Leading Article: The pressure for tax reform mounts

HISTORICALLY, attempts at increasing taxation have required the state to think again about how it raises money. So at the end of the 18th century the cost of foreign wars led to taxing the incomes of the rich: until then taxes had fallen disproportionately on traders and the poor. At the turn of this century, the burden of social programmes led to progressive income tax establishing itself as the prime way of raising revenue.

Today, governments find themselves once more in that historic conundrum: how to raise money when the prevailing tax system is losing public support. The need for more revenue is pressing: the numbers dependent on the state are rising, as are the costs of labour-intensive public services that they require. But no one has worked out how to give the tax system a new legitimacy. Politicians advocating higher taxes lose elections. These issues lie behind Paddy Ashdown's speech yesterday championing the democratisation of taxation. The leader of the Liberal Democrats called for reform 'so that people feel more connection between the taxes they pay and the services they receive'. He said that taxes which are hypothecated - ringfenced for spending in particular areas - could be the way to restore people's faith. He rightly placed his recommendations in the middle of a speech about constitutional reform. As the American revolutionaries would have acknowledged, taxation and the legitimacy of government are inextricably linked.

Mr Ashdown's speech, following Reconnecting Taxation, the recent study of hypothecated taxation by the Demos think-tank, is seductive; he highlights consultative referendums, which some local authorities have held to gauge support for different levels of taxation and services. Introducing hypothecated taxes is increasingly discussed: before the last general election Labour considered earmarking National Insurance contributions for the National Health Service as a way of mobilising support for extra health spending.

However, such taxes can produce problems. Putting every tax to the vote would no doubt guarantee those taxes funding popular services such as health and education. But - witness the current vilification of single parents - groups less favoured by public opinion could end up with a raw deal. A liberal democracy does not allow public policy to be dictated solely by votes. The question of bringing back hanging, for example, is not put to a referendum, even though opinion polls suggest that a majority would vote for its restoration.

There are other problems: if taxation was disaggregated, people might pay only for services of which they approved. Perception of public spending could change: instead of being seen as a collective good, it could be mistakenly regarded as the state merely buying for the individual taxpayer.

The pressure for hypothecated taxes highlights the lack of accountability and perceived inefficiency of public spending. Politicians must address these issues, but they should be careful not to undermine the social values that the welfare state and other aspects of public spending maintain.