Roar writer Elsie Todd on the risks and rewards of taxation as a solution to inequality.
Taxation is an instrumental solution to inequality, but why is it that we have not seen serious changes? Perhaps life really is “mean, brutish and short” and people would prefer to spend their money on themselves, or perhaps a lack of trust in governing institutions and the distribution of taxation leads to a hatred of taxation.
Liberalist Robert Nozick might argue that taxation on earnings is on par with forced labour. Regarding ideas around self-ownership, he believes “if I own myself, then I must own my labour, and if I own my labour I must also then be entitled to the fruits of my labour. So, therefore, does the state have a right to take that away from me?” Even the most deeply progressive systems do not take 100% of our income; yet Nozick maintains that the government does own any part of us more than the part that we must pay to support causes beyond the minimal state.
At the other extreme, we have anarcho-capitalists who think taxes should be got rid of altogether, even that part which supports Nozick’s minimal state. They believe in the ultimate free market where everything is privately owned; there would be no social services, social welfare. Everything would be replaced by private enterprises which would encourage investment, and people would only pay for those services they wanted.
However, in this scenario, who would want to pay for essential communities facilities, such as street lamps and traffic lights? This seems unimaginable, yet it existed in the middle ages when cities were operated by merchants and run for the sole profit of the individual. How about tax-free havens such as Monaco, Brunei and Dubai? Yes, their income taxes rates are almost nothing, but they impose other forms of taxation such as VAT, specific cooperate tax, and road/car taxes. With strong economies and good welfare states, taxing those who use cars and roads heavily sounds not only like a good idea, but a green idea.
Advocates for the trickle-down theory might argue that lower taxes for both businesses and the rich should be reduced to encourage investment, which would in the long term help society and reduce inequality. Yes, Reagan’s tax cuts in the 1980s may indeed have contributed to bringing the US out of recession. Henry Curr, an editor at the Economist, said in an interview with Rutger Bergman that paying higher taxes distorts investment and decisions about savings. He brought up Elizabeth Warren’s proposal as an example, by which the wealthiest 75,000 households would pay a 2% tax on every dollar of their net worth above $50 million, mentioning how if your return on capital is 5-6% that would represent a large sum, ultimately distorting investment incentives. However, a recent study conducted by the LSE studied fiscal policies in 18 countries over 50 years concluded that tax cuts for the rich have never trickled down to society in general, and only really benefit those individuals who are directly affected. The paper proved that cutting top-rate taxes only made the rich wealthier, heightened inequality and did very little for business investments.
Increasing and making taxes more progressive could reduce inequality provided that the government redistributes the money directly into the welfare state. Of course, there are other factors which can reduce inequality such as increasing benefits, a national minimum wage and universal basic income. Sweden, the post child for democratic socialism, demonstrates how higher taxes lead to a better quality of life and lower levels of inequality. Swedes are happy to pay their taxes because they can see where the money is going.
Sweden has a well-funded welfare state that offers free education, university and healthcare and paid parental leave to both parents. Despite this, in 2019 Sweden’s social democratic- led government introduced a policy that cut income tax. The bill scrapped a 5% surcharge levied on incomes over 700,000 SEK a year. Furthermore, to wreak the benefits of the well-funded welfare state, you must be a Swedish citizen, and citizenship in recent years has been hard to obtain. Despite 90% of Swedes are happy to pay their taxes, with the highest income tax capped at 57%.
Denmark is another example of a country with exceptionally high taxes and low levels of inequality, with income tax up to 60%. The average American student debt is $28,650pa, whereas Danish students receive $900 a month from the state to attend university. Kenneth Rogoff pointed out that countries like Denmark and Sweden are incomparable with the US owing to their size, so can we even begin to use them as a model for comparative purposes?
Well, another great example of where higher taxation has helped level inequality is Alaska, USA. In Alaska people receive money for living from a social wealth fund that is seeded from oil revenues. It was introduced by Jay Hammond in Bristol Bay, where he initially imposed a fish tax which did not work. He then created a contract between companies that wished to drill for oil. The revenues of this go to the government and a quarter to the Alaska Permanent Fund which is now worth over $50 billion. This kind of taxation is brought about by pre-distribution rather than redistribution, making Alaska one of the most equal US states, with the lowest level of poverty and the highest wellbeing index. A good example of how taxation contributes to higher levels of equality.
As mentioned, taxation is not exclusive when it comes to reaching perfect equality. Other factors, including increasing benefits to the poor, a national minimum wage and a universal basic income would also dramatically decrease inequality. Despite these other factors, the words of Gabriel Zucman resonate, that “tax decisions are the most important that a democratic society makes” and that “taxes are the price we pay for civilisation and civilisation cannot afford free-riders”. There seem to be clear ways equality can be combatted, especially in the US, by making for example the tax system more progressive than it is and following the Scandinavian model. Ways to do this include reinforcing the estate tax, similar to the wealth tax and making sure internal revenue services have the resources they need to be effective. Natasha Sarin and Larry Summers recently noted that the IRS currently fails to collect 15% of total tax liabilities. Furthermore, introducing a surtax on capital income, corporate income, and on high-income labour would increase the funds available for redistribution. The ideas are there, economists have proven it and governing bodies know this, it now needs to be put into place. Maybe society just lacks confidence, or is it in fact that we are innately selfish beings? In the spirit of Rutger Bergman, Gabriel Zucman and Immanuel Saez what we need is a sense of hopeful optimism. The zeitgeist is changing and so can tax reforms.