onsdag 25 juli 2007

Viper's nest of tax avoiders

This was the title of an article in the Guardian today. The big accountancy firms were blamed. But surely it is the tax system that is at fault?

Neither the author of the original article, nor any of he commentators, made this point.

Underneath all the fog of discussion there lies a simple reality. Taxes can ultimately be levied only on one of the three factors of production. These three factors are land, capital and labour. Wealth is created when people, with the aid of capital, apply their labour to land.

If labour is taxed, this increases the cost of labour and discourages people from employing. This has two results. The first is unemployment. The other is to encourage people to move the employment elsewhere. If individuals are taxed, they will move themselves, if they can.

If capital is taxed, then the tendency again will be for capital either not to be created in the first place of for it to be destroyed (remember the de-roofing of factories to avoid rates, and look at the large areas of brownfield sites all over the country) - or for it to be moved elsewhere. How many factories have been moved lock, stock and barrel to China and India in recent years?

The third option is to tax land. There are many ways of doing this, eg when land is sold or when planning consents are granted. These cause stagnation of the land market and are harmful. But a tax falling on the rental value of land, based on market assessments, has the effect of bringing land into its most productive use.

Since land cannot be hidden or removed to a tax haven, and development of the land does not increase the amount payable, there is no way of avoiding the tax.

Instead of blaming accountants and the wealthy for acting in their own interest, mostly taking account of the legal loopholes in the tax laws, it is up to governments to address the problem by reforming their tax systems.

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