Taxation : Equal Pay for Equal Work

According to Leftists, equal pay for equal work is a basic principle, particularly when they discuss the pay gap between men and women. Today, however, we're discussing how progressive income tax violates this principle.

Suppose you have two individuals. Let's say they're lawyers and make a fairly steady income. For the ease of calculation, let's say they both make roughly $100 an hour. And for the sake of our conversation, we'll say their work is of an equal caliber. 

Let us also suppose we have a country with three tax rates: 

A: 0% for people making $29,999 or under a year.

B: 15% for people making between $30,000 and $49,999 a year. 

C: 20% for individuals making more than $50,000.

As I mentioned in a previous post, progressive taxation is inherently discriminatory because the difference between an individual making $29,999 and $30,000 is arbitrary. Why is it justifiable to take 15 cents away from the latter and not the former? 

But that's not the question we're considering at present. Suppose one of our lawyers has had a bit of luck. He's been working for a few years, but he's mother went and did a very nice thing. Soon after he was born, his mother purchased a deferred annuity for her son, and she has dutifully been making the payments ever since. The annuity has been accumulating for 30 years. Now it has finally started distributing. It pays $3,000 a month. 

What will our lawyer do now that's he's making an extra $33,000 a year?

Let's suppose he made $20,000 from lawyering, working a mere 200 hours a year. He now stands to make $53,000 a year, putting him in the top tax rate. Will he continue to work those 200 hours? Perhaps. Perhaps not. 

What we do know is this. If our lawyer decides to work even a single hour, charging his normal rate, he'll take home only $85. Compared to the $100 the other lawyer will take home. Is this fair? It certainly isn't. But maybe you don't care for fairness. I can't say I blame you. 

How does this action harm the wider community? It can harm the wider community in one of two ways:

1. The lawyers aren't equally competent. The lawyer with the annuity offers a superior service. Because of his increase in income, he cuts back on his hours. This harms the entire community. His former clients get into legal complications. Trails take longer.
2. The lawyer with the annuity curs back his hours, and the one lawyer left in the game raises his rates. 

By introducing a progressive income tax, we inevitably distort prices, which have repercussion for society as a whole. 

Research Update: Income Tax

I've been spending my evenings slogging through Hansard, specifically for 1909-1910, researching the debates surrounding the introduction of progressive income tax. No major news to report, but there are three interesting bits to report.

• Deductions for Employing Servants It appears that military officers and other individuals were allowed to deduct the wages of their servants from their income. Its interesting because a lot of these young officers are the sort of people that would make just enough money to be taxed. It's also interesting because Hayek says that progressive income tax makes employing servants much more costly. Hayek uses an example like this. Suppose I am a writer. Writing articles, I can make $10 an hour. To free up an hour of my time, I decide to call in a maid for an hour of work a day. She charges $5 an hour. Without taxation, it makes perfect sense to hire a maid. But suppose I am taxed at 50% of income and my maid at 0%. It no longer makes much sense to employ her. I am actually working on another article that examines he impact of taxes on the decline of household servants.
• Direct Taxation as an Emergency Measure Earlier in British history, income tax as a wartime measure. It was introduced to fight the Napoleonic Wars. After that emergency was met, the tax was repealed. A few decades afterwards, it was reintroduced under Peel. Looking at the government speeches, they expect the opposition to object to increased rates on grounds of national security. The idea is simple. In peacetime direct taxes must be kept at a minimum to allow economic expansion, creating a reserve of wealth that can be tapped by higher tax rates during wartime. It is an interesting argument. Indeed, during much of American and British history, tax rates are increased to meet war spending. During the First World War, however, the Germans didn't increase tax rates dramatically. Instead they increased borrowing and resorted to printing money to pay off their subsequent obligations. They suffered dreadfully as a result.
• Super Tax Unopposed In the Commons, people simply aren't objecting to the top rate. I still have 120 pages of result to go through, and I haven't even started in on the debate in the Lords, where the resistance was strongest. It's very interesting. The difference in rates is so minor that people in the Commons simply seem to take it in stride.