Last week’s discussion on responsible tax policy was well attended by representatives from financial industry and accounting, academic economists and those working in the third sector. Our aim was to begin a conversation about how tax can be used in a responsible manner to support equitable growth and a stronger, more balanced economy across the country.
While the TUC is likely to have differing views from some of the attendees on the precise level of taxation, we were keen that the meeting did not devolve into a debate about raising or reducing corporation tax. Our intention was to examine the issues, obstacles and opportunities that attended using tax incentives as part of an industrial strategy.
However, one of the most interesting and encouraging aspects of the conversation, was the fact that corporation tax rates did not arise as a fault line. One attendee, who worked at a large financial organisation (though speaking in their own capacity) was clear that tax rates were not the decisive factor for them, and that a drop in corporation tax was not a solution. Rather simplicity in the tax system should be the priority.
What did become clear from the outset was that a discussion of tax incentives would need to be based on a wider debate about the nature and function of tax.
One prominent tax expert opened with a review of Adam Smith’s four tenets of taxation:
- Equity – it must be fairly applied
- Certainty – it must be clear
- Convenience – it must be easy to collect
- Economical – it must generate enough revenue to cover the costs of collection
These principles apply not just to taxes that are levied, but also to those that are remitted or reduced via credits. Last week the IFS released their Green Budget, predicting that tax rates would increase to their highest rate for three decades. In this context, there are good questions to be asked about how a tax credit – which is effectively an expenditure by the tax payer – is justified. One result may be that tax payers demand much greater monitoring of the effectiveness of any credit. Another may be that any scheme must explicitly aim at more equitable distribution of economic growth around the country. In order to address this, tax may need to be based on clear moral principles. If the public grants the system as a whole a degree of legitimacy this may be robust enough to survive disagreements over specific deployments of tax revenue.
This brought us to a broader discussion of the ethical basis of taxation. For tax policy to succeed, it must be considered legitimate by the relevant population. Economic discussion of taxes has begun to focus on the issue of ‘tax morale’ – the willingness of the populace to pay. The possibility of hypothecation – separating out and listing the intended uses of a tax for the benefit of the tax payers – was raised as a potential aide to tax morale. However, this solution is not without its risks. For instance, it raises the possibility that tax payers will object to their tax money going to uses that don’t benefit them, or to which they disagree: particular benefits, or military spending were two examples mooted.
These are some interesting questions rather than solutions. Further questions to be addressed through this joint Common Vision/ TUC workstream include how principles are applied to the real world pressures that exist, particularly in light of Brexit, and the role that tax incentives can play when they are deemed by policy makers and the public to be legitimate and justified.