For longer than I can remember it has been axiomatic for me that taxation keeps people poor.  Unfortunately, fellow libertarian, Leon Louw’s work (if true) rather puts the kybosh on this.  His conclusion, drawn from huge amounts of data is that tax rates don’t make much difference.  While this doesn’t completely undermine the argument against taxation it does change it.  What follows is what I used to think and I include for the sake of posterity.

I am against taxation because:

• it involves force which I am against
• it makes the world a worse place (than it otherwise would be)

So, it makes the world a worse place, then?

Yes, all things being equal, the more taxation you have the poorer you end up and the less you have the richer you end up.

Evidence?

The star economy of the 20th Century was the United States.  I am pretty sure I am right in saying that for most of that period it had lower taxes than, for instance, Europe.  And for most of the 20th Century Americans were (on average) richer than Europeans.

Another example is Hong Kong.  I believe they have an incredibly low rate of tax.

Britain’s era of being top dog ie the Victorian period coincided with a low rate of tax.  Before the First World War it was 10%.  It is now over 40%.

A star performer over the last 50 years was Japan.  Again it had a very low (comparatively-speaking) rate of tax.  Hmm, perhaps I ought to re-phrase that.  It had a very low effective rate of tax.  I have been told that it is a nation of tax dodgers and that the government turns a blind eye to this.

But surely Japan’s growth was due to all that government intervention?

There has been intervention in most places, including Japan but little in areas such as cars, motorbikes and consumer electronics ie precisely the areas where Japan has done well.  See Phillip Oppenheim’s ”The New Masters” (if you can get hold of it)

Ah, but what about Sweden, that has a very high tax rate?

It does.  And seems to be pretty prosperous.  I have been told (by Swedish economists) that the high tax rate is relatively recent - certainly that Sweden’s greatest period of growth happened when taxes were much lower - and that nowadays, although taxation is high, regulation (which is a form of taxation) is low.  So, that may compensate.  Whatever the case may be no one seems to have been able to repeat the Swedish experiment while low taxes have brought prosperity to, well, just about anywhere that’s ever tried them.

OK, but what about the downside to low taxes - no NHS, no welfare state etc, inequality?

Well maybe we shouldn’t have an NHS.  And maybe we shouldn’t have a welfare state (to follow).

On the question of inequality, I should point out that it does bother me.  I don’t want to live in a world where I am prancing around with my silver-topped cane and everyone else is on their uppers (though the reverse would be worse).  But that is yet another argument for freedom.

Huh?

Let me explain.  When people complain about inequality they tend to focus far too much on “income” inequality rather than what that income will actually buy.  After all, is a £100,000 car really 10 times better than a £10,000 car?  Not really.  Usually, in some respects such as fuel economy and maintenance costs it is considerably worse.

In terms of what people actually end up it seems to me that in areas such as cars, food and holidays ie things provided in a freeish market we are fairly equal but in areas such as housing and education ie areas dominated by the state, we are not.

You make it sound as if prosperity is an unalloyed good thing.  But doesn’t it also bring along global warming, pollution, obesity and the end of community?

Well let’s take those one by one.  If the mainstream media is to be believed global warming/climate change is caused by CO₂ and other forms of pollution and there are ways of dealing with that.

As far as obesity goes, I need little convincing that it’s a problem but it’s far less of a problem than starvation which is what you get when you’re not so prosperous.

When it comes to the end of community, progress certainly does this.  It did it at the beginning of the Industrial Revolution and when the Industrial Age (certainly in Britain) came to an end.  But it also created communities, such as trade unions and friendly societies in the Industrial Age and the online communities that are being created now.

Permalink • Economics • Last Updated: 05 February 2007

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