Saturday, December 24, 2011

Tax aversion

Many people try to turn tax rates for the richest sector of the population into a political argument but it isn't, it is about straight forward inequality, ego and greed.

The same arguments for under-taxing the rich crop up again and again:

1. They help to promote our country abroad which brings in income. I heard Michael Caine using this argument. To raise taxes for people like him, he said, was a mistake as they had already generated huge amounts of income and prestige for the country with their work.

I admire Michael Caine immensely and on the face of it this sounds reasonable: somebody raises the profile of the UK all over the world, surely it is wrong to demand extra tax from them as well?

OK, but someone is going to have to decide which individuals or jobs promote our country enough to offset the extra tax. Maybe a league of top celebrities who, just by being famous enough, inevitably bring benefit to the UK. Or everyone could declare on their tax return how much they considered they were worth in increasing the global reputation of the UK. It could work: if a pop or film star was watched by X million people this year that could give them a tax rebate of X percent. The other side of the coin would be those who damaged the reputation of the UK abroad...

This leads to the situation where the celebrity is being taxed less but all the people who make or sell the records, DVD's, t-shirts, run the cinemas, tours etc. continue to pay the same tax as before.

2. They provide jobs and boost the economy.

Fine, but so does every self employed person (they provide a job for at least one - themselves).

3. If you raise their taxes they just move abroad.

The law does have to be pragmatic: there is no use having laws which are unenforceable as they just cost money paying for people to chase shadows. But it doesn't sit easy with many people that because somebody is in a privileged enough position to do something they should get away with what less privileged people cannot. We know it happens in all kinds of things - top criminals get away while those who work for them end up in jail etc. but it shouldn't really form the basis of policy.

If Michael Caine is right, then all those tax exiles are still contributing to UK Inc. through their status anyway.

He says that raising extra tax on the rich and successful is a half-think: it doesn't consider the value of the person to the country already. Actually, he is guilty of half-think: he is not considering the hospitals and schools that cannot be funded because he is holding on to the extra money. He is making choices about what to do with that money (maybe better ones than the government - who knows?) but he is unaccountable for those choices. If he thinks the government should spend his tax money differently he is much better placed to get his point of view across than most of us so why not pay the tax and be vocal in his opinion on where it goes?

4. Having higher tax rates for higher earners disincentivises their working at all.

It seems very unlikely that Michael Caine continues to work in order to earn money. At some point that he may not have been aware of he stopped earning a living and started doing what he does simply because he loves doing it. Some people may be driven purely by the love of accumulating wealth but they are in a very small minority if you believe what rich people say. Money itself is a proxy for power and, as I said above, they have power through their own status.

Some people argue for flat tax rates and this would be fine if wealth and income were normally distributed - that is the graph of people's wealth looked like the graph of people's heights for example. If you taxed everyone one inch out of every six inches of their height you would get a workable (if arbitrary) system. However, because the graph of wealth is shaped like the infamous hockey stick of global warming, a flat tax rate has the direct effect of squeezing the majority on the near horizontal part down while the near vertical stick (the top few percent most rich people) is pushed higher and higher with nothing to hold it back. It is regressive with a capital R - it promotes inequality with vigour.

Seems to me you have two choices: get rid of tax altogether and run everything on a mixture of charitable donation and free market competition, or have a proper sliding scale of tax which goes some way to reverse the trend for the rich to get richer at the expense of the poor. Anything else is unsustainable in the long run.


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