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Poor TaxMany countries have instantiated a so-called "progressive" taxation system. This system -just like any other tax system- does not work (see for example Taxes And Myths ) but why is it so popular? Why is it that so many people believe that it is "just" and "fair"? Why so many people fall for it?

Good questions. Let's take a look.

The basis of a progressive taxation system is that it…well… taxes your income on a progressive scale. This is, the more you earn the more they rob you… er… pay… pay (need to remember this).

MARKETING ARE US

To begin with, the term "progressive" has a positive connotation. Who would oppose progress? Progress means civilization, wellbeing, happiness. Only an idiot would oppose it. Nevermind politicians use the term "progressive" as in its mathematical definition (a scale going up), not in its social or political one… but who is counting…

Then we have the perennial concept of forcing the rich pay since they can afford it. Seems fair, just… hell… almost divine! Who cares if it is disinformation! You must remember that governments do not produce wealth, governments only consume it. People produce wealth by saving and investing those savings in productive enterprises. The richer a person, the higher its savings the higher the investment level and the higher our standards of living (see for example Those Bastards - The Rich People ). If this would not be the case, then the USSR would have been a paradise! There you have it, an incontrovertible example of the success of pure government wealth generation. Communism anyone? No?

Of course, there are always people "out there" that believe in "socialism". You see dear reader, it would seem that somehow socialism is different from communism neveryoumind that they both have the same roots and the same goals. It is only a matter of degree. Following in the same though, if a lethal dose of poison is… well… lethal, a sub-lethal dose must be good for you! Rat poison anyone? No?

And then we have the "free" factor. Who can refuse a "free" good or service? Free health care? Sure! Free schools? Sure! Free welfare, free money? Sure! Free for everyone from the government near you! Well… not quite. It so happens that all this "free" stuff actually has a value. Somebody, somewhere had to manufacture it and this person did not work for free. The same is valid for services. Somebody, somewhere had to perform a task and this task was not free. So, somebody, somewhere had to pay for all of that and that somebody certainly isn't the government since governments do not produce wealth and as such they cannot spend it. Easy right? Taxes paid for all of that. This is, non-government wealth paid for them. But this reality contrasts with the previous image where the government is the giver of free stuff, when in reality people (through taxes) are the real givers. But then again, a lie should never stay in the way of a good propaganda story.

IT'S THE ECONOMY, STUPID!

Many politicians sell the notion of progressive taxation as something that improves the economy. You see, with all that spending (coming from taxes) the government is actually "stimulating" the economy and as we all know, a "stimulated" economy is a good economy for everyone! But there is a tiny problem with this. What happens once the money is spent? The "stimulus" stops and with it this fake economic progress and so more money (taxes) is required. And so the cycle begins anew. But then again a question lingers: why is that a government is necessary to spend all this money? If governments would not exist people would spend some of this money (thus naturally stimulating the economy) but they would also save some of it hence creating a pool of wealth that will be invested and as such improve our standards of living! So in reality the government spending our taxes not only creates unsustainable economic booms (followed by busts) but, more importantly, removes investments from markets. After this, the equation is simple: less investment = less economic activity. Happy now? We know that politicians are but how do you feel?

ONLY THE GOVERNMENT CAN DO IT

Then we have the inevitable thought that certain projects are "too big" or "too expensive" for "private initiatives" to take on them. You see dear reader; taxes are required for such projects "for the good of the people". This much is true; many are indeed too large and expensive. But the question is a different one. The correct question is this one: why would we want those projects in the first place? Think of massive electrical dams or all-reaching electrical grids or massive subway lines or gigantic ports or border-to-border railways or socialized health care or public schools or many others. Massive undertakings indeed! They are all useful, right? Sure. But at what price?

The question whether or not we want those things is meaningless unless we add a price tag to it. But this price tag cannot be thought as the actual price only, but price going forward too. Here is where a key economic concept comes into play: the opportunity cost. If the government spends our tax money in all those things, it is clear that this money won't be used for other things… which would have been a substitution for the first thing but at a cheaper price. This is complicated, we know. So we will explain some more.

Consider this. People uses electricity but let's say that a new form of energy is discovered. Let's call it "Energboost" (for no particular reason). Two scenarios:

  • Free market: Enerboost is far more efficient than electricity but it is more expensive to produce. In the beginning only rich people could afford it but eventually scientists and engineers pushed by competition drive prices down until it is accessible to everyone. These developments come at no direct cost to the consumer since all investment money is private. Also, as this change is gradual, everybody has the chance to adapt to it and slowly replace all energy-using devices at a pace they can afford or prefer.
  • Government: Within a few years of Energboost being discovered, the government declares it a "national priority" and sets-up a commission to "Energboost" the entire country. The price tag of such endeavour will be massive and taxes will have to be raised (or money borrowed, which has the same effect). This money comes directly from your pocket since there is no private investment to Energboost the country. In a few years the progressive country of (insert your favourite country name here) will be the proud owner of a fully developed and massively expensive Energboost system. Great! Except that now you have to replace all your electrical devices (which means more expenses for you whether you can afford them or not). Also, Energboost is expensive to produce (although it is subsidized)… more money out of your pocket. Lastly Energboost capacity is ridiculously exaggerated… but all the infrastructure still needs to be maintained… at an exorbitant price.... coming from your pocket.

The difference is simple. The free market operates on the basis of pay-as-you-go as you need it. Governments operate on the principle of pay now, pay later and continue to pay forever. Furthermore, as the free market is competitive, wealth is used to create new and efficient ways to improve on existing technologies and deliver cheaper gods and services. However, in the government scenario this is not the case because the required wealth to produce such improvements has been syphoned-out from everybody's pockets.

The amount of money required to Energboost the entire country used by the government cannot be used by private companies to improve on Energboost technology and hence drive total costs down. The opportunity has been lost and this is the real cost of such lost opportunity; the difference between both  price tags, the Free Market price and the Government price.

And so when we advocate that the real price must take into consideration the opportunity cost we are only acting as honest accountants. Although the notion of "opportunity cost" is somewhat obscure, its effects are very real indeed! In our Energboost scenario the question is simple: do you want Energboost now at expensive prices going into the future or would you prefer to wait and have real and ongoing reductions in prices over time?

Presented in this manner (i.e. with reality in mind) the answer to the question changes a lot. Most people go for cheap, not now. Of course, most people want now, but not at the real price tag. Yet, this price tag (not surprisingly) is never put forward or even calculated! Do you still believe that such mammoth undertakings are indeed "for the good of the people"? Of course not!

SYNERGY

And then we have the inevitable synergy. These mammoth undertakings will "electrify" (pun intended) the economy which through synergy will develop faster and hence create higher levels of wellbeing for everyone.

Not really.

Consider this.

In our Energboost scenario after the project is finished, Energboost is still very expensive and must be subsidized. Sure, companies would jump at the opportunity to use Energboost at artificially depressed prices and yes, companies will flourish. But then again, who is paying the subsidies? You are! Through the unholy trinity: tax, borrow and print. There is no free lunch. Somebody must pay for this and in this case it is you. Sure, you may get a job but your taxes and inflation will go up (which will rob you of your salary) and government-provided goods and services will go down (which will force you to spend more of your salary on them). Does this make any sense? Furthermore, do you realize that by subsidizing Energboost through the government, you are subsidizing private enterprises? Money is flowing from your pocket to company's pockets without your knowledge or consent.

The synergy effect is real and it can be measured. The problem is the old one: at what cost? The government's way of doing it produces a cost that it is way too high, although it is distributed among the population and hence invisible (for propaganda purposes). The free market way is slower but it produces far lower costs which are also distributed throughout the entire population. The first one harms the population, the second helps it.

WE DON'T PAY TAXES

Lastly, we have the myth that "poor" people don't pay taxes.

In which universe? Because this is most certainly not the case in this one.

In "progressive" taxation systems most people on low wages do not pay direct taxes. This is correct and this is used to create all kinds of political propaganda. You see dear voter? Vote for me and I will raise minimum wages while keeping you untaxed! What else can you ask for?

This is, again, propaganda. In real life everybody pays taxes whether this person is taxed directly or indirectly.

Every single product is produced by companies that pay taxes and rest assured that this cost is passed to you, particularly to poor people.

In addition, many products have so-called Value Added Taxes (VAT's) put on them. Some of the VAT's are visible such as in UK or US, but in most places they are invisible; they are computed directly into the retail price. People (including poor people) pays those taxes.

And then we have the double/triple/quadruple "dipping" that governments do when taxing. Just because you may be federally-tax exempt, this does not mean you are tax exempt (think provincial, municipal, sales, etc., taxes, for example)

Think food, clothing, transportation, shelter, municipal taxes, and in general terms every basic good and service that a person needs to live a reasonable life. They are all taxed even if you are on minimum wage or even if you have no income!

The concept that in a progressive taxation system poor people do not pay taxes is the truth; it's just that it isn't the whole truth.

CONCLUSION

All progressive taxation systems are sold to people through deceptive propaganda. They are indeed re-gressive systems because the more you earn, the more money you have to save and invest, the more money is taken from you hence preventing you from investing and in the process stagnating everybody's standards of living. Let's be clear: taxation is theft plain and simple and as such it creates the very same consequences as theft... well... perhaps not exactly all the same... since politicians get to keep their jobs.

At least this is how we see it. You may see it differently, but the next time you think that a price is too high or your wages too low, you will know who to blame. Your choice.

Note: please see the Glossary if you are unfamiliar with certain words.

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