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4. Binary Intervention: Taxation > 7. Canons of "Justice" in... > C. Distribution of the Tax Burden

(5) The Equal Tax and the Cost Principle

Equality of taxation has far more to commend it than any of the above principles, none of which can be used as a canon of taxation. “Equality of taxation” means just that—a uniform tax on every member of the society. This is also called a head tax, capitation tax, or poll tax. (The latter term, however, is best used to describe a uniform tax on voting, which is what the poll tax has become in various American states.) Each person would pay the same tax annually to the government. The equal tax would be particularly appropriate in a democracy, with its emphasis on equality before the law, equal rights, and absence of discrimination and special privilege. It would embody the principle: “One vote, one tax.” It would appropriately apply only to the protection services of the government, for the government is committed to defending everyone equally. Therefore, it may seem just for each person to be taxed equally in return. The principle of equality would rule out, as would the benefit principle, all government actions except defense, for all other expenditures would set up a special privilege or subsidy of some kind. Finally, the equal tax would be far more nearly neutral than any of the other taxes considered, for it would attempt to establish an equal “price” for equal services rendered.

One school of thought challenges this contention and asserts that a proportional tax would be more nearly neutral than an equal tax. The proponents of this theory point out that an equal tax alters the market's pattern of distribution of income. Thus, if A earns 1,000 gold ounces per year, B earns 200 ounces, and C earns 50 ounces, and each pays 10 ounces in taxes, then the relative proportion of net income remaining after taxes is altered, and altered in the direction of greater inequality. A proportionate tax of a fixed percentage on all three would leave the distribution of income constant and would therefore be neutral relative to the market.

This thesis misconceives the whole problem of neutrality in taxation. The object of the quest is not to leave the income distribution the same as if a tax had not been imposed. The object is to affect the income “distribution” and all other aspects of the economy in the same way as if the tax were really a free-market price. And this is a very different criterion. No market price leaves relative income “distribution” the same as before. If the market really behaved in this way, there would be no advantage in earning money, for people would have to pay proportionately higher prices for goods in accordance with the level of their earnings. The market tends toward uniformity of pricing and hence toward equal pricing for equal service. Equal taxation, therefore, would be far more nearly neutral and would constitute a closer approach to a market system.

The equal-tax criterion, however, has many grave defects, even as an approach toward a neutral tax. In the first place, the market criterion of equal price for equal service faces the problem: What is an “equal service”? The service of police protection is of far greater magnitude in an urban crime area than it is in some sleepy backwater. That service is worth far more in the crime center, and therefore the price paid will tend to be greater in a crime-ridden area than in a peaceful area. It is very likely that, in the purely free market, police and judicial services would be sold like insurance, with each member paying regular premiums in return for a call on the benefits of protection when needed. It is obvious that a more risky individual (such as one living in a crime area) would tend to pay a higher premium than individuals in another area. To be neutral, then, a tax would have to vary in accordance with costs and not be uniform.80 Equal taxation would distort the allocation of social resources in defense. The tax would be below the market price in the crime areas and above the market price in the peaceful areas, and there would therefore be a shortage of police protection in the dangerous areas and a surplus of protection in the others.

Another grave flaw of the equal-tax principle is the same that we noted in the more general principle of uniformity: no bureaucrat can pay taxes. An “equal tax” on a bureaucrat or politician is an impossibility, because he is one of the tax consumers rather than taxpayers. Even when all other subsidies are eliminated, the government employee remains a permanent obstacle in the path of equal tax. As we have seen, the bureaucrat's “tax payment” is simply a meaningless bookkeeping device.

These flaws in the equal tax cause us to turn to the last remaining tax canon: the cost principle. The cost principle would apply as we have just discussed it, with the government setting the tax in accordance with costs, like the premiums charged by an insurance company.81 The cost principle would constitute the closest approach possible to neutrality of taxation. Yet even the cost principle has fatal flaws that finally eliminate it from consideration. In the first place, although the costs of nonspecific factors could be estimated from market knowledge, the costs of specific factors could not be determined by the State. The impossibility of calculating specific costs stems from the fact that products of tax-supported firms have no real market price, and so specific costs are unknown. As a result, the cost principle cannot be accurately put into effect. The cost principle is further vitiated by the fact that a compulsory monopoly—such as State protection—will invariably have higher costs and sell lower-quality service than freely competitive defense firms on the market. As a result, costs will be much higher than on the market, and, again, the cost principle offers no guide to a neutral tax.

A final flaw is common to both the equality and the cost theories of taxation. In neither case is benefit demonstrated as accruing to the taxpayer. Although the taxpayer is blithely assumed to be benefiting from the service just as he does on the market, we have seen that such an assumption cannot be made—that the use of coercion presumes quite the contrary for many taxpayers. The market requires a uniform price, or the exact covering of costs, only because the purchaser voluntarily buys the product in the expectation of being benefited. The State, on the other hand, would force people to pay the tax even if they were not voluntarily willing to pay the cost of this or any other defense system. Hence, the cost principle can never provide a route to the neutral tax.

  • 80. This does not concede that “costs” determine “prices.” The general array of final prices determines the general array of cost prices, but then the viability of firms is determined by whether the price people will pay for their products is enough to cover their costs, which are determined throughout the market. In equilibrium, costs and prices will all be equal. Since a tax is levied on general funds and therefore cannot be equivalent to market pricing, the only way to approximate market pricing is to set the tax according to costs, since costs at least reflect market pricing of the nonspecific factors.
  • 81. Blum and Kalven mention the cost principle but casually dismiss it as being practically identical with the benefit principle:
    Sometimes the theory is stated in terms of the cost of the government services performed for each citizen rather than in terms of the benefits received from such services. This refinement may avoid the need of measuring subjective benefits, but it does little else for the theory. (Uneasy Case for Progressive Taxation, p. 36 n)Yet their major criticism of the benefit principle is precisely that it requires the impossible measurement of subjective benefit. The cost principle, along with the benefit principle, dispenses with all government expenditures except laissez-faire ones, since each recipient would be required to pay the full cost of the service. With respect to the laissez-faire service of protection, however, the cost principle is clearly far superior to the benefit principle.