In order to determine what taxes should—and should not—be
levied we need to know what the purpose of taxation is. A simple answer is that
taxation is to raise revenues for the government. However, while this is true,
it is an inadequate answer. In my PhD thesis and in a section of my forthcoming
book, Rethinking taxation, I provide
a fuller answer to this question, which I will summarise here.
The primary aim of taxation is to secure distributive justice.
Taxation has a crucial role to play in ensuring that the main institutions society
are constituted in a way that is fair to all members. Some aspects of the state
are important for all, such as having a stable and prosperous society (political
system, criminal justice system, regulation of markets, provision of public
goods etc.). A certain amount of taxation revenue is therefore needed to provide
the fundamental responsibilities of the state and its government, but the state
will need more than this baseline amount.
A market capitalist society is the only one that can
reliably provide stability, prosperity, and a degree of personal freedom.
However, markets do not distribute in a way that is fair to all. Some people do
very well as they have rare and valuable talents, while others find it
difficult to find work at all. Some people are fortunate with their investments
while others have bad luck due to unforeseeable circumstances. Markets tend to
reinforce this process, making it easy to turn good economic fortune into
further economic fortune. Some people get in a position whereby they own the
property that earns easy rents.
The taxation system overall should do something in response
to these forms of economic fortune. This is achieved by taxing the more
economically fortunate (or the things from which the more economically
fortunate will gain an income) at a higher rate and subsidising or supporting
the less economically fortunate in so far as this is possible.
This is complicated by the fact that taxes have economic effects, which can undermine redistribution. If tax policies undermine economic prosperity then pretty much everyone loses out. The incidence of taxes and the economic effects of the tax system therefore have to be carefully considered. Even if we deny that economic efficiency is itself the primary aim of taxation,[1] economic analysis is still very important.
This is complicated by the fact that taxes have economic effects, which can undermine redistribution. If tax policies undermine economic prosperity then pretty much everyone loses out. The incidence of taxes and the economic effects of the tax system therefore have to be carefully considered. Even if we deny that economic efficiency is itself the primary aim of taxation,[1] economic analysis is still very important.
Taxes are needed to provide revenue to the state. These
enable the state to function, but also provide funds for redistributive
purposes. Unfortunately, it is not always easy to anticipate the consequences
of taxation, and therefore consideration of the economic consequences of policies
are of paramount importance.
[1] A common
approach to taxation by economists in recent years is to assume that taxation
should produce minimal economic distortion. For example, see the Mirrlees Review. However, there
is no value to the free-market outcome that means its outcome should be
preserved for its own sake. The strange hybrid between libertarianism (against
state intervention) and utilitarianism is highly regrettable: both are
discredited approaches to distributive justice.
2 comments:
Surely the primary purpose of taxation should be to pay the expenses of government? One then needs to define the duties of government, from which the duties of the citizen arise reciprocally.
I hope you will discuss this in future postings. Both the libertarians and the successors to the socialists seem to have ideas on the subject which need to be challenged. Does government need to run, for example, a national monopoly chain of stores selling an astonishing range of alcoholic beverages?
We have taxation to ensure a fair distribution of the factors of production. If there was fair distribution, and the State needed to raise revenues, a Poll Tax would be the only morally/economically justifiable way of do so.
Unless the value derived from natural resources is equally shared, we will have excessive inequality and economic dysfunction.
Taxing output and re-distributive spending is an inefficient, costly, and ineffective way of going about addressing this unequal distribution of Land values.
It suits both the Conservative who seek to protect privilege and inequality, and the Socialists as it inevitably leads to a large and overweening State.
The Socialists and Tories basically agree on maintaining the status quo. Those who advocate an end to neo-feudalism, often mistaken for Capitalism, are a tiny, tiny minority.
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