INCOME TAX: The Worst Tax of All

I'll say it bluntly - so there is no misunderstanding. I consider all tax to be immoral. And by "tax", I mean any money collected by the government by force. If the government was really about providing "services" - then they would act like other entities that provide services (businesses) - and allow us to pay for what we choose to use. In other words, a voluntary transaction.

However, in the world as it is, taxes (like death) are a certainty.

And given that, I'm always in favour of any move to reduce or eliminate tax.

The first tax I'd get rid of is the "income" tax, as I consider this to be the worst of all taxes - for two major reasons.

1) An income tax is a tax on effort.

An income tax is just that - a tax on your income. Your income is derived by you exchanging your effort (in your business or job) for money. The government steps in here, and demands a very large percentage of your earnings.

Most people don't really notice this, because the tax is taken out before they get paid. Politicians, very early on, realised that if they wanted to siphon off the earnings of citizens, then they'd best do it in as hidden a way as possible.

However, people DO notice it as their income grows - either as a result of a pay rise, working longer hours, taking on a new job, or an increase in business profits.

In fact, due to the "progressive" nature of income tax (the more you earn, the higher percentage you pay), the average worker is bound to notice what is often called "bracket creep" - meaning how their taxes go up once they enter a higher tax bracket.

In the 60s, I recall the Rolling Stones expatriating themselves from the UK - in order to avoid such "creep" - which in their case put them in the top tax bracket - over 90% of their income at that time!

Of course, it doesn't take a genius to work out the effect of such a policy.

Just ask yourself the question: "Would I prefer to work 40 hours and be taxed at 28 cents in the dollar - or add an extra 10 hours and have those extra earnings taxed at 48 cents in the dollar?"

The same calculations are often made by the unemployed - when they consider the financial advantages of either sitting at home and receiving the dole, or getting a job.

In each case, a rational person will take the easy option - less effort for more money. That's human nature.

So, in this modern industrialised world, we are lumbered with a pre-industrial tax policy. A policy which actually acts as a disincentive to work.

Consider this: if you win $10 million in the lottery, in most countries I know of, you won't be taxed. In other words, get your money by luck - and you get to keep it. But get your money by honest work - then sorry buster, hand over 35% to the tax man!

What sort of message does that convey? What sort of society taxes work and effort, but rewards luck?

To make this clearer - imagine the income tax being applied to sports teams, as in the following scenario: You belong to a top- rated sports team of one code or another, and you are a professional. What makes your games interesting is the fact that the more successful you are, the higher your tax rate. Win one game - and pay 10% of your earnings in tax. Win 10 games during the season and you end up paying 90%. Mmmm, I wonder how many members of your team would feel a slight disincentive in this arrangement - and perhaps make a clandestine decision to only win 5 games, in order to keep the tax rate under 50%!!

The developed world will pay a high penalty, in the near future, for such income tax policies - as they compete with mean, lean and hungry "developing" countries - with a much lighter income tax burden.

2) An income tax is an attack on your financial privacy

There is a much more insidious effect of income tax - than just taking money out of your pocket. The fact your "income" is the target, means the government needs to know exactly how much you earn - and for that matter, how much you spend also.

In the days when a larger proportion of the workforce were employed on wages, this didn't really surface as a problem - as the tax was taken out at source and the whole process was less "public". But now there is rapid growth in the small business and self-employed sector. Such people are paying their tax on self- assessed income - and have to pay it manually, one to four times each year.

This trend towards self-employment, contracting and consulting means more and more of the government's taxes come from people who are not in the "taxed at source" net. And there is only one way then, to ensure tax compliance - the full and complete disclosure of all your financial affairs.

This is what "self-assessment" means. It means you have the privilege of calculating your own tax due - but you must have all the documentation to back it up, and it must be made available to the government on demand.

Perhaps you don't consider this loss of financial privacy to be much of an issue - but I can assure you it is.

Financial privacy is closely linked to personal freedom. If you cannot go through life without the government needing to know everything about your financial dealings - then I'm afraid that whatever freedom you perceive you have, is illusory.

Financial privacy is of the same order as personal privacy.

When you go to the Doctor, you don't expect him or her to divulge your personal medical information to the government. Well, it's the same with money. In a free society you wouldn't have your bank or accountant divulging your personal financial information to the government either!

So, income tax is a two-pronged danger. It removes both the possibility of financial privacy, and the essential incentive for effort and self-betterment.

A tax on income is bad enough, but the fact it is "progressive" makes it even worse.

If you earn $40,000 a year, then a 25% tax rate will take $10,000 off you. If you earn $80,000 a year, then the same tax rate will take $20,000. So even a "flat" tax is progressive in this sense - the more you earn, the more you pay.

However, a "progressive" tax takes this one step further. Once again, if you earn $40,000 and pay 25% - you're out of pocket by $10,000. But, by earning $80,000 - the extra $40,000 is taxed at a higher rate - say 35%, making the total tax grab $24,000.

So, what to do? Well, any reduction in income tax would be a good thing. Even better if such a tax were to become "flat" - i.e. the same rate for everyone (as in Russia, 13% - or Hong Kong, 17%).

I think the economic engine would receive a kick start if a flat rate of income tax was implemented - and yet that is a very minor reform as far as I'm concerned.

Shifting tax to spending (a sales tax) would be even better - comparatively, because it would completely remove the need for reporting income as an individual - as well as removing all road blocks to working smarter and harder.

A sales tax would break, forever, the link between tax and income - and although still a tax, it would go a long way to liberating human creativity and maximising individual freedom.

The downside, of course, would be that all those in business would be defacto tax collectors. However, in reality, this already happens in most countries (VAT, GST etc) - and what's more, it happens on TOP of the income tax regime.

Removing at least one such tax would have immense benefits.

Will this happen? Not likely - not as long as people see the government as some sort of parent-substitute, and go running to it on any whim and for any "need".

Not until the very principle of "income redistribution" becomes a dirty word, will there be any serious reduction in taxes.

Of course you, personally, don't have to wait that long!

Yours in freedom

David MacGregor