A question from a regular reader:

“I have a question to do with taxes. Recently I came across an article that said that your average Frenchman, German or Austrian pays virtually half of their income in income and social security taxes. I support the welfare state, but isn’t it getting too expensive and isn’t it nice to be able to keep your own money, even if public services deteriorate as a result?”

I see several complications arising out of this question but let’s start first with what Epicurus says:

–  Live simply and prudently, with self-control and moderation, avoiding excess of all kinds.  Seek simple pleasures, those that satisfy natural and necessary desires, chief of which are food, drink, clothing, shelter,friendship and love. Seeking luxuries (extravagant food, excessive drink or sex) creates anxiety in our minds and disturbance in our bodies; simple pleasures are preferable to painful excesses.

You have referred to the marginal tax rate, that is the tax rate paid by upper income people.   If you can relate to the above words of Epicurus, why, if they have a good, fulfilling life with enough money to avoid anxiety, do people resent paying half their income in tax? There is no doubt that governments do waste money and some of their programs don’t work well. But on balance we need a good, functioning government that will maintain law and order, keep the roads mended, invest in medical and other research, run the legal system etc etc.   Maybe a tax rate of 50% is the price one pays for civilised life, where poor people can have roofs over their heads and get help when they are sick.

Another issue is the overall progressiveness of the tax system.  Clearly it would be unfair for everyone to pay half their income in taxes, as  some people may not be left with enough money to cover their basic needs.  In the US people with very low incomes pay  income taxes.  If the minimum wage were a “living wage”, this might be alright but in many areas it is not.  The principle that everyone makes a contribution is good, but not if they don’t have enough income to cover their basic needs.  Once basic needs are covered, a tax rate of say 5 to 10 percent should not discourage people from additional work just because they have to pay a small amont of tax.

Then there is the issue of the efficiency of government referred to above.   Some inefficiencies must be tolerated as we do not live in a perfect world, but gross inefficiencies and misallocation of funds are legitimate causes of alarm, but the effort should be put on correcting these, not necessarily on lowering marginal tax rates.

Finally, in the US , the people with the highest incomes have created or found tax loopholds to avoid paying high marginal tax rates, so that upper middle class families pay much higher average taxes than the wealthy.  It is similar in Europe.