torsdag 1 februari 2018

Tax competition - may the best win

The EU is threatening the UK if it competes by reducing corporate and other taxes. Surely the most dangerous threat would be for the EU to do the same thing?

That would be tax competition, which is damned for being a “race to the bottom”.  Once again, it is looking through the wrong end of the telescope. Tax competition must be a good thing? Let the best system win!

The Physiocrats were possibly the first to note that all taxes are ultimately at the expense of land rent. This conclusion also follows from Ricardo’s Law of Rent, which has never been formally refuted. In principle, therefore, all existing taxes could be replaced by a single tax on the annual rental value of land, since as taxes on wages, goods, services and profits are removed, land values rise by roughly the same amount in aggregate. This is confirmed in a general way by observation; where taxes are low, land values are high, in some cases extraordinarily so. Singapore and Hong Kong in particular have exploited this with great success to the point that land values are a major source of public revenue.

Because of the strength of the landowning interest in the UK, this is not going to happen. However, in the not-distant past - as recently as thirty years ago - a substantially higher proportion of public revenue was raised from property taxes than is the case today. This is one of the reasons for the chronic shortage of public funds. There is no reason why income tax could not be reduced to a modest level for high earners for, Corporation Tax and VAT scrapped, vehicle fuel duties replaced by road pricing, and owners of valuable IPR monopolies made to pay a charge more commensurate with their value. The tax cuts would bring about an equivalent increase in land values (commercial and industrial rents and house prices) which would provide a buoyant tax base.

Realistically these changes would have to be brought in over a period of between five and ten years, but they are not impracticable. Amongst the benefits would be
  • Increase in production due to elimination of deadweight losses.
  • Reduction in associated welfare costs to the government.
  • Reduction in administration and compliance costs.
  • Release of some of the most talented people in the country from the tax avoidance industry, so that they could engage in wealth production.
This is a strategy which is available to any government, though not under present EU regulations. If the UK government decided to follow it, the E27 has the options of continuing and suffering from the competition, or following suit, to the benefit of its own people. That is what tax competition means. May the best system win. It is all the people who will benefit.

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