Published: 14/02/2002, Volume II2, No. 5792 Page 28
Paying for Progress A new politics of tax for public spending
By the Commission on Taxation and Citizenship
Publisher: The Fabian Society. ISBN: 0716360039. 382 pages.£9.95.
Reviewer Nick Bosanquet Professor of health policy, Imperial College, London
Those who are fated to swim against tides of fashion can welcome contributions from others in the same situation, even if they are from a different school of thought.
This Fabian Society report of a two-year commission, headed by Lord Plant, is a well researched and eloquent statement of a case for higher taxation.
There is a big gulf between the political debate - in which advocacy of tax increases is seen as leading to Kinnock effects - and opinion surveys.
The survey evidence on support for higher taxation and spending is well known and well presented here.More unusual is the survey finding that people feel a complete lack of connection between taxation and spending.There is also little confidence in the ability of government to deliver value.
The tax system has shifted away from progressive direct taxation towards indirect taxation. In effect, a family with a gross income of£12,430 in 1998-99 had to pay 35 per cent of that income in tax, while a family with a gross income of£52,340 had to pay 36 per cent.
Understandably, the Fabians want to see a rebalancing of the tax system so people earning over£100,000 would pay a 50 per cent tax rate.This seems plausible but would have both symbolic and practical disadvantages.
As a symbol, it would be seen as a tax on success.The practical effects would be felt most by top managers in the public sector.
But the main effect would be to increase the earnings of accountants, since most of those earning above£100,000 are probably able enough to explore ways to avoid the tax.
The report could be criticised for its rather lordly attitude to tax-paying by people with lower incomes.
High levels of tax really cut into any margin for spending over and above day-to-day survival.The social solidarity allegedly created by public spending may seem to come a little expensive to people at these income levels.
The sections on accountability for public spending are likely to have greater practical impact.
The document supports the recent King's Fund report on an independent corporation for the NHS. It also advocates more annual reports to citizens through an independent office of public accountability.
It discusses possible effects of hypothecation and will be a good read for students in NHS professional exams faced with this knotty question.
The commission ended up divided but with most in favour of hypothecation: however, the detailed discussion suggests the Treasury could be right.
For hypothecation to make any sense, the spending would have to be strictly confined to the chosen revenue source.
This report could have been written 20 or 60 years ago.The possible impact of globalisation in terms of increased migration is discussed, only to dismiss it.
Yet the tax system may have serious effects on enterprise culture.The UK and US are benefiting a great deal from many thousands of migrants from France and Germany.
Nor does the report focus on the changed balance of public spending, which means that the tax level is buying fewer services than in the past.
In the days of Macmillan,10 per cent of employees paid income tax and 30 per cent of GDP brought a pension and free higher education.Now, the citizen has to pay 35-40 per cent of their income in tax and save for old age, as well as for higher education.
Our good Fabians should above all offer up prayers for a continued strong rate of growth in the economy.For the past few years, we have been able to have our cake and eat it.
The time of choice may be to hand and they may have to fear that a government so abstemious in the good times may show little appetite for public spending in worse.
The strongest link
Reviewer Edward Peck Director, institute for applied health and social policy, King's College London
This important and timely book presents the analysis and recommendations of the commission on taxation and citizenship established by the Fabian Society, a Labour-affiliated think-tank.
The exploration of the link between taxation and citizenship in Paying for Progress is central to an argument about how the disaffection of the public with both tax and public services can be overcome.
The commission was concerned that taxes are now widely viewed as illegitimate, a situation that makes it difficult for politicians to discuss the benefits. In contrast, the book is robust in its advocacy of progressive (that is, the more you earn the more you pay) and re-distributive taxes as a building block of a strong civic society.One of its preferred ways of reinvigorating the connection between tax and public services is the introduction of hypothecation.
It was the book's discussion of this issue, and its potential benefits for the NHS, that was the focus of the press release accompanying its publication and thus most media interest.
While acknowledging that the book has a much wider scope than hypothecation and health, I want to focus on this.Supporters argue that hypothecation would create a direct relationship between the payment of tax and a public good - such as the NHS - that will bolster the legitimacy of the tax regime.
The book quotes opinion poll research showing that 'around 40 per cent of people supported an increase of 1p on the basic rate of income tax for unspecified public spending'.
'But when the spending area was specified, these numbers rose substantially to 68 per cent for education, and 80 per cent for health.'
On the face of it, therefore, all of us - from Alan Milburn to Rose Addis - should be advocates of the introduction of a hypothecated health tax.
Most of the commission's members opt for a strict version of hypothecation in which all the income generated - probably through a specific income tax - would be spent to cover the entire cost of the service for which it was raised.
Only if earmarked money met all the financial requirements of the NHS and was never re-allocated by politicians for other purposes, the book suggests, would public confidence in the legitimacy of taxation be rebuilt.
However, one of the book's strengths is its even-handedness, and it produces robust arguments against this form of hypothecation.
Three of these strike me as being particularly compelling.First is a simple fiscal issue: what happens if the tax produces less or more than is required for the NHS in any financial year?
The suggested solution is an 'NHS fund' to manage the peaks and troughs, depositing money in years of plenty and drawing it out in years of 'famine'.This solution serves to make the second problem - the political problem - more acute.
Would governments, and in particular Treasury ministers, want to restrict their financial freedom of movement in this way? It would grant a degree of financial selfdetermination to the NHS unparalleled in its history and frankly, difficult to envisage.
Third, there is no hard evidence, despite much assertion, that hypothecation would render taxes more legitimate in the eyes of the public.
Perhaps more worryingly, if hypothecated income taxes for health and education were seen as more legitimate, then the income tax that paid for unpopular services - such as social security payments - might be viewed as even more illegitimate and be increasingly vulnerable to cuts.This outcome would undermine the commission's aspiration for a redistributive tax system.
On balance, it seems to me that if hypothecation is introduced in the UK it will be the Liberal Democrat version, where a specific addition is made to income tax to fund improvements in health or education.
This may bring a degree of legitimacy to an otherwise unpopular move, without entailing the three problems discussed above.
It is to this book's credit that it does not duck the complexities of the issues that it addresses. I put it down feeling better informed about a topic where the presentation of the arguments is too often both dry and partisan.
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