The question of why—and how much—we tax people and redistribute that income is at the centre of all political debate and choice. A state can do nothing without the revenue it collects and uses to create and sustain the rule of law, necessary infrastructure and the advancement of social justice. Which sectors are taxed, and whether the aim of that tax is revenue maximisation or behavioural change, is also important because taxes change incentives, behaviours and outcomes.
After years of political parties manoeuvring on a narrow strip of political ground when it comes to how high overall tax revenue should be, the future is shaping up to be radically different.
This change is being driven by an ageing society, an eroding tax base, increasing avoidance and evasion and new technology. It is about to be turbocharged by the re-engineering that will be required to avoid runaway climate change. For example, as cars become electric the revenue from petrol duty will clearly have to be replaced, with road charging the most likely contender.
The current tax system is seriously unbalanced and clearly unsustainable. Sixty per cent of all revenue currently comes from income tax, national insurance and VAT. Business currently only pays 10 per cent of tax take directly, in the form of corporation tax and business rates, though it also pays other employment and sales taxes. It could be argued that income is overtaxed, capital gains are undertaxed and soaring levels of wealth, increasingly concentrated in a few hands, is barely captured at all.
The Tories, who are the self-proclaimed party of low taxes, have just raised overall taxes to the highest level in decades while breaking their manifesto commitment not to raise National Insurance (together with income tax or VAT). When the pandemic hit, they borrowed £400bn in a single year, taking the national debt to an eye-watering 100 per cent of GDP. They have already broken another manifesto commitment to cut corporation tax by announcing a significant increase to be implemented in 2023.
“A state can do nothing without the revenue it collects”
Meanwhile, the “super deduction” is supposed to bring forward investment and encourage the economy to retool after the pandemic shock. Thus far, investment has reduced and it is unclear if the UK’s productivity puzzle is any closer to being solved. Perhaps the disruption caused by the hard Brexit the government chose to inflict—uncertainty on trade deals and rising costs of doing business at our borders dampening activity—is outweighing any super-deduction incentive.
Little effective action has been taken to date to capture the tax revenues lost by the move from the high street to online retail, nor to combat the disadvantage that the different tax treatment of high street retail—in the form of business rates—imposes on the cost base of those who trade in person, rather than online. Still less has emerged to capture tax revenue from the global “platform” companies whose claims that they are not employers continue to stretch credulity and further erode the tax base. Talk of a “Google tax” is yet to come to fruition, though Biden’s engagement has increased the energy around the G7 talks on the issue.
What is certain is that the tax environment within which businesses must operate has entered a period of change unprecedented since the Second World War, as the world struggles to recover from the pandemic and tackle the twin challenges of climate change and technological advances.
