"Business taxes" are inefficient and dishonest. It's time for a rethink.

Ahead of the budget, calls for more spending from various government departments, lobbying groups, charities, think tanks and media outlets will become near-deafening. Against it all will be the Treasury, reminding people that pennies don’t fall from Heaven and have to be earned here on Earth. Whether the medium is Philip Hammond’s spreadsheets or Liz Truss’ marvellous Instagram feed, it’s not a popular message in 2018.

It is, however, a crucial one. The Government still borrows tens of billions of pounds a year more than it takes from taxpayers. The national debt is approaching £2 trillion, a figure that pales in comparison to the scale of unfunded public sector and state pensions. This ought to mean that recent pronouncements on the ‘end of austerity’ were ignored as demands of an economically-illiterate opposition.

But, the idea of higher spending is a popular one among voters and the Labour Party knows it. It likes the popularity that comes from offering voters ‘free stuff’ that is paid for by ‘the rich’. But because the left has either not heard of the Laffer Curve, or ideologically doesn’t want to think about it, higher spending almost always leads to higher taxes, even though that frequently fails to lead to more revenue.

The TaxPayers’ Alliance firmly believes that lower spending and lower taxes help individuals, families and businesses more than higher spending and higher taxes. But as a thought experiment, if we were to imagine that, politically speaking, a government simply couldn’t cut spending from today’s level, and couldn’t also cut tax overall, there are still better and worse ways to tax the country.

For example, we are better off taxing income and consumption and avoiding taxes on transactions and capital. “Business taxes” whether they be on profits, labour or something else are inefficient and fundamentally dishonest. The burden of corporation tax falls on shareholders, workers and customers, and it’s not obvious exactly how this burden is shared.

So, when Jeremy Corbyn et al argue for corporation tax increases, they don’t even know who they are taxing. This can’t be the basis for good tax policy and it begs the question, how many people realise that a business cannot actually pay any tax? Only those stakeholders attached to it in some way can.

Profits are also a bad basis for tax. Some will argue that this is payback for the services the state provided the workforce (health, education etc). But you could have a small hedge fund making millions using a privately-educated workforce sat in a small office using nothing but a few laptops. And at the same time, you could have a haulage company sending lorries up and down the country wearing down the roads and polluting but making next to no profit.

I could go on (and on). But, as we approach the budget, instead of talking about who should be taxed, more economically literate conversations about what activities should and shouldn’t be taxed would be very welcome. That way, the UK would benefit from more growth, higher productivity and less distortion than using the tax code to promote ideological beliefs, or even worse, affect the toppings on pizza!