Tax policy is a hotly debated topic and highly complex. This post is not at all seeking to be comprehensive, but rather to raise some questions that I’ve been working through in my own mind.
Throughout history it can be seen how tax policy shapes behaviour either through deliberate design or by unintended consequence. The UK window tax saw large houses infill their windows, the wig powder tax saw the end of the fashion of wearing wigs… and of course more recently we’ve seen the demand for the imposition of, or increase of, taxes on tobacco, alcohol, sugar, fatty foods, and so the list goes on.
What seems to be generally accepted in all this is that the more you tax something the less desirous that activity becomes. Which leads me to ask why do we tax labour so heavily? Following from the above line of thinking, surely we must conclude that the more we tax labour what we’re really doing is discouraging work – surely the very opposite of what we desire in our society?
And at the same time, we don’t tax so much which is unproductive in society and yet accounts for so much of our wealth. For example if we take two imaginary citizens who’ve just entered the workforce and one gets a job and works hard all their life to provide for themselves and their family, and the other happens to get lucky on a lotto ticket and never does a day’s work. Our tax system currently takes a great chunk from the earnings of the former, but never requires anything from the latter – that seems perverse to me.
Whilst there is largely universal consensus that some level of taxation is necessary for the provision of necessary centralised services, the degree to which this happens is a point of debate. I’ve argued elsewhere for a generally smaller and less controlling government, and with this comes the preference for government spending to be kept to a minimum and to allow individuals to make more choices on how they spend their money. Obviously this meets with the same trade-off as discussed in the article referred to – namely that we can’t demand lower taxes and higher levels of government spending and services.
But back to the point at hand, which is the way in which we are collecting taxes. Of all the things to tax someone on, their income would seem to be the worst. I’m no fan of death duties, but at least the argument can be made that it doesn’t affect the person whose wealth is being taxed! Income tax is a relatively new form of tax in the UK being just over 200 years old and introduced to fund the Napoleonic wars (with rates increasing from under 1% to the highest rate of 10%), and even in the late 19th century its continued existence was being hotly debated in parliament.
Perhaps we should revisit those debates and question whether an income tax has outlived its use. Indeed this would also extend to corporation tax – again, why tax a business for doing what we want it to do; namely create wealth and jobs? Instead we could seek to gain the necessary money for the national expenditure from the accumulated wealth of the country. For example, why do we think it’s better to tax a poor person with say almost no wealth who earns £50,000, than it is to tax a wealthy person with considerable assets who is not creating any wealth.
The means of doing this is something for another post, and we’ll need to consider that changing from one system to another has many problems – not least that those with accumulated wealth but no income will rightly point out that they’ve already paid taxes on that wealth; but in principle and in theory, I feel far more comfortable with a taxation on wealth than one on wealth creation. But in either case we need to lower the tax burden we currently face.