Still More on Taxes

Here in one shot is the final set of replies I served up over at Barticles regarding taxes and justice. Enjoy…

 To the various respondents:

1)      On the question of how one can support a regime of liberal rights without necessarily believing they are “natural” rights in the strong sense (i.e. applicable in all times to all places). (I respect those who think we do have such strong natural, but don’t think the argument for rights needs to rest on that point of view being accepted.)

 

There are two alternative strategies for accounting for rights without appealing to timeless, natural rights. First is the argument laid about John Stuart Mill in his classic text Utilitarianism, in which he argues that rights are simply codifications of rules which long centuries of human experience have shown to be best suited to advancing human utility. The right of freedom of speech has been established, according to this logic, because experience has shown that social progress is maximized when individuals are given free rein to express their ideas and no ideas are silenced.

 

A second strategy would be to start from the premise that freedom consists in being able to govern ourselves, free from domination by outside forces or by overly-powerful internal forces (such as say, feudal lords). From that premise, you can derive support for all kinds of democratic rights, on grounds that things like free speech are needed if we are to remain non-dominated, self-governing people, and that these things are so fundamental to self-governance they should be secured as rights in a constitution. If you further believe that freedom requires a certain amount of personal autonomy—that we shouldn’t be forced into a particular line of work, or be forced to marry someone we don’t want to, etc.—that would provide justification for additional rights, some of which may be so fundamental they should be hard-wired into a constitution.

 

The common thread in both these lines of thoughts is the notion that rights are morally justified by the various goods they secure (be they security, self-governance, personal autonomy). I think this way of thinking about rights give us a better sense of why they are really important.

 

Going back to the question of taxes:

 

You can’t have a system of property rights without government, and government requires taxation. If you want to have a system in which individuals have a legally enforced right to property holdings, you have to be willing to pay taxes. (So far, even libertarians should agree; only possibly anarchists could object.)

 

But property rights don’t just pop out of thin air, waiting for government to enforce them. Government has to define, to specify them. If I find a dollar on the ground, am I allowed to keep it? If so, how is that different from if I find an unattended car with the keys in the ignition—am I similarly allowed to take possession of that car? If I jointly own a piece of property and I die, does the remainder of the property go to the other owner, or to my heirs? Do spouses have a right to one another’s income? Am I allowed to cut down branches from my neighbor’s tree that hang over my property? How much in the way of royalty fees must internet radio stations pay to copyright holders? Is the landlord or the tenant responsible for household repairs? Are investors liable for the debts the companies they own incur?

 

Government has to make rules governing these and many many other situations in which there are potentially conflicting or ambiguous property rights claims. This is significant because 1) the existence of functional market without functional government is impossible; governments are need to specify these laws, keep property records, prevent fraud, provide police enforcement, etc. There is simply no such thing as a free market independent of government. It’s also significant because 2) the specific rules and regulations government adopts in creating a property rights regime will necessarily impact the specific returns actors in the economy receive.  Whether I can build a chemical factory on my vacant lot a block away from Carytown affects the potential returns I can get from that property; so too do all the various laws specifying the precise extent of property rights.

 

Beyond these absolutely essential functions, modern governments also provide public goods, without which we’d be a much poorer society. The way these public goods are created also directly impacts the shape of the market and the returns individuals receive within them. An obvious example is the evolution of the computer industry in the 20th century, which is inseparable from the role of government spending and research. If the public hadn’t made the investments it made, we wouldn’t have so quickly reached the era of personal computers. Another example is the Internet—a direct product of public activity. Think of all the entrepreneurs now making a livelihood off the Internet; the market returns they are able to get are directly affected. Yet another example is suburban real estate development, which is enabled by the construction of public roads. Yet another would be any new large-scale industrial enterprise in the
United States, which typically receives a host of public subsidies from state and local governments.

 

The big point here is that there simply isn’t a free market untouched by government action; and that the specific character of government action shapes market returns. Consider one more example: human capital, and the income one’s skills are able to command in the market. One’s particular skill set is influenced (not determined, but predictably influenced) by the quality of schools one has attended. If one went to a public school, a public university, or received a government scholarship at any point, or went to a private school financed by tax-deductible private contributions, then the skills you developed and can now earn a profit from have been shaped directly by public action. If there were such a thing as a free market, you wouldn’t have had access to this crucial public good, which would have been bad for you and your economic prospects both a) because you likely would have fewer skills yourself and b) because you’d be living in a society in which many fewer people had such skills, meaning the overall productivity and quality of life of the society would be lowe

 

So where do taxes fit into all this? Taxes are part and parcel of the overall system of property rights. If we take seriously the fact that taxes are necessary to undertake the public action which sustains and shapes property rights regimes, we will recognize that it’s not the case that you have a “market” that generates returns and then a government that comes along and takes those returns away from us by taxes. Actors in the market wouldn’t have gotten those returns in the first place without the general activities of government, and the specific quantity of those returns are also shaped by the specific nature of those public activities.

 

That’s why A) we don’t have a right to our pre-tax income and B) we shouldn’t use our pre-tax income—which itself is an artifice of the specific regime of property rights in place at a given time– as a baseline for thinking about how fair the overall tax system is. Indeed, for thinking about distributive justice, asking how fair the tax system is generally a misleading way to ask the question; what we should be asking is how fair the property-rights-and-tax-system is as a whole.

 

Let me give one more example to spell out the logic behind and implications of conclusion A. Suppose I do in fact find a dollar lying on the street. Suppose also we’ve had dramatic tax reform and simplification (a cause with which I have some sympathy) and that now all taxes are collected via a sales tax on all purchases. In
Virginia, let’s say through the political process we’ve settled upon a sales tax of 9%.

 

Now in this scenario, I would have the right to keep that dollar as an unused piece of paper under my mattress, untaxed, for the next 30 years. Or I would have a right to spend it, and have 9% of its value taxed away at the point of sale. I wouldn’t have a right, however, to spend that dollar and not be taxed at all. If I (and everyone else) did have such a right, there would be no taxes, and consequently no system of property rights (or legally valid currency, for that matter), and we would be back in a state of nature nightmare ruled by force and fraud. Consequently, we don’t have a right to our pre-tax income as such.

 

Again (I hope) even many libertarians will follow me so far on this. But some may say, well we don’t have a right to all our pre-tax income, but government should only take the minimum necessary to keep the system intact. On this view, if (continuing the scenario laid out above), the 50 states each set their own sales tax rates, the state with the lowest tax rate would by the same fact be the “freest,” less oppressive state.

 

I disagree with that view. If say Mississippi had a tax rate of 6 cents compared to Virginia’s 9 cents, but Virginia provided more and better public goods than Mississippi,
Virginia might be the better, more prosperous place to live. Moreover, there would be nothing inherently less free about living in Virginia than in
Mississippi, even though the tax rate is higher. If that higher tax rate has been established by legitimate, democratic measures—with the approval of the people’s representatives—then no one’s rights or freedoms have been compromised; all that has taken place is a democratically sanctioned revision of the property rights system. In particular, it would be utterly invalid and illogical for a Virginia resident to claim that they have a moral right to have the $75,000 income they earned in Virginia with its 9% tax rate, instead be taxed at
Mississippi’s lower tax rate of 6%. By now hopefully the reason why such a claim is invalid should be clear; the fact that an individual is able to earn $75,000 pre-tax in Virginia depends heavily on the specific bundles of public goods and market-shaping government activities present in the state, which quite likely could not be sustained if the tax rate were slashed from 9% to 6%.

 

One further footnote: a public good does not have to be GDP-enhancing to be a public good. Public parks and health care for veterans and housing subsidies might have only a marginal (if any) impact on GDP. But they might improve quality of life in noneconomic terms (parks), or express or repay our debt to those who’ve served the country (veteran’s benefits), or assist persons who are not able to gain access to essential goods via the market (housing assistance).  Governments can legitimately act to provide such public goods when and if they serve other purposes deemed as important by the public.

 

This leads us to B), which has to do with questions of distributive justice. This topic was only hinted at in the RTD op-ed, so it’s fair to request a fuller explanation as a couple of posters have. The view here again is that 1) there is no “free market” apart from government activities in establishing a property regime and 2) the specific shape of such activities affects market returns, often in profound ways (as the human capital example hopefully shows). Consequently, we should not conceive of pre-tax income as the moral baseline for evaluating the fairness of tax policy, as if you had pretax income generated by “the market” on one side and government intervention only after the fact.  Rather we should focus our evaluations on the overall system of property rights and taxes (remember, no property rights without taxes!)—that is, on post-tax income.

 

Now, the practical upshot of the argument that we don’t have a moral right to pre-tax income is not that government should confiscate all market earnings. That would never be agreed to by a democratic government. And the notion that people should be rewarded for hard work, innovation, and cleverness, as well as for the contributions the use of their skills makes to society, is a compelling one. But it’s not the only relevant moral consideration to keep in mind here. If it were, old people and those who are disabled or otherwise can’t earn sufficient market returns to sustain themselves would be allowed to starve. So the notion of rewarding effort and endeavor must be traded off against competing moral considerations in judging our overall system of property rights and taxation (and subsequently, in the setting of actual tax rates).

 

Here we enter into fundamental moral debates about distributive justice which are beyond the scope of this little debate to enter into, although as the op-ed said I think we should be having more such debates. Here’s just one example of a relevant moral question: if I went to public high schools, and a public four-year university, all at taxpayer expense, and now am making great money in the six figures, can I protest if society (through democratic means) decides that it requires more of “my” pre-tax income in order to give more of the same opportunities I had to the next generation of citizens?

 

Two final notes: throughout all this it’s important to recognize that government isn’t an alien entity. It is us, our agent. That’s why we fought the British! Taxation without representation is illegitimate; taxation with representation is legitimate, necessary, and an essential part of a prosperous society. Thus Benjamin Franklin:  “Private property . . . is a Creature of Society, and is subject to the Calls of that Society, whenever its Necessities shall require it, even to its last Farthing, its contributors therefore to the public Exingencies are not to be considered a Benefit on the Public, entitling the Contributors to the Distinctions of Honor and Power, but as the Return of an Obligation previously received, or as payment for a just Debt.”

 

Second, no one can deny (and I do not) that there are some government expenditures which are not worthwhile and do not serve a compelling public good. To the extent this is the case, we should reform our political institutions and/or expand citizen oversight over our decisionmakers. It’s equally likely, however, that there are some public goods which are now underprovided, and where we would be better off with greater public investment. Judgments about both sorts of problems ultimately rely in the hands of democratic publics—that is, all of us.

 

Finally, it should be noted here that the ideas I’m advancing are neither original nor by any stretch of the imagination radical. At most, they are simply an explication of the principles behind our current system of taxation, and a defense of that system against the idea that government has us in chains via its current level of taxation. I’m not going to have time to make any further responses in this venue, but if you’re interested in reading authors who have developed the set of ideas I’m drawing on here in more detail, here are some recommended books:

 

The Cost of Rights by Cass Sunstein and Stephen Holmes (

University of
Chicago)

Entitlement by Joseph Singer (

Harvard
Law
School)

The Myth of Ownership by Liam Murphy and Thomas Nagel (

New York
University
Law
School)

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Published in: on May 1, 2007 at 9:56 pm  Leave a Comment  

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