The Confederation of British Industry has released a consultative report entitled:"UK business tax: a compelling case for change" (March 2008). In this report it is stated that:
| “The key principles of a reformed and competitive tax system should be simplicity, certainty, flexibility and neutrality” |
Neutrality?This provides an opportune platform to present a real incomes analysis on the current failures of the taxation system. In large part the shortcomings of the tax system are part of the historic legacy of Keynesianism giving rise to a conflict between the desire of goverment for fiscal neutrality
1 whilst trying to run a macroeconomic policy which is anything but neutral in terms of its impacts on economic units. The maintenance of fiscal neutrality whilst bringing Monetarism centre stage has simply resulted in the same sort of gridlock. Both Keynesianism and Monetarism are "fair weather" policy sets which cannot respond to exogenous shocks because of the constraints set by "fiscal neutrality". This state of affairs was a contributing cause of the failure of Keynesianism in the 1970s and remains the basic cause for the ineffectiveness of Monetarism now.
From a real incomes perspective it is not possible to secure neutrality of the incidence of taxation at the firm level whilst also trying to uphold fiscal neutrality. Above all corporate performance is directly related to price performance and the only way firms can be free to optimise their individual performance is to ensure that the pubic sector plays by the same rules. On this basis it is possible to achieve a neutral tax system but its effect will not be fiscal neutrality but rather an enhanced performance of public sector goods and service provision.
It's the political economy stupidContrary to the apparent dedication to public sector reform expressed by political parties of all colour, a fiscal regime which brings about required changes in the performance of the public sector will also dilute the ease with which political parties can lever their power through large centralised budgets. This is the major reason why "fiscal neutrality" is given so much prominence on the part of all poltical parties. There is therefore an entrenched political interest in fiscal neutrality which will complicate the introduction of a tax system which secures neutrality of the incidence of taxation at the firm level.
Real incomes policies are fiscal policies based on price performance. Price performance rests with company and public sector management and therefore if applied equally to the private and government sectors this can achieve a neutrality of taxation incidence at the firm level whilst removing fiscal neutrality as a constraint.
Articles and downloadable papers on these issues are under preparation. These will appear in the main articles section.
Notes:
1 Fiscal neutrality can be generally defined as a requirement that changes in policy leave the public sector cash flow, and in particular "revenues", unchanged. With the public sector accounting for 40% of the GNP it is readily apparent that this can result in an erosion in the performance of the whole economy by diluting the benefits achieved in the non-public sector. As much attention needs to be given to how improvements in
public sector real incomes generation and this would be likely to change public sector cash flow, negating the economic rationality of fiscal neutrality. On the other hand the interest of political parties in using the weight of centralised funds as a means of sustaining political power and influence over those using and employed in the public sector will resist such change.
Updated: 19th April, 2008 - footnote on fiscal neutrality added.
Updated: 19th April, 2008 - footnote on fiscal neutrality added.
