A pathetic array of muddled and utterly unprincipled tax policies

Rishi Sunak MP – hi-res” by Ministry of Housing, Communities and Local Govt is licensed under CC BY-ND 2.0.

The chief role of government is to enact laws that  protect the lives and civil freedoms of its citizens. Any “add-ons” warrant the most careful scrutiny before being admitted to the nation’s laws.

However, even a minimalistic democratic government cannot function without financial resources and, since governments possess no money of their own, they are obliged either to borrow or raise the necessary funds in taxes. The amounts generated will set a natural limit to the state’s size. Ability to borrow, either from foreign lenders or from its own citizens, will of course be determined by (i) the state’s record of honouring terms of past debts by making interest payments and meeting scheduled repayments; and (ii) perceptions in the market of the ability of its domestic economy to generate the resources necessary for making those payments.

A party elected for a specified term will normally wish to be re-elected for a further term. But any government-in-waiting that espouses high-tax policies is unlikely to succeed at the polls. Consequently any party seeking office requires tax-raising policies that citizens will recognise as both principled and affordable within the limits of their tax-bearing capacity.

For all its fundamental importance as an election year beckons – nowhere is the directionless bewilderment afflicting the UK government more evident than in its pathetic array of muddled and utterly unprincipled tax policies. These betray ignorance of the most basic economic tenets – and hence, by default, transgress into matters that are not, nor ever should be, any part of the state’s legitimate concern: how citizens in a free country choose to live their lives.

The fashion for penal taxes on alcohol, betting, fizzy drinks or fuel is in its infancy. It has the propensity to dictate taxes on a widening array of naughty products that are bad for you. The lockdown experience demonstrated to our rulers the depth of public susceptibility to orders that masquerade as benefits, and the tax regime is one of the most readily available instruments of torture because non-compliance is not an option. Taxes are levied at a variety of rates in accordance with the state’s prevailing prejudices – what’s good for your health/ what’s good for the planet/ what’s good for diversity/ indeed anything sufficiently removed from principle.

A contemporary example is the so-called “minimum wage”. While its emotional appeal derives from a loathing of exploitation, it rides roughshod over economic reality and any possibility of successful implementation.   The idea of a minimum wage comes straight out of the Stalinist playbook. When the state tells private businesses what they must pay their employees you know just how far we have advanced on Hayek’s “Road to Serfdom”.

Prof. Pat Barron tells of a metal shop in North Carolina that has taken full advantage of AI technology by adding a robotic arm to its sheet metal-bending brake, and supervisors monitor everything on their smart-phones. Lower-paid jobs have progressed from mundane loading/unloading to more skilled and better-paid setting-up and monitoring work. Since the highest job-turnover is with the least-skilled jobs, these are the first the owner plans to automate, thereby escaping the “minimum wage”.

As an aside, how on earth does a government busybody who has never worked in a competitive environment, know how much real workers should be paid? While he’s about it, why not pitch the minimum wage at $30, or $50 per hour? Questions of whether an employer can afford it are conveniently disregarded.

But in this hard world wages are largely determined by what another person will accept for doing the same work – or, “the rate for the job”. No obfuscatory statistics needed.

Actually, this isn’t a question of wages at all! To the extent that the “minimum wage” exceeds the economic rate-for-the-job, it’s just another tax: an enforced “selective employment tax” in disguise.

As Barron puts it, no government can escape a development created by its own laws, idiotic though they may be. He knows the president of a leading manufacturer of grippers used in robotics and automation, and its technology is capable of multiple applications. When the $15 dollar-per-hour minimum wage comes into effect it will make obvious economic sense for restaurants to use this type of automation instead of people, avoiding the hassle of hiring and training costs – not to mention the bureaucratic compliance nonsense that always accompanies it – and hence avoiding employment taxes, including the minimum wage.

We had a “Selective Employment Tax” (SET) in the UK. In 1966 Harold Wilson’s Labour Government imposed a weekly payroll tax on companies “that did not boost UK exports”. The crackpot notion that exports are more important than imports has guided state protectionist policies as far back as any of us can remember. As soon as SET was introduced the gaming industry simply shortened the odds offered in its betting shops to make up for it. There are always retaliatory consequences when madness rules the statute book.

Because it defies rational thought, it’s a boon to experts in tax-planning because it challenges them to contrive tax-avoidance strategies that benefit their clients In his book “Daylight Robbery” Dominic Frisby elaborates convincingly on this madness. The title of his book derives from the tax imposed on owners of houses in 1696. The more windows they had, the steeper the tax. Owners hardly needed tax avoidance advice – they merely boarded them up or bricked them in, with disastrous health outcomes for millions.

Perhaps you imagine  that even the nutcases now poncing about in the Treasury wouldn’t  enact anything quite as daft today? Expensive court time has recently been lavished on the profound philosophic issue of whether Jacob’s Cream Crackers and Twiglets are “biscuits” for VAT purposes when they are covered in a layer of chocolate.  Such is the depth to which the UK tax code has descended. To lend some perspective on the span of its tentacles, please reflect on the fact that the tax code runs to 10 million words. That’s just an unanchored number, of course – but it may mean more when you see that it has 12.5 times the number of words in the St James Bible (800,000), and 12 times the length of the Complete Works of Shakespeare – a mere 880,000 words. George Osborne even set up the Office of Tax Simplification. But under his tenure the size of the tax code doubled.

Real simplification may begin by using the correct labels of the two taxes that raise the most tax in the UK:

1 – “Pay-as-you-earn” (PAYE) is NOT a form of income tax deducted, for convenience, by employers from the earnings of employees. It is based on a fiction known as “gross pay” which no worker has ever seen. Employees work for wages they can actually spend – money that finishes up in their pockets or bank accounts. PAYE and its partner in crime, National Insurance, also an employment tax with no connection to insurance.  are unvarnished employment taxes that punish employers for the sin of employing people. The “gross pay” fiction is merely part of the mechanism for calculating the tax, which is paid to the authorities monthly. It is, and remains, the liability of the employer, who will be prosecuted for non-payment.

2 – “Value-added tax” (VAT) is NOT a tax on value-added. It is indistinguishable from a common-or-garden Sales Tax, added to the price of goods and services as a punishment for the sin of buying things.  By its very nature it is price-inflationary. The true value-added of a business is the difference between its total sales (turnover) and the amounts it has paid its suppliers and therefore part of their turnover. This is the true measure of “output”, or “product”, and it represents the tiny contribution made by that business to the nation’s own “gross domestic product”. Since true added value arises from the combined contributions of the factors of production – land, labour and capital – it approximates the classical “economic rent”,  the only pool of wealth that represents a nation’s taxable capacity, and the only source of savings that provide the seed-corn for economic growth.

I held lengthy discussions with Oregon Congressman Al Ullman in 1980 when he invited me to Washington to ascertain my views on his proposed Tax Restructuring Actthat would have introduced VAT as a federal tax in the USA. Fortunately he was open to reason, enabling me to persuade him that, based on eight years’ experience in the UK, VAT was one of the most unprincipled and pernicious taxes ever invented, being utterly indiscriminate in punishing both rich and poor alike by pushing up prices. After a single morning he could see it and ceremoniously ripped up his copy. My American friends have been grateful ever since!

© Emile Woolf February 2024 (website)