Guest Blog by Fred Harrison, Land Research Trust.

Austerity has caused deep anguish for people across Europe. They did not cause the depression that followed the financial crisis of 2008, but they are paying the price. Scotland’s government has announced its determination to cushion the austerity effect by spending more money on low-income people. But where is the money to come from?

Governments from Ireland to Greece think that, by selectively raising some taxes, they can increase welfare spending. In reality, that strategy compounds the trauma. Tax increases, whether on high-end properties or top incomes, inflict yet more costs on everyone. Those governments claim to be democratic. And yet, when it comes to taxation, they ignore the principles of transparency and accountability. They refuse to disclose the scale of the damage they inflict on people at large.

That damage can be audited. Taxes on wages, and on the profits of enterprises, destroy jobs and reduce national income. Governments try to disguise these effects by spreading the burden widely, hoping that people do not notice. But people are not stupid, which is why distortions have measurable effects on the economy.

In the US, for example, Prof. Martin Feldstein at Harvard estimated what would happen if marginal taxes were raised by 10%. Government would receive extra revenue of $21 billion, but the loss to society as a whole would amount to $43 billion. A bad trade-off! (1)

But there is an anti-austerity strategy that can fund itself. That is the outcome from switching to raising the same amount of revenue with a different composition of revenue-raisers. By raising the revenue from pure economic rent, which is the value of the services provided by nature and by society.

The net gain to national income stem from the “better than neutral” effect, in the phrase of Nicolaus Tideman, an American professor of economics. By reducing revenue from taxes on wages and/or profits, the damage done by these taxes is reduced. And by replacing that revenue with income from rent, no distortions are imposed on the economy.

Tideman and his colleagues calculated this effect for the US. They wanted to know what would happen if government raised $1 from land taxes instead of the same dollar from existing taxes on wages and business profits. The  extra gains from that switch ranged from about $1.25 (substituting land taxes for Social Security taxes) to about $2.25 (substituting land taxes for property taxes levied on the value of buildings). (2)

So it turns out that we can have our cake and eat it! We can run a revenue-neutral budget while expanding the aggregate income available to be shared between the public and private sectors. In Scotland, that would result in more jobs while providing government with extra resources to help the vulnerable sectors of society.

How to construct such a strategy will be explored at a conference in Glasgow next Wednesday, which is open to the public. Evidence from two professors of economics – one from Strathclyde, the other from California – will reveal the enormous gains that the people of Scotland would enjoy if Holyrood embarked on a real anti-austerity programme. In fact, it’s the only anti-austerity plan in town.

 NOTES

(1) Martin Feldstein (1995), “The effects of Marginal tax Rates on Taxable Income: a panel study of the 1986 Tax Reform Act,” Journal of Political Economy 103 (3).

(2) Nicolaus Tideman et al (2002), “The Avoidable Excess Burden of Broad-Based U.S. Taxes,” Public Finance Review 30 (5).

Guest Blog by Fred Harrison, Land Research Trust.

Scotland’s First Minister has created an awkward rod for her political back. Her attack on the Coalition Government’s “austerity” policies renders the SNP vulnerable to its enemies in Westminster. Speaking in London on Wednesday (video above, text here), Nicola Sturgeon trashed the UK Government’s policies on three counts. She condemned the economic policies pursued by David Cameron for failing to deliver long-term growth, increased productivity and fairness. Her own government in Holyrood will now be judged on those tests.

Fortunately for the SNP, the new powers on taxation that are being devolved to Scotland will enable her to undertake reforms that can shift Scotland in the direction of an alternative economic path. But this will require a major change to the way Scotland funds its public services. The taxes employed by the London government certainly fail the first test: long-term growth. Tax policies are rigged against people who earn their incomes by working and saving. The revenue system is biased to favour land as an investment asset. And the pages of history leave us in no doubt that those fiscal policies drive the boom/bust business cycle that terminates long-term growth.

The productivity test is an awkward one. How inefficient is the current tax regime? I will explore that issue at a public conference in Glasgow on 25th February. But there is no doubt that performance of the Scottish economy could be dramatically enhanced if the Sturgeon government decides to rebalance the tax regime. It will need to shift the emphasis away from Income Tax and onto a re-based property tax.

There is no ambiguity about the third test: fairness. At present, the tax regime discriminates against families that rent their homes, and favours the owners of residential property. So the SNP’s commitment to land reform will challenge Ms Sturgeon to find a way of shifting the structure of taxation so that people are treated as equals.

In her London speech, Ms Sturgeon pointed out that the austerity programme was being forcefully opposed throughout Europe. But she is now in a unique position. Unlike the newly elected Greek government, the SNP administration does not have to secure the permission of others to change course. It has the political mandate to launch the reforms that would shift Scotland onto the high productivity growth path. Those reforms would be fair to everyone willing to work by adding to the sum total of Scotland’s wealth and welfare.

Ironically, the SNP government’s enemies within Scotland will not invoke Nicola’s three tests. Already, the opponents of land reform are mobilising their ammunition to try and defend the status quo. The last thing they want is a shift in the direction of efficiency and fairness! The tax regime, after all, was created by those who sought privileged treatment, and to hell with the unfair impact on others. So it will be up to Nicola’s friends to hold her to account, by invoking the three tests to measure the performance of the SNP government.

“I’m deeply dismayed that this issue has been re-opened again. I can understand that there are always going to be some people who object to large-scale landownership but we felt that that was dealt with at the time of the establishment of the Scottish Parliament.

What is being done challenges the nature of the society we live in and property rights. It also, in practical terms creates deep uncertainty in planning for the future and I think that’s going to be the disadvantage of the rural economy……..”