Let’s be honest: no one likes to pay taxes. Most of us do it (reluctantly) because we understand that at their core is the concept of pooling: we all contribute, so that public services are there when we need them. So that we get healthcare when we are ill, so that there is someone at the end of the line when we report a crime, so that our kids get a good education. If we feel that these services function well, our tax morale – the technical term for our willingness to pay taxes – tends to be high. When we don’t, our willingness to pay decreases.
When waiting times for adequate healthcare run into years, when schools close because of a lack of safe facilities, when you report a crime but no one comes, the allure of the tax cut – always there, always present – becomes nearly irresistible. The little devil on top of your shoulder is telling you that taxes are too high already, and “What are you paying for anyway?” If those tax cuts are accompanied by a promise that public services will (magically) also improve, so much the better.
Deep down we know that there is no such thing as a free lunch. We know that we cannot have both outstanding Scandinavian-style public services and a low tax-burden. Despite recent increases, according to the latest OECD data, at present the UK tax burden is still slightly below average when compared with other wealthy countries, and substantially lower than the taxation of other western European states such as France, Germany or Denmark. But we want so much to have our cake and eat it that we will cling on to any possible rationalisation.
The rarely told, painful truth about taxes is that there are never simple answers. Taxes, like reality, are complex and full of trade-offs. The first, and most important of all, is that generally we get what we pay for: lower taxation, lower standard of public services; high standard of services, higher taxes. But there are many more trade-offs.
We should have a competitive tax system. Attract investment, create jobs, encourage economic growth. Seems like a no-brainer, right? Well, it isn’t. First, it is not easy because almost every government in the world is following the same strategy. So in order to remain competitive, countries must often offer ever greater tax advantages. This has led to a race to the bottom in corporate taxation that global reforms have been trying to stop for the last decade.
Second, even assuming that we win that competition, there are still trade-offs. In a competition there are always losers: for us to win, others will lose. If other countries are not getting investment, or not getting the tax revenues that can increase their economic growth or improve public services, then we cannot be surprised that young people feel the need to migrate to richer countries in search of a better life. Of course, it is not all about taxes. But there is a link between global tax policy and migration flows, which we all too often choose to ignore.
We need a fairer tax system. Few would disagree. But we first need to agree on fairness, and that is not as easy as it appears. Even if we assume that by fair we mean decreasing inequality, which is philosophically and politically divisive, there are many inequalities. Most obviously income inequality, but also gender, race, etc. But which should we prioritise?
The tax system should also encourage the transition to a sustainable and greener economy. In the middle of the Cop28 agreement, sustainability and environmental protection are key priorities, so using the tax system to achieve those aims seems obvious.
Alas, there are trade-offs. Tax measures designed to protect the environment will often hit those on the lowest incomes hardest – globally and domestically. This was recently exposed by the cost of living crisis, and the consequent decision in the UK – as in many other European countries – to lower taxes on energy products. The measure was designed to protect those on lower incomes, but had obvious environmental and geopolitical consequences: we gave a tax incentive to the consumption of fossil fuels, potentially increasing dependency on Russian gas. It may be that, at that moment in time, protection of the poorest and the most vulnerable was most important. That perhaps is understandable; less so, however, is the fact that no government, neither the UK’s nor others, seemed willing to even acknowledge this trade-off.
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Debates on taxes are too often caught up in absolutes, and strategic (mis)representations. The uncomfortable truth is that there are very few simple
answers. Can we have a fairer, more efficient, greener tax policy? Yes, of course we can. But to get it, we must dispel the comforting myth of tax measures as free lunches. The stakes could not be higher. Tax policy has the potential to make a meaningful change to the standard of living of everyone in this country, and, if we are lucky, contribute to the greater good and help save the planet in the process. To pass on that opportunity would be a terrible waste.
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Rita de la Feria is the chair in tax law at the University of Leeds, and a contributor to think tank ReImagine Europa’s talks series
