Sunday, September 18, 2011

A discourse on the Coalition Tax strategy

I have been mulling over the general tax-raising policies of the Coalition recently, and come to the conclusion that—barring a few jarring issues—the general movement is in the right direction.

Before I move onto the specifics, however, there are a few assumptions that should be stated.
  1. Tax is theft and therefore a bad thing.
    Tax is simply legalised theft, and is therefore, at best, a necessary evil. If one is to have a state then one almost certainly needs taxes to support it. But, simply from a moral perspective, should be kept as low as possible: most importantly, the level of tax should not be levied at such a level that people are then struggling to survive.

  2. But, given the above, the best taxes are those that are, at least partially, voluntary. I have, for many years, opined that a sales tax (with VAT-style exemptions for "essential goods") as being the best tax precisely because people do not have to go out and buy shit. And the shit that they do have to buy—such as unprocessed food—is exempt.
  3. Different types of taxes have different effects on the economy.
    This should be self-evident: if you tax savings, people will save less. If you tax work, then fewer people will work. And if you tax jobs, then fewer jobs will be created. This is not rocket science.

  4. Tax incidence is important.
    With any tax, it is not necessarily those on whom it is immediately levied who actually pay the tax. Companies, for instance, do not pay tax—no, really, they don't. All taxes, everywhere, must at some point come out of the pocket of a living, breathing human being. And companies aren't.

    Companies do not pay corporation tax: the tax incidence falls on the shareholders (in lower dividends) and the workers (in the form of lower wages). Most studies find that it is the workers who bear the greater part of corporation tax.

  5. People spend their own money better than the state can.
    It is not simply that people spend their money more efficiently than the state—although they do. It is that people spend their own money on things that they themselves want: the state has to guess what many millions of people want. And, in any case, the state tends to spend money on what will get its politicians re-elected.

So, given all of the above, you are now in the Coalition government and economic growth is absolutely critical to your strategy—what do you do? Bearing in mind, of course, that you have a crippling deficit which needs to be reduced and so you cannot cut taxes across the board.

The vast majority of employment in the country is provided by companies, and the vast majority of new jobs are created by small and medium size enterprises (SMEs). Quite apart from the historical significance of unemployment figures, people with jobs have money: this enables them to buy stuff, and it also reduces the benefits that the state has to pay out.

Companies generally need some capital backing to operate and grow, especially in the early stages—and especially if they are making an actual product (because, largely, the product needs to be researched, designed and made before it can be sold).

So, you want to encourage people to invest capital into companies; you want to ensure that companies produce valuable products; you want to ensure that companies can afford to employ people, and you want to ensure that companies can pay their workers a decent wage.

So, let's see what the Coalition have done.
  • Raised Capital Gains Tax:FAIL. This discourages people from investing in companies because their capital returns will be reduced.

  • Raised Employers and Employees National Insurance Contributions (NICs): FAIL. Quite simply, employers NICs are a tax on job creation.

  • Lowered Corporation Tax: MINOR WIN. For the obvious reason that, as stated above, companies do not pay taxes. This might also help to offset the NICs rise: however, this only benefits profitable companies, which many start-ups, initially, are not.

  • Raised the Personal Tax Allowance significantly: WIN. Quite simply, workers see more of their own cash—and they have the choice of how to spend it. Or, of course, to save it.

    On another note, taxing the poor and then handing them back some of their own money in benefits is colossally wasteful. And, as I've argued many times, deeply immoral. Letting them keep more of their money is a very good thing.

  • Raised VAT to 20%: MINOR WIN. In the context of other tax rises, this is a fail. However, VAT is the closest that we have to a voluntary tax and, coupled with the rise in the personal allowance, the Coalition is shifting (in however small a way) the burden of tax from earnings onto spending.

So, the general direction of the Coalition's tax policy is not too bad—not great, but not bad. And, as far as we know, the general continuing direction is as laid out above.

So, whilst the Buttered New Potato and his merry men might be fucking things up generally, in this area it is not all bad.


Lord Blagger said...

With any tax, it is not necessarily those on whom it is immediately levied who actually pay the tax

That's why politicians should be subject to a double the pain, half the gain rule.

Lord Blagger said...

The main problem with your argument, is that you've ignored spending and debt.

Debt being nothing more than future taxation.

Andrew said...

I think you've been very (uncharacteristically) charitable to the government here. They are still borrowing a truckful of cash every day, which still has to be paid back or at the very least have interest payments maintained on it.

So, while the tax changes you have mentioned might arguably tinker in the right direction, the biggest change in taxation is the one marked "to be collected later".

Lord Blagger said...

Exactly Andrew.

What's the rational policy as an individual when a government is behaving like this one.

1. You're going to be taxed more in the future.

2. You're going to need more money in the future because the government will deny services to the middle class upwards.

3. If you do work and invest, they will take the rewards off you. Look at students. Heads they take the risk by getting into debt. Tails the government wins, its going to tax the benefits.

4. If you save in a pension, they will do a Hungary, Argentina, ... and confiscate the lot. Since public sector workers don't have a fund, they are taxed 100% of 0 = nothing.

Roger Thornhill said...

I do not doubt The Devil wishes to see significant cuts in expenditure. Removing disincentives for economic activity is almost as important.

I think there is a way to go, but in some aspects it could be much worse.

James said...

So... the BBC license fee is Voluntary as well now? Is it only Vountary for the Government to force a secondary payment on people for a Voluntary purchase, or can I do it too? Let me know when you buy any product beginning with C, and then send me £50, k thx bye!

I do so hope you come to the light side soon... Richard would have loved that. Instead of an organisation of force taking my money when I buy chocolate, why can't we buy those services they claim to provide Voluntarily too :).

Anonymous said...

Can I take issue with your statement that "Tax is simply legalised theft".

It isn't. It's more accurately "the payment one must make for living in a ordered civilized society which allows one to relatively safely accumulate wealth."

Lola said...

Erm, about 3 out of ten for that. Sales tax / VAT is a Very Bad Tax that does just as much damage to wealth creation as income and corporation tax and NIC. There are three factors of production - land , labour and capital. In the UK we wildly overtax labour and capital and we wildly undertax land. So, (and you've guessed it) better to move to a land value tax and scrap every other tax except some fuel duty and bank asset taxes than apply a deeply estructive increased sales tax.

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