I wrote a couple of days ago about how taxation should properly be seen as a rent that is paid for the privilege of living in a well-structured, orderly society, and that companies and the wealthy should be happy to pay a higher tax-rate as they get to enjoy a higher level of benefit from that social structure than less well-off people.
I also had some interesting discussions, both online and off, with some people who hold right-wing views about taxation, though obviously I disagreed with them on a lot of things.
On top of all that, I’ve written recently about the need for the Left, if it wants to have a chance of effecting change: to engage people, break the mould of the prevalent thinking these days that ‘all politicians are alike’ and the perception that Labour is simply a slightly redder, perhaps slightly kinder, version of the Tories because we’re all fighting for the same ‘middle ground’ – and to equip the next Labour Prime Minister to resist the inevitable attempts of ‘the markets’ to force him to bow to neoliberal ‘policies’, to conceive and present some radical thinking. To show some truly different visions of how the world might and should be.
The combination of these things has had me mulling over things. I’m convinced that the status quo is not the only option – that we don’t have to simply put a new coat of paint on the existing structures while doing nothing to change their substance; that we can have a more just world that works better than it does now. It takes some bold thinking to jar most people into seeing beyond the current reality to that better one – but that thinking has to be practical and workable.
So I’ve been thinking about tax. Specifically corporation tax. One thing I’ve agreed with my conservative interlocutors about is that the tax system needs to be simplified. Too much complexity means too many loopholes for clever people (and rich people and big corporations can afford to hire a lot of clever people) to exploit and avoid taxes.
Of course, my conservative friends would regard that as justifying a ‘flat tax’, where we all pay the same rate of tax no matter how much or how little we have (though even they would generally agree that very low earners shouldn’t pay tax at all), rather than a sliding scale ‘progressive taxation’ where you pay a higher percentage of earnings above certain thresholds, such as we have now.
But flat taxes still disadvantage the poorer, because their essential spending leaves them with much less disposable income, so their flat tax of, say, 30% would represent a much greater burden on them than the same rate would on a rich person with a lot of disposable income.
We need taxation that is simple, hard to avoid, easy to calculate, and fair – and which covers our national costs for things like the NHS, pensions, welfare for the vulnerable and so on. So – at least for companies – how about abolishing it altogether?
Sounds crazy? Possibly. But the idea I’ve been mulling over for the last few days is this: replace income tax with a ‘national rent’ concept based on share of GDP rather than a tax on profits.
In my allegory of taxation, I pictured the UK as a big apartment building, where rich and poor share the same building but in vastly different conditions. The landlord/govt charges the rent that he needs to, in order to maintain the building, pay for security, for the building’s free clinic, for cleaning, fire services etc. When his costs increase, he’s perfectly rational in weighting the increase in rent to the richer tenants – they get to enjoy a different level of benefit from living in the building, and they can afford to pay better than the poor tenants.
But in reality, corporations (and people) can, and do, use clever accounting to end up staying almost rent-free. For corporations, who do pay a flat tax on profits (which the Conservatives plan to bring down next April and again the year after), this is generally done by moving profits around between companies and locations to minimise the tax bill, notional write-offs and by the ways in which capital expenditures are treated (though there are lots of ways, and too many to list here).
By making profit the measure of what a company pays, leeway is automatically created for profit to be creatively accounted to avoid tax.
But if we abolish corporation tax and replace it with a ‘rent’, all that leeway disappears. In the rent allegory, the greater floor-space enjoyed by the rich represented their share of the national GDP – they enjoyed a higher share, so should pay a higher ‘rent’. So the replacement for a profit-tax would be based on calculating their turnover the previous tax-year as a percentage of that year’s GDP, and charging them a fee based on that turnover. The total fees the government would charge would be enough to cover our necessary expenditure to maintain the social structure (which is why I consider this a perfectly socialist idea) – health, welfare, policing, fire services, army etc – minus what it expects to gather in terms of personal taxation.
While I’m fully expecting squeals of outrage and derision from the Right for the idea, I think it should actually appeal to them in some ways, as well as to the Left. Here are some of the advantages:
A balanced budget
Because the rent is based on covering expenditure, the UK would not run at a deficit. The rent level could even be set in such a way as to gradually eliminate the national debt, just as a landlord with a mortgage covers his mortgage repayment costs from the rent he charges to his tenants.
Clear, simple, difficult to avoid
Because companies’ turnover is much more visible than their profit, and is stated as a bald figure, the level of ‘rent’ would be much easier to calculate and much harder to avoid.
Rather than governments having their hands tied by the corporate desire to avoid tax, the government would set the spending levels and the required corporate rents would ‘trickle down’ from that (I don’t mind that kind of trickle-down effect!). The country would be run by the government elected by the people, with a much greater freedom to actually do it, rather than the current corporatist situation where large companies have undue influence on government decisions, especially on social spending and taxation.
Incentivised efficiency and competition
Because profits would not be taxed, companies would be free to maximise their profit by working efficiently. Escalation of costs would be controlled via competition. To prevent the short-sighted from minimising cost and maximising profit by simply driving down wages, a ‘living wage’ minimum wage would need to be set and enforced – but if the corporate ‘rent’ was set so that the minimum threshold for personal taxation could be raised significantly, the rate required to be a living wage wouldn’t need to be as high as it does now.
Companies would be tempted to simply pass on the cost of their rent to consumers, but this would be like increasing VAT and would unfairly penalise consumers. The need to offer competitive pricing should prevent this, but to ensure that companies didn’t collaborate on pricing to force consumers to pay their rent for them, the UK should emulate the US (one thing about their system I do admire!) and legislate for draconian penalties for participating in a cartel or for any kind of illegal price-fixing.
Small companies near-exempt
One of the favourite right-wing arguments against taxation and ‘red-tape’ is that they dis-incentivise the formation of small businesses. A small business’ share of GDP would be negligible, therefore so would their national ‘rent’. Costs would only become significant as they grow – and within that growth, competitiveness, innovation and efficiency would be rewarded by better profits without . Surely a Tory’s dream!
Anyway, we’re about to go out so I’ll leave it there for now. It may be I’ll think of (or someone else will point out) a reason why this system would be unworkable, or worse than what we have now. But hopefully, this is an example of the ‘out of the box’ thinking that we need – and demonstrates in some small way that there can be alternatives to the status quo, not just in the tax arena but everywhere.
Get thinking and come up with your own contribution! 🙂