1 May 2015, 11:56am
economy:
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  • Representation without Taxation

    There’s an election in the offing in Blighty, as it’s been nearly five years since the last one. There’s much hue and cry, although to my eyes less separates the three main parties than there used to, much is about the details and less about the big picture. Some of the big picture stuff is changing, and it’s changing is some pretty rum ways.

    Many years ago, in the 1770s in the reign of good ‘ole King George there was a bunch of uppity upstarts in one of the colonies of the Empire that got all het up about paying tax without any say in how it got spent, and their rallying cry was no taxation without representation. They had a point, and the rest is the history of the United States of America, no longer a colony for over 200 years.

    Now one of the aims of becoming financially independent is of course to minimise taxes. One of the curious twists of fate in Britain is that it’s much easier to do that when you have money – you can influence how much tax you pay by using pensions and by controlling your income. As a wage slave I was always a PAYE employee, so the main option I used was using pensions, but the ways of controlling your income are much greater for the self-employed. In particular paying yourself in limited company dividends can be a lot more attractive that paying yourself in cash income.

    However, a more recent accelerating trend seems to be increasing the personal allowance, which lifts more and more people out of the tax system altogether. Of course they still pay consumption taxes like VAT; another curious twist of fate is that those chasing financial freedom probably pay less of this sort of tax simply because you probably buy less Consumer Stuff.

    From a personal point of view, that’s dandy. And yet I do wonder what will happen as this trend increases, and we have a larger and larger number of people represented in elections but who aren’t personally impacted by the grubby costs of all the jam today we would like. Some of this trend is simply the results of increasing inequality of income and wealth, of course – if the 1% own 99% of the wealth and most of the income then it isn’t surprising that most of the tax revenue comes from a smaller tax base. Although I don’t agree with all of his conclusions, I think the Torygraph’s Jeremy Warner makes an interesting case in his article about the tax and benefits system –

    it also makes the government dangerously reliant on those with increasingly less direct interest in what the money is actually spent on, the more so given the growing focus on pensions, health care and other welfare entitlements. The contributory principle in taxation has all but disappeared. By progressively raising the tax-free allowance, the Coalition has turbo-charged this process of disassociation between revenue providers and users.

    Obviously the Torygraph is there to bang the drum for Wealth, but his case is supported by Mona Chalabi’s brilliant Guardian article that shows that higher rate taxpayers contribute the vast majority of tax revenues, though they are only 15% of the taxpayers by number.

    Contrast this with the situation when the Ermine started work in 1982. Ignoring university infill summer jobs and suchlike, this was my first real job, a junior test engineer lining up electronic sensor heads. I was intrigued to find that after compensating for inflation it paid better than the average wage is now. However, the personal allowance in 1982/83 was shockingly low – £1565, so most of that salary was taxable, and the basic rate of income tax was 30% with an additional ~9% national insurance. The young Ermine paid nearly 40% tax/NI on a higher proportion of his salary at the beginning of this career than the 2006 higher-rate taxpaying Ermine.

    People in those days were much more involved in the costs side of the tax and spend equation than they are now – if the personal allowance goes up to £15,000, which of course I am all for, personally :), then a typical two-person household earning the average UK household income of £27,000 need not pay any tax at all if they both earn roughly half. The whole tax/spend/representation thing is very different to how it used to be. Perhaps the argument is that inequality has gone up and so this is inevitable.

    Inequality has risen since 1982

    Inequality has risen since 1982

    There’s some support for that argument in the change in GINI coefficient since 1982, unfortunately although the figures show inequality has increased I have no feel for how significant a shift from ~33% to ~37% actually is.

    Maybe representation without taxation is just what you get as power shifts from labour to capital. I figure it’s going to lead to some strange places at times. It’s easy to make the case to no taxation without representation. I’m not so sure the other way round won’t have difficult birth pangs of its own…

     
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