Taxing Thoughts

“And it came to pass in those days, that there went out a decree from Cæsar Augustus, that all the world should be taxed”  (Luke 2:1, King James Bible)

Kicking off with a seasonal quote, and closely following party promises leading up to the  General Election, here are some thoughts from an ex-civil servant. I might add that I’ve also worked in the arena of legal tax avoidance and worked against tax evasion.

Governments have no money. When a party says ‘We will spend a million pounds’ they mean ‘You will spend a million pounds’.

95% of Government spending is already fixed, so any new administration has very little wriggle room. Public sector salaries take an enormous slice of the cake, property demands to be looked after and much expenditure is ‘formula led’ based on the number of people sick, homeless, unemployed etc. Quibble the percentage if you may, but this expenditure cannot be drastically changed in the short term.

Taxation changes behaviour, so increasing taxes does not necessarily increase revenue. This sounds counter-intuitive but has been proved repeatedly. The higher taxes are, the more people will cheat and the more worthwhile it is to look for legal ways to avoid paying. They might work less, retire earlier, give up work entirely, shift their spending pattern or move to Monaco. It may be cathartic to hit the rich, but don’t rely on it bringing in more money.

Reducing taxes can have the reverse effect. However, the government cannot determine how or where people will spend their tax savings so it can simply be a giveaway without that money necessarily reaching the parts of the economy where it is needed. Tax changes up or down need surgical targeting not a blunt hammer.

Tax evasion is illegal but tax avoidance is not. It is a principle of law that nobody is obliged to pay any more tax than they are legally required to, and only a fool would do so willingly. The more complex a taxation regime is, the easier it is for people to find loopholes. Big corporations and high earners are very good at finding loopholes.

A “1% increase” is not as trivial as it sounds. A 1% increase on a 20% tax rate is 5% by my maths. Most people and most businesses spend or commit most of the income they have, so even a small increase could bite heavily into the amount left after normal expenses, the difference between profit and loss. A lot of businesses are very marginal, so adverse tax changes mean they may close or simply pass the cost on to consumers. 

Green Taxes cut one way but not both. If the objective is to raise money, the government must acquiesce in the undesirable behaviour (i.e. air transport levy). If the objective is to change behaviour (i.e. smoking), the government must expect declining revenues as people adjust their lifestyle.

No Taxation Without Representation swings back to become ‘No representation without taxation’. Progressive taxation is a fine idea, in that the poor pay relatively little and the rich pay proportionally much more. The problem is that this pushes a lot of power into the hands of the rich, or at least the wealthier 50% of the population who pay the majority of the tax. Governments have to treat the affluent carefully; one person on a million-pound salary pays enough tax to fund a dozen nurses.

Minorities have limited synergy. One weakness of the left is the desire to support a range of disadvantaged or self-defined oppressed groups which have little else in common. Whilst each cause in isolation may be deserving, they are competing for scarce resource. Do we support pensioners or the young low-paid, the single mothers or the asylum seekers, council tenants or firemen? If you are not in the smorgasbord of deserving causes you might ask ‘what’s in it for me?’ and vote for someone else.

Socialists have a very expensive constituency not only in those sections of the population who pay relatively little tax but have high demands on services, but also the public sector workers themselves. Once elected, they have a big pay-off to face before making any actual improvements in services. Ironically they must rely on a healthy capitalist economy to provide the taxes to fuel their programmes.

Conservatives will always have a hard sell at election time. Prudence is boring, pragmatism looks hard-faced, traditionalism looks old-fashioned and there is always drag against progressive ideas. As they play to the comfortable middle class and aspirant working class, their policies look selfish and their candidates can smell of money and privilege. Opposing conservative policy becomes child’s play and supporting it feels smug, whilst dumbed-down conservatism simply comes across as dumb. Hence we have the ‘shy Tory’ phenomena in Britain which has fooled pollsters and leaves energetic campaigners on the left flummoxed.

Whoever wins, there is not enough money and there never will be enough money. If we spent the entire GDP on health, people would still get sick and die. This is a big problem for my colleagues working in museums, libraries, art galleries and across the heritage sector. We don’t stop children dying or houses burning down or defend against the enemy at the gates so we know we will only get a fraction of 1% of expenditure, and have to fight for every tenth of a decimal point.

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