D. J. Webb
I’m a great supporter of lower taxation, and so the report released on Sunday evening by the 2020 Tax Commission, supported by the Taxpayers’ Alliance under the chairmanship of Allister Heath, attracted my attention. Of course, as a libertarian, I would prefer to see the state spend around one-third of GDP, as recommended in the report, which would be an improvement on the current level of around 50%. But the report struck me as incredibly unambitious. Why should the state even spend as much as one-third of GDP? In Hong Kong, the figure is closer to one-fifth. The conclusions of this report are therefore a long way from libertarianism, amounting to a proposal that would keep the gravy train coming for the bloated public sector. A glance at the image below shows that the proposals in this tax reform report are far from amounting to a genuine closing down of the public-sector sinecures. All the income streams indicated below are required to keep the state show on the road:
The following passage in the Commission’s summary of its report indicates that its proposals would allow for repeated taxation of income streams in a way that amounts to a total top marginal tax rate of 73%!:
Many streams of income are currently taxed repeatedly to such an extent that the total top marginal tax rate on income earned, saved, invested in a company and passed on to children is nearly 95 per cent—and that is before taxes on consumption such as Value Added Tax. Incentives for entrepreneurs would improve substantially with the abolition of Corporation Tax, Capital Gains Tax and Inheritance Tax, and their replacement with a single tax on capital income. The top total marginal tax rate on income earned, saved, invested in a company and passed on to children would fall, under the 2020 Tax Commission proposals, to 73 per cent.
Income and capital taxes at 30%
Let us look at detailed tax proposals in the report. The personal allowance would rise to £10,000 a year; national insurance would be abolished; and a single tax rate of 30% would be brought in. This would mean that someone on the average wage of around £25,000 would pay tax at 30% on £15,000, handing £4,500 over to the state, and taking home £21,500. This is a little better than the situation that currently obtains, where someone on £25,000 pays £3,505 in tax and £2,132.64 in national insurance and takes home £19,362.36. The proposals amount to a reduction in taxation, but not a sea change in the relationship between an individual on average earnings and the state. At present, employers also pay £2,474.06 in employers’ national insurance for each employee on £25,000, and one of the Tax Commission’s better proposals is to do away with employers’ national insurance, thus eliminating the deterrent to taking on staff.
The current range of income tax bands, extending up to 45%, with national insurance taking the effective highest band up to 47%, penalises entrepreneurs, and so there would be many positive economic effects from establishing a single 30% rate of taxation. This would be an improvement compared with the status quo, but a 30% rate of taxation remains exorbitant. As a conservative, I cannot see why personal income tax exists at all: it is simply none of the state’s business how much I earn, and to that extent I would object to a 1% tax rate, let alone a 30% one.
I would welcome the abolition of capital gains tax called for in the report, as this is merely a tax on investment. But for the same reasons libertarians oppose income taxes, we must oppose the Tax Commission’s recommendation that a 30% be imposed on “capital income”, in the form of dividends, interest and rent.
Land and rent
The Tax Commission’s definition of “rent” as “capital income” is worth analysing, because rent is not the same thing as capital at all, and land should be considered separate from capital. A glance at the history of taxation in England—and indeed many other countries—shows that taxation originated in possession of land. Allodial title to land was held by the Crown under the feudal system, with freehold title developing out of tenancy in fee simple. Simply put, ownership of land has never been absolute, but has carried obligations with it. This makes sense, as land is a social resource that is not being produced (other than by occasional sea reclamation), and the value of a particular land site is enhanced by social activity, including public provision of infrastructure and population movements.
For this reason, from a libertarian perspective, it is land that ought to be the source of a smallish revenue stream for what services need to be provided by the state, not wages or capital. This analysis is supported by the classical economists, who drew a three-way distinction between capital, labour and land (or profits, wages and rent), rather than the two-way distinction apparently being employed by the Tax Commission in its recent report.
Whereas the Crown has ultimate title to land, and therefore the right to impose a levy on land, the Crown has no constitutional or logical right to impose levies on labour or capital. Yet the Tax Commission wants to see the state permanently carrying off 30% of our wages, and fails to call for a levy on land. The report argues that transaction, wealth and inheritance taxes should be abolished, and includes an abolition of the stamp duty on property in its prescriptions. The result is to allow the current fixation on speculation in property to continue. There should be no stamp duty, they argue, and any increase in site location values that pushes up property values should be passed on as a legacy to the next generation, without inheritance tax.
Yet speculation in property is what landed the UK in its financial mess in the first place. Libertarians would, of course, support the abolition of inheritance tax: where someone’s estate derives from productive activity, it is nothing less than an abuse of power for the state to commandeer a percentage of that during probate proceedings. But where the estate comprises property, whose value has increased over time owing to both government policies that have boosted the housing market and infrastructure developments, this is another thing entirely. Passively benefiting from an increase in property prices is not the same thing as investment at all. The Tax Commission’s proposals, including the abolition of stamp duty, would amount to an attempt to pump the housing market once again.
The report also argues that local authorities should raise half of their expenditure from local taxes, including sales taxes and local income taxes. While the report lamely argues that councils would be prevented from “abusing” this, I see it as inevitable that such a proposal would lead to a large increase in taxation by pompous council bureaucrats who would see the advantages to themselves of yet more empire-building at local taxpayers’ expense. Worse, this proposal amounts to an admission by the Tax Commission that income tax would not actually be kept at 30%. If local governments were permitted to add on their income taxes and central government funding for local governments were halved, we could see effective tax rates much closer to 40%. Where is the radicalism in this tax report?
It is probably a good idea for central government funding for local authorities to cease, but income tax surcharges are not the way to go. For a start, many people get few services they need from the local council. I would prefer legislation to lay down a final and complete list of things local governments can spend money on, with expenditure on further items rendered illegal. Education services and rubbish disposal could be privatised. Other than sweeping the roads, providing streetlighting and policing, I am at a loss to know what local governments could be spending money on. There is nothing genuinely decentralised about giving financial autonomy to councils: the real decentralisation is to allow people to spend their own money on what they want, which means they buy in the services they need and are not forced to fund council services they don’t need.
The Commission claims that its proposals would not lead to a sharp fall in spending by local government, as “many academic studies have found that competitionbetween local authorities leads to lower spending but not a race to the bottom”. But a “race to the bottom” in public-sector spending means a rebalancing towards private consumption. Why is less fraud and less embezzlement via the tax system “a race to the bottom”?
Paying for a bloated public sector
The Tax Commission argues for a large state in these terms:
Academic research has found that the level of spending that maximises performance on the Human Development Index is around 30 to 35 per cent of national income. But the optimal level to promote economic growth, and therefore long term prosperity, is lower than that.
While admitting that long-term prosperity would be enhanced by lower levels of taxation than this, the report states that the maximum justifiable size of the state is 35% of GDP. The reference to the Human Development Index requires analysis: the United Nations’ Human Development Index includes weightings for public expenditure on health and education, as well as for social inequality, and so it follows that a country whose health and education systems were privatised would score badly for the Human Development Index. Similarly, a society without welfarism is “less equal”, and so scores poorly. Greenhouse gas emissions per capita and other indicators included in the index also show that the index is politically inspired, amounting to an index for technocratic rule on the Western model.
From a libertarian perspective, the ideal rate of tax is not that at which the maximum in taxation can be extracted without overly deterring productive activity, as taxation of income and profits is always a deterrent to productive activity. Rather, the ideal rate of taxation is that where the state performs only the activities that logically need to be done by the state, and people get to keep their own profits and incomes. What little needs to be done by the state can be financed by land value levies and sales taxes or excise duties. It is quite apparent that a small state cannot be arrived at overnight—as our cultural policies have fostered family breakdown, which has left many millions looking to the state for support, where they might once have relied on family members—but there is no reason why the state should not be reduced over time to 15% or 10% of GDP. This report amounts to a step in the right direction, but would still keep the state’s gravy train coming, allowing the technocracy to continue to direct our lives.