The Economist as Adviser
The Mirrlees Commission, which reported in 2010, aimed to update the earlier IFS Commission on Taxation chaired by Cambridge economist James Meade three decades earlier in 1978. Not only was Mirrlees chairing it but some of the distinguished members were also his erstwhile PhD students, including Timothy Besley and Gareth Myles. The title ‘Tax by Design’ certainly reflected the Mirrleesian world view that we have met in his writings on optimal tax and growth:
Tax by Design is both an imperative and a description of our approach in this review. Our aim is to set out the principles on which a 21st century tax system should be based and then to apply them in suggesting concrete policy recommendations to improve the UK tax system. To that end, we use insights from economic theory and empirical research to discuss the impact that the tax system has on people’s behaviour, and the resulting trade-offs that policymakers have to make between the various and often conflicting objectives that they might wish the tax system to achieve (Mirrlees et al. 2011a: 1).
The review shows that the UK system falls short of the ideal in costly and inequitable ways. It discourages saving and investment, and distorts the form they take. It favours corporate debt over equity finance. It fails to deal effectively with either greenhouse gas emissions or road congestion. The revenue it raises, and the redistribution it does, could be achieved in less costly ways. We propose both a long-term vision of a better system, and directions for reform. Some of the recommended reforms involve tweaks to current policy; others involve radical change, and are probably for the longer term. It is undeniable that some of the proposed changes would be politically difficult. But failure to reform imposes enduring costs (Mirrlees quoted in IFS 2010: 1).
The report is over 500 pages long and includes a great deal of detail. However, the three main recommendations were:
- 1. The tax system should be designed as a whole, being both green and progressive.
- 2. The tax system should seek neutrality. Tax systems should not distort people’s behaviour by treating similar activities differently without very good reason.
- 3. The tax system should achieve progressivity as efficiently as possible. That means relying on the rate schedule of personal taxes and benefits—rather than inefficiently distorting the tax base—to achieve redistribution.
We can see very much the Mirrleesian theme of the need to redistribute income resulting in progressive taxation. However, the tax system needs to be efficient and take into account the distortionary effects it creates. Also, it is necessary to look at the benefits system as a whole. Mirrlees himself is typically very modest about his role in the commission bearing his name: ‘I wish I had been in the UK during that period: it was difficult to get properly involved so far away in Hong Kong; but I liked what we produced’ (private correspondence).
In 2007, the devolved Scottish government set up the Council of Economic Advisers (CEA) in which James Mirrlees was and still is a member. He was also a member of the Fiscal Commission Working Group (FCWG), alongside Joseph Stiglitz and others advising on fiscal issues that would face an independent Scotland. Although he has always kept his own personal views on Scottish independence private, he made a decisive public intervention in the 2014 referendum (The Telegraph, 24 August 2014). He argued that in postindependence negotiations, the Scottish government should not agree to take on its share of the British national debt unless currency union and sharing of the pound was agreed. His reasoning was that ‘[i]t is hard to see how Scotland can take on the debt unless there is a full currency union’. Earlier in 2014, he had also suggested that an independent Scotland would have to look at the ‘alternative of a Scottish pound’ separate to sterling, with Scotland launching its own central bank and borrowing at a higher rate to protect the new Scottish pound. However, he believed that the currency would have to be pegged to the pound to prevent inflation rising sharply: ‘It would probably require some borrowing initially, at a rate a little higher than UK’s current borrowing rate, but initially lower than the rate of inflation, so not very expensive; and it has the advantage of somewhat greater policy flexibility in the longer run’.[1]
On the issue of currency union with England, Mirrlees argued against the Governor of the Bank of England, Mark Carney. He stated that ‘My views are based on economic principles and observation of monetary unions elsewhere. They are about what is technically possible and identifying a clearly workable and preferable option’. The advantages of a currency union were
reducing transaction costs and exchange-rate risk, encouraging trade, competition and economic efficiency. Surely it is better for the English to be able to use their money in Scotland without paying to change it? That is not a trivial benefit. Nor is the absence of exchange risk, which otherwise has to be added to investment risk.
He also argued that the Eurozone experience did not provide a good example for an Anglo-Scottish union. Whereas the Eurozone membership was diverse, ‘In contrast Scotland and the rest of the UK are very similar economies. Though there are some risks of asymmetric shocks, institutions can be built to adjust to them; and the costs are small relative to the advantages mentioned’.[2]
Earlier, in 2013, Mirrlees presented evidence on the Scottish government’s Revenue Scotland and Tax Powers Bill. In his discussion,
Efficiency is a concept that, for economists at least, means something more precise and restrictive than it did for Adam Smith. As a (joint-)author of an ‘efficiency theorem’ in tax theory, I am strongly attached to this property, but it is a property of the whole production of the economy, as influenced by the tax system as a whole. A main requirement is that there should not be taxes on transactions between producers, except to counter externalities such as atmospheric pollution and congestion (Mirrlees 2013: 2).
