3.5.1 Economic Reciprocity – Paying to Keep it All Going
The creation of wealth depends on an economic environment which has an educated and healthy workforce, sufficient infrastructure for goods and services to reach their markets, and the maintenance of law and order for wealth to be protected.
To support this environment, almost everyone would agree that some government spending (3.2.3) is necessary. They often disagree about its scope, as discussed in the next section (3.5.2), and they disagree about who should pay for it. It means paying tax, which is always unwelcome and contentious but is necessary for the economy to thrive. It can be seen as a form of economic reciprocity, paying something back in return for the benefits one receives.
People who have retired from work have benefited in the past, so wealthy old people should pay proportionally as much tax as those who are still in work. Overtaxing those who are in work has the effect of slowing down the economy.
If everybody were to pay the same amount of tax, those with low incomes would find it harder than wealthier people to find the money. If people were to pay in proportion to their incomes, though, the wealthier people in society would shoulder more of the burden – which is fair, because they have derived more benefit from the economy than the poor. Adam Smith put forward this view, in An Inquiry into the Nature and Causes of the Wealth of Nations:
“It is not very unreasonable that the rich should contribute to the public expence [sic], not only in proportion to their revenue, but something more than in that proportion.” (book V, chap. 2, para. 71)
It is worth dividing Smith’s proposition into its two parts: the proportional contribution and the “something more”. The considerations are different, as described in the following sub-sections:
● People who create wealth should contribute towards the cost of the shared economic environment that they depend on, at least in proportion to their earnings (220.127.116.11).
● There are arguments for wealthy people to be asked to contribute even more than their share (18.104.22.168).