Wednesday, 5 December 2012

Tax The Rich: Why It's Not As Moral As You Think

George Osborne wants us to think that he is preparing an economic blitzkrieg on companies like Starbucks and Amazon, as he acquiesces to the general public opinion that their tax avoidance is 'immoral'. I have written before in defense of richer people paying more tax, but as this blog is about the 'moral' issue of taxation, there is something I think many people are missing here.  Have a think about this question; on what grounds is it moral that rich people pay more tax?  I think you'll find that question is harder than you think. I don't think I've ever heard anyone be able to proffer any moral principles from which they can derive a conclusion that Mr. Starbucks and the like are paying less than their fair share. The reason it is hard is because I suspect that the reasons you assume are valid reasons for higher tax for the rich are almost certainly wrong. I gave a few of them in this blog post, but they were economic reasons.  Here I'll give you some moral issues to consider.

The primary reason why people think it is more moral to tax the rich at a higher rate is that culturally they have the old Marxist maxim ingrained - "From each according to his ability, to each according to his need". This amounts to the favouring of maximising the well being of the poorest and least well off people.  Surely this supports the notion of the rich having a moral duty to pay more tax to ensure the poorer people of Britain have a more even distribution.

Most definitely not - that reason just won't do.  Following the "From each according to his ability, to each according to his need" to its true conclusion, this does not support the view that the rich should pay more to support the poorer people of Britain - it says that the rich (and middle earners, and even some of the lower earners) should pay to support the poorest people in the world.  Even today around 1.5 billion live in poverty around the world - their condition would make the poorest people in Britain seem comparably well off. The Marxist principle insists that British people stop complaining that rich people's tax is not going into their reasonably well off pockets in the UK, and instead start complaining that that the money isn't going to help those around the world that most need it.  Giving it to those in global poverty is how you maximise the well being of the poorest and least well off people.  Claiming that not enough of it is coming to Britain is the howl of a person who doesn't care enough about the people who really do need the money - many of whom need it just to stay alive.

Ah but wait a minute, you may say - even if we can't get justification on grounds of 'the needs of the worse off', everyone should be paying their 'fair share' of the aggregate tax bill to cover the total cost of Government spending, shouldn’t they?  The trouble is, I've no idea what everyone's fair share is, because Government spending isn't a singular dimensional expenditure.  Some of our State funded goods are public, but private goods are provided by the state too.  You’ll notice that rich people tend to pay higher prices for their private goods – they usually pay for private health care, they usually are privately educated and they usually pay into more lucrative pension schemes than lower earners.  If a high earner wants to pay for better services then there is nothing ‘unfair’ about that – in fact, he lessens the burden on the non-private sectors of the service.

So ‘fair share’ really limits the consideration to the public goods the State provides, because they are the goods that we all share more or less equally.  That is to say, whether a man is on £200,000 per year or £20,000 per year, he has the same basic access and benefits of the public goods the State provides, such as emergency services, law and order, roads, street lighting, bridges, armed forces, and national defence.  If our troops are called to defend us against an invading nation, Mr Starbucks has the same level of national defence as Mr low-middle earner, just as they both have access to the same police force, motorways, street lighting, road sweepers and dustmen.

So if your concern is ‘fair share’ based on equal treatment for equal services then Mr Starbucks is paying more than his fair share, because he is contributing a lot more tax than Mr low-middle earner for the same level of State provided public goods.  Moreover, if on the other hand you base your view on the notion that everyone should make an equal contribution to society then Mr Starbucks needs to stop paying tax until all those who have been paying less tax than him over the years catch up on their payments, because in the process of acquiring huge wealth, Mr. Starbucks has already contributed more to society than the average earner.  The ‘fair share’ argument doesn’t fly here.

Another way to measure value is by what is called ‘consumer surplus’.  When The Rolling Stones played the O2 recently the ticket prices were high – but not too high, because they sold out.  They sold out because Rolling Stones fans valued the performance more than they valued the cost of the ticket (if they did not they wouldn’t have gone to see The Rolling Stones).  So the consumer surplus of the gig is the difference between what Rolling Stones fans are willing to pay for O2 tickets and what they do actually pay.  If I would have paid £100 for a ticket, but I am able to purchase one for £75, then the consumer surplus is £25.  When a consumer has £25 consumer surplus that means £25 of consumer surplus has been contributed to society.  Given that each ticket sale generates consumer surplus to society, and given that The Rolling Stones only get a proportion of the ticket sales, they must have contributed much more consumer surpluses to society than the vast majority of low and middle earners (this pattern follows in just about analogous situation).  To translate that, the Rolling Stones can argue that if everyone should make an equal contribution to society, then their share of the tax burden is too generous.  So the argument doesn’t really fly on that one either.

Hence, the problem is twofold; it starts with the issue that so far as I’ve seen nobody has any idea how to logically justify their belief that it is ‘fairer’ if the rich pay more tax.  And it carries on with the issue ‘fair’ and ‘more preferable’ are not the same things.  It is not fairer if the rich pay more tax, but it is preferable – and it is especially preferable if the tax of the richest people in the world goes to the poorest in the world – those who need that money for food, health care and regular supplies of drinking water. 

There is only one way to have a system that is not unfair yet at the same time ‘especially preferable’ – but that would involve living in a world in which the rich were glad to pay more than their fair share to provide revenue for their own country, but were also glad to pay a proportion of their tax money for food, health care and regular supplies of drinking water for the poorest in the world.  And that would only happen if the richest Governments got together and set up tax systems that directed a lot more of their own revenues into the mouths of the world’s neediest.  What you’d then have is greater incentives – and people do respond to incentives.  A company like Starbucks or Amazon whose tax avoidance means money is being kept out of the mouths of the world’s neediest would be frowned upon a lot more than a Starbucks or Amazon whose tax avoidance means money is being kept out of British pockets.  Moreover, the tax avoiding Starbucks or Amazon that keeps money out of the mouths of the world’s neediest is likely to be seen as hugely uncaring and immoral, and will likely increase the chances that customers will go to Costa and instead.  Naturally this fear of mass boycotting will provide greater incentive for Starbucks and Amazon to pay more tax.  But things like that only happen when there is a big collective effort to do more for those most in need.