Should Tax Be Taxing?

This is not about the deadline for submitting tax returns which has just passed  – smugly I did mine back in May. Instead, I muse about whether some of the tax we pay is rather odd.

After over three months of sharing our home with builders arriving at 7am daily, at last we have the place to ourselves again. All that remains (apart from countless weekends to come being spent decorating) is to pay off the final bill. Interestingly, before sending their final invoice, our builders sent their schedule of works and costs which included their own gross profit figure. This was interesting to me because alongside that figure of 24% was also the 20% VAT we have to pay. So, in return for three months where on average two skilled tradesmen worked a full day knocking down walls, putting in steelwork, fitting a kitchen and two bathrooms, laying new floors, installing French doors and rewiring the house, the building company will make only a little more profit before tax than HMRC will take as VAT. After the builders have paid their workers, paid their NI and paid their corporation tax, by having work done on our house we will have enriched the Treasury more than all of the hard working men who’ve brought our home into 2015 from its 1970s Avocado bathroom suite former self.

I’m not one of those people who rants on about tax being legalised theft, nor even am I one to particularly clamour for tax cuts to benefit me. I thought it fair that as a family with a decent income we should no longer be eligible for child benefit so that saving could mitigate cuts for those who were less fortunate. However, it does strike me as strange that what should be seen as positive economic activity is more profitable for the public purse than for the people who actually do it (I hope that unlike with our last house we might at least recoup these costs if we ever sell but we didn’t do the work to profit).

Some time back I seem to recall a proposal (perhaps from Ed Balls) that there should be a cut in VAT for home renovations. Perhaps it would be worth revisiting this. If VAT on our works had been less, we’d have had more money left to spend on new furniture (or engaging an excellent local upholsterer we know to reupholster our rather tired sofas), or perhaps on doing more work on the house (and so have kept our tradesmen employed with us for longer) – so there would have been more economic activity which would have been, I think, a better outcome for more people than just taking a fifth of our budget as tax.

However, there might be a broader point to look at. How much positive economic activity is foregone by the need to pay tax? While taxes are essential to pay for public services, a large proportion goes towards supporting those who are unemployed or underemployed. If a tax, like VAT on renovations in my example, leads to fewer people being employed than might obtain otherwise, this should be balanced against the benefit we get from the tax funding public spending. But I suppose the other side of this is that renovations like the ones we have just finished are not within the reach of poorer people, so would the benefit to us as well-off people (even with it being trickled down to all the people we paid to do the work) of reducing the cost be an unpalatable transfer “from” the poor?

This takes us to a more fundamental set of questions about what tax should be for. Should it be principally a mechanism for redistributing from the better off to the worse off (in which case VAT is not a great one for achieving this as it takes up a larger proportion of the income of the less well off than the rich)? Should it just be the way that the government raises money to pay for public spending (in which case my concern about the impact of it on economic activity and demand for public spending needs to be addressed)? Or is it a mechanism for enforcing moral judgments (disincentivising spending on inessential luxuries, or on bad things like booze and fags, or on driving through central London or driving a car at all)?

In reality of course our tax system has all of these competing aims, but that is the problem. It is hard to say whether any tax is at the “right” level when the right level to maximise the effect of the tax as measured in each of these ways will be different. For example, if tax is for redistribution of wealth, excise duty on cider and beer should be slashed while the duty on champagne massively increased. If it is to raise money, perhaps excise duty should be cut generally to increase consumption by more than the value of the cut. If it is to provide moral nudges, taxes on “bad” things like booze and fags should be raised to prohibitive levels regardless of whether this hurts the poor more than the rich and without care as to whether this leads to a lower amount of money raised.

But, regardless of this, it still seems wrong that the excellent hard work of so many men on our house is apparently of less value to society than the tax we pay on it.


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