Tax at root of EU squabble

The present EU squabble has, we would suggest, come about primarily because contemporary tax systems are not sufficiently robust.

From an economic perspective, they are little more than a structure of fines and penalties for successfully engaging in legal economic activity. This sends a particular message to which people in different strata of society will respond so as to turn the situation to their advantage as best they can, whether they be a poor uneducated teenager living on a sink estate, a well qualified graduate, a self-employed artisan, or an heir to a fortune.

The result is a deadweight cost: that is production which would have taken place were it not for the distorting effects of the tax system. In a study for the Institute of Economic Affairs, Fred Harrison estimated that it resulted, in 2005, in a loss to the economy of around 12% of GNP.

It also gives rise to a huge welfare bill as some groups of people are effectively locked out of work due to the effects of tax on the cost of employment. Worse still, the system is expensive to administer, imposes heavy compliance costs and leaks like a rusty bucket through legal avoidance and illegal evasion.

A robust tax system would produce in buoyant revenues for the exchequer with no deadweight loss to the economy. We do of course have a few ideas of our own on the subject.