Earn. Own. Do.
Chequebooks at the ready? It's TAXES time!
In my previous newsletter, I talked about how taxes were born…And, consequently, where money comes from.
I accept this appears to be a somewhat topsy-turvy perspective for many people.
The usual story of where money comes from is:
Someone wanted to trade a cow for some chickens, via some carrots and beetroot. And it all got so-dang-complex that humans collectively decided to, instead, do all future trades with little bits of metal and pieces of paper.
With all due respect to everything you’ve ever thought about money, that’s idiotic.
From our contemporary perspective, we tend to naturally imagine things like gold and silver were always valuable. But precious metals were of zero value to most of the population for hundreds-of-thousands of years. Despite what Instatok influencers would now have you believe, you can’t survive by eating gold leaf; you can’t plant it and grow food; you can’t even build durable tools from it, or construct a house out of it.1
The concept of valuing little bits of silver and gold came millennia after the concept of valuing shelter and food and safety. Shiny jewellery and idols are of interest only once much more basic needs have been met. And so, as we learned in the previous newsletter, you simply need to threaten to ‘tax’ some basic needs, then demand payment in whatever you want your new ‘currency’ to be and, BAM!, you’ve kick-started money.
That was money’s first magic trick. Today, we’re going to going to move onto the next act: Fine-tuning social behaviour.
The value-making threat still exists of course2. But now we’ve essentially internalised the fact that money=stuff, so it doesn’t really need to be enforced. Sure, people don’t like paying tax, and some even get pretty antsy (or criminal) about it, but that’s only because they genuinely ‘believe’ that money has value, and it’s that proxy-for-value they want for themselves… so, basically, the magic works.3
And, because the magic works, and no-one questions the fact that money is worth something, you can put that universal ideology into action; rewarding or punishing by simply adjusting how you tax people.
Suffice to say, we’ve got a lot more sophisticated with both tax and heavily-armed friends in the past few centuries, so we now have lots of ways of taxing. Although, we can generally summarise them as taxing stuff you earn; stuff you own; or stuff you do…
Now. Before I dig into this, I should clarify I don’t think taxpayers and markets and corporations and financiers provide no value! Obviously, the citizens in an economy are its drive-train—moving us forward, via risk-taking and imagination and labour.
But we also shouldn’t conflate the umbrella idea of ‘overall human progress’ with the means of equitably-sharing the fruits of that progress—that’s where unforgivable nonsense like ‘trickle-down economics’ comes from.
And nor should we confuse money with value, any more than we should confuse language with communication—they are both just ‘tools’ to get the job done; and both need to be girded by a structure that ensures they work consistently; that is, equitable taxes and universally-recognisable sounds, respectively)
Stuff you earn
We’re all familiar with income tax. It is a government/state bite out of some money you had coming your way—as an individual or an organisation. It is tax on work you’ve done, or support you’ve received, or rent you’ve charged, or a sale you’ve made, or a share of profit or inflation you’re entitled to. It’s really pretty simple, although I’m consistently amazed at just how little it appears to be understood; especially given it’s something that we essentially all have to interact with.
Aside from the generic “taxation is theft” bollocks—which, hopefully, on the basis of my last newsletter, you’re now rethinking—the biggest confusion with, especially, personal income taxes (but actually, any tax) seems to be around how ‘progressive’ taxes work.
So, a quick primer.
When you’re taxed, it’s usually as a percentage (“rate”) of your total due, and you will have both a marginal tax rate and an effective tax rate. Those are, basically, the top tax rate you are eligible for, and the actual tax you pay on your total.
If you are dealing with a flat tax, the marginal and effective rates will be identical, meaning $100 earnt and a flat tax of 20%, will deliver $80 (after-tax) into your sticky little hands.
Where marginal and effective rates start to differ is when you have a ‘progressive’ tax system, where different rates apply to higher earnings. This is generally done so lower income earners are taxed at a lower rate, allowing them to still contribute to value in the economy, without it being such a burden that they become destitute.
So, extending that previous $100 income example, you might be required to pay 10% tax on your first $50; then 15% up to $80; then 20% on everything above $80. This will net you $45 (from the ‘up to $50’ earned) + $25.50 (from $50 to $80) + $16 (over $80) = $86.50 after-tax in the hand
10% of $50 = $5;
15% of $30 (that is $80 less the, already taxed, $50) = $4.50;
20% of $20 (that is $100 less the, already taxed $50+$30) = $4
It’s worth noting four things about this:
20% is the marginal tax in this example; that is, the highest tax bracket your income puts you into.
Your actual tax paid—your effective tax rate—is just 13.5%; far lower than your marginal rate.
The less you earn the lower your effective tax rate, regardless of what marginal bracket you are in. If you earn $81, your top rate is still 20%, but your effective tax rate would be just 12.7% ($45 + $25.5 + $0.20)
No one—no matter how much they earn—pays 20% on their full income, because their first $80 is always at a lower rate… Even if you earn $1,000,000, your effective tax rate will still be 19.99%
That last point is important. Most disingenuous or ignorant people laser-focus on the high marginal tax rate in claims about how “highly taxed” we are. To be ultra-clear, under a progressive tax system, NO ONE PAYS THE TOP MARGINAL RATE ON THEIR ENTIRE INCOME.
In theory, of course, a tiered tax rate like this can also work in reverse: You could lower tax rates as incomes increase. That would be a total dick-move by any government of course. But, in practice, because high income earners can afford accountants and can afford to invest in things that offer lower tax rates, that’s exactly what most countries offer in practice.
For example, in New Zealand, we have no capital gains tax on a typical house sale. So, if you can afford to buy a shitty old house, leave it vacant and rotting for a few years, then sell it at a profit, you earn thousands tax-free—and perpetuate house-price inflation.
Meanwhile a productive worker, bringing in the same ‘income’, is likely paying an effective tax rate of around 32%.
It’s worth pointing out that the owner-class don’t normally like the working-class to think about ‘profits’ from things like house sales as ‘income’. But we should, because it’s all just money and all can be spent the same way.
Frankly, it is only not treated like income because the kinds of people who would have to pay tax on things like house sales have traditionally been friends, funders, and electors of law makers.
So, the obvious one is capital-gains, but there’s other similar ‘incomes’ we could also tax, like inheritances. For all practical purposes, these do still represent income earned from some kind of work (the owner-class love to talk about how hard they work): The work of waiting for the capital gains on something; or the work of having to spend years of your childhood with some “perpetually old people who don’t understand you” (AKA: ‘your parents’).
We’ll come back to this during this series but, in my opinion, any ‘realised’ gain can be thought of as ‘stuff you earn’ taxable—and that includes the trust-funds, and the houses and paintings and jewellery and companies that you might suddenly acquire at your parents’ death.
Once you get over the ‘these people are value creators’ myth that somehow applies to a $70,000 gold watch, the usual argument against taxing things like these is that people purchase ‘capital goods’ using ‘after tax’ income. As we’ll see during this series, that’s mostly bullshit wealth-universe nonsense… But also, when was the last time you heard a rich person argue that minimum wage earners should pay no income tax, because they already spent ‘after tax’ income buying a bus ticket to get to their fry-cook job at McDonalds?
That’s a bit facetious I know. Obviously, it’s clear there needs to be some subtlety in how taxes like these are applied, especially if you genuinely are taxing income which is then used to purchased capital goods, or genuinely taxing any rent/dividends/profits, or wealth, those goods continue to represent. But, I’m actually not here to talk about fair tax ‘rates’, I just want you to think about tax purpose and equity.
Because, despite those capital-gaining and inheritance-earning people ‘working hard’ for that family and economic-growth money, “fair-and-square!”, the fact is capital gains and inheritances are never taxed at anything like the rates of other honest work!
Still facetious, sorry!
Real talk now: In a just society, taxes should be higher on capital gain or inheritance than on income. In a just society, taxes on capital goods, wealth, inheritance and financial transactions would replace income taxes altogether.
Right now, we’re in a double-bind: Not only does taxing flagging working-class incomes punish us all, with welfare abatements that disincentivise people from even getting a job or, for many job-havers, still requires all sorts of (inefficient) public food grants, family tax rebates, and accommodation subsidies; But also, capital gains and inheritance ‘incomes’ increasingly don’t deliver any productive benefit at all—they are simply built from starting with enough money, buying something with it, then monopolising it until it becomes scarce.
Why is this something we’re ok with?
Stuff you own
This is the crux of this series, because it is hard and misunderstood. For now though, let’s just say there’s a bunch of ways you might consider taxing wealth. I’m not advocating for any one in particular, because different regions will need to consider what it is they want the tax to achieve.
For example, as I mentioned, housing costs in New Zealand are a huge social and economic issue (literally the worst in the world!), and housing is also a vast store of, largely unproductive, wealth in our country. So, a tax that focuses on housing—for example, a blanket land-value tax (LVT)—is often proposed as a good solution. In other countries, wealth may be distributed or held in other assets—art, crypto, shares, gold bars...
In practice, however, wealth is relatively easy to move now. There are massive industries that exist solely for the purpose of moving and hiding wealth. You could spend years building the perfect policy to target one type of wealth, only to find the money gets immediately moved elsewhere, and you are back at square one.
The other challenge of course, with any wealth tax, is what you consider ‘wealth’. I’m going to invest some words into trying to answer that question over the next few newsletters, but the point is, any wealth tax requires some pretty careful threading of the needle, to avoid either catching people up in it who are not practically ‘wealthy’, or allowing those who are rich enough to afford fancy accountants to slip through the carve-outs.
Stuff you do
This is an interesting category, and one we’ll likely swing around to again at another time. In simple terms though, because ‘tax’ is money, and ‘money’ (when the magic is working) is valuable, you can make use of taxation to discourage or encourage behaviours.
We all know about things like road taxes and taxes on alcohol or cigarettes, designed to reduce (socially) harmful behaviours. In some countries, there are financial transaction taxes which might be thought of as a way to discourage inefficient or thoughtless trading. Even something like public parking fees might be thought of as a kind of tax.
And there is also its counterpart, subsidies, which represent a sort of reverse tax to encourage certain behaviours—a rebate when you buy an electric bike or solar panels, or subsidies that support an important export industry to remain competitive. Even tariffs, which tax outsiders when they import goods, are a kind of unpaid subsidy to support local manufacturing of competitive categories.
Basically money that comes from or goes to the government, in order to guide certain behaviours, is ‘stuff you do’ taxes.
But there’s one other kind-of-weird-when-you-think-about-it ‘stuff you do’ tax, which lots of countries use, largely for political reasons:
The Sales Tax.
Different countries call it different things—Value-Added Tax (VAT) or Goods and Services Tax (GST) or Consumption Tax are typical examples—but it always essentially amounts to an extra bit of tax-cost added to a good or service purchased.
It’s generally a pretty flat tax, and what economists like to call a ‘broad base’ tax—that is the same percentage on all purchases for all purchasers, so it is a wide net. Sometimes it might apply to primary goods, such as a tree or unprocessed milk, but generally it applies to finished goods like the wooden table or block of butter those things get turned into.
Sometimes it is excluded from certain goods, and then it operates as a kind of subsidy to encourage behaviour. For example, there might be no sales tax on a fresh watermelon at the supermarket, but it could apply to the watermelon-flavoured candyfloss sold at the same store.
Often it is refundable if you’re purchasing the good or service for business reasons, or you’re not a resident tax-payer and can therefore purchase it ‘duty-free’. And administratively, if you run a business and charge sales tax, you simply collect it on behalf of the government or state and then pass it on. In return, you can claim back any sales taxes you have paid yourself when purchasing legitimate business operating expenses.
But this is where this gets weird. If you recall all the way back in the first newsletter of this series, I said:
“the primary goal of a government with taxes should be to maintain the value of money at a level that maximises its motion.”
But a consumption tax doesn’t do that.
It goes against everything that tax should do, and becomes—boy, do I hate to say shit like this—a “tax grab”. I mean, that’s a garbage phrase used almost exclusively by garbage people, but it’s actually accurate in this instance! Because a sales tax is just a big ol’ con job, perpetrated by rich and powerful fucks to distract the rest of us plebs from their syphoning.
“What the blazers are you talking about??” I hear you ask. Incredulously.
The normal narrative around a sales/consumption/VAT/GST-type tax is “the more you spend, the more of it you pay. So, it’s super-fair and equitable: The rich spend more, and they therefore pay more”… But, let’s just interrogate that a tinsy bit:
Jeff earns $1000 a week, after he’s paid his income tax. He then pays $500 in rent, $250 in groceries and food, $100 in transport, $100 in utilities like power, internet and water, and $45 on other things like insurance, health care, entertainment and clothes. And then, responsibly, puts aside $5 for a rainy day.
Judith on the other hand earns $5,000 a week after income tax. She spends $1000 to rent a much nicer place, and $500 on nicer food and groceries. On all the other bits, including clothes and entertainment, she spends another $1000, leaving her $2500 for her rainy day savings.
Consumption tax is typically paid on everything except the rent and savings. So Jeff pays tax on $495 of his income; and Judith pays it on $1500 of her income. Obviously, Judith is therefore going to pay more consumption tax. But—and here’s the rub—she is living in far more comfort, and saving way-way more money. And she is still paying consumption tax on just 30% of her take-home pay, while Jeff is paying consumption tax on ~50% of his.
I don’t want to get into a debate about whether Judith’s skills or education cause her to deserve her higher pay or not. I’m not even going to give you that information to stew over. The question is, does she deserve to pay proportionately less of her income in tax just because she earns more?
Earlier we discussed ‘progressive’ taxes, where you (in theory) pay less if you earn less. You’ve possibly come across the phrase that describes its opposite before, “regressive taxes”. That’s what consumption taxes are: A tax that places a greater overall burden on a poor person than a rich person, purely because of what they earn or own.
It would be tough to argue that any tax which takes a larger portion of a poor person’s income than a rich person’s income is ‘equitable’. Even the most committed tax-curious-libertarians I know believe in either a progressive tax rate, that increases as your income increases; or a flat tax, that applies the same effective rate to every income. As I noted above, you’d have to be a real dick to overtly suggest “the highest income earners should be on the lowest tax rates”—even if you defend the regulations, accounting tricks, and optimisations that make sure it effectively happens anyway!
This is a magic trick again.
The simple set-up for the consumption taxes trick is having us all pay the “same tax” when we purchase the “same loaf of bread”. That way—like a clever magician—you misdirect any questions about the burden on poor people, by pulling “high income earners spend more on things that attract consumption taxes” out of your top-hat!
So. Why?
This just seems super-mean right? Why would a government apply a regressive tax that hurts poor people, AND doesn’t even help money move as efficiently as it should?
Well. You’ll not be surprised to know, it’s because of wealthy people.
See, for various political, and some financial, reasons, governments—even ones that print their own money—like to ‘balance the books’ as much as possible. They like to pretend that government finances operate like household finances. They like to pretend they need to earn some ‘income’ in the form of tax, in order to pay for ‘outgoings’ like public infrastructure, education and healthcare. This obviously doesn’t match up especially with the way I described money working, but it is how the game is played.
The point is, it benefits politicians on both the right and centre-left (read: electable-left) to perpetuate this myth, because it gives them something to hold the opposition party to account on.
Most political policies are a bit of a crapshoot. Even the best ones typically don’t deliver their full benefit for years or even decades—healthcare and education policies can take a generation to unfurl into the wider economy. But, money being spent, and taxes being ‘earned’, happens in real-time, and that makes it a super-duper tool for political campaigning and attack.
And, once you’re stuck in that death spiral, you have to use taxes politically, right?
After all, what are you going to do?
Increase taxes on wealthy people who donate and vote?
Or
Increase taxes on ‘everyone’, in a plausibly-deniable way that appears fair, but actually punishes poor people (who happen to also be less likely to donate, vote, or have time to think hard about it)?
The net outcome is that wealthy people can effectively spread any tax burden that should fall to them onto the wider population; and, especially, onto the people least connected, and least qualified to understand what’s being done to them or to fight back.
Being good in politics is hard.
Of course, in order to accept any of this argument, you have to accept that the wealthy should pay more taxes. The debate really comes down to whether you believe the wealthy create more value in society—through jobs, growth and industry—or whether they cost society more—through oligarchy, exploitation, and ecological damage.
We’re going to dig into that over the next few newsletters. Stay tuned…
-T
>>Donald Trump has entered the chat…
You might have come across the phrase “state monopoly on legitimate violence”, originally coined by Max Weber in 1919. It’s basically the idea that the state can legitimately use violence (police/military) to protect the value/s of its economy (via tax, defence, justice, regulation etc)
Some of you will be thinking ‘what about cryptocurrencies like Bitcoin which have no-one to tax them. How come they are worth anything?’ I’m sure I’ll do a series on crypto at some point, but for now let me just say the human internalisation of ideas is powerful stuff: If the idea that “currency” has inherent value is strong enough, it’s not a stretch to entirely disconnect it from the reason it has value…How long that disconnection can last remains to be seen.