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In this world nothing can be said to be certain, except death and taxes. Benjamin Franklin's puritan aphorism suggests that our fate is indeed sorry: The grim reaper will each year take a tithe of our harvest before his scythe eventually chops off our heads. After 2 1/2 centuries, we still can't seem to shake off mortality, but the founding father from Pennsylvania might be surprised by the universal popular political will to exempt very large numbers of people from income tax.
In Canada, the leader of the Liberal Party wants to make tax "fairness" the battleground in the forthcoming federal election. In order to win over the middle classes, Justin Trudeau is proposing to raise taxes on the wealthy (those earning more than $200,000) and spread the benefits among the great mass of middle-income earners who will pay a bit less.
Squeezing a bit more out of the 1 per cent of top earners is an idea that has instant appeal. What it tends to ignore, however, is the extent to which tax systems everywhere are becoming lop-sided. The focus on the very wealthy means that more and more of the national budget is supported by a smaller proportion of earners. At the same time, many taxpayers make no direct contribution to the state from their income at all.
In the 2013 fiscal year, some 9.1 million Canadians paid no federal income tax. These represented 34 per cent of people with a positive total income, says the Canada Revenue Agency, and it includes the self-employed as well as those receiving top-up income in the form of social assistance and child-care benefits. Meanwhile, the top 10 per cent of Canadian earners contributed 56 per cent of the federal government's income-tax receipts. The top 1 per cent of super-rich accounted for 21 per cent of the federal government's haul from individuals.
From this we can infer two things: There is a political drive to push more and more of the burden of paying for the state on to the shoulders of the minority of people who are very wealthy. It must also be true (because state expenditure increases annually) that the government desires – indeed it requires – that the very rich carry on getting much richer in order to underwrite the enlarging bill of an expanding state.
Canada is not unusual in loading the fiscal burden onto the very well-to-do. According to Britain's Institute of Fiscal Studies, the top 10 per cent of taxpayers account for 59 per cent of U.K. income-tax revenue. The exclusive club of British one-per-centers also outperformed their Canadian cousins, paying 27 per cent of all income tax paid. Even that load was not enough for the U.K. Labour Party, which in its recent election manifesto proposed an increase in the top rate of tax as well as introducing a mansion tax – effectively, a new tax on capital.
Intriguingly, the proposal to soak the rich was not welcomed by the electorate and Labour suffered a massive defeat at the polls. It is worth considering why they failed, because it is obvious that most of the electorate would have been entirely unaffected by taxes on very high incomes, not to mention taxes on homes worth more than £2-million ($3.8-million).
Could it be that the British are too stupid to accept the logic of making the rich pay more? (in Marxist sociology, this is referred to as false consciousness). Or, could it be that they wondered whether a further loading of the dice might cause the wealthy punters to quit the casino? During the election campaign, there was a great deal of panicky talk among the financial fraternity about capital flight.
My guess is that people at large are not stupid or suffering from some infantile political disorder (as some on the left seem to believe). There is an obvious question about incentives for wealth creation and whether it is sustainable to continue to load more of the burden of supporting the state on those with the most means and the least need. In Britain, as in Canada, more than a third of earners pay no personal income tax. In France, it was revealed this week in the financial newspaper Les Échos that less than half of French households are paying any income tax, following recent reforms by President François Hollande's government. In the United States, no federal income tax is paid by 43 per cent of earners.
This is not to say that the less well-off pay no tax at all. Since Benjamin Franklin's era, the world has become awash in taxes on sales of certain goods, real estate, liquor, tobacco and gasoline. Yet, the most important of taxes in political terms is always income tax because it is imposed directly on what you earn, for most people even before income is received. If the British decided to say no to further taxes on the better-off, I sense that in a curious way they perceived it to be unfair.
If we believe that the state is there for everyone's benefit, it follows that everyone should contribute something to its maintenance. If everyone has the right to decide through the democratic process how much tax and to what end, then it is invidious that anyone with an income should be deemed to be entirely outside the scope of income taxation.
There is a political danger in the endless drive to load the tax burden on a smaller portion of earners. It is not only risky in terms of narrowing the state's sources of income but it exacerbates social division – two nations, one that pays and one that doesn't. Moreover, in appearing to use the tax system to repair social ills while shoring up dependency, we ignore the true cause of inequality, which is low pay, low skills and lack of opportunity. Without properly addressing these issues, the state has to carry on hitching a ride on the backs of a small band of the super-rich.
There is a huge intellectual vacuum in the argument about tax where the implied social contract between the state and its citizens is conveniently ignored. If we truly believe that a very large section of society is unproductive, forever dependent and a net burden on the state, then we are truly lost.
Carl Mortished is a Canadian financial journalist and freelance consultant based in Britain.