You can have a progressive taxation system or a large state - choose wisely

A further little point concerning the World Inequality Report. They argue that corporate taxation is a backstop to the income tax one. That a truly progressive taxation system - by which they mean high taxes on richer folk, not just a progressive system - is only possible if the combinations are taxed as well as the individuals.

As part of this discussion they seem to be arguing - implicitly at least - for both a large state and also that progressive tax system. We feel honour bound at this juncture to point out that you cannot really have both.

The American federal tax system is significantly more progressive than any of the European. Progressive in its true sense, that the portion of income paid in tax rises as income does. This system captures some 18% of GDP. The US system as a whole captures some 26% and is, with that addition of state and local, less progressive but still more so than European.

The European systems capture, largely, in the 35 to 45% range of GDP. The reason they’re much less progressive is that it’s just not possible to only - or only heavily and then lightly for the poorer - tax the rich and capture that amount of GDP. Even attempts to do so will lead to those richer leaving, or not working, or cheating, so that GDP itself is smaller which really isn’t quite the point.

So, taxation to gain that portion of GDP needs to weigh more heavily upon the poorer as well. It’s necessary to tax everyone, not just the rich, to gain that portion. This is largely achieved with VATs which are sometimes actually regressive and near always more so than income taxation systems.

To have a large state you have to tax everyone and heavily. There’s a limit to how much you can tax the rich. The combination means that you cannot have a large state financed y a highly progressive taxation system. The need for higher rates upon the rich, which are necessarily limited, means there’s no room to lightly, or not at all, tax the poor to provide the progessivity.

It’s necessary to make a choice. Progressive financing of the state or lots of the state?

We’re just fine with the progressive part - Adam Smith did muse on “more than in proportion to income” as being a reasonable taxation basis. In fact we’d insist upon it, as all our taxation proposals have done. This does bolster our further insistence upon the small state though.

It’s true that we always do argue for that small state. We’re liberals, so we insist that the vast majority of life is best, also righteously and justly, run by people themselves doing as they themselves desire. We’re also - having spent these decades up close and personal with the system - insistent that government isn’t very good at the vast majority of the things it tries to do. But it is also true, as a supporting argument, that you cannot finance large government progressively. On balance we think the large part is the one to get rid of.

Why not a state that we can pay for out of what can be grifted off the rich?