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Benjamin Franklin remarked that the only things certain in life are death and taxes. Unsurprisingly then, the death of Margaret Thatcher has much in common with Google’s recent defence of its alleged avoidance of tax[1]. A key moment in the debate over taxation and public spending was the 1979 Budget in which the first Thatcher administration slashed the rate of taxation and renegotiated the relationship between citizen and state. I want to look at the history of taxation in the UK and what that tells us about the relationship between the state and its citizens today.

A necessary evil

Today, politicians attack those who avoid paying tax; tackling this was at the heart of the Coalition agreement[2]. But not so long ago, politicians actually promised to help taxpayers avoid tax. Income tax was introduced controversially during the Napoleonic Wars to fund the war effort, only to be repealed afterwards with much public support. Sir Robert Peel reluctantly re-introduced it despite having campaigned against it and, for the next half century, politicians regularly promised its repeal.

Income tax was seen as a gross infringement of people’s liberty and an intrusion by the government into their private lives. In 1929, Lord Clyde remarked:

No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores.

Indirect taxes were preferred as they allowed people to avoid the tax by not buying the products which were taxed. The infamous tax on windows during the eighteenth century saw people brick up their windows rather than pay it.

The post-war consensus

The Government increased income tax to as much as 99% for the highest earners after World War II to re-distribute wealth, fund the new welfare state and repay war debts. In 1816, the abolition of income tax had been met with bonfires of taxpayers’ records, such was the concern with the government interfering with people’s lives; yet, almost 150 years later, the government was doing precisely that. Individual liberty and small government was replaced by a large state which promoted what might be termed ‘collectivism’.

This change in public thinking was part of a move from what is known as the ‘red light’ theory of law to the ‘green light’ theory. Dicey believed in a minimal state, subordinate to and respectful of the rule of law and a servant of the population. He was very much on the ‘red light’ side of the theory[3]. By the mid-twentieth century, the light had turned green. The right of the government to tax and receive money was gaining ground in judicial minds. In 1971, Lord Reid noted that the ”plain words’ of tax legislation ‘are seldom adequate to anticipate and forestall the multiplicity of ingenious schemes which are constantly being devised to evade taxation.’ Instead, he suggested, Parliament might consider sweeping legislation to prevent such avoidance.’

1979: a red dawn?

Margaret Thatcher’s 1979 budget was revolutionary[4] in that it reduced taxes 83% to 60% for the top earners and 33% to 30% for the basic rate. Crucially, it challenged the consensus that the state was best placed to look after people’s lives. One of the most countercultural critics of the green light theory in the mid twentieth century, Frederick Hayek, was one of Thatcher’s favourite authors and his book, The Road to Serfdom, influenced her profoundly[5]. Thatcher had shown the expanding state the red light. But despite low taxes and lowering public spending, the battle between those who favour a powerful state and those who favour power to individuals continues. While the Government launches a legal challenge against the EU’s transaction tax[7], Google is criticised for not paying enough tax: a red light and green light to government power respectively. Perhaps the legacy of Thatcher is more amber than anything else?


[1] http://www.bbc.co.uk/news/business-22244253

[2] http://www.guardian.co.uk/politics/2010/may/12/lib-dem-tory-deal-coalition

[3] http://assets.cambridge.org/97805217/01792/excerpt/9780521701792_excerpt.pdf

[4] http://www.margaretthatcher.org/document/109497 ; http://www.ifs.org.uk/bns/bn09.pdf (specifically section 4)

[5] https://en.wikipedia.org/wiki/The_Road_to_Serfdom

[7] http://www.bbc.co.uk/news/business-22227019

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