Why the left should favour lower taxes

As Chris Dillow from Stumbling and Mumbling argues

David Semple thinks the left should join American tea parties, which protest against high taxes. I think I agree. The desire to shrink the state should be a leftist aim. I say so for four reasons.

1. Big government cannot be redistributive government. If the state is raising 40% of GDP in taxes, it must tax the worst off, simply because the rich, even in the UK and US, arent that rich or plentiful. This pdf gives us the numbers. Table 2 shows that the tax system – leaving aside benefits – actually adds to inequality. This is because direct taxes cut the Gini coefficient by 4 percentage points, but indirect taxes add 5 points to it. And table 21 shows that the poorest fifth of households with children pay a higher proportion of their income in taxes than the richest 10%: 37.2% against 33%.

2. A big state hurts the worst off. Right-wing nut jobs might pose as victims of ZaNuLabour.  But whether we look at Purnells welfare plans, repressive anti-immigration laws or the policing of protests, it is ordinary people who are the real victims of an overly powerful state: newspaper sellers, poor foreigners, the unemployed and ill.  The left should be on their side.

3. When the state has lots of power, therell be a big fight to control it. And its the rich and powerful that win such fights. Why do you think banks get big bail-outs whilst ordinary workers are flung onto the dole with little compensation?

4. Belief in big government rests upon the notion that theres an elite of leaders which has the wisdom and know-how to manage our affairs from the top-down; this is why New Labour found common cause with corporate bosses – both share the same ideology. But it is an utterly anti-egalitarian notion. It is also utterly wrong.

Regarding the fouth point, I think the first ‘third way’ government in the world – the Hawke/Keating Government made a much better fist of corporatism than Tony Blair’s New Labour seems to have done. Still, the basic logic above is pretty powerful.  I note for instance that one of the triumphs of the Hawke/Keating Government – compulsory super – might have been generally a very worthwhile initiative and a showpiece of corporatism.  If only it had been implemented with a modicum of thought for its distributional consequences. It was the most regressive policy of any political party for a generation or so, involving a flat tax on a large pool of household savings. Add to that the changes made by an outgoing coalition government and we have a regime in which those over 55 can cycle their earnings through super and draw on their savings to live, thus living their lives within a flat tax regime at 15%.  

A couple of other caveats:

  1. At a time like this it’s appropriate that government expands to play its countercyclical economic role 
  2. Having just visited Europe, and without minimising the cost to the marginally attached to the labour market, there is something fantastic about public systems working.  This isn’t entirely to do with funding.  Almost nothing works in Britain and what does work costs the earth, whereas things work pretty well here.  But public things like railways and so on just work better in Europe and things working well is a public good with both economic and non-economic benefits that are hard to fully measure. 
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David Coles
David Coles(@david-coles)
12 years ago

Speaking of super, Alan Kohler is against removing dividend imputation on the basis it’ll lower share prices and punish super funds. The obvious thing he’s missing is greater foreign investment, but do his arguments about share buybacks and bonds have any weight?

Patrick
Patrick(@patrick)
12 years ago

Hey, someone tell Don Arthur – Nick has found progressive fusionism!!

derrida derider
derrida derider
12 years ago

Of course all else equal its better to have lower taxes – people who want to tax “the rich” just for the sake of taxing them seem silly to me. IME they usually have no idea just how few in number the truly rich are and therefore how little revenue you can actually raise from the bastards with income tax (wealth taxes are another matter). If you want to raise serious money you have to tax the average joe in the street; the beauty of taxing working class people is that there are so many of them.

So if you’re concerned about income inequality (and you most certainly should be – all evidence is that an unequal society is an unhappy and, eventually, undemocratic one) you need to be willing to contemplate instruments other than income tax to achieve it. Unconstrained laissez faire soon creates massive inequality because the Golden Rule quickly gets turned into “he who has the gold makes the rules”.

But as I’ve said elsewhere, ANY advanced society is going to need big government. This idea of the libertarians that small government will be easy for the populace at large to control and generate prosperity is dead wrong:

– small government can be more easily captured, especially in a plutocracy; see much of South America or Africa for examples. Big governments may have more power than small ones, but it rends to be dispersed, if only from the sheer complexity of the beast. And a big government focused on social welfare and public goods is not focussed on domestic repression or military adventures.

– most of all, small government is simply not possible in a rich society. The proportion of output that has to be devoted to public goods rises with the society’s productivity and complexity. You can see that by just how unsuccessful the attempted dismantling of the welfare state by Thatcher and Reagan was in reducing the % of GDP going to government.

Tel_
Tel_
12 years ago

And a big government focused on social welfare and public goods is not focussed on domestic repression or military adventures.

I dunno, a few people have been pointing out that Obama recently increased the US military budget (along with a bit of reallocating in favour of tech-weapons, and away from the established brass). Surely the Obama government would be prime candidate for “big government focused on social welfare and public goods”, yet the military adventures keep on comin’.

The proportion of output that has to be devoted to public goods rises with the societys productivity and complexity. You can see that by just how unsuccessful the attempted dismantling of the welfare state by Thatcher and Reagan was in reducing the % of GDP going to government.

Hmmm, I don’t find that convincing. Fundamentally I believe that a government takes what it is able to, Thatcher and Reagan included. The limit has nothing to do with necessity and everything to do with opportunity — taking as much as possible just an inch short of causing systemic collapse. Talking about small government is much easier than implementing it, the temptation of kleptocracy is pretty much irresistible in practice. High-tech, complex societies simply offer more opportunity for the taking so it gets took, simple as that.

However, the “size” of government is much more than merely the money taken. It’s also the degree of influence on how people want to live their own lives (if you can’t own yourself, what can you own). That money is a small price to pay if it buys the opportunity to be left alone the rest of the time. Thatcher and Reagan both had quasi-religious socially conservative lifestyle programs they wanted to implement, which is not small government in my books. Reagan also got too much credit for Gorbachev’s work, but that’s getting beside the point.

Bruce Bradbury
Bruce Bradbury(@bruce-bradbury)
12 years ago

The “- leaving aside benefits -” in point 1 makes a BIG difference. From Table 2 in the linked publication we have (using more descriptive, if approximate, terminology)

Gini Coefficients:
Market income (MI) 52
MI + benefits 38
MI + benefits – income tax 34
MI + benefits – income tax – indirect tax 39

The big impact of the state on inequality is via spending. That is, the Gini drops from 52 to 38. (I think the study includes cash benefits, plus assignable goods like education and health, but not pure public goods like defence and law and order).

But the state cannot spend without taxing. So reducing taxes must inevitably reduce spending and (most likely) lead to a more unequal society.

James Rice
12 years ago

Bruce is entirely right of course. I found it a little hard to take Chris Dillow’s post seriously after he mystically abstracted taxes away from benefits in point 1. And as far as point 1 is concerned, since indirect taxes (such as the GST) increase income inequality while income taxes decrease inequality (as described in Table 2 in the linked publication), presumably Dillow should issue a clarion call to the left to campaign against indirect taxes (such as the GST), while at the same time favouring high levels of income tax…

pedro
pedro
12 years ago

“Regarding the fouth point, I think the first third way government in the world – the Hawke/Keating Government made a much better fist of corporatism than Tony Blairs New Labour seems to have done.” Yes, and I expect that is because the Hawke government had better people in it, something you can’t count on repeating.

I took Dillon’s point to be that you keep the transfer payments and otherwise keep government small.

derrida derider
derrida derider
12 years ago

Tel_ and pedro, that the only countries in the world with small governments are extremely poor countries is no coincidence.

The reason economies get richer is that they can produce more and more tangible goods with the same amount of human effort. But many, many services cannot be mechanised – teachers, policemen, nurses, etc still have much the same output for an hour of their labour time that they did a hundred years ago. So as we need to put less and less effort into producing tangible goods then a bigger and bigger proportion of our overall effort goes into these services. It’s called the Baumol Effect.

And guess what – governments don’t produce many tangible goods; they’re all about services.

pedro
pedro
12 years ago

Sure dd, but that still begs questions about the total extent of government activities, and I think smaller is not the same as small.

I don’t want to debate the merits of a voucher system, just use it for an example. With such a system the transfer of wealth would still be taking place, but the social footprint of the government could be smaller because there would be greater scope for private schools.

Health provides another example and again I don’t want to start a different debate, but in Qld at least there allegedly are more bureaucrats than health workers in the public health system. That would seem to indicate a declining productivity from health-labour.

Tel_
Tel_
12 years ago

[img]http://203.206.220.108:1111/tax.png[/img]

Something to think about in the light of Derrida’s Baumol Effect. I certainly don’t see a strong overall correlation in the picture but I do see clusters of similar styles of government.

Yeah, I know, “macho stats man”, there are many reasons to criticize the true meaning of the figures, but I just plot ’em as I download ’em.

derrida derider
derrida derider
12 years ago

Sorry, but those figures make absolutely no sense at all. The per capita income figures mesh with what I know, but the tax ones are ridiculous. Look where Germany is – and I know it spends 12% of GDP on age pensions alone. And the OECD has the US and Canada both taking about 38% of GDP in taxes – about the same as Australia. The US spends 8% of GDP on the military alone (not a clever choice IMO). The Canadian government spends about 9% of GDP on health. And Switzerland and Spain have big welfare states with an old population – taxes there are far higher than 10% of GDP.

Take them, along with the Gulf oil exporters (who raise all their revenue from royalties) out of that graph and you do in fact get a good positive correlation between tax burden and income per capita. But given that the figures I know a little about in the chart are way, way off I wouldn’t trust any of it.

Tel_
Tel_
12 years ago

Here’s the link to the nationmaster data in clickable format:

http://www.nationmaster.com/graph/tax_tax_rev_of_gdp-taxation-tax-revenue-of-gdp

DEFINITION: Tax revenue refers to compulsory transfers to the central government for public purposes. Certain compulsory transfers such as fines, penalties, and most social security contributions are excluded. Refunds and corrections of erroneously collected tax revenue are treated as negative revenue.

The definition sounds like it might exclude state and local government, and I do note that the data points are NOT all the same date, but then again who wants to do a yearly tax audit of Rwanda?

The original source is the World Bank (a dodgy organisation with an axe to grind on these matters) from the “World Development Indicators database” and it would seem that the URL has changed. If you go to http://web.worldbank.org/ and follow around a bit they want you to buy their data on CDROM. Presumably the banking business is a bit tight these days and they are selling CDs to make a bit of cash on the side. Knowing what Nationmaster is like, I guess their figures stop in 2005 because that’s when the data stopped being freely available.

I’m willing to look at alternative sources if you know of one. This does bring up a basic problem of economics that high quality measurements are difficult to get hold of.

And the OECD has the US and Canada both taking about 38% of GDP in taxes – about the same as Australia.

Have you got a source link? I found this, which claims to be OECD and comes vaguely close to your figures (but only covers a handful of countries):

http://www.nationmaster.com/graph/tax_tot_tax_as_of_gdp-taxation-total-as-of-gdp

Strange that the World Bank and OECD are so different, there’s obviously some tricks to the measurement system here.

Tel_
Tel_
12 years ago

FWIW I found this one:

http://oberon.sourceoecd.org/vl=700441/cl=21/nw=1/rpsv/factbook2009/10/04/01/10-04-01-g1.htm

The US and Japan are near the lowest tax countries on the OECD list along with Korea (presumably South) and Switzerland all of which have been doing pretty well (similar ranking to where the World Bank puts them, even if the actual numbers differ). Admittedly Mexico is also at the low-tax side of the equation and they are not doing so well, but corrupt police and drug wars will do that to a country. Slovak Republic: still early days for them, and Australia are ranked lower/middling on tax (which surprises me and it a major departure from the World Bank ordinal placement).

At the high-tax side we have: Norway, France, Belgium, Sweden and Denmark. No surprises there and close to the same ranking as the World Bank puts them. None of these are doing exactly badly, but nothing exceptionally good either, maybe the hardships of the coming Depression will show up the difference.

Speaking of tax, given that our tax is already paying for collection of vast amounts of statistics including the OECD stuff, you would think it might be a bit more available to make use of the results. As with everything that goes to the taxman, bugger all seems comes back — this being yet another of a long list of examples.