Wednesday, July 07, 2010

Austerity is not the only option: tax land

Michael Hudson has a useful article in the Financial Times, looking at Eastern Europe and outlining some alternative policies to those prompted by the recent terror of deficits. Most countries, he says, feel they have only two options: austerity, or currency devaluation.

"Taxes in most post-Soviet eastern European economies, along with countries such as Greece, are regressive. They add to the price of labour and industry while under-taxing property. Latvia is an extreme example: its flat taxes fall almost entirely on employment, meaning workers take home less than half of what employers pay.

The good news is that these high taxes on labour leave open the option of shifting taxes on to other areas, in particular land. Lowering taxes on wages would reduce the cost of employment without squeezing take-home pay and living standards. Raising taxes on property, meanwhile, would leave less value to be capitalised into bank loans, thus guarding against future indebtedness."

Well, indeed. Low taxes on land are an important part of the reason for property bubbles, because untaxed land value was paid to banks, which, in turn, lent it out to bid up prices all the more.

This is an issue of tremendous importance for countries around the world. Landed elites will resist such proposals, but these taxes can be extremely efficient and welfare-enhancing measures. We explored it in detail in our latest edition of Tax Justice Focus.


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