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Mike's Spot

The Fiscal Theory Of Relativity

What percentage tax do you think you pay? Me, I pay 100%. Yes I do.

And that's not because I earn such a ridiculously huge amount of money that the government has invented a special 100% tax bracket just for me. We all pay 100% tax. Yes, even you.

Allow me to explain.

There are many forms of tax, we get taxed on a multitude of different things and in different ways, but there are basically two main categories of taxation.

  • Tax on money you earn (e.g. Income tax, corporation tax, national insurance)
  • Tax on money you spend (e.g. VAT, road tax, excise duty)

Let's focus on tax on money you spend and follow the life cycle of one hundred pounds that you have in your pocket. You go to the supermarket and spend it on the provisions that you'll need for the next few days. Some of these will be VAT free (fruit and veg, basic foods) some will have VAT on them (biscuits, chocolates, household goods) and some will have duty on top of that (beer, wine, cigars).

You'll never know precisely what percentage of your hundred pounds will go to the treasury (actually you could tot it up off the receipt if you're really interested) but because of the varying proportions of taxable and non-taxable goods that you buy each time you go shopping, your percentage tax will differ each time. But that's not important. What's important is that some of your hundred pounds gets collected by the store and passed on to the treasury and some of it doesn't. It's the some of it that doesn't that's important.

This gets used to pay wages to the staff, pay for maintenance of the shop and profits for the owners. The staff then go and spend their wages on rent/mortgage, food, clothes, luxuries, etc. Again it doesn't matter what proportion gets taxed, the money that doesn't go in tax gets passed on to other people in rent and wages and profits and they in turn pass their parts of your original hundred pounds on to other people.

At each iteration some money gets passed on to the treasury and the amount of your hundred pounds that doesn't make its way into the government's coffers gets smaller and smaller. Even if at one stage the entire amount is spent on non-taxable goods, its migration to the treasury is only delayed by one step and it will soon enough be taxed. Eventually all of your hundred pounds ends up as tax.

Pedants will argue that this iterative process will never take the entire hundred pounds but that the amount that is taken in tax moves asymptotically towards a hundred pounds. However, if you take into account taxes that are paid as a fixed amount rather than as a percentage (e.g. road tax, TV licence, driving in the bus lane fines) this mops up the remainder and so the government ends up receiving every last penny of your one hundred pounds. In other words, 100%.

Now, there will be those that say that this logic is balony and that you should be looking at taxation from the individual's point of view rather than the money's point of view. This, of course, is not true. If you want to understand taxation you have to look at it from money's perspective.

When Einstein decided to look at the universe from the perspective of the speed of light instead of from an absolute stationary point, he opened up a whole new branch of physics, was able to explain things that previously were inexplicable and made predictions which have since been proved correct.

Similarly, I can predict that if we were to abolish all forms of income tax then we would be naturally all be better off and the government would still get their 100% of our money. In fact, they would get even more because we would have more money to spend and as we've just seen, all our money goes to the treasury in the end.

And all of this extra wealth can be generated simply by looking at the fiscal universe from the perspective of the speed of the money. It doesn't take a genius to work it out.


Mike's Spot
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