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.