Janan Ganesh, in his FT column (£) this week, suggests that there may be something “morally dubious” about a tax rate in excess of 50p. He doesn’t say 50p and no more, because he isn’t endorsing Labour’s proposed increase either, but it’s an important idea: that there may be a moral limit to tax.
The philosophical arguments around this aren’t straightforward. You probably knew that I was going to say that. Incidentally, the word ‘moral’ itself may be badly used in this setting, some philosophers would argue, but I’m going to stick with it if only because it broadly denotes that we’re talking about a justification rooted in values rather than about pure economic or business arguments.
The quick answer to the moral question might be that any tax that has been mandated by a proper democratic process is moral, so let’s just get on with the politics. Yet there are many things that would be immoral even if they were mandated by a proper democratic process. We might say that proper democratic process makes it very difficult to mandate things that are immoral, because of the scrutiny that the process provides, but that’s a question about likelihood. As a matter of logic, proper democratic process doesn’t guarantee moral taxes.
The public good(s)
Making tax moral also requires more than an economics-driven argument about paying for public goods and services. Yes, the supply of public goods and services may be sub-optimal if left entirely to the private market, but why do we care that everyone should have those goods anyway, and even if we agree to providing them in common, then we can pay for them via user charges rather than by tax. Especially as people consume different amounts of public goods, user charges may even be preferable to tax in terms of efficacy.
But wait: the problem is that in something like healthcare user charges will produce perverse outcomes, e.g. people foregoing health interventions to avoid charges and hence infecting others. While this might suggest that pure pay-as-you-go user charging is problematic, this is a practical rather than moral argument, not least because we can conceivably deal with the disease-spreading, cost-averse patient by social or regulatory pressure rather than by tax. Critically, even if we can’t do that, we still haven’t proven the case for tax. Ultimately, we can deal with the objection to pay-as-you-go user charging by using monthly or annual user charges or indeed by using insurance. What’s unique about tax is that the amount we pay differs not according to our usage of public goods and services but by something else.
What might that be? For what it’s worth, while I’m moving on from the economics-driven argument, there is more life in it. There are other economics-driven arguments for tax that can be tried, e.g. tax leads to a more productive distribution of wages, and indeed there are some more broadly utilitarian ones too, e.g. tax = less inequality = less other bad things. But all these consequences-based arguments for tax eventually collapse. Any thorough-going utilitarians are very welcome to use the comments section below to have a go.
The broadest shoulders
In the richer philosophical territory beyond utilitarianism, there are two possible answers, I think, to why tax might be moral: the ‘broadest shoulders’ argument; and the ‘families are unfair’ argument.
The broadest shoulders argument reckons that people with the highest means have the greatest responsibility to fund the costs of public provision. The broadly shouldered crowd – I’m thinking of tax fans like Bill Gates and Warren Buffett – might agree with that, so the morality of tax flows from their consent. If they don’t agree, then they might be making a mistake; tax is moral anyway because they owe this responsibility, whether they like it or not.
There is a problem here. Just referring to broad shoulders, as frankly some politicians will do, isn’t enough to make tax moral, or rather it’s too much. Ganesh is on to something here. This argument for tax suggests that we accept that there is a general obligation to be a ‘good samaritan’, to give up our income, which derives from our time and effort, in order to help others. It might feel good to do that, and it might be admirable when it’s done, but suggesting that there is a general obligation to behave in this way is going too far, i.e. if we accept this argument, then there is no limit to tax: the tax rate should be 100p for anyone who is, for example, beyond need until everyone else has reached the same point.
Now we might actually believe that this is the case, but that shoving this philosophical proposition into our tax system will curtail incentives to work or lead to massive avoidance, and so turn out to be self-defeating. However, my sense – to put it mildly – is that relying on a moral argument for tax which might take us all the way to a 100p tax rate were it not for the Laffler curve is a bit of a problem.
Families are unfair
Fortunately, there is another and better moral argument for tax: families are unfair. Due to a mixture of genes and upbringing, some people end up with talents and abilities that provide them with much higher earning power than others. They haven’t done anything to deserve those talents and abilities, they have them as a matter of their genes and upbringing, which in turn are a matter of chance, but they count for a lot, easily enough for the blessed people to secure their basic needs and a lot more besides. Others are not so lucky.
In fact there is more here than unfairness: families are unfair plus the earning power provided by family-derived talents and abilities has little to do with right or wrong. To put it another way, there is nothing inherently better about the talents and abilities of football players compared to chess players, but football players have much higher earning power than chess players. In sum, families are unfair, and society is a bit random. That’s the reason why those who have been blessed with high-earning talents and abilities should pay taxes.
This argument is powerful, and it has some limits built into it, i.e. talents and abilities – or genes and upbringing, to strip it back a level – don’t account for all of a person’s earning power. To take an obvious example, a person’s level of effort counts for something, potentially a lot. Hence, by this argument, the tax rate can never be 100p. Equally, family-derived talents and abilities do count for something, so neither can the tax rate be 0p. The critical question is working out how much do talents and abilities count for, then expressing that in the tax system.
Now this is by no means an uncontroversial argument in favour of tax, either within philosophical terms or more widely. But it has some decent pedigree, the ability to withstand some obvious objections and a good fit with many of our intuitions about fairness.
The other interesting thing about the argument is that it suggests the moral tax rate – or perhaps more accurately the proper level of variation between tax rates, the progressivity written into the tax system – might vary over time and between different societies, i.e. it’s arguable that in a society with very high social mobility, upwards as well as downwards, where therefore family-derived talents and abilities matter for less, the progressivity should be less than in a society with low social mobility.
Equally, in a society with very little diversity or complexity in its labour market, i.e. where income depends on some pretty basic skills and most people do the same sort of work, there too the progressivity of the tax system should be less than in a society with a more diverse or complex labour market, where therefore family-derived talents and abilities are going to count for more.
So what tax rate does our moral compass point to?
Where does that leave us then? Is a more progressive system of tax with a 50p top rate more right for us in the UK right now than 45p? Is 55p morally dubious as Ganesh suggests? Working out a precise number for the top rate of tax from the argument I’ve made is a mug’s game, I reckon, not least because the total taxes needed in any society will depend on the prices of the goods and services that we want to buy in common, plus the efficiency of the state and the market each in providing these. In any case, philosophy probably reaches its limits when it approaches the design of tax thresholds, reliefs and bands.
Nevertheless the argument I’ve sketched might help in considering the case for changing the level of progressivity in the tax system. To make its case for increasing the top rate of tax, it might be that Labour has to prove that social mobility is declining and/or that the labour market is providing more varied outcomes than before, i.e. family-derived talents and abilities matter for more and so tax needs to do more work in correcting the unfairness of genes and upbringing.
To resist the increase, or more ambitiously to get the top tax rate down to 40p, it might be that the counter-argument has to be that social mobility is improving and/or that the labour market is providing less varied outcomes than before, i.e. family-derived talents and abilities matter for less, so the tax system can ease up a bit.
So here in the end we are back to economics, or more broadly to evidence if you like, but you can’t go straight there – you have to do a decent bit of philosophy before the social sciences come in to complete the argument.