It seems that something has gone wrong with our tax system, particularly for smaller businesses. Forces stronger than mortality are sapping the buds of enterprise. Tax is now a small-firm killer.
Two studies in the last three years have shown how the present tax system works against small businesses. Figures from the Department of the Environment show that uniform business rates bite a massive 35% off the annual profit of a micro-business with less than #50,000 turnover but only nibbles 3.3% from companies that turn over more than #1bn.
A study by Bath University showed that the smallest businesses spend #375 per employee per year collecting income tax through PAYE. Meanwhile, the biggest employers make a profit from their treasury departments, mainly through using short-term money markets to invest tax deducted from payroll.
A recent seminar on sustainable taxation, organised jointly by the Henry George Foundation and Friends of the Earth, looked at what can be done to change this. The word ‘sustainable’ is often only used in an environmental sense, but it should also be applied to the economy and to society. Sustainable taxation seeks to sustain all three.
We seem perversely to be stuck with taxes on ‘good things’, while the ‘bad things’ like pollution and speculation go untaxed. Any sensible tax system would minimise taxes on wages in an ageing society, building renovation and investment in machinery and research.
We should tax derelict land and buildings, polluting gases, extraction of non-renewable resources, things we want to discourage.
Taxation is not just about balancing government’s books here and now.
It has always been an instrument of economic and social policy. But globalisation has greatly changed the balance of power between governments and those they would wish to tax. Multinational companies, liquid capital and skilled labour now choose where – and even whether – to pay taxes.
There are two types of tax: those on production (good) and those on resource use (bad). Clearly income tax, corporation tax, VAT and capital gains tax belong in the first category. In the second: landfill tax, the licensing of the broadcast spectrum and even the parking meter. If the latter group seems relatively trivial, that’s because this is a much neglected area.
In the middle is one of the oldest taxes: the tax on land and its everlasting potential to create wealth. The trouble is, property – which is what rates tax – is really two quite distinct things – in economics if not in law.
As any estate agent knows, property is not just buildings but location.
Two commercial sites can fetch very different rents, even if the premises appear the same. The difference is in location value. A good business location comes with footfall, which is not a function of the building in isolation, but of the community around it.
The theory Friends of the Earth, the Town & Country Planning Association and others are signing up to is that it is more sustainable to tax those things that acquire their value because of location, while un-taxing those things that acquire value by application of labour and/or capital.
Governments in many countries are gradually feeling their way towards this sustainable taxation. The Henry George Foundation has created a Progressive Forum to promote research and debate into how policies can be developed that achieve this.
A group of ten PF members from a variety of backgrounds recently visited Pennsylvania, USA, to look at several cities that have switched their local rates off buildings and onto land values. Pittsburgh’s Downtown Business Partnership in the state’s second largest city raises all its tax revenue from land values, not business rates.
This ‘smart’ tax helps revive cities without pumping funds into them.
The city council in Liverpool voted to ask government to be allowed to do the same a year ago. It was awarded a fellowship to study how this most run-down of English cities could adapt the Pennsylvania policy.
The Centre for Reform estimated this year that shifting UBR to a site-value basis could lift #27bn of the annual tax burden off business occupiers of property and onto landowners.
Largely this would be by taxing owners of vacant sites and empty buildings.
In prosperous Newbury, one such site recently fetched #2m (before site clearance for 40 houses) ten years after changing hands for less than a fiftieth of that. While many small businesses in that street had gone under waiting for their blighted prospects to be restored, the absentee owners had no doubt invested the collateral from their derelict asset somewhere else: a free lunch at Newbury’s expense.
To be in favour of sustainable taxation is certainly not to be against the free market. Quite the opposite. Taxing resource usage brings down prices and helps new players enter the market. Lord Rogers, international architect and chairman of the Urban Task Force, reported to John Prescott two years ago that a vacant land tax was among the best policies to stimulate urban renewal.
It isn’t just the ground under our feet that can and should be taxed, for sustainability. The principle of using the ‘rent’ of a natural resource as a tax base was behind Gordon Brown’s auction for licences for third generation mobile phone wavebands, which raised #21bn.
John Prescott has called for aircraft landing slots to be licensed in the same way: experts estimate that could bring the Treasury #1bn a year.
Satellite orbits, deep-sea mineral deposits, aircraft landing slots, airwaves, rights to exploit new knowledge: what they have in common is that their value to those who ‘possess’ them comes from – and is dependent for its continued existence upon – the presence of a prosperous human society.
The tax system can be used not only to restore to society the value due to us all from this ‘common wealth’ but to mitigate other taxes. The CfR report, studying only a few of the above ‘land’ taxes, concludes that 30% of the existing tax burden on enterprise could be alleviated over ten years.
There is no moral reason why the wages of human labour or the enterprise and capital creation of productive business should be taxed. What we produce, we should keep in full. I suggest that we only pay such taxes because we have been persuaded over the centuries that this is the only way to sustain government spending.
There is another way. Hundreds of cities in over 20 countries use it to an extent already.
It is no accident that the one which does so to the greatest degree – Hong Kong – is also a byword for enterprise. Nobody earning less than the average wage pays income tax, nor does any business pay tax until they are in the major league. Around 40% of Hong Kong’s revenue comes from land values. It isn’t only in Hong Kong that they don’t make land any more. So let’s tax it.
Progressive Forum, a network of researchers interested the use of resource rents for public revenue, can be found at www.progressiveforum.cjb.net
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