Taxation and fairness

Taxation and fairness

Equality, equity and tax

We do not believe that every individual and business should be treated equally in relation to tax (which would equate to a flat tax structure). Where we do believe in equal treatment (or procedural fairness) is that every individual and business should pay the full amount of tax that they owe, with no special cases or loopholes, a more coherent and stronger approach to preventing tax avoidance, and a consistent and proportionate approach to enforcement. But how much tax individuals and businesses are asked to pay should be progressive, with those earning more money asked to pay a higher percentage of their income in tax than those earning less.

When it comes to how progressive the tax system should be, we differentiate between horizontal equity and vertical equity. Horizontal equity means that people in the same circumstances should be treated the same. So, for example, people should pay the same rates of tax on their incomes, whether they are employed, self-employed, or engaged through a personal services company. Income from capital gains or dividends should also be taxed at the same rate as income from work (which will not cause the ‘exodus of the wealthy’ that defenders of the status quo like to invoke). Reforms should be introduced to iron out inconsistencies in how people in similar circumstances are taxed in terms of national insurance contributions, council tax and inheritance tax. And enforcement should be applied consistently (for example, enforcement of tax avoidance by large companies compared to individuals, or the treatment of tax cheats compared to benefits cheats, as outlined below). Meanwhile, vertical equity (a progressive taxation system, in which those who own more pay a higher rate of tax) is about the extent to which income should be redistributed between different groups, and is more of a political value judgement.

We know that people get very angry when wealthy individuals or organisations are able to use their wealth, influence or power to avoid playing by the rules, and to get away with it. This has led to widespread public anger about tax avoidance. So an unfair tax system undermines public faith in the social contract, as well as their willingness to pay tax themselves.

The four ‘Rs’ of tax

Taxes are a necessary building block for a fairer society, providing governments with the revenue to support high-quality, universal public services and redistributing income to those in greatest need. This helps to reduce economic inequality and create a slightly more level playing field, which is necessary before any degree of equality of opportunity can be possible. Taxes deliver the four Rs:

  • Revenue (funding to deliver the services citizens need): taxes raise the revenue with which governments can drive human development by providing health, education and social security systems, as well as the basis for a successful economy through regulation, administration and investments in infrastructure.
  • Redistribution (addressing poverty and inequality): a progressive tax system redistributes wealth within an economy from the wealthy towards the poorest and most vulnerable, to reduce poverty and inequality and ensure that the benefits of development are felt by all. IFS analysis from 2019 found that though benefits do much of the work in reducing income inequality, taxes also redistribute from rich to poor, and are responsible for at least a fifth of the total redistribution the tax and benefit system achieves. However, some aspects of our tax system (such as many tax reliefs, and tax avoidance, and certain taxes such as council tax) are regressive, and redistribute wealth upwards, from the poorest to the wealthiest in society.
  • Representation (building governments accountable to citizens): taxation is a fundamental part of state-building and democracy. Collective bargaining around tax revenue creates a ‘social contract’ between people who pay taxes and vote for political parties, and officials who are expected to raise and spend those revenues in a way that benefits the constituents who elected them.
  • Repricing (limiting public ‘bads’ and encouraging public ‘goods’): Taxes can be used to ensure that all of the social costs and benefits of the production or consumption of a particular good are reflected in the market price, making it costly to engage in activities that are considered socially undesirable, or incentivising behaviour that is considered beneficial to society.