Leading Article: How to make paying taxes more palatable

AS Kenneth Clarke and his Treasury colleagues wield the scalpel over public spending this summer, they face a paradox. When voters are asked in polls to choose between higher taxes and higher spending or lower taxes and lower spending, they say they prefer the first. At the past four elections, however, they have clearly chosen the second.

A paper published this morning by Demos, the new cross-party think-tank, suggests it is too easy to blame voters for their apparent inconsistency. This is not just a British issue. All over the world traditional ways of taxing and spending are no longer seen as politically legitimate. Voters are not prepared to see the state take their money en bloc and fritter it away without consultation. 'Government,' the paper says, 'appears as a black hole into which resources disappear'.

Geoff Mulgan and Robin Murray, the authors, believe ways can be found to make voters more willing to pay taxes. First, the taxes should be hypothecated - linked clearly to where the money would go. Second, voters should have more influence on spending choices: rather than the present, secret system of horse-trading between Civil Service departments, spending should be decided by referendums - with enough signatures, any group of voters would be able to table a question. Third, local spending should be tied more closely to local taxes: councils, for instance, should be allowed to overspend central limits, provided their electorates agree. Meanwhile, governments could safeguard their revenues against the mobility of capital by adopting the Californian system of unitary taxes and by looking for new ways to raise money - with taxes on drug patents, hit records and the profits of mobile telephone companies.

Hypothecated taxes have a bad name in Britain. In some cases, such as National Insurance or the Road Fund Licence, the apparent link between the tax and where the money goes is misleading; in others, such as the television licence fee that pays for the BBC, the tax has provoked controversy. But the authors have in mind a wider notion of hypothecation: taxes could be linked, they argue, not just to specific areas of spending, but also to specific people over time (by using tax credits to pay for training or a period of part-time work), or to redistributive projects to attack homelessness or environmental damage.

Under such a system, neither spending ministers nor Chancellors of the Exchequer would have much room for manoeuvre; the job of politicians would merely be to lobby for specific mixtures of taxes and spending before a referendum, and then to comply with the decisions taken by voters. But the more damaging criticism is that the proposed revolution can succeed only if governments agree not to use lower taxes as a lure to attract companies (and rich people) from abroad. That may eventually be possible inside the European Community, which the authors believe could achieve a single-tax system. But even if it were possible, newly industrialised countries such as South Korea, and tax havens such as Monaco or the Channel Islands, would find the temptation to undercut impossible to resist.