The Structure and Reform of Direct Taxation (Routledge Revivals)

James E. Meade

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136323560
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1978, The Structure and Reform of Direct Taxation presents the full findings and recommendations of the 'Meade' committee set up by The Institute for Fiscal Studies. It represents the most importantcontemporary examinationof the structure of UK taxation and direct taxation systems in general. The results of two years' intensive research and discussion by this independent committee are presented as a report under the joint authorship of an outstanding team of tax experts. The committee brought together professional practitioners-lawyers, accountants and taxation administrators-and academic specialists in fiscal studies, and here provides a unique review of direct taxation which is comprehensive, singularly original and full of good sense.
The book begins with a return to first principles, restates the objectives of a good tax system and analyses existing structures. It goes on to examine the feasibility of basic reforms which would allow the system to become more straightforward in operation and which would base taxation on what individuals take out of the economy rather than on what they put into it.

PART ONE INTRODUCTION

In this Part we explain the scope and purpose of our inquiry and consider in general terms what are some of the main characteristics of a good structure for a system of direct taxes.

1 Scope and Purpose of the Study

We were set up as a Committee to make a study of the structure of the UK tax system as a whole. There is a widespread view, the justification for which we illustrate in Part Two of this Report, that, as a result of many successive independent changes and ad hoc modifications first of this tax and then of that tax, the whole system now contains a number of anomalous complica tions and inconsistencies, which have been much intensified by current rates of inflation. In present inflationary conditions and with the high rates of tax necessary to finance the present high levels of public expenditure, these anomalies can have very grave and important effects on the economy. Accordingly it was thought fit to set up a Committee to undertake a radical review of the tax structure as a whole.

But the very fact that over recent years there have been so many changes in the tax system suggests that an essential need is to put a stop to this bewildering process of altering each element in the tax structure as soon as the taxpayer gets used to it and arranges his affairs appropriately. Uncer tainty and lack of confidence in the stability of present arrangements are serious impediments to the national effort to improve our economic performance.

These two points of view are not very easily reconciled. As so often in this wicked world, one cannot have one's cake and eat it; but one can com promise, and eat half and keep half. Accordingly we have tried to respond to this difficult situation in the following way. In Part Three of our Report we have embarked on a root-and-branch radical analysis of the tax structure based on first principles, a process which, for good or bad, we were set up to carry out. In discussing the possible radical restructurings of the tax system we have paid close attention to the transitional problems involved; and in the final Part Four of our Report we have placed emphasis on the fact that we cannot jump by one revolutionary movement from the existing tax structure to a completely new one. Accordingly in that Part we have paid great attention to the sort of gradual modifications which would lead one nearer to, rather than further away from, the desired new structure. The root-and-branch analysis can be regarded as defining the ultimate goal against which the desirability of any step-by-step changes can be judged.

In this Report we have restricted our attention to the structure and operation of the main direct taxes, such as the income tax, the capital gains tax, the corporation tax, the capital transfer tax, and the proposed Wealth Tax. As part of this corpus of direct taxes, we have included for certain purposes the present structure of social security contributions and benefits, which for many purposes must be regarded as negative direct taxes, and also the value-added tax, which in many respects is similar to a general direct tax on consumption expenditure. Given the time and the resources available to us, we have tried to make a thorough going examination of this part of the tax structure rather than to make a more superficial examination which would cover a wider range of taxes.

We would justify this limitation of the scope of our inquiry on the grounds that the main anomalous complications and inconsistencies in the present UK tax structure are the result either of special inappropriate provisions in one or other of these direct taxes or, above all, of the way in which the provisions of these taxes interlink and react on each other. This latter topic has played a central role in our inquiry. For example, as we demonstrate in Part Two of our Report it is the combined effect of the provisions of the income tax, the capital gains tax, and the corporation tax which gives rise to some of the most marked and, one imagines, wholly unplanned distortions in the capital market; and it is the combined effect of the un related provisions of the income tax and of the arrangements for socia security which give rise to what are also, one imagines, wholly unplanned disincentives in the labour market. The examination of structural effects of this kind and the suggestion of alternative structural tax arrangements which would avoid these distorting effects have constituted a large part of the substance of our work.

This fact that a large part of our work consists in a search for ways of getting rid these unplanned distortions may leave the reader with a wrong impression of the underlying object of our analysis. We search continually for tax arrangements which will be as neutral as possible in their effects in the market in influencing the taxpayer's decisions and choices. The purpose of this search is to find a structure which will introduce as few unplanned distortions as possible. In other words it is our view that one should as far as possible start from the firm basis of a general interlocking structure of direct taxes which is as neutral as possible in its effects on market decisions. This does not, of course, rule out the introduction of a limited number of ad hoc modifications which are specifically planned to influence market decisions in one way or another.¹

Thus the fact that we have not in this Report considered specific taxes or charges to discourage polluting activities, or special subsidies to employment in specially depressed regions, or specially heavy excise duties on particular commodities like alcoholic drinks and tobacco, should not be taken to imply that we disapprove of them because they are not 'neutral' in their effects.

There are other very important aspects of the present UK tax system which we have not attempted in this Report to examine. We have not considered tax problems of devolution nor the problems of local taxation except in so far as they impinge directly upon the operation of the main national direct taxes. We have not examined the special problems of the taxation of oil revenues or of land and development values. We have not investigated the tax problems involved in short term demand management for the macroeconomic control of economic activity. We have no intention of denying the great importance of these topics. We can only repeat that in the time available to us we could not cover everything, that we consider the basic interlocking relationships of the main direct taxes to have proved to be a most important subject for analysis, and that it is against the background of such a pre liminary study that further work on these other topics might well be organised.

We have conducted our inquiry primarily from the national point of view. In doing so we have, of course, taken into account the main international problems which would arise from the tax changes which we discuss. We have explained these problems at considerable length in Chapters 20 and 21 where we have described a number of possible ways of dealing with them. But the main focus of our inquiry has been on the domestic effects of different tax arrangements, and it is on the study of these effects that we have concentrated the time and resources at our disposal. As a result, the analysis and pro posals in Chapters 20 and 21 should be regarded as rather more tentative than those in the rest of our Report.

In any reforms which we have analysed for the main direct taxes we have made every effort to take note of, and to present to the reader a full account of, the administrative and similar difficulties which the changes would involve. We have taken such administrative problems very seriously. But we have been less worried about the fact that some of the new tax arrange ments which we discuss are unfamiliar and may for that reason not be immediately politically possible. History suggests that what is not 'politically possible' can change quite radically and quite rapidly over the years; and nothing can become politically possible unless it is first proposed and discussed by some body of persons.

But there is one political aspect of our proposals which we have had very much in mind. As we have argued, stability in the tax structure is a necessary condition for business and for individual taxpayers to plan their affairs with confidence for the future. But one cannot hope to achieve any stability in the tax structure unless one can find a combination of taxes which commands a fairly wide political consensus among the main parties and is treated by each of them as a structure which each could live with if and when each came to form a government. This does not, of course, mean that there must be 100 per cent political agreement on all tax matters. Limited alterations of the tax system or changes in rates (provided that they are not on such a scale as in effect to alter the basic tax structure) must provide opportunity for the expression of different political philosophies, which put different emphases on different social and economic objectives. But one must attempt to find a broad stable framework within which all governments will be able to operate.

We have attempted to consider tax structures which might meet this criterion. Thus the combination of a progressive expenditure tax, of a reform of social security, and of a progressive tax on inherited wealth is one such combination which we discuss. A progressive expenditure tax is a tax which by exempting savings and investment from tax gives a maximum opportunity for economic growth and development in a mixed economy, but which simultaneously levies a heavy charge on those who live at a high standard of consumption whether it is based on a high income or on the dissipation of capital wealth, while a reform of social security could put a floor to poverty, and a progressive tax on inherited wealth could encourage a wider dispersion of the ownership of property. This is only one example of possible candidates which we discuss for tax systems; but for all of them we have in mind the crucial need to consider combinations which could com mand a wide political appeal.

It is very possible that quite extensive changes in the existing tax system must be made if a structure is to be found which might command a fairly wide political consensus. We may well have to face extensive change in order to find a stable and lasting resting place; and this is a main reason why we do not regard our radical approach to reform of the present tax system as being inimical to the ultimate objective of avoiding continuous tax changes.

Whatever form the ultimate tax structure may take, the rates of taxation will depend not only upon the nature of that tax structure but also upon the level of government expenditure. In making our assessment of the relative merits of different tax systems, we have taken into account the extent to which each provides a wider or narrower tax base and therefore implies a lower or higher average rate of tax. But we have not considered it to be part of our task to pass any judgements on the levels of public expenditures, except for those parts of the social security system which we must inevitably treat as negative taxes. But the ultimate level of tax rates will depend basically on the levels of public expenditures; and different treatments of the payoff between high tax rates and high levels of public expenditure constitute one of the ways in which differences in political philosophies will show themselves within any given tax structure.

Another way in which differences of political emphasis will show themselves within the framework of any given tax structure is in the degree of progressiveness of the rate structure. Different governments will put dif ferent emphases on the relative importance of economic incentives and of a more equal distribution of standards of living as social objectives, and such differences of emphasis will affect their views on the best pattern for pro gressive tax schedules. Later in this Report (Chapter 14) we say something on the principles underlying this choice; but we make no far reaching pro posals on what in our view constitutes the best pattern. Indeed it is doubtful whether we could have reached agreement on such a question even if we had tried to do so.

Thus we do not profess to say much about the general level of tax rates or on the degree of progression in the relevant tax schedules within any given tax structure. But we do claim to have said some interesting things, and possibly a few useful things, about the choice of the tax structure itself and about possible step-by-step processes for moving towards the chosen system.

¹ Modifications of the main tax structure which lead to a loss of revenue are as important as increases in public expenditure in putting a strain on the rest of the tax structure. For this reason we would welcome the institution of an annual statement of such tax remissions or 'tax expendi tures' in order that losses of revenue may be subjected to the same scrutiny as increases in public expenditure.

2 The Characteristics of a Good Tax Structure

We have explained in Chapter 1 the limitations of our inquiry. Thus, except as they impinge directly on our main inquiry, we are not concerned with such matters as the total level of public expenditure and the consequent need for tax revenue, the distribution of taxing powers between different authorities, possible methods of linking the levying of taxes with the expenditure of the revenue, and the political problems of the accountability of taxing and spending authorities to the public.

As we interpret the phrase ‘the structure of direct taxes in the United Kingdom’ we are seeking answers to questions of the following kind: Do the various direct taxes make a coherent whole, or do they overlap and impinge on each other in an inconsistent and undesirable manner? Are there any ways in which, for example, the tax bases of the particular direct taxes and the rules relating one such tax to another could be modified so as to make the whole structure simpler, more effective and fairer in its operation?

In order to answer such questions one must have in mind what one would regard as the desirable characteristics of a tax structure. We consider the most important of these under the following six headings:

1 Incentives and economic efficiency

2 Distributional effects

3 International aspects

4 Simplicity and costs of administration and compliance

5 Flexibility and stability

6 Transitional problems.

1 INCENTIVE S AND ECONOMIC EFFICIENCY

There are many channels through which a tax system may affect economic efficiency. It can have important effects on incentives and opportunities to work, to save, to invest in capital developments, to take risks and innovate, to use resources efficiently and to allocate them to uses which best serve the needs of society.

To a large extent these efficiency effects depend upon the total level of taxation. If the need for tax revenue to finance a large public sector is high, some tax rates will inevitably be high with inevitable effects upon some economic opportunities and incentives. We have not regarded it as part of our task to consider what is the proper balance between the public and private sectors of the economy and what, in consequence, is the proper target for total tax revenue. But there are different ways of raising a given tax revenue with differing effects upon economic opportunities and incentives; and this aspect of the matter we do regard as being at the heart of our inquiry.

The economist distinguishes between the ‘income effect’ and the ‘substitution effect’ of a tax burden. Thus heavier taxes on i...