|Montréal, 30 septembre 2000 / No 68||
by Edward W. Younkins
Income taxation in the United States began as an emergency means to be exacted only during times of war or drastic revenue needs. Its growth during the last century was caused by increased federal revenue demands and the growing willingness to use the tax law as an instrument of social and economic change.
The idea of taxes raises questions of justice and morality regarding the
nature of government, its proper objectives, its use of force in obtaining
its revenues, and the distribution of the tax burden. Taxes can be used
by government to control citizens. Throughout the ages and around the world,
taxation has had enormous influence on the structuring of society and the
status of the individual within society. Today, in America, income taxation
presents one of the greatest potential threats to individuals and their
rights to life, liberty, and pursuit of their own happiness.
The Nature of Taxation
Taxation is the price we pay for government services. A tax is a compulsory payment by individuals to government. Taxes are always coercive – the idea of voluntary taxation is oxymoronic. If taxes were voluntary contributions, then many persons would quite likely not want to pay their share unless they knew that everyone else would pay their share. Then too, voluntary taxes would be subject to the possibility that government might only protect those who contributed to its operations.
Legitimate government activity consists of defense and protection of life, liberty, and property. Every dollar of taxes must provide an equivalent legitimate benefit, or else taxes become theft. Taxes raised for purposes other than defense and protection become a way for government to control citizens. Taxation can, and has, become a tool of fiscal and monetary management and a means for redistributing wealth. The purpose of reallocating money via taxation is to distribute it differently than free market transactions would. Taxation thereby becomes a means to thwart individuals' minds by using their money contrary to their judgment. When taxes are used to redistribute wealth and support social programs, they not only divert resources from other useful purposes, they also become a power contest between organized interest groups. Special interest groups and lobbyists pressure Congress to pass tax laws conducive to their own self-interests. Various special treatments make economic decisions dependent upon arbitrary tax rules instead of on economic factors. Business decisions are made with an eye toward tax advantages.
Disguised and Hidden Taxes
Disguised taxes are not labeled taxes but have the same effects that taxes have. For example, inflation is a tax against savings. When government increases the money supply through deficit spending and the abandonment of the gold standard, it reduces the economic value of money that thrifty people accumulate as savings. Inflation thus encourages people to spend rather than to save.
In addition, social security insurance payments retard capital accumulation when people are forced to pay into a
Then there is the insidious practice of requiring taxes to be withheld by employers from the wages of the employees. Not only are these monies taken out of the hands of the earner earlier than they need be, the practice of having the employers automatically deduct and remit the tax collection to the government makes the payment of taxes seem less painful to the employees.
Also, there are cases in which taxes are incorporated into the price of things to make them less noticeable. This practice can be found in cigarettes, liquor, gasoline, etc. And, of course, the effect of government regulation is the same as that of taxation – earnings are used to enforce government policies.
Taxes are destructive – they tend to destroy the power of individuals to create and keep what they have created. In particular, progressive taxation dampens incentives to produce goods and services and deters capital accumulation. The graduated income tax discourages excellence through the periodic (i.e., yearly) retraction of rewards. Progressive taxation thus burdens society's most productive members.
By reducing the opportunity cost of consumption relative to investment, the government causes consumption activities to be favored over saving and investment activities – acts of investment can be traced back to acts of saving.
Taxes reduce citizens' levels of living. For every dollar spent by the government, individuals have one less dollar to spend for themselves. Taxes, especially those that are progressive and/or that are spent for illegitimate activities, contradict the principles of freedom and justice that America was built upon.
In addition, tax increases reduce the price of leisure. It follows that many people will decide to work less and spend more time in leisure activities. Furthermore, as the government collects and redistributes more funds, there is an increased incentive to attempt to become a recipient of government transfer payments.
Also, the more government benefits one group at the expense of others, the less respect citizens have for tax laws and the less likely they are to feel obligated to pay their share of taxes. Then too, a tax and spend program tends to undermine the spirit of helpfulness and voluntary charity on the part of citizens. The more functions assumed by the government, the weaker the belief that helping one's neighbor is a proper voluntary action of the individual.
Taxes in a Free Society
What, if any, tax structure can be said to be compatible with the philosophy of freedom? The purpose of the state is to provide only those benefits necessary to prevent harm and keep peace which apply equally to all members of the community. More specifically, a free and orderly society requires state force to deal with aggression and fraud and a court of final resort to settle disputes that were insoluble through private means. Private judicial arrangements of conciliation, mediation, and arbitration and private defense agencies can accomplish a great deal. However, there still remains the need for a coercive court of final appeal to enforce judgments and protect individual rights.
The legitimate functions of the state require funding. These include defense, peacekeeping, preventing and protecting individuals from force and fraud, and maintaining a just, common, and equal system of administering justice and settling disputes. In other words, the state should provide a stable system of governance that protects life, liberty, and property while maintaining due process of law for its citizens.
Tax laws should only raise the revenues necessary to fund the legitimate purposes of the government. Non-essential functions should be performed by voluntary associations. Tax law should not be used as a tool for implementing social policy.
The objective of income taxation policy should be to obtain sufficient revenues to run legitimate government programs. Unfortunately, during the 20th century, there has been an increased willingness to use the tax law to affect a variety of economic and social changes through the addition of a number of secondary tax objectives such as: 1) encouraging growth (or slow down) in the U.S. economy; 2) promoting short run stabilization of the economy and controlling the price level; 3) providing social justice through the redistribution of wealth; 4) preserving the competitive position of small firms; 5) encouraging the growth of certain industries and certain segments of the economy and discouraging the growth of others; 6) promoting employment; 7) promoting (or discouraging) the investment of risk capital; and 8) helping to serve everchanging national priorities. Taxation should not be used as a tool for effecting economic changes by altering consumption patterns, redistributing income and wealth, providing jobs for the unemployed, stimulating business spending, etc.
Search for a Just Tax
Equity signifies equal treatment of equals. Horizontal equity in taxation means that persons under similar circumstances should bear equal tax burdens. It follows that individuals with the same income or the same increases in income or wealth should be taxed equally.
A case can be made that each individual and entity (e.g., corporation, foundation, etc.) receives an equal value from government protection and thus should pay an equal flat amount. But, do persons and entities with higher incomes or greater wealth benefit more from legitimate government expenditures (i.e., defense and property protection)? Are these activities more proportionate to income? Does the wealth creator benefit more from the proper function of government than does the non-producer? If greater benefits are received, then tax justice would call for larger tax payments.
A reasonable case can be argued that an individual or entity with more to protect may require legitimate government services more frequently and in greater amounts than persons or entities with less at stake. It follows that all persons, or persons operating in voluntary association as entities, should pay a flat percentage of funds received from every source with no exceptions.
There would be no preferential treatment for various sources of income – labor, investment, entrepreneurship, gifts, prizes, scholarships, inheritances, etc. Favoring certain types of income (or outlays for that matter) would lead to discrimination. There would no longer be incentives for pressure groups to work for the enactment of provisions favorable to income sources of different kinds and natures.
A flat (i.e., universal, proportional, or single) tax rate meets the requirement of higher taxes on higher incomes. A flat tax rate is consistent with the rule of law and with the principle of non-discrimination. The idea of ability to pay, in its original traditional meaning, supports a tax proportionate to income. Under the proportional theory of tax justice, a wealthy person would pay more taxes than would a poor person. Every dollar of income or assessed property value would be taxed at a flat percentage rate.
Advocates of progressive taxation have modified the meaning of ability to pay to support the idea that those with greater tax paying ability should pay a larger portion of total taxes in order to distribute tax collection equitably among taxpayers. Those in favor of graduated tax rates thus found a new norm of vertical equity to replace the older, established standard of horizontal equity. The idea of vertical equity is virtually synonymous with the revised meaning of ability to pay.
One theory of justice that underpins progressive taxation is the idea that it imposes equality of sacrifice. Individuals with larger incomes are said to place a lower value on additional dollars earned (or that would be paid on taxes) than do persons with lower incomes. Proponents of progressive taxation use marginal utility theory to argue that as incomes increase the importance of an additional dollar decreases and, therefore, taxing higher income involves a lesser sacrifice per dollar than obtaining the equivalent revenue at lower levels of the income scale. A wealthy man's last dollar of income is judged to mean less to him than what the last dollar of a poorer man's income means to him. The contention is made that tax justice is attained by taking more of what the wealthier values less. The espoused goal of sacrifice theorists is to minimize the aggregate sacrifice of all taxpayers.
However, sacrifice theory can be criticized. Both the pain of taxes and the value of money are immeasurable psychological experiences that vary across individuals. Men differ by their circumstances, motivation, philosophical premises, psychological characteristics, preferences, education, etc. It follows that no one can know the proper amount of justice or fairness based on the doctrine of vertical equity. There is no objective method to measure whether or not one person obtains more or less value from an additional dollar of income compared to other individuals.
Progressive taxation can also be supported by the doctrine of the desirability of economic equality. Many hold that heavier taxes on higher incomes are justified by the belief that inequalities are immoral and that taxation is an appropriate means of reducing them. The imposition of graduated tax rates is seen as a way of achieving greater equality in the distribution of after-tax income. Egalitarians want to pull the successful back into the pack via the income tax.
The attempt to attain equality through tax policy is a product of envy. Government use of progressive taxation leads people to believe that they have a legitimate claim to the country's overall wealth and to the wealth of any person earning more than they earn. Egalitarians view income as a common resource pool, believe that no one deserves greater income than anyone else, and work to deprive people the right to the income that they earned.
Progressive taxation abandons any attempt to connect the usage of government services with tax payments. Services are distributed according to need while receipts are extracted according to ability to pay. A progressive tax system permits a majority of individuals to impose tax rates upon a select minority who, for the most part, have earned their position because they have provided a good or service that others value highly. In other words, the majority is allowed to vote a rate of tax for the minority to which the majority itself is not subject. The majority is able to vote on the degree to which it wants to reduce economic inequalities between itself and a wealthier minority.
Today, the idea of welfare implies an income transfer through taxation from people who have earned it to members of a subgroup who are adjudged to need income but who have not been able to earn it through their own productive efforts in the marketplace. Today's domestic welfare and foreign aid programs redirect tax money to others.
To the founders of our country, welfare meant providing the necessary common conditions for people to fare well on their own by seeking their own happiness, prosperity, and success. They did not mean providing benefits to some particular group or locale.
Today, progressive taxation is seen as a means to achieve
A Consumption Tax?
If a flat tax rate was applied to consumption instead of income, then the current bias against savings would vanish and economic growth would increase. Replacing progressive income taxation with a tax on consumption would increase national savings rates. Under a system of consumption taxes, the federal tax would be separately listed and imbedded in the price of what we purchase. Taxes would be levied on what is sold, not on individuals and corporations.
By exempting investments or savings from taxation, consumption taxes would encourage savings and stimulate capital formation. In essence, individuals would be taxed on what they remove from the economy (i.e., when they spend to consume), rather than when they produce via work, saving, or investing.
Various types of consumption tax systems exist and have their advocates. A cash flow expenditure tax is based on one's total income minus his savings. A value-added tax (VAT) is levied on goods and services at each production stage through the retail level. It is collected by the seller with a percentage rate applied to the difference between a company's sales and its purchases. This amount is incorporated in the price of the product or service. Finally, in the national sales tax approach, a sales tax is levied on the sales of goods and services and is collected from the consumer by the seller.
Toward a Less-Taxing Future
America's progressive income taxation system must be repealed and replaced with either a proportional (flat) tax on all sources of income or with a tax on consumption expenditures. All individuals should stand equally before the tax law and should be subject to the same rate of taxation. Either of these major changes would eliminate the power of special interest, simplify the taxation process, improve individuals' incentives, and reduce compliance costs.
In addition, and even more importantly, government spending should be limited to that necessary for maintaining the peace and providing only these services for which the use of force is necessary and proper. Taxes should never be levied for any objective other than raising revenue for legitimate government operations. There should be no transfer payments between income groups and between generations, no regulatory agencies, and no funding of the humanities, arts, and sciences.
Many public enterprises will have to be privatized. Until then, taxes should be tied as closely as possible to the objective for which the money is to be used. The amount of tax one would pay should equal the cost of providing the service he is using. Those who benefit from a government service ought to pay for its provision. User fees (e.g., roads through tolls and gasoline taxes) should fund such operations as much as possible until the inappropriate government operation can be privatized. After all illegitimate government activities have been privatized, the country could then establish a proportional income tax or a consumption tax that would only raise enough money to finance functions which the state should properly perform. Excessive taxation is a form of tyranny.
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