Canons of Taxation

[Qurratulain]

The Canons of Taxation

The classical economists, with their powerful common sense, outlined four criteria of a good tax. Their skill is evident in the simplicity and comprehensiveness of the following provisions.

1) Taxation should bear as lightly as possible on production.

The very word "tax" suggests a burdensome load. Taxation is an allocation of wealth, which is produced by labor, to the needs of the community; nobody benefits if taxation inhibits production!


2) It should be easy and cheap to collect, and fall directly on the ultimate payer.

If great resources must be devoted to the collection of taxes, they are simply wasted! Indirect taxes (such as sales taxes, and tariffs) are imposed on sellers and importers, yet ultimately paid by consumers. Not only are such taxes unweildy and cumbersome; they also tend to be regressive - weighing heavier on those with lower incomes.

3) It should be certain.

The more complex the rules of taxation are, the more they can be subverted and evaded. As the tax code becomes a hieroglyphic that can be understood only by specialists, only those who can afford to pay the specialists can take advantage of its loopholes!

Also, the production of wealth fluctuates from year to year, so if production is taxed, the amount of revenue cannot be predicted with certainty. Revenue shortfalls have to be met by means of public borrowing.


4) It should bear equally, so as to give no individual an advantage.

We have seen how regressive sales taxes fail in this regard. The conventional standard of tax fairness is "ability to pay." People with higher incomes are able to pay a greater part of the tax burden. The progressive income tax, for example, is based on ability to pay; in fact taxes are called "progressive" if they bear more heavily on those with higher incomes. But is the "ability to pay" principle really fair? No - because it makes no distinction between earned and unearned income. If individuals are more wealthy because they are efficient and honest producers, then taxing them according to their ability to pay burdens production, violating rule number one! A truly equitable public revenue system will not confiscate the legitimately produced wealth of some while allowing others to collect unearned incomes. The alternative principle of "benefits received" achieves fairness by levying taxes according to the value of the opportunities people have been given.


Source: Henry George

[Qurratulain]

Broad-Based Taxation vs. the Single Tax


The favored public revenue strategy today is to make taxation as "broad-based" as possible - that is, to spread it out over as many different sources as are available. The reasons for this political as well as theoretical. The more different tax sources there are, the more they can be played against each other to favor special interests. Local taxes can be played against federal subsidies, property taxes against sales taxes, taxes on consumption against taxes on production; an endless variety of deductions, abatements, tariffs or subsidies can be applied to reward particular constituents.
The theoretical reason is that taxation is considered to be a burden on all economic activity. When such things as wages, sales, interest, etc. are taxed, it makes goods and services cost more, thus lowering demand - and demand is what stimulates production. So if all taxes are a burden on production, then they should be spread over as wide an area as possible to minimize the load on individual producers.

But there is one thing in the economy that can be taxed very heavily - to the full extent of its value, in fact - without decreasing the demand for goods and services. A tax on the rental value of land cannot diminish production, because land is not produced. A land value tax cannot increase the price of goods because those prices include the cost of land in any case, whether the rent is paid to a landowner or to the community.

The "broad-based" tax idea, failing to recognize the distinctive character of land as a factor of production, seeks to spread out the tax burden. In so doing, broad-based taxes - whether by accident or by design - provide all manner of opportunities for special interests to influence tax policies in their favor, at the expense of fairness and accountability. Land value taxation, on the other hand, is merely the collection by the community of the very fund that the community has created.

[Qurratulain]

Can a Tax on Land Values Be Shifted?


Taxes on commodities are usually passed on to the consumer in higher prices. What is to stop landowners from doing the same thing? That is, can a landowner increase the rent charged to tenants so as to pay the land value tax and still collect the same net rent as before?
Remember: land is not produced by labor. It is fixed in quantity and its price is a monopoly price (all the traffic will bear). A tax on labor products increases the cost of those products and this is reflected in the price. If the new price meets consumer resistance, the supply of that product is checked.

But a tax on land does not affect either its cost of production (it is not produced) or its supply (which is fixed). Thus its price is not increased (for it is already all the traffic will bear), and the tax falls directly on the owner. The rent of land is determined by the margin of production and it is a certain amount whether taxed or untaxed. A tax on land is simply a division of the rent between the owner and the community.