Taxation: it’s not Conspiracy. It’s Cowardice

Conspiracy theory is the lazy way to explain political puzzles. And it lets the villains off the hook. That’s the case with the failure of politicians to reform the public’s finances. The explanation is simple: politicians won’t make the changes that would make everyone better off because they are cowards. How else can we explain what happened when an eminent economist wrote three reports for the British government? Two of them were published with official fanfare. His report on taxation was buried.

Nicholas Stern, now professor at the London School of Economics and president of the British Academy, was head of the UK’s Government Economic Service when he wrote the reports. His analysis of the economics of the environment attracted a great deal of attention, as did his study for the Commission for Africa. But when he proposed ways to improve the tax system, his report “was promptly buried in the chancellor’s drawer,” he writes in the Financial Times (“Fairer fixes for the public purse lost in a chancellor’s drawer”, August 7, 2014).

There were two problems with Stern’s report. First, he identified the need to reform property taxation. As he now puts it: “Far better to base taxation on the value of land – which, unlike other assets, cannot be spirited offshore. We urgently need a thoroughgoing review of housing and land taxation”. That is troublesome talk!

Stern is not contrite. He insists that his reform proposals are even more urgently needed now than when he crafted them for his suppressed report a decade ago. As with all other market economies, Britain needs to raise productivity and employment, and reduce the budget deficit. These objectives can be achieved, but they require champions of courage in the face of opposition from the rent-seekers.

Courage is what the political elites lack. They are willing to punish the vulnerable sections of society, but they shy away from those who wield the power that is associated with rent-seeking.

The second problem is with the way Stern discusses the reform agenda. To talk of “taxing” the “bads”, for example – concepts that shape the debate on how to address issues associated with the natural environment – is to invite negative reactions from the public at large.

People are hostile to taxes in general. That hostility is understandable, and intuitively correct. Taxes were introduced by land-grabbers of old as substitutes for the natural way to defray the costs of administering the state – from the rents of land.

Furthermore, confusion is created when routine practices are branded as “bad”. They may be, but why get locked into an argument when there is a more acceptable way of putting the case? If people wish to dump their waste into the atmosphere, they are using a natural service. It would be uncontroversial to tell them that they ought to pay for that service. After all, they comply with that rule in their everyday transactions. They don’t expect to pay less than the cost of the basket of goods they lift off the supermarket shelves…so it would appear uncontroversial to them if they were merely asked to remain consistent, and pay for the services provided by nature, and by society. This would have two effects.

  • The “bad” taxes could be abolished; resources would be used more efficiently; and the quality of people’s lives would be enhanced all round.
  • To cut back on the payments made for nature’s services, people would reduce their demands on the environment – that’s the way to “conservation”.

So why isn’t more attention paid to the language of public finance?

Economists remain locked into the tax paradigm. That way of thinking is a legacy of the rent-seekers, who do not want tax reform. Likewise, national treasuries are free to tax all and sundry, provided they comply with the imperatives of power: don’t touch the rents of land.

So there is no mystery as to why Professor Stern’s report on taxation was buried. There was no conspiracy. As soon as he proposed the need to “tax” land, the bureaucrats at the UK Treasury would have recoiled as if poked with a branding iron.

As for politicians who exercise governmental power, they claim to be acting in the best interests of the people who elect them to power. But they are too scared to face up to the rent-seekers who mobilise to defend their interests. And so, perverse policies (such as tax-funded subsidies paid to people who are rendered involuntarily unemployed) are cooked up as substitutes. But these palliative policies further aggravate the problems that stem from a dysfunctional system of public finance that fails to comply with the norms of justice and efficiency.

It’s called cowardice.

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