American Experience
of Seeking Fairer Taxation

Edward J. Dodson

[A letter printed in The Herald (Scotland), 19 September, 2005]

A colleague of mine living in Scotland asked for my comments on your country's ongoing debate over how government ought to raise revenue. Similar debates are occurring here in the United States, where the "philosophy" of our elected officials over the decades has been to tax every person, every asset and every type of transaction -- so that no-one feels excessively taxed. However, beginning with the Reagan years, there has been a steady attack on the federal income tax as confiscatory. Our elected officials have, in response, lowered the effective rate of taxation on what are called "capital gains" (ie, the sale of shares of stock, of land and of buildings and equipment) and on the highest marginal ranges of income.

Reagan-era "supply-side" economists forecast that lower tax rates would yield greater investment in production of goods and a net gain in revenue for government. This did not occur. The already wealthy took their additional income and invested it the stock market or speculated in the land market. The results should have been predictable: spiralling share prices and land prices, as well as a rapidly rising national debt. The corrections followed: the 1987 stock market correction; the 1988-1993 land market crashes followed by the savings and loan crisis.

The Bush administration, supported by his party in Congress, have ignored the results of their revenue policies at a time of dramatic increases in spending. By the time George Bush leaves office, the federal debt will likely exceed $10 trillion, requiring $500bn in annual taxation just to service this debt.These are the lessons of recent and current history the citizens of Scotland ought to keep in mind as you entertain changes in how your government raises its revenue.

Economic theory supports shifting government's source of revenue to land values as possible. No less an authority than your own Adam Smith recognised that land values are societally-created (ie, the result of aggregate public and private investment, rather than of what individuals do or do not do with land they hold). At the same time, homes, office buildings, manufacturing plants, warehouses, retail stores and other types of property improvements are best left untaxed.As more modern economists have observed, the path to non-inflationary economic growth is best served by taxing as little as possible those behaviours desired, while taxing at a high rate those behaviours a society wants to discourage. A relatively high annual tax on land values discourages the hoarding of land for speculation, encouraging land owners to bring their land into development according to the market-determined "highest and best use". A competitive land market also keeps land prices down, so that businesses enjoy a lower entry cost, which is extremely important in today's global economy.

As for the taxation of income, the one model that combines simplicity and progressivity without being overly confiscatory is what I refer to as the "graduated flat tax". This tax structure would exempt all individual incomes up to some maximum (eg, the national median) from taxation. Then, without any additional exemptions or deduction, a gradually increasing rate of taxation would be applied to higher marginal ranges of income, with a cap of 35-45% on the highest ranges of income. The exact tax rates would be adjusted for every budget period to ensure that government enjoys a balanced budget.These are measures our organisation has championed here in the United States.

As you might expect, powerful vested interests are opposed to any systemic changes that causes them to carry their fair and appropriate share of the burden of how our layers of government raise revenue. But, as in Scotland, those of us who believe in justice continue to press for change.Edward J Dodson, director, School of Co-operative Individualism, Cherry Hill, New Jersey, USA.