Bad taxes


I am not convinced there are such things as 'good' taxes, although I admit the possibility. I am wholly convinced that there are bad ones, however.

Adam Smith put forward four maxims whose "evident justice and utility" should guide nations in their tax policy. He wanted equity, with people to contribute in proportion to the revenue they enjoy. Note that this implies a flat, rather than a progressive, rate. He sought certainty, with citizens knowing the amount, the manner of payment and the time it fall due. Any arbitrary discretion would open opportunities for corruption. He specified convenience, with taxes levied in ways and at times most convenient to the taxpayer. And he stressed efficiency, with no taxes that were disproportionately costly or damaging to collect.

Smith did not sanction taxes simply designed to punish people for being rich. The forthcoming 50 percent tax rate fails the tests of both equity and efficiency. It unfairly taxes people at a higher rate simply because they are richer, and it is already causing behaviour distortions that will diminish its yield, probably making it negative.

It is probably not the most unpopular tax, however. When asked to name taxes they dislike, many people seem to nominate Council Tax or Inheritance Tax among their least favoured options. This might be because both are taxes on property, and there is no income stream generated by that property out of which the tax can conveniently be paid.

Council Tax falls in many cases on people whose home is their main or only asset. Inheritance Tax is backed by its supporters on the grounds that inheritance represents a 'windfall' which can be taxed opportunistically, and that it is wrong for some people to have the 'unfair' advantage of parents wealthy or prudent enough to make provision for them. Yet Inheritance Tax fails not only the convenience test (with no income stream generated by the property to pay it with), but also the efficiency test, in that people's behaviour is distorted by efforts to avoid it, and by the break-up when it is levied of the capital pools so important to new businesses.

George Osborne and his team are rumoured to be looking at some radical tax changes. They could do worse than undertake a review of all taxes, armed with Adam Smith's four maxims. If they did so, I very much doubt that Council Tax and Inheritance Tax would survive in anything like their present form.