Finance

How to switch taxation to a subscriber model

BY Andrew Willshire   /  21 June 2017

Another election and yet more evidence that no-one is really prepared to pay for anything. The elderly refuse to contribute more from their accumulated wealth, the young are rebelling against contributing from their future wealth, and those in the middle will not countenance contributing from their current wealth through higher taxes.

Lest they be thought of as tight-fisted, though, the electorate’s generosity of spirit remains undimmed. More money must be found urgently for the NHS, schools, welfare, pensions, the police, MI5, MI6, the armed forces, infrastructure, and anything else you care to mention. After all, they’ve paid in all their lives – they’re entitled to it.

How can a country stave off penury when everyone wants something but no-one is willing to pay? It turns out that we’ve seen this movie before.

Up until the mid-nineties, people bought newspapers, music and films in physical format until two aspects of the digital revolution combined to terrible effect. First, the digitisation of media permitted perfect duplication (unlike the degradation that occurs when copying a vinyl record to cassette tape). Second, the distribution of digital media widely became free, easy and beyond legal oversight.

Different industries responded in different ways. The newspaper industry wholeheartedly embraced the new world, seeing the opportunity to gain a wider readership. The music and film industry just stuck their fingers in their ears, hoping it would all go away. However, as far as a new generation were concerned, all content was suddenly free at the point of delivery.

Sales of newspapers and CDs plummeted. An artist’s entire back catalogue could be downloaded royalty-free in minutes while pirated DVDs were sold out of carrier bags in car parks. Journalists may have had a bigger following than ever before but they had ceased to generate the income that justified their salaries. By the middle of the noughties it was clear that the internet had broken the commercial models which underpinned these industries. What rescued some of them was the humble subscription.

The newspaper industry was saved by the paywall. The Times was the first mainstream newspaper in the UK to adopt the technology in 2010 and while it was, at first, derided for the 97% decline in visitors, the Times recorded their first profit in over a decade in 2014. Of the traditional broadsheets, only the Guardian remains open to all, loftily proclaiming its virtue on each page while rattling the begging bowl at the bottom.

In the music industry, the major players eventually reconciled themselves to digital downloads, but the radical departure from their business model came with streaming services – people paid a monthly fee in exchange for unlimited access to almost any music that they wanted.

Perhaps the greatest success of the subscription model is to be found in television. The success of HBO, Netflix, Amazon Prime and Now TV demonstrate that many people making small is a viable business model and has resulted in cinematic production values on the small screen. Almost all must-see TV now requires a subscription.

In the space of just twenty years, these industries followed a path from “Paid” to “Free” to “Crisis” to “Subscription”. Perhaps we are on the same path with our public services.

Up until the time of the First World War, education and healthcare were paid for directly by individuals. Charities and churches often subsidised these services for the poor but everyone was expected to pay a contribution. However, during the 20th century, education and health were nationalised, breaking the connection between what an individual paid and the service they received in return. Ever since, demand has outstripped the willingness to pay.

However, the subscription model shows that people are willing to pay. The market has, in effect, imposed hypothecated culture taxes on us all. We pay the “Music Tax” to Spotify, the “Television Tax” to Netflix, the “News Tax” to News UK, the “Fitness Tax” to Virgin Active, the “Communications Tax” to Vodafone, and the “Broadband Tax” to BT. In return, we get virtually unlimited access to these services.

We also pay regardless whether or not we actually use them – no-one gets a rebate for not visiting the gym, not reading the news or not using their phone. This is a radical change in consumer behaviour. In times past, people might have a daily newspaper but little else in the way of subscriptions. Bills were variable and proportional to usage.

Suppliers of these services make no distinction between rich and poor. But while everyone pays the same for the standard service, optional additional payments are common, whether for extra data, more TV channels or even permission to exercise at peak times. Many of these additional payments are quite high yet the marginal cost to the supplier of providing them is low. In some sectors, these additional payments are responsible for the bulk of the profits.

So, how could we change the funding of our public services to more closely resemble this model? After all, we’re half-way there. We’ve got the unlimited usage bit nailed.

There are three rules:

1) All tax must be personal and everyone must pay

2) Major spending areas should be identified as separate hypothecated taxes

3) Co-payment should be encouraged at every level

What might this mean in practice?

Given that personalisation is the objective, all impersonal forms of taxation should be abolished, including corporation tax. Instead, a Single Income Tax (like that proposed by the Institute of Directors’ 2020 Tax Commission) would make no distinction between earned income, dividends, or unearned income (including inheritance) and would be applied at a single rate. This would not only be far easier to administer, it would render much corporate and personal avoidance behaviour ineffective.

Personal allowances should also be removed. In recent years, it has become an article of faith that lifting people out of tax entirely is a good thing. But while it is argued that there is little point in collecting tax only to be redistribute it as welfare, it means that a large proportion of the country makes no connection between what they pay in tax and what they receive as services. Instead, people would be paid a basic state income (set according to family circumstances) which would then be taxed in the same way as any other income. This provides the opportunity to simplify the welfare state as well as the tax system.

(The noble conservative belief that as few people as possible should be recipients of welfare may well be unsustainable in a future of mass automation and artificial intelligence and we should start preparing for that now. Also, rolling back Gordon Brown’s sprawling tax credit scheme appears to be politically impossible.)

On the spending side, the revenue from the single tax should be divided into multiple subscriptions at a ratio fixed by the chancellor, creating, in effect, a small number of hypothecated taxes.

First, there could be what amounts to a membership fee for belonging to the shared society; this would cover the costs of government, defence, and major infrastructure – essentially the services provided by the state before 1918. A second subscription would be for redistributive measures including pensions and welfare while another could cover education. The final subscription would be for health and social care.

In each area, there would also be a clear statement of provision levels. What is on offer to every individual must be clearly outlined whether it is the drugs and treatments available on the NHS, what apprenticeship or type of degree will be funded by the education levy and even what size of army we aspire to maintain.

A modified tax return would show that all citizens were nominally charged the same for each of these areas, i.e., an equal share of the cost per adult, but that low earners received a subsidy to offset this cost. Conversely, high earners would explicitly see their contributions to other members of society.

Although debatable, some people view the single rate tax as regressive. To address this, the final aspect would be to encourage co-payment for services at the point of usage. Consider how many people who would balk at paying higher taxes would happily pay £100 per night for a private room and better food during a brief stay in hospital, not just for themselves but for friends and relatives. Then consider how that money could be used to relieve pressure on other parts of the service.

Similarly, schools should also be free to ask for co-payments from parents (as some effectively do already) while offering scholarships and exemptions for children from low-income backgrounds. This could be integrated with an education voucher scheme such that parents could send their children to whichever school they want, with varying levels of co-payment.

Clearly, the cost of providing this additional level of service must be well below the cost of providing it, in much the same was as first-class air passengers pay more than double the economy fare for a slightly wider chair and a warm roll. The advantage to co-payments is that it is money volunteered by those with higher disposable income in a way that provides them with a tangible benefit while subsidising the service for other people. As income from co-payments rise, it might be possible to reduce the single tax rate, creating a highly progressive tax system.

The move to subscriptions and co-payments also creates space for the private sector and charities to be involved. A local charity could offer to make the co-payments for people of a certain background while private providers could offer insurance against the cost of top-up services

In summary, the subscription model would restore the connection between individual contributions and the standard of public services, simplify the tax and welfare systems, and raise more money from high earners with less squawking. What’s not to love?

The taxpayer is dead – long live the subscriber.


     Email

     linkedin      Email