FT Taxing Kids   Richard Murphy’s blog on tax, accounting and political economy

J Aldred on the comfy delusions of trickle down tax dodging

Licence to be Bad: How Economics Corrupted Us

Aldred, Jonathan. Licence to be Bad – Penguin Books

The popular presumption that income tax cuts must lead to more work and productive economic activity turns out to have little basis in either common sense or economic theory. There are deeper difficulties with Osborne’s argument, difficulties not widely known even among economists. It is often assumed that if the top 1 per cent are incentivized by income tax cuts to earn more, those higher earnings reflect an increase in productive economic activity. In other words, the pie gets bigger. But some economists (including the influential Thomas Piketty) have shown this is not true for CEOs and other top corporate managers following the tax cuts in the 1980s. Instead, they essentially funded their own pay rises by paying shareholders less – which led in turn to lower dividend tax revenue for the government. Allowing for this and related effects – the rich redistributing the pie rather than making it bigger – Piketty and colleagues have argued that the revenue-maximizing top income tax rate may be as high as 83 per cent. 37 The income tax cuts for the rich over the past forty years were originally justified by economic arguments:

Laffer’s rhetoric was seized upon by politicians. But to economists his ideas were both familiar and trivial. Modern economics provides neither theory nor evidence proving the merit of these tax cuts. Both are ambiguous. Although politicians can ignore this truth for a while, it suggests that widespread opposition to higher taxes on the rich is ultimately based on reasons beyond economics. When the top UK income tax rate was raised to 50 per cent in 2009 (until Osborne cut it to 45 per cent four years later) the musicals composer Andrew Lloyd Webber, one of Britain’s wealthiest people, responded bluntly: ‘the last thing we need is a Somali pirate-style raid on the few wealth creators who still dare to navigate Britain’s gale-force waters’. 38 In the US Stephen Schwarzman, CEO of private equity firm Blackstone, likened proposals to remove a specialized tax exemption (from which he greatly benefited) to the German invasion of Poland.

While we may scoff at these whines from the super-rich, most people unthinkingly accept the fundamental idea behind them: that income tax is a kind of theft, taking income which is rightfully owned by the person who earned it. It follows that tax is at best a necessary evil, and so should be minimized as far as possible. On these grounds, the 83 per cent top tax rate discussed by Piketty is unacceptable. There is an entire cultural ecosystem which has evolved around tax-as-theft, recognizable today in politicians’ talk about ‘spending taxpayers’ money’, or campaigners celebrating ‘tax freedom day’. It is not just populism. Tax economists, accountants and lawyers refer to the ‘tax burden’ – and if you think ‘tax burden’ is a neutral label, then for the sake of consistency you should be happy for the term ‘public spending’ to be replaced with ‘public benefits’. But the idea that you somehow own your pre-tax income, while obvious, is false. To begin with, you could never have ownership rights prior to, or independent from, taxation. Ownership is a legal right. Laws require various institutions, including police and a legal system, to function. These institutions are financed through taxation. The tax and the ownership rights are effectively created simultaneously. We cannot have one without the other.

Perhaps we overlook this inherent interdependency between tax and property rights because as individuals we can fantasize about escaping from it: clearly, an individual could receive all their pre-tax income and have enforceable ownership rights over it – providing everyone else pays the tax to maintain the system to enforce matters such as intellectual property, formal markets such as stock exchanges, and jurisdiction across national borders. Andrew Lloyd Webber’s wealth depends on government decisions about the length of copyright on the music he wrote. In sum, it is impossible to isolate what is ‘yours’ from what is made possible, or influenced, by the role of government. 40 Talk of taxation as theft turns out to be another variation on the egotistical tendency discussed earlier – to see my success in splendid isolation, ignoring the contribution of past generations, current colleagues and government. Undervaluing the role of government leads to the belief that if you are smart and hard-working, the high taxes you endure, paying for often wasteful government, are not a good deal. You would be better off in a minimal-state, low-tax society.

One reply to this challenge points to the evidence on the rich leaving their home country to move to a lower tax jurisdiction: in fact, very few of them do. 41 Here is a more ambitious reply from Warren Buffett: Imagine there are two identical twins in the womb … And the genie says to them, ‘One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be born in the United States?’ … The people who say, ‘I did it all myself’ … believe me, they’d bid more to be in the United States than in Bangladesh. …” 

source: J Aldred Licence To Be Bad Penguin Books Ltd. Kindle Edition. (p. 234).   6/2021  The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax  by Jesse Eisinger, Jeff Ernsthausen , Paul Kiel

…”The results are stark. According to Forbes, those 25 people saw their worth rise a collective $401 billion from 2014 to 2018. They paid a total of $13.6 billion in federal income taxes in those five years, the IRS data shows. That’s a staggering sum, but it amounts to a true tax rate of only 3.4%.

It’s a completely different picture for middle-class Americans, for example, wage earners in their early 40s who have amassed a typical amount of wealth for people their age. From 2014 to 2018, such households saw their net worth expand by about $65,000 after taxes on average, mostly due to the rise in value of their homes. But because the vast bulk of their earnings were salaries, their tax bills were almost as much, nearly $62,000, over that five-year period.”

see also > INEQUALITY