Here is a summary of what we were debating here.
Basically, in a sane world, normal earned income, output or profits would not be taxed at all. But there's no harm, and a lot of benefit to taxing rental income or monopoly/cartel income.
Monopolies and cartels
The traditional view of monopolies is simply to say that if one business controls a large share of a particular market, then the government steps in and prevents it increasing in size, opening new outlets or taking over rivals. The usual example is supermarkets in the UK. This is actually a misuse of the word "monopoly" because what the supermarkets have is a cartel with half a dozen big players and a few minnows. So what the Monopolies and Mergers Commission does if it restricts each business to a market share of x%, it ensures that there are 100/x players in the market, and cartel behaviour or collusion is less likely the more players there are.
Some kinds of monopolies/cartels arise solely because of barriers to entry, usually imposed by the government (encouraged by incumbents), which restrict the size of the market, thus enabling incumbents to push up prices without fearing competition. Two examples of this are towns where there is only a limited number of taxi-drivers permits and the mass of regulations imposed on children's nurseries and child-minders. These monopolies can be largely abolished by getting rid of the barriers to entry.
But there are "natural" monopolies where there can only ever be a limited number of providers or where the total market is limited by other forces (natural, economic, legislative, doesn't really matter). If the government wants to claw back the monopoly element of their profits, there is no one-size-fits-all approach, it's a question of divide and conquer.
The main sources of rental or monopoly income:
Rental income from land-location values
An annual tax on the land-location's market rental value. The tax can be anything up to 100% of that rental value without any harm being done, but it could be a lower figure.
This is by far and away the largest potential source of revenue. In the UK, it's only about one-sixth of GDP (£200 - £250 billion per annum) but if taxes on earned income were abolished, it could easily be one-third or one-half.
In monetary terms, the second largest source of rental income for the government is user-charges for roads (currently about £50 billion per annum). In theory, this can be done by road pricing but that requires a lot of technology.
What most countries do is simply have fuel duty and then VAT on top of that. There are lots of other bits and pieces like the annual car tax; VAT on new cars, parts and repairs; P11D charges on company cars; parking fees and fines; insurance premium tax and so on. It all adds up to about £50 billion a year.
The whole lot could be replaced with a slightly higher fuel duty. This has the advantage over road-pricing in that it is also a tax on pollution and encourages people to build/use more efficient cars, drive more steadily and reduces the cost to occasional motorists. It also acts as a "congestion charge" because driving during the rush hour is simply less fuel-efficient than driving at other times when the roads are emptier.
Oil, gas and other natural resources
Different countries do different things.
Some countries auction off extraction rights for a certain period and some levy a very high rate of corporation tax on the profits.
The most sophisticated system would be to realise that actual extraction costs + reasonable profit margin are fairly fixed but market prices fluctuate wildly. Any excess of selling prices over actual costs is pure unearned rental income.
So what a sensible government would do is to declare itself the legal owner of the resources and put the extraction out to tender - whichever company offers to extract a certain amount per year at the lowest cost (for a given minimum safety and environmental standard) wins the tender. From thereon in, the company receives the agreed price for unit extracted, and the government then runs a daily or weekly auction system again to sell those materials for their market value.
Other sources of rental or monopoly income
There is then a whole list of much smaller monopolies, the value of which is in the order of a couple of billion or perhaps only a few million every year, but it's useful to go through some examples:
Airport landing slots
The UK government currently raises about £3 billion a year in Air Passenger Duty, which is an incredibly daft tax, as it is per passenger, it doesn't matter which airport you are flying from and depends on the distance travelled.
The scarce resource which is being used is that few minutes for which the runway and the airspace leading to/away from it is needed for landing or take-off. This clearly places a burden on the people under the flight path, whether the plane is full or empty. It doesn't really matter how far the plane flies after that, there's no shortage of airspace over the Atlantic or the Pacific.
So a more sensible tax is a per-plane tax, and even better than that is a tax on the value of the slots themselves (or annual auctions thereof), which in turn is down to the location of the airport (i.e. near London is worth far more than near Newquay) and how many connections there are from that airport. So although Heathrow only accounts for half of aircraft movements in the UK, its slots are probably 80% or 90% by value.
Happily enough, such a tax/auction achieves three things: it raises revenue; it captures the agglomeration benefit of lots of routes converging at one airport; it captures the location value of the airport itself (i.e. half an hour from a large city) and it captures the external costs of half a million flights a year over a densely populated area.
Depending on the cost of the technology required to exploit frequencies fully, the government can just auction off twenty- or thirty-year licences for capital-intensive things like 3G, 4G. For bread and butter stuff like radio or television, the auctions can be for much shorter periods like a year.
Please note, the amount which the winning bidders pay for their licences has no impact on the prices paid by end-consumers, because the bidders worked backwards from their likely total income, deducted their likely real costs and a fair profit margin and the amount left over was what they were prepared to bid.
Cherished number plates
These are a government-created monopoly. It came up with the sensible rule that motor vehicles all have to have unique number plates to make it easier to track down offenders and recover stolen cars.
Then it noticed that some people were prepared to pay over the odds for the right to use certain numbers, so about thirty years ago, the UK government started auctioning off new number plates.
It doesn't raise much money from this, about £3 - £4 million a year, but so what? It's a good principle and an entirely voluntary tax - just imagine that the government just embedded a radio-readable micro chip in each car to help identification and abolished the requirement to have unique number plates entirely? What would a really cool number plate be worth if everybody were allowed to make himself one and drive round with it as decoration?
Fishing, angling, hunting
Having decided how much fish can be safely caught from the North Sea without depleting stocks, the government can then auction off quotas on an annual basis. Or it could measure how much each boat catches and charge per amount caught. If stocks are becoming depleted, it increase the charge and vice versa.
For whatever reason, the UK government decided years ago to hand out quotas which can be traded on the grey market, which is the worst of all worlds, as one cartel has now accumulated all the quotas for itself and imagines this to be its "property" and even had the temerity to try and sue the UK government when it tried to cancel/re-allocate some of the unused part of the quota.
If a town notices that there are too many hobby-anglers using a river, it can make a few quid by charging a daily rate for angling permits. The same applies to hunting and shooting rights - if people really get a kick out of hunting foxes with dogs, then make them pay £x00 per fox.
Water and utility companies
Their monopoly income can be choked off at source by imposing price caps. This leads to slight over-use of water or electricity, which you might consider a price worth paying.
Or the government could abolish price caps and allow them to charge what they like and levy a very high rate of corporation tax and pay this out as a kind of Citizen's Dividend, i.e. every person gets a few hundred pounds a year cash to cover the increased cost - if they manage to curb their water or electricity use, then they can keep the rest to spend on what they like.
Betting shops and pubs
A local council can restrict the number of betting shops or pubs by simply limiting the number of licences it will grant. All this achieves is to push up the profits of the few lucky people who own a licence. The second-hand value of that licence can be hundreds of thousands of pounds, so a bookie or landlord can cash in several years income at once by selling on the business.
So the better way is to make people pay for the market value of the licences (the super-profit or monopoly element). So if the council decides that there should be only two betting shops or three pubs in a certain area, it just auctions the licences off each year, or for a few years at a time. That way the people in the area are still restricted in their choice of gambling or drinking haunts, but at least there is some money in the kitty to pay for libraries or lollipop ladies, or indeed treatment for compulsive gamblers or drinkers.
Without the protection of international governments, nobody would earn much in royalty income. But protection of intellectual property stimulates creativity and innovation creativity - up to a certain extent - so it seems reasonable for governments to levy a tax on royalty income.
The system of patents is used by some to stifle innovation. Corporations (especially electronics and software) just register thousands of vaguely defined patents to prevent anybody else from actually turning a good into a viable product. I suppose you could deal with this by charging exorbitant registration fees for such vague ideas. If registering the design of an actual existing piece of technology were cheap or free (but making the owner liable to tax on the future profits) but it cost £1 million a pop to register a vague idea, then the practice would more or less cease overnight.
The administration of this is going to be quite tricky, but it is still less complicated than taxing everybody's income. The owner of a patent can set his own price for the amount of monopoly income embedded in a certain product. If he sets a high price, then he will pay a lot of tax on that price, and if he chooses a low price, his competitors will be able to use that patent in their own product provided they pay the price (net of tax) over to the patent owner.
We can also looks at methods rather than sources:
Annual user charges/licence fees
This is the best and simplest method, and applies to LVT, fishing quotas, radio spectrum, betting shops etc.
Where a country has a natural advantage in producing something for prices well below world market prices, it can lock in some of that saving for its own citizens by imposing export restrictions.
Is always a fall-back, but approached with caution, as there is always mission-creep and a reluctance of politicians to accept that some industries ought best be shut down or privatised, so this often ends up as subsidies for unviable industries.
The government retains the monopoly and pays others to do the work
This works with oil, gas and natural resources. It also works with e.g. public transport - the government can decide the routes, timetable and the prices and then put the franchise out to tender. If the franchise is profitable, the highest bidder wins. If the route is unprofitable, then whichever company is prepared to do it for the lowest price gets paid to it, see for example with refuse collection (one of the examples where privatisation really worked well).
Very high corporation tax rates
This is what Norway and The Netherlands do this with oil and gas companies.
"Windfall taxes" aka "fines"
Another fall back for governments when they think that large corporations are abusing a position of market power but can't quite pin down how or why, is to simple find them guilty of "anti-competitive behaviour" or other misdemeanours and negotiate a fine.
The EU does this every few years with Microsoft and the USA does it quite often with non-US banks.
Sunday, 1 September 2013
Here is a summary of what we were debating here.
My latest blogpost: Monopolies, rents, taxesTweet this! Posted by Mark Wadsworth at 15:54