Tax competition — or tax tyranny?

Tax Tyranny – I wish I had thought of that as a book title.  Fortunately Pascal Salin did, and has done the title justice; this is a broad-ranging book about the many problems of tax, and one that manages the difficult task of being very knowledgeable about taxation, both the theory and practicalities, whilst also being very readable.

Written for the general reader, it avoids the technical language of tax economics, instead illustrating the principles with plenty of interesting examples.  Most of these are French, but it is always beneficial to realise that other countries have their problems too; indeed one of the disconcerting things for a British reader is to see our tax rates regarded as comparatively low!

Rather than a textbook for tax wonks, this is political philosophy informed by tax economics.  Professor Salin gets into the real basics of what tax policy should be about – the reality of human nature; voluntary co-operation; human rights and ethics; liberty vs slavery.  Reducing taxes is, he shows, not just an economic imperative, but essential to give us humans the space “to act in accordance with our very nature”.

But the philosophical theory is combined with robust practicality; for example, after showing why a poll tax is better than an income tax, he then goes on to explain why it would still be worth working for a flat income tax of 20%

The book aims “to put taxation back in the context of the actual working of human societies” rather than leaving it in the hands of those who see their role as directing the wise allocation of resources, and as such it neatly skewers many of the arguments used by proponents of higher taxes.  For example the principle of progressive tax, higher rates on higher incomes, is shown to conflict with human nature, since in voluntary contracts overtime is frequently paid at a higher rate than base salary – we naturally need more incentive to work harder or longer, but a higher rate tax removes that incentive and leaves us with less benefit from extra work.  

That illustrates the trade-off between work and leisure that is a frequent theme of the book; tax is a disincentive to our natural tendency to work for each other, so it reduces the trade (domestic and international) that is “a key driver of progress”.  He contrasts the entrepreneur, doing productive good for society, with another individual of the same ability who “prefers to walk in the countryside humming music”.  How should the two be taxed, and what incentives – or disincentives – would those taxes have?

Like myself, Professor Salin sees tax competition as beneficial – the risk of productive individuals moving to lower taxed countries acts as a restraint on politicians’ desire to increase taxes too much.  At a time when the US and EU politicians are calling for worldwide minimum levels of taxation, it is good that someone points out that the emperor has no clothes - “if a tax is stupid, it is no less stupid because it is harmonised” – and useful to be reminded that taxes should really be set “at the level of the smallest possible community”, encouraging tax competition and giving a genuine diversity and choice between different levels of taxation and government spending, so that people can vote with their feet.  And he really does mean “the smallest possible community”, suggesting that tax policy could be set by each town or even village.

I was almost disappointed when the book actually suggested a tax system – it seemed something of a surrender after the splendid opposition to the whole principle of tax.  However it is prefaced by the comment that “there is no good tax” and that his recommendation is merely the least bad.  And this is a comprehensive reform proposal, rather than his opposition to the illogicality of much tax policy, where governments solve the problems of the bad design of one tax by introducing another tax in addition to it.

For those who collect tax proposals, his is an individually assessed consumption tax, with consumption calculated as receipts minus investments (Professor Salin, like myself, prefers VAT to income tax, whilst opposing having both).

But far more interesting than his proposed tax are his proposals for tax constitutional provisions, particularly the “tax house” of parliament, separately elected, which would have to approve all tax and borrowing but which would have no responsibility (and therefore could not seek electoral credit) for expenditure.

There is a recurrent theme of “the destructive nature of taxes”, particularly their destruction of human capital and interactions.  Rather than the usual claim that tax is “the price we pay for a civilised society”, Professor Salin warns that “civilisations die … when individuals have lost the desire to create and the enthusiasm to innovate”, and that tax stifles that creativity.

At the root of taxation and public spending is the bizarre idea that it is better for decisions to be imposed by politicians rather than by the free interaction of people.  This book is a splendid call for human relations based, not on coercive taxes and top-down government-directed spending, but on free will and the voluntary interaction of people living in liberty.

Buy the book here.