3.5.1 Economic Reciprocity – Paying Tax for Shared Services
There is an economic argument for paying tax for shared services, and for infrastructure that everyone depends on to survive and prosper
The purpose of economic governance is to ensure that the economy benefits all those who participate in it and depend upon it. The creation of wealth requires an educated and healthy workforce, infrastructure for goods and services to be efficiently produced and reach their markets, and the maintenance of law and order for wealth to be protected.
To support this environment, almost everyone would agree that some government spending (3.2.3) is necessary. They often disagree about its scope, as discussed in the next section (3.5.2), and they disagree about who should pay for it. It means paying tax, which is always unwelcome and contentious but is necessary for the economy to thrive. It can be seen as a form of economic reciprocity: paying something back in return for the benefits one receives.
If everybody contributed equally to the cost of shared services, those with low incomes would find it harder than wealthier people to find the money. If people were to pay tax in proportion to their incomes, though, the wealthier people in society would shoulder more of the burden – which is fair, because they have derived more benefit from the economy than the poor. Adam Smith put forward this view, in An Inquiry into the Nature and Causes of the Wealth of Nations:
“It 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.” (book V, chap. 2, para. 71)
It is worth dividing Smith’s proposition into its two parts: the proportional contribution and the “something more”. The considerations are different, as described in the following sub-sections:
● People who create wealth should contribute towards the cost of the shared economic environment that they depend on, at least in proportion to their earnings (3.5.1.1).
● There are arguments for wealthy people to be asked to contribute even more than their share (3.5.1.2), on the basis that they are better able to afford it. There are several forms of so-called progressive taxation.
This page is intended to form part of Edition 4 of the Patterns of Power series of books. An archived copy of it is held at https://www.patternsofpower.org/edition04/351b.htm