3.5.1 Economic Reciprocity

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Almost everyone would agree that some government spending (3.2.3) is necessary, even if only for national defence and policing. Individualists would argue to reduce this spending, which is an argument that is examined in the next section (3.5.2), but there is nonetheless a need to fund whatever amount has been agreed. If everybody were to contribute equally towards the cost, those with low incomes would find it harder than wealthier people to pay their share; but if people were to pay in proportion to their incomes, the wealthier people in society would shoulder more of the burden €“ as envisaged by Adam Smith:

€œIt is not very unreasonable that the rich should contribute to the public expence [sic], not only in proportion to their revenue, but something more than in that proportion.€ [1]

It is worth dividing this proposition into its two parts: the proportional contribution and the €œsomething more€. They have different justifications.

There are several economic reasons why people should pay for the cost of publically-funded transfer payments and shared services in proportion to their wealth, and why it is in their interests to do so:

· The delivery of goods and services, and the connection of suppliers with their customers, depends upon a shared infrastructure which may have been at least partly publically-funded. People cannot run their businesses without an infrastructure €“ and the more money they make, the greater the value they are likely to have derived from it.

· Infrastructure is only one aspect of a total socio-economic system which affects wealth creation. Warren Buffet, for example, made the point that he would not have been able to create his wealth in a poorer country.[2] The linkage between the financial sector and the rest of the country was also vividly illustrated by the impact of the 2008 financial crisis: the banks needed the help of the general public to restore their stability.

· The libertarian Robert Nozick tried to defend the economic inequality that flows from individual merit, using the example of a baseball player called Wilt Chamberlain who, he argued, should be allowed to charge more for tickets to the games in which he was playing because he was popular and people were prepared to pay the extra price.[3] But this individual relied on other people: the rest of the team, the customers and society€™s infrastructure were all necessary. Talented individuals can justify earning more than other people, but it is equally justifiable that they pay more tax, reflecting the use that they have made of other people€™s contributions to their wealth.

· The collectivist vision of a society is that we are working together for the good of all: we provide goods and services which people want and we are paid in accordance with the value to society of our work. This is compatible with self-interest , which provides a motivation to do better and to have pride in being able to make a greater contribution to society €“ both in the value of our work and in the tax we pay towards the common good.

· Benefit payments enable poorer people to actively participate in economic activity €“ so they generate demand and thereby increase the opportunities for others to create wealth. The element of tax that goes towards transfers is going to the taxpayers€™ potential customers.

Wealth€™s dependence on other people, and on collective infrastructure and institutions, thus provides a justification for what is called €˜economic reciprocity€™ in this book; it is sometimes referred to as €˜redistribution of wealth€™.

Economic reciprocity requires the wealthy to pay tax in proportion to their wealth, but it does not justify €œsomething more than in that proportion€. The economic argument for the rich to pay more than their share is not based on their self-interest but on the pragmatic basis that they are better able to afford it €“ though there are other arguments, which are political (6.7.2.2), for reducing inequality by increasing tax on the wealthy.

There are several ways of levying more tax on those who are richer:

· Progressive taxation applies at a higher percentage to greater wealth of the type that is being taxed (3.2.4.1). For example, income taxes are usually progressive.

· A higher purchase tax can be levied on items that are not deemed to be basic necessities, or which would normally only be bought by the rich.

· Capital gains tax is not a problem for the poor.

· Tax on capital transfers, like the British €˜stamp duty€™, only affects those who own property.

· Inheritance tax affects wealthy people more than poor people, particularly if there is a threshold below which it is not applied.

There are limits, though, on the extent to which it is possible to €˜soak the rich€™. If high earners are asked to pay very high rates of tax on their income and their wealth, they can either move elsewhere, try to evade the taxes or just reduce their workload. This happened in Britain in the 1960s, when top tax rates on incomes exceeded 90%. When top tax rates were reduced to 40% in Margaret Thatcher's government, the amount of top-rate tax received by the State actually increased €“ which was an example of the Laffer curve (3.2.4.6). If, however, the differences between countries€™ tax systems are comparatively small, other factors such as quality of life reduce the incidence of tax exile and the shape of the Laffer curve is different. It is worth noting that progressive taxation of incomes does not prevent more successful people from being richer than those who are less successful, so even a system with relatively high taxes on incomes still provides some incentive to work harder.

This section has focussed on the two propositions that rich people are able to pay more than poor people, and that at least some of their contribution is likely to be in their own self-interest. These do not per se completely justify the redistribution of wealth but they are two of the economic factors in the negotiations between collectivists and individualists.