Budget 2013 drew few surprises. Income tax, including the top rate on high earners, was, as expected, not touched. Somewhat surprisingly for a coalition including Labour, the budget was deemed less progressive than previous budgets.1 With Sinn Féin and the ULA both proposing to increase the top rate of tax (as well as a wealth tax), the debate on how high or low taxes should be is sure to remain around for some time. I propose that not only are high top tax rates justified in general, but actual penal levels of taxation on high earners are too.
Economically, advocates of not increasing the already ‘penal’ rates on high earners any further argue that it would be a disincentive to work and would have adverse economic effects more generally. To be more precise, they argue these high earners or ‘wealth/job creators’ will stop conjuring employment and riches for the masses and pack up and leave for greener pastures. Of course, there’s plenty to say about this. Is it really believable that people would pack-up and leave for a different country – including taking their children out of school – because their tax liabilities have been increased by a few points.
Economic arguments aside, what rate of taxation is fair?
As many readers are no doubt aware, Paul Krugman pointed out in the Irish Times a few weeks ago that during 1950s, the so-called Golden Age of Capitalism, the top tax rate in America was over 90%.2 Is this fair? I suspect many people would say this is indeed penal and point out that business leaders and CEOs excel at what they do, innovate, invest, help create jobs and wealth, and so on. Progressives and leftists who support higher taxation tend to struggle when this argument is put to them because, essentially, the argument has a lot of merit.
A person earning €100,000 is likely to be more competent than one earning €30,000 in the same field – or at least better at applying his or her skills to profit-making. As well as perhaps being more competent, the former is likely to be more innovative because he or she is likely to be higher up the hierarchy and, as such, has more decision-making power. Because he or she will have been promoted to get the top, the meritocracy argument carries some weight, though with qualifications.
For one, innate ability and hard work, though important, are not the only determinants of success. A wealthy person is likely to have been born into wealth. As such, he or she will have been given more opportunities and encouragement. A poor person will likely have had fewer education opportunities, and whose way of life – how he or she dresses, speaks etc. – is denigrated by society. If born into poverty, even the very capable (whatever that means) are unlikely to have the confidence and social skills to excel.