I have been asked to give evidence to the Scottish Parliament's Finance and Constitution Committee on the subject of the Foundations of Scottish Taxation and related issues on April 19 and will be doing so. In anticipation I have written a briefing document, as I was asked to do. It is available here.
There are four main themes to the briefing and I will highlight each separately in due course, even though they are related. The first addresses the core issue of the Foundations of Scottish Taxation. Revenue Scotland proposed that these be:
- Proportionality;
- Certainty;
- Convenience;
- Efficiency
As I note in my submission:
These ideas are, of course, familiar. Adam Smith might have used the term equity rather than proportionality; otherwise these come straight from The Wealth of Nations [and date from 1776].
As I added:
I have no desire to question the authority of a great Scottish moral philosopher but it is fair to note that Smith might be a little surprised at the scope and range of taxes to which his principles are now being applied. He would, for example, have been unfamiliar with the idea of:
- Income tax
- National insurance
- VAT
- Corporation tax
- Capital gains tax
- Many other modern levies and charges.
In that case I argue that
If the tax system has changed out of all recognition since Smith wrote so too might some other issues as well. Modern principles of tax need to reflect:
- Modern taxation theory
- The role tax now plays in economic policy
- The social and economic priorities of the society that imposes the charge;
And concluded that:
I suggest that this means that the proposed principles may prove to be insufficient as the foundation for a Scottish tax policy.
I may have understated my case. To be candid, I am a little surprised that such limited aspiration has been suggested for Scottish taxation. What these supposed foundations really relate to (proportionality or equity apart, which is undoubtedly ethical) are rules of administrative convenience that assume that the main purpose of tax is to fund government spending. As a matter of fact, as I will primarily note elsewhere, that is not true. The main purpose of tax is to recover for the government the funds that it has spent into the economy to prevent excess inflation arising. Because this liberates tax from the artificial constraint imposed upon it of, firstly, funding government spending and, secondly, being the tool required to balance the government's books tax can then be seen in its true role as a tool to deliver the required level of inflation, to stimulate the economy when appropriate and to deliver social policy.
Based on this analysis I argue in my submission that:
The principles that should guide the management of the Scottish tax system must be broader than those suggested by Adam Smith. They should instead recognise the fact that tax is the instrument that has the greatest power to shape many of the economic and social outcomes of the society in which we live. This suggests the following principles should form the basis for tax in Scotland:
- The tax system should deliver the macro-economic goals of the Scottish government.
- The tax system should reflect the social priorities of the Scottish people.
- The tax system should encourage the engagement of all in Scotland in the democratic process.
- The Scottish tax system should be effective in:
- Reducing economic and social stress within Scotland and between Scotland and other states;
- Encouraging truthful, tax compliant behaviour;
- Minimising opportunities for tax abuse.
- Additionally the Scottish tax system should be:
- Integrated with other law, such as that regulating companies, partnerships and trusts to help deliver tax compliant behaviour and a level playing field for all Scottish businesses;
- Be adequately resourced to achieve these objectives.
It's my suggestion that these are true economic and social principles that can really underpin tax in Scotland (and elsewhere come to that) and will, as a result, guide the work of ministers, MSPs, Revenue Scotland and those concerned with Scottish economic and taxation debate more appropriately than some maxims written in 1776, however useful they might have been at the time.
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[…] have already written about what I think the foundations of Scottish taxation should be. This thinking is based on a report I have submitted to the Finance and Constitution Committee of […]
Two tiny typos Richard, in an excellent and wide-ranging response –
14 “then economy”
43 “dial residence”.
Thank you
Corrected
This will mean their own currency?
Yes
If independent
Is the only viable way
You’ve been a bit quiet over the weekend. I hope all is OK.
All good stuff above – nation building ‘bricks and mortar’ I’d call it. No private enterprise is capable of creating a nation in my view.
I do worry that an independent Scotland would – if it does not get its facts right – leave itself having to compete on taxation and thus unable to use tax constructively at all.
I took some days off
Officially I still am!
However the Scottish Gov has only control of a part of Income Tax, all the rest would need Scotland to be Independent and in control of all taxes.
Please read the report
I do, of course, address this issue
I welcome the fact you have been invited and that you are overtly challenging the narrative which has caused so many problems in the UK.
I have one quibble: you say “The main purpose of tax is to recover for the government the funds that it has spent into the economy to prevent excess inflation arising.”
I agree with the first part of the sentence. However it seems to me that you have adopted the shift which Ms Thatcher et al introduced in the UK (though she reflected a much wider change as shown in IMF rules and elsewhere) in placing control of inflation at the core. To me, that usurps the place of full employment as a central function of the tax system. That difference of opinion is central to the difference between neolibs (for want of a more neutral term) and keynesians.
In saying that, I hasten to add that “full employment” is a moveable feast, and I do not wish to suggest that precludes UBI, for work is not in itself an ethical “good”, despite the neolib invention of the biopsychosocial story as a figleaf for that position. I reject BPS in its harmful and dishonest entirety.
But inflation is not a bogeyman, as your post recognises. Increasing inequality and a focus on money rather than real lives, is. It is clear that increased equality etc is part of your objective, and it may be that you are pragmatic in focusing on inflation, given we have to start from here. But it is abundantly clear that putting control of inflation as primary objective does not necessarily lead to good outcomes: in the wrong hands it is a damaging abstraction and we have seen the results over decades
In a society where equity and redistribution in the interests of greater equality is core, inflation becomes a tax on idle wealth. Plutocrats who oppose tax as a tool for social policy predictably also oppose inflation for all the same reasons. I am not persuaded that it ought to have its place in your narrative as outlined above
I think you need to consider that comment inside the broader principles, of which full employment is one
I do not think there can be lasting inflation without full employment
Whilst o also think some inflation useful it cannot be allowed to be out of control
I think the appropriate checks and balances are in what I wrote
Ghanks for your comment
Thanks for your reply. As I said I do recognise that we are broadly in agreement about broad principles. I suppose I think you have placed the wrong element centre stage, and it may be that in the current climate, where inflation control has been given this privileged position for decades, we must not frighten the horses. The tale is widely accepted and direct challenge to the central importance of controlling inflation is going to be attacked. That I recognise.
But it is not a peripheral issue, nonetheless, and I think you cede too much. I may be wrong, because I do not really know what you mean by your second sentence. Perhaps it would help me if you elaborated that a bit, because your response was quick and maybe assumed too much knowledge on my part. It appears to say that full employment is a necessary condition for a desirable level of inflation: yet that seems to be at odds with the central place you give to control of inflation: if full employment is necessary for it, then full employment is primary, surely?
In my list the foundations are all key, and not prioritised
Two would in my opinion include full employment, greater equality, a sustainable economy, and much more. But that is for people to decide via democracies. I do not think foundations dictate.
Typo – 18776.
Great article, thanks!
John Cowperthwaite was a Scot as well.
How would an Independent Scotland fare, with an fair and equitable tax system within its borders, and the world’s largest tax haven next door? (I know, they’re not yet, but that’s the plan.)
Do you think Scotland would be able to reverse the UK’s tax subsidies to the oil companies, for example, and actually make them pay their way?
Your proposal in 42, final sentence, is impossible. Unless you mean that higher rate taxpayers should have a reduction, which isn’t exactly ‘fiscally neutral’.
Scotland does not have the power to implement changes by band, only by equal application to all bands. Booby-trapped indeed…
It can play where bans apply
It could beat rUK – I will highlight how tomorrow
The Scottish Government does now has powers over all income tax rates and bands. It cannot change the Personal Allowance, and cannot alter the tax on savings or dividends. Hence they could effect the suggested changes.
It’s still a booby-trap, in the sense that real economic power does not come from the ability to change only income tax.
They have no power over the taxes that apply to oil exploration and extraction.
Accepted
For completeness, http://www.parliament.scot/ResearchBriefingsAndFactsheets/S5/SB_16-88_The_Fiscal_Framework.pdf has the details of the new powers of the Scottish Government under the Scotland Act 2016, including the complexity of the Fiscal Framework – which describes the arrangements for block grant adjustment.
Many other learned authorities (some with axes to grind) have given explanations of the Fiscal Framework. I’d wager none of the explanations are entirely intelligible to ordinary mortals (such as me). You may find http://www.parliament.scot/S5_Finance/Essentials_of_the_Fiscal_Framework_David_Eiser.pdf to be a wee bit more intelligible.
I do not make the points below in order to attempt to score a point, but to develop our understanding (I hope). I am not a tax specialist, nor seek to appear to be one. I do however think that “taxation” is done very badly; is poorly understood by the public that always pays the bill, produces a UK system that is abused, and is too often ineffective in producing the political or social benefits it is claimed to achieve. Often the people who understand it least, and are most impervious to the consequences of policy, are the politicians who make the decisions.
In 2010 you wrote this in “Tax Briefing: The Foundations of Tax Justice”:
“There are five reasons for taxation. Tax is used to:
1. Raise revenue;
2. Reprice goods and services considered to be incorrectly priced by the market such as
tobacco, alcohol, carbon emissions etc.;
3. Redistribute income and wealth;
4. Raise representation within the democratic process because it has been found that only
when an electorate and a government are bound by the common interest of tax does
democratic accountability really work; and finally to facilitate:
5. Reorganisation of the economy through fiscal policy.”
You will notice that 1) is “Raise revenue”. Inflation does not appear to be mentioned. I accept that the purpose of funding “public spending” may not be implicit in your statement of (1), but it is not explicitly rejected either. The problem here is that it is widely understood by the public that tax revenues are raised to pay for public spending. The public draw the implication from its own entrenched political and economic presuppositions, fed by media and politicians. I do not think I am making a particularly controversial claim here either. It is the standard, rote convention of political discourse throughout the UK: tax revenues fund public spending. No doubt it goes with the ‘household economics’ argument to support austerity policies and (the spurious, eternally missed, meaningless) deficit reduction targets, but it is nevertheless the standard fare of politics, and it is hard to shift.
If I may raise a second issue: the references to Adam Smith in your remit seem to me (without any special insight) perhaps to derive from the Meade and Mirrlees Reports (presumably well known to the Scottish Government), and some IFS papers.
It seems to me that while there is an acceptance of the ethical and distributive justice elements of Adam Smith, the nature of the underlying argument being made attempts to shift the debate towards establishing what the objectives of a tax system should be for any given distributional outcome. It has thus already reduced the argument to a technical and managerialist process: operating ‘the system’; only operating it ‘fairly’. Thus in this kind of argument (if it is current in Scottish Government thinking – I do not know) then the issues are reduced to a kind of procedural functionalism that emphasise “efficiency” or “fair process”: minimise the tax collection costs; reduce the negative effects of tax; apply a non-discriminatory tax policy; ensure transparency. All of these are admirable, but do not really address the fundamentals or enhance public understanding of the purpose of taxation. I am merely speculating when I surmise that the remit may already encapsulate an intended “fudge”.
Finally, in reflecting on public knowledge of policy issues, could I draw attention to Chris Wales (an insurance risk specialist) who wrote this in a commentary on Alt, Preston and Sibieta ‘The Political Economy of Tax Policy’ (2010):
“There are relatively few academic centres in the UK that engage directly on UK tax policy issues”, and: “There remain …. a relatively small number of institutions outside government that support the tax policy-making process and few of these have the kind of public profile that can generate a broadly based policy debate in which the public will engage” (p.1307).”
I suspect that remark could be expanded to encompass the plethora of “think-tanks” in which we are invited by the media to place our trust, without knowing much about them, their purposes, or who pays their bills.
Three issues here
First, may ne’er standard NGO has moved on from 2010. I was on my way then: now I know much more. That’s what study is all about. So I do not now agree with my 2010 paper. I would have wasted a lot of life if all my study had not improved my understanding
Second, you are right: Smith’s maxims reveal a poverty of aspiration for tax amongst those who adhere to them. Tax is not just a technical issue. It’s about ensuring a society lives to the full
Third, I know Chris Wales. HMRC in its current form may well have been his idea. That’s not something to be proud of. The last I knew he was at PWC
Thank you for your prompt reply. I respect changes of opinion; it was not a criticism.
The great 18th century anatomist and experimentalist, John Hunter (who revolutionised surgery and inspired the generation of practitioners who followed, both in the UK and US), was once challenged by a bold student that he had changed his mind in what he was teaching on a specific subject. Hunter replied ‘Very likely I did. I hope I grow wiser every year’. This is how knowledge works and should not cause the problems it seems to do.
The matter to which I wished to bring attention was that there is a fundamental change in understanding among experts on taxation, but it is not understood by politicians, the media or the public. It is rarely openly discussed (I have some speculative thoughts on why this might be, but that would take too long here). There is some progress on the issue of currency and the use of the public debt (although not yet sufficient), but not taxation. At least that is how it appears to me.
On Chris Wales, the reason I raised the matter was not the writer, but the underlying issue he had raised: with the exception of your site there seem to be few institutions or sources where issues of substance in taxation policy may be discussed and explored in the public realm.
Thanks
I agree with the point you are making: there is a dearth of tax material
I am discussing right now how this issue might be addressed by better materials – maybe on this site; maybe another
As the discussion around oil has already started raging again, how should one argue the revenues-from-oil issue when you say that:
“this liberates tax from the artificial constraint imposed upon it of, firstly, funding government spending and, secondly, being the tool required to balance the government’s books…”
One of the arguments for Scotland to manage its own resources is that Norway collects so much more revenue from oil because of -among other things- a different taxation approach to its off-shore industry whereas the UK is now essentially paying the industry to take our oil.
But in light of what you say above, is the argument valid that taxation here is indeed a tool to fund government spending? And that this is a legitimate way to use taxation?
I would hope Scotland might rethink oil taxation.
I accept it looks like tax funds government spending. If a government has its own currency I do not accept that it does.
Thanks! I can’t help thinking I need to do a lot more reading to fully understand this. I think I get your main point, but not, it seems, how this all fits together into a coherent, and successful, economic policy for an independent Scotland. I’m glad the Scottish Government is reaching out to experts who know this stuff though.
My books explain more, perhaps most especially The Joy of Tax
Way-hay!! Someone is listening!
Bravo.
Richard,
You say you’ve been asked to give evidence to the committee “in April 19”. I assume you mean on April 19th 2017, not “in April 2019”.
Also you still have a typo on the date Wealth of Nations was published. You have 18776 but wasn’t it 1776?
What you are saying here is very interesting. Hopefully you will inspire some more imaginative thinking.
Ian
Something went wrong there
This post got a bug and I had to restore a back up
I forgot to change the mistakes I’d edited out once
I have done so again
Thanks Ian
It is indeed 19 April