Cooking the Books: Whom to Tax?

‘Economists used to think that it doesn’t matter whom you tax, but it does’ was the title of the LSE’s Europp blog (18 November). Written by two ‘behavioural economists’, Matthias Weber and Arthur Schram, to publicise their research, it began:

‘In most countries, employers and employees both contribute to the taxes (or social security contributions) levied on labour. Employers pay taxes on top of the wage they transfer to employees and employees pay income taxes on the money they receive from employers. For many decades, economists thought that it should not matter who pays. Employers were thought to care only about total labour costs (gross wage paid plus employer taxes). Employees were thought to care only about their net wage (what’s left of the gross wage after income tax). The gross wage itself should be of interest to neither of them, so it should not matter who pays the taxes.’

According to Marxian economics, taxation is not a burden on wage and salary workers as a class. This is not to say that workers don’t pay taxes but that, if a tax is levied on wages, this will ultimately be passed on to employers in the form of higher wages. The increase in wages would not come about automatically, but through the class struggle and the play of supply and demand.

This was the view of the classical economists Adam Smith and David Ricardo, inherited by Marx. It is based on wages having to be enough to cover the cost to workers of reproducing their working skills. If workers have to pay taxes, this reduces the money they have to maintain their skills to below what is needed ; if employers are to continue buying the same quality of working skills they have to compensate for this by increasing wages.

The bloggers wrote that their research showed that who pays the tax in the first instance does have an effect even if it doesn’t affect the amount of money workers end up with – it affects workers’ perception of what is happening and so their behaviour. They found that, if employers paid all the tax, workers would favour more government spending, and vice versa:

‘This suggests that employees believe that their own contribution to public spending is lower when taxes are levied on employers even if there is de facto no difference in the amount of money that ends up in their pockets.’

In other words, we can add, if workers do pay tax in the first instance they consider this is a part of their money that is taken from them. This opens the way for politicians and defenders of capitalism to con them into believing that they are part of a national community of taxpayers with a common interest in getting ‘value for money’ from how the government spends tax money.

The fact is, though, that if taxes on wages were to be reduced, workers would not be better off as their gross wage would fall correspondingly. As Marx pointed out:

‘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 today 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 taken place. Instead of the present system, whereby the capitalists also advances, as part of the wage, what the worker has to pay, he [the capitalist] would no longer pay them in this roundabout way, but directly to the state’ (Moralising Criticism and Critical Morality, 1847).

Whatever the form of tax-collecting ‘there is de facto no difference in the amount of money that ends up in their pockets’. As long as the wages system exists, workers should indeed ‘care only about their net wage’.