Tag Archives: Taxation

Automation: challenges and solutions

Automation is a bless and a curse. On one hand it liberates humans from dangerous, monotonous and boring work, while on the other hand it takes jobs from people and hence their source of income. The latter is not without consequences. Continue reading Automation: challenges and solutions

Pigouvian Taxes

Introduction

In economics externalities are the effects of one’s action on third parties. An externality can be positive or negative, and in general the occurrence of externalities is unintended. Negative externalities are those effects which cause harm upon (non-consenting) third parties.

Because of the harm principle the government is justified to create regulation to reduce the amount of negative externalities. There are several ways to do so. First the government can prohibit or restrict certain activities. Secondly the government can discourage certain activities.

Pigouvian tax

One method to discourage certain activities is to impose a tax on such activities. The idea is that by making undesirable activities more expensive, people will either limit such activities or to abstain completely from it.

The first question is how much tax should be levied. There are several things to be considered: the cost of enforcement, the effective deterrent and the compensation of harm caused.

Every tax has to be enforced, and tax enforcement is not for free. Ideally the revenues of a tax should be larger than the costs to collect it. Once we know what it takes to enforce a pigouvian tax, we could determine the minimal tax liability.

A possible problem, however, might be that this minimal liability, does not actually deter people from performing undesirable activities. This because the benefits they can gain, outweigh their tax liabilities. Hence the tax should be large enough to cancel any net benefit. On the other hand, this second minimum could be lower than the costs of enforcement.

Another way to look at the height of tax liability, is to take the cost of compensating negative externalities into account. For instance if water wells have been polluted, there are costs involved in restoring the water wells. On the maxim “the polluter will pay”, it’s reasonable to charge those who have polluted with this costs.

On the other hand, pigouvian taxes are meant to prevent the occurrence of negative externalities. Economically, the costs saved by this prevention should be counted as a benefit. Consequently, it does not actually matter if the revenues raised by a pigouvian tax does not cover the costs of its enforcement, as long as this tax succeed in reducing negative externalities.

Also the success of a pigouvian tax should not be measured in terms of revenues generated, but in terms of harm reduced. In a best case scenario a pigouvian tax will generate zero revenue, because everyone quits producing negative externalities. A pigouvian tax should not be imposed solely for the purpose of raising public revenue. Nevertheless the revenues raised in this way, should be used for public causes.

Should households pay for waste disposal?

In many civilized countries households pay a fee for funding the public waste disposal service. This system, however, stems from the age when garbage was dumped at landfills and waste was considered as a valueless annoyance. Though many developed countries has switched to incineration as their primary method of waste disposal, waste was and is still seen as the useless by-product of consumption. Continue reading Should households pay for waste disposal?

Tourist tax

The regular visitors of Republic of Lagrangia will be aware of our opposition toward income taxes, and instead we advocate the raise of public revenue through the lease of land and radio spectrum frequencies. Additionally we have argued in favour of so-called health taxes on sugar, soda, salt, fat to partially fund a universal single-payer healthcare system (and to reduce the amount of unhealthy ingredients in food).

Mordan citizens and permanent residents will enjoy both free healthcare as well free public transport, which they have paid for through the LVT. However, foreign tourists will also made use of these particular services. It seems reasonable to us if tourists will also contribute to these services. The question is how they can do this.

In the Netherlands there’s a local tax called tourist tax (toeristenbelasting), which local governments are allowed to levy upon tourists from outside their jurisdiction (both domestic and foreign). Usually this tax is charged per night spend at an ad valorem base. If a hotel charge 100 per night, and a tourist has to pay a 5% tourist tax, he will have to pay 105 to the hotels, which will turn 5 to the local government.

We propose to introduce a similar scheme, but with several adaptations. First our tourist tax will be collected by the federal government rather than by local governments. Hence there will be a uniform tariff throughout the nation (in the Netherlands local governments are not obliged to charge tourist tax). Second in our system the tax will only be charged onto foreign tourists, not on domestic ones.

Space colonies and monetary systems. Part 1

Introduction

A key aspect of any society is its monetary system, and Space settlements are no exception. Though money-less societies have existed in the past, and to some extent even to this day, all modern economic systems use money. However, there are different monetary systems possible, and the choice for a particular monetary system has fundamental consequences for how the economy operates. Therefore it is of great importance to choose a monetary system that fits into our commitment to create a secular, liberal and humanist society.

In this post and its sequels we will give a sketch of the monetary system we propose for a future space-based Republic. The basic features of this system are: 1. government issued debt-free money, 2. full reserve banking and 3. a federal credit bank for providing interest-free loans. We will deal with feature 1 in this post, feature 2 will be the subject of part 2, and part 3 will deal with the third feature. Though some people might argue that monetary and banking systems are separate issue, we believe that these two concepts are fundamentally connected with each other.

1 Debt-free money

First of all, we propose that space governments will have monetary sovereignty, e. g. they will issue their own currencies instead of using foreign currencies and also they won’t pledge the national currency to foreign currencies. If a space nation has no sovereign currency, it will not be able to implement its own monetary system.

Secondly, we propose a system of pure fiat money, which is money not backed by any commodity. Some readers might wonder how money with no intrinsic value would ever be accepted, this is an important question. The answer is given by what is known as modern monetary theory: taxation drives money. By mandating some payments in a specified currency, the government creates an effective demand for said currency. We will explain this by an appropriate example.

As the regular visitor of our site might know we support a land value tax as the primary method to fund government. It’s our opinion that all land in a space habitat should be the property of its respective government, but space governments will be able to lease their land to private parties. Since the government is the owner of the land, it is therefore capable of demanding that the lease has to be paid in the national currency. Subsequently the landholders will have a demand for some national currency, they have to earn this somehow. A landholder might, for instance, choose to become a farmer and to trade his crops for national currency. In their turn the buyers of these agricultural products will demand that their wages to be paid in national currency. And the end everyone will demand to be paid in national currency, and consequently the national currency will be generally accepted.

The requirement that the land value tax has to be paid in the national currency, also implies that so-called legal tender laws are superfluous. Legal tender laws are those laws which demand that a person must accept national currency as payment for debt. As we have seen, any sane person would accept the national currency because it is demanded by everyone else regardless of whether he is obliged to accept the national currency. Therefore legal tender laws could be abolished, or rather space colonies should not introduce such laws in the first place.

Now we know that taxation drives money, it follows that the government can create money, just by printing it. Once the government has imposed the obligation to pay land rents in national currency, it knows people will accept it in payments. And since the citizens has to get national currency somehow in the first place, they will be eager to sell goods and services to the government.

Since the government can print money at will, there is no need for the government to borrow any money, ever. This means that money issued by the government is debt-free, the government also pays no interest over it. The cautious reader should, however, be concerned about inflation. However, if the money supply grows proportionally with the economy, then inflation would be near zero. The problem of (hyper)inflation occurs when the government will print money at a faster rate than the growth of the economy.

It’s clear that even if the government can create money at will, it cannot afford to create an unlimited amount of money at a given time. According to modern monetary theory the growth of the money supply can be regulated by the government: by collecting tax, money is destroyed and by public spending, money is created. If more tax is collected than is spent, then the money supply will decrease. And if more money is spent than taxed, then the money supply will be increased.

Economists who support this theory, argues that in case of high inflation the government should raise taxes and to cut spending. Of course the problem will arise that if politicians control the money supply, they will use the tools of spending and taxing for political rather than economic reasons: decreasing taxes and increasing spending during the time just before an election. Therefore an independent agency should be created which decide whether taxes will be raised, and how much money the government is allowed to spend. Politician will be in charge of deciding how they spend the money, not how much.

Todd Altman has proposed an interesting idea: pegging the national currency to the consumer price index. If the general price level rises with, say, five percent, taxes will be raised also by five percent, whilst spending has to be cut down.

See also

External links

Richard Werner: Debt free & interest free money A YouTube video featuring economist Richard Werner, who explains how debt free money will work.

Modern Monetary Theory Primer An introduction to modern monetary theory on the “New economic perspectives” blog.

On “Republic of Lagrangia”

On the problem of taxation. Part One

On the problem of taxation. Part Two

On the economy of a Space colony

Space colonies and monetary systems. Part 2

The problem of taxation. Part two

Introduction

The post is a sequel to The problem of taxation. Part One. If you haven’t read that post, we urge you to read it first. In this post we will give a justification of the Land Value Tax (LVT), subsequently we will investigate how Space governments can establish a fair rental value. Thereafter we will propose a method to deal with defaulters. Finally we will address briefly the discussion of additional taxes.

Although we use in this post the term “land value tax”, we have explained in part one that a LVT is not a tax in an economic sense (however, it might be in a legal sense). Secondly, the discussion in this post is concerned primarily with land, however our argument applies equally to things like broadcast spectrum licensing.

Justification of the Land Value Tax

There are two defenses for implementing a Land Value Tax (this is actually a misnomer): 1) the classic Georgist defense and 2) Ronald Burgess’ theory of public value.

The first approached is based on the fact that land is a fixed quantity, that land cannot be destroyed or created by man. This statement might seem contrary to space colonization, which aims at the expansion of humanity’s living space. However we have to consider that though the Solar System is large it is still finite. Suppose that we should build a Dyson sphere, a sphere with a radius of one astronomical unit, we “create” an area much larger than the surface area of the earth but it is not infinite. Further we do create the space itself which occupied by the Dyson sphere. Land, in a Georgist sense, are the coordinates in space we occupy in space. Space itself is not created by man.

In the Second Treatise of Government English philosopher John Locke explained how people can become owners of land. According to Locke land becomes one’s property if one has mixed his labour with it, the rationale is that you own your body and hence [the fruits of] your labour. However Locke placed a restriction on the amount of land one can appropriate. This Lockean proviso states that one might appropriate land with the condition that there will be left enough land of sufficient quality for other people.

This proviso leads to a problem: if more and more people are appropriating pieces of land, the amount of unowned land will decrease. If simultaneously population is increasing, there will be at some time not enough land for some people. In Anarchy, State and Utopia (ASU) American philosopher Robert Nozick argued that because of this all previous appropriations are unjust. In order to solve this problem Nozick proposes a weaker version of the Lockean proviso (Nozick 1974: p.176-177).

However, this weaker proviso is still problematic and is also unnecessary. Earlier in ASU Nozick introduced his principle of compensation: if someone is violating your rights, then you are, according to Nozick, entitled to compensation by that person (Nozick 1974: p.78-84). If under the original Lockean proviso the appropriation of all lands is unjust, then the landholders are obliged, in Nozick’s theory, to pay compensation to the landless. Since there is no one-to-one relation between any particular landholder and landless person, it’s up to government to collect this compensation and to distribute to those whom are entitled to it.

A second defense for implementing a LVT is presented by British economist Ronald Burgess. According to Alfred Marshall the value of land is composed of two parts: the public and the private value of land. What is the public value of land? We can answer this question with an example: suppose I own an apartment complex in London, I can sell the building or more accurate the land on which it stands for a certain price. If I, however, would own that same building but now somewhere in the emptiness of the Sahara, I can sell it now only for a much lower price than in the previous case. Why? In the Sahara there are no public services, while in London there is a multitude of services.

The value of a particular location is partially determined by the amount of services available in the surrounding area. Infrastructure, schools, shops, police, hospitals etc. are all factors which increase the value of a certain plot of land. Suppose I own a plot of land outside a big city, at some day the city’s subway line is extended to my neighbourhood. As a result of this subway extension land prices are tripling. Without any effort on my part, I can make a nice profit by selling my land. This what is called the public value of land.

However, this increase in land value is due to public investments, not mine. Therefore it is perfectly reasonable if the community, which has paid for those investments, should benefit from this, according to Burgess (Burgess, 1998: p.98-102).

One might ask what the private part is. Well, this is the part of the value of your land which is the result of your own efforts. According to Burgess this is the part to which you are entitled to and which cannot or should not be sized by the government.

Since the investment in (certain) public services is related with the increase of public value of land, the imposition of a LVT which collects all public land value should raise enough money to fund public spending. Consequently, there is no need for the government to tax people’s private income or private property (Burgess, 1993: p.106-107).

How to calculate the LVT?

An important question is, of course, how we can calculate the value of land within a space habitat? The problem is that space colonization is about settling “new” area, in which almost by definition are no market prices to base our calculations on. We might set an arbitrary price, but this might be to low or to high. In Progress and Poverty George discussed the use an auction to sell land to highest bidder, however he rejected this because he didn’t consider it necessary to expropriate current property holders. Instead he preferred to tax the unimproved value of their land.

However, since there are in space no existing landholders, allocation of land through auction is a good idea. In fact this is also a simple method for determining a market comparable value. The auction of land inside a space habitat is a kind of multi-unit auction, an auction in which several items are allocated to sever bidders.

Multi-unit auction are either uniform or discriminatory price auctions. As explained on Wikipedia:

A uniform price auction otherwise known as a “clearing price auction” is a multi-unit auction in which a fixed number of identical units of a homogenous commodity are sold for the same price. Each bidder in the auction may submit (possibly multiple) bids, designating both the quantity of units desired and the price he is willing to pay per unit. Typically these bids are sealed – not revealed to the other buyers until the auction closes. The auctioneer then serves the highest bidder first, giving them the number of units requested, then the second highest bidder and so forth until the supply of the commodity is exhausted. All bidders then pay a per unit price equal to the lowest winning bid (the lowest bid out of the buyers who actually received one or more units of the commodity) – regardless of their actual bid. Some variations of this auction have the winners paying the highest losing bid rather than the lowest winning bid. (Wikipedia, visited at April 5, 2013).

It’s not hard to see how this would work for the owners of Space habitats. Suppose that in a O’Neill cylinder we have some 10 square kilometers for lease. We organise an auction and we ask potential lessees to submit a bid. In this bid they announce what amount and for what price per unit they are willing to lease a plot of land. The price is the rent to be paid per period (once a year, once per month).

A discriminating price auction works in the same, only in this case people do not pay the same price (say 10,000 per hectare). Instead the highest bidder pays the second bid, the second bidder the third bid etcetera.The question which auction gives the fairest price is a complicated one and is the subject of auction theory.

In order to deal with inflation, we suggest that the price as determined in the way described above should be corrected each year. One way of correcting the rental price to the rate of inflation is to fix it to the consumer price index. If this index increase by, say, three percent the rental price will rise by the same amount. If, however, the index will decrease, the land rents will also decrease. In this way public revenue is protected against inflation. Of course this annual adjustment will be communicated beforehand to the prospective lessees.

Failure to pay

Another issue we have to address is the possibility that some landholders might refuse to pay the land rents they owe to the public. We are familiar with tax evasion, tax avoidance and the like in our current tax systems, so it is reasonable to assume some people will try to forsake their obligations. There it will be necessary to have a method to deal with reluctant landholders.

A LVT has one benefit compared with modern tax systems: land cannot be hidden. Whilst people can decide not to report (part of) their income or use all kind of elaborate schemes to avoid to pay income tax; landholders cannot hide their land from the government, nor can they avoid to pay (some) LVT by using legal persons as strawman. Unlike the tax systems we are familiar with, the LVT system does not provide for a different treatment for corporations. One might decide to rent land through a trust, but that will not change the amount of rent.

In order to collect the LVT, the government has to register all landholders and some landholders might try to avoid registration. However, if some piece of land is not registered as already rented by some one, the government is free to rent it to someone else. Therefore landholders have a strong incentive to register.

So the only way landholders can avoid to pay their rent is simply to refuse to pay. What should we do in this case? Our proposal is simple: first we should send the landholder a reminder to pay within a reasonable period of time. If the landholder has not paid after this period, his tenure will be revoked and he will be evicted from his land. Subsequently the landholder will be placed on a blacklist, which means he cannot rent another piece of land as long as he has not paid to money he owes to the public.

We see no reason why we should waste our time with prosecuting and imprisoning reluctant landholders. Just revoke their land and blacklist them, until they come to terms.

Other “Taxes”?

This is a good moment to ask whether we should have another kind taxation as source of revenue. (This phrasing is, of course, wrong since a LVT as we endorse, is strictly speaking no tax.) The first question is whether is will necessary at all, however I will address this issue in another post.

One kind of taxation we consider to be appropriate are the so-called pigovian taxes. Actually these are also no taxes, they are called tax mainly because of legal reasons. In fact a pigovian tax is a monetary compensation for externalities caused by some one. Many activities have negative consequences for third parties, an example is pollution. Since this is an infringement on the rights of these third parties, they are (at least according to Nozick’s principle of compensation) entitled to some compensation.

However, often there is no clear direct relation to the person who cause a negative externalities and the people who suffer from it. Often we only know that some people cause the externalities and some people suffer, therefore it’s up to the government to collect this money and spend it in such way to reduce the effects of the externalities.

References

Nozick, Robert 1974. Anarchy, State and Utopia. Basic Books, New York.

Burgess, Ronald 1993. Public Revenue without Taxation. Shepheard-Walwyn (Publishers) Ltd, London.

The problem of taxation. Part One

Introduction

For the purposes of this post, I will define Space governments as the owners of space habitats.

Governments of space colonies need funding, both for protecting their citizen and for maintaining space habitats (and for several other purposes, depending on the specific policies of space colonies). The question is how Space governments would raise their funding. In this post I will discuss several proposals for taxation and non-tax revenues.

Regardless how future space communities will be organized, one thing is certain: space habitats have to be maintained and are someone’s property. The communities of the larger space habitats, like the Bernal sphere or the O’Neill cylinder, with their several thousands of inhabitants, also need security, both internal and external. So the “owners” of space habitats have to provide at least the following services: maintenance, police and national defense. Also highly desirable is the arbitration of conflicts between residents of the space habitat. But governments will almost certainly offer many other services, especially when they have to compete with other space colonies for citizens who are able to vote with their feet. Of course some space governments will only a minimal government package, with low taxes, but I guess that many more governments will offer more elaborate bundles of governmental services.

Whatever services a government of space colony offers, they need to be funded. One way to do this by imposing a head tax, a fixed amount of money to be paid per person. In fact this is a kind of “rent”, where the taxpayer pays for the “right” to live in a particular space habitat. A head tax is especially interesting for those space communities which are committed to a minimal state. But for space communities with a more elaborate government a head tax will most likely to be insufficient for funding these services, or they had to be so high, that no person is willing to pay them, or many are simply unable to pay them. Foot voting present a fundamental problem for any space government: people like to have many services to be provided by their governments, but are less willing to pay the required taxes.

Since space colonies are new comers in the global “market” of societies, the cannot rely on for example feelings of nationalism, people who strongly identify with their country are more likely to pay their taxes (with the possible sole exception of the USA). Furthermore, we can safely assume that the persons most likely to emigrate to a space colony are those who have the least attachments to their homelands. Attracting immigrants with income tax rates of 90% will not work.

Therefore we need to find other ways for funding space governments.

Canons of taxation

Adam Smith formulated in his famous work On the Wealth of Nations, four rules for levying taxes which governments should keep in mind. These rules are known as the canons of taxation.

1. Canon of equity: this is the principle that people should pay taxes according to their ability to pay and the benefits they receive from society. The logic is that people who has the greatest advantage of public services should also contribute the most of it.

2. Canon of certainty: this means that people should know in advance how much they had to pay. This is both beneficial for the government as the tax payers, since they can plan their revenue and obligations in advance.

3. Canon of convenience: taxation and the collection thereof should not place an unreasonable on the tax payer. For example taxes should be collected at the moment the tax payer receives the money.

4. Canon of economy: the collection of taxes should not be more expensive than the revenue. The lower the costs of collection, the better. If a tax is difficult to collect, less revenue can be spent on public services since more money has to be spent on collection.

For more information on the canons of taxation can be found on this site, it also discusses additional canons made by modern economists.

Tax on consumption

Many popular proposals for abolishing income taxes advocate their replacement with sale or value-added taxes. There are several problems with this idea. First of all are taxes on consumption regressive to income. Wealthier people spend as a proportion of their income less than poorer people, the wealthier a person is the more he will either save or invest his money instead of consuming. Because basics needs are (almost) the same for everyone, regardless of their income. This problem might be solved be charging a higher tax rate on luxury goods than on basic goods, however this leads to the question of what is a basic or luxury good? And who decides this?

A basic problem with consumption taxes is the collection, these taxes are collected by retailers from their costumers. Although costumers will be pay their taxes without notice, the tax officers have to check whether the retailers are collecting the right amount of revenue. It’s easy to imagine that some shopkeeper collects the sales tax from his costumers, but keeps a part of the money himself.

Another complication is in our age the on-line sale of goods and services. On line shopping is not restricted by national boundaries, so if one buy something on the Internet from abroad, how would you impose a sales tax? Recall that sales/VAT taxes are collected from retailers, not consumers, and foreign based retailers are not bound by laws of other countries.

Income taxes

Most modern countries rely nowadays on taxation on income as prime source of public revenue. A common system is Pay as you earn, which means that your employer will withhold some of your earnings and transfers it to the tax agency. Income taxes may be levied on both natural persons as on corporations.

However a common problem is unreported employment. For employers it is attractive to employ people unreported, because they will have to pay less wages for the same amount of work. Another problem we have with income taxes is the fact that these taxes are violating people’s privacy. In order to calculate how much money someone owes to the state, tax officers has to collect a huge amount of data: how much and what work one has done, what kind of assets one has and so on.

Income taxes are usually progressive or proportional. Also most countries have a lot of deductions for all kinds of stuff, mortgage interest rate, if you have a business, or whatever. Actually these deductions are more a tool for wealthy people to avoid taxes legally, if you afford to pay a good accountant you can save a lot on your tax by exploiting all kinds of loopholes. Therefore tax agencies has to spend a lot of efforts in order check whether tax deductions are filled legitimately. Because of this, we are no fan of such deduction. In our view it is better to have a low tax rate with no deduction than a higher rate with much possible deductions.

Non-tax revenues

A common definition of tax is:

A compulsory contribution to state revenue, levied by the government on workers’ income and business profits, or added to the cost of some goods, services, and transactions (Oxford dictionaries).

This helps us to understand what non-tax revenue is. However this definition is missing one essential aspect of taxation, namely that taxes are without a direct quid pro quo for the tax payer. Non-tax revenues are non-compulsory payments for goods and services provided by the government to private parties.

Many governments in the world have multiple sources of non-tax revenues. In some countries this kind of revenue is a substantial part of public funding. We should ask what kind of non-tax revenues could be utilized by the governments of Space habitats. This question is in fact equivalent to what kind of services can space colonies provide to their residents for the purpose of raising public revenue?

There is actually a very obvious service which can be provided by the governments of space habitats: land. Since they are the owners of the colony, all land contained in the habitat is their property. By renting land to interested private parties, space governments can raise revenue to fund their activities. Interestingly, by providing certain public services the governments of space colonies might increase the rental value of their land. Good school, clean streets, low crime rates are among of several factors which will attract potential emigrants from Earth.

The idea of using land rents to fund governments is not a new one. During the 19th century American economist Henry George argued in his famous work Progress and Poverty, that a so-called Land Value Tax (LVT) would not only be quite efficient but it would also raise sufficient revenue for governments to fund public services.

Because land cannot be hidden or moved out of the country, collecting a LVT is quite efficient. Most modern countries have already an elaborate registration of ground ownership, and space colonies should easily be able to keep track of who rents  what and how much land. A further advantage of the LVT is that it does not discriminate among different classes of tax payer. It does not matter whether a single person, a family or a corporation rents the land.

In a future post we will explain more about Henry George and his defense of the LVT. Here we want to state that according to George taxation on income from labour and capital is both immoral and bad for the economy. A tax on land, however, is just because land is not created by any particular human and hence belong equally to all.

Land in a Georgist sense does not only include “area”, but also the electromagnetic spectrum (used for wireless communication) (among other things). Because the EM spectrum is not made by man, it also belong equally to all. Licensing the radio spectrum will be good source of additional revenue for space colonies.

Another important source of non-tax revenue for space colonies are the sale of asteroidal resources. Asteroid mining is, we believe, is the raison d’être of space colonization and as we has argued in a previous post, it would be one of the most profitable activities of space colonists. However, terrestrial experiences has taught us that funding governments with the easy money from natural resource extraction is often detrimental for both the economy as political freedom.

Economists talk about the Dutch disease in this context. The export of a natural resource by a nation often leads to increase in public spending and to a decrease in productive activity. Instead of spending revenue from resource extraction, it would be better to put these into a sovereign wealth fund and to use the dividend from this fund for public spending. In future post we will discuss the role of sovereign wealth funds for space colony governments.

See here for part two of this post.

For more information on the land value tax:

http://www.newstatesman.com/economics/2013/01/whats-justification-land-value-tax

http://geolib.pair.com/essays/sullivan.dan/royallib.html