It is not rare today to hear calls for the wealthy to ‘pay their fair share’ in the context of taxation. But is it appropriate to conceive of a ‘fair share’ only in terms of government revenue?
Surely, if someone has become wealthy through legitimate business activities – having reached a point in life where they pay a notably larger sum in taxes than they receive back in public benefits – it usually follows that they did in fact create value for the markets they serve. To ignore this value-add to the community and focus only on government revenue seems to amount to a purposeful misunderstanding of the market economy.
A few days ago, an Avaaz petition appeared in my inbox. A ticker on the page shows in real time who is signing the petition. For the few minutes I watched it, only Western Europeans and one or two people from wealthy East Asian states were putting their names to the campaign.
The petition calls on the G20 countries to ‘tax the mega-rich now!’ because of ‘spiralling inequality’ around the world. ‘It’s time the ultra-rich pay what they owe,’ the petition concludes.
To prove its point, the campaign notes that whereas Elon Musk’s true tax rate is around 3%, a Ugandan rice trader pays 40%. This is unjust, because whereas the rice trader earns $80 per month, ‘Musk is worth US$180 BILLION’.
Their solution to this injustice is not to lower the taxes on the rice trader and allow her to keep what she earns, but to raise the taxes on Musk. The campaigners believe that ‘there is one clear way to address this gap – we must Tax the Rich’.
It seems clear that so-called ‘inequality’, rather than actual poverty, is the major concern of the Western left.
That the rice trader is paying 40% on the measly sums she earns to an autocratic government is no problem whatsoever. It is that wealthy people elsewhere, who are presumably innocent in the plight of the rice trader, are not paying more.
The petition is therefore perversely concerned with the notion that those who have generated wealth must pay their ‘fair share’, and the medium through which this is to be done is taxes paid to government.
The market economy
The market economy works when two requirements are met, both related to the conduct of government. The first requirement is that government must not conceive of itself as a parental authority. It is not there to care for society and ensure ideal outcomes. It must, as a default rule, leave people alone.
The second requirement – the exception to the default rule – is that government must be effective and relentless in its combating of rights-violating crimes and coercion. This is the service government renders to society – not that of parent, but as the provider of a service that seeks to minimise or eliminate coercion.
When government has effectively barred coercion, and leaves society alone to pursue its own welfare and interests, something wonderful tends to happen. In trying to advance their own self-interests, people are productive and create value for those around them. If they could, many of them would use violence to get ahead, but with this not being an easy option in a liberal order, they must do things that necessarily benefit their fellows.
In a liberal order, government enforces the framework for peaceful people to engage with and create value for one another. And through the courts, government also enforces those agreements that members of society come to voluntarily.
The only way, in a market economy, of becoming filthy rich and sustaining that wealth (in the case of trust fund babies), is to identify what society needs or wants – what it demands – and to supply that thing.
When, after a hard day’s work, one buys a much-anticipated beer or Coca-Cola, one does so because one values the beer or Coke more than one values the price the retailer has put on it. This is a benefit: a win. By one’s action of purchasing the product, one has signalled to the market that one has gained more than one has paid. (Had one placed more value on the money, one would not have paid the price!)
And it is the creators, distributors, and retailers of these products that are responsible for this benefit. They have added value to one’s life. And one thanks them by paying the price they charge.
This, in a nutshell, is the market economy.
Taxes and ‘fair shares’
Most wealthy people already pay their ‘fair share’ to society. By creating value for consumers, those entrepreneurs and businesspeople are rewarded by those consumers. Just because government feels left out, does not mean a fair share is not being paid, entirely based on voluntary exchange.
If one takes the liberal social contract as the basis or grundnorm of modern government – which, it is submitted, it is – taxes are meant to finance the government’s provision of services in line with the terms of this contract.
Over time, this notion has become perverted into the belief that government may endlessly expand its mandate and concomitantly raise taxes, which the public is simply expected to pay. The latest fad is that government (as opposed to other social formations) must ‘combat’ global climate change, and as the Avaaz petition notes, raising global wealth taxes could help in this fight.
It is, in other words, not necessarily that the wealthy are somehow unpatriotic or selfish, but that they cannot keep up with government’s self-expanding mandate. If government takes it upon itself to secure to every single person a life partner – something that no doubt would cost trillions – it will once more be the ostensible case that the wealthy are not paying ‘enough’ in taxes to allow government to do so.
The greater government’s mandate becomes, the greater the ‘share’ the wealthy must pay for it to be ‘fair’, according to this interpretation.
Low taxes
When the social contract is not adhered to (John Locke tells us), the institutions of government become illegitimate.
Applied to taxation, the best way for government to adhere to the social contract is for taxes to be as low and as non-distortive as possible, and fund government only to the extent necessary for it to fulfil its core mandate. It follows that the lower taxes are, the less distortive of market signals – being the forces that arise out of the voluntary engagement between market participants (everyone) – they are.
In the case of a Ugandan rice farmer earning a measly sum, any taxation is highly distortive, and in such cases the correct thing might be a complete exemption from direct taxation. For most others, however, lower taxes are the answer. Higher taxes, perhaps except in the case of high-earning politicians and civil servants, are in my view almost never the answer.
Avoid fallacious thinking
One cannot measure the contribution of the wealthy to society by looking only at what they hand over to the taxman. To do this would be to commit the fallacy of thinking only government contributes to social improvement, when that is not the case.
Government’s contribution to society is the exception, not the rule. In fact, governments were established not to be totalitarian vehicles for ‘goodness’ in society, but to fill the few, small gaps that markets cannot appropriately fill. This is the protection of liberty and property that everyone is entitled to by birth, and not by discretion or wealth.
It is society and commerce that contribute by far the most to social improvement. And as such, we measure the contribution of the wealthy to society by looking at how society responds to their conduct. Coca-Cola is an international behemoth, and if it paid no taxes whatsoever it would likely still be paying its ‘fair share’ by bringing contentedness to billions around the world through the sale and enjoyment of its products.
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