The most recent issue of the Canadian Journal of Law & Jurisprudence (Vol. 18, No. 1, 2005) contains a wonderful collection of tax articles by a dazzling array of American and international tax scholars assembled by Guest Editor Edward J. McCaffery (USC):
Without question, the libertarian vision that envisions the use of state power to control force and fraud as a proper governmental function is one piece of any comprehensive political theory. But the hard-line libertarian goes astray in finding this the sole function of government or in thinking that the maintenance of order is possible without the imposition of taxes. Rather, the case for taxation rests on the familiar view that state coercion is sometimes necessary to overcome coordination problems. The justification for a minimal system of taxation therefore is that it provides more in benefits for the individuals taxed than they lose in revenue. Stressing the benefit shows the mistake in Nozick’s famous observation that taxation is “on a par” with forced labor. And the proper understanding of the logic of taxation shows the defects in the series of steps in demoktesis—or “ownership of the people, by the people, and for the people”—that Nozick offers to show how difficult it is to draw any clear line between taxation and slavery.
The idea that taxes involve the confiscation of private property is widely held in popular thinking and scholarly writing. This article challenges the libertarian foundations of this assumption by critically examining libertarian theories of private property and their implications for tax policy. Part II summarizes the leading libertarian theories of private property, reviewing John Locke’s argument in the Second Treatise of Government and Robert Nozick’s account in Anarchy, State, and Utopia. Part III examines the implications of these libertarian theories for tax policy, considering libertarian prescriptions for substantive tax measures as well as institutional arrangements that affect tax policy outcomes. Part IV criticizes libertarian theories of private property, casting doubt on tax thinking that relies on these libertarian foundations. Part V considers the implications of this critique for tax policy and tax scholarship.
Conventional wisdom among contemporary liberal egalitarians is that taxing individuals according to their “endowment” or “earnings capacity” would constitute an unacceptable intrusion on basic human liberties. In effect, the argument goes, such a scheme would result in a type of slavery – in order to pay the tax, people would be forced to accept jobs commensurate with their identified levels of endowment. The most succinct formulation of this argument comes from John Rawls, who argued that an endowment tax “would force the more able into those occupations in which earnings were high enough for them to pay off the tax; it would interfere with their liberty to conduct their life within the scope of the principles of justice…”
This Article examines the Rawlsian objection to endowment taxes and considers whether it can be distinguished from the libertarian claim, advanced most famously by Robert Nozick, that taxation of earnings is unjust because it is “on a par with forced labor.” The Article’s principal claim is that unless one assigns greater moral value to non-market activities than to market activities (a position arguably in tension with the liberal principle of neutrality as between alternative visions of the good life), there is no difference in kind or in degree between the interference with liberty occasioned by the two types of taxes. It follows from this analysis that if one accepts Rawls’s argument regarding endowment taxes, one must also accept Nozick’s argument regarding wage taxes. If correct, this conclusion presents the liberal egalitarian with a dilemma: she must either (1) embrace endowment taxes as a moral ideal, rejecting the liberty concerns expressed by Rawls and others, or (2) join Nozick in renouncing the ordinary taxation of earnings, a move that would substantially weaken her commitment to egalitarian outcomes.
The purpose of the Article is not to offer any particular resolution of this dilemma, but rather to expose some of the tensions inherent in the liberal egalitarian framework and to suggest that consideration of these tensions is necessary to the development of a more satisfactory liberal egalitarian position on questions of taxation and distributive justice. Toward that end, an alternative framework is suggested for assessing the liberty cost of taxation. It is contended that all taxes—whether on income, consumption, wealth, endowment or other tax bases—interfere with individuals’ pursuit of the good life. For any given level of revenue to be raised through taxation, the recognition and protection of a liberty interest in one type of activity will simply increase the liberty costs associated with unprotected activities. The liberal instinct to shield non-market activity from taxation does not reduce the liberty cost of taxation, but rather shifts it to those whose conceptions of the good life involve the use of markets. This is not to suggest that a concern for personal autonomy should not inform our choice of tax institutions, but rather that the question may ultimately be one of distribution. That is, in fashioning a tax system, how best can we allocate the benefit of being free from taxation’s inevitable interference with personal autonomy?
In this short essay I argue that the main insight of Murphy and Nagel’s book, The Myth of Ownership, that people have no right to their pre-tax income, is not supported by their claim that the right to private property is not a natural right. The non-naturalness of the right to private property, I argue, is irrelevant to their moral argument. The plausibility of their moral conclusion derives from the thesis (which they also seem to endorse) that people have a right to the fruits of their labor, maintaining, however, that there is no possible conception, morally speaking, of what the fruits of one’s labor are, independent of a system of legal and social norms that constitute the terms of fair bargaining, pricing, etc. People can only have a right to a fair assessment of the added value of their labor, and the latter cannot make any sense independent of the entire system of norms prevailing in the relevant society. I argue that this last conclusion is not affected by the nature of the right to private property.
It is not untypical for arguments about the justice of taxation to be framed in the rhetoric of property, for example by equating taxation with the taking of property by the state, a form of expropriation. An important recent example is found in Murphy and Nagel's book, The Myth of Ownership: Taxes and Justice. In this paper the author argues that the equation of taxation with expropriation is conceptually awry, and that, properly understood, justifications for property rights bear only tangentially on the justice of taxation. The author elaborates this view by discussing Murphy and Nagel's general strategy when they attempt to justify taxation in the face of libertarian 'pro-property' arguments, in the particular case of the 'saver's argument', i.e., the argument that taxation on the income from investments amounts to an unfair burden on savers.
Publicity of information is a fundamental principle of American democracy. Not only is it instrumental in increasing compliance with the laws, a necessity of any government, but also it is an essential element of the right to know — which itself is an aspect of the first amendment right to free speech. Unfortunately, publicity often conflicts with another fundamental right —the right to privacy. In regards to taxes, citizens essentially have two rights to know: a right to know what the tax laws are, and a right to know that these laws are being administered fairly. Publicity in the tax context traditionally means making tax return information public records in an attempt to ensure the fair administration of the tax laws. This type of publicity, however, generates intense hostility because taxpayers perceive it as a huge invasion of their privacy. After examining the pros and cons of traditional publicity of tax information, this Essay suggests that tax publicity be reconceived more broadly. Redefined in the dictionary sense of simply the transmission of information, tax publicity can include a wide array of communications, varying as to content and audience, which can better achieve publicity’s underlying goals with minimal invasions of privacy. A large portion of publicity in this broad sense can be — and should be — educational.
The Essay outlines four publicity proposals to stimulate discussion. Three use the expanded definition of publicity and focus on individual taxpayers: an annual tax statement, a short booklet to accompany the 1040, called Know Your Taxes, and an annual W-4. These essentially educational programs should deliver tax information to taxpayers more effectively than currently occurs. The fourth, more controversial, proposal suggests partial publicity — in the traditional sense. It attempts, however, to minimize the customary objections to publicizing tax return information by reducing invasions of privacy. All the proposals will cost money, but probably less than the costs of enforcing compliance only through increased audits and litigation. They may also have psychic and political costs. Although recent studies show that more informed taxpayers are often more compliant, some of the information may trigger negative attitudes which would decrease compliance and/or create pressure for lower taxes.
Regardless of whether taxpayer reactions to the increased information are positive or negative, the greater publicity proposed in the Essay could have salutary effects, especially if it occurred in the context of a rational debate by elected officials about tax policy (instead of the current inflammatory rhetorical sound bites). On the one hand, if taxpayers respond positively to publicity, compliance will increase. If they act negatively, and their hostility to taxes increase, at least the publicity will arm them with more precise information that will allow them to focus their objections to the income tax and thereby lobby more effectively for real tax reform.
This article considers the use of cultural analysis by tax academics, particularly as it concerns comparative tax issues. While various authors have used the terms "culture" and "cultural" in tax scholarship, it is not clear that they have ascribed the same meanings to these terms, and their approaches have (with rare exceptions) not yet been systematic. In particular there is a division between those scholars who have used the term to indicate broad national characteristics, such as the American ambivalence toward wealth or the Italian tolerance for tax evasion, and those who have considered the beliefs and practices of tax professionals or administrators--what might better be called the tax anthropology or sociology of a given country or region. The author considers these issues in the context of two specific problems: the issue of progressivity and tax reform, and the narrower issue of statutory interpretation and tax shelter limitations. The author concludes that cross-cultural comparisons hold substantial promise in the tax field, but are likely to be most productive when focused on specific, well-defined problems and when the author is clear as to what definition of culture he or she is concerned with.
Recent U.S. tax cuts, to the extent that they involved a principled, long-term policy view, seem to have been aimed at shrinking the size of government. The idea apparently was to force eventual spending discipline, even (or perhaps especially) with respect to Social Security and Medicare, by turning reduced tax revenues into a political fact on the ground that would be difficult to reverse. In fact, however, the idea that the tax cuts would make the government smaller seems to have rested on spending illusion, or confusion between the actual size of government, in terms of its allocative and distributional effects, and the observed dollar flows that are denominated ‘taxes’ and ‘spending’. Given the long-term budget constraint, which holds that government inflows and outlays must ultimately be equal in present value, and the huge preexisting fiscal imbalance, the tax cuts are likely to be paid for, in the main, through some combination of future tax increases and cuts to Social Security and Medicare. (Other government spending cuts, relative to the case where the tax cuts were not enacted, are likely as well, but cannot contribute nearly enough.) To the extent that the 2001 through 2003 tax cuts lead to future tax increases, the combined effect is likely to make the government bigger both allocatively and distributionally. To the extent that Social Security and Medicare spending bear the brunt, the government still gets larger in the sense of increasing redistribution from younger to older generations, although Medicare cuts might decrease the size of government allocatively.
Virtually all liberal egalitarian advocates of redistributive taxation support an income tax, believing that consumption taxes fail to reach capital and its yield. But this is not true under progressive rates. There are two forms of consumption tax, prepaid and postpaid. A consistent progressive postpaid consumption tax reaches the yield to capital in just those cases in which ordinary moral intuitions want it to be reached: when savings are used to finance a "better," more expensive, lifestyle. Such a tax stands between an income tax, which double taxes all savings, come what may, and a prepaid consumption tax, which never taxes savings. It is the last, best hope for some semblance of redistribution via tax on earth.