The Art of Taxation is not to Tax

Tax is almost as old as civilisation itself. The conquering emperors of the past would raise taxes to wage wars. Many historical rebellions, civil wars, and uprisings have been driven by resentment against taxation. In recent history, income tax was introduced by William Pitt the Younger 200 years ago, to fight the Napoleonic wars. Today, tax is associated with providing public service and national ‘defence’, which is a euphemistic term for war.

There is a constant debate between the right and left of politics about the level of taxation. The former advocates lower taxes, because they argue that tax saps incentives of those who create wealth, and the latter says taxing is about protecting the poor and needy of society, so they advocate higher taxes.

There are four axioms in this tax debate.

First, any society consists of people of various capabilities; hence, one will always find some who are the bottom of the social ladder and always in need of help. It’s not just referring to those who are poor by their physical or mental incapacity, some able bodied section of the population will be relatively the poorest in society. In addition, the need to provide certain public services like national defence makes the case for taxation obvious.

Only the eccentric philosophers and idealists have argued against tax as some form of legal theft, encroaching on individual rights. However, the reality is we live collectively, and certain aspects like national defence, can only achieved collectively through taxation. To put it simply, it’s the pooling of money (tax revenue) in a society to achieve certain objectives which necessitates a collective approach.

Second, regardless of your political affiliation everyone more or less concurs that tax should be paid in proportion to your income; the rich should pay more than the poor – simple. It should be proportional at the least or even better progressive within reason, whereas regressive fixed tax like VAT (Value Added Tax) is morally reprehensible. The rich should certainly pay their share, but that does not happen often due to the use of tax consultants and lawyers exploiting legal loop holes, which it could be argued were created and left there deliberately.

The super-rich not paying enough tax made the headlines after the recent comments of the US tycoon, Warren Buffet and Europe’s richest woman, Liliane Bettencourt. Both said they are not taxed enough; in fact their employees pay more tax as a percentage! This challenges those who say that tax cripples the rich, preventing them from creating wealth, and it will force them to move elsewhere as we have been hearing for decades and through the recent financial crisis caused largely by the bankers.

Third, the private sector, through taxation, largely funds the public sector and taxing them out of business would reduce tax revenue in the long term. This idea is often used by the right to set taxes that lead to bigger GDP where the rich get richer and the poor get poorer; the latter should wait for the wealth to trickle down. The problem is the super-rich also hoard their wealth or invest it outside the country.

Fourth, tax should aid a better distribution of wealth, which means a larger middle class and a stronger economy – good for everyone. It should not be the few super-rich obese trickling down crumbs to the starving masses, but rather there should be more people consuming a fairer share, so that you have a good section of the population displaying lean and healthy bodies. Yes, there is an obesity epidemic.

To resolve this debate between the right and the left – is it simply a matter of striking a balance, so that the rich are not put out of business and concurrently the poor along with the public services are protected? Tax is not the most effective tool as it compels people to act in a certain way, it is far better to motivate someone to act from within, you will get far more out of them this way, the carrot is generally better than the stick.

Therefore, the emphasis should be to motivate the rich to contribute more to society; that does not mean giving more taxes to the government, as one of the arguments is governments often waste money. This is true – in the past I have worked in the public sector, and have seen this with my own eyes. Nor does it mean unfettered charity by the rich. There should be prudent investment that borders on philanthropic decisions, injection of funds into small businesses for example or setting up new ones in deprived areas. The super-rich with the normal-rich can easily set the economy on fire without getting anywhere near bankruptcy.

The culture or habit of the rich is hoarding. They should be made to realise that if they spent their huge sums of excess money, it would be better for everyone in the long run. If there is a general contraction of the economy, their business will also feel that contraction. The super-rich know this simple fact. However, there is a lack of collective sprit to implement this. I would never take my business overseas to increase my profit margins, it’s not an act of patriotism, but simply that it is in my business interest to see the local economy flourish and I am making my contribution.

In the short term I could make more money by employing cheap foreign workers, at the expense of making the local labour force redundant, on a collective scale this will hit the local economy hard. When there is a loss of company revenue, the ones at the top should take the cut, as more unemployed labour force means the local demand for the goods will fall, eventually biting everyone harder. It is essential to keep the business engine operating, and this means keeping many of the ordinary workers in employment and shedding the fewer ones from the top prudently.

Moreover, there has to be a change in philosophy on this issue of ‘incentive’ for the rich. Agreed, the rich needs to have the incentive to make money, but they should be taught to realise how much is ‘enough’. Because, there is a physical limitation for everyone with regards to consumption. For example, if a billionaire chooses to buy thousands of pairs of trousers, and shoes, there isn’t enough time in his life to enjoy those goods. This open license to create an infinite level of wealth as the minimum should be reassessed. It comes from the rotten economic theory or assumption of ‘scarcity’ of resources. The resources are not scarce; there is enough to meet the needs of everyone.

If the rich accept that ample financial security is achieved well before they have a million in their account, and if they could be motivated to work harder for society with their excess wealth, that would remove this futile nagging debate over the level of taxation.

Finally, there are those who have grown accustomed to the benefit culture in the UK. I can accept tax for those in need or those in the poverty trap, but there is no way I can accept that I should pay taxes for someone who refuses employment due to some personal inconvenience. It is not infringement of their human rights to be forced to take up employment when available; it is infringing the rights of the hardworking tax payers for those lazy bums.