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.

Libertarianism

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.

Libertarianism and Utilitarianism

In my previous blog I mentioned that many people view taxation through the lens of either libertarianism, utilitarianism, or a mixture of the two. I thought it would be a good idea to write up some of my thoughts on these approaches. I’ve got a lot to say about libertarianism so I’ll do that over the course of several separate blogs.

Regarding utilitarianism, I will just make the brief point that Rawls’ well-known insights against utilitarianism from his Theory of Justice are still powerful. When applied to the distribution of goods in society (distributive justice), utilitarianism requires these goods to be distributed in the way that maximises overall happiness. But it does not matter who gets the happiness.

Rawls correctly diagnosed that this approach therefore ignores the fact that, even if we accept that all that matters is overall happiness (which is patently false anyway), people are separate from one another. It matters what resources each person has to live their life.

An improvement on utilitarianism is therefore prioritarianism, an idea presented by Derek Parfit. This still holds that the total utility matters, but allows that people who have less should receive priority in the receipt of goods even if this results in a lower overall maximum. (In fact, this is similar to the way that many economists appear to refer to Rawls’ view even though Rawls explicitly talks about the distribution of primary goods such as income and wealth rather than utility.)

While I accept prioritarianism is preferable to a classical utilitarian approach to distributive justice I still don’t find it the best approach. Prioritarianism shares with utilitarianism the problem that it takes human beings to be receptacles of utility rather than individuals who might have other concerns.

What is the purpose of taxation?

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.

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.

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[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.

Book: Tax Justice and the Political Economy of Global Capitalism

I mentioned in a previous blog that the book Tax Justice and the Political Economy Of Global Capitalism, 1945 to the Present (Leaman and Waris, eds) is out. I didn't include pictures, so I'll do that now. 

Here is the cover:

And here is me with a copy of it:

Visualising Interpretations of Egalitarianism

I thought I would share the way I have visualised two different forms of egalitarianism when thinking about and teaching them. It might be useful to others, or spark off a useful debate. I start with a simple representation of the role of the state or government in distributing or redistributing resources to maintain a just distribution.

The question for egalitarians is how the state should work out how to adjust the resources people have in order to have an equal outcome. I'm sure there are many candidates, but I will focus on two very prominent ones; equality of resources and social egalitarianism. The former was first presented by Ronald Dworkin in the early 1980s and discussed in detail in his book Sovereign Virtue (2000). It may be possible to present other versions of 'luck egalitarianism' in this same way. The idea is that a distribution of resources is fair if every individual has no complaints that another person has been treated better than them. Differences in resources should therefore be justified to all. I will illustrate this by emphasizing that the individual in question should look to the resources that others have received.

I have highlighted one of our citizens in yellow and drawn arrows to indicate how that person is to judge whether she is equal to others. She would consider whether the amount of resources that she obtains are fair when compared to those of others. Of course this will not require the resources to be exactly the same; people are different and this should be reflected in the resources that they obtain. So one person might work more than others and earn and save, while others enjoy a more leisured existence. Furthermore, some people might receive additional resources because they have some disability relative to others which everyone accepts would entitle them to additional compensation. 

The second approach to equality been suggested under several names, such as democratic egalitarianism (Elizabeth Anderson, "what is the point of equality?" Ethics, 1999), and relational egalitarianism. In some ways this latter name is the most accurate since the approach focuses on relationships between people, not the different treatment with regard to resources. However, the first approach is also relational and so it is potentially misleading. The motivation for this approach is that people should all members of society should feel themselves to be equal to others. The challenge to resource egalitarianism is that it might produce distributions of resources that enable some people to look down on others, that are in some sense hierarchical (see Scheffler, "What is egalitarianism?" Philosophy and public affairs, 2003). 

According to this theory, what matters is that our yellow person considers herself an equal to all others in society. No one should look down on anyone or feel inferior to others, and resources should be distributed in such a way that such judgments would be avoided. 

The social egalitarian charge against resource egalitarianism is that it might result in this kind of inequality for several reasons. This could be because people have to claim extra compensation for their disabilities which means they have to consider themselves inferior to others. In addition, there can be large differences in resources as a result of people's different working and spending choices, which would allow big differences in wealth which would result in hierarchies.

Must we choose between these two different approaches? 
Yes - they are different interpretations of egalitarianism. It may happen to be, of course, that the two approach would coincide; the equal outcome according to one could be the equal outcome according to the other. However, this doesn't seem likely. Furthermore, even if they did coincide, we would be interested to know which of the two was the reason for wanting this (then less controversially) equal outcome.

What are the differences between the two approaches? 
Well, the first emphasizes that what matters primarily is the way the government treats its citizens while the second emphasizes the relationships between people in society. So if we go with the second then it could be that the government should give some people extra resources at the expense of others in order to stop those others from looking down on them. 

I find the former approach more attractive. It is an empirical question whether the two approaches would require different distributions, but I do not think that the distribution should be so influenced by how people might judge one another based on their resources. I'd also question whether the relational approach would not be self-defeating since people would resent those who get additional resources solely because they would otherwise be looked down upon. This seems exactly against the spirit of the approach - I would not feel like an equal if I got extra resources because I wouldn't otherwise have as much as others and others may well resent me for getting resources because I chose not to work as hard as them. The response to this would presumably be that in a large society people most people are strangers and will be judged based on appearances and so these are what matter.

Perhaps more importantly, the former approach allows people responsibility for their resources and what they want to do with their lives. If I am concerned with how people perceive me then I can focus on that, but if I am concerned with other things then I accept that people might judge me as they see fit. Personally, I don't think that these judgments are that important when compared to this idea of people being entitled to do what they want compatible with what others want to do. 

I recommend Zosia Stemplowska's writing in this area, such as ‘Responsibility and Respect’, in Responsibility and Distributive Justice, Oxford University Press, 2011, 115-35

Collection on Taxation

About three years ago I presented a paper at a very interesting and informative conference at the University of Loughborough on Taxation. The book that follows from this conference, Tax Justice and the Political Economy Of Global Capitalism, 1945 to the Present (Leaman and Waris, eds) has now come out. I look forward to reading through it once I get it in my hands.

I took the opportunity to make some improvements to my paper in the intervening time and hope that my proposals will gain some traction. I'll briefly summarise my position, though I will also describe it elsewhere including my forthcoming book on taxation.

I begin by highlighting certain problems regarding international taxation. These are tax avoidance and tax competition. Tackling tax avoidance requires greater international co-operation, as many have acknowledged. However, tackling tax competition is also an issue. This could be done by limiting states in their power to set tax-rates, either insisting on a global tax rate structure or by setting minimum tax rates.

I do not think that tax competition is a bad thing, per se. There are many legitimate reasons why states might want to set their taxes higher or lower than other states. However, tax competition has bad effects, in that it encourages a "race to the bottom" whereby states have to set lower taxes than they otherwise would in order not to lose business or workers to rival states. This is a particular problem for progressive taxation, since the most of the tax-bases that are ideal for progressive taxation (tax on economic rents) are often the most mobile (workers with rare talents and skills, ownership of valuable copyrights, brands and patents).

I propose that the only way to stop this from occurring is for states to have a holistic solution - all states would need to a agree to a common framework for taxation. Assuming a comprehensive lifetime personal tax base, I suggest that states should agree to share tax information on international citizens who pay tax in multiple jurisdictions in order to calculate a global tax rate for that person. This rate would be determined by calculating what the individual would have paid in each of the states which which she has some economic or personal relationship, taking account of the strength of that relationship.

The global revenues from our international citizen would then be shared in accordance with the strength of the relationship with each state. However, the system would have a counter-incentive mechanism in order to deter states from setting tax rates too low. This would work by rewarding states who would have taxed the individual at a higher rate with a larger share of the revenue for that individual. Low-tax states on the other hand would receive a lower proportion of the tax revenue than their relationship would otherwise imply.

This proposal has several virtues. It would stop states from setting different tax rules for their own citizens and outsiders since the calculation is based on the tax that local citizens pay. It would also hold individuals to their past relationships - if someone leaves a country to go elsewhere then their tax revenues will be shared with their past states and therefore fellow citizens. This would reduce the impact of "brain-drain" that afflicts so many countries. As I have emphasised it also counteracts damaging competition over tax rates and tax bases while still allowing states the option of setting very low tax rates if they wish to do so for their own citizens or to encourage economic activity.

The proposal is clearly not immediately ready for real world implementation given the lack of global agreement on taxation. However, with increasing technological prowess it should become more feasible to have an automated global tax calculation system such as this. I argue that political feasibility will come about because states are going to be increasingly vulnerable to revenue loss as current trends continue, with risks and costs falling on states and economic rewards being spirited away through tax havens rather than being shared through taxation.

Governments and their citizens are gradually losing power and they really need to wise up and fight back. Hopefully they are starting to realise this and will support sensible multi-national efforts. My proposal anticipates the need for practical policies at some unspecified future date. However, as I emphasise in my paper, the proposal is also useful as a way of testing the justice of current international tax arrangements. As things stand, we are a long way from justice.