Friday, 6 November 2009

Guest post by Niall Douglas: Tax Sin, Never Good

Following TASC's Autumn Conference in October, we have been carrying an occasional series of guest posts from some of the attendees. This is the second post by Niall Douglas.
Niall Douglas: One of the major themes of the recent TASC conference was the need for a stimulus plan for Ireland – and it got my mind thinking about what shape such a stimulus plan should take. Encouraged by the comments to my last post which suggests there is an interest in progressive conservative economics, I thought I might try applying one of their most important mantras to the current poorly state of the Irish Economy and see what happens. That mantra is simple: Tax Sin, Never Good.

To quickly explain, orthodox economics holds that taxation – which it views as an evil made necessary only by the requirement to provide public goods – ought to be placed upon goods and services which are the most “inelastic” (which is the economic jargon for “insensitivity of consumption to price changes”). In other words, the reason why petrol, cigarettes, alcohol, new cars (in the form of VRT) and your income are much more heavily taxed than other items is because Economists have determined that people are most likely to continue to buy these items no matter their cost: one therefore biases taxation towards necessities rather than luxuries. Because the maximisation of production of stuff is the single most important thing in Neo-Classical Economics, taxes placed on inelastic goods are inferred to have the least effect on output maximisation, and therefore on employment maximisation because it requires people to make all that stuff.

That sounds sensible, but note firstly how amoral such a proposal is: on the one hand most people would agree that petrol, cigarettes and alcohol ought to be heavily taxed because none of these are good for you or society at large, so economic theory and morality coincide. However there is considerably less moral alignment with the taxation of work: how can it be morally right that living off of Jobseeker’s Allowance is not taxed, yet the first step into legal work is immediately taxed at 5-10% (this the total cost to society i.e. it includes Employer’s PRSI) after which it rises rapidly to consume some twenty-five percent of the average worker’s earnings before all taxes? This sends a signal to society that, rationally speaking, working and self-reliance is to be punished and that indolence and helplessness is to be rewarded. It is this viewpoint of that situation, and the logical reaction to it, which underpins the anger felt towards the welfare system in general by conservative parts of society.

The second logical problem with inelastic taxation is this: inelastic goods are, by their very definition, the most important to society and therefore they are the most utilised by society i.e. they are the fundamental building blocks of an economy from which economies of scale are most possible. Maximising total output, as orthodox Economics would do, assumes the equivalence of a single luxury product costing €100 and one hundred necessities costing €1. When viewed like this rather than through output maximisation, any emphasis of taxation upon necessities such as a person’s income is not only morally unjust but also the most economically retarding and taxation regressive of any economic policy because it severely punishes the most impoverished and weakest in our society. Therefore, the social conservative with a strong moral conscience has particular issue with taxation as the damnation of the poorest and weakest – which if you are religious as say most Americans are, means that taxation is sinful.

It is upon these two fundamental arguments that progressive conservative economic policy rests: perhaps you now understand why the right is always so concerned with income tax cuts and why progressive conservatives such as Milton Friedman were so adamant that taxation of income hurts the poor the most – which of course is in direct and total contradiction to the position of the left which regards progressive income taxation as a tool to help reign in the growing inequalities in income. The truth is that both positions have merit, and the economics effects of both positions are amply covered even in the reduced worldview of the Neo-Classical Economic model.

In future posts I shall identify a set of good and bad behaviours – as according to the economic literature – in the Irish Economy and then proceed to investigate what might happen should we eliminate all taxation on the good things and make up the shortfall by taxing bad things. I shall try wherever possible to provide figures and links to research for my proposals. In so doing, I hope to lay out one possible revenue-neutral stimulus plan for Ireland in as much detail as I am able. I look forward to reading your comments.

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