Mirrlees – the fundamental flaw

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I am at the launch of the Mirrlees review on the future of the UK tax system.

Mirrlees’ fundamental assumption is that the tax system should be neutral. The report follows from this assumption, and this is its fundamental flaw.As they say:

Tax systems that distort people’s behaviour by treating similar activities differently without very good reason — as the UK tax system does — create inefficiency, complexity and opportunities for avoidance. Exceptions, to deal with the cost of smoking or pollution for example, should be limited and designed with care.

This is an assumption I reject. Tax systems are not neutral. They reflect the society that promotes them and the choices, political and otherwise they make.

There are five reasons for tax:

1. Raising revenue

2. Redistributing income and wealth

3. Repricing undesirable and desirable goods and services

4. Raising representation

5. Reorganising the economy

This, to me, seems obvious. There is no prospect whatsoever that a democracy can be run effectively without  embracing these ideas. There is no way an economy can be managed without recognising these aims.

The report is, from the outset, fundamentally flawed as a result.

Why ass this mistake mean made? Simply because this whole review is built on the bankrupt model of neoclassical economics. The assumption of neutrality is, of course, not neutral. It is a choice, and it is a choice based on three assumptions:

a. Government is bad;

b. Tax is bad;

c. The market is good.

So neutrality is actually an argument that the market must decide and governments, through the tax system, must not interfere with the market.

Of course they did not say that — so I will for them.

And they’re wrong. Markets are utterly dependent on governments for their survival — by maintaining property rights, by providing the regulation on which  all markets are utterly dependent, on bailing out market failures — whether of banks or by providing unemployment benefits, and by pricing externalities which the market is unable to do.

Mirrlees ignores — to a very, very large extent externalities bar (it seems smoking and the environment) and seems quite indifferent to the fundamental role of government in all other aspects of market behaviour.

The result is that this review is based on flawed assumptions — and everything it prescribes has to be viewed in light of that even when they seem useful.


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