After the tax cuts of the 1980s, the tax debate in the 1990s has become more subtle. The uproar over VAT on fuel has challenged the view that indirect tax is less politically sensitive than direct tax. Meanwhile, the left has made its peace with indirect taxation, while all parties and countries are embracing green taxes. Stephen Tindale reportsby Stephen Tindale / November 20, 1995 / Leave a comment
Published in November 1995 issue of Prospect Magazine
Franklin Roosevelt called taxes “the dues that we pay for the privileges of membership in an organised society.” Paddy Ashdown made the same point-in almost the same words-at the last Liberal Democrat conference. Having endured a decade and a half of “tax revolt”-a gift to the world from the pampered citizens of California-the rehabilitation of taxation as a civic duty is, perhaps, overdue. The Labour party, seeking to escape its tax-and-spend reputation, could not afford to begin the campaign. So all credit to Citizen Ashdown.
The tax revolt has not led to lower levels of taxation. In the last financial year the UK government took 37.75 per cent of GDP in tax, compared to 34.1 per cent in 1980. The Nigel Lawson tax cuts of the late 1980s proved unsustainable as recession reduced revenues and increased the social security budget. Attempts to reduce public spending, particularly on welfare, have failed in the face of public hostility. A change of government will do little to alter the situation: Labour is committed to maintaining expenditure on welfare, health, education, defence and law and order. It will seek to cut the cost of unemployment by creating jobs, but it is unlikely that the net effect on public spending will be downward. The UK tax burden is already lower than other European welfare states such as Germany, 40 per cent in 1993, and France, 44 per cent in 1993, (though higher than Japan and the US-29 per cent in 1993). So whatever the short term debate about tax cuts, the prospect is one of a broadly stable or increasing level of taxation. Nor is the picture different in other industrialised nations: all but three OECD countries saw increases in the total tax burden over the 1980s.
But if we cannot significantly alter how much we raise, we can certainly refine how we we raise it; witness the shift from direct to indirect tax over recent years. Modern tax systems are haphazard affairs, complex mixes of necessity, opportunity and political will. Before this century taxes were levied solely to raise money, usually to finance wars. With the rise of mass politics and the influence of the new liberalism and socialism, taxation began to be used also as a means of redistributing income. With the Keynesian revolution, taxes took on a new role as macroeconomic stabilisers, and more recently still they have been used as a means of influencing behaviour: tax credits as inducements, special excise duties to discourage consumption of certain goods such as cigarettes. Environmental taxation, which remains in its infancy, is probably the most substantial attempt to use taxes to change outcomes, rather than simply raise revenue.