A reader asked that I explain a little more about the deadweight costs of taxation. So, here, stripped own to the simple essentials necessarily used when talking to politicians, is the evidence I gave to the Treasury Committee:
Chair: Tim, in terms of what the Chancellor might do, the Chancellor has
said that there is not now and never will be a time for a wealth tax. Is
that a statement that you would support and, if so, why?
Tim Worstall: It is not so much me being against a wealth tax. It is the
assembled mass of taxation economists. Wealth taxes are contraindicated
in pretty much all academic discussion of taxation. We do not have that
many Nobel laureates in economics from the UK, but Sir James Mirrlees
gained his Nobel for the study of tax systems. Optimal tax systems was
his area. He says that we should not tax wealth; it is a bad thing to tax.
We should tax land values. We can tax consumption, incomes and capital
incomes, but capital itself, wealth, is just not the right thing to be taxing.
Therefore, I would say, no, let us not tax wealth.
Q282 Chair: Even if a lot of economists say that, that is fine, but what is the
reason for it not being the right thing to do?
Tim Worstall: The major reason is something called deadweight costs.
Whenever you tax something, you lose some economic activity as a
result of having taxed it. This is why we tax smoking, so that people do
less of it. This is why we tax congestion in London, so that people do less
of it. This is true of any tax and every tax. The mere act of taxation
means that you stop some economic activity happening. It is entirely true
that the revenue you have raised may then be used to do something
lovely and useful, but the tax itself stops something happening. That is
called a deadweight cost.
We also know that there are a range of deadweight costs. Different taxes
have different deadweight costs, which means that if you tax in this way
then we lose more economic activity for the revenue that we raise than if
we taxed in this other way. The lowest deadweight costs are land value
taxation, so great, we should have land value taxation — Henry George
and all that. Then consumption, then income, then capital income, then
corporations, then wealth and then, right at the top, is the complete
lunacy of something like the financial transactions tax, because that is
transactions taxation. We have higher deadweight costs and we lose
more from the rest of society by raising money through taxing wealth;
therefore, we do not do it.
Q283 Chair: That is very clear.