updated 11 July 2018
Raising the money!
Every modern society has taxes, because every Government needs money to provide goods and services that are better provided communally.
Our Armed Forces need forward planning and resource allocation, which would be very difficult if one had to negotiate with hundreds or thousands of part funders.
Roads, bridges, railways, hospitals, schools and airports have been provided by private enterprise in the past, by public enterprise in the past, and nowadays are often built by private enterprise commissioned by public monies.
Where does the money come from?
Central Government and local government spend. Where does the money come from?
Much of the income of the Roman Empire came from agricultural land, mines, and businesses owned by the government (Emperor or Republic).
In England the King was expected to live “of his own”, on his income from the Crown lands. It was the strains caused by the constant need for additional taxation that led to the English Civil War and the gradual transference of the King’s powers to the taxpayers.
The American War of Independence was in part sparked by the financial troubles of the British Government, which forced it to impose new taxes and to increase existing taxes.
The easiest taxes to collect are on international trade in goods, because that can be channelled through a few locations and tax can be demanded on the spot. If the Government raises taxes too much, there is usually a reduction in trade because the profits of trade are eaten into too much. There is also a greater temptation to evade taxation by smuggling. Both these reactions reduce the total tax income.
A government can encourage or discourage particular exports and imports by the tax regime it charges. Britain helped its wool industry develop into a cloth industry by its use of taxation. Increasing the overall value of British exports and reducing imports of foreign cloth doubly helped the balance of payments.
“Protectionism” can help to protect industries at home, reducing the stresses of economic collapse and unemployment.
Today, Pakistan has a very high import tax on cars, because it is relatively easy to collect. As Pakistan does not make cars or car components, the economy of Pakistan is not obviously damaged. One effect of this tax is that cars stay on the roads for years because it is cheaper to keep repairing them than to import replacements.
The General Agreement on Taxes and Tariffs (GATT) is reducing the use of import and export taxes in the belief that increased international trade is more valuable to society than import and export taxes.
Internal trade can be taxed along rivers and along major roads. However, if taxes are too high there is a reduction in trade and increased use of other routes, reducing the tax income.
Expenditure Taxes
The advantage of a tax on expenditure is that it is relatively hidden. Much of the administration costs are borne by business rather than Government, and the tax can be targeted to protect vulnerable groups or targeted at certain spending.
Excise duty on alcohol, taxes on “bad” goods like cigarettes, or on luxury goods like perfume are relatively cheap to collect and may influence the behaviour of your citizens. If the taxes are raised too high, they may encourage smuggling or even revolt such as the American Whiskey Rebellion of the 1790s. If raised too high they may reduce use of the product and reduce total tax income. Significant reduction of cigarette consumption reduces current income but hopefully reduces future expense on Health. It may be the right thing to do.
Most modern societies have developed taxes on expenditure, called sales tax or value added tax. The tax is paid by the customer as part of the price of the goods, and the merchant pays the tax to the Government.
The Government can have a universal sales tax on everything, or it can discriminate. In Britain for instance biscuits and cakes are regarded as food and have nil rate VAT. Chocolate biscuits are a luxury, and are subject to full VAT. In 1999 the European Court of Justice (the EU court) ruled that Jaffa Cakes are VAT free cake and are not VAT liable chocolate biscuits.
Children’s clothes do not carry VAT, but adult clothes carry VAT. Small women quite often buy clothes intended for teenagers! It would be legally possible, but politically difficult, to tax food and children’s clothes. VAT is charged on meals but not on take away or delivered food.
Income Tax
Income Tax was introduced as a temporary measure in 1799 to help pay for the Napoleonic Wars. It was only charged to people earning relatively high incomes.
Income Tax was abolished in 1815 after the Battle of Waterloo, but came back in 1842.
The Pay As You Earn (PAYE) scheme was introduced in 1944. By the 1960s income tax was so high in England that in the financial year 1966-67 the marginal rate of income tax on investment income for very high earners was 136% ( income tax 41.25% plus surtax 50% plus a special one year special levy of 45%). In other years the marginal rate of tax was “only” 91.25%. An industry and culture of tax avoidance and tax evasion grew up. Although tax levels are lower now, the tax avoidance industry and culture are still with us.
National Insurance is not strictly speaking a tax. It is a contribution towards old age pensions, unemployment pay, and invalidity benefit. The worker pays based on income, the employer pays, and the balance of these costs comes from other taxation. If you have paid National Insurance for enough full years you will be entitled to the full pension on retirement. If you have not paid enough full years your pension is reduced.
National Insurance is collected through the PAYE system, to avoid having two systems dipping into the same wage. As Shakespeare said, “That which we call a rose, would by any other name smell as sweet” (Romeo and Juliet).
One of the innovations of William the Conqueror was that when he dished out land to his supporters, they held it “of the Crown”. The land was subject to a requirement to provide so many knights in armour with horses for so many days a year.
Towns were required to supply so many arrows a year, which were stored in the Tower of London and at other strategic locations.
Villages had to supply bowmen. In many areas there was a requirement for weekly bow practice, to ensure a ready supply of bowmen. Many lords sponsored archery competitions on their estates, to make sure they had good bowmen to take to war.
People who lived on the lord’s estates were required to provide so many days paid labour each year, provide a share of the crop, and go off to war with the lord when required. They also had to pay fees to the lord when they inherited land. Those living on the King’s estates also had to pay.
Over time, many of these obligations were changed into annual money payments. For a large one off sum you could become free hold, or as we now call it “freehold”.
One of the complaints in Magna Carta was that the King’s servants were rapacious in their demands. Sometimes the servant demanded that a bridge be built, then took a big bribe to forget about it, and then came back next year for another big bribe.
Justice
Justice was another source of profit, because quite often both sides had to pay fees just to be allowed to take part in the case.
Criminal justice was also good, because of fines and the possibility of confiscating land.
When a big landowner died, the heir had to pay tax to come into his inheritance.
If the heir was a child, the estate would be “looked after” by a trustee who would have all the income from the estate. Often he would harvest and sell all the wood just before the heir came of age. The trustee could also arrange the marriage of the child, effectively selling the child and the estate to the highest bidder. People paid the King to become a trustee.
Prisoners sentenced to transportation could be sold as slaves to the American colonies or to the West Indian colonies. Children from workhouses could be “apprenticed” to the industrial mills in the North of England. The mill paid the workhouse or the workhouse manager.
Is there some way that criminal prisoners could earn their way to freedom?
Land Tax and Head Tax
Land tax in different forms existed in Saxon times, and at times has been part of the general taxation system. For much of English history, local government was financed by a property tax. Now there is also a subsidy from central government.
In some of our colonies we had a “head tax” where every adult male had to pay the annual tax. If he could not pay it he was imprisoned or he was made to do forced labour.
Mrs Thatcher abolished “the rates” – the local taxation based on property values. She replaced it with a “head tax”, “the community charge” known as the Poll Tax. This caused riots and was one of the main reasons for her downfall. Many youngsters disappeared from the electoral roll, and some are still not on the electoral roll many years later because they are afraid of being imprisoned for back taxes. In the short term it reduced the number of anti – Conservative voters, but it galvanised many normally uninterested youngsters (and their families) to vote against the Conservatives.
We are now on “Council Tax”, a tax based on the value of property.
Wealth Tax
Much wealth now is in assets rather than land. It seems illogical that someone with £2,000,000 in land might have to pay tax on his land even if it does not generate income, but if he has shares or paintings they are not subject to wealth tax. The practical difficulty is that if there was a wealth tax these assets would evaporate or be held offshore.
We have a Capital Gains Tax which applies to profits realised on the sale of assets. There are ways to avoid paying it or to put off paying it for decades.
The government can make “one off” raids on the banks, but the banks are already reorganising themselves to minimise the tax they pay.
There is a well established tax on inheritance, but it is particularly unpopular with the Conservative Government, because it tends to be paid by the rich rather than by the poor.
Social Engineering
There have been “hypothecated” taxes, where the money is taken for a particular purpose. The Road Tax is a tax on the ownership of vehicles, which supposedly is used for road maintenance. That link was broken many years ago.
Arguably National Insurance is a hypothecated tax.
Taxes on fuel, “green” taxes, special levies and so forth can be adjusted to meet social ends.
The government can influence social policy by taxation and by exemptions from taxation.
There used to be a Construction Industry Training Levy where a tax based on payroll was collected from all employers, but if they trained apprentices they could claim against the levy fund. Mrs Thatcher abolished that.
Apprenticeships in the construction industry reduced dramatically, and now we have to import our joiners and plumbers from Poland!
The production of children can be encouraged by exemptions from tax (and by payment of benefits – see Part 2 “Spending the Money”).
We can encourage thrift by not taxing investment income, not taxing it at such a high rate, or giving tax incentives to save. This is in practice a subsidy to those who can afford to save from working people who cannot afford to save.
A number of the famous schools – Eton, Harrow etc. are run by charities and so are exempt from tax on any profit they make, and their investment income is also protected. Given that these are fee paying schools, and the fees are very high, the education of many children of rich people is subsidised by the working poor. On the positive side, the state is not having to pay to educate these children.
Although mortgage relief has gone, the people currently paying mortgages when I first wrote this in 2010 are benefiting substantially from the current low interest rates. There seems to be no desire in any political party to tax this “windfall” benefit. At a recent Labour Party social occasion, I mentioned that my mortgage is £500 a month less than it used to be. The person I was speaking to said that her £500 a month rent has not changed. There is no obvious reason why my windfall should not be taxed, except that to do it would be political suicide.
The National Lottery is sometimes called “a tax on stupidity”. It is generating considerable sums for sport and the arts and for education and for social issues which otherwise would come from taxes.
We tax property transactions through Stamp Duty.
We have Capital Transfer Tax on inheritance and gifts. We could tax financial transactions or certain financial transactions.
We tax air travel, and travel using petrol and diesel. Provided we can monitor it we can tax it.
We tax sanitary towels.If we wished, we could tax contraceptives or Viagra.
Taxation and exemptions from taxation, personal allowances and differential rates such as the 10p tax rate all allow the Government to influence how people behave and how society works. For our own good of course.
Could the NRA really object to a tax on any weapon more powerful than currently used by an American Army sniper?
Sell Honours and Assets?
The King used to sell honours like knighthoods, baronetcies and peerages.
I suspect the UK Government could raise a considerable sum by selling the Earl of New York (a village in North Yorkshire) or the Duke of Boston (a town in Lincolnshire). Of course when the heir inherited there would be a payment to make before admission to the title. Or it could just be a Life Peerage available for sale by the Government after each death.
The Government can sell assets, in England called “privatisation”. The Railways have been nationalised, privatised, and the track nationalised again.
Privatisation gives the Government cash. The investment the business needs is provided by the purchaser, who often has appropriate skills and experience.
There was a problem with the sale and rent back of all the Inland Revenue local offices across the country when it was discovered that the purchaser is an offshore company that does not pay UK tax.
If the sold off company does extremely well there is a complaint that it was sold off too cheap. The problem with selling assets is that you eventually run out of things to sell.
The Government earns money from bridge and tunnel tolls, renting out agricultural land, and using its assets in an intelligent way. A joke about our crack Special Forces unit, the SAS, is that it makes a profit for the government because some Middle East countries use it as a palace guard or for dealing with rebellions.
The Government can borrow. There are circumstances where this can be the right thing to do – to fund capital expenditure for example.
When the Government is borrowing to meet money shortfalls every year then it is headed for trouble.
How a government chooses to raise money or not to raise money says much about its values and its wisdom. Social engineering is inevitable, so let us look at each measure to see who it helps and who it hurts and by how much.