Public Services Management: How to join taxes and those who pay them: Earmarking revenue can offset cynicism over accountability but may bring new problems

TAXATION is not unpopular. It is the lack of accountability over how our money is spent that breeds cynicism and discontent. This, at least, is the opinion voiced by some influential politicians and academics.

It is a view that gained some credibility in the last general election, with the apparent success of the call by the Liberal Democrats for an extra penny in the pound tax for improvements in education. Since then Paddy Ashdown has placed the phrase 'no taxation without explanation' at the centre of his party's campaigning.

The argument has gained ground in the other parties. Neil Kinnock told the New Statesman that if he could pass just one law, it would be to introduce earmarked taxation to pay for the health service.

It appears they may be whistling the public's tune. In an NOP survey in New Century magazine, 76 per cent of those responding said earmarked taxes could be 'a real boost to public services like education and the NHS' and 59 per cent said they would be more likely to vote for a party that proposed a penny tax increase to raise funds for the NHS.

The Chancellor no doubt will ignore such calls in his Budget, opting instead to cut public services further. Not that the growing budget deficit is the worst of our problems, according to Demos, the new think tank. In a recent publication entitled 'Reconnecting Taxation' it argues that the tax burden has shifted on to the individual because of the success of multi- national corporations in avoiding taxation by declaring their profits in countries with low tax rates.

One of the solutions, the targeting of benefits, would cause fresh problems, Demos added. At present the average taxpayer gets back 62 per cent of what is paid out. Any decline in this could add to public hostility to taxation.

Demos called for a fundamental re-examination of how direct taxes are levied. To be publicly acceptable, it said, a tax should be earmarked for specific purposes, spending must be decided democratically and be accountable, and what is spent locally should be decided upon and collected locally.

Robin Murray, joint author of the paper, believes the debate could improve accountability: 'It reconnects spending to the people who are paying. Harlow council is thinking how it could adopt it. The first candidate is housing where it is considering offering tenants a higher standard of repair. They could vote at area level to put up rents to pounds 17 rather than pounds 16 for a higher standard. The council is excited about it.'

Richmond and Tower Hamlets councils, both Liberal Democrat controlled, have already undertaken similar exercises. In Tower Hamlets this year voters decided in a referendum for the level of tax and spending they wanted. They chose a middle-ranking option.

Demos sees other applications for this approach. Residents across London could have a referendum to decide whether they pay a surcharge to fund improvements to the city's public transport.

The television licence fee is a success, Demos says, because fee payers relate what they pay to what they get. In return, it forces the BBC to be more responsive to viewers and listeners - and to be more involved in market research.

Several policy areas lend themselves to creating a closer link between taxes and spending, Demos said. Taxing of petrol could be earmarked for improved public transport. This would create a form of equilibrium, it argued, and income would go down as the policy became more successful and transport needed less subsidy.

Opening decision-making has its problems, Demos concedes. Some health authorities are consulting widely and polling the public to decide health priorities. One uncomfortable truth is that the public often prefers to spend on babies with little chance of survival rather than on care for people with Aids. It is not a judgement that could be supported by many health professionals.

Robin Murray acknowledged the difficulties but said they could be overcome. 'This has been the result in California of hypothecation, but you have to argue your case. If people are violently against something, then giving power to Michael Portillo and Company doesn't resolve how you get a consensus behind a spending decision. We have had this discussion in relation to nursery schooling. We envisage that those with interests would form coalitions with other groups. It would push them outwards to campaign.'

However, even the Demos view of democracy is constrained. 'We are not in favour of hundreds of questions on a ballot paper,' Mr Murray said. 'You could have two or three on one ballot, relating only to discretionary spending. Where a vote was lost by government, it could decide to use some of its discretionary funds.'

Jonathan Michie of the Judge Institute at Cambridge has looked at this vision of the future and rejects it. 'The main disadvantage is the danger of it leading to an opting out of the welfare state and the collapse of collective provision,' he said. 'The kindest thing that can be said about it is that it is a presentational device to make taxation more acceptable. I don't think you could earmark all taxes, just income tax, which begs the question of how government would spend corporation tax and all the others.

'The more sensible approach would be to show more of a breakdown of how tax is spent. The irony is that it could sow the seeds in the opposite direction.' He said he foresees non-payment campaigns, as sections of the public refuse to pay for defence, or whatever else they object to.

But it could prove a useful device for increasing local democracy. A referendum could even be a solution for the annual stand-off between councils and the Government over how much councils should spend. Not in itself a new or radical idea - indeed, it was suggested by Michael Heseltine in 1981.

(Photograph omitted)