Adam Smith Institute

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Taxation and the budget

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Taxation is bad; the new budget reminds us of that important truth. Taxation takes their property from people and uses it for purposes other than those they might have chosen themselves. That this is done with state power makes it legal, but does not justify it morally. When two wolves outvote a sheep over the dinner menu, it may be democratic, but that does not make it right.

Taxation involves confiscation and coercion. We should not hide that unpleasant truth. Most of us tolerate taxation in return for the essential services it funds. In an ideal world our defence and judiciary might be funded by voluntary contributions, but in this real world essential services rely on tax revenues.

Taxation should inflict minimal damage on the economy. It should cost a fraction to collect of what it yields. It should come from income streams, taking a little for the public purse when money changes hands in earnings or sales. Taxes on capital are invidious because there is no income stream from which to take them, and they are also stupid because the capital would otherwise generate future income streams of profits, wages and sales.

Taxation should be transparent and predictable, and should fall on people who can pay it. The Adam Smith Institute has long campaigned to have low earners lifted out of income tax altogether, since they have insufficient money to pay it. The fact that they receive tax credits underlies this absurdity.

The new budget raises the top tax rate to 50 percent on high earners. It also increases taxes on their pension contributions, and removes their personal allowance threshold, imposing an effective tax rate of well over 60 percent. The Treasury blithely puts down over £7bn of anticipated revenue from this, but it will not yield that because most high earners will not pay it. At those levels it is worth employing accountants to shelter income. The Treasury will close some loopholes and the accountants will open more.

Some high achievers will go abroad, preferring the more benign tax climate of Switzerland to one which forcibly takes from them nearly two-thirds of what their talents and energies earn them. With them will go the jobs they create and sustain.

If the money taken by government actually provided good things, taxation might be easier to accept, but much of it is wasted, spent in useless ways on worthless projects. The new budget is very bad. It appeals to low sentiments of envy, and seeks its justification in an egalitarian ideology that has no place in the real world. The only comfort in it is that this is the last gasp of a dying government.