Why tax policies have to change in the next two decades and what it means for the sustainability of public finance

Estimated reading time: 3 Minutes
Blavatnik School students and alumni in a discussion at the Challenges of Government Conference 2019

“Taxation is a complex technical issue, but that
hasn’t stopped the Blavatnik School’s Master of Public Policy (MPP) students from
rolling up their sleeves and getting down to the business of considering
structural tax reform,” says Professor Karthik Ramanna, director of the MPP and
co-author of the Future of Taxation case note. A new publication by the Blavatnik
School’s Case Centre on Public Leadership, the case note serves as a
discussion-starter for policymakers worldwide to examine some of the profound
questions behind much-needed tax reform for the 21st century.

Blavatnik School students and alumni in a discussion at the Challenges of Government Conference 2019
Blavatnik School students and alumni in a discussion at the Challenges of Government Conference 2019. Photo by John Cairns.

Tax policies around the globe have remained largely
unchanged for the past four decades despite the enormous social, technological
and economic leaps the world has experienced. Around 85 per cent of all taxes
in OECD countries come from labour and consumption – things like personal
income and VAT. But emerging trends are putting pressure on governments’
ability to raise money from these traditional tax sources: robots are predicted
to take over the typical domains of human workers, threatening widescale job
loss; platforms like Uber and Deliveroo are rewriting the rules of traditional
full-time employment; and cross-border e-commerce has eroded the national
boundaries of consumption. Meanwhile, we are facing an ageing society that
demands ever greater public resources, and rising income and wealth concentration

The Future of Taxation case note outlines how these
trends threaten to deplete government tax income and allows non-tax experts to
consider some bold new alternatives discussed in academic and policy circles.

Traditionally, governments have taxed labour income
and consumption more than capital and wealth, as taxing the latter – for
example, machinery companies use to make goods – reduced future investments in them.
At the same time, in setting tax rates, governments have typically accounted
for individual ability to pay, as measured by income and consumption: people
with lower incomes pay a smaller percentage in tax than high-income earners.

In the case session, students become policymakers
and are asked to design new tax policies that would address the threat of
depleting income and consumption taxes – a robot tax and a wealth tax, for
instance. Both taxes have already been championed by politicians and experts alike
and imply a fundamental shake-up of the existing model.

‘Who and what
exactly would you tax? How would you define a robot or wealth?’ students are
asked to consider. ‘How would you prevent individuals and corporations from gaming
the system?’

Discussions are heated, all groups engrossed in the
task and committed to finding a solution, arguments and rebuttals flying

On the robot tax, concerns of deterring innovation
become a central question: ‘We cannot disincentivise technological innovation
by making automation too expensive,’ says one student. ‘But current tax
measures encourage automation even where human workers are preferable, just
because governments make it cheaper for companies to automate,’ responds

On the wealth tax, students debate the challenges
of quantifying and tracking wealth: ‘Any tax on wealth has to be a global one.
Otherwise there will be capital flight to other jurisdictions,’ one student suggests.
‘But who will enforce such global tax?’ another challenges.  ‘A global tax authority? That will likely meet
with political resistance on the national level. And global enforcement is extremely
hard to monitor.’

Consensus is hard to reach: ‘Has any group collectively
agreed to implement their new tax?’ asks the instructor. Two tentative hands rise
up. There are no simple answers, no silver bullets, especially when the details
of implementation are considered.

The session closes with a few key take-aways.

around the world, regardless of their political programme or ideological
leanings, can’t do anything if they don’t have money,’ remarks Professor Ramanna.
‘But we see that for all the holes in the status quo model, it is difficult to
come up with fair and efficient alternatives.’

is not only a system of raising government revenue. It also reflects a
society’s notion of social justice: who gets taxed and how determines what we
value in our communities.

that’s what drives students out of the classroom and into the pub to continue
discussing the issues with fervour over a few pints of beer.  

For a related discussion of technical and operational options for addressing shortfalls in tax revenue see Aurélie Barnay, Jonathan Davis, Jonathan Dimson, and Marco Dondi, ‘How smart choices on taxation can help close the growing fiscal gap’, McKinsey & Company.

Zuzana Hlavkova, case writer, and Sarah McAra, senior case writer, are part of the Blavatnik School of Government’s Case Centre on Public Leadership which develops real-world case studies to aid in policy research and teaching. Zuzana is also an alumna of the Blavatnik School of Government (MPP 2018).