Tax Commission Response 1: Principles

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One of the reasons I decided to resume blogging was that the Lib Dems have a number of major policy consultations going on at the moment and I thought this would be a good place to develop my personal responses. Rather than write it all in one go however, I thought it might be better to develop in a number of bite-size chunks which should be both easier to read and write. I’m also hopeful that people will provide me with (constructive) criticism so I can hone it. So, without further ado, here’s my first response to the Taxation Working Group/Tax Commission/Williams Commission (delete as appropriate to your degree of pretension – pdf).

The first major section in the consultation paper is about principles, and it identified four major principles a liberal tax system should feature:

  • Fairness
  • Simplicity
  • Decentralisation
  • Economic efficiency

I have absolutely no problem with the latter three, but I will outline why I feel that “fairness” is unsatisfactory below – including my alternatives – and explain why “sustainability” ought to be a feature of the taxation policy of at least this liberal party.

In *ahem!* fairness to the paper, it does recognise that fairness is an ambiguous term. It is a shame therefore that it chooses to stick with such a vacuous phrase rather than attempt to come up with something more comprehensive. So I will explain my definition of fairness with a view to establishing a more precise term.

For me, for a taxation system to be fair, it has to pass two tests. Firstly, it has to be intergenerationally equitable (which the paper does allude to). We shouldn’t squeeze the wealth-creators of today, simply because we didn’t squeeze the wealth-creators of yesterday enough. I have no objection to my taxes going on basic pensions because we live in a civilised society with a welfare safety net. I have a very major objection to my taxes going on ensuring that pensioners who own large assets that will, in the main, be untaxed until they die, get to keep those assets. Lib Dem policy currently pays lip service to asset-poor, income-poor pensioners, while concentrating entirely on providing subsidies to the asset-rich, income-poor (via the abolition of council tax and free nursing care). This is theft, pure and simple, which has almost nothing to do with social justice: it isn’t the poorest who actually benefit.

Secondly, it has to be environmentally equitable. This concept, which of course goes wider than simple taxation, is based on the premise that everyone is entitled to the same natural resources as everyone else. This is the founding principle behind ideas such as contraction and convergence.

I’m not that fussed about redistribution of wealth; I certainly see the case for allowing wider society to see some return from the private wealth it has helped create but am not sold on the idea that tax-and-benefits are the best way to go about achieving this. What I am sold on is the idea that finite natural resources belong to no-one and that it is one of the roles of the state to ensure that when they are used, the wider society benefits.

Yes, that means land. Land values are not based on the inherent value of the plot itself, but the value society ascribes its location. But it goes much wider, and it should be one of the ‘big ideas’ that informs Lib Dem policy.

The principle of environmental equity also lies at the heart of thinking behind personal carbon allowances/domestic tradable quotas. Instead of taxing carbon usage, everyone is given a carbon allowance based on the total carbon limit of the country (according to international treaties) distributed equally on a per capita basis. People who need more than their “fairshare” simply buy extra credits from people who underspend on the open market. The point is that individuals have a real financial incentive to minimise their carbon usage, not through some crude system of taxation setting, but through a dynamic and flexible market mechanism. This idea should be looked at, both for its own inherent value and for how it could possible be applied in other areas as well as carbon.

In Alaska they take this idea one step further, by providing each citizen an annual dividend based on their share of environmental taxes.

Many people argue against environmental taxation on social justice grounds: poor people are effectively taxed at a higher proportion of their incomes than rich people. That argument can be exaggerated, poverty tends to breed more sustainable living in any case, but a taxation system that is steeped in environmental equity at the very least takes the hard edge off environmental taxation by essentially allotting everyone an “allowance” that they are encouraged to live within.

Environmental equity is not the same thing as sustainability however, although they are linked. If we all consumed the earths resources at the present rate we will face enormous difficulties in the future, whether we do it equitably or not. So sustainability has to be at the heart of our taxation system. That means gradually lowering our consumption of natural resources until we have reached a sustainable rate. It also means not making government dependent on environmental taxation to such a degree that its very purpose has been forgotten.

One could argue that is the present case with, for example, petrol taxes. Set at too low a rate to discourage car at a considerable degree, the revenue raised by them are completely swallowed up by general spending. By behaving in this way, the present government has done enormous harm to our ability to impose environmental taxes in the future, embedding the concept of “stealth taxes” firmly in the public consciousness.

It is disappointing that the paper does not even mention the environment in its section on principles. Indeed, the section on environmental taxation consists of 2 pages of a chapter on “indirect taxation”. In my view, it is indicative of the party’s “green box” approach to environmental policy. The initial, well-intentioned idea of including a special subsection of environmental policy in every chapter of our manifestos has become tokenistic at best and has limited the party’s ability to think about wider environmental issues. We need a green thread to run throughout our policy, shaping our overall approach, not just the occasional nod to Friends of the Earth.

10 thoughts on “Tax Commission Response 1: Principles

  1. Please, please, please, please, please can you change your style-sheet to use a proportional font for the text. That was a complete nightmare to read and I still haven’t absorbed it properly.


  2. I agree that much of current Lib Dem policy benefits asset rich pensioners (local income tax, free personal care etc). This is all very well for winning the grey vote, but is it ‘fair’? I think not, unless clawed back by increases in inheritance tax.

  3. Please, please, please, please, please can you change your style-sheet to use a proportional font for the text.

    I might change it eventually, but it suits my current mood. 😈

  4. This is all very well for winning the grey vote, but is it ‘fair’? I think not, unless clawed back by increases in inheritance tax.

    Point of fact though, all the polling evidence suggests that it DIDN’T win us the grey vote!

    I’ll cover inheritance tax in a later post.

  5. Good stuff James. Current definitions of “fairness” are highly
    selective and pander to the electorally active rather than the
    economically so. While “sustainable” may not be the same as
    “environmentally equitable”, it is surely the same as
    “intergenerationally equitable” – given that the unsustainable
    use of finite resources is also theft from future generations.
    On the other hand, sustainability is about more than just green
    issues. Tax must be economically sustainable or it will erode
    its own base and socially sustainable, like the poll tax wasn’t!
    So on all counts “sustainability” should be there as a principle
    and “equitable” is a better word than “fair”.
    You are absolutely right about environmental tokenism. Let’s
    forget “green threads” though. We need a green backbone!

  6. Andrew,

    I think you’re right about intergenerational equity and sustainability being one and the same, and I absolutely agree that sustainability is about more than green issues – indeed I was trying to make that point and will look at how it can be reinforced. “Equity” on its own though is pretty much as problematic as “fairness”.

  7. I understand the logic and aim of personal carbon allowances, but I am inherently uncomfortable with central government introducing a rationing of supply.

    Isn’t taxing commodities which produce carbon emissions a better way of redistributing resources between those who value them highly, and those (like me) who are very light
    users of carbon-intensive products?

    Isn’t the mechanism for introducing personal carbon allowances – a form of credit card – a pretty cumbersome system compared with the flexibility of raising/lowering tax?

    ‘Green taxes’ strike me as a more liberal – and effective – concept than introducing a form of command economy.

  8. I don’t really see any “liberal” difference between the state rationing supply and the state arbitrarily setting a tax rate. What I do see is that setting a democratically agreed limit and using market forces to achive it is far more dynamic and effective than setting a tax rate and hoping that it will lead to a reduction in demand at the level that is needed. An effective environmental policy is more liberal than one that fails, both from the point of view of future generations and in commanding respect for the democratic process.

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