07 October 2007

Tax and Democracy

chris dillow is ready to give up on democracy, based on observations that cutting inheritance tax, paid only by the rich, is more popular electorally than cutting income tax, which is paid by the poor.

I'm not here to cheer for democracy, but his explanation, that the low expectations of the poor lead them to accept being victimised by the tax system, does not seem to me the most likely one.

For me, the key fact is that PAYE income tax is the ultimate stealth tax. If someone pays £100,000 in tax on inheriting a £500,000 house, that is seen as a huge blow, but I have never heard anyone ask what difference it would make to someone on £20,000 a year if they weren't paying £3,500 of it in income tax (and, while we're at it, another £1,500 or so in VAT).

Evidence for this is articles like the one I picked on in 2005 , which claimed that transport was the average household's biggest expense, ignoring the fact that taxation added up to as much as transport, food and housing put together.

Further, it is still widely believed that higher taxes help the poor. Helping the poor by cutting income taxes would generally be looked at as an absurdity. The same goes for inheritance tax, of course, but that is more likely to be seen, probably correctly, as a fringe issue. Therefore cutting inheritance tax wins votes of those who pay it, but does not lose many from the rest.

The fact is that when government took 10-20% of the economy, it could be funded mainly by taxing the rich. As the figure has grown to 40%, the tax burden has fallen far more heavily on the poor, despite the widening of the franchise. To me, the obvious explanation is that government has for a long time been extracting as much or nearly as much from the rich as it practically can. If that is correct, then the only way to achieve genuinely redistributive taxation is to drastically shrink the state.

If I'm right (and I admit I'm asserting a few controversial things here without much in the way of evidence), then the problem isn't any fundamental conflict between democracy and equality as chris fears, but a single mistaken view which might possibly be reversed.

Help the poor - cut taxes.

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