So what is fair taxation? Talk given by David Drew at the Arkell Centre, Nailsworth, Monday 4 February 2013
In choosing this topic and indeed this title I am really a hostage to fortune in that tax remains one of the more toxic subjects for politicians. But that is exactly the reason we should be discussing tax and its repercussions. That is why I am so pleased to have Mike Warburton as the respondent for tonight’s debate as there is no one more capable of dissecting the arguments and trying to find a way through the morass that the politics of tax have become.
Now for all sorts of reasons I am going to talk more about principles and implications of what I believe a fair taxation should look like rather than to spend much time on other aspects of taxation. I am not going to get into the macro-economics of tax and spend, for instance, though clearly there can be no government expenditure without taxation. Neither am I going to debate the benefits of individual taxes, rather I want to get behind the implications of those taxes and how that affects entrepreneurs, investors, consumers and employees.
Let me start with the real basics of taxation, Adam Smith’s canons of taxation. These are:
- Economy – that a tax should be efficient to collect
- Equity – the impact should take account of people’s ability to pay
- Certainty – the tax should be applied in a fair and consistent manner
- Convenience – the tax should permit payment in the most appropriate manner
Whilst it is possible to modify and add to the canons they are still the best way to decipher the principles behind taxation.
So let me try to identify what I think should be the ingredients of a fair taxation system, using the canons where useful.
My starting point will be that tax policy must rediscover the principle of equity, which currently has been compromised because of increasingly reliance upon regressive expenditure-based taxes. Accompanying this account has to be taken of increasing tax avoidance as a feature of our modern-world. Here I have to express a point of interest – I regularly contributed to Richard Murphy’s Tax Justice Network which along with publications such as Nicholas Shaxson’s ‘Treasure Islands’ have done much to explain how people avoid taxation.
What I would like to discuss is how we might change our system of taxation to make it more equitable. Now I accept that some of my ideas will be controversial and others not yet practicable but I feel that it is right to outline these proposals.
I want to attempt this by looking at the different factors of production and how we treat them in terms of taxation. To begin by looking at taxes on Labour we pay taxes both through the income we receive and in the form of national insurance towards our pension, and to protect us from the accidents of fate that can befall us.
Much of the debate on taxation reverberates around income taxation so it is inevitable that arguments around equity and fairness are central to this form of tax. Sadly most elections result in lowest common denominator pledges on how much the basic rate can be cut by. Instead we need to revisit and revitalise why this form of tax must be a crucial tool for government. In so doing we need to re-establish the progressive principle so that ability to pay – I have never had any truck with the notion of a flat tax – believing it is based on a fallacy that the tax take increases if everyone pays at the same level regardless of their income. I have the same criticism of the Laffer curve which alleges that if tax rates are reduced people become more willing to pay their way. I see this as cleverly counter-intuitive I have never seen much empirical evidence to back up the proposition.
If income taxation is to play such a vital role in the panoply of tax what will it look like and how should we pay it? The greatest change over my lifetime has been the growth of self-employment contingent upon a massive expansion in self-assessment. Even recently we have seen a further encouragement to this with the proposed changes to the pension system. Overall this has made the situation much more complex and puts greater emphasis upon the individual tax payer to get their contribution right and to pay their dues. I feel that despite the way in which self-employment is being seen as the only answer to employment generation in the on-going recession this comes at a cost taxation-wise.
If we are to re-establish the centrality of income taxation there is now a need for greater clarity, honesty and efficiency in how income taxation is levied, whether that be through earned or unearned income. To me the motive behind this is no longer simply economic or financial but a moral one. This may be hard to visualise in today’s society but I believe that if we can go back to identify that taxation must be levied in a fair and just way, then the exception may become the norm, although I sometimes feel that there are many more exceptions out there than is commonly understood or reported by the media. To me it behoves each taxpayer to self-assert that they are doing all they can to meet their tax obligations. The best way to do this is to ensure greater transparency. I have long called for MPs to publish their tax returns as American politicians have to; this would be at least a start in shining a light into some very dark corners.
Of course the other side to taxing income is taxing expenditure, and whereas the former has been somewhat in decline relatively as part of the total tax take, the latter has been rising. There are many reasons why this is so – ease of collection; difficulty of avoidance; government using tax to deter the uptake of consumption to name but three. The downside is by their very nature expenditure-based taxes tend to be regressive, hitting the poor disproportionately harder than the better-off. The main tax is VAT which is now at unprecedentedly high levels, though some discretion is still allowed for staple items through exemptions and zero-rated arrangements. To this must be added the notion that gained credence under New Labour of co-funding to find additional sources of revenue to pay for important services. Though this has not developed as quickly as was thought it would as a concept this remains a vital means whereby local government in particular can raise monies. The worry is that this is even more unaccountable than taxes are and even more regressive.
Moving on to the second factor, Capital, this is an even more complicated area of taxation to look at. Tax on capital and the profits that result can be taxed in a number of ways. Clearly as many more businesses operate on a global scale it has been increasingly difficult to trace jurisdiction and to decide where tax should be paid and what a fair level is. Capital taxation has also been subject to an arms race amongst the Parties – to reduce taxes such as corporation tax – in the hope that more business will take place or more companies attracted to the country. This approach allied to one that prioritises regulation reduction, has given the whip-hand to business. The bottom-line is however that if we are to continue to reduce business taxation, other aspects of tax will have to take the strain – or we will have to recognise that there will be a dramatic fall in government spending.
The realisation that capital taxation is subject to international pressures and therefore there must be greater tax coherence and co-operation at that level. As we know from the Republic of Ireland’s case reducing capital tax regimes to too low a level can have adverse macro-economic consequences. This must be a strong rationale for greater European tax co-ordination - I’ll whisper that quietly for reasons that at least some of you will know the irony of making this statement!
The problem is that as with income taxation, capital taxation is increasingly subject to avoidance, if not evasion. This is not a new issue, but we are more and more recognising that companies are going to extensive lengths to move receipts to low tax regimes. Again to me this is again an ethical issue. In the same way as the old American Independence call of ‘no taxation without representation’ there should be ‘no representation without taxation’. Rather than run away from these issues governments ought now to be facing them head on.
My concern is that overall the pressure is for both income and capital taxation to be heavily constrained. Some of this will be because both income and capital are increasingly porous. This will inevitably lead to a more regressive system of tax if we are to just see tax as a zero sum game. This cannot be fair and certainly is not sustainable. However there may still be a way of trying to square the circle, for there is one factor of production that we have not talked about – Land.
It may seem strange to finish by talking about taxing land. Whilst it is untrue that land is exempt from tax. We charge a tax for local services in the form of council tax on property, and there is a transactions tax on house purchase which we actually refer to as stamp duty/land tax. However land is in reality immune from serious levels of taxation. That is why I am a long-time advocate of land value taxes.
There is not time here to go into all the detail of this. If you want a simple explanation of how this works can I recommend Jerry Jones’ pamphlet ‘Land value – for public benefit’ which sets out what a betterment levy would achieve and why it is a fair measure.
Land taxation is bound to be controversial but it has been around for as long as Henry George came up with the original rationale for including it within the tax portfolio. It would at a stroke do more to re-orientate the growing disparity between the rich and the poor as well as bringing in considerable new resource. Naturally this would not be in addition to other forms of tax but would allow a reorganisation of the tax structure and the thresholds that currently exist. There are countries that currently operate a land tax. I am not for one moment saying a move in this direction will be easy or is a quick solution, but it would allow us to redefine tax in terms of fairness.
I’m sure that this will give Mike plenty to get his teeth into, and I’m sure that you will want to engage in this very important discussion.