Tuesday, 7 January 2014


Libertarianism is broadly the view that things should be left to the free markets, and that the state should do nothing over and above facilitating the market and property rights. According to this view, the correct distribution of resources is that which is produced by a minimally interfered with market. There are two broad arguments for this, a consequentialist one and a rights-based one.

The consequentialist argument for libertarianism is associated primarily with F.A. von Hayek and Milton Friedman. These authors sometimes make some important points about states can sometimes fail in their attempts to improve things because they do not take proper account of the role of the market. I hope to come back to this useful insight in later blogs (and the insight is included in my earlier post about the purpose of taxation) but the basic thought is that these attempts to improve things can be self-defeating.

Consequentialist libertarians take this point further and create a principle or maxim that state actions always have negative consequences overall. This takes the sensible insight far too far, unless it is assumed that the free market outcome is somehow optimal. There is no reason to think that this will be the case, and it would be necessary to argue for this as a theory of distributive justice. Another form of argument for libertarianism does this, the rights-based (or deontological) argument.

The most sophisticated and best known rights-based argument for libertarianism was presented by Nozick in his book Anarchy, State and Utopia. This is an impressive book, but has been thoroughly criticised by philosophers such as G.A. Cohen, Allan Gibbard, Thomas Nagel and Samuel Freeman. I will not rehearse these criticisms here. However, I will mention an important book on taxation which touches on libertarianism.

An important theme in Nagel and Murphy’s book The Myth of Ownership is that people seem to operate with something the authors call everyday libertarianism. This is the unfortunate tendency that people have to assume that the state takes their pre-tax (or gross) income. In fact, this is an illusion. Taxation by a legitimate state is not in fact a reduction in anyone’s income from this pre-tax income. The framing effect produced by the market transaction for labour can encourage people to think of pre-tax income as theirs but this is just an illusion. The state sets the rules for the market and this includes taxation. People are only entitled to their post-tax income and so the pre-tax income that they would have received if there were no taxation has no moral importance regarding the distribution of resources. It is neither here nor there when it comes to what people should get from society, what matters is that the rules—including rules about taxation—are fair.


Physiocrat said...

Good point. The incidence of income taxes is on the employer, who is ultimately the customer, and thus taxes on wages are built into retail prices. But this also leads to churning where the employer is in the public sector: over 40% of, for example, NHS costs, consist of tax!

The effect is pernicious as employers will be encouraged to replace labour with capital, which in the absence of the tax would be uneconomic. A further effect is to promote replacement rather than repair, and to destroy labour intensive jobs - thus bus conductors, train guards, station porters are a thing of the past, and street cleaning is at a minimum.

nairobiny said...

Your last sentence is one that is hard to disagree with. Yet does it really illuminate, or have you just retranslated the problem in terms of another problem: 'fairness'?

In my recent report for ICAEW on Taxing Corporate Profits, we agree that taxes must be fair. Yet fairness encapsulates many concepts, some of which conflict with each other. So, for example, we don't generally give tax rebates for business losses unless the business has already paid tax in the past. The flipside of this is that those losses get carried forward, which can produce results that don't look 'fair' when that business starts making profits again. Another aspect of fairness is to limit retrospective taxes, even if the results of our existing tax system - in retrospect - look unfair because the 'wrong' sorts of business seem to have paid more/less tax than others.

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