I just wrote two posts that seem to contradict the title of this one.
In the first one, I made the point that the state can harm our financial well being in many ways and taxation is not the worst. Focusing on it is short-sighted.
In the second, I exposed the intellectual laziness of the attacks on taxation, pointing out that the real target should be the enablers of those taxes.
In this post, I will try to demonstrate that the practices of taxation represent a far more important and also a far more complex problem than the morality and the politics that brought them into existence.
Taxation may be ‘theft’, but repeating that as some sort of divine mantra will not get us any closer to a world without it. Taxes are a serious business requiring a serious discussion.
We will have to start with some assumptions:
- We live in advanced, social democratic, crony capitalist, redistributive welfare societies where the state (government) is consuming about 50% of their country’s GDP. It is a reality that cannot be changed overnight.
- We will assume that we can change that with peaceful means. Collapse and revolution are not part of this discussion.
- We must understand that cutting spending and scaling back the role of the state in our lives and the economy MUST precede any reduction of taxes.
Then we may apply some principles:
- Whatever the extent of government is, a certain degree of ‘taxation’ is inevitable.
- Not all taxes are created equal. Beyond the obvious money grab, they all serve different goals and have different economic and political consequences. On the road to freedom, we should aim for the reduction of some, the reform of some others and the elimination of the most harmful.
- A simple principle of tax-transparency could greatly improve our wasteful spending.
The flat tax or the restriction of certain taxes to specific purposes could be steps toward less government and more freedom.
Understanding the above we can start analyzing taxation with a utilitarian approach.
Let’s discus a few different types of taxes. I will list them in the order of undesirability, from the worst to the theoretically acceptable. This list does not aim to be comprehensive.
Estate and wealth taxes
I am having a hard time ranking the top three (estate, Capital gain and Corporate income tax) as I consider them equally evil and harmful.
All three are clear representations of the Willie Sutton principle:
The law is named after the bank robber Willie Sutton, who reputedly replied to a reporter’s inquiry as to why he robbed banks by saying “because that’s where the money is.”
Estate and wealth taxes are the clearest examples of confiscation, the most blatant abuse of the power of the state.
Capital gains tax
The capital gains tax is a tax on investment of any kind and therefore it is a tax on savings and economic activity in general. From an economic perspective, it is just stupid. Anything that is restricting or disincentivising economic activity is counterproductive. From a political perspective it is a perfect tax. It builds on envy and muffles opposition through guilt much like the sin taxes. It also tends to function like an estate tax. Let me show how using a US inflation calculator:
You bought a property for $100.000 in 1980.
A cumulative rate of inflation (187.8%) would have brought that to a nominal value of $287.756.07.
If you were to sell the property in 2016, you would have to pay capital gains tax on 187.756.07 even though the real value of the property has not changed at all. If you sold it for, let’s say, $200,000.00, you would still have to pay capital gains tax, even though you lost in real value. The capital gains tax never takes inflation into account.
From a moral perspective, as long as governments are in complete control of the value of fiat money, the capital gains tax remains the sleaziest of all taxes.
Corporate income tax
While it is true that all taxes are taxes on production, the statement is truest referring to the corporate income tax. The corporate income tax is wrong in principle and worse in practice.
It is wrong in principle because corporations cannot receive the kind of benefits that are supposed to justify the personal income tax (health care, education, social security). It is not possible to really determine – in theory – what the taxes are actually for. In practice, we could say that they are used by the political classes for political gain. Most of what is taken from all businesses will be given as subsidies to politically favoured ones. What this means is that we could eliminate the Corporate income tax with no impact to the economy and the government’s balance sheet if we would also eliminate any and all subsidies and other types of preferential treatments given to corporations at the same time.
The level of corporate income tax is inversely proportional with economic activity.
The correct rate of corporate income tax therefore is ZERO.
Dividend taxes are a cross between corporate and personal income taxes. They can be seen either as income on investment or as income on business activity. As long as we have personal income tax but no corporate income tax, I could live with dividend taxes, which is somewhat silly to say as without a corporate income tax, the dividend tax credit wouldn’t even exist. The only reason for its existence is to address the differences between the personal and corporate income tax rates.
Payroll taxes should be eliminated without a question, without a second thought. No business should be compelled to act as a tax collector for the state. Payroll taxes are complicated, convoluted and entirely unnecessary. In an ideal world without personal income tax there would be no need for it, but to get there we could start by freeing businesses from the onerous burden of being unpaid tax collectors.
The only reasons behind payroll taxes are to 1) – help the state collecting taxes and to 2) – the ‘out of sight, out of mind’ fooling of the tax-payer. Opposition to the personal income tax would be much stronger if people had to write a check every year to the government.
Personal income tax
When Libertarians call taxation theft, the income tax is the first that comes to mind. It is the most obvious, the most visible, the most offensive of the taxes. What bugs me the most about it is not its very existence, the philosophical immorality of coercion that it implies, but all the injustice, unfairness and political sleaze that is built into it. The income tax, as it is, is not just the most important ‘revenue tool’ of the government but also a tool of manipulation, division and class warfare.
It is the convoluted, complicated nature of the income tax code that makes this possible. Its illusory gains, breaks, exemptions and refunds are just a giant smokescreen to divert attention from the overall scale of the robbery. By constantly tweaking the code, adding some here, taking some there, the state directs the taxpayer’s attention to the insignificant details.
The worst problem with the personal income tax is the fact that it is progressive. If taxation is ‘theft’, then progressive taxation is doubly so. Make that triply. It means that if you work twice as hard as your neighbour, you have to pay trice as much for the same services he does.
When the national sales tax was introduced in Canada, there was much libertarian opposition to it as there is now in the US as the idea is floated yet again. I had mixed feelings about it at the time, as I consider sales taxes and value added taxes a little less harmful than other forms of taxation. The sales tax penalizes consumption and therefore incentivises savings.
Duties and export/import taxes
Trade is a good thing. We all benefit from it. Duties and import taxes are taxes on trade and therefore on economic activity in general. They are usually levied for political reasons and they are universally harmful.
The problem I have with excise taxes is their use. The practice, not the principle.
The best example of the excise tax would be the gasoline tax. It is the kind of tax that comes closest to users’ fees. The problem is that the income from it goes into a general revenue bucket with very little connection to the way it is spent. Ontario raising the gasoline tax now, when oil prices are low is a perfect scam. It will be difficult to notice because we are used to higher prices and when oil prices go up, we can just blame the evil capitalists and their profit motive. Excise taxes should be strictly related to their sources as in gasoline taxes should only be spent on transportation infrastructure and cigarette taxes on cancer and addiction research.
The point of sin taxes is that they are very easy to pass. All you need to do is to make people consuming certain types of products (luxury taxes, taxes on booze and tobacco, etc.)
They are patronizing, condescending and very often counterproductive, but I would not put them in the centre of a serious tax reform policy proposal.
This post (the whole set in fact) was prompted by the following question on Facebook:
“Do you believe individuals have a right to keep private property?
If yes, then you must necessarily be against property tax.”
My answer to the question was that it would not be very high on my list of taxes to be eliminated. As you can see, it isn’t. The question, unfortunately, hides some very important ones: What is a right? What is property? What is the minimum acceptable role of governments and the state? I will deal with these questions separately, but I had to mention them to address the point made above.
The only rights we have are the rights we can defend. A hungry tiger you happen to be alone with in the jungle does not give a damn about your ‘right’ to live. The essence of civilisation is the protection of the rights agreed upon by its members. The most basic function of the property tax is to pay for the system that allows you to register, and thereby protect, your claim on your property. If you buy a property somewhere in the far North, the nominal amount of the tax will reflect this basic function.
The second function is to provide – not just you, but the property, with basic services such as roads, sewage, water, etc. and extended ones such as electricity, garbage pickup and so on. How these services are provided and whether the government is the best provider of them is another question; what is not a question is that these services have to be provided and paid for somehow. The property tax is a perfectly legitimate kind IN PRINCIPLE. The problem, as with many others, is the practice and the implementation.
The practical problem is what the money is spent on and how. From education to gay parades; from overpaid and unionized garbage collectors to public housing and art exhibitions.
The moral problem is basing property taxes on market value. It is a most blatant money grab as it has ABSOLUTELY NOTHING to do with the kind of services that the taxes are supposed to provide for. If you decide to put gold shingles on your roof doubling the value of your house, your taxes will double. This is fundamentally wrong. The only proper assessment of a property for taxes should be a combination of the size of the land, the square footage of the building(s) on it and the number of people occupying it.
While this would undoubtedly be fair, it is not politically popular. Margaret Thatcher lost her power for what was the generally accepted consequence of trying to introduce such system.
And I could go on….
I could go on talking about other types of taxes (takings) such as professional licensing, using traffic and parking fines as a revenue source, civil forfeitures and so on.
I could also keep talking about the taxes above, more on what’s wrong with them, how can they be made less onerous and how could we possibly free ourselves from them. I only started and
I barely scratched the surface!
…which leads to the point of this post, which is simply this:
When self-righteous Libertarians stand up to proudly declare: “Taxation is theft!”; they actually think that they did something. That they stood up for the cause. That they are fighting the righteous fight against the evil statists. That they really showed them this time.
They should be made to understand that these vacuous banalities are NOT helping the cause!
All they can achieve with these declarations is that they make all libertarians look like fanatics.
People who can be easily dismissed. Worse yet, ideas that can be easily dismissed.
Libertarians need to replace pompous banalities with serious policy proposals.