By the end of Part 2, we had covered the first 10 points, now we conclude with the remaining six
11. Imagine that a government decided to abolish income tax
To illustrate the difficulties of dramatic tax change, let us suppose that a government wished to abolish Income Tax. There are good reasons why a government might:
- Greater personal freedom.
- Income Tax is the most obvious tax through a person’s wage slip.
- Greater incentive to work.
But how to make up the 30% shortfall if income tax is abolished? All the obvious things to tax in Britain are already taxed and taxed at a hefty rate. Vat is 20%. Most of what a motorist pays for petrol is made up of various taxes and duties. The burden could be shifted onto the existing national insurance system, however, the effect of that would be very like an income tax.
An alternative would be to try to run the welfare state on a proper actuarial basis. People would pay the sum calculated as necessary to provide what the Welfare state provides, with a safety net for low earners and others unable to pay the full amount.
Such a scheme might be practical for healthcare and unemployment, where the costs each year are to a large extent predictable because of their short-term nature. But what of pensions? These are more problematical because of the period over which contributions must be made. An alternative is to make a non-state pension compulsory, however, large numbers of people would be left with insufficient pensions. Therefore, I cannot foresee a time when the state should not be the provider of the last resort, but this brings us back to the problem of where to raise the money from.
12. Local taxes
Local taxation is more problematical than national taxation in one important respect – the variation of wealth throughout the country is of no account when setting national taxes but it is at the local level.
The large majority of what local authorities spend these days comes from central government. Supporters of local government decry this on the grounds that it removes responsibility from local politicians and voters. However, this would create the problem of councils in poorer areas needing to spend more, but would struggle to raise sufficient taxes from residents. If they did impose higher local taxes, they would drive people and businesses away to low tax areas. The effect on those still living in the high tax areas would be dire with a vicious circle of increasing poverty, decreasing employment and a smaller taxable base.
13. The circumstances of a tax can change
Income tax is a very popular tax with British governments. It is inherently easy to collect, because of the cooperation of employers in operating PAYE. If everyone paid their tax directly to the Treasury, as the self-employed do, the amount collected would drop drastically and the cost of collection rise massively. There are approximately 28 million people in work in the UK. Most are under PAYE. Imagine having to administer 28 million separate tax returns.
Through becoming self-employed or a director of a private company, there are numerous ways in businesses can avoid tax, legally, although some practises such as liquidating businesses and transferring the assets to another business are seen as theft by others, the taxpayer effectively meeting the cost.
14. Non-taxation measures
Governments have many other weapons at their disposal to shape the economy and society. They may control interest rates. They can restrict credit. For example, house price inflation could be curbed by placing an upper limit on the wage multiplier used by mortgage providers to decide what mortgage is granted. They can protect their industries from foreign competition. They can relax or tighten immigration. They can provide subsidies to industries.
Take the single issue which has caused more political dissent than any other over the centuries, differences in wealth. This can be corrupting to a society because it concentrates power into too few hands and creates profound dissatisfaction amongst the have-nots, which social traits guarantee regular social upheaval.
Unfortunately, we know that the really rich can place their money outside the reach of governments. We also know that those societies which have tried to enforce some equality of income and wealth have invariably ended up as tyrannies and that a different type of privilege has been created for the people with the power in such societies, such as The Soviet Union.
If a government cannot effectively tax gross differences in wealth out of existence what can they do to stop abuse? Happily, a good deal is the answer, provided the political will is there.
A government can act in non-economic ways to control the behaviour of the rich. Access to the law could be made more or less equal if all legal work was in effect legally aided. A statutory right to reply for the individual to media coverage of them would be a powerful weapon. Restrictions on members of the same family taking political office could be introduced. A law banning national newspapers and broadcasters from employing more than one member of a family would have the same effect.
15. How governments constrain themselves
If governments potentially have a very wide range of tax and non-tax tools to pursue their ends, in practice many are constrained from freely exercising such powers.
A written constitution will restrict the powers of those in executive authority by setting limits to what they may do and will prevent the passing of laws by forbidding those which contravene the constitution.
More generally, treaties and free trade agreements can restrict virtually anything, in theory at least. They can restrict the ability to:
- Control immigration.
- Impose tariffs and certain taxes.
- Protect their economy through embargoes, quotas and subsidies.
There is a rarer way in which a government may hamstring itself. That is by becoming part of a supranational unit such as the EU. The sovereignty of the country becomes restricted so that vast swathes of taxation and non-tax policy are taken out of their hands. For example, Britain can no longer reduce VAT where it is already levied on British goods and services.
16. Do not confuse tax raising with political ends
If I was asked to give one piece of advice regarding taxation it would be this: avoid confusing taxation with government expenditure. Taxation should simply be a means to meet government spending plans. These plans may include social engineering such as providing university grants to students from poor families and economic engineering such as subsidies for important industries. What experience shows is both inefficient and damaging is the attempt to use taxation to alter behaviour.
However, with or without social or economic engineering a government cannot ignore the effect of the overall level of taxation. It has to consider the possible effects of any tax:
- Disincentive to work harder
- Incentive to tax evasion
- Driving of talented people from the country
- Tax burdens on particular products making them uncompetitive with foreign products.
- The parts of society upon which a tax falls most heavily.
A government should consider all these things and then place them in the context of the society and the government’s policies. Unfortunately, politicians being politicians, this never happens and taxes are seen to be bad taxes only by painful experience.