Principles Of Taxation
NOVEMBER 01, 1962 by DEAN RUSSELL
Dr. Russell recently rejoined the staff of the Foundation for Economic Education to develop and direct the
Compulsory military service in our nation is based squarely on the democratic principle that every person is obligated to serve his country equally and to the best of his ability. We American people would not tolerate the idea that one soldier should be compelled to serve ten times longer than another soldier merely because the first one happened to be a better gunner.
But when it comes to economic support for our government and nation, that principle of equal treatment is rejected. Our system of progressive taxation is based squarely on the idea that some persons shall pay 70 per cent of their incomes while other persons shall pay only 20 per cent, or even no income tax at all. The more you earn, the more you must pay to government out of each additional dollar of income.
Whether or not I like the idea of compulsory military service, at least I can understand the principle on which it is based; for the idea of equal treatment is, of course, the heart of the democratic concept. But I cannot find any principle in morality, economics, or political science to justify the progressive income tax.
Economically, it is about as logical as paying half-time (instead of time-and-a-half ) for overtime work. Or paying less instead of more for increased production.
Morally, the progressive income tax seems to be based mostly on this idea: "They earn more money than we do, we outnumber them, so let’s vote to have the government take it."
Politically, our current procedure is clearly a total departure from the principle of taxation on which this nation was founded.
There is, however, a theory and practice of taxation that is in harmony with democratic principies and that will still raise the enormous amounts of money our government now spends. It is proportional taxation. That is, each person shall pay the same rate—10 per cent, 20 per cent, 30 per cent, or whatever tax rate the people vote for. The democratically selected rate shall apply equally to all incomes, whether large or small. If the tax rate were 20 per cent, for example, the person with a taxable income of $100,000 would pay $20,000—and the person with a taxable income of $5,000 would pay $1,000.
Under proportional taxation, it is true, of course, that the rich man would still pay more money than the poor man. But at any rate, each would then receive equal treatment under the law, in both war and peace. That is, each conscript would serve the same time in the army, regardless of military ability; and each taxpayer would be subject to the same rate of taxation, regardless of economic ability.
Actually, proportional taxation is traditionally American. While the principle of absolute equality has sometimes prevailed, the "equality of rate" or proportional principle has usually been followed. Taxes on real and personal property are current examples. The person with a $20,000 home pays twice as much in taxes as does the person with a $10,000 home—not five or six times as much merely because he owns more property than his neighbor. Sales taxes are also in proportion to purchases. The social security tax is a combination of equal and proportional. The tariff tax has always been in proportion to the amount imported. And so on.
Graduated Rates A New Principle in Taxation
But with the adoption of the Sixteenth Amendment in 1913, a heavily discriminatory system of taxation was accepted by the American people. Some persons now pay no income tax at all on their earnings. Others pay 20 per cent and 40 per cent. And a few pay as much as 91 per cent on the upper brackets of their earnings.
Since discrimination in any area usually brings with it certain unforeseen problems, it is hardly surprising that this tax discrimination has produced certain unfortunate results. For the long run, certainly the most unfortunate result is revealed by the accusation of officials of the Bureau of Internal Revenue (as well as by at least two Presidents of the
If it is true that we are rapidly degenerating into a nation of lawbreakers, perhaps we should examine again the laws we violate so flagrantly. Perhaps we should give serious thought to the old idea that the only possible way to insure respect for the law is to pass only laws that receive the automatic respect and compliance of more than 95 per cent of the people. For obviously, no law is really enforceable if as many as 5 per cent of us deliberately and consistently violate it; there just aren’t enough jails to keep us in, or enough police to put us there.
Several reputable economists have argued that a flat tax rate of 20 per cent to 25 per cent would bring more, not less, revenue to government. They argue that almost all of the money now taxed away above that rate would be invested in new equipment and plants, instead of being spent for nonproductive items as is done by government. Thus if the persons who earn the money could spend it as they wish, the result would be more production, jobs, and incomes—and also more tax revenue.
Be that as it may, it is a fact that the amount of total governmental revenue that comes from personal income taxes in excess of 25 per cent of earnings is small indeed—less than 5 per cent. Thus it is clear that the principle behind our endorsement of the progressive features of the income tax is not based on the necessity for governmental income. The progressive income tax appears to be based primarily on our current and increasing mania for compulsory equality in the economic area. Thus we use our hard-won voting equality (one man, one vote) to support a system of gross inequality in taxation (one man 20 per cent, another man 91 per cent).
The issue facing the American people in this area of progressive taxation is clearly not fiscal; it is a moral issue.
John Stuart Mill
It is also important that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something for the taxes imposed. Those who pay no taxes, disposing by their vote of other people’s money, have every motive to be lavish and none to economize.