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Enterprise and development

The current system of taxation creates many distortions to people's behaviour in the market place.

Taxes on wages can deter people from working, as the extra income gained from more hours of work may not be considered worthwhile in comparison to the take home pay after taxes have been deducted and the reduction in leisure time.

Taxes on capital can deter investors, who might consider the extra costs of the tax in addition to risks of investment to not yield a high enough return, compared to investments abroad, for example. This may mean that taxes on business deter new entrants, expansion, research and development and so on.

Innovative fiscal policy, that aims to capture unearned income, can stimulate economic activity, encouraging enterprise and development, whilst supporting other desirable goals such as social and environmental justice or community empowerment.

For both labour and capital, a certain amount of effort is put into earning a return, whether this is wages or interest. Therefore, taxes that take away some proportion of this return are likely to have a detrimental effect. This is not to suggest that there are no benefits associated with taxing labour or capital; rather, in considering the current system of taxation there is an inherent inequality that may be damaging for the economy.

Economic rent can arise in a number of areas within the economy, but in the current system there is an unequal distribution in the burden of taxation, which means that a significant amount of economic rent is not taxed. There is no significant attempt to recapture any of the wealth that is generated by society, that manifests itself in the form of increasing land values, the unearned income of which goes straight to land owners.

There are significant gains to be made by shifting some of the tax burden from labour and capital onto owners of land. A major benefit of such a shift – that has been noted since the classical economists – is a consequence of land being fixed in supply. Labour and capital are variable in supply and, as discussed above, taxes can distort the amount of labour and capital, reducing economic activity. As the supply of land is fixed, a tax on the value of land would not create such a distortion.

An alteration to the system of taxation, whereby increases in the value of the land rather than increases in the value of the property as a whole is taxed would produce an incentive for the land to be used in the most economically productive way. Therefore, in economically prosperous areas, the high land value will mean that whatever income is generated due to the land, whether it is a factory, or shop benefiting from a particular location etc. will have to be paid for. This will not act as an economic disincentive in this area due to the high returns created by the community and public infrastructure that in part gives the land its high value. This will also create an interest in regenerating less prosperous areas where the value of land is lower, and hence where the lower tax is an incentive to invest.

Moreover, this shift in the tax burden is a sustainable form of taxation as there are no disincentive effects generated due to the fact that the tax is placed on economic rent, which is essentially unearned income.

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Land & Liberty magazine is a publication of The Henry George Foundation.