In his new Politeia pamphlet, Taxes in a Global Economy, Irwin Stelzer is right to identify the pressures on developed economies’ tax systems as one of the hardest challenges facing any government.
There is the economic challenge from mobile flows of capital and labour, when the building blocks of our tax systems were largely designed for a much more closed economy. The negative reaction to the Government’s proposals on the taxation of foreign profits is only the most recent example of this tension.
And there is the political challenge from hard-pressed voters who are already struggling with the rising cost of living. The scale of the anger over the abolition of the 10p rate of income tax shows that Gordon Brown’s strategy of raising taxes by stealth has finally caught up with him.
The right way to meet these challenges is with long-term thinking and a solid set of guiding principles. The last few years have illustrated what happens if those principles are missing. Budgets and Pre-Budgets have been driven by the shortest of short-term political considerations with little apparent regard for the longer-term economic consequences. These unfortunate episodes have been catastrophic for public trust in taxation and for Britain’s reputation as a place to invest.
So what are the fundamental principles that should guide tax policy?
Irwin cites Adam Smith in his pamphlet, and I believe the four principles of good taxation that Smith outlined over 200 years ago still provide a good guide for policymakers in the modern age. He said that taxes should be efficient, certain, transparent and fair.