Virtue and vice: Labour needs to shift tax burdens to unearned wealth

One of the best things Einstein ever said was about the complexity of filing a tax return: “this is too difficult for a mathematician. It takes a philosopher”. He meant that the act of filing a return raises the implicit question of what tax is really for. The answer to this question divides political traditions.

The social democrat tends to see tax as the means by which fairness, absent in the market distribution of earnings, is retrieved by the state. Taxation, on the left, is therefore a moral question and it is no coincidence that the all-purpose compliment ‘progressive’ is exactly the term applied to making the rich pay more income tax. On the right, tax is seen as the individual’s property, which the state is bent on taking. That is accompanied by scepticism about how well the government will spend the revenues collected.

It is hard for partisan people to accept that both sides are almost always right. The left is correct, of course, to think that progressive taxation is one way to correct an unfair settlement. The right is also correct, however, to suppose that people earn their money. The left is good on the virtues of tax and the right is good on its vices.

The trouble the left gets into when it talks about tax is that it trumpets the virtues and forgets the vices. Left-of-centre people sound as if they relish tax but real people do not feel this way. A far better message would be that tax is an unfortunate necessity in a state in which we have many needs in common. Yet Labour always sounds like it is telling the electorate that it is their moral duty to cough up.

The strangest attitude of all concerns income tax. Income tax was first levied in 1798 to raise funds for the Napoleonic Wars and is, strictly speaking, temporary to this day. There is a clue in the fact that government has to pass an annual Finance Act to make income tax legal again. The unpopularity of income tax is something that the Labour party, of all parties, ought to understand. It is incomprehensible that the party of organised labour should be so keen to tax income.

One way to change the conversation about tax would be to abandon the obsession with income tax rates, especially at the top. It raises precious little money and squeezes the debate about tax into a cul-de-sac. The left ought to have as its abiding principle that it will tax labour as lightly as possible but that it will, in order to compensate for the revenue foregone, tax unearned income more heavily.

The source for this principle is Liberal, embodied in Lloyd George’s ‘People’s Budget’ of 1909. We no longer follow these principles in Britain. At the moment, 44 per cent of what we raise is a tax on our hard work. Just over half the tax take comes from activity of various kinds, much of it beneficial: the taxes on business introduced by Jim Callaghan in 1965 are a fifth of the total and consumption taxes account for about a third.

A meagre 5 per cent comes from taxes on land and buildings, but the technical case for taxing property and land is excellent. Unlike income, property is visible and the tax is hard to evade. It could be done by a revaluation of council tax, which is still based on 1991 prices. Every house above a value of £320,000 pays the same amount. The obvious reform is to revalue properties now and introduce a graded property tax, proportional to the value of the house. Anyone with a large house and little cash could defer the levy and pay it out of the estate.

The other commodity which sits idle yielding unearned returns is land, of which there is a fixed and immovable supply of 60 million acres. The ownership of land is subject to windfall gains which derive largely from public infrastructure. A tax of 1 per cent on the £5tn of British land would raise £50bn which would be enough to cut income tax by a third or abolish corporation tax entirely.

None of these things can be done instantly. There is a lot of persuasion to be done yet and that leads to the final, and most important, point. Labour needs to learn to need less money. There is £700bn of public spending available. Labour needs to learn to keep its hopes within that amount and stop promising more. There is another question for which a philosopher, rather than a mathematician, is required. That is the question of how social democracy can thrive in a cold climate. Nobody has answered it yet.

Philip Collins is a columnist for The Times

This article originally appeared in the Winter 2014 edition of the Fabian Review. For more information on the Fabian Society’s tax reform programme, visit http://www.fabians.org.uk/the-future-of-tax