What’s “Just” about Taxes?

Acton.org | Samuel Gregg | Mar. 5, 2008

Everywhere, it seems, tax is in the news. At least two U.S. presidential candidates have signaled their intention to raise taxes on higher-income earners and specifically target oil companies if they are elected.

In Venezuela, Hugo Chavez is threatening to heavily tax any food company making “excessive profits” — whatever that means — as his “21st century socialist” economy falters in its ability to perform even basic tasks such as feeding Venezuelans.

Across the Atlantic, Germany is proposing “special” taxes on bank-transfers to Switzerland, Liechtenstein, and Monaco. Britain’s government recently suggested increasing taxes on non-domiciled foreigners, and only retreated after a public outcry. Even the Organization for Economic Cooperation and Development (OECD) has weighed in, recently telling Monaco, Liechtenstein, and Andorra that their low tax rates are anti-competitive. Oddly enough, by “anti-competitive,” the OECD means that these countries’ tax-rates are lower than everyone else’s.

Another bizarre development is that some American clergy and politicians now quote the Bible to justify raising taxes — as if the Bible expressively mandates high tax-rates.

Of course, there’s nothing intrinsically immoral or unjust about low tax rates for individuals and companies. It’s telling, however, that numerous interest groups, NGOs, and politicians treat any proposal to lower taxes as if it was the equivalent of homicide. Perhaps even more disturbing is the fact that most people in developed countries — especially Western Europeans — have simply become habituated to governments taking over 40 percent of their annual incomes.

In 1913, the highest American federal individual income-tax rate was 7 percent on $500,000. Today, the equivalent tax-rate is 35 percent on $357,700. It is not only the rate increase that is remarkable. One dollar in 1913 had considerably more buying power than a 2008 dollar. In other words, most Americans today pay more tax on money which itself is worth much less than it was 95 years ago.

In his Wealth of Nations, Adam Smith said that taxes were necessary to enable governments to perform three essential functions. One was national defense. Another was public security and the administration of justice. The third was public infrastructure needs, though Smith envisaged that governments could contract much of this to private companies.

Today’s reality, however, is that taxes are raised for purposes that go far beyond these limits. Many politicians, for example, do not even bother to disguise the fact that they regard high taxes as a means for massive wealth-redistribution and financing social engineering. The fact that high taxes destroy incentives for entrepreneurs and businesses to create the wealth that gradually improves everyone’s material well-being — including the poor — appears to escape many politicians’ attention. Likewise high tax rates are often justified by the need to fund government-provided social services that families, charities, private associations, and churches are invariably much better at performing.

Then there are the negative moral effects of high tax rates.

First, high taxes undermine respect for property rights. If the state routinely takes, say, 40 percent of peoples’ incomes, then we should hardly be surprised that some individuals become rather casual in the way they treat others’ private property. Second, the existence of high taxes helps facilitate a culture in which some political parties basically tell people that, in return for their vote, they will effectively transfer large amounts of others’ property to them via taxation. That’s surely a mild form of corruption.

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3 thoughts on “What’s “Just” about Taxes?”

  1. Those looking for greater details on government spending of tax revenues can look at the Citizens Against Government Waste’s Pig Book Summary. There’s obviously room for trimming in the federal budget.

    One factor that Gregg omits, however, is the Consumer Price Index. There is a risk from any immediate and drastic reduction in taxes for inflation, caused by market pricing adapting to sudden changes in incomes. In other words: in a free market, pricing is often (though not always) dictated by the demand for goods and services and what consumers are willing to pay based on their incomes. Suppliers and manufacturers would be apt to take advantage of sudden net “increases” by jacking up prices, effectively wiping out any gains seen by the initial tax decrease.

    Estonia was used as a proof of the success of the flat tax: however, their drastic reduction could perhaps be a reason for their 11.3% rate of inflation.

    Perhaps a more gradual reduction would have eased these inflationary pressures.

  2. James, Individuals and businesses keeping more of the money they have ethically and fairly earned does not and never has “caused” inflation. Governments OVERSPENDING, over-taxation, price controls, excessive regulations, increasing the minimum wage, protectionist trade policies, and printing more money are usually the main reasons for inflation.

  3. James, This comment from you exemplifies once again the disconnect with reality of leftists and many liberals:

    in a free market, pricing is often (though not always) dictated by the demand for goods and services and what consumers are willing to pay based on their incomes.

    Reality check time! In a free market pricing is ALWAYS dictated by the supply and demand of goods and services. It is only when governments interfere with the freedom of individuals to exchange value for value that problems, shortages, and inbalances appear.

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