Tax can be pretty boring. Hearing about the virtues of one tax system over another can quickly cause even the most ardent political observer’s eyes to glaze over. Yet taxation is probably the most important issue in politics.
Tax policy has brought down governments, deposed monarchs and lead to violent revolution or civil war (“No taxation without representation!”). When tax and spending decisions are being made on issues such as healthcare, it can literally mean the difference between life and death.
So, what do our readers think? We had a comment sent in from Peter, who says he wants to see a “a fair tax system where the rich pay more”. We had other comments, however, arguing that a tax system needs to promote economic growth and innovation so that the whole of society can benefit. Is is true we need to choose what our tax system does? Is there such thing as an “ideal” tax system? Or is the question completely subjective?
To get a response, we spoke to Matthew Lesh, Head of Research at the free-market Adam Smith Institute in the UK. What would he say?
[…] In terms of whether the tax system is ‘fair’ and whether the rich pay enough tax, it’s really a very subjective question in that your sense of what the rich should pay might be different from my sense…
The question should be, though, is tax ‘fair’ to solve inequality? And, to some extent, it does and it is because the more income you earn the more tax you’re going to pay, and as a result it is redistributive by nature, and we have a tiered income tax system, so that as you start to earn more income you pay a higher proportion of that income in tax.
We have to be careful, though, because at some point, when you start taxing people too much you’re removing the incentive to work and contribute to the economy. This is what France found when they started taxing top incomes over 90%, these people left the country or stopped working at those higher income levels. So, you’ve got to be careful that you don’t tax top income earners to the point where there’s no point being a top income earner and doing that work, and then you don’t actually have the revenue for the government you can use to support social welfare programmes, healthcare, and transfers.
I think you’re much better to try to maximise the amount of revenue you can get for the economy by ensuring the economy is still growing and the tax system isn’t getting in the way of economic growth.
For another perspective, we put exactly the same question to Alex Cobham, Economist and Chief Executive of the Tax Justice Network. How would he respond? Do we have to choose between a “fair” tax system and one that works for the economy?
That is absolutely a false dichotomy. This is a very old-fashioned view, that you have a choice between a kind of neutral taxation that supports growth, or progressive taxation that reduces inequality. That goes back to the 1970s at least. But all of the evidence, and increasingly over the last 10-20 years, shows it’s the opposite; when you have high inequality, it is a very serious obstacle to economic growth. And with the type of levels of inequality that we have in high income countries today, there is a clear benefit to the prospects of economic growth from having more progressive taxation that reduces inequality, because inequality has become such a barrier to growth.
Now, in some ways that’s a bad news story; it tells us we’re in a bad position. But it’s very much a good news story from the perspective that we can take the right tax measures, more progressive tax to raise more revenues, and it will strengthen the prospects for economic growth. So, there is a clear path through this, but politicians have to grasp that nettle and understand that this will deliver for people, even if some of their elite backers may, in the short-term, resent paying higher taxes.
Does an ideal tax system exist? Do we have to choose between a ‘fair’ tax system and one that delivers economic growth? Or is that a false dichotomy? Let us know your thoughts and comments in the form below and we’ll take them to policymakers and experts for their reactions!