Obama, Miliband, Tax and State

I’ve completely changed my mind, thanks to Peter Watt. I used to agree with Peter’s position, that taxation is a necessary evil, not a automatic right of the state. Then I read his piece, “It’s not our money stupid, it’s theirs”, and I’ve since reversed my position completely.

This is part of a wider debate about whether the state creates private business, that began with a gaff from Obama. “If you’ve got a business, you didn’t build that. Somebody else made that happen.”

It was a gaff, but the rest of the quote made sense of what he meant. “There was a great teacher somewhere in your life. Somebody invested in roads and bridges. If you’ve got a business—you didn’t build that”.

The debate re-emerged in this country during the party conference season. Miliband had described a Tory tax-cut with the visual image of David Cameron writing out £40k cheques to his mates. At the Tory conference Cameron responded, “When people earn money, it’s their money. Not the government’s money: their money. Then, the government takes some of it away in tax”.

Previously I was very much in agreement with David Cameron on this one, but reading Peter’s article got me thinking. If it were the case that the state acts as a hindrance to wealth creation, then why do millions of enterprising and ambitious young people, from the developing world, risk their lives to enter the western world every year? Surely if our top heavy state was standing in the way of business, why don’t they stay in their own country and make their fortune there?

As Obama pointed out, we have an infrastructure allowing fast and smooth transportation, as well as an advanced rule of law. We have an educated and healthy population who are available both as workers and as consumers. The state provides conditions that allow enterprise to flourish.

Let’s say you wanted to open a shop and you looked around for a retail outlet. In Oxford street the rent is £1m per year. While in Bethnal Green Road the rent for the same sized outlet is £30k. Why is there a difference in rent for the same sized shop? The reason is that Oxford street has a massive amount of pedestrian traffic with lots of money to spend. The rent reflects the likely turnover of a business located there. John Nash created that street and his descendants were lucky enough to have the state install tube stations all the way along that street. If you rent out that retail unit, you owe him the rent before you’ve sold anything.

If you wanted to start a business making widgets and you have a choice of starting that business in England, Somalia, or Columbia, which country would you choose? It might be much more expensive to start in England, but it’s worth it, because in Somalia there is no state, so there is no security, while in Columbia, the state is weak. Tax in the western world is good value. If it wasn’t good value then businesses would move overseas.

So the relationship between the state and industry is rather like the historic landowner and his tenant farmers. The farmers pay their rent and the land is provided, the roads are kept up and the landowner is also the magistrate casting judgement of matters of law. In the modern day the landowner has been replaced by professional politicians to decide the tax rate and the allocation of resources. So in this metaphor, the state is the landowner and we citizens are tenant farmers. The difference is that we elect the landowner every five years.

This is the deal that allows our economy to reach such an advanced stage. It’s not true to describe tax as some acceptable form of theft. Tax is the investment that allows industry to be successful. If the tax didn’t exist, then the economy would disappear with it. The state is not taking a person’s money, the state is taking her rightful share.

One Response to Obama, Miliband, Tax and State

  1. Ex-Labour says:

    I’ve left my comment on Labour Uncut. Summary: illogical drivel

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