The fairness of 50p

Over in the twitterverse, a Very British Dude has asked whether I think it reasonable to confiscate by force more than half of someone’s marginal earnings.
Note that this question is, in principle, wholly separate from the question of whether high taxes raise revenue. It is perfectly possible to argue that a 50p+ tax rate is fair and just but economically damaging or, alternatively, that it is unjust but an effective revenue-raiser. Which makes me wonder why so few argue for such positions.
Anyhoo, to a VBD’s question. I’d suggest three possible answers here, which vary in force depending upon the precise type of the rich:
1. A high tax is a dividend, paid to the state in return for its investment in the things that made you rich.
Even if the state did not educate you, the chances are that it educated your colleagues and customers, whose education benefits you. The state has provided the domestic peace that has enabled the economy to grow and thus give you the chance to get rich; very few of the UK’s top earners would be so rich had they been born in sub-Saharan Africa. It has provided laws - such as patents and copyright protection - that allow artists and entrepreneurs to profit from their efforts and talent. And in various ways the state helps to sustain  capitalism and hence profits and high earnings.
Why shouldn’t it demand payment for such benefits?
2. The state’s force is a form of countervailing power. Some (many?) of the rich owe their fortune to the fact that they are powerful. Most egregiously, this power consists of an ability to extract cash from the state. When the government taxes bankers or the bosses of BAe, Serco or Capita, it is merely getting its money back.
 In other cases, high earnings come from a power to extract rents from either shareholders or workers - if only because of an ideology which says that management is a rare talent that should be highly prised. In these cases, state power corrects for private power.
3. Inequality is a form of market failing. Imagine we were all behind a veil of ignorance, not knowing what talents we’d be born with. Isn’t it plausible that, behind such a veil, people would agree to enter into insurance contracts such that if they got lucky or talented they would pay out to the unlucky and untalented? People would, surely, agree to pay out a proportion of the £1m-plus a year they would earn as Premiership footballers in order to soften the misery of being born with no marketable skills.
You can therefore regard redistributive taxation as, in effect, the sort of insurance payments that would be made, if such contracts were  feasible. In this sense, the tax merely fills in for the missing market.
These arguments do not get us to a precise tax rate. But they do suggest a case for some degree of progressivity in the taxes.
And let’s be clear. A 50p tax is not massively progressive. Overall revenues are equal to just over 37% of GDP. Under a purely proportionate tax system, then, we would all pay 37% of our income. A 50p tax rate look burdensome not because it is highly progressive, but because the overall tax take is so large. Expecting a tiny proportion to pay 50% (yes, for some the marginal rate is 62%, but the average rate is lower than this) strikes me as not wholly unreasonable.

Comments

[Paul Sagar]

Careful, Chris. I once defended the 50p top rate and VBD called me a "maggot" (an envious maggot, if I recall) on his blog.

You have been warned.

[Luis Enrique]

yes, some of the "property rights" based objections are bizarre (tax is theft). I rather suspect that in the absence of a "thieving" state, I'd find some of my other rights violated, possibly by men with big sticks. And anyway, even if one accepts that the state violates my rights by taking my money, there may be practical advantages to that state of affairs (the state can do things that markets cannot) which offset that outrage. So it boils down to a pragmatic question, in the end.

doesn't any possible system, state or private, that involves doing things like ensuring the children of the poor get access to education and healthcare, necessarily entail that some people (the well off) pay more than others (the badly off). Progressiveness, in that sense, is a necessary feature of any state of affairs in which people who need help (however you define need) receive it.

[Marksany]

The poor look on in envy at a low 60p rate. IDS is struggling to bring benefit withdrawal rates down from 96p to 65p.

[Neal]

Chris
All of your numbered points are correct, but none really convinces me. The most convincing bit is the last paragraph: GIVEN that the overall take is 37%, 50% for the richest is not unreasonable.

But that's a pretty big proviso!

[Jock]

Luis, why is it bizarre to object that something which, if you did it to me one on one would be called theft, when what, 25%, of people vote for someone who proposes some more or less arbitrary amount on a more or less arbitrarily chosen group of people, can be done with impunity?

If you came to my home and asserted that you had the right to kidnap and cage me if I didn't give you half of everything I earned, you could be prosecuted for theft or extortion. Yes some magic arrangement says that when you club together and come first in some way of selecting a "government" you can confer the right to do what you would be a criminal if you did yourself on thath "government" and bestow on them all the means and threats to do it effectively.

What do you think that only the state can do and not "markets", by the way?

Chris, I feel like I shouldd blog properly a response to this but I've kindd of lost my mojo for blogging at the moment.

All three justifications appear to me to make the state look really bad. In the first, what you seems to be saying is that some group sets itself up as a monopoly provider of many things, some you may very well need, some you may not, and perhaps even not know about, and then come along and demand to be paid for them, whether you agreed to having them done by that organisation or not. That seems like extortion not a "dividend".

The second shows the state is really crap at its job. You are admitting that notwithstandingg that it is suppose to reflect the will of the majority of the population that elected it, it allows some people more access than others and enables them to enrich themselves because of the state's peculiar position to grant privilege. In which case, better off without the state I'd say.

The third seems far too speculative. People do sometimes/often fail to insure themselves against many risks in life. Some have talent and fail to make the most of it. I saw an argument the other day, that seems to apply here, that such people should be castigated, even punished, for not making the most of their own lives and skills. But it also assumees that there genuinely are a fair number of people (i.e. sufficient to justify a huge state apparatus to "help" them) who are "born with no marketable skills". I suspect most of those who appear to have "no marketable skills" are that way precisely because of the sort of restrictions and failings often made by the state. Poor standard education that prioritises paper credentials over finding that marketable skill a child has hidden away for instance. Preventing people from exploiting their niche because of regulation and so on.

Give that the state exists, perhaps these make sense, but to me they demonstrate why the state mechanism for doing many of these things is spectacularly bad.

When Churchill was campaigning for the 1909 budget, he used to say that for the first time the tax man would be asking not "how much you have" but "how did you get it" (i.e. was your acquisition of wealth just). It seems to me that high rates of income tax in particular do not bother with that question and that if you are going to have to pay for the protection racket that is the state somehow, then we should look at particular types of wealth that better reflect, for example, rent seeking.

Mark's comment above contains the germ of a better justification though. Many state programs, and state failings (such as caving into pressure from lobby groups' rent seeking) benefit the rich at the expense of the not-rich. If Housing Benefit claimants have to suffer a high benefit withdrawal rate, perhaps the rich should too!

[alastair harris]

50p (or for the pedant, 50%) is neither fair nor unfair. After all it is just a number. A big number, but still just a number. But worth considering the yield that you would most likely get if it went to 51%. Rates goes up, yield goes down - how fair is that?

[Luis Enrique]

"... you could be prosecuted for theft or extortion"

hilarious. prosecuted how, if no state?

[Jock]

Why do you think only a state can hold people responsible for their actions? Besides, you are the one defending the state, not me. Why do you think that something that would be unjust, even criminal, if you did it, suddenly becomes okay if the gang you a a part of does it?

[Jock]

In fact that is itself quite a good example of how spectacularly bad at even it's most basic functions the state is. It only solves 11% of property crime. You really think people should pay through the nose for such a bad monopoly service?

[Falco]

I wont go into the rest of it because I simply disagree with you and don;t see any hope of bridging the gap given that it's more of an ethical disagreement than a factual one.

However this: "Inequality is a form of market failing." is just wrong"

In a market you would expect, through a combination of talent, work and luck, that some would do better than others. Bitch about or try to rectify this 'problem' if you wish but it is not a market failure.

[Daniel]

Like Falco, above, while all three arguments were awful and not even to the point (by your own admission, since they didn't deal with the rate, which was the who question), I didn't break out laughing until your statement about inequality being a market failure.

And I can say that as someone who supports progressive income taxes!

[Liam Murray]

"These arguments do not get us to a precise tax rate. But they do suggest a case for some degree of progressivity in the taxes."

How? They seem like loose variants on social contract theory; refutations of the silly 'tax is theft' argument but not serious arguments for a differentiated tax rate.

Take the dividend argument (1); the states investment in the "things that made you rich" also yielded benefits for the lady on the Tesco till as well as the CEO, hence it explains why we have a tax system, not why the latter should pay proportionately more than the former.

[Brian Seck]

While I agree with at least parts of all 3 arguments, my main response would be something like this:

There is no inherent ethical reason to enact or to respect private property laws. Possession of private property is to a large degree morally arbitrary, especially if there is a large component of inherited advantage. However there may well be pragmatic reasons - e.g. that we are all better off in an economy where private property is respected. But this calculation of 'better off' has to be something everyone can in principle agree on. It's reasonable for those who lose out to demand something in return.

In other words, higher taxes are part of a deal (er, if you will, a "social contract") under which the rest of society lets the wealthy keep at least some of their wealth.

Now, can we find any general principles to justify a particular rate, or a particular curve of the graph of how much money you get paid and how much you can keep? Such principles would involve a mixture of justice and pragmatic considerations. One is to consider the marginal utility of extra money - which I reckon declines quite steeply beyond the first 100,000 or so. Another is to consider the social value of the work or business through which money was gained.

These decisions have to be made somehow on behalf of the whole of society, and as pointed out by other posters, there's no reason to think a state elected on 25% will adequately reflect the views of more than a portion of society. This is a good reason for thinking that governments should follow (and perhaps even be constitutionally forced to follow) broad principles rather than taxing the hell out of whatever group is currently unpopular. But it's no reason at all for saying that tax should be set at zero, or at 20%.

[Tom]

'the states investment in the "things that made you rich" also yielded benefits for the lady on the Tesco till as well as the CEO'

But more benefits for the latter than the former, no?

[chris]

My statement "inequality is a form of market failing" is too bald. I don't mean all inequality.
All I mean is that the big inequalities that would exist in an free market economy would diminish if such an economy were accompanied by that insurance market behind a veil of ignorance.
I don't deny that the state does too much, and a lot of it badly, and that the overall tax take is thus too high. But this is a separate issue from the progressivity of the tax system. One reason I favour a smaller state is that it would be a force for equality, if the poor were taxed less.

[Jock]

Heh - I listened to someone the other day explaining how inequality is how markets work. If we were perfectly equal there would be no comparative advantage, no benefit to us trading with anyone else who all had perfectly equal resources and preferences :-)

[Keith]

Its remarkable how much time is wasted on the gripes of the wealthy that they are taxed too much! Poor darlings so oppressed by the state forcing them to recognise they live in a political society rather than a robinson Crusoe Island. Such absurd self pity makes you gag.

[Pete B]

1. Surely in this context the biggest thing a state provides is money? As well as creating it in the first place, states can reduce or increase its value at any time by adopting different policies (in/deflationary, strong/week exchange rate etc). And its only their money they're taking back from VBD in their taxes - not the more important things. (Didn't somebody famous say something about rendering unto Caesar...?).
2. In the UK no-one is forced to pay tax - it's a lifestyle choice that follows from earning and spending money. VBD can free himself from his dependency on the provisions of government, and payment of tax to it completely by living as a hunter-gatherer - or almost completely by subsistence farming as John Seymour and others have demonstrated is quite practical (but hard work).
3. In the UK no-one is forced to stay in the UK. I would say to VBD "if yer knows a better ole - go to it". Monaco, Russia, Bulgaria all have zero or very low income taxes ... flights are cheap ... missing you already.

Pete

[Lotus 51]

@Pete
"all have zero or very low income taxes ... flights are cheap ... missing you already."

Of course when people actually take you up on your offer (e.g Mrs Green)you wail like a child whose had their dummy removed.

[ortega]

'Even if the state did not educate you, the chances are that it educated your colleagues and customers, whose education benefits you. The state has provided the domestic peace...'

So, let's see a place with good education, peace and all that:

http://www.homebiznez.com/bizmatters/taxrates.htm

[Pete B]

Lotus51 - As I understand it Mrs Green was unemployed and so wouldn't have paid UK tax anyway. (Honesty best policy etc.)
Ortega - Singapore!! National Debt > 100% GDP ? Yeeahh Riiight ... Good point.

Pete

[Alex]

Jock, why exactly should I be stopped in going onto "your" property (if you didn't want me there) by MEN WITH GUNS (whether or not they're government men or private contractors)? Why shouldn't "your" property be common land (note, I said "common land", not "government land"), which everyone has access to?

[john b]

Alex is right, obviously. "Property" and "the state" are both completely artificial constructs which we wouldn't have in a state of nature. Anyone who thinks that there's anything *inherently* wrong with "the state" taking "property" doesn't understand the question.

[Jim]

Ignoring the thorny issue of whether property (in the sense of land) can be owned in the absence of the State, more importantly does an individual own his or her own body and the fruits of the labour thereof? Or does the State have the fundamental right to expropriate as much of that as it sees fit as well?

Are we just the State's slaves?

[gastro george]

Tax should be seen by the rich as a benefit that stops them from turning into knobs.

[CharlieMcMenamin]

"...does an individual own his or her own body and the fruits of the labour thereof?" asks Jim

The Labour Theory of Value returns! I seem to recall that this was the basis of one rather influential stream of thought arguing that,under capitalism, most rich people got rich precisely by appropriating the fruits of others' labour.

So taxing 'em on it doesn't exactly seem totally unfair. & it seems probably more palatable to most of the rich than, erm, 'appropriating the appropriators' which I believe was the original policy option offered :).

[rodney dawkins]

I hate working, and people who have a greater net worth than myself. Luckily for me, I am not alone, in fact there are millions of us who treat intellectual property as much smarter - since you can't be taxed that! I wait until my party of the gentle and non-monied gets elected, then I can use state power to carry out my wishes - greater extortion of the efforts of hard-working shills.

[Graeme]

I just cannot help feeling that this is looking at things upside-down. It feels as if the argument is that the state has the right to levy tax on incomes at whatever level it chooses and the justification is that the state has given you advantages - (mainly real advantages like secure tenure of property etc) - so you should pay for them.

Isn't a more mature argument to look at what things the state has to provide? Then you draw up a budget or plan of some kind. Then you decide how best to fund it - by what combination of taxes and borrowings. Note that in a Marxian state taxes are unnecessary. There is nothing pre-ordained about the absurdly complex and intricately tangled tax system we have in the UK. All this debate about the permissible top marginal rate of personal income tax is argument about the cake decoration rather than about the composition of the cake.

[Keith]

Jim I think The Pope would say God gave you your body to worship Him and so you cannot sell your liver or kidney for gain as it violates Gods moral Law to do so. Men have no absolute right to exercise Liberty without regard to moral duties they owe to God or other Human beings. Libertarianism is a childish whimpering philosophy that is excessively Individualistic and that leads to results that are open to severe question at least. I do not say his Holiness is right about selling organs; but there are many theological and philosophical views about such matters and absolute Individualism is only one way of answering this question.