The Case Against Colbertism
By Len Shackleton, IEA Editorial and Research Fellow
We’ve all heard Colbert’s famous one-liner about the art of taxation being that of plucking the goose to obtain the largest possible amount of feathers with the smallest possible amount of hissing. Well, stuff the goose. Jean-Baptiste Colbert may have been an energetic and resourceful finance minister, but I’m not a fan of the over-regulated dirigisme which was his continuing legacy to France – and nor do I approve of his cynicism towards taxpayers.
It is this same cynicism – hiding from taxpayers the true burden of the impôts – which has led Rachel Reeves into her difficulties with the budget. Of course she is only the latest in a long, long line of shifty Chancellors of the Exchequer. Governments of both parties have consistently hidden from the public what is really going on, and allowed them to think that somebody else will pay for the NHS, pensions, defence, the police, the schools, the ‘free’ childcare – not to mention the railway lines to nowhere, the wind turbines, the invading army of electricity pylons, the migrant hotels, the diversity counsellors and all the other gewgaws that we seem to need in the 21st century.
The current row centres on the Chancellor having put up employer’s national insurance contributions, and removed inheritance tax relief for farms. In the first case Ms Reeves has tried to pretend that the burden of employer NICs falls on businesses, and is therefore not a breach of the promises in Labour’s manifesto. This is disingenuous: the Office for Budget Responsibility has rightly pointed out that the result will be a reduction of jobs and eventually about 80% being paid for by slower growth in wages. In the second case the story was that IHT would only hit large landowners, when it is becoming clearer by the day that the knock-on effects are likely to damage, probably irreparably, thousands of family farms and, by reducing food supply, possibly pushing up prices.
More generally, the real incidence of taxation is consistently hidden from the public. The average household pays over £30,000 a year in tax of one form or another, although it is unevenly spread: the median is lower. But very few indeed are fully aware of this. Those of us on PAYE, by studying our payslips closely, can work out what we pay in income tax – but that is only just over a quarter of total government revenue. Even then we have little idea of our marginal tax rate – what we would pay if we got a raise. Sometimes the reality can come as a big shock – loss of child benefits and personal allowances as incomes rise can lead to effective marginal tax rates of 60% or more. Nor do most of us grasp that failure to uprate personal allowances and tax bands for inflation means that even when our salary just ticks over with rising prices, we will pay more in tax.
We can also observe from payslips what we pay in NICs, though again we usually have no idea about how pay increases impact employee NICs – and many of us remain under the impression that this form of tax is paying for our future pensions , when it is just going into general state coffers.
Bear in mind that about a third of all adults don’t pay income tax at all. Some may pay Council Tax and be aware of this element of the tax system, but in the bigger picture this tax is trivial: it raises less than half of 1% of total government revenue.
The incidence of around 60% of all taxes – for instance VAT, excise duties, business rates and corporation tax – is completely hidden from us. Where an increase in these opaque taxes hits us, we may wrongly blame it on those nasty price-gouging supermarkets or brewers rather than on the government. We get easily side-tracked into irrelevancies about how much Tesco’s CEO, or train drivers, or MPs are paid.
Corporation tax is a favoured resort of those who want ‘the rich’ to pay more. But it accounts for less than 9% of total government revenue. Of this, up to 60% may ultimately be paid by workers on lower wages, with some going in higher prices and relatively little by shareholders, many of whom (through their pension fund investments) may be employees themselves. By the way, this tax, riddled with reliefs and loopholes caused by micro-managing governments which want to subsidise various pet projects, also creates distortions in capital allocation and leads to excessive debt-financed investment. It is costly to administer and keeps armies of tax consultants wastefully employed. Many leading economists (including arch-Leftist Joe Stiglitz) think corporation tax should be scrapped. They’re dead right.
If people don’t know what they are paying in tax, and think the state can be financed by other people far richer than themselves, it is no wonder that they are always demanding more from politicians and that there are howls of protest when any cut in public spending is suggested. To assuage this ignorance-fuelled demand for more spending, we end up borrowing colossal amounts, creating such absurdities as budgeting next year to spend £83 billion on defence but a predicted £126 billion on debt interest.
I have no great hopes that we can easily alter the population’s mindset, but we ought to work towards greater transparency in taxation. We need a much simpler income tax system, with a long overdue merger with national insurance, fewer allowances and fewer bands – perhaps even a flat tax. Our indirect taxes should be spelt out to the public; many countries display taxes on the prices of goods and services and so should we. People should know what proportion of the purchase price is paid in VAT, while cigarette packets should find room, amongst the photos of diseased lungs and gall-bladders, for the information that 80% of the price is tax. Pubs should prominently display the fact that a third of the price of your expensive pint is excise duty.
If Rachel Reeves could make some moves in this direction, she would have a chance of being remembered for something more positive than an inflated CV and a flair for upsetting farmers.