Towards A Fair Taxation System

The Liberal Democrat conference was primarily interesting for the reaction to their tentative local taxation plans. At a time when many of Britain's poorest people are paying 8-10% of their income as council tax, plans to replace this with a flat 3.5% of taxable income have been described as "high tax". Yet, the Liberals are only marginally addressing the fact that after six years of Labour rule, our tax system remains incredibly regressive.

Fair taxation is not impossible. By that, I am not referring to a barmy socialist dream where incomes over a certain level are destroyed by tax. The size of the total tax burden, and an individual's maximum share of that burden is a discussion for another time. I simply mean the idea that the poor should not pay proportionatly more tax than the rich. Broadly, fair taxation can be achieved by two means - proportionate tax on income, and proportionate tax on non-essential outgoings. Anything else is likely to effect the poor more than the rich.

Some justification of my assertions is needed. Mostly, the proof of my statements is a direct result of my definition of fair - that the poor not pay a larger percentage of their income in tax than the rich. By this definition a constant rate of income tax is clearly fair, but so (in principle) is our income tax system, where a higher percentage is paid by those earning over a certain amount. I'll come back to the exceptions that make income tax unfair in a moment. Equally, the laughably named national insurance is unfair, as it is only paid on the first £31,000 of income. There are other examples of such taxes - capital gains tax and inheritance tax to name two.

Taxing ourgoings is more complex. The key to me is that sales taxes should only be applied to luxury items. Taxing food, tampons and heating are regressive - the tax needs to be paid by those who can least afford to do so. A tax on necessities therefore represents a larger proportion of income for the poorer sections of society - those who already spend more of their income on food and other basics. Taxing the purchase price of luxuries, however, is fair. Those unprepared to pay the tax, do not need to buy the item. The poorest, of course, cannot afford to spend much on luxuries anyway. In the middle are difficult items - clothes and housing are necessary, yet many people clearly spend more than necessary on such items. Defining a boundary at which they move from necessity to luxury is difficult, but not impossible. Stamp duty on expensive houses has been long accepted.

That proportionate taxation of income and luxury purchases is fair should be clear, but is it equally clear that everything else is unfair? I would hope so. If a tax is not proportionate to income or disposable income, it must be in some form static. Whether it is a £3000 fee to attend university, a £1000 council tax bill, or a £5.90 prescription charge, the percentage of your income represented by a flat rate tax depends on the size of that income.

Let me once again make clear that I'm not talking here about taxing incomes above a certain level out of existence, just asking for everyone to contribute equally to our society. I'm afraid I hold no truck with those claiming that those paying tens of thousands in taxes are contributing more than those paying hundreds. Those on high incomes enjoy many advantages in our society - from higher life expectancy and improved quality of life to better education, health care, and advancement opportunities. Taxes is the price paid for living in a civilised society, and contribution according to means is a reasonable enough request.

There is one other way in which our tax system is regressive, and this is a problem not just for Britain but for the whole world. Those with enough money have access to a multitude of ways to avoid paying taxes. From the duty free at airports, through inheritance and investment tax loopholes to tax havens, blind trusts and off shore accounts, those with money can avoid even the relatively low demands our tax system places on them. Coupled with the many regressive taxes that our tax system already has, tax avoidance ensures that the poorer sections of society shoulder considerably more than their fair share of the tax burden. International tax avoidance is one of the greatest evils perpetrated by the current globalisation aggenda.

So, what of the Liberal Democrats, and their local taxation plans? Increasing income tax in order to remove the hugely regressive council tax is, on the face of it, unarguable. If you have any doubts, look at the figures - 70% would be better off. If they are sensible, and simply add the collection of the local tax onto the existing income tax system, the overall tax burden would even drop. Collecting a single, albiet larger, income tax would be cheaper than collecting both income tax and council tax seperately. Yet, this faltering step in the right direction has attracted criticism from all sides. Predictably the Tories have attacked, claiming it is evidence of a "barrage of new taxes", but so have Labour, with Treasury spokesman Paul Boeteng hinting darkly about "the true cost of their plans". Both mainstream party would rather continue a status quo that punishes the poor, rather than risk offending the wealthy minority.

It is a minority that would "suffer". Even fewer if bolder initiatives were followed - say, removing the ceiling on National Insurance, and significantly increasing stamp duty on second homes. Yet, our media coverage is disproportionatly weighted towards the wealthy few, and political will for such reforms is decidedly lacking. I have my doubts that even the Lib Dems would be so bold if they felt they had the slightest chance of actually winning power. A fair tax system is easy enough to imagine. Imaging a government with the will to implement it. Now, that's the challenge.

Graham Robinson. 1st October 2003.

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