All’s fair in love and war…and politics, apparently.
Bankers’ bonuses, workfare, the 50% tax rate – every headline in the news at the moment seems to be about ‘fairness’. Now, I know what we regard as ‘fair’ is simply a byproduct of our genetic strategies, and I know you can’t prove a ‘should’, but despite that – or perhaps for that very reason – I’m still amazed (and deeply depressed) by people’s extraordinary double standards. If rich people go shopping for groceries, we don’t expect supermarkets to charge them higher prices than poorer customers – in fact, it’s illegal – and yet the tax system is built on the assumption that the rich should pay more than the rest of us. We now know that the richest 1% pay over a quarter of this country’s income tax bill, but that’s not just because they earn so much more than the rest of us. We expect them to pay tax at a higher marginal rate, irrespective of the fact that they generally use public services less than those who can’t afford private healthcare, public schools and chauffeur-driven limousines. Why is their extraordinarily disproportionate contribution not enough? When will it ever end? Will ‘fairness’ never be achieved until all our bankers are forced to retreat to their ski chalets in Switzerland?
If I allow reason to take over from emotion for a moment, I can see exactly why. As Darwin eventually revealed, we’re all in competition with one another. Never mind the fact that we have a set of genes left over from the African savannah that’s 40,000 years out of date, we still want to be better than our peers. And it just so happens that democracy and economics are fundamentally at odds. We live in a constantly shifting equilibrium, in which the distribution of wealth is skewed dramatically towards the wealthy, whereas political power is apportioned equally to each voter, regardless of income. That means the poor will always be able to demand more from the rich – up to a point. A balance is only struck because the maximum levels of wealth creation and income redistribution lie at opposite ends of the curve. As Arthur Laffer pointed out, too high a tax rate removes any incentive to work, but too low a tax rate results in zero income available for redistribution. The calls for punitive taxation from the masses constantly bump up against the limits imposed by economics, while the rich are beaten with the ‘fairness’ stick to within an inch of their lives.
I understand the inevitability of the ratchet effect, as government grows and grows, but I comfort myself with the knowledge that there is a limit. If one of our parties were brave enough to shrink the tax burden and therefore the deadweight cost of government, people might find out that the economy would grow faster, and rich and poor alike would be better off, but that wouldn’t solve the problem. People will always want to compete with one another, which means absolute levels of wealth are never so important as relative wealth. Given a choice between earning £20,000 when their neighbours earn £15,000 and earning £50,000 when their neighbours earn £100,000, people will, sadly but inevitably, choose the former. It may not be ‘rational’ to an economist, but it makes perfect sense if you’re in a race. The lesson is: be careful what you wish for. You might get the economic system you deserve!