What is the Best Tax-System?

Abstract

SUCH a question as whether savings should be exempted from incometax cannot be considered adequately if it is discussed as a self-contained and isolated topic. It is connected with a number of other questions, notably those concerning the taxation of capital gains, undistributed profits, receipts from wasting assets (such as mines), gifts, and bequests. In order to answer all such questions, and to give answers which are consistent with one another, one must first decide what concept of income is the most suitable for purposes of taxation. In this article I shall discuss two such concepts, each of which is clear-cut and provides clear answers to all such questions. But should there be no other taxes in addition to a tax on income ? If we think so, then we must give reasons for thinking so. If, on the other hand, we think that there should be other taxes as well, we may not completely answer our various questions by considering only the' definition of income. In any event, therefore, we are compelled to discuss the wider question of what tax-system is best. This means that we must lay down criteria by which we can decide whether one kind of tax-system is better than another. All such criteria must inevitably be arbitrary. There is no way of proving that one is right and another wrong. I believe, however, that the two which I shall adopt will meet with the approval of most readers. For the purposes of this discussion, I shall leave out of account the standpoint of the Chancellor of the Exchequer. He wants to get revenue by taxes with good yields which are easy to collect and difficult to evade and which arouse relatively little discontent and opposition. He would regard old and tried revenue-producers such as the duties on beer and tobacco, to which people have become accustomed, as admirable taxes. It could be argued that it follows from the principles of democracy that his standpoint is the correct one: people get the taxes which they dislike least. But this may be because they do not realise fully the consequences of these taxes. At any rate, I shall adopt a rather superior attitude, similar to that of a democratic economist who argues for free trade wlhilst conceding that if people want protection they must have it, and shall ignore the considerations which influence the Chancellor. These must, of course, be given due weight in practice. But this article