The truth about taxes

27 Oct 06
PETER WILBY | Deep in the Conservatives’ tax commission report, published this month, you will find this sentence:

Deep in the Conservatives’ tax commission report, published this month, you will find this sentence:

‘The temptation to use tax to favour particular groups or to achieve certain social ends should be resisted.’

I know the competition is stiff, but I think this might be the silliest statement ever made in a party political document. Almost equally foolish is the commission’s repeated advocacy of a simpler tax system.

All taxes favour one group over another: the poor over the rich, the enterprising over the slothful, the homeless over the property owner, for example. The only one that treats everybody alike is a poll tax, which has always been wildly unpopular.

Similarly, almost all taxes try to achieve social ends: encouraging saving, marriage or charitable giving, say, and discouraging pollution or smoking.

There is nothing wrong with using taxes as instruments of social policy. It is nearly always better than direct prohibition: as the French philosopher Montesquieu observed, heavy taxation is the price of liberty.

This month’s public debates on taxation have started with the wrong question. Both major parties are preoccupied with the overall ‘burden’. But the extent to which tax eats up GDP depends more on the state of the economy than on any ministerial decisions.

The highest recent levels of taxes occurred under Margaret Thatcher and John Major: they peaked at over 48% of gross domestic product in the early 1980s and rose again to over 44% in the early 1990s.

In both periods, Britain faced severe economic recession. The trough of 37% came, not under the Tories, but under Gordon Brown and Tony Blair as the economy boomed at the turn of the century.

Yet politicians’ decisions on what to tax and what not to tax can make a huge difference to economic and social behaviour.

The British obsession with owning the largest possible house in the best possible area, for example, derived largely from the preferential treatment that governments gave to home ownership: mortgage interest tax relief, exemption from capital gains tax, and so on. It is hard to think of any policy that had a more profound effect on post-war Britain.

The tax breaks have dwindled in recent years, or have been offset by devices such as raising stamp duty on house sales.

The Tories’ commission, however, proposes partially to restore them, by exempting a primary residence from inheritance tax. The lost revenue would be of far less consequence than the likely effect on the housing market of elderly widows staying in four-bedroom homes.

Another great shift in behaviour was achieved by the Thatcher governments’ cuts in business and personal income taxes, and their moves towards higher spending taxes.

Labour, too, now regards it as axiomatic that the tax system should provide incentives to money-making. Britain has become such a magnet for financial services that London accounts for a third of the world's foreign exchange turnover.

Many, however, would argue that the price — in the social divisions created by enormous City salaries or in the distortion of economic priorities — is too high. Some future government might decide that the tax system should discourage such activity.

These are examples of how taxation can achieve big shifts in behaviour. But it can also try to achieve smaller shifts.

In Opposition, all parties call for simpler taxes. In power, they rarely resist the temptation to complicate: since 1997, the official handbook on taxation has doubled to 9,841 pages.

A tax concession is the easiest way for a government to mollify a politically troublesome pressure group and to signal its commitment to certain policy priorities.

You probably didn’t know that, if your employer gives you a free meal on a cycle-to-work day, you don’t have to pay tax on it. This is one of many exemptions that the Tories’ tax commission wants to abolish, and it is so rarely claimed that it is indeed hard to see the point of it.

But you can bet your last allowance that the Tories, having scrapped one lot of exemptions, will introduce others.

David Cameron promises to bring about another big shift in behaviour through green taxes. But it is almost impossible to imagine a simple regime. Chancellors would want to fine-tune the taxes: think of the stories of old folk freezing to death that would follow rises in domestic fuel taxation.

Or they’d want to ease the effects on economic activity: think of the protests about the damage to the road haulage industry of the fuel tax escalator.

At least three years from an election, Opposition proposals should be treated with scepticism. Take the Tories’ promises of simpler taxation with an especially large pinch of salt.

Did you enjoy this article?