Toward Tax Freedom and Justice

Improving Tax Choice through a more democratically-just, rules-based fiscal policy.

Summary

Although considerable resources are expended upon attempting to influence Government spending, advocacy of greater tax choice (taxpayers having greater discretion regarding how their taxes will be spent) is relatively low despite it being a more efficient, effective and direct means to influence Government spending. I have sought to theoretically fortify arguments for tax choice. The ‘Policy Initiative’ section maps the policy; a key difference with this tax choice policy suggestion is an option for taxpayers to share data regarding allocation-preferences. The ‘Taxation, Morality and Choice’ section presents a moral argument for improving tax choice and the relation between the outcomes-based argument to morality argument. ‘The relatively poor and taxation’ section briefly examines the impact of taxes on the poorest in British society. The ‘Some potential benefits’ section outlines potential benefits of this policy initiative regarding social welfare, divisiveness, accountability, efficiency, transparency, political conduct, and more. The ‘Some potential problems…’ section introduces potential drawbacks and implementation issues whilst proposing potential solutions. Finally, the ‘Proposal for a phased implementation…’ and ‘Remarks on feasibility and relevance’ sections exposit the benefits of phased implementation and also highlights the relative feasibility and relevance (given growing discontent with democratic mechanisms amongst the less well off in the ‘developed world’).

 

Policy Initiative

  • Allow taxpayers to choose which Government departments to allocate proportions of their taxes to, according to their preferences. For example, an individual who pays £30,000 in income tax could choose to allocate 40% of that for the government to use at its discretion and then, subsequently, allocate the remaining 60% according to a rule based on their individual preferences (e.g 25% of their income (£7500) to the Department for Health, followed by 30% (£9000) to the Department for Education, followed by 5% to the Ministry of Defence (£1500)). Such a proposal would work not only for national taxes but also further downstream (e.g council taxes) and not only for income tax but VAT, Inheritance, Capital Gains and so on.
  • Allow taxpayers to share the data on proportions and volumes of their tax payments anonymously, semi-publicly or entirely publicly according to their preferences and possibly record this on an appropriately engineered Blockchain[1] of sorts.
  • Have a phased implementation towards this more democratically-just, rules-based fiscal policy regime.[2]

Taxation, Morality and Choice

 

Taking freedom and choice to its logical conclusion would lead us to conclude that contributions toward ‘public goods’ must be paid voluntarily rather than imposed upon peoples.[3] Such a situation may be viewed as idealistic or naïve but it would be morally unproblematic if public goods were funded voluntarily and the state acted merely as a facilitator that was truly at the mercy of the people rather than the contemporary arrangement.

 

However, the counter-argument here is that people would not voluntarily pay taxes and public goods would not be provided for.[4] Nevertheless, the pragmatically feasible alternative of improving tax choice so that people still pay their taxes but are given far greater choice in terms of where it is allocated and how it is spent wins the moral argument because the moral aspect of this policy suggestion simply regresses back, in its essence, to improving choice. Thus, the moral argument based upon principles is won apart from in the eyes of proponents of dictatorial, authoritarian or totalitarian regimes.

 

As such, contentions regarding how greater tax choice would result in worse outcomes should be countered by fortifying the theoretical arguments for the outcomes; for example, the argument that it would not lead to an improvement in welfare and fund-allocation would be sub-optimal or haphazard is a theoretical one that requires rational counter-arguments.

 

Finally, if monetary policy (the other great arm of interventionist macroeconomic policy) can be subjected to rules-based regimes, fiscal policy may also, in principle, benefit from such an arrangement.[5] [6]

 

 

 

The relatively poor and taxation

Looking merely at the United Kingdom, here’s an infographic from The Equality Trust:[7]

 

This gross, significant divergence in perception and reality regarding tax distribution across income groups[8] is a cause for significant concern and, clearly, taxation reform should be a priority since public perceptions will obviously shape public policy in terms of who benefits from it since policy makers seek to gratify it. All people – and the least fortunate especially – would benefit from greater tax choice so that they are not at the mercy of the few.

 

This evidence is corroborated by analysis from The TaxPayers’ Alliance[9] which found that, in 2012-13, the “bottom 10 per cent of households paid an average of 47 percent of their gross income in taxes – by far the highest of any income group.”

 

Finally, the following chart[10] (released by Her Majesty’s Revenue & Customs in May 2016) shows projected income tax liability statistics for 2016-17 for the bottom 50% of taxpayers who are projected to be liable to pay 9.9% of total income tax.

Simply put, economic inequality can be countered through democratic empowerment via greater tax choice.

 

Some potential benefits

  1. Shifting the locus of power from government institutions, politicians and unelected policymakers to taxpayers. Enabling a rules-based regime equates to power being transferred directly to taxpayers and, to reflect this, efforts to effectively and convincingly educate and persuade taxpayers of policies’ merits will gain more importance (whether that be by education institutions, lobbyists, think tanks, media outlets, corporations or other taxpayers, for example). Transferring (national) fiscal policy power to taxpayers would shake up the political establishment out of complacency in a positive manner. Taxpayers would no longer be at the mercy of politicians’ or policymakers’ ideologies and/or hidden agendas.

 

  1. Reducing the power of corrupt lobbyists and improving general political conduct. Currently, many lobbyists leverage their ‘special relationships’ and ‘access’ to office-holders (elected or unelected) with significant responsibilities to influence the allocation of resources and the design of legislation, rules and regulations. This is generally viewed unfavourably due to the lack of transparency and significant risk of moral bankruptcy. As such, from potential benefit (1), we can deduce that their power would also be significantly diminished in proportion to that of government officials’, ministers’ and so on. As these corrupt lobbyists change their lobbying toward the taxpaying entities themselves, they will generally also have to improve the means by which they persuade taxpayers; this would, thereby, improve general political conduct, transparency and enable a sense of trust in politics.

 

  1. Incentivising increased general education of Government and Politics. People are limited in their direct political power through electoral voting or indirectly expressing discontent through various means. Direct power to allocate taxes accordingly will incentivise people to become more educated regarding government, politics and public policy; this greater demand corresponding to their increased power would be met with a greater supply of such educational bodies and, as it relates to (1), the redirection of lobbying resources towards the general public.

 

  1. Improving the performance of Government departments through intra-government competition. As Government departments and services would answer directly to the taxpayer rather than indirectly to them through their elected representatives and Ministers, the departments would have greater incentive and face greater pressure to compete with each other to provide higher-quality services, more cost-effective ones and to convince the public of their benefits.[11] [12] [13]

 

  1. Keeping Government far more accountable, reducing costs and increasing transparency. If every budget was determined by taxpayers, Governments would be held accountable throughout their terms in office. Therefore, they would find it more difficult to renege on their promises and taxpayers could ensure Governments behave according to their preferences in the case of political, financial or economic shocks that introduce uncertainty regarding future budgets.[14]

 

  1. Increasing tax revenue through reduced tax evasion. Since people often feel the Government misuses their income for purposes they do not (morally) agree with or uses it poorly for purposes they are intended for, this increased power to specifically redirect money away from functions of government that one disagrees with in part or on the whole[15] will work to reduce tax evasion conducted on the basis of principle. Additionally, through the increased performance of Government departments following logically from the competition effects of (4), tax evasion and/or avoidance for private benefit may also be willingly repatriated if taxpayers feel that their money will be spent more satisfactorily.[16] [17]

 

  1. Moving Government toward being the facilitator rather than ultimate dictator of tax expenditure. Having government subjected to a rules-based fiscal policy regime means that they would merely facilitate the funding and/or provision of public goods in so far as they are instructed by taxpayers as opposed to the current system where government has ultimate discretion to decide on what public goods are provided or defunded and how which is only indirectly held accountable through current democratic channels.
  1. Allocation of funds where they are needed in a timelier manner. Taxes would be allocated more quickly, where they are needed and in greater amounts according to peoples’ malleable preferences and the pressing problems of the time.[18]
  1. Promoting the general interest rather than favouring particular special interests. Through (1) and (2), on an aggregate scale, this system would work in favour of the general interest more than the status quo.[19]
  1. Improving fiscal discipline. Since each Government department will be subjected to uncertainty with respect to respective budgets, this would ensure greater fiscal discipline during ‘the good times’ to ensure a reasonable ‘buffer’ for the ‘bad times’. Indeed, (annual) reviews and subsequent adjusting of Governments’ expenditure by taxpayers would leave far less room for Governments (on average) to borrow irresponsibly and for creditors to lend them irresponsibly since taxpayers under a rules-based fiscal policy regime may not collectively have the same tolerance towards ballooning national debt that governments under a relatively discretionary fiscal policy regime do.
  1. Naturally balancing the budget. From (10), it is clear to see that this improved fiscal discipline will work, over time, to naturally balance the budget across the developed world. This balanced budget would reduce expected future tax increases, enable future tax cuts and generally promote governments’ creditworthiness,[20]
  1. Consensual data-sharing of taxpayers’ allocation-preferences would help heal social divisions whilst fostering greater contributions to civic life. If taxpayers are allowed to share their chosen apportionment of their taxes, they can signal their virtues, morality and preferences for contributing to society with greater specificity – as such, they have an even greater incentive to contribute positively to civic life through this channel and others.[21] Additionally, data-sharing of taxpayers’ allocation preferences and even the (personal) qualities of the taxpayer with their consent may even heal social divisions if people can see that people are not simply inclined to help people who share particular characteristics (region, occupation, sex, race, ethnicity, culture, disability, gender, class, educational background etc.) and, if people can see the exact proportion to which these sentiments are actualised via a rules-based fiscal policy regime through data-sharing, it will work to heal social divisions.[22]

 

  1. Improving Inheritance Tax. The deceased and/or those who were due to receive this portion of their estate in the absence of this grotesque tax will determine its redistribution.[23]

 

 

Some potential problems and how they may be overcome

  1. Entities apportioning funds ‘selfishly’ rather than ‘altruistically’. Whether they be businesses or individuals, taxpaying agents have incentive to distribute funds that benefit them disproportionately highly versus how they may have been distributed in a discretionary regime – this could restrain overall social welfare amelioration. Potential solution: The mechanism by which people can share information regarding the amount they allocate to each department could also allow them to share information (personally or non-personally identifiable) regarding their characteristics. If, for example, people observe that people from particular demographic groups allocate funds to areas where the majority of the benefit is derived from another demographic or even the general population, this verifiable, inalterable, anonymised data will improve peoples’ trust in others.

 

  1. Defunding entire departments when only part of the department is what is disagreed with. For example, one may disagree with the Ministry of Defence’s Trident Nuclear weapon system whilst wanting to continue funding other operations. Potential Solution: Deepening tax choice so that taxpayers can apportion funds not only to departments but also to specific parts of department and/or policies being delivered by the department accordingly.

 

  1. Managing indirect taxes such as VAT. Whereas income and business taxes are more easily traceable, the incidence of VAT and who pays it is more complex because, depending on the nature of the good or service, the burden of indirect taxes such as VAT will fall on the consumer and/or supplier proportionately and accordingly.[24] As such, it could be challenging to determine who should decide where VAT is spent and frustrating to repeatedly claim VAT in the case of cash transactions. Potential solution(s): Increasing proliferation of financial technologies and cashless-payments means these service-providers could voluntarily participate, share their transaction data and thereby ensure VAT volumes per taxpayer are fully accounted for. Furthermore, VAT and sales taxes are often viewed as taxes on consumption; by default, the consumer may decide where these tax revenues should be allocated. However, if the producer wishes to dispute this, the consumer may agree (through other mechanisms made feasible through technology) with the producer that they will split the VAT tax choice in a mutually-agreed manner. [25]

 

  1. Taxpayers may not reveal their contributions publicly. Potential solution: Assure and educate taxpayers of the privacy as well as self-defined limits of provided information. Tell taxpayers that public revelation of preferences will help inform other peoples’ allocations and lead, overall, to greater efficiency and social welfare. Additionally, people will naturally be discouraged from hiding information because, though they have a right to privacy, they have incentive to signal preferences and, in order to foster trust between themselves and others, they may gradually choose to disclose more information as others do.

 

  1. Reinforcing the ‘untouchability’ of Central Government departments. If taxpayers can only allocate funds to specific departments in Central Governments, these departments would inherently reinforce their status as the facilitators of public goods provision through taxpayers’ funds. This would make them more resistant to reform and abolition when superior means of facilitation emerge. Potential solution: Incorporate taxpayers’ having mechanisms (which they can periodically alter through some form of collective agreement) by which they can specify the means through which their taxes are to be spent on various projects. This will undoubtedly require some more complex (algorithmic) mechanism design which can be continually refined over time but, for now, enabling choice of departments to fund would be a step in the right direction.

 

  1. Benefits the rich more than the poor. Since the rich pay a higher amount of tax, it could be argued that it would benefit them more. However, since the relatively poor pay a higher proportion of tax relative to their income the relative, proportional benefit of such a policy initiative would be in their favour. Furthermore, since the aforementioned divergence in public opinion regarding proportion of taxes paid by household income groups will mean that the poor may benefit less from contemporary fiscal policy in proportion to the political impact of perceptions, despite having control of a lesser overall share of the taxes paid, they will reap a far greater, absolute and relative benefit from this new system.

 

 

Proposal for a phased implementation and possible extensions of it

  • Moving from a system where the government practically has overwhelming discretion regarding expenditure to one where it must regularly abide by the diverse, time-varying preferences of taxpayers would introduce substantial uncertainty that could be economically-destabilising.
  • As such, this policy can be gradually introduced such that the proportion of the taxes that people can allocate increases over time (beginning with 25%, for example, and then increasing gradually to 50% and so on) so that Government departments and all other institutions actively involved in public policy have time to adapt effectively to this new modus operandi.[26]
  • One might also extend this to money not merely being allocated to particular departments but also, more specifically, to particular divisions, desks, units, policy ideas, schemes etc. As such, the ‘depth’ of choice is not stifled.

Remarks on feasibility and relevance

  • Such a system may have previously been deemed to be infeasible on the grounds of logistical complexity and inadequate technology. However, the widespread use and innovation of information technologies means that information is far more easily accessible and usable. As such, information technologies enable taxpayers to make far more informed decisions regarding these matters than was previously possible
  • This is particularly relevant when considering that there is significant, widespread discontent with democratic mechanisms across the developed world. Whether that be in post-referendum Britain or the USA which is experiencing increasing social divisiveness, the general mood is that ‘ordinary’ voters and/or the ‘general public’ do not have as much control over public affairs and policy as they would like to and/or ought to. Improving tax choice is a means by which to democratically empower the less well off as a means to economic freedom, justice and progress.

 

Concluding Remarks

These are our taxes and although, as in monetary policy, there will always be both a discretionary element and rules-based element, we whom fiscal policy is imposed upon and derived from should have a greater, direct say in determining the rules that Government follows. Whereas well-resourced Special Interests have more power to lobby for favourable fiscal policy, the relatively poor peoples across the developed world are generally not so fortunate. Providing direct levers for preference-specification regarding fiscal policy (besides periodic, paltry votes) to enable greater integration into and benefit from economic growth and progress would improve both democratic and economic justice through enhancing the freedom of choice.

[1] ‘Blockchain’ technology is an increasingly exciting technology that rose to prominence through the digital currency, Bitcoin, but has since been adopted by financial services firms more broadly (such as Goldman Sachs) for various purposes. Within the Blockchain development community, besides its obvious applications in transforming or at least improving financial markets’ functioning, there is increasing recognition surrounding its potential for improving Democracy since the technology is cryptographically secure (to alleviate privacy concerns) but also publicly accessible (to verify and validate trust in recorded information, transactions and other agents involved in them).

[2] More information on this under the heading ‘Proposal for a phased implementation and possible extensions of this policy’.

[3] On this, Brittany Binowski published an article at Forbes on June 18 2012 entitled “Why Mandatory Taxes Are Bad – And How The Government Should Fix Them (But Probably Won’t)”, available at: http://www.forbes.com/sites/brittanybinowski/2012/06/18/how-to-get-americans-to-pay-taxes-willingly/#7638e0426247 .

[4] This particular contention is predicated primarily upon mankind’s general lack of trust in one another due to historical and contemporary observations and resulting, reinforced rationales.

[5] This is an especially pertinent analogy since a rules-based monetary policy regime has often been argued to produce better results than a purely discretionary one (though admittedly, the empirical evidence can be conflicted and there is fierce disagreement amongst economists regarding how monetary policy ‘should’ be conducted).

[6] Daniel Indiviglio wrote an article for The Atlantic on the 3rd October 2010 entitled “What If Taxpayers Could Decide How Their Money Is Spent?”, available at: http://www.theatlantic.com/business/archive/2010/10/what-if-taxpayers-could-decide-how-their-money-is-spent/63946/ , where he describes the US Congress having “discretion” regarding allocation of taxes and advocates devolving “discretion” back to taxpayers. However, this is merely a difference in terminology since granting greater discretion to taxpayers in this way simultaneously reduces the discretion of the US Congress and imposes rules upon them. What Indiviglio was arguing for was essentially a form of a rules-based fiscal policy regime without explicitly using the term ‘rules-based’.

[7] This infographic was initially found by the author in this article written by Katie Allen and published by The Guardian on the 16th June 2014: “British public wrongly believe rich pay most in tax, new research shows”, Available at: https://www.theguardian.com/money/2014/jun/16/british-public-wrong-rich-poor-tax-research

[8] The divergence coming not primarily from income tax and national insurance but indirect taxes on consumption such as VAT and council tax, for example.

[9] “Distribution of tax burdens and benefit receipts”, The Taxpayers’ Alliance, Research Note 140, Available at: https://d3n8a8pro7vhmx.cloudfront.net/taxpayersalliance/pages/5133/attachments/original/1419248480/taxdistribution.pdf?1419248480

[10] Released by Her Majesty’s Revenue and Customs on the 18th May 2016, the report is titled “UK Income Tax Liabilities Statistics”, Available at: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/524106/Income_Tax_Liabilities_Statistics_May_2016.pdf

[11] Currently, many departments and service-providers depend disproportionately on the ideologies of the ruling parties, the mixed-signal mandates from election outcomes and the relationships between their Ministers, other Ministers and the most powerful ‘Special Interest Groups’. This creates a highly perverse situation.

[12] For example, in the UK, the Department for Work and Pensions would have to justify its status as the largest spender of UK National Wealth (compared to any other, single Government department) through directly convincing the public of the efficacy of its policies, efficiency of delivery and/or otherwise.

[13] If the reader is particularly interested in following up through an insider perspective, they may wish to consult with Julian Le Grand’s (2009) book entitled The Other Invisible Hand: Delivering Public Services through Choice and Competition (Princeton University Press).

[14] Brexit being a prime example of this.

[15] Russell Baker puts this point quite humorously and eloquently in a New York Times article published on the 25th July 1990 entitled “Taxpayers’ Choice”, available at: http://www.nytimes.com/1990/07/25/opinion/observer-taxpayers-choice.html .

[16] Quite simplistically, people evade taxes in order to increase their own ‘utility’, ‘happiness’ or otherwise. If they have greater direct power to specify where government spends their taxes, the same amount of taxes paid will yield a higher utility, happiness or overall social welfare than if they have no direct power to express their spending-preferences. As such, greater tax choice will proportionately increase peoples’ utility.

[17] Evidence for these contentions are further provided by Lamberton, De Neve and Norton (2014) in the Harvard Business School Working Paper 14-106 entitled “Eliciting Taxpayer Preferences Increases Tax Compliance.”, available at: http://www.hbs.edu/faculty/Publication%20Files/14-106_479019b0-1a7c-4a7a-a338-798a91a9e83d.pdf . Within the abstract, they state that “Allowing taxpayers to signal their preferences on the distribution of government spending results in a 15% reduction in the stated take-up rate of a questionable tax loophole. Providing taxpayer agency recouples tax payments with the public services obtained in return, reduces general anti-tax sentiment, and holds satisfaction with tax payment stable despite increased compliance with tax dues. With tax noncompliance costing the US government $385 billion annually, providing taxpayer agency could have meaningful economic impact. At the same time, giving taxpayers a voice may act as a two-way “nudge,” transforming tax payment from a passive experience to a channel of communication between taxpayers and government.”

[18] Contingent upon frequency of and preference-specificity expression-capability in budget-allocation voting mechanisms; that is, the design of the voting system that decides budget-allocation.

[19] Since individuals will have a greater say in advancing their interests, the aggregation of greater individual preference-specification possibilities would make this possible.

[20] Since sovereign debt has massive implications across the credit market(s) in terms of its yields, price and volume playing a role in determining the interest rates and volume of other forms of debt that are perceived to be riskier, this would also improve general access to credit for consumers since lenders would no longer be confident in being able to lend to a highly solvent government which may not have a mandate to continue borrowing from year-to-year or even quarter-to-quarter and, therefore, they would be more inclined to lend to other entities and this would reduce the rate of interest that regular consumers and businesses pay on their debt which would, thereby, increase disposable incomes and increase investment in the economy.

[21] Especially if we expect to see positive ‘spillover’ effects in terms of the signaling being associated with psychological self-gratification (whether that be through social approval, self-image and/or otherwise) since this would act as a natural incentive for people to want to contribute more positively through other channels also since they would come to associate positive contributions with positive sentiments.

[22] This is particularly relevant given the social divisions that have been highlighted through the Brexit referendum as well as the US Presidential election, for example.

[23] To give a rather emotive example, if the deceased fought Cancer, the would-be inheritors may specify that this money be allocated to a government research council’s cancer research program and this would help make this controversial tax at least somewhat easier to swallow for the parties involved. Another example could be if the person is to pass away and they feel strongly about funding Britain’s Armed Forces and the Royal Navy in particular, for example. This person could specify that the inheritance tax proportion is allocated to the Royal Navy within the Ministry of Defence for various reasons.

[24] An economist may say that this would depend on the price-elasticity of demand and price-elasticity of supply of the good or service in question.

[25] Such a scheme may also enable the benefits from the policy suggestion by the author in the articles “The potential for Data-Dependent Taxation via Data Science” (published by The Cobden Centre on the 27th November 2015, available at: http://www.cobdencentre.org/2015/11/the-potential-for-data-dependent-taxation-via-data-science/ ) as well as “Policy Proposal After the Brexit Vote: Data-Dependent Tax.” (published by The Market Mogul on the 23rd July 2016, available at: https://themarketmogul.com/policy-proposal-after-the-brexit-vote-data-dependent-tax/ ).

[26] Daniel Indiviglio (2010), whose article was referenced in an earlier footnote of this essay, was also concerned about the chaos that could ensue in terms of uncertainty, inability to plan spending and potential “chaos”; he says that this is “easily solvable” and provides “one solution” where one could create “a lag of a year or two between when tax allotment is made and when it is actually used. That way, agencies will be able to plan their budgets accordingly.” The issue is that, as the policy’s moral spirit is to improve taxpayers’ choice, this solution would impose an inherent restriction on the means by which taxpayers could exercise their newfound autonomy in fiscal policy. As such, a more natural way to mitigate the potential chaos is to gradually introduce the choice in a ‘non-shocking way’ over time and, thereby, allow Government to adapt to this new rules-based regime more naturally by improving fiscal discipline, building in the budgetary uncertainty by estimating how it will affect them over time based on past apportioned contributions, public sentiment etc.