Labour's broadband plans - there's a reason we don't do tax hypothecation

It can be somewhat depressing to continue to make the same point for a decade and more but that’s where we find ourselves with this latest little plan from the Labour Party. Hypothecation of tax revenue is simply a bad idea. But they’re trying it again:

A Labour government would nationalise Britain’s broadband network and offer free internet access to every household and business in the country, the party will say today.

That idea contains its own foolishness of course. We are not, to put this mildly, in a state of technological certainty over broadband. It’s still a developing technology that is. We’d rather like to have market competition therefore, the one thing that any nationalisation and free provision is going to kill stone dead.

We do all, after all, recall how wondrous the GPO was at extending coverage and advancing technology back in those pre-privatisation days?

But more than that there’s this:

Mr McDonnell told The Times that a new Labour government would make a priority of establishing the new state-owned entity, British Broadband.

The running costs, estimated at £230 million a year, would be funded from a new tax on multinational companies. They would be charged a percentage of their profits, according to a calculation of what proportion of the assets, staff and turnover was located in Britain, he said.

Hypothecation is the idea that this tax, raised on this activity over here, will be spent upon this, different and unrelated, activity over there. It’s an idea that is more than just foolish. For what is the connection between the profits of companies and the costs of broadband?

Say we have a horrible recession - apply your own odds of that with McDonnell in office - and thus corporate profits drop substantially. Does that mean we wish to spend less on broadband? Say that the glory days of the 1970s return and the profits made in the economy fall below even the costs of depreciation, as they did. Does that mean we wish to spend nothing on broadband?

Equally, say that the Indian subsidiary of a company that also trades in the UK - this tax is to be on global profits allocated proportionately to Britain - profits from that swiftly growing economy. Why does this mean that we in Britain should righteously put more of our own GDP into building broadband?

Which is the problem with hypothecation. Whatever the formula used there simply is no connection, whatsoever, between the amount that can or should be raised in tax over here and what should, or could, be spent on this other activity over there. Which is why it has been, for centuries now, a basic rule of fiscal policy that we don’t do hypothecation of taxes. We don’t even reserve national insurance to pay for the welfare state it is meant to fund.

Yes, of course the nationalisation of broadband is a bad idea, it’s election season. But the method of paying for it is even worse.