Government employees don’t really pay income tax. When government employees are taxed by the same government that pays them, it’s essentially a bookkeeping illusion, since their tax payments are just returned to their employer—the state.
In Democracy: The God That Failed, Hans-Hermann Hoppe explored the hypothetical scenario of abolishing all taxes and questioned whether this would lead to an increase in everyone’s income. Undoubtedly that would be the case for non-government employees, but it would not be so for those employed by the government. Hoppe argued that for government employees, their salaries would decrease by the amount they currently pay in taxes, effectively leaving their net income unchanged.
This is because the taxes they pay are essentially a portion of the government’s own funds being cycled back to itself. Therefore, eliminating taxes would not result in a real income increase for these employees; instead, it would transparently reveal their actual earnings without the misleading appearance of taxation.
Hoppe argued, “Their salaries could not possibly rise, if taxes were abolished. Rather, their salaries would fall to zero, which demonstrates that they are not paying any taxes at all.”
He then cites Murray Rothbard, in his work, Power and Market: Government and the Economy, which highlights this reality further: “If a bureaucrat receives a salary of $5,000 a year and pays $1,000 in ‘taxes’ to the government, it is quite obvious that he is simply receiving a salary of $4,000 and pays no taxes at all.
“The heads of the government have simply chosen a complex and misleading accounting device to make it appear that he pays taxes in the same way as any other man making the same income.”
Rothbard observes that it would be more transparent for governments to follow the United Nations’ model, where employees are exempt from income taxation under the Convention on the Privileges and Immunities of the United Nations (1946). This agreement grants UN staff tax immunity on income earned through official duties, aiming to ensure uniform treatment across member states and avoid disparities arising from differing national tax laws.
Hoppe argued that once it is understood that government employees don’t pay income tax, it “becomes obvious why certain groups such as school teachers and university professors are almost always and uniformly in favour of higher taxes.”
“They are not, thereby, generously accepting a greater burden imposed on themselves,” he said. “Instead, higher taxes are the means by which they increase their own tax-financed salaries.”
