by T. R. Reid
Whatever changes we eventually make, almost every observer agrees that the current corporate income tax is not working. The corporate income tax, once a key source of funding for the U.S. government, has become just another minor revenue source. There are already many of those.
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THE SINGLE TAX, THE FAT TAX, THE TINY TAX, THE CARBON TAX—AND NO TAX AT ALL
Thomas Piketty’s surprising bestseller, Capital in the Twenty-First Century, sold nearly a million copies in the year after its publication, a stunning development for a heavyweight economics tome. But Piketty is a piker compared with an earlier author who wrote a similarly hefty volume on the same subject. The newspaperman Henry George’s economic magnum opus, Progress and Poverty, first published in 1879, sold more than three million copies in the late nineteenth and early twentieth centuries. It was translated into two dozen languages (there were three separate editions in German). The book made its previously unknown author one of the three most famous men in the United States (after Mark Twain and Thomas Edison); it spawned a national political movement (Georgism) that claims dedicated followers to this day. Literary titans including Leo Tolstoy, Arnold Toynbee, and George Bernard Shaw called George a crucial influence (“one of the greatest men of the 19th century,” Tolstoy said). Dr. Sun Yat-sen, the leader of the rebellion that threw out China’s last ruling dynasty, embraced Georgian tax policy for his (short-lived) new government. Franklin Delano Roosevelt and Martin Luther King Jr. cited Georgian principles in major speeches. To further their cause, George’s followers in the early twentieth century created a board game designed to denounce the landlord class; this offshoot of Georgism lives on today as one of the world’s most popular parlor pastimes. It’s called Monopoly.
George’s book became a surprise bestseller for essentially the same reasons that Thomas Piketty’s did. Just as Piketty’s book followed the Great Recession of 2008–9, Progress and Poverty came out in the wake of the national depression of 1873–77, a time when millions of working-class Americans felt they had been handed a raw deal by the economic and political establishment. Both books dealt directly with the gnawing problem of inequality; both came at a time when Americans were increasingly worried about the wealth gap and its impact on prosperity and democracy.
It is stunning to see how closely George’s discussion of inequality in America tracks what is being said in the same country 140 years later. Although Henry George had a more florid style—“Amid the greatest accumulations of wealth,” he wrote, “men die of starvation, and puny infants suckle dry breasts”—his book is studded with lines that would sound right at home in a 2016 campaign speech by Bernie Sanders.
So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury and make sharper the contrast between the House of Have and the House of Want, progress is not real and cannot be permanent.
Some get an infinitely better and easier living, but others find it hard to get a living at all.
It is true that wealth has been greatly increased, and that the average of comfort, leisure, and refinement has been raised; but these gains are not general. . . . The tendency of what we call material progress . . . is still further to depress the condition of the lowest class.
It is true that disappointment has followed disappointment, and that discovery upon discovery, and invention after invention, have neither lessened the toil nor brought plenty to the poor.1
In another striking parallel with Piketty, Henry George came up with the same proposed tool to deal with the problem of inequality: taxes. Piketty calls for personal income tax rates as high as 80% and for an international wealth tax, like the one that’s used in France, to extract even more from the richest taxpayers. George, in contrast, came up with a distinctive approach to taxation—indeed, an idea so radical it had not been tried before. This new system he called the Land Value Tax, or simply the Single Tax.
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FROM THE ECONOMISTS, George took the basic principle that when you tax something, you generally get less of it. Therefore, a tax on labor—such as an income tax or a payroll tax deduction for Social Security—would lead people to work less and reduce overall productivity. A tax on commerce—such as a sales tax or a corporate profits tax—would diminish business activity and innovation. A tax on interest or dividends would discourage saving and investment. The only thing there wouldn’t be less of if it were taxed, he concluded, is land. The quantity of land in any state or nation is fixed. It’s not going away, no matter how steep the tax on landownership might be.
From the Bible, George drew the conviction that private ownership of land was contrary to God’s word. (People can find almost anything in Holy Scripture, of course.) After all, it says right there in Psalm 115 that “the heavens are the Lord’s, but the earth hath he given to the children of men.” So, to Henry George, private landownership is sinful. Even worse, it is the source of the basic problem of economic inequality. When a small number of rich people own massive swaths of land—and the profit from rents and resources earned from their land—the privileged elite will consistently grow richer, while the masses struggle to get by. “Virtually all economic problems,” George wrote, “arise from the fact that the land on which and from which All must live is made exclusive property of Some.”
Logically, this might have led to a system that seized the land belonging to the Some and dispersed it equally to All. While Henry George was a radical, though, he was not so radical as to call for confiscation of private property. In his system, the rich could keep their land, but they were to be taxed to pay for this privilege. “The land belongs equally to all, and land values . . . should be shared among all.” George proposed that governments impose a heavy tax on the value of land. In fact, this Land Value Tax was to be so heavy that the revenues would be enough to replace the income from all other forms of taxation. All governments would need only one form of tax. And because this Single Tax would be paid almost entirely by the landowning elites, working people would be free to spend and save their earnings without the need to fund government through other forms of taxation. The rich would pay more, the working class would pay less, and over time inequality of wealth would sharply diminish.
Could it have worked then? Could it work now? Even with a property tax regime at exorbitant rates, it is hard to see how a single tax on land could bring in enough money to finance every level of government. But in George’s day, government—and thus the funding needed to pay for it—was vastly smaller than what we know today. When Progress and Poverty was published, in 1879, there was no Social Security, no Medicaid, no NASA, no Department of Transportation or Energy or Health and Human Services. Some economic historians argue that the Georgian Single Tax might have been adequate to maintain the relatively minimal governmental establishment of the 1880s.
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THE SINGLE TAX WAS enormously popular in George’s day, prompting Georgist movements to spring up around the world, and it continues to have prominent backers, both left and right. “In my opinion,” declared the iconic conservative economist Milton Friedman, “the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago.” And yet Henry George’s “least bad tax” was never fully adopted anywhere. Some countries, though, have placed a heavy reliance on the land tax. Australia adopted unusually high property tax rates and has retained them to this day. In the United States, property taxes account for 17% of all tax revenue, and they are the main source of income for most cities, counties, and school districts. In most nations, though, the property tax remains a fairly small share of overall government revenues—about 5% in the richest countries and even less in poorer nations where land has less value, according to the International Monetary Fund. Tax authorities like the property tax, because it is hard to evade. You can move your family and your bank accounts to some low-tax haven. But you can’t move your fa
rm, or your beachfront hotel, or your twenty-eight-bedroom Palm Springs mansion across the border. Because a property tax imposes the heaviest burden on those with the biggest properties—that is, on the rich—it is also widely seen as a useful tool for fighting inequality. Accordingly, after the Great Recession of 2008–9, many countries raised their property taxes to make up for the decline in revenues from personal and corporate income taxes. Ireland reenacted a property tax that it had ended during the boom years of the 1990s. Some nations, such as Denmark, have enacted property taxes on a national basis; usually, though, the property tax is a local levy, used to fund schools, streets, and parks, and it is generally a minor aspect of a nation’s overall tax structure. No country has ever been able to fund its governments with only the Single Tax on the value of land that Henry George envisioned.
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OF COURSE, TAXATION IS an effective way for government to discourage people from doing things that are harmful to themselves or to society at large. As Henry George pointed out, property taxes don’t reduce the amount of land; other than a land tax, however, taxing something leads to less of it. The classic success story here is the tobacco tax; heavy taxes on a pack of cigarettes, together with advertising restrictions and public education campaigns, have sharply reduced the rate of smoking in almost every nation. Thus encouraged, in the last few years many governments have turned their attention to reducing consumption of another popular product that is broadly considered harmful. Sugar has become the new tobacco.
Governments are popping the lid on a new type of tax designed to reduce drinking soda pop. One person knocking back one can of Red Bull is hardly a problem. But with billions of people consuming billions of cold cans of Coke and Pepsi every day, all those sugared sodas have led the World Health Organization to declare a global epidemic of obesity. First in the world’s richest countries, and now in the poorer (“developing”) nations as well, obesity and its derivative health problems, such as diabetes and heart disease, have become major national concerns. The sugar in drinks is also a major contributor to dental problems, particularly among children.
One straightforward approach to this growing concern would be to prohibit the sale of soda pop. It’s a solution, though, that reeks of the nanny state and is proven not to work. One U.S. city famously tried prohibition, when Mayor Michael Bloomberg pushed through a regulation banning the sale of soft drinks larger than sixteen ounces anywhere in New York City. This effort ended in total failure; indeed, it was ruled invalid by the courts almost immediately on technical grounds. There were several problems with the Bloomberg approach. The regulation was poorly designed (for some reason, the sixty-four-ounce Big Gulp at 7-Eleven was exempt from the rule), it was imposed by a powerful mayor with little public input, and it was highly unpopular from the start. But the central issue was that Mayor Bloomberg used the wrong policy recipe to cut sugar consumption. Instead of outright prohibition, he could have achieved the same goal, without Big Brother–style dictates, through taxation.
That’s what Mexico did. Our southern neighbor, a developing economy with a population of about 128 million, ranks roughly even with the United States for the dubious honor of being the world’s fattest country. Year after year, Mexico and the United States report the world’s highest rates of obesity. By several measures, in fact, Mexico is worse off on the body weight scale. About 70% of Mexican adults are designated overweight, and more than 12% of the population has diabetes—both alarming statistics significantly higher than the U.S. rates.
A major reason is sugared soda pop. A study by the American Heart Association found that Mexico had the world’s highest rate of deaths due to diseases causes by sugared drinks (the public health experts call them SSBs, or sugar-sweetened beverages).2 “We Mexicans are among the most avid consumers of soft drinks,” notes the novelist David Toscana. “We swig a half-liter per person every day—thanks in part to the multinational beverage companies’ distribution, advertising, and pricing strategies, but also because soft drinks, while not exactly nutritious, are at least (usually) free of germs. In Mexico, it is never easy to find water that is safe for drinking, and this is true in both the city and the countryside.”3
To deal with both problems at once—the obesity epidemic and the lack of clean drinking water—Mexico in 2014 imposed a national tax on all drinks with added sugar or other high-calorie sweeteners. To make the idea palatable, its backers promised from the start to use much of the revenue to purify public water systems; supporters promised fountains bubbling with clean drinking water in the courtyard of every public school. Still, the legislation to create this new tax provoked a massive lobbying battle. Coca-Cola, Pepsi, and other soda sellers spent hundreds of millions of pesos fighting the tax; their money was countered, in part, by none other than Michael Bloomberg and his anti-obesity organization. Several TV networks refused to run Bloomberg’s ads, so as not to offend the cola companies that advertise heavily on their air. But when the pro-tax ads did appear, they were potent. The most famous commercial, which almost all Mexicans still remember, showed a young girl sitting at a table with twelve spoonfuls of sugar in front of her. “Would anybody eat twelve spoonfuls of sugar?” the announcer asks, in incredulous tones. Then, as the girl casually pops open a can of cola, the announcer drops the bombshell: “We consume that much sugar every time we drink a soda.” The law eventually passed, partly because of the ad campaign and partly because even the most conservative members of the federal Congreso saw the need for a dedicated revenue stream to improve the nation’s drinking water.
Mexico’s sugar tax makes a bottle of regular Coke about 15% more expensive than the sugarless version. To make this “fat tax” comprehensive, the law also imposed a new tax on junk food like chips, cheese curls, French fries, and candy bars—anything that had more than 275 calories per hundred grams (about three ounces).
Several studies carried out in the first two years after the “fat taxes” took effect suggested that they were having a significant, and healthy, impact. The giant Mexican Coca-Cola bottler, FEMSA, reported a sharp drop in sales of sugared products after the tax took effect. A nationwide household survey showed that consumption of sugared drinks fell by 6% in the first year of the tax—after rising, year after year, for decades before that. Sales of bottled water (sugar-free and thus tax-free) rose dramatically in the first two years of the tax; even the big soda pop makers put far more marketing oomph into their sugar-free offerings. And federal revenues from the tax hit $1 billion in the first year. In this chart, the two lines cross at the beginning of 2014, just as the soda pop tax took effect.
Source: Instituto Nacional de Estadistica y Geografia
Visit bit.ly/2mfsd9a for a larger version of this graph.
Mexico’s success prompted other countries to start taxing sugared drinks; Chile, Barbados, Dominica—all nations with untrustworthy public water systems—took up the idea in 2015; a year later, the idea spread to Europe. In presenting his budget for fiscal year 2016, Great Britain’s chancellor of the exchequer, George Osborne, apologized to Parliament for not acting sooner. “We knew there was a problem with sugared drinks,” the chancellor said. “We knew it caused disease. But we ducked the difficult decisions and we did nothing.” But no longer: Britain passed a soda pop tax, to take effect in 2018, with the rate of tax rising depending on how much sugar the drink contains. Under the British formula, regular Coke, Pepsi, Red Bull, and such will incur the highest tax; less sugared recipes like Schweppes lemonade and Sprite will be taxed somewhat less. In the United States, there are diligent advocates of a fizzy-drink tax, but their efforts have fallen flat. Sugar-based taxes have been proposed in some thirty American cities; the soft drink industry has successfully fought them off almost everywhere. The exception was (wouldn’t you know it?) Berkeley, California, a green, liberal bastion that imposed a penny-per-ounce tax on sugared drinks. This raised prices by $0.12 per can, or $0.68 per two-liter bottle. (The probl
em with a tax in one city, though, is that consumers eventually figure out they can go down the street to the next town and save $2.88 per case.) In the summer of 2016, the city of Philadelphia passed a soda pop tax but applied it to diet as well as sugared beverages; so Philadelphia’s tax should raise revenue but may have no impact on the problem of obesity. In the 2016 election, a few more cities—including San Francisco and Oakland, California, and Boulder, Colorado—approved sugared-drink taxes aimed squarely at obesity.
Despite all the lobbying efforts of the soda companies, this looks like an idea that can’t be corked up for long. The sugar tax, and the more extensive fat taxes, are likely to spread broadly in the next few years.
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GOVERNMENTS AROUND THE WORLD have shown increasing interest in recent years in another form of FAT tax. This one is the “financial activities tax,” although it has many other names. It’s also known as an FTT, standing for “financial transactions tax” or “financial trading tax.” This FAT tax is also widely called the “tiny tax,” which seems unlikely but actually makes sense.
The financial trading tax that is about to take effect in the European Union has been dubbed the “Robin Hood tax,” because it takes mainly from the rich. In the academic literature, economists generally refer to a tax on financial transactions as a “Tobin tax,” in honor of the American economist James Tobin, a professor at Yale and a Nobel laureate in economics who began preaching the virtues of this form of taxation in the 1960s. When Bernie Sanders went around the country calling for taxes on financial trading during the 2016 presidential campaign—he said the revenue from this tax would finance his plan for free tuition at all public universities—he referred to his version of the FAT tax as the “Wall Street speculation tax.”
The most basic form of a financial transactions tax is a sales tax applied to the purchase of financial instruments—stocks, bonds, options, foreign currencies, loans, insurance policies, and the more complicated securities such as derivatives that Wall Street traders keep dreaming up. This form of tax has been around a long time; Britain’s stamp duty, which imposes a tax of one-half of 1% on all stock trades, has been in continuous effect since 1694. The United States had a tiny tax on stock market transactions from 1914 to 1966, until the growing political clout of the financial industry successfully pressured Congress to repeal the tax, which Wall Street had always hated. (But the Securities and Exchange Commission still imposes a fee—essentially, it’s a tax—on stock trading, known as the Section 31 Fee, to finance its regulation of security markets.)
