Taxation and privacy

Privacy as a Test of Legitimacy
in Revenue-Raising

Gavin R. Putland
Land Values Research Group, Prosper Australia

Presented at the
25th Annual National Republican Convention
Traralgon, Vic., May 21, 2011.*

Chair: Chris Doig.

1.  The proposition

Prosper Australia's “Talking Point” #12  (2nd ed., Feb. 2006) says:

TAXATION VS. PRIVACY

If you own a piece of land, the State government wants to know. Why? Because you expect the government to enforce your exclusive right to occupy or let that land. Moreover, as the total supply of land is fixed, it is a matter of public interest that you are depriving other people of a certain part of that supply. Fair enough.

If you claim a patent on an idea, the Federal government wants to know. Why? Because you expect the government to protect your exclusive right to profit from that idea, and because it is a matter of public interest that other people cannot use that idea without your permission. Fair enough.

But if you bake a loaf of bread and sell it, the Federal government still wants to know. Why? You're not claiming an exclusive right to bake bread. The supply of bread isn't fixed. You're not taking bread from anyone else. So why should the government want to know what you're doing? Because it wants to tax you for it!

And if you hire someone to help you bake the bread, the State and Federal governments want to know. Why? You're not claiming an exclusive right to hire workers. You're not even claiming an exclusive right to hire that worker. So why should two governments want to know what you're doing? Because the State wants to tax you for hiring and the Commonwealth wants to tax the worker for working!

We think this has got out of hand. As long as you're not hurting anyone else, there's no need for Big Brother to know what you sell or whom you hire or whom you work for. To avoid invading your privacy in the name of taxation, governments should tax you only on things they need to know about anyway — things like the land you own and the patents you hold.

Otherwise we say your business is... your business.

So the proposed test of legitimacy — the “privacy test” — is:

For revenue purposes, a government should not need any information that does not need to be disclosed to that government (or published) for other reasons.

2.  The two tests

To form an opinion on whether the privacy test is a fair test, one would need a separate definition of legitimacy, which in my case, and in the case of many participants in this convention, would be a Georgist test, which (to put it politely) would not be universally accepted.

So, to avoid reliance on controversial premises while still catering for a largely Georgist audience, we must reframe the proposition as a question:

What set of taxes and charges would pass the privacy test, and how closely does it resemble the set that would pass the Georgist test?

Problem: Neither test is unambiguous.

• The Georgist test says that revenue devices should tap existing sources of economic rent and not needlessly create new ones. But Georgists disagree among themselves on the precise scope of “economic rent” and how it should be collected.

• Opinion is divided on what information needs to be public, and on the scope of the proper role of government, hence the information needed for that role. (Indeed, even Georgist opinion is divided on these matters. This is not surprising; it simply indicates that politics as we know it would not end if the whole world turned Georgist, just as it did not end when the whole world turned neoclassical.)

Solution: Let each test be three-way: some revenue measures pass, some fail, and some are debatable. With two tests, we sort revenue measures into nine categories, forming a 3×3 matrix. If the two tests are equivalent, all examples will be on one diagonal of the matrix — passing both tests, or failing both, or being dubious under both. The more examples we find away from that diagonal — especially in the corners that represent passing one test and failing the other — the more the two tests disagree.

3.  Classification of revenue devices

3.1  Those that fail both tests

We begin with personal income tax, of which Adam Smith wrote:

Capitation taxes, if it is attempted to proportion them to the fortune or revenue of each contributor, become altogether arbitrary. The state of a man's fortune varies from day to day, and without an inquisition more intolerable than any tax, and renewed at least once every year, can only be guessed at. [Wealth of Nations, V.2.139; emphasis added.]

In all “advanced democratic” countries, we have chosen the “inquisition more intolerable than any tax”. Most of what that inquisition discovers is not economic rent. Yet, in Australia, personal income tax accounts for 38% of all revenue.

Neither does corporate income tax fall entirely on economic rent. For an unlisted company, it requires information that would not otherwise need to be disclosed. For a listed company, the tax could be based on information that the company needs to disclose to the market. This method would pass the privacy test. It would also enhance compliance, because the desire to minimize tax would conflict with the desire to maximize the share price. But this method is not used. In Australia, corporate income tax accounts for 18% of revenue.

Similarly useless information is needed for

• GST (14% of revenue in Australia),
• sales taxes on luxury goods (<0.5%),
• payroll tax (5%),
• tariffs (2%), and
• insurance taxes (1%).

None of those is aimed at economic rent. Concerning tariffs, one might argue that the Commonwealth needs to collect information on the balance of payments, including imports. But tariffs, being selective, do not serve that purpose.

Taxi licences, known as plates, make an interesting sideshow. Because they are limited in number, they are sources of economic rent, which would make them legitimate revenue sources under the Georgist test — except that the limit on their number is an unjustified restraint of trade. The privacy implications of licensing would be accepted on safety grounds, except that plate owners are not necessarily the cab drivers. So the system fails both tests.

Round-the-clock road tolls, is so far as they apply at off-peak times, constitute unnecessary surveillance, and fail the Georgist test in a practical sense, namely that one can get more revenue with less intervention by capturing uplifts in values of land serviced by the road. (Peak-time congestion charges are different, as we shall see.)

Perhaps 2% of revenue comes from local “rates” as applied to buildings, which are not sources of economic rent, and which governments do not otherwise need to know about.

Already we have accounted for 80% all revenue raised by all levels of government.

That total includes capital gains tax (CGT) and the petroleum resource-rent tax (PRRT), which many Georgists support or at least tolerate (as will be explained), and which account for roughly 3% of revenue. Taking those out, we conclude that in Australia, 77% of all public revenue comes from taxes that fail both the privacy test and the Georgist test.

3.2  Those that pass both tests

Land, electromagnetic spectrum, mooring space, airport slots, earth-orbital slots, and rights of way are in limited supply: they cannot be produced at will by those who require access to them. Therefore access needs to be rationed somehow (which is problematic in the case of orbital slots). The least intrusive form of rationing (the form that passes the privacy test) will cause access to have observable market rents (economic rents), which can be tapped for public revenue.

Unfortunately only about 4% of revenue in Australia comes from these sources.

In the case of land mortgaged to a lender, Henry George himself believed that the lender should be treated as the owner to the extent of the debt [See “Land-Backed Debt as a Revenue Base”]. If George's authority is accepted, land-backed debt is part of the land-value base under the Georgist test; in other words, the land-value base is equity in land.

3.3  Empty categories

Examples of revenue devices that

• pass the Georgist test and fail the privacy test, or
• pass the Georgist test and are dubious under the privacy test, or
• fail the Georgist test and are dubious under the privacy test

are elusive.

The categories considered so far do not reveal any disagreement between the tests.

3.4  Stark disagreement on stamp duties

Let us hear Adam Smith again:

The transference of all sorts of property from the dead to the living, and that of immovable property, of lands and houses, from the living to the living, are transactions which are in their nature either public and notorious, or such as cannot be long concealed. Such transactions, therefore, may be taxed directly. The transference of stock, or movable property, from the living to the living, by the lending of money, is frequently a secret transaction, and may always be made so. It cannot easily, therefore, be taxed directly. It has been taxed indirectly in two different ways; first, by requiring that the deed containing the obligation to repay should be written upon paper or parchment which had paid a certain stamp-duty, otherwise not to be valid; secondly, by requiring, under the like penalty of invalidity, that it should be recorded either in a public or secret register, and by imposing certain duties upon such registration...

[Many examples follow.]

Those modes of taxation, by stamp-duties and by duties upon registration, are of very modern invention. In the course of little more than a century, however, stamp-duties have, in Europe, become almost universal, and duties upon registration extremely common. There is no art which one government sooner learns of another than that of draining money from the pockets of the people.

[Wealth of Nations, V.2.114,124; emphasis added.]

If a purchase must be registered on pain of invalidity, then the buyer has no interest in proceeding with it unless it is registered, and will therefore consider any associated “duty” as part of the cost of acquisition.

Sometimes the need for registration is reasonable. For example, the State may have established a registry of property titles to protect buyers against unknown claimants, and a registry of vehicle titles to protect future buyers against past thefts, in which case, if you buy a property or a vehicle, you will gladly provide the State with evidence of your purchase, including (inevitably) the price. And the State will use that information to tax you — because it can!

These taxes are anathema to Georgists, but do not seem to involve any loss of privacy beyond what is necessary to protect buyers against faulty titles.

Indeed, the purest Georgist revenue devices pass the privacy test for a similar reason: if you want the State to enforce your entitlement to use a limited resource, you need to provide the State with evidence of that entitlement.

3.5  The singular case of excises

Having found that customs duties (tariffs) fail the privacy test, let us hear Adam Smith on excises:

When a merchant has imported goods subject to certain duties of customs, when he has paid those duties, and lodged the goods in his warehouse, he is not in most cases liable to any further trouble or vexation from the custom-house officer. It is otherwise with goods subject to duties of excise. The dealers have no respite from the continual visits and examination of the excise officers. [Wealth of Nations, V.2.210; emphasis added.]

In short, excises cause more invasions of privacy because they have more collection points.

Some Georgists defend excises on tobacco, liquor and fossil fuels as compensation for externalities, which allegedly amount to encroachments on the commons. Georgists of more libertarian bent reject that argument, demanding a more objective accounting of the economic rent (if indeed there is any). Not surprisingly, the privacy test supports the “libertarian” faction.

I have no other examples of taxes that clearly fail the privacy test but pass or possibly pass the Georgist test.

3.6  Those that divide Georgists but satisfy privacy

The following list may be interesting to Georgists but boring to everyone else:

• There are few values more visible than the total market value of a listed company, or the above-par component of that value. Each tranche of shares has a known number of shares with a known current price and a known issue price. A tax of so many percent per year (or so many ppm per day) of the above-par component, payable by the company, would require no information that is not already public. To this, a Georgist would say that at least some of the above-par component is probably economic rent, some of which might otherwise be hard to assess, so one could do worse; but one could also perhaps do better.

• A tax on interest-bearing debt, payable by the creditor on pain of non-enforceability, can be defended by the same logic as stamp duties. Debt against land is part of the Georgist base. Concerning other debt, a Georgist might argue that because central banks try to limit the supply of credit, debt is a source of economic rent.

• If certain limited resources are owned by the people through a particular government, that government has a duty to monitor and control the exploitation of those resources. Hence we may excuse the privacy implications of licences or quotas for water, minerals, logging, fishing and hunting. Likewise we might excuse royalties imposed by that government, whether they are based on quantity or value or excess profit. We cannot so easily excuse severance taxes or profit-based resource-rent taxes imposed on the same base by some other level of government, using the taxation power instead of the ownership power, unless the revenue reverts to the appropriate government under some inter-governmental agreement. Georgists agree that rights to exploit limited resources yield economic rent, but some of them get into difficulty when those rights are legally separate from land titles.

• Fees for on-street parking involve no loss of privacy when payment is anonymous. The parking spaces are certainly land, and the ability to extract the fees shows that the land has a rental value. Some Georgists therefore conclude that the user should pay that value, to compensate the community for encroaching on the commons. Others insist that common land ceases to be common as soon as you have to pay for access to it.

• The payment of road congestion charges can hardly be anonymous; but if we accept the need to ration use of the road, we must also accept the loss of privacy. The Georgist arguments on this are similar to those on parking, except that the vehicles are moving land-grabbers instead of stationary land-grabbers.

3.7  Those that are dubious under both tests

On the following imposts, the two tests are indecisive but at least not contradictory:

• Severance and resource-rent taxes have already been mentioned.

• So-called capital gains overwhelmingly represent economic rent, and include uplifts in land values caused by infrastructure funded by government, in which case the responsible government has a legitimate interest in measuring the effect. But Georgists are aware that holding charges on land values also capture capital gains, with less discouragement to transactions and less need for information on the taxpayer's affairs.

• Because vehicles take up land, vehicle registration charges are somewhat analogous to congestion charges, but less well targeted, so that the encroachment on privacy is arguably less excusable.

• On gambling taxes, if people cannot agree on whether gambling should be unrestricted or restricted or banned, then they probably cannot agree on the privacy implications; and while Georgists will agree that a gambling licence is presently a source of economic rent, they will disagree as to whether it should be and, if so, how best to collect the rent.

4.  Summary

Table: Revenue bases classified by privacy test and Georgist test

(If the two tests were equivalent, all examples would be on the diagonal from the top left to the bottom right.)

        |
        | GEORGIST PASS    GEORGIST QUERY       GEORGIST FAIL
--------|-------------------------------------------------------------
PRIVACY | Land value       PLC value            Property purchases 4%*
PASS    | Land mortgages   Other debt           Vehicle purchases
        | Spectrum         Royalties [1]
        | Mooring space    Licences/quotas:
        | Airport slots      water/hydro
        | Orbital slots      minerals
        | Rights of way      logging
        |                    fishing/hunting
        |                  On-street parking
        |                  Road congestion [2]
--------|-------------------------------------------------------------
PRIVACY |                  Resource income [3]
QUERY   |                  Severance [1]
        |                  Capital gains 2%
        |                  Vehicle reg.  2%
        |                  Gambling      2%
--------|-------------------------------------------------------------
PRIVACY |                  Excises       8%     Pers. income      38%
FAIL    |                                       Corp. income [3]  18%
        |                                       Sales
        |                                       Value added (GST) 14%
        |                                       Payroll            5%
        |                                       Imports (tariffs)  2%
        |                                       Insurance          1%
        |                                       Building values    2%?
        |                                       Road use [2]
        |                                       Taxi plates
        |                                       Total             80%
        |                                       Total - CGT/RRT   77%
______________________________________________________________________

* Percentages are of total revenue for all levels of government in Australia in 2009-10 (mostly from ABS 5506.0). Figures for “income” include CGT and PRRT.

[1] In this document, “royalties” (e.g. on minerals) are based on public ownership, whereas “severance” taxes and “resource income” taxes (meaning resource-rent taxes assessed using the income-tax machinery) rely the taxation power.

[2] “Road congestion” charges, applicable at peak times, are distinguished from round-the-clock “road use” charges (tolls).

[3] For listed companies, privacy is redeemable by using only such information as is supplied to the stock market.

5.  What about a carbon price?

A carbon price could be implemented as a mineral royalty, as a licence or quota (for mineral extraction or pollution), as a resource-rent tax or severance tax (for mineral extraction), or as an excise. Thus its classification and placement in the table are implementation-dependent. The options are all in the middle column — dubious under the Georgist test, with various outcomes under the privacy test.

6.  Conclusion

About 77% of public revenue in Australia comes from taxes that fail both the privacy test and the Georgist test. The outcomes of the two tests are highly correlated.

Of the revenue measures considered, all examples that pass a strict Georgist test also pass the privacy test. But a strict Georgist test would also exclude a large group of measures that clearly pass the privacy test and would pass a more permissive Georgist test. The relevance of these observations to the Georgist movement's internal disputes will presumably be the subject of another such dispute.

But clearly, if you are a Georgist, you could do worse than to campaign on privacy; and if you are furious about invasions of privacy in the name of taxation, you could do worse than to become a Georgist.

__________

* This paper is dedicated to the author's father, Frank Donald Putland, who died in February 2011, and whose ashes were interred at Mt Gravatt, Qld, a few hours before the paper was presented.

[Online edition posted May 25, 2011; edited June 1. Copyright claimed by the convention organizers.]