Comment: The government’s four tax problems
Since the poll tax, successive governments have been terrified of radical tax policies.
By Dr Matthew Ashton
A financial minister once commented that "the art of taxation is like plucking a goose: to get the most feathers with the least amount of hissing". This is the issue facing George Osborne this week. No one disagrees with the argument that lowering taxes could help kick-start growth, however if the overall burden of taxation is reduced then the government potentially will have to make up the gap with further borrowing. This makes the Budget the world's most complex balancing act. Osborne has to take into account not only the wishes of his own party and supporters, but the Liberal Democrats, the IMF and the various credit rating agencies. The smallest change in taxation one way or another could significantly alter how they view the UK's long term prospects, with knock-on effects on our AAA credit rating. I'd argue however that there are four other problems with regards to the government’s long-term approach to tax.
One is simply the fact the system still has so many loopholes. Billions are being lost every year from individuals and companies who can afford good enough accountants. While these loopholes remain open this behaviour is completely legal and logical. An accountant friend of mine once showed me how certain firms avoided tens of billions in tax through a process so labyrinth it gave me a headache. However these loopholes remain open and governments seem intent on looking the other way. I can't help but think that if ordinary British citizens discovered a similar loophole they could benefit from and collectively similar sums were being lost the chancellor would close it down with immediate effect.
The other issue is not of the governments making, which is that national taxes are increasingly problematic in a globalised world. The rise of transnational companies has meant that figuring out where they make their i,ncome and where they're based is a bit like trying to pin a tail on the donkey in the dark. Equally their constant threats to move elsewhere if taxation is raised leads everyone into a race to the bottom. This is an issue that will one day have to be properly looked at as we can't ignore it forever.
The third difficulty is that governments far too often make taxation policy based on politics rather than evidence. Or they apply a rather one sided view of the evidence. For instance any conclusions drawn about the effects of taxation based on evidence from the last five years has to tempered with the knowledge that we're currently going through the worst recession in living memory. A taxation policy that works during economic booms might not work at the moment and vice-versa. However governments frequently approach taxation as if a one size fits all policy was the best way forward.
This brings me to perhaps the biggest problem of all, which is successive governments’ inability to think radically. Obviously taxation is a contentious issue. For years, though, governments have been terrified of making any radical decisions because of the debacle of the poll tax two decades ago. Margaret Thatcher's premiership was destroyed because this tax was widely perceived as being unfair, leading to riots and widespread non-payment. As a result whenever anyone suggests a far-reaching shake up to the tax system, governments find every reason under the sun not to attempt it. This seems odd, as they're always happy to attempt new and untried policies when it comes to other areas of British life, such as the NHS and the welfare state. Without radical thinking, we wouldn't have either of those two institutions.
Adam Smith in his general principles of taxation laid out several questions that every government should ask themselves before drawing up a budget. Is the tax fair? Can it be collected regularly? Can it be collected easily, and is the amount brought in sufficient to justify the cost of collecting it? However at no point does he warn against radical or innovative thinking. Radical does not necessarily mean more taxation or more complex taxation, a distinction lost on some of its critics.
In the last few years a range of new ideas have been suggested including the Robin Hood tax, the mansion tax, abolishing VAT, the land tax and several dozen others. I'm not saying that any of these are necessarily the solution to our problems, just that they're too often dismissed out of hand by governments without proper study, simply because they're radical and radical equals bad. If we have to pay tax, then let's have tax policy based on reasoned argument and evidence rather than assumptions and dogma.
Dr Matthew Ashton is a politics lecturer at Nottingham Trent University. Visit his blog.
The opinions in politics.co.uk's Comment and Analysis section are those of the author and are no reflection of the views of the website or its owners.
