GOOD AND BAD TAXES

Jean-Baptiste Colbert, financial guru to France's King Louis XIV, is supposed to have said once that "the art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing". Since Finance Ministers the world over are short of cash, they would do well to look at the feather/hissing trade-off. For any given amount of money raised, some taxes are better than others.

Taxes should, if possible, be efficient (i.e. cheap and easy to collect), not distort incentives (unless done so on purpose) and "broadly" fair. I say broadly, since what constitutes fair is different for different people. Low rates on a broad base, a mix of income, expenditure and assets, are in general better than high rates on a narrow base.

A good example of a tax which meets these requirements is property taxes (the old household rates in the U.K.). They help to dampen down property market bubbles, which are otherwise ramped up by other policies such as the tax deductibility of interest and the absence of capital gains tax on a main residence. They are broadly fair, since bigger houses are in general owned by richer people and taxed more than smaller houses. And they are easy to collect; you grab either the registered owner or the person living there, while houses can't up and move abroad in order to avoid the charge. Mrs Thatcher forgot the value of property taxes, and it cost her her job as Prime Minister. She had a bee in her bonnet about local authorities, which used to collect the rates, and tried to undermine them by abolishing the rates and replacing them with a poll tax. The first time England had a poll tax was in the late fourteenth century, and it led directly to the Peasants' Revolt of 1381. A similar revolt saw off the Iron Lady pretty smartly.

Another good tax is that much maligned one, VAT. It works in both a positive and negative sense, so that if you produce negative added value (either because of operating losses or because of investment), you get an immediate refund. There is a positive in-built incentive to export and a corresponding disincentive to import. And the ultimate burden of the tax falls on consumers (i.e. pretty much everybody). Governments sometimes try to make it more complicated by zero-rating various categories, leading to arguments as to the dividing line (is a chocolate biscuit chocolate or a biscuit?) By and large, though, these are limited.

In contrast to VAT, which is uniform throughout the E.U., are the systems of overlapping sales taxes in (eg) the U.S. or India. These make internal trade across state boundaries ridiculously complicated, and introduce all sorts of distortions into what should be fairly straightforward transactions. Introducing a national VAT system would greatly increase the efficiency of the U.S. tax system at a time when it is crying out for reform. Sadly, that proposal is not on any politician's agenda.

Walter Blotscher