Chapter 22 - Good Taxes

Most of our taxes are collected from Circulating Money. Most of our taxes are direct taxes on certain classes of transactions. Income Tax is a tax on employer-employee transactions. Sales tax is a tax on business-consumer transactions. Company Tax is a tax on the result of a string of transactions. There are other taxes that are independent of any transaction: Wealth Tax, Demurrage Tax, Land Tax, Death Tax, Inheritance Tax. There is also one more tax that is a direct tax on transactions, but its magnitude is so small that it is almost invisible. This is a general Transaction Tax that is payable on all and every transaction at an extremely low rate of one-tenth of one percent. That is $1 in $1000 or 0.1%.

As a simple example, an increase in the income tax rate can cause people to work less and an increased sales tax can cause citizens to spend less. Transaction-independent taxes do not have this issue. It is difficult to avoid a property tax. The only avenue to reduce a Property Tax is to sell your property. The property is then sold to someone else to take on the Property Tax. A totally encompassing Transaction Tax is so small that it is irrelevant to the real economy. Currently, Sales Taxes are of the order of $100 to $300 per $1000. A full Transaction Tax would be $1 per $1000. However, it would incorporate the same $1 per $1000 on financial gambling and all transactions in the financial sector. Currently, a purchase of $1000 of gold paint would attract a sales tax of up to $250 but a purchase of $1000 of gold would attract no sales tax.

Land Tax

Land was provided freely by nature for all living things to use and share. When we became civilised we started to draw lines on maps to give individuals some certainty over the use of land. The rights granted in the land title are not true ‘ownership’ as such, but they do allow exclusive use of the land and the right to exclude others, but there are many restrictions as to use. Ownership, in this regard, is a bit of a misnomer. The land title does not give rights to anything below ground nor in the air above. The ability to pass the title to others for money, then allows money to be borrowed in a manner that capitalizes future potential rental income or land price rises into a current price. With limited availability of land, large debts can be hung on the land. The lenders can allow the land price to rise to the maximum that can be extracted from a person’s income. So the drawing of lines on maps allows the hanging of debts onto the created titles. The level of debt increases wherever there is employment. This makes industry financially inefficient as interest payments to banks takes a major portion of the income of the business and its employees. A better system is to lease land at sensible prices in a Land Tax system. Land is effectively rented from the government on very long term leases. Thus, speculation is curbed but not stopped. Under a Land Tax system, persons do not buy land in the hope that the land appreciates. They only buy land if they are going to do something with the land. Singapore, Hong Kong, and to a certain extent, Australia used a Land Tax system to develop their nations. Taking tax from land reduces the effect of the capitalization of the future income of the land. It also allows the reduction of anti-productive taxes such as income tax, company tax, and sales tax.

You should be aware of the system used for pegging of mining plots as a method of allocation of resources. The government grants mining leases on the basis that the minerals are going to be mined by the prospector and royalties paid on the minerals removed. Thus, no one can peg ground and on-sell the rights for profit. Similar should be used for land and resources. You do not grant land that is to be rented to someone else for profit. You lease the land at close to its rental value. This then becomes a major part of the tax take which then allows you to greatly reduce the economy-damaging taxes (income tax, company tax, and sales tax.).

The best-known proponent of Land Tax is Henry George (1839-1897). He proposed that his Land Tax should be a single tax, but my current thinking is that Land Tax should provide 20% to 50% of the tax take.

Please do some significant background reading on ‘Henry George’ and also on Land Tax generally. His book, “Progress and Poverty” is available as an audiobook which you can play whilst driving your Mustang or riding your buffalo cart.

George explains how the poor distribution of wealth in a free enterprise society is caused by the private ownership of land and natural resources. He advocated a tax upon the value of land so that its annual worth or economic rent would be taken into the public treasury in lieu of taxes on labour and production.

Property Taxes tend to lead to an efficient transfer of wealth from property owners to the government. We need to finance government, and this is a very efficient way to achieve this. Unfortunately, the concept of Land Tax is very unpopular with the citizenry. Without a Land Tax, the government is forced to use less efficient taxes.

The use of tax incentives on property interest and home purchase grants have some interesting effects. One would assume that These would help the young purchaser. However, due to the competitive bidding nature and the psychology of home purchase, these procedures tend to lift the house prices, drive up rents and increase the size of mortgages. This is to the advantage of banks as these concessions raise the size of loans. These mortgages are then more vulnerable to shocks. When a property tax is instituted where the tax is linked to house prices, the house prices are reduced and mortgage payments reduced.

Robin Hood Tax Logo

A Robin Hood Tax is also called a Financial Transaction Tax FTT. My version of the Robin Hood Tax is a very low tax on ALL transactions. My thoughts are towards a tax rate between 0.02% and 0.05%. This equates to 20cents or 50cents per $1000. My version of a Robin Hood Tax would include all bank transactions, including speculation, hedge funds, share transactions, derivatives, foreign exchange transactions and other financial transactions, many of which entirely escape taxation at present.

The FTT would raise would raise hundreds of billions of dollars annually. Be very wary of international corporations demanding an international tax paid to them. It will disguise itself as a tax to the World Bank which is just a private corporation masquerading as an international bank giving an illusion that it is somewhat like the United Nations. The World Bank is a profit-driven multinational corporation.

In the UK, financial transactions are approximately £2,000,000 billion. In 2014 – 15 UK tax receipts equaled £513.6 billion. This is very close to 0.025% of the total transactions. Thus, an FTT of 0.025% would produce exactly the same tax as all the currently collected taxes combined. Thus, an FTT of 0.025% could completely replace the whole of the current UK tax regime. Thanks to Simon Thorpe, again, for his brilliant analysis. [1]

There are numerous estimates of the tax collecting ability of a Robin Hood Tax and they depend rather heavily on the magnitude of the tax and the number of items that are excluded. I list a few examples mainly sourced from the websites of the Robin Hood organizations around the world:

There are significant advantages to an FTT over other taxes:

John Maynard Keynes 1936

Economist John Maynard Keynes suggested that a transfer tax on securities transactions might reduce financial market speculation. The idea emerged in the wake of the great depression to counter speculation in the market.

Critics say that investors may pull their money out of the countries that apply the tax. However, Britain has a minor tax on share trades that appears not to have dented the market in shares. This tax of 0.5% is significantly higher than any proposed FTT but has not significantly hampered one of the largest stock exchanges in the world. [4] And a point against the FTT detractors is that the tax is UK specific and has not caused the flight of capital from that stock-market.

Schmidt of Canada

Mr. Schmidt found that “a currency transaction tax of 0.5 basis points (0.005%) in the major currency markets would reduce transaction volume by 14% … A 0.5 basis point CTT would raise at least $US33 billion every year, probably more”.

Ralph Nader: “A good start would be a tax on financial speculation… It has the potential to curb risky speculative trading that contributes little real economic value.” [5]

Tobin Tax 1972

This was proposed by Nobel laureate economist James Tobin in 1972. He proposed a currency transaction tax (CTT) and revitalized his ideas in the mid-1990s. The Tobin tax is an FTT on currency transactions.

The trading on financial markets has grown dramatically in recent years. The volume of financial transactions is now many times higher than world GDP. In 1990 financial transactions were 15 times GDP. In 2015, they are 73 times higher. [2] The volume of foreign exchange transactions is about 70 times greater than the volume of world trade and this is mostly due to a dramatic increase in derivatives. Just as currency speculation far exceeds the requirements of international trade, the derivatives market vastly exceeds any requirement for hedging and insurance. An FTT may be the only way of curbing this dangerous activity. Boom and bust cycles that have dangerous international consequences would be softened. don’t expect any support for the high-flying big spenders.

With the advent of rapid trading, the world’s finance sector no longer performs its social function in a satisfactory manner. Trading has moved towards the gain of a quick profit rather than the serving of the Real Economy with a secondary effect of creating instability.

High-Frequency Traders account for 70% of US equity market, whereas at the London Stock Exchange it is 30 to 40%. The UK has a 0.5% stamp duty on share trades.

During 2014 The USA Automated Clearing House Network handled:

At $1 per $1000, this would raise $40 billion.

Some Comments about Property Tax:

Excise Tax

This is a tax charged on each unit of a good sold or service sold. It differs from a Sales Tax in that is not levied as a percentage of the sales price, but at a fixed price per unit of the good. Excise Tax tends to be levied on: petrol, cigarettes, alcohol and hotel rooms. Excise Tax is often designed to limit consumption where the good has a negative impact on society. I class this as a very good tax. It should be expanded to other areas such as plastic bags, plastic lawn, chewing gum and anything that has a waste impact or an environmental impact. Even, trees could be included.

The revenue collecting ability of Excise Tax is interesting. Increasing the Excise Tax on an item may either increase or decrease the total tax collection. An increase in the tax rate increases the tax collected per unit of good, but reduces the consumption. However, this is of little consequence because the primary role is to limit consumption. With cigarettes, an Excise Tax may create reduced revenue collection, but reduce the healthcare costs of the nation. Excise Tax on items such as beds may need careful adjustment as the primary role of the tax becomes revenue collection. The primary role of Excise Tax should not be tax collection. Where is used as a tax collection, it begins to have a counterproductive effect and as such it has the same disadvantages as Sales Tax. It should not be used as a primary tax collection method. The revenue should be considered as a by-product of its primary purpose as a limiter on the use of the product.

An equivalent to Excise Tax does not exist in the Income Tax regime. Some employment modes are preferential to others. Hairdressers recycle money straight back into circulating money. Personal services generally cycle money straight back into society. With a reduced income tax on personal services, we can all be well groomed, with clean houses and mown lawns without slowing the flow of circulating money. It is more appropriate to take tax from those that inhibit haircuts and mown lawns by hoarding the money by taking money out of circulation. Unearned income should have the equivalent of an Excise Tax.