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4. Binary Intervention: Taxation > 7. Canons of "Justice" in... > C. Distribution of the Tax Burden
(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.”61
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.62
(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.63 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?
- 61. 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).
- 62. Mises, in Aaron Director, ed., Defense, Controls and Inflation (Chicago: University of Chicago Press, 1952), pp. 115–16.
- 63. 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.