Thursday, 3 April 2008

Taxation, or Taxidermy?

Tax. That chunk of pay that you earn but don't get in your pay packet.

Some principles and some questions.

We British have the French to thank for Income Tax and Clement Attlee for National Insurance. The government introduced income tax in 1799 to fund the war with Napoleon; in 1946 the Labour government led by Attlee brought in NICs. We've been paying them ever since.

The basic principle of income taxation - and there is really no difference any more between NICs and Income Tax - is that everyone pays towards the 'upkeep' of the country according to their means. (The raising of government income through 'council taxes' levied according to the value of your house follows a similar logic). This is the tenet of 'wealth redistribution', the aim of making society 'fairer'.

In the West, and increasingly in the rest of the world, the capitalist system continues to stand as the fairest and most efficient economic model. Sure it has its inequities and failings, but the tenet that 'he who works hardest lives best' broadly works. Meritocracies tend to thrive compared to planned economies.

Are these two principles at odds?

For one thing, is it actually fair to expect the person earning more money to pay more tax? Does he consume more of the nation's resources? Does he drive more, need more defence, cause more administration in the offices of government, require a better health service, more active policing, more schools or libraries or town halls or traffic wardens? He may even help to employ more people by his spending, or tend to use the health service less as he relies on more expensive health insurance.

Should the person on a lower income have a right to expect his better paid compatriots to give over part of their wealth for his benefit?

Not questions that are often asked, and if I'm to maintain any sense of realism not questions ever likely to be asked by any politician also hoping to win a large number of votes. But think about it. It might not seem charitable to suggest that the poorer members of society ought to pay more and the wealthier to pay less, yet this is where the 'meritocracy' principle is at odds with the principle of 'wealth redistribution'.

Those that create the most wealth also pay the most tax - they are forced to give wealth away; those creating the least wealth have the wealth of others given to them. If you equate the acquisition of wealth with working harder, this means that the harder you work the more you will be required to give away.

Now I accept that this is a simplification, but not a gross one. If it had a stronger element of fairness about it, income taxation would not have to be mandatory and deducted at source. Do you think the same level of taxes would be paid if they were voluntary?

OK, there are those members of society who will never earn above the average through no fault of their own. There are those who do not have the abilities of others, and you shouldn't have to live a miserable life because you weren't born with the abilities or aptitudes that are in demand and pay good money. I have no truck with the redistribution of wealth to allow such people a reasonable standard of living.

And it is hard not to agree that people earning seriously big salaries shouldn't expect to chip in a extra few quid. If you're earning a million a year then perhaps you won't feel that you have to turn the heating down if the taxman wants a few thousand more.

The people in the middle ground seem to be the ones most put upon. 'Middle England', the 'Middle Class'. Call them what you will. These are the people who contribute the most tax into the system. They are the ones paying 50p+ in the pound when they enter the 'upper tax bracket', a band of income that was once reserved for the 'rich' but which now accounts for millions of people. They generally get very little relief (MIRAS went years ago, the married couple's allowance likewise, and child tax credits are like rocking horse crap to people at this income level). But they are the people who pushed themselves through college, work long hours, have to continue to study and learn to retain their qualifications and employability.

Contrast their lifestyles with people earning half their gross pay. You'll find little to differentiate them. The lower earners still have the new cars, the foreign holidays, the computers, dishwashers, nice houses, Wiis and HDTVs, gym membership and big bills at Morrisons.

In an equitable society your lifestyle improvement should come with extra effort expended, and that's a link that taxation policy refinements over 200 years has broken.

As is my tendency, I exaggerate to make a point. But squeezing the guy in the middle is not good politics because the more voters who get hit with tax, the more your votes are in jeopardy. Our masters should realise that to many of us taxation seems more like taxidermy - an age old method for getting stuffed.

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