Saturday, October 08, 2005

A Question of Fairness

There can be no doubt liberals and leftwing academics agree virtually unanimously on the mixed economy model of a progressive tax system. The usual model correlates an individual’s tax rate proportionally to his or her earnings. Liberals generally view the taxation policy as justified morally on the grounds of altruism, but if the socialist was pushed to be more specific as to whom the system benefits I believe he would answer that graduated tax systems benefit wage earners more than professionals. His arguments imply the wage earners higher degree of dependence on the welfare state relative to the educated professional, combined also with his equally implied lower earning potential over the course of a life time. A model like this is based on the misassumption that wages and earning potential stay consistent over the course of a lifetime, which is true for the educated professional (the liberal ha ha), but untrue for the ambitious wage earner, the person most hurt by this discriminatory socialist tax policy.

Industry has always traditionally been subject to market extremes, known as boom and bust cycles, the boom associated by high wages and ample opportunity, the bust with the opposite. While doctors, lawyers, and teachers will be affected by these cycles they are less affected than other workers, due to the fact their skills are a service, and thus not directly affected by market forces. For example, when the demand for oil is low, the doctor’s income may slightly fall, but not dramatically, as health would still be high on the value lists of most citizens. The people most affected by boom and bust cycles are private industry wage earners. Cycles, the result of market forces, make them hard to predict, both regionally and world wide, as they are affected by many variables, such as quotas, technology, investment, foreign relations, resource supply and access. This makes the wage earner more dependent on his high wages when there is a boom cycle as he’s always preparing for the possibility of a bust cycle and unemployment. The progressive taxation policy pretends that there is no such thing as a bust cycle, predicating itself upon the myth of consistent earning potential, which professionals have and laborers do not.

If a worker is lucky enough to live and be employed through a consistent boom period he will then be subject to another factor of wage fluctuation and thus progressive taxation discrimination. Industry work is hard, lonely, and dangerous. Loggers are injured and killed by runaway logs every year in B.C, Alberta’s oil patch can lose up to 15 good men in any year, and everyday fisherman lose fingers in out rigging equipment in the throes of Atlantic ocean climates. And besides the obvious danger, the physical nature of the hard work also wears out backs, knuckles and knee joints. Combined with the danger and physical wear is the individuals desire to be closer to his family, as high paying industry jobs are most often found in remote locations. The results being that the vast majority of industry careers are over after 10 years. Consequently, the worker is faced with a much shorter period of peak earning potential. It is during these 10 years a laborer can match the salary of a doctor, but when his body begins to show wear and when he’s forced to leave the demanding trade the graduated tax model truly fails the working man.

Compare the laborers short peak earning potential with doctors, lawyers and engineers that are guaranteed a high salary long into life. Professionals work successfully into there 60’s, making them less affected by excessive taxation on peak earnings. There is little doubt the doctor unjustly feels the sting of socialism when his $130,000 salary is reduced to $70,000, but strictly from an economical standpoint he will be guaranteed high a standard of living based on his forty years of high earning potential.

A progressive tax system presumes workers earning potential remain consistent throughout the course of a worker’s life when clearly this is not the case. This mistake is most destructive to the individuals the flaw doesn’t take into account: namely workers that have careers where incomes are prone to fluctuation. Regardless of what amount of tax was paid when income levels were high, the benefits aren’t transferable to the times when his earnings are restricted. A time when he’s faced with switching careers and the possibility of low wages none of his “boom” paid taxes will be redistributed to him

Taxing the roughneck close to 45 per cent during the years of his highest wage levels restricts his ability to develop his capital the only time in his life he has it. It’s these years that a roughneck needs to pay his house off faster than other workers, organize enough capital to start a business, or save enough money to afford post secondary instruction. Yet it’s during these exact years that a progressive tax system punishes the young ambitious worker most severely almost guaranteeing his inability to be financially secure when he tries to make the eventual move to working and providing closer to his family; a period where his earning potential is sure to dramatically drop, as he will have to learn a new trade starting as an apprentice.

Inherent, in the graduated policy is its inability to compensate workers when their incomes change for the worse, as compared to its precocious ability to punish them when incomes are high. A policy like this condemns the wage earner to mediocrity, by negating his capital advantages during the only times he has it, as compared to the lawyer’s lifetime consistent capital advantage, which makes progressive tax policies overtly discriminatory toward the wage earner.

-Angry Roughneck


At 6:14 PM, Blogger AWR said...

I actually agree with you on this one. But it is not only wage earners that fall prey to such a system, but also anyone who is self-employed (their income also fluctuates widely from year to the next), and their numbers are growing extremely fast in Canada.

And, yes, we have been overtaxed in this country for quite some time now, which is the primary reason why our productivity rate is so low (people who are afraid of getting pushed into a higher bracket naturally cut back on working hours). I am guilty of that myself: I am self-employed, and trust me, you make the mistake of earning "too much" only once, because Revenue Canada makes you pay for that mistake dearly. So, I pace myself and turn down projects when I get too close to a higher bracket. But that also means that I am not as productive as I could be - bad for the economy, bad for me, but good for my tax bill.

At 7:33 PM, Blogger Aaron said...

As a guy with a grad degree in Economics, I'll assume I'm reasonably qualified to comment on your insightful analysis.

Here is what I interpret you to be saying:

* taxing young guys who sell their labour is unjust
* it is unjust because the nature of the work wears down bodies
* it is unjust because labourers have a 10 year shelf life of peak earnings, lawyers and doctors have like 40
* it is unjust because it denies the labourer his wad of capital

My points:

1. Not all professionals were born with silver spoons in their mouths (initial wad of capital from Daddy). Someone I know, for example, can make 7 grand a month operating heavy equipment. He gave up 7 grand a month to operate equipment for 8 months out of the year for 4 years. He did this to get an accounting degree. His wages are now not nearly 7 grand per month. 7000 x 8 months x 4 years = 224,000 dollars in foregone income. Add to that the 20 grand in tuition he's paid and the guy has given up about 250,000 dollars not to mention the blood sweat and tears of studying. Divide 250 grand by 40 years of working - that's 6,250 dollars a year he is essentially paying to be an accountant. By the time he's 30, he'll probably gross over 100 grand per year. That's not a bad investment.

2. Professionals accumulate capital in the form of their degrees. If they go bankrupt, their degrees cannot be taken away. (Although Accountants are not allowed to go bankrupt - they lose their professional status I think). This implies that one can accumulate capital by giving up income early on in life - but only if they trade it for paper (degree). The price of that degree is about 250 grand in tuition and lost earnings.

3. In the trades, you hit your peak earnings after 4 years on the job. In unionized trades, you are getting about 30 bucks an hour. Your rate will increase with inflation, but it will be at that same collectively negotiated rate for life, unless you make it to foreman or start your own company. Few people do this, but it is possible to play your cards right. If you don't buy the truck and house early on and settle for something a little more modest, you can flip that savings into something bigger.

4. Older guys in the oil patch become consultants. They do this because their bodies are smashed up, but their minds are better than ever. They might take a few courses on safety auditing and branch out into that.

5. The tax system, as burdensome as it is, is designed to encourage saving. RRSP's help to shift the tax burden to later in life and encourage investment/savings. That might be something to look into for a young guy making big bucks.

The key, it seems, is education. A piece of paper is just that - but it can get you places, like a passport.

At 6:53 PM, Blogger angryroughneck said...

The point isn't that it's unjust to tax labourers because they're bodies break down, but rather I am demonstrating that a progressive taxation model hurts the very people it claims to help. Socialists champion tax graduated tax models as helping the working class, by inlicting greater penalty on the "rich". But that model is more destructive to the wage earner as his income is much more susteptible to market fluctuations than the proffessional. So when times are good he is taxed as if they have always been that way, which is untypical for the average laymen.


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