Tax policy is about far more than just economics. The fact that no-one enjoys paying taxes means they have the power to influence – and, some would say, distort – how people behave. Governments have traditionally raised taxes on things which they wanted to discourage, such as smoking, and drinking alcohol, while offering tax breaks on things which are seen as being beneficial to society, such as saving money into a pension, lending tax policy a moral dimension.
Taxes almost never affect all people equally; in effect, taxing certain things more than others amounts to saying that certain people are expected to bear more of the burden for financing the work of the state. Taxes are also often structured to reflect some conception of justice, especially the notion that the wealthy should pay more than the disadvantaged within society.
The reason why these facts are important is that they demonstrate that our debates over tax are really debates about who should have to pay. In Britain, we already pay relatively high taxes by international standards: the government collects over a third (35%) of national output in tax revenue. Yet our national finances are such that further tax rises following the next general election appear to be an inevitability. So, who will have to pay?
Analysis – “They’re Coming for Your Money”
This question was at the heart of a recent episode of Analysis which aired on BBC Radio 4 on Monday 8 July, narrated by Paul Johnson, the director of the Institute for Fiscal Studies. This is now available online at the following web address:
Paul Johnson was arguing that further tax rises during the next parliament are a virtual inevitability, barring a miraculous turnaround in the UK’s current economic predicament. Governments have historically put in place their biggest tax increases at the beginning of their time in office, and whoever wins the next general election in 2015 will be confronted by a structural deficit (the gap between revenue raised and government spending) of at least £20 billion per year. This gap is much too large to be closed entirely through cutting what the government spends, so achieving higher revenues will be an urgent priority for whoever is the next Chancellor.
The programme then takes listeners through a series of potential options for which taxes the government could potentially raise, laying out the possibilities and drawbacks that each one would offer.
It is made very clear to the listener that, however tax rises are implemented, it will ultimately be ordinary households who are worse-off. Campaigns for tax justice that focus solely on the most popular targets – the rich and major companies – both receive short shrift from the programme. It points out that the rich are already quite heavily taxed as it is (the richest 1% pay 22% of all Britain’s income tax), and in any case, it is simply a reality of the situation that wealthier people find it easier to shift their assets around so that they incur the lowest taxes possible. Major companies – despite the recent success of campaigns against corporate tax-dodging by firms such as Apple and Google – are still able to structure themselves in such a way that they can avoid onerous national tax regimes. It was emphasised that the economic evidence shows the cost of taxing companies is inevitably passed on to their shareholders, employees and customers, meaning it is ultimately ordinary people who pick up the tab anyway.
How can we raise taxes?
As a whole the programme was rather negative about the potential for large-scale reforms to the tax system which would reflect any coherent set of economic or political principles, as Paul Johnson reached the conclusion that the politicians are likely to use their most tried and tested methods deployed during previous waves of tax rises: avoiding the serious reforms which could create major political controversies, and instead focussing on small, subtle changes which could have a major impact over time, such as freezing tax thresholds and fiddling around at the margins with things like different rates of VAT.
This may seem like political cowardice, but the public is partly to blame. Given the rather hysterical reaction which greeted moves such as the “Granny Tax” (a reduction in the generosity of age-related income tax allowances), or the infamous “Pasty Tax” (an attempt to apply VAT on hot baked goods), we should not be surprised if politicians have been scared away from making the really difficult decisions.
The poor quality of our debate around tax is a shame, because there is much that could be improved about the UK tax system. One particularly interesting feature from IF’s point of view is the relatively favourable tax treatment given to older people. At present, pensioners pay no national insurance, have until recently benefited from a higher personal allowance, receive most pensioner benefits untaxed (such as the winter fuel allowance) and are some of the biggest beneficiaries of the fiscal privilege given to unearned income and asset wealth over earned income more generally.
Centre Forum, another think-tank, published a report last year called Tax Justice: Whatever Your Age, which argued that the imbalances between taxation affecting different age groups is one of the major distortions within the UK tax system.
They estimated that removing some of the most obvious tax breaks which are given to pensioners, such as not having to pay national insurance contributions and being able to take a tax free lump-sum from their pensions, could raise over £9 billion in the long term. Reforms to wealth taxes, especially making council tax more progressive or introducing a new property tax, would also make older property owners share more of the burden while discouraging the hoarding of properties which are larger than people need.
Strategies which looked at opening up new streams of revenue for the government, such as these, would be fairer to young people than simply piling more of the burden onto higher taxes on earnings, which has been a favourite tactic of politicians in the past.
Clearly we are all going to have to carry our share of the burden if Britain is to regain control of the deficit. Tax increases are not a panacea, but they will be a very important part of the solution, and it will only be fair if everyone has to do their bit – regardless of how old they are and how likely they are to vote.