A Fair Tax System

Is Paying More Tax Than Others Any Fairer?(Image © agrilifetoday 2013)

As discussion begins in the media about the rich paying their fair share of taxes once more I am once more interested in the definition of that fair share. I’m not talking here about the actions of corporations who exploit loopholes in the complex tax laws to reduce their tax burden. I am talking about the peculiarly British problem of ensuring that anyone who is successful gets portrayed as having the easy life. The concept that one should be punished for being successful.

There are various degrees of being fair. On the (slightly flawed) assumption (there is actually an inverse correlation to tax paid to services used) that everyone uses tax funded services to the same level, at its simplest one might say that fair would be to all pay the same amount of tax. So everyone pays a flat fee of say £20k per year. Fair then in that we all pay the same. Socially unfair though in that if one earns £100k one has £80k left to enjoy life but if that person only earns £20k per year, they are almost in debt before they are even living. Clearly that’s not going to work.  Thus this proposal is actually unfair the other way although anyone with any sort of social morality would surely discount this element! 

So, maybe it’s fairer if we all pay the same proportion of our income as tax. That seems to work, with a few allowances so that those on extremely low levels of income are offered an increased exemption we are left with all taxpayers having the same proportion of income left. At a flat rate of say 20%, a worker earning £20k still retains 80% of their income as does the worker earning £100k. The richer one is the more one pays. In the above example the £100k earner pays five times as much as the person earning £20k. Even with our slightly simplistic assumption above, that is five as much to use the same tax funded services.

I guess that is at the limit of fair for me. The financially successful massively subsidise the lower earners. Fair though as in any society, there needs to be a degree of social responsibility to enable it to work.  This allows for that without deliberately targeting and penalising the rich, I would argue that this definition of fairness is the impression that many people have of where the tax system is at present.

But no. There is a further concept of fairness which, even as a child I have always failed to comprehend. That goes beyond the idea where the richer you are the more you pay to use the same services. It says that the more you earn, the higher proportion of that income you should pay. under this regime the multiplier above goes crazy. Let’s assume for simplicity a flat rate tax rate of 20% for the first £40k of earnings and then a further 20% for anything earned above that level.  With our example above, the lower salaried example pays £4k in tax. The higher one, £32k. The more financially successful is therefore paying 8 times as much to use the same services.

Clearly the tax system is, and needs to be far more complex than this. It needs to safeguard those on very low wages. It needs to incentivise certain professions or segments of the population to work. It needs above all to provide the income necessary to keep the country functioning.

However, it’s the definition of fairness that I struggle with. I agree with an argument that says that the more one earns, the more one should give back to society. The proportional tax rate achieves that. To take that further though penalises people for being successful. The media in this country currently seem on a witch-hunt to penalise the wealthy.  There is a concept out there that they should be paying more, far more proportionately than those less well off. a concept that if you are successful at what you do, you should almost feel guilty for those less successful. I’m not sure when that crept in. I know that when I was at school, the mantra was work hard now and it would create success in the end. If you wanted to work in the areas where jobs roles were going to be in short supply then you worked hard to ensure that you secured those roles, and the accompanying financial rewards. It feels now like we are supposed to apologise for that and pay guilt money to those who didn’t fancy that choice.

To my mind, that’s just not fair.