As a rule, people have a general aversion to discussions of tax policy. Except for the most elementary understanding – progressive, neutral, regressive, or exempt or non-exempt – public discourse on taxation is mostly banal or non-existent.
It’s really no wonder, because political leaders have filled tax bills with intricate and confusing provisions that make discussion of matters all but impossible. Moreover, the general study of tax policy requires expertise in a number of areas, and therefore involves a long learning curve. Consider the number of subjects a tax expert needs to master in order to talk intelligently and wage arguments with others. It’s not just economics, but accounting, statistics, law, politics, geography, history, business and commerce, and even sometimes the physical sciences.
The past century has witnessed the expansion of the realms of tax policy to include corporate franchise and personal income taxes, and more recently sales taxes and user fees. How these various taxes intersect and interact is beyond conventional comprehension. A whole new dimension of tax theory is involved in what have come to be known as “tax expenditures.” These are the exemptions, deductions and credits from what would otherwise be the “normal” formulas of application. Observers and authorities in every corner call for simplification, but this means something different to everyone.
The acolytes of Henry George, over a century ago, promoted the idea of a “single tax,” a tax on the rental value of land alone. This proposal still makes compelling sense. Unfortunately, its defense today requires further explication to demonstrate its soundness. For example, a tax on land value requires appreciation of the assessed value of land parcels, and only in recent years has it been possible to create land value maps using GIS – geographic information system — technology showing the comparative market (or rental) value of parcel sites.
Moreover, the distinction between income and wealth that is earned and that which is unearned could make clear a fundamental pillar of economic science. Over a century ago, this was widely understood: J.S. Mill referred to the latter as the “unearned increment,” and British Statesman William Gladstone called it “lazy income.” There was a widespread understanding that freeloading or speculation was reprehensible.
Furthermore, only in recent years has it been possible to empirically demonstrate the loss of productivity of alternative taxes – what in economic parlance is called “deadweight loss” or “excess burden.” Assiduous analysis of comparative tax regimes could ably demonstrate that some designs are deleterious, that they can reduce the marginal output of our economy by between ten and twenty percent. There is an acronym employed to express this: EBCOR, or Excess Burden Comes out of Rent.
It has been explicated by students of tax theory that All Taxes [Ultimately] Come out of Rent, using the acronym ATCOR. Another acronym, ATAAER, states it differently: All Taxes Are at the Expense of Rent. Legislatures sometimes elect to design tax regimes so that they “balance,” what has been often referenced in the literature as the “Three-Legged Stool.” This rests on the notion that if different tax bases are employed – say, property, sales, and income – that burdens as well as revenue streams will somehow be stabilized. This is mistaken, because tax burdens get shifted in any case, and simply complicate and confuse the general public.
The irony of all these machinations is that principles to guide the design of tax policy have been enumerated as long ago as 1776 in Adam Smith’s venerable book, The Wealth of Nations. At that time, he stated them as “fairness, certainty, convenience and efficiency.” Since that time, public finance textbooks have restated them differently. But, they essentially follow the same themes. Today, one often sees argued that an ideal tax should be neutral, totally efficient, progressive, easily administered, reliably stable, simple to understand, and impossible to avoid. Many students of taxation assume that these tenets need to be compromised with one another on the assumption that there is no perfect tax.
This stems from the failure to recognize land rent as the ideal tax base. Indeed, it comports with all the textbook principles of sound tax theory. When Henry George’s tax on land rent – his “single tax” – is appreciated, our economy, and our society, will be put right.