The mascot of the anti-land-tax campaign is the “poor widow” — you know, the one who will allegedly be forced out of her home because she doesn’t have the cash flow to pay the tax on the astronomical value of the land under her house, and who can’t be compensated by cuts in income tax because her income is below the threshold. Oh, how awful.
So, if we believe that the necessary costs of government should be financed by a charge on land values rather than taxes on useful activities, we’re on notice that we need to find ways to keep the widow in her home. So we do! For example:
- Most obviously, the asset-rich, income-poor widow can be invited to defer the tax at some token interest rate for as long as she remains in the house. Then the tax becomes her heirs’ problem. And if we don’t want the heirs complaining about a “death tax”, we can further defer payment until the property is actually sold — meaning that the tax cannot force the sale.
- Income tax is not the only tax that might be partly or fully replaced by a charge on land values. In particular, the widow pays indirect taxes through the prices of goods and services that she consumes. If the land revenue is used to replace indirect taxes, the widow receives some compensation through lower prices.
- Whether the widow should pay land tax at all depends on the purpose for which the revenue will be used. If the tax is earmarked for the age pension, then presumably it won’t apply to the principal addresses of people of pensionable age, because that would be giving with one hand and taking with the other (“churning”). In any case, if the tax system stops punishing productive activity, there will be more production, hence more capacity to pay pensions to the aged.
How old is the “poor widow” hoax? Older than any widow! According to Winston Churchill, defending the land tax in the House of Commons on 4 May 1909, the widow had already been “used to exhaustion” by his opponents. So instead of the widow, they cited the market-gardener who might be forced to realize his capital gain and move further out of town — as he should!
Notice that the supporters of a broad-based land tax have been campaigning for more than a century. So, if they are eventually allowed to implement their policy, will they want to give it a bad name by turfing widows out of their homes? Is it not rather the opponents of the policy who would like to see that happen‽ As Cicero might have said, Cui bono?
Moreover, although the widow’s income is below the income-tax threshold, it doesn’t follow that she “can’t be compensated by cuts in income tax”. Yes she can, because income tax, like the aforesaid “indirect” taxes, feeds into prices of goods and services that she consumes.
Perhaps the easiest way to explain the price effect of income tax is to compare it with the “value-added” tax (VAT) — also known as the GST. Under a “value-added” tax, the value added by the labour of a firm’s employees, as measured by their wages and salaries, is taxed in the hand of the firm, not in the hands of the employees. Hence wages and salaries are not deductible from the firm’s taxable “value added”; that is, there are no input credits for wages and salaries. But under an “income” tax, the value added by the employees is taxed as “personal income” while the value added by the firm’s assets (that is, its profit) is taxed as “corporate income”. Hence wages and salaries are deductible from the firm’s taxable “income”. In summary, an “income” tax is a value-added tax except that the taxable value added is split between the firm and its employees, and the part attributed to the employees is called personal income while the part attributable to the firm is called corporate income. So, as no one denies that a “value-added” tax feeds into prices, how can anyone deny that an “income” tax feeds into prices?
One might answer that a “value-added” tax is border-adjusted, so that a VAT taxes the consumption of imports but not the production of exports, whereas an income tax does the reverse. In other words, while the price effect of the VAT falls entirely on domestic consumers, the price effect of the income tax falls on domestic and foreign consumers of domestic production, and is circumvented by domestic consumers of foreign production. But imports account for only part of the cost of living. Moreover, because income tax adversely affects the balance of trade, it causes a lower currency value, which partly offsets the price advantage of imported products.
So, as far as consumers are concerned, border-adjustment is a minor detail, and income tax is essentially a VAT by another name.
In Australia, certain products, such as fresh food, are free of GST. These products are cheaper than they would be if the GST applied to them. But the same thing could be done with income tax. If employees in the fresh-food industry were exempt from personal income tax, labour would be attracted into that industry until competition reduced gross wages in the untaxed industry to a level competitive with net wages in taxed industries. If the companies producing fresh food were exempt from income tax on their profits, investment would be attracted into the fresh-food industry until competition reduced gross profits in the untaxed industry to a level competitive with net profits in taxed industries. Lower wages and lower profits would imply cheaper fresh food.
And yet, while it was a political necessity to make fresh food GST-free, nobody suggested that the producers of fresh food, or of any other necessity of life, should be exempt from personal or corporate income tax, because not enough voters knew how income tax affects prices. What the voters didn’t know wouldn’t hurt the politicians.
Of course, to say that an “income” tax, like a “value-added” tax, feeds into prices is not to say that the whole of the tax is added to prices. It is merely to say that, for the same amount of revenue, the two taxes affect prices to a similar degree. An income tax on wages will be borne partly in higher prices and partly in lower net wages. An income tax on profit will be borne partly in higher prices and partly in lower net profit. Adding the two together, we conclude that a value-added tax is borne partly in higher prices and partly in lower value-added. So, while an “income” tax is not entirely added to prices, neither is a “value-added” tax.
To the extent that income tax feeds into prices, retired people, in their capacity as consumers of goods and services, benefit from its abolition even if their personal income is below the threshold. When assessing the effect on retirees of replacing income tax by land tax or any other tax, that benefit must be taken into account — along with all the other sweeteners that politicians would inevitably include in the package.