Dear Ronald

Many thanks for spending the time it must have taken you to formulate and write all that! (My own priority when writing at such length is to focus on the subject matter of my Economics essays or Accountancy articles, which I am still contractually obliged to submit bi-monthly.)

Indeed, pace i tuoi amici Italiani, I am now engaged on my forthcoming Economic Perspectives essay which will offer yet another blast on the despicable antics of the so-called “negotiators” in Brussels with whom we are forced to deal. Truly, Ron, as each week goes by, the disingenuous words of the unelected Brussels elite merely confirm to us (just in case it still needs confirmation) exactly why Britain voted to leave!

The notion that keeping the UK inside the EU is a safeguard against incipient fascism, is, in my view, the worst reason for succumbing to the rakshasas [Hindu term for ‘villain’ etc]  and free-loaders that are bent on implementing policies that will in any case guarantee the implosion of the entire dream, as my next piece will show.

Your economic questions:

Penetration of any subject to the point of understanding it properly must, of course, serve as an entry point to the spiritual world, which is why the great sage Shankara pointed out that economic laws and spiritual laws are, in essence, the same. Understanding Added Value  provides an entry point into the world of true economics. The fact that it is invariably confused with the common V.A.T. is why I have always been so careful with terminology.


Tax as a proportion


A tax levied as a proportion of the added value of a business is a very different proposition of course. John’s insight was that “added value” is nothing more esoteric than the “product”. Its “product'” is what any business enterprise “produces“, as measured in monetary form, and lumped together it is that enterprise’s “production“. And the rate of production achieved (as expressed in terms of “per hour” or “per employee” etc) is its “productivity”. A valid alternative term often used is “output“, especially when expressing “rate of output”.

What an enterprise produces is measurable in money terms, and is equal to its gross revenue minus the cost of goods and services it has “bought in” (ie minus the output of other enterprises). What it does with that “product” or “added value” is to repay the indispensable factors of production for their contribution to the value they have combined to create, thus wages to the employees (including management); rent for the use of land; interest for the use of capital borrowed; and taxes as government’s share. You can have interminable arguments over what belongs where (eg depreciation, R & D, rent of buildings, etc), but all that is subsidiary to the principle stated above. What is left of the product, after all the allocations to factors of production, is “profit”, which represents the return to the entrepreneur – the capitalist who assembled the whole enterprise, with profit as its objective.


Identifying taxable capacity


Thus understood, added value is entirely distinguishable from terms like “gross profit”, “cost of sales”, “overheads” “net profit” etc, terms that  feature in book-keeping, not economics. Unlike “added value”, or “output” or “product”, (all of which are capable of precise calculation and expression) these terms are susceptible to endless manipulation and fakery, which is why they are very poor bases for levying taxes. By contrast, the added value remaining after deducting allocations to factors of production represents the enterprise’s “taxable capacity”. It is of course obvious that a reasonable level of “profit” should be allowed before arriving at taxable capacity. Otherwise a high tax could leave the capitalist with no return – an unsustainable situation. Any tax that exceeds the enterprise’s taxable capacity obviously threatens its economic viability.

Rent and added value – the link

References to “rent” by Henry George and the classical economists (Mill, Smith, Ricardo, et al) meant the rent of land, and they noted that the most favoured locations, whether by reference to natural resources, population centres, or whatever (which differed in different times), always, virtually by definition, were home to enterprises that generated the largest “product”. Hence the words “most favoured”. By virtue of that location they “added the most value” however measured. The economic rent was therefore highest in locations that fostered the highest added value. Enterprises so located also, by definition, had the highest taxable capacity. Since the economic rent always “shadows” or “reflects” added value as correctly understood, a tax based on (but not equal to) added value will always fall within the enterprise’s taxable capacity and will therefore never be the proximate cause of unemployment or business failure. This is the link between a tax based on added value and a tax based on the value of land.


Sparing USA from the pernicious VAT!


It was via this intellectual route that, during my visit to USA in 1980, I steered Congressman Al Ullman’s group of young economists away from the unvarnished sales tax, albeit labelled “value added tax”, that he was on the point of introducing, and persuaded him to abandon it altogether, as described in the relevant section of my website.

Many Eastern European countries have followed the above lead almost by default. First, they adopt a tax which is levied at a constant rate, which therefore produces more tax revenue when applied to higher levels of “profit” (or whatever tax base they are using), in contrast to a “progressive” tax which charges tax at higher rates for higher profits, and can be penal in its incidence. Second, they invariably charge tax at a “low” rate (invariably well below 20%) which is bound to fall within taxable capacity, not worth dodging by complex “schemes”, and will, in accordance with the principle symbolised by the Laffer Curve, raise far more in taxes than charging tax at high rates.

Many thanks for providing the spur for revisiting this vital theme.