6.7.1.5 Tax Policy

Governments must make choices on tax policy, so that they can pay for the services they deliver.  They are constrained by their need for political consent, so they try to minimise public criticism by choosing taxes that are less visible or less unpopular (3.2.4.2).  An Economist article, Plucking the geese, observed that:

‘LOUIS XIV’S FINANCE minister, Jean-Baptiste Colbert, famously declared that “the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” When it comes to taxing companies, a modern finance minister might rephrase this as “the largest possible amount of revenue with the smallest possible amount of economic and political damage.”’

As much as politicians look around for suitable targets for taxation, wealthy individuals and companies try to avoid paying it.  Multinational companies can choose where to report their profits, and only a high level of international cooperation could compel them to pay a fair amount of tax in each country they work in.  Wealthy individuals and companies can also practise aggressive tax avoidance, as described previously (3.2.4.4), unless they are exposed and politically pressurised to pay more.

A government’s macroeconomic policies – its management of the overall health of the economy – must be coherent (3.3.8).  If it wants to deliver good public services and adequate benefits, it must persuade the population to pay enough tax to cover the cost of these.  It is economically unsound, politically dishonest, and unsustainable to either print money or borrow it to avoid making difficult choices on tax policy:

●  Government borrowing must be repaid by raising enough tax at some future date, preferably within that government’s term of office.  There is an obvious unfairness in passing the cost of current services and transfer payments to later generations who did not benefit from them and hadn’t voted for them.

●  Politicians are very fond of offering ‘self-funding tax cuts’, as illustrated by the contenders to replace Boris Johnson after he had resigned: Tory leadership race: Rivals battle over tax cutting pledges.  Liz Truss won that Tory leadership race by offering immediate tax cuts, but the implied short-term increase in borrowing was seen as unacceptable.  Her mini-budget was seen by financial markets as a reckless gamble; it destroyed the government’s credibility and destabilised the economy.

●  Some governments have even resorted to concealing the truth about their borrowing, as was the case with the Greek government’s decisions that ultimately precipitated the 2011 Eurozone crisis.  This was described in a New American article, EU Trouble: US Banks Helped Hide Government Debt.

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This page is intended to form part of Edition 4 of the Patterns of Power series of books.  An archived copy of it is held at https://www.patternsofpower.org/edition04/6715a.htm