Can There Be a 'Just Tax'?

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This article
is excerpted from Power
& Market
(now included in the Scholar’s Edition of
Man,
Economy, and State
) where it was originally titled “Canons
of ‘Justice’ in Taxation.”

A.
The Just Tax and the Just Price

For centuries
before the science of economics was developed, men searched for
criteria of the “just price.” Of all the innumerable, almost infinite
possibilities among the myriads of prices daily determined, what
pattern should be considered as “just”? Gradually it came to be
realized that there is no quantitative criterion of justice
that can be objectively determined.

Suppose that
the price of eggs is 50¢ per dozen, what is the “just price”?
It is clear, even to those (like the present writer) who believe
in the possibility of a rational ethics, that no possible ethical
philosophy or science can yield a quantitative measure or criterion
of justice. If Professor X says that the “just” price of eggs
is 45¢, and Professor Y says it is 85¢, no philosophical
principle can decide between them. Even the most fervent anti-utilitarian
will have to concede this point. The various contentions all become
purely arbitrary whim.

Economics,
by tracing the ordered pattern of the voluntary exchange process,
has made it clear that the only possible objective criterion for
the just price is the market price. For the market price
is, at every moment, determined by the voluntary, mutually agreed-upon
actions of all the participants in the market. It is the objective
resultant of every individual’s subjective valuations and voluntary
actions, and is therefore the only existent objective criterion
for “quantitative justice” in pricing.

Practically
nobody now searches explicitly for the “just price,” and it is
generally recognized that any ethical criticisms must be leveled
qualitatively against the values of consumers, not against the
quantitative price-structure that the market establishes on the
basis of these values. The market price is the just price, given
the pattern of consumer preferences. Furthermore, this just price
is the concrete, actual market price, not equilibrium price,
which can never be established in the real world, nor the “competitive
price,” which is an imaginary figment.

If the search
for the just price has virtually ended in the pages of economic
works, why does the quest for a “just tax” continue with unabated
vigor? Why do economists, severely scientific in their volumes,
suddenly become ad hoc ethicists when the question of taxation
is raised? In no other area of his subject does the economist
become more grandiosely ethical.

There is
no objection at all to discussion of ethical concepts when they
are needed, provided that the economist realizes always (a) that
economics can establish no ethical principles by itself
– that it can only furnish existential laws to the ethicist
or citizen as data; and (b) that any importation of ethics must
be grounded on a consistent, coherent set of ethical principles,
and not simply be slipped in ad hoc in the spirit of “well,
everyone must agree to this….” Bland assumptions of universal
agreement are one of the most irritating bad habits of the economist-turned-ethicist.

This book
does not attempt to establish ethical principles. It does, however,
refute ethical principles to the extent that they are insinuated,
ad hoc and unanalyzed, into economic treatises. An example
is the common quest for “canons of justice” in taxation. The prime
objection to these “canons” is that the writers have first to
establish the justice of taxation itself. If this cannot be proven,
and so far it has not been, then it is clearly idle to look for
the “just tax.”

If taxation
itself is unjust, then it is clear that no allocation of its burdens,
however ingenious, can be declared just. This book sets forth
no doctrines on the justice or injustice of taxation. But we do
exhort economists either to forget about the problem of the “just
tax” or, at least, to develop a comprehensive ethical system before
they tackle this problem again.

Why do not
economists abandon the search for the “just tax” as they abandoned
the quest for the “just price”? One reason is that doing so may
have unwelcome implications for them. The “just price” was abandoned
in favor of the market price. Can the “just tax” be abandoned
in favor of the market tax? Clearly not, for on the market there
is no taxation, and therefore no tax can be established that will
duplicate market patterns. As will be seen further below, there
is no such thing as a “neutral tax” – a tax that will leave
the market free and undisturbed – just as there is no such
thing as neutral money. Economists and others may try to approximate
neutrality, in the hopes of disturbing the market as little as
possible, but they can never fully succeed.

B.
Costs of Collection, Convenience, and Certainty

Even the
simplest maxims must not be taken for granted. Two centuries ago,
Adam Smith laid down four canons of justice in taxation that economists
have parroted ever since.[1]
One of them deals with the distribution of the burden of taxation,
and this will be treated in detail below. Perhaps the most “obvious”
was Smith’s injunction that costs of collection be kept to a “minimum”
and that taxes be levied with this principle in mind.

An obvious
and harmless maxim? Certainly not; this “canon of justice” is
not obvious at all. For the bureaucrat employed in tax collection
will tend to favor a tax with high administrative costs,
thereby necessitating more extensive bureaucratic employment.
Why should we call the bureaucrat obviously wrong? The answer
is that he is not, and that to call him “wrong” it is necessary
to engage in an ethical analysis that no economist has bothered
to undertake.

A further
point: if the tax is unjust on other grounds, it may be more
just to have high administrative costs, for then there
will be less chance that the tax will be fully collected. If it
is easy to collect the tax, then the tax may do more damage to
the economic system and cause more distortion of the market economy.

The same
point might be made about another of Smith’s canons: that a tax
should be levied so that payment is convenient. Here again, this
maxim seems obvious, and there is certainly much truth in it.
But someone may urge that a tax should be made inconvenient
to induce people to rebel and force a lowering of the level of
taxation. Indeed, this used to be one of the prime arguments of
“conservatives” for an income tax as opposed to an indirect tax.
The validity of this argument is beside the point; the point is
that it is not self-evidently wrong, and therefore this
canon is no more simple and obvious than the others.

Smith’s final
canon of just taxation is that the tax be certain and not arbitrary,
so that the taxpayer knows what he will pay. Here again, further
analysis demonstrates that this is by no means obvious. Some may
argue that uncertainty benefits the taxpayer, for it makes
the requirement more flexible and permits bribery of the tax collector.
This benefits the taxpayer to the extent that the price of the
bribe is less than the tax that he would otherwise have to pay.
Furthermore, there is no way of establishing long-range certainty,
for the tax rates may be changed by the government at any time.
In the long run, certainty of taxation is an impossible goal.

A similar
argument may be levelled against the view that taxes “should”
be difficult to evade. If a tax is onerous and unjust, evasion
might be highly beneficial to the economy, and moral to boot.

Thus, none
of these supposedly self-evident canons of taxation is a canon
at all. From some ethical points of view they are correct, from
others they are incorrect. Economics cannot decide between them.

C.
Distribution of the Tax Burden

Up to this
point, we have been discussing taxation as it is levied on any
given individual or firm. Now we must turn to another aspect:
the distribution of the burden of taxes among the people
in the economy. Most of the search for “justice” in taxation has
involved the problem of the “just distribution” of this burden.

Various proposed
canons of justice will be discussed in this section, followed
by analysis of the economic effects of tax distribution.

(1)
Uniformity of Treatment

a. Equality
Before the Law: Tax Exemption

Uniformity
of treatment has been upheld as an ideal by almost all writers.
This ideal is supposed to be implicit in the concept of “equality
before the law,” which is best expressed in the phrase, “Like
to be treated alike.” To most economists this ideal has seemed
self-evident, and the only problems considered have been the practical
ones of defining exactly when one person is “like” someone else
(problems that, we shall see below, are insuperable).

All these
economists adopt the goal of uniformity regardless of what principle
of “likeness” they may hold. Thus, the man who believes that everyone
should be taxed in accordance with his “ability to pay” also believes
that everyone with the same ability should be taxed equally; he
who believes that each should be taxed proportionately to his
income also holds that everyone with the same income should pay
the same tax; etc. In this way, the ideal of uniformity pervades
the literature on taxation.

Yet this
canon is by no means obvious, for it seems clear that the justice
of equality of treatment depends first of all on the justice
of the treatment itself. Suppose, for example, that Jones,
with his retinue, proposes to enslave a group of people. Are we
to maintain that “justice” requires that each be enslaved equally?
And suppose that someone has the good fortune to escape. Are we
to condemn him for evading the equality of justice meted out to
his fellows? It is obvious that equality of treatment is no canon
of justice whatever. If a measure is unjust, then it is just that
it have as little general effect as possible. Equality
of unjust treatment can never be upheld as an ideal of
justice. Therefore, he who maintains that a tax be imposed equally
on all must first establish the justice of the tax itself.

Many writers
denounce tax exemptions and levy their fire at the tax-exempt,
particularly those instrumental in obtaining the exemptions for
themselves. These writers include those advocates of the free
market who treat a tax exemption as a special privilege and attack
it as equivalent to a subsidy and therefore inconsistent with
the free market. Yet an exemption from taxation or any other burden
is not equivalent to a subsidy. There is a key difference.
In the latter case a man is receiving a special grant of privilege
wrested from his fellow men; in the former he is escaping
a burden imposed on other men. Whereas the one is done at the
expense of his fellow men, the other is not. For in the former
case, the grantee is participating in the acquisition of loot;
in the latter, he escapes payment of tribute to the looters. To
blame him for escaping is equivalent to blaming the slave for
fleeing his master.

It is clear
that if a certain burden is unjust, blame should be levied, not
on the man who escapes the burden, but on the man or men who impose
it in the first place. If a tax is in fact unjust, and some are
exempt from it, the hue and cry should not be to extend the
tax to everyone, but on the contrary to extend the exemption
to everyone. The exemption itself cannot be considered unjust
unless the tax or other burden is first established as just.

Thus, uniformity
of treatment per se cannot be established as a canon of
justice. A tax must first be proven just; if it is unjust, then
uniformity is simply imposition of general injustice, and exemption
is to be welcomed. Since the very fact of taxation is an interference
with the free market, it is particularly incongruous and incorrect
for advocates of a free market to advocate uniformity of taxation.

One of the
major sources of confusion for economists and others who are in
favor of the free market is that the free society has often been
defined as a condition of “equality before the law,” or as “special
privilege for none.” As a result, many have transferred these
concepts to an attack on tax exemptions as a “special privilege”
and a violation of the principle of “equality before the law.”
As for the latter concept, it is, again, hardly a criterion of
justice, for this depends on the justice of the law or “treatment”
itself. It is this alleged justice, rather than equality, which
is the primary feature of the free market. In fact, the free society
is far better described by some such phrase as “equality of rights
to defend person and property” or “equality of liberty” rather
than by the vague, misleading expression “equality before the
law.”[2]

In the literature
on taxation there is much angry discussion about “loopholes,”
the inference being that any income or area exempt from taxation
must be brought quickly under its sway. Any failure to “plug loopholes”
is treated as immoral. But, as Mises incisively asked:

What is
a loophole? If the law does not punish a definite action or
does not tax a definite thing, this is not a loophole. It is
simply the law…. The income tax exemptions in our income tax
are not loopholes…. Thanks to these loopholes this country
is still a free country.[3]

b. The
Impossibility of Uniformity

Aside from
these considerations, the ideal of uniformity is impossible
to achieve. Let us confine our further discussion of uniformity
to income taxation, for two reasons:

  1. because the vast bulk of our taxation is income taxation; and

  2. because, as
    we have seen
    , most other taxes boil down to income taxes
    anyway.

A tax on
consumption ends largely as a tax on income at a lower rate.

There are
two basic reasons why uniformity of income taxation is an impossible
goal. The first stems from the very nature of the State. We have
seen, when
discussing Calhoun’s analysis
, that the State must
separate society into two classes, or castes: the taxpaying
caste and the tax-consuming caste. The tax consumers
consist of the full-time bureaucracy and politicians in power,
as well as the groups which receive net subsidies, i.e.,
which receive more from the government than they pay to the government.
These include the receivers of government contracts and of government
expenditures on goods and services produced in the private sector.
It is not always easy to detect the net subsidized in practice,
but this caste can always be conceptually identified.

Thus, when
the government levies a tax on private incomes, the money is shifted
from private people to the government, and the government’s money,
whether expended for government consumption of goods and services,
for salaries to bureaucrats, or as subsidies to privileged groups,
returns to be spent in the economic system. It is clear that the
tax-expenditure level must distort the expenditure pattern
of the market and shift productive resources away from the pattern
desired by the producers and toward that desired by the privileged.
This distortion takes place in proportion to the amount of taxation.

If, for example,
the government taxes funds that would have been spent on automobiles
and itself spends them on arms, the arms industry and, in the
long run, the specific factors in the arms industry become net
tax consumers, while a special loss is inflicted on the automobile
industry and ultimately on the factors specific to that industry.
It is because of these complex relationships that, as we have
mentioned, the identification in practice of the net subsidized
may be difficult.

One thing
we know without difficulty, however. Bureaucrats are net tax consumers.
As we
pointed out above
, bureaucrats cannot pay taxes. Hence,
it is inherently impossible for bureaucrats to pay income taxes
uniformly with everyone else. And therefore the ideal of uniform
income taxation for all is an impossible goal. We repeat that
the bureaucrat who receives $8,000 a year income and then hands
$1,500 back to the government is engaging in a mere bookkeeping
transaction of no economic importance (aside from the waste of
paper and records involved). For he does not and cannot pay
taxes; he simply receives $6,500 a year from the tax fund.

If it is
impossible to tax income uniformly because of the nature of the
tax process itself, the attempt to do so also confronts another
insuperable difficulty, that of trying to arrive at a cogent definition
of “income.” Should taxable income include the imputed money value
of services received in kind, such as farm produce grown on one’s
own farm? What about imputed rent from living in one’s own house?
Or the imputed services of a housewife? Regardless of which course
is taken in any of these cases, a good argument can be made that
the incomes included as taxable are not the correct ones. And
if it is decided to impute the value of goods received in kind,
the estimates must always be arbitrary, since the actual sales
for money were not made.

A similar
difficulty is raised by the question whether incomes should be
averaged over several years. Businesses that suffer losses and
reap profits are penalized as against those with steady incomes
– unless, of course, the government subsidizes part of the
loss. This may be corrected by permitting averaging of income
over several years, but here again the problem is insoluble because
there are only arbitrary ways of deciding the period of time to
allow for averaging. If the income tax rate is “progressive,”
i.e., if the rate increases as earnings increase, then failure
to permit averaging penalizes the man with an erratic income.
But again, to permit averaging will destroy the ideal of uniform
current tax rates; furthermore, varying the period of averaging
will vary the results.

We have seen
that, in order to tax income only, it is necessary to correct
for changes in the purchasing power of money when taxing capital
gains. But once again, any index or factor of correction is purely
arbitrary, and uniformity cannot be achieved because of the impossibility
of securing general agreement on a definition of income.

For all these
reasons, the goal of uniformity of taxation is an impossible one.
It is not simply difficult to achieve in practice; it is conceptually
impossible and self-contradictory. Surely any ethical goal that
is conceptually impossible of achievement is an absurd
goal, and therefore any movements in the direction of the goal
are absurd as well.[4]
It is therefore legitimate, and even necessary, to engage in a
logical (i.e., praxeological) critique of ethical goals and systems
when they are relevant to economics.

Having analyzed
the goal of uniformity of treatment, we turn now to the various
principles that have been set forth to give content to the idea
of uniformity, to answer the question: Uniform in respect to what?
Should taxes be uniform as to “ability to pay,” or “sacrifice,”
or “benefits received”? In other words, while most writers have
rather unthinkingly granted that people in the same income bracket
should pay the same tax, what principle should govern the distribution
of income taxes between tax brackets? Should the man making
$10,000 a year pay as much as, as much proportionately
as, more than, more proportionately than, or less than, a man
making $5,000 or $1,000 a year? In short, should people pay uniformly
in accordance with their “ability to pay,” or sacrifice made,
or some other principle?

(2)
The “Ability-To-Pay” Principle

a. The
Ambiguity of the Concept

This principle
states that people should pay taxes in accordance with their “ability
to pay.” It is generally conceded that the concept of ability
to pay is a highly ambiguous one and presents no sure guide for
practical application.[5]
Most economists have employed the principle to support a program
of proportional or progressive income taxation, but this would
hardly suffice. It seems clear, for example, that a person’s accumulated
wealth affects his ability to pay. A man earning $5,000 during
a certain year probably has more ability to pay than a neighbor
earning the same amount if he also has $50,000 in the bank while
his neighbor has nothing. Yet a tax on accumulated capital would
cause general impoverishment.

No clear
standard can be found to gauge “ability to pay.” Both wealth and
income would have to be considered, medical expenses would have
to be deducted, etc. But there is no precise criterion to be invoked,
and the decision is necessarily arbitrary. Thus, should all or
some proportion of medical bills be deducted? What about the expenses
of childrearing? Or food, clothing, and shelter as necessary to
consumer “maintenance”? Professor Due attempts to find a criterion
for ability in “economic well-being,” but it should be clear that
this concept, being even more subjective, is still more difficult
to define.[6]

Adam Smith
himself used the ability concept to support proportional
income taxation (taxation at a constant percentage of income),
but his argument is rather ambiguous and applies to the “benefit”
principle as well as to “ability to pay.”[7]
Indeed, it is hard to see in precisely what sense ability to pay
rises in proportion to income. Is a man earning $10,000
a year “equally able” to pay $2,000 as a man earning $1,000 to
pay $200? Setting aside the basic qualifications of difference
in wealth, medical expenses, etc., in what sense can “equal ability”
be demonstrated? Attempting to define equal ability in such a
way is a meaningless procedure.

McCulloch,
in a famous passage, attacked progressiveness and defended proportionality
of taxation:

The moment
you abandon … the cardinal principle of exacting from all
individuals the same proportion of their income or their property,
you are at sea without rudder or compass, and there is no amount
of injustice or folly you may not commit.[8]

Seemingly
plausible, this thesis is by no means self-evident. In what way
is proportional taxation any less arbitrary than any given
pattern of progressive taxation, i.e., where the rate of
tax increases with income? There must be some principle
that can justify proportionality; if this principle does not exist,
then proportionality is no less arbitrary than any other taxing
pattern. Various principles have been offered and will be considered
below, but the point is that proportionality per se is
neither more nor less sound than any other taxation.

One school
of thought attempts to find a justification for a progressive
tax via an ability-to-pay principle. This is the “faculty” approach
of E.R.A. Seligman. This doctrine holds that the more money a
person has, the relatively easier it is for him to acquire more.
His power of obtaining money is supposed to increase as he has
more: “A rich man may be said to be subject … to a law of increasing
returns.”[9]
Therefore, since his ability increases at a faster rate than his
income, a progressive income tax is justified. This theory is
simply invalid.[10]
Money does not “make money”; if it did, then a few people would
by now own all the world’s wealth. To be earned, money must continually
be justifying itself in current service to consumers. Personal
income, interest, profits, and rents are earned only in accordance
with their current, not their past, services. The size
of accumulated fortune is immaterial, and fortunes can be and
are dissipated when their owners fail to reinvest them wisely
in the service of consumers.

As Blum and
Kalven point out, the Seligman thesis is utter nonsense when applied
to personal services such as labor energy. It could only make
sense when applied to income from property, i.e., investment in
land or capital goods (or slaves, in a slave economy). But the
return on capital is always tending toward uniformity, and any
departures from uniformity are due to especially wise and farseeing
investments (profits) or especially wasteful investments (losses).
The Seligman thesis would fallaciously imply that the rates of
return increase in proportion to the amount invested.

Another theory
holds that ability to pay is proportionate to the “producer’s
surplus” of an individual, i.e., his “economic rent,” or the amount
of his income above the payment necessary for him to continue
production. The consequences of taxation of site rent were noted
above
. The “necessary payments” to labor are clearly impossible
to establish; if someone is asked by the tax authorities what
his “minimum” wage is, what will prevent him from saying that
any amount below the present wage will cause him to retire
or to shift to another job? Who can prove differently?

Furthermore,
even if it could be determined, this “surplus” is hardly an indicator
of ability to pay. A movie star may have practically zero surplus,
for some other studio may be willing to bid almost as much as
he makes now for his services, while a disabled ditch-digger may
have a much greater “surplus” because no one else may be willing
to hire him. Generally, in an advanced economy there is little
“surplus” of this type, for the competition of the market will
push alternative jobs and uses near to the factor’s discounted
marginal value product in its present use. Hence, it would be
impossible to tax any “surplus” over necessary payment from land
or capital since none exists, and practically impossible to tax
the “surplus” to labor since the existence of a sizable surplus
is rare, impossible to determine, and, in any case, no criterion
whatever of ability to pay.[11]

b. The
Justice of the Standard

The extremely
popular ability-to-pay idea was sanctified by Adam Smith in his
most important canon of taxation and has been accepted blindly
ever since. While much criticism has been levelled at its inherent
vagueness, hardly anyone has criticized the basic principle, despite
the fact that no one has really grounded it in sound argument.
Smith himself gave no reasoning to support this alleged principle,
and few others have done so since. Due, in his text on public
finance, simply accepts it because most people believe in it,
thereby ignoring the possibility of any logical analysis of ethical
principles.[12]

The only
substantial attempt to give some rational support to the “ability-to-pay
principle” rests on a strained comparison of tax payments to voluntary
gifts to charitable organizations. Thus Groves writes: “To hundreds
of common enterprises (community chests, Red Cross, etc.) people
are expected to contribute according to their means. Governments
are one of these common enterprises fostered to serve the citizens
as a group….”[13]
Seldom have more fallacies been packed into two sentences. In
the first place, the government is not a common enterprise akin
to the community chest. No one can resign from it. No one,
on penalty of imprisonment, can come to the conclusion that this
“charitable enterprise” is not doing its job properly and therefore
stop his “contribution”; no one can simply lose interest and drop
out. If, as will be seen further below, the State cannot be described
as a business, engaged in selling services on the market, certainly
it is ludicrous to equate it to a charitable organization. Government
is the very negation of charity, for charity is uniquely an unbought
gift, a freely flowing uncoerced act by the giver. The word “expected”
in Groves’ phrase is misleading. No one is forced to give to any
charity in which he is not interested or which he believes is
not doing its job properly.

The contrast
is even clearer in a phrase of Hunter and Allen’s:

Contributions
to support the church or the community chest are expected, not
on the basis of benefits which individual members receive from
the organization, but upon the basis of their ability to contribute.[14]

But this
is praxeologically invalid. The reason that anyone contributes
voluntarily to a charity is precisely the benefit that
he obtains from it. Yet benefit can be considered only
in a subjective sense. It can never be measured. The fact of subjective
gain, or benefit, from an act is deducible from the fact that
it was performed. Each person making an exchange is deduced to
have benefited (at least ex ante). Similarly, a
person who makes a unilateral gift is deduced to have benefited
(ex ante) from making the gift. If he did not benefit,
he would not have made the gift. This is another indication that
praxeology does not assume the existence of an “economic man,”
for the benefit from an action may come either from a good or
a service directly received in exchange, or simply from the knowledge
that someone else will benefit from a gift. Gifts to charitable
institutions, therefore, are made precisely on the basis of benefit
to the giver, not on the basis of his “ability to pay.”

Furthermore,
if we compare taxation with the market, we find no basis for adopting
the “ability-to-pay” principle. On the contrary, the market price
(generally considered the just price) is almost always uniform
or tending toward uniformity. Market prices tend to obey the rule
of one price throughout the entire market. Everyone pays an equal
price for a good regardless of how much money he has or his “ability
to pay.” Indeed, if the “ability-to-pay” principle pervaded the
market, there would be no point in acquiring wealth, for everyone
would have to pay more for a product in proportion to the money
in his possession. Money incomes would be approximately equalized,
and, in fact, there would be no point at all to acquiring money,
since the purchasing power of a unit of money would never be definite
but would drop, for any man, in proportion to the quantity of
money he earns. A person with less money would simply find the
purchasing power of a unit of his money rising accordingly. Therefore,
unless trickery and black marketeering could evade the regulations,
establishing the “ability-to-pay” principle for prices would wreck
the market altogether. The wrecking of the market and the monetary
economy would plunge society back to primitive living standards
and, of course, eliminate a large part of the current world population,
which is permitted to earn a subsistence living or higher by virtue
of the existence of the modern, developed market.

It should
be clear, moreover, that establishing equal incomes and wealth
for all (e.g., by taxing all those over a certain standard of
income and wealth, and subsidizing all those below that standard)
would have the same effect, since there would be no point to anyone’s
working for money. Those who enjoy performing labor will do so
only “at play,” i.e., without obtaining a monetary return. Enforced
equality of income and wealth, therefore, would return the economy
to barbarism.

If taxes
were to be patterned after market pricing, then, taxes would be
levied equally (not proportionately) on everyone.
As will be seen below, equal taxation differs in critical respects
from market pricing but is a far closer approximation to it than
is “ability-to-pay” taxation.

Finally,
the “ability-to-pay” principle means precisely that the able
are penalized, i.e., those most able in serving the wants of their
fellow men. Penalizing ability in production and service diminishes
the supply of the service – and in proportion to the extent
of that ability. The result will be impoverishment, not only of
the able, but of the rest of society, which benefits from their
services.

The “ability-to-pay”
principle, in short, cannot be simply assumed; if it is employed,
it must be justified by logical argument, and this economists
have yet to provide. Rather than being an evident rule of justice,
the “ability-to-pay” principle resembles more the highwayman’s
principle of taking where the taking is good.[15]

(3)
Sacrifice Theory

Another attempted
criterion of just taxation was the subject of a flourishing literature
for many decades, although it is now decidedly going out of fashion.
The many variants of the “sacrifice” approach are akin to a subjective
version of the “ability-to-pay” principle. They all rest on three
general premises:

  1. that the utility of a unit of money to an individual diminishes
    as his stock of money increases;

  2. that these utilities can be compared interpersonally and thus
    can be summed up, subtracted, etc.; and

  3. that everyone has the same utility-of-money schedule.

The first
premise is valid (but only in an ordinal sense), but the second
and third are nonsensical.

The marginal
utility of money does diminish, but it is impossible to compare
one person’s utilities with another, let alone believe that everyone’s
valuations are identical. Utilities are not quantities, but subjective
orders of preference. Any principle for distributing the tax burden
that rests on such assumptions must therefore be declared fallacious.
Happily, this truth is now generally established in the economic
literature.[16]

Utility and
“sacrifice” theory has generally been used to justify progressive
taxation, although sometimes proportional taxation has been upheld
on this ground. Briefly, a dollar is alleged to “mean less” or
be worth less in utility to a “rich man” than to a “poor man”
(“rich” or “poor” in income or wealth?), and therefore payment
of a dollar by a rich man imposes less of a subjective sacrifice
on him than on a poor man. Hence, the rich man should be taxed
at a higher rate. Many “ability-to-pay” theories are really inverted
sacrifice theories, since they are couched in the form of ability
to make sacrifices.

Since the
nub of the sacrifice theory – interpersonal comparisons of
utility – is now generally discarded, we shall not spend
much time discussing the sacrifice doctrine in detail.[17]
However, several aspects of this theory are of interest. The sacrifice
theory divides into two main branches: (1) the equal-sacrifice
principle and (2) the minimum-sacrifice principle.
The former states that every man should sacrifice equally in paying
taxes; the latter, that society as a whole should sacrifice the
least amount. Both versions abandon completely the idea of government
as a supplier of benefits and treat government and taxation as
simply a burden, a sacrifice that must be borne in the best way
we know how. Here we have a curious principle of justice indeed
– based on adjustment to hurt. We are faced again with that
pons asinorum that defeats all attempts to establish canons
of justice for taxation – the problem of the justice of taxation
itself. The proponent of the sacrifice theory, in realistically
abandoning unproved assumptions of benefit from taxation, must
face and then founder on the question: If taxation is pure hurt,
why endure it at all?

The equal-sacrifice
theory asks that equal hurt be imposed on all. As a criterion
of justice, this is as untenable as asking for equal slavery.
One interesting aspect of the equal-sacrifice theory, however,
is that it does not necessarily imply progressive income taxation!
For although it implies that the rich man should be taxed more
than the poor man, it does not necessarily say that the former
should be taxed more than proportionately. In fact, it
does not even establish that all be taxed proportionately!
In short, the equal-sacrifice principle may demand that a man
earning $10,000 be taxed more than a man earning $1,000, but not
necessarily that he be taxed a greater percentage or even proportionately.

Depending
on the shapes of the various “utility curves,” the equal-sacrifice
principle may well call for regressive taxation under which
a wealthier man would pay more in amount but less proportionately
(e.g., the man earning $10,000 would pay $500, and the man earning
$1,000 would pay $200). The more rapidly the utility of money
declines, the more probably will the equal-sacrifice curve yield
progressivity. A slowly declining utility-of-money schedule would
call for regressive taxation. Argument about how rapidly various
utility-of-money schedules decline is hopeless because, as we
have seen, the entire theory is untenable. But the point is that
even on its own grounds, the equal-sacrifice theory can justify
neither progressive nor proportionate taxation.[18]

The minimum-sacrifice
theory has often been confused with the equal-sacrifice theory.
Both rest on the same set of false assumptions, but the minimum-sacrifice
theory counsels very drastic progressive taxation. Suppose, for
example, that there are two men in a community, Jones making $50,000,
and Smith making $30,000. The principle of minimum social sacrifice,
resting on the three assumptions described above, declares: $1.00
taken from Jones imposes less of a sacrifice than $1.00 taken
from Smith; hence, if the government needs $1.00, it takes it
from Jones. But suppose the government needs $2.00; the second
dollar will impose less of a sacrifice on Jones than the first
dollar taken from Smith, for Jones still has more money left than
Smith and therefore sacrifices less. This continues as long as
Jones has more money remaining than Smith. Should the government
need $20,000 in taxes, the minimum-sacrifice principle counsels
taking the entire $20,000 from Jones and zero from Smith. In other
words, it advocates taking all of the highest incomes in turn
until governmental needs are fulfilled.[19]

The minimum-sacrifice
principle depends heavily, as does the equal-sacrifice theory,
on the untenable view that everyone’s utility-of-money schedule
is roughly identical. Both rest also on a further fallacy, which
now must be refuted: that “sacrifice” is simply the obverse of
the utility of money. For the subjective sacrifice in taxation
may not be merely the opportunity cost forgone of the money paid;
it may also be increased by moral outrage at the tax procedure.
Thus, Jones may become so morally outraged at the above proceedings
that his marginal subjective sacrifice quickly becomes very great,
much “greater” than Smith’s if we grant for a moment that the
two can be compared. Once we see that subjective sacrifice is
not necessarily tied to the utility of money, we may extend the
principle further.

Consider,
for example, a philosophical anarchist who opposes all taxation
fervently. Suppose that his subjective sacrifice in the
payment of any tax is so great as to be almost infinite. In that
case, the minimum-sacrifice principle would have to exempt the
anarchist from taxation, while the equal-sacrifice principle could
tax him only an infinitesimal amount. Practically, then, the sacrifice
principle would have to exempt the anarchist from taxation. Furthermore,
how can the government determine the subjective sacrifice of the
individual? By asking him? In that case, how many people would
refrain from proclaiming the enormity of their sacrifice and thus
escape payment completely?

Similarly,
if two individuals subjectively enjoyed their identical money
incomes differently, the minimum-sacrifice principle would require
that the happier man be taxed less because he makes a greater
sacrifice in enjoyment from an equal tax. Who will suggest heavier
taxation on the unhappy or the ascetic? And who would then refrain
from loudly proclaiming the enormous enjoyment he derives
from his income?

It is curious
that the minimum-sacrifice principle counsels the obverse of the
ability-to-pay theory, which, particularly in its “state of well-being”
variant, advocates a special tax on happiness and a lower
tax on unhappiness. If the latter principle prevailed,
people would rush to proclaim their unhappiness and deep-seated
asceticism.

It is clear
that the proponents of the ability-to-pay and sacrifice theories
have completely failed to establish them as criteria of just taxation.
These theories also commit a further grave error. For the sacrifice
theory explicitly, and the ability-to-pay theory implicitly, set
up presumed criteria for action in terms of sacrifice and burden.[20]
The State is assumed to be a burden on society, and the question
becomes one of justly distributing this burden. But man is constantly
striving to sacrifice as little as he can for the benefits he
receives from his actions. Yet here is a theory that talks only
in terms of sacrifice and burden, and calls for a certain distribution
without demonstrating to the taxpayers that they are benefiting
more than they are giving up.

Since the
theorists do not so demonstrate, they can make their appeal only
in terms of sacrifice – a procedure that is praxeologically
invalid. Since men always try to find net benefits in a course
of action, it follows that a discussion in terms of sacrifice
or burden cannot establish a rational criterion for human action.
To be praxeologically valid, a criterion must demonstrate net
benefit. It is true, of course, that the proponents of the sacrifice
theory are far more realistic than the proponents of the benefit
theory (which we shall discuss below), in considering the State
a net burden on society rather than a net benefit; but this hardly
demonstrates the justice of the sacrifice principle of
taxation. Quite the contrary.

(4)
The Benefit Principle

The benefit
principle differs radically from the two preceding criteria of
taxation. For the sacrifice and ability-to-pay principles depart
completely from the principles of action and the accepted criteria
of justice on the market. On the market people act freely in those
ways which they believe will confer net benefits upon them. The
result of these actions is the monetary exchange system, with
its inexorable tendency toward uniform pricing and the allocation
of productive factors to satisfy the most urgent demands of all
the consumers. Yet the criteria used in judging taxation differ
completely from those which apply to all other actions on the
market.

Suddenly
free choice and uniform pricing are forgotten, and the discussion
is all in terms of sacrifice, burden, etc. If taxation is only
a burden, it is no wonder that coercion must be exercised to maintain
it. The benefit principle, on the other hand, is an attempt to
establish taxation on a similar basis as market pricing; that
is, the tax is to be levied in accordance with the benefit received
by the individual. It is an attempt to achieve the goal of a neutral
tax, one that would leave the economic system approximately as
it is on the free market. It is an attempt to achieve praxeological
soundness by establishing a criterion of payment on the basis
of benefit rather than sacrifice.

The great
gulf between the benefit and other principles was originally unrecognized,
because of Adam Smith’s confusion between ability to pay and benefit.
In the quotation cited above, Smith inferred that everyone benefits
from the State in proportion to his income and that this income
establishes his ability to pay. Therefore, a tax on his ability
to pay will simply be a quid pro quo in exchange for benefits
conferred by the State. Some writers have contended that people
benefit from government in proportion to their income; others,
that they benefit in increased proportion to their income,
thus justifying a progressive income tax.

Yet this
entire application of the benefit theory is nonsensical. How do
the rich reap a greater benefit proportionately, or even more
than proportionately, from government than the poor? They could
do so only if the government were responsible for these
riches by a grant of special privilege, such as a subsidy, a monopoly
grant, etc. Otherwise, how do the rich benefit? From “welfare”
and other redistributive expenditures, which take from the rich
and give to the bureaucrats and the poor? Certainly not. From
police protection? But it is precisely the rich who could more
afford to pay for their own protection and who therefore derive
less benefit from it than the poor.

The benefit
theory holds that the rich benefit more from protection because
their property is more valuable; but the cost of protection
may have little relation to the value of the property. Since it
costs less to police a bank vault containing $100 million than
to guard 100 acres of land worth $10 per acre, the poor landowner
receives a far greater benefit from the State’s protection than
the rich owner of personalty.
Neither would it be relevant to say that A earns more money than
B because A receives a greater benefit from “society” and should
therefore pay more in taxes. In the first place, everyone participates
in society. The fact that A earns more than B means precisely
that A’s services are individually worth more to his fellows.
Therefore, since A and B benefit similarly from society’s existence,
the reverse argument is far more accurate: that the differential
between them is due to A’s individual superiority in productivity,
and not at all to “society.” Secondly, society is not
at all the State, and the State’s possible claim must be independently
validated.

Hence, neither
proportionate nor progressive income taxation can be sustained
on benefit principles. In fact, the reverse is true. If everyone
were to pay in accordance with benefit received, it is clear that
(a) the recipients of “welfare” benefits would bear the full costs
of these benefits: the poor would have to pay for their own doles
(including, of course, the extra cost of paying the bureaucracy
for making the transfers); (b) the buyers of any government service
would be the only payers, so that government services could be
financed out of a general tax fund; and (c) for police protection,
a rich man would pay less than a poor man, and less in absolute
amounts. Furthermore, landowners would pay more than owners of
intangible property, and the weak and infirm, who clearly benefit
more from police protection than the strong, would have to pay
higher taxes than the latter.

It becomes
immediately clear why the benefit principle has been practically
abandoned in recent years. For it is evident that if (a) welfare
recipients and (b) receivers of other special privilege, such
as monopoly grants, were to pay according to the benefit received,
there would not be much point in either form of government expenditure.
And if each were to pay an amount equal to the benefit he received
rather than simply proportionately (and he would have to do so
because there would be nowhere else for the State to turn for
funds), then the recipient of the subsidy would not only earn
nothing, but would have to pay the bureaucracy for the cost of
handling and transfer. The establishment of the benefit principle
would therefore result in a laissez-faire system, with government
strictly limited to supplying defense service. And the taxation
for this defense service would be levied more on the poor and
the infirm than on the strong and the rich.

At first
sight, the believer in the free market, the seeker after a neutral
tax, is inclined to rejoice. It would seem that the benefit principle
is the answer to his search. And this principle is indeed closer
to market principles than the previous alleged canons. Yet, if
we pursue the analysis more closely, it will be evident that the
benefit principle is still far from market neutrality. On the
market, people do not pay in accordance with individual benefit
received; they pay a uniform price, one that just induces the
marginal buyer to participate in the exchange. The more eager
do not pay a higher price than the less eager; the chess addict
and the indifferent player pay the same price for the same chess
set, and the opera enthusiast and the novice pay the same price
for the same ticket. The poor and the weak would be most eager
for protection, but, in contrast to the benefit principle, they
would not pay more on the market.

There are
even graver defects in the benefit principle. For market exchanges
(a) demonstrate benefit and (b) only establish the fact
of benefit without measuring it. The only reason we know that
A and B benefit from an exchange is that they voluntarily make
the exchange. In this way, the market demonstrates benefit.
But where taxes are levied, the payment is compulsory, and therefore
benefit can never be demonstrated. As a matter of fact,
the existence of coercion gives rise to the opposite presumption
and implies that the tax is not a benefit, but a burden. If it
really were a benefit, coercion would not be necessary.

Secondly,
the benefit from exchange can never be measured or compared interpersonally.
The “consumers’ surplus” derived from exchange is purely subjective,
nonmeasurable, and noncomparable scientifically. Therefore, we
never know what these benefits are, and hence there can be no
way of allocating the taxes in accordance with them.

Thirdly,
on the market everyone enjoys a net benefit from an exchange.
A person’s benefit is not equal to his cost, but greater. Therefore,
taxing away his alleged benefit would completely violate market
principles.

Finally,
if each person were taxed according to the benefit he receives
from government, it is obvious that, since the bureaucracy receive
all their income from this source, they would, like other recipients
of subsidy and privilege, be obliged to return their whole
salary to the government. The bureaucracy would have to serve
without pay.

We have seen
that the benefit principle would dispense with all subsidy expenditures
of whatever type. Government services would have to be sold directly
to buyers; but in that case, there would be no room for government
ownership, for the characteristic of a government enterprise is
that it is launched from tax funds. Police and judicial services
are often declared by the proponents of the benefit principle
to be inherently general and unspecialized, so that they would
need to be purchased out of the common tax fund rather than by
individual users. However, as
we have seen
, this assumption is incorrect; these services
can be sold on the market like any others. Thus, even in the absence
of all other deficiencies of the benefit principle, it would still
establish no warrant for taxation at all, for all services could
be sold on the market directly to beneficiaries.

It is evident
that while the benefit principle attempts to meet the market criterion
of limiting payment solely to beneficiaries, it must be adjudged
a failure; it cannot serve as a criterion for a neutral tax or
any other type of taxation.

(5)
The Equal Tax and the Cost Principle

Equality
of taxation has far more to commend it than any of the above principles,
none of which can be used as a canon of taxation. “Equality of
taxation” means just that – a uniform tax on every member
of the society. This is also called a head tax, capitation tax,
or poll tax. (The latter term, however, is best used to describe
a uniform tax on voting, which is what the poll tax has become
in various American states.) Each person would pay the same tax
annually to the government.

The equal
tax would be particularly appropriate in a democracy, with its
emphasis on equality before the law, equal rights, and absence
of discrimination and special privilege. It would embody the principle:
“One vote, one tax.” It would appropriately apply only to the
protection services of the government, for the government is committed
to defending everyone equally. Therefore, it may seem just for
each person to be taxed equally in return. The principle of equality
would rule out, as would the benefit principle, all government
actions except defense, for all other expenditures would set up
a special privilege or subsidy of some kind. Finally, the equal
tax would be far more nearly neutral than any of the other taxes
considered, for it would attempt to establish an equal “price”
for equal services rendered.

One school
of thought challenges this contention and asserts that a proportional
tax would be more nearly neutral than an equal tax. The proponents
of this theory point out that an equal tax alters the market’s
pattern of distribution of income. Thus, if A earns 1,000 gold
ounces per year, B earns 200 ounces, and C earns 50 ounces, and
each pays 10 ounces in taxes, then the relative proportion
of net income remaining after taxes is altered, and altered in
the direction of greater inequality. A proportionate tax of a
fixed percentage on all three would leave the distribution of
income constant and would therefore be neutral relative to the
market.

This thesis
misconceives the whole problem of neutrality in taxation. The
object of the quest is not to leave the income distribution
the same as if a tax had not been imposed. The object is to
affect the income “distribution” and all other aspects of the
economy in the same way as if the tax were really a free-market
price. And this is a very different criterion.

No market
price leaves relative income “distribution” the same as before.
If the market really behaved in this way, there would be no advantage
in earning money, for people would have to pay proportionately
higher prices for goods in accordance with the level of their
earnings. The market tends toward uniformity of pricing and hence
toward equal pricing for equal service. Equal taxation, therefore,
would be far more nearly neutral and would constitute a closer
approach to a market system.

The equal-tax
criterion, however, has many grave defects, even as an approach
toward a neutral tax. In the first place, the market criterion
of equal price for equal service faces the problem: What is an
“equal service”? The service of police protection is of far greater
magnitude in an urban crime area than it is in some sleepy backwater.
That service is worth far more in the crime center, and therefore
the price paid will tend to be greater in a crime-ridden area
than in a peaceful area.

It is very
likely that, in the purely free market, police and judicial services
would be sold like insurance, with each member paying regular
premiums in return for a call on the benefits of protection when
needed. It is obvious that a more risky individual (such as one
living in a crime area) would tend to pay a higher premium than
individuals in another area. To be neutral, then, a tax would
have to vary in accordance with costs and not be uniform.[21]
Equal taxation would distort the allocation of social resources
in defense. The tax would be below the market price in the crime
areas and above the market price in the peaceful areas, and there
would therefore be a shortage of police protection in the dangerous
areas and a surplus of protection in the others.

Another grave
flaw of the equal-tax principle is the same that we noted in the
more general principle of uniformity: no bureaucrat can pay taxes.
An “equal tax” on a bureaucrat or politician is an impossibility,
because he is one of the tax consumers rather than taxpayers.
Even when all other subsidies are eliminated, the government employee
remains a permanent obstacle in the path of equal tax. As we have
seen, the bureaucrat’s “tax payment” is simply a meaningless bookkeeping
device.

These flaws
in the equal tax cause us to turn to the last remaining tax canon:
the cost principle. The cost principle would apply as we
have just discussed it, with the government setting the tax in
accordance with costs, like the premiums charged by an insurance
company.[22]
The cost principle would constitute the closest approach possible
to neutrality of taxation. Yet even the cost principle has fatal
flaws that finally eliminate it from consideration. In the first
place, although the costs of nonspecific factors could be estimated
from market knowledge, the costs of specific factors could not
be determined by the State.

The impossibility
of calculating specific costs stems from the fact that products
of tax-supported firms have no real market price, and so specific
costs are unknown. As a result, the cost principle cannot be accurately
put into effect. The cost principle is further vitiated by the
fact that a compulsory monopoly – such as State protection
– will invariably have higher costs and sell lower-quality
service than freely competitive defense firms on the market. As
a result, costs will be much higher than on the market, and, again,
the cost principle offers no guide to a neutral tax.

A final flaw
is common to both the equality and the cost theories of taxation.
In neither case is benefit demonstrated as accruing to
the taxpayer. Although the taxpayer is blithely assumed
to be benefiting from the service just as he does on the market,
we have seen that such an assumption cannot be made – that
the use of coercion presumes quite the contrary for many taxpayers.
The market requires a uniform price, or the exact covering of
costs, only because the purchaser voluntarily buys the product
in the expectation of being benefited. The State, on the other
hand, would force people to pay the tax even if they were not
voluntarily willing to pay the cost of this or any other defense
system. Hence, the cost principle can never provide a route to
the neutral tax.

(6)
Taxation “For Revenue Only”

A slogan
popular among many “right-wing” economists is that taxation should
be for “revenue only,” and not for broad social purposes. On its
face, this slogan is simply and palpably absurd, since all taxes
are levied for revenue. What else can taxation be called but the
appropriation of funds from private individuals by the State for
its own purposes? Some writers therefore amend the slogan to say:
Taxation should be limited to revenue essential for social services.

But what
are social services? To some people, every conceivable type of
government expenditure appears as a “social service.” If the State
takes from A and gives to B, C may applaud the act as a “social
service” because he dislikes something about the former and likes
something about the latter. If, on the other hand, “social service”
is limited by the “unanimity rule” to apply only to those activities
that serve some individuals without making others pay, then the
“taxation-for-revenue-only” formula is simply an ambiguous term
for the benefit or the cost principles.

(7)
The Neutral Tax: A Summary

We have thus
analyzed all the alleged canons of tax justice. Our conclusions
are twofold:

  1. that economics cannot assume any principle of just taxation,
    and that no one has successfully established any such principles;
    and

  2. that the neutral tax, which seems to many a valid ideal, turns
    out to be conceptually impossible to achieve.

Economists
must therefore abandon their futile quest for the just, or the
neutral, tax.

Some may
ask: Why does anyone search for a neutral tax? Why consider neutrality
an ideal? The answer is that all services, all activities, can
be provided in two ways only: by freedom or by coercion. The former
is the way of the market; the latter, of the State. If all services
were organized on the market, the result would be a purely free-market
system; if all were organized by the State, the result would be
socialism (see below).
Therefore, all who are not full socialists must concede some area
to market activity, and, once they do so, they must justify their
departures from freedom on the basis of some principle or other.

In a society
where most activities are organized on the market, advocates of
State activity must justify departures from what they themselves
concede to the market sphere. Hence, the use of neutrality is
a benchmark to answer the question: Why do you want the State
to step in and alter market conditions in this case? If market
prices are uniform, why should tax payments be otherwise?

But if neutral
taxation is, at bottom, impossible, there are two logical courses
left for advocates of the neutral tax: either abandon the goal
of neutrality, or abandon taxation itself.

D.
Voluntary Contributions to Government

A few writers,
disturbed by the compulsion necessary to the existence of taxation,
have advocated that governments be financed, not by taxation,
but by some form of voluntary contribution. Such voluntary contribution
systems could take various forms. One was the method relied on
by the old city-state of Hamburg and other communities –
voluntary gifts to the government.

President
William F. Warren of Boston University, in his essay, “Tax Exemption
the Road to Tax Abolition,” described his experience in one of
these communities:

For five
years it was the good fortune of the present writer to be domiciled
in one of these communities. Incredible as it may seem to believers
in the necessity of a legal enforcement of taxes by pains and
penalties, he was for that period … his own assessor and his
own tax-gatherer. In common with the other citizens, he was
invited, without sworn statement or declaration, to make such
contribution to the public charges as seemed to himself just
and equal. That sum, uncounted by any official, unknown to any
but himself, he was asked to drop with his own hand into a strong
public chest; on doing which his name was checked off the list
of contributors…. Every citizen felt a noble pride in such
immunity from prying assessors and rude constables. Every annual
call of the authorities on that community was honored to the
full.[23]

The gift
method, however, presents some serious difficulties. In particular,
it continues that disjunction between payment and receipt of
service which constitutes one of the great defects of a taxing
system. Under taxation, payment is severed from receipt of service,
in striking contrast to the market where payment and service are
correlative. The voluntary gift method perpetuates this disjunction.
As a result, A, B, and C continue to receive the government’s
defense service even if they paid nothing for it, and only D and
E contributed. D’s and E’s contributions, furthermore, may be
disproportionate.

It is true
that this is the system of voluntary charity on the market. But
charity flows from the more to the less wealthy and able; it does
not constitute an efficient method for organizing the general
sale of a service. Automobiles, clothes, etc., are sold on the
market on a regular uniform-price basis and are not indiscriminately
given to some on the basis of gifts received from others.

Under the
gift system people will tend to demand far more defense service
from the government than they are willing to pay for; and the
voluntary contributors, getting no direct reward for their money,
will tend to reduce their payment. In short, where service (such
as defense) flows to people regardless of payment, there will
tend to be excessive demands for service, and an insufficient
supply of funds to sustain it.

When the
advocates of taxation, therefore, contend that a voluntary society
could never efficiently finance defense service because people
would evade payment, they are correct insofar as their strictures
apply to the gift method of finance. The gift method, however,
hardly exhausts the financing methods of the purely free market.

A step in
the direction of greater efficiency would have the defense agency
charging a set price instead of accepting haphazard amounts varying
from the very small to the very large, but continuing to supply
defense indiscriminately. Of course, the agency would not refuse
gifts for general purposes or for granting a supply of defense
service to poor people. But it would charge some minimum price
commensurate with the cost of its service.

One such
method is a voting tax, now known as a poll tax.[24]
A poll tax, or voting tax, is not really a “tax” at all; it is
only a price charged for participating in the State organization.[25]
Only those who voluntarily vote for State officials, i.e., who
participate in the State machinery, are required to pay the tax.
If all the State’s revenues were derived from poll taxes, therefore,
this would not be a system of taxation at all, but rather voluntary
contributions in payment for the right to participate in the State’s
machinery. The voting tax would be an improvement over the gift
method because it would charge a certain uniform or minimal amount.

To the proposal
to finance all government revenues from poll taxes it has been
objected that practically no one would vote under these conditions.
This is perhaps an accurate prediction, but curiously the critics
of the poll tax never pursue their analysis beyond this point.
It is clear that this reveals something very important about the
nature of the voting process.

Voting is
a highly marginal activity because

  1. the voter obtains no direct benefits from his act of voting,
    and

  2. his aliquot power over the final decision is so small that his
    abstention from voting would make no appreciable difference
    to the final outcome.

In short,
in contrast to all other choices a man may make, in political
voting he has practically no power over the outcome, and the outcome
would make little direct difference to him anyway. It is
no wonder that well over half the eligible American voters persistently
refuse to take part in the annual November balloting.

This discussion
also illuminates a puzzling phenomenon in American political life
– the constant exhortation by politicians of all parties
for people to vote: “We don’t care how you vote, but vote!”
is a standard political slogan.[26]
On its face, it makes little sense, for one would think that at
least one of the parties would see advantages in a small vote.
But it does make a great deal of sense when we realize the enormous
desire of politicians of all parties to make it appear
that the people have given them a “mandate” in the election –
that all the democratic shibboleths about “representing the people,”
etc., are true.

The reason
for the relative triviality of voting is, once again, the disjunction
between voting and payment, on the one hand, and benefit on the
other. The poll tax gives rise to the same problem. The voter,
with or without paying a poll tax, receives no more benefit in
protection than the nonvoter. Consequently, people will refuse
to vote in droves under a single poll-tax scheme, and everyone
will demand the use of the artificially free defense resources.

Both the
gift and the voting-tax methods of voluntary financing
of government, therefore, must be discarded as inefficient. A
third method has been proposed, which we can best call by the
paradoxical name voluntary taxation. The plan envisioned
is as follows: Every land area would, as now, be governed by one
monopolistic State. The State’s officials would be chosen by democratic
voting, as at present. The State would set a uniform price, or
perhaps a set of cost prices, for protective services, and it
would be left to each individual to make a voluntary choice whether
to pay or not to pay the price. If he pays the price, he receives
the benefit of governmental defense service; if he does not, he
goes unprotected.[27]
The leading “voluntary taxationists” have been Auberon Herbert,
his associate, J. Greevz Fisher, and (sometimes) Gustave de Molinari.
The same position is found earlier, to a far less developed extent,
in the early editions of Herbert Spencer’s Social Statics,
particularly his chapter on the “Right to Ignore the State,” and
in Thoreau’s Essay on Civil Disobedience.[28]

The voluntary
taxation method preserves a voluntary system, is (or appears to
be) neutral vis-à-vis the market, and eliminates
the payment-benefit disjunction. And yet this proposal has several
important defects. Its most serious flaw is inconsistency. For
the voluntary taxationists aim at establishing a system in which
no one is coerced who is not himself an invader of the person
or property of others. Hence their complete elimination of taxation.
But, although they eliminate the compulsion to subscribe to the
government defense monopoly, they yet retain that monopoly. They
are therefore faced with the problem: Would they use force to
compel people not to use a freely competing defense agency
within the same geographic area?

The voluntary
taxationists have never attempted to answer this problem; they
have rather stubbornly assumed that no one would set up a competing
defense agency within a State’s territorial limits. And yet, if
people are free to pay or not to pay “taxes,” it is obvious that
some people will not simply refuse to pay for all protection.
Dissatisfied with the quality of defense they receive from the
government, or with the price they must pay, they will elect to
form a competing defense agency or “government” within the area
and subscribe to it.

The voluntary
taxation system is thus impossible of attainment because
it would be in unstable equilibrium. If the government elected
to outlaw all competing defense agencies, it would no longer function
as the voluntary society sought by its proponents. It would not
force payment of taxes, but it would say to the citizens: “You
are free to accept and pay for our protection or to abstain; but
you are not free to purchase defense from a competing agency.”
This is not a free market; this is a compulsory monopoly,
once again a grant of monopoly privilege by the State to itself.
Such a monopoly would be far less efficient than a freely competitive
system; hence, its costs would be higher, its service poorer.
It would clearly not be neutral to the market.

On the other
hand, if the government did permit free competition in
defense service, there would soon no longer be a central government
over the territory. Defense agencies, police and judicial, would
compete with one another in the same uncoerced manner as the producers
of any other service on the market. The prices would be lower,
the service more efficient. And, for the first and only time,
the defense system would then be neutral in relation to
the market. It would be neutral because it would be a part
of the market itself! Defense service would at last be made
fully marketable. No longer would anyone be able to point to one
particular building or set of buildings, one uniform or set of
uniforms, as representing “our government.”

While “the
government” would cease to exist, the same cannot be said for
a constitution or a rule of law, which, in fact, would take on
in the free society a far more important function than at present.
For the freely competing judicial agencies would have to be guided
by a body of absolute law to enable them to distinguish
objectively between defense and invasion. This law, embodying
elaborations upon the basic injunction to defend person and property
from acts of invasion, would be codified in the basic legal code.

Failure to
establish such a code of law would tend to break down the free
market, for then defense against invasion could not be adequately
achieved. On the other hand, those neo-Tolstoyan nonresisters
who refuse to employ violence even for defense would not themselves
be forced into any relationship with the defense agencies.

Thus, if
a government based on voluntary taxation permits free competition,
the result will be the purely free-market system outlined in
chapter 1 above
. The previous government would now simply
be one competing defense agency among many on the market. It would,
in fact, be competing at a severe disadvantage, having been established
on the principle of “democratic voting.” Looked at as a market
phenomenon, “democratic voting” (one vote per person) is simply
the method of the consumer “co-operative.” Empirically, it has
been demonstrated time and again that co-operatives cannot compete
successfully against stock-owned companies, especially when both
are equal before the law. There is no reason to believe that co-operatives
for defense would be any more efficient. Hence, we may expect
the old co-operative government to “wither away” through loss
of customers on the market, while joint-stock (i.e., corporate)
defense agencies would become the prevailing market form.[29]

Notes

[1]
Adam Smith, The
Wealth of Nations
(New York: Modern Library, 1937), pp.
777–79. See also Hunter and Allen, Principles
of Public Finance
, pp. 137–40.

[2]
This discussion applies to Professor Hayek’s adoption of the “rule
of law” as the basic political criterion. F.A. Hayek, The
Constitution of Liberty
(Chicago: University of Chicago
Press, 1960).

[3]
Mises, in Aaron Director, ed., Defense,
Controls, and Inflation
(Chicago: University of Chicago
Press, 1952), pp. 115–16.

[4]
To say that an ethical goal is conceptually impossible
is completely different from saying that its achievement is “unrealistic”
because few people uphold it. The latter is by no means an argument
against an ethical principle.

Conceptual
impossibility means that the goal could not be achieved even
if everyone aimed at it. On the problem of “realism” in ethical
goals, see the brilliant article by Clarence E. Philbrook, “‘Realism’
in Policy Espousal,” American Economic Review, December,
1953, pp. 846–59.

[5]
See Walter J. Blum and Harry Kalven, Jr., The
Uneasy Case for Progressive Taxation
(Chicago: University
of Chicago Press, 1963), pp. 64–68.

[6]
Due, Government
Finance
, pp. 121ff.

[7]
Said Smith:

The subjects
of every state ought to contribute toward the support of the
government, as nearly as possible, in proportion of their respective
abilities; that is, in proportion to the revenue which they
respectively enjoy under protection of the state. The expense
of government to the individuals of a great nation, is like
the expense of management to the joint tenants of a great estate,
who are all obliged to contribute to their respective interests
in the estate. (Wealth of Nations, p. 777)

[8]
J.R. McCulloch, A
Treatise on the Principle and Practical Influence of Taxation
and the Funding System
(London, 1845), p. 142.

[9]
E.R.A. Seligman, Progressive
Taxation in Theory and Practice
(2nd ed.; (New York: Macmillan
& Co., 1908), pp. 291–92.

[10]
For an excellent critique of the Seligman theory, see Blum
and Kalven, Uneasy Case for Progressive Taxation, pp. 64–66.

[11]
See ibid., pp. 67–68.

[12]
Due, Government Finance, p. 122.

[13]
Groves, Financing
Government
, p. 36.

[14]
Hunter and Allen, Principles
of Public Finance
, pp. 190–91.

[15]
See Chodorov, Out
of Step
[also in PDF],
p. 237. See also Chodorov, From Solomon’s
Yoke to the Income Tax
(Hinsdale, Ill.: Henry Regnery,
1947), p. 11.

[16]
The acceptance of this critique dates from Robbins’ writings of
the mid-1930′s. See Lionel Robbins, “Interpersonal Comparisons
of Utility,” Economic Journal, December, 1938, pp. 635–41;
and Robbins, An
Essay on the Nature and Significance of Economic Science

(2nd ed.; London: Macmillan & Co., 1935), pp. 138–41.
Robbins was, at that time, a decidedly “Misesian” economist.

[17]
For a critique of sacrifice theory, see Blum and Kalven,
Uneasy Case for Progressive Taxation, pp. 39–63.

[18]
For an attempt to establish proportional taxation on the basis
of equal sacrifice, see Bradford B. Smith, Liberty
and Taxes
(Irvington-on-Hudson, N.Y.: Foundation for Economic
Education, n.d.), pp. 10–12.

[19]
Pushed to its logical conclusion in which the State is urged to
establish “maximum social satisfaction” – the obverse of
minimum social sacrifice – the principle counsels absolute
compulsory egalitarianism, with everyone above a certain standard
taxed in order to subsidize everyone else to come up to that standard.
The consequence, as we have seen, would be a return to the conditions
of barbarism.

[20]
The ability-to-pay principle is unclear on this point. Some proponents
base their argument implicitly on sacrifice; others, on the necessity
for payment for “untraceable” benefits.

[21]
This does not concede that “costs” determine “prices.” The general
array of final prices determines the general array of cost prices,
but then the viability of firms is determined by whether
the price people will pay for their products is enough to cover
their costs, which are determined throughout the market. In equilibrium,
costs and prices will all be equal. Since a tax is levied on general
funds and therefore cannot be equivalent to market pricing, the
only way to approximate market pricing is to set the tax according
to costs, since costs at least reflect market pricing of the nonspecific
factors.

[22]
Blum and Kalven mention the cost principle but casually dismiss
it as being practically identical with the benefit principle:

Sometimes
the theory is stated in terms of the cost of the government
services performed for each citizen rather than in terms of
the benefits received from such services. This refinement
may avoid the need of measuring subjective benefits, but it
does little else for the theory. (Uneasy Case for Progressive
Taxation, p. 36 n)

Yet their
major criticism of the benefit principle is precisely that it
requires the impossible measurement of subjective benefit. The
cost principle, along with the benefit principle, dispenses with
all government expenditures except laissez-faire ones,
since each recipient would be required to pay the full cost of
the service. With respect to the laissez-faire service
of protection, however, the cost principle is clearly far superior
to the benefit principle.

[23]
Dr. Warren’s article appeared in the Boston University Year Book
for 1876. The board of the Council of the University endorsed
the essay in these words:

In place
of the further extent of taxation advocated by many, the essay
proposes a far more imposing reform, the general abolition of
all compulsory taxes. It is hoped that the comparative novelty
of the proposition may not deter practical men from a thoughtful
study of the paper. (See the Boston University Year
Book III (1876), pp. 17–38)

Both quotations
may be found in Sidney H. Morse, “Chips from My Studio,” The
Radical Review, May, 1877, pp. 190–92. See also
Adam Smith, Wealth of Nations, pp. 801–03; Francis
A. Walker, Political
Economy
(New York: Henry Holt, 1911), pp. 475–76.
Smith, in one of his most sensible canons, declared:

In a small
republic, where the people have entire confidence in their magistrates
and are convinced of the necessity of the tax for the support
of the state, and believe that it will be faithfully applied
to that purpose, such conscientious and voluntary payment may
sometimes be expected. (Smith, Wealth of Nations, p.
802)

[24]
The current poll tax began simply as a head tax, but in practice
it is enforced only as a requirement for voting. It has
therefore become a voting tax.

[25]
See below on fees charged for government service.

[26]
Voting, like taxation, is another activity generally phrased in
terms of “duty” rather than benefit. The call to “duty” is as
praxeologically unsound as the call to sacrifice and generally
amounts to the same thing. For both exhortations tacitly admit
that the actor will derive little or no benefit from his action.
Further, the invocation of duty or sacrifice implies that someone
else is going to receive the sacrifice or the payment of the
“obligation” – and often that someone is the exhorter himself.

[27]
We are assuming that the government will confine its use of force
to defense, i.e., will pursue a strictly laissez-faire
policy. Theoretically, it is possible that a government may get
all its revenue from voluntary contribution, and yet pursue a
highly coercive, interventionist policy in other areas of the
market. The possibility is so remote in practice, however, that
we may disregard it here. It is highly unlikely that a government
coercive in other ways would not take immediate steps to see that
its revenues are assured by coercion. Its own revenue is
always the State’s prime concern. (Note the very heavy penalties
for income-tax evasion and counterfeiting of government paper
money.)

[28]
Spencer, Social
Statics
; Herbert and Levy, Taxation
and Anarchism
; and Molinari, Society
of Tomorrow
. At other times, however, Molinari adopted
the pure free-market position. Thus, see what may be the first
developed outline of the purely libertarian system in Gustave
de Molinari, “De la production de la sécurité,”
Journal des Economistes, February, 1849, pp. 277–90,
and Molinari, “Onzième soirée” in Les soirées
de la rue Saint Lazare (Paris, 1849).

[29]
These corporations would not, of course, need any charter from
a government but would “charter” themselves in accordance with
the ways in which their owners decided to pool their capital.
They could announce their limited liability in advance, and then
all their creditors would be put amply on guard.

There
is a strong a priori reason for believing that corporations
will be superior to cooperatives in any given situation. For if
each owner receives only one vote regardless of how much money
he has invested in a project (and earnings are divided in the
same way), there is no incentive to invest more than the next
man; in fact, every incentive is the other way. This hampering
of investment militates strongly against the cooperative form.

Murray
N. Rothbard

(1926–1995) was dean of the Austrian School, founder of modern
libertarianism, and chief academic officer of the Mises
Institute
. He was also editor – with Lew Rockwell –
of The
Rothbard-Rockwell Report
,
and appointed Lew as his executor. See
Murray’s books.

Copyright
2013 by the Ludwig von Mises Institute.
Permission to reprint in whole or in part is hereby granted, provided
full credit is given.

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