Ron Banks explains how national debts can be funded to foster growth and protect the natural environment
Most European governments are now reducing public services as the austerity approach to reducing the debts accumulated during the boom years. Some – like Greece – have been forced to retrench under the supervision of the IMF. Spain is being pushed by the European Union. Britain’s Coalition Government is voluntarily replacing the Welfare State with something called “the Big Society” in order to reduce the sovereign debt. These policies are deepening the crisis in Europe and could lead to terrible social consequences. But it’s all unnecessary, because there is a more effective route to cutting the national debt and re-launching the economy onto the path of sustainable growth.
The starting point is the realisation that taxes on incomes, on earnings from savings and on production burdens the economy with enormous “deadweight losses”.† Britain, for example, could just about double its national income if Parliament once again raised its revenue from the rents of land and natural resources. This can be done without damaging the natural environment.
Instead, Parliament complies with the received wisdom – that the tax base should be “broadened” (the tax net cast wide) supposedly to make the tax system “fairer”. In fact, taxes are structured to conceal the amount of revenue that is taken. But whether a tax is visible or not, most of them decrease the efficiency of the economy, lowering productive capacity, and creating poverty.
In the case of the British example, there should be a shift in the structure of taxes that makes it possible to reduce income tax. The initial steps are:
- reduce income tax by 5p in the £
- abolish the property taxes (Council Tax and Business Rates), and
- collect the amount lost by levying a charge on land rentals.
This charge is not a new tax! It begins to deliver an incentive to get the economy moving again without the “deadweight losses” or “excess burden” that are caused by taxation. In addition, this reform serves notice that property speculation will not – in the end – pay the rich dividends that caused the bust in the banking sector. Instead, banks would shift their lending practises in favour of credit to productive enterprises.
By reducing taxes, there would be a loss to public revenue. The figures below are derived from the Treasury website – Table 4 of the 2008 Treasury Report, Tax Ready Reckoner & Tax Reliefs. The figures shown for the year 2009/10:
1p off basic rate = £4.1 billion loss of revenue.
Same for Scotland = £0.34 billion loss of revenue.
5p off basic rate = £22.2 billion loss of revenue.
This loss of £22.2bn could be replaced with revenue from a land rentals charge.
In addition, I would propose that we abolish Council Tax and Business Rates. The loss here is: £24.8bn (Council Tax: 2009/10) and £23.7bn (Business Rates: 2009/10). The total loss of revenue would be £70.7bn, but the bulk of it is replacement for Council Tax and Business Rates.
Why shift the Tax Structure?
You may well ask why bother to replace one property tax with a land-rent charge. There are several reasons:
- Just about every economist from Adam Smith onwards agrees that a public charge on land values (that is, on the “unimproved” value: excluding the value of ‘bricks and mortar’ improvements) acts in a different way from a tax on people’s earned incomes. A “land rentals charge” (I am not proposing the introduction of another “tax”), whether on vacant or developed sites, is an incentive to owners to make use of land in the most efficient way. A tax on the improved property stunts development. That is what Britain discovered when Land Development Charges were introduced by the Labour Government in 1947. Such charges leave untaxed vacant land sites and empty buildings as eyesores.
- Taxes on incomes, on earnings from savings and on production are harmful in two ways. They directly reduce incomes, as the present increase in VAT demonstrates, and they indirectly reduce national Income or growth. As Winston Churchill said, when he was a Liberal Cabinet member in the early 1900s, “taxing yourself into prosperity is like standing in a bucket and trying to lift yourself up by the handle”.
- At the time that Winston Churchill offered this observation, Liberal legislation was on the statute book as the first step to a full land rentals charge. The whole reform process was thwarted by landowners, who used the courts to defeat the vital process of valuing the land. Such tactics are likely to be used again, but the present dire financial situation might encourage MPs to drive the reform through.
- A full land valuation is necessary to form the building blocks of a structural system that allows further tax reductions and higher land rental charges. This is the virtuous circle of growth!
The Weimar Connection
It would take about three years to value the unimproved value of land, however, and to enable Parliament to get the proposals through the legislative process. In the dire financial circumstances that now prevail, this is too long. We need the tax cuts NOW! One possible solution is to use a device developed in Germany in 1923.
Following the First World War, Germany experienced a massive hyperinflation. With no gold backing for the Mark, the currency was named the Papiermark. People did not have confidence in the Papiermark and hyperinflation took hold. People were forced to buy bread by waiting in long queues, their bank notes bundled in wheelbarrows. The long queues often meant that the price had gone up by the time they got to the front, so no bread!
With no gold to back the currency, one bank found something that the German people did have confidence in – land!
The Rentenmark (literally, “Security Mark”: RM) was a currency issued on 15 November 1923 by the Rentenbank, to stop the hyperinflation of 1922 and 1923. It was backed by the bank’s assets of mortgaged land and property together with industrial goods.
The Rentenmark was only an intermediate currency and was not legal tender. It was, however, accepted by the population and it effectively stopped the inflation. The Rentenmark continued to circulate, and was valid until 1948. (Parallel with the Rentenmark, the Government introduced a new currency in 1924, the Reichsmark, which lasted until 20th June, 1948.)
So, come back to our dire financial circumstances today. The Rentenmark gives us the clue – confidence! We can cut the “bad” taxes now, to stimulate growth, and we can use the German experience to cover the deficit. We have to make up the loss of £22.2bn as a result of cutting 5p off income tax. (We do not need to cover the losses from Council Tax and Business Rates because we can continue collecting those taxes during the three years of Parliamentary legislation and land valuation.)
When the policy is announced in Parliament, everyone is warned about what will happen in three years time – Land Rental Charges will be levied to cover the whole £70.7bn of lost tax revenue.
To cover the 5p income tax loss, the Government could issue a Land Rentals Bond. The security of this bond is British land, and the income generated by the Land Rentals Charge. I have to stress that confidence is the key. It should be easy to sell those bonds in the market, because the asset – land – is the best possible security. It does constitute more public borrowing, but the advantages are enormous. The cut in income tax of 5p in the £ would jump-start the economy onto a path of virtuous growth alongside a rise in the spirits of the people. Now, working harder would yield higher rewards. And at the same time, land values would rise to provide more revenue and enable government to institute further cuts in the taxes on earned incomes.
Land valuations would need to be carried out regularly (say, every three years). Denmark has a system where individual sites are inspected and re-valued every three years, and computer models are used to update the values in the years in between. The computerised updates are very accurate.
Every commentator declares that we need growth. Governments think they can help their economies to recover by cutting spending on essential services, like schools and hospitals. The Rentenmark model is the alternative to austerity. Deficits would be reduced not by harming the services that people need – like public libraries – but by stimulating the growth that rewards the people who work for their living, rather than rewarding land speculation which drives the boom/bust economy.
† The full figures are in Ronald Banks, Double-cross – Gordon Brown, the Treasury & The Hidden Cost of Taxes, London: Centre for Land Policy Studies, 2001.