LVT has the advantage of being a direct tax. One of the arguments against indirect taxes is that they are indiscriminate––they are paid equally by the rich and poor alike and are therefore unfair. However they are popular with governments, as they allow the people to believe that they are not really being taxed, they are simply paying higher prices.
This phenomenon was noted by Adam Smith, who, in discussing taxes on commodities, commented that ‘the consumer, who finally pays them, soon comes to confound them with the price of the commodities, and almost forgets that he pays any tax.’ 1 Indirect taxes also seem to be preferred by taxpayers, for the reason that they are impersonal and clearly paid by everyone equally, no doubt appealing to a sense of fairness, regardless of the fact that the poor pay the same as the rich. Also, indirect taxes are convenient for governments as they are more flexible, being easily adjustable to meet unexpected events without constant reference to electoral promises, and so they are undeniably useful, but for the reasons mentioned above it is better if they are kept to a minimum. Direct taxes are therefore I suggest more honest, and I believe, in the long run it is better for governments to be honest with the people.
Direct taxes may be divided into two basic groups:
- Taxes imposed on existing wealth
- Taxes imposed on the wealth-creation process
To encourage wealth creation and general prosperity it is always better to levy taxes on the first group rather than the second. The first are taxes on ownership, the second are taxes on work and trade. Among the first group are property taxes (Council Tax and Business Rates), Capital Gains Tax and Inheritance Tax. Capital Gains Tax is more accurately a tax on the realisation of increased value at the point of a sale. Inheritance Tax is a tax on the realisation of value at the time of a transfer of wealth, but they are both taxes on existing wealth. None of these taxes are impediments to wealth creation.
Among the second group are Earned Income Tax* and Employee’s National Health Contributions, which are taxes on work. Also included are VAT, Corporation Tax and Stamp Duty, which are taxes on trade. These taxes act as discouragements to wealth creation. LVT would fall into the first group as a tax on unearned wealth, actual or potential, due to the simple ownership of land––one of the essential elements of production. This would include vacant land being held out of use for speculative purposes. Although land is not in itself wealth (see Part 3, item 17, Definitions) it is one of the two elements that are necessary for (physical) wealth creation, the other being labour. The ownership of either element implies the ownership of the means to wealth creation.
* Unearned income (on interest, for example) should be taxed separately.
(1) Adam Smith, The Wealth of Nations, Book 5, chapter 2, pp 492-3