The moral case for high taxation

This post is about the moral case for high taxation and makes no reference to any of the practical concerns associated with collecting large amounts of tax. it is not specifically an attempt to articulate the moral case for high taxation of the rich based on some notion that the rich have more money and therefore they should pay more tax. Although, I do agree with that premise.

The moral case for high taxation goes something like this. Suppose for example you are the owner of a bakery. You could argue that there are four different groups of people who have a legitimate claim to the value that is created by your baking. These groups are as follows

1. Your customers

Your customers claim the value generated by your bakery through the simple mechanism of paying for your bread but paying a price for that spread this is lower than the value of that bread to that specific individual customer. We know that the customer is deriving value from the transaction because if the money in their pocket was worth more to them than the loaf of bread that they purchase then they would simply not purchase the bread in the first place.

Nothing controversial there.

2. Your suppliers

By suppliers I mean everyone who sells services to you or provides you with a product that you need in order to make your bread. This would include your employees, the company that supplies you with flour, the electricity company that heats and lights your premises and many other organisations that provide the things that you need in order to make and sell bread.

The amount of value that the suppliers derive is based on the difference between the price you pay them for their services or products and the cost to them of providing those products or services. Again, nothing controversial here.

3. You

As the owner of the bakery and therefore the one who supplies the capital and perhaps some of the management expertise you also have a legitimate claim to the value created by your bakery. In a highly libertarian model of the world the value you create is simply the difference between the price you charge for your bread and the cost of supplying that bread. And while most people recognise that you should pay some tax on that value the basic idea is that the wealthy is yours and the state takes it from you to help to pay for services that the government provides. There is considerable disagreement over how much that tax should be. My argument is that that tax should, at the margins, be extremely high. Or, more precisely, the morally correct tax rate should be extremely high. A bit later on I'll discuss why I don't think it's necessarily a good idea to charge the morally correct rate of tax. But, for now I'm arguing that the reason why the morally correct rate of tax is very high is that there is a fourth group who have a legitimate claim on the value that you create.

4. Civil Society

You see, your bakery only exists within the context of an ecosystem of companies, people, networks, rules and behaviours. This ecosystem creates a context in which an effective entrepreneur can create a large amount of value. The question is, how much of that value is really attributable to the entrepreneur and how much is attributable to civil society. This is quite a hard question because there are two ways of looking at it.

The first way to look at it is to say that a given entrepreneur has a legitimate claim on large amounts of value because that value would not exist if it were not for the entrepreneur. This is true. However, this ignores the second way of looking at the same situation and in this view if the same entrepreneur were to operate with the same degree of skill and hard work in a society that did not provide such an effective ecosystem then the entrepreneur would make much less money. Put bluntly a brilliant baker is going to make a lot more money in central London than they would do if they were in North Korea. From this point of view, the huge additional value that the entrepreneur creates only arises because the entrepreneur operates within that ecosystem. And therefore civil society has a legitimate claim to a very large chunk of the value created by the entrepreneur.

If the entrepreneur doesn't like it. They could always go somewhere with with no real civil society and see how much money they make. It's a fairly safe bet that most of them would choose to live in a country with very strong civil society because that's where they can make the most money.

It's as if the entrepreneur is a miner in a goldmine. Effective entrepreneurs are just good at mining gold. But, the amount of gold in the mine and the ease with which it can be reached has nothing to do with the entrepreneur and everything to do with the strength of civil society. Sure, those who are best at mining the gold should receive more of it. But the real value is in the ecosystem that puts the gold there in the first place.

Civil society, doesn't really belong to anybody or, you could say it belongs to everybody with equal shares attributable to everybody. Therefore, a very large proportion of the wealth created by the should be given to society in general and the mechanism that society chooses to facilitate this transfer is the tax system. After all, everybody else that supplies the baker makes a profit when they supply the services. Surely civil society should be able to charge a very high price for the service that it provides to the entrepreneur.

So there you have it, entrepreneurs exploit the brilliant ecosystem created for them by civil society to generate large amounts of value. Entrepreneurs should pay a very high price for the right to operate within that civil society. After all, if they operated in a civil society that was far less effective they would make far less money.

The reality of course is that this if very high tax rates were to be charged the amount of wealth created by entrepreneurs would be reduced. If you like, one of the things that makes a well run civil society such a good generator of wealth is the fact that it chooses not to collect all of the value to which it has a legitimate claim.

What this means in practice is that the rate of tax should be set in such a way that it maximises tax revenue in the long run. The idea that those who generate wealth actually deserve to keep the amount of wealth that they do keep just does not hold water. The only justification for allowing entrepreneurs to keep large amounts of wealth is because, in the end, that generates more tax revenue and more value for civil society as a whole.