Firms outside London must subsidise City, mayor says

The Mayor of London, Boris Johnson (pictured) who hides his love for bankers and inequality behind a buffoonish, colourful exterior, has been calling for businesses outside London to help pay towards the £11 billion Crossrail ‘super tube’ project. It has worldwide lessons, from a tax perspective.

Crossrail is, to a large degree a project about increasing the profits of London's financial districts at Canary Wharf and the City of London. Among other stakeholders in the Crossrail consortium is the very, very peculiar Corporation of London (or City of London Corporation), which calls the project "essential for London’s competitiveness" and admits that

"The City of London Corporation has agreed to make a direct contribution of £200m to the Crossrail project. In addition, the City Corporation will seek contributions from businesses of £150m, and has guaranteed the first £50m of these contributions."

Now there is often a lot to be said for mass transit projects, especially if they get people out of carbon-belching cars. But it is also essential to understand what other effects they have, such as how they affect wealth distribution in a country. It's interesting, in this context, to hear the words of Professor Michael Hudson in New York, an interesting character who was one of relatively few people issuing specific warnings about the looming economic crisis, ahead of time. Here's an excerpt from something he said in a round-table discussion last year:

"Mass transit in almost every country creates an increase in real estate values along the routes that could actually—the rental increase that’s created by this transportation could actually finance the entire transport system. For instance, in London, when they built the Tube extension to their financial district, they created thirteen billion pounds worth of increased real estate value, and the Tube itself cost only eight billion dollars [sic.]. But they left this thirteen billion of real estate value in the hands of the private landlords.

And note, in this context, what the Corporation of London says:

"the delivery of Crossrail will provide a boost of at least £20 billion to the UK economy . . . it will also help secure London’s position as a world leading financial centre."

Now back to Michael Hudson:

Same thing in Chicago in the United States. There can be a very heavy investment in mass transportation here. This is going to create enormous real estate values. The tax system will leave these in private hands. And I think all of the tax proposals that Mr. Obama has spoken about have to do with income tax, primarily. The rich people prefer not to earn income, because you have to pay taxes on them. They prefer to make capital gains. So the intention of the economic team that Mr. Obama’s brought in is really to create a huge capital gains economy and even more disparity of wealth, while leaving in place the one thing that should have been addressed in the last year, and that’s the enormous debt overhead. Nothing is happening at all on that. He’s adding to debt, not reducing it."

And this is why we should be very, very cautious about projects like Crossrail, and think about their long-term consequences in terms of future tax revenues, and distribution of wealth -- beyond the more obvious effects of concentrating investment and people more strongly still around the City area. And it illustrates another set of reasons why it is essential resist the calls of those like the buffoonish Boris Johnson to get the already heavily deprived rest of the country to subsidise a project that is -- while certainly likely to make lives easier for a significant number of the 350,000-odd workers in the City of London, is more fundamentally and more importantly - though more invisibly - about subsidising the wealthiest sections of society.

That's one reason why land value taxes are an essential and important part of any good tax system. And that's a reason why tax competition - which has eroded capital gains taxes (which is, to generalise, what wealthy people pay) downwards while leaving income taxes (which is what ordinary people pay) -- is so very pernicious. And why we should resist the bleatings of those who constantly call for lower capital gains taxes in order to stop people and businesses fleeing offshore. It has been shown that when their bluff is called, their clamour is exposed as fraud.

Postscript: newly added to our quotations page:

People think that taxation is a terribly mundane subject. But what makes it fascinating is that taxation, in reality, is life. If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness, charity. Everything's in there. That's why it's so hard to get a simplified tax code.
Sheldon Cohen, former IRS Commissioner