Justice, Fairness and Taxation, Part Three

This article was originally published by

The Distributist Review on 19 January, 2011

In Parts One and Two, I mainly discussed the different schools of Capitalist thought (Keynesian and non-Keynesian) and how Distributism differs from them in regard to the role of government in stabilizing the economy and the use of taxation in doing so. Before I begin discussing the different methods of taxation, I should also make a brief mention of other contemporary views on the subject.

Many in the conservative and libertarian camps objected to the “too big to fail” claims the government used to justify the recent bailouts of large banks and other big businesses that were in danger of collapse. Rejecting the Keynesian notion that works to preserve the existing wealthy class, they would rather have allowed those institutions to collapse and make way for new ones. They also reject the Keynesian idea of redistributing wealth to stabilize the economy and would rather let it fluctuate “naturally.” Like the Keynesians, they accept the idea of the wealthy monopolist as an essential part of a healthy economy, but they would limit the government’s interference to insuring that workers were paid at least a living wage and had good working conditions. They generally accept the government being able to regulate the exchange markets to prevent what they would consider fraudulent and immoral trading practices, but they also reject the government being able to artificially adjust the market. Their view on the role of government is much closer to that of the Distributist, but the libertarian would restrict the government even more. While the Keynesian camp divides on the lines of just how much wealth should be redistributed and what kind of programs should be used for that redistribution, the conservative-libertarian camp divides on how much they would restrict the government’s ability to regulate business and the economy in general.

The Socialist generally believes in the complete redistribution of wealth. Private ownership is abolished.

I do not pretend that the following views represent “the Distributist view.” These are really my own musings as I struggle with this very complex topic. I offer them to the reader for consideration and as an opening of frank discussion.

When attempting to establish justice in taxation, there are many complex issues that are all too easy to overlook, especially when one is looking for quick answers to a crisis. This is one of the points that Mr. Médaille tried to point out in his article. The truth is that any system of taxation that does not leave everyone in the same economic situation will be harder on the poor than the rich. This is true even if the rich pay a much higher tax than the poor. Therefore, discussions on what type or level of taxation is “fair” cannot be based on those taxed, but on why and how they are taxed.

Taxes exist to fund the function of government. This opens a whole new topic of conversation between Capitalists, Socialists and Distributists regarding what the function of government is, but that’s a possible topic for other articles. The funding of those functions is achieved by imposing taxes. Since this is coming from the view of a Distributist, I will approach the various forms of taxation from the viewpoint that government should operate according to the principles of subsidiarity.

Income Tax

It seems to me that an income tax does very little in the way of establishing economic justice. However, the truth of this may depend on what you consider economic justice to be. Calls to raise the income tax, or to establish one, seem to rest on the idea of making the rich “pay their share.” Critics refer to these calls as the “politics of greed and envy.” They are right about this because the advocates never really define what a “fair share” is. What is the real goal? It obviously isn’t egalitarian because the taxes are never high enough to accomplish that. A 90% tax on someone earning $1,000,000 would still leave them with far more than someone who only earns $30,000 and is taxed at 0%. Instead, income tax seems to be made to order for the Keynesian idea of redistributing wealth, and the “fair share” is whatever it takes to maintain that redistribution through the government programs desired for accomplishing it.

Another problem I have with income tax is that it seems to put the government before the people instead of the other way around. Not only are you hit with the Keynesian notion of “the more you earn, the more you pay,” but it buffers the government from the consequences of recession at the expense of the workers. Workers try to save their earnings during a recession, but the government grabs its same share from those earnings—and may even try to increase the percentage—before the workers get it. Additionally, charitable contributions given to someone in need can be considered as income and taxed. It may be true that it isn’t at the present time, but that doesn’t change the fact that the notion of the income tax includes this ability.

Actually, wages should not be considered income at all because it is an exchange. The government considers the income to be without loss, but the wage earner has lost the time as well as the product of his labor. As the law stands now, however, if you find a dollar on the street, that’s income; if I give you a sandwich, that’s also income because that sandwich can be translated into a monetary value. The fact that you are not currently taxed on such things means nothing. In the United States, you can be taxed on any income “from whatever source derived.”

Sales Tax

If only given the choice between income and sales tax, I personally prefer sales tax. It seems to me that this at least puts the citizen before the government. It seems more just to me that, if the government’s economic policies mess up the economy and drive people to spend less, the government should feel the pinch as well—and not just when people can’t pay income tax because things have gotten so bad that they lose their jobs. Those with a lower income must utilize a higher percentage of it for the basic necessities of life, which means the poor pay a higher percentage of their available monetary resources to taxes than the rich simply because they must spend a higher percentage of their money in order to live. Of course, it gets even worse when we are subjected to both income and sales tax.

The Common Problem with both Income and Sales Tax

Both of these forms of taxation result in a widely variable income for the government. This leads to an unstable government because it cannot accurately predict how much money it needs to pay for its functions. This opens the door to funding the government through debt, and it has become the common practice is for the government to borrow to cover the loss, but that has led us to some very unfortunate consequences. We have grown to accept that the government implements programs everyone knows it will have to fund through debt. Once this became the accepted practice, the number of government programs exploded without regard to the means to pay for them. We leave it to future generations to cover the debts being incurred today. Anyone should be able to see that no government would be granted an absolutely unlimited line of credit. The ride has to come to an end some time. Anyone should be able to see that holding a debt over someone gives power of them. Therefore the banks and foreign government’s who hold the debt over our own government hold power over it. The only way to escape that power is to pay the debt or to default on the debt and all claims against it.

Society needs its government to have a stable and predictable level of income, which can only be achieved if what is taxed is also stable and predictable. This cannot be achieved with either income or sales tax. A predictable and stable level of income for the government means that we would know exactly how much money the government (at any level of government) has to spend. If we deem that more is necessary, the tax rate can be adjusted, but in a way that remains stable and predictable.

I will consider some other methods of taxation in the next part.