Who should pay tax?

Posted on January 16, 2012 at 11:17 am,

This is the latest in our series of posts critiquing Wayne Grudem’s book Politics According to the Bible. Today we’re looking at the issue of taxation.

Grudem starts with the most fundamental principle of taxation – whether it should happen or not. He points out that Jesus endorsed the principle of taxation in Matthew 22:17-21, and that Paul also upheld this principle in Romans 13:6-7. However, later in his treatment of taxation, he implies that taxation is incompatible with his conception of human freedom and implies, again that government spending is less useful for society than private sector spending.

Setting the right tax rates

Grudem begins by looking at the general question of whether tax rates should be high or low. He says that if taxes are too low governments won’t have enough money to function (though he doesn’t mention the possibility of governments being dependant on foreign aid or state-run businesses instead of taxes), and that a tax rate of 100% will mean complete government control of the economy – something he’s already strongly disagreed with. In this, he is correct, and points to something that is commonly called the “Laffer Curve”.

An example of a Laffer Curve which shows tax income peak at a low level

A Laffer Curve similar to Grudem's

This is, basically, an attempt to work out the tax level that will provide the greatest income for the government and/or the tax level that will lead to the highest rate of economic growth (which may or may not be the same point). Grudem gives an example of a laffer curve where the maximum revenue is a fairly low rate of tax, and the maximum level of economic growth is far lower. In reality, laffer curve calculations show all sorts of things – some economists’ calculations have shown that certain countries at certain times might actually receive the highest possible revenues with tax revenues quite close to 100%, some resemble Grudem’s model, and others are bell curves.

Grudem spends some time trying to establish why a lower rate of tax might produce more tax revenue. He says that:

  1. lower tax rates encourage businesses to invest and grow
  2. that this produces more jobs and lower prices – which benefit the economy, and encourage greater economic growth
  3. that the growth leads to higher incomes for businesses and individuals
  4. that because there is greater economic growth, there will be greater tax revenues despite lower rates of taxation.

I think this theory does have some significant flaws. Firstly, there’s the inherent assumption that government spending does not contribute to the economy as much as the same money spent privately. Yes, this is true in some cases (the UK government buying new nuclear weapons moves a lot of money out of our economy and into the US economy), but not in others (spending on basic infrastructure that wouldn’t be commercially viable, but is essential for businesses to function effectively).

Secondly, it assumes that tax levels are a major factor in economic growth, when there are dozens of other factors that are likely to make a larger difference. Proving this theory to be true or false would be virtually impossible, due to the statistical noise. Especially if you only made fairly small changes – and taking a penny off the basic rate of income tax is far more likely than taking 10p off.

Thirdly, some of the consequences Grudem lists don’t necessarily follow. Economic growth doesn’t necessarily mean that companies will produce more jobs – my employer was consistently downsizing its UK workforce before the current economic problems started, and is continuing to do so now. And it has remained a highly profitable company for the entire period. And whilst the corporate executives may have seen higher incomes as a result, many of us doing the actual work have seen our real-terms incomes stagnate or even decline. Whether things like more jobs and higher wages follow from economic growth or not depends on a range of economic factors, and tax rates will only make a difference at the margins.

Grudem does list some examples of tax cuts which he says increased the tax take. He starts with Ronald Reagan’s tax cut in 1981, saying that economic growth and real incomes increased during this period. He ignores the fact that the US (and global) economy during the Carter years was dominated by the 1970s oil crisis – something that had cleared up by Reagan’s era. Whilst the tax cuts may or may not have contributed to the Reagan-era boom, there were clearly far bigger factors in play.

He also cites George W Bush’s tax cuts in 2001 and 2003. Now I had a brief look at the US revenue service website, and from what I can make out, tax revenues fell in the wake of the 2003 cuts, and Bush left office with a massive budget deficit (even if you ignore the effect of the bailout/stimulus right at the end of his second term), although he had inherited a budget surplus from Bill Clinton. Basically, it’s highly questionable whether these tax cuts actually boosted either the economy or tax revenue. And by portraying the case as clearly proved, Grudem is doing his readers a disservice.

Should everybody pay tax?

On Wednesday, I’m going to look at the balance of taxation between rich and poor (and companies and people). But Grudem raises a good point about taxation in general by saying that everybody who earns income should pay some taxes. His point is that if you pay taxes, then you have a greater stake in the way government spends it. He agrees that the poorest should pay lower taxes, citing Leviticus 12:8 as an example of such a provision, but strongly disagrees with the idea of anybody paying no tax at all.

Whilst I think it’s actually quite a good principle, Grudem’s arguments are very much ideological. Elsewhere in the sections on tax, he deplores the politics of envy, which he believes is solely responsible for the idea that rich people should pay higher taxes. Here he seems to be espousing the right-wing equivalent – a sense of envy that the government is spending his taxes in ways that he doesn’t approve of, and seems to think that this is a feeling that everybody should share.

Also, there is a big question about how such a policy is feasible. In many countries, working a full-time job on the minimum wage simply doesn’t pay the bills. Unless and until wages for those at the bottom of the system are at least high enough to cover basic living expenses for a family, you can’t expect to levy more than a token amount of income tax on the poorest. And in both the USA and many parts of the UK feeding, clothing, and housing a family on the minimum wage is impossible without help from either the state or charities. Unless minimum wage levels are raised, or there are radical changes that would result in the living wage being lower (something like citizens’ income, for example), then taxing the poorest will simply increase the poverty level.

3 Trackbacks

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