The Night Watchman

A Small Beacon in the Night of Unreason
raised and maintained by Per-Olof Samuelsson

Fictional taxes

I have written about this in Swedish before, but I think it may be of interest to non-Swedes as well.

Suppose you are a young child and your parents give you pocket money in the form of a weekly allowance of 200 kronor. However, every week your father hands you over 300 kronor and immediately takes 100 kronor back. When you ask: "Dad, why on earth do you do this?", he answers: "Those 100 kronor will go to paying your next weekly allowance".

This could be described as you, the child, getting an allowance of 300 kronor, of which you pay a third back in "income tax". But of course, no child would be fooled by this reasoning. Only adults can be that foolish.

Now, back to real life:

For the last 25 years I have worked for the Swedish government, as a librarian ("second assistant") in the Swedish Royal Library. (Before that, I worked for some years as a school teacher, which is also a job in the public sector.) For this work I receive a monthly salary, on which I allegedly pay approximately a third in income tax. So, every month, I get a slip of paper in my mail, saying that I have received (approximately) 21 000 kronor, from which 7 000 kronor are deducted as tax, so that I actually get 14 000 kronor into my bank account.

But where are those 7 000 kronor? They exist only in the form of a figure on a slip of paper!

By contrast, if I earned the same amount of money from a job in the private sector, then a third of my income would actually go to the government in the form of income tax. In terms of time, it would mean that I work a third of the year for the government and two thirds for myself and/or my family.

This income tax money goes to defraying government expenses, part of which is of course paying the salaries of government servants (such as second assistant librarians at the Royal Library). But when I, a government servant, pay a third of my income as income tax, this money also goes to paying the salaries of government servants – which means, in effect, that I supposedly pay the government 7 000 kronor a month, which then goes to paying my salary for the next month! Exactly as in the fictional example I started out with.

Obviously, this "income tax" I am paying is entirely fictional. The government could just as well pay me 14 000 kronor and take no tax at all; it would make no difference.

But suppose the income tax is raised to, say, 50%. (The public sector is expanding; the government needs more servants and more money to pay their salaries.) For those of you who work in the private sector, this would mean you now work half of your time for the government instead of just one third; but I am a government servant and already work 100% of my time for the government. The change for me would be that I now only receive 10 500 kronor in take-home pay. If the fiction of me paying an income tax is removed, it would simply mean that I now have a lower monthly salary, which is of course exactly what I have. And the situation would be the same, if the tax were raised to, say, 90%. The actual outcome is that I will now receive 2 100 kronor in take-home pay, which, of course, I could not live on.

But the government certainly does not want to treat its servants that unkindly. So in order to compensate me (us) they have to raise our pay. In the 50% case above, this would mean that my "before tax" income would have to be raised to 28 000 kronor. In the 90% case, it would have to be raised to 140 000. But this tax is as fictional as before. I won’t suffer from the raised tax, but everyone who works in the private sector will.

But say there is a genuine tax reform and income tax is lowered to 10%. Now, my take home pay will be almost 19 000! But who is paying for my raised income? Not me: the 2 100 I allegedly pay is still only a figure on a slip of paper. No, the pay raise is paid by the taxpayers in the private sector. But wait a moment – their taxes have just been lowered to 10%! The government after this tax reform will not have enough money to pay its servants’ salaries! Government servants (including second assistant librarians) will have to be fired! Or else, my "before tax" pay will have to be lowered so my take-home pay still stays at 14 000. But even so, the government now has much less money to pay in salaries. It won’t be able to pay me my 14 000 either.

This is of course the reason why such drastic tax cuts are never made. They are simply not affordable, from the government’s point of view. (Such tax cuts of course would have to be made in conjunction with a radical slimming of the private sector – libraries and schools, along with many other things, would have to be privatized.)

There is another, "macro-economical" point: although this tax money is entirely fictional, I believe it is still counted when national income or GDP is calculated. I don’t know what ramifications this might have; if any reputable (i.e. non-Keynesian) economist should read this, he could think about it and maybe tell me. (Obviously, the figures have to be overstated if fictional money is included.)

Why, then, is this fiction being maintained? Well, I think it is sheer hypocrisy. People with statist inclinations simply want us to believe that we are all taxpayers, although some of us clearly aren’t.

To illustrate the hypocrisy: one Swedish politician (Mona Sahlin, currently the leader of our Social Democratic party) a few years ago made a statement to the effect that she, personally, loved to pay taxes! Paying taxes was the best thing in life! And so, everybody else should love it, too.

But there is no slightest difference between me and Mona Sahlin, except this one: her income is exorbitant, compared to mine. Her "taxes" are as fictional as mine. She loves paying taxes that in actual, sober fact don’t exist.

But what would happen if this plain fact were simply acknowledged and we public servants actually did not have to pay those taxes we do not really pay anyway? Well, there might be a public outrage, as people now would see clearly what the fiction is intended to hide: that some of us don’t pay taxes. The whole public sector would be seen as parasitical (which, to a great extent, it certainly is). The result might be a tax revolt.

Now, I certainly don’t regard myself as a parasite because of my work. Libraries are an important part of civilization, and so are schools (although I say the last with some hesitation, considering the sorry state of our educational system). In an ideal laissez-faire society, such institutions would be privately owned and maintained. But unfortunately, I live in this century, not in some future utopia – so this is not something I should accept unearned guilt for.

In feudal times members of the nobility were tax exempt. But they were so, because they performed another service to the country (or "society at large", to use the common collectivist catch-phrase) – they were supposed to take part in warfare, whenever there was a war.

Today, many public servants (librarians and school-teachers are examples) do perform a valuable service and of course should be paid for it. It would be unfair to call them "parasitical", just because they work in the public sector and are paid with tax money. Teachers can of course try to find work in private schools. But I don’t think this is a possibility for librarians – at least not here in Sweden.

So there is no reason for feeling bad about working in the public sector – at least not for us who are also fighting for a future of limited government. But we should not pretend that we are taxpayers – neither me nor Mona Sahlin.

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