The Progressive Flat Tax

Hot IssuesLeave a Comment

The flat tax fanatics are back. They say that if there were only one rate of income tax, the system would be simpler, and the rich couldn’t reduce their tax by converting one kind of income into another kind taxed at a lower rate. In the case of a pure flat tax — that is, a tax with one rate and no tax-free threshold — the tax rate could be lower, and the rich couldn’t claim multiple thresholds by splitting income between persons or between financial years.

But of course such reforms would make the tax system less progressive — a “progressive” tax being a tax that takes a higher fraction of income as income increases.

Well, it so happens that the more income people earn, the higher the fraction of their annual income that they tend to have tied up in assets. This fraction rises very rapidly with income; for example, if you can barely pay the mortgage on your home, you probably know of people who own numerous properties but whose salary is only slightly higher than yours.

So a pure flat tax on asset values — that is, a certain small percentage of the value per year, with no tax-free threshold — is highly progressive because “progressiveness” is defined in terms of income, not assets. With no threshold, there is no possibility of juggling assets to claim multiple thresholds. What if your income was high in the past but is now low — e.g. because you have retired — leaving you asset-rich but income-poor? No problem: you can defer the tax until you sell or bequeath the asset; deferral takes the place of thresholds. If the flat asset tax is confined to assets that taxpayers can neither create nor destroy nor move out of the taxing jurisdiction — assets such as land and monopolies — taxpayers’ efforts to minimize their tax by rationalizing their asset holdings do not affect the total stock of assets and therefore do not cause any overall loss of revenue. So all the advantages claimed for a pure flat (income) tax are retained.

We don’t have to choose between flat taxation and progressive taxation. By taxing assets instead of income, we can have a tax that is both flat and progressive!

IR Reform: Banks and P.A.Y.E.

Hot IssuesLeave a Comment

IR Reform: Let Banks Collect P.A.Y.E. Tax

The Howard government’s industrial relations agenda attacks the wages and conditions of workers as if this were the only way to reduce the cost of hiring. What about the administrative costs imposed by government? For example:

* If you become an employer, you must also become a tax collector and tax agent, deducting and remitting pay-as-you-earn income tax from employees, and issuing group certificates.

* If you become an employer, you must also become a superannuation agent, paying 9 percent of your employees’ wages into personal superannuation funds. You may even have to give a choice of funds — just like the independent brokers, except that you don’t get any commission!

Why should all this be done by employers? Why not by banks and other financial institutions? After all, financial institutions ought to have more knowledge of tax and super than most employers, and could do this work with greater economies of scale than even the largest employers. And unlike employers, financial institutions charge fees for their services!

So instead of deducting tax from a worker’s wages, the employer could simply deposit the gross wages into the nominated bank account, and the bank would deduct tax from all deposits made by the employer. And instead of making a super contribution on top of the worker’s wages, the employer could roll the super contribution into the gross wages, and the bank would deduct the super contribution.

If you have more than one employer, the simplification would be even greater. Instead of claiming the tax-free threshold from one employer, letting the others deduct tax at the top marginal rate, and sorting out the mess at the end of the financial year, you would tell all your employers to deposit your wages into a common bank account, and the bank would deduct tax and super from the total deposits made by those employers.

So prospective employers would no longer be deterred by the complexities of personal tax and superannuation.

Infrastructure: Free Riders On The Tollway

Hot IssuesLeave a Comment

The Mitcham-Frankston tollway, also known as EastLink, will reduce commuting times in suburbs serviced by the tollway and in suburbs serviced by alternative routes, such as the untolled Springvale and Stud roads, whose congestion levels will be reduced by EastLink. The market value of this benefit (net of tolls) will be manifested as uplifts in land values in the lucky suburbs (because you have to live or work in those suburbs to get the benefit). So owners of property in those suburbs will benefit from EastLink even if they don’t use it and don’t pay the toll on it. But people who live in rental accommodation and who commute via EastLink will pay for it twice — they’ll pay the toll and their rents will go up. How equitable is that?

To satisfy the “beneficiary pays” principle, road projects must be funded out of the uplifts in land values that they cause. If a project satisfies a cost-benefit test, the total uplift will exceed the cost, so the project can be funded by clawing back only a fraction of the uplift through the tax system, leaving the rest of the uplift as an unearned windfall for the property owners.

This system can be set up in a revenue-neutral manner by abolishing payroll tax and other job-destroying State taxes, and strengthening land tax. From then on, desirable infrastructure pays for itself through the increase in taxable land values that it causes. The higher the marginal rate of land tax (or the fraction of properties to which that marginal rate applies), the greater the range of projects that become self-funding through the ensuing uplifts in land values, and the greater the range of other taxes that can be scrapped when the new system is introduced.

Property owners can only gain from this arrangement, because their tax bills don’t increase unless their property values do, and their property values don’t increase unless, in the judgment of the market, the owners are better off in spite of the tax implication. Indeed, if projects pay for themselves, they are more likely to proceed, so property owners are more likely to get the uplifts in land values. The tax means the owners get only a fraction of the uplifts, but a fraction of something is better than 100 percent of nothing!

So is there ever any need for tolls? Yes — on certain routes, at certain times of the day, tolls can prevent congestion by encouraging travel at other times. But they are not needed 24/7, and they are never needed for funding.

I Want to Live Here Report released

Karl FitzgeraldCampaigns, CommentaryLeave a Comment

Land Supply Strangled by Speculators

Earthsharing Australia has released the first ‘I Want to Live Here’ Report, demonstrating the extent to which speculative vacancies are the hidden issue in the housing affordability debate.

The ‘I Want to Live Here’ report found that 1058 people could live on vacant sites within the Bluestone Ward (City of Maribyrnong). This Google Earth photo of Bluestone Ward West shows a snapshot of some of the many vacancies.

“Housing affordability debates focussed on government controlled land supply were today dispelled” stated Karl Fitzgerald, the report’s author.

“It is the privately controlled supply of land by speculative interests that is heating the market to record levels. It is also driving the argument for unlimited sprawl.”

“Even if Commonwealth Land was put onto the market, speculative interests would snap up the property and drip feed it to the market. History shows that land release only leads to more designer suburbs with a focus on ‘lifestyle’ living, not affordable housing. First home owners cannot compete with speculators under the current tax regime.”

The findings include:
* 1058 people could live in 430 vacant properties within this municipality.
* 93% of these were vacant blocks of land.
* The ‘official’ vacancy rate should include ‘speculative vacancies’ to reflect the genuine vacancies in the land and property market.

The report’s findings on speculative vacancies were discovered by Earthsharing Australia in an extensive survey of the Bluestone Ward, covering parts of Footscray, Footscray West and Tottenham.

“Victoria’s much publicised Vacancy Rate of 1.4% radically understates the true situation in the land and property market. ‘Speculative vacancies’ are not included in this figure. Only properties on the rental market are included by the Real Estate Institute of Victoria in their vacancy statistics.”

“Young people are bidding for rental properties, paying months in advance to secure a place to live, yet they are surrounded by vacant land and housing that is shut off to them in the name of private profit. Neither political party is offering any solution to this issue.”

“The questions we must ask are ‘Why don’t either of the political parties promote the taxing of economic rents?’ and ‘Why are property developers the major beneficiaries of the ‘solutions’ on offer?'”

Speculating on the Great Australian Dream should be deterred by a Federally implemented Site Rental charge on all land, replacing income taxes.

Read the full ‘I Want to Live Here’ Report

Henry George In New England

HistoryLeave a Comment

In May, 1890, Henry George delivered three public lectures in northern New South Wales, Australia. Reports of two of these lectures were recently discovered in the Dixson Library of the University of New England and re-published in the History of Economics Review (M.L Threadgold and J.M. Pullen, pp. 83-95) No. 23, 1996

Glen Innes Examiner, June 3, 1890
The Armidale Lecture
Henry George in New England
– by X.L.

Monday, the 26th inst., was announced as the date of the great social reformer’s visit to Armidale, but somehow his managers had contrived to make the least possible use of the occasion by neglecting to give publicity to the event by the ordinary means of advertisement throughout the district. Although the visit of Mr Henry George was intended to serve as his personal introduction to the New England district – including Glen Innes, Walcha and Uralla; yet, so far as we know, no advertisement outside of Armidale was inserted in any other newspaper circulating in New England.

Arriving at the city by the northern train, we certainly expected to see the usually crowded platform filled with representatives of the intelligence and even the beauty of Armidale, to do honour to the arrival of a man who – whatever may be his faults as a practical politician – has succeeded by the mere power of his genius in stirring the intellectual faculty of his fellow man throughout the civilised world to a depth which has not been equalled since the “Contrat Social” came hot from the brain of Jean Jacques Rosseau (sic), and developed itself in living action during the next generation by means of the French Revolution. Whether “Progress and Poverty” will so fertilise the mind of the present generation as to produce in the next a peaceful political Reformation, which will banish the inequality of the conditions of life, and save this fair country of ours from being swallowed up in the Stygian pool of landlordism; or whether its voice will be rather that of “one crying in the wilderness”, a warning note only of sudden and sanguinary revolution to come; the fact remains that the author of this monumental work, so far as Armidale was concerned on Monday last, “came to his own and his own received him not”.

Had a couple of unaspirating members of Parliament, aspiring nevertheless to be Cabinet Minister in futuro, arrived at the cathedral city to do a bit of log-rolling about land offices or railways, the platform would doubtless have been crowded; but on Monday, although the city was so full that a bed could not be got for love or money, and a shakedown was a matter of favour, yet it was not the great solver of social problems who had drawn the crowd, but a programme of trotting matches, hurdle races, and football which had filled the town with muscular Christians. From them the question, “Are you going to hear Henry George this evening?” brought the answer, “Perhaps I may look in after settling,” so that having no anxiety about getting a seat we betook ourselves leisurely to the Town Hall in the evening without much fear of being trampled upon by a crowd of hungry truth-seekers.

Yet the large hall was fairly filled, and when Mr George appeared on the stage the applause was hearty and genuine enough. A somewhat clumsy and insignificant figure, clad Yankee-like in broadcloth trousers and double-breasted frock coat, whose cut Holly would not perhaps own to, with a presence that at first reminded one of a “meenister’s”, gave no promise of great magnetic influence. A somewhat thin and harsh voice gave no promise of what is called oratorical power, but when the footlights illuminated the rugged, homely face, and brought the square cut brow and massive head into bold relief against the darkness of the empty stage behind, the eye then rested on something that commanded attention and as the lecture proceeded a certain art of posing the body in rhythm with the action of the arms and hands, and a marvellous control over the modulations of his voice, forced the listener to attend, made him feel that he was in the presence of one of nature’s kings, and impressed him all the more forcibly owing to the very absence of sensational adjuncts.

The lecture itself was short, little over an hour, and except that once the lecturer allowed himself to be betrayed for a few minutes into a rather tedious repetition, that hour sped swiftly. Of course it is impossible in an hour to do justice to all or even part of the topics discussed in Mr George’s writings; he therefore cleared a little space on the bedrock – the land question – which underlies all political enquiry, and there planted the seed which may fertilise hereafter in many a shrewd New England brain.

Taking the land question as necessarily the fundamental question – the bedrock so to speak – of all political enquiry, Mr George without preamble announced himself as about to give a reason for the doctrine of the Single Tax to which he stood pledged. In order to understand my doctrine, said he, you must understand the great economic law of rent. Economic rent has nothing whatever to do with rent as generally understood – that is, the rent of land inclusive of its improvements; it simply includes the unimproved value of the land in its natural state – which may be nil – together with the whole additional value conferred upon it by the increase of population, and consequent growth of civilisation. This is rent economically speaking, and he illustrated the increase of rent by the position of the ranks of chairs on which the audience were seated. Let the front rank represent land which produces 20 bushels of wheat, bags of potatoes, or anything else that is the best from its quality and position. Rank No 2 produces 19, and is therefore second best, and so on until the last, which is the worst. The labour on each class of land being the same, it is obvious that No 1 is five, 10 or 20 times better than inferior land; or, in other words, a man could give five, 10 or 20 pence, shillings or pounds more in proportion for it, as a stand upon which to employ his labour. Hence rent – economic rent – arises as a necessary condition of things, and is therefore called the law of rent. This rent must go to someone, and as its increase is not caused by the improvements or labour of any individual, but by the growth of population and public improvements consequent on civilisation, it is just that the community, whose increase in members and civilisation creates rent, should be the recipient of it. But when land comes into private ownership, the individual receives what he has not created, instead of the Commonwealth.

Henry George proposes therefore to appropriate economic rent as national revenue, which increasing along with, and in consequence of population will thus supply a constantly sufficient fund for all the purposes of government, will enable governments to sweep away the whole taxation through customs, and live upon the rent of the national estate, just as the landlords do now on the rent of their private estates.

By this means it is theoretically possible to establish Freetrade; by which Henry George means, not English or Sydney Freetrade, which levies duties through the custom (sic) houses for revenue purposes to the extent of one-fourth its whole income, and which he describes as spurious or German-silver freetrade – but absolute Freetrade – freedoms from customs as well as excise.

At this point the lecturer descended from his high level to a little play to the “gallery”, by tongue-flogging what he called “howling Protectionists”, though later on he let it be again seen that the great theme does not touch the colonial or domestic dispute between Freetrade and Protection at all, as he has no more sympathy for the one than the other. (See “Protection or Freetrade,” Chap VIII, in which he declares “protection is the only justification for a revenue tariff”, and that “the advocate (sic) of a tariff revenue only, have no case”.)

Returning to the Law of Rent, the lecturer declared that it was as simple as the laws of nature; profound and all embracing as they are, unchangeable and beneficent as they are – for the profoundest things are also the simplest. This irresistible (sic) and unchangeable economic law of rent provides therefore a means of relieving labor and the products of labor, as well as capital – which is but labor accumulated or labor saved, labor in latent condition-from all taxation. He traced some of the effects of the application of this doctrine, upon the actual conditions of life, leading to abolition of municipal rates, poor rates, customs and excise; the possibility of ennobling the national and individual (sic) life by creating libraries, public baths, even free railways, out of the rent of the public estate. Finally, its effect on poverty, that greatest of modern problems; illustrating the pressure of modern poverty by the declaration of an American judge that there were families to whom an increase of numbers among the proletarian classes of New York meant only “another boy for the penitentiary, another girl for the brothel”.


At the close of his lecture the chairman invited questions, and Mr George spent over half an hour in good humoredly replying to some childlike queries asked with a mysterious assumptions (sic) of importance by the junior member for Glen Innes, who, having been told by someone that Henry George is a Freetrader, sought to “put him down” by asking if he thought the Single Tax would abolish the natural selfishness of mankind, and especially of the Sydney importor (sic). Fortunately Sir Henry Parkes was not there, but as the audience clamoured loudly against monopoly of the privilege of questioning the lecturer, place was given at the chairman’s request to Mr Cleghorn and some other questioners who received instructive replies.

Mr Henry George and the chairman occupied the stage alone, and though the effect was to make the lecturer’s physique more striking when lit up by the footlights against the comparatively dark background, yet the loneliness of his position was to a stranger somewhat conspicuous, and suggestive of the position occupied by the prophets and truth seekers of all ages in the delivery of their messages, who have ever lived alone, worked alone, and died alone.

Re-printed in Good Government, October, 1996