Abstract
Decisions regarding the proper levels and forms of taxation are not merely questions of economics. Instead, taxation should be seen as the manifestation of a nation’s philosophical ideals of distributive justice. As such, legislators must consider the underlying philosophical beliefs of their constituents in determining the tax laws. Those philosophical beliefs should then inform decisions regarding the form those taxes should take, and amount of tax that the government should impose. This Chapter considers a variety of political philosophical positions that are common in contemporary societies, and then evaluates how a legislator might incorporate those views into the creation of a system of tax laws that properly reflect those political perspectives. In order to consider these issues in a variety of circumstances, this Chapter contemplates the philosophical positions of libertarianism, political liberalism, and utilitarianism, and then thinks through how each of these positions would apply to the creation of a variety of tax laws, including sales taxes, property taxes, wealth taxes, and income taxes. Rather than being an exhaustive analysis of the development of moral standards for taxation, this Chapter is meant to be an example of how a legislator could go about developing such standards in her own particular circumstances.
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Notes
- 1.
Oliver Wendell Holmes, Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100, dissenting; opinion (21 November 1927).
- 2.
‘All of our technical knowledge on the economic side effects of taxation cannot resolve the fundamental fiscal issue that dominates contemporary political discourse, which is how much tax revenue our technical expertise should be harnessed to collect in the first place’ (Kleinbard 2014, XXI).
- 3.
‘In a capitalist economy, taxes are not just a method of paying for government and public services: they are also the most important instrument by which the political system puts into practice a conception of economic or distributive justice’ (Murphy and Nagel 2002, 3).
- 4.
‘It turns out that all fiscal policy recommendations rest on a foundation of moral philosophy: the only question is whether we are conscious of that fact’ (Kleinbard 2014, XXII).
- 5.
See infra Sect. 6.3.1.
- 6.
See infra Sect. 6.3.2.
- 7.
See infra Sect. 6.3.3.
- 8.
See infra Sect. 6.3.4.
- 9.
See infra Sect. 6.2.1.
- 10.
See infra Sect. 6.2.2.
- 11.
See infra Sect. 6.2.3.
- 12.
There are clearly other available philosophical perspectives one might choose to base a moral argument for taxation on. The work in this chapter is meant to illustrate how to work through such an argument, using these three common perspectives as a model.
- 13.
The famous libertarian philosopher Nozick (1974, 287) makes clear his views of implicit consent when he writes that ‘… everyone realizes that tacit consent isn’t worth the paper it’s not written on…’. Earlier in the book he claims to have demonstrated that the reason a minimal state is not redistributive, when the amounts paid by some are used to pay for the protection of others, stems from the fact that those who are receiving protection without paying are getting that protection for free in compensation for the rights they may have given up (Nozick 1974, 114). However, Barbara Fried demonstrates that Nozick’s lack of a coherent theory of property rights and consent leads to the result that, in certain circumstances (such as the move from a minimal state to a slightly more than minimal state), consent to limit the rights of citizens does not have to be explicitly attained. Fried claims that ‘… in place of actual or implied consent, Nozick does away with consent entirely’ (Fried 1999, 235).
- 14.
In Nozick’s explanation of the shift from anarchy to a minimal state he demonstrates the situation in which an individual could be compelled to pay for protection, since she is benefitting from the provision of that protection (Nozick 1974, 110–118).
- 15.
The benefit principle of taxation, authorizing taxation only to the extent that it compensates the government for services it provides to its taxpaying citizens, is not a view held only by libertarians. For a discussion of the benefit principle of taxation, and an explanation of its ongoing role in tax policy debates, see Bakija and Slemrod (2008, 86).
- 16.
Even Friedman (1962, 65) himself, in many ways the father of libertarianism, imagined that a government should provide certain services, and could therefore assess tax on its citizens in order to receive payment for those services.
- 17.
There is a tradition known as Left Libertarianism, in which a more expansive state, such as one that might provide the second set of services listed above, is more likely to be endorsed. What Left Libertarianism shares with the tradition of Right Libertarianism is the insistence on the importance of consent in providing moral legitimacy to the government and its curtailing of property rights. For examples of Left Libertarianism, see, e.g., Otsuka (2003), Vallentyne and Steiner (2001).
- 18.
A common theory of tax law, the benefit principle of tax law says that tax should be assessed in proportion to the benefits that taxpayers receive through the tax system. See, Bakija and Slemrod (2008).
- 19.
Friedman (1962, 65) acknowledged that a government should provide certain services and would then be entitled to collect payment from the citizenry in payment for the services provided.
- 20.
The night watchman state is one where all individuals live independently, relying on each other only insofar as some individuals pay others to offer their protective services. See Nozick (1974).
- 21.
While John Stuart Mill is, by most accounts, the most well-known utilitarian philosopher, he was the intellectual heir of Jeremy Bentham, who introduced Mill to the concept of utility. Bentham (2008, 2) wrote of the idea, ‘By the principle of utility is meant that principle which approves or disapproves of every action whatsoever, according to the tendency which it appears to have to augment or diminish the happiness of the party whose interest is in question: or, what is the same thing in other words, to promote or to oppose that happiness.’.
- 22.
Compare this to libertarianism, as described in Sect. 6.2.1, where the fundamental priority of property rights makes any violation of those rights an unethical action.
- 23.
Mill discusses taxation towards the end of utilitarianism, primarily by criticizing non-consequentialist analyzes of the justice of taxation. Mill claims that the only way out of the debate about the appropriate way to tax is with the application of utilitarian principles. Having pointed out that some theories of justice will demand equal taxation from all, and others will require graduated tax, Mill states ‘from these confusions there is no other mode of extrication than the utilitarian’ (Mill 1863, 102).
- 24.
‘In a properly constituted world, the individual’s happiness will be found in doing what is morally right’ (Mill 1863, Editor’s Introduction, 5).
- 25.
This is meaningfully different from deontological thinkers like Immanuel Kant, who insist that actions are only moral if they stem from moral motivations. ‘Utilitarianism is often described as a consequentialist theory …. A non-consequentialist theory, such as Kantian ethics, will claim that certain actions are just wrong in themselves, and not wrong because of their consequences for happiness or anything else. But consequentialist theories make the rightness of actions depend on their consequences. Kantian ethics may claim that murder is wrong in itself, while utilitarianism will claim that it is wrong only because of its consequences (the decrease in overall happiness brought about by the absence of the person killed, by the grief, distress, anxiety caused to others, and so on)’ (Mill 1863, Editor’s Introduction, 14).
- 26.
Theorists who insist that morally just societies guarantee equality of outcome, or the idea that all members of society should share in that society’s wealth equally, generally identify as communist. While this is an important theoretical view in the history of political philosophy, it remains only marginally important in contemporary political debates. Despite the recent trend of interest in the possibility of a guaranteed universal basic income, there is not a contemporary government anywhere in the western world that guarantees equality of outcome. For that reason, I do not dedicate a section of this chapter to that political theory.
- 27.
- 28.
‘The basic shortcoming of utilitarianism—in whatever form—is that basic rights of individuals can be sacrificed for a collective societal goal such as maximizing social welfare. It allows an unacceptable trade-off among persons: utilitarianism formulates a principle which may require lesser life prospects for some, simply for the sake of a greater sum of advantages enjoyed by others. Utilitarianism does not recognize that everyone has equal moral worth (which, as we will see, for Rawls does not entail that distributive shares have to be equal), and therefore recognizes neither the way persons are equal to each other, nor the way they differ from each other (Lehning 2009, 17–18).
- 29.
‘Freedom of fair choice, fair equality of opportunity, and relative priority for the position of the least advantaged, are not only core elements of a (political) conception of justice, they are also characteristics of modern welfare states. Pointing to the importance of freedom of choice means that, in actual social economic policies in welfare states, more than has been the case in the past, a distinction is being made between the positions that people are in, and for which they themselves bear responsibility, and the positions that they are in for which they are not to blame, positions that are a consequence of the “Rawlsian” ‘contingencies of social life’, so to speak. Freedom of choice, in this line of reasoning, goes together with stressing personal responsibility, provided that conditions are fulfilled such that people can actually take responsibility for their choices’ (Lehning 2009, 220–21).
- 30.
In a head tax system, also known as a poll tax, all taxpayers (or all individuals, depending on the system) pay the same amount of tax. In order to be properly characterized as an income tax, this tax should only be collected from individuals earning income, but a head tax could collect a per individual amount, so that larger households pay more than households with fewer members. Margaret Thatcher notoriously imposed a poll tax in the United Kingdom in 1990, with somewhat disastrous consequences.
- 31.
In a flat tax, all tax is assessed at a particular percentage, regardless of the income amount of the individual earning the income. In other words, higher income taxpayers pay more tax than lower income taxpayers, but the amount they pay is in the same proportion to their income as is the tax paid by lower income taxpayer.
- 32.
Most western democracies impose a progressive income tax, meaning that the tax rate assessed on the income earned increases as the amount of income increases. Therefore, higher income taxpayers pay not only a larger total amount of income tax, they also pay proportionately more in tax than do their lower income counterparts. Progressive income tax systems vary in a number of ways. There can be multiple income tax brackets (the United States currently has seven brackets), or only a few (the Hong Kong income tax only has four brackets), and the tax rates can range widely (in Austria the lowest rate is 0% and the highest rate is 55%), or can be relatively close together (in Hong Kong the rates range from 2 to 17%).
- 33.
In 2017 the individual income tax brought in $1.66 trillion in the United States. This represents about 48% of all government revenues for that year (Center on Budget and Policy Priorities 2018).
- 34.
For more about the deduction for home mortgage interest, available through Internal Revenue Code section 163, see Hemel and Rozema (2017).
- 35.
- 36.
For instance, the deduction for charitable contributions (Internal Revenue Code section 170) and the exemption for income earned on municipal bonds (Internal Revenue Code section 103) are two examples of Congress creating incentives for particular behaviors through the tax code.
- 37.
California Proposition 13, passed in 1978, limits the property tax assessment value of homes in that state to the purchase price of the home. This law disproportionately benefits those who have owned their homes for a long time, allowing the appreciation in the value of the home to go untaxed. For more about the possibilities within the property tax arena broadly, and with regard to Prop 13 specifically, see Shanske (2014).
- 38.
I certainly do not mean to suggest anything here about the nature of the correlation, nor to suggest which way causation flows, or even if there exists a causal relationship. Indeed, some taxpayers argue against the imposition of new taxes, by claiming that imposing taxes or raising them ultimately decreases the value of their homes, by creating new obligations for potential buyers.
- 39.
Using the geographical location argument to claim that all taxpayers who live in a particular country have consented to the taxes imposed by that country by continuing to live there is a more difficult argument to make than the argument about property taxes imposed by a locality. In particular, those who affirmatively decide to purchase a home in a locality, with full knowledge of the property taxes imposed in that district, seem truly to have consented to those taxes. One could make an origin argument about the original homeowners in a district first imposing property taxes, and require the affirmative consent of each of those individuals, but such a claim will be irrelevant for most homeowners today.
- 40.
Of course, it need not necessarily be so. Any form of taxation could be used to implement the benefit principle theory of tax law. However, as a practical matter, it seems most straightforward to assess the value of benefits received over a period of time that is shorter than a lifetime.
- 41.
See, supra, Sect. 6.3.2.
- 42.
For an example of this theory, see the discussion of a global wealth tax by Piketty (2014).
- 43.
While subnational governments in the U.S. could impose wealth taxes, and non-U.S. governments can impose (and occasionally have imposed) wealth taxes, direct wealth taxes are prohibited by the U.S. Constitution, and so cannot be imposed by the U.S. federal government.
- 44.
Because an estate tax is not imposed until after the death of the holder of the property rights, even if one adopts the strongest libertarian form of property rights, an estate tax would not violate those rights, since property rights cannot extend beyond the death of the creator and holder of the right (Bird-Pollan 2013).
- 45.
For an explanation of the VAT system, and the recent proposal in the U.S. to create a similar system, as well as an explanation of why that proposal failed, and why a VAT is never likely to succeed in the United States, see Shaviro (2017).
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Acknowledgements
The author would like to thank Stefan Bird-Pollan, David Gamage, Robert van Brederode, and participants in the SEALS Tax Policy Discussion Group and Ethics and Taxation Workshop for helpful comments on earlier drafts of this piece. Thanks also to the University of Kentucky College of Law for supporting this research with a summer research grant.
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Bird-Pollan, J. (2020). Developing Moral Standards for Taxation. In: van Brederode, R. (eds) Ethics and Taxation. Springer, Singapore. https://doi.org/10.1007/978-981-15-0089-3_6
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