The vexed issue of taxes part two………


Ok so we saw below (blog) why we may need to pay taxes the
question now becomes how we pay them.  Basically there is no free lunch – someway in some form you are going to pay a tax.  Income tax is the obvious one, the value added tax is fairly clear, national insurance and car road fund are types of taxes too so there are a few for a start – even if you don’t work they’ll get you.  We could always load it on corporation tax instead – after all they have lots of money. But then if we do that it will impact on prices. Companies are not able to run at a loss and so company tax becomes just another business expense.  
 
Of course we can conclude that the Government is on the make– after all why have I paid my car tax for such rubbish roads, why do the government expect me to fund my health care when I pay NI? Here’s the problem, we don’t pay enough….

 NI take - £110 billion – £289 billion cost of pensions and NHS

 Car tax, tax on fuel -£5.9billion and £26 billion - £23billionspend on transport

 So the we haven’t paid anything like enough for health and pensions but we have paid a bit too much for roads, especially as
transport includes non-road transport.  Or have we?  Of course non-road transport (trains) eases pressure on the roads, in addition ‘transport’ does not include policing nor does it include spend at a local level by councils.  So maybe we could ease
tax on fuel back by £9 billion but then which other tax will we put up to cover this and what impact will that have on car use – people won’t drive less as a result!

Thinking about tax and fairness it always seems a little strange to tax someone on effort.  Income tax is problematic as it taxes work.  Income tax also makes up our biggest tax revenue at £167 billion. That said many people don’t pay it –  after all the tax threshold is£10,000 and after that you pay 20% until you get into the 30s.  But actually it’s not quite that simple.  If you have
a couple of children and earn£20,000 the Government give you back about £4,000 – which is more than 20% on the £10,000 you have earned.  So income tax is, contrary to popular belief, mostly paid by the wealthy.

It still seem a little perverse to tax people on effort but at least the present approach taxes proportionally higher based on ability to pay.   The third biggest tax is National Insurance.     As we have seen above this doesn’t cover what it was set out to pay for but provides a useful income.  Again it charges proportionally more for those earning more.  
 
Sat between these two is VAT.  VAT seems fair, tax on spend not on effort.  Of course there are anomalies such as the VAT on health and hygiene products but overall it seems a  fair tax.  Perhaps an answer is to lower income tax and increase VAT? 
An increase in VAT to 25% would in theory raise over £20 billion and that could crudely see a 20% drop in income tax (from 20% to 18% not unfortunately from 20% to 0%).  The only trouble with this is those on a zero income would see cost rise but income remain static.  Pension and benefits would have to increase to cover this shortfall.  
 
Once cars are stripped out of excise duties the remainder is quite modest and let’s face it the drunks and smokers clogging up the NHS and the courts outweighsthe amount collected in revenue.   Corporation tax and business rates together add up to £68billion.   In many ways it is hard to see how this could be increased. Any increase is likely to be passed on in the form of
higher prices and so we may as well collect that money directly via VAT.   

Inheritance tax is a funny one.  It’s very low and only applies above £325,000.  The thing is most of this relates to increases in the value of houses.  It is not earned but a happenstance of owning property, property that you  wouldhave paid less  than £50,000 in the early 80s now worth over the inheritance tax threshold.  Of course even with interest you would have paid nothing like this amount.   So why don’t we lose the threshold and simply charge a flat 20% on all estates.  We only raise about £3billionthough inheritance at the moment but this could rise significantly with a new threshold and rates.  In addition it has the advantage of stimulating the housing market by encouraging sales to fund the tax bill whilst not reducing anyone’s incentive to work.  
  
What we see of course, just as with spending, is that taxation is necessary but over complicated.  We take income tax from the low paid and give back more in the form of credits.  We strip the NHS of cash and then expect enhanced services – when we haven’t even paid for the ones we get.  We complain about poor infrastructure but want to pay less tax in order to improve it. 
Overall we simply want someone else to  pay….

The vexed issue of taxation……


People always like to complain about taxes,  public spending and growth and so I thought it would be fun to start from scratch and build up a system in a naive copy of Plato’s Republic. 
If we make certain assumptions such as people’s desire for economic wellbeing and growth and a desire to live in a fair and just society we can try to work through what might make up a tax
system.


Why taxes?  Well  taxes are used to take care of market failures – things that aren’t provided for a by a market mechanism.  There is no need to subsidise soft drinks firms and phone companies as people will happily pay for these and it is easy to see ownership and control. Streetlights, on the other hand, cause us the problem that ‘pay-as-you-go’ would see towns in darkness and Pied Piper like lines following the one sap who is paying.  
 
Looking back in history we see that kings raised taxes to pay for armies and to build palaces.  We can forget the second one and the first shouldn’t be an end in itself.  What we really need first of all is a way for us to do business.  We need some way of being able to enforce contracts and secure legal title.  In the absence of this business will not flourish.  So sort form of judiciary is equired and that needs to be freely accessible and independent – so we need to cover that with a tax and a bit of central dministration too.    Ok so now we can do business and get paid, we really could do with infrastructure.  We could build toll roads and perhaps we should, though that does restrict the movement of people and goods somewhat.  Probably best the state builds and maintains roads.  Electricity and water are also required and these can be either state or private.  Either way though we pay
to use so no tax is required there. 



Ok so we have a country that has enforceable contracts and infrastructure.  We haven’t forgotten the army – some sort of defence force needs to be added and  that will require more tax.   To ensure we have an effective and efficient workforce we will need education – most people won’t be able to pay for that and so again we will need to raise some taxation.  Ideally this education will extend to as high a level as required but should at least secure literacy and numeracy to adult levels.  
Of course we need to help people manage their health – we need to ensure vaccines are used and communicable diseases are managed and reduced.  Again people may not be able to pay for this – and certainly we don’t want to leave it to chance so some form of health care provision is needed.  We can’t do business with ourselves though so need to fund embassies and aid overseas to increase our customer base and influence.  Some of this can be privately funded but we probably need some state
intervention.


In summary we have a judiciary (to include police), infrastructure, defence, education, health and foreign affairs.  People do get old though and probably won’t have saved enough so some sort of basic pension is required, alongside some sort of fiscal help for those  unable to work due to health.  Should this utopia not provide enough work then there needs to be some  subsistence allowance for those not working.  
 
So what do we do in reality?


 20%  Pensions
 19%  Health
 13%  Education
 10%  Other benefits (inc. tax credits)
 7%    Debt  Interest
 7%    Culture, sport  etc.
 5%    Defence
 4%    Public Order
 4%    Personal Social 
 3%    Housing & env
 3%   Transport
 2% Dept for  Business

Most of our money is spent on paying pensioners.  There are lots of them of course and so that’s a big bill.   We spend a fair bit on health too – though we have one of the lowest spends per head in the developed world (we are 15th).  With education we are 17th –though we have very crammed classroomsso that may help explain that.  We spend a lot on tax credits, subsidising low paying companies –  about 10% of the total.  Then of course a big chunk goes to  private landlords in the form of housing benefit.  Paying for the banking crisis is our next big spend followed by sport and  culture.  Defence is relatively cheap and policing even cheaper.  Infrastructure and business are last of all. 
 
Let’s take a step back though and ask again why.   For example £53 billion doesn’t need to be spent on sport and culture –
they are not market failures.  The  FA is wealthy beyond the dream of avarice after all.   Numerous billions could be trimmed from pensions if people had paid in to  their own schemes.  Housing benefit  could be reduced if the housing market was freed to operate properly and  councils freed to build.  Health is  a tricky one – we don’t pay that much by international standards. 
Perhaps though efficiencies can be made centralising and reducing the  number of local GPs?  
 
All in all though the tax system doesn’t seem that mad – at least on the spending side.  Perhaps we should look again at the tax raising side though?