Taxation is inevitable
Extreme libertarians claim that “taxation is theft” and envisage their ideal society as one in which every necessary social expenditure – yes, even extreme libertarians tend to grudgingly admit that the public provision of defence, justice, diplomacy and suchlike are necessary – should be funded from voluntary contributions. Pleasing as the idea of a world without taxes is, all of history is resolutely against it and our experience of human nature tells us that altruistic behaviour has severe limits.
No society beyond the tribal has ever survived without some form of overt forced contribution and even tribal societies place onerous social obligations on people, such as sharing food and the provision of hospitality to strangers, which are scarcely voluntary because of the fear of social ostracism. We also know for a fact that where people are left to make voluntary contributions, for example to charity, the vast majority either contribute nothing or very little.
Most societies which have ever existed, and that includes most which currently exist, have had no state sponsored welfare provision and in such societies voluntary aid has always proven to be completely inadequate to meet the needs of the poor and unfortunate. The first country anywhere to avoid serious and regular famines was England, which was also the first country to have national welfare provision as a legal obligation as a consequence of the 1597 and 1601 Poor Laws. No coincidence.
It would take an optimist of Herculean faith in the malleability of human beings to imagine that a society of any sophistication would work if it was solely based on voluntary contributions to provide those things necessary for the general good.
The tax people will bear
Louis XIV’s finance minster, Colbert, had a dictum any tax raiser should heed: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing”. How right he was. Taxes are subject to the laws of psychological supply and demand. Set a tax at what people think is reasonable or more trouble than it is worth to evade, and tax revenues will be strong. Set it too high and tax revenues will diminish. A good example of this occurred during the 1980s. In the 1970s income tax rates reached very high levels – even basic rate tax peaked at more than 30% The Thatcher government gradually reduced the basic rate to 23% and the upper rate to 40%. Income tax revenues rose after the reduction.
The vast majority of people (at least in the First World) accept that taxation is necessary, not merely a burden which cannot be avoided. For them the question is not whether there should be any taxation, but at what level taxation should be set.
The level of tax people are willing to tolerate is dependent upon six things: (1) confidence in the government to tax fairly; (2) confidence that the money raised is being used for the public good; (3) the general level of tax; (4) the nature of taxes levied; (5) the efficiency of the state in collecting taxes and (6) the personal circumstances of the individual.
People may claim to be influenced by ideology when it comes to taxation and public expenditure, but in practice their behaviour is determined by mundane considerations of personal advantage and the degree of material freedom already possessed by an individual.
Generally, the richer a man is the less likely he is to be inclined to favour high taxation and public expenditure. This makes obvious sense. Human beings seek strategies which maximise their advantage. The rich can buy their safety and comfort, the poor ensure their survival by mutual action. Ostensibly, there are exceptions with rich socialists and poor conservatives, but when their behaviour is examined it is generally at odds with their supposed ideology. Rich socialists very rarely give away their wealth to the extent that it seriously constrains their manner of living, while poor Tories are only to happy to take state help. In other words, their behaviour is essentially that of the population at large, whatever their “principles” may be.
Those who doubt this somewhat stark view of human nature, should reflect on all the people they have known personally and then ask how many of those people actually live up to altruistic principles.
The taxes people are most willing to pay are those which they believe are going to popular causes such as the NHS. Often the public supports a tax under a misapprehension. British National Insurance is one such.
Most of the British public believe quite erroneously that the tax funds pensions, unemployment pay and the health service and make much less complaint about it than they do about income tax. In fact, national insurance is really an extension of income tax, being merely a tax whose revenues go directly into the general government fund. Never underestimate the power of words. Call it “insurance”, tag on “national” to make it seem absolutely secure and the public goes to sleep.
What counts as taxation?
Taxation is a forced contribution. Forced contributions may not be taxation as we think of it. They may be slave labour, the provision of labour by serfs, military service or payment in kind or service, but these exactions are still doing what taxation does today, namely, those in authority are taking from men and women that which they would not voluntarily give.
Even in the modern industrial state there are elements of non-monetary exaction, for example, conscription for military service, or its civilian equivalent for conscientious objectors, and labour for the unemployed such as workfare.
But people do not really think of such things as taxation even though they are. What the ordinary voter means by tax is simple, the taking of a part of the value of incomes, capital and the price of goods and services, and administrative taxes such as Council Tax (based on property values) and the television licence fee (a poll tax) which have something of the nature of a charge for services.
Visible and invisible tax
Place ten pence on basic rate income tax and people will probably rebel at the ballot box. Raise the duty on whiskey and cigarettes by 10 per cent and people will grumble but put up with it. Remove tax exemptions from money paid into pensions and few will realise it has happened. Place extra taxes on private business and most electors will probably cheer.
However, although using invisible taxes may seem like a jolly good wheeze to politicians, sooner or later the chickens will come home to roost. A private pension will be less than expected and the pensioner will turn to the taxpayer for help. Companies will expand less rapidly or remove their business abroad. Unemployment will rise. The general tax revenue will contract. The tragedy is that the politicians responsible for such irresponsible behaviour rarely or ever brought to book or are even around when the mess has to be cleaned. From a cynical political view, the practice works.
An hypothecated tax is one raised for a particular purposes, for example, to pay for a health service. The British television licence is an hypothecated tax, but that is about it in Britain for hypothecation .
Attractive as the idea of an hypothecated tax is, they have severe practical drawbacks. To begin with one cannot be sure that the revenue from the tax will be sufficient to cover the costs of the chosen target. Suppose, for example, VAT was allocated to the NHS. What happens if VAT is too little? Either services must be cut or tax revenue from other areas must be used to make up the shortfall, which rather defeats the object of an hypothecated tax.
On the other hand the tax revenue from VAT might turn out to be considerably more than expected and greatly exceed the money needed for the NHS. What does the government do? Allow the extra money to be spent on the NHS or take some of it and use it for other purposes?
The other major difficulty lies in the idea of allowing people to choose how their taxes are spent. Left to the will of the general public certain things such as schools and the NHS would be grossly over funded and others such as defence grossly underfunded. No responsible government could tolerate that.
Taxation in a command economy
In an unashamed command economy such as that of the Soviet Union, the line between taxation and income is seemingly notional, because what each person officially earns is determined by the state (what they earn through bribes and the black market is another matter). However, tax in its broad sense is there if one looks hard enough. It is the amount which the state takes from the individual in terms of labour and product. Although the detail of state financing in a command economy is complicated, the principle is as simple as that: the individual works and the state takes whatever it chooses to take and leaves the individual with that it chooses to leave.
Unsurprisingly, true command economies have only existed where democratic forms are absent. However, they have been true command economies only in as much as the state decreed that was how things were meant to be. In fact, very healthy black markets have always existed in such economies. The old Russian joke during the latter years of the Soviet Union – “We pretend to work and they pretend to pay us” – was not that far from the truth.
Because black markets exist, it is possible that in practice a command economy can gain some extra revenue from illicit private enterprise through taxes such as a sales tax.
Taxation in a market economy
This is a somewhat problematical concept because all advanced market economies have elements of the command economy within them, not least because of necessity they must have large bureaucracies and because in practice no government can resist the pressure or temptation to interfere with the market, for example by passing safety regulations and having anti-monopoly laws. However, even in the non-communist states with the most heavily modified market economies – Britain under Attlee for example – the large majority of economic activity is private activity, which in practice if not in theory is effectively without state interference. So it is not unreasonable to speak of them as market economies, although it is important to understand that market economy does not equal free trade economy – a domestic market may be subject to either free international trade or protected from it.
Taxation in a market economy has two masters – ideology and practicality. Ideology divides between the simple need to finance government and the desire to use taxation as a means of social and economic engineering.
The practical principles of tax collecting in a market economy are three. Is a tax easy to collect? Is it cheap to collect? Does it produce sufficient money?
A example of a practical tax and an impractical tax
Until the late 1980s the only tax raised on private individuals by local government in Britain was the domestic rate. It was levied on property. The rates were related to the value of the property. It was not a progressive tax because it was levied without regard to a person’s ability to pay, although for the poorest rate relief was available. Nonetheless, there was a certain rough and ready justice in it because generally the more expensive the property the better-off the resident. It was also an ideal tax to levy because although people can easily disappear, property cannot. Its main drawback was political. During periods of rapidly rising house prices, the valuations on which the rates were calculated were soon out of date. By the late eighties the valuations were severely below the true values of properties. A new valuation was needed, but that would mean greatly increased valuations and from that would come much higher rates unless politicians had the wit or courage to reduce the rate levied to produce an income equivalent to what had come before. However, this would have meant in effect taking all power to set rates from councils at a time when the Tories were already under attack for removing power from local government, a practice which had dismayed many of their own supporters. Faced with toughing it out on this point or facing the looming electoral albatross of vastly higher rates, the Tories decided to scrap rates and replace them with something called the Community Charge, which very rapidly became universally known as the Poll Tax. The last straw for the Tories was the revaluation of rateable values in Scotland which produced a vast outcry and gave a foretaste of what would happen in England.
The Poll Tax was introduced at the whim of Margaret Thatcher. It was the tax from Hell. Just about everything which a tax should not be it was, being difficult and expensive to collect, it paid little heed to a person’s ability to pay and was genuinely too great a burden on large numbers of people. As it was a most visible tax, for example, unlike indirect taxes such as VAT people were only too aware that they were paying it, these were disastrous disadvantages.
Incredible as it may seem, Thatcher made the commitment to introduce the tax casually during an interview without any understanding of what she was doing. The wise thing would have been to quietly repudiate the commitment, just as Blair’s various extempore commitments during interviews, such as the one to ensure that NHS spending was raised to European levels within a few years, have been repudiated. Unfortunately, by that time Thatcher had such a dominance within the Tory Party that it proved impossible to do that without her agreement, which she was unwilling to give. Her refusal was part personal vanity and part ideological fixation. She was attracted to the tax because it fitted with her political philosophy of people paying their way. Thatcher saw it as more a fee for services than a tax, hence the rather odd name of Community Charge. She also quite naively thought it would bring in vast amounts of money, dwarfing the revenue from domestic rates.
The tax was a certain failure because it took no account of the administrative difficulties it entailed. To obtain its projected tax revenue, 95% of the adult population of the U.K. had to be identified with 90% of them paying the tax in full, a quite absurd assumption. Collecting from individuals is always the most difficult and expensive form of tax collection because a substantial proportion of the target population are mobile and difficult to identify.
But if the Poll Tax was damned before it began on simple administrative grounds, it also broke the rule that taxes should not be too high. The old domestic rates had their faults, but at least they were related to properties people owned, leased or rented. Whether ten people or one lived in a property, the rates were the same. With the Poll Tax, the inhabitants of identical properties could attract vastly differing tax demands because the tax was attached to the individual not the property. The situation was made worse by the fact that the old domestic rates had not been uprated for many years. This meant in practice that the Poll Tax levied on even a single person living alone was frequently substantially more than what they had paid under the old rates. Why, the acute reader might ask, did the government not insure that the tax bore some relationship to what had been paid under the rates? In principle this could have been done, but it would, as with capping uprated rateable values, have effectively killed local government involvement in tax setting.
The Tories were soon faced with a widespread tax rebellion as pensioner couples found they were being asked to pay a combined amount three times or more than they had paid in rates and young couples wondered how they could meet the massive mortgages they had just taken on as well as paying the new tax. Even the comfortable middle classes balked at the charges. The justice system threatened to come to a dead halt as tens of thousands of people were summoned for non-payment and the revenue from the tax fell dismally short of what had been projected. People who had never previously dreamt of joining a protest march took to the streets. Matters came to a head after a particularly violent protest in Trafalgar Square. The Government caved in and withdrew the tax. It was the nearest Britain came to general civil disobedience in the twentieth century. Within a year Margaret Thatcher was out of office.
The Poll Tax is a dire warning to politicians of any colour. It tells them two things: do not introduce a tax without understanding the administrative details and never allow ideology to override practicality. However, politicians being politicians, they rarely if ever learn this lesson.
Social and economic engineering
Taxing for the purposes of social or economic engineering rarely if ever works. If you try to tax the rich severely (or for the very rich, at all) because you disapprove of wide differences in wealth, they will simply put their money out of the reach of the government of the country in which they are resident. Put up the tax on tobacco and alcohol to reduce their consumption to “improve” the nation’s health and you tax the poor disproportionately because demand for these products is inelastic. Increase tax on petrol because you wish to restrain the use of private cars and you increase the costs of commercial transport and make your commerce and industry uncompetitive. The law of unintended consequences operates ferociously in the world of taxation.
Economic engineering through taxation has an equally woeful record. My favourite failed attempt in this category is the Selective Employment Tax introduced by the first Wilson government in the 1960s. This tax was designed to encourage employment in manufacturing at the expense of service industries. The service industries paid a levy on each of their employees which manufacturers did not pay. The result was to depress employment in the service sector without increasing it in the manufacturing sector. There was an excellent and entirely foreseeable reason for this: it did not change the general economic circumstances of manufacturers. Their costs were not reduced. They still had to compete with foreign competition on the same basis as before. All that happened was that service sector employers had an additional cost. They not unnaturally cut jobs and did not create new ones. The tax was quietly dropped after a few years.
Fairness in taxation
It is difficult to say exactly what fairness in taxation is. Is it everyone paying the same or people paying according to their ability to pay? Should the manner in which people make their money be taken into account? Is inherited wealth more worthy of taxation than earned wealth? There are no certain answers to such questions, although most in Britain would probably choose “ability to pay” if asked where justice lay.
In fact, taxation in a modern Western state is always a balance between what seems fair and what can achieved. In Britain we have ostensibly ability-to-pay taxes such as income tax and ostensibly pay-the-same taxes such as VAT. In fact the dividing line is nothing like so clear because of both the inherent qualities of taxes and their practical operation.
British indirect taxes with one exception (the TV licence Poll Tax) are all related directly or indirectly to either wealth or income. A rich man pays more than a poor man in VAT and excise duty because he spends more. Those items deemed necessities such as food are either taxed more lightly than non-necessities or not at all, which benefits the poor most because they spend proportionately more of their income on necessities than the rich.
Nonetheless, most British people would say that direct taxes such as Death Duties, national insurance (NI) and income tax are in principle fairer than indirect taxes. In practice this is dubious.
Death duties in theory apply to all, but in practice can be avoided by the rich either through the use of trusts or the movement of their assets off-shore. They produce very little tax revenue and increasingly the people caught in the net are not the genuinely rich but those of fairly modest means whose property values have risen greatly and who had not taken the trouble to avoid the tax. It is their children, or people other than their spouses who inherit, who often end up paying Death Duties, not the likes of Paul Getty.
NI has elements of a poll tax. For most people it is comprised of two elements, the employers’ and the employees’ contribution – the self-employed just pay a single contribution. The employers’ contribution applies these days to the entire pay, but the employees’ contribution until 2002 was capped at a relatively low level, somewhere around the full-time average wage. Those earning more than the ceiling did not pay the employees’ contribution on their earnings above the ceiling. Thus, the richer you were the more beneficial the NI rules. In the 2002 budget, the rules were modified and all earnings above the ceiling are now subject to a 1% employees level. Nonetheless, the more you earn, the less proportionately you pay of your income in NI.
Income tax may seem to be the fairest tax yet in fact it is anything but. Generally, it is only honestly paid by those under the Pay-as-You-Earn scheme (PAYE). Even if they deign to make a tax return, the self-employed can, at worst, reduce their liability very substantially or make it vanish altogether by setting cost against their gross income. Of course, many of those not under PAYE do not declare to the Inland Revenue at all. Moreover, many employers collect income tax and national insurance and fail to pay it to the Inland Revenue. Add in the fact that those in control of limited companies – the directors, are able to legally avoid the full burden of PAYE by devices such as share options and national insurance by receiving massive benefits in kind (which do not attract national insurance) and illegally evade by not recording money received on the books, and you should begin to get the unsavoury picture. The rich of course need pay no tax because they can put their capital and income beyond the Tax Man in any number of ways, for example off-shore.
Because income tax is only paid in full by those under PAYE, it is far from being a means of redistributing wealth according to income. Rather, it is simply a means of shearing the least mobile taxable sheep. If it could be enforced, a wealth tax would be a much more equitable means of taxation than income tax.
Which taxes raise the money?
It is all very well saying that this or that tax is unfair and should not be levied. In the end the first concern of a government must be to raise funds to meet its standing obligations and pay for any new policies it wishes to introduce. Governments however radical they are when they come to power, soon find that they have to worry about bringing in the money before making any attempt at social or economic engineering.
Which taxes bring in the money? In the UK, the proportion of total tax revenue raised from the most productive taxes are :
Income Tax 28.7%
National Insurance 17.9%
No other tax exceeds 10% of the total and only one exceeds 5% (Corporation Tax at 8.2.%).
Institute for Fiscal Studies Table 1. Sources of government revenue, 2008–09 forecasts
Income tax, national insurance and VAT made up 61.7 % of the total tax revenues of the UK. In 2008/9. Consequently, anyone feeling that the taxes are unfair or retrogressive has a real problem even if they only wish to substantially reduce the taxes in those categories. If they wish to abolish them, it is an Everest to climb. If a government wishes to significantly reduce or abolish a major tax, they first have to find substitute sources of revenue or cut back very substantially on government expenditure, something virtually impossible to do in a country which provides a comprehensive welfare state.
Imagine that a government decided to abolish income tax
To illustrate the difficulties of dramatic tax change, let us suppose that a government wished to abolish Income Tax. There are good reasons why a government might. They could do it on the general issue of personal freedom, for the tax allows the most comprehensive means in any society one might call free for the state to probe into the lives of individuals. Then there is the craven self-interest of politicians. Income Tax is the most sensitive tax a government ever levies, because people are made aware of it in the most dramatic and personal way. A man gets his wage slip and sees directly what is taken. Most of the time tax is taken without people being directly confronted with the fact. Any government has a pressing incentive to keep down income tax for that fact alone. Alternatively ideology might drive the change, with a free market government arguing that people needed more incentive to work.
But how to make up the 30% shortfall if income tax is abolished? All the obvious things to tax in Britain are already taxed and taxed at a hefty rate. Vat is 17.5% Most of what a motorist pays for petrol is made up of various taxes and duties. The only obvious option would seem to be to shift the burden onto the existing national insurance system, which has no linkage to any particular expenditure. This could be done in principle by simply raising NI payments to make up the lost revenue. However, the effect of that would be very like an income tax, with the more you earn meaning the more you pay. It would be largely a change of name rather than fact.
An alternative would be to try to run the welfare state on a proper actuarial basis. People would pay the sum calculated as necessary to provide what the Welfare state provides. The full amount would be paid only by those earning over a certain amount. Anyone under that would pay proportionately to their income. Those unable to pay premiums at all would have to be given full credits by the state.
Such a scheme might be practical for healthcare and unemployment, where the costs each year are to a large extent predictable because of their short-term nature. But what of pensions? These are more problematical because of the period over which contributions must be made – anyone who believes that a pension can be guaranteed over a period of 40 odd years is living in cloud cuckoo land. Even if payments towards a non-state pension were made compulsory, it is all too easy to see situations where large numbers of people would be left with pensions insufficient to keep body or soul together or no pensions at all – remember Maxwell, think of Equitable Life reneging on its promises to policy holders, bear in mind the closing of final salary schemes by many companies. Therefore, I cannot foresee a time when the state should not be the provider of the last resort. Such pensions need to be funded out general taxation. Which brings us back to square one, namely, where do we get the money from if not income tax or a non-actuarial based enhanced NI? Damned if I know. You can play with the figures until the cows come home but they do not add up. There are only so many things to tax and most are already taxed at a level which encourages widespread tax evasion. Put up the taxes on items such as VAT and petrol and evasion and avoidance will simply rise.
Local taxation is more problematical that national taxation in one important respect – the variation of wealth throughout the country is of no account when setting national taxes but it is at the local level.
The large majority of what local authorities spend these days comes from central government. Supporters of local government decry this on the grounds that it removes responsibility from local politicians and voters. That is true. However, there is a problem with giving local government greater taxing powers. Councils in poor areas will have both a greater need to spend than richer areas – because they have more people in need of support – and a smaller tax revenue than rich areas, a revenue and expenditure circle which could never be squared. Certain parts of the country may have a similar level of prosperity, but some will have special circumstances causing higher council expenditure such as a substantially larger proportion of their population being above retirement age.
If councils raised much more of their revenue from local taxation without interference from central government, inevitably some areas would impose much higher taxes than others. This would have the effect of driving people and businesses from high tax to low tax areas. This may sound fine and dandy, but the effect on those still living in the high tax areas would be dire as a vicious circle of increasing poverty, decreasing employment and fewer businesses to tax was set in progress. Apart from common sense telling us that is what would happen, we have the confirmatory experience of the period before the Standard Business Rate was introduced and council expenditure capped.
The circumstances of a tax can change
Income tax is a very popular tax with British governments. It is popular not because it is inherently easy to collect, but because of the cooperation of employers to operate PAYE. If everyone paid their tax directly to the Treasury, as the self-employed do, the amount collected would drop drastically and the cost of collection rise massively. There are approximately 28 million people in work in the UK. Most are under PAYE. Imagine having to administer 28 million separate tax returns.
As most of the tax is collected from those under PAYE, it becomes less effective the fewer large employers there are. This is because large employers are generally (1) willing to collect and pay over tax and NI and (2) their PAYE schemes are cheap for the Inland Revenue to administer. The number of large employers is rapidly diminishing because of mergers and takeovers and the expansion of public service employment. . This both increases the cost of tax collection and the frequency of evasion by small companies who can easily evade tax.
How do small companies avoid tax? A favourite trick is to trade for a year or eighteen months without paying over tax of any kind to the state and then liquidate voluntarily. (Creditors other than the state are paid to ensure the continuance of the business under the next company) A new company is set up on the same day as the other one is liquidated and the business continues as before. So, for example, AB Fashions Ltd liquidates on the 15th March and AB Fashions (New) Ltd begins trading on the same day. A separate company holds any assets such as machinery, so there is nothing for the liquidator to realise. The taxpayer makes up the non-remitted National Insurance payments from the liquidated company by crediting them to the ex-employees. Thus the taxpayer meets the cost of what is essentially theft by the employer. The employers get away with it because non-payment of tax or NI to the Inland Revenue – as opposed to non-declaration or non-deduction – is a civil not a criminal matter. In short, tax and NI deducted from wages but not paid to the Revenue is simply a debt to the Revenue.
This trick, incredibly, can be done almost ad infinitum because the legal restraints, such as banning people from being company directors, are utterly insufficient to stop the practice. Indeed, if a man wishes to engage in criminal activity with little chance of prosecution, he cannot do better than set up a limited company and trade fraudulently. As long as no blatant removal of assets and money occurs, prosecution can normally be avoided provided the principals of the company keep reciting such time honoured phrases “l thought trade would improve” and “I was out of my depth”. If all else fails, lose the records or claim that they were never kept.
None of what I have written means that a government is constricted unduly in its policies. Governments have many other weapons at their disposal to shape the economy and society. They may control interest rates. They can restrict credit. For example, house price inflation could be curbed by placing an upper limit on the wage multiplier used by mortgage providers to decide what mortgage is granted. They can protect theirindustries from foreign competition. They can relax or tighten immigration. They can provide subsidies to industries.
Take the single issue which has caused more political dissent than any other over the centuries, differences in wealth. There is a strong case (which the ancient Greeks clearly identified at least 2500 years ago) for preventing wide differences in wealth because they are corrupting to a society because they concentrate power into too few hands and create profound dissatisfaction amongst the have-nots, which social traits guarantee regular social upheaval.
I have a good deal of sympathy with this view, for it is certainly true that the rich enjoy privileges which go far beyond the mere enjoyment of material possessions and sensual pleasure. Their wealth buys them power and influence. On moral grounds inherited wealth and position are simply indefensible. It is also true that the rich abuse their position. If there was a way of abolishing gross differences in wealth I would vote for it. Unfortunately, we know that the really rich can place their money outside the reach of governments. We also know that those societies which have tried to enforce some equality of income and wealth have invariably ended up as tyrannies and that a different type of privilege has been created for the people with the power in such societies. The Soviet Union is a prime example, where the leaders were not rich by Western standards, but enjoyed immense privileges in the context of their state. So, however attractive the idea of a society without gross differences in wealth is, reluctantly I turn against it because the cure is in the end worse than the disease.
If a government cannot effectively tax gross differences in wealth out of existence what can they do to stop abuse? Happily, a good deal is the answer, provided the political will is there.
A government can act in non-economic ways to control the behaviour of the rich. Access to the law could be made more or less equal if all legal work was in effect legally aided. That alone would have a massive effect on the abusive power of the rich and powerful. A statutory right to reply for the individual to media coverage of them would be a powerful weapon. Restrictions on members of the same family taking political office could be introduced. A law banning national newspapers and broadcasters from employing more than one member of a family would have the same effect.
How governments constrain themselves
If governments potentially have a very wide range of tax and non-tax tools to pursue their ends, in practice many are constrained from freely exercising such powers.
A written constitution will restrict the powers of those in executive authority by setting limits to what they may do and will prevent the passing of laws by forbidding those which contravene the constitution.
More generally, treaties can restrict virtually anything, in theory at least. They are increasingly important and have profound effects on the power of governments including their ability to tax and control immigration. In particular the range of taxes available to a government is massively constrained by free trade. Not only may it not impose tariffs, the free movement of goods and services means that taxes cannot be set without regard to taxes and price levels in other countries. Nor can a country use other non-tax means of protection for their economy such as embargoes and quotas and subsidies.
There is a rarer way in which a government may hamstring itself. That is by becoming part of a supranational unit such as the EU. When that happens, the sovereignty of the country will become soon be hemmed in by the demands of the larger unit that vast swathes of taxation and non-tax policy will be taken out of their ands. For example, Britain can no longer reduce VAT where it is already levied on British goods and services. In the end, the original national government may be reduced to the level of independence of a State in the USA.
Do not confuse tax raising with political ends
If I was asked to give one piece of advice regarding taxation it would be this: avoid confusing taxation with government expenditure. Taxation should simply be a means to meet government spending plans. These plans may include social engineering such as providing university grants to students from poor families and economic engineering such as subsidies for important industries. What experience shows is both inefficient and damaging is the attempt to use taxation to alter behaviour.
Of course, saying that a government would be wise to simply tax to obtain revenue rather than to engage in social or economic engineering is not to say that a government can ignore the effect of the overall level of taxation. It has to consider the effects of any tax whether they be a disincentive to work harder, an incentive to tax evasion or the driving of talented people from the country. A government must ask itself whether a tax burden on particular products will make them uncompetitive with foreign products. It must consider the part of society upon which a tax falls most heavily. A government should consider all these things and then place them in the context of the society and the government’s policies. Of course, politicians being politicians, this never happens and taxes are seen to be bad taxes only by painful experience.