Exactly 100 years ago Winston Churchill and Lloyd George introduced a radical budget even by today’s standards. The budget introduced a high land tax, while severely reduced all other taxes. However, it was rejected by the House of Lords (or rather Landlords) for obvious reasons. I argue that a 100 per cent betterment levy with income, GST, capital gains, superannuation taxes, tariffs, dividends and corporate taxes, all abolished, or at least severely reduced, can simultaneously cure unemployment and budget deficits. This levy, sometimes called a “Mills tax” was formulated by John Stuart Mill, the great liberal philosopher of the 19th century.
Arguments in favour
A cure to a budget deficit
Prime Minister Rudd plans to spend billions on public infrastructure such as transport and school upgrades. Sounds great. However, the problem arises when one considers the “tax” system this takes place under. You build a school, land values in the area go up. The same is true for hospitals, roads, transport, shops or any other public good.
Question: why tax wages and not windfalls? Why should this value - created by government via our taxes - be crystallised in the parasitic hands of landlords and not recycled back into the Treasury’s funds to build even more infrastructure that we use together? Why should the value of government windfalls and population growth be deposited to landlords when the owner of the land had no role in creating this value but we - the community - through our backbreaking labour and taxes - did? This is what JS Mill labelled to as the “unearned increment”. I call it a “betterment levy”. It aims to reward hardwork and savings, over speculation and idleness.
Only a betterment levy is able to make a profit out of government debt.
First, Hong Kong funds 35 per cent of its budget, which even now is in surplus, through land-based taxes while keeping all other taxes low. This encourages international business investment due to these tax incentives, raising revenues even further due to more capital inflows funnelled into business investment not commercial property. Thus, a betterment levy, with most other taxes reduced, in a competitive international tax system, would make Australia an investment hub like Hong Kong, raising government revenue due to the influx of business investment while simultaneously employing locals.
Furthermore, this levy causes businesses to actually utilise their land and not withhold valuable sites from use for competitive or speculative advantage, like retailer giant Tesco. Rental sites are no longer withdrawn from the market due monopolistic influences but put into productive use. This levy allows government to recoup revenue by encouraging a more efficient use of land without penalising employment. With more people employed, there is less need for welfare expenditure.
Second, in the United States, it costs $6 million and $10 million to build the Washington and Watergate bridges respectively. Valuators showed that the bridges lifted land values by $100 and $120 million in a 20km radius respectively. The bridge could pay for itself in one to two years. Government railroads increase value in a similar way. For example, UK property developer, Don Riley, calculated that lines cost the Treasury £3 billion to build, but lifted land values by £15 billion across a 1000 yard radius along the track one year after its creation. Infrastructure pays for itself!
Third, the city of Pittsburgh in Pennsylvania, USA, ranked America’s “most liveable city”. It uses a variant of a betterment levy: a land tax, to upgrade transport routes and to upgrade the aesthetic nature of the city. Here, too, their local council manages to run a budget surplus by recycling their “unearned increment”.
In America, researchers found a school with a good reputation could increase land values as much as $10,000. Similarly, British economists found increases as much as £25,000. Here, too, the school value can be recycled back into public coffers. Once again, the vlaue of the school's reputation can be recycled back into the public purse.
This is called the “Henry George theorem”, identified by Nobel Prize winning economist Joseph Stiglitz. Stiglitz showed that aggregate rents equal aggregate government expenditure. William Vickery quantified this assumption by showing transport and a betterment levy goes together: marginal rents mean marginal utility derived from access to transport utility. The above examples, however, imply aggregate rents can, in fact, equal more than government expenditure. You pay an “economic rent” based on where you are, not who or what you are; it is not about equality but equality of opportunity.
Clearly, with other taxes abolished, government can fund it projects into the long term (the Sydney Harbour Bridge may reap windfalls of $40 million in the first year plus roughly the same next year … ad infinitum) and not waste our money via the ATO hunting “tax evaders” and a bureaucracy which needs 30,000 or more people to administer. Any surplus can be returned to the citizenry via a citizen’s dividend.