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Tuesday, February 24, 2004
The price we all pay for high taxes

Ron West kindly sent me the text of a letter he wrote to the Times in response to the Catholic Church's call for higher taxes. As he notes, for any aid given to others to be moral, it has to be voluntary. Money taken by the taxman on threat of imprisonment does not qualify. He also points out the disastrous effects on incentives once the bulbous state is a part of the economic landscape.

High taxation is economically illiterate because it works directly against the principle of 'Division of Labour' that enables members of all modern societies to generate the wealth required to finance acts of charity to the needy. The result of the 70's taxation the bishops hanker for, where the state takes two-thirds of a person's income, is that someone has to be three times as efficient as you before it is worth paying them from your net income to do work for you instead of doing it yourself.

This is a simplified account, because it bypasses comparative advantage (even if your secretary is much less efficient than you at typing letters, it may still make sense to employ her because you can be earning more than enough to pay her in the time you save) and the differing values people put on money (one person may value his net income of £333 at more than his rich employer values the gross pay of £1,000).

But as a general principle, all other things being equal, the point is very important. When government creates a wedge this large between what one person pays for a job and what another person earns for doing it, then division of labour - the cause of the wealth of nations - perversely becomes less and less economic. You may be happy to work for x amount of money and your employer may be happy to pay it, but once the mega-state sticks its claws in, you have to start charging a price of 3x to take home that much pay. Small wonder if people turn away from economic transactions and resort to doing such jobs themselves, and badly, with the resultant fall in living standards going far beyond the amount one loses to the taxman.

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