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Taxation and its burden

Continuing our tedious but necessary economic education posts. This one on the subject of taxes.

When capitalist political parties are in disagreement, the issue of taxation usually looms large. Should income tax be reduced or increased?  The serious-minded worker who does his own thinking will probably at first be amazed at the dexterity exhibited by both the Labour and Tory sections of the capitalist class. We watch them handling figures and statistics in a way that must cause a circus juggler to turn green with envy, each proving that the poverty and misery is bound to increase if the proposals of the other side are adopted!

 If, however, we examine the facts of the situation calmly, our amazement will soon disappear. One aspect of our socialist analysis of capitalism that we have not always found easy to get across is the view that taxation is not an issue that concerns wage and salary workers since in the end it is a burden on property-holders. If then taxation  is not a working class problem whose problem is it? Taxation is the problem of the capitalist class. All of the wealth that the workers produce is the property of the employing class. When the employers have succeeded in selling the goods produced by the workers they employ, and after they have paid wages and met all other expenses of production, they still have to meet the demands of the local and central government for rates and taxes of various kinds. All of the employing class have an interest—as they continually show—in trying to reduce the cost of government. As far as is politically practicable and militarily safe they try to reduce the amount the government raises as taxation and spends on civil service, military service, prisons, police, etc. If they succeed in getting taxation reduced it is in the hope of benefiting themselves; certainly not with the intention of passing on the benefit to the workers. Capitalists are much concerned with trying to place some of the burden of taxation on the shoulders of other sections of their own class. When the brewing interests try to get beer duties reduced (because they hope thereby to increase sales and profits) they do not at all mind if the government meets the situation by putting a corresponding increase of taxation on the capitalists in some other industry—the cinemas for example. But however the struggle between sections of the capitalists over taxation may turn out that is their problem and it involves no interest affecting the working class. The debate 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. The burden of taxation does not rest on the shoulders of workers. Although taxes on wages appear to come out of wages, in reality taxes come out of profits. Workers should therefore ignore all the false promises and baloney about taxes that politicians use in order to try to win votes at election times, and concentrate their efforts instead on the class struggle, seeking to raise their wages and improve their living and working conditions.

The state, or government as it is more familiarly termed, exists for the purpose of maintaining the authority of the capitalist. It costs money to run a government. The workers have not the necessary money. If they had, the capitalist would find a way to make them pay the expenses of government. Owing to the competition for jobs, the workers’ wages are always at a minimum. On the average they are just sufficient to maintain the existence of the slave. Some, it is true, get more than the average necessary wage, but for one who does there are large numbers who are getting less, and there is a permanent section of the population that gets no wages at all – the unemployed. If the workers could live for a year without eating, paying rent, buying clothes, etc., then they would be able to do little more than pay the taxes of the nation.

 The capitalists know these facts. They know that the workers do not earn enough, so they do the only thing possible, that is, pay the taxes themselves. The tax question is not a working class question. As an issue, it is often used as a political red herring to be drawn across the nose of the working people who are made to believe they are taxpayers. Actually, we don't deny that workers pay, in the sense of themselves handing over the money, some taxes. Our argument is that the burden of taxation does not fall in the end on the working class but on the propertied class and profits. At the moment, workers’ pay slips show deductions for income tax and national insurance contributions (a tax in all but name, as was recognised by the merger a couple of years ago of the DSS’s contributions section with the Inland Revenue), which are paid to the government, and, in some cases, contributions to the company pension scheme. We’ve always pointed out that these are not really paid by the employee, not even in the formal sense of personally paying the money to the government or to the pension scheme – it’s just an administrative exercise – and that what matters to them is their take-home pay, not gross pay before deductions. As far as they are concerned, their employers never really paid them in the first place the amounts deducted and might as well have paid them directly themselves.

The capitalists do not like to pay taxes, but they must surround themselves and their property holdings with an extensive and expensive machinery. The preacher and the policeman have both to be provided for, and many other retainers besides. 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 armed forces, police, jailers, judiciary, and a whole host of strong men and intellectual retainers must be kept to do their bidding. The state originally arose out of the division of society into classes.  In by-gone days, a brutal chieftain would surround himself with a bodyguard of string men to protect his person and smash and suppress all who threatened his privileges. Such is now the function of the state, carried out on a civilised plane, under the cloak of respectability – law and order. 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. Moreover, it is in the interest of the ruling class to maintain the state apparatus because it maintains their dominant social position - though of course that doesn’t stop them complaining about the cost and demanding cuts in its running charges.

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. The agitation over taxes helps to obscure the fact that the worker is robbed as a producer in the industries. Surplus-value is produced by buying labour-power at its value, and selling the product of labour at its value – a much greater value.  If the capitalists could retain all; the surplus produced by labour they would be overwhelmed with joy. But no such luck. The poor capitalist has to give up part of the plunder. The surplus-values which are exploited from the workers do not flow to the capitalists in even quantities. There are different grades of capitalists. The real big fellows try hard, and often successfully, to pay the smallest percentage of taxes. They shift as much as possible on to the shoulders of the small capitalists, and a little of it, as we have already pointed out, on to the shoulders of the higher paid workers and in times of stress they resort to pilfering, such as sales taxes/VAT , which will reduce the workers’ real wages.

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.

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 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 pounds to 250 pounds if take home pay was to remain around 150 pounds. The increase in this case would be borne entirely by the employer and would come out of surplus value.

It is obvious that the real price of labour power is what is actually received and is not a hypothetical sum  (not some theoretical gross, but what is actually received, what the employer invests as ‘variable capital’), 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 pounds a week, 50 pounds of which is taken in income tax. If the income tax rate was halved and the amount taken in tax was reduced from 50 pounds to, then Republicans would presumably argue this would lead to an automatic rise in the worker's take home wages from 150 pounds to 175 pounds, 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 pounds 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 pounds to 250 pounds if take home pay was to remain around 150 pounds. The increase in this case would be borne entirely by the employer and would come out of surplus value.

This is based on the assumption that in the medium term workers sell their ability to work at its cost of production (or what Marx called its value), i.e. at the cost of what they must buy to keep their skills up to scratch and also to raise a family to take their place on the labour market when they retire. It follows from this that any permanent increase in the workers' cost of living, whether from taxes or from higher prices will be passed on to employers as higher money wages and salaries (On the other hand, any permanent decrease in their cost of living, as from rent control or from subsidies to food or transport, will end up being a subsidy to employers in the form of lower than otherwise money wages.) Having said this, most taxes in Britain are not even paid by workers but are collected and paid by businesses. Obviously, this is the case with corporation tax. It is also the case with income tax on wages and salaries, which in the UK is deducted by employers from nominal wages under the PAYE system and never even get into the hands of bank accounts of employees (income tax, in fact, is mainly a means of ensuring that workers without families don't get that part of wages meant for raising a family).

Some say that sales taxes fall upon the consumer, and therefore the workers will have to pay increased prices for the articles they purchase if a tax is placed upon those. The obvious retort is that as the working class are the only producers, but not the only consumers, it is from the former point of view that they should look at the matter. But apart from this, the statement is not true of itself. Prices are determined primarily by the cost of production, and immediately by supply and demand. The variations in the latter cause prices to fluctuate, but the point above and below which they move, and tend to come to rest, is the value of the article - or, technically, all commodities exchange upon the average at their value. If owing to circumstances a commodity were being sold above its value, fresh capital would soon be turned in that direction, and competition and extra supply would cause prices to fall. If being sold below its value, part of the capital would be withdrawn, and the diminished supply, other things remaining constant, would cause prices to rise to the normal level. Whatever may be the conditions at any given time, the capitalist always sells at the highest price the market will bear at that period.

 It is thus easily seen that if the whole of the taxes were abolished it would not benefit the working class unless competition among the capitalists drove prices down in proportion, and then others would benefit as well, while the workers would have to resist a reduction in wages. The question thus becomes reduced to one of a quarrel between the big and the little thieves as to the apportionment of the cost of maintaining the present system, and is expressed chiefly by the small middle-class forming various tax-reform parties with the object of curtailing the powers of the monopolists and big capitalists. Being only really concerned with the problem of how to stop the robbery under which they suffer, the workers should take no stock of the quarrel over the paying of the expenses of the burglary. Whether he is living in a country is highly taxed or otherwise makes little difference; the worker finds that whatever of the above conditions he may be under, a subsistence is all that upon an average he obtains.

Another argument that has been put to demonstrate why workers should be interested in taxation is concerned with indirect taxes, like the European VAT and excise duties. To increase indirect taxation, it is argued, will mean higher prices and therefore lower real wages and living standards. Perhaps less obviously VAT too falls on and is collected by businesses. As its name implies it is a tax on "value added" which, in capitalist economics, translates into a business's wages bill plus its profits. As we have just seen, wages in the medium term represent the cost of production of labour power, so though the amount of VAT payable is calculated on the amount of "value added" in fact just like corporation tax it only comes out of profits. Firms can't automatically increase their prices by the amount of the tax; they reduce their profits by it. 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 also paid out of their profits by the firms involved. Only in this case prices are raised.  The government in effect creates an artificial monopoly position allowing monopoly prices to be charged - and then taxes away the monopoly profits for its own benefit. lnsofar as these goods (beer, spirits and tobacco, for instance) selling at their monopoly prices, enter into the general cost of living of the working class they are reflected in higher wage levels.

The taxes workers actually pay out of their own pockets are such things as car licences, TV licences and, if they are owner occupiers, council tax - but, once again, in so far as these enter into the general cost of living they are reflected in wage levels.

 In Britain in regards the poll tax, the Thatcher government clearly made a major blunder in imposing a tax which had to be physically paid by every adult. Not only was this not cost-effective in capitalist terms (the extra costs of collecting it) but it led to resentment amongst those who had never paid such taxes and in many cases couldn't afford to anyway. ln the end a combination of nonpayment, riots, demonstrations and the loss of votes in by-elections, caused the government to back down and restore something akin to the old system under which only owner-occupiers paid local taxes.

As to the unwaged, since they depend tor their income mainly on handouts from the state, taxing them does not make much sense from a capitalist point of view - its just takting back part of what's been handed out, so why hand it out in the first place? This is why the government will he introducing so-called "tax credits", under which what is to be paid as tax (if anything) is to be set against what is to be paid as benefit and only the difference paid. So, as with PAYE, the poor will never see the taxes they "pay". Forcing the poor to physically pay a tax like the poll tax doesn't make sense either as the level of income support (formerly supplementary benefit, formerly national assistance, formerly the poor law) is fixed as the minimum supportable level which in theory can't be reduced further. If you try, you get riots even in small peaceful towns .

Rises in tax (direct and indirect), by increasing the cost of maintaining employees, are generally passed on, through the operation of market forces, to employers in the form of increased money wages and salaries. However, this process is not automatic 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 to demand 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. Workers have to struggle for higher wages and salaries. The Socialist Party holds then that the question of high or low taxes is not a working class question because what the working class live by is wages and they have to struggle to maintain wage levels whether taxes are high or low and the principal factors in the struggle are, on the one side, the workers' cost of living, and on the other side the factors such as good or bad trade conditions, how much or how little unemployment which help or hinder the trade unions in pressing wage claims. In the long run taxes are a burden on the capitalist class only. Wages and salaries corresponds more or less to the cost of maintaining and reproducing the working skills which employees sell to employers. During their time in employment employees perform surplus labour, they create surplus value which belongs to the employer. The upkeep of the state and its machinery of government ultimately fall on surplus value, or incomes derived from surplus value, through taxation.  Rises in tax (direct and indirect), by increasing the cost of maintaining employees and their skills, are generally passed on, through the operation of market forces, to employers in the form of increased money wages and salaries. However, this process is not automatic or inevitable: workers have to struggle for higher wages and salaries.

Although taxes are one of the largest items of business expenses, there are others as well. The legal profession, insurance, advertising, and a host of other parasitic enterprises feed off the body of the real parasite – capitalism. All these force the capitalist to disgorge a part of the plunder. It is out of the surplus-value that they get their incomes. The capitalists don’t like to give it up. They would like to keep it all but they must maintain their supporters. What is left over in the hands of the capitalists – plenty of course – is profit. How necessary it is to understand the economics of capitalism. Not the capitalist explanation of economics, but the Marxian or working class explanation. How necessary to understand that taxes in general must come from some other source than the worker’s pay envelope – that they are paid by the capitalist out of the surplus wrung from the toil of the workers.

The capitalist class are bound to return to the workers enough of the wealth that members of the working class themselves have produced to maintain them in a state of working efficiency and to keep on reproducing itself. The capitalists may differ among themselves as to the exact level at which this standard may be fixed at, but they are unanimous in fighting to retain as much of the surplus value above this limit for their own spoils. The workers, on the other hand, are always struggling to increase their share of the wealth produced, with varying degrees of success, which results in individual or sectional wages varying, but makes the return to the class as a whole a close approximation to the cost of living under the conditions obtaining in that society. 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 little importance to the worker in the long run.

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)

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

 The Marxist analyst Paul Mattick Jr. makes the following argument:
“Tax money appears to be paid by everyone. But despite the appearance that business is undertaxed, only business actually pays taxes. To understand this, remember that the total income produced in a year is the money available for all purposes. Some of this money must go to replace producers’ goods used up in the previous year; some must go in the form of wages to buy consumer goods so that the labour force can reproduce itself; the rest appears as profit, interest, rent – and taxes. The money workers actually get is their ‘after tax’ income; from this perspective, tax increases on employee income are just a way of lowering wages. The money deducted from paycheques, as well as from dividends, capital gains and other forms of business income, could appear as business profits – which, let us remember, is basically the money generated by workers’ activity that they do not receive as wages – if it didn’t flow through paycheques (or other income) into government coffers” (Business As Usual )

Our point precisely. As Mattick also points out in his book, while “neither economists nor businessmen have an adequate theoretical understanding of capitalism, the latter at least have a practical sense of how it works”. This applies in the case of tax. The capitalist argument that taxes are bad because they raise the costs of labour is very true and the logical implication is that this is a problem for those who pay for labour – the capitalists – not for those obliged to sell it - workers. Capitalists understand that raising taxes on wages will just put upward pressure on wages, raising the cost of labour for the capitalist.

Firmly gripping the above sound and logical position, The Socialist Party, truly representing the workers, makes its attack to capture the political machinery and therewith control of economic powers and social forces for the purpose of ending the robbery by overthrowing the system of capitalism, emancipating the working class, and laying the foundations of the socialist co-operative commonwealth


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