Globalisation: Shortcut to the Bottom

In this age of internationally mobile capital, we are repeatedly told that if we want to attract and retain investment, we must make our tax system more “competitive”. Very conveniently for the investors, competitive taxes are taken to mean low taxes, in which case governments must engage in a “race to the bottom” — competitively cutting taxes and public expenditure, sacrificing their schools, hospitals, transport systems and other essential services on the altar of global finance.

Fortunately this is bunk. In fact the attractiveness of the tax system to investors has more to do with the type of tax than with the amount of tax collected. “Taxes ain’t taxes!”

Consider land tax — that is, a holding tax of a certain percentage per annum on the value of land, excluding buildings. Clearly the land can’t flee overseas to escape the tax. As land is a limited natural resource and has no cost of production, its price is determined simply by what people are willing to pay for it. A holding tax on land reduces what buyers are willing to pay and encourages selling, and therefore reduces land prices. More importantly, it drives speculators out of the market, further reducing prices for the benefit of productive investors. So productive investors actually find it easier to acquire land. Similarly, land tax does not discourage investors from renting land for productive purposes; on the contrary, it forces landlords to offer their properties at affordable rents in order to attract tenants and cover the tax liability. Neither does it discourage building on the land, because that is another way to earn income to cover the tax, and because the tax does not apply to the buildings themselves.

So land tax can raise revenue without discouraging productive investment. To replace existing taxes by land tax is to go straight to the bottom as far as investors are concerned, but requires no sacrifice of revenue or essential services.

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