Achieving fairness in the tax system

Posted on

These are the slides I used for a talk at De Montfort University this morning on achieving fairness in the tax system:

  • A talk for the Taxation and Social Policy Group Launch Event - 12th June - De Montfort University, Leicester by Richard Murphy, Professor of Practice in International Political Economy, City, University of London
  • Some theory
    • Most of us are here because we are aware of austerity
    • This is the idea that, in formal terms
    • G = T
    • Where G = government spending
    • And T = tax revenues
  • But we know that austerity has not happened
    • G ≠ T
    • Instead the government has borrowed
    • G = T + ∆B
    • Where B = Total government debt
    • And ∆B = the change in government debt in a period, or total government borrowing
  • But this is not the whole story
    • The government has also created £435 billion of quantitative easing funding since 2009
    • As the Bank of England says:
    • “Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds.”
    • Which means that QE funds government spending instead of debt in that case
  • To give the whole story
    • Now
    • G = T + ∆B + ∆M
    • Where M is the stock of government created money
    • And ∆M is the change in that stock in a period
  • Why explain this?
    • What it means is that tax does not fund government spending
    • All government spending can be funded by money creation (not printing, I stress)
    • Or by borrowing
    • And the only reason why a government does not do this is because of the risk of inflation
    • In other words, the reason governments tax is to control. inflation - and not as such to fund government spending which can be and is all done by money creation in the first instance by overdraft at the Bank of England
  • This matters because it fundamentally changes our view of tax
    • I argued in The Joy of Tax that there are six reasons to tax:
    • Reclaiming the money the government spends into the economy to prevent inflation
    • Ratifying the value of money - because the government only accepts its own currency in tax payment it has value - which is what the ‘promise to pay’ now means
    • Redistributing income and wealth
    • Repricing market failure
    • Reorganising the economy - or fiscal policy
    • Reinforcing democracy - people who pay tax vote
  • This theoretical diversion has, then, been for a reason.
    • Social purpose is not a tack on extra
    • Tax is a fundamental instrument of monetary policy
    • And fiscal policy
    • And social policy
    • As well as industrial, environmental and every other policy you care to mention
  • But most important of all
    • If tax is not primarily about funding government spending then its role in creating social justice is more important than ever before
  • So what can make the tax system fairer?
    • First, we need to define inequality
    • And then see how tax exacerbates it
    • And then see what can be done about tackling those faults in the system
  • Inequality
    • Income inequality
    • Wealth inequality
    • Market access
    • Security
      • The social safety net
  • Income inequality
    • The tax system is notionally progressive
    • But
      • Those with excess income can take it out of income tax and take it into lower rate corporation tax
      • Or lower rate capital gains tax
      • And even offshore - sometimes legitimately
    • So a progressive system is undermined by tax spillovers within the tax system that favour the wealthy
    • Where a tax spillover is the way in which one part of the tax system reinforces or undermines the effectiveness of another part of that system
  • Income inequality (2)
    • The tax system is nominally progressive but:
    • Of the hundreds of tax reliefs and allowances most favour the wealthy
    • Pension tax relief costs more than £50 bn a year and is intensely biased to the wealthy
    • ISA relief costs billions and has the same effect
    • As do many investment reliefs
    • The annual cost is well over £60n a year
  • Income inequality (3)
    • NIC is regressive - it starts at low levels of income and is reduced at higher levels of income
    • All our indirect taxes are regressive
      • Council tax
      • Licence fees
      • Excise duties
    • VAT is regressive
      • Because the well-off do not spend all their income
      • Things they tend to buy more of such as education, health, houses, travel and financial services all enjoy major tax advantages for VAT purposes
  • Wealth inequality (1)
    • CGT is not progressive
      • Each person gets a second personal allowance
      • And the allowance if effectively transferrable within marriages and civil partnerships
      • Rates are low
      • Some incentives such as Entrepreneur’s relief are absurdly generous at 10% on £10 million of gain
  • Wealth inequality (2)
    • Inheritance tax is absurdly designed
      • It will capture the wealthy middle classes
      • But most higher levels of wealth still avoid it by gifts in lifetime or the use of trusts
      • But such planning requires there to be excess wealth - beyond that required to live upon or in (the family home)
      • Some investments, like estates, farms and private companies, are favoured without reason being offered
    • Offshore only remains open to the wealthy
  • Access to markets
    • Limited liability has a cost to the user and is only available to those who can afford it but protects wealth against failure
    • Having a single rate of corporation tax effectively lowers the cost of capital to large companies and creates unloved playing fields
    • Only large companies can really use offshore
  • Security
    • The price of a private social safety net - and the saving for it - is a lot lower in net of tax cost for the wealthy because of subsidies e.g. to pensions and low tax rates on savings
    • There is no such bias to those who use the state social safety net, from which the wealthy are not excluded
  • Action required
    • Education on the true nature of tax
    • Promotion of the 6 Rs of tax
    • Correct assessment of tax spillovers as they impact inequality and fairness
    • Equalisation of tax rates
    • Removal of subsidies
    • The removal of bias within markets
    • New taxes to create progressively - especially on wealth