A Side Order of Tax

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Value Added Tax, Corporation Tax, Alcohol Duty, Fuel Duty, Sugar Tax, Swamp Tax…Ok, I made that last one up. But it is quite apparent that there are umpteen different taxes, duties, and levies on the items we buy and the services we use, with each and every pound coming from our pockets one way or another.

Most of these taxes resulted from times when the government decided to ‘fix’ some kind of issue over the years. But are we doing it properly? Do these various charges by the state actually fix the problems they claim, or are they distorting market dynamics to the detriment of the consumer?

Let's play out a simple scenario. You walk into a cafe and order yourself a coffee and a slice of cake costing a grand round total of £10. Now ask yourself, how is that £10 broken down? You may say that some of it will be the cost of the materials to make the coffee and cake, then some perhaps to pay the staff and the rent, you may even say VAT, and then probably the profit the cafe makes. There is nothing wrong with that assessment and will be pretty close to reality. However, VAT is not the only tax being slapped on your bill, and there are taxes interwoven inside the other costs. Your slice of cake has a sugar tax in there. Then there is Corporation Tax on the profits the cafe makes, there is the National Insurance and PAYE tax on the staff wages, there are green levies on the energy the cafe uses, and then there are the taxes (a repeat again of many of them so far) on the landlord of the building, and that's before the local council wants its Business Rates.

There’ll be then a repeat of these taxes on the suppliers of the cafe, and then their suppliers and so on and on. You don’t obviously pay the entirety of these taxes all the way up the chain, but you do pay your share. It begs the question of just how much of what you pay ends up in the pockets of those businesses and employees, compared to how much ends up in the coffers of the state. It’s all very murky and complex, which other than being a headache for business owners, it is in itself a problem for wider society. That complexity requires a larger state to run it, which means higher costs, which means higher taxes (and perhaps extra ones) — more money from your pocket so that the state can extract your cash in ever more elaborate ways. There are also ways in which tax is done as a bit of theatre. Every payslip for an employee will display their National Insurance contribution. But on the business owners' wage book, they’ll see Employee NI contribution and Employers NI contribution. If one day they shifted NI contributions under one single item and it was displayed on the employee payslip with the total wage cost moved to the payslip, then both will be no worse off financially — the business will have the same wage bill, and the employee will take home the same money — but such a thing would be unpopular because it will make the employee think they’re paying more tax whereas they are not.

Then there are the more unscrupulous among us. Tax evasion and fraud are well-known terms, but most of the time these happen because taxation is so complex. Large businesses have the resources to employ very smart people to find loopholes and clauses in our tax system to avoid paying what they can get away with — and we are all paying for it. Every pound someone doesn't pay who should be, is a pound needed from someone else — maybe you.

Taxes too can distort markets and artificially bend them, often to the detriment of the guy on the street. Any tax is an extra cost a business would just pass on to the consumer, and punitive taxes, as they’re called, like Sugar Tax and Alcohol Duty target specific areas in the market. The idea of them is to disuade would be consumers from buying those items as their retail cost would be artificially elevated in order to reduce the prevalence of unhealthy habits in society. The problem with these though is that poorer tax payers feel these targeted levies more than wealthier ones as they would have less disposable income to spend on such items. Then there is the question of if such punitive taxes actually make a difference. The amount added to the retail cost of sugry foodstuffs and alcohol is quite small and besides, is it really the job of the state to nanny us into deciding what we can and can’t consume?

The state does not hold a monopoly on the need to be healthier. Gyms, health foods, and fitness gadgets have seen a renaissance over the last decade or so resulting from free market trends to meet consumer demands. These industries were not setup by the beareucrats in Whitehall, they came from enterprising individuals and businesses. So why are our taxes not reflecting this? Do we need punitive taxes when it is quite evident there is an appetite in society to live healthier?

If you wanted to be sinister, then you could say that many of these duties are to cream off cash for the treasury without alerting too many people to how much the state is indeed taking. Even though each tax, levy, and duty is suppose to fund a particular government service, in reality, it all goes into the same treasury pot — so then it wouldn't matter where each tax came from, or why, as long as the government gets its two pieces of silver.

The question of taxation has been with us for thousands of years. It has caused friction before with the Peasants Revolt being around excessive taxes. Is this myriad of taxes intended to keep down the risk of another Peasants Revolt? Maybe, but more likely that is just a perk and not the central meaning. These taxes result from subsequent governments engaging in tummy tickling policies — policies that sound good and appease people for a time without addresses the issues long term.

There is a need to radically simplify our taxes, but it is something no government would have the stomach for. In an ideal world, the only tax would be income tax on any earnings, for individuals and businesses. This might not be possible just yet, but ask yourself, do we need any other taxes?