Mr. Leef, a recent graduate of Duke University Law School, is now employed by Miliken & Company, Spartanburg, S.C.
With the exception of the weather, probably no subject is more complained about than taxation. Almost everyone feels that our tax system treats him unfairly, for one reason or another. The poor say that wealthy persons and businesses should pay more than they do, and the latter argue that the taxes they already pay are economically counterproductive. Politicians are forever promising tax “reforms” and legislative bodies debate the desirability of an endless variety of deductions, credits, exemptions and rates. The overall tax scheme which results is not predicated upon any principle, but rather is capricious, based only upon the respective success of each interest group in influencing the political process.
This, I submit, is an undesirable state of affairs. In pace with the rise of mass democracy, our tax system has become an institution for plunder, prodigality, and the gratification of envy. Many a shrewd politician has taken the easy road to power of promising the voters governmental services or subsidies paid for in the main by somebody else. The one discernible principle of our tax system, that of “progressivity,” is inherently unjust, as it compels some to subsidize others’ use of governmental services.
What we have is the ugly spectacle of a societal gang war, each group attempting to manipulate government so as to enrich itself at the expense of the others. This is possible—indeed, inevitable—because our tax system is not rooted in principles of justice (as are, e.g., our property and tort law). But it need not be so. There is, I believe, one principle, and only one principle, upon which taxation could be based which avoids injustice to any citizen. It is the same principle which underlies all market transactions: You pay for what you get.
The Rights of Man
The view one takes of man’s rights will inform his judgment on the moral defensibility of a system of taxation. I do not propose here to argue at length for the position I take, as that has been ably done elsewhere.’
Individuals have rights. Locke distilled the fundamental rights to these: life, liberty, and property. Each person has a right to be the master of his life, the only life he has. It may not be taken from him, and neither may it be made the tool of others. That property which justly comes into his possession is his to do with as he pleases—consume it, save it, exchange it, or give it away. The dominion of an individual over property excludes any rightful claim to that property by another. As Professor Nozick writes, “The particular rights over things fill the space of rights, leaving no room for general rights to be in a certain material condition.”2 This concept of man’s rights is deeply embedded in our religious heritage, and was embodied in the earliest forms of the common law.³
Let us agree that man has a right to enjoy the fruits of his labor. Can there coexist with this right such alleged rights as the “right to decent housing” or the “right to an education”? The answer is no. As soon as an agent of compulsion, usually the state, takes any part of the fruit of one’s labor from him in order to give effect to these other so-called rights, the primary right is violated. Then we can no longer say that man has a right to enjoy the fruits of his labor, but only that man is permitted to enjoy that which the state does not demand be put to purposes of its choosing. The degree of the taking does not matter. The right is violated whenever an owner is compelled to part with any portion of his property against his wishes.
The Nature of Taxation
Taxation is the price we pay for government services. Government takes (or keeps) from us an amount of property (money), calculated by various formulae, each year. During that year, government does certain things for (or to) its citizens. Each of these services has a cost per citizen, although some would be difficult to account for with certainty. Under our present tax system, however, there is no necessary relationship between the size of one’s tax bill and the cost of the government services he has used.
If you go to get a haircut, the price you pay reflects the costs of the barber’s time, his tools, rent on the shop, and so forth. It is deemed just that the recipient of the haircut should pay for these costs incurred on his behalf. Compare this with our tax system. Taxes are computed on the basis of income, wealth, purchases, and other measures. There is no attempt whatever to charge the costs of government to those people for whom they were incurred. Unavoidably, some taxpayers must pay more than the value of the government services they received while others pay less (or not at all). This system is undesirable for a number of reasons having to do with efficient use of resources, but I wish to focus on the reasons why it is immoral.
Taxation and Morality
First, our tax system is immoral because it compels some individuals to purchase government services which they do not desire. For example, many Americans contribute involuntary support to public schools even though neither they nor any children of theirs make any use of these facilities. There are also many citizens who drive very little or not at all, yet have no choice but to help underwrite the costs of our highway network. And there are those who, although they do not care for such things, are patronizing the fine arts through governmental subsidies.4 In this, their rights are violated because they are deprived of the freedom to choose how they will dispose of their property.
Secondly, if taxation requires us to purchase services we do not want (or want less than other things we might have bought), a corollary is that we are compelled to subsidize services used by others, and this too is immoral. Payments for services we do not use, or use only to a small degree, usually go to reduce the amount that more extensive users need pay. For instance, those of us who make considerable use of public libraries are relieved of paying the full cost of our usage because of the tax dollars taken from occasional and nonusers which go to defray the expense. It is a violation of those rights which we posited above to compel someone to support another’s desires or even needs, yet our tax system is a hopeless maze of involuntary subsidizations of some by others. The most obvious example of how the tax system is used to compel one person to make purchases for another is the phenomenon of transfer payments. Here, there is no governmental service at all, merely the taking of money from one person thought not to need it, and giving it to someone else. Such acts of robbery by indirection can occur only because our tax system does not link payments to benefits received.
Neither of the above objections to the morality of our tax system depends upon the existence of a “progressive” rate structure. If the government merely figured its costs and divided them equally among all taxpayers, we would object for the reasons given above. Progressivity is a separate issue, and must be regarded as a third indictment against our tax system.
We have had it drummed into us for so long that taxation should be based upon “the ability to pay” that this axiom is hardly ever questioned. (We might call it the Willie Sutton principle of taxation—”Why do you rob banks?” “Because that’s where the money is.”) Yet, upon examination, it cannot stand under our view of the rights of individuals.
When we say that taxation should be based upon “ability to pay,” we are saying that two persons who use the same governmental services, and in the same amount, should pay different amounts of tax if their incomes are different. To illustrate the point, imagine two potters who live next door to each other. They place identical demands on governmental services in 1977 (use of roads, schools, national defense, etc.) and both pay the same amount of tax because they sold the same number of pots. Then, in 1978, one of the potters gets ambitious and produces and sells 15 per cent more pots than in the prior year. His neighbor produces the same number as he did in 1977. Their lives remain the same except that the ambitious potter now buys steak more frequently than hamburger and drives a new car instead of an old one. Oh yes, and he also has to pay the government more in taxes. But why should he have to? Why should he now have to pay, let us say, $1.10 per unit of service while his neighbor still pays only $1.00 per unit? There is no defensible ground for the discrimination. If the government was previously extracting a proper amount from our ambitious potter to cover the cost of the services he used, it now is taking too much; it is demanding more than the services are worth. That is unjust. I conclude that “progressivity” is a bad principle of taxation in that it charges different people different prices for the same service.
A Neutral Principle
We have seen that our present tax system is unjust in that it violates the rights of many citizens. What we desire is a tax system which will require the government to respect the rights of each, to remain neutral among taxpayers. I submit that such a system can be based upon this, and Only this principle: The amount of tax one pays should equal the cost of providing the services he uses. In the market, there is only one price for a good or service, not a sliding scale based upon some notion of ability to pay, and no one is required to buy things he does not want. Government should be constrained to follow this principle in charging for its services.
How could this be put into practice? Wherever possible, government should finance its operations through user fees rather than taxes. A good, though not perfect example of what I have in mind is found in the U.S. Postal Service. (Of course, a large part of its budget comes from taxes and to that extent is immoral in compelling some people to subsidize others’ use of the service, but we will ignore that. Ignore also the fact that there is no reason why the government should deliver the mail.) The price of a stamp is the same for each buyer, regardless of income. If you do not send any mail, you do not have to buy any stamps. Thus, this method of financing the service closely resembles a market transaction.
Other services could be treated similarly. Roads could be paid for through tolls and other forms of user fees, and schools (if we must have public education) could be paid for solely out of funds collected from those who use them. If put to the task, man’s ingenuity would be able to devise means of accurately accounting for the costs of government-provided services and charging them back to those who caused them to be incurred.
There are, however, many elements of a government’s budget which relate to administration and enforcement of the law rather than the provision of a service per se, and these create analytical difficulties. How, for instance, do we allocate to each citizen his just share of the cost of the Presidency, the Congress, or the Defense Department? Do we assume that everyone benefits equally from these expenditures and divide them accordingly? Or do we assume that persons with higher incomes or greater wealth benefit more from these expenditures, and therefore charge them more? To a considerable extent, these expenditures relate to the protection of property, and the proper analysis would seem to focus on how the market would handle analogous services. Premiums for property insurance contracts are largely a function of the value of the property covered. Therefore, an allocation of costs based upon wealth might be optimal. I do not claim that no better formula is possible, but propose the wealth tax idea merely to demonstrate the nature of the analysis which should underlie our approach to the just allocation of tax burdens.
The largest item of governmental spending in this country would be dramatically affected by the adoption of this principle. The item is transfer payments; they would cease. To see why, look to the principle. You pay for what you get. To get a dollar from the government, you would have to pay a dollar, plus administrative overhead. Obviously, there is no point in doing that. Many will think it unspeakably cold-hearted to suggest that the government not give anything to the needy, but it must be answered that the best policy is to rely upon individual charity and never allow the idea that the level of one’s income is a matter for political consideration to gain a foothold. Bastiat was certainly correct when he wrote in The Law that government should not be allowed to do any act which would be a crime if done by an individual citizen. We do not permit even the neediest to steal. Neither should we permit the government to play Robin Hood.
The Free Rider Argument
Some will object to my analysis on the ground that since most people benefit in some way from governmental expenditures, it is not unjust to require them to pay for these benefits. For example, it is said that everyone benefits from the system of public education in this country because better-educated people improve society as a whole. I contend, however, that the free rider argument does not justify compulsory tax support for services one does not use.
In the first place, it is just too easy to assume that everyone is better off as a result of the provision of some governmental service.5 Who among us is so all-knowing that he can make the judgment not only that everyone benefits from some service, but what the extent of that benefit is in each case? No one, I answer.
Secondly, we should be extremely hesitant to allow the making of unilateral contracts. Even if you clearly benefit from an expenditure by someone else, we should prefer that you not be compelled to help defray the cost. Allowing others to direct in some measure how you spend your money by making you pay for “benefits” for which you have not contracted might very well deprive you of funds you need for things of greater value to you. It is true that an elderly couple might derive some benefit from public education, but requiring them to pay for that benefit for which they had not contracted deprives them of money needed to pay medical or utility bills. Everyone has his own hierarchy of values, and it is wrong for the government to demand that its hierarchy take precedence over the individual’s.
Finally, people usually do pay for services rendered by others, albeit indirectly. Assume for a moment that public education does yield a benefit to all of society. How does each person benefit from this increase in erudition? Presumably, by the better products and ideas which educated people can produce. But unless one lives his life as a self-sufficient hermit, he will eventually pay for the educational component of the products he uses and ideas he absorbs, through the operation of the price system. Ph.D. chemists do not work for free—their salaries, part of which is a return on their educational investment; are reflected in the price of the things which their research makes possible. Thus, there is no free ride, and this objection fails.
Some Advantages
Not only is a system of taxation requiring citizens to pay taxes only to the extent of benefits received consonant with man’s rights, but it would yield us some significant tangible advantages as well.
One benefit would be that no longer could government use taxation as a tool for social engineering or economic tinkering. The dense pages of the Internal Revenue Code are full of deductions and credits for use of money which the state wishes to encourage.° Since government is to be the servant of the populace and not its master, it is wrong for it to attempt to direct how we spend our money. Moreover, such interferences lead to inefficient use of resources. The deductibility of mortgage interest unjustifiably encourages home ownership; the deductibility of bond interest unjustifiably causes corporations to favor debt financing over equity. These interferences would be at an end if government had to link taxes to the provision of services, rather than to income or some other irrelevant measure. For instance, “business expenses” (lunches, travel, entertainment, etc.) would be immaterial to a company’s tax bill if it were taxed on the basis of the cost of governmental services it used; thus, there would be an incentive to economize on these currently deductible items.
‘It has been persuasively demonstrated that federal tax policies are in large measure responsible for the plight of the large northern cities. The investment tax credit has encouraged firms to build new plants in uncrowded southern and western states, and their movement has been facilitated by the expansion of the interstate highway system, paid for in the main with tax dollars taken from the already-developed areas in the Northeast and Midwest. See, “How Federal Policies are Hurting the Cities”, Business Week, December 19, 1977, p. 86.
Another benefit would be that it would tend to get government out of the business of providing services appropriately left to the market. If people had to pay the full cost of using government services, they would quickly see how inefficient government is, and would turn to (or demand to be allowed to turn to) alternatives.
Finally, and perhaps most importantly, taxation based on benefits received would eliminate the government’s motive for inflating the currency. Inflation is governmental additions to the money supply. (Rising prices are a consequence.) Governments resort to inflation because they desire to spend money in excess of the amount they dare to collect in taxes. Now suppose that government were operated as a service company, requiring all who partook of its services to pay for what they had used. Inflation would be impossible because government would have to balance its expenditures and receipts. With each person paying only the cost of providing him with services, there would no longer be any need, or motive, for government to resort to money creation to balance its books.
Conclusion
Freedom would be greatly expanded in this country if government could not compel us, through the tax system, to devote our money to services we do not want, and to subsidize services used by others. These annoyances frequently are part of a deliberate plan to redistribute wealth, which is inherently immoral; but even in the absence of redistributionist schemes, a tax system which does not base the amount of tax one pays on his use of government services is unavoidably unfair to some citizens.
The only tax system which would require government to treat each citizen neutrally—not forcing anyone to act as a tool for someone else more favored by the government—is one which embraces the concept that one should pay only for the cost of those services he actually uses. It is wrong to force one person to purchase government services for another, just as it is wrong to force him to purchase anything else for another. If a wealthy person is to pay more tax than a poor person, it should be because he causes the government to incur larger expenses on his behalf, and not simply because he has more money.
When people make purchases in the market, they expect to pay for what they get. They have no expectation that others will pay part or all of the cost for them. If it is just that each person pay the full cost of a haircut or movie ticket, then it is also just that he pay the full cost of those services which the government provides him. Others should not be expected to pay his way. Our present tax system is unjust in that it often compels one person to subsidize the government used by another. Government would have to remain neutral among its citizens if we taxed strictly on the basis of the benefits received by each person. Any other system becomes a breeding ground for injustice and social strife.
*Anarchy, State and Utopia, p. 238. The author cannot recommend this brilliant work of political philosophy highly enough.
¹The reader may wish to consult in this regard F. A. Hayek, The Constitution of Liberty, especially chapter 2.
³Interestingly, early Anglo-Saxon criminal law was actually tort law in nature. That is to say, the state demanded that restitution be made by criminals to those who had suffered at their hands, but itself exacted no punishment. One may wonder whether the contemporary state deprives the victims of crime of a property right when it incarcerates those who have committed offenses against their persons or property, thus making restitution difficult or impossible.
’4The National Endowment for the Arts recently awarded a $6,000 grant to the producer of a film showing large rolls of crepe paper being tossed from an airplane and floating back to earth. This vicariously generous bit of artistic patronage earned Senator Proxmire’s “Golden Fleece of the Month” award. See National Review, Sept. 30, 1977, p. 1090. Many other fantastic boondoggles are recounted in Donald Lambro’s The Federal Rathole (Arlington House, 1975).
5Regarding the supposed benefits of public education, the reader should consider (or reconsider) E. G. West’s article, “The Perils of Public Education”, in the November, 1977 Freeman, p. 681.
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Progressive Taxation
Progressive taxation of income by the federal government, which is currently practiced in the extreme, provides, first, that many voters of small income are either exempted entirely from paying, or pay very little, and, secondly, that successive increments of larger incomes are taxed at progressively increased rates that become confiscatory.
There is no justification in morals or in the principles of individual liberty for progressive taxation. It is the simple looting through law of the more productive by the more numerous but less productive. Its appeal is demagogic, and its result is communism, which in turn is but a transitory stage in the evolution away from liberty into dictatorship. The endorsement of progressive taxation is, knowingly or unknowingly, the endorsement of communism, and sincere endorsement of progressive taxation, motivated often by generosity, is unwittingly one of the worst forces undermining individual liberty in America.
BRADFORD B. SMITH, “Liberty and Taxes” (1947)
