In the UK we have just had the autumn economic statement, which was largely about tax. In the background are those questions about multinationals who pay minimal corporation tax. Meanwhile, our American cousins continue the heated debate about taxes and entitlement, getting closer to the ‘fiscal cliff’ as each day dawns.
The slow-motion train crash that is the Eurozone crisis is, of course, nothing to do with tax. Unless you happen to be a German taxpayer. Or a net contributor to the wider European Union. Or an honest citizen of one of those countries where tax evasion is endemic (no names, no pack drill).
Since there is so much talk about this subject, it seems surprising that there is so little discussion about the morality of taxation. After all, the whole concept is closely tied to the very basic issue of property rights. If we truly own goods, money or facilities, then what right does anyone have to take them from us?
It is, of course, easy to take an extreme ‘Tea Party’ type of view, that tax is at best a necessary evil and should, therefore, be kept to an absolute minimum. At the other end of the scale are those high-tax nations in which social justice is held to require higher-than-average public spending.
The first mistake we often make is to think that these two positions are poles apart. Ironically, the greater the national wealth, the more common goods there are – even when the background to such prosperity is proclaimed to be one of individual effort. We no longer have private armies, police forces and fire brigades. In addition, governments routinely pay huge amounts for transport, communications, education, healthcare, scientific research, pensions, welfare and environmental protection. The upshot is that, among OECD countries, average government spending is approximately 46% of GDP. The idea that the historic beacon of capitalism, the US, escapes this is largely myth, with their figure hovering around 40%. Those notoriously high-tax European countries deviate in the opposite direction, sometimes breaking the 50% barrier – but generally not by much. The national culture of high or low spending obviously makes a difference, but it could hardly be called a game changer.
The second mistake we make is to believe that governments have the ability to reduce their own spending. In reality they do not. Citizens of a country may be aware that their government spends around 40% or 50% of GDP, but they tend to believe that this could be reduced with the application of a little common sense. Unfortunately, the evidence is against them. Growth in spending does not arise only when the ‘wrong’ sort of government is in power. In fact, all democratically elected governments, of whatever hue, find it extremely difficult to reduce expenditure for more than a brief period. As far as I can see, this applies across the board for about the last century at least.
We would do well, then, to put aside the mythology and the idea that somehow the total tax burden can be greatly reduced, especially when we look closely at the results of government spending. Despite regrettable exceptions, the great bulk of public expenditure in most developed democratic countries goes on purposes with which we could hardly disagree. Civilised life has its price. Having dispensed with the myth that some countries like the US have a negligible public sector, we should also dispense with the myth that government spending can easily be reduced. It can sometimes be trimmed through greater efficiency, but I doubt it can ever be ‘slashed’ as the press like to put it.
Public spending is not high because of the failure of nations or governments, but because the potential of what we can now do has steadily increased. We could reduce government spending, and therefore the tax burden, quite easily: allow the road network to decay, end education at the age of 14 years, cut support for medical provision and research, allow people to die on the streets if they can’t cope. I don’t think many of us want to follow this path.
Seen from this perspective, the propensity of governments to spend is a good thing. It is their tendency to deficit budgeting – not creating enough tax income to cover the spending – which causes problems. Politicians like to claim, and we like to believe, that we can get something for nothing. We grudgingly agree that there is no such thing as a free lunch, but still feel entitled to a decent discount voucher.
I said that the removal of individual property in the form of tax is a moral issue. It has been solved by a general consensus that a democratically elected government does have the right to levy taxes. In the words (almost) of the original tea party, taxation with representation is fine. The general issue, however, of what we are entitled to is more difficult – and it breaks down into equally difficult practical questions.
For example, are the rich entitled to reduce their tax bills, through relocation or political influence? Are the financial institutions who brought hardship to millions entitled to a bail out from public funds? Are individuals or couples entitled to have so many children that they are certain to be a huge demand on welfare spending for decades to come? Are people entitled to unlimited health care even if they put their own health at risk? These questions have huge economic implications, but they are not economic questions. They are moral, I would say spiritual, questions.
We seem to have spent a considerable amount of the last hundred years in our developed democracies increasing joint expenditure, but at the same time diminishing joint morality. I don’t believe in being over-judgemental, but I can’t help feeling that this is a recipe for disaster.