As I watch the mid-Atlantic states dig out from heavier snows than they are accustomed to dealing with (or budgeting for), the question of how we ought to finance such costs comes to mind.
Let's review the choices.
- We could tax wages.
- We could tax capital income (dividends, interest, appreciation of capital - a/k/a capital gains).
- We could tax sales of goods.
- We could tax services.
- We could tax corporate profits.
- We could tax specific kinds of transactions: e.g., stock sales, property transfers, tobacco sales, luxury goods, imported goods.
- We could tax pollution.
- We could tax buildings.
- We could tax land value.
- We could impose user fees.
It is very tempting, of course, to recommend that We tax whatever I have the least of. That's the "don't tax you, don't tax me; tax the guy behind the tree" approach, and many people never move beyond it in their thinking about taxation. It is one of the factors that causes us to rely on taxes which fall on people who have relatively little. (Remember Leona Helmsley's statement -- "WE don't pay taxes; the little people pay taxes." -- I don't think she was talking about tax evasion; she was describing how we've structured things.)
When we tax wages, we take from people that which they create. We discourage them from working, from producing, from contributing.
When we tax dividends or interest, we discourage savings and investment. Our corporations need capital. (Notice, however, that when one buys an existing share of stock from another investor, the corporation is not getting a new infusion of capital; what is changing hands is the entitlement to an actual or potential stream of dividends, and to a payment of some size if management decides to sell the corporation to another corporation or some private entity.)
When we tax capital gains, what we are taxing is a mixed bag. Capital does not appreciate. As anyone who has left a home unoccupied for a few months knows, as anyone who has owned a car knows, buildings and machines and the like do not appreciate. They depreciate, even with the best of maintenance. Most "capital" gains are actually either appreciation of land, or relate to the extraction of scarce -- nonrenewable -- natural resources. (Much of what is taxed by the estate tax, too, relates to one of these kinds of gains, which have NOT already been taxed elsewhere in our system. Taxing them once per generation, particularly when there are huge concentrations, is better than not taxing it at all.)
When we tax sales of goods, or sales of services, we impose both on the purchaser and on the buyer; by raising the price of goods or services, we lower the demand for them.
When we tax corporate profits, we encourage corporations to move those dollars to another country. And they are happy to oblige.
When we tax transactions of various kinds, we discourage those transactions. That can be a good thing or a bad thing. If we are discouraging hedge funds from skimming profit away from the market, many would argue this is desirable. If we are discouraging the flipping of houses by making it less profitable, many would argue this is desirable. Some would argue that discouraging liquor, or tobacco, or recreational drug transactions is desirable. Some would argue that discouraging trade with other countries is desirable. (Others would take the position that Henry George took: that it is doing to ourselves in peacetime what other countries might seek to do to us in war!)
When we tax pollution, we should get less pollution.
When we tax buildings, we should expect to have slower redevelopment, poorer maintenance, less investment in energy-conserving technologies and renovations, fewer highrises and less vibrant cities. We will certainly have fewer people employed in these activities or in spaces created by them.
When we tax land value, what happens? To quote the eminent economist Lowell Harriss,
Land as area is fixed in quantity. Tax it heavily, and it will not move to some other place, or decide to take a vacation, or leave the inventory of productive resources by going out of existence. Tax land lightly, and the favorable tax situation will not create more space in the community.
But we don't have to figure this out over and over. Adam Smith, in The Wealth of Nations, provided us with the canons of taxation -- the criteria by which to judge the various options. You might take a look at these two pages on the subject:
- Taxes: What Are They Good For? at http://www.henrygeorge.org/canons.htm
- Canons of Taxation at http://www.wealthandwant.com/themes/Canons.html
All those goods and services whose effect is to maintain or increase property values -- land values, since buildings depreciate -- should be financed via taxes on land value. We should avoid taxing any of the other possible tax bases at all until we have fully taxed land value. (At this point, you might be wondering what it means to "fully tax land value." Generally, it means to collect something approaching 100% of the annual rental value of the land itself. Quick and dirty, that's about 5% of what the selling price of the land would be in the complete absence of a tax on it. So if a lot would currently sell for $100,000, while bearing no annual tax on land value, the annual land rent would be about $5,000. Land value taxes up to that amount do not place a burden on the landholder. Collecting 100% of that amount would reduce the selling price of the land to a token level, but would not reduce its annual rental value by a penny.)
If you tend to think that "balance in taxation" is a good idea, you might take a look at The Fallacy of the 'Three-Legged Stool' Metaphor, by Bill Batt. You might see it differently.
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