Mr. Gold is associate director and communications director at the Tax Foundation, a nonprofit research organization in Washington, D.C.
In the battle over tax reform, skirmishes over the current level of taxation are inevitable. As in the past, supporters of big government will almost certainly complain that taxpayer advocates only focus on one side of the fiscal equation, that is, the revenue side. What about the return on our money? As Justice Oliver Wendell Holmes once said, and high tax enthusiasts are wont to repeat, “Taxes are what we pay for civilized society.”
Of course, when Justice Holmes made this observation in Compañia de Tabacos v. Collector (1904) the average American’s total tax burden was about 7.6 percent of his income. Today, federal corporate income taxes alone account for a higher percentage. In all, our nation’s tax burden hovers around 35 percent of total income, not including the cost of tax compliance, future taxes made necessary by deficit spending, or regulation.
Counter tax advocates: So what? More taxes simply mean more (and, by implication, better) government. “Every nickel that goes in comes back in some way or another,” Robert McIntyre of Citizens for Tax Justice has stated. A Des Moines Register editorial defended the current level of taxation, pointing to the value of such programs as national defense, public schools, police and fire protection, national parks, roads and highways, and safety nets for the unemployed, the disabled, and the elderly.
Yet such ad populum arguments, while relevant, leave fundamental questions unresolved—such as, how much government spending is actually necessary? Or, to phrase it in a way Justice Holmes would appreciate, how much tax collection does it take to achieve a “civilized society”?
What Is Civilized?
To answer that, we must first ask: what do we mean by a “civilized society”? In an informal sense, “civilization” simply means a modern society with conveniences, as opposed to life in the middle of the jungle—Webster’s definition. But Justice Holmes probably had in mind a more technical meaning, one centering on a stable system of governance that could protect life, liberty, and property, while providing due process of law for its citizens.
Based on this view, the United States was civilized at its founding. The central government created by the framers of the Constitution was, to say the least, a minimalist national government, with a primary mission of maintaining a military, minting coins, operating judicial and postal systems, and, later, helping to build roads and canals. Throw in some police, courts, and additional roads at the state and local level, and that was about the extent of late eighteenth-century American government. There were no large transfer payments between generations and between income groups, no regulatory agencies, and no funding of the arts, humanities, or sciences. Nevertheless, society was still civilized.
Indeed, one of its most civilizing aspects was the legal framework that protected property rights and economic freedom. As a result, the economy expanded, people grew steadily wealthier, and living standards rose. All this while federal revenues were a mere $1 per capita in 1790, almost all of which were collected through duties on imported goods. In today’s dollars, that’s roughly $9 per person. So not only was society civilized, but the path to civilization was economical.
A little over a century later, when Oliver Wendell Holmes joined the Supreme Court, government’s prime mission remained centered on national defense, law and order, roads, and mail delivery. In addition, the federal government had ventured into such areas as public land management, agriculture, and regulation of interstate commerce. As a result, between 1815 and 1900 federal employment jumped 4,950 percent, compared to U.S. population growth of 880 percent. Meanwhile, state and local government had taken on the responsibility of undertaking such public improvements as street lighting, street cars, and sewage systems. Yet by contemporary standards government was still small, unobtrusive, and cheap. By 1900 the total cost of government had risen to $21 per capita (about $380 in today’s dollars), a third of which was for federal operations.
Here, then, was Justice Holmes’s vision of and price for a civilized society. Maybe it was overpriced, considering that taxes were used to create Jim Crow laws and Supreme Court cases like Plessy v. Ferguson (a.k.a. “separate but equal facilities”), which served more to set civilization back. But compared with today’s unimaginably large government expenditures, the price was low.
What, then, of our current level of public services? Over the past 90 years the federal government has aggressively expanded into such areas as income redistribution, business regulation, and education, not to mention a vast array of special interest subsidies. To fund its growing activities, government expanded its ability to collect taxes, most significantly through the addition of an income tax (1913) and a payroll tax (1935)— which, combined, now account for almost two-thirds of all taxes collected. Altogether, total taxes in 1995 average $8,303 per person, an inflation-adjusted increase of about 2,300 percent over 1900 levels.
More Civilized Today?
Does this dramatic growth over the past century imply that we are more civilized—indeed, 2,300 percent more civilized—than before? In terms of having the ability to uphold democratic principles worldwide (winning World War II and the Cold War come to mind), the answer would seem to be yes, which would confirm Justice Holmes’s view of the purpose for taxes.
That said, the increased tax burden has led to few other truly civilized trends. Government’s financial generosity to certain segments of the population has only come at the expense of others, and has helped create an underclass of people highly dependent on public handouts. Government’s control of private enterprise, through a tangled web of regulations, has come at the expense of economic growth and liberty. Government enterprises, like education, are in disarray. Similar policies internationally, such as foreign aid, seem to have done more harm than good. Big government advocates may call these public policies fair and necessary, but they hardly qualify as civilizing features in the tradition of Justice Holmes.
Indeed, to imply that every dollar in taxes today is necessary to maintain our civilized society is to ignore government’s inevitable waste, its bureaucratic inefficiency, and the constant political shuffling of money to favorite targets. How much of today’s tax burden has gone to fund programs—started perhaps a century ago (Interstate Commerce Commission) or a half-century ago (Rural Electrification Administration)—that have outlived their usefulness? For that matter, how much of the money sent to Washington could be more wisely used by the families and individuals if they were allowed to hold onto it?
The current level of taxation in America should be a part of any future debate in Congress over tax reform. For its part, the American public needs to decide what it expects out of government and how much it’s willing to pay. In other words, Americans need to rethink Justice Holmes’s observation, and decide what is really needed to make a civilized society in the twenty-first century.