Chapter 8: Ethical taxation and finance
The financial crisis of 2007–08 has raised serious questions about the moral hazard created by financial institutions and the wider financial system. The regulation of finance has come under great scrutiny, but it also raises two questions about the tax system. The first question is whether the tax system enabled or exacerbated the financial crisis. The second is whether there are any tax reforms which would make such crises less likely in the future. In this chapter I will set out the determinants of an ethical tax system and then apply these to the finance industry. I will begin by arguing that the ethical approach to taxation is to create a tax system that generates a just distribution of benefits and burdens within society. I will highlight two relevant principles that follow from this approach and which should be applied to the finance industry. The first is a principle of efficiency, namely that the tax system should make inefficient outcomes such as financial booms and busts less likely and certainly not to increase their likelihood. The second is a principle of progressivity, which has two components. The first is that the tax system overall should be progressive, and the second is that this is best achieved by taxing returns to economic rents.
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