In late 2017, the Republican Congress and Senate were designing and negotiating what would end up becoming the Tax Cuts and Jobs Act of 2017, signed into law by Donald J. Trump on December 22. There was a media firestorm surrounding the passage of the law, not only because of the inherent stake citizens (= taxpayers) have in tax policy, but also because of the haste with which Congress went about passing the first major piece of legislation under the Trump administration.
Notoriously, in the House version of the tax cut, Paul Ryan proposed taxing graduate students’ tuition waivers. As most of us at the Vim are graduate students, this touched home. We struck while the iron was hot and released a podcast on the bill itself and some of the procedural irregularities in its creation.
As philosophers are wont to do, however, we decided to take a step back from the harum-scarum and particularity of the 2017 tax cuts and philosophize on taxes per se. We recorded and released that podcast as well. What follows are the notes we used in recording that podcast, somewhat modified and with hypertext links for further reading. We hope that your perusal of the following material will be enlightening as well as enjoyable. Utile et dulce, as they say.
ZB: If you recall from our previous tax episode about the GOP tax bill, Dylan and I argued a bit about how we can judge whether a tax bill is good or bad. All the Democrats rose up in opposition to the GOP tax bill. But how do we know they are right in their criticisms?
Dylan and I have talked extensively about all this since our previous episode. His idea is that debate over tax policy is frustrating because there are so many contentious background assumptions. When it comes to tax policy, the assumptions are both moral and empirical. We need to settle both types of questions before we put forward a tax policy in good faith.
JD: In Dylan’s honor let’s quote his best friend and former NYU professor, Thomas Nagel. Nagel co-wrote literally the book on philosophy and taxes, The Myth of Ownership. The following quote gives an idea of the lay of the complicated land and highlights this intertwining of morality and facticity.
“Fiscal policy involves large empirical uncertainties about the economic consequences of different choices, and it is hard to disentangle the disagreements about justice from the disagreements about what will happen. A theory of justice cannot by itself approve or condemn a tax cut, for example; it requires some estimate of the effects of such a change on investment, employment, government revenue, and the distribution of after-tax income.”
ZB: Dylan advocated for doing a ‘philosophy of taxes’ episode first. He may be right about that. But what is past is past. And the GOP tax bill is here and a part of our lives now. When it comes to political activism where lives and well-beings are at stake, sometimes you cannot afford to spend your time on abstractions.
So maybe a word of defense for the first episode. We at the Vim always worry whether our discussions will appear too abstract and removed from day to day life. Philosophers have that reputation and often get criticized for advocating theories that cannot be implemented—or the philosopher might not spend time thinking about how to implement a theory. And especially because we talk about politics, we wanted to forestall the potential objection that we don’t know about policy and so should leave the editorializing to the experts. It is true that we are not tax experts, but we wanted to show a bit of our ability to engage with the particulars of policy. More generally, we at the Vim read the news carefully, even if we don’t go into detail about it on the podcast or in articles. That isn’t our lane. (Listen to episode zero for our lane.)
I’m saying all this not only to respond to the potential objection that we are a bunch of aloof academics. But I also want to point out that the first tax episode was meant to be an exercise in media literacy of the sort we are constantly trying to encourage. So we do more than call for careful and engaged reading of the news, but we try to live it. And sometimes we record it and let others listen. That was the idea.
JD: We practice what we preach, to coin a phrase.
Regardless of one’s philosophy of taxation, there were plenty of procedural objections one could make regarding how the tax bill was pushed through. It was passed at a breakneck speed and it was completely partisan and massively unpopular. It was one of those moments of hypocrisy/irony where it was basically an inversion and intensification of everything Republicans criticized about the passage of the Affordable Care Act. But the bill passed and so no more talking about that. Plus, we’ve got philosophy to do!
Should there be any taxes?
ZB: If we want to talk about the philosophy of taxes, we should start at the beginning. The first question is whether there should be taxes at all. We tend not to think about this issue. So a listener might wonder about how they would respond if someone asked them to justify the legitimacy of taxation in any form at all.
JD: That is what a philosophizing, first-principles monger would ask. Unfortunately, it’s going to lead us back even further to the question of why we have government at all. We’re going to more or less assume that some degree or form of government is legitimate. That said, I think looking at just a couple of arguments that have as their conclusion the legitimacy of government will shed light on the legitimate functions of government and thus the legitimate ends of taxation.
Let’s start where everyone starts, Thomas Hobbes. Mr. Hobbes was an English polymathic philosopher who lived through the English Civil War and hence had a very negative view of what philosophers call the state of nature, that is, how things are before there is a government. He famously said that in such a government-less state of nature “the life of man [is] solitary, poor, nasty, brutish and short”. Those are, by the by, great adjectives. Life in a state of nature is solitary because it’s a war of all against all, each left to fend for him or herself; it’s poor because there’s no economic cooperation; it’s nasty because, famously, homo homini lupus, man is a (nasty) wolf to other men; it’s brutish because the fragile flower of education and erudition never blooms; and it’s short because someone’s going to knock you over the head soon.
Hobbes thought that this anarchy would be so bad that even life under a tyrant was better. So he wrote the Leviathan. But most thinkers after Hobbes have allowed the subjects living under a government to retain more autonomy and rights. And thus John Locke usually comes next in the history of Early Modern political thinkers. Now, many of his arguments from his Second Treatise on Government are God-based and thus not so useful in today’s secular arena of reasons, but he did have one argument about private property that’s going to be relevant for us today. But we’ll get to that in due time. We’re saving it for later because taxes and private property are two sides of the same coin and right now we’re still figuring out government.
The last thing I’m going to say about the existence of government per se is that even the most libertatem-loving of libertarians advocate what’s called a “watchman state,” a term popularized in the philosophical community by Robert Nozick. I’ll just shamelessly quote Wikipedia on this one, “a night-watchman state is a model of a state whose only functions are to provide its citizens with the military, the police and courts, thus protecting them from aggression, theft, breach of contract and fraud and enforcing property laws.” Importantly, it’s taken to be the type of state endorsed by ‘minarchists’, which I think it’s fair to say is the quantum jump up from anarchism, as in, anarchism and minarchism share a border in conceptual space. So minarchism really is minimal.
To tie this to taxation one only has to point out that insofar as you think the soldiers, policemen and apparatus of the courts are going to want to eat food and have a house, they’ll probably need an income from the state and taxes are how you’d get those funds.
I want to make one last point, and that’s this idea that government’s only effect on the economy is to slow its growth. That’s totally wrong. Even if one’s sole concern was increasing GDP, you’d want a government. As Charles Wheelan put it, “Good government makes a market economy possible. Period. And bad government, or no government, dashes capitalism against the rocks, which is one reason that billions of people live in dire poverty around the globe. … Countries without functioning governments are not oases of free market prosperity.”
Zach, do you want to comment on this, or should we go forward assuming the legitimacy of some government and some form and level of taxes to pay for it?
ZB: Government is a part of our everyday life, but it is quite difficult to justify why it should existence. It is actually a scandal. You mentioned a couple of the so-called social contract theorists. That is no doubt the most prominent view, and in fact the United States was formed on the basis of social contract ideas. There are a couple other attempts to justify the legitimacy of government, but that won’t be our focus here. The position that government is illegitimate is called anarchism.
At the end you blitzed through a bunch of contentious philosophical terrain—in particular your last point about capitalism requiring a state. There is such a position as anarcho-capitalism—people who are both anarchists (meaning they think governmental authority is illegitimate) and capitalists (meaning that markets and private ownership are the best way to meet human needs).
JD: Ah, yeah. I forgot about them. So what do they say about the probably correct idea that governments actually make private commerce much less costly, i.e. make markets much more efficient? They seem to be saying that markets are the way to go, but we’d like the least efficient one possible. I mean, who is going to build the infrastructure? Who’s going to enforce contracts? Who is going to print the dead presidents that I’m going to earn? Who’s going to keep some ANTIFA hipster from robbing my shoes?
ZB: Well, the market will work out who builds the infrastructure. But we need to distinguish two different questions: 1) would a government help capitalism? An anarcho-capitalist might well say yes, but that will get messy. 2) More importantly, is a government necessary for capitalism? An anarcho-capitalist would say no, but this will also get messy. Here is the main point. Big fans of capitalism are always pointing to the excesses of the government and how the market can do almost everything (if not everything) better. But the anarcho-capitalist isn’t especially interested in whether a government would help. That is because government simply isn’t an option. There is no moral basis for government. So you can take your efficiency arguments and shove ‘em.
JD: So these guys are pretty strong deontologists or at least individual rights boosters Here I’m using ‘deontology’ loosely to mean that they incorporate moral rules whose validity is independent of the consequences that such rules have. I say this because they seem to not respond at all to general welfare arguments but dig their heels in in the soil of illegitimacy of all coercion. Do you know if they say anything about how material need is a kind of coercion and how extreme poverty debases its victims and prevents them from living in human dignity? Call me a brainwashed member of the bourgeoisie, but I’d take coerced cooperation (taxation is coerced cooperation) over the coercion of death and disease any day.
ZB: I’d say you are talking about two different types of coercion there. I might be coerced, in some sense, by nature to need food. But being coerced to give a piece of my property to the government is a different deal.
One last anarchism-advocacy point. Communism, at least in it pure or ultimate form, is a form of anarchism. It is also a rejection or negation of capitalism (if there is anything you know about communism it is that it is scheme for meeting human needs that is quite different from capitalism: instead of private ownership, there is no ownership or common ownership). So there we have a form of anarchism where concern about the functioning of markets doesn’t arise.
JD: Well, I think there are pretty good reasons to think that private property is ultimately beneficial. I realize I sound like a starchy representative of a transnational explaining to a Bolivian why his water prices are increasing, but I have to admit that those economists have convinced me that private property allows people to make the investments that allow for the creation of wealth that ultimately lifts nations from from the third world to the first world, even though they in the famous late stages those same societies start to become characterized by inequity. Let’s just run through some things that are only possible with private property. Getting loans, selling your property for cash, knowing that someone else has the right to sell their property; it’s also incredibly useful for farmers who can actually sell crops before harvesting them so that they have money all year round and can increase their financial security.
Moreover, you actually owning something can give you an incentive to make the most productive use of the resource. For example, privatizing fisheries, as in literally privatizing fish, has proven to be an extremely effective way of a) helping fishers make a better living b) get fish to the consumers year round and c) prevent a tragedy of the commons situation where the fishery is depleted.
I’ll quote Nagel and Murphy’s book to sum up.“Only in a society in which such [property] rights are recognized, and theft is prohibited and contracts and wills enforced, can there be the sort of economic cooperation, long-term planning, and capital accumulation that make economic growth and prosperity possible.”
So that’s my apologia for property rights. It won’t convince a skeptic, but we’ve gotta move on to taxation. Zach, do you have any questions or objections from the utopian political corner?
ZB: Let’s pretend I’m fully on board. This is brought to you by capitalism, after all. So let’s move to the issue of why a legitimate government would collect taxes.
Why should a government collect taxes?
ZB: Let’s assume that we should have taxes in some form. The next question would be what form. What should our tax system look like and what should it accomplish? Here we are starting to come down from the clouds and closer to the ground. If you watch a debate between politicians on the left and right, you can see disagreements on this question.
One quick point on it. We should distinguish two issues: 1) how much money should be raised from taxes, which is dependent on the issue of how big the government should be, and 2) what system the government should use in collecting taxes, meaning we can debate whether to have an income tax (head tax, flat tax, progressive tax), sales tax, property tax, etc. And those two questions are what elitist academics would call ‘orthogonal’, meaning you can answer one independently of the other. Thinking the government should be really big doesn’t tell you which tax system to implement, just as thinking the government should be really small doesn’t immediately give you a tax system.
JD: Right, and people have much stronger views about the size and overall cost of government than the methods of tax collection, though the Stamp Act is a notorious counterexample. One of the huge splits between Republicans and Democrats is in their respective attitudes about the goodness of government. Democrats will laud government programs and Republicans will demonize the exact same ones. In fact, derogatorily using the phrase “big government” is probably a shibboleth in the Republican community. Part of their platform is “Government should be smaller, smarter, and more efficient” (even if they are no longer the party of small government).
All that whereas the cadre of people who can get worked up debating progressivity vs. the flat tax or whether or not Ted Cruz’s business flat tax was really a VAT is much more limited. The only exception that occurs to me is that people are in favor of a simpler tax code.
ZB: We can remember Herman Cain’s famous (and famously stupid) “999” tax idea, that income tax, sales tax, and corporate tax should all be 9%. Maybe one day we will get to the idea we find in the mind of many voters that if something is simple it is therefore a good idea. But a quick question. Your idea is that in our public discourse the issue is how big our government is, not about what our taxing system is? Why do you think that is?
JD. The reason is probably simplicity. It’s much easier to say, whatever the tax structure is, the government should be doing this or that for the poor, the government should be spending more or less on military, the government is underinvesting in green technology or the government shouldn’t pick and choose winners, etc. The structure of taxation is just less fun to talk about. Making money is less fun than spending it.
It’s not only less fun, it’s also painful. No matter how much you think that the government is philosophically justified in taxing its citizens, there are political and economic pushbacks. And of course most people don’t even arrive at the level of a philosophy of taxation; they just sort of wish that they could used 1040 forms as toilet paper.
ZB: Ok. And I think people rarely make a distinction between these two issues (size of government vs. tax system). In politics we kinda run back and forth between them.
JD: Now that we’ve differentiated the two, let’s tackle the first issue, that is, the size of the government.
Let’s start by going back to minarchism. What did they say the government should do? Military, police, courts. You can actually go to the preamble of the US Constitution and find that our government is there to, “establish Justice [courts], insure domestic Tranquility [police], provide for the common defence [military]”. Thusly are the blessings of liberty secured.
Of these, the military is the easiest to justify. Remember that a military is common defense. Here’s where a concept from economics is really useful. It’s that of a public good. Public goods are defined by lacking two properties. Or by having two properties. Let’s not get into the metaphysics of properties. These two (non)properties are public goods’ being non-rivalrous and non-excludable. ‘Non-rivalrous’ means that once the good exists you can give it to more people, even a lot more people, at no cost because it’s not consumed. A piece of cake is rivalrous because I can’t just let thousands of people have it. We’d all become ‘rivals’ with regard to that piece of cake. ‘Non-excludable’ means that you can’t prevent people from using it.
Now, let’s go back to the military and common defense. This is non-excludable because as soon as I build a military that can protect me from foreign invasions, I’m protecting everyone. My anti-missile system doesn’t just protect my house, but a large radius around it. My navy intercepts all boats off my shores, not just the ones coming for me. My intelligence agency is tapping and spying and 007ing in general, not just for me-related stuff. To reinforce the vocabulary, it’s non-excludable because I can’t exclude anyone from the benefits it provides.
In addition to being non-excludable, my military is non-rivalrous because it doesn’t matter if my population booms, all members of it will continue to benefit from the military. One person’s enjoyment of it doesn’t diminish another’s.
Here’s the interesting bit. Any good that has these two properties, that is, any public good, will be underinvested in by the private sector. That means that the market isn’t going to solve the issue, as in it’s not going to come to the most efficient solution, which is the key value of most free-market proponents. And this is going to be true of all public goods, from municipal fireworks shows to clean air.
ZB: Why will it be underinvested by the public?
JD: First, a correction. It will be underinvested in by the private sector, not the public. That is, the market won’t provide it. Why? Basically because of free riders. Given that a public good is by definition non-excludable, as soon as the good is provided you’re dependent on the goodwill of the consumers to pay what it’s worth to them. But it’s not in their rational interest to do so since they can get it for free.
Stephen King once tried to write a serial novel where he uploaded each chapter and asked people to pay using the honors system. It was one dollar per download. He said that once a certain proportion of people were free riding on it, that is, not contributing, he’d stop writing. He set the free-rider threshold at 25%. So 75% had to honor the honors system. After not many chapters, the story folded with a pay rate under 50%.
ZB: Ok. Free riders. Let me say one last thing about anarchism. You can never say too much about it. Your point is a serious problem for anarchism. If there is an anarchist region of the globe, there wouldn’t really be borders or a military. At least, it is difficult to think about how they would arise. So there is a general foreign policy problem with anarchism. Other states could simply move in. So we get to the idea that if anarchism is going to work (whether capitalist or communist), it will have to be global.
That was my last digression to political philosophy. I promise.
JD: This isn’t a podcast about economics, so I’m going to try to limit myself to putting just one more economic idea on the table, externalities. An externality is “the gap between the private cost and the social cost of some behavior” and, tellingly, it’s a subclass of market failures. I suppose I’m sneaking in yet another concept from economics. Whoops. A market failure is defined as a situation in which “a market left to itself does not allocate resources efficiently.” I’ll come back to those definitions after giving an example to make things concrete.
The classic example of a negative externality is pollution. The polluter, we’ll say some type of industrialist. It costs him a certain amount to make his product, he has to pay for raw materials, payroll, operations, advertising, etc. Note that nowhere in those costs are checks to all those affected by polluted air, water, and soil. The farmers pick up the cost of having to choose a new water source, the parents of the asthmatic child have to pay for more medication and those poor Pacific Islanders have to be relocated to Australia. These are very real costs, and the tab is picked up by society at large (hence they’re called social costs). And when the private cost is below the social cost, private individuals will have “incentives to do things that make them better off at the expense of others.”
Now, it may be that all of this seems like some liberal mumbo-jumbo, but I assure you that this just falls out of definitions and equations of hard-nosed economists who are rarely accused of being moved by the plight of the downtrodden. Also, because we live a society where half of us don’t believe in global warming, I think it’s useful to point out that the smog that sits over Beijing and leads to hundreds of thousands of premature deaths is a negative externality. The same was true when smog was killing Londoners back in the 20th century. And that story doesn’t end with a free market solution, by the way. It ends with the Clean Air Act of 1956. And, according to the very logic of free-marketeers, these issues aren’t amenable to a market solution. Remember that a free marketeer says that all of us individuals pursuing our private interests produces the best outcome. Market failures are the counterexamples. By the way, this is part of the explanation for the Republican denial of climate science. The equation is simple. If anthropogenic global warming is a thing, it calls for more government. But they don’t want more government. So there must not be anthropogenic global warming. You could actually teach elementary logic that way:
anthropogenic global warming → more government (economics)
¬ more government (Republicans)
∴ ¬ anthropogenic global warming (modus tollens)
But I digress…
From a slightly different angle, notice an implication of externalities is that some people are involuntarily made worse off, and notice as well that when free-marketers extol the market system it’s because it’s a “a tapestry of voluntary actions between individuals.” So this is another case where even if your only goal is maximum efficiency and maximum unmolested individual freedom, you’d support government intervention.
ZB: Ok. Let’s assume that we need a government and markets cannot function well without them. Now what?
JD: We wade into controversial territory, that’s what. Here I’m going to quote The Myth of Ownership again,
“Public goods like defense and domestic order or security are uncontroversial, but beyond that minimum there is controversy. To what extent should education be financed out of tax revenues, or health care, or mass transportation, or the arts? Should taxation be used to redistribute resources from rich to poor, or at least to alleviate the condition of those who are unable to support themselves adequately because of disability or unemployment or low earning capacity?”
Summarily, there are three types of ends government can pursue: public goods, benefits to individuals, and distributive justice.
But, as Nagel and Murphy say, taxes are “the most important instrument by which the political system puts into practice a conception of economic or distributive justice.”
So, what is economic justice? What is distributive justice?
ZB: I think one of the issues we’re talking about here is inequality. How much inequality can we tolerate in our society? How far should we go to balance it? We can imagine two extremes, one where the government does nothing to redistribute wealth, everyone pays a head tax (meaning, the same amount money for each person, regardless of wealth), and the rest is left to market forces. Or we can imagine a society of complete equality. Everyone has the same amount of money. This is most likely accomplished by taxing people heavily and redistributing wealth. And there are innumerable points in between. Where should our society fall in the spectrum?
The issue is fairness. We like the word ‘equality’, but there is something to be said for the idea that, assuming people have their basic needs met, imposing complete equality is unfair (namely, for the people who produce the valuable stuff for society). But there is surely something unfair about large amounts of inequality. So how we do we settle this question?
JD. No one has ever settled it. So please don’t hold your breath for us to do it. But let’s take a look at the poles at the ends of the solution spectrum. At one end we’ve got the libertarians and at the other end you’ve got a John-Rawls approach. One of the cruxes of the disagreement is their respective views on property rights and other economic rights. And just in case it seems like we’re going off on another tangent, it’s worth keeping in mind that there is no separating taxes and property rights. Taxes are a part of property rights, because what is a tax if not a limitation or condition on property (in this case one’s money)?
Now, libertarians are famously proponents of very strong property rights. They are inheritors of John Locke’s philosophy of property. Even though Murphy and Nagel aren’t sympathetic to this view, they express it in a forceful way. “Our original sovereignty over ourselves—a moral given, not created by the state—leaves us free to employ our capacities and implies that others have no right to interfere with that freedom, unless in using it we transgress the rights of others. The state cannot change this. It is not a collective arrangement whereby we all own shares in each other, which we can exploit for the common good.” Locke said that this ‘original sovereignty over ourselves’ extends to the objects of our labor via an infamous theory of labor mixing. This would give strong prima facie reasons against a government’s right to cream off a person’s profits (i.e. the ultimate results of their labor).
A libertarian will say that my right to engage in unfettered economic dealings is a right in the same way that freedom of speech or religion is a right. In both of those cases, we only restrict individuals’ rights in very extreme circumstances. In fact, the whole idea of individual rights is that there are certain things a majority — the collective — can’t do, no matter how well intentioned they think they are. According to a libertarian, we should accord that same strong inviolability to economic rights. Hayek expressed this forcefully in saying, “a democracy in which the majority was free to impose a discriminatory tax burden on the minority was unjust and oppressive.”
Zach, can you think of any reason why the libertarian is wrong about this?
ZB: So how basic or central are property rights? Let me frame that by talking about how we think property rights come up. So the issue is how private property arises and whether property has some sort of political priority. By that I mean, does the state come along after some property is established in order to protect the property? This is what our previously mentioned friend John Locke thought. He has the most famous theory of property, and you mention his influence in libertarianism. His idea was that when you mix your labor with something you can come to own it. You pick up some wood, mix in some labor and make a chair, and in the process the product has become yours. The fact that we own our labor allows us to extend ownership to things that have our labor in it. And this all holds outside of the state.
Plenty of people think this is nonsense, even if it is kinda clever. A philosopher named David Hume, one of the greatest, thought that there was no property outside of a state. Property is a product of a “convention”—an agreement we all enter on the basis of private and common interest. This convention he called justice. We come together and agree to some rules about how we handle our possessions. Following those rules is just, breaking them is unjust. And then, within the convention, our possessions acquire the morally loaded significance of being property. Hume actually said that the people who talk about property outside of the convention of a state are committing a “very gross fallacy.”
Immanuel Kant also didn’t have much use for Locke’s view. His idea was that property is not about how we relate to an object (as Locke thought) but actually about how we relate to each other. So there must be a community before there are property rights.
Instead of going into that more let me step back. All of these thinkers are trying to solve one of the biggest problems in political philosophy. The question is what it means to own something. Private property is about more than holding something in your hand. That is one sense of possession. But to own something means that even if I’m not holding it is wrong for you to take it. So how did this come about? What is the ownership relation? It is an hard problem. So if we want to look to property for some firm footing, we aren’t really going to get it.
JD: But where is justice in that? It’s in the fact that all transactions are voluntary. Whatever distribution results from the free market is just because the process is just. A famous libertarian thinker, Robert Nozick, once criticized many views of economic justice by saying that “liberty upsets patterns.” Here, “patterned justice” means some ideal distribution of wealth — and note that anyone who complains of inequality has at least a minimal idea of a patterned justice. The phrase “liberty upsets patterns” means that freedom in the form of
unimpeachably and obviously good, voluntary, mutually beneficial transactions will upset this pattern of justice. Nozick produced a famous thought experiment designed to show this.
ZB: Surely someone says Nozick is wrong!
Let’s move to the most famous example of an equity or fairness approach. That would be John Rawls. His fundamental insight is that nature isn’t fair. Some people are born into wealthy families; some people happen to go to a school where they will be networked with the movers and shakers of the economy; some people when the genetic lottery. These are all things that determine one’s life prospects and there is no way that we can be said to deserve them. The lingo says that they’re morally arbitrary. This throws a wrench into the idea of the market producing a just distribution. Justice isn’t supposed to be pure dumb luck.
ZB: Right. You didn’t choose to have your parents and all that comes along with that—wealth, skin color, geography. So if you were to build a society and yet you didn’t know beforehand what place you would occupy in the society, what sort of choices would you make? If you didn’t know whether you’d be rich or poor, disabled or able bodied, black or white, how would you construct the society?
JD: It’s interesting to see Rawls’s argumentation surrounding this. He thinks that the most just distribution of society’s goods is to have it be as equitable as possible before you start to make the worst off worse off. That is, you redistribute, regulate and redesign society to be more and more equitable until you’re actually hurting the worst off. The idea is that eventually you’ll reach a point where taking more money from the rich will actually start to just be purely destructive. For Rawls, we should get to that point and then stop.
Often in this context you’ll hear “maximin” which refers to his idea that you’re trying to maximize the minimum. This is really the essence of his line of thought. It does have some interesting implications, though. By “interesting” I of course mean counterintuitive. And by “counterintuitive” I mean probably wrong. One of those interesting implications of the maximin principle is that it isn’t responsive to improvements in the middle or upper echelons of society. According to the theory, if your middle class is vibrant and moving upward socio-economically, that’s just as good as if your middle-class is just barely better than society’s poorest. It’s actually the same as there being no middle class and your poorest being legion.
But this does capture a common intuition, namely that social justice is intimately concerned with the plight of the poor. There’s a famous Ghandi quote that’s something like “A nation’s greatness is measured by how it treats its weakest members.” And there’s a quote I really wish I could remember that’s something like, The point of view of justice is the point of view of society’s poorest members.
ZB: Alright. Let’s not dig more into Rawls. I’m sure, as always. people could defend him. Academia is swimming in defenses of Rawls. So I ask listeners to direct your Rawls fan-boy letters to Justin and not me.
JD: I’m just repeating water-cooler rumors. Anyway, there are many conflicts between libertarianism and Rawlsianism, and some things quite off that spectrum, but we’re limited corporeal beings, so let’s move on and discuss some nuts and bolts of taxes.
How should a government collect taxes?
ZB: For the last segment we’ll talk a bit about some specific issues in tax policy. We think there should be some taxes and we kinda know what we want to accomplish with the taxes (some conception of justice, some set of services only the government is suited to provide). So what tax system should we implement?
JD: We’re going to talk about the exciting battles between flat and progressive taxes, income versus consumption taxes, and death. Death taxes. I know everyone’s interest is piqued. The first controversial decision we’ve made as a society is to get a lot of revenue from income, be that personal or corporate. Zach, can you sense why that might not be the most obvious way to get taxes?
ZB: So an income tax is when the government takes a portion of the money you make. It gets deducted from your regular paycheck. Why is that not the most obvious way to get taxes? Because it involves an annual awful tax season?
JD: Here’s a quote from the witty Charles Wheelan. “Taxes provide a powerful incentive to avoid or reduce the activity that is taxed. In America, where much of our revenue comes from the income tax, high taxes discourage … income?”
And we’ll address other possibilities for government revenue in a second. But even having chosen to get revenue from income doesn’t mean that all relevant decisions have been made. There are different ways to tax income, most prominently a flat tax and a progressive tax. In a flat tax regime everyone gets the same percentage taken from their income. In a progressive tax regime, as you pass certain thresholds, as you enter into higher and higher brackets, you start to pay more money. There is a presumptive fairness to the flat tax. Rhetoric from Dick Armey (R, TX) and Richard Shelby (R, AL). “The flat tax will restore fairness to the tax law by treating everyone the same. No matter how much money you make, what kind of business you’re in, whether or not you have a lobbyist in Washington, you will be taxed at the same rate as every other taxpayer” So there you hear “treating everyone the same”. That’s one way to look at fairness. Zach, why do you think it might not make sense to treat everyone the same?
ZB: Because it kinda sounds like what the liberals are always saying they want. Ultimately, in some abstract sense, it would be nice to live in a society where everyone is treated the same. Why not start now with income taxes?!
JD: The short answer to my question of why not treat everyone the same (in this case that means taxing them at the same rate) is the obvious reason that not everyone is the same. That is, there are relevant differences between people when it comes to taxation. This is thought and talked about under the header of vertical equity.
When people talk about vertical equity, they’re talking about morality, specifically about fairness. But there’s also an economic reason why progressive taxation isn’t actually taking a disproportionate amount from the rich. The answer has to do with yet another economic concept called diminishing marginal utility. It’s actually an easy concept to grasp.
Say it’s hot outside and you’ve got a sweet tooth. You order a scoop of ice cream. That first scoop is the top of the tits. Dopamine is rip roaring through your brain and you’ve known no greater ecstasy in your life. A second scoop is still good, but it isn’t psychologically as good as the first scoop. And eventually you wouldn’t even pay for another scoop. After that point, they’d actually have to pay you to eat another scoop. From an economist’s point of view you’ve gone from positive utility of ice cream to zero utility to negative utility. And that’s diminishing. The “marginal” refers to the fact that you’re considering the margins, i.e. you’re looking at each additional unit as it comes along.
Since this isn’t a podcast about ice cream, let’s go back to money. The idea is that money can be described by the same function, even if we’ve not seen someone get negative utility from money. Just imagine what would happen if three different people had a $10,000 windfall. If an inhabitant of the third world gets it, he’s rich. That’s it. No more working. He’s set for life. It’s more money than he imagined he’d ever see. If a lower-middle class American gets it, that’s great. That’s going to solve some debt issues or maybe go into getting a kid some college education. It’s a truly wonderful moment, but it isn’t quite as manna-from-heaven-like as in the first case. Now imagine Donald Trump gets $10,000. What does he do? He gives it to Don Jr. and says, “Have a nice dinner.”
To me, that’s a pretty convincing argument that if you’re thinking about the ‘sting’ of taxation, progressivity makes sense.
ZB: To give a quick recap, it doesn’t make sense to tax all people, rich and poor, at the same rate because a dollar does not mean the same thing to them all. A dollar to a poor person has more utility than a dollar to a rich person. So extracting more money from a rich person via taxation is fair from the perspective of utility of money. And that is the perspective we should be considering since what we care about is what value money has to the people who own it. Some type of objective value is not what we’re interested in since that’s not how people are.
JD: Yes. That said, I’m aware of one conservative argument that makes progressivity look quite ridiculous. You interested? It’s here, in video form.
ZB: It is a parable about three brothers that is meant to show the grave injustice of progressive taxes. Now, it is easy to tell a parable about why the progressive tax is bad. There is something implicit in the parable: that it is generalizable to the whole of society. The parable stipulates that the brothers have the same starting point (ability, family size, earning potential). There is also nothing in it about inheritance and the wealth of their family (and it wouldn’t matter because they are brothers). That’s not how the world works.
JD: Yes. That’s why it’s misleading. That said, do you think it has any value as a thought experiment given that, in theory, this could happen?
ZB: The fact that in theory it could happen means that the conclusion of the parable is that in theory progressive taxes could be bad. I will give it only that much.
One point about progressive income taxes. Sometimes people argue that we should not tax high earners at a higher rate because these rich people are the job creators. If they are giving more of their taxes to the government then that is less money they could spend employing people. What we have been saying provides the response to this. I’m talking about the distinction between moral and empirical questions. This conservative anti-progressive tax position actually assumes a moral position: that we want the poorer people to have their needs met. The idea is that employment will be the way to make that happen. What is debatable is the empirical question of whether lower tax rates for wealthy people will in fact lead to higher and better employment for poorer people. The people who think it does are advocates of what is called supply side economics or “trickle down” economics. Considered at the level of conceptual abstractions, there is something intuitive about it. If you repeat the idea enough it starts to sound plausible. But I think the evidence is strong that it doesn’t actually work. The reason it is still a fixture of the tax debate is that one political party is primarily concerned with doing the bidding of wealthy people. But I’ll leave that point there.
JD: So now that we’ve solved that issue, we can briefly go on to talk about alternatives to taxing income. Actually, for time’s sake, just one. That’s a consumption tax. According to The Economist magazine, taxing consumption is what’s favored by economists. As mentioned earlier, taxing something is disincentivizing that thing. You don’t want to disincentivize income, or savings, but expenditure might not be so bad. In addition to not perversely disincentivizing activities we value, it’s also discreet and harder to evade. Its discreet-ness is apparent in the lesser outrage we feel when looking at the sales tax on our receipts than the outrage we feel at paying income tax. It’s harder to evade because buying things is a procedure without loopholes, whereas filing taxes has more Swiss cheese holes than pipelines to Swiss banks. One problem with such a tax is that it might be regressive, which is a sin against the aforementioned vertical equity.
ZB: Are you talking about the famed value added tax? A lot of progressive European countries have it (in fact,the U.S. is quite the outlier on this). The idea is that a product is taxed at each point along the market chain (at each point where value is added). So a product has already been taxed numerous times by the time it reaches the shelf. This raises a bunch of money so that income taxes could be low. The issue is that products become more expensive to recoup the cost of all the taxes along the way. But since consumers have more money from a decreased income tax, it’s actually not so bad.
There would be problems implementing this in the U.S. for a number of complicated reasons that I do not really understand. I’ll leave it to the economists, but many of them seem to like this idea. So if you think experts should have a say in what we should do, maybe consider it.
JD. Yeah, and I think that you’ve actually hit upon why it’s not going to fly in the US. It’s that you see it in “liberal Europe” (a stigma). As we’ve both said, focusing taxation on expenditure is well-supported by economists and economists are a right-leaning group economically. They study the market and tend to believe in it, so perhaps this is a case of a ‘miasma of socialist stink’ infecting an idea that conservatives would otherwise accept.
Alright. I think the marginal utility of us continuing is below our opportunity cost of continuing, so let’s exercise our rational self-interest and end this thing.