13 August 2019
Accountants are often mocked for their involvement in subjects that are generally regarded as dull. But nearly all of us pay tax, so why not take a few moments to consider its wider context?
No taxation without representation
On his recent return from a holiday in Italy, a colleague told me that he had been surprised that two of the hotels he had used required him to pay a tourist tax – in cash – as he checked out. In this day and age payment of tax by cash is somewhat curious, but this type of tax is an example of one that economists call ‘efficient’ because it has no significant influence on the behaviour of the payer. My colleague would not have foregone his holiday to avoid it, or restricted other spending in order to fund it.
As tax professionals, involved every working day in the compliance aspects of taxation, we rarely indulge ourselves in considering its social and political basis. While tax originated as a levy to pay for the lifestyle (and wars) of absolute rulers, by the middle of the seventeenth century, in Europe at least, political theories had evolved around who had the authority to raise it. Those of you who watched a recent three-part TV documentary on the 50 days that led to the English Civil War, will recall the cry “No taxation without representation”. This is one of the founding principles of modern democracy, and, following the Glorious Revolution of 1688, Parliament alone had the right to set taxes. The outcome was that in Great Britain, theoretically at least, taxation was by public consent and taxes could therefore be higher and easier to collect than in many other comparable nations. This, in turn, contributed to this country’s financial pre-eminence and its consequent domination of world trade.
To see the opposite you need look no further than the Gulf States, where the state is funded entirely by oil revenues, the population pays no tax but has no right to vote or participate in the political process, and total obedience to the ruling family is required.
The Nanny State?
In modern democracies tax is now the preferred tool, not just for raising revenue, but also for shaping society and producing cultural change. A typical example is the ‘Sugar Tax’, a levy on sugar-rich soft drinks designed to constrain their consumption and reduce the national rate of obesity. Interestingly, although the objectives appear eminently reasonable, there are voices of dissent, claiming that the tax is ‘regressive’, i.e. it has a disproportionately large effect on the less well off, who are more likely to be consumers of the product. Of course, any attempt at social engineering by taxation is likely to elicit protestations that we are becoming a Nanny State. And yet all taxation has a socio-political dimension, from VAT exemptions on basic – but not luxury – foodstuffs, to generous nil rate bands for Inheritance Tax, not to mention the promises of tax cuts specifically aimed at the voters involved in the recent Conservative Party leadership election!
National or international
Taxation is also inextricably linked with the concept of the nation-state. Distinct tax regimes are delineated by national borders. This still applies even in the European Union. In spite of decades of attempts at alignment, only VAT has a significant degree of homogeneity. If you travel in that relatively small area where the borders of Germany, France, the Netherlands, Belgium and Luxembourg coincide, you will be hard-pressed to know which country you are in, but rates of tax still vary across invisible boundaries and companies will tend to locate their operations in the jurisdiction most favourable to their tax obligations. In the same vein, Ireland owes much of its economic revival in recent years to its low rate of corporation tax, which attracts overseas businesses that might otherwise have invested in other EU member states. It might be the Celtic Tiger, but in the eyes of the European Commission it is more of a bête noire.
Globalisation, however, has brought major challenges to this tie between the nation-state and taxation. Major corporations are now able to trade anywhere in the world whilst establishing themselves in low-tax jurisdictions. The most oft-quoted culprits are the American Tech giants. The UK government is already consulting on ways to levy amounts of tax that represent a fair contribution for the size of their operations in this country. International cooperation is growing, but is as yet inadequate, so in the meantime the French government has bravely gone it alone and passed the required legislation. Since the new tax will only affect American companies, the US administration is claiming unfair discrimination and threatening tariffs on French wine and cars.
It’s not fair!
All of which raises the concept of fairness, against which all tax is ultimately tested. For many, the most unfair tax is the one they currently pay, but this is not always the case. For example, the tax that is perceived to be most unfair is inheritance tax, notwithstanding the fact that very few people actually pay it, and the fact that it has more potential than most other taxes to engineer a more equal society by restricting the accumulation of wealth by the privileged few. Fairness is of course entirely subjective, which is why the democratic process is so important in establishing a consensus of opinion on how tax should be used to raise revenue for public expenditure, and even the obvious drawback, which is the cynical use of promises of tax cuts to buy votes, is a legitimate part of this process.
So there is much more to tax than just gritting one’s teeth and paying it. If you have just had to dig deep to pay your 31 July tax bill you can perhaps console yourself with the satisfaction of feeling a part of the democratic process. Of course, if you think it is incorrect you should immediately contact me or your usual UHY tax adviser.