Why Tax Policy is Politics

One of the things that I find useful about the experience of the last recession and accompanying economic crisis is the need to re-examine and distinguish between economics and business policy. The reason for stating this is that many people with a successful business background more often than not assume knowledge and competence in matters of economic policy. In addition, the economics crisis has led me to the more critical distinction between what advise a dispassionate economist may give on the one hand and other issues of policy that involve political choices.  This too is an area in which even economists mistake their political opinion for professional views.

An example of such an area of policy involves taxation generally and the application of appropriate tax rates to capital gains. Economists argue rightly that taxation of capital gains amounts to second-round taxation because these gains arise from income that was already subjected to taxation. Often the happy compromise is to subject capital gains to a lower level of taxation in comparison to other income. Sensible as ever, John Kay illustrates why capital gains is difficult to precisely define and therefore to exempt or to subject to taxation in  a rational and consistent way. His main argument is that maintenance of tax compliance requires that some capital gains taxes be levied. In emphatic terms, he states that the issue is "quite properly the subject for political compromise". This is one point that should be borne in mind as taxation policy is discussed.