The income tax taboo

This is the fifth in a series of posts on what sort of welfare state we might want. The first can be found here, the second here, the third here  and the fourth here.

There seems to be an unshakeable conviction shared by all the major political parties that the surest way to lose an election is to suggest in your manifesto that you might want to raise income taxes. Perhaps they are right. Perhaps most British people really believe that paying more income tax is the worst thing that could happen to them financially. But if they do believe this, we should ask why they do so, because it flies in the face of just about all the evidence.

The belief seems to be rooted in the idea that there is some terrible unfairness in taking a slice from the incomes of hardworking individuals and spending it on general social goods and services. But this kind of logic is rarely applied to other taxes.

Take, for example, Value Added Tax (VAT). This was introduced into the UK in 1973, as a condition of joining the European Common Market. What it replaced was purchase tax, which was levied on selected goods, at the point of production, from companies, although of course the costs were passed on to consumers. With a few exemptions, VAT is applied to all sales and purchases of goods along the value chain, with companies able to claim back the VAT they have spent on purchases and set this amount against what they have charged to customers. The tax is therefore funneled inexorably towards the final consumer, who, needless to say, cannot set anything against it and must pay the full whack.

As the excellent work of Richard Murphy has shown, unlike income tax, VAT is strongly regressive. In 2010, before the VAT rate went up from 17.5% to 20%,  he compared direct taxes (income tax) with indirect ones (VAT) and concluded that:

Direct taxes then rise steadily as a proportion of income as incomes rise and both VAT and all indirect taxes combined do the exact opposite, falling as a proportion of income as income rises. So marked is the trend that the overall progressive effect of income tax is not enough to counter the fact that the poorest households suffer such a high rate of overall indirect tax that they end up with the highest average tax rates in the economy as a whole. The message from this data is unambiguous: the poorest 20% of households in the UK have both the highest overall tax burden of any quintile and the highest VAT burden. That VAT burden at 12.1% of their income is more than double that paid by the top quintile, where the VAT burden is 5.9% of income. (Taken from Is VAT Regressive and if so why does the IFS deny it?, Tax Research UK, July 12, 2010)

Five years later, with VAT at 20%, this inequality between the poorest fifth of the population and the richest fifth has undoubtedly worsened. Yet we find very little in the public discourse decrying this unfairness. It is overwhelmingly the redistribution of income tax that is denounced, implicitly or explicitly, generally in the form of a rhetorical question on the lines of ‘Why should the hardworking taxpayer subsidise ____ ?’. There are many ways the blank can be filled in: single parents, students, child benefit, winter fuel allowance, bus passes, cosmetic surgery on the NHS, education for prisoners … you name it. But I cannot recall ever hearing a sentence starting ‘Why should the consumer subsidise ____ ?’.

Such discourse both obfuscates and distorts reality. Let us take the example of benefits paid to parents of young children. The rhetoric implies that having children is a selfish pleasure that should only be indulged in by those who can afford it, and that those who are usually described as having ‘chosen to remain childless’ are unfairly penalised if a portion of their taxes is diverted in the direction of feckless parents. This ignores the larger reality that what parents are actually doing is bringing up (with very little support from the state) the next generation of workers (and taxpayers) whose labour will support them in their old age. Parents are thus providing what should be regarded as a public service in which it makes pragmatic instrumental sense for everyone to invest.

In other cases, the taboo against defending the principle of income tax extends even to cases where it is manifestly the best and fairest solution to the problem it is purported to create. Student loans provide a clear example of this. They were introduced to replace student grants using the argument that it was unfair for the hardworking taxpayer to subsidise the higher education of people who were eventually going to end up earning more money because of their higher qualifications. Let us leave aside the fact that this is not necessarily the case. The value of an undergraduate degree on the labour market has in fact deteriorated in proportion to the extent to which university attendance has spread across the population (increasing from 3.4% in 1950, 8.4% in 1970, 19.3% in 1990 to 33% in 2000*) and many graduates end up doing low-paid menial jobs, often with little relation to their qualifications. More importantly, for the purposes of this argument, the loan system manifestly does not work on its own terms. It was announced in November 2014 that three quarters of students won’t be able to pay off their debt (see this report in the Independent). To those who can’t pay must be added those who won’t. Loan repayments can, for instance, be avoided by the simple expedient of moving abroad. Students (and their parents) are in effect being asked to pay in advance for something that might or might not happen (in the process enriching the financial services industry). The logic that those who earn more should pay more has been stood on its head.

If the ‘problem’ is that graduates end up earning more than other workers, then the solution to that problem seems glaringly obvious. If and when they start doing so, let them pay it back in the form of income tax. Such a solution (tried and tested as it was in most developed countries in the latter part of the 20th century and still working in some) is undoubtedly simpler to run and more efficient in achieving the stated objectives of the policy that gave us those disastrous loans. It also has another benefit in that it recognises that the value of a university education does not only lie in the financial rewards it leads to. As I already discussed in this blog here, producing a well-educated population has general social benefits that accrue to everyone – not just those who receive that education –  in the form of art, culture, charitable work, the quality of public debate and political life, imaginative and better-informed parenting and what is currently known as ‘social innovation’.

As with child benefits and student grants, so it is with many other forms of social redistribution. Not only do they provide efficient solutions to managing economic and social reproduction, they also enrich the commons and provide the foundations of a civilised culture. So let’s grasp the nettle and start promoting income tax as a good thing.

to be continued

*figures taken from here


2 thoughts on “The income tax taboo

  1. Pingback: The importance of a minimum wage | Ursula Huws's Blog

  2. Pingback: The importance of the minimum wage | Ursula Huws's Blog

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