I welcome the CBI’s late arrival in the tax debate that has been going on in civil society for more than a decade now, but with some reservations about the approach that it, and many in business, take towards this issue.
It may come as a shock to many, but the economic reality is that the primary purpose of tax is not to pay for government spending and yet almost all the CBI’s comments on this issue suggest that this is the case.
Because that’s wrong unless the CBI changes its position on this issue it will remain peripheral to any discussion.
There are at least five reasons for raising tax.
The first is to redistribute income and wealth because markets create inequalities that are harmful to the economic well-being of those who suffer them and to economies as a whole by reducing overall effective demand.
Second, tax can and should be used to correct market imperfections; that is the externalities that markets fail to price.
Third, tax is, and has to be, used to rebalance the economy. This is where fiscal policy comes into play, especially in an era of low interest rates. The simple fact is that whatever some economic theory says markets do not create optimal economic outcomes and governments need to intervene to meet economic objectives that are both desirable and possible, such as high levels of employment. It can do this by counter-cyclical economic spending that deliberately injects money into the economy to boost economic activity for the benefit of everyone, including (and perhaps, most especially) business when business will not do it for itself. The CBI’s recent call for the legal abolition of future deficit spending is, in this context, either indication of an extremely worrying lack of economic understanding or indication of quite remarkable political naiveté.
Fourth, tax raises democratic representation. Put bluntly, people vote because tax matters to them. And no, corporations are not people in this sense so please do not respond by calling for them to have a right to vote: we can see the distortions in representative rights that gives rise to in the City of London Corporation.
And finally, tax is about raising money. But let’s be clear: this exercise is reclamation of what the government has already spent into the economy through its commitment to fulfill a democratic mandate. Spending always comes first and tax comes second.
There are three points of explanation to note on this last issue. First, governments can, and always have, spent before they have tax revenues precisely because they can create new money. Second, that spending is not predicated on having tax revenues available. The quantitative easing programme, and the effective cancellation of government debt that it has given rise to proves that: deficit spending can be met without taxation. And third, this makes clear that there is a fundamental relationship between tax and monetary policy as well as tax and fiscal policy. In that case to treat tax as an administrative, technical or micro-economic issue, as the CBI very largely seems to do, is to fundamentally misunderstand its nature and significance. This is bound to lead to the promotion of policies that are politically and economically implausible, at best, which is why some of the CBI’s contributions to tax debate are not only bound to be ignored but have to be ignored.
Given all these facts (and I think most political economists outside the Austrian school would agree on most of them) if there is to be a ‘Great Tax Debate’ then I suggest, firstly, that to be ‘great’ it has to be correctly premised on tax as a whole, not some issues in particular. In this context discussing technical tax issues, or the role of business taxes is isolation, looks peripheral in the overall scheme of things.
Secondly, the ‘debate’ also has to be undertaken within the context of a proper understanding of what ‘tax’ is, and what it does.
And thirdly, the debate has to look to take understanding forward, and not simply defend the status quo, or promote ideas that would restrict the role of government and undermine the role of democracy as a demand for legally balanced budgets would.
On this broader basis the CBI’s debate could be useful but if it is simply an excuse for promoting large, and sometimes questionable numbers on the taxes business pays then this will be seen as an exercise in promoting self interest, and that is not a debate.
The choice is the CBI’s to make, but if it wants to be noticed in tax then that requires some change in stance before anyone is going to take this discussion seriously because right now it looks, and is, far too partisan and limited to have credibility.