William Watson: How many people really think a 70 per cent income tax is ‘fair’?

Let me tell you how it will be: three for you and seven for me.

OK, so it doesn’t scan as well as the original: “Let me tell you how it will be/There’s one for you, nineteen for me/Cause I’m the taxman/Yeah-ah, I’m the taxman.” That was how the Beatles’ classic 1966 album, Revolver, began. Taxman was the first song by guitarist George Harrison to lead off one of the group’s albums and for most fans — which in 1966 meant just about everybody — it was a strangely political departure from a group that had burst into the musical stratosphere with songs about puppy love, holding hands and driving my car.

But in 1966, thanks to the British Labour government of Harold Wilson (whose name you hear in backing vocals added by John Lennon), the U.K. had a supertax of 95 per cent on high “unearned” incomes. The lovable lads from Liverpool were kings of pop but were just learning, as Harrison put it, that “even though we had started earning money, we were actually giving most of it away in taxes.” With his extended foray into Eastern mysticism, George was probably the most peace-and-love Beatle but even he thought “one for you, 19 for me” was a bit much.

We aren’t yet back to 95-per-cent marginal rates, but thanks to the ideas of the new darling of left-wing U.S. Democrats and media, Congresswoman Alexandria Ocasio-Cortez — who is going through her own Alexandria-mania stage — 70 per cent seems to be in play.

The usual economic analysis of “optimal income taxation” looks at the problem this way: If we take a dollar from someone with lots of them, how big is that person’s reduction in well-being? The more he or she has, the smaller the loss, presumably. If we then give that dollar to a poorer person, what’s the gain in well-being? We’ll never really know, not until we can hook up people’s brains and see how much each extra dollar sets their synapses atingle. But you’d think it’s probably greater than the loss to the rich person.

And we also consider the effects of both the taking and the giving. How will the rich person react if the tax deal they face is “three for you and seven for me”? By working and investing less? How much less? By moving somewhere else? How many people move? By hiring smart tax lawyers to hide as much income as possible? How much will they be able to recast in less-taxable forms? And how big is the loss to society from having brainy people dedicate their lives to income-hiding rather than curing cancer or writing novels? Finally, what’s the effect on people at the bottom end? Do they work and earn less? What happens to their overall well-being?

If you make enough assumptions about money, well-being and people’s behaviour, you can guesstimate what tax rate gives you the biggest social gain. Some models do say a 70-per-cent top marginal rate makes sense. (Some say even higher.) Other models with other assumptions produce a much lower optimal rate.

My bet is most Canadians see 50-50 as about as high as the state should go, though even that says half of yours is ours

But that raises two big questions. One, how much are you willing to bet on your model being right? Because if you do go to a top rate of 70 per cent and it turns out that, in the real world, the optimal rate is 45 per cent, you can do a lot of damage. You’re not just betting the farm or the business on your decision. In many ways, you’re betting the whole society.

And the second big question: Even if a 70-per-cent rate does bring about a net increase in well-being after you’ve compared top-earner losses with everyone else’s gains, is it fair? Is it fair to say to people, “Out of the extra dollar you have earned for yourself, we get 70 cents, you get only 30”?

I suspect most people agree with George Harrison: one for you, 19 for me definitely isn’t fair. But what division crosses the fairness line? My guess is most people probably think 70-30 does. In the last federal election, NDP leader Thomas Mulcair argued that New Brunswick’s combined federal-provincial top rate of 56 per cent was close to the line, if not over it. Of course, he got dumped as leader and now, from the revisionist perspective of 2018, many party members evidently regard him as having been a tool of the bosses. Still, my bet is most Canadians see 50-50 as about as high as the state should go, though even that says half of yours is ours.

In the real world, it turns out love isn’t quite all you need. How could we set that to music? “Seventy-thirty ain’t so purty, no, no, nooo.”

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