No more plucking taxes?

Could there be a reason behind why taxes are seen as hurting so much?

Paying taxes is painful, but one of the unfortunate necessities of life. Getting people to pay tax has, in the past, been compared to plucking a goose with the key being to get the “largest quantity of feathers with the least possible amount of hissing”. Yet, our taxes do go towards numerous things that we could not do without. Finding the optimal balance between the right amount of taxes is therefore crucial. The trend of late has been for lower taxes and less government, and this might be because if enough of us pay enough taxes, everyone finds it all too much pain to be worth bearing.

The amount of tax we pay relative to what we earn has been in a downward trend since the 1980s. The level of taxation had been set to high levels during WWII and remained at elevated levels until the political winds changed with Thatcher and Regan. Rising levels of income have resulted in the absolute amount of tax payment increasing for many even as the tax rate fell. Although many people do pay considerable sums in tax, it is the very wealth that increasingly pay the bulk of taxes. Despite this, voters (who may themselves actually pay little in taxes) have continued to elect governments that promise even more cuts to taxes. To do the opposite has been a tough sell.

It should not come as a surprise that people prefer to pay less in taxes but this also limits the ability of government to provide services. There seems to be lots of things that governments could do with more money, such as spending on infrastructure or childcare, but tax cuts seem to win out. The extent to which this ethos has remained unchallenged suggests that bigger forces could be in play. This all got me thinking about whether a reason behind this might be a tendency for voters to prefer lower taxes as their income levels rise. This might be something that impacts on us as individuals but also affects decisions we make in electing our governments.

It seems an obvious thing that say that voters would be put off by a larger amount of money being taken out of their pay packets as taxes. There could, in theory, be a level of income at which more people are likely to prefer lower taxes even if they accept that this will results in fewer government services. Large tax bills could also make people more sympathetic towards arguments that taxes in themselves are bad. Taxes can be seen as “unfairly” taking away money from hardworking and successful business people who would otherwise work more.

If a majority of people pay a decent chunk of their earnings in taxes, these arguments are more likely to ring true. Rising incomes may also means that, not only do people prefer to pay less tax, but also that they also have less need for government. There are many things that government provide that all of us need. Examples of this include roads, policing, and national de fence. But a certain level of income can also bring less reliance on other government services such as health or education.

The combination of these effect would create a feedback mechanism, whereby less need for government among the well-off would drain their willingness to pay taxes which would, in turn, restrict the capacity of government. This tendency is one part of a bigger picture in which views on government change as society gets richer. Other potential developments could include such things as increased bureaucracy as government grows in size and difficulties in providing higher standards for schools and hospitals. Sympathy towards the less well-off might also be weakened if everyone has access to government-provided education and healthcare. Even the policies of austerity and paying off government debt would make more sense to people with a mortgage to pay back.

In this way, increasing wealth can be seen as a way in which social solidarity wanes as more people prosper. If this were the case, it has profound effects on the way in which government may develop in the future. There may be a limit to the size of government as suggested by total government spending having stopped growing (if not declined slightly) relative to GDP in many countries. The trend for less government may continue if the majority of people think they are better off just looking out for themselves.

Yet, economic forces, such as globalization and automation, has been buffeting the middle class who, in turn, have been feeling the pinch. This economic hardship has fed into politics, leading to the rise in populism and a revival of policies from the old Left. If the economy is no longer provide as it has done in the past, voters may start wanting the government to get to work plucking more taxes.