Wednesday, October 08, 2003
Morals and Taxation
Quite often when tax is discussed, moral words are used. Fair taxation is a good example. However, it’s unlikely you hear the word transparent discussed with regards to taxation. This is wrong. There is a basic assumption that a government should be working for its citizens. As such, citizens are the consumers of services that a government provides; they are also the employers of the government, just like a shareholder in a company. Therefore a simple understandable tax system is required. Everyone should know when they are paying tax, and how much tax they are paying.
Now there are some differences. Unlike a commercial relationship, it’s difficult for a citizen to change their brand of government. You can either do this through the ballot box, but if your fellow citizens disagree, then you have the costs of moving to another country. With the EU, this is easier, but your choices are still limited.
The problem with the current set up is this. In a market, you normally pay for a service and receive it at the same time. If the quality of your purchase is not up to scratch, you return it and look for another supplier. With the government, you vote for a collective package of goods, including those that you want and these that you don’t’, and who is going to get what and who has to pay. Only at a future time, do you get told the costs and the consequences of the vote, and it includes the choices of everyone else.
This is the traditional prisoner’s dilemma for those who are familiar with game theory. It’s very tempting for people to free load on those that pay. Receive services and not pay for them, because you can get someone else to pay for them, now, or a future tax payer.
This is all made worse, by the move to stealth taxes. Deliberately obscuring the tax paid to break the link between taxation and services.
As an example, look at previous posts on the cost of the health service. In the end, the way of calculating the cost was to work backwards from the sums spent and doing the maths.
There is a certain moral high ground taken by government. We know how to spend you money better than you do. Just as everyone on this board wouldn’t say that about or to a best friend, it’s also false to say that a government knows best.
Government’s clearly design the rules to maximise tax income. In just the same way as a private company or individual tries to maximise income. This is part of the growth in complexity and obfuscation of the tax system. It’s getting worse too.
Only with a simple taxation system can these moral issues be resolved. People then have a choice. Change the government locally, or look for another one.
The objections can only really come from those that believe that people can’t make their own choices. It’s clear that these ideas have fallen with the demise of the communist block. Here the state was right, even to the extent of making illegal for people to change the system, or to leave to find another one. Its clear Tony Blair and Gordon Brown are still thinking along these lines. Extend the state, and promote secrecy about paying for services. Currently people are just noticing what is going on.
The problem for Tony Blair and company is that with a clear taxation system in place, citizens will vote for the removal of particular services because the costs are too high. It is also a problem for pressure groups, who want particular spending plans implement for some pet project, but have other people pay for them, the prisoner’s dilemma again.
A simple taxation system (and benefits system) will change the current winners and losers. However, it will reduce the wastage in taking money off people, administering it, and paying it out, minus the charges. It removes the uncertainty of how much people are going to pay. It also means that people don’t spend effort in avoiding or in administering the tax. For example, National Insurance costs small firms a lot of money to administer. IR35 has cost contractors a lot of time and effort to avoid. This money could be better spent on more productive activities, then doing the Inland Revenue’s job. These are some of the hidden costs of taxation. A simple taxation system, where everything is transparent is also a fair tax, since you and I know what others will be paying. If there are hints that others are free loading, then it's more likely that we will do the same.
Now there are some differences. Unlike a commercial relationship, it’s difficult for a citizen to change their brand of government. You can either do this through the ballot box, but if your fellow citizens disagree, then you have the costs of moving to another country. With the EU, this is easier, but your choices are still limited.
The problem with the current set up is this. In a market, you normally pay for a service and receive it at the same time. If the quality of your purchase is not up to scratch, you return it and look for another supplier. With the government, you vote for a collective package of goods, including those that you want and these that you don’t’, and who is going to get what and who has to pay. Only at a future time, do you get told the costs and the consequences of the vote, and it includes the choices of everyone else.
This is the traditional prisoner’s dilemma for those who are familiar with game theory. It’s very tempting for people to free load on those that pay. Receive services and not pay for them, because you can get someone else to pay for them, now, or a future tax payer.
This is all made worse, by the move to stealth taxes. Deliberately obscuring the tax paid to break the link between taxation and services.
As an example, look at previous posts on the cost of the health service. In the end, the way of calculating the cost was to work backwards from the sums spent and doing the maths.
There is a certain moral high ground taken by government. We know how to spend you money better than you do. Just as everyone on this board wouldn’t say that about or to a best friend, it’s also false to say that a government knows best.
Government’s clearly design the rules to maximise tax income. In just the same way as a private company or individual tries to maximise income. This is part of the growth in complexity and obfuscation of the tax system. It’s getting worse too.
Only with a simple taxation system can these moral issues be resolved. People then have a choice. Change the government locally, or look for another one.
The objections can only really come from those that believe that people can’t make their own choices. It’s clear that these ideas have fallen with the demise of the communist block. Here the state was right, even to the extent of making illegal for people to change the system, or to leave to find another one. Its clear Tony Blair and Gordon Brown are still thinking along these lines. Extend the state, and promote secrecy about paying for services. Currently people are just noticing what is going on.
The problem for Tony Blair and company is that with a clear taxation system in place, citizens will vote for the removal of particular services because the costs are too high. It is also a problem for pressure groups, who want particular spending plans implement for some pet project, but have other people pay for them, the prisoner’s dilemma again.
A simple taxation system (and benefits system) will change the current winners and losers. However, it will reduce the wastage in taking money off people, administering it, and paying it out, minus the charges. It removes the uncertainty of how much people are going to pay. It also means that people don’t spend effort in avoiding or in administering the tax. For example, National Insurance costs small firms a lot of money to administer. IR35 has cost contractors a lot of time and effort to avoid. This money could be better spent on more productive activities, then doing the Inland Revenue’s job. These are some of the hidden costs of taxation. A simple taxation system, where everything is transparent is also a fair tax, since you and I know what others will be paying. If there are hints that others are free loading, then it's more likely that we will do the same.