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.

3 thoughts on “Martin O\’Neill on the tax system”

  1. Actually as far as I can tell the social democratic method says nothing at all about what any tax system should look like. It all turns on your definition of social justice. Define taking someone’s labour as a violation of social justice and you’re back at the everyday liberatarian stance.

  2. “high on consumption, low on capital and corporates.
    As, umm, the social democracies of the Nordics do.”

    Please notice, however, that in this case, the Nordic social democracies make a virtue of necessity. They don’t do it because they would think it is right.

    Typically, aspiring social democrat politicians (whatever party flag they carry – major parties have little differences here, except traditions) want to have lower taxes on consumption (because “the poor will suffer from consumption taxes”) and high taxes on wealth, corporations, capital gains, and high income workers. It’s just that when they gain power (typically in a coalition government), they can no longer work based purely on ideology and populism. In order to sustain the functionality of the state, they need to maximize tax revenue, and abandon ideology at least to some extent.

    Which is why the Nordic social democracies don’t have so excruciatingly high capital gains taxes as you would expect.

    I think it goes like this: when you have your first day at work as the finance minister, the ministry chief of staff -and other senior civil servants – will dig up their Excel sheets, tell you that if you raise the capital gains tax so and so much, the capitalists will evacuate so and so much, and your tax revenue will collapse so and so much. They also tell the freshman minister that if you increase the income tax of high-income workers, some of them will move out of country, and the rest will just work less and tax revenue does not increase; instead, the rest of the economy slows down.

    And thus then we’re being operated by civil servants. Which is just as well. Being a mediu9m-income worker who bears the brunt of income taxes, I’m so glad there is some tax competition even within the EU (and this is why the more socialist-minded politicians try to find out ways to eliminate the competition).

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