Are taxes paid proof of contribution made?

One of the standard arguments that is wheeled out every time reform of the finance sector is discussed takes the following form:

We can't risk reforming the finance sector too dramatically: if the banks decide to relocate elsewhere, they will take their enormous tax contributions with them, and we'll have shot ourselves in the foot.

In other words, we may not like the vast riches that bankers award themselves, but we'd be silly to kill the goose that lays the golden eggs: sure, they get paid a lot, and that might make us jealous, but they also contribute a lot, and for that we ought to be grateful. (It's often pointed out that this is the theme of Ayn Rand's Atlas Shrugged: John Galt and his Nietzschian supermen - the wealth creators - grow weary of the parasitic and jealous citizens of more modest talents, and so withdraw from mainstream society to "Galt's Gulch", leaving the jealous masses to consider the consequences of having driven off the greatest contributors to society.)

Here's Jeremy Warner writing recently in The Daily Telegraph:

"Once the myriad business services, IT and other support staff that ride on finance's back are accounted for, the City is responsible for rather more than 20pc of tax revenues. The economy would be in a state of ruin without it."

How valid is Warner's claim? It seems to be a compelling argument at first, especially when applied (as here) to the UK. Take away the finance sector, and you lose a whopping 20% of the current tax base.

The only problem with Warner's conclusion is that it is completely unsubstantiated. He makes one critical (tacit) assumption in the process of arriving at that conclusion: that the finance sector is generating non-zero-sum wealth. In other words, he is assuming that the banks generate wealth that would simply not be there without their presence. But this may or may not be the case. I'm going to argue that Warner's argument lacks rigour and is invalid in its current form.

Let me start off by describing an extreme situation in which somebody can pay huge taxes while contributing nothing at all to the economy, then we'll move on to something a little more realistic, and finally ponder where the banks sit along the spectrum of usefulness versus parasitism.

An extreme example: legalized appropriation

Let's imagine that your country's government has a strange brainwave and decides to allocate a special licence to one individual in the country, at random. The terms of the licence allow its holder to stop anybody they like on the street and demand a payment of ten thousand dollars (/pounds/euros etc) from them, to be paid by the end of the month. The money so taken is treated as income, and is subject to taxation. Because it's so easy to make large sums of money this way, almost all of it falls into the country's highest taxation bracket, which I'll say is 40%.

The licence is given (after a lottery) to somebody called Jones. At the end of the first year following its introduction, Jones has acquired a vast sum of money: let's say that it's ten billion dollars. (Note as an aside that Jones works hard every day to make this sum: she accosts nearly three thousand people a day, powering away like a trojan. Jones is by no means lazy.) Jones therefore pays almost four billion dollars in tax to the government: a huge sum, by anybody's standards.

But what contribution is Jones actually making to the economy?  She can point to the huge level of tax she's paid, and make the claim that she has funded hospitals, schools, the armed forces...surely her four billion dollars powers the economy, making life easier for other people? When it's suggested that Jones has been given unfair powers to acquire money, and that the terms of the licence should be changed, or that she should be taxed more heavily, she makes this counterargument:

If you try to make it harder for me to maintain my current level of income, I will leave the country, taking my tax dollars with me. Indulge your jealousy if you like, but if you drive me away, you will face a loss of four billion dollars from your tax base. Do you really think this is a good idea?

To somebody who didn't understand what Jones was doing to acquire her income, and who only saw the levels of taxation that she contributed, this would be an intuitively plausible argument: Jones pays four billion in tax! That helps our economy! Yet what is Jones's actual contribution?

It's zero.

Jones makes no contribution whatsoever. She simply moves money around. It's the other people in the economy who generate the wealth; she just skims it off. She's able to operate as a parasite. The taxes she paid were earned by others, but the licence allows a situation where somebody examining the ledger at the treasury would think that it was her who had earned the money and made the contribution.

Note, by the way, that it isn't being rich that makes her a parasite. It's the manner in which she acquired the riches that is parasitic. By contrast, the likes of Steve Jobs and Ingvar Kamprad are not parasites. They create real goods and services that people/companies/governments want. Even venture capitalists, who do not create goods and services themselves but facilitate others to do so, are not parasites: they are proto-wealth generators. By contrast, Jones is able to get rich without creating or facilitating any goods or services demanded by the market.

A less extreme example: monopoly

It's not especially likely that any of our governments are going to hand out licences for individuals or companies to take money off others with nothing in return. It seems to offer them no advantages (although I'm going to suggest in a later blog post that this is not necessarily the case), and the public would be able to see clearly how unfair the setup was. But there are ways that economic agents can gain powers that are broadly equivalent to a licenced cash-swiper. Specifically, if an agent is able to extract economic rents, it has the power to charge - and receive - more money for a good or service than it ought to be able to able to in a free and fair market. An obvious example of this is a monopoly: if an agent can prevent rivals from entering a market for a desirable good, it can charge excessively for that good. This ends up being the equivalent of the swiping licence, which is one of the reasons why monopolies are discouraged by government laws and regulations. (In general, good government discourages any activity that allows somebody to get rich without providing anything useful in return. The Chicago economist Gary S. Becker once asserted that the single best reason to discourage theft is that it is inefficient: it requires effort on the part of the thief, yet no value is added to the economy.)

If contributing huge tax receipts was by itself deemed to be proof of the economic value of any given company, monopolies would be encouraged rather than discouraged. After all, a company that has a monopoly will be making much greater tax contributions than one that is not allowed to maintain monopoly powers.

Am I saying that all bankers are de facto thieves?

No. I should make it very clear that I'm not. What I'm arguing here is simply that pointing to the taxes submitted by any individual or corporation at the end of the financial year does not by itself demonstrate that those agents are making a valuable contribution and that the economy would suffer if they stopped doing what they were doing (or moved elsewhere to do it). The licenced money-swiper and the monopolist in our two examples make huge tax contributions, but we can see that their real contribution is zero (or very low). So playing the tax receipts card is an invalid move; you need to do more work than that to show that the entity in question is an asset to the economy. When Warner assents dumbly in response to the finance sector's threats to leave, he's falling for a fallacious argument, and discouraging proper investigation of the matter. 

But do I happen to think that banks are de facto thieves/monopolists? The answer to that question is not pertinent to the argument here. I'll leave that to you to decide for yourself, but most importantly, I hope that you'll recognize that it is a question worth asking.