Since You Asked

The conservatism of progressive taxation

Nobody likes taxes. Okay, that’s not true. There are students on every university campus, who live in social housing and have never paid taxes in their life. They will tell you that they fully support taxation. But let’s focus on those of us who pay taxes on a regular basis: working people. 

Most everyone of us hates taxes, no matter which part of the political spectrum we identify with. In most languages the word even translates to burden or suffering. So why do we pay taxes? The simple answer is, because we choose to accept the lesser evil. 

It is no secret that the accumulation of wealth allows you to initiate projects and systems that would otherwise be impossible to achieve. And the faster you get money together, the faster you can launch these initiatives. That is one of the reasons why companies are founded.

Much like splitting the bill at a pub, where you had a large shared platter of finger food, taxation allows the state to provide services for all of its citizens at far lower costs than what everyone would have paid individually. At least that is the idea. 

Of course, it never is as simple as that. For one thing, you might ask, what about that guy who is on a diet and barely touched the plate? Or that girl that came late to the party and didn’t have as much, or was already full before she arrived? Why should they pay the same amount? 

In theory, everyone should still pay less and get enough out of it. It is not a perfect system, but if everyone pays their share, then the state is able to provide everyone with all the services that they specifically need. If you put all the things that you get from the state together, you should end up with more than you paid in. 

Unfortunately, that’s not how it works in practice. Some people pay in much more, while others pay next to nothing at all and not because they can’t spare anything. 

What is the progressive taxation system?

In essence it is an attempt to decrease the income inequality gap, by making workers pay a fair share into the system, based on how much they earn. Someone who earns more, should give more, so that everyone benefits. 

Socialists will have you believe that they invented progressive taxation, but it is actually a conservative instrument and also serves their purposes. The first progressive taxation model was employed by the Ancient Romans (and Augustus actually introduced the wealth tax) and the first modern progressive tax system was introduced by a conservative prime minister in the United Kingdom, William Pitt the Younger. The second iteration was also introduced by a conservative prime minister, Sir Robert Peel. 

Photo taken by Ken Teegardin. www.SeniorLiving.Org

Why would conservatives want to impose heavy income taxes? Elementary. In times of war, the state needs as much money as possible to persevere against the opposing side. But in times of peace, the Tories always tried to revert to a flat tax model or no taxation at all (albeit quite unsuccessfully). 

In theory it makes sense to have a flat tax model. If you earn 1000€ per month, and your neighbour earns 3000€, at a flat tax rate of 20% you will pay 200€ and your neighbour will pay 600€. 

So even though you have the same tax rate, high-earners still pay more in taxes. If you make the 20% a wealth tax, rather than an income tax, it even doesn’t matter how your wealth grows. You will always contribute your fair share to the system.

Then why is a progressive tax system better? 

It both is and isn’t. The main issue is the complexity of our current state infrastructure. Not only are we citizens often paying for things we don’t know about (and sometimes might not want to pay for if we did), but our social systems have become increasingly stressed, due to demographics. 

Older people need a functioning pension system and they get sick more often and need medical care, or even just elderly care. This makes up a huge amount of the average European state’s expenses. 

According to Statistik Austria, 43% of all state expenses in Austria are social expenses, of which 66,7% are pensions. Another 15,9% are healthcare-related. 8,76% go into state-funded education. 

If we look at the aggregate numbers, maybe we could cut spending by 10% if we really needed to. But the majority of expenses cannot be avoided, even if we reform the system to the best of our abilities. 

This money has to come from somewhere and unfortunately, the progressive taxation system is thus far the only way we have found to reliably fill the state coffers. The only difference between now and then is, today we spend money on our elderly, rather than on wars. It is a mild improvement, if you ask me.

Photo Credit – 401kcalculator.org

Why is the flat tax model insufficient for this purpose?

Because not everyone contributes. 

You often hear the phrase “the first million is the hardest”, which is actually down to Benford’s Law. If you start with 1€, 1 Million € is 1.000.000% of what you have, whereas when you have one million, two million is only an increase of 100% and from two to three million you have an increase of 50% and so on. 

The main problem is that those that already have acquired a wealth of one million or more are more likely to keep increasing that wealth and increasingly less likely to do so through work. They will likely find other ways to invest and grow their money, usually also keeping their assets outside of Europe. 

In 2016 the world was shocked to find out how many wealthy upstanding citizens had offshore accounts in Panama & Co. But it makes perfect sense. Wouldn’t you try to save all your hardearned money if you had the chance? Of course, you would. You hate taxes as much as the next person. Most of us do. 

So even if we abolish the progressive income tax system and replace it with a flat tax on wealth, or wealth increase, we won’t capture those wealthy enough to move their assets to countries that don’t apply our own rules. We would have to go to extreme measures to fix all of the tax loopholes and crackdown on tax havens, before we could introduce such a system and tax everyone more fairly. 

In whose interest is this?

Large corporations and wealthy individuals are happy with the way things are now. Even some European countries are quite happy to play the role of tax havens and will continue to block any tax reforms on the European level. It is both low and middle-income and even high-income working people, as well as small and middle-sized enterprises which shoulder the brunt of the tax burden. 

As it stands, the progressive tax system is our best option. But it is also an option that is making things worse. Remember Benford’s law? It is already hard enough to keep up with the wealthy if you come from a workingclass family. But then you are taxed into submission by the state. 

A Belgian worker who earns 3000€ gross per month earns slightly less than 2000€ net (we won’t even attempt to calculate how much it costs the employer to hire someone). To significantly increase that salary to 3000€ net, a Belgian worker has to earn around 5700€ gross per month, or about 80.000€ per year. 

That essentially means that employees are being bottlenecked by the system, as their actual income does not increase, unless they make a very big jump (which is rarely the case).

At the same time, their employers have no incentive to pay them more either, because an increase of a few hundred euro can easily cost them 1.000€ or more. Instead, non-taxable alternatives are often employed to incentivise employees, such as company cars, computers, phones and taking care of the gas bill. 

The message the state is sending is loud and clear: You are a cash cow. We can’t catch the wealthy, so we are going to milk you for all you are worth and make sure you cannot catch up to them. 

As stated above, we don’t currently have an alternative to this system, but does it justify the gross exploitation of employers and employees alike? Hardly. If anything, at least the tax ceilings should be raised across the board, so both employees and employers can breathe a little easier and can start accumulating some wealth of their own.

Populist Tax cuts do not equal tax reform

Last Thursday, Poland’s government scrapped the income tax for workers under the age of 26, who earn less than 85,500 PLN (about 20.000€) per year. It was sold as an attempt at decreasing brain drain but really is a populist measure to win the upcoming elections.

First of all, our generation hardly gets a chance to even be taxed at the age of 26, because most of us don’t have a real job at that age, but are either still studying or going from internship to internship (in some cases unpaid ones). Those few that have stable jobs, in most cases either earn very little, or have gotten them through their family connections.

Assuming they don’t spend it all right away, young Polish workers will be able to save a maximum of 25.000 PLN, or 5800€ a year if they earn exactly 85500 PLN per year. Assuming they can get a job at the age of 24 that pays them more than 75% of the Polish population that is a saving of 11.600€ over two years. That is a nice sum. But if you are that well educated, you could just as well go abroad to the UK or any other European country, pay taxes and likely still save up this much money in a year and continue to do so well beyond your 26th birthday. So the brain drain argument is moot.

At the same time, the Polish government is well aware, that most young Poles don’t have high-paying jobs (or jobs at all), meaning that the amount of money the government loses from not taxing them is small enough that it won’t hurt them in the slightest. If they had increased the tax ceilings regardless of age on the other hand, they would have lost a lot of money. This way, the PiS government has found a cheap and great sounding new tax policy that will not stop brain drain, but will give their voting target group some extra pocket money and an incentive to vote for them again. Meanwhile, the issue of tax avoidance remains unaddressed and working people continue to be exploited.

Conclusion

It is one thing to earn enough to survive and know that that is as good as it is going to get. It is another thing entirely, to work with the prospect of being able to save up to afford the realisation of one’s dream, whether that is ones own business, a home or anything else. Past generations lived this dream. Why should new generations be denied this promise? 

It is up to us to advocate for a change in the tax paradigm. Employees are told that employers are only out for themselves, while employers are being scared with horror stories of worker unions taking their last shirts during salary negotiations. In reality employers and employees need to stand together and demand an end to the exploitation both sides experience, in favour of those that can choose not to pay taxes and still enjoy the state’s services.

If we do not change things, the progressive tax model employed across Europe will continue to conserve the status quo, where the rich grow richer, while the rest of us stay behind, equal only in how little we progress.

Dominik Kirchdorfer
Dominik is a European writer and entrepreneur of Austrian and Polish descent. His passion is storytelling and he wants to do everything in his power to give the story of Europe a happy ending. He is currently the President of the EFF - European Future Forum, as well as Editorial Coordinator for the EUREKA Network, Editor In-Chief of Euro Babble and Managing Editor of Italics Magazine. Twitter: @NikKirkham
http://www.nikkirkham.eu

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