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INTRODUCTION

AIRR NEWSLETTER No.3 was devoted to a submission to The Margo Commission on Taxation, headed "The Character of a Nation is Shaped by it's System of Taxation." 1.

It was stated that "All existing taxes which adversely affect the quality of life of the majority of the population should be phased out and replaced by a system of taxation which will enhance the physical, mental and spiritual well being of our nation".

"It is said that both extreme wealth and extreme poverty are counter productive to spiritual and mental development. Our present taxes result in the increase of both extremes; of progress and poverty. They are not conducive to the establishment of a stable and happy nation."

How can different taxes be evaluated in terms of their effect on the nation as a whole?

Each tax has a different effect and the magnitude of the tax changes the impact on various sectors of the community.

This article will evaluate the adverse effects of different types of taxes and attempt to rate their effect.

"There is a sense in which all taxes are antagonistic to free enterprise - yet we need taxes..... so the question is: which are the least bad taxes?" Milton Friedman.

Any tax which causes one person to became unemployed is a bad tax; if it cause 10 000 to be unemployed it is a very bad tax: but what of the millions forcefully unemployed in the Western world, mainly because of bad taxation?

If you have lost your job or your business, what part has taxation played?

YARDSTICK FOR EVALUATING TAX EFFECT

Each sector of the economy tends to evaluate taxes according to the effect they have on that sector* s* personal and vested interests. What to business is a bad tax may be insignificant to many private individuals; on the other hand what may at first appear to be a reasonable tax, could cause a large increase in unemployment.

For the purposes of this study a common yardstick is necessary, one that has a measurable effect on a large portion of the population.

The yardstick chosen is the effect of each tax on marginal business, marginal industry, marginal farming and marginal labour.

By far the worst taxes are those which contribute to insolvencies, liquidations and unemployment. These factors have seldom been as bad as they are today.

MARGIN OF PRODUCTION

Starting with the primary factors of production namely land, labour and capital, the wealth produced will depend on how these factors are brought together and conditions at their point of interaction.

Under truly free market conditions and where labour and capital have easy access to land the total production of wealth will be at its greatest level.

Any factors which prevent land or labour being available for production will reduce production of wealth for the nation as a whole.

The primary distribution of the wealth produced or value added, is to land as Rent, to labour as wages and to capital as interest.

For the sake of clarity in this article the word Rent spelt with a capital R will apply to Rent on the unimproved value of land, not taking into account the value of improvements thereon. Improvements are rightly capital.

When the production of wealth is only sufficient to pay wages and interest, which normally have first call, and nothing left for Rent then by definition that land is marginal. If the production of wealth is insufficient to pay both wages and interest then that land is sub-marginal.

Sub-marginal land cannot produce without showing a loss and is not normally in continuous production.

Where production is more than enough to pay both wages and interest, the balance goes to Rent of land, excluding the return on improvements which are rightly capital.

TAXES AT THE MARGIN

When marginal land was freely available for those who would use it, labour had the choice of being employed or being self employed at the margin. All that was necessary was to produce sufficient for a man to pay his own wages, in the form of produce and pay a return on his capital. At the margin, land had no commercial value.

No rent or taxes were demanded or payable out of the product of a man's labour at the margin.

The advent of land enclosure encouraged speculation in land. This led to the withholding of land from use to await speculative return on capital appreciation. The tendency in speculation is to demand a return from land that produces no current Rental value and some marginal land is thus rendered unproductive.

Asking for rent is sufficient to remove that land from the productive economy although no rent is actually received, because the land lies idle.

The margin thus becomes very sensitive. Onto this margin various taxes are imposed which leave insufficient product to pay a return on labour and capital. When either labour or capital is withdrawn then the land will lie idle.

Depending on the nature of the taxes and their magnitude, much otherwise productive land is rendered unproductive ami the margin of production is moved inwards. This results in land lying idle and unemployed labour migrating towards prime land.

Abandoned farms and squatter camps are a direct result of the above process.

NATURE OF TAXES

All taxes may be grouped, between the two extremes of A. (Positive) those which tend to zero at the margin without putting marginal land out of production and B. (Negative) those that bear heavily on the margin and are directly responsible for unemployment.

Because of the multiplicity of taxes and the varying magnitude, it is unlikely that any will fall under either of these two extremes. All have varying impact at the margin and in combination result in unproductive marginal land and unemployment.

To counteract this adverse effect. Government meddles with the free enterprise system by introducing incentives, subsidies, grants, guaranteed prices and a variety of complex systems to protect failing business. Invariably these have the wrong effect.

Again these subsidies may be grouped between two extremes C. (Positive) those which help only marginal and sub- marginal enterprises' and D. (Negative) those which make prime enterprises wealthy at the expense of the general public and have little impact in improving conditions at the margin.

By a combination of negative tax B. and negative subsidies D. it is possible to legally rob the poor to give to the rich; a process practised to a greater or less extent by all governments. This is normally done with finesse so that it is not recognised by the average tax payer who suspects but cannot explain the resultant economic injustice.

Having established this plethora of taxes and subsidies governments are left with a further problem of alleviating the misery which they have caused. The resultant relief is then established in sane form of socialism which aggravates the problem by paying people not to work and robbing them of their human dignity. Man has a right to work!

PRODUCTION CURVE

The effect of Rent and taxation at the margin of production may be graphically shown by use of a production curve, figure 1.

The curve is developed from the island diagram. For any site x the production is indicated by y, i.e. its interception with the production curve.

Figure 1. PRODUCTION CURVE

The curve shows the total of all sites and indicates the production or value added after paying for all purchases of materials, raw materials and services.

This represents the total wealth produced within the nation by the application of labour and capital to or on land: the term land being used in its broadest sense of land from prime business and industrial to marginal and submarginal agricultural land. It also includes all natural Land lying between the economic margin and the natural margin in Fig. 2. is at present unproductive and pays no taxes. It provides no employment as a direct result of present taxation methods.

By collecting all government revenue only from the potential Rent on Land, the land between A2 and M in Fig. 2. would be encouraged into production. More important, high quality land presently withheld from production would be forced into production.

In both cases there would be a great demand for labour and marginal land would become available for those who would prefer to be self employed. The new distribution of tax is shown in Fig. 3.

Figure 3. REVENUE AS A PERCENTAGE OF RENT

It will be seen that the residual Rent only reduces to zero at the natural margin bringing much land back into economic production.

CONCLUSION

The earth is indeed bounteous and with modern scientific and technological developments correctly applied would be quite capable of providing a reasonable standard of living for all.

Simply by a change in the method of collecting all government revenue, idle labour would be economically employed on presently idle or under utilized land. Productivity would be increased significantly and all who are prepared to work would enjoy an improved standard of living.

Migration of people from rural areas to the cities would not only be slowed down but in many case reversed.

Increasing numbers of workers would own the land they work on or the land they live on. Ibis would bring about a significant .change in political stability and the will to establish peaceful conditions. Rioting, crime, violence and subversion would become irrelevant and gradually reduce to very low proportions.

This new economic system would be able to bring about a society in which all men can enjoy freedom and security to develop their talents re-establish human dignity and stimulate mental and spiritual development.

By little more than a change in the system of taxation all men will be able to safely walk the streets of our nation instead of living in fear of those who prowl them.

The choice is ours!

REFERENCES:

1. Dunkley G.R.A. (1986) The Character of a Nation is Shaped by it's System of Taxation. Submission to the Margo Commission. AIRR Newsletter No. 3.

2. Friedman M. (1978) Comment during public debate of the American Education League, quoted in "Human Events" 18-11-78 p. 14.

3. George H. (1879) Progress & Poverty, Robert Schalkenbach Foundation. 212-213.

4. Ibid., 440-441.

5. Dunkley G.R.A. (1976) Where Human And Natural Resources Meet. Certified Engineer 49, 40-45

6. Dunkley G.R.A. (1983) Natural Rent and the Road to Full Employment. Land & Liberty 90, 26-28 & 58-59

7. Maclaren L. Nature of Society. School of Economic Science. Chapter V.

8. Harrison F. (1983) The Power In The Land. Shepheard-Walwyn 68-69

9. Dunkley G.R.A. (1983) Natural Rent and the Road to Full Employment. Land S Liberty 90, 58-59

10. Dunkley G.R.A. (1982) The Economic of Rating, South African Treasurer. 55 20-24

11. Cord S.B. (1983) Taxing Land More Than Buildings, The Record in Pennsylvania, The Property Tax and Local Finance, New York: Academy of Political Science.