Tag Archives: Economics

To be truly “Open for Business” Brexit Britain needs a Land Value Tax

Since the UK voted to leave the EU in June, the Tory leadership has been determined to make it clear to the rest of the world that Brexit Britain will remain “open for business”.

A recent report published by the Institute of Economic Affairs (IEA) has suggested numerous tax and government spending reforms intended to achieve just that.  The authors encourage Chancellor Philip Hammond to take a sledgehammer to the UK’s tax system to stimulate economic growth, in what has been dubbed a “bonfire of taxes” by the Telegraph.

A key part of their solution is to replace several taxes with a new land value tax, described in the report as “well understood by economists to be one of the least growth-inhibiting taxes available”.

The idea of a land value tax – or LVT- has a long history, with figures from the 18th to early 19th century such as Thomas Paine, Adam Smith and David Ricardo supporting its implementation. It is closely associated with American journalist and economist Henry George, who believed that a tax on land could act as a “single tax” and replace all other taxes. LVT was also described by 20th century economist Milton Friedman as “the least bad tax”.

henry_george

American journalist and economist Henry George who believed a land value tax should replace all other taxes.

In the UK, a land value tax was proposed in 1909 by then Chancellor of the Exchequer David Lloyd George and his ally Winston Churchill. The reform was included in their People’s Budget but was ultimately rejected by the land owners who filled the House of Lords.

More recently, LVT has been supported by the Green Party and Labour’s Shadow Chancellor John McDonnell.

Numerous arguments are made in favour of LVT. Firstly, increases in the value of land are largely a result of the economic activity of other people. It is possible for land owners to receive unearned income simply by speculating on increases in the value of land without making any improvements themselves. Furthermore, by taxing land, governments can recoup some of the money that they invest in infrastructure and utilities, rather than allowing the resulting increase in land values to merely provide a windfall for land owners.

14963660_10101774289292442_124081165_o

Winston Churchill makes the case for land value taxation in 1909.

Photo credit: By BiblioArchives / LibraryArchives [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)%5D, via Wikimedia Commons

Secondly, the tax would encourage owners to develop valuable land rather than leaving it unused. In particular, sites in inner city areas would be used more efficiently, leading to a reduction in urban sprawl.

Unlike corporation and income tax, LVT would be virtually impossible to avoid. Advocates also claim that it would stabilise the economy, curbing the boom-bust cycle.

Lastly, switching to a land value tax means the burden of taxation can be shifted away from productive enterprise, and taxes that fall mostly on the poor can potentially be reduced or even abolished.

14958996_10101774289297432_347704332_o

In the UK, three taxes that are usually considered prime candidates for replacement with LVT are:

  • Council tax – In the above-mentioned report published by the IEA, council tax is derided as “Confused, outdated and unpopular”.

 The regressive nature of council tax has been criticised by journalist George Monbiot: “Why should council tax banding ensure that the owners of cheap houses are charged at a far greater relative rate than the owners of expensive houses? Why should Rinat Akhmetov pay less council tax for his £136m flat in London than the owners of a £200,000 house in Blackburn?

 Furthermore, MSP and LVT advocate, Andy Wightman of the Scottish Green Party has noted that 83% of households in England would immediately be made better off by a revenue-neutral shift from council tax to a land value tax.

  • Business rates – The IEA has previously criticised business rates in a blog post arguing for LVT: “Ideally, as argued here, they [the government] should at minimum consider scrapping business rates and replacing them with LVT. Business rates have long been criticised by many businesses because of their complexity and discouragement of investment and growth.” 

Another problem is that business rates are reduced or zero for charities, agriculture and unused or underdeveloped land, which, according to the IFS, “provides a clear and perverse incentive to use land inefficiently”.

  • Stamp duty -It has been claimed that stamp duty, a tax on property purchases,  has “a strong claim to be Britain’s worst tax”.

Jonathan Isaby, Chief Executive of the TaxPayers’ Alliance says that “Stamp Duty is unfair, unjust and must be reformed. It stops ordinary families moving up the property ladder, discourages the elderly from downsizing, and worst of all is a barrier to young people looking for their first home”.

However, abolishing these taxes could be just a first step. As mentioned above, a land value tax could also be used to shift the burden of taxation away from workers and businesses, thus encouraging enterprise and entrepreneurship. Taxing land rather than income would help the government to achieve its aim of “making work pay”.

A shift to a land value tax would encourage economic growth as it would result in lower “deadweight losses” than other forms of taxation. Economist and land value tax advocate Fred Harrison estimates that these deadweight losses amount to around £500 billion every year: “How does this happen? Taxes such as those on corporate profits, consumption and most of the rest of the fiscal tools imposed on the people of Britain result in negative forms of behaviour. The cumulative effect of all those distortions can be summed in one statistic: £500bn. That is the additional annual wealth and welfare which the people of Britain would produce if they were not burdened by Treadmill Taxes… That is because the incentives to work, save and invest would favour higher productivity in the way people went about their daily lives.

Although, strictly speaking, they don’t have a land value tax, Singapore and Hong Kong are good examples of places where land rents have been captured for public revenue. In Singapore and Hong Kong most land is owned by the government, which leases it out to businesses and private individuals.

According to economist Neville Bennett, Hong Kong raises approximately 38% of its revenue from land leases. This has enabled the city state to keep its taxes on businesses and income relatively low. Income tax is very low in Hong Kong, with a top marginal rate of just 17%. Corporation tax there is 4% lower than in the UK (16% vs 20%).

Similarly, the highest earners in Singapore pay a maximum marginal rate of 20% on income above $320,000, while businesses pay a flat rate of 17%.

2048px-1_singapore_city_skyline_2010_day_panorama

Singapore, the country that topped the ease of doing business rankings every year from  2007 to 2016.

Photo credit: By chensiyuan (chensiyuan) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 4.0-3.0-2.5-2.0-1.0 (http://creativecommons.org/licenses/by-sa/4.0-3.0-2.5-2.0-1.0)%5D, via Wikimedia Commons

Land value taxes have been implemented in a couple of European countries. One of these is Estonia. In part thanks to its use of LVT, Estonia is considered to have the most competitive tax system in the OECD.

Denmark also has a land value tax in place, and like Hong Kong and Singapore, it has been among the top six countries in the ease of doing business index every year since 2008. Impressively, Singapore topped the rankings every year between 2007 and 2016.

ease-of-doing-business

Ease of Doing Business index 2015-17. Source: Wikipedia (link)

Although numerous other factors contribute to the ease of doing business in a particular country, basing their tax systems on capturing land rents clearly hasn’t had a negative impact on those countries in this respect.

In addition to regularly featuring among the easiest places to do business, these places also perform significantly better than the UK in terms of budget surpluses/deficits.

The most impressive record belongs to Hong Kong, which has achieved a budget surplus every year since 2006, while Singapore has done so on seven occasions over the same period.

hong-kong-government-budget

Hong Kong budget 2006-15 (link)

singapore-government-budget

Singapore government budget, 2006-15 (link)

Meanwhile, although not as impressive as Hong Kong or Singapore’s records, European countries Denmark and Estonia have also registered multiple budget surpluses during the period 2006-15.

denmark-government-budget

Denmark government budget 2006-15 (link)

estonia-government-budget

Estonia government budget 2006-15 (link)

By contrast, the UK has only achieved a budget surplus eight times in the past six decades, and not once in recent years, despite the austerity measures implemented by the coalition and subsequent Conservative government.

united-kingdom-government-budget

UK government budget, 2006-15 (link)

If the government wants to ensure that Brexit Britain is truly open for business, it would be well-advised to consider the examples of Hong Kong, Singapore, Denmark and Estonia and take a serious look at the idea of land value taxation.

Photo credit for featured image: CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=353710

Basic Income vs Job Guarantee: A Few Thoughts

Since I began following the discussion about basic income a couple of years ago, I’ve seen a number of people arguing that a job guarantee is a better solution to alleviate poverty. Briefly, a job guarantee is where the government acts as “employer of last resort”, providing jobs when the private sector is unable to. I’ve read several articles about the concept, but have always had a few reservations about it and felt that some of the criticisms of basic income made by its supporters have been somewhat unfair.

For example, in August Pavlina Tcherneva, a prominent supporter of the job guarantee, made an appearance on RT’s Boom Bust programme (see video below). One of her main criticisms of basic income is that it doesn’t do enough to stabilise the business cycle. “The basic income doesn’t have this counter-cyclical stabilisation function” she says. “It is supposed to be provided at all times irrespective of the macro-economic conditions. Every fiscal policy has a counter-cyclical feature except the basic income guarantee”.

So far, this doesn’t seem to have been an issue with the Alaskan dividend – the nearest example to a basic income that we have – which has been providing every Alaskan with an annual, unconditional cash payment since 1982. Funding a basic income like this by means of a sovereign wealth fund is the method preferred by Guy Standing, co-founder of the Basic Income Earth Network. He has refuted the “business cycle” argument, saying that basic income payments made in this way can be increased and decreased depending on the state of the economy with an independent body making judgements on the amount being paid out.

However, if –unlike the Alaskan dividend – a basic income is used to replace existing elements of the welfare state, in particular unemployment benefits and tax credits, then Tcherneva’s criticism may be a legitimate concern.

Many basic income models already have a counter-cyclical feature built into them though. This usually involves an integration of the benefits and tax systems. For instance, several proposals for a basic income in the UK include the abolishment of the personal tax allowance. This means that, unlike now, all income would be liable for taxation. As soon as someone’s income rises they would begin to pay back more of their basic income through income tax. Additional marginal tax rates can be implemented to ensure that more of the basic income is clawed back from higher earners.

In this way, a counter cyclical feature is ensured: when the economy is doing well more people will be paying back their basic income, and when it’s not doing so well people will rely more on the basic income, just as they do with welfare now. Alternatively, a land value tax could be introduced to recoup some of the money from wealthy individuals. It is often argued that a land value tax would stabilise the economic cycle of boom and bust.

Clawing back the basic income in one of these ways also tackles another common criticism of basic income, namely that it isn’t targeted enough to people on low incomes. If the basic income is recouped from the rich, more money would be available to raise the level of the basic income and ensure that people on low incomes are better off.

I’m not against the idea of a job guarantee in combination with a basic income though. “Providing a financial incentive to seek work may not be enough, if job-hunting is difficult and expensive” writes basic income advocate Frances Coppola in Forbes. “People may need help looking for jobs, and in some areas may need the government to guarantee a job… The combination of job guarantee scheme with basic income should ensure that anyone who wants to work can do so.”

If there is work to be done that won’t be taken care of by the market then why not have the government employ people in certain areas of the economy? If we look at the United States for example, there is clearly a need to deal with the country’s crumbling infrastructure. A jobs programme to fix this, like the one proposed by Bernie Sanders in his presidential campaign, would be a good idea.

L. Randall Wray, a professor of Economics at the University of Missouri–Kansas City and colleague of Pavlina Tcherneva, provides a list of other possible jobs that could be guaranteed by the government, such as companion for senior citizens, the bed-ridden, mentally or physically disabled, public school classroom assistant, neighbourhood clean-up worker, library assistant, environmental safety monitor, etc. These would be useful jobs that wouldn’t necessarily be filled by the private sector so I see no problem with a job guarantee providing this work.

A worthy goal that advocates of both the job guarantee and basic income have in common is the aim of redefining what is meant by “work”, allowing people to choose to do useful work that is not usually considered “productive”. However, if a government were to implement a job guarantee with the objective of simply achieving full employment, no matter what sort of jobs are being done, then I probably wouldn’t be in favour of it. This would continue the fetishizing of jobs and lead to more people being employed in what David Graeber describes as “bullshit jobs”. The main issue is see really is whether there is enough useful work to do for the government to guarantee everyone a job.

There is also plenty of work, such as care work, already being done that isn’t always remunerated and wouldn’t necessarily make sense being part of a job guarantee programme. According to Emily Holzhausen, Director of Policy at Carers UK, 1.4 million people in the UK each provide over 50 hours of unpaid care per week. A basic income seems like the simpler way to recognise this unpaid contribution and make it easier for people to take on and possibly share the responsibility of care work without involving state bureaucracy. If there are important jobs that need to be done within a community, does the government really need to get involved to provide formal jobs? We could instead just provide a basic income and let people decide what work needs to be done on their own.

An issue that I have with implementing a job guarantee without a basic income is that it would do nothing for people who are already employed but whose incomes fluctuate; the self-employed, freelancers working in the gig economy or workers on part-time/zero-hour contracts, for example.

In particular with the potential for giant leaps forward in terms of automation and artificial intelligence, it seems clear that we’re moving further towards an economy that creates fewer and fewer steady full-time jobs, and increasingly promotes flexible labour markets. Without a basic income we will forever be resisting this. It would surely be better to embrace new, more flexible ways of working, while also ensuring improved financial stability for workers in the form of a basic income.

Furthermore, a job guarantee doesn’t eliminate the disincentives to work caused by high marginal tax rates at the lower end of the income scale. As Scott Santens explains in a recent article, welfare effectively punishes people for working because it is withdrawn, whereas a basic income would help to remove the “benefits trap” and make sure that work always pays.

Related to this is the final criticism of basic income that I want address: the idea that basic income simply pays people to stay at home. Mariana Mazzucato (who I thought was a supporter of basic income) recently tweeted an article by L. Randall Wray to present this argument.

In the article, Wray talks about a job guarantee programme called Plan Jefes y Jefas, – or Jefes – that was introduced in Argentina following an economic crisis there in 2001-02. The scheme created around 2 million new jobs for poor heads of households.  

According to Wray, at one point three quarters of the participants were female. However, when the economy recovered and the men in the families began to find work again in the private sector, the government decided to draw down the Jefes programme and place the women back on regular welfare. When the women were asked “would you prefer to receive the benefit of the Jefes program but stay at home,” they all said that they would prefer to go out to work.

It seems odd to me that Mazzucato would see this as an argument against basic income. Surely it is rather an argument against welfare in its current form? I think this idea of basic income paying people – in particular women – to stay at home is a really unfair representation of basic income. Pilots have shown that a basic income can help people to work. For example, following a basic income trial in India, Guy Standing notes that people actually worked more, not less. One example he gives is of a disabled woman who was able to buy a sewing machine and become a seamstress. If – as job guarantee advocates seem to agree – people instinctively want to work, why would a basic income stop women from going out and participating in the community or finding a job? Unlike conventional welfare, a basic income would give them every incentive to do so.

I think this discussion about these ideas is really interesting and I intend to keep an open mind about a job guarantee. Like France Coppola, I think a job guarantee could be done alongside a basic income and I see no reason why we can’t try both.

See also Scott Santens discussing basic income and job guarantee with Iain Dooley of the Australian Employment Party:

Guy Standing Talk in Prague: Transcript, Part 2

This is the second part of Professor Guy Standing’s talk at the “Of Money and Men” conference in Prague on 12th May. In this part he focuses on basic income. You can read the first part of the talk here.

“I’ve been working and lobbying for basic income since 1985. And we set up in 1986, a group of economists, philosophers – many have gone on to fame and glory, if not richness – an organisation we called BIEN. I came up with the name because it’s French and it’s nice; Basic Income European Network. But when hundreds and thousands of people started to join from around the world, we decided to change the name at our Barcelona congress in 2004. And we became BIEN, but the “E” became “Earth”. And since then, for various reasons, basic income has suddenly become mainstream. Basic income is seen by mainstream economists of high reputation now. Those same economists, 10, 15 years ago, would have written, saying it was a stupid idea. Today they understand that if we do not address the major crisis of inequality and insecurity – they go together but they’re different – we are at risk of going to a dystopia of neo-fascist authoritarianism. It’s no light-hearted matter.

And also there are philosophical reasons. I’ve just come from speaking at a big conference in Zurich because, as you may know, on June 5th there’s going to be a national referendum on whether a basic income should be introduced as a constitutional amendment in Switzerland; commit the Swiss government to move towards a basic income. What was interesting about a number of other speakers who were there; they included two plutocrats from Silicon Valley, a former US secretary of labour, a venture capitalist from New York and sundry other prominent economists and philosophers. I don’t think we’ll win the referendum, but it’s now up there in the mainstream.

And, I want to emphasise several points. First, the standard argument against basic income is that it’s unaffordable. Yet, every country spends six or seven percent on subsidies, which distort markets, which go predominantly to the corporations and to affluent groups. A basic income would cost much less than that.

Second, we spend a huge amount – we, governments – on means-tested, behaviour tested, costly welfare systems that act as a deterrent to labour. Because if you have means-testing you have poverty traps. So in those countries, I’ve just come from Denmark, there the calculations are that the poverty trap is, you have a marginal tax rate, if you go from low benefits into the sort of low-wage jobs that that the precariat can get, of 86%! That means you only get an extra 14% by going into a low-wage job of the type that’s available. In Germany it’s 85%. In Britain it’s a wonderful 80%. Can you imagine what would happen if the salariat had marginal tax rates of 80% or more? They would be – PAH! – creating havoc! Creating wonderful speeches. But the precariat has to face them. We need to overcome the poverty trap. The only way to do that is to move to a basic income as a floor.

But I want to advocate the basic income for a philosophical reason. It’s a matter of social justice. All the aspects that are instrumental, they’re important, but Thomas Paine and a very fine thinker in the early 20th century, G.D.H. Cole, put their finger on it. The way I put it is this; the wealth and income of any of us is far more to do with the efforts and achievements of our ancestors than anything you or I do ourselves. But we don’t know whose ancestors created our wealth; yours? Mine? His? So, in a sense you can see a basic income as a modest amount given to everybody as a right, as being a social dividend paid from the collective wealth.

I came to this idea when I was asked to talk in Middlesbrough, an industrial town in the north east of England, and I mention it in my book. Middlesbrough was a village in the 1820s. Then they discovered iron. And within 15 years Middlesbrough became the centre of the industrial revolution, the centre of industrial capitalism. So if you go to San Francisco, the Golden Gate Bridge was built with iron ore from Middlesbrough. If you go to Sydney Harbour, the bridge was built with iron from Middlesbrough. Today if you do to Middlesbrough you see poverty; you the precariat; you see people hanging around in the streets – no future. But you see the toffs down in the south of England who got the wealth produced by Middlesbrough. And they’re back in government; they went to Eton and Oxford, and so on. And you say that is fundamentally unfair. The wealth was created by the ancestors of those people. So for me that is the main justification.

But a basic income would also give security to people. It would also enable people to have a greater sense of control of their time. To be able to make choices about work, reproductive work. I want to spend more time caring for my elderly mother and not just doing a job pouring the tea for a boss. Are you telling me that pouring tea for a boss is more valuable than doing the caring?

It also gives us a sense of encouraging work and encouraging leisure. The only condition, which I think could be justifiable for giving, attaching to a basic income is a moral one. I say that, in fact, to encourage democracy, which is very weak at the moment, we should do what Pericles did in 450 BC, which is, he said, for participating in the life of the polis, as citizens, I – the state – will give you a basic income. He did that. He didn’t make it conditional; he gave it as a reward. And I say that anybody when they start receiving their basic income should sign a statement morally committing to voting in elections and to going to one political meeting a year.

I want to end by just mentioning this is the year of the pilots, the experiments. Some years ago I was involved in the first basic income pilots in Africa, designing it, carrying it out. Saw fantastic results. And then I got an opportunity to do three pilots, experiments, in India. When we were designing it and raising the money to do it, Sonia Gandhi let us know that she thought we were wasting a lot of money and that everybody would be lazy and drink alcohol and smoke cigarettes. I thought we were going to be blocked from doing it. But we did it. We provided over 6000 people in nine communities with a guaranteed basic income. Every man, every woman, every child; the child’s paid through the mother. For 18 months and then four more, they each had that basic income. No conditions; they could do what they liked. And we monitored it through what everybody calls a randomised control trial, comparing it with other communities where nobody got a basic income. And the results, which we published in a book, – I’ve got a few copies if anybody is interested – were remarkable. Sonia Gandhi asked us back to her house. Two cabinet ministers came out in favour once they saw the results.

First, the welfare effects. People who have a basic income improve their nutrition, particularly the children, improve their health, improve their schooling, school performance, sanitation.

Second, contrary to what people say, people worked more. And laboured more; but more work.

Income in those communities, discounting the basic income, went up. And the income inequality went down, and there was greater economic dynamism.

The third aspect was that equity improved, because people, like the disabled, this woman who we pictured and is on the front of the cover, she’s disabled, she has no legs. But people like her, when they had their basic income and her family and friends contributed part of their basic income, she was able to buy the means of production and become a seamstress, making the clothes in her village.

But the thing that really excited me, and we emphasised it, – and if anyone’s interested, I’ve written some articles on this – is the finding that the emancipatory value of the basic income is greater than the money value. Because people who have that basic income have security and they can make choices and decisions. So people managed to save and get out of bonded labour. People managed to find ways of cooperating with their neighbours and building their community.

But I’ll end with a story. I went to one village where we were doing a basic income, and when we started it we had to get everybody with a card, because they had to have their picture card so we knew who to give the basic income to until they had bank accounts. And in one village all the young women wore veils. And they didn’t want their picture taken. We said “alright, then go into a hut” and have their picture taken unseen.

When I went back to that village about six, seven months afterwards when the program had been going, I said to an Indian colleague of mine, working on the project, I said “have you noticed the change in this village?” He said “no”. “Yeah, yeah, yeah, when we came here all the women were wearing veils and now none of them are”. He said “yes”. So we called the young women, some of the young women across, and they wouldn’t, you know, young women, don’t like talking to strangers. But eventually one of them said “I’ll tell you why. Before, we had to do what the elders told us to do. Now we have a little of our own money we can make decisions ourselves.” Thank you very much.”