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Thursday, 27 December 2012

How To Make Taxation Popular

This is quite a long and serious Blog post, so bear with me.

Thanks to the efforts of government Treasuries around the world, we take it for granted that our Taxes all go into one big Pot for our governments to spend as they see fit. This assumption needs to be challenged. First, because it facilitates wasteful expenditure, which is often rampant (it certainly is where I live, in the UK). Second, because it allows governments to spend large sums on causes which - if they had to approve them - voters would never agree to.

Suppose, for example, that Britain had a War Tax system in place: If a government wanted to go to war, then it would have to finance the war from the proceeds of a separate War Tax. The direct costs of a war would be those over and above those incurred by maintaining regular armed forces. So it would include the cost of bullets and bombs used, transport and other logistic costs, additional wages paid out for active service duties, compensation for the victims of  mistaken targetting, and so on through a very long list.

Mr Blair would have found it much harder to launch his vanity war on Iraq if he had been obliged to get support for the funding as well. And if he had succeeded, we would still be paying an Iraq War Tax - for example, to compensate victims of our abuse.

It's no bad thing if governments don't always get their way. But if they went down the route I am proposing, they might actually find it easier in many areas to secure popular support for taxation - and popular support means, among other things, that people will make less effort to avoid or evade those taxes.

In many aspects of our lives, it is not hard to see how specific - purpose, ring-fenced taxation would work. A national government maintaining a national road network would fund it from vehicle licensing or fuel taxes or ... In my view, fuel taxes are the fairest method since they automatically link tax paid to use made of the road network. In a rough way, they are also progressive since the richer man in his non-fuel economical car pays more per kilometre than the poorer man in his more fuel-efficient vehicle.

But what about Benefits? Ah, yes, what about Benefits?

One hundred years ago in the UK, voters signed up to the idea of state Benefits as things which were paid out from a compulsory state Insurance scheme. There were defined contributions and were - or could be - defined benefits directly related to the actuarial calculations of the scheme's managers.

In the UK, we still have National Insurance numbers and we still pay National Insurance contributions. But the Treasury does not like this and it has made the relation between Insurance contributions and benefits as non-transparent as possible.

Instead, the Treasury prefers to run Ponzi schemes, in which you pay out to those in need of benefits now out of the general taxes of those who don't currently need benefits - and keep your fingers crossed that you can stay one step ahead of bankruptcy.

But if you are trying to pay pensions to an ageing population out of the taxes of a shrinking work force, then bankruptcy is the inevitable result - though it may be disguised for some years by reckless borrowing. As Greece has shown us, reckless borrowing is something banks are very willing to facilitate.

The only long-term viable solution is to make people face up to the fact that if you want a pension then you have to save for it - and that this will cost you a LOT. And governments seem reluctant to tell voters this truth. In France, President Hollande's first act on election in 2012 was to LOWER the pensionable age for some groups of workers (who of course had just voted for him). This is at least as suicidal as the American Congress's current fascination with falling over the fiscal cliff.

In short, taxation will only become popular when those who pay taxes know what they are for - and when their overall level has been reduced because Insurance schemes have replaced the current electoral-bribe system of Handout Benefits.

A good measure of progress towards the goals I am setting would be the abolition of VAT. This is a regressive tax on poorer people which produces one of the biggest all-purpose government slush funds. What's good enough for the Channel Islands - which don't have to have VAT because we have set them up to suck serious taxable money away from the UK - is good enough for the UK too. We just need to reverse the direction of suck.

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