History of taxation lies in war financing

The need for taxation, historically, has been to finance wars. There is some evidence that China was probably the first country to impose taxes on income, albeit temporarily. One or two kings of England also imposed short-term taxes to finance Crusading. The modern era of income taxes began when England needed to raise money for the Napoleonic wars. Even that tax was repealed, amidst much emotion. Opponents of income taxes wanted the records to be publicly burned,hoping to symbolise and cement the idea that taxes are temporary. British bureaucrats did stage a bonfire of the relevant documents but kept hidden copies in a Whitehall cellar. The US began its love-hate relationship with income taxes during their civil war.

Wars usually end but their associated taxes live forever. The real genius behind modern tax systems is the man who invented Pay-As-You-Earn (PAYE). Again, this was an innovation born out of war. Both the UK and the USA introduced variants of the PAYE system during the Second World War. Most countries now deduct income taxes at source; one notable exception is France, where people get to hand over their taxes much later than the rest of us. Ask any French taxpayer and they will confirm the psychology of taxation: it is a more visceral experience to write cheques to the government than it is to see money disappear before it ever gets anywhere near your bank account (but the French authorities do give a small tax credit if you allow them to take a direct debit from your bank account).

The accounting is the same but it is somehow much more painful to hand over cash that is sitting in your bank than it is to see a line on your payslip. It is even worse when you have been tempted to spend that cash: insolvency and bankruptcy often comes via the wrath of the tax man.

PAYE taught governments an important lesson: as with children’s toys, taking anything away from somebody is fraught with difficulty. Figuring out how to take it by stealth is a much more attractive proposition.

Managers of businesses know this too. Taking away an employees perks or privileges can be a traumatic process. Ask any manager about the fights over parking spaces and you will be reminded of Henry Kissinger’s old dictum that the smaller the stakes, the more poisonous the politics.

It doesn’t matter how unjustified is that perk: we always, almost without exception, fight bitterly to keep what has previously been granted, no matter how undeserved that might have been, or might have become. As a result, tax and benefit systems came become ridiculously complicated; nobody understands them any more. It is almost as if we have learned that the only way we can take something away relatively painlessly is to bury it under a mountain of complexity.

Bank of Ireland came under fire this week for raising the age at which older customers qualify for free banking. It wasn't much of a storm, more a weary protest that seemed to implicitly recognise that this isn't the first time banks have done something like this, nor will it be the last. There is a growing awareness that pensioners the world over have been given cash from pots of money that are rapidly dwindling. More importantly, prospective pensioners have been given promises about cash piles that simply don't exist. This is going to be a train-wreck of massive proportions in the public sectors (and for some companies) of many countries, not least the United States. The political consequences of denying the 'grey vote' of assumed rights and promised entitlements are going to be simply enormous and unpredictable. Here, the row over universal pensioner entitlement to medical cards is but a foretaste of what is to come.

The policy of ‘extend and pretend’ can be seen everywhere. It’s at the heart of why we have yet to deal with the mortgage crisis. It’s much easier to pretend that the loan will one day be repaid. It’s so much easier to let the tough decisions be taken by the next generation of politicians and managers. But at least three things are clear, to me at least. The longer we delay dealing with impossible to keep pension promises, the bigger the crisis will be when it hits. The longer we delay dealing with the mortgage problem, the less our economy will grow; unemployment and emigration will be that much worse. Simplicity is good: tell the truth and simplify to one page each the tax and benefit rules.