Ideas@TheCentre

What is a fair share?

Politicians are fond of dressing up tax increases as reasonable requests to various classes of taxpayer – usually companies or well-off individuals – to pay their ‘fair share’ of tax. This language has been used most recently in the context of multinational companies that appear to minimise tax by allocating profits to the lowest tax jurisdictions, but many other examples could be cited. I wonder if those uttering the phrase ‘fair share’ have ever stopped to consider what it means, other than the share they subjectively and arbitrarily judge someone should pay.

Politicians may think they know fair taxation when they see it, but political philosophers and economists have grappled with its meaning for centuries. In The Constitution of Liberty (1959), Friedrich Hayek, like many other liberals, argued that fairness is best represented by proportional taxation, which means an equal percentage of income or other measure of ability to pay. Anything else is arbitrary. In Hayek’s words: ‘Unlike proportionality, progression provides no principle which tells us what the relative burden on different persons ought to be. It is no more than a rejection of proportionality in favour of a discrimination against the wealthy without any criterion for limiting the extent of this discrimination.’

Hayek did allow for a degree of progression in income tax to offset the regressive tendency of indirect taxes and thereby produce proportionality of overall taxation. However, always mindful of the need for democratic government to be constrained in practice by principles and rules applied consistently under the rule of law, Hayek searched for a rule to prevent progression becoming ‘no more than an open invitation to discrimination.’ He proposed that the maximum marginal rate of income tax should be set at the proportion of overall taxation in national income. Subject to that ceiling, he was happy for low incomes to be taxed more lightly or not at all.

It is well to recall that progressive taxation applied without limiting principles has been one of the key instruments of the massive growth of government over the past century, and to reflect on Hayek’s wise counsel in the context of the CIS’s TARGET30 campaign to wind the size of government back to 30% of GDP. Coupled with the CIS target, Hayek’s rule would imply a maximum income tax rate of 30%, well below its current level of 46.5%.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.