Cedric Sandford

Taxation—Principles, Classification and Analysis

This chapter discusses the principles, classification, and analysis of taxation. The possibility of conflict of objectives in the tax structure is likely to arise in particular between simplicity and equity, and between equality and efficiency. Simplicity and equity exist in tortuous interdependence, and many of the complications of tax systems spring from exemptions, and provisions for special treatment that seek to remove inequities, and yet their very existence not only reduces simplicity but often creates the inequities for those whose circumstances place them just the wrong side of the special provisions. There is some point beyond which one cannot push the rates of income taxation without reducing willingness to work and take risks. Attempts to impose marginal rates of income taxation of 100% would soon reduce the amount of income coming into existence, and people would not try to earn income taxed at this rate, and if their income was from property, they would change the form of their wealth so that they received less monetary income but more nonmonetary satisfactions.

Local Government Expenditure and Income

This chapter discusses the local government expenditure and income. The central governments concern with overall management of the economy may require it to retain powers to ensure that total local government spending is in line with national economic policy. Governments may feel under an obligation to ensure minimum standards in certain services. In some aspects of services, uniformity of treatment may be considered essential. Interventions may also be necessary in the form of grant aid to allow for externalities arising from certain services and to secure some regional redistribution of income. Local government expenditure in the United Kingdom has been growing much more rapidly than central government spending; the proportion of total government expenditure by local authorities is substantially less than in the first decade of the 20th century. This relative decline is partly a product of the centralization fostered by two world wars and the large nationally administered system of social security payments and it is also partly a reflection of a national desire for uniformity of treatment in particular services.

The Economic Role of Government

This chapter discusses the economic role of government. One of the essential characteristics of the price mechanism is the interdependence of prices, and it is indeed an economic truism that everything depends on everything else. A change in the price of one good has its effect on prices of related goods, and on the prices of the many factors of production used in producing the good in question, and because factor prices are also incomes, this will in turn have some influence on the prices of things that fishermen buy in so far as they are different from the goods, and services that butchers and meat breeders buy. This interdependence has an important significance for government policies. If a government intervenes in the free operation of the market mechanism, at one point this will have a series of repercussions, and if a policy is to be rational, it must take those repercussions into account.

Taxation of Personal Income

This chapter discusses the concept of the taxation of personal income. One of the fundamental problems with income taxation is to provide a satisfactory definition of the tax base, income. A number of economists have argued for a comprehensive definition of income as additions to spending power over a period of time. On this definition not only wages, salaries, interest, profit, and rent would count as income, but also capital gains, gifts, and legacies. Receipts in kind would also be included. Capital depreciation would count as a deduction. No country has adopted a fully comprehensive tax base, but the Carter Commission in Canada made such a proposal. Problems arise with irregular receipts, such as legacies, and it would be unfair to tax them to the full progressive income tax in the year they are received, for the recipients would then pay much more tax than if they had been more evenly spread over time. Carter proposed to deal with this inequity partly by averaging provisions, and partly by restricting the maximum rate of income tax to 50% but the Canadian government never implemented the Commissions recommendations.

Taxation of Business Income

This chapter describes the taxation of business income. Taxes on company profits are a form of income taxation, and they may be more or less closely related to the structure of personal income tax. The main issues raised by the taxation of company profits are thrown into relief by the changes in methods of profits taxation in the United Kingdom. There have been three different structures for company taxation since 1965, each embodying rather different principles. Under the pre-1966 system, income tax at the standard rate together with profits tax was paid on both distributed and undistributed profits, and but on distributed profits the income tax payment was simply a device for collection at source and if the shareholder was not a standard rate income tax payer he claimed a rebate or paid surtax according to his personal circumstances. Essentially, under this system, both distributed and undistributed profits were charged to profits tax, and undistributed profits were charged to income tax at the standard rate and distributed profits paid income tax according to the personal circumstances of the shareholders.

Regulation of the Economy Through Budgetary Policy

This chapter describes the regulation of the economy through budgetary policy. Budgetary or fiscal policy mean changes in government income or expenditure designed to affect the level of activity in the economy as a whole. The prime aim of such a policy is to maintain a high level of employment without inflation. The emphasis of policy makers in Britain in pursuing stabilization policy has been on budgetary or fiscal policy. There may be unemployment associated with a casual labor scheme, such as in the docks and seasonal unemployment, for example where an area is particularly dependent on tourism or in the construction industry during the worst winter weather. Unemployment may arise because of the changes in demand for goods, either in the home, or the export market, resulting from changes in tastes, or technology, such as the superseding, wholly, or partly, of one form of heat, and power by other forms that can be generated more cheaply.

Reappraisal and Reform

This chapter describes the reappraisal and reform government expenditure. A high and growing level of public expenditure, more particularly the taxation required to release resources for public use, presents serious problems. Inflation is more difficult to hold in check, and effort, saving, and enterprise may be discouraged, and evasion, and avoidance are stimulated, and the costs of raising additional revenue may rise disproportionately. The increase in public spending in 1973–1975 led to a sharp fall in tax thresholds in relation to average earnings, to people being drawn into tax at income levels below the social security benefit levels, and to a heavy increase in the tax burden on low wage earners. The basic problem of allocating resources between the public and private sectors of the economy springs from the characteristic of publicly provided goods that, unlike private goods purchased in the market, there is no direct relationship between benefit and cost, and hence, there is no relatively clear-cut determination of how much should be allocated to each service, and hence, to the whole public sector.

International Perspective and the European Economic Community

This chapter describes the international perspective and the European Economic Community (EEC). EEC countries differ considerably in overall weight of taxation. Total tax burden is only one of the aspects of their diversity. Individual EEC countries differ markedly in the ratio of direct to indirect taxation and in the proportion of tax taken in social security contributions and in the form of taxes, notably the differing structures of corporation tax and in tax philosophy, such as the extent to which the tax system should be used to reduce inequalities in the distribution of income and wealth and in tax morality. The U. K. tradition is to use the tax system to reduce inequalities of income and wealth, and thus, to have high marginal tax rates on income and to seek to temper the effects of taxes on expenditure on the poor, especially by exempting foodstuffs. A relatively high proportion of tax revenue comes from personal income tax and a moderate proportion from social security contributions.

The Growth of Public Expenditure

This chapter describes the growth of public expenditure. In defining government, or public expenditure one must first decide which spending agencies to include, and then which items of their expenditure to take into account. There are four possible spending agencies to consider—central government, local government, the national insurance fund, and public corporations of which the most important are the nationalized industries. There is also a strong case for including the national insurance fund on the grounds that its disbursements are wholly determined by government policy, and its income is derived partly from a general exchequer contribution, and partly from levies on employers, and employees of a largely compulsory nature, and scarcely distinguishable from taxes. Part of local government expenditure is made from grants received from central government, and transfers like this between public authorities must be omitted to avoid double counting while considering both authorities together.

Economic Aspects of Government Expenditure

This chapter describes the economic aspects of government expenditure. Military defense is a collective good par excellence, wholly provided by the government and where user charges are inapplicable. For a variety of reasons, market prices may provide no valid criteria for assessing costs. The government is the only purchaser of defense services in the domestic market, although other governments may purchase some of the products of the defense industries such as military aircraft. The market mechanism for securing manpower for the Armed Forces may be superseded by conscription that provides a supply of labor irrespective of the price offered. The national debt of a country is only analogous to a personal debt in so far as the national debt is external. Payment of interest on an external debt can be expected to reduce the living standard of members of the community and the existence of the debt is a genuine deduction from the real wealth or capital of the community, just as, when the loan was acquired, it provided additional real resources for the country to utilize.