In this morning's video, I note that people like to claim they have a gross income out of which their tax is paid. But is that gross income ever really theirs when it comes with the legal obligation to pay tax attached to it, meaning that the tax owed always belongs to the government? And what does that do to the idea of taxpayer money?
The audio version is here:
This is the transcript:
Do you have a legal right to claim that your income before tax is yours? Or is your only legal right to claim that your income after tax is what you really own?
I think that's a really important question. And one that has to be answered if we are to truly understand the way in which taxes work.
This question was raised by two economists around the turn of the century. Their names were Liam Murphy and Thomas Nagel. I am not related to Liam Murphy, as far as I know. And they put forward the idea that we only have a legal entitlement to our net income after tax.
Now I know most of the time, most people look at their pay slip and say, I've been paid £3,000 or whatever this month, and then groan about the amount of tax they've got to pay. But the truth is, what right do they have to groan about that tax? Because they can't get that gross income without having a legal obligation to settle the tax liability owing on it.
It's a bit like owning a car and moaning about the fact that you have to pay for a road fund licence to drive it on the road, and to have insurance. You cannot drive without those two things having been settled.
So why do you think you have an entitlement to your gross income when legally, as a consequence of getting it, you must pay tax and there is, in law, no way around that?
My point is this. I believe that we only legally have an entitlement to our net income after tax, because the payment of tax is a necessary condition of receiving the gross income. As a consequence, the money that we settled in tax was never ours. We held it in trust. We held it in trust on behalf of the government, in particular, because the government had an entitlement to it. So, we can't say it was ever our property to pass over to the government. It was always their property because they had a legal claim on it.
Now, why does this matter? Well, I think it matters because so often we hear the term ‘taxpayer's money'. But if the money was never really legally belonging to a taxpayer, how can it be taxpayer's money? Because it wasn't.
The money in question always belonged to the government because it had passed laws to which we accept that we are subject, which said that money was never ours. It was always in the legal possession of the government itself.
Now we might have held it as custodian, and in the case of self-employed people, that is clearly true. A self-employed person gets their income gross, no taxes deducted, and they therefore have to settle their tax liability, in the UK at least, twice a year, once on 31st January and once on 31st July. And so it feels like the taxpayer's money is being paid over. And yet, my argument is this. That money never was the taxpayer's. It belonged to the government all along.
And if that's the case, we'll resolve this dilemma about this so-called ‘taxpayers' money', because it doesn't exist at all. The government always owned the money that was owing to it. And logically, that must be true. After all, you wouldn't have to pay it if the government didn't own it. The fact that the government can claim it is only because they've passed laws that say it is theirs, which laws we have agreed to comply with.
So, this philosophical question of do we own our pre-tax income or our post-tax income has a significant impact on the way in which we look at the way in which government is managed.
If we think the government is managing our money, they are custodian for us.
If, on the other hand, we manage their money whilst it is in our possession before we make payment of tax, we manage money on their behalf.
Which of those two is true? I think it is the second one. We have money which we hold on behalf of the government, not the government has money which they hold on behalf of us.
Now that gives rise to other questions, very clearly, about who has obligation and why. And I think the government does have obligation to us, even though they don't spend taxpayer money. Why? Because there is another relationship between us and the government, and that is the relationship between them as elected representatives and us as voters. We can hold them to account for what they do, but not because they hold our money, but because we have the democratic right to take them out of office if we so wish.
That's the real relationship that we have in a democracy. But we don't have a financial hold over them by saying they have our money, because they don't. The money was always theirs.
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What a weird issue to post a video on.
You didn’t have to watch it
And I would call it pretty important
Ideas matter
On the contrary, it’s a very important issue. It really goes further than taxation. It’s about how we view Society and our role in it.
An interesting way of looking at tax I’d never thought of before.
I think the concept of owning the gross income is easier for people to get their head around, not least because it’s a fixed amount. Having an income (net) that’s varies when neither you nor your employer changes the job is harder to square off
I admit I do not follow the second para
Employers and employees can only change the gross, not the net (pensions, by and large, apart)
I think the difficulty people have is that 2 individuals, doing the same job for the same pay may receive wildly different amounts of net income because the tax free allowance is personal to each individual. That makes ot harder to get your head around the concept.
But the concept is right and it is the same with VAT. A business that charges VAT and receives that additional 20% from their custmers never owns that money. It is always the government’s money and I have never met a business owner who does not understand that.
The personal allowanbce is the same
Other factors are taken into account – because that is what the law days
But the tax free allowance is fixed until you get to high levels of income – when it goes (I think inappropriately)
OK – an interesting one is this and for someone who bangs on a lot about sovereignty, couldn’t one accuse the state of rentier behaviour concerning the use of its currency – I’m sure that that would be the extreme libertarian view?
Allied to the way tax is represented – (for example, it has to pay for stuff is does not necessarily have to pay for/it belongs to the people) I am reminded that this is a heady brew of a subject, plus how it relates to other issues such as the rate of tax, low wages/low income, perceived poor public services and the most important of all – bad government – of which we’ve had quite a lot of recently. It’s a real mess.
But sorting out that mess would be a good idea, because we could then focus on democracy itself because what Thatcher did was essentially financialise democracy when she talked about ‘tax payer’s money’ and created a self-contradictory system of thinking that actually works against the very people who need to be invested in – the tax payer. It is an once attempt to hyper-individualise those who pay tax as well as creating a cohort of people who think the same and can be exploited for political reasons.
Democracy to me is a form of reasoned leveraging between the ruled and the rulers, where power can change. To just leverage by allotting power via money is just an over-simplification with hardly any nuance at all.
No wonder our politics is in a mess. A very interesting post.
A constant mantra, I get when discussing taxing wealth or more specifically now more equitably taxing passive income derived from excess wealth is “their wealth is from their own hard work or brains and they should decide how they want it spent” sort of diatribes. Taking no account of birthright advantages in wealth, intelligence or that the hard work of many people assist in creating the wealth. Also that everyone regardless of station or abilities has hopes and dreams and responsibilities in life and should have an even chance of pursuing decent ones.
Pointing out that money as an exchange medium of wealth and should be more equitably distributed by the body that creates and controls the medium of exchange sort of makes it a lot clearer. To me anyway, thanks for this post today. It will add to my repertoire of responses to the diatribe noted.
Ignoring to the advantages of limited liability, and state cintract enforcement, and state training of the workforce and so very much else
It was all down to them, like heck it is was not
Thank you for posting the transcripts to these videos. I much prefer to read them than watch them.
I very much agree with what you write. If I understand correctly, we never really possess the money we earn as salary, in any case, even if we are paid in cash.
One minor point. Road Fun License is really vehicle excise duty. It, for the most part, does not fund roads. It is, a far as I understand it, a duty to discourage vehicle ownership and encourage people to buy/lease smaller and more efficient vehicles.
Yes, there is now a hypothecated National Roads Fund, or there was? https://www.highwaysmagazine.co.uk/VED-hypothecation-fizzles-out-after-2bn-Treasury-raid/9384
Even if the NRF still exists, the caveats to it meant that it doesn’t pay for maintenance of existing roads, but for new roads and upgrades, largely linked to new housing development.
This really is an aside, but the point I am trying to make is that the misconceptions around VED fuel conflict between motorists and road users who do not pay VED. Some motorists actively endanger other more vulnerable road users because they are “non-contributors”, hence I am taking the time to explain.
Keep up the good work.
Road fund licence is a tax – it is nothing else. There are very minor policy implicatiions, but that is it
And the NRF is a budget, not a fund
Richard,
Are you always this obtuse? I’m inclined to refrain from commenting in future.
Yes it is a tax. And it ends up in the same pot as all our other tax. Which means it not reclaimed by Government to exclusively pay for its expenditure on highways.
The policy implications may be slight but the real world misconceptions are not slight and in some cases those misconceptions have tragic consequences.
So please, it is vehicle excise duty. A tax on vehicle ownership. Not a tax for roads.
There may be policy implications
When someone arrives here and makes comments that are unclear as to facts and purpose I tend to assume they are a troll – based on 18 years experience
If I am wrong, I apologise.
But I am still unsure as to what yoy are really trying to say except the obvious that it is a tax on vehicle ownership
Calling VED either ‘Road Tax’ or ‘Road Fund License’ makes some people think that road users that don’t pay it have no right to use the roads.
Hence I would prefer people to call it VED because that is the correct name for it and it does not reinforce misconceptions that are sometimes used as justification for some road users being assaulted or worse.
I and other cycling advocates are continually correcting the comments/trolls on other social media, to make them know there’s no ‘road tax’ – as you (both) say. But the falsehood definitely has an effect on some drivers’ attitude to others, with an entitlement culture; which is symptomatic of individualism and a general ‘contractual’ attitude such as ‘I pay all this tax and what am I getting for it?’
I think the whole issue relates to libertarian ideas (in extremis, ‘taxation is theft!’) and Public Choice theory, with Coasian economics – that all social relations and transactions can be monetized and negotiated freely between autonomous agents. Cf: ‘There’s no such thing as society ‘.
Our citizenship or more particularly our residence makes us part of a society under a government (however established but especially if in a generally democratic way); and they are empowered to do as they will, including issuing currency and claiming some of that back as tax, according to their plans for economic management. So absolutely a fine philosophical point, Richard! Thanks for the ‘thought provocation’!
Thanks
Thank you for raising this issue and continuing to highliight other related false narratives, Richard. The language used to speak about economics has to change in order for our society to change for the better.
The same logic could be applied for prices in a shop window. The gross price has to include all costs to the consumer including all taxes and duties. The shop does not have right to the income of the written price. It has a legal duty to retain the tax before it is collected by the tax administration.
If it was the case that we only had right to gross income, then negative taxation could never work. Since we would not be entitled to the income that was given to us by the government. The idea of negative taxation would have been instantly dismissed.
What was previously established right was that people have the right to the produce of their labour. And I believe that this right has been confused with wages.
I scanned the title first and missed the ‘gross’. That got me thinking, does any of the money we have actually belong to us, or is it all provided by the Government (or controlled by it via banks) to enable us to assign value to things we buy as the Governemnt owns a proportion of the value of the things we buy via the tax system, but ultimately it will all return to the Government over time. Therefore the government has claim to all money because the system we have at present is what we’ve ended up with. There may well be other ways of assigning value, other systems.
There is some truth in what you say, but it is more complicated than that
Surely, having control of the official means of exchange does not automatically confer absolute rights to intervene in every exchange, or every transactional relationship, if these are a reasonable use of that currency.
If government has the power, at will, to deprive people of the entire means of their sustenance,, their income, without providing and meeting assurances on the responsible exercise of its duty of care, then it will exceed a level of authoritarianism that is acceptable in purportedly democratic societies.
In the case of government, it is based on Rousseau’s theories of reciprocity in terms of a social contract.
Yes, what citizens and governments explicitly and implicitly agree to in order for civil society to exist, and what their respective rights and responsibilities are under this contract, are certainly open to debate.
IF there is a social contract between people and the state that does permit absolute control over every individual’s income by government, quite possibly involving a whimsical exercise of power, then there are reciprocal duties that governments must meet in order to legitimise this power.
The conflation of “trust” and “government” in this setting raises really serious constitutional issues.
In the case of a majoritarian constitution, a government with 20% of electoral support, for example, might have considerable difficulty arguing it has the legitimacy to act at will.
Shoiuld I accept a government that subsidises elected representatives at the expense of the public ?
Ought I to accept government legitimacy that extends to sanctioning gold wallpaper in state owned residences, when there is substantial poverty in the population ?
Should I accept government contracts to build bridges or tunnels that guarantee 20% profit margins?
Given the level of criticism of the competence of the decision makers in government on this blog, particularly those wielding monetary and fiscal power, then I have serious doubts as to their absolute rights to do as they please.
Any sensible person would question the absolute rights of government to sequester any individual’s income at will when we have increasing more examples of government exercising their total power to tax incomes with abuse of that privilege coming to light today. .
These are undoubtedly breaches of the social contract.
The emerging, and reputably confirmed, story of Truss proposing to withdraw all NHS cancer treatments in England, to cover the costs of her tax benefits to the wealthy, is one example of such incompetence and/or abuse.
Similarly, the £40m helicopter contract simply to taxi Sunak, represents an abrogation of financial responsibility by government, and the duty of care of elected representatives.
I am going to strongly disagree
Exceptions do not create rules
Your outline of the state’s absolute right to tax at will really does raise massive constitutional questions in the way it is expressed.
My point is that these are pretty much unexplained and unanswered. (not necessarily that the constitutional context is your responsibility to justify). I do not believe the social contract as such exists has ever been delineated in terms of how it covers our fiat currency.
Yes, the fiat currency status quo does describe the current elective dictatorship as is, if it is considered in terms of realpolitik.
But I’d argue this needs much better articulation to be acceptable democratically.
I have no issues with the need to tax.
Yet I maintain that the context of total transactional control over the currency, in terms of absolute state power, as this post describes, really does exemplify wider matters of the relationships between us as individuals and state, and that they need to be seen and justified in terms of that social contract.
The examples I have cited are indicative of the dangers of absolute state power, and our inability to do anything about it.
These issues need articulating and discussing because they are neither obvious nor widely understood.
Here we all know what a fiat currency does, but that PositiveMoney survey discovered that 85% of MPs did not. As for the wider population, who knows ?
There is questionable legitimacy in a social contract with unstated rules, and carte blanche for political and financial elites to behave as they wish.
Rules require specificity.
They need to have express conditionality to have validity, let alone authority, especially when it comes to state control.
Without reciprocity and, especially in the absence of substantive debate, any rule of absolute transactional power is not likely to be unacceptable, unless of course, unexpressed absolute state power is intended.
The sins of omission, of simply not being honest with electors, dissimulation and flagrant lying all conspire to weaken and breach the trust essential between political elite and wider population, to which you refer.
That is why the issues accompanying absolute financial control by government need enunciating, as well as their more obvious impacts on take home pay.
I am struggling here.
All i have said that property owed to the state beloings to the state, and since tax can be described as owed to the state we canno0t claim that the part of our gross income that is due in tax can ever be claimed to be ours.
Bit we do have an absolute right to our next income.
How does that change the social contract? Why does it give the state transactional control, exceptinmg with regard to the claim for settlement of tax due? It is this extension of the logic that I cannot understand.
Your outline is of a technocratic process to be undertaken by tax bureaucracies.
I consider there is a wider significance, that these processes are not neutral, and such technics can only occur within the social matrix we have as individuals with government authority.
Ergo, it is a critical monetary element of our ‘social contract’, and being implicit, unexplained.
Given the widespread lack of public understanding of the nature of fiat currencies, I hold that transactional powers need clarified and justified in a way that people can grasp, especially given the “government money versus my money” dichotomy.
It is part of the validation of that fiat currency, but then also reinforces our personal subject status, of which we need to be very aware.
Hope that clarifies.
You have given me much to think about
It might sound odd, but that’s why I like this blog
Interesting post / comment. T / PSR, Reading your post I wasn’t sure if this is 1700’s …. but the fundamental rights, freedoms and relationship with the power of the people/state stuff rings true. Now … if only there was a vacant bit of New_Land somewhere and a boat to use …… and that is what people are doing all the time…..
I hate to see the decline/division and waste of so many people caused by our poor governance (in many places). Among the heavy-weight contributors to this blog, is anyone working on a better version of a constitution ? Mike Parr/Anyone? How can I help?
All I can say Ex-Teacher is that when I see my pay-slip I just accept that the money is gone in tax and that is just the way things are – I’ve never got hot under the collar about being a tax payer – nor do I get angry about NI or my pension contribution either.
There are other more heinous things to worry about that a government can get up to and I always question the money element last if at all.
The morality, fairness or otherwise of state operations is of more concern to me.
And hegemony is more of a two way street between the ruler and the ruled than is often portrayed. Neo-liberalism seems to be in the process of disrupting the interdependence between the state and the individual that has existed since the dawn of time – Michael Hudson, the late David Graeber and others making links between how societies were ruled and how that positively affected cohesion in societies at times of stress (war, famine etc).
To simplify this – lets imagine a UK without a pound and tax raising powers or even public services.
What a mess eh?
‘Interdependence’ is the human truth – not independence really nor dependence – which is really inter-dependence both ways. That is what I think Richard’s post sums up to me in way. We are really all joined up. The Neo-liberals however, just will not have it, nor will the rich who are different anyway, and increasingly more so it seems every year.
It makes a lot of sense, however, I am of the opinion that employees on PAYE do not pay any tax and that it is the employer that pays the tax (as a cost for employing them, similar to empoyers NI). For example, if I want to pay an employee £30,000 I would need to make roughly £50,000 profit. I would pay £30,000 into my employees account and £20,000 to HMRC bank account. My empoyee does not care if I pay £80,000 to HMRC as long as they get their £30,000 net.
I would like to hear your view on this opinion as I am yet to convince anyone of my friends that I am correct.
Thanks
I admit I have never thought that in nearly 40 years of employing people – because I did not determine the tax people pay and could not take the benefit or cost of changes in them. So I disagree with you.
This only just occurred to me, so there’s probably a gaping hole of logic in it, but what Barry says makes some sense to me. Accepting the premise that the difference between my gross and net pay wasn’t ever mine, then logically I can’t pay tax because I’m giving the government nothing. Instead I’m just…acknowledging? that the government handled an internal accounting matter by identifying where some of its money was, and allocating it somewhere else.
But that’s completely wrong. You do owe the tax. It is based in your situation alone. You can even legally alter it. Your employer is only another agent, but now your agent to settle the tax you owe because it belongs to the government. The tax you owe is never yours to enjoy, but that really does not mean it was never due by you.
I didn’t say I that I don’t owe the tax (though intuitively I can see that may be up for debate too). I’m just saying that if the money was never mine, and at no point did I possess or even see it, then logically I can’t be said to have paid the tax. That’s weird, because it certainly feels like the tax has been paid, but physically that was done by my employer, and financially it was done using the government’s money, not mine. I can tell it was the government’s money because I got all of my money, as you’ve pointed out, in the net figure that went to my bank account.
I appreciate this might seem like pedantry or somesuch, but the same could be said of your original post, and I genuinely don’t think that’s the case – you’re making an interesting argument that at first glance seems to ignore common wisdom, but actually is asking us to re-examine that wisdom.
But you did pay the tax
Try being self employed – then you would know
You do pay, because the money is not yours
Ignore PAYE – that is the smokescreen that is confusing you
Thank you, Richard for a very insightful and thought-provoking article. This is one of the many reasons that I love this blog.
Thanks
Hats off to you, Richard. A novel point well made, and on the very merest consideration, self-evidently true.
Of course, in practical terms, most folk – uninformed and uninterested, mind – see it that way when they read their payslip anyway.
This blog makes a point of turning the telescope the correct way around for a change, and this post certainly fits that description.
Thank you
To be honest, during my long career, working for the government, I rarely even looked at my gross figure,just at the bottom line.
Only when I previously worked as a self employed taxi driver, did I consider my gross takings and look to protect my eventual income. I think lots of other workers just look at the bottom line and barely wonder about the amount we never see.
Might it be more reflective of “Daily Mail” thinking if people pore over the taxes they “pay” and ,inevitably start speculating about the “waste” of “taxpayers money”.
Very interesting discussion! “Your employer is only another agent, but now your agent to settle the tax you owe because it belongs to the government.” So is it also the case that the employer is the agent who pays the employers NICs that are determined by the employee’s gross pay amount? Or is this the iniquitous “tax on jobs” that the popular media like to complain about?
Of course they are an agent of the government….isn’t that obvious? They hold the funds they owe a a result of paying staff in trust for the government. It is never their own.