Why High Taxes Makes Black Market Nannies Necessary

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In recent weeks,
since the naming of new ministers in Sweden and the
revelation
that some of them hadn’t paid the special tax on
television sets called “TV-license” and had hired black market nannies,
there have been increased discussion of the morality of tax evasion.

Stefan Swärd,
an Evangelical leader, claimed
[In Swedish]
that tax evasion is “theft” and said that not paying
the excessive taxation imposed on work efforts is equivalent to
going to a municipal building and take money out of their pay office.

The fallacy
here should be apparent. When one performs a black market activity
one does not make the State or anyone else worse off. If you hire
someone to clean your house, the State will receive no less income
than had you cleaned the house yourself or had no cleaning taken
place and the house remained a mess.

Nor can the
State legitimately claim credit for the activity. The State had
no role in initiating or performing the activity and so it could
not in any way claim moral credit for creating the activity. Perhaps
one could argue that the State’s implicit police protection for
the fulfillment of obligations (even that is dubious not least considering
that we’re talking about a black market transaction) gives them
a small right to revenue, yet even assuming that, that would be
more than paid for anyway by the taxes that even black market workers
are likely to pay in their official market dealings.

If there is
any “theft” involved here, then it is outrageously excessive taxation
imposed by the Swedish government where hardworking people are deprived
of the fruits of their labor.

It must also
be emphasized that when it comes to many of these particularly labor
intensive activities, the high tax rates now imposed make it necessary
to perform them underground – or else they won’t be performed at all.

Consider the
case of, say, an accountant who produces a value of $50 per hour
with his work and a would-be nanny who is willing to work if she
receives at least $10 per hour. In a free society they would undoubtedly
make a mutually beneficial deal where the accountant pay the nanny
somewhere between $10 and $50 per hour to perform some household
services, allowing the accountant to either work more or to have
more spare time. Even had there been a modest level of taxation,
like the 15% flat tax in Hong Kong, there would be no trouble making
a deal, as the marginal value of work as an accountant for the accountant
would have been $42.50 and the minimum pay for the would-be nanny
would cost the accountant $11.80.

But with the
Swedish levels of taxation, where the total tax wedge is more than
70% for high-income earners and 60% for low-income earners, no such
mutually beneficial exchange will take place. This is because the
net income for the accountant is just $15 per hour, while the minimum
pay for the nanny will cost the accountant $25 per hour. This will
induce the accountant to reduce his hours and perform these household
services himself, as this will be economically rational for him
under these conditions.

The end result:
the state will receive no tax income for the household services.
Meanwhile, the accountant will produce less of his highly productive
services and the would-be nanny will go unemployed.

From what
perspective would it then be immoral to pay the would-be nanny $10
in a black market transaction with money received from a highly
taxed job and so give the accountant more time to perform his highly
productive services or the spare time he needs to endure his job
and at the same time give the would-be nanny more income? The rest
of society will certainly not lose, if anything they will win, while
the two involved parties will both benefit.

The high tax
rates that in effect forbid the legal performance of these mutually
beneficial exchanges should be recognized as the immoral element
here – not the “black market” performance of these mutually
beneficial exchanges.

October
23, 2006

Stefan
M.I. Karlsson [send
him mail
] is an economist working in Sweden. Visit his
blog
.

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