On the subject of the deadweight costs of taxation

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A reader asked that I explain a little more about the deadweight costs of taxation. So, here, stripped own to the simple essentials necessarily used when talking to politicians, is the evidence I gave to the Treasury Committee:

Chair: Tim, in terms of what the Chancellor might do, the Chancellor has
said that there is not now and never will be a time for a wealth tax. Is
that a statement that you would support and, if so, why?

Tim Worstall: It is not so much me being against a wealth tax. It is the
assembled mass of taxation economists. Wealth taxes are contraindicated
in pretty much all academic discussion of taxation. We do not have that
many Nobel laureates in economics from the UK, but Sir James Mirrlees
gained his Nobel for the study of tax systems. Optimal tax systems was
his area. He says that we should not tax wealth; it is a bad thing to tax.
We should tax land values. We can tax consumption, incomes and capital
incomes, but capital itself, wealth, is just not the right thing to be taxing.
Therefore, I would say, no, let us not tax wealth.

Q282 Chair: Even if a lot of economists say that, that is fine, but what is the
reason for it not being the right thing to do?

Tim Worstall: The major reason is something called deadweight costs.
Whenever you tax something, you lose some economic activity as a
result of having taxed it. This is why we tax smoking, so that people do
less of it. This is why we tax congestion in London, so that people do less
of it. This is true of any tax and every tax. The mere act of taxation
means that you stop some economic activity happening. It is entirely true
that the revenue you have raised may then be used to do something
lovely and useful, but the tax itself stops something happening. That is
called a deadweight cost.

We also know that there are a range of deadweight costs. Different taxes
have different deadweight costs, which means that if you tax in this way
then we lose more economic activity for the revenue that we raise than if
we taxed in this other way. The lowest deadweight costs are land value
taxation, so great, we should have land value taxation — Henry George
and all that. Then consumption, then income, then capital income, then
corporations, then wealth and then, right at the top, is the complete
lunacy of something like the financial transactions tax, because that is
transactions taxation. We have higher deadweight costs and we lose
more from the rest of society by raising money through taxing wealth;
therefore, we do not do it.

Q283 Chair: That is very clear.

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Bloke on M4
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Bloke on M4

I remember reading that the London people were disappointed that they didn’t make as much money as they hoped out of congestion charging, and the reason was that it modified behaviour.

I mean, how is this not self-evident? Raise the cost of X past the cost of Y and people will buy more Y. Ice cream men without a GCSE between them know this.

Michael van der Riet
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Michael van der Riet

If it stops moving, subsidise it.

James Prostate
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James Prostate

Great to see this. The deadweight costs of taxation don’t get enough attention. People seem to talk as if they don’t understand modification to behaviour, except they know well the impact of tax on smoking.

Spike
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Spike

In short, it’s most likely with wealth taxes that the cost will exceed the benefit. No one should want to live in a country with reduced wealth, no matter how much of what’s left ends up in my pocket.

Will the lesson hit home? Over here, every increase in the cigarette tax is hailed both for what we can do with all that loot and for the healthy behavioral change; that is, that it will reduce smoking and that it won’t.

John B
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John B

All taxation is a land tax… or rent if you prefer.

Government is a land monopolist and taxes everyone on its land according to the productive value of the land it owns.

Government is the descendent of the Lord/Baron who had acquired large areas of land, usually by conquest, and who then charged everyone on it rent, and skimmed off taxes on productive activity.

It is in essence an extortion and protection racket, not unlike the Mafia – good to widows, orphans and the poor too.

Gomorrah
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Gomorrah

Ok anarchist

Spike
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Spike

Well, everyone pays a land tax, because everyone wants a place to sleep; you either own and pay it or rent and pay your landlord’s. (Unless you sleep rough, in which case you give up a lot, and this case is not as numerous as often claimed.)

But all taxation doesn’t have to be a land tax; the machinations about how to get some of Google’s loot are attempts to tax activity that has nothing to do with land, apart from the fact that servers need to reside somewhere, not necessarily on land of the country doing the taxing.

John B
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John B

I wasn’t clear. It’s a land tax, because what ever it’s name, you are liable only if you are on the land (a Country = land)… and from the moment of birth onto the land.

Spike
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Spike

Very well. The “problem” now is that Google has all that loot, and they’re not on the land, and how do I get some of it?!

john77
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john77

So, if you are a citizen of the USA it is a tax on the whole of the planet …
The other leg has bells on