Tax Reform
IT is a general rule, with few exceptions, that governments in a free society can do far less than they think. Thus Mr Brown seriously impairs his health in the pursuit of an incomes policy as wages rise faster than ever, while Mr Crossman arrogates to himself a vast Whitehall empire to forge a housing policy as fewer homes are built and at higher prices.
One of the very few areas where the Government really is sovereign and sole master is taxation policy. For this reason, if for no other, governments would do well to spend more time than they have done in the past in seeing that we have in this country a tax system that meets the national need. And in this context it is particularly encouraging that Mr Wilson let it be known a few days ago that the Government is once again looking into the possibility of intro- ducing a TVA, or tax on value added.
It is, on the face of it, extraordinary that at the very moment when the highly contentious 1966 Finance Bill is passing through Parliament the Prime Minister should reveal that what he would really like is something very different from the Seleg- tive Employment Tax and totally at vari- ance with the Corporation Tax, the `historic' reform introduced in last year's budget.. But we must be grateful for progress, however unexpected and however slow.
And it certainly has been slow. The TVA was first mooted some five years ago, during Mr Lloyd's chancellorship. In 1963 his successor, Mr Maudling, got round to setting up a committee to look into the subject, which, on evidence since widely regarded as unsatisfactory, rejected it. And now we are offered a will-o'-the-wisp of hope that it may actually see the light of day in the 1967 budget, a full two and a half years since Labour took office.
In brief, the TVA is a tax on the value of a company's turnover, minus the cost of the bought-in materials, components and so on which have already borne tax as part of the suppliers' turnover. In other words, if—as is reasonable—capital expenditures are to be exempted as a form of investment incentive, it boils down to a tax on payrolls plus profits. Because of the payroll tax element, it encourages economy in the use of labour and the installation of specifically labour-saving investment, and as a straight percentage on wages is infinitely superior to the SET—a crude poll tax that is in- capable of distinguishing between scarce and highly-paid skilled craftsmen and part-time pensioners. And because it is a TVA it is permissible, under GATT rules, for the full value of the tax paid, both by the exporter and his suppliers, to be refunded to the final exporter on all goods sold abroad. It is the only worthwhile legal export incentive.
But it can only act as an incentive if the quid pro quo for the new tax is a major reduction in Corporation Tax. Mr Wilson spoke as if the TVA offered glittering possi- bilities of a slashing cut in personal income tax. This is a serious delusion. If the TVA were simply an addition to existing com- pany taxation it would push up the costs of Britiskipods and price us out of what few export' markets we still have. It is vital that the TVA should be a reform of company taxation, so that the overall burden on in- dustry would be unchanged and, above all, so that the profit margin on exports, after tax, would be increased. This is not to say that the higher rates of personal taxation should not be cut : of course they must be. But some other method must be found— perhaps through an enlargement of capital taxation—which will not cripple British industry. The offset to the TVA must be a reduction in the tax on company profits. Such a switch would be wholly rational : high costs are usually a sign of inefficiency, high profits (ceteris paribuS) a sign of efficiency. Plainly it is more sensible to tax inefficiency than efficiency, quite apart from the export bonus permitted by GATT. All the same, it is interesting to record Mr Wilson's progress. In his celebrated speech at Swansea on January 25. 1964, he was advocating pure Socialism : a swingeing tax on distributed profits and discriminatory tax rates for every industry, if not every individual firm, to make sure each fulfilled the national plan. All this was then aban- doned in favour of the only semi-Socialist Corporation Tax and SET. And now, as in the seainen's strike, he has repudiated Socialism altogether, revealing as his ideal a form of taxation which, recognising the vital role played by profits in the capitalist economy, would tax them more lightly than even the Tories dared to do.
Of course, the TVA will not solve all our problems. In particular, it will not solve our balance of payments problem. Had it been introduced when it was first advocated it might have done the trick; but now it is too late: the situation has sharply deteriorated and more drastic sur- gery is needed. But at least it will mean that, once the surgery is completed. the patient will be far less likely to suffer a relapse. In spite of the Prime Minister's kite, the battle for a TVA is far from won. It is a battle well worth fighting.
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