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How will we pay for everything if there is no tax?

We need a new tax system for the digital age, writes financial writer Dominic Frisby
We need a new tax system for the digital age, writes financial writer Dominic Frisby. Image credit: Public Domain Picture / Pixabay

“Annual income 20 pounds, annual expenditure 19, 19 and six, result happiness,” said Charles Dickens’ Mr Micawber. “Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery.”

Governments around the world have got a big problem on their hands. They are spending a lot more than they are receiving.

This has been the case for many years, but Covid has made things worse. Spending has gone up, tax revenue will fall – many have earned next to nothing this year.

What’s more, spending shows no sign of slowing. To win elections, parties promise goodies – any party that promises to spend less doesn’t get elected. Social democracies around the world are trapped in this cycle of ever-increasing spending.

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They cover the deficit – the gap between expenditure and income – by two means. First, with more and more debt (a tax on the future), made possible by suppressing interest rates, so that debt is cheap to service. This is money that will either never be paid back, just rolled indefinitely into the future, or only paid back in currency that is significantly devalued.

Second, central banks are printing money. They don’t call it that, of course. They give it obfuscatory names like “quantitative easing” or “modern monetary theory”. But whatever you call it, the effect is the same.

Printing money is stealing from the poor.

If you have an economy with, say, 100 identical units in it, and 100 coins, then each unit will cost a coin. Introduce another 100 coins, then the value of the units will rise to two coins. It’s great if you own the unit. You’ve doubled your money. But those who don’t own the units see the purchasing power of their money fall by half.

Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future (Penguin, £9.99)
Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future (Penguin, £9.99)

That is essentially what is happening in our economy. It’s why houses have become so unaffordable to those who have only their salaries (which haven’t risen by anything like the same extent to which money supply has increased). But printing money, with the casualty being the less well-off, has been the solution for governments incapable of reining in their spending.

Roughly 50 per cent of government revenue worldwide derives from income taxes, with another 20-25 per cent in sales taxes. Very little tax revenue derives from taxing land, capital or wealth. The tax system is geared against the ordinary worker.

Income tax has proved easy to collect. The employer collects it on behalf of the government, and if they don’t, they get into trouble. But more of us are turning freelance. The gig economy is on the rise. Surveys show much higher satisfaction levels among the self-employed than the employed – more freedom, more flexibility – and so more and more workers take that route. Employers like it too. It reduces their costs. Customers like it too. Lower costs mean cheaper prices.

The one body that doesn’t like it is the government, because, as strategist Matthew Taylor discovered in his report on employment practices for the Theresa May administration, self-employed workers pay significantly lower levels of tax. They find more expenses to write off, there is greater scope for non-compliance, whether accidental or design. There is the loss of employer contributions.

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Then there is the rise of robots and AI. Blue and white-collar workers are losing their jobs to machines. “The robot that takes your job should pay taxes,” says Bill Gates. But it is not so easy. Particularly if that robot is based in China.

The one thing that is sure: the easily taxable relationship between employer and employee is in jeopardy.

Tax Google more, comes the reply. Where exactly is Google based? Who should it pay tax to? The rapidly expanding economy that is the internet is largely borderless. Do you know what the fastest growing workforce in the world is? The digital nomad. What should these borderless individuals pay in taxes, and to whom?

Our tax laws were written in another age, designed around physical economies with clearly defined borders. They have not been adapted for the realities of the new digital economies around us. No politician attempts wholesale reform, when that is precisely what is needed. They just tinker around the edges, adding a little here, taking away a little there.

Major reform is too big, too long-term an undertaking in a political system that thinks only in terms of getting re-elected in four or five years’ time. And to get re-elected they promise more goodies, which means more spending, which means…

Dominic Frisby is a financial writer, author of Daylight Robbery: How Tax Shaped Our Past And Will Change Our Future (Penguin, £9.99)