Understanding Taxation

If you like paying taxes raise your hand.  Anyone? Anyone? Bueller?

With all this austerity going on around us, television news channels and some newspapers have produced various “special reports” trying to explain what it all means.  They’ve been pretty good at explaining complex macroeconomics concepts, but they never quite got to the basics in my view.  So here it is.

Governments have two ways to raise money- transaction fees and confiscation.


Transaction Fees.

We’re all used to paying transaction fees.  If you sell something on eBay, you pay a transaction fee.  If you sell your house, you pay commission to an estate agent. Some discount airlines charge a transaction fee when you use your credit card to buy tickets.

You are also paying transaction fees to your government every day.  When you buy something at a department store and have to pay Value Added Tax (VAT) or sales tax.  When you import a product you may have to pay import duty.  When you sell your home and have to pay “stamp duty” (UK).  When you buy fuel for your car it has both fuel duty and VAT.   And on and on.


The other way governments raise money is by confiscating your money.  This might be in the form of an income tax where a portion of your income is confiscated from your paycheck each month.  It might be when you make a profit from selling an asset (e.g. in the stock market or a second property) in the form of capital gains tax.  It may also occur when you inherit money from a deceased relative in the form of a death or inheritance tax.


Personally I think that using “confiscate” instead of “tax” is a clearer expression of what is occurring.  The word “tax” no longer means what it did in many countries due to its ubiquitousness.  Think of the Sheriff of Nottingham in the Robin Hood stories and how the Crown practically bankrupted both land-owners and peasants with its excessive taxes:

Sheriff of Nottingham: [to the collectors] Well, what sort of day have you had? Productive, I trust.
1st Tax Collector: I only wish your trust was better placed, milord. It’s getting harder than ever to get the taxes out of them.

Generally, I think that people don’t mind paying transaction fees – providing that they are reasonable.  This is the cost of “doing business” in one country compared with another.   There is an element of choice when it comes to transaction fees too – you choose to consume and therefore accept the transaction cost of doing so.

Confiscation on the other hand is an emotive issue – and an intentionally emotive word.  Most people understand that confiscation taxes are appropriate in any modern society providing that they are applied fairly and reasonably.  I don’t know of many governments that confiscate fairly and reasonably, but I wish they would.  Perhaps if we change the nomenclature, we can change the behavior.