All this fuss about where a few billions can be found in the upcoming Budget should remind us of a basic fact. We can’t ask the rich to pay for big government. Sure, each individual rich person has lots of money - that’s why they’re rich, see? But there aren’t very many of them and in aggregate they’ve not got that much money.

So, we’ve those suggestions that Capital Gains Tax should be raised to be the same as Income Tax rates. This produces revenue predictions of a positive couple of billion to a negative couple of billion. That is, we’re around and about maxed out on what we can squeeze out of the rich that way. We could - if electoral promises had not been made - talk about higher rates of income tax but the best research there is tells us we’re about at the peak of the Laffer Curve on that too. And, well, there are all of those discussions of tweaking this or that tax upon those rich. All of which are predicted to raise, singly, again in that couple of billions level or, possibly, lose money.

There’s not much left that we can do to the rich to pay for more government that is. In fact, there’s not much left we can do to the rich to pay for the government we’ve already got. At which point:

Income tax thresholds are usually raised along with inflation, to take into account the fact that people’s wages usually rise year-on-year.

Freezing tax thresholds means more people are dragged into higher rates every year.

It is believed that freezes save around £7 billion a year.

Now this isn’t a tax upon the rich at all. Because once your income goes up into the 1% sort of area you don’t, in fact, get a personal allowance at all. So thresholds has little effect at those “rich” incomes. But this does raise lots of money. Why? Because of course the bulk of the population is where the bulk of the money is. Therefore, if we want to have lots and lots of government then we need to be taxing everyone.

This then gives us a certain problem. As with Adam Smith it seems fine that taxation might be more than in proportion to income. That is, a progressive taxation system. But, progressive taxation does top out because there really is that Laffer Curve. There’s a limit to how much can be gained from taxing just the rich because they’ll leave, stop being rich or stop making effort to be so. Thus there’s a constraint to how much government we can gain by having a purely progressive taxation system.

It is possible to raise substantially more revenue than that. By having a less and less progressive tax system. Which is what the icy social democracies of the Nordics do (and moving over to the truly absurd, what France does). Pile the taxation upon everyone to pay for more bureaucracy - what joy, eh?

It’s possible, like Sweden, to have a 25% VAT rate. The reduced rate of 12% applies to the foods that we here in the UK have at 0%. It is possible to raise more revenue but it does have to be the bulk of the population paying for it.

So, at some level of logic, we need to make a decision. We can have big government and a less than progressive tax system to raise the money to pay for it. We can have much smaller government and a more progressive tax system. In that second we have to limit the size of government so that we can pay for it out of what we can pluck from the rich in tax.

Yes, it’s possible to then go on and say that a lower government and less tax place will grow faster and all that but in reality this comes down to a choice. Which do we want? To be able to pay for government from the fleecing of the rich? Or so much government that all get dunned?

We have our preference here. We are liberals therefore we believe in progressive taxation, that more than in proportion. Therefore we end up desiring less government so that we can have that progressive taxation system to pay for it. Seems very simple to us to be honest.

Stop government doing about - ooh, just a little target here - about 50% of what it currently does, raze those buildings, plough that land with salt and release the public sector workers from their bondage. Then we can run the system on the taxation of the rich and for the rest of us our money can fructify in our pockets.

Tim Worstall