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The morality of taxation

By David Leyonhjelm - posted Wednesday, 30 May 2018


This week I had planned to ask the nice people at the AFR to accompany my column with a chart showing the income tax paid under current law, income tax paid from July if the Coalition's budget plan is passed, and income tax paid from July next year if Labor's additional tax cut is passed.

However, it turns out that the differences between these amounts are so miniscule you would need a magnifying glass to identify them. So I'll tell you the numbers instead.

For instance, if your income is $120,000, right now you have to pay $34,432 in income tax including Medicare levy. Under the Coalition's budget plan you'll pay $34,217 next year, and under Labor's plan for the following year you'll pay $34,157.

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But the story here is not just the paltry difference between the plans of the major parties. The story is also how much income tax we expect high income earners to pay.

Do those earning $120,000 receive $34,000 worth of value from the federal government? Are the subsidies for child care, schooling, healthcare and opera tickets worth that much? Or do they receive $34,000 worth of roads, defence force services, courts and public broadcasting?

The answer is no; the value someone earning $120,000 gets from the federal government is a tiny fraction of the tax paid. This is a violation of the benefit principle of taxation; that your tax should reflect the value you get from government.

The principle is based on the idea that government should provide services that a taxpayer wants but cannot obtain from the private sector. It is the moral foundation for the formation of government and for taxation, just as voluntary payment for services is the moral underpinning for the private sector.

The tax system that would best reflect the benefit principle of taxation would be a poll tax, where each person pays the same dollar amount of tax to reflect the fact that we all receive the same value from government services such as national defence and the justice system. A proportional tax system, where someone with double the income pays double the tax, violates the benefit principle because that person does not get double the value from government. And a progressive tax system, where someone with double the income pays more than double the tax, is a further violation.

There is pragmatism in taxing richer people more - after all, that's where the money is - and poll taxes are impractical. But let's not pretend there is anything moral about pursuing the pragmatic course. Taking $34,000 from someone earning $120,000 and providing relatively few services in return satisfies no moral principle.

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The 'ability to pay principle' is no principle at all. It is a euphemism for 'take what you can get' and 'might is right'.

Some claim that high taxation of the rich is moral as it allows redistribution to the poor. But the moral case for forced redistribution is shaky. Robin Hood and Ned Kelly, who robbed the rich and gave to the poor, are popular figures because of the injustice of their times. But modern Australia is a fundamentally just place, where the rule of law reigns, wealth is earned, and destitution is rare.

The high taxation of the rich is not justified by the willingness of some rich people to pay high taxes either, because these people are free to donate to causes they believe in, whereas tax is compulsory and applies to all.

Quite a lot of what is taken for redistributive purposes is lost on administration costs, while much more goes to those on middle incomes instead of the poorest. And taking hard-earned money from people reduces their donations to charities, whose services are often more personal, tailored and effective than state-provided cash.

Libertarians like me are not opposed to welfare for citizens in genuine need, but we object to taxes to fund middle class welfare and the motley array of government spending programs that serve no legitimate purpose.

If we cut such spending we could have a $40,000 tax free threshold with a 20 per cent flat tax rate thereafter. For someone earning $120,000 this would mean they paid $16,000 of income tax, still more than the value they receive from government but less than half the tax burden imposed by the major parties. It's not as if the government is spending our money so well that we should be paying any more.

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This article was first published in the Australian Financial Review.



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About the Author

David Leyonhjelm is the Liberal Democrat Senator for NSW.

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