2 The principles of tax policy
14. Oliver Wendell Holmes considered tax as the price
we pay for a civilised society. Modern governments and societies
depend on taxation. As the recent World Bank/PwC report on Paying
Taxes, said:
Taxes are essential. In most economies the tax system
is the primary source of funding for a wide range of social and
economic programmes. How much revenue these economies need to
raise through taxes will depend on several factors, including
the government's capacity to raise revenue in other ways, such
as rents on natural resources.[13]
The OECD reports that tax revenue as a percentage
of GDP in OECD member states in 2008 ranged from 21 per cent in
Mexico to 48.2 per cent in Denmark. The political debate around
the structure and incidence of taxation can obscure the broad
agreement that a significant proportion of GDP has to be devoted
to taxation in order to sustain necessary services. It is notable
that even in Mexico, a comparatively low tax country, over a fifth
of GDP was taken in taxes.[14]
Establishing the principles
15. In its written evidence to this inquiry, HM Treasury
said
Defining a sound basis for tax policy making is critical
- taxation affects the decision making processes of business,
households and individuals, reaching into all aspects of life
and the economy.[15]
16. Tax policy covers a whole range of matters from
where tax should fall and what it should aim to achieve, to the
legislative framework for tax, its administration and complexity.
As a 2001 OECD study put it:
Three features of taxation are especially important.
First, so long as taxation affects incentives it may alter
economic behaviour of consumers, producers or workers in ways
that reduce economic efficiency. These effects should be taken
into account when the costs and benefits of public expenditure
to be funded are being assessed. Second, the distribution
of taxation's impact across the population raises issues of equity,
or fairness, which must be given substantial weight even if it
entails costs in terms of economic efficiency. Third, the
practical enforceability of tax rules and the costs arising from
compliance are important considerations, the more so since these
are both affected by, and have implications for, the efficiency
and public perceptions of the fairness of tax systems.[16]
17. Although these aspects of tax policy are linked,
it is possible to distinguish between what can be seen as "basic"
principles and "procedural" principles. The two basic
principles raised by almost all of our witnesses were the fairness
of taxation and its effects on economic performance. The "procedural
principles" were given various names, but can be described
as certainty, stability and practicability.
18. There is a further overarching principle, which
is coherence with the rest of the tax system. In a mature tax
environment, radical change cannot be made quickly without having
an impact on other parts of the system. For example, while income
tax has been charged on individuals since independent taxation
was introduced in the 1980s, tax credits are awarded on the basis
of family income. This creates complexity in the system for a
particularly vulnerable sector. In our inquiry into the Comprehensive
Spending Review, we noted similar problems created by the clawback
of Child Benefit from higher rate tax payers.
19. In this Report, we discuss the principles separately,
but the distinction between basic and procedural principles is
fundamental. A tax system which is theoretically structured to
promote growth, that is, which has the basic principles right,
will not succeed if businesses are faced with constant change,
or if the inefficiency of collection outweighs any benefits. And
taxes can reduce growth, even if they are stable, clearly targeted,
and efficiently collected, for example where the system contains
incentives which distort economic activities. The coherence of
the system affects the basic principles of both fairness and growth—a
system which is riddled with anomalies will not be considered
fair and will impair economic performance. It also matters for
the procedural principles of certainty, stability and practicability,
since incoherence will make them harder to achieve.
13 PwC and World Bank, Paying Taxes 2011, The global
picture, p 7 Back
14
OECD Revenue statistics, comparative tables Back
15
Ev w95 Back
16
OECD 2001, Tax Policy Studies No. 6, Tax and the Economy: A Comparative
Assessment of OECD Countries, p 17 Back
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