Archive for the ‘taxation’ Tag

Tax Reform: a wealth tax?

I follow, on Twitter, the so-called “Red Tory” Philip Blond.

He has tweeted a few times today about a wealth tax and a tax on land values (which the think tank ResPublica is working on, and which is a much better idea).

A wealth tax is a tax on net assets, that is, the value of what you own less what you owe. It’s usually levied at a few percent a year. Many countries have such a tax (in France, it’s called l’impot sur la fortune). It’s quite different to an income tax, which is a tax on what you earn. In theory, it’s a great idea. In practice….

The big problem with a wealth tax is determining the value of what’s being taxed. It’s a practical problem, not an economic problem. Values go up and down. It’s relatively easy to value liquid assets, like publicly-quoted stocks and shares, but what about the value of a private company? The old master on the wall of the mansion house? M’lady’s tiara? The contents of the cellar? Do you have to get a valuer in every year? Or do you value it, say, every five years and then apply an indexation figure for a particular class of asset?

Immediately you run into complications. And it immediately creates an opportunity for tax advisers, who will be all over your assets (if you are rich) working out how to minimise their taxable value. Much as they do with income and capital gains. This isn’t necessarily a bad thing, after all, the tax profession is an important sector in our service economy…. but in my view it is a significant weakness in the proposal.

I think that objective determination of the tax base is very important to make taxes fair. It’s a weakness of income tax that income (specifically, the difference between income and capital gain) is  subjectively determined, according to complicated rules which create an ecosystem in which tax professionals thrive.  It’s this complexity that explains why the 50p top income tax rate will raise much less than it should and won’t solve the deficit problem.



Taxing Sin?

The other day I was talking about tax reform – a favourite subject of mine – with a couple of bright American friends. As he poured himself another large glass of  red wine, one friend said, “It’s obvious – we should start by taxing sin”.

The other agreed, and both were much more content with the soundbite than willing to engage with my arguments in favour of Cashflow Taxation, so – as the red wine was dulling our collective intelligence – I let the matter drop, and the ranting moved on to something else.

Taxing sin, though, is a really rotten basis for a tax policy. It might have its merits as a means of controlling sin, but it’s rubbish for raising revenue – and the worst thing about it is that it’s regressive, leastways if you count the most obvious sins of tobacco and alcohol. There was a doctor the other week suggesting that chocolate should be taxed, because it’s making us all diabetic. Which is nonsense in so many ways. If you were to ask me what I think is responsible for the epidemic of type 2 diabetes, I’d say pop: particularly the practice of feeding children sugary drinks when they are thirsty. Never mind the chocolate, it’s the calories in ‘beena and pop hitting a metabolism that hasn’t yet registered hunger that cause the damage. And it’s not the chocolate but the sugar it contains that’s the trouble. So we should, perhaps, add sugar to the list of sinful items ripe for punitive and deterrent taxation. Jolly good, another way to tax the poor without feeling guilty about it.  An even better wheeze than the National Lottery!

These days, of course, the worst sin of all is being environunfriendly; and before the credit-crunch hit home, all the main parties were talking about “green taxes” as a virtuous, and painful only in the right places, way of raising money.  The same criticisms apply. Green taxes are a good thing if they mean we change our behaviour, but they hit the poorest hardest because poor people tend to spend a larger proportion of their income on fuel. So to stop them being regressive, green taxes have to be accompanied by a complicated programme of countervailing subsidies – such as free home insulation – which will absorb much of the revenue raised.  Consequently, as everyone insulates their home and behaves more greenly virtuously in other ways, the tax take falls.

Since we choose to live in a society which spends thirty or forty percent of its income on universal state-provided goods and services such as education, health and defence, we need to find a lot more money than sin taxes can possibly raise.  By all means, tax sin as part of a sin reduction strategy; but if it works, it’ll be the lack of funds that lead to closing hospitals, not the lack of patients.  Mainstream funding still needs to come from mainstream economic activity.