THEY WANT MORE TAX - AND NOW IT'S PERSONAL

New Labour is looking for new ways to make you pay more

tax, says Dominic Hobson. But be warned, Mr Brown: a

great tax rebellion is on the way

HONEST people everywhere know it. The tax burden is heavier now than it was when Labour took office. It is not just the quantity of money that the government takes away: up 9 per cent (to £128 billion) since last year in favour of the Inland Revenue alone.

What is astonishing is the proportion of our national income devoured by the gov- ernment — up 2 per cent since 1997, to 39.6 per cent — and all this during a time of rising economic prosperity, the era of 'prudence' and the allegedly conservative Chancellor; and before Labour has begun seriously to splurge our money on its public-sector clientele.

What is more frightening still is that the middle classes seem to have no idea what is hitting them, or that it will get worse. 'If you sit down at a dinner party and talk about interest rates, you can have a sensible conver- sation with your neighbour, irre- spective of background,' says one former government tax adviser. 'But any sort of conver- sation about the tax system starts from the base that most people think they should get tax relief for their nannies.'

Even if Gordon Brown were to give us something for nanny in the forthcoming Budget, even if he nom- inally 'cuts' some taxes, the tax burden will rise. By 2001 to 2002, public spending is expected to clear the Lawson benchmark of 40 per cent, and, as it is highly unlikely that people will be satisfied with the NHS or the state of schools, we can expect it to keep rising during the next parliament; and that, my friends, brings us to the really bad news.

The world is changing; old sources of gov- ernment revenue are drying up and, since the money must come from somewhere, it's coming from. . . you, of course. In person.

It is no longer possible to tax corporate capital on the basis of location or nationality. Multinationals can switch revenues between tax jurisdictions. They can sell to British consumers from offshore locations and abandon their old job of collecting VAT or excise on behalf of the government. Already the government has recognised this, by cutting corporation tax (to 30 per cent for major companies); but to retain a constituency of taxable corporations at all, the rate will have to fall further. From 2003, the Irish will ask a mere 12 per cent. So where else is the money coming from?

It's no use raising excise duty. People are smoking less and, in response to lunatic levels of duty, they are smuggling more. Excise duties, as a proportion of total rev- enue, now produce half of what they did in the 1980s. The Treasury has cut its estimated revenue from tobacco duty this year, from £8.9 billion to £5.7 billion. We have excise duties on fortified wines one and a half times as high as those in France; on spirits, twice as high; and on wine, 75 times as high. And then there's VAT, payable at 17.5 per cent on top. With margins like that, no wonder Dover is swarming with organised crime and Geordies in transit vans. The only way to put them out of busi- ness is to cut the duties.

So where else is Mr Brown to find his dosh? Already the Internet is putting all kinds of businesses beyond his clutches. Everyone from toy shops to stock exchanges can sell direct to British consumers from offshore tax havens. Victor Chandler has taken his betting company offshore, threat- ening the £1 billion the government collects from the 6.75 per cent it levies on every wager. Even the truckies can move offshore, filling their tanks with cheaper foreign diesel and registering abroad. By the time of the last pre-Budget statement, the fuel duty 'escalator' was costing £100 million in lost tax; the Chancellor ditched the escalator.

Tax on British business has gone up by an average of 8 per cent a year. But in many busi- nesses, multinationals can now choose their tax jurisdiction. So who does that leave? It leaves us, the employees, the self-employed, domestic share- and bond-holders, owner-managers, consumers and pensioners. Now we will pay our taxes directly, rather than through corporate intermediaries.

The traditional remedy — emigration — is available only to the rich and talented. As the science writer Adrian Berry points out, escape from the taxman awaits the dis- covery of habitable planets and the inven- tion of cheap and convenient space travel. Until then, we are all going to face an unprecedented degree of intrusion into our private affairs.

Since the introduction of PAYE in 1944, only a minority have endured the indignity of filing a tax return or writing a cheque to the Inland Revenue. Business has collected VAT and excise duties on behalf of the pub- lic while the public has been in a state of blissful anaesthesia. All that will change. If these taxes can be collected at all in the new digital economy, they will have to be collect- ed from punters, smokers and drinkers; VAT will be extended to sacrosanct areas like food, children's clothing, air and rail travel, domestic fuel and water, medicines, books, magazines and newspapers.

As the numbers of self-employed and contract workers rise, PAYE will give ground to Schedule D (self-employed tax), and all of these forms of taxation will neces- sitate a higher degree of inquisition into the earning and spending habits of us all. The cost of administration will rise. The Inland Revenue already absorbs 1.33 per cent of the tax it collects in administration and that figure is only kept in check because the Rev- enue has transferred the bulk of the cost of collection to employers and self-assessing tax-payers. The economic damage inflicted by the tax system, in terms of otherwise rational decisions postponed, distorted or aborted, will increase. Threats to liberty will multiply. The tax adjudicator recently described offi- cers of both the Inland Revenue and Cus- toms & Excise as 'rude, aggressive • . . unhelpful. . . and even threatening'. Under self-assessment, the Inland Revenue is already free of any obligation to state its reasons for mounting an investigation into the affairs of a tax-payer. A general anti-avoidance provision, shift- ing the onus of proof from tax-gatherers to tax-payers, remains an ambition of the Inland Revenue. The black economy, a vital economic and social safety-valve Which guesstimates suggest is host to per- haps £100 billion of transactions which would not take place on a fully taxed basis, is now to be assessed for annihilation by the newly ennobled Lord Grabiner. HM Customs & Excise squanders £140 million a year on hopeless battles against the Importation of drugs, firearms, pornogra- phy and contraband alcohol and tobacco. Despite a vast augmentation of men and material since 1997, tobacco smugglers alone are still escaping an estimated £1.7 billion in excise duty. The Brewers and Licensed Retailers Association reckons at least 100,000 heavily laden vans (to say nothing of 1vIPVs and station wagons) made the round trip from Dover to Calais last year, taking 5 per cent of the UK beer market. Enlarging thethe powers and resources of Customs & Excise cannot halt a trade on this scale, any more than the Inland Rev- enue can eliminate the black economy, or advertising restrictions halt the emigration of the betting industry. A great tax rebellion is in train, which free trade and technology will fuel. The taxation of people through corporate intermediaries (a role which New Labour now seeks to extend to the payment of benefits as well) has shielded the majori- ty of tax-payers from the coercion and loss of privacy inherent in a system which pre- empts £2 in every £5 the country earns. Greater exposure to the realities of taxation will bring to an end the astonishing quies- cence of the tax-paying classes. In framing its response, the government has few choices. It can re-arm the Inland Revenue and Customs & Excise with greater resources and wider powers, argue for the emasculation of offshore tax havens, work with other governments on the forma- tion of an international tax police, and hope to maintain the integrity of the public rev- enues by force. This is the current strategy, and it will work for a time. But ultimately the government cannot prevent the steady emigration of income and wealth to more favourable tax jurisdictions unless it is pre- pared to close the economy completely to the outside world. This would have an even greater destructive effect. A better alterna- tive is to broach a debate with the public by equipping them with full information on the cost of the public services and how they are financed, and present the voters with a range of alternative expenditure and financ- ing proposals. The clerisy of tax experts and advisers — who believe instinctively that all income belongs in the first instance to the state, and then is allocated by them to individuals and families — have high hopes of such a debate. They predict it will inaugurate an era of willing acquiescence in traditional forms of taxation by well-informed and responsible tax-payers. This is unlikely. Well-informed tax-payers will not afford governments the luxury of using a growing economy to adjust rates of taxation to their own political advantage without any reduc- tion in the overall burden of public expendi- ture. Tax decisions will no longer be secondary to expenditure decisions reached by democratically elected governments. Rather, as taxation becomes to some extent voluntary, the ends of government will be adjusted to the means, rather than the means to the ends — assisted perhaps by privately organised referendums on the Internet. Lobbyists for higher public expen- diture, including politicians, will be forced to sell their pet schemes directly to the pub- lic and explain precisely how they would be financed. The political marketplace will become more like the real marketplace.

The overall effect is likely to be a shift away from collective decision-making towards genuine personal choice. Instead of buying quinquennial packages of second- or third-rate public services at a single price from various brands of political huckster, consumers will be able to assemble their own portfolios of health insurance, pen- sions and educational services. Those public services which survive (including genuine public goods, like defence and law and order) will incorporate a larger element of charging. To win support for further tax- financed proposals, governments will have to concede a greater degree of earmarking. Gordon Brown has already agreed to assign the revenue from increased fuel duties to public transport, and even the Conservative party may come to recognise that an ear- marked tax for the National Health Service is a potential vote-winner, If tax-payers seize the opportunities which are now before them, the 20th-century state will be the last to be run by tax-gatherers for tax-eaters.