The UK is a hotbed of tax discussions, from proposed tax hikes affecting households, rethinking of inheritance tax, debates on cutting the welfare budget, uncosted council-tax freezes and even how mythical a meat tax is. Amidst this confusing and complex backdrop, understanding the principles of effective tax policy is more crucial than ever.
Eight fundamental principles underpin any robust tax system; considering these would help policymakers propose fair, effective tax strategies. Understanding them allows voters to judge manifesto policies and commitments better.
Fiscal Neutrality
Fiscal neutrality posits that taxes for revenue generation should minimise distortion of economic behaviour. The principle aims to minimise the impact of taxation on individual and corporate decisions, such as work, saving, and investment. However, this principle often contradicts taxation to encourage specific behaviours, like promoting electric vehicles to reduce pollution.
Progressive Taxation
Progressive taxation should ensure that the tax burden is equitably distributed. While this system has historical roots, dating back to ancient Athens, it also has administrative challenges. For instance, means-testing multiple income bands can be costly, and higher tax rates may discourage income-generating activities.
“It is fair that one who possesses much should pay a lot in taxes while one who has little should pay little”
Aristotle
Taxation by Usage
We can also levy taxes based on the usage of public goods. While measuring people’s ability to pay is more straightforward, the benefit derived from public goods is often more challenging to quantify. For example, should a factory owner without children pay taxes that fund local education? Some argue that they benefit from Factory workers educated enough to be trained while conditioned sufficient to stay in one place 8 hours a day, five days a week.
Tax Diversification
A diversified tax portfolio, including income, consumption, property and other taxes, helps spread the tax burden and mitigate the impact of economic fluctuations. When revenue pay in one area of the economy dips, revenues may be hedged in another sector.
Tax Simplification
Simplifying the tax system, such as deducting income at source, makes tax collection more efficient and less costly. For example – a flat income tax rate of 15% requires no means testing. It may gather additional revenue overall because it becomes cheaper for wealthy people to pay it than to have complex and expensive avoidance and evasion schemes.
Tax Evasion and Avoidance Minimisation
Minimising tax evasion and avoidance is essential to realise projected tax revenues. Increasingly, International cooperation is required to tackle tax avoidance by multinational corporations.
“As matters of state go, whenever there are taxes, the just person pays in more from the same amount on which the unjust man pays less. And when there are refunds, the former takes nothing while the lesser profits a lot.”
Plato
High Tax Morale
Various factors, including the perceived fairness of the tax system and the quality of government services, influence tax morale. High tax morale leads to higher compliance rates. Morale is based on perception rather than reality – for example, inheritance tax is often considered an unpopular tax – yet this might not be the case if it was better known how few estates are liable.
Economic Growth Focus
While economic growth can naturally increase tax revenue, and a tax shouldn’t hamper growth, it’s still important to consider the planet’s finite resources and the limits to growth. Governments can also design tax policies to address ethical, environmental, and social issues, such as carbon taxes to combat climate change or tobacco duty to reduce smoking.
Easier said than done
Implementing these principles is challenging; often, there may be conflict in any single policy, such as balancing fiscal neutrality with social goals. Considering the interaction, this requires a holistic approach to the tax code overall. What we can surely say for sure is that if a politician is serious about a fair and effective tax policy, then it will need thought, modelling and consideration; not being decided on a napkin 24 hours before a party speech, with no time even to inform cabinet, as a desperate bid for popularity.
https://x.com/Dennynews/status/1714934800673280229?s=20
Analysing SNP’s Council Tax Freezes Through the Lens of Effective Tax Policy Principles
Fiscal Neutrality
The SNP’s council tax freeze does distort economic behaviour by disincentivising local councils from raising funds for essential services. This policy interferes with the councils’ ability to make decisions about work, saving, and investment at the local level.
Progressive Taxation
Council tax is often criticised for being regressive, as it disproportionately affects lower-income households. The SNP’s freeze does little to address this issue. In fact, it exacerbates the problem by reducing the funds available for services that lower-income households rely on the most.
Taxation by Usage
The freeze impacts the ability of councils to levy taxes based on the usage of public goods. With reduced funds, councils are forced to cut back on services, affecting the quality and availability of public goods like education, healthcare, and public transport.
Tax Diversification
Councils in Scotland are already limited in their ability to diversify their tax portfolio. The freeze further restricts them, making them more dependent on funding from the Scottish Government, which is not a sustainable or diversified approach.
Tax Simplification
While the freeze might seem like a simplification, it actually complicates the financial planning processes for local councils. They must now find alternative ways to fund services, which can lead to inefficiencies and increased administrative costs.
Tax Evasion and Avoidance Minimisation
The freeze doesn’t directly impact tax evasion or avoidance but does reduce the overall tax base for local councils, making them more vulnerable to the effects of evasion and avoidance. Council tax, linked to residence, is relatively easy to measure and collect, alternatives may not be.
High Tax Morale
The manner in which the freeze was announced, without consultation with local councils, could negatively impact tax morale. It undermines the perceived fairness of the tax system and could lead to lower compliance rates in the future. It’s possible the freeze in 2007 did create higher tax morale, but that same policy now may not as voters are better informed of the consequences.
Economic Growth Focus
The freeze hampers economic growth at the local level by reducing the funds available for public investment. It also fails to address ethical, environmental, and social issues, which are crucial for sustainable growth.
In summary, the SNP’s council tax freeze falls short on multiple principles of effective tax policy. It distorts fiscal neutrality, fails to make taxation more progressive, and complicates rather than simplifies the tax system. Most importantly, it undermines local councils’ ability to focus on economic growth and deliver essential services, thereby affecting the quality of life for their residents.
The Populist's Playbook 