Chapter 4--Binary Intervention: Taxation (continued)
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Table of Contents
Chapter 4—Binary
Intervention: Taxation (continued)
B.
Costs of Collection, Convenience, and Certainty
Even the simplest maxims must not be taken for granted. Two centuries
ago, Adam Smith laid down four canons of justice in taxation that
economists have parroted ever since.
One of them deals with the
distribution of the burden of taxation, and this will be treated in
detail below. Perhaps the most “obvious” was
Smith’s injunction that costs of collection be kept to a
“minimum” and that taxes be levied with this
principle in mind.
An obvious and harmless maxim? Certainly not; this “canon of
justice” is not obvious at all. For the bureaucrat employed
in tax collection will tend to favor a tax with high
administrative costs, thereby necessitating more extensive bureaucratic
employment. Why should we call the bureaucrat obviously wrong? The
answer is that he is not, and that to call him
“wrong” it is necessary to engage in an ethical
analysis that no economist has bothered to undertake.
A further point: if the tax is unjust on other grounds, it may be more
just to have high administrative costs,
for then there will be less chance that the tax will be fully
collected. If it is easy to collect the tax, then the tax may do more
damage to the economic system and cause more distortion of the market
economy.
The same point might be made about another of Smith’s canons:
that a tax should be levied so that payment is convenient. Here again,
this maxim seems obvious, and there is certainly much truth in it. But
someone may urge that a tax should be made inconvenient
to induce people to rebel and force a lowering of the level of
taxation. Indeed, this used to be one of the prime arguments of
“conservatives” for an income tax as opposed to an
indirect tax. The validity of this argument is beside the point; the
point is that it is not self-evidently wrong, and
therefore this canon is no more simple and obvious than the others.
Smith’s final canon of just taxation is that the tax be
certain and not arbitrary, so that the taxpayer knows what he will pay.
Here again, further analysis demonstrates that this is by no means
obvious. Some may argue that uncertainty benefits
the taxpayer, for it makes the requirement more flexible and permits
bribery of the tax collector. This benefits the taxpayer to the extent
that the price of the bribe is less than the tax that he would
otherwise have to pay. Furthermore, there is no way of establishing
long-range certainty, for the tax rates may be changed by the
government at any time. In the long run, certainty of taxation is an
impossible goal.
A similar argument may be levelled against the view that taxes
“should” be difficult to evade. If a tax is onerous
and unjust, evasion might be highly beneficial to
the economy, and moral to boot.
Thus, none of these supposedly self-evident canons of taxation is a
canon at all. From some ethical points of view they are correct, from
others they are incorrect. Economics cannot decide between them.
C. Distribution
of the Tax Burden
Up to this point, we have been discussing taxation as it is levied on any
given individual or firm. Now we must turn to another aspect:
the distribution of the burden of taxes among the
people in the economy. Most of the search for
“justice” in taxation has involved the problem of
the “just distribution” of this burden.
Various proposed canons of justice will be discussed in this section,
followed by analysis of the economic effects of tax
distribution.
(1) Uniformity of Treatment
a. Equality Before the Law: Tax Exemption
Uniformity of treatment has been upheld as an ideal by almost all
writers. This ideal is supposed to be implicit in the concept of
“equality before the law,” which is best expressed
in the phrase, “Like to be treated alike.” To most
economists this ideal has seemed self-evident, and the only problems
considered have been the practical ones of defining exactly when one
person is “like” someone else (problems that, we
shall see below, are insuperable).
All these economists adopt the goal of uniformity regardless of what
principle of “likeness” they may hold. Thus, the
man who believes that everyone should be taxed in accordance with his
“ability to pay” also believes that everyone with
the same ability should be taxed equally; he who believes that each
should be taxed proportionately to his income also holds that everyone
with the same income should pay the same tax; etc. In this way, the
ideal of uniformity pervades the literature on taxation.
Yet this canon is by no means obvious, for it seems clear that the
justice of equality of treatment depends first of
all on the justice of the treatment itself.
Suppose, for example, that Jones, with his retinue, proposes to enslave
a group of people. Are we to maintain that
“justice” requires that each be enslaved equally?
And suppose that someone has the good fortune to escape. Are we to
condemn him for evading the equality of justice meted out to his
fellows? It is obvious that equality of treatment is no canon of
justice whatever. If a measure is unjust, then it is just that it have
as little general effect as possible. Equality of unjust
treatment can never be upheld as an ideal of justice. Therefore, he who
maintains that a tax be imposed equally on all must first establish the
justice of the tax itself.
Many writers denounce tax exemptions and levy their fire at the
tax-exempt, particularly those instrumental in obtaining the exemptions
for themselves. These writers include those advocates of the free
market who treat a tax exemption as a special privilege and attack it
as equivalent to a subsidy and therefore inconsistent with the free
market. Yet an exemption from taxation or any other burden is not
equivalent to a subsidy. There is a key difference. In the latter case
a man is receiving a special grant of privilege wrested from his
fellowmen; in the former he is escaping a burden
imposed on other men. Whereas the one is done at the expense of his
fellowmen, the other is not. For in the former case, the grantee is
participating in the acquisition of loot; in the latter, he escapes
payment of tribute to the looters. To blame him for escaping is
equivalent to blaming the slave for fleeing his master. It is clear
that if a certain burden is unjust, blame should be levied, not
on the man who escapes the burden, but on the man or men who impose it
in the first place. If a tax is in fact unjust, and some are exempt
from it, the hue and cry should not be to extend the tax to
everyone, but on the contrary to extend the
exemption to everyone. The exemption itself cannot be
considered unjust unless the tax or other burden is first established
as just.
Thus, uniformity of treatment per se cannot be
established as a canon of justice. A tax must first be proven just; if
it is unjust, then uniformity is simply imposition of general
injustice, and exemption is to be welcomed. Since the very fact of
taxation is an interference with the free market, it is particularly
incongruous and incorrect for advocates of a free market to advocate
uniformity of taxation.
One of the major sources of confusion for economists and others who are
in favor of the free market is that the free society has often been
defined as a condition of “equality before the
law,” or as “special privilege for none.”
As a result, many have transferred these concepts to an attack on tax
exemptions as a “special privilege” and a violation
of the principle of “equality before the law.” As
for the latter concept, it is, again, hardly a criterion of justice,
for this depends on the justice of the law or
“treatment” itself. It is this alleged justice,
rather than equality, which is the primary feature of the free market.
In fact, the free society is far better described by some such phrase
as “equality of rights to defend person and
property” or “equality of liberty” rather
than by the vague, misleading expression “equality before the
law.”
In the literature on taxation there is much angry discussion about
“loopholes,” the inference being that any income or
area exempt from taxation must be brought quickly under its sway. Any
failure to “plug loopholes” is treated as immoral.
But, as Mises incisively asked:
What
is a loophole? If the law does not punish a definite action or does not
tax a definite thing, this is not a loophole. It is simply the law. . .
. The income tax exemptions in our income tax are not loopholes. . . .
Thanks to these loopholes this country is still a free country.
b. The
Impossibility of Uniformity
Aside from these considerations, the ideal of uniformity is impossible
to achieve. Let us confine our further discussion of uniformity to income
taxation, for two reasons: (1) because the vast bulk of our
taxation is income taxation; and (2) because, as we have seen, most
other taxes boil down to income taxes anyway. A tax on consumption ends
largely as a tax on income at a lower rate.
There are two basic reasons why uniformity of income taxation is an
impossible goal. The first stems from the very nature of the State. We
have seen, when discussing Calhoun’s analysis, that the State
must separate society into two classes, or castes:
the taxpaying caste and the tax-consuming
caste. The tax consumers consist of the full-time bureaucracy
and politicians in power, as well as the groups which receive net
subsidies, i.e., which receive more from the government than they pay
to the government. These include the receivers of government contracts
and of government expenditures on goods and services produced in the
private sector. It is not always easy to detect the net subsidized in
practice, but this caste can always be conceptually identified.
Thus, when the government levies a tax on private incomes, the money is
shifted from private people to the government, and the
government’s money, whether expended for government
consumption of goods and services, for salaries to bureaucrats, or as
subsidies to privileged groups, returns to be spent in the economic
system. It is clear that the tax-expenditure level must
distort the expenditure pattern of the market and shift
productive resources away from the pattern desired by the producers and
toward that desired by the privileged. This distortion takes place in
proportion to the amount of taxation.
If, for example, the government taxes funds that would have been spent
on automobiles and itself spends them on arms, the arms industry and,
in the long run, the specific factors in the arms industry become net
tax consumers, while a special loss is inflicted on the automobile
industry and ultimately on the factors specific to that industry. It is
because of these complex relationships that, as we have mentioned, the
identification in practice of the net subsidized may be difficult.
One thing we know without difficulty, however. Bureaucrats are net tax
consumers. As we pointed out above, bureaucrats cannot pay
taxes. Hence, it is inherently impossible for bureaucrats to
pay income taxes uniformly with everyone else. And therefore the ideal
of uniform income taxation for all is an impossible goal. We repeat
that the bureaucrat who receives $8,000 a year income and then hands
$1,500 back to the government is engaging in a mere bookkeeping
transaction of no economic importance (aside from the waste of paper
and records involved). For he does not and cannot pay
taxes; he simply receives $6,500 a year from the tax fund.
If it is impossible to tax income uniformly because of the nature of
the tax process itself, the attempt to do so also confronts another
insuperable difficulty, that of trying to arrive at a cogent definition
of “income.” Should taxable income include the
imputed money value of services received in kind, such as farm produce
grown on one’s own farm? What about imputed rent from living
in one’s own house? Or the imputed services of a housewife?
Regardless of which course is taken in any of these cases, a good
argument can be made that the incomes included as taxable are not the
correct ones. And if it is decided to impute the value of goods
received in kind, the estimates must always be arbitrary, since the
actual sales for money were not made.
A similar difficulty is raised by the question whether incomes should
be averaged over several years. Businesses that suffer losses and reap
profits are penalized as against those with steady
incomes—unless, of course, the government subsidizes part of
the loss. This may be corrected by permitting averaging of income over
several years, but here again the problem is insoluble because there
are only arbitrary ways of deciding the period of time to allow for
averaging. If the income tax rate is “progressive,”
i.e., if the rate increases as earnings increase, then failure to
permit averaging penalizes the man with an erratic income. But again,
to permit averaging will destroy the ideal of uniform current tax
rates; furthermore, varying the period of averaging will vary the
results.
We have seen that, in order to tax income only, it is necessary to
correct for changes in the purchasing power of money when taxing
capital gains. But once again, any index or factor of correction is
purely arbitrary, and uniformity cannot be achieved because of the
impossibility of securing general agreement on a definition of income.
For all these reasons, the goal of uniformity of taxation is an
impossible one. It is not simply difficult to achieve in practice; it
is conceptually impossible and self-contradictory. Surely any ethical
goal that is conceptually impossible of achievement
is an absurd goal, and therefore any movements in the direction of the
goal are absurd as well.
It is therefore
legitimate, and even necessary, to engage in a logical (i.e.,
praxeological) critique of ethical goals and systems when they are
relevant to economics.
Having analyzed the goal of uniformity of treatment, we turn now to the
various principles that have been set forth to give content to the idea
of uniformity, to answer the question: Uniform in respect to what?
Should taxes be uniform as to “ability to pay,” or
“sacrifice,” or “benefits
received”? In other words, while most writers have rather
unthinkingly granted that people in the same income bracket should pay
the same tax, what principle should govern the distribution of income
taxes between tax brackets? Should the man making
$10,000 a year pay as much as, as much proportionately
as, more than, more proportionately than, or less than, a man making
$5,000 or $1,000 a year? In short, should people pay uniformly in
accordance with their “ability to pay,” or
sacrifice made, or some other principle?
(2) The
“Ability-To-Pay” Principle
a. The Ambiguity of the Concept
This principle states that people should pay taxes in accordance with
their “ability to pay.” It is generally conceded
that the concept of ability to pay is a highly ambiguous one and
presents no sure guide for practical application.
Most economists have
employed the principle to support a program of proportional or
progressive income taxation, but this would hardly suffice. It seems
clear, for example, that a person’s accumulated wealth
affects his ability to pay. A man earning $5,000 during a certain year
probably has more ability to pay than a neighbor earning the same
amount if he also has $50,000 in the bank while his neighbor has
nothing. Yet a tax on accumulated capital would cause general
impoverishment. No clear standard can be found to gauge
“ability to pay.” Both wealth and income would have
to be considered, medical expenses would have to be deducted, etc. But
there is no precise criterion to be invoked, and the decision is
necessarily arbitrary. Thus, should all or some proportion of medical
bills be deducted? What about the expenses of childrearing? Or food,
clothing, and shelter as necessary to consumer
“maintenance”? Professor Due attempts to find a
criterion for ability in “economic well-being,” but
it should be clear that this concept, being even more subjective, is
still more difficult to define.
Adam Smith himself used the ability concept to support proportional
income taxation (taxation at a constant percentage of income), but his
argument is rather ambiguous and applies to the
“benefit” principle as well as to
“ability to pay.”
Indeed, it is hard to see
in precisely what sense ability to pay rises in proportion to
income. Is a man earning $10,000 a year “equally
able” to pay $2,000 as a man earning $1,000 to pay $200?
Setting aside the basic qualifications of difference in wealth, medical
expenses, etc., in what sense can “equal ability”
be demonstrated? Attempting to define equal ability in such a way is a
meaningless procedure.
McCulloch, in a famous passage, attacked progressiveness and defended
proportionality of taxation:
The
moment you abandon . . . the cardinal principle of exacting from all
individuals the same proportion of their income or their property, you
are at sea without rudder or compass, and there is no amount of
injustice or folly you may not commit.
Seemingly
plausible, this thesis is by no means self-evident. In what way is proportional
taxation any less arbitrary than any given pattern of progressive
taxation, i.e., where the rate of tax increases with income? There must
be some principle that can justify proportionality;
if this principle does not exist, then proportionality is no less
arbitrary than any other taxing pattern. Various principles have been
offered and will be considered below, but the point is that
proportionality per se is neither more nor less
sound than any other taxation.
One school of thought attempts to find a justification for a
progressive tax via an ability-to-pay principle. This is the
“faculty” approach of E.R.A. Seligman. This
doctrine holds that the more money a person has, the relatively easier
it is for him to acquire more. His power of obtaining money is supposed
to increase as he has more: “A rich man may be said to be
subject . . . to a law of increasing returns.”
Therefore, since his
ability increases at a faster rate than his income, a progressive
income tax is justified. This theory is simply invalid.
Money does not
“make money”; if it did, then a few people would by
now own all the world’s wealth. To be earned money must
continually be justifying itself in current service to consumers.
Personal income, interest, profits, and rents are earned only in
accordance with their current, not their past,
services. The size of accumulated fortune is immaterial, and
fortunes can be and are dissipated when their owners fail to reinvest
them wisely in the service of consumers.
As Blum and Kalven point out, the Seligman thesis is utter nonsense
when applied to personal services such as labor energy. It could only
make sense when applied to income from property, i.e., investment in
land or capital goods (or slaves, in a slave economy). But the return
on capital is always tending toward uniformity, and any departures from
uniformity are due to especially wise and farseeing investments
(profits) or especially wasteful investments (losses). The Seligman
thesis would fallaciously imply that the rates of return increase in
proportion to the amount invested.
Another theory holds that ability to pay is proportionate to the
“producer’s surplus” of an individual,
i.e., his “economic rent,” or the amount of his
income above the payment necessary for him to continue production. The
consequences of taxation of site rent were noted above. The
“necessary payments” to labor are clearly
impossible to establish; if someone is asked by the tax authorities
what his “minimum” wage is, what will prevent him
from saying that any amount below the present wage
will cause him to retire or to shift to another job? Who can prove
differently? Furthermore, even if it could be determined, this
“surplus” is hardly an indicator of ability to pay.
A movie star may have practically zero surplus, for some other studio
may be willing to bid almost as much as he makes now for his services,
while a disabled ditch-digger may have a much greater
“surplus” because no one else may be willing to
hire him. Generally, in an advanced economy there is little
“surplus” of this type, for the competition of the
market will push alternative jobs and uses near to the
factor’s discounted marginal value product in its present
use. Hence, it would be impossible to tax any
“surplus” over necessary payment from land or
capital since none exists, and practically impossible to tax the
“surplus” to labor since the existence of a sizable
surplus is rare, impossible to determine, and, in any case, no
criterion whatever of ability to pay.
b. The Justice of the Standard
The extremely popular ability-to-pay idea was sanctified by Adam Smith
in his most important canon of taxation and has been accepted blindly
ever since. While much criticism has been levelled at its inherent
vagueness, hardly anyone has criticized the basic principle, despite
the fact that no one has really grounded it in sound argument. Smith
himself gave no reasoning to support this alleged principle, and few
others have done so since. Due, in his text on public finance, simply
accepts it because most people believe in it, thereby ignoring the
possibility of any logical analysis of ethical principles.
The only substantial attempt to give some rational support to the
“ability-to-pay principle” rests on a strained
comparison of tax payments to voluntary gifts to charitable
organizations. Thus Groves writes: “To hundreds of common
enterprises (community chests, Red Cross, etc.) people are expected to
contribute according to their means. Governments are one of these
common enterprises fostered to serve the citizens as a group. . .
.”
Seldom have more fallacies
been packed into two sentences. In the first place, the government is
not a common enterprise akin to the community chest. No one
can resign from it. No one, on penalty of
imprisonment, can come to the conclusion that this
“charitable enterprise” is not doing its job
properly and therefore stop his “contribution”; no
one can simply lose interest and drop out. If, as will be seen further
below, the State cannot be described as a business, engaged in selling
services on the market, certainly it is ludicrous to equate it to a
charitable organization. Government is the very negation of charity,
for charity is uniquely an unbought gift, a freely flowing uncoerced
act by the giver. The word “expected” in
Groves’ phrase is misleading. No one is forced to give to any
charity in which he is not interested or which he believes is not doing
its job properly.
The contrast is even clearer in a phrase of Hunter and
Allen’s:
Contributions
to support the church or the community chest are expected, not on the
basis of benefits which individual members receive from the
organization, but upon the basis of their ability to contribute.
But
this is praxeologically invalid. The reason that anyone contributes
voluntarily to a charity is precisely the benefit
that he obtains from it. Yet benefit can be
considered only in a subjective sense. It can never be measured. The
fact of subjective gain, or benefit, from an act is deducible from the
fact that it was performed. Each person making an exchange is deduced
to have benefited (at least ex ante). Similarly,
a person who makes a unilateral gift is deduced to
have benefited (ex ante) from making the gift. If he
did not benefit, he would not have made the gift. This is another
indication that praxeology does not assume the existence of an
“economic man,” for the benefit from an action may
come either from a good or a service directly received in exchange, or
simply from the knowledge that someone else will benefit from a gift.
Gifts to charitable institutions, therefore, are made precisely on the
basis of benefit to the giver, not on the basis of his
“ability to pay.”
Furthermore, if we compare taxation with the market, we find no basis
for adopting the “ability-to-pay” principle. On the
contrary, the market price (generally considered the just price) is
almost always uniform or tending toward uniformity. Market prices tend
to obey the rule of one price throughout the entire market. Everyone
pays an equal price for a good regardless of how much money he has or
his “ability to pay.” Indeed, if the
“ability-to-pay” principle pervaded the market,
there would be no point in acquiring wealth, for everyone would have to
pay more for a product in proportion to the money in his possession.
Money incomes would be approximately equalized, and, in fact, there
would be no point at all to acquiring money, since the purchasing power
of a unit of money would never be definite but would drop, for any man,
in proportion to the quantity of money he earns. A person with less
money would simply find the purchasing power of a unit of his money
rising accordingly. Therefore, unless trickery and black marketeering
could evade the regulations, establishing the
“ability-to-pay” principle for prices would wreck
the market altogether. The wrecking of the market and the monetary
economy would plunge society back to primitive living standards and, of
course, eliminate a large part of the current world population, which
is permitted to earn a subsistence living or higher by virtue of the
existence of the modern, developed market.
It should be clear, moreover, that establishing equal incomes and
wealth for all (e.g., by taxing all those over a certain standard of
income and wealth, and subsidizing all those below that standard) would
have the same effect, since there would be no point to
anyone’s working for money. Those who enjoy performing labor
will do so only “at play,” i.e., without obtaining
a monetary return. Enforced equality of income and wealth, therefore,
would return the economy to barbarism.
If taxes were to be patterned after market pricing, then, taxes would
be levied equally (not
proportionately) on everyone. As will be seen below, equal taxation
differs in critical respects from market pricing but is a far closer
approximation to it than is “ability-to-pay”
taxation.
Finally, the “ability-to-pay” principle means
precisely that the able are penalized, i.e., those
most able in serving the wants of their fellow men. Penalizing ability
in production and service diminishes the supply of the
service—and in proportion to the extent of that ability. The
result will be impoverishment, not only of the able, but of the rest of
society, which benefits from their services.
The “ability-to-pay” principle, in short, cannot be
simply assumed; if it is employed, it must be justified by logical
argument, and this economists have yet to provide. Rather than being an
evident rule of justice, the “ability-to-pay”
principle resembles more the highwayman’s principle of taking
where the taking is good.
(3) Sacrifice Theory
Another attempted criterion of just taxation was the subject of a
flourishing literature for many decades, although it is now decidedly
going out of fashion. The many variants of the
“sacrifice” approach are akin to a subjective
version of the “ability-to-pay” principle. They all
rest on three general premises: (a) that the utility of a unit of money
to an individual diminishes as his stock of money increases; (b) that
these utilities can be compared interpersonally and thus can be summed
up, subtracted, etc.; and (c) that everyone has the same
utility-of-money schedule. The first premise is valid (but only in an
ordinal sense), but the second and third are nonsensical. The marginal
utility of money does diminish, but it is impossible to compare one
person’s utilities with another, let alone believe that
everyone’s valuations are identical. Utilities are not
quantities, but subjective orders of preference. Any principle for
distributing the tax burden that rests on such assumptions must
therefore be declared fallacious. Happily, this truth is now generally
established in the economic literature.
Utility and “sacrifice” theory has generally been
used to justify progressive taxation, although sometimes proportional
taxation has been upheld on this ground. Briefly, a dollar is alleged
to “mean less” or be worth less in utility to a
“rich man” than to a “poor man”
(“rich” or “poor” in income or
wealth?), and therefore payment of a dollar by a rich man imposes less
of a subjective sacrifice on him than on a poor man. Hence, the rich
man should be taxed at a higher rate. Many
“ability-to-pay” theories are really inverted
sacrifice theories, since they are couched in the form of ability
to make sacrifices.
Since the nub of the sacrifice theory—interpersonal
comparisons of utility—is now generally discarded, we shall
not spend much time discussing the sacrifice doctrine in detail.
However, several aspects
of this theory are of interest. The sacrifice theory divides into two
main branches: (1) the equal-sacrifice principle
and (2) the minimum-sacrifice principle.
The former states that every man should sacrifice equally in paying
taxes; the latter, that society as a whole should sacrifice the least
amount. Both versions abandon completely the idea of government as a
supplier of benefits and treat government and taxation as simply a
burden, a sacrifice that must be borne in the best way we know how.
Here we have a curious principle of justice indeed—based on
adjustment to hurt. We are faced again with that pons asinorum
that defeats all attempts to establish canons of justice for
taxation—the problem of the justice of taxation itself.
The proponent of the sacrifice theory, in realistically abandoning
unproved assumptions of benefit from taxation, must face and then
founder on the question: If taxation is pure hurt, why endure it at
all?
The equal-sacrifice theory asks that equal hurt be
imposed on all. As a criterion of justice, this is as untenable as
asking for equal slavery. One interesting aspect of the equal-sacrifice
theory, however, is that it does not necessarily imply progressive
income taxation! For although it implies that the rich man should be
taxed more than the poor man, it does not
necessarily say that the former should be taxed more than
proportionately. In fact, it does not even establish that all
be taxed proportionately! In short, the
equal-sacrifice principle may demand that a man earning $10,000 be
taxed more than a man earning $1,000, but not necessarily that he be
taxed a greater percentage or even proportionately. Depending on the
shapes of the various “utility curves,” the
equal-sacrifice principle may well call for regressive
taxation under which a wealthier man would pay more in amount
but less proportionately (e.g., the man earning $10,000 would pay $500,
and the man earning $1,000 would pay $200). The more rapidly the
utility of money declines, the more probably will the equal-sacrifice
curve yield progressivity. A slowly declining utility-of-money schedule
would call for regressive taxation. Argument about how rapidly various
utility-of-money schedules decline is hopeless because, as we have
seen, the entire theory is untenable. But the point is that even on its
own grounds, the equal-sacrifice theory can justify neither progressive
nor proportionate taxation.
The minimum-sacrifice theory has often been confused with the
equal-sacrifice theory. Both rest on the same set of false assumptions,
but the minimum-sacrifice theory counsels very drastic progressive
taxation. Suppose, for example, that there are two men in a community,
Jones making $50,000, and Smith making $30,000. The principle of
minimum social sacrifice, resting on the three assumptions described
above, declares: $1.00 taken from Jones imposes less of a sacrifice
than $1.00 taken from Smith; hence, if the government needs $1.00, it
takes it from Jones. But suppose the government needs $2.00; the second
dollar will impose less of a sacrifice on Jones than the first dollar
taken from Smith, for Jones still has more money left than Smith and
therefore sacrifices less. This continues as long as Jones has more
money remaining than Smith. Should the government need $20,000 in
taxes, the minimum-sacrifice principle counsels taking the entire
$20,000 from Jones and zero from Smith. In other words, it advocates
taking all of the highest incomes in turn until governmental needs are
fulfilled.
The minimum-sacrifice principle depends heavily, as does the
equal-sacrifice theory, on the untenable view that everyone’s
utility-of-money schedule is roughly identical. Both rest also on a
further fallacy, which now must be refuted: that
“sacrifice” is simply the obverse of the utility
of money. For the subjective sacrifice in taxation may not be
merely the opportunity cost forgone of the money paid; it may also be
increased by moral outrage at the tax procedure.
Thus, Jones may become so morally outraged at the above proceedings
that his marginal subjective sacrifice quickly becomes very great, much
“greater” than Smith’s if we grant for a
moment that the two can be compared. Once we see that subjective
sacrifice is not necessarily tied to the utility of money, we may
extend the principle further. Consider, for example, a philosophical
anarchist who opposes all taxation fervently. Suppose that his
subjective sacrifice in the payment of any tax is so great as to be
almost infinite. In that case, the minimum-sacrifice principle would
have to exempt the anarchist from taxation, while the equal-sacrifice
principle could tax him only an infinitesimal amount. Practically,
then, the sacrifice principle would have to exempt the anarchist from
taxation. Furthermore, how can the government determine the subjective
sacrifice of the individual? By asking him? In that case, how many
people would refrain from proclaiming the enormity of their sacrifice
and thus escape payment completely?
Similarly, if two individuals subjectively enjoyed their identical
money incomes differently, the minimum-sacrifice principle would
require that the happier man be taxed less because he makes a
greater sacrifice in enjoyment from an equal tax. Who will suggest
heavier taxation on the unhappy or the ascetic? And who would then
refrain from loudly proclaiming the enormous enjoyment he
derives from his income?
It is curious that the minimum-sacrifice principle counsels the obverse
of the ability-to-pay theory, which, particularly in its
“state of well-being” variant, advocates a special tax
on happiness and a lower tax on unhappiness.
If the latter principle prevailed, people would rush to proclaim their unhappiness
and deep-seated asceticism.
It is clear that the proponents of the ability-to-pay and sacrifice
theories have completely failed to establish them as criteria of just
taxation. These theories also commit a further grave error. For the
sacrifice theory explicitly, and the ability-to-pay theory implicitly,
set up presumed criteria for action in terms of sacrifice and burden.
The State is assumed to be
a burden on society, and the question becomes one of justly
distributing this burden. But man is constantly striving to sacrifice
as little as he can for the benefits he receives from his actions. Yet
here is a theory that talks only in terms of sacrifice and burden, and
calls for a certain distribution without demonstrating to the
taxpayers that they are benefiting more than they are giving up.
Since the theorists do not so demonstrate, they can make their appeal
only in terms of sacrifice—a procedure that is
praxeologically invalid. Since men always try to find net benefits in a
course of action, it follows that a discussion in terms of sacrifice or
burden cannot establish a rational criterion for human action. To be
praxeologically valid, a criterion must demonstrate net benefit. It is
true, of course, that the proponents of the sacrifice theory are far
more realistic than the proponents of the benefit theory (which we
shall discuss below), in considering the State a net burden on society
rather than a net benefit; but this hardly demonstrates the justice
of the sacrifice principle of taxation. Quite the contrary.
Adam Smith, The Wealth
of Nations (New York: Modern Library, 1937), pp.
777–79. See also Hunter and Allen, Principles
of Public Finance, pp. 137–40.
This discussion
applies to Professor Hayek’s adoption of the “rule
of law” as the basic political criterion. F.A. Hayek, The
Constitution of Liberty (Chicago: University of
Chicago Press, 1960).
Mises, in Aaron Director, ed., Defense,
Controls and Inflation (Chicago: University of Chicago Press,
1952), pp. 115–16.
To say that an ethical goal is conceptually
impossible is completely different from saying that its
achievement is “unrealistic” because few people
uphold it. The latter is by no means an argument against an ethical
principle.
Conceptual impossibility means that the goal could not be achieved even
if everyone aimed at it. On the problem of
“realism” in ethical goals, see the brilliant
article by Clarence E. Philbrook,
“‘Realism’ in Policy Espousal,”
American Economic Review, December, 1953, pp.
846–59.
See Walter
J. Blum and Harry Kalven, Jr., The Uneasy Case for
Progressive Taxation (Chicago: University of Chicago
Press, 1963), pp. 64–68.
Due, Government Finance,
pp. 121ff.
Said Smith:
The
subjects of every state ought to contribute toward the support of the
government, as nearly as possible, in proportion of their respective
abilities; that is, in proportion to the revenue which they
respectively enjoy under protection of the state. The expense of
government to the individuals of a great nation, is like the expense of
management to the joint tenants of a great estate, who are all obliged
to contribute to their respective interests in the estate. (Wealth
of Nations, p. 777)
J.R. McCulloch, A
Treatise on the Principle and Practical Influence of Taxation and the
Funding System (London, 1845), p. 142.
E.R.A. Seligman, Progressive
Taxation in Theory and Practice (2nd ed.; (New York:
Macmillan & Co., 1908), pp. 291–92.
For an excellent critique of the
Seligman theory, see Blum and Kalven, Uneasy
Case for Progressive Taxation, pp. 64–66.
See ibid.,
pp. 67–68.
Due, Government Finance,
p. 122.
Groves, Financing
Government, p. 36.
Hunter and Allen, Principles
of Public Finance, pp. 190–91.
See Chodorov,
Out of Step, p. 237. See also Chodorov,
From Solomon’s Yoke to the Income Tax
(Hinsdale, Ill.: Henry Regnery, 1947), p. 11.
The acceptance of this critique
dates from Robbins’ writings of the mid-1930’s. See
Lionel Robbins, “Interpersonal Comparisons of
Utility,” Economic Journal, December,
1938, pp. 635–41; and Robbins, An Essay on the
Nature and Significance of Economic Science (2nd ed.; London:
Macmillan & Co., 1935), pp. 138–41. Robbins was, at
that time, a decidedly “Misesian” economist.
For a critique of sacrifice
theory, see Blum and Kalven, Uneasy Case
for Progressive Taxation, pp. 39–63.
For an attempt to establish
proportional taxation on the basis of equal sacrifice, see
Bradford B. Smith, Liberty and Taxes
(Irvington-on-Hudson, N.Y.: Foundation for Economic Education, n.d.),
pp. 10–12.
Pushed to its logical conclusion
in which the State is urged to establish “maximum social
satisfaction”—the obverse of minimum social
sacrifice—the principle counsels absolute compulsory
egalitarianism, with everyone above a certain standard taxed in order
to subsidize everyone else to come up to that standard. The
consequence, as we have seen, would be a return to the conditions of
barbarism.
The ability-to-pay principle is
unclear on this point. Some proponents base their argument implicitly
on sacrifice; others, on the necessity for payment for
“untraceable” benefits.
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