torsdag 18 oktober 2007

Tax woes again

Yet again, Computer Weekly reports troubles with tax. This time (9 October) the story is of firms being wrongly fined. But nearly every issue of Computer Weekly carries a piece about some tax problem or other.

The article mentioned the cost without putting a figure to it. At a conservative estimate the tax system costs around £25 billion a year. This is to pay for the government departments involved, plus compliance borne by the private sector, such as administration, accountancy and legal services. But this figure is overshadowed by another - the deadweight loss to the economy. This is wealth that is never created because of the disincentive effect of tax; according to the best estimate, this amounts to a staggering £138 billion a year (Harrison, "Ricardo's Law", published 2007).

There is an urgent need to reform the tax system and relieve the wealth creation process of this crippling burden. There is a perfectly viable alternative - to raise revenue from a charge on the rental value of land. The land value component of every piece of real estate would be assessed and an annual charge levied on that value. Given a realistic time scale for its introduction, implementation would be a smooth transition, as developed land is already assessed either for Council Tax or Business Rates. To assess site values alone would be simpler as there would be no need to take account of buildings or other structures and improvements. And as present taxes were phased out, the reform would initiate a benign cycle.

Unlike present taxes on the wealth creation process, with such a system, there would be no deadweight loss.

Given the present state of Geographical Information Systems (GIS), this form of land value taxation, combined with a reliable register of land ownership and billing system, would be straightforward to implement and keep up to date. If the former rating system is any guide, once it had bedded-in, costs should be less than 1% of the amount collected.

In this age of IT and globalisation, where everything moves but the land, LVT the only logical and effective system.

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