Economic Myths #10: Taxes Benefit "Us"

[First published on Free Life]

Whenever there is the appearance of some headline berating large corporations for arranging their affairs so as to pay as little tax as possible on profits earned in the UK, the indignation from the general public seems to centre on the belief that the “lost” state revenue was somehow a “lost” benefit to the average citizen. After all, won’t lower tax revenues result in fewer hospitals and worse schools? Such was the fury greeting the news, on August 3rd of this year [2018], that Amazon UK’s tax bill fell from its 2017 figure of £7.4m to just £1.7m in spite of pre-tax profits having almost trebled.

Unfortunately for libertarians, tax avoidance (together with the deliberate blurring of the legal and moral distinction between that concept and that of tax evasion) has become a favourite topic of heavily indebted governments as they attempt to balance their books without reducing their profligate spending.

For anyone who has ever heard of him, Danny Alexander (now “Sir Danny”, for some reason) is something of a political has-been, having been ousted from his parliamentary seat and, consequently, his ministerial role of Chief Secretary to the Treasury in the 2015 General Election. Nevertheless, the following excerpt from a speech he made to the Liberal Democrat party conference in the autumn of 2014 remains one of the most chilling utterances of the state’s sense of entitlement with regards to taxation:

Liberal Democrats have led the crackdown on tax avoidance. The investment I announced at this conference in 2010 is now bringing in an extra £7bn. We are now insisting that tax dodgers pay the right tax up front – they will only get any money if their scheme is later proved in the courts to work. And we are using psychologists and behavioural economists in HMRC to get the money quickly. Tax dodgers beware – we know where you live, we know how much you owe, and now we know how you think. Your behaviour is unacceptable, and we are coming for our money.

Part of the vitriol of the general public is explained by the fact that people desire some kind of tax equality and don’t want to be shouldering the burden of public expenditure themselves when others appear to be shirking their alleged responsibility to “society”. Indeed many of the cries for reform all appear to be in the direction of making people their “fair share” of taxes – an amount that is, conveniently, never defined or quantified but always means more, in spite of the fact that the highest earners already pay the vast majority of income tax revenue. Yet the core focus appears to be that life will somehow be worse off without Amazon and Google paying tax in the UK.

This is, of course, nonsense. Profits that are retained by private shareholders (many of whom, incidentally, are ordinary people’s pension funds rather than wealthy fat cats) do not magically “vanish” from the economy. Rather, they are reinvested in productive enterprises that create capital goods in order to churn out more products that people want to buy at lower prices. Fewer profits retained by investors means fewer capital goods and fewer products on the shelves. So if that money disappears into the hands of the state it is not invested prudently in productive business. Instead, most of it disappears into the pockets of favoured state contractors to spend on wasteful projects – with very little resulting in marked improvements for the average citizen.

According to the 2014 Bumper Book of Government Waste, while Alexander was busy demanding more money from those who earned it, his was the same government that, in 2012-13, wasted the extraordinary sum of £120 billion on delights such as the following:

£1.2bn on subsidising foreign farmers through the Common Agricultural Policy;
£20.6bn on public sector fraud;
£406m on EU fraud and error (the UK’s share of a total amount of £5.5bn across the continent);
£3.0bn on benefits to people who don’t need them;
£145m on “ghost patients” on the books of GP surgeries;
£300m on unused medicine;
£113m in subsidies to trade unions;

And somewhat famously:

£4m funding by the Department for International Development to create an Ethiopian version of the Spice Girls.

Unfortunately, it gets worse. For these amounts are only the headline figures of a long schedule of smaller sums such as the following, the spending of which leaves one wondering whether to either laugh or cry:

A £200K grant from the Cabinet Office to multi-millionaire supermodel Lilly Cole to set up a website where people make wishes;
£76K was spent by Bournemouth Borough Council on a piece of 3D artwork intended to give visitors a “sense of arrival” (in hell perhaps?);
Bromyard and Winslow Town Council paid £32K to compensate a man who slipped on a berry in a churchyard;
£20K compensation was paid by Kirklees Council to a teacher who was bitten by a flea;
£4K was spent by Angus council on a whisky tasting event for international golfers;
£1K was spent on a council officer to investigate a picture taken of the mayor looking at her phone during an Armed Forces Day ceremony;
Preston Council spent £500 on an art performance consisting of a man walking up and down a flight of stairs;
£70 was spent by the Forestry Commission on a bunny outfit.

Every pound that is taken by the state to be spent on these wasteful ends is one pound less that can be invested in genuine, private enterprise that must produce products that people wish to buy. Which category of spending – public or private – are we really worse off without?

Some of the more extreme rhetoric with regards to tax avoidance – that the likes of Amazon and Starbucks have “blood on their hands” because hospitals have to deny treatment to patients owing to the lost tax revenue – is akin to a sick joke. Apart from the fact that those public officials who wasted all of the sums above are far guiltier, what about the lives that are saved because the state was not able to use Amazon’s tax revenue to throw bombs at civilians in the Middle East?

Yet even if we ignore this, the disapproving attitude of corporate tax affairs owes itself to the belief that companies are like vampires, sucking the blood out of Britain before fleeing into the night – and that they should be punished accordingly. There is no mention of the fact that, in contrast to the state, these companies are creating jobs and producing stuff that people want to buy – and right at the time when we are barely out of a deep, state-induced economic malaise and so should be celebrating what little success there is. It is true, of course, that most large corporations are in bed with the state and benefit from state largesse. However, this should be dealt with directly by removing state regulatory privilege and making businesses wholly dependent upon their ability to serve consumers. It is not an argument in favour of increased taxation.

In any case, every company has to pay tax somewhere even if it is at a lower rate in an alternative jurisdiction. If Google pays tax in Ireland then what is wrong with that? To the rejoinder that this means a foreign government and foreign public services are benefiting from profits earned in the UK, well doesn’t the £13bn or so foreign aid budget do the same thing?

Increased taxes on the people who take risks to provide us with jobs and produce goods and services that improve our lives do not make things better for “us”. It only benefits the state and those recipients of its bloated, wasteful spending. Fewer taxes and vastly reduced spending, with more of the state’s legitimate functions being wholly privatised, would be far better for all of “us”.

Next week’s myth: The Mixed Economy

Freedom – the Law of the Jungle?

It is often asserted that a system of free market capitalism reduces everyone to the level of animals, subject to the "law of the jungle". Similar emotive epithets accuse capitalism of being little more than a "dog eat dog" or "winner takes all" economic system. However, as we shall see now, nothing could be farther from the truth.

Under a capitalist system all property is privately owned, and all legal exchanges must be voluntary, not coerced. However, for a voluntary exchange to occur both parties must expect to benefit from the exchange. If they did not expect to be better off then neither would have made the exchange. The exchange is therefore productive as it is designed to leave each party with something that they deem to be better than what they had before.

Once you extrapolate this to an entire economy, we can see that the very reason why capitalism is able to lift whole populations out of the slum of poverty is because people invest in the production of goods that other people want to buy. They then trade these goods for other goods that they themselves want. Everyone's lives are better off - it is a plus-sum operation that creates more for everybody.

Contrast this, however, with state intervention. Such interventions, such as taxation, are involuntary, i.e. the taxed individual has no choice as to whether the exchange occurs. But if he would not have made the exchange voluntarily then it follows that he does not regard the exchange as being to his benefit compared to an alternative. Instead of having his tax money taken to be spent on the salaries of bureaucrats, he might have preferred instead to buy a new suit or car. Hence, while the state benefits, the forced giver manifestly does not. Further, as it is not possible to measure utilities between individuals we cannot say that the eventual recipient of the funds gains "more" than the tax-payer loses.

In contrast to the productive nature of capitalism, taxation and other forms of coerced exchange are, therefore, fights over existing goods; the state wades into an extant process of production and decides that someone other than the productive party should possess those goods. In contrast to capitalism, this is manifestly a zero-sum game, with one party reaping what another loses.

What could be closer to the law of the jungle than this? Animals in the jungle are not productive; they fight with other animals for the restricted goods that nature has offered them so that they may survive. What one animal gains another animal loses. "Dog eat dog" is therefore a more appropriate description of political fights for taxpayers' money rather than for free exchange.

Finally, "winner takes all" would be a more apt description for democracy than for capitalism. With private property and free exchange, the minority does not have to restrict itself to purchasing the products and services that the majority wants. Most people might decide to shop at the mall, but that does not force others to do so; they are quite free to continue spending their pounds or dollars at a boutique. In a government election, however, the minority – the losers – always has to put up with the successful candidate, even though they may have wanted neither him nor his policies. Such a system benefits only the majority – the winners, who take all – at the expense of the hapless losers.

Criticising capitalism as a “winner takes all” system is usually the effort of those who - on account of their own inability to serve the needs of others - believe that they have failed to benefit sufficiently from free exchange. To remedy this, they want to take what other people have to fulfil their demands for "fairness" or "equality". As we can see, however, it is the resulting squabble over existing resources which would truly reduce human civilisation to the law of the jungle.

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Economic Myths #10: Taxes Benefit "Us"

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