Monday, 4 February 2019

Progressive Tax Is Fine When It Applies To Others

A progressive tax system means the rate of an earner's taxation increases as the taxable base amount increases. So someone earning £100,000 per year will not just pay more in tax due to higher earning, they will pay a bigger proportion of their income too. The thing about progressive taxation is that just about everyone prefers it more when it applies to others than if it applied to themselves.

Suppose Jacqui takes up writing fiction in her spare time. She works on her debut novel "50 Shades of Jax", which turns out to be her masterpiece, and earns her a large one-off payment for her efforts. Jacqui spends 2 years on her book, working in her 9-5pm job in the daytime (and paying tax on those earnings too lest we forget) and dedicating her evenings to writing the novel.

If Jacqui's day time labour value is £15 per hour in her 9-5 job, and she spends 800 hours on "50 Shades of Jax" in the evenings, then the cost of her time writing the book is around £12,000 (this is an economic value based on a truism that the cost of an hour spent doing something is roughly proportionate to your earning power in that hour). Thankfully Jacqui gets the rewards for her hard work and skilful writing - she earns a one-off fee of £100,000 from a top publisher (we should actually deduct the £12,000, making it £88,000, as that was the cost of her writing the book - but let's forget that).

So, Jacqui has earned a straight £100,000, and she has big plans for the money. She can pay off some of the mortgage, pay her daughter's fees to send her to university, give some to charity, make a donation to keep open her local community centre, and arguably most importantly she can afford to give up work for a while in order to work on a follow-up book. Her success enables her to fulfil her lifetime ambition of being a paid writer.

The trouble is, she won't get to keep it all, because on current tax rates the government will want to take approximately £36,000 of her £100,000. Generally speaking, there are only two ways that anyone can get your money; either you give it away voluntarily (for example, in the form of a gift, a donation, or spending it on something you want), or it can be taken from you against your will (for example, in the form of an act of theft or extortion).

I've no doubt that Jacqui would rather pay zero tax on that £100,000 if she was let off by the government, so in being forced to pay the tax under the threat of imprisonment the government is engaging in extortion. Under any other circumstance - a big kid in school taking 36% of the little rich kid's pocket money, or being threatened by a couple of muggers for 36% of the money in your wallet - the extraction would be a crime. When a government does the same thing, it is called taxation.

Now most people aren't as averse to taxation as they are to being extorted or mugged, because they are able to live in a society in which they and their fellow citizens benefit from some of the taxation obtained. But my guess is that Jacqui will be pretty indignant at actually handing over a whopping £36,000 of her £100,000 after producing something she is very proud of, and working very hard to do so.

And why shouldn't she be indignant? It's true that some of her money will be spent on things of which she'd approve (basic health care in the NHS, education, roads and social services) but equally much of the money will be spent on things of which she probably wouldn't approve (foreign wars, PFIs, agricultural subsidies).

The upshot here is that many people are quite happy to endorse progressive taxation, but in most cases they are bound to be less enamoured with it when it applies to them. Given that we must therefore live in a society in which the majority of people would be indignant if they had to hand over £36,000 of their £100,000 earning (what's more, it's actually more like £60,000 when you account for all the ways they'd be taxed further on what they get to keep), but would be perfectly happy to see others pay that kind of tax, that ought to be a blatant indication that something is fundamentally wrong with the system, and needs changing.