Wednesday, 8 January 2014

Is tax a burden?

In my last post I discussed the libertarian political philosophy in relatively abstract terms. I will consider the issue from another perspective by asking the question is tax a burden? When judging whether taxation is just we should focus on the overall taxation system rather than any particular tax, and indeed the place that taxation plays in society. So the proper question is: In what ways does the tax system burden people, and are these burdens justifiable?

In one sense the tax system creates a burden. This is the burden of complying with the rules of taxation. We might call this the administrative burden; people have to know the rules of taxation and provide whatever information and payments are needed to be compliant with the laws and rules. This is a burden of time and effort in the small scale, and it should be minimised where possible by the withholding of tax revenues from taxpayers. However, the burden imposed is fully justified on a larger scale if the tax system as a whole is imposed in a legitimate manner by a legitimate state. If the tax rules are legitimate then people have a duty to comply with them and the state is justified in enforcing compliance. Since this administration is a duty on citizens it is not really a burden in any morally troubling sense.

A second sense of the burden of taxation might be the idea that handing money over to the authorities is a burden. However, this is even less clearly a burden than the administrative burden. Paying money to the tax authorities is not a burden on anyone since the tax bill is merely a sign that the taxpayer has not paid the correct amount of money to the tax authorities. This may be because it is necessary for the taxpayer to receive the money and then pay it to the authority where the authority is unable to arrange for the revenue to be withheld at source.

A more sophisticated argument for the burden of taxation is that if someone were taxed less they could either a) work less or b) have more resources to live their life. It is of course a greater burden on people to live their life with fewer resources. However, this comparison is irrelevant unless people have a right to those resources in the first place. Of course, we can imagine numerous different sets of rules and laws surrounding taxation and state benefits which would ease the burdens on one group and increase them on another. Everyone could therefore complain that they are burdened compared to some regime or other. The proper question is whether the regime is legitimate (and ideally it would be fully just).

The important point to emphasise is that the “loss” of money to the taxpayer is in fact not a loss at all. The payment does not take away anything that was the person’s to begin with, since people are only entitled to their post-tax (net) income anyway. Most people appreciate this point when they reflect on it. However, “everyday libertarianism” mentioned in my previous blog can creep into people’s thoughts on taxation. This makes it appear that taxation is a burden when it is not.

What matters is that the overall system of taxation and assistance payments by the state are legitimate. If the system is not legitimate then we can say that taxation payments are a burden. The points I have made above also explain why retroactive taxes—where rules are changed to create taxes on past income—are generally considered unjust. These are burdensome since the taxpayer can legitimately treat the money they have received as post-tax income to use as they please. Retroactive taxes cross a moral line between the legitimate seizure by the state of what does not belong to the citizen and the seizure by the state of what does belong to the citizen. These cases aside, however, citizens are in no way burdened by paying taxes.


Matt Fernandez said...

Based on your argument, it seems like you are saying that the primary reason people view income taxes as a burden is one of language. If I take a job working at Pizza Hut for $8 an hour, I am obviously agreeing to trade the hours of my life at a rate of $8 per hour. But then when the taxes come into play, I am left with, say, $6.50 per hour of my life, which is not what I agreed to.

One could argue that, yes, the tax is to be expected and I should take that into account, but that's not really how people think. It is always going to be a difficult or losing battle to argue that point against how our brain perceive things. A society could, in theory, made this tax more invisible, and therefore easier on perception of the individual, if it became the norm for businesses to conduct their wage negotiations at the post-tax levels, as well as, as you said, having the tax being deducted before wages being payed to the individual, rather than after. That why while the end result is still the same, the employee's deal with their employer is more straightforward, easy to understand, and no one is forcefully removing the earned income of the individual.

Still the same thing, I suppose, but by perception it becomes less an income tax and more of a sales tax on your time.

One other reason I think people think it is a burden is that they feel (misguided or not) that they could be fine without the services taxes provide, but there is no "opt out" option. That is probably an entirely different discussion though.

Physiocrat said...

I am not going to argue about the semantics of "burden" in this because, apart from anything else, there is a difference between the BURDEN of a tax ie the one who is nominally responsible for paying it, and the INCIDENCE of the tax ie who actually ends up paying it. The incidence of Income Tax, for instance, arguably falls on the employer, who then passes it on to customers by building it into the prices charged for goods and services.

The really important issue with taxation is its economic effects. Taxation affects economic outcomes; taxation can render non-viable economic activity which would be viable in the absence of the tax. An example was the UK coal mining industry, which was believed to be unviable since the pithead price of coal was £10 more per ton than world prices. However, tax paid by the National Coal Board in the form of employee's Income Tax and NI was around £10 per ton. It has been estimated that the tax system results in a loss of between 12% and 30% of GDP.

So the burden of tax is, amongst other things, a massive welfare bill to pay for the country's army of unemployed.

Ben Jamin' said...

So, if you were taxed at 100% of your income, that wouldn't be a burden?

No one would bother going to work for a wage and the economy would collapse.

This deadweight loss is called the excess burden of taxation for a pretty straightforward reason, I'd have thought.

Payment for exclusive rights to land have no excess burdens. Quite the opposite, because they allow the market of operate at optimal efficiency.

In competitive, efficient markets, income and capital will always be fairly distributed. There is never any justification for the taxation, and re-distribution of those factors.

Even in competitive markets, due to its irreproducibility and uneven distribution, the value derived from natural resources will always be unfair.

The collection and equal sharing of Land rents is justifiable.

This is best done with a direct, thus fair "tax" on those rents. The more indirect the collection of those rents, the more unfair and burdensome they become.

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