In this 3-part article, we will explore 16 different ideas that can help shape taxation policy. They are:
- Taxation is inevitable
- How much tax will people bear?
- What counts as taxation?
- Visible and invisible tax
- Hypothecated tax
- Taxation in a command economy
- Taxation in a market economy
- Social and economic engineering
- Fairness in taxation
- Which taxes raise the money?
- Imagine that a government decided to abolish income tax
- Local taxes
- The circumstances of a tax can change
- Non-taxation measures
- How governments constrain themselves
- Do not confuse tax raising with political ends
So, let’s start at number 1 and work our way through them!
1. Taxation is inevitable
Extreme libertarians claim that “taxation is theft” and envisage their ideal society as one in which every necessary social expenditure should be funded from voluntary contributions, although they grudgingly admit that public provision of defence, justice, diplomacy and suchlike are necessary. Pleasing as the idea of a world without taxes is, all of history is resolutely against it and our experience of human nature tells us that altruistic behaviour has severe limits.
Most societies which have ever existed, and that includes most which currently exist, have had no state sponsored welfare provision and in such societies voluntary aid has always proven to be completely inadequate to meet the needs of the poor and unfortunate. The first country anywhere to avoid serious and regular famines was England, which was also the first country to have national welfare provision as a legal obligation as a consequence of the 1597 and 1601 Poor Laws. No coincidence.
Voluntary contributions to provide those things necessary for the general good cannot be relied on, so taxation is inevitable.
2. The tax people will bear
Louis XIV’s finance minster, Colbert, had a dictum any tax raiser should heed:
“The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”.
How right he was. Taxes are subject to the laws of psychological supply and demand. Set a tax at what people think is reasonable or more trouble than it is worth to evade, and tax revenues will be strong. Set it too high and tax revenues will diminish. A good example of this occurred during the 1980s. In the 1970s income tax rates reached very high levels – even basic rate tax peaked at more than 30% The Thatcher government gradually reduced the basic rate to 23% and the upper rate to 40%. Income tax revenues rose after the reduction.
For the vast majority of people the question is not whether there should be any taxation, but at what level taxation should be set, which is dependent upon six things:
(1) confidence in the government to tax fairly;
(2) confidence that the money raised is being used for the public good;
(3) the general level of tax;
(4) the nature of taxes levied;
(5) the efficiency of the state in collecting taxes and
(6) the personal circumstances of the individual.
People may claim to be influenced by ideology when it comes to taxation and public expenditure, but in practice their behaviour is determined by mundane considerations of personal advantage and the degree of material freedom already possessed by an individual.
The richer a man is the less likely he is to be inclined to favour high taxation and public expenditure. While the rich can buy their safety and comfort, the poor ensure their survival by mutual action. Human beings seek strategies which maximise their advantage, whatever their political ideology, so we can have rich socialists and poor conservatives.
If you doubt this somewhat stark view of human nature, reflect on all the people you have known personally and then ask how many of those people actually live up to altruistic principles.
The taxes people are most willing to pay are those which they believe are going to popular causes such as the NHS and pensions: in this way the British support the idea of National Insurance, but not income tax, albeit both taxes go directly into the general government fund. Never underestimate the power of words. Call it “insurance”, tag on “national” to make it seem absolutely secure and the public goes to sleep.
3. What counts as taxation?
Taxation is a forced contribution. Forced contributions may not be taxation as we think of it. They may be slave labour, the provision of labour by serfs, military service or payment in kind or service, but these exactions are still doing what taxation does today, namely, those in authority are taking from men and women that which they would not voluntarily give.
While we don’t do conscription any more, we are re-introducing labour for the unemployed such as workfare. However, this is not seen as a tax: to the voter tax means the government taking a slice of income, capital, spending and things like Council Tax and the TV Licence.
4. Visible and invisible tax
Place ten pence on basic rate income tax and people will probably rebel at the ballot box. Raise the duty on whiskey and cigarettes by 10 per cent and people will grumble but put up with it. Remove tax exemptions from money paid into pensions and few will realise it has happened. Place extra taxes on private business and most electors will probably cheer.
However, although using invisible taxes may seem like a jolly good wheeze to politicians, sooner or later the chickens will come home to roost. A private pension will be less than expected and the pensioner will turn to the taxpayer for help. Companies will expand less rapidly or remove their business abroad. Unemployment will rise. The general tax revenue will contract. The tragedy is that the politicians responsible for such irresponsible behaviour rarely or ever brought to book or are even around when the mess has to be cleaned. From a cynical political view, the practice works.
5. Hypothecated tax
A hypothecated tax is one raised for a particular purposes, for example, to pay for a health service. The British television licence is an hypothecated tax, but that is about it in Britain for hypothecation.
Attractive as the idea of an hypothecated tax is, they have two main practical drawbacks. It is very difficult to continually (and possibly retrospectively) adjust expenditure to match revenue.
The other major difficulty lies in the idea of allowing people to choose how their taxes are spent. Left to the will of the general public certain things such as schools and the NHS would be grossly over-funded and others such as defence grossly underfunded. No responsible government could tolerate that.
In the next part we will move onto Taxation in a command economy,