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Like many heads of state before and since, King William III faced the dilemma of how to fill English coffers without overly irking his subjects. In 1696 he imposed a levy on the number of windows in a house, finding a way to draw money from the wealthiest in society while avoiding a conspicuous tax on incomes. Some other countries went on to adopt a “window tax” too, but bricked-up windows of buildings from the period reveal how some people tried to avoid it. It is thought to have inspired the phrase “daylight robbery”.
Britain’s tax system is certainly not as backward as in William III’s time. But it is poorly designed for a 21st-century nation that desperately needs, once again, to raise revenues. Like most other advanced economies, the government faces enormous demands for more spending. Ageing and longer-living populations need additional funds for social care and pensions. The green transition will require billions in investment. And geopolitical threats are forcing countries to boost spending on national security.
But UK public services, after years of lacklustre economic growth and the “austerity” of the 2010s, are particularly overstretched. Its health system is close to crisis, and other services such as social care, education and defence are short of funds. It has experienced months of public-sector unrest over pay involving doctors, teachers and train drivers, and is struggling to fill key vacancies. All this is happening while the country’s tax burden — how much revenue it raises as a proportion of its economy — is already high by historic standards, and is set to reach its highest since the second world war.
Further tax rises are politically unrealistic — whichever party wins next year’s election. So is cutting back public services. Yet taking on significant additional borrowing would be unwise. Britain’s debt pile is now roughly the size of its entire economy, the highest level since the early 1960s. Its interest costs, as a proportion of revenue, are the highest in the developed world.
Turbocharging economic growth is the best way to plug spending needs. It results in bigger income and corporation tax revenues. But Britain’s productivity growth — which underpins the long-term expansion of the economy — has been subdued for more than a decade, with low public and private investment a key factor. There are few quick fixes.
Reforming and simplifying the byzantine British tax system could, however, go a long way towards changing the situation. The UK tax code is considered to be the longest in the world. It is filled with reams of reliefs, carve-outs and distortions that stymie productivity.
There are potential ways to reform it to promote long-term economic growth, which would in turn deliver higher revenues. They involve taxing “bads” such as pollution and congestion better, capturing more “economic rents” (the income derived from the ownership of a limited resource such as land) and removing existing disincentives to productive investment. In a series of forthcoming editorials, the Financial Times will explore some potential options.
Changing the tax system will inevitably involve difficult trade-offs, and will produce both winners and losers. Politics will be a big impediment, with many lobbies dedicated to preserving the system as it is. This makes it all the more important that any reforms are geared towards boosting economic growth and are implemented prudently. They must be fair, easily understood, and imbue long-term confidence.
Tax reform is not easy, but the prospect of trying to govern effectively without enough revenue is worse. Future governments ought to emulate King William III, not for his tax design, but for his boldness.
