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Chapter 1 of 9 · explanatory only · no rates, thresholds or deadlines

The four jobs a tax system is asked to do, and why they pull against each other.

Almost every argument about tax is really an argument about which of several different jobs the system is supposed to be doing. The mechanics are rarely in dispute; the priorities always are. It is worth separating the jobs before weighing any of them, because a measure that looks incoherent under one heading is often perfectly coherent under another.

1.1Paying for things bought in common

The oldest and plainest job is buying things that are difficult to sell person by person. Roads, courts, sewers, street lighting, defence, public health measures: each is hard to withhold from someone who has not paid, and each is worth more when everybody has it. A charge that everybody pays and nobody can easily avoid is a practical answer to that problem, and it is the reason taxation appears in almost every settled society that has left records.

This job sets a floor rather than a ceiling. It says that some revenue must be raised; it says very little about who should raise it or how.

1.2Changing the distribution of what people have

The second job is deliberate: taking more from some people than others, and returning value in a different pattern than it was collected. Progressive rate structures, allowances that shelter low incomes, and transfers paid out of general revenue all belong here. So does the reverse: a charge that falls heavily on necessities takes proportionally more from people with little.

Judgements about this job are genuinely value-laden, and no amount of arithmetic settles them. What arithmetic can settle is the factual question of who actually ends up worse off, which is rarely the same as who writes the cheque. That distinction is the subject of the next chapter.

1.3Putting a price on behaviour

A tax raises the price of whatever it lands on, and people do less of things that cost more. Duties on tobacco and alcohol, charges on emissions or waste, and reliefs for research spending or pension saving all use that fact on purpose. The revenue is almost incidental; in the limiting case, a behavioural tax that works perfectly raises nothing at all, because nobody does the thing any more.

Two consequences follow. First, a behavioural tax and a revenue tax pull in opposite directions: if the base shrinks as intended, the money dries up, and any spending that came to depend on it has a problem. Second, behaviour changes in ways nobody planned. People substitute, reclassify, relocate, or restructure. Every serious tax system spends a great deal of effort on the gap between the behaviour it meant to price and the behaviour it actually priced.

1.4Steadying the wider economy

The fourth job is the least visible. Because tax receipts rise when activity and incomes rise, and fall when they fall, the system drains money away in good years and takes less in bad ones without anybody deciding to do so each time. Economists call this an automatic stabiliser, and it works in the same direction as unemployment payments, which move the opposite way for the same reason.

1.5Why the four jobs conflict

A tax that is excellent at one job is often poor at another. A broad charge on spending is a reliable revenue raiser precisely because it is hard to avoid, and for exactly that reason it takes a larger share of a small income than a large one. A steeply graduated charge on income does more redistributive work, but its revenue swings hard with the economic cycle because the top of the income distribution is the part that moves most.

Three further criteria are usually applied to any proposal, and they are worth having in mind whenever a change is described as an improvement:

• Efficiency. How much does the charge distort choices that would otherwise have been made on their merits?
• Simplicity. What does it cost to comply with and to administer? A rule that raises revenue and consumes much of it in administration has achieved less than it appears.
• Certainty. Can a person work out in advance what they owe? Rules that require prediction of a later judgement impose a cost even on people who end up owing nothing.