Systemic Fiscal Reform – way to beat boom and bust

By Dr Adrian Wrigley, Neale Upstone and Robin Smith (10th Sept 2008) – SystemicfiscalReform.Org

Systemic Fiscal Reform is a radical programme for the reform of taxation, subsidies and welfare. It is designed to stabilize economies, improve quality of life, and facilitates the transition to full environmental sustainability.

The reforms mainly comprise the abolition of cumbersome and wasteful tax, welfare and subsidy systems, together with abolishing the bureaucracies which implement them.

In their place, a simple integrated tax and welfare system is introduced. This includes retaining a number of existing taxes which have been found to operate effectively where they have been   tried.

The wasteful burden of personal and corporate tax returns is generally eliminated.

Key Reforms

No Income or Corporation Taxes – Replaced by a Land Value Tax

Income Tax and Corporation Tax are to be abolished (along with all payroll taxes, National Insurance payments and Gains taxes). In their place a Land Value Tax is levied on landowners, equal to the value of their land, but excluding any buildings, crops or other improvements. The land values are calculated using a standard procedure applied by local assessors. Landowners  generally pay the annual fee in regular monthly instalments to their local government.

No Value Added or Sales Taxes – Replaced by a Carbon Tax

VAT and sales taxes are to be abolished. In their place, a uniform Carbon Tax is levied on all extraction and importation of fossil fuels. This Carbon Tax is in proportion to the pollution and climate change potential of the fuel when used in the normal way.

No Estate (Inheritance), Gift, Transfer or Stamp Taxes

Estate taxes such as Inheritance Tax and Accession Taxes are to be abolished. All Stamp Duties are to be abolished, including those on share and real-estate transfers.

No means-tested welfare benefits – Replaced by a Citizens’ Income

Welfare benefits based on poverty and joblessness tests are to be abolished. Any welfare payments based on disability are retained.

Universal Welfare-a Citizens’ Income

All resident citizens and lawful residents are entitled to claim a universal welfare payment called the Citizens’ Income. Such payment is made monthly by the local government, and may be directly used by home owners and their families to offset or cancel out their Land Value Tax obligations. Citizens’ Incomes for those in prison and state-funded care are retained by the state to help pay the costs incurred. Those in state-funded education will have an amount deducted from their Citizens’ Incomes to help pay for the education costs.

Subsidies abolished

Many tax-based subsidies cease to exist with the abolition of Sales, Value, Income and Corporation taxes. For example, tax exemptions on aviation, fuel, public transport, education and food simply disappear. Business subsidies such as investment relief, tax rebates, pension relief also disappear.

Explicit subsidies including those on energy and carbon emissions trading schemes should be abolished. Banking subsidies are withdrawn by removing banks’ rights to create new money in the economy (seignorage) in exchange for increases in debt.

Effects of Systemic Fiscal Reform

General economic effects

Widespread effects are certain, because Systemic Fiscal Reform addresses core economic issues, such as the costs and benefits of business activity, land ownership and employment.

* Enterprise is promoted by removing the tax and administrative barriers to employment and business activity. We get free trade within nations.

* Bureaucratic activity such as tax accounting, planning and advice are eliminated. Workers in these sectors move to other work, entrepreneurship, early retirement or reduced hours.

* The ‘black’ and criminal economies no longer gain an unfair tax advantage.

* High value-add products such as software, music recordings or consultancy fall in cost as their tax burden falls.

* Fuel efficiency is promoted by raising the costs of fuel and goods particularly in energy-intensive industries.

* Labour intensive goods such as restaurant and other services, recycling, and education become less expensive.

* Economic output grows rapidly where real value is delivered. Waste is reduced.

Effects on housing, homes and land

The Land Value Tax has far reaching and revolutionary effects: property speculation ends; new and second hand houses become a comparable market to second hand cars reflecting their size, efficiency, condition and quality; urban land values fall, encouraging regeneration of poor and derelict land and housing; property price inflation becomes similar to that of other goods; housing becomes and remains affordable, contributing to a drastic shift in social mobility.

Effect on poverty

The universal welfare payment will virtually eliminate poverty. All in society benefit from the “social dividend” created by a thriving society and effective government. The poverty trap will be a thing

of the past, with financial barriers to employment removed. Elderly home owners with insufficient income to pay their Land Value Tax will be able to “roll up” payments secured on their house value, while others will choose to move house.

Universal Welfare is as significant a step forward for society as universal healthcare or universal education has been in most developed nations.

Effect on oil prices

By imposing a rising Carbon Tax on imports and production of oil, coal and natural gas, demand will be progressively reduced, improving the balance of payments (trade deficit) considerably. Suppliers will be forced to accept lower prices or reduce output (or both). If this policy is implemented by the major energy consuming nations, a substantial fall in international fuel prices will occur. A Carbon Tax is particularly attractive to nations such as the US or the UK with rising dependence on fuel imports.

Effect on politics

At present, government spending on local amenities brings direct windfall benefits to owners of nearby homes and land. The spending is mainly taken from workers’ taxes. This misalignment of taxpayer and beneficiary is at the heart of many political conflicts and failures. Systemic Fiscal Reform ensures the beneficiary of local spending (i.e. landowner) is the taxpayer, eliminating this fundamental conflict. Any excess benefit over spending is returned through the Citizen’s Income.

Conclusion

Systemic Fiscal Reform answers the challenges of today and of the future. It resets the creeping state control and interest in every aspect of household and business life while ensuring an efficient, equitable, stable and free society.

9 comments on “Systemic Fiscal Reform – way to beat boom and bust

  1. A lot of this is very good. Massive simplification of tax and welfare is right. Basic Income + Flat Tax is the way to achieve infinitely progressive taxation without the bureaucracy, waste, and perverse incentives of means-testing. Carbon Tax is probably the best approach for a national mechanism to internalize the social costs of climate-change, but it needs to be backed by an international framework to avoid simply offshoring the carbon (see my paper posted on this site).

    But the land-tax part is Henry Georgism, and however superficially attractive it may seem, would be a mistake. (It’s one thing on which Milton Friedman was mistaken.) It introduces more inequities and perverse incentives than it replaces. I don’t like tax on transfer of ownership (IHT or stamp duty) either, but if you have to tax land, it is the only time you can do so on the basis of a fair valuation and without risking dispossessing someone for no fault of their own. But better not to do it at all.

    Imagine an old lady living in an area where prices are being driven up. She cannot substantially increase her income. But her annual tax bill may rise exponentially. Most people will not be substantially better off, though everyone will be better or worse off to some degree. During periods of monetary expansion, increases in many people’s income will lag increases in prices, including asset-prices, leading them to try to keep up with rising costs (and if exacerbated by a land tax, hang on to their property) through equity-withdrawal (sound familiar?). Many people could find themselves driven out of their homes because of fiscal and monetary policy, planning restrictions (limiting supply), speculation and credit expansion, through no fault of their own.

    All taxes have disadvantages. One of the first priorities should be to minimize costs of public provision, so overall costs of government are much lower than at present. But for whatever is left, there is probably not a better option than some combination of income tax, corporation tax, and consumption tax. In the balance of these three dependable sources of government revenue, we probably under-tax consumption and over-tax income (i.e. employment) and profits (i.e. innovation and efficiency).

    Carbon tax is additional, but if successful should tend to zero. That is the problem with green taxes as revenue-raising measures rather than deterrents.

  2. Bruno Prior mistaken, at least in theory. The value of land is realisable, since it is accessable to remortgaging at the very least. Thus the old lady in his example doesn’t need to lose her home. If a bank failed to step in, she could at the very least tithe some of the land value to the government, yet (by definition) this value is never more than the value of the land itself. In such a scenario, the government “pays” itself the rent, to be recovered as a capital gain when the property is sold.

    Taxes on economic rent do not create perverse incentives, if you have successfully taxed rent, since rent is by definition a surplus. Since the rent is the same on a piece of land regardless of use, the order of use preference remains the same, thus no distortion occurs. If you contrast this with a transaction tax, in this latter case you get clear deadweight loss.

    Let me run through an example, where I wish to fix your car if you weed my garden. Without transaction taxes, this is pure barter, yet with such taxes, a proportion of the value is lost from the participants (let’s say, for the sake of argument, 50%). While it was worth taking part in the original exchange, it is likely that the exchange plus a loss on both sides renders the trade not worth the bother. Furthermore, the prescence of money in the population no longer creates work freely as it would do without transaction taxes, since the 50% remaining becomes 25% in the next trade, 12½% in the one after, 6¼% in the one after that… so that the money peters out, and does so fast. Combined with the deadweight cost (which prevails even if the wealth is redistributed), transaction taxes appear to be a major culprit is one is looking for structural causes for unemployment.

    In terms of economic justice, when one realises where land value comes from, it is the rent, rather than the tax which appears unjust. Land value is the product of other people’s work, almost exclusively. A new hospital or school, a new road or rail-link, a park kept up by the local authority; all of these things raise land rent. Working on your own property does not, so, as long as valuations are reasonably fair, the result will be just.

    Of course there will be errors, and any tax will cause people hardships relative to not being taxed at all. People are pushed to the edge regardless of the nominal cause behind failing to make ends meet, but land value tax is not special here. Indeed, the tax should have the effect of stabilising the value of the land as the surplus is taken off, which discourages land speculation, so that the scenario of radical changes of valuation leading to financial disaster is in fact less likely to occur.

    As for green taxes, the argument there is straightforward. The tax organises other people’s property rights (such as to clear air). The tax exists to reinbourse the costs incurred to everyone else, and there’s no reason why such taxes should tend to zero, since the costs aren’t going away with the consumption of that right.

    Green taxes actually make more sense than “cap and trade” which the industry tends to prefer since “cap and trade” allows the industry to set the valuation subject to a given level of emissions, but surely it makes more sense for those who are having their property taken from them to set the value so as to encourage efficient use of resources? Cap and trade is far too sensitive to slight excesses and shortfalls, which leads to price volitility, whereas green taxes change more slowly.

  3. [Hope this doesn’t show up twice. It seemed to disappear into the ether first time round.]

    1. Mortgages for grannies. Could you let me know where I can get hold of a mortgage for a 75-year-old with only a modest pension for income? How is the mortgage to be paid? What period should be chosen?

    2. Government as deus ex machina. Shall we have a regular department, or shall we set up some more quangos to handle the assessment and administration of the “tithing”? The (good) intention of the proposed fiscal reform is simplification. This goes in the other direction.

    3. Government as repository of perfect information. Let’s say we implement the tithing option, and granny takes advantage of it. What happens if prices continue to go up? Her tax continues to increase, her net income is reduced by the need to pay the interest on the mortgage, and her outgoings increase further because her land tax continues to be driven up. Does she take out a second mortgage? The “tithing” system would only provide a satisfactory outcome if government were able to predict either that prices were at their peak, or to allow her to take out a Northern-Rock-style proportion of the present value, to allow for future rises in the valuation.

    4. Government cash-flow. This reform is supposed to balance the books. But if you introduce a system where government has to provide cash to a large number of householders during a rising market (i.e. inflationary period), and then recover the cash slowly in subsequent years, you will do great damage to the government’s budget during the inflationary period. A government needing to find more cash for this purpose, and with very much more limited means to respond (because you have scrapped many of its other sources of revenue) would have little choice but to borrow and/or print money. A significant increase in either during an inflationary period would be highly unhelpful. In fact, it would be remarkably similar to what we have just done.

    5. Government losses. Prices rise and fall. You say that the government will recover the value of the rent it paid itself (que?) through capital gains. But what if they were capital losses? What if this system had been in effect during the past five years. How would the government’s budget now look? Reducing income from land taxes and no prospect of capital gains.

    I’m sorry, but however you dress it up and try to justify it with abstract (and in my opinion unsound) theory, this is still simply Henry Georgism. Nice idea in theory (if you subscribe to certain schools of economics, to which I do not subscribe), but lousy in practice.

    One of the aspects that seems to me most suspect about the concept is that Henry Georgists are so keen to attribute rising land values to the impact of public works. As you put it, “Land value is the product of other people’s work, almost exclusively. A new hospital or school, a new road or rail-link, a park kept up by the local authority; all of these things raise land rent.” Almost exclusively? You must live in a different area to me, and to anyone that I know. Rising land values round here had little to do with public works. They had much more to do with the availability of credit. The idea that our local council and other providers of infrastructure and services increased the value to us of those services and infrastructure by (say) 50% in the last 5 years bears no resemblance to the reality that most people have experienced. And they would probably deny that their services and infrastructure have decreased substantially in value to the community in recent times. It seems to me that Henry Georgists see the world through a prism that distorts reality so that all developments can be explained by means consistent with their theory.

    As for carbon tax and cap-and-trade, we agree (you can find a paper on this site where I set out many other reasons why cap-and-trade is a bad idea). But it is politically difficult to get governments to implement a carbon tax unilaterally, because they point out with justification that this will place an unfair burden on their nationals compared to others and simply offshore the carbon. You need some mechanism to achieve a politically-acceptable international share of the costs. I suggest one possibility to do so without the many disadvantages of cap-and-trade in another paper on this site.

    My point was not that carbon tax is a bad idea (it’s not, it’s a good idea), but that you shouldn’t rely on it as the basis of a substantial proportion of government revenues, because the whole intention of a carbon tax, and the test of whether it is effective, is to achieve progressively reducing yields, reflecting the greening of the economy.

    I don’t follow your argument for why that isn’t the case. If you are arguing that the rate of a carbon tax would continue to be increased as people’s carbon emissions fell, so that it maintained a steady revenue for the government, people’s obvious response would be to stop trying to reduce their carbon emissions, as it would have no impact on reducing their tax bill. There has to be a benefit to taxpayers from reducing their carbon emissions, or the mechanism won’t work.

  4. 1. Mortgages for grannies. Could you let me know where I can get hold of a mortgage for a 75-year-old with only a modest pension for income? How is the mortgage to be paid? What period should be chosen?

    2. Government as deus ex machina. Shall we have a regular department, or shall we set up some more quangos to handle the assessment and administration of the “tithing”? The (good) intention of the proposed fiscal reform is simplification. This goes in the other direction.

    3. Government as repository of perfect information. Let’s say we implement the tithing option, and granny takes advantage of it. What happens if prices continue to go up? Her tax continues to increase, her net income is reduced by the need to pay the interest on the mortgage, and her outgoings increase further because her land tax continues to be driven up. Does she take out a second mortgage? The “tithing” system would only provide a satisfactory outcome if government were able to predict either that prices were at their peak, or to allow her to take out a Northern-Rock-style proportion of the present value, to allow for future rises in the valuation.

    4. Government cash-flow. This reform is supposed to balance the books. But if you introduce a system where government has to provide cash to a large number of householders during a rising market (i.e. inflationary period), and then recover the cash slowly in subsequent years, you will do great damage to the government’s budget during the inflationary period. A government needing to find more cash for this purpose, and with very much more limited means to respond (because you have scrapped many of its other sources of revenue) would have little choice but to borrow and/or print money. A significant increase in either during an inflationary period would be highly unhelpful. In fact, it would be remarkably similar to what we have just done.

    5. Government losses. Prices rise and fall. You say that the government will recover the value of the rent it paid itself (que?) through capital gains. But what if they were capital losses? What if this system had been in effect during the past five years. How would the government’s budget now look? Reducing income from land taxes and no prospect of capital gains.

    I’m sorry, but however you dress it up and try to justify it with abstract (and in my opinion unsound) theory, this is still simply Henry Georgism. Nice idea in theory (if you subscribe to certain schools of economics, to which I do not subscribe), but lousy in practice.

    One of the aspects that seems to me most suspect about the concept is that Henry Georgists are so keen to attribute rising land values to the impact of public works. As you put it, “Land value is the product of other people’s work, almost exclusively. A new hospital or school, a new road or rail-link, a park kept up by the local authority; all of these things raise land rent.” Almost exclusively? You must live in a different area to me, and to anyone that I know. Rising land values round here had little to do with public works. They had much more to do with the availability of credit. The idea that our local council and other providers of infrastructure and services increased the value to us of those services and infrastructure by (say) 50% in the last 5 years bears no resemblance to the reality that most people have experienced. And they would probably deny that their services and infrastructure have decreased substantially in value to the community in recent times. It seems to me that Henry Georgists see the world through a prism that distorts reality so that all developments can be explained by means consistent with their theory.

  5. [This should be preceded by a response on the question of land tax, but it doesn’t want to show up for some reason.]

    As for carbon tax and cap-and-trade, we agree (you can find a paper on this site where I set out many other reasons why cap-and-trade is a bad idea). But it is politically difficult to get governments to implement a carbon tax unilaterally, because they point out with justification that this will place an unfair burden on their nationals compared to others and simply offshore the carbon. You need some mechanism to achieve a politically-acceptable international share of the costs. I suggest one possibility to do so without the many disadvantages of cap-and-trade in another paper on this site.

    My point was not that carbon tax is a bad idea (it’s not, it’s a good idea), but that you shouldn’t rely on it as the basis of a substantial proportion of government revenues, because the whole intention of a carbon tax, and the test of whether it is effective, is to achieve progressively reducing yields, reflecting the greening of the economy.

    I don’t follow your argument for why that isn’t the case. If you are arguing that the rate of a carbon tax would continue to be increased as people’s carbon emissions fell, so that it maintained a steady revenue for the government, people’s obvious response would be to stop trying to reduce their carbon emissions, as it would have no impact on reducing their tax bill. There has to be a benefit to taxpayers from reducing their carbon emissions, or the mechanism won’t work.

  6. 1. Mortgages for grannies. Could you let me know where I can get hold of a mortgage for a 75-year-old with only a modest pension for income? How is the mortgage to be paid? What period should be chosen?

    2. Government as deus ex machina. Shall we have a regular department, or shall we set up some more quangos to handle the assessment and administration of the “tithing”? The (good) intention of the proposed fiscal reform is simplification. This goes in the other direction.

    3. Government as repository of perfect information. Let’s say we implement the tithing option, and granny takes advantage of it. What happens if prices continue to go up? Her tax continues to increase, her net income is reduced by the need to pay the interest on the mortgage, and her outgoings increase further because her land tax continues to be driven up. Does she take out a second mortgage? The “tithing” system would only provide a satisfactory outcome if government were able to predict either that prices were at their peak, or to allow her to take out a Northern-Rock-style proportion of the present value, to allow for future rises in the valuation.

    4. Government cash-flow. This reform is supposed to balance the books. But if you introduce a system where government has to provide cash to a large number of householders during a rising market (i.e. inflationary period), and then recover the cash slowly in subsequent years, you will do great damage to the government’s budget during the inflationary period. A government needing to find more cash for this purpose, and with very much more limited means to respond (because you have scrapped many of its other sources of revenue) would have little choice but to borrow and/or print money. A significant increase in either during an inflationary period would be highly unhelpful. In fact, it would be remarkably similar to what we have just done.

    5. Government losses. Prices rise and fall. You say that the government will recover the value of the rent it paid itself (que?) through capital gains. But what if they were capital losses? What if this system had been in effect during the past five years. How would the government’s budget now look? Reducing income from land taxes and no prospect of capital gains.

    I’m sorry, but however you dress it up and try to justify it with abstract (and in my opinion unsound) theory, this is still simply Henry Georgism. Nice idea in theory (if you subscribe to certain schools of economics, to which I do not subscribe), but lousy in practice.

  7. [I’m breaking this up into small chunks, to try to figure out why the whole thing won’t show up.]

    1. Mortgages for grannies. Could you let me know where I can get hold of a mortgage for a 75-year-old with only a modest pension for income? How is the mortgage to be paid? What period should be chosen?

    2. Government as deus ex machina. Shall we have a regular department, or shall we set up some more quangos to handle the assessment and administration of the “tithing”? The (good) intention of the proposed fiscal reform is simplification. This goes in the other direction.

    3. Government as repository of perfect information. Let’s say we implement the tithing option, and granny takes advantage of it. What happens if prices continue to go up? Her tax continues to increase, her net income is reduced by the need to pay the interest on the mortgage, and her outgoings increase further because her land tax continues to be driven up. Does she take out a second mortgage? The “tithing” system would only provide a satisfactory outcome if government were able to predict either that prices were at their peak, or to allow her to take out a Northern-Rock-style proportion of the present value, to allow for future rises in the valuation.

Leave a Reply

Your email address will not be published. Required fields are marked *