it all. She is not able to pass the VAT any further. As far as she is concerned it is part of the price which must be met out of her budget.
A similar woman may be looking at a similar garment in Germany. If the two women also have similar incomes the German woman may be able to afford the garment while the British woman cannot. British women have either to accept a lower standard of living or seek higher wages from their employers.
This is the position of every British employee who has contributed to the production of the garment, and as expectations of standards of living converge in the EC every UK employer will come under pressure to pay higher wages to match German spending power. The effect of VAT is therefore to drive up the wage bill of the UK employers. This raises the price of the British garment still further. The German garment becomes even more competitive and UK retailers are forced to turn to overseas suppliers. Almost any product involves many stages of production. The more stages there are, the more tax additions will be made to the price tag.
VAT is by no means the only tax levied on sales, there are also various import and excise duties. All of them raise prices for the consumer and costs for the producer.
Levels of sales tax vary considerably around the world. In France it is 20.6%, but States in the USA have much lower levels, more like 5%. Where these sales taxes are low industry has a double advantage!
As all these taxes mean higher prices, the consumer tries to find ways of meeting the extra bill. If he is an employee, he presses for higher wages. If the wage demand succeeds, the employer must raise his prices for goods or services, which gives another twist to the spiral.
On top of the 'indirect taxes' like VAT which have to be borne, there are also 'direct taxes' like income tax and corporation tax, and 'quasi-taxes' like National Insurance, all of which force up prices and reduce competitiveness.
For public sector employers these overheads form part of the public revenue that is needed to run the public services. But a manufacturer has to try to keep his sales and prices high enough to cover them. If his foreign competitor is in a more favourable tax régime, the British producer will be in serious difficulty. The effects are obvious in the rapid decline of our manufacturing industry.
The UK manufacturer may try to reduce the cost of his product by investing in modern machinery. This may raise the 'productivity' of his labour force, which might mean greater sales and higher production, but it can also mean fewer workers and more redundancies. He might try to vary the price at which he sells his products. He could package them more attractively, give them a fashionable design, or use more impressive materials to try to outclass his competitor. But in the long run his competitor can do the same. The adverse tax régime can still force the British manufacturer out of business and make his workers unemployed.
We see British industry trying all these solutions, yet still declining. The impact of our taxes in raising the cost of labour has other effects too. Manufacturers are reluctant to employ any but the most productive labour. Youth unemployment is very high because employers cannot afford the cost while people learn 'on the job'. And at the first sign of an employee slowing down in late middle age an employer will seek an opportunity to persuade him to take 'early retirement'. Meanwhile there are many activities that would benefit everyone which are too costly to undertake. All of these unemployed non-producers, young or elderly, need to be supported - which adds further to the tax bill, and thereby to the burdens on production.
For many years, farming in Britain has sought to compete by enriching the fields with fertilisers and feeding the cattle with enriched foods. The BSE crisis, the environmental effects of fertiliser residues and the overproduction of sheep have exposed the danger in this approach. Farmers compete not at the farm gate but on the supermarket shelf. If costs of processing, packaging and distribution in the UK dominate the cost, then an increase in any one of these can price the UK farmer out of business. The added cost of removing beef from the bone in the wake of the BSE and scrapie scares (1999) has made some farm animals virtually worthless.
The government tries to address these problems in all sorts of ways. It has Training & Enterprise Councils, depreciation allowances, venture capital incentives, etc. All have to be paid for out of taxation. And in many cases the recipient employers are those paying for their own subsidy.
A different tax
It would be much simpler to seek to replace most of our existing taxes by a different kind of tax which would not burden our manufacturers.
Is there such a tax? Yes, there is. It is used to raise revenue for local government in many Commonwealth countries and in parts of the USA. It contributes 20% to 40% of the public revenue of Taiwan, Singapore and Hong Kong and enables those countries to pay for nearly all their investment in public infrastructure. Many other countries use it to a greater or lesser extent. Instead of burdening the economy this tax actually stimulates it. It is the taxation of 'land values'. The word 'land' is used here to include all natural resources but none of the 'improvements' which man has introduced upon them, like buildings or crops. The government should first assess all land values and then levy a 'ground rent' on the holder of the land. He should pay whether or not he derives income from his ownership, franchise or licence. This would stimulate him to put the resource 'land' to economic use. The 'ground rent' is the market rent for the resource. If the owner of the land cannot earn the market rent, he will be encouraged to sell it to someone who can.
The owner cannot pass this 'land value tax' on to a tenant because the competition the tenant faces would force him either to move elsewhere or to go out of business.
Most of our present taxes damage production. They are therefore damaging to the economy. A tax on land values is unique. Not only does it do no damage to productive activity, but it actively helps production by disposing the owner of idle land to bring it into productive use.