When is a charge a tax?

Tuesday January 24, 2012

Tom Miers observes that charges are not just more efficient than taxes, but are generally resented less too.

One of the grey areas between government and voluntary activity is the extent of charging for particular services.

Many will remember from their history lessons the way in which Charles I sought to circumvent Parliament by extending charges to the point of absurdity to avoid having to get parliamentary asset for new taxes (which would come with condition attached in other areas of policy).

The King extended ‘Ship Money’ – a charge on coastal towns to pay for maritime defence – to inland areas, and even broadened the boundaries of the royal forest so that he could fine people for living within them.

Modern government gets up to the same tricks. The BBC licence fee is surely nothing but a tax on owning a TV. The lottery ‘good causes’ fund is financed from a huge 50% tax on that form of betting. For some the congestion charge in London is a tax, and so are the parking fees charged by local councils or even the NHS in hospitals car parks.

Mrs Thatcher tried to pass off her new method of funding local government as a ‘Community Charge’ for local services (on the grounds that it was a flat payment made by every household), but this didn’t wash. It was quickly labelled the ‘Poll Tax’ by her opponents, and the furore caused lasting damage to her government.

Is it possible to develop a fail-safe definition of when a charge is really a tax?

It is tempting to think of the problem as being one of monopoly. If we don’t have any choice in the matter, then the money we pay for a service is in effect extorted from us. People object to road charges and tolls for this reason. But what about water charges? Most of the time we do not choose our water supplier, but is a payment to Rutshire Water really a tax?

Nor is the definition necessarily to do with government ownership. Mercifully government in then UK has stopped running many commercial services. But even so it is hard to argue that a ticket paid to a government run train line is a tax. Hospitals are surely entitles to charge people to park on their land, just as Tesco’s is.

A charge does seem more like a tax, though, when the proceeds are used to fund unrelated programmes. The Poll Tax failed because people knew the money was going to fund a whole set of government projects. There was no clear link between the payment and the service rendered.

Perhaps this is why the congestion charge arouses such ire in London. Drivers know that the money is going into the greedy coffers of a wider bureaucracy, which will use their money to finance all sorts of dubious schemes. They are being fleeced, in other words.

Payments to the lottery and the BBC are similar. Essentially government creates an artificial monopoly to stop people bypassing the payments. Only the state is allowed to run a lottery. And if you buy a TV you have to pay your licence, even if you have no intention of watching the BBC. In the former case the ensuing money is creamed off to bolster the Treasury’s coffers, and in the latter to give the Beeb a massive competitive advantage in offering programming and services that others have to finance commercially.

So in terms of public perception a payment is more likely to be seen as a charge rather than a tax if there is choice on offer and the payment is clearly connected to the service rendered. This surely has lessons for government. People resent charges a lot less than equivalent taxes and are also happier to accept ‘conditions of use.’

Take road regulations for example. Motorists resent not just congestions charges and tolls, but speed bumps, speed limits, cameras and bossy signs. The road is regarded as a ‘public space’ and its users as having certain freedoms, even if these are seldom clearly defined.

But ask someone if they object to rules, regulations and even surveillance in, say, a restaurant or cinema, and they will shrug their shoulders. It is up to the proprietor.

The case has long been made for the greater efficiency of private sector ownership of businesses and service providers. But it also makes a big difference to public acceptance of the rules that govern society. If it’s your host telling you what to do, that’s different from big government. Charges tend to be not just lower than taxes, but also less objectionable.