On top of this are 'compliance costs' which are borne by private individuals and firms. Many people find themselves compelled to employ professional accountants, at high cost, to help them. A sizeable company needs to employ special staff to sort out not only the firm's tax liability, but the liability of the staff for PAYE and for National Insurance - which, whatever the theory, is a tax for all practical purposes. A lot of correspondence is entered into with the tax office, and all that costs money.
Consider the position of an employer who wants a certain job done, and a potential employee who is able and willing to do the job. The employee is interested in what his 'take-home pay' will be; the employer is interested in what the employee will cost the firm. There is a huge gap between the two sums of money. The employee is required to pay Income Tax through PAYE; but in practice PAYE functions as a 'payroll tax', making it more expensive for the employer to take on workers. The employer is required to pay National Insurance on his own behalf, and also to collect that part of National Insurance which is ostensibly paid by the worker. Both PAYE and National Insurance increase the gap between what the employer must pay and what the employee receives.
So an employer who wants a job done, and who would gladly pay somebody as much money as that person requires to do the job, very often shies away from offering the job at all because of the gap between the cost to him and what the employee receives. This leads to unemployment. It also means industrial inefficiency. If direct taxes like Income Tax and Corporation Tax, and quasi-taxes like National Insurance, are damaging to employer and employee alike, indirect taxes like VAT and customs duties are often even more damaging.
If a householder wants a room decorated and can just afford the cost of materials and labour which somebody requires to do the job, the extra 17.5% VAT is likely to put him off. The room remains in disrepair and the decorator is out of a job. More unemployment! Alternatively, the householder and the decorator may do the whole thing on a cash basis and no VAT is paid at all. This, of course, means that both parties are breaking the law - but who can blame them, when the law is so silly?
When business is done on a larger scale, evasion becomes more difficult. But every shopkeeper, every manufacturer, knows that if the price of the goods he sells is increased by VAT, he won't sell so many of them.
Even that is not the end of the story. As all these taxes, direct and indirect alike, generate unemployment, there are many losers. The plight of the unemployed themselves is obvious. But useful jobs are not done, and the taxpayer is required to fork out yet more money - this time in order to keep unemployed people in idleness.
The Moral Effect
The moral consequences of our present taxation system are also fearful. Not only is taxation heavy, but taxation law is widely considered to be arbitrary. All the major taxes are subject to various exceptions and exemptions. People and firms which are already rich and powerful can afford to pay somebody to discover those exceptions and exemptions. People who are not so rich duck out by not declaring their liability, or by various other devices which, in ordinary human dealings, we would call dishonest. So there is a huge amount of tax avoidance and tax evasion by people of all classes.
Land Value Taxation
Is it possible to devise a tax which would not exhibit all these disadvantages?
Suppose that we introduce Land Value Taxation (LVT).
Before we do that, we must first assess the value of all 'land'. The word 'land' is used to mean the value of the site alone - that is, it discounts anything like buildings, machinery, crops and so on, which the landowner or occupier or their predecessors have added to it. When the site value has been assessed, a tax related to that value should then be levied.
As money is collected through LVT, other taxes may be reduced or abolished according to the revenue thus received.
Tests of a good tax
As long ago as 1776, the great Scottish economist and philosopher Adam Smith laid down four principles which he said a tax ought to satisfy. Nobody seems to have seriously challenged those principles since that time.
How far does LVT satisfy Adam Smith's criteria of a good tax?
1. Taxpayers should pay in proportion to benefit received
Land, as defined above, is something which no human being has created. Anybody owning land derives benefit from that ownership, and the benefit he derives is proportional to the value of the land. With LVT, it is also proportional to the tax paid.
2. The liability of a taxpayer should be certain, not arbitrary.
A taxpayer's liability for LVT is related exclusively to the value of his land. The complicated qualifications which apply to Income Tax or VAT, for instance, are not required. Nor is avoidance possible, for land cannot be hidden or moved. The value of a site can readily be assessed by any valuer.
3. The tax should be levied in the way most convenient for the
A regular tax of this kind can be collected in the form, and at the intervals, which suit the taxpayer.
4. A tax should take as little as possible from the taxpayer in excess of
what the State requires.
LVT scores very heavily here. Because the value of land is so easy and cheap to assess, the cost of that assessment and subsequent collection is low by comparison with the revenue received. It is likely to be a great deal lower than the cost of any existing taxes. Thus LVT satisfies all of Adam Smith's criteria for a good tax.
Since Adam Smith
Since Adam Smith's day, new problems have arisen with taxes, which were not very serious in the 18th Century. It has been seen that many modern taxes produce various kinds of incidental damage. They inhibit useful economic activity; they foster unemployment; they encourage dishonesty and so on. LVT does none of those things. LVT actually stimulates the use of land. Nobody wants to pay tax for something from which he derives no benefit, and so the holder of idle land is encouraged either to bring it into use himself or to dispose of it to somebody else who is willing to do so. This helps employment.
LVT provides no temptation for dishonesty. There are many ways of avoiding, or evading Income Tax or VAT, for example; there is no way of avoiding or evading LVT.