TAXATION

Low tax economies perform better and create more wealth, but Britain’s increasing tax burden is harming its competitiveness.  Future governments must bring down this burden.  However, within this burden there is also plenty of scope for restructuring the existing tax system.

Government expenditure is inherently less efficient than private expenditure.  It is not just the £101 billion of waste identified by the Taxpayers’ Alliance in the Bumper book of Waste[1], but in far more subtle ways.

When taxes are high, a higher percentage of spending is made by people who do not bare the burden of this expenditure.  When people only see the benefits of spending and not the costs, poor decisions are made.

We only need to look at the example of Ireland and a number of eastern European nations, who having cut their tax rates have seen strong economic growth as a result.  Ireland has lowered its corporate tax rate to 12.5 percent, and now enjoys strong economic growth and higher living standards than Britain[2].   Estonia is enjoying extremely high levels of economic growth and is a leader in the development of flat taxes that is planning to cut the flat income tax rate from 22 per cent to 18 per cent by 2012[3]

Low tax economies such as the United States and Ireland have consistently had higher economic growth compared with high tax nations such as Britain and Canada.  In the 15 years from 1990 to 2005 the United States grew an average 0.6 percent faster than the United Kingdom, while Ireland grew an average 4.31 per cent faster.

Progressive Vision strongly advocates a lower tax burden for Britain, and believes a goal of substantially reducing the tax burden in the medium term is attainable. 

Among those who support lower taxes, there remains considerable debate about the structure of the existing tax system.  While maintaining a desire to lower taxes in the medium tern, Progressive Vision believes that there is plenty of scope for simplifying the current tax system and shifting the burden of taxation from wages and profits to user chargers, including those for environmental resources.

The complicated nature of the current tax system discourages productive economic activity, especially for the small business community who generate 52 per cent of private sector turnover, employing 12.6 million people.[4]  Larger businesses have dedicated staff to deal with tax and regulatory requirements – indeed such taxation and regulation often act as a barrier to entry to potential competitors – but smaller businesses are more seriously hindered by the complicated system.  Worse, we will never know how many small businesses are never started because of the complex taxation and regulatory regime.

Simplifying the tax regime, would involve removing taxes, such as stamp duty and the television licence fee, and flattening taxes such as VAT with a complicated array of levels depending on the product or purpose.

Progressive Vision advocates the rebalancing of government revenue into a more user charge basis, not allowing such charges to become additional sources of revenue for government.  Any revenue raised through user or resource charges should be offset by reductions in blunt taxes such as PAYE, NIC, VAT or company tax.

There is much confusion about the difference and the desirability of user charges as opposed to taxes.  User charges directly reflect the choice of the user of a service or resource – taxes do not.  By reflecting the real costs of the resource, user charges encourage conservation of the resource or service.   Sometimes these user charges are called green or environmental taxes, however these are misnomers as people are purchasing a resource.  When food is purchased from a supermarket, this isn’t called a “food tax”.  Often when people are asked to pay for something that was once provided through taxation it is interpreted as a “stealth tax”, particularly when the charge is levied by the government.  The purchase of postal services referred to as a “postal tax”.  In consuming good and services that attract a user charge, we can reduce or even eliminate these charges by altering behaviour.  Taxation is an involuntary charge, the amount of which is not based on consumer decision nor on the scarcity of a resource are we consuming.  An environmental charge is proportionate to the scarcity of the resource, be this a carbon allocation*, a water pollution right or even landfill space.

Many complain that the tax on petrol (a blunt user charge for road user an environmental pollution) is already too high and exceeds what is spent on the roads and more than compensates for the carbon emissions.  However, this ignores the concept of scarcity and in this case the scarcity of road space and toleration of the polluting effects of cars.  Such environmental charges   reflect the scarcity cost of the resource in the same way that the price of gold does reflects more than the cost of extraction and transport costs.

The shifting of government revenue from the tax burden on income and profit to environmental charges allows society to value and ration the use of resources that are unvalued or rationed in less efficient ways.  Charges on services such as rubbish removal are better and more fairly managed on a fee for use basis rather than a blunt tax.  Why should a household that places one rubbish bag out a week pay the same as a household that places out ten?

With people paying for the true cost of their decisions, including the scarcity of a resource, such resources will be more efficiently used.  By making individuals price sensitive to resource use, people will find their own ways to minimise their use of such resources.

Indeed the concept of environmental charges as a means of modifying behaviour and discouraging the use of specified resources is endorsed by many who also support high levels of taxation.  These same people deny that high taxes on business discourage economic activity or that taxes on wages discourage working.  Such people cannot have it both ways – either such costs deter activities or they don’t.

Progressive Vision believes that it may be possible in the long term to move to a society that has no tax on income or profit and that vital government services can be funded through resource and user charges.  A society with such levels of taxation will be extremely prosperous, while efficiently managing scarce resources.

* Progressive Vision is not taking stance on the validity of the science of anthropogenic climate change.  In this example, we are providing an example of carbon as a perceived scarce resource. We use this example as it dominates many debates about environmental charges or taxation.