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The Taxation Myth

When capitalist political parties are in disagreement, the issue of taxation often looms large. Should income tax be reduced or increased? What should be done about local government taxation? Why all the fuss about taxation—is it so important?

Why Taxes?

To begin with it is worth looking at why we have taxes in the first place. Taxes are levied by the government in order to raise revenue for the state. The vast bulk of state revenue comes from taxation or borrowing, and as the complexity and functions of the state machine has grown enormously throughout the history of capitalism, so has the tax burden.

The state originally arose out of the division of society into classes. See (Two Class Society) for our definition of 'capitalist class' and 'working class.' It is controlled by the capitalist class and their political representatives who need to levy tax to pay for the police, the armed forces, civil service, the 'education' system and so on. The various functions of the state machine are necessary if the capitalist class are to maintain their privileged position in society, and, of course, these functions have to be paid for by somebody.

Who Really Pays Tax

Of course, the capitalists present an image of the state as a 'neutral' agency standing above society, before which all are equal, and to which all contribute; state revenue is the 'public purse', which we all have to support through taxation. Our argument is that although some taxes are paid by the working class, the burden of taxation rests on the capitalists and has to be paid out of the profit accruing to them in the form of rent, interest and profit, the basis of which is the unpaid labour of the working class (Where Profits Come From) .

Wages are the price of labour power—that is, the price received by workers selling their mental and physical energies to an employer. Labour power is a commodity like so many other things in capitalist society and its price is governed by the type of factors governing the prices of other commodities—principally the amount needed to produce and reproduce it. In the case of labour power, this includes clothing, housing, food, entertainment and the like. On average, wages are enough to keep us fit to work in the type of employment we have been trained for and are working in and it is around this level that market forces, helped by trade union action, tend to establish wage rates.

It is obvious that the real price of labour power is what is actually received and is not a hypothetical sum, a large part of which is never received by the worker and therefore cannot be spent. In recent years many politicians have argued that if income tax is reduced "we will all be better off". However, this is incorrect and can be demonstrated to be so with a simple example. Say a worker's nominal wages are 200 a week, 50 of which is taken in income tax. If the income tax rate was halved and the amount taken in tax was reduced from 50 to, then Conservatives would presumably argue this would lead to an automatic rise in the worker's take home wages from 150 to 175, thereby making him or her "better off". But this is not what will happen in reality. The worker's wage, remember, is the price of his or her labour power, which, all other things being equal, will tend to gravitate around the 150 mark in this instance, which is the real sum received all along. The 'benefit' from the tax cut goes to the employer. If the situation was reversed and the income tax rate was doubled, the 'nominal' wage would then have to rise from 200 to 250 if take home pay was to remain around 150. The increase in this case would be borne entirely by the employer and would come out of surplus value.

Of course, this will not happen automatically but as a result of an economic tendency for the working class to receive the value of its labour power. When there are tax reductions this will be a major factor in stiffening the attitude of the employers. With tax increases, this stiffens the pressure of the workers for higher wages, especially when unemployment is low. It should be noted that this tendency for workers to receive the value of their labour power is helped by trade union action.

The concept of how tax increases lead to increased nominal wages that cut into profits was rather better understood in the past than it is now. Here, for instance, is what the capitalist and British MP David Ricardo wrote in 1817:

"Taxes on wages will raise wages, and therefore will diminish the rate of the profits of stock… a tax on wages is wholly a tax on profits; a tax on necessaries is partly a tax on profits and partly a tax on rich consumers. The ultimate effects which will result from such taxes, then, are precisely the same as those which result from a direct tax on profits." (The Principles of Political Economy and Taxation, p140)

The view that taxes are a burden on the capitalists and not the workers was also put by Marx:

"If all taxes which bear on the working class were abolished root and branch, the necessary consequence would be the reduction of wages by the whole amount of taxes which goes into them. Either the employers' profit would rise as a direct consequence by the same quantity, or else no more than an alteration in the form of tax-collecting would have Our argument is that although some taxes are paid by the working class, the burden of taxation rests on the capitalists and has to be paid out of the profit accruing to them in the form of rent, interest and profit, the basis of which is the unpaid labour." Criticism and Critical Morality (Marx and Engels Collected Works—Volume 6.)

Two Further Myths

Another argument that has been put to demonstrate why workers should be interested in taxation is concerned with indirect taxes, like Value Added Tax (VAT) and excise duties. To increase indirect taxation, it is argued, will mean higher prices and therefore lower real wages and living standards. However, what this argument ignores is that capitalists will tend to seek the best possible price for their products in the market conditions that are prevailing. Sometimes VAT increases may initially cause some prices to rise as capitalists try to pass on the burden of the increase, but capitalists may well find that they have to reduce prices again when sales dip, as market forces assert themselves. VAT is not usually charged as a separate tax from the price—prices are usually stated to be "inclusive of VAT" which tends to confirm that sellers sell at the highest price the market can bear.

The other main form of indirect taxes, excise duties, are often levied in those industries where profits are abnormally high because of the existence of monopolies or cartels. It should also be remembered that it is by no means certain that any price rises that do take place (either through tax increases or the continuing process of inflation) will cut working class living standards. in Britain, for example, the vast majority of years since the Second World War wages have risen more than prices.

Look At History

That taxation is an issue for the working class is a delusion. Is it seriously to be believed that the working class in Britain, for example, was better off before the Second World War when most workers paid no income tax? It is sometimes argued that if income tax is reduced "we will all be better off". However, this is incorrect and can be demonstrated to be so with a simple example. Say a worker's nominal wages are 200 a week, 50 of which is taken in income tax. If the income tax rate was halved and the amount taken in tax was reduced from 50 to 25, then the argument would presumably be that this would lead to a rise in the worker's take home wages from 150 to 175, thereby making him or her "better off" .But this is not what will happen in reality. The workers wage, remember, is the price of his or her labour power, which, all other things being equal, will tend to gravitate around the 150 mark, which is the real sum received all along. The 'benefit' from the tax cut goes to the employer. If the situation was reversed and the income tax rate was doubled, the 'nominal' wage would then have to rise from 200 to 250 if take home pay was to remain around 150. The increase in this case would be borne entirely by the employer and would come out of surplus value.

Of course, this will not happen automatically, but as a result of an economic tendency for the working class to receive the value of its labour power. The discussion between political parties about taxation is over which sections of the propertied capitalist class should most bear the burden of the cost of maintaining the functions of the state machine.

What We Said Before

The burden of taxation cannot fall on the working class, who receive only enough to produce and reproduce their labour power, and as we said in the October 1904:

"It thus becomes evident that the taxes must be paid out of the surplus value extracted from the workers by the capitalists; this explains not only the latter's interest in the question of taxation, but also why it is of small moment to the workers."