TAX NEWS - 2010

Martin O'Neill on the tax system

Quite interesting piece on the morals and philosophy of taxation.

There's "everyday libertarianism" in which what is ours is ours and tax is a necessary evil to pay for the necessary State.

Then there's social democracy in which:

On this second view, assessing tax fairness in terms of differential "tax burdens" no longer makes sense, as notional pre-tax incomes no longer have any special standing. Instead, "tax justice" dissolves into the broader question of overall social justice. The question to ask is not whether the "tax burden" is fairly spread, but whether the full set of economic and political institutions within a society leaves nobody unjustifiably badly off.

If we are to hold to that then there doesn't seem to be any special place for progressive taxation any more as pre-tax incomes no longer have any special standing.

The question is, instead, whether anyone has a justifiable complaint of injustice in light of their treatment by the state, where the tax and benefit systems are taken together, and both are viewed against the level of provision of public services.

And we still have a great deal of wriggle room here: there are indeed those who would say it is an injustice that the State take more than 50% (choose your own number) of the value produced by their labour.

The most important thing such pondering upon the morality of taxation misses though is the necessity of pondering upon the efficiency of taxation. Even if the social democratic view is correct (perhaps, more accurately, both views are correct in that they depend upon your original assumptions, so you can find one view correct while I can find the other so, as we've started with those different assumptions. Neither of which are in and of themselves correct: they're assumptions) we still need to look at the boring details of tax.

Is there a tax rate upon an activity at which revenue falls? Yes, most certainly there is, yes, there really is a Laffer Curve. Taxation above these rates doesn't help the social democratic view: it makes some worse off without making any other better off. Indeed, by the loss of production (which is what leads to the lower tax revenue) all are made worse off.

Similarly, there is the structure of the tax system. Taxation upon capital and corporates reduces future growth more than taxation upon consumption or property. Thus even within any particular amount of taxation we can have differences in inter-temporal justice by this very social democratic standard.

All of which means that, even if we accept the social democratic standard (which I don't but you might, see assumptions above) that doesn't mean that we should accept a simply blind adherence to either higher taxes than now or a particular suggested structure of taxes.

Indeed, proper consideration of that very socially democratic standard, of a truly holistic view, would lead to an acceptance of the classically liberal taxation standards. A high level of governmental redistribution, yes, but raise the money according to the classically liberal strictures: high on consumption, low on capital and corporates.

As, umm, the social democracies of the Nordics do.