Taxes and equality

Forecasts that taxes will soon have to rise should, but probably won’t, draw attention to a major reason why the old left is in such a mess. The problem is that there is a basic conflict between two of its traditional ideals – progressive taxation and big government.

The fact is that high government spending means the tax system cannot be used to redistribute income.

These figures from the Inland Revenue illustrate the point. They show that the 1.8 million people earning over £50,000 will pay £55.6bn in income tax this year. That’s 43.7 per cent of all income tax.

But it’s only 12.2 per cent of the £454.7bn the government will raise this year (table C8 here).

This means that even if the government could double income tax receipts from people earning £50,000 or more – which might not be possible - the rest of the population would still have to pay three-quarters of the money raised by government. (I’m ignoring here the fact that the rich pay more in VAT and other taxes, but this is a minor wrinkle).

Even if we define the rich as those earning above £30,000, income taxes on these account for only 18.2 per cent of all government revenues.

The bottom line here is simple. If taxes account for two-fifths of national income, they cannot redistribute income very well, because most taxes will have to fall on people who aren’t rich.

This much should be, but isn’t, well known. As Gosta Esping-Anderson wrote in Politics Against Markets in 1985:

As the incidence of taxation grows…the tax system automatically loses its potential for progressive redistribution. Under conditions of heavy expenditure, the bulk of taxes must be collected among the largest income brackets, and that happens to be workers and middle-level white collar employees.

I think this explains a lot about the demoralization of the traditional Left. They want more equality. But they cannot bring themselves to see that one way to achieve this would be to shrink the state and abolish the taxation of lower incomes. Instead, they carry on in the bone-headed notion that big government and equality must always go together.

If any political party wants my support – and they all seem determined not to get it – they would recognize that limited government and social justice are not necessarily enemies of each other.

I suspect I'll have to return to this theme....

Comments

[Blimpish]

I say this purely out of intellectual curiosity: but could you post sometime on how you define social justice?

It's such an ambiguous term - one of those that people invest with their own meanings, forming a false consensus - that it turns me off straight away, even though on the tangibles I sometimes might agree.

[Blimpish]

After all, you're the one quoting vol.2 of Hayek's "Law, Legislation, and Liberty" a few posts down!

[Jim]

Sorry to drag up an old post, but I've come here via Tim Worstall's trackback and I've got a question. I think I get what you're saying about taxation, but aren't you leaving out the other side of the redistribution coin, i.e. how the money collected by the government is spent? People on various parts of the income range may end up handing over similar proportions of their incomes once all kinds of taxes are taken into account, but they don't receive similar proportions of government spending. Certainly under Labour government spending has been fairly tilted towards the poor, and a recent Institute of Fiscal Studies paper argued that without Labour's redistributive spending inequality of net incomes would have risen strongly since 1997 instead of remaining largely static.