Is Taxation Immoral?
Introduction
This essay is an attempt by an economic-leftist to introduce his Libertarian friends to some philosophical & economic arguments which challenge the famous Libertarian accusation that taxation is theft.
Because I’ve come to view Libertarians quite favorably due to their positions on some of the most important issues of the day, I approach this essay as one who hopes to persuade a friend, instead of imagining I am confronting an enemy.
Our Minimal Differences
While there are a variety of leftist visions of Economic Justice, my own is one which embraces many of the principles that lie at the core of Libertarian thought.
Unlike some economic leftists, I happen to wholeheartedly embrace markets. In fact, my prescriptions all revolve around actions taken to make markets function as they ideally should, which I argue would optimize the economic welfare of the Working Class.
True, my prescriptions require the use of government actions to correct market failures but the kind of intervention I advocate is mostly restricted to the government making real economic investments in the productive capacity of the economy that will improve the standard of living of the American people.
So we are not that far apart in our thinking regarding the importance of markets and the importance of governments eschewing the option of “band-aid programs” with all their associated bureaucratic inefficiencies.
There is however one area of disagreement we must visit and that is our differing views with respect to tax policy and property rights.
Understanding Rights
In a 1947 pamphlet entitled Taxation Is Robbery, Frank Chodorov argued that taxation is fundamentally immoral, insisting that it violates the sanctity of citizens’ property rights.
As a philosopher, my immediate response to this kind of argument is to ask what do we mean when we say that a person or a group has “rights?”
Yes, we were all taught in civics class that Americans possess God-given or inalienable rights, but almost no one understands what it means to make such a statement.
Is a right something you will always have that no one can take from you?
Certainly, no person can be deprived of her belief that she deserves some right. But seriously, if none of the rest of her tribe agrees with her then she clearly possesses nothing, other than some thoughts in her head that she thinks are important.
Yes, if everyone you meet does believe you are deserving of some right, then you do in a certain sense “possess” it, but only because others are actively gifting it to you. Nothing emanating from you is giving you this right.
So if you want to claim that some individual or group has a right, what you’re actually saying is you believe everyone else in the tribe should feel morally obligated to behave in a certain way with respect to that individual or group.
That being said, we might then want to ask why you should feel obligated to treat someone you don’t know in a way that affords them a certain privilege…to your considerate behavior?
The answer is people only feel inspired to grant others such “rights” if they believe it is the moral thing to do.
Understanding Morality & Moral Motivation
It’s actually not difficult to determine if a given action — or decision to not act — is moral, immoral, or neither.
All we need to determine is which of these apply…
1) An action [or decision to not act] is moral if everyone would be better off if everyone were to act [or choose not to act] in the same way.
2) If everyone would be worse off — if everyone acted [or chose not to act] in the same way — then the action [or decision to not act] is immoral, by definition.
3) If everyone would be neither better off nor worse off — if everyone were to act [or not act] in the same way — then the action or failure to act is neither moral nor immoral.
This is the simple rubric that people apply on a subconscious level when they ponder the morality or immorality of some behavior they’ve heard about. They wonder, “what if everyone acted this way?”
So if you want to claim that your actions are moral, you need to do more than simply show how you would benefit from them. You need to show how everyone would benefit if everyone behaved the same way.
Applying this rubric, we can see why people consider murder to be immoral; they recognize that we would all be worse off if we all killed the people who anger us or who “stand in our way.” We consider it immoral to initiate violence in our encounters with other people for the same reason.
Notice that moral motivation ultimately arises from perceived self-interest; we value moral behavior because we see benefit in it for ourselves if everyone were to always emulate moral behavior and eschew immoral behavior.
The Moral Parameters Of Property Rights
We should first recognize the inherent morality of typical marketplace transactions. They occur for one reason: people are always willing to trade some of what they have (e.g. their labor) for something they don’t have. Either there is mutual benefit or no transaction takes place.
It’s the peaceful alternative to people simply taking what they want from other people if they can get away with it. Clearly, if everyone participates in mutually beneficial transactions like these, everyone will be better off.
Next, we want to notice how foundationally dependent market transactions are on the concept of property rights. Typically, both parties assume that the people they are trading with have a legal and moral right to trade “their” property.
The problem, of course, is that people do acquire property through various immoral means, e.g. by stealing it or by cheating others out of their property via fraud or other manipulative schemes.
When we apply the morality rubric to these acts of thievery, we recognize that they are — by definition — immoral, for we can see that we’d all be worse off if we were all constantly stealing from each other.
This is why morally focused people broadly support the concept of property rights, the idea that everyone in the tribe should be gifted a certain right to his property, to be able to dispose of it as he wishes. We like it because we can see that we’d all be better off if this “right” were universally respected.
But unfortunately, circumstances do arise which prompt tribe members to agree that some individuals/groups do not deserve a right to maintain possession of certain properties they’ve acquired, not if they were acquired immorally.
When such perfidies become publicly known, tribes universally desire that the cheaters be dispossessed of their ill-gotten gains, as they realize that not doing so would incentivize people in general to cheat and steal with abandon, which would clearly create a very immoral outcome.
But who is going to dispossess the cheaters of their ill-gotten gains?
When Governments Act Morally
For obvious reasons, most tribes believe that cheaters should be deprived of their property rights with respect to any properties they might have acquired immorally. But who is going to carry out such a task?
Historically, tribal governments have been relied upon to carry out this duty, with the hope that they’ll produce justice outcomes with respect to disputes over property ownership. To the extent that governments are able to do this, they’ll enjoy the approval of their tribes.
Unfortunately, most governments around the world are easily corrupted by money. Corrupted governments produce unjust outcomes. Naturally, we do not approve of such governments since they are obviously failing to act in ways that will make us all better off.
Nevertheless, people in general typically view the efforts governments make in pursuit of just ends as being morally justified, in spite of the fact that they know governments can’t be regularly depended upon to produce justice outcomes.
So while we all acknowledge that — because of corruption — governments frequently fail to deliver the justice we desire, we must also nevertheless admit that governments are capable of acting morally.
How can we apply our expanded understanding of morality to the question of whether or not government taxation is immoral?
So Is Taxation Immoral?
We can begin by noting that tribe members will judge their government’s tax laws to be moral if they perceive that everyone will be better off if they are enforced.
But — as is true of all moral questions — our final judgment as to whether or not a particular tax law is moral/immoral depends on what we expect the consequences will be if that tax law is enforced.
Generally speaking, Libertarians view taxation as immoral because they believe it imposes a painful sacrifice on at least some taxpayers who have little reason to expect any benefit worth the cost imposed on them by the tax.
Certainly, by the definitions of morality we’ve established thus far, there is no doubt that any tax which makes people worse off is indeed immoral. But is the assumption — that some taxpayers are made worse off — correct?
The ultimate reason I don’t agree with Libertarians on tax policy is because I understand some things about the consequences of one form of taxation in particular that they do not.
I wish to inform them that — unique among all the methods of taxation — the Progressive Income Tax is structured in a way that does not — in real terms — impose any material sacrifice nor any loss of purchasing power in the marketplace on those who are required to pay it.
Because of the way it is set up, those who are required to pay the tax are insulated from the negative effects we normally associate with taxation.
History Teaches
The last time Congress decided to dramatically increase the top marginal rates that the richest Americans were required to pay on their incomes was 1932, in the depths of the Great Depression.
That year Congress increased the Income Tax’s top marginal rate from 25% to 63%. Fours years later, it was raised again to 79%.
Just how bad did it get for the country’s millionaires, once the government started to take huge amounts of money away from them? Answer: they got along just fine.
When we look at what actually happened to rich people at the time, it becomes clear that dramatically increasing the tax obligations of these people did not actually inflict any kind of real suffering on them at all.
In the years that followed the 1932 tax hike, none of the mansions, or the yachts, or the beachfront property disappeared. Throughout the Great Depression, rich people still owned all of the economy’s luxuries and they continued to enjoy them fully.
They may have had fewer disposable dollars to throw around than they used to, but that just meant that they were able to get all the luxuries that the economy produced at lower prices.
You see, in spite of the much larger tax bills they were paying, rich people still had the highest disposable incomes in the land, and in a market economy, that’s all the money you need to claim the scarcest luxury goods & services that the economy brings to market.
Why this is true is something that becomes apparent once you’ve come to thoroughly understand how market economies determine prices.
Markets Determine Prices By AUCTION
Any competent economist will tell you that the marketplace sets prices by auctioning the scarcest goods & services to the highest bidders. The auction process we see in most markets is different from the one we observe at Sotheby’s, but the results are the same.
The essential element driving the process is the freedom sellers have to charge the highest price for their products that they think the market will bear. With extraordinarily few exceptions, this is precisely what sellers in competitive markets always do.
If sellers become aware that — for whatever reason — supplies of the product they sell will soon be in short supply relative to demand, they will immediately raise their prices. They understand that, given the anticipated shortage, many people will be willing to pay a higher price for the product rather than do without.
How high will the price ultimately go? That is what the auctioning process ultimately determines.
A seller starts off by trying to guess the highest price she can charge while still being able to sell all of her products. If her guess is too high, product will remain on the shelf unpurchased.
But if instead she finds her products are ‘flying off the shelf’ at the original price she set, she will increase her prices further to see what happens. If they are still flying off the shelf, she will proceed to raise them again.
The price she charges will continue to go up until sales slow to a trickle and product remains on her shelves unpurchased. When this happens, she will then lower her price just enough to move the product off the shelf, but no lower. Equilibrium — for the moment — is achieved.
In this Markets’ Method of auction, sellers try to guess the winning high bid in advance, ask for it up front, and then allow potential buyers some time to respond. Potential buyers only participate in the auction if they believe they can afford the winning high bid that the seller/auctioneer has set.
In a free-market economy, prices are always going to go as high as they can possibly go, limited only by the quantity of $$ that potential buyers have available to them. That is why the scarcest luxuries always end up in the hands of those who possess the most disposable dollars because sellers are always going to do their best to price everyone else out of the market.
It is a process that is every bit as effective as a Sotheby’s auction at delivering the scarcest goods & services generated by the economy to the highest bidders.
PURCHASING POWER In Market Economies
From this explanation of marketplace dynamics we derive a supremely important economic truth: purchasing power is not determined solely by the number of dollars you have. What determines your purchasing power is the number of dollars you have compared to everyone else.
The purchasing power of your disposable income is ultimately determined by its ranking within the hierarchy of all disposable incomes. Those who have more disposable dollars available have a higher ranking than those who have fewer. The higher your ranking, the more able you are to ‘outbid’ others for the scarcest luxury experiences.
One principle stands out above all others: whenever a household experiences an increase its disposable income, its purchasing power will either increase, decrease, or not change at all depending on what has happened to the disposable incomes of all other households.
- Your household income may increase next year, but that seemingly happy development would only provide your household with an increase in purchasing power if your gain in $$ earnings is exceptional (e.g., you win the lottery, or land a much better paying job).
- If the only reason your disposable income increases next year is because you and everyone else got a nice tax cut, then none of you is going to experience an improvement in your ranking within the hierarchy, and that means none of you will see an improvement in your purchasing power, all else equal.
- A third possibility: your household income increases next year at a time when everyone else’s is going up more. In this case, your household’s purchasing power would actually decline, even though your nominal income had increased, because your ranking within the hierarchy would decline relative to everyone else.
- Yet another possibility: your household’s disposable income declines next year, but because everyone else’s disposable income declines even more you actually end up experiencing an improvement in your purchasing power.
People Are Not Harmed By The Income Tax
With this more sophisticated understanding of purchasing power in market economies, we are able to see why it is indeed a fact that imposing steeply progressive [marginal] income tax rates on rich people does not actually impose any kind of material sacrifice on them whatsoever.
Through its use of marginal tax rates, the Income Tax is structured in a way which preserves the disposable income rankings — and therefore the purchasing power — of all those who are taxed. Once the luxury markets have adjusted their prices through the auction process to the new disposable income realities, rich tax payers will find that their privileged lifestyles are just as ‘affordable’ as they were before their taxes went up.
You see, decreasing the number of dollars that rich people have available to spend does not decrease the quantity of the luxury experiences that are brought to market. The same luxuries will still be offered for sale to the same people and they will still be bought by those same people once the price has dropped to a level that they perceive to be affordable.
In the real world — the world of actual goods/services consumed — nothing changes.
And thus the fear that rich people have always had of deprivation and unfair treatment via the Income Tax has never had any basis in reality. It turns out that they have feared the specter of steeply progressive income taxes, not because they are evil, but because they have simply never understood the nuances of marketplace dynamics.
So Is The Income Tax Unfair To Rich People?
No, it Is not.
In the world of Public Finance and Taxation Theory, it is simply not possible to conceive of a method of taxation that is more fair to rich people than one which actually preserves both their purchasing power and their material possessions in spite of the fact that they are being asked to hand over large amounts of money to the government to pay for its bills.
All the Income Tax really does is take excess dollars/euros from all rich people that they don’t actually need to be able to purchase their very privileged lifestyles at the top of the economic ladder.
And yet, though the Income Tax is ideally fair in its construction, there are still some important fairness issues that rich people ought to be concerned about.
There is, for example, the high likelihood that if the Income Tax’s top marginal rates were made much more steeply progressive, certain disreputable rich people would feel inspired to defy the supremely virtuous intent of the Income Tax by acting to enhance their own disposable income rankings at the expense of all other rich people.
Which is to say they will seek to cheat, lie, or otherwise game the system that has been set up to calculate the government’s share, often by not reporting all of their sources of income. If/when they do such things at the same time the majority of rich people are following the rules they would indeed be able to improve their rankings within the hierarchy of all disposable incomes.
So maybe all rich people should copy their behavior? Well if they did, it would negate the benefit that is enjoyed when only a few are cheating the system. If everybody were to follow their example, then none of them would be able to improve their rankings (assuming they all cheat equally).
You see, in order for these scoundrels to truly benefit as they desire, they need for most rich people to play by the rules while they are cheating.
So if you are a rich person who has come to realize that the income tax is indeed the fairest method of taxation you could ever hope for, it does not mean that all of your concerns about fairness have gone away.
The people who are actually trying to victimize you with unfair treatment are those ‘other’ rich people out there who don’t want to play by the rules, rules that are set up to protect all rich people from any loss of purchasing power in the marketplace.
Conclusion
The ultimate point I wish to convey to my Libertarian friends with this article is that — at least with respect to income taxation — it is not immoral for a government to tax its citizens, if the method it chooses does not actually impose any real penalty on those who are required to pay the tax.
But having made that point, I do agree that there are profoundly important reasons why taxpayers should condemn any immoral projects or endeavors that governments decide to spend their tax revenues on.
Yes, a government’s method of collecting taxes can be 100% morally justified, but if that same government chooses to spend its tax revenue on immoral activities, then the collection of those taxes — for those purposes — is properly perceived to be immoral.
Notice that it is not immoral because all tax collections are immoral, but rather, because this particular tax collection event is immoral…due to the consequences of the government’s spending decisions.
While I hardly expect this article will persuade Libertarians everywhere to abandon the tenets of their faith(!) my hope is that it might serve to narrow the existing divide between us on economic matters somewhat, thereby adding to the already substantial range of topics upon which we both agree.
