What is the fairest form of tax?

Blisterman

I was just thinking this. In terms of taxes which can raise a substantial amount of money overall (i.e. not things like bin charges, cigarette and alcohol duty, as their overall contribution to government earnings could only ever be a small percentage), which one is the fairest?

Income tax seems fair on the surface, those who earn the most money pay in proportion to how much they earn but in effect it's the companies who provide jobs who end up paying it, as they have to raise wages to compensate for the money lost to tax. So it could be viewed as a penalty for providing jobs.

VAT is often said to be an unfair tax as it's not means tested, but so long as basic necessities are exempt, I don't see why that's a problem, as it becomes a tax on luxury. The difficulty is that it acts as a disincentive to spend money.

Council tax, as found in the UK is deeply unfair in my opinion, as the overall cap is quite low, meaning that as a percentage the amount paid by poorer people is much much higher. In my borough, a person living in a shack worth under £40,000 pays £800 a year, whereas a £200m mansion in the same borough pays only 4 times that.

Property tax and inheritance taxes are also often criticised, though they both fundamentally have the same effect. That is to discourage the accumulation of wealth, something which I don't see how it benefits society. So I actually think, as a whole, they are the fairest taxes.

Chuck Stone

Blisterman wrote: »

VAT is often said to be an unfair tax as it's not means tested, but so long as basic necessities are exempt, I don't see why that's a problem

For people who live in caves, travel on foot, and wash their clothes in rivers VAT is a fair tax. VAT disproportionately taxes those on lower incomes.

I'd largely agree with the rest of your post.

Peregrinus

Income tax is obviously related to ability to pay, but as pointed out it can tend to disincentivise economic activity.

Expenditure tax (like VAT) is related to ability to consume, but it tends to favour the wealthy, since they can to spend less of their income on consumption (and more on saving and investment, which does not attract expenditure tax).

Asset taxes (like rates on land) are also related to ability to pay - if you have large amounts of assets, you should be able to generate a return from them, and you shouldn’t
avoid your obligations to society by failing to generate a return, and so avoiding income tax. But they tend to have a narrow tax base, since a large proportion of society has no substantial assets.

I think’s it’s a mistake to assume that one form of tax must be fairer than the others. It seems to me that the fairest system will combine a number of different forms of tax, will tend to ensure that the burden is shared by all, regardless of their circumstances.

Victor

Peregrinus wrote: »

I think’s it’s a mistake to assume that one form of tax must be fairer than the others. It seems to me that the fairest system will combine a number of different forms of tax, will tend to ensure that the burden is shared by all, regardless of their circumstances.

Agreed. A range of taxes that covers all forms of income and all forms of wealth is the ideal. Load the tax in one particular direction and you merely discourage that area, to the benefit of others.

However, it needs to be kept somewhat simple.

http://www.businessdictionary.com/definition/taxation-principles.html
http://www.electronicflattax.com/?PageID=165

The Corinthian

Define 'fair'.

Victor

Victor wrote: »

Load the tax in one particular direction and you merely discourage that area, to the benefit of others.

Also, if you load the tax in one particular direction, it incentivises avoidance / evasion.

Blisterman

The Corinthian wrote: »

Define 'fair'.

That's the point of the thread! Discuss what you consider to be "fair".

p1akuw47h5r3it

I believe that a flat tax system is the most fair.

mitosis

Rates. Pay per sq metre of land you own/occupy.

The Corinthian

Blisterman wrote: »

That's the point of the thread! Discuss what you consider to be "fair".

That's the thing; before one can even consider a 'fair' strategy for taxation, one must decide upon what is a 'fair' principle of taxation.

Is it that the wealthy should carry a larger burden of the tax bill, for the sake of the poor? Or is that in reality 'unfair', after all, if a person has spent years studying, unpaid (even paying for the honour), instead of going out and getting a job straight after their LC, to get the qualifications necessary for a job that now pays a lot of money, should we punish them for their industry? Or reward indolence, as has been highlighted on many Dole related threads here?

Or at the other end of the scale, a purely meritocratic (or Darwinian) approach, would see everyone paying an equal share, or ideally paying for what they personally consume, regardless of income or wealth. Yet would this not leave some unable to afford basic state services?

Or somewhere in-between? And if so, where in-between?

Ultimately, you can't suggest a tax system until you've decided on what is 'fair' in this regard or not, and even with the small number of responses here, we can already see differences in opinion in this regard.

Peregrinus

Well, there are prior questions even to these, such as why any tax at all should be considered “fair”. This raises pretty fundamental questions - what do we mean by “property” or “ownership”, and what moral significance do we attach to it? (In what sense is the euro the state takes from me in tax “mine” to begin with?) What is the relationship of the individual to the community, and do I have any moral obligation at all to support (financially or otherwise) community endeavours and activities? If so, what is the limit of that obligation?

Victor

Peregrinus wrote: »

and do I have any moral obligation at all to support (financially or otherwise) community endeavours and activities?

I would say yes, because we all benefit from those endeavours and activities. Not necessarily the same endeavours and activities or to the same extent, but we all benefit (directly or indirectly) from, say, public health efforts.

If so, what is the limit of that obligation?

How long is a string?

The Corinthian

Victor wrote: »

I would say yes, because we all benefit from those endeavours and activities. Not necessarily the same endeavours and activities or to the same extent, but we all benefit (directly or indirectly) from, say, public health efforts.

We don't though; many of these endeavours do not benefit us at all (e.g. emigrant rights groups) and some actually do the opposite for some of us (e.g. the NWCI). Would charity not be a more meritocratic means to handle much of this funding?

How long is a string?

That's kind of the point here; many would feel that it's really not up to them to pay for someone else's string.

Victor

The two cases you mention may not benefit you, but there are others that do benefit you - I presume you availed of education here.

The Corinthian wrote: »

That's kind of the point here; many would feel that it's really not up to them to pay for someone else's string.

So you would like to have smallpox, provided it wasn't anyone else's smallpox?

Permabear

This post has been deleted.

Victor

Permabear wrote: »

This post had been deleted.

Slightly disingenuous. The Troika have told the government to stop calling PRSI and USC 'not-a-tax' and we should do the same.

At present, anyone earning over €32,800 is taxed at an effective marginal rate of 52 percent, when income tax, PRSI, and Universal Social Charge are factored together. Such a taxation arrangement obviously has motivational implications. Why work hard to get a promotion and earn an extra €10,000 a year, only to keep just €4,800 of that?

Because you get another €4,800?

The Corinthian

Victor wrote: »

The two cases you mention may not benefit you, but there are others that do benefit you - I presume you availed of education here.

First of all, I'm playing Devil's Advocate here - certainly I understand that redistribution of wealth for the greater good is necessary in any modern society, so I certainly would not be advocating social Darwinism.

But then again, I'm not doing that; just because I point out that your statement was false (we don't actually all benefit from those endeavours and activities), doesn't mean that I oppose all distribution to all endeavours and activities. That's a straw man, I'm afraid.

Personally, I have no desire to live in a Charles Dickens novel, where life is short and brutal for most. Neither, on the other hand, do I wish to live in some socialist paradise, where indolence is rewarded and you are forbidden to reap the fruits of your labour. But that does not mean that my middle ground between these two points is the same as yours.

Ultimately, this discussion is based upon a false premise; that we already agree upon what level of redistribution is 'fair'. If we did, we could well debate the most equitable and efficient way of collecting taxes.

But we don't; even if most people broadly agree, you'll find no shortage of threads even here where people disagree to what degree - some people are willing to pay for more of that string than others - which makes this discussion a bit impossible to have.

And that is the point I'm making.

The Corinthian

Victor wrote: »

Because you get another €4,800?

When faced with such dilemmas, you find most people won't bother. One of the things I noticed about people from the former DDR is how few of them had degrees (or got them only after reunification). There was little point in going to college, studying for years, just to leave and enter a job that paid at best marginally more than the local factory that you could work in the moment you finished school.

You see the same economics in Ireland today, with some on social welfare favouring making a little less, instead of having to do a 40+ hour week for maybe a few thousand more per year.

Victor

A (West) German friend commented on (East) German kids that were in a youth group where she was a leader - I'm not sure, but I suspect they were in the 8-12 year old group. She proposed to a bunch of them that they play a game. The children asked what the prize was. She said it was only a game and there was no prize. The children refused to play.

I'm not sure if that is an indictment of capitalism or communism.

Permabear

This post has been deleted.

The Corinthian

The Corinthian wrote: »

Ultimately, this discussion is based upon a false premise; that we already agree upon what level of redistribution is 'fair'. If we did, we could well debate the most equitable and efficient way of collecting taxes.

But we don't; even if most people broadly agree, you'll find no shortage of threads even here where people disagree to what degree - some people are willing to pay for more of that string than others - which makes this discussion a bit impossible to have.

I recall reading several years ago about an interesting experiment that showed that although people didn't precisely agree a definition of concepts like fairness, reasonableness or equity there was a broad norm to which they tended to gravitate.

I liked the experiment, and it would be a fascinating one to try to reproduce. It involved a game scenario, in which people were given roles in a society/economy (I think it was a village), where different people had varying levels of income and wealth, and had to engage and trade with others in the game. Some were rich, some poor, and many were in the middle.

At the outset, players could choose to set certain parameters that in effect determined how "left" or "right" the rules of the game would be. In essence, they could set tax rates, say whether healthcare and education would be publicly or privately funded, set welfare rates and levels and so on.

There were two versions of the game. In the first version, everybody knew what roles were available in the game and which role they would have, and then set the parameters. In the other version, everybody knew what roles were available, but were required to set the parameters and then find out what role they would have.

Not surprisingly perhaps, people behaved very differently in the two variants of the game. In the first, people tended to set the parameters to suit their game role, with some people setting according to their real-life beliefs or circumstances. But in the second, people tended to set the parameters in a way that "hedged their bets" in case they drew a less fortunate role in the game. People were hugely influenced by the role they would play (or thought/feared they might play), and tended to gravitate towards what we would call centre or centre-left settings when not knowing their game role. One of the views the researchers took from that was that there is a general notion of fairness that people have, but that it can only be read accurately in a blind test - otherwise their view of fairness will depend on what suits them personally.

This was years ago, and I read it in an actual book so I don't have a link. And maybe there have been many other experiments in the years since showing contrary findings. Perhaps the research is so well known that you've already heard of it. But in any event I thought the experiment was an interesting way of looking at the problem.

Peregrinus

The Corinthian wrote: »

When faced with such dilemmas, you find most people won't bother.

Two thoughts:

First, do we actually find this? If your thesis is correct, when we look at income distribution figures, we should see an otherwise unexplained drop in the numbers of (single, childless) taxpayers with incomes just over €32,800 as compared with those with incomes just under that. And, over time, we should see (single, childless) taxpayers tending to progress upwards in salary (due to career progression) until they reach €32,800, and for progression then to slow or stop.

Do we in fact see this? Or are you simply assuming that we do?

Secondly - and this is the bigger point - I think you’ve moved away a bit from discussing fairness. If the only criterion of fairness was that people were incentivized to work more by allowing them to keep their earnings, then the fairest tax system would be no tax at all. But, of course, incentivisation =/= fairness. Letting people keep the rewards of their labours is a Good Thing, both for them and for the community at large, but it’s not the only Good Thing. Having sustainably solvent public finances is a Good Thing, as is having roads, schools, hospitals, theatres, museums, parks and other public goods, as is caring for the weak and disadvantaged. The problem is that these Good Things can often be in tension, and if “fairness” means anything, it means finding the right balance between them.

It’s not a given that a tax system which changes the income level at which people decide that they prefer extra leisure to extra income (assuming it does change it) is “unfair”. In fact, that seems to me to have relatively little to do with the idea of fairness.

Blisterman

Permabear wrote: »

This post had been deleted.

A point you're missing is that it takes a lot more effort for a person to go from earning 15,000 to 20,000 than for a person earning 60,000 to 65,000.

And additionally, the 5,000 will generally mean more in terms of improving standard of living to the former person than the latter. Hence why it makes more sense to tax the latter by a greater amount, as you're penalising them to a lesser degree.

The Corinthian

Peregrinus wrote: »

First, do we actually find this? If your thesis is correct, when we look at income distribution figures, we should see an otherwise unexplained drop in the numbers of (single, childless) taxpayers with incomes just over €32,800 as compared with those with incomes just under that. And, over time, we should see (single, childless) taxpayers tending to progress upwards in salary (due to career progression) until they reach €32,800, and for progression then to slow or stop.

Not quite as simple as that. Were someone to essentially reach their earning zenith at, say, €40k, then we probably would see that behaviour. However, there's technically no 'upward' limit on salary, so that marginal increase could well be seen as a stepping stone to €50k or €60k.

Nonetheless, you do actually statistically see drop offs at the tax bands, but it's difficult to say if it is as a result of the substitution effect or some other factor - such as tax avoidance practices.

You certainly do see this effect though where the choice is between social welfare benefits for one or two short meetings per month, versus marginally more money for working full time.

Secondly - and this is the bigger point - I think you’ve moved away a bit from discussing fairness. If the only criterion of fairness was that people were incentivized to work more by allowing them to keep their earnings, then the fairest tax system would be no tax at all. But, of course, incentivisation =/= fairness.

No one suggested that incentivization is the same as fairness. It's actually only an term used to describe behaviour in labour economics.

The question is over the taking of wealth (and how much) from one person's labour to pay for another. That certainly does beg the question of whether it is 'fair' or not.

The problem is that these Good Things can often be in tension, and if “fairness” means anything, it means finding the right balance between them.

Not how the original discussion was framed though. It was framed with the assumption that an apparently unspoken model for redistribution of wealth was already agreed upon, and this discussion would instead concentrate on the best way to collect taxes for this.

It's not agreed though, so it makes the subsequent discussion moot.

The Corinthian

Blisterman wrote: »

A point you're missing is that it takes a lot more effort for a person to go from earning 15,000 to 20,000 than for a person earning 60,000 to 65,000.

Not entirely true.

Often the reason that someone is in the 60k rather than 20k salary bracket is because of other factors. Education is one example; where that person may have spent years, and money, getting qualifications, when they could have gone out and started earning straight away. For an entrepreneur who chooses to give themselves a raise, they went through years of risk at the start of their career, perhaps also not paying themselves much, if anything, to keep their venture afloat, or suffering several failed ventures before hitting on a successful one.

In both cases, much of the effort of going from 60k to 65k is not immediately apparent, because it was carried out long ago. But it's there.

Peregrinus

The Corinthian wrote: »

. . . Not how the original discussion was framed though. It was framed with the assumption that an apparently unspoken model for redistribution of wealth was already agreed upon, and this discussion would instead concentrate on the best way to collect taxes for this.

It's not agreed though, so it makes the subsequent discussion moot.

I take your point, though I disagree that the “subsequent discussion is moot”.

As I see it, there are two related but nevertheless distinct ethical questions around tax.

1. How much tax should we be raising to devote to common goods and social solidarity? What is the proper share of national resources to be applied to these purposes? (And concerns about disincentivising economic activity are obviously relevant here.)

2. Given that an amount of tax is to be raised, what is a fair way of raising it?

You do need to answer both questions in order to have a fully-developed tax policy. Nevertheless, you can consider the second question (indeed, either question) on its own. Assuming the appropriate amount of tax to be raised is going to be some amount greater than nil, you can usefully consider fair mechanisms for raising tax (Capital taxes? Income Taxes? Expenditure taxes? Poll taxes?) without necessarily having identified the sum to be raised. And I think that’s what the OP is directed at.

(Disincentivisation arguments are relevant here, too. For example you might feel that an expenditure tax disincentivises consumption and incentivizes saving (when compared with raising the same amount through income taxes) while capital taxes would tend to work the other way around. And, depending on the prevailing economic circumstances, you might want to incentivize consumption, or to incentivize saving, so what you think would be optimal might vary according to where we are in the economic cycle.)

Blisterman

The Corinthian wrote: »

Not entirely true.

Often the reason that someone is in the 60k rather than 20k salary bracket is because of other factors. Education is one example; where that person may have spent years, and money, getting qualifications, when they could have gone out and started earning straight away. For an entrepreneur who chooses to give themselves a raise, they went through years of risk at the start of their career, perhaps also not paying themselves much, if anything, to keep their venture afloat, or suffering several failed ventures before hitting on a successful one.

In both cases, much of the effort of going from 60k to 65k is not immediately apparent, because it was carried out long ago. But it's there.

Yes, but there's not always a correlation between effort and salary. There's a huge amount of luck involved. Somebody may have spent years getting qualifications only for circumstances to change, and the only job available down the line pays 15k. Whereas sombody else, through sheer chance may have found their skills highly in demand.

The point I was making anyway is that, regardless of what effort has previously been invested, somebody on a tenner an hour will need to work 500 extra hours to earn 5k, whereas somebody on a hundred euro an hour would only need to work 50 extra hours for the same amount.

Valmont

Given that 'tax' is just a fluffy synonym for stealing, the idea that there could be a 'fair' tax is bizarre. It's all well and good scientifically discussing how to pluck the optimal number of feathers from the goose but as soon as you bring the word 'fair' into the discussion we have to ask: fair for whom? Politicians and their dependants, of course. But what about the hard-working victims? The only 'fair' option here is to leave them alone and let them keep what they have worked for.

The act of taking a person's property against their will and under the threat of violence is theft, and any attempt to argue otherwise relies on faulty logic, double-standards, and a frightening rejection of the function of nouns. If you accept the premise that stealing is fair then I really can't see the point in discussing the fairest way to steal. I feel it's a discussion more suited to the world of Tony Soprano than to our supposedly free society.

The Corinthian

Peregrinus wrote: »

You do need to answer both questions in order to have a fully-developed tax policy. Nevertheless, you can consider the second question (indeed, either question) on its own. Assuming the appropriate amount of tax to be raised is going to be some amount greater than nil, you can usefully consider fair mechanisms for raising tax (Capital taxes? Income Taxes? Expenditure taxes? Poll taxes?) without necessarily having identified the sum to be raised. And I think that’s what the OP is directed at.

I see your point, but unless the first question is agreed upon, it becomes impossible to discuss the second in any but the most basic and general terms.

For example, I would probably not use means tested taxation for much other than income tax and this is principally because I do not agree with you on your definition of fairness.

Simultaneously, the question of what this money is spent on is relevant. There are many services that are in need of further funding out there, but there are many others that should frankly be cut or abolished altogether, which further affects how tax needs to be collected, because it may well mean that less tax needs to be collected.

So we can talk about the best way to handle taxation to an extent, but without agreement on the first question, we're not going to get far.

Blisterman wrote: »

Yes, but there's not always a correlation between effort and salary. There's a huge amount of luck involved.

I know there is - I specifically mentioned risk. And like it or not risk has a value.

The point I was making anyway is that, regardless of what effort has previously been invested, somebody on a tenner an hour will need to work 500 extra hours to earn 5k, whereas somebody on a hundred euro an hour would only need to work 50 extra hours for the same amount.

Yet you are discounting the unpaid hours studying that brought them to a point where they could charge 100 p.hr. Or the risk of ending up earning nothing p.hr.

The Corinthian

Valmont wrote: »

The act of taking a person's property against their will and under the threat of violence is theft, and any attempt to argue otherwise relies on faulty logic, double-standards, and a frightening rejection of the function of nouns. If you accept the premise that stealing is fair then I really can't see the point in discussing the fairest way to steal. I feel it's a discussion more suited to the world of Tony Soprano than to our supposedly free society.

Well no, tax isn't always stealing. The Hobsian contract is one whereby the citizen freely sacrifices rights and property to the state, in return for protection and services. In a democracy, this means a sufficient democracy has agreed to do this, so that minority dissenters may be forced to go with the flow, but that's life - even if they went off and set up their own state, they'll have their own dissenters before long.

So it's not necessary against their will and under the threat of violence, in many counties it's seen as a fair trade, decided upon through democratic consultation with the citizens.

Where I'd agree with you is where the citizen no longer freely sacrifices, because the options to democratically dissent are lost. As Western democracies become increasingly more technocratic, you're seeing more and more of this, and in turn a loss of community spirit.

The result of this can become a modern interpretation of Atlas Shrugged, which we commonly call the brain drain. I've known more than a few who have left Ireland because of this; because of the introduction of certain fiscal and social laws that have meant that moving abroad became attractive. Actually, I'd be one of those.

Victor

Valmont wrote: »

Given that 'tax' is just a fluffy synonym for stealing,

Some would argue that property is theft or the proceeds of past theft.

The act of taking a person's property against their will and under the threat of violence is theft, and any attempt to argue otherwise relies on faulty logic, double-standards, and a frightening rejection of the function of nouns. If you accept the premise that stealing is fair then I really can't see the point in discussing the fairest way to steal. I feel it's a discussion more suited to the world of Tony Soprano than to our supposedly free society.

Then how should street lighting be paid for? I don't think anyone can argue that it doesn't benefit them (directly or indirectly). If they don't contribute to the cost of street lighting, then surely they are the thieves?