Tax

The arguments against tax are a cluster of propositions which follow from the neoliberal conception that people are at all times rational and are motivated primarily by economic self interest. The individual decisions made on that basis lead to optimal outcomes in all spheres, and any intervention by government can only make things worse. I don't accept any of that, but let us suppose it is true, for a moment.

According to this one should take the absolute minimum in tax, so allowing people more control of the money they earn: and they will then put that money to sensible use in their own interest, as they perceive it.

I have been thinking about that in the context of pensions. It is obvious that there will come a time for all of us when we are unable to work. That may be early or late, but it will come. So how does one provide for an income in old age?

In societies where there is no welfare state one can rely on children or extended family. This is one of the reasons that the birth rate falls when a country gets richer: through a combination of the introduction of social welfare, availablility of contraception, a better survival rate for the children you do have, private insurance, and perhaps more surplus income available for savings, the horror of a poverty stricken old age diminishes, and so people can make a rational decision to limit family size. How far one can do that is affected by culture and religion and a lot of other things: but generally that is a pattern we have seen in many places. One may argue that this demonstrates that people are mainly motivated by money, as the neoliberals say. I would differ because I do not think there are all that many women who wish to have a child every year, even if it is their best chance of a "pension": child birth is dangerous and they may not live to need it. It follows that the rational economic actor would make a different calculation if they happened to be female: by itself that seems to me to refute the analysis. But it has deeper implications, I think.

The neoliberals wish to reverse the move to social welfare, and return all responsibility to the individual and, by extension, to the family. They wish to do that by removing tax and letting people use the extra income to make those provisions for themselves. There are two problems with this that I can see: the first is already outlined above. In order for this to happen one must assume that some members of a family will sacrifice current income for the future gain of support in old age. But if everyone is motivated by economic gain there is an inherent contradiction which I do not see addressed. For it to work one must assume either that current income, as increased by reduced tax, will let everyone save enough to give them an adequate income in old age. In that case, and assuming that women are people, why would they have children? There is no certainty that the children will contribute; there is no certainty of survival. A rational woman would do exactly what a rational man would do: she would work and make certain of her financial position throughout her life: and she cannot do that if she has kids. In short the neoliberal position depends on women acting differently from men: and that means they cannot be fully human in the terms the neoliberal conceives of human nature. The alternative is what we see in the third world: current income is not enough to provide for old age and so we are to rely on children and extended family. I will come back to that.

The fact is that most people do want to have children, and that is taken as a given: but there is no equality in the sacrifice made and, given the biological facts, there cannot be. It is true that men can take equal responsibility for the care of children after birth (they don't, even now, but they could) but that will not change the fact that for some period the woman will not be able to work. It might be quite a short period, but she will be disadvantaged vis a vis a man no matter how short: and why would she do that if the neoliberals are correct?

At this point the neoliberals move from the individual as the unit, to the family as the unit. They have to. But already this undermines the whole thesis. If we are to rely on cooperation between individuals on the basis of "the family" then what is to stop us relying on "the community" or "the society"? Nothing whatsoever that I can see. The neoliberal depends on the altruism of women and there is no escaping that. Yet per his stated position altruism does not exist. The othering of women is essential to the neoliberal position: it is intrinsically sexist. It also relies on the altruism of men, actually. The man in this conception is to sacrifice some of his income to support his children: and that is also at odds with the characterisation of human nature. Since he can provide for all his needs across the life span through work etc there is no benefit for him in doing this. So he won't. The neoliberal position is incoherent in this sense. If the proposition is that, sans tax, we can provide for ourselves throughout our lives we have no economic incentive at all to form families. And it is all about economic incentive ! It follows that this cannot be the argument underpinning the proposition: it must depend on inter-generation cooperation and not on the ability to provide for yourself by your own efforts (assuming they do not wish to see the extinction of the species)

If we rely on children to provide for old age there is another curious consequence: we are loading a debt on to the next generation. It happens that the iniquity of doing this is, in another part of the forest, used as a justification for the "austerity" we are invited to accept in order to reduce debt. There is no difference here: we demand that the next generation work to support us, as we work to support our parents and grandparents now. But if we do that through an equitable arrangement for support of the elderly that is somehow a bad thing. Well why is it? It is because it is imposed by government rather than voluntary, perhaps? Well if that is the case then it is wrong because we do not allow the next generation to decide to let their parents starve. That is freedom of a sort, I suppose. You can keep it, for me. Once again the neoliberal position is either nasty or it is incoherent. They do not believe anyone will take that decision, in which case they are utopian, which I have mentioned before in other contexts: or they do, and don't care. They also have to believe that there will be no one who would like to support their parents, but can't: so presumably there will be no-one without sufficient income in this bright future. But we only got here because it is assumed that people will not have enough income to support themselves across the life span if they make the rational decision to keep all their money for themselves (which, you will note, is the whole justification for a reduction in tax in the first place): and if that is true of the current generation how is it not going to be true for the next? I suppose they think it is a transitional problem: the parents paid tax so couldn't save to support themselves: the children won't, so they can support the parents: and they will still have enough left over to save for themselves? Without the economies of scale attendant on redistribution through tax? I don't think that will work.

On a more practical note, we are told that we can no longer afford pensions and so people must save more for their old age. Once again the reduction in tax is supposed to allow them to do that. So let us think about that. At present in this country the state pension is unfunded: it is paid through current taxation. There are also private pensions, which are funded, and those rely on saving some part of your income which is then invested to provide income in later years. This does not work. It does not work for two reasons: in the first place private pensions eat up all the profit from investments in management fees and profit. That has been the subject of some consternation just recently and I need not go into that which has been covered in the news extensively.

The other reason it does not work is because of inflation. A normal working life in the country is 40 years. Even when inflation is very low savings do not keep pace with the rise in the cost of living all the time: and for many years we have been wedded to "low interest" as a positive benefit, for reasons unrelated to pensions etc. That may or may not be a good thing: but that does not matter in this context. The fact is that over 40 years the amount saved in the early years CANNOT generate enough to meet expenditure when the period is over. To illustrate: Say the average wage in 1970 was £30 per week and that it is £475 now. If we assume that the amount required to meet current expenditure is 80% in both cases (not very realistic as it is far too high, but it serves) then a very prudent person in 1970 could save £6 per week. £312 per year. If all else remains equal (which it doesn't but let that pass), and assuming interest at an average of 2% on savings throughout, and inflation at 7.34%, then total savings over a lifetime of work are £88,139. If you change the interest/return to 5% it results in savings of £139,424. It bears no relation at all to what is need to keep you in old age: and it cannot. What it means in practice is that if you live 15 years after retirement you can spend 15% of average income each year on the 2% assumption: and about 30% on the 5% assumption. Which is poverty by anybody's standards. If you live any longer you leave behind a debt: which is a problem for the next generation though that is one of the problems this whole idea is supposed to solve...And as Vninect just pointed out, it means you save 20% of your entire income over a whole working life to live on 15% of the average income for 15 years. Is that a good deal?

The actual amount you can save in the early years cannot increase enough because, whatever inflation does, interest rates and returns on savings are not high enough, and saved wealth is taxed by inflation. The rate of interest/return can vary and be higher than that: but the fact is that low levels of saving get low returns. I used 20% savings because that is close to the level of income tax in this country: so that is the amount one can reasonably expect if that tax is reduced by 20%, as neoliberals propose.

Edited by FionaK - 31/12/2011, 13:31