Tuesday 1 May 2012 7:19 pm

People calling for an equal tax burden ignore how wealth is generated

IN A recent article, Times columnist Philip Collins implied that an individual’s income is really the collective property of all citizens. He did not use those words, of course. He is a former speech writer for Tony Blair and a political moderate, not a communist. But he said something that makes sense only if all income is collective. Specifically, he said that “abolishing the 50 per cent rate of income tax risked the government’s claim that the burden of austerity has been shared equally”. This is peculiar. At 45 per cent, top rate taxpayers will still contribute far more to the government’s tax revenues than lower earners. You may think they should contribute even more. But then it is perverse to complain that they are not bearing an equal share of the burden. To achieve an equal contribution, the tax rate on incomes above £150,000 would need to be zero. Collins knows what “equal” means. So we must look for an idea that could explain his apparently bizarre use of this simple word. I can think of only one. To understand it, suppose you went to dinner with someone, agreeing to “share the bill equally”. It comes to £100. What should each of you pay? £50 is the obvious answer. But it could be wrong. Suppose the two of you had just found a stash of cash, perhaps dropped from Ben Bernanke’s stimulating helicopter. You quickly stuffed it in your pockets, agreeing to even up later. But before doing so, you went for that £100 dinner. Because you need to even up your shares of the money you found, you should split the bill so that, after paying, you both have the same amount left over. For example, if one now has £50 more, he should pay £75 and the other £25. This must be how Collins sees things generally. Someone who earns £1m is like someone who, along with the rest of us, has happened upon some money but, unlike the rest of us, has managed to stuff a lot of it into his pockets. A 45 per cent tax does not even up his contribution to government spending because he still ends up with £550,000 of our collective money. Someone who earns £50,000 and pays £15,000 in tax makes a bigger contribution because he ends up with only £35,000. Collins is not unusual. Such thinking is implicit in the common idea that tax cuts must be “funded”. On the collective view, your post-tax income is simply another part of government spending. Cutting taxes is a welfare payment to those it benefits, which must be paid for. The collective view of incomes also explains why fairness is always taken to support a higher top rate of tax, no matter how high it already is. Those who think that equality requires progressive taxation are not confused about equality. They are confused about how incomes are generated. Jamie Whyte is a senior fellow of the Cobden Centre.

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