lördag 17 maj 2008

British tax system unfit for purpose

Since the beginning of the year, problems with the tax system have been continually in the news.There have been the row over non-domiciles - still not finally resolved; the Lichtenstein tax avoidance affair; the Capital Gains Tax changes and partial retreat; proposed changes in the taxation of profits earned by UK business overseas; relocation of companies to countries with more favourable tax regimes; the threat and partial abandonment of a bin tax; the now widespread realisation of the extent to which fuel prices are inflated by taxation as prices of crude oil go up; and the expectation of significant general inflation, which is effectively a tax on people with sterling balances since it reduces government debt in real terms.

At the same time, there seems to be no limit in the growth of expectations of what government should provide: pensions and care of the elderly; food security; fuel affordability as prices rise; and the continuation, in changing circumstances, of public services which have long been taken for granted. It is also apparent that those public services which have been funded generously are still not living up to people's aspirations.

The tax system, allegedly progressive and based on "ability to pay", is unfit for purpose. It needs to be rebuilt from the ground up, on the benefit principle. What is the benefit principle as it would applied to taxation? It obviously does not mean that those who receive the most in social security benefits should be paying most. The most valuable benefit that people receive from government is protection of their right to property title (land) through the making and enforcement of the law, and of the sustaining and enhancement of the value of that land though the establishment and sustenance of a peaceful society, the construction and maintenance of supporting infrastructure and the provision of public services. This value, variously termed location value or land value, is created by the presence and actions of the community. It is the principal benefit that people receive from the polity at large. The tax that would most closely conform to the benefit principle would be one levied on the rental value of land.

Sadly, such a tax is off the agenda, so much so that it nobody is prepared to publish in the national press a statement that the UK tax system is not fit for purpose. There seems to be an implicit acceptance that the present system is OK, needing only is a bit of tweaking for all to be well.

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