TAX AND POLITICS

 

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TAX AND POLITICS

 

I have been reading an article in Tax Journal on “Tax and Politics” by Sam Mitha.  Sam is a friend of mine.  Until he retired a few years ago, he spent his career with the Inland Revenue/HMRC where he was involved in tax policy since I first met him in the early nineties.  What interested me is how differently tax changes appear to Sam looking out than they appear to me looking in.

 

For a start Sam points to some things that have gone wrong because ministers put politics before tax, whereas I believe that tax is a creature of politics so needs to be crafted by HMRC/The Treasury to be able to meet the political needs.  This comes down to the purpose of taxation, which, sadly, Sam does not address.  I believe that taxation should have only one purpose, namely to raise the money that the politicians in government believe that they need to run the country.  In practice, of course, a significant part of the tax legislation does not have this aim.  It creates incentives for people to engage in activities that the government wishes to encourage.  A lot of the complexity derives from this.  Firstly, such legislation needs to be targeted to restrict the “goodies” to the activity in question.  Secondly, much of such targeting is short-term so affects only a few years but nevertheless needs to be complex to deter misuse.  Thirdly, most tax incentives only benefit those who generate sufficient profits to utilise a tax relief, whereas often who ought to be encouraged is the entrepreneurial new business that has not yet reached profitability (and taxabililty!).

 

I mention this because Sam starts by lamenting that Mrs Thatcher (actually her Chancellor) reversed the seemingly inexorable increase in the level of income tax “that had funded the growth of government expenditure on health, welfare and education”.  He thinks that as low income tax rates have a powerful electoral appeal, later Chancellors have been almost forced into maintaining that policy.  This begs a number of questions?  Why should government expenditure on health, welfare and education grow inexorably?  Why should that growth be funded wholly by taxation, not partly out of fees charged to those users of government services that can afford to contribute – as happens with prescription charges for example and is happening with pension auto-enrolment which is intended in due course to reduce reliance on the State pension?  Why single out those three areas when government expenditure grows generally.  Wikipedia tells me that there are currently 25 government departments.  There are also a large number of Quangos and bodies such as HMRC to which ministers have delegated functions.  Why do we need to fund such a vast machine?

 

Sam thinks that low taxation can force governments to resort to stealth taxes, which he defines as “taxes collected in ways that are not always obvious to those who are paying them”!  If an ideal tax involves plucking the goose with the least amount of hissing, plucking the goose with no hissing at all sounds like almost a perfect tax to me.

 

Sam says that “the policy of increasing the income tax personal allowances, whilst leaving tax rates unchanged, has made the tax system lop-sided.  Over 40% of those who receive taxable income don’t pay any income tax, while the top 1% of earners pay an estimated 30% of all income tax”.  He worries that exempting so many people from tax might encourage them to vote for those who advocate irresponsibly expensive policies.  I have not heard that suggestion before.  But exempting low earners from tax also reduces the costs of administering the tax system and reduces the silliness of the State taxing the low paid and then paying them benefits to restore the spending power that the tax has taken from them.

 

Sam is in favour of a wealth tax to “help alleviate the economic, social and political risks posed by the growth in wealth inequality”.  He does not mention that few countries have managed to create efficient wealth taxes and many such taxes have been short-lived.  It is politically unacceptable to tax some forms of wealth such as houses, pension funds and family businesses, which makes a wealth tax unfair on those who choose to invest their wealth in different assets.  A wealth tax is difficult to collect because many forms of wealth are hard to value.

 

Wealth inequality is a different area to address, and it seems doubtful to me that greater taxation of those with wealth is the right way to do it.  Indeed, wealth inequality arises from a number of factors.  Most would agree that equality of opportunity to accrue wealth is needed.  I doubt that many would agree that those who work hard and save a large part of their earnings to pass on to their families, should have some of their savings taken away and given to their neighbour who has worked less hard and has spent every penny he has earned in enjoying life in the extra time that not working has hard has given him.  Do many of those who seem to spend their lives in front of their computer and phones really resent that Bill Gates, one of the leaders of the microchip revolution that made that lifestyle possible, has, as a result of his energies, more wealth than they do?

 

To put things in perspective, a recent Institute for Fiscal Studies briefing note, tells me that the top 1% of income taxpayers (those with income exceeding £164,000 p.a.) received 12% of total earnings, but paid 27% of the total income tax.  Indeed, the top 10% of income taxpayers (those with income over around £54,000 p.a.) paid 59% of the total income tax, and the bottom 50% of earners contributed less than 10% of the total income tax.  The IFS describes this system as “very top heavy”.  It certainly seems to me to be already addressing wealth and equality.  It is also sobering to realise that 90% of all earners earn under £54,000.

 

Another factor that Sam does not mention is that most of the top 1% of earners and their 27% contribution to the country’s total income tax burden are highly mobile and can readily move to a country that is content to tax them less.  Wanting a bigger golden egg is dangerous if laying it risks killing the goose.

 

Sam is worried that “the tax system has, at times, departed to an egregious extent from the principle of applying similar tax treatment to the same sort of income”.  He instances reduced rates of corporation tax.  But this depends on what is meant by “the same sort of income”.  The tax system has never treated earnings from employment in a similar way to earnings from self-employment.  The treatment of loan interest on a trade within the scope of income tax differs from that within the scope of corporation tax.  Indeed, prior to 1965, companies paid income tax, so the introduction of corporation tax itself departed from Sam’s principle.  This suggests that the reality is that no such principle exists.

 

Sam also thinks that “until about 15 years ago, the Labour party was in the vanguard in warning about the dangers of tax avoidance” and that the Conservatives have toughened up their policy as “fearful of being accused of being “soft” on tax avoidance.  I certainly think that HMRC find it easier to get a Conservative government to introduce tax avoidance measures by playing on that fear.  But the reality is that all of the main tax avoidance measures, transfers of assets abroad in 1937, transactions in securities in 1960 and transactions in land in 1962 were introduced by Conservative governments, which is inconsistent with Sam’s perception.  One thing that has changed is that prior to the Blair years, anti-avoidance legislation was aimed at generic behaviours, whereas now it is mainly either used to block loopholes left by poor drafting of recent legislation or to give wide powers to HMRC to block anything they perceive to be avoidance.  Personally, I would rather that Parliament went back to the old days when it used to scrutinise proposed legislation rather than rush through reams of incomprehensible law in the (normally forlorn) hope that the draftsman had fully thought it through.  I doubt that even Sam welcomes the current approach where Parliament would rather create uncertainty – the enemy of business transactions – than try to get the legislation right.

 

Sam is also worried that as the economy recovers, the increase in interest payments might outweigh the growth in tax revenues.  But 58% of the gilts issued in 2020/21, were medium to long-term, which pay a low fixed rate of interest until they mature by which time we ought to be in a very different economic position.  Who knows?  However, I do not myself question Mr Sunak’s approach of giving priority to a rebound for the economy, which many think would be jeopardised by increasing taxes at the present time.

 

 

ROBERT MAAS