Taxation is never far from the headline news. Whether it is government ministers being forgetful about where they have put their money, or corporations paying low levels of tax on profits, stories about taxation appear regularly in the media.
Behind these stories lie social attitudes that are often ignored or misunderstood. Leaving aside tax evasion (the illegal hiding of money from the tax authorities), when we look at most news stories about taxes, they revolve around some scheme or another to avoid taxation through ‘tax planning’ or what is often referred to in the corporate world as ‘tax efficiency’.
Tax avoidance starts from the premise that tax is a necessary evil, and it is perfectly legitimate to do anything legal to reduce the tax you pay. Unfortunately, the idea that tax is a ‘necessary evil’ misses some very important aspects of taxation and unhelpfully distorts the political discussion of how we are taxed.
One way of avoiding these distortions is to reframe the whole issue. Academics Liam Murphy and Thomas Nagel have argued that it is a mistake to see tax as something that follows economic activity; that an activity exists and then is targeted for taxation. Rather, a modern state facilitates our economic activities through the legal structures it provides and its economic institutions. From security to health care, from monetary stability to property ownership, it all starts with the state and the rule of law.
Therefore, we owe everything we have to the activities of the state, which makes taxation no more than the holding back of some of the benefit that state transfers to us. This argument presents taxation as a withholding, not a taking away, and as such sees the benefit we receive from the existence of the state as part of a bargain between the ordinary citizen and those who rule society.
Certainly, this is an elegant criticism of the way we speak about tax, but it doesn’t really reflect how we experience taxation on a day-to-day basis. However, there are three other ways of thinking about the tax we pay and what is does that much more closely match our experiences.
One of the key purposes of taxation is to nudge us into different behaviour. How many smokers have given up smoking (as the state wishes them to) in the face of the ever-rising cost of cigarettes driven by higher tobacco taxes? When an outright ban might prove too politically difficult, higher levels of taxation are a means for the state to dissuade us from doing something, for health or other reasons.
This reflects the conventional economic logic that as a price for something rises, we will either consume less of it or find an alternative to buy. Equally, in the other direction the state will encourage us into certain actions by reducing the tax on a beneficial behaviour; tax relief on your pension provision, or tax credits for home insulation are notable examples.
So, the state uses taxation to nudge and incentivise us towards some practices and actions, while raising the price of others in a bid to dissuade us from them. It might seem a bit much to call this social engineering (not least as the term has some sinister connotations), but in the end this is what the state is doing with the tax system. It is engineering a different society from the one that might be produced if our behaviour was shaped by markets in which there was not intervention at all.
We might also refer to redistribution as a form of social engineering, but more importantly redistribution is about the perception of fairness in the face of bad luck. Especially in a democracy, there is a certain expectation (or even demand) that the state will reduce levels of inequality that are due to luck or happenstance. This usually takes the form in the first instance of a progressive income tax.
Below a certain threshold, income is not subject to taxation; in the UK this is expressed in the personal allowance encapsulated in your tax code. As you may know, it is currently £12,570, above which you pay tax on income at the basic rate before hitting the higher rate at just over £50,000.
Once income tax is calculated and benefits are paid to those who are eligible, a progressive taxation system is intended to redistribute money from the richer members of society to the poorer. This basic system is then modified by a range of allowances that may allow those in higher tax bands to reduce their tax exposure if they do certain things.
Equally, while some benefits paid to the poor are universal, many may have various conditions attached that reduce the redistributive element, such as requirements to be seeking work while on unemployment benefit, or to be subjected to assessment before you get health related benefits.
Nevertheless, in this case the tax system is used by the state, with varying levels of success, to reduce the impact of bad luck, accidental life constraints or life situations all (or partly) out of your immediate control.
Contract for services
The third way we might understand taxation is to see it, in general, as a service fee that we pay for the provision of various services.
Most of us at one time or another will have thought (or said), ‘this isn’t the service I paid for’ (perhaps while waiting in a hospital, or when the police have failed to find the person who broke into your house). Here, where taking up a private service seems like a better bet (from school for your children, to private health care), you might feel that its only fair that you seek to reduce your tax exposure by legal means.
This instrumental view can also lie behind the logic of a low tax, low spending small state. Here, it is better (‘more efficient’ in economic terms) for us to contract for our own services than be beholden to the state for them.
Conversely, when we are paying a high rate of taxation, we might adopt this position when we are complaining about state provision in a range of areas: ‘as a taxpayer, I want better service’. Taxation in this position is similar to a membership fee at a club, focussing our attention on the capacity and quality of the services we receive from the state.
The price we pay for civilisation
On the whole, rather than treating these three themes as alternatives for justifying or explaining the role of taxation in our society, we are better combining them. Different and specific taxes may involve different balances between the three themes, but overall they reflect a more general justification for paying your taxes.
Overall, we pay our taxes to get some benefits, while hoping that the consequences of bad luck (ill health, for instance) will be reduced and the state will seek to encourage better behaviour towards various goals.
When we pay tax, it might be better for us to see it as the general price we pay for civilisation. In one sense this brings us back to Murphy and Nagel’s argument; without the state, funded via taxation, it is hard to imagine we would have a society at all. But, thinking of tax as the price we pay for civilisation also builds on our own experiences of paying tax and seeing its impact on our social practices and behaviours.
Of course, there are many ways of combining and balancing these three depictions to justify and/or explain the fairness of taxation, at the same time that in general they establish why tax is overall a good thing.
When we see, or present tax as a ‘necessary evil’ we are implicitly denying the good taxation does, denying the role it plays in maintaining a civilised society and begin to assert a form of individualism that before long moves from tax avoidance to tax evasion.