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Taxing times

15 December 2003

A simple, fair, transparent tax system that undertakes to provide everybody with specified services of a specified quality. Is that really too much to ask?

Questions about tax were in the news last week. The debate, as always, centred upon the willingness, or otherwise, of the public to stump up the cash to fund the government's spending. Information from the British Social Attitudes Survey and a yougov internet poll provided plenty of material for the commentators but was far from conclusive. Meanwhile, the debate was spiced by the Chancellor of the Exchequer's pre-Budget borrowing and spending figures, which many saw as evidence of tax rises on the way.

Received wisdom on this subject is that the public say they are in favour of increased taxation to fund better public services, but that when elections come round they don't vote for the tax-raising party. The conflict is therefore identified as residing within the individual voter, who likes to think of him- or herself as public-spirited and generous but whose innate selfishness inevitably pops out in the privacy of the polling booth.

There is nothing to object to in this. Both impulses are present in human nature and the one that predominates at any given moment will depend largely upon the structure within which the individual thinks that they are operating. That structure is the creation of government, and the political parties have differing ideas about what it should be like.

The Conservatives, who consider themselves traditionally the party of low taxation, are nonetheless aware that people want good public services. Their emphasis, therefore, is upon efficiency, or getting more for less by eliminating such evils as fraud and bureaucracy and the undeserving. The idea that it may be possible to get more for less encourages taxpayers to conclude that a proportion of their money is being wasted. In this way a vote for lower taxes comes to be seen as a vote against waste, and since waste is a known evil this vote now has a moral spin that counteracts the perception of selfishness.

New Labour, terrified of being branded a high tax party, came into office with all sorts of promises of fiscal frugality. There were naturally most wary of the high profile taxes, particularly income tax which, of all charges levied by the state on its citizens, is the one most closely associated with the generic term "tax". New Labour was determined not to increase income tax but its colossal spending plans for the public services meant it had to find money in other ways. The consequence was the famous "stealth taxes", which crept up slowly on the middle- to better-off. Low inflation (and, therefore, mortgage rates) coupled with rising net wealth softened the blow and reduced the political impact.

The problem with stealth taxes is that, if they really are stealthy, people become accustomed to a higher level of government spending without understanding the extent to which they are paying for it. This might sound just the sort of thing that Tony ordered, but its long-term consequences are less attractive. Like the Tories and their drive for efficiency, the stealthy approach sows misconceptions about what quality public services actually cost. People who believe they can get a lot by paying a little can satisfy simultaneously their generous and selfish tendencies. But, having been lulled into this false comfort zone, they cut up decidedly rough when the true costs begin to bite further down the line.

A second problem is that when people lose sight of the real cost of something, other, normally rational, assumptions begin to break down. The idea that you can have quality services at little cost in taxation indicates a state of mind equally susceptible to the converse argument that a large reduction is cost can be achieved at the expense of a minor reduction in services. In this way the Tory thesis becomes the natural antidote to "excessive" Labour spending, and the ding-dong cycle of spending and cutting is sustained. The services themselves suffer from the lack of long-term consistent funding, which is all they need.

The Liberal Democrats, naturally, have another way. They don't want to be coy about taxes and think that people should pay more. To this end they have tried various formulas, including a penny on the basic rate and a 50% rate for income over £100,000. Instead of adopting the Labour approach of trying to make tax increases invisible, The Lib-Dems go for the highly visible income tax and try to make their proposed increases look classy.

The extra penny idea was designed to bring the ethos of the church fund-raiser to taxation. If everybody chips in a little bit we'll all be alright, is the spirit of the thing. It aims directly for the public-spirited regions but is careful to be small and unthreatening. The additional one per cent was an amount that it might be thought of as churlish or mean-spirited to refuse.

The 50% rate of tax on income over £100,000 is subtly different in its approach. It relies upon the same sweet reasonableness, the idea that nobody could possibly object to such a modest proposal; least of all, perhaps, those lucky people upon whom the 50% rate would fall. But it has the enormous political advantage that most people would never pay at this rate. It therefore appeals to a generalised notion of public-spiritedness, allowing people to say to themselves that of course they wouldn't mind paying 50% if they had that sort of income but (tragically) they don't. Such generosity falls into the category of the easiest sort - generosity with someone else's money. Unfortunately, the sums raised from taxing rich people are always disappointing, because there aren't that many of them to tax.

The approach of each party to taxation, although different in emphasis, has the common theme of allowing people to expect a quality service without having to pay for it themselves. The different forms of this deceit - that efficiency will stretch the money, or that large additional taxes are really small, or that someone else richer than you will pay - all reveal the same fear of telling the unleavened truth. This fear can be seen in the syntax of public spending, which is designed to obscure truth with re-assuring words. The Chancellor talks of "finding the money", of "putting extra money" here or there or of "making additional money available" in the manner of some supremely benevolent uncle dipping his had into his waistcoat pocket and pulling out a billion or two.

In the face of this conspiracy, it is not surprising that people send confused messages to pollsters about their attitudes to taxation. It is evident from their behaviour that the public do wish to consume large quantities of public services such as roads, schools, hospitals and parks. The presumably also know that these things cost money. What they do not know is how much they should pay relative to what should come from others. There is no effective framework for the public understanding of this question. The tax system is so complicated and the government's sources of income apparently so many that people who already feel they are paying "a lot" naturally suppose that any further increases can come from elsewhere.

People respond well to a system that is fair, but fairness requires transparency above all else. To pretend, as the political parties do, that the burden can be distributed in a way that will be to the advantage of Mr and Mrs Average Voter, is not only inherently dishonest but it muddies the water of public understanding by giving people false expectations. Complicated and diverse taxation systems are also designed to obscure the picture. If an individual is paying tax in half a dozen or more different ways - income tax, VAT, stamp duty, a bit of CGT, council tax, National Insurance, petrol duty, airport tax, insurance tax, inheritance tax etc., etc. - and is benefiting from an equally wide range of reliefs and benefits, it is difficult to know what it all adds up to, and how it compares to what somebody else has to pay.

A simple, honest tax regime run with clarity and openness would help create the conditions of confidence that would encourage people to pay more tax. That would create the space for the second stage in the process, which is to make the services provided by the state - in health, education, pensions or policing - good enough to ensure that the taxpayer has confidence in the "purchase" he is making. When he pays his tax he needs to know that he can safely kiss good bye to the money - there is no danger that he will need it later to pay privately for services the government has failed to provide.

For politicians, this second stage is the most challenging. It requires careful tailoring to he resurgent political philosophy of self-reliance, since people having to provide more and more for themselves will increasingly resist putting money into the collective pot. Self-reliance is all very well, but the consequences of its failure are a charge on the government. When the government does not tax enough to provide good services, and people do not save enough to look after themselves, there comes eventually a dissatisfied crunch in which people, economy and government all get hurt.