The Fiscal Coin of Tax and Spending

A few days ago, Rasmus C. Christensen (aka FairSkat) tweeted that ‘‘Tax is only one side of the fiscal coin. Expenditure is the other’’. This should be no great surprise, but it is nevertheless something worth reminding ourselves about. When we talk about the objectives that our tax system, few would disagree that one goal is that it ought to be redistributive: that is should facilitate the redistribution of wealth from those better off to those less well off. This can be made for instance as an economic case (leveling out the disparities caused by the economic structure), as a moral case (improving the life chances of those less fortunate), or as a political case (it is unfair that power should reside only in the hands of so few).

But there are two elements to this. The first is that the overall burden of taxation should fall more heavily upon those that are more able to bear it. Progressive taxes, strictly meaning that the marginal rate is higher than the average rate, but in layman’s terms meaning that the rate of tax increases as income or wealth increases, are a means to this end. The second element however is that expenditure then should more heavily benefit those that are less well off. Health and education are two prime examples of public spending which have a significant impact upon leveling the life chances of individuals from poorer backgrounds.

The two elements are inseparable for the purpose of redistribution. For instance, if taxes are regressive overall, public spending even on equality drivers like education will not render the system progressive overall. Rather it would merely mean that people are paying exactly for the services they use. The tax system then becomes more of a ‘pay for use’ system. This would also be the effect at the other end: where taxes are progressive themselves, but public spending served merely the interests of those that have been most taxed, for example, by subsidizing polo lessons for children in Chelsea.

Whilst this might be an extreme example, such a state of affairs can occur less obviously when there is a regional element involved. Think for instance of an area in the UK in which there are a minute number of very wealthy taxpayers who bear more or less the entirety of the burden of taxation in that area. However the rest of the inhabitants are poorly off. A redistributive system would mean that the region should receive significant amounts of public spending. Through ignorance however, the government of the day may neglect to do so.

This is precisely what occurred in the case of the 1853 Income Tax in Ireland. Professor Peter Clarke in his recent presentation at the biannual Cambridge Tax History Conference set out how in 1853 a tax was levied in Ireland as a means of paying for the famine relief provided to the country. The tax however continued well beyond the point at which the debt was recovered, with the Report of the Financial Relations Commission in 1896 concluding that it was not a good settlement for Ireland (on which, see: here). Of course, the tax was only levied on the wealthy, with only 21,000persons paying the tax, 17,000 of whom were Schedule D taxpayers (presumably wealthy farmers or professionals). Viewed from the tax side of the fiscal coin accordingly, Gladstone was justified in asserting that “the fact of a country being poor was no argument prima facie against the application of income tax”. It was the redistribution in terms of public spending which was lacking in respect of the tax. The money was directed towards causes like the Crimean War, rather than into the feeble Irish state. As Professor Clarke surmised, this “added” to Irish perceptions of British misrule, and to a Gaelic revival.

Politics in the UK is currently in a state of flux. But the business of government will continue regardless. It will soon be time for another Finance Bill. Politicians on both sides of the House of Commons would do well to remember the two sides of the fiscal coin when the debates inevitably next turn to the tax system.


About taxatlincolnox

Tax law academic. With this blog, I seek merely to contribute to the debate. All thoughts are mine, of course.
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