What sort of tax system do we want?

Posted on

There are three events of major political significance to the public sector this week.

The first is the issue of the Department of Work and pensions’ White Paper on the future of benefits. Important as this is, and as concerned as some, like the Archbishop of Canterbury, are about this issue I’ll leave it aside.

The second and third both relate to tax. Of these two one is the TV documentary that Channel 4 will broadcast on Thursday entitled ‚ÄòBritain’s Trillion Pound Horror Story’. As Channel 4 say :

Film maker Martin Durkin explains the full extent of the financial mess we are in: an estimated £4.8 trillion of national debt and counting. It's so big that even if every home in the UK was sold it wouldn't raise enough cash to pay it off.

Durkin argues that to put Britain back on track we need to radically rethink the role of the state, stop politicians spending money in our name and introduce, among other measures, flat taxes to make Britain's economy boom again.

Durkin has a history of producing documentaries that have been open to challenge with regard to the facts; his last for Channel 4 denied global warming and in the process aligned itself with the libertarian right of politics. This programme looks as though it does the same thing. The national debt is not £4.8 trillion. To construct any number near that amount ignores the fact that state pension liabilities might be paid over the next sixty years. Few are due now: all those that are can be afforded.

In that case Durkin is – as Channel 4 admits – presenting a polemic not so much based on fact but instead on a desire to radically transform the structure of our society. When I undertook research on flat taxes for the Association of Chartered Certified Accountants in 2006 I interviewed the creator of the concept, Alvin Rabushka, who told me:

The only thing that really matters in your country is those 5% of the people who create the jobs that the other 95% do. The truth of the matter is a poor person never gave anyone a job, and a poor person never created a company and a poor person never built a business and an ordinary working class guy never drove economic growth and expansion and it’s the top 5% to 10% who generate the growth for the other 90% who pay the taxes to support the 40% in government. So if you don’t feed them [i.e. the 5%] and nurture them and care for them at the end of the day over the long run you’ve got all these other people who have no aspiration for anything more than, you know, having a house and a car and going to the pub. It seems to me that’s not the way you want to run a country in the long run so I think that if the price is some readjustment and maybe some people in the middle in the short run pay a little more those people are going to find their children and their grandchildren will be much better off in the long run. The distributional issue is the one everyone worries about but I think it becomes the tail that wags the whole tax reform and economic dog. If all you’re going to do is worry about overnight winners and losers in a static view of life you’re going to consign yourself to a slow stagnation.

As for the role of government, he said:

I think we should go back to first principles and causes and ask what government should be doing and the answer is “not a whole lot”.

This is more than polemic: this is about radical reform of the whole way in which w organise society. Let’s not pretend otherwise. In the context of the Uk this is little short of revolution for this is a world none of us have known, and which consistent election of democratic governments with a mandate to tax shows we do not seem to want.

What then of the third event? This is the launch of the Mirrlees Review on Reforming the Tax System for the 21st Century.  This review is sponsored by the Institute for Fiscal Studies and is closely linked to the Oxford University Centre for Business Taxation.  They probably won’t appreciate the link to Durkin’s work, but I’m going to make it anyway.

The review has published thirteen papers so far. I can’t possibly review all here. But they show a similar theme to Durkin in supporting radical reform that assists the accumulation of wealth through the tax system, even if they don’t go so far as to promote a flat tax. Some quotes illustrate the point:

Given that the justification for double taxation is arguable and that inheritance tax currently raises less than £4 billion a year, consideration could be given to abolishing it altogether.

This is a position widely associated with the right wing of politics. As is this:

An alternative [to corporation tax] which we put forward for consideration is a destination based tax, levied where a sale to a final consumer is made. ... The result is ... essentially a destination-based VAT, but with labour costs deductible.

Such a tax would, of course, hit those who have to consume all their income (the poorest) hardest and be much less of a burden on those who could save (the most well off). It is , as a result, like Durkin’s flat tax a seriously regressive shift in the UK tax agenda. And as I showed in 2008, to replace corporation tax in this way would require a VAT increase of at least 7.5%, and by now probably somewhat more.

The same theme can be found throughout much of the Mirrlees Review and that is unsurprising. The review claims to be objective and free of political influence but that is untrue. This is a review begun before the crash and based on the whole structure of neoliberal economics that takes as its premise the idea that free markets are efficient, government is bad and inefficient and that the reduction of state activity is to be encouraged on all occasions. The only difference with Durkin is one of degree.

Both Durkin and the Mirrlees review (unless I’m going to be very pleasantly surprised at the revisions since the drafts were issued in 2008) represent a challenge to the state we have enjoyed, the lifestyle we have appreciated, the society in which we live and the social cohesion that (by and large) underpins it. Both would increase division in society if their prescription were to be followed. Both would diminish government. Both would make life rougher, tougher, cruder and more extreme.

Is that what we want? I know where I stand. And we have to realise that this is not some peripheral, academic or philosophical issue now. This is becoming the mainstream of politics in a way that could not have been anticipated before the crash.

Tax systems reflect the societies that give rise to them. Do we want a compassionate society, or something else altogether? Those are the choices being offered this week.