Regular readers will know that I’m pretty leftwing, but that doesn’t mean I’m blind to the fact that people respond to financial incentives. Sometimes people on the left get viewed as thinking we should act as if financial incentives didn’t really affect people’s behaviour much, and if this idealization results in a bit of inefficiency then you just have to suck it up. At the extreme that sort of thing might lead to something like communism, but maybe some lefties who aren’t communists are guilty of the idealize-and-suck-it-up mindset too. But I try not to be.
Given this, I think it’s a bit of a shame that we pay people to be unemployed, even though we don’t want people to be unemployed, and we charge people for earning money, even though we want people to earn money. (In case you can’t tell, I’m talking about unemployment benefits and income taxes.) The thinking behind these prima facie wacky policies is that if you don’t pay people to be unemployed then the unemployed will starve, and if you don’t charge people for earning money then you won’t be able to raise enough money to run the government. In the past I’ve expressed an interest in the idea of replacing unemployment benefits with a universal basic income that you give to employed people as well as unemployed people. But what about income tax? Is there a better way to raise money?
First let’s remind ourselves why income tax is such a shame. Suppose I’m rich and I’d rather have Lancelot Capability Brown landscape my garden than have £100,000, and Brown would rather have £80,000 than not landscape my garden. In an ideal world, I’d pay him somewhere from £80k-£100k to landscape my garden: it's a win-win situation. But if there are income taxes, the state will probably charge us so much to make this transaction that it isn’t worth either of our while to make it. I don’t get my garden landscaped, Brown doesn’t get his money, and the state doesn’t get anything out of it either. That’s no good. And everyone knows it’s no good, but we can’t think of a better system, so like the hypothetical lefties I mentioned earlier, we just suck it up. Where income taxes apply, people don’t just work when they value their time and labour a bit less than the employer does; the employee has to value it a lot less, so they'll still both be happy with the deal once the income tax is factored in.
What’s the alternative? Well, on the face of it, maybe it’s wealth taxes. If the wealth’s going to get taxed at the end of the year whether I have it or Brown has it, then transferring it to him doesn’t cost anything, and the inefficiency goes away. If I value his time and labour more than he does, we do the deal. I don’t know whether libertarians like wealth taxes – they sometimes seem to talk about sales taxes as better than income taxes, which I don’t really get – but I think there’s a case that they should. Libertarians don’t like the state charging people to engage in harmless activities, and that includes employment. With a wealth tax, the state’s taking some of your money anyway, but for the money you’re allowed to keep, you’re equally allowed to give it away. I’m not a libertarian, but I like freedom as much as the next person, so this seems like a nice feature. There’s also a case that libertarians shouldn't even see wealth taxes as a necessary injustice, because the state is the body enforcing continued property rights over people’s wealth and so it’s only fair for it to take a cut. (I sometimes wonder what would happen if big countries insisted that tax havens bear the burden of enforcing the property rights and contracts officially under their jurisdiction. Maybe Luxembourgish police officers would have to travel the world chasing up second-hand books people bought on Amazon and never received.)
So what’s the problem? Why are modern democracies nuts for income tax, while often having no wealth taxes at all? (Unless you count inheritance tax, which is a bit like a crude wealth tax.) Maybe it’s because they wouldn’t work the way I’m imagining, which is perfectly possible; my understanding of this stuff is pretty basic. Or maybe it’s because wealth taxes would hit the wealthy more than income taxes do, and so they use their wealth to stop it happening. Or maybe it’s because income tax is the only one people can’t rampantly avoid. I remember when Thomas Piketty’s book came out and he was pushing wealth taxes, he thought they’d need a lot of multilateral co-operation, and maybe he was thinking about avoidance. If that’s all it is, though, it seems a real shame, and economic libertarians are arguably the people who should be most bothered by it. Maybe if Rand Paul becomes US president then something will be done.