As early as 1897 the great reconciler, Henry George, electrified the world by “identifying one underlying cause for two great economic plagues: chronic poverty, and cycles of boom and bust.” These twin plagues, according to him “arose from concentrated ownership of land, compounded by land speculation” (Gaffiney M, 1997). Large landowners and speculators held the best land idle or underused, forcing labor onto marginal land and driving down wages. Collapse of speculative land price bubbles caused periodic slumps. This paper attempts to explore if rising land prices contribute to the growing socio-economic inequality (especially in Bhutan’s context) and if taxing of unearned income (capital gains tax)[1] would help resolve the gap between the rich and the poor.
Deeply moved by a burning thought, Henry George, made a vow that he will never rest until he had found the cause of and remedy for the deepening poverty amid advancing wealth. In “Progress and Poverty: an inquiry into the cause of industrial depression and increase of want with increase of wealth,” he revealed that “land speculation locked up vast territories against labor” (Henry George, 2003).
Everywhere he perceived an effort to “corner” land; and effort to get it and to hold it, not for use, but for a “rise.” Everywhere he perceived that this caused all who wished to use it to compete with each other for it; and he foresaw that as population grew the keener that competition would become. Those who had a monopoly of the land would practically own those who had to use the land (p xxii).
The Kuensel editorial of August 01, 2004 rightly points out that “land has sent countries to war and split families into bitter rivals”. In case of Bhutan, land is undoubtedly the cause of maximum number of court cases. (Kuensel, Editorial, August 01, 2004).
It has been observed that most of the developing countries fail to tax capital gains, which “is a major loophole in the tax system” (Bahl R.W. et al, 2008, p 287).
In 2007, Land Act of 1979 was reviewed and updated in a comprehensive way to suit today’s developments –primarily to address the plight of urbanization vis-à-vis modernization. Thus The National Assembly in its 87th proceedings (2007) debated and approved the revised Land Bill, with minor changes. The bill was drafted by a multidisciplinary team, led by the Ministry of Agriculture. The Act did insert several provisions which were friendly to the administration and management of urban land and urbanization.
The intrinsic function of land as a locus for speculation and the capture of economic surplus can hinder the capacity to plan for more balanced patterns of urban and regional development. Land owners, particularly in the urban centers, have an opportunity and capacity to capture unearned income. Anecdotal evidence suggests that a major source of socio-economic inequality is caused because of the expropriation or exploitation of this unearned income. The failure to tax that surplus associated with urban land ownership is an element in the impoverishment of the public sector. Therefore the land price inflation due to urbanization limits our capacity as a nation to achieve balanced regional development. In order to create a more productive economy and a more equitable society, an understanding and a resolution of these problems is essential.
Generally speaking the capacity of landowners to gain increments of wealth is partly due to the role of government in the urban land market. The supply of land available for urban use is reduced by imposition of land-use-controls which in turn raise general price levels. Restriction of uses to which land can be put by way of zoning is an obvious case in point. Zoning of land as residential or commercial, for example, sharply raises its market value above what would otherwise pertain if it were restricted to agricultural purposes.
The landowners of prime urban sites and their children who stand to inherit them are the most advantaged people in this process of urbanization and zoning. The underprivileged people include aspiring new urban home owners and the tenants in the rental sector who bear the costs of inflationary processes that flow from land and housing purchase prices to the rental levels.
The question then is – how can the economic surplus be captured more effectively for public purposes?
The first and the most straight forward option would be the public ownership of land. Although the Land Act of 2007 empowers the government to acquire land (eminent domain) it can be at odds with prevailing ideologies about the limited role of the nation reflected in the vogue for devolution of powers to the grass root level and the constitutional rights to property. Moreover, once land has been allowed into private ownership, its re-socialization is notoriously difficult and expensive to achieve. Further, it is not hard to fathom that wealth owners have more political power than non-owners of wealth and thus may influence policy decisions.
Instead of focusing on the redistribution of land, taxation of unearned income (capitals gains tax) may be another, but practical option to capture the economic surplus. However its effectiveness may be significantly impaired by contemporary trends. Bhutanese people have been paying land and property taxes as per the Revised Taxation Policy of 1992 at very minimum rates. For example, as of 2010 a landowner of 400 sq. m. plot in the extended capital city of Thimphu paid only about Nu. 5/- a year. This has reduced the scope of expenditure commitments for infrastructure provision and regional development policies. However an effort seems to have been made in 2001 with the passing of the Income Tax Act 2001 which covered three areas of taxation – Corporate Income Tax (CIT), Business Income Tax (BIT) and Personal Income Tax (PIT). This Act remains silent on ‘capitals gains tax’ or in other words the taxing of the unearned income.
As of 2011 Bhutan’s tax to GDP ratio stood at 15.32 percent of the total GDP (MoF, National revenue Report 2011-12). If a nation is to transition into a “developed” country it is argued that it needed to collect taxes in the range of 25 to 30 percent of GDP (Bahl R.W. et al, 2008, p 287). Looking at the trends in the past, vis-à-vis, reduction of the proposed tax rates during the 2007 parliament session the prospect of increasing the tax (PIT, BIT & CIT), let alone the introduction of new tax (capital gains),remains bleak.
Another relevant and important issue that needs to be highlighted here is that the government’s attempt to raise vehicle tax in 2011 was met with strong resistence from the Opposition Party which led to the case being adjudicated at the Supreme Court. The ruling of the High Court was upheld, which stated that “the Government’s imposition of taxation measures without introducing the revised tax schedule as Money Bill under Article 13, Section 2 and without a law to that effect as mandated by Article 14, Section 1 of the Constitution as unconstitutional.” Thus anything related to revising tax and tax policies, how-much-ever well-intentioned they may be, will need to go through due process of law, which can be a lengthy process.
Further, a report on ‘Municipal Finance and Revenue Study’, 2002(MFRS) prepared through funding from Danida has been gathering dust on the racks of various government agencies. The report contained proposals to increase the urban land tax which was not revised for a long time. It is interesting to note that the consultant (Svend Trollegaard) has had as many as 37 meetings involving many policy and decision makers from various agencies while drafting the MFRS. The indication one gets is that there doesn’t seem to be much commitment to amend or revise the tax/taxation policy, especially with regard to land and housing. It seems like a clear case of ignoring the problem/solution.
It is felt that the task should now be to focus the tax debate on more fundamental issues, particularly the taxation of unearned income. In comparison to other forms of taxation, “taxes on unearned income are efficient, equitable and ethically unobjectionable”. This is because they do not distort incentives on productive effort, rather they tend to hit hardest at the wealthy, and they affect incomes which are ultimately the product of other people’s productive labor. In the era of widespread tax avoidance and evasion, land taxes have the strong advantage that land cannot be shifted or easily concealed.
A crude attack on the rich, however, would be dismissed as socialism and fail to build majority support. It may therefore be appropriate to introduce the distinction between earned and unearned wealth, and tax them accordingly. As Gordon Brown (the then Prime Minister of Britain) took over David Lloyd George as Britain’s longest serving Chancellor in 2004 it was declared that they “have to pick a fight with the undeserving rich on behalf of the deserving poor” (Johann Hari, 2004). It is also said that taxing of unearned income doesn’t create a drag on the economy because it doesn’t discourage work.
Moreover and undoubtedly a top priority of the democratically elected government is the reduction of poverty and curbing the gap between the rich and the poor. It is also an accepted fact that the success of democracy largely depends on the availability of a large number of middle-income-class. Obviously reducing the gap between the haves and the have-nots may help increase the number of middle-income-class which in turn will help nourish a strong democracy. Therefore if we are bent on making democracy work, one of the criteria should be the reduction of the gap between the rich and the poor. The current level of poverty at 23% for a small country with a small population (0.7 million) like ours is not at all acceptable.
A formidable task that need to be performed in order to tax land so that they are put to efficient use include the assessment of land value[2] and determination of its net yield (Goode R, 1993). Without fixing the market value, the taxing of unearned income (capital gains) is a distant dream. However according to Enid Slack (World Bank Institute, 2001, p 270) the following six principles may be applied in evaluating the tax and approaches to its reform in any jurisdiction:
- Fairness based on benefits received: Taxes should be related to the benefits received from government expenditures
- Fairness based on ability to pay: Taxes should be similar for those in similar circumstances. For example, people should pay comparable taxes on comparable properties
- Neutrality: The tax should not distort economic behaviour, including decisions about where to live and work and what improvements to make to one’s property. Negative side effects should be minimized.
- Stability: Taxes should not fluctuate dramatically from year to year.
- Accountability: Taxes should be designed in ways that are clear to taxpayers so that policymakers can be made accountable to the taxpayers for the cost of government
- Ease of administration: Taxes should be fairly easy to administer. The simpler the system, the easier its administration
It is however fortunate that this formidable task of assessing and valuing of land and property has successfully been completed in May 2009. The government has also established an understaffed institution called the Property Assessment and Valuation Agency (PAVA) under the Ministry of Finance. In order to move forward, the government may now need to strengthen this institution and introduce a comprehensive land and property tax policy. In the meantime all agencies and stakeholders, including the financial institutions and the public should refer to the PAVA values for any transactions.
Now, some might argue that increasing land tax or taxing unearned income will impinge on the fundamental right provided by the constitution whereby “Bhutanese citizen shall have the right to own property” (Article 7, 9). However the constitution also states that nothing shall prevent the State from subjecting reasonable restriction by law, when it concerns “the rights and freedom of others” (Article 9, 20f). Thus it is not unconstitutional to tax the unearned income for public purpose. Just as the individual citizen has a moral right to keep as private property all of the wealth derived from one’s own labor and capital, so the community has a moral right to prevent the common wealth from being appropriated and hoarded by individuals or corporations – by taxing and sharing the wealth resulting from unearned income.
The Bhutan 2020 document, a vision for peace, prosperity and happiness, also recognizes that “although the vast majority of our populations have been benefited in very tangible ways from the process of social and economic development, the benefits have not been shared equally” (PCS[3], p33). Thus the equitable provision and distribution of the benefits of socio-economic development was acknowledged as a big “challenge that must be met in the years ahead” (PCS, p 33).
The Bhutan 2020 document also recognizes that; “Traditionally, Bhutanese people have been an egalitarian society”, where, differences between the rich and the poor were never pronounced. However with the rapid socio economic development and “although reliable evidence are not available, evidence suggests that income disparities appear to be on the increase” (PCS, p77). Moreover it is appalling to note that “with the progressive liberalization of our economy and the deliberate efforts now being made to promote entrepreneurship and private sector initiative, we must recognize that conditions are being created which could give rise to the future growth of income disparities” (PCS, p 78). Against this backdrop, it is doubtful whether the ‘progressive system of income tax’ as recommended by the PCS, and as implemented currently, would be of any effect. The government needs to seriously and rigorously explore other effective means of taxing and distributing the income – for the common good, for public purpose and most importantly for nourishing and upholding the democracy that our beloved king has handed to us.
Inheritance tax for instance is also used as one of the most effective and popular ways to attack inequality in many countries and the trend has been a steady reduction in the gap between the rich and the poor. In Bhutan, there is no tax on inheritance of properties.
Apart from most of the developed countries, the Asian Tigers such as Taiwan, South Korea, Hong Kong and Singapore have shown immense success in using the Henry George’s theories (introduction) of taxing the unearned income. Founded on the twin principles of access to land – implemented by land reform, land taxes and land leasing – and universal education and health care, these Asian tigers’ booming economies make them models for developing countries.
Lloyd Goeorg, the political counsel to Tony Blair once contended that “he was in favor of people who earned their money and against people who simply inherited it”. Further Leo Tolstoy argued – “People do not argue with the teachings of George (Henry George), they simply do not know it. And it is impossible to do otherwise with his teaching, for he who becomes acquainted with it cannot but agree”. F.L. Wright in The Living City contends that “Henry George showed us…the only organic solution of land problem…” Henry George himself also declared that “what man has produced belongs to the individual producer; what God has created belongs equally to all…therefore abolish all taxation save the value of land”. Similarly the movers and shakers of the world such as F.D. Roosevelt, Winston Churchill, and many others have appreciated the theories propounded by Henry George and some of the quotations are annexed in Appendix 1 for ready reference.
There is also a need to clearly segregate, understand and take necessary actions in relation to the “easy to collect” taxes (tariffs) and the “hard to collect” taxes (value added and income taxes). Globalization as a process has induced “countries to embrace greater trade and financial integration,” which in turn has caused the shift in tax revenue from “easy to collect” taxes towards “hard to collect” taxes (Aizenman J & Jinjarak Y, 2009). It makes sense that our policy and decision makers begin discussion and deliberating on introducing taxes that will help the long run growth of our country instead of focusing on easy jobs and doing some superficial works.
Whatever said and done, as a society, unless we develop appropriate structures of taxation and governance, especially with regard to land, we are likely to experience greater social division, deterioration in the quality of public sector and increased spatial imbalance in patterns of economic development. And it becomes even more relevant after the issuance of the Royal Kasho (edict) by His Majesty the 5th King which stated that;
In order for democracy to flourish and take unshakeable root in our small, land-locked nation, my hope is that every single citizen will have the opportunity to own a home of his or her own, and become an equal partner in, and beneficiary of, the nation’s progress and growth (His Majesty’s Kasho dated 12/06/2007, Tashichhodzong).
Moreover His Majesty the King, during the Sherubtse College Convocation in 2007, said:
In this globalized and modern world there can be only one answer – a strong dynamic economy. We need resources, our country needs national wealth and this can only come from our own economy. (His Majesty’s speech, 2007)
And what is more? His Majesty the Fourth King, during the celebration of the National Day in Trashigang, on 17th December 2000 said;
In other countries the main source of government revenue comes from taxes. Even the assistance we receive from donor countries are tax-payer’s money.
The King hoped that the people of Bhutan would understand that it is important for all Bhutanese to contribute to nation building through the payment of taxes.
He also made it known that “the Bhutanese people are among the least taxed in the world” and “In fact the total rural taxes paid by the people in all our 20 dzongkhags only come to Nu. 7.8 million.” He therefore instructed that “the rural taxes and all other taxes collected at the district level” be “left with the dzongkhag administrations for implementing development programmes in the respective dzongkhags”. By leaving the taxes in the communities the people would see their money working for themselves. It will mean that they judiciously and carefully use the money to build infrastructure for their own conveniences, instead of complaining our cash strapped government who has to beg from the donor countries for support. We should also remind ourselves that the donor countries are now slowly withdrawing their support.
Yet, have we really understood what His Majesty meant to convey. Or are we simply being complacent – as always?
Appendix 1: Quotes
Extracted from Butcher, A. Allen. 2001 (Originally compiled by Jeff Smith)
- Men did not make the earth … It is the value of the improvement only, and not the earth itself, that is individual property…. Every proprietor owes to the community a ground rent for the land … he holds. – Thom Paine (1737-1809)
- Ground rents are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Ground rents are, therefore, perhaps a species of revenue which best bear to have a particular tax imposed upon them. -Adam Smith (1720-1790) The Wealth of Nations
- Landlords grow rich in their sleep without working, risking or economizing. The increase in the value of land, arising as it does from the efforts of an entire community, should belong to the community and not to the individual who might hold title. – John Stuart Mill (1806-1873)
- The earth belongs to the people. I believe in the gospel of the Single Tax. – Mark Twain (1835-1897)
- People do not argue with the teachings of George, they simply do not know it. And it is impossible to do otherwise with his teaching, for he who becomes acquainted with it cannot but agree. – Leo Tolstoy (1828-1910)
- In allowing one man to own the land on which and from which other men must live, we have made (these) his bondsmen in a degree which increases as material progress goes on. It is this that turns the blessings of material progress into a curse. – Henry George (1839-1897)
- Henry George showed us … the only organic solution of the land problem … Frank Lloyd Wright (1869-1959) The Living City
- Men like Henry George are rare, unfortunately. One cannot imagine a more beautiful combination of intellectual keenness, … and fervent love of justice. – Albert Einstein (1879-1955)
- Henry George told us this system would work a hundred years ago. -William F. Buckley
- Who reads shall find in Henry George’s philosophy a rare beauty and power of inspiration, and a splendid faith in the essential nobility of human nature. – Helen Keller (1880-1968)
- I believe that Henry George was one of the really great thinkers produced by our country. – Franklin D. Roosevelt (1882-1945)
- The teachings of Henry George will be the basis of our program of reform. – Dr. Sun Yat-Sen (1866-1925)
- If I were now to rewrite the book (Brave New World), I would offer a third alternative … the possibility of sanity … Economics would be decentralist and Henry Georgian. -Aldous Huxley (1894-1963)
- (I) would have written it (Ecotopia) with Georgism as the economic system ….Ernest Callenbach
- I have never seen a convincing refutation of Henry George’s proposition …Alfred E. Kahn
- I have made speeches by the yard on the subject of land-value taxation, and you know what a supporter I am of that policy. – Winston Churchill (1874-1965)
- Land should be taxed as much as possible, and improvements as little as possible. -Milton Friedman
- Property taxes could profitably be revised to fall more heavily on land, rather than, as at present penalizing property improvements. – Jack Kemp
- You can always trust Americans to do the right thing, after they’ve tried everything else. -Winston Churchill
- What man has produced belongs to the individual producer; what God has created belongs equally to all … therefore abolish all taxation save on the value of land. Henry George 1839-1897
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