What is tax for?

It could be time to boost the money we earn from the land
June 18, 2014

Tax collectors have not always been portrayed favourably

The most important piece of legislation this year was not contained in the Queen’s Speech. It was passed on 5th April when the application for a mandate to renew income tax was raised in parliament. Income tax, which was first levied in 1799 to raise funds for the Napoleonic Wars, is, strictly speaking, temporary to this day. The government has to pass an annual Finance Act to make income tax legal again.

This oddity contains a message. Tax will never be popular and income tax especially so. There is something about the taxing of income which has always been resisted. There have been periods when the entire political conversation seems to have turned on whether it was, or was not, possible to increase (or for a Conservative, cut) the top rate of income tax. To understand why, it is important to heed what Albert Einstein said on filing tax returns: “This is too difficult for a mathematician. It takes a philosopher.”

The underlying question is: what is tax for? The best answer is the most direct and the simplest. Taxation is an unfortunate necessity given the requirement to raise public funds in a complex society of many needs.

Of course, tax comes freighted with moral arguments on both sides. The social democrat tends to see tax as the road to the progressive future. It is the means by which fairness, so evidently absent in the original market distribution of earnings, is allowed a second chance. It is not merely the raising of money for social programmes: it is itself a moral question. It is no coincidence that the only precise meaning that can be given to the all purpose left-of-centre compliment “progressive” is with regard to income tax.

On the political right, virtue often gives way to vice. Taxation is regularly conceived as an evil to be avoided, somehow an illegitimate confiscation of private property. This is linked to a sceptical account of how well government will spend the money gathered. The non-libertarian right has always, in practice, presided over a large state apparatus—indeed, the supposedly neo-liberal years of Margaret Thatcher added to public spending rather dramatically—but the resultant taxation is usually seen as the necessary price of the devil’s work rather than a moral virtue in itself.

Whatever the assumptions at work in the minds of those who levy the charges, government has grown to the point where there is going to be an awful lot of them. In 2011/12, the government set itself the task of raising £589bn. For a right-of-centre coalition that is an awful lot of taxing it would rather not do. Inevitably, the most potent force was the power of inertia. The government carried on taxing largely in the style that it had inherited. There was no systematic attempt to describe the tax system in a grounded, philosophical way. George Osborne’s decision to cut the top rate of income tax from 50p to 45p was justified more on the grounds that the higher rate raised no money than that it was wrong for the state to take so much from the pay packet.

The only exception to that rule was the Liberal Democrat-inspired decision to increase the threshold under which people pay no income tax at all. This is justified in public by senior Liberal Democrats precisely on the philosophical grounds that people should be allowed to keep as much of the money they have earned as possible. The operative word in that sentence, which is the key to what a system of taxation ought to be for, is “earned.”

To find the best principle for taxation we need to go back a century. In his Budget of 1907, Herbert Asquith set the terms for fair taxation: as far as possible avoid imposts on work and endeavour and seek instead to locate idle wealth, the fruits of which, as John Stuart Mill memorably said, “fall into our mouths while we sleep.” It is better, where possible, to levy a tax on activity that is clearly harmful to others; in other words, to tax bad things rather than good things. These principles became the bedrock of Lloyd George’s “People’s Budget” of 1909.

It is striking the extent to which we no longer follow these principles. At the moment, 44 per cent of what we raise is a tax on our hard work. Just over half the tax take comes from activity of various kinds, much of it beneficial: Jim Callaghan’s 1965 taxes on business are a fifth of the total and consumption taxes account for about a third. That leaves 5 per cent on land and buildings, those static creators of unearned income that go under the technical name described in Addington’s Act of 1803: schedule A taxation.

The technical case for taxing property and land is excellent. Unlike income, property is visible and the tax is therefore harder to evade. It might have the incidental benefit of helping to flatten the volatile cycle in house prices. A levy on houses above a value of £1m would also do something about the absurd north-south divide in Britain, as 60 per cent of the revenue raised would come from four London boroughs. The whole of England north of, and including, Birmingham would pay just 2 per cent of the total.

This could be done by a revaluation of the council tax, which is still based on 1991 prices. Every house above a value of £320,000 pays the same amount. The obvious reform is to revalue properties now and introduce a graded property tax, proportional to the value of the house. Anyone with a large house and little cash could defer the levy and pay it out of the estate.

The next tax on unearned income should be the imposition of capital gains on the family home. If the British continue to insist on a portfolio containing only a single item, then we should at least treat that investment on a par with other asset classes.

The other commodity which sits idle yielding unearned returns is the land, of which there is a fixed and immovable supply of 60m acres in the UK. The ownership of land is subject to windfall gains, deriving largely from public infrastructure which is developed on and around the holding. It should be taxed accordingly. So should the gains that accrue from large-scale construction. The economic rent created by high-speed rail, for example, should be taxed and given to local authorities as an incentive to develop vacant lots.

This is no small measure, either. A tax of 1 per cent on the £5 trillion of British land would raise £50bn—enough to cut income tax by a third or abolish corporation tax entirely. The objection, of course, is neither technical nor philosophical, but political. As Mill once said in a letter to Henry Chapman: “I fully expect to offend and scandalise 10 times as many people as I shall please.”

Perhaps there is a compromise. Perhaps it could be a temporary tax, renewable every year, just until it is no longer needed.