Taxing Questions on Rights and Responsibilities

The surreal nature of the debate on taxation continues. At a Resolution Foundation seminar on November 2, the panel of experts was asked whether the UK tax-take was about right (35% of GDP), or too high, or whether it ought to be lower. There is no correct answer to that question, the infantile nature of which reflected the incoherence of tax policy. As Sir Vince Cable, who was Business Secretary in the Cameron coalition government, observed: “People want US levels of taxation [very low] and Scandinavian levels of spending [very high]”.

If stupid questions are asked, politicians will get stupid answers. One consequence is that governments end up with huge deficits and an escalating sovereign debt which is shifted onto future generations (who will never be able to repay it).

People complain about the quality of public services, and they moan about politicians taking too much in taxes out of their earnings. This corrodes respect for government and the public sector. Trust in governance needs to be restored, but that will not happen until we sort out the language used to discuss fiscal policy.

The correct question to ask people is this: “What services do you want government to provide, which you are willing to fund?”

That concentrates attention. If we have to pay for what we receive, we would think hard about the volume of services we want, how much we can afford, and who should provide them. If we are not willing to pay, we cannot complain if there is a shortfall in the quality of the services we would like to use.

Rights and Responsibilities

But we cannot blame the public in general for the confusion that prevails over tax policy. The problem may be disentangled in terms of the “human rights doctrine” enshrined in documents like the UN Declaration of Human Rights. The architects of such documents have misled generations of people, who have been raised to argue in terms of their rights, without acknowledging their corresponding responsibilities.

That has two effects.

1. People who can exercise privileged power to capture value that ought to be flowing into the public purse are not held to account.
2. Victims of this perverse financial arrangement seek compensation by demanding that their rights should be enforced (to housing, education, etc) without locating that discourse to responsibilities.

Outcome: a reckless feast on the public purse, even when there is insufficient money to fund all the services that people need.

Locating tax in the correct context

The London-based Institute of Economic Affairs has now proposed that order be introduced to the fiscal nightmare. They propose the abolition of 20 taxes in favour five taxes that would render governance more efficient and raise the living standards of people on the lowest incomes.

Their most interesting proposal: a tax that collects 75% of the location value of land. That would incorporate real progressivity into the tax system. The rich, who occupy high-value locations, would pay more than the poor, who occupy low-value locations.

Most importantly, the IEA’s proposal stimulates awareness of the relationship between the services people want, and the money they are willing to pay for them. In fact, people are already aware of that link. When they buy or rent their homes, they exercise their choices based partly on the quality of the dwellings, and partly on the public services that they want to access in the places where they live or work. Location choices are made in relation to proximity to schools, or recreational amenities, public transport, and all the other benefits that are displayed in the windows of estate agents.

The anomaly with the current tax system, of course, is that the value which people are willing to pay for access to public services is paid to private land owners, not the agencies that provide the services. That needs to stop, if we want coherence in the way governments raise their revenue.

• The IEA report is available here.