What should be the tax base?

I’m not happy with the debate surrounding UKUncut’s demand for companies to pay more tax. On the left, this seems to consist of denying the evidence about tax incidence, making dubious factual claims, or wibble about ethics. The right,  on the other hand, seem relaxed about the rich minimizing tax.
There is, though, a third way - to consider ways of changing the tax base to make the rich pay more.
For the left, what matters is not that companies pay tax, but that the rich do so. There are, I suspect, at least three ways of achieving this:
1. A progressive consumption tax. This, in effect, taxes high spenders rather than high earners. It is less likely to encourage high earners to migrate, to the extent that such earners live modestly. It can also be a backdoor way of taxing inheritances. Remember - housing is a consumption good, and should be taxed accordingly.
2. Land value tax. Unlike labour or head offices, land cannot migrate, which makes it an obvious candidate for tax in a global economy. A hefty tax on land in Kensington would, in effect, hit the rich.
3. Nationalize the banks. This, in effect, amounts to a 100% tax upon their profits, which they cannot avoid by migrating.
Of course, there are counter-arguments and problems with all of these. And they could be a complement to cracking down on corporate tax loopholes and not just a substitute. But don’t they deserve more inspection than they’ve had?

Comments

[Eric]

Why not a flat tax, with the tax on the first £7,000 spent returned on one's birthday or diverted by choice into government savings or a personal pension fund?

[alastair harris]

how does "what should be the tax base" become an essay on how to tax the rich? I suppose they are reasonable topics, but in no sense are they related.

[Matt Heath]

Is that spam-bot mocking the syntax of the headline?

[CharlieMcMenamin]

I don't necessarily agree that the left is only interested in taxing rich people, not corporations. Insofar as corporations don't invest their surpluses at all, or do so in ways that seem guaranteed* to produce socially unwanted ends**, then taxing them seems entirely reasonable to me.

I take your point about tax incidence however.

*'Guaranteed? OK, 'I mean high probable to'

**Yeah, I accept this would have to be pretty widely defined - the point is tax policy can be used to create financial disincentives for certain types of corporate behaviour.

[Tim Worstall]

1) and 2) are good: 3) I'm much less relaxed about. Political control of who does or does not get an overdraft doesn't sound all that good an idea to me.

[Carl]

with regards to 1) - which has the surprise support of Tim Worstall of all people - isn't one of the overlooked elements of capital flight not spending money abroad, which poorer people tend to do less. Realistically higher purchase tax could offset more spending abroad - I doubt the left or the owners of Harrods et al would thank you for that suggestion.

[Luis Enrique]

I agree with all of this. Including the paucity of debate on the left about this. Very many lefties - I suspect many of the same who accuse econ 101 of being overly simplistic - seem to think that what happens when you raise corporate rates, or better enforce them, that what happens is that 'corporations pay more tax' and that's it.

However, I think I have come across some arguments why it might still be a good idea to tax corporations, and I think we'd better recognize lefties do want to do that. In which case the question "how do you minimize corporate tax avoidance" deserves a bit of thought from left wingers.

Seems to me that tax harmonization across countries combined with sanctions and other impediments against non co-operating countries, is a potential response. That and perhaps looking at interest tax deductability, although d2 has recently convinced me that's not as easy as I'd thought (companies could then much more easily go bankrupt because of tax liabilities)

[Andrea]

Companies need to pay taxes as well as all the rest of the citizens. Flat tax policies are the best I think.

[Niklas Smith]

@alastair harris: "how does 'what should be the tax base' become an essay on how to tax the rich? I suppose they are reasonable topics, but in no sense are they related."

They are certainly related if one type of tax base is highly concentrated among the very wealthy. Land fits that bill perfectly.

Another advantage of a Land Value Tax is that it does not tax transactions so, unlike almost all other taxes, it causes no deadweight loss.* (I.e. it doesn't reduce the size of the economic pie in the way that income tax or VAT do.)

*Of course a poll tax or a household tax cause no deadweight loss, but for obvious reasons these are not attractive options for people who want the rich to pay more tax!

[Niklas Smith]

@Chris: The problem with nationalising any business is that the government doesn't just get the profits for nothing: it has to tie up capital that could be used elsewhere (e.g. to build a hospital or a school).

Of course the government has the advantage that it can borrow to fund equity investment cheaply, but for people like me who think that investment banks shouldn't put their own capital at risk on proprietary trades it seems bizarre to suggest that the state should do so instead!

(In fact, borrowing to buy shares is a silly thing for anyone to do, but at least when hedge funds or individuals do it and get burned they don't run to taxpayers demanding a bailout.)

[dcomerf]

I'm always amazed at socialists' objections to LVT (as well as other things like a busy-ness adjusted per mile charge for road space). The fact is that the rich have more land (and more access to cars) and so the tax is progressive.

Just because Mrs Smith (who had 6 kids but now lives alone in a massive former council house in a high amenity area of a city) would also be hit hard by LVT is no reason to deny the value of the principle. These objections can be overcome by allowing the tax bill to be paid on death out of the proceeds of sale of the land in question.

[Praguetory]

Yes to LVT. It is the obvious reply to the UKuncut crew which (deliberatley?) fails to understand campaigning against agreed tax liabilities is futile and demanding high revenues from high payroll and corporate taxes is like trying to screw jelly to the wall.

[andrew]

I may be being a bit thick,but VAT seems to be a fairly simple and not too inefficient method of getting tax revenue. It is levied when you spend money.
Perhaps you are looking for a tax that is levied when you do not spend money.
I am not sure how it would work in real life as I think the french are getting rid of their version.

[Steve]

I think lefties do like LVT. The Scottish Greens have it as policy and even Andy Burnham floated it in his doomed Labour leadership campaign.

Given the political difficulties of tax reform, an increase in the number of council tax bands at the top alongside revaluation would act as a short-term palliative

[Niklas Smith]

@Steve: "Given the political difficulties of tax reform, an increase in the number of council tax bands at the top alongside revaluation would act as a short-term palliative"

Possibly. But Council Tax is a tax on occupation (not ownership), levied on households (though with a discount for single people). In other words, it's a pretty ridiculous form of taxation.

LVT is better for these reasons among others:

1) It is levied on propertyowners, which makes it more progressive as poor people are more likely to be renting than richer people. This also means that landlords pay tax for their portfolio, not just for their own home.

2) It is levied only on the underlying value of the land, not on the value of any improvements built on it. Council Tax is only levied on occupied houses, meaning that abandoned houses or unbuilt plots are completely untaxed. LVT encourages such plots to be used productively instead since improvements are never penalised.

3) It applies to all land, not just houses. This would allow local government* to be funded from a single tax, rather than messing about with Council Tax and Business Rates.

Reform would not be politically difficult if politicians put their minds to it - it would in fact allow the Coalition to boast of a progressive tax policy amid all the cuts. So long as the rates of LVT start low and increase gradually there will not be a housing market crash (remember that Council Tax is already priced in to house prices).

*I would like to see LVT introduced as the main source of funding for local government, rather than as a national tax. Local authorities need to be weaned off reliance on central government grants.

[Tim Worstall]

"with regards to 1) - which has the surprise support of Tim Worstall of all people"

Why the surprise?

The type of consumption tax being talked about here is not simply a souped up VAT. Rather, it's a replacement for income tax.

When you file your taxes (and everyone would have to) then you put down your income for the year. You then deduct from that any money you put into savings that year. This number is now your taxable income to be taxed at whatever rate, however progressive etc.

But it also works in reverse. You put down your income and then AD to it what you took out of your savings that year to spend on consumption (thus the name of the tax). Which then becomes your taxable income for the year.

One way to think of it is that all savings (and the earnings from them if reinvested) are inside a giant ISA. But you get taxed when you take the money out of savings to spend it on consumption.

As Chris says, this is a fairly cute way of taxing inheritances. Doesn't matter that Daddy left you £20 million in a trust fund. Sure, you don't pay any tax as long as you keep investing all the earnings. But you start spending the interest on that £20 large on blondes and cocaine and we'll have the tax thanks very much.

[Fcablog]

"For the left, what matters is not that companies pay tax, but that the rich do so."

Come now, Chris. You *know* that the rich do pay tax. Humungous amounts of tax. It's only in the media that the rich don't pay tax.

The obsession with eye-catching headlines like "rich boss pays less tax than his cleaner", even though it's patently misleading and untrue, means our tax policy making is held at only an infantile level, instead of the proper, adult debate we should be having.

[chris strange]

1 & 2 ... fine.

3 ... definitely not. Nationalization has too strong correlation with the industry in question loosing competitiveness or dropping dead. If the industry that generates over 10% of all government revenue drops dead that is going to cause some very serious problems.

[Laban]

Labour had the opportunity to (justifiably) nationalise RBS and Lloyds in 2008, although admittedly Lloyds were a victim of Gordon's brilliant wheeze of attaching the leaden weight of HBOS. They ran a mile from the idea.

As Simon Johnson says, the finance industry has effectively captured our government.

http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/

[Glenn]

Maybe LVT will as a side-benefit help prevent speculative property/land booms? OK certain individuals would bear the brunt, but this would be beneficial for society. It also would bring land/buildings back into productive use and prevent dereliction - i.e. more incentive to sell rather than land bank if accruing high annual LVTs.

[Mark Wadsworth]

Hurray for Land Value Tax!

Boo to 'consumption tax'. As any fule kno, 'consumption tax' (i.e. VAT) is largely borne by the producer/the supplier, so actually it's a tax on gross profits, or, as the name suggests "Value Added".

But failing that, a flat income tax is the second least bad tax after LVT.