Income Tax

I never learned how to tune a harp, or play upon a lute; but I know how to raise a small and inconsiderable city to glory and greatness.

Themistocles (524 – 459 BC)

Many years ago, before the mine, before independence, before the war, my father took me with my sister and brothers to Bougainville.

So far as I know my father was the first and only orthopaedic surgeon ever to practice surgery in Bougainville as he went around the mission hospitals fixing club feet and other injuries. I recall even visiting the wreckage of Admiral Yamamoto’s aeroplane which had been shot down by the Americans some 20 years before.

Those two visits left me with an enduring affection for the people of the South Pacific and their islands.

It was also my first real lesson about Australian bureaucracy. Sister Mary Leo, the nun and mission doctor, who had invited my father to work in Bougainville had wanted to import a free US donation of medicine for yaws. The Australian customs officers in Sohano, then the administrative capital, banned her from importing the medicine. When she protested they said “We have just sent off a report to the UN Decolonization Committee saying yaws has been eradicated in Bougainville. So we can’t allow you to import it.” Eventually a compromise was reached — “The disease wasn’t yaws but looked like yaws and needed the same medicines”!

I was therefore pleased to be invited many years later, in July 2002, as a Visiting Fellow at the Australia National University’s Centre for Development Studies to give a talk on Vanuatu’s options for the future and what it might do in the way of tax policy. That talk was later published in the Pacific Economic Bulletin as ‘Harmful’ tax competition and the future of offshore financial centres, such as Vanuatu.

The simple economic message is that no country has to copy any other country’s tax system and that you can be far better off thinking for yourself.

So I was recently surprised to discover that Australia’s colonial ambitions still run in the South Pacific and Australian “experts” are designing an income tax for Vanuatu by way of “technical assistance”.

Unfortunately, having studied taxation for many years and having recently published a book on Taxation – The Lost History on the theory of land value taxation, I have come to the sad conclusion that most tax “experts” make a complete hash of tax policy.

Yet taxation is the key to the economic rise, decline or stagnation of every nation and this has been recognized for generations by the profoundest of economic thinkers.

As Adam Smith realized back in 1776, in the final analysis, there are only three factors of production land, labour and capital. There are therefore only three types of income you can tax – the wages of labour, the profits of capital or the rent of land. Of those three things, there is only one that cannot strike for higher wages, slack off, stop breeding, rust out or get hidden.

Land as Adam Smith recognised is the great original fund available to a sovereign. Land values can be taxed because land can always be identified and valued.

In fact, modern economic theory tells us that the optimal rate of taxation of labour and capital is precisely zero — not 10%, not 17%, not 35% and certainly not 60%.

By contrast, a tax on land values does not distort prices or production, it cannot be shifted and land values can be taxed to the full without any distorting effects. In fact, there are some commentators who are now realising the failure to tax land values, as Western central banks drive interest rates to zero, has created a massive speculative bubble which will drag down financial systems.

Vanuatu does not need an income tax, no more than does any other country. Vanuatu, like other countries, does need government revenue to provide public services. However, that revenue need not be torn from the sweat and savings of the people; it can come from the government demanding payment for use of alienated or leased land and enforcing that rent charge via a land value tax.

As Adam Smith realised, any government is like the landlord of a great estate who needs to collect rent from his tenants to provide the infrastructure and services they require. Where the government collects land rents via land value taxation and applies them to providing services which are needed, as the English economist Alfred Marshall recognised, the land value tax base can become self-reinforcing and strengthened, rather than diminished by taxation, unlike taxes on labour and capital.

If countries are concerned about international tax avoidance or the rich avoiding tax, all they need to do is tax land values.

In the case of Vanuatu, the relevant land to tax would be alienated or leased land. There is no need to tax communal land which is performing its natural social security function of providing a minimum subsistence. The existence of communal land tenure is actually a hidden financial asset of Pacific Islands because it enables people to survive without government handouts. I recall back in July 2002 an elderly ni-Vanuatu gentleman quite sensibly querying naïve IMF agendas for privatising land and asking what Vanuatu would do when people were driven off their land and into urban slums as in places like Lima in Peru – a very sensible question indeed! Taxing the land values of alienated land ensures that common land remains devoted to common purposes and that Vanuatu does not have to repeat the sorrows of English history where the common people were driven off their lands and then, having been reduced to beggars and begging for work, were taxed for the privilege — at first via excises on commodities and later via mass income tax as well.

One thing Vanuatu need not become if it does not wish to – it need not become a tax slave for other countries.

The introduction of an income tax in Vanuatu has, I suspect, a lot more to do with the revenue agendas of Australia and other OECD countries than it has to do with Vanuatu’s needs or capacity or helping Vanuatu.

If Vanuatu is to be pressured into imposing an income tax for the purpose of collecting information for foreign countries as a tax vassal, the least Vanuatu could do would be to insist that its people receive benefits from the foreign taxes which they are assisting in collecting. For example, Vanuatu could insist that its people have access to work visas in Australia and access to Australian social security and Medicare benefits – and likewise for any other country demanding Vanuatu should help them collect taxes on income arising in Vanuatu. If you insist I help you collect taxes on income arising in my territory – even though it’s not part of your country — why can’t I insist that you can extend your social security and Medicare spending to my country as well? That would be a minimum price for signing any treaties on exchange of tax information or introducing income tax to facilitate such information collection.

But if Vanuatu wishes to remain truly independent and not be a tax collector for other countries in this new era of disguised neo-colonialism while maintaining its revenues, it needs to look at first principles. Rather than trying to tax income which can flee across borders it should be looking to collect land rates and rents from alienated or leased land. Land is sovereignty; land is the original and permanent fund of every government and only governments which tap into their territorial revenues can truly ensure their independence

Unlike capital or labour, land does not rust, does not wear out, does not retire or grow old, cannot hide itself overseas or via cash and is easily and forever visible. A land value tax is simple to administer compared to other taxes and taxes more effectively than virtually another tax. Non-payment, avoidance or evasion are not possible – the land can be resumed for non-payment of tax. A land value tax is naturally territorial, it requires no tax treaties or information from foreign governments (as if you would get it anyway).

Most importantly, a land value tax does not drive away productive investment while discouraging foreign land speculation. If your tax rate on banking and business profits is zero, people are happy to pay a rent to you to operate in your country. But choose to tax business at 10 or 20% and you instantly condemn yourselves to be uncompetitive with Ireland, Singapore and Hong Kong. What then happens to employment opportunities? If one wants to drive investment and development away, why waste money educating people for jobs that will not be there for them?

Taxing land values and keeping tax rates on wages and profits at or close to zero is the real secret to economic development. It has been their oil revenues (a form of land tax) which have enabled the Gulf States to grow beyond recognition in the last 30 years. It was their land revenues which enabled Hong Kong and Singapore to keep tax rates low and become financial centres and lift their people out of grinding poverty.

Vanuatu has a choice about whether or not to impose an income tax. There is an alternative. Vanuatu and its people are owed a far better explanation of what the choice involves over the next 30 or 50 years than they are likely to receive from foreign officials from foreign governments.

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