Is the Tax Wedge Becoming Unaffordable?
Updated: Oct 28, 2020
My friend has a property which is being rented out. Getting that done has thrown into stark relief the crushing effects of Democratic Socialism’s ever rising tax wedge.
My friend has a property which is being rented out. Getting that done has thrown into stark relief the crushing effects of Democratic Socialism’s ever rising tax wedge. The tax wedge is the big difference between how much everything costs nowadays and how little producers get for deploying their labour or capital to supply those things.
Roughly speaking, let’s say my friend is looking to get a monthly rent of £1,500. That represents an annual rent of £18,000. The gross rental income is taxable as marginal income. Most reasonably productive people, in the Southeast UK at least, now pay 40% income tax at the margin. That means the state helps itself to £600 a month from each month’s £1,500 rental cheque. So the annual net income to my friend is £10,800 (i.e. 12 times £900).
The government takes this cut, equivalent to £7,200 per year, to pay for the increasingly unloved Democratic Socialist Welfare-Warfare State, which is simply a vast, discreditable mix of unaffordable, ineffective, and inefficient ‘services’ of dubious worth, vote buying public sector payments and deep state waste.
Back to my friend. The property will provide a monthly income of £900 after tax (i.e. £1,500 less £600), and before most expenses. For this reduced return, constant attention is required to placate tenants and ensure that broken appliances are rapidly replaced.
One reason that the tenants may be so demanding is because the rental transaction looks very different to them than it does to my friend. The tenants are young professionals who almost certainly also pay 40% of their marginal income in largely pointless tax tribute. Assuming this is the case, in order to pay £1,500 monthly rent to my friend, the tenants must earn £2,500 per month. This is £30,000 per year. That in turn is very roughly the average pre-tax income in Britain.
So they must earn £30,000 annually to be able to rent a modest suburban flat. (See my www.awah.uk posts 4th on May ‘Cheaper Better Housing after the Fall’ and on May 4th ‘The Cantillon Effect displaces poductive People’ on how the state has driven housing costs up so high.) But my friend only gets £10,800 of that, and that is before property management and maintenance. The tax wedge, here amounting £19,200, has been taken from the tenants and from my friend collectively (£7,200 from my friend and £12,000 from the tenants).
As described in my May 19th post ‘Twice as well off without Politics’, only about a third of UK government spending is on services such as education, health, transport or defense. And it is clear that voluntary cooperation arrangements would provide these services to a higher standard and at a much lower cost. So most of this tax tribute really is just an uncalled for drain on productive people’s resources and living standards.
It may be objected that not everyone is paying 40% marginal taxation in all such transactions – though increasingly they are. The example may be a little exaggerated, but the overall tax wedge is very great across the board. A notable example, in particular in western Europe in particular payroll and income are payroll and income taxes on workers’ salaries. In some countries taxes can oblige employers to pay two Euros for every Euro that the employee takes home, creating another huge tax wedge.
The point is that tax represents such a high cost that it greatly reduces the amount of productive cooperation and exchange that is worth undertaking in the first place. Every manufactured product made in a western Democratic Socialist society basically must be sold for twice the underlying cost of production. The product’s sales price must include both the direct costs of all resources used up during production, and then as much money again in the form of the state tax ‘social overhead’.
Imagine two societies, one free and the other a typical European Social Democracy. Assuming both are equally technically competent, they might, for example, both be able to make a car for, say, £10,000 a unit. The socialized economy however has to add another £10,000 of tax overhead to give a final sales price of £20,000.
Clearly many more cars will be produced and sold in the free society, where they cost £10,000, than in the unfree society where they cost £20,000. The standard of living in the free society will be much higher. This is not just because cars are so much cheaper, but because so many more people will be able to afford them. So many more cars will be produced, creating still more wealth and employment in the free society.
And it is hard to see why customers in any third country should want to pay £20,000 for a car from a democratic socialist society, rather than £10,000 for the comparable product made in an un-parasitised society. Unsurprisingly western countries with relatively larger state sectors and bigger tax wedges, for example Italy, used to rely on constant devaluation of their currencies to make their goods competitive. Effectively they were continuously pushing down the value of productive people’s incomes (and savings) to make space for their super expensive, useless state overheads.
With the European Union’s creation of the Euro, higher tax wedge societies can no longer devalue a national currency. The EU uses tariffs and so called ‘standards’ to keep out cheaper products from lower tax societies, thus making European consumers still worse off. But the higher-tax-wedge EU members are still stuck with being perpetually un-competitive compared to Germany. As a result, industrial production in Italy has fallen back to 1970s levels.
The EU is a club of gigantic national Democratic Socialist state sectors trying to strip as much money as possible out of their productive people. It exists to stop the Continental state sector take from being undermined by competition from lower taxation societies, or by political resistance in any nation state. On the way it supports and feeds on crony capitalist scams such as compulsory movement towards an impoverishing ‘Zero Carbon’ economy (see Jul 2nd ‘Some Perspective on Climate Change’).
Cheaper goods from less heavily taxed societies are therefore excluded. Nobody can vote against remorseless state sector looting at the national level because the supra-national kingpin, the EU Politburo in Brussels, is unelected, unaccountable and unsackable. Thus proving, by the way, that Democratic Socialism is well on the way to failing on the Continent, at least as far as its Democratic component is concerned.
The last thing such a statist club wants is for a member to leave the reservation and escape their cartel of tax and regulation states. The EU’s worst nightmare is a lower tax, less regulated Britain prospering outside of their control. All these high tax wedge arrangements depend on suppressing competition from freer societies. At the moment the world is dominated by a coterie of mega-states including the USA, the EU, and China. This makes preventing international tax competition between rival jurisdictions easier, at least for the time being, because the remaining smaller jurisdictions can be bullied into acquiescence.
These mega states are linked by overlapping international bureaucracies and their fellow travelling crony capitalists. The clearest current example is the WHO, CDC, Big Pharma and Bill Gates club of vaccine pushers who have managed to override traditional healthcare practice and indeed common sense in almost all nation states.
These international interests are pressing an agenda which amounts to world government, and one which amounts to an international EU style bureaucratic politburo with nary a trace of any say for the peoples of the world. That means no place for people to move to escape bureaucratically mandated, bloated state costs and diminished freedoms.
The EU has taken a big step towards tightening its grip by getting its hands deep into the pockets of the last big semi-solvent Continental society, Germany. Merkel has betrayed German voters by allowing the EU to borrow money to spend in southern states like Italy and Spain based on German creditworthiness. It remains to be seen whether they voters will offer any resistance.
However, the One World Order or ‘Globalist’ interests, associated with the billionaires and crony capitalists of the Davos crowd, do face obstacles to their top down interventionist designs.
The main one, of course, is that Socialism, Democrat or otherwise, never works. Socialism always suppresses productive effort and values in a society - and it always fosters unproductive attitudes and values. That’s the reason why the tax wedges exist, and continually grows. Socialism diverts more and more people away from productive, voluntary co-operation towards theft and bullying. But, as Mrs. Thatcher said, in the end socialists always run out of other people’s money.
And right now, the interaction between the huge tax wedges in some EU member states and the catastrophic economic damage caused by generalized government failure in relation to lock downs is adding a whole new twist to the problems facing those countries.
In 2019, before the mass hysteria of the most recent corona virus scare started, Italy recorded total economic output (GDP or Gross Domestic Product) of around 1,800 billion Euros. Of this the Government sector – which in reality is only marginally productive – accounted for around 870 billion Euros and the productive, private, or market sector accounted for around 920 billion Euros. Italian Government debt was 135% of total GDP. (These statistics are based on information from the invaluable www.goldmoney.com site.)
Since the productive sector is the only one that creates resources that could be used to service the debt it would be better to say that Italian Government debt in 2019 was equivalent to over two and a half times annual marketable production, which was already probably difficult to sustain.
Enter ill-conceived and crippling coronavirus lockdowns and related social distancing, quarantines and mask mandates. They all had, as far as anyone can determine, no effect either way whatsoever on the progression of what was only ever the equivalent of a severe winter flu, just like those in so many previous years. But they have reinforced the pre-existing global slump and its associated trade wars, especially in tourism dependent southern European EU members.
So back to Italy. All figures for 2020 must be estimates at this stage, but on the basis of an assumed increase in Italian Government spending of 8%, and a 20% to 30% lock down induced fall in market sector GDP, the state’s share of GDP could rise to nearly 60%. It is uncertain whether the private sector crunch will be quite as bad as this, but it is very believable that state spending will increase still faster than expected.
The likely outcome is that a shrunken Italian private sector would be left shouldering the cost of a public sector up to 1.4 times bigger than its entire marketable production. Italian Government debt would be rising towards being 4 times the size of the productive base.
You may say that the economy will bounce back next year, but the crushing tax wedge will itself certainly impede recovery of marketable production. France, and indeed Spain, is in similar straits. The cost of France’s already elephantine public sector could well rise from 1.25 to 1.7 times the annual production of France’s put upon marketable production sector. Official French Government debt will be around 115% of total French GDP. But it would be more realistic to say it will be would be over 3 times the resources created annually by its market sector.
How is this, and the similar messes in the UK and the USA, to end? It is impossible to say. It is at least possible that different outcomes will appear in different places.
One result of the lock down lunacy is that many productive people have been reappraising what expenditures are really necessary, especially in relation to work, commuting and city versus suburban living. For most people the biggest expenditure they will ever make is not a house but their government’s taxes. As people try to simplify their lives and cut costs the rising tax wedge will weigh down ever more obviously on well-being.
Obviously, officials, elected or unelected, would like just to take more for themselves and their crony capitalists allies. They may succeed, especially in the EU, at great cost to future prosperity. In the United States there are, however, many decentralised jurisdictions. For years economic activity has been shifting from high tax states to lower tax states, even though the total federal, state and city tax wedge does not vary hugely across the country.
Given the more damaging lock-downs typically inflicted by Democrat politicians in declining higher tax cities and states, the tax wedge faced by impoverished ordinary Americans may finally be becoming a defining issue. Hence, perhaps, President Trump’s remarkable recent proposal to suspend federal payroll taxes.