Amid the row over Britain’s new 50p income tax rate, no one is asking the basic question. Why do we have tax incomes at all?

We are so used to this Chinese idea that William Pitt borrowed to finance the Napoleonic wars that we argue only about the rate and allowances rather than the principle.

The reason income is taxed is that because once we accept governments spend money, they have to raise it and there is no point imposing taxes on those unable to pay. We thus tax consumption, earnings, profits and wealth. Our attempt to tax people simply for existing and benefiting from state spending – poll tax – proved unpopular and impractical.

Vat and excise duties are consumption taxes, corporation and capital gains taxes give the government a share of profits, inheritance tax takes a cut of our wealth, but there is no intrinsic reason to tax any of those sources or to tax wealth. Not all countries impose all those taxes and all vary the balance.

Even if an income tax is levied, there is no reason why people should pay more simply because they earn more – nevermind pay exponentially more. Think of it as a tax on working rather than a tax on earning and the illogicality is clear: we should encourage people to work harder to increase the country’s gross domestic product.

And if it makes no sense for someone working twice as hard to pay twice the tax it makes even less sense to increase the tax rate from 20 to 40 or 50 per cent on marginal income for those who work longer or harder.

Perversely, overtime premiums mean we pay people more to work longer hours – but we then tax them more on the additional income to reduce the premium.

A tax should, in fact, pay for the service supplied by the state – and should thus be called a price rather than a tax, even if is may be imposed compulsorily. And ideally, everyone would pay for the services consumed: the municipal golf course should be financed from players’ green fees, for instance, not all residents’ rates.

But because some people cannot pay for the services they consume the cost has to be put onto others. That means a redistribution of income and the choice is to make everyone pay more to subsidise the poor or to load the extra onto the rich.  Our “progressive” tax system does the latter by increasing the tax rate for higher earners. The 50p rate does that.

Will 50p be enough to make high-earners emigrate or simply encourage them to earn less? Most people will not be affected – which makes a tax on fat cats politically popular, of course – and most of those that are will be affected only on the final small tranche of their income above £150,000.

So governments will get away with the 50p rate. However, there is no sound base for higher rate taxes and a strong case for tax rates falling as people earn more. We do not consume more state services as we earn more – we may consume less if we substitute private health or education – and keeping more of our earnings would encourage us to keep working and improve the country’s wealth.

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