A Tax Reform Too Far?

Mark Braund writes in today’s Guardian (UK) a piece, “Must Try Harder”, (http://politics.guardian.co.uk/economics/comment/0,11268,1656759,00.html)
“We will never make poverty history until we rip up the tax system”.
In it puts a modern version of Henry George’s ‘land value taxation’, which some see as the solution to all manner of problems in society’s economic basis, particularly that of poverty.

Having been, for a number of years, a colleague of Dr Roger Sandilands, who was an enthusiastic believer in Henry George’s ‘LVT’ (he had custody of an ornate wooden chair presented to Henry George on a visit he made to Glasgow), I do not feel any particular need to debate the merits or otherwise of his prescriptions for changing the taxation system.

I prefer to take ‘route one’ towards that goal – lessen the tax burden by more than half – than go through the social upheaval implied in LVT, which because of the narrowness of the land base for taxation in GDP terms it would amount to confiscation on a large scale. Taxing less seems a surer way to achieve a more harmonious society. At this point, Adam Smith’s warnings against ‘men of system’ seem particularly apposite.

Here are two extracts from mark Braund’s article:

“It was clear to Adam Smith that any philosophy for a fair society needed to acknowledge the economic forces that determine the distribution of economic opportunities and therefore wealth. It was Smith's near contemporary David Ricardo who made explicit what was becoming obvious: if the ownership of land and natural resources is grossly unequal, then wealth and wellbeing will be the privilege of the minority. And as the economy develops and more wealth is created, the gap between rich and poor will widen. This is an inescapable conclusion of classical economic theory, and although the world has moved on since Ricardo's day, the fundamentals remain the same”

And:
“Instead of arguing over how much we should tax, we should be asking why an economy based on free markets and private enterprise is so incapable of delivering opportunities and security for all. This brings us back to classical economics. If access to the land and natural resources upon which economic activity depends is concentrated in the hands of the few, the many will struggle to find adequate life-sustaining opportunities. This conclusion drove Ricardo to despair. Two centuries ago there was no possibility of persuading the aristocracy that wholesale changes in land ownership were needed to reduce poverty. After staggering economic and technological advance but still no end to poverty, we may be more receptive. But we still need a mechanism to widen access to economic resources without threatening individual freedom.

A neat solution was proposed more than a century ago by an American economist named Henry George. Today, his followers are subjected to unfair accusations of intellectual naivety by the economics mainstream. But his ideas deserve a hearing because they adhere to the essential truths of classical economics, and because they promise an economy in which individual freedom and social justice become co-dependent rather than mutually exclusive. For George, the key to transforming the economy lay in the tax system. He argued that instead of taxing effort and enterprise through taxes on incomes and profit, we should tax ownership and the exploitation of natural resources.”
Comment:

Braund’s point: “… any philosophy for a fair society needed to acknowledge the economic forces that determine the distribution of economic opportunities and therefore wealth.”

Adam Smith’s “Wealth of Nations” considered that the increasing division of labour as the economy grew (in conditions of Natural Liberty, which meant freedom from the insidious monopolising influences of some of those who participated in it) and the continual extension of markets, was the route to raising incomes of the poor – abolishing poverty comes from creating wealth in the form of the annual production of goods and services. The ‘wealth of the rich’, as a bye-product of economic growth, for Smith (and in my view should also be for us), was a price worth paying if the mass of labouring poor were lifted out of poverty and able to feed, cloth and shelter their families, have them educated and healthy.

While envy is inevitable, I do not think the rhetoric of anger at what can only be changed by the destructive violence that leads to the equality of total deprivation for all. It is far easier to destroy an economy in months than it is to let it take the long road to prosperity. Braund seems to accept this when he writes:

“Two centuries ago there was no possibility of persuading the aristocracy that wholesale changes in land ownership were needed to reduce poverty.”

What does he see as the consequence of this inability to ‘persuade’ the aristocracy? In what sense were the accumulated trinkets and baubles (as Smith expressed it contemptuously) of the ‘aristocracy’ a barrier to economic growth? The landowning aristocrats were hardly players in the ‘causes of the wealth of nations”. Agriculture represented fewer than 50 per cent of GDP in Smith’s time and was a declining force throughout the 19th century. Now this sector accounts for about 3 per of GDP in Britain and the country is littered with ‘stately homes’ of no real economic meaning, except as expensive ‘piles’ and monuments to the flattery of ‘ancient families’.

Mark Braund’s professional work as an economic advisor to the Mozambique government may have tipped his attention into over emphasising the importance of land, agriculture and mineral extraction as a cause of the growth of wealth – these are themes akin to the French Physiocrats also playing in the background as I read his essay.

Absolute poverty is not a problem in the UK (certainly on anything near the scale it was in the 18-19th centuries and as it is in Africa in the 21st). Relative poverty is always a problem, but an emotional one. But so is the road to reducing and eliminating relative poverty in the size of the public sector and the taxation regime that is required to support it. Redistribution is one policy that acts to counter this problem, but it cannot sensibly be the only or the major policy. If all the ‘wealth’, which Braun calls ‘obscene’ (a word that springs too easily to the mouths of those spouting empty rhetoric about anything they disapprove of), were redistributed by punitive taxation and the confiscation of property by legal means or tolerated looting, the very poorest would not be but a trinket better off, and then only for the moment.

Wealth creation is not a once-only action (would that it was!). It is the slow, gradual and continual accretion of the annual output of goods and services, during which the value-added is distributed to those who labour and those who own the means of production and the raw materials they process. Opening up an economy to trade, both internally and externally (including with neighbours in Africa), and reducing as quickly as administratively convenient and practical the barriers that stand in the way of free commerce (all those licences, permissions, petty bribes and pay-offs, both legal and criminal), is the Smithian road to opulence.

It won’t lift all the labouring poor immediately into opulence, but it might within two or three generations lift most of them out of absolute poverty and into health, education and dietary sufficiency. That process is now under way in India and China on a grand scale, and in the ex-communist countries to a lesser, and slower, extent; it has already achieved much in Taiwan, Singapore, Malaysia and South Korea. Elsewhere it is stymied for reasons we are all familiar with - political tyranny, civil wars, genocide, corruption at all levels, bureaucratic administration, religious barriers, gender biases, unequal, even fraudulent, legal systems and so on (see Amartya Sen's books) – and all of them endemic in the countries concerned and not imported or imposed from abroad.

If the ‘West’ contributes to the problem it is from tolerating the above barriers to wealth creation, including by its avoidance of causing diplomatic upsets by exposing their true and very real causes (with few exceptions, for example in Zimbabwe, where the regime is so awful, even the Foreign and Commonwealth Office comments critically) .