1
20
2
-
https://s3.us-east-1.amazonaws.com/sjcdigitalarchives/original/a750e33a1cad4235ae601e22819f9821.pdf
472b3820a62b938da44bfd8fe905ba99
PDF Text
Text
Can Taxes Be Fair? Should They Be?
Lecture to be delivered at St. John's College, Annapolis, October 11, 2013
By William S. Peirce
Professor Emeritus of Economics, Case Western Reserve University, wsp@cwru.edu
Abstract: The concept of "fairness" is so frequent in modern discussions of taxation that the absence of
the term in ancient and medieval discussions of taxation may seem surprising. The older literature uses
such terms as "intolerable" and "confiscatory," as well as "old" and "new." Fairness seems to have
entered the tax discussion in the literature on natural rights that held sway in the era of the U.S. and
French revolutions. Despite the ubiquity of fairness as a criterion in the discussion, it has not led to
agreement in the design of taxes. The flaws are fundamental; the concept cannot be perfected. The
economic concept of "opportunity cost" is more basic, and this leads directly to the choice of the land
value tax. This offers a way out of the swamp of fairness in the design of a tax system.
We hear references to fairness and taxation all the time. The President calls on the rich to pay
their fair share. Organizations actively promote the "Fair Tax." If you study Public Finance you will hear
much about specific versions of fairness in the form of horizontal equity (that equals should be treated
equally) and vertical equity (that unequals should be treated in an appropriately unequal way).
Although vertical equity has some echoes of Aristotle (bk.5, ch.3), the juxtaposition of the concepts of
fairness and taxation is a recent phenomenon, beginning in the late 18th century—the intellectual
climate that gave us Adam Smith, the American Revolution, and the French Revolution. That climate
was, of course, the culmination of centuries of development of parliamentary control of the sovereign,
as well as the evolution of Judeo-Christian concepts of natural law and individual rights.
My topic is already impossibly large, but I want to sketch out an earlier view of taxation that
explains why the pre-Enlightenment references to "fairness" are so scarce. Lacking the time and
knowledge to review the facts of ancient history, and in the spirit of Adam Smith and the Scottish
Enlightenment, I will engage in some "theoretical or conjectural history" inspired by Mancur Olson
(2000, pp.3-12):
Imagine yourself in a squalid village surrounded by wilderness a thousand or so years ago. You
and your neighbors are engaged in the daily struggle to scrape together dinner. A cloud of dust appears
on the horizon, followed by the thunder of galloping hooves. The villagers scramble to hide from the
gang of roving bandits who kill or rape anyone they see, steal whatever they can carry, set fire to the
rest, and gallop off. The surviving villagers crawl out of their hiding places and try to piece together their
squalid life before winter sets in, knowing that the next gang of bandits may gallop in at any time.
1
�Now put yourself in the position of the roving bandits. (History is written by the winners.) You
ride for days through the wilderness, risk the perils of attacking and plundering, and have very little to
show for the effort because squalid villages provide scant booty. Eventually, the more perceptive roving
bandits realize that by settling in a village as stationary bandits and protecting the inhabitants from
other marauders, they can induce the villagers to work harder, accumulate capital, produce more, and
provide them with more loot than they could extract by plunder. The stationary bandits can evolve into
government by providing internal order, judging disputes, defending property rights, converting
indiscriminate looting into predictable taxes, and providing the public goods that increase production
and, hence, tax revenues—roads, bridges, irrigation, training in useful skills, etc. Although the villagers
were safer and more comfortable when the roving bandits evolved into stable government, there was
no doubt that the government was an alien power extracting surplus from the people. Taxes were not
described as "fair" or "unfair." but rather as "tolerable" or "oppressive." A "good king" was someone
who understood that arbitrary exactions and high tax rates did not yield him as much revenue as more
moderate and predictable rates that allowed his subjects to prosper.
The story with which you are probably more familiar is from I Samuel 8:5-18. Samuel judged
Israel, but when he was old and his sons were corrupt, the people requested a king "like all the nations."
Samuel explained what kings were like: "He will take your sons, and appoint them for himself, for his
chariots, and to be his horsemen; and some shall run before his chariots. And he will appoint him
captains over thousands, and captains over fifties; and will set them to ear his ground , and to reap his
harvest, and to make his instruments of war, and instruments of his chariots. And he will take your
daughters to be confectionaries, and to be cooks, and to be bakers. And he will take your fields, and
your vineyards, and your oliveyards, even the best of them, and give them to his servants. And he will
take the tenth of your seed, and of your vineyards, and give to his officers, and to his servants. And he
will take your menservants and your maidservants, and your goodliest young men, and your asses, and
put them to his work. He will take the tenth of your sheep: and ye shall be his servants." Again, the
picture is that of an outsider who takes whatever he wants from his subjects. Fairness is not an issue.
The alien power did not always settle in the subject territory. The Roman empire, and many
others, extracted tribute from weaker nations. Often local agents (the hated "publicans" of the Bible)
would be granted the tax franchise for a particular area. Each agent was responsible for paying the
contractual amount to the government, but could keep whatever he could squeeze out of the populace.
This ancient device of "tax farming" persisted in some form for many centuries, which suggests the value
of using someone with local and particular knowledge to estimate what the government could extract
from taxpayers. The problems with authorizing an agent of government to squeeze an arbitrary amount
from the taxpayer have led most commentators to condemn any practice that seems to put revenue
agents on commission.
The details of the taxes and forms of government varied from place to place and time to time,
but from the viewpoint of the mass of mankind the differences were not great. The masses could
expect that nearly all of the surplus above subsistence would be extracted from them either as taxes or
as rents to a landlord. When taxes became intolerable, the masses were squeezed to the point where
2
�population would actually be decreasing from malnutrition or because people fled from the high tax
civilization to refuge with the barbarians.
Even before the great invasions of Rome in the 5th century, central control of the Empire had
weakened. As taxes on farmland were raised to the point where small farmers abandoned their plots,
the large landowners absorbed the smaller plots and became the feudal lords who contended with each
other and with kings for power and taxes throughout the Middle Ages. Much of the political history
focusses on barons, dukes, princes, and kings, but the maneuverings of these folks for land and revenue
made little difference to the mass of mankind. Nevertheless, the concept of justice in taxation was
developing and property rights and contracts retained their force. The teachings of the Church became
increasingly important. "God will certainly punish anyone who reinstitutes an old tax…" (Pope
Gregory,c. 600,quoted in Adams, p. 137). New taxes, also, were forbidden by the Edict of Paris (614 )
and it was expected that an exactio inaudita (unheard-of tax) would provoke divine retribution. Kings
would often have to ask the barons for special assistance to fund wars. This was generally granted for
defensive wars, but not for offensive expeditions, which were expected to be self-financing through
plunder and tribute. Montesquieu (Bk. XXX) cites a number of contracts between kings and cities or
particular populations setting , among other matters, the taxes that could be levied on the city or group.
These examples are from 7th – 12th centuries in western Europe when the king, however limited the
geographic extent of his kingdom, was the highest earthly power until usurped or conquered. Yet kings
did feel bound by their contracts. Whether this was evidence of a fear of eternal retribution, some
innate feeling of ethics, or a pragmatic calculation of the value of being known to keep one's word, or
some combination of these, the result was strengthen an ideal of justice in taxation that involved
stability, predictability, and appropriateness.
Today, "just" is often used as a synonym for "fair," but the medieval concept is more closely
related to the idea of being fitting, proper, and lawful. In Plato's Republic (p.112, "The Guardians'
Duties"), the potter should not be paid either too much or too little because only the optimum pay
would result in the maximum production of high quality pots. This is purely an efficiency rule. It has
nothing to do with fairness. Aristotle (Ethics, Bk.4, ch.2) described the contributions that a man should
make to his community. They should reflect his wealth and station in life, being neither too cheap and
tawdry nor too extravagant. For example, a very rich man might present a well-equipped naval vessel to
his city. Someone with less wealth could offer a good banquet to the poor of the city. By the time that
Aquinas [1225-1274] brought the later works of Aristotle into the mainstream of western scholarship,
that version of justice in taxation was firmly established. That is, the individual's contribution to the
community should be somehow proportionate to the wealth and standing of the individual, but there
was no thought of using taxes to change the wealth of one person relative to another.
King Louis the 14th of France [1638-1715] is reputed to have responded to reports that the
people were complaining about high taxes by stating, "It is all mine anyway, I can take whatever I want."
Whether he actually said that is irrelevant. The statement is a throwback to the view that taxing power
is just the continuation of the plunder by the roving bandits that is justified by the power of the
government. In stark contrast, the roughly contemporaneous words of John Locke (1690) define the
new intellectual atmosphere: "…every man has a property in his own person; this nobody has any right
3
�to but himself. The labor of his body and the work of his hands, we may say, are properly his" (The
Second Treatise of Government, para. 27). That leaves no room for slavery or feudalism and room only
for those taxes to which he has consented. At this stage, reached in different countries at different
times, it becomes possible and seemingly useful to speak of "fairness" in taxation. The concept
presupposes the existence of a surplus above subsistence for the masses—a surplus that is not
considered to be rightfully the property of landowners or governments, but rather belongs to the
individuals who create it by their labor.
This rough and impressionistic notion of a real divide in the way intellectuals perceived the
world is borne out by a careful study by Alfani and Frigeni (2013). They analyzed manuscripts and
printed documents from about 1100 to 1830 centering on Italy. They found that people were aware of
the vast disparities in wealth throughout that period, but in the earlier years considered it acceptable
and a natural part of a natural or God-given order. This is consistent with Aristotle, Augustine, and
Aquinas. Beginning in the 16th century, they find signs of "jus naturalism" or individuals in a State of
Nature with freedom and equality. This is consistent with Grotius, Hobbes, and Locke. The concept of
the State of Nature reflects an abandonment of the Medieval (and earlier) concept of a natural
hierarchical order. A key word count confirms the shift: "aequalitas" occurs 17 times from 1700-1785,
and 334 times from 1789-1830; whereas "aequitas", which was common prior to the French revolution
declined afterwards. To put it bluntly, the atmosphere shifted from the regal, "Why do they complain
about taxes, it is all mine?" to the individualistic "What right do those bandits have to plunder any of my
hard earned wealth?"
Regardless of shifts in intellectual climate, the practical administrators needed to raise tax
revenue, especially in times of war with the increasing cost of a professional military establishment. The
traditional land taxes, tariffs, tolls, and excises had been stretched to the point where everyone
recognized their weaknesses. By the beginning of the 19th century, many practical tax specialists
thought that "capacity" or "faculty" to earn income was the appropriate tax base. It was commonly held
that property was a good measure of faculty in a primitive economy, but that it had become
progressively less comprehensive as an increasing proportion of income seemed to be generated
without involving much visible property.
When the British Prime Minister William Pitt was scrambling for revenue to fight the war against
Napoleon, he proposed a "property tax" that was, in fact, an income tax. It was adopted in 1806. It
relied heavily on "stoppage" (withholding at the source), but there were many difficulties in compliance
in that era when the few written records were considered strictly confidential. One device was to
establish committees of men in the same occupation and city who were charged with estimating the
income for each of their competitors. The British tax was so thoroughly reviled, especially for its highly
intrusive implementation, that when the wars ended and the budget stabilized in 1816 the tax was
abolished and Parliament voted to destroy all of the records, as had been done with the income tax of
1404. Despite the public bonfire of destruction, the income tax administrator secretly retained a
duplicate set (Adams, p.347).
4
�In 1842 Prime Minister Robert Peel persuaded Parliament to reinstate the income tax
temporarily until the budget was in balance. It never was repealed, nor was the initial 3% flat rate
maintained (Seligman, p. 132; Adams, p. 349). The top rate on earned income peaked at 83% before
1979, with a surcharge of 15% on investment income above 7,100 pounds (Pechman, p.298). The U.S.
had a top rate in excess of 90% in the 1950s. So much for the assertions of Seligman, the great
champion of the income tax for the U.S., that, "…the moderate rate [less than or equal to 6%] has been
an important factor in the success of the income tax [in Great Britain]"(p. 216) and, with respect to Italy,
"Obviously an income tax running up to twenty per cent, to which all manner of other kinds of local
taxes are to be added, would indeed be unendurable if enforced to the hilt" (p. 353).
The U.S. adopted an income tax to finance the Civil War in 1863. The rate was 3% on income
exceeding $600 with a 5% rate above $10,000. Soon, the 5% rate was raised to 10%. The tax expired in
1872 when the revenue was no longer needed (Seligman, p. 437). Still, pressure was building for a
permanent income tax. Enormous accumulations of wealth during the rapid growth of the post-civil war
boom stirred the ire of reformers. Moreover, Lough (2013) stresses the growth of the free trade
movement. If the tariffs that had traditionally supported the government, and aided northern
manufacturers, were reduced, some substitute tax was necessary. Not least, the Progressive
Movement, with its enthusiasm for direct government action and control of individual behavior,
contributed to the pressure. An Income tax was passed in 1894 but declared unconstitutional. When
the 16th Amendment was ratified in 1913, that obstacle was removed and the income tax soon followed
because "wealth is escaping its due share of taxation" (Seligman, p.675). The rates were graduated,
with a tax of 1% of the first taxable $20,000 and then increasing by 1% steps to 7% over $500,000
(equivalent to $11.7 million today). When Justice Oliver Wendell Holmes, Jr., opined in 1904 that "taxes
are what we pay for a civilized society" he was living in a world of 1% tax rates. Is a 40% rate 40 times as
civilized?
The progressive rates of the new law were immediately challenged in court as a denial of
"equality," but the Supreme Court allowed the law to stand. This was a significant change because legal
theory and popular opinion had long supported the idea that taxing everyone an equal proportion of
income (the Biblical "tithe" or 10%) was the just way to share the cost of government. In order to
understand the sudden prominence of progressive taxation, it is necessary to look at what the economic
theorists had been writing.
Adam Smith's Wealth of Nations provides a compendium of the best economic thinking circa
1776. His four Maxims of Taxation are frequently cited:
"I. The subjects of every state ought to contribute towards the support of the government, as nearly as
possible, in proportion to their respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state."
"II. The tax which each individual is bound to pay ought to be certain, and not arbitrary."
"III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient
for the contributor to pay it."
5
�"IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people
as little as possible, over and above what it brings into the public treasury of the state."
(summarized from book V, chapter II, Part II, pp. 777-779)
Smith's advice and discussion have held up remarkably well for more than two centuries, but
note that in Maxim I he slurred over the distinction between taxes as a price for the benefits received
from government by the taxpayer (the benefit principle) and taxes as a measure of the ability of the
individual to pay or the sacrifice that is inflicted on the taxpayer (ability-to-pay principle). He papers
over the distinction by assuming that both approaches point to taxes proportional to income, although
in other passages Smith suggests that additional taxes on luxury goods are acceptable because they fall
only on the rich for goods they need only to display their status. A great deal of public finance literature
since Wicksell (1896) has dealt with the benefit principle. Presumably, it is fair, and certainly efficient, to
charge for services that can be directly or indirectly priced; e.g., charge tolls on limited access highways
and finance construction of roads with a gasoline tax. After exhausting the cases where fees for service
are technically feasible and politically acceptable, however, governments usually have a lot of bills to
pay (e.g., the military budget and other aspects of foreign affairs, interest on the debt). This is where
"ability to pay" usually becomes the standard.
Instead of making the tax strictly proportional to income, the amount of income necessary for
subsistence could be exempted, with a flat rate above that. This is sometimes called a digressive tax.
For example, you pay 0% on the first $20,000 and 25% on everything above that. The marginal rate is
25% for everyone above the exemption level, but the average rate never quite gets to 25% although it
approaches it for the very rich. [This is the concept underlying the "Flat Tax" advocated by Hall and
Rabushka (1983).] Even this modest departure from strict proportionality raised warnings from those
who forecast class warfare over the amount to be exempted.
The strong support for progressive taxes in the economic mainstream originates in two
separate, but highly interrelated, developments in economic theory during the century following the
publication of the Wealth of Nations. The first of these is "utilitarianism" and the second is the
dominance of marginal analysis. Jeremy Bentham (1748-1832) coined the "utilitarian" term and
adopted the slogan, "the Greatest Happiness of the Greatest Number." Bentham was a lawyer, but
wrote voluminously in many fields including the design of legislation. His work influenced economics
directly through writings and also through his sometime coauthor, economist James Mill (1773-1836)
and participation in the education of John Stuart Mill (1806-1873), son of James. While the slogan
suggests a mathematically impossible double maximization, it does convey the sentiment that has
motivated much of the subsequent analysis of taxation and public expenditures, including modern
cost/benefit analysis.
Although he did not use the modern words, Bentham wrote his utilitarian analyses under the
assumption that the marginal utility of income is declining (see Robbins. 1965, p.62). This view starts
with the plausible proposition that a dollar more or less makes a lot less difference to the rich person
than does a dollar more or less to the person who has very few dollars. The extra dollar that allows the
6
�beggar to buy a crust of bread increases his welfare (or happiness or utility) more than a decrease of a
dollar would decrease the utility of Warren Buffet. Decreasing marginal utility is usually assumed in
economics for most ordinary goods and services. You may value one bag of carrots or professional
tooth-cleaning, but the second one that month is worth less to you and the third even less than that.
But is that true for income in general?
Most economists ceased to ask that question after the "Marginal Revolution" of 1870. At about
the same moment, William Stanley Jevons (1835-1882), writing in English, Leon Walras (1834-1910),
writing in French, and Carl Menger (1840-1921), writing in German, adopted a form of analysis that a
cynic described as "the reinvention of a crude form of differential calculus a couple of centuries after
Newton and Leibniz." Nevertheless, this "marginal analysis" soon came to dominate economics and
made the concept of decreasing marginal utility of income almost automatic for economists. If we
assume that successive units of income have less value, and we assume that everyone is equal with
respect to capacity to enjoy income, then the tax implications can be quite dramatic.
If the objective is to collect the required tax revenue while imposing the minimum total sacrifice
on society, the appropriate tax is zero up to a certain point and then 100% after that. That is, depending
on the revenue requirements, the government would set one annual income, for example, $100,000. If
you have less than that, you pay no tax. Anything you earn above that is sent directly to the Treasury.
Of course, most people realized that this was not going to work well—at least not for long. A few
extreme socialists and utopians wanted to believe in it, and even such a clever economic theorist as
Edgeworth (1897) had difficulty in abandoning the spirit of it. Indeed, if one accepts the goal not just of
minimizing the sacrifice of taxation, but of maximizing the utility of society, why would you not advocate
continuing the leveling by transferring money from rich to poor until everyone had the same income?
A clever socialist, George Bernard Shaw (1928, p.470) put it this way: "Socialism means equality
of income or nothing, and that under Socialism you would not be allowed to be poor. You would be
forcibly fed, clothed, lodged, taught, and employed whether you liked it or not. If it were discovered
that you had not character and industry enough to be worth all this trouble, you might possibly be
executed in a kindly manner; but whilst you were permitted to live you would have to live well."
Faced with this logic, most economists retreated slightly to the goal, not of maximum utility or
minimum sacrifice, but rather to the notion that everyone should endure the same proportional
sacrifice of income. Opposition to progressivity was the common position even among the liberal
utilitarians of the 19th century (Hutchison, 52). The opposition was based in part on the fear that
progressivity would diminish incentives to work and invest and hence hobble the engine of economic
growth that was essential for raising the laboring poor to a more comfortable level. Another factor was
the fear that breaking the rule of proportionality would lead to continuing efforts to shift all tax burdens
to the small minority of the very rich. (Adams, ch. 31). It is interesting that the economists , in general,
were more caught up in the utilitarian notion that the happiness of society would be enhanced by
reducing the burdens on the poor, while the lawyers retained the tradition from history and political
philosophy that, in the absence of firm rules (such as proportional taxation), the problems of "faction"
as discussed by Madison in Federalist 10 would tear the republic apart or turn it into a tyranny.
7
�But John Stuart Mill, who had grown up with utilitarianism, added this caution: "For what reason ought
equality to be the rule in matters of taxation? For the reason that it ought to be so in all affairs of
government. A government ought to make no distinction of persons or classes in the strength of their
claims on it. If any one bears less than his fair share of the burden, some other person must suffer more
than his share. Equality of taxation, therefore, as a maxim of politics, means equality of sacrifice." (Book
V, Ch.I, section 2, p. 539). Despite the emphasis on sacrifice, "To tax the larger incomes at a higher
percentage than the smaller is to lay a tax on industry and economy; to impose a penalty on people for
having worked harder and saved more than their neighbors. It is not the fortunes which are earned, but
those which are unearned, that it is for the public good to place under limitation." (pp.541-542) .
Moreover, the income tax relies on self-reporting of income and, thus, "…is, in practice, unequal in one
of the worst ways, falling heaviest on the most conscientious." (p. 556). Mill's comments provide a hint
of the way out of the morass, but before we follow that trail, let us dig ourselves in deeper.
If one accepts the view that the marginal utility of income is diminishing, and one accepts the
goal that everyone should sacrifice an equal proportion of his total utility to pay for government, then it
is easy to see that rich people should pay more dollars in taxes than should poor people. Does that
require a progressive tax on income? It is easy to lapse into that conclusion, but it is incorrect, as was
demonstrated cogently by Cohen-Stewart in 1889. [Also see Blum & Kalven. 1953]. Briefly, if the loss of
a dollar is as painful to a rich man as to a poor, then equal sacrifice would call for equal dollar taxation.
That is, a lump sum tax or a head tax—each person must pay a tax of, e.g., $1,000/year. That is the
extreme of regressivity, unless one considers extremely decadent societies such as the strange world of
pre-revolutionary France where, "One will hardly believe that in order to become noble it is sufficient to
become rich; and to cease to pay taxes it is sufficient to become a noble. So there is only one way of
escaping taxation and that is to make a fortune." [Pierre-Samuel Du Pont de Nemours, as quoted in
Adams, p.218].
How quickly would the marginal utility of income have to decrease before equal sacrifice
resulted in proportional taxation? The answer seems to be that proportional taxation is appropriate if,
and only it, the marginal utility of income curve is a rectangular hyperbola! [See Musgrave, 1959, pp.
98-102] That is a wonderfully precise answer, but none of the assumptions can be observed to be met.
We have no way to observe utility, let alone the shape of the marginal utility curve. Moreover, does
anyone believe that the relationship between income and happiness is the same for everyone, or even
for anyone throughout a lifetime? And we have not even inquired about the relationship between the
happiness of one person and what he observes of his neighbors. In particular, if Mr. Smith is altruistic,
deriving pleasure from observing that Mr. Knight is wealthy, and Mr. Knight is envious, deriving pleasure
from the poverty of his neighbors, the way to improve the total happiness of society is to tax the altruist
Smith and give the money to the mean-spirited Knight. Most of us would probably not vote for such a
tax, even if it could be designed and administered.
Yet, the prevailing economic definition of fairness leans on such weak reeds. In the modern
public finance literature, fairness (and, perhaps, efficiency), depends on horizontal equity and vertical
equity. Vertical equity depends on the degree of progressivity, as discussed above. Horizontal equity
requires that "equals be treated equally," but, equals in respect to what? Academic tax specialists and
8
�reformers in the U.S. have usually begun with a bias toward a comprehensive definition of income as
developed by Henry Simons (1950) and others. This amounts to whatever the person consumed during
the year plus the net increase in wealth. Thus, it is the power to consume without decreasing wealth. In
the purest form, consumption plus the net amount added to the accounts would be taxable income.
That includes, for example, wages, interest, dividends, capital gains, rents (including the rent that an
owner occupier could have received from his own house), gifts (of cash, securities, goods, and services).
It would not matter where the power to consume came from or how it was used. The British debate,
however, often favored the notion that wage and salary income should be discounted 25% relative to
investment income because wages and salaries end when the recipient dies or loses his job. It is
interesting that Andrew Mellon (1934, pp. 56-57), wealthy investor, Secretary of Treasury for Harding
and Coolidge, and considered an arch conservative, stated, "The fairness of taxing more lightly incomes
from wages, salaries and professional services than the income from business or from investments is
beyond question."
The actual tax law, of course, is a jumble of special treatment of particular sources and uses of
income. Ownership of real estate is heavily favored, as is any investment that generates capital gains.
Similarly on the uses side, medical expenses, gifts to charities, child care expenses, historic preservation,
energy conservation, electric cars, and saving for education and retirement are among the favored
expenditures. Which is fairer, the comprehensive definition or the tax law definition? Each exception to
the comprehensive base for particular sources or uses of income is defended in the name of "fairness"
by its beneficiaries. It matters because it is (roughly) taxable income, rather than comprehensive
income, that determines who is treated as an equal of whom.
In recent years an effort has emerged to consider consumption, rather than income, as the tax
base and, thus, the fair basis for defining equality. The classical reasoning for this is that consumption
measures what a person uses up from the product of the economy, whereas income should be a better
measure of what he produces. John Stuart Mill arrived at consumption as the preferred tax base by an
alternate route. In his view, the lower tax on earned income would allow the wage earner to
accumulate savings for the years when his earning capacity had diminished. The modern pressure for
consumption taxation is driven in part by belief that saving and investment should be encouraged.
Some versions of consumption taxation also promise less intrusive administration (Zodrow and
Mieszkowski, 2002).
Some of these problems seemed remote prior to 1930 when the federal government took less
than 5% of GDP, but with total government spending now exceeding one-third of GDP, including massive
redistribution, the warnings about control of a dominant faction to prevent exploitation of the rest of
society become more pertinent. In the modern era, economists have continued to analyze the effects
of taxation on incentives to earn income and balance these against changes in social utility, defined in
some unmeasurable way. The philosopher Rawls (1971) added the twist of assuming that only the
income of the person with the lowest income needed to be a concern of public policy. But economists
and philosophers of the Rawlsian type do not stop to consider the Madisonian question of what will
happen to a tax bill of the most sophisticated design when it is submitted to Congress. Nor do they
9
�consider the possibility that the sovereign is a revenue maximizing entity at war with his subjects; i.e., a
stationary bandit.
Because of the impossibility of defining a "fair" tax, it is worthwhile searching for a different
approach. The comment by Mill, "It is not the fortunes that are earned, but the fortunes that are
unearned..." provides the starting point. Of course, an income tax becomes totally arbitrary and
capricious if the IRS agent has to review your return to judge each receipt for its "worthy earnedness."
Spare us that intrusion! In fact, it is possible to make a distinction between earned and unearned if we
are willing to give up the idea of taxing the individual on his income and turn, instead, to a tax levied on
the source of the unearned income. This does require giving up progressivity as it is usually defined
because the concept applies only to people.
The specific alternative to consider is the land value tax (LVT) as developed with great vigor and
insight by Henry George in his best-selling book, Progress and Poverty (1879). LVT had antecedents in
both practice and theory, including the Physiocrats, Smith, Ricardo, and Mill, but George and those
inspired by George have worked out the details most fully. To put the matter in its simplest form, the
LVT would replace other taxes with a single levy on the market value of the land that each person claims
title to. Thus, the mechanics are similar to the existing real estate tax used by most local governments
and school districts in the U.S. The difference is that the tax would apply only to the value of the land.
All buildings and other improvements would be exempt.
The market value of land reflects the income you could receive just from holding title to the
land. Thus, if you happened to inherit a block of vacant land in the middle of Manhattan, or any other
thriving city, you could easily lease it to a developer who would do the work of arranging for a building
to be built and rented out and managed. The developer would be compensated for his work, but you
could just sit back and enjoy the lease payments. Those payments would be described by an economist
as "economic rent." The proposed LVT would be designed to take a substantial portion (e.g., 90%) of the
economic rent, but it would be levied as a percentage of the market price of the land, so that you could
not avoid it by leaving the land idle. You would have a strong incentive to put the land to work at the
optimum moment.
If you think of imposing a LVT today while dropping all other taxes it may seem unfair to those
who have just invested their hard-earned savings into a piece of land. That is the transition problem
that arises with any change in the tax law—there are winners and losers, and sometimes special
transition rules can be adopted to ease the pain. Most parcels of land in the city already have buildings
on them, so the taxpayer would save by eliminating the building tax while paying more for the land. The
most important point is that the LVT would, over time, make the whole economy, especially the cities,
function more efficiently.
The LVT is easier to justify if we think of starting with a blank slate, before anyone has laid claim
to land. The words of John Locke are the starting point for the analysis of property by many in the
classical liberal tradition:
10
�26. God, who has given the world to men in common, has also given them reason to
make use of it to the best advantage of life and convenience. The earth and all that is therein is
given to men for the support and comfort of their being. And though all the fruits it naturally
produces and beasts it feeds belong to mankind in common, as they are produced by the
spontaneous hand of nature; and nobody has originally a private dominion exclusive of the rest
of mankind in any of them, as they are thus in their natural state; yet, being given for the use of
men, there must of necessity be a means to appropriate them some way or other before they
can be of any use or at all beneficial to any particular man. The fruit or venison which nourishes
the wild Indian, who knows no enclosure and is still a tenant in common, must be his, and so his,
i.e., a part of him, that another can no longer have any right to it before it can do him any good
for the support of his life.
27. Though the earth and all inferior creatures be common to all men, yet every man
has a property in his own person; this nobody has any right to but himself. The labor of his body
and the work of his hands, we may say, are properly his. Whatsoever then he removes out of
the state that nature has provided and left it in, he has mixed his own labor with, and joined to
it something that is his own, and thereby makes it his property. It being by him removed from
the common state nature has placed it in, it has by this labor something annexed to it that
excludes the common right of other men. For this labor being the unquestionable property of
the laborer, no man but he can have a right to what that is once joined to, at least where there
is enough and as good left in common for others. (John Locke. 1690. The Second Treatise of
Government).
This analysis has a powerful appeal for the situation where land is a free good. Locke, himself,
noted that significant restriction in the famous closing phrase of the quote, “where there is enough and
as good left in common for others.” Although Locke tried to make the case that the world had enough
good unclaimed land that men might enclose and homestead, few would try to argue that proposition
today.
When land of a particular quality is no longer a free good, unregulated markets will readily
generate annual rental rates for particular parcels, and those annual rents can readily be capitalized into
sales prices for parcels that change hands and appraised values for parcels that do not. Land rents, like
other prices, can serve to allocate inputs to their most productive uses. The rents are an opportunity
cost that must be paid by the user of the land if the economy is to operate efficiently. But who should
receive that rent? Henry George argued that the rent should belong to society because it either
measures the natural advantage of a parcel; e.g., superior fertility of soil or location on a natural trade
route, or the efforts of other people; e.g., highways, ports, and other public infrastructure, the activities
of neighbors that attract business to your block, and the growth of population of the community.
The opposition to LVT often cites the unfairness of taking nearly all the rent, and hence, nearly
all the value, of property in land. Most holders of land today have acquired it in legal and morally
11
�defensible ways. That is correct and is a serious concern, but there are two sets of counterarguments.
Georgists often claim that even a fully legal land title still leaves the buyer of land as the holder of stolen
property. After all, British titles date to a roving bandit, "a French bastard landing with an armed
banditti," as Thomas Paine (1776, p.16) so gently expressed it. U.S. titles generally date to a grant by a
European monarch of land that belonged to someone else. Even in the rare case when a title does not
originate in "force or fraud," --even if it originates in Locke's enclosure from the state of nature—why
should that historical accident contribute to the inequality of fortunes today?
The set of arguments that I find more convincing, however, relate to the comparison of the LVT
with nearly all other feasible taxes. If the LVT is theft, it is a one-time problem. The income tax robs
people every year of the fruit of their labors. When this moral case is combined with the efficiency and
privacy advantages of the LVT, the case, to me, seems overwhelming. So, rather than arguing about
fairness or justice in taxation, let's shift the focus toward the one tax base that has a well-defined
market value based on opportunity cost; i.e., what the market determines to be the rent of the land.
The focus can then shift away from the utilitarian pseudo-science of minimizing unobservable
"sacrifices" and maximizing unseen "utilities" or pretending that we can say anything about the
"fairness" of taking from one person to give to another.
To quote Frank Chowderov (1946, p.267), "Taxation is highwaymanry made respectable by
custom, thievery made moral by law," while the LVT just allows the community to reclaim the value that
it has produced.
References
Adams, Charles. 1993. For Good and Evil: The Impact of Taxes on the Course of Civilization. Lanham,
Maryland: Madison Books.
Alfani, Guido, and Roberta Frigeni. 2013. "Inequality (un)perceived: The emergence of a discourse on
economic inequality from the Middle Ages to the Age of Revolutions." Dondena Working Papers,
No. 58. Milan: Carlo F. Dondena Centre for Research on Social Dynamics, Univ. Bocconi.
Aristotle. c. 330 B.C. The Ethics of Aristotle, translated by J.A.K. Thomson. London: Penguin Books, 1955.
Backhaus, Juergen, and Richard E. Wagner. 1987. "The Cameralists: A Public Choice Perspective." Public
Choice 53 (No.1): 3-20.
Blum, Walter J., and Harry Kalven, Jr. 1953. The Uneasy Case for Progressive Taxation. Chicago:
University of Chicago Press.
Buchan, James. 2003. Crowded with Genius; The Scottish Enlightenment: Edinburgh's Moment of the
Mind. New York: HarperCollins.
12
�Chodorov, Frank. 1946. "Socialism via Taxation." In Fugitive Essays: Selected Writings of Frank Chodorov.
Compiled, Edited, and with an Introduction by Charles H. Hamilton. Indianapolis: Liberty Fund,
1980.
Cohen-Stuart, Arnold Jacob. 1889. "On Progressive Taxation." Musgrave and Peacock, pp.48-71.
Edgeworth, Francis Ysidro. 1897. "The Pure Theory of Taxation." Musgrave and Peacock, pp.119-136.
George, Henry. 1879. Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of
Increase of Want with Increase of Wealth. The Remedy. Garden City, NY: twenty-fifth
anniversary edition, Doubleday, Page & Company, 1911.
Hall, Robert E. and Alvin Rabushka. 1983. Low Tax, Simple Tax, Flat Tax. New York: McGraw-Hill, 1983.
Holmes, Oliver Wendell, Jr. 1904. Compania de Tabacos v. Collector, 275 U.S.87, 100.
Hutchison, T.W. 1953. A Review of Economic Doctrines, 1870-1929. Oxford: The University Press, 1962.
Locke, John. 1690. The Second Treatise of Government. New York: The Liberal Arts Press, 1952.
Lough, Alexandra Wagner. 2013. "The Federal Income Tax and the Georgist Movement." Pittsburgh:
Lecture presented to the meeting of the Council of Georgist Organizations, August 8, 2013.
Mellon, Andrew W. 1934. Taxation: The People's Business. New York: Macmillan Company.
Mill, John Stuart. 1848. Principles of Political Economy. Abridged by J. Laurence Laughlin. New York: D.
Appleton and Company, 1884.
Montesquieu, Baron de. 1748. The Spirit of Laws. Thomas Nugent, trans. New York: The Colonial Press,
rev.ed., 1900.
Musgrave, Richard A. 1959. The Theory of Public Finance. New York: McGraw-Hill.
Musgrave, Richard A. and Alan T. Peacock. 1967. Classics in the Theory of Public Finance. New York: St.
Martin's Press.
Olson, Mancur. 2000. Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships. New
York: Basic Books.
Paine, Thomas. 1776. Common Sense. In Basic Writings of Thomas Paine.New York: Willey Book
Company, 1942.
Pechman, Joseph A. 1987. Comparative Tax Systems: Europe, Canada, and Japan. Arlington, VA: Tax
Analysts.
Plato. c. 380 B.C. The Republic of Plato. Cornford translation. New York: Oxford University Press, 1945.
Rawls, J.A. 1971. A Theory of Justice. Cambridge, MA: Belknap Press.
13
�Robbins, Lionel. 1965. The Theory of Economic Policy in English Classical Political Economy. London:
Macmillan & Co.
Seligman, E.R.A. 1914. The Income Tax: A Study of the History, Theory, and Practice of Income Taxation
at Home and Abroad. New York: Macmillan, 2nd ed. 1914.
Shaw, Bernard. 1928. The Intelligent Woman's Guide to Socialism and Capitalism. New York: Brentano's
Publishers.
Simons, Henry C. 1950. Federal Tax Reform. Chicago: The University of Chicago Press.
Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: Modern
Library. 1937.
Wicksell, Knut. 1896. "A New Principle of Just Taxation." Musgrave and Peacock, pp.72-118.
Zodrow, George R. and Peter Mieszkowski. 2002. United States Tax Reform in the 21st Century. New
York: Cambridge University Press.
14
�
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Description
An account of the resource
Items in this collection are part of a series of lectures given every year at St. John's College. During the Fall and Spring semesters, lectures are given on Friday nights. Items include audio and video recordings and typescripts.<br /><br />For more information, and for a schedule of upcoming lectures, please visit the <strong><a href="http://www.sjc.edu/programs-and-events/annapolis/formal-lecture-series/" target="_blank" rel="noreferrer noopener">St. John's College website</a></strong>. <br /><br />Click on <strong><a title="Formal Lecture Series" href="http://digitalarchives.sjc.edu/items/browse?collection=5">Items in the St. John's College Formal Lecture Series—Annapolis Collection</a></strong> to view and sort all items in the collection.<br /><br />A growing number of lecture recordings are also available on the St. John's College (Annapolis) Lectures podcast. Visit <a href="https://anchor.fm/greenfieldlibrary" title="Anchor.fm">Anchor.fm</a>, <a href="https://podcasts.apple.com/us/podcast/st-johns-college-annapolis-lectures/id1695157772">Apple Podcasts</a>, <a href="https://podcasts.google.com/feed/aHR0cHM6Ly9hbmNob3IuZm0vcy84Yzk5MzdhYy9wb2RjYXN0L3Jzcw" title="Google Podcasts">Google Podcasts</a>, or <a href="https://open.spotify.com/show/6GDsIRqC8SWZ28AY72BsYM?si=f2ecfa9e247a456f" title="Spotify">Spotify</a> to listen and subscribe.
Contributor
An entity responsible for making contributions to the resource
St. John's College Greenfield Library
Title
A name given to the resource
St. John's College Formal Lecture Series—Annapolis
Identifier
An unambiguous reference to the resource within a given context
formallectureseriesannapolis
Text
A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text.
Original Format
The type of object, such as painting, sculpture, paper, photo, and additional data
paper
Page numeration
Number of pages in the original item.
14 pages
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Creator
An entity primarily responsible for making the resource
Peirce, William Spangar
Title
A name given to the resource
Can taxes be fair? : Should they be?
Date
A point or period of time associated with an event in the lifecycle of the resource
2013-10-11
Format
The file format, physical medium, or dimensions of the resource
pdf
Description
An account of the resource
Typescript of a lecture delivered on October 11, 2013 by William Peirce as part of the Formal Lecture Series.
Publisher
An entity responsible for making the resource available
St. John's College
Coverage
The spatial or temporal topic of the resource, the spatial applicability of the resource, or the jurisdiction under which the resource is relevant
Annapolis, MD
Rights
Information about rights held in and over the resource
A signed permission form has been received stating, "I hereby grant St. John's College permission to: Make an audio recording of my lecture, and retain copies for circulation and archival preservation in the St. John's College Greenfield Library. Make an audio recording of my lecture available online. Make a typescript copy of my lecture available for circulation and archival preservation in the St. John's College Greenfield Library. Make a copy of my typescript available online."
Type
The nature or genre of the resource
text
Subject
The topic of the resource
Taxation
Fairness. Economic aspects.
Language
A language of the resource
English
Identifier
An unambiguous reference to the resource within a given context
Bib # 80998
Relation
A related resource
<p><a title="Audio recording" href="http://digitalarchives.sjc.edu/items/show/45">Audio recording</a></p>
Friday night lecture
-
https://s3.us-east-1.amazonaws.com/sjcdigitalarchives/original/1a240f1a567f64d9a88d16b3932ef4a7.mp3
5e88a97280a7d1ce8613931a0744545b
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Description
An account of the resource
Items in this collection are part of a series of lectures given every year at St. John's College. During the Fall and Spring semesters, lectures are given on Friday nights. Items include audio and video recordings and typescripts.<br /><br />For more information, and for a schedule of upcoming lectures, please visit the <strong><a href="http://www.sjc.edu/programs-and-events/annapolis/formal-lecture-series/" target="_blank" rel="noreferrer noopener">St. John's College website</a></strong>. <br /><br />Click on <strong><a title="Formal Lecture Series" href="http://digitalarchives.sjc.edu/items/browse?collection=5">Items in the St. John's College Formal Lecture Series—Annapolis Collection</a></strong> to view and sort all items in the collection.<br /><br />A growing number of lecture recordings are also available on the St. John's College (Annapolis) Lectures podcast. Visit <a href="https://anchor.fm/greenfieldlibrary" title="Anchor.fm">Anchor.fm</a>, <a href="https://podcasts.apple.com/us/podcast/st-johns-college-annapolis-lectures/id1695157772">Apple Podcasts</a>, <a href="https://podcasts.google.com/feed/aHR0cHM6Ly9hbmNob3IuZm0vcy84Yzk5MzdhYy9wb2RjYXN0L3Jzcw" title="Google Podcasts">Google Podcasts</a>, or <a href="https://open.spotify.com/show/6GDsIRqC8SWZ28AY72BsYM?si=f2ecfa9e247a456f" title="Spotify">Spotify</a> to listen and subscribe.
Contributor
An entity responsible for making contributions to the resource
St. John's College Greenfield Library
Title
A name given to the resource
St. John's College Formal Lecture Series—Annapolis
Identifier
An unambiguous reference to the resource within a given context
formallectureseriesannapolis
Sound
A resource primarily intended to be heard. Examples include a music playback file format, an audio compact disc, and recorded speech or sounds.
Duration
Length of time involved (seconds, minutes, hours, days, class periods, etc.)
00:51:44
Original Format
The type of object, such as painting, sculpture, paper, photo, and additional data
wav
Dublin Core
The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/.
Creator
An entity primarily responsible for making the resource
Peirce, William Spangar
Title
A name given to the resource
Can taxes be fair? : Should they be?
Date
A point or period of time associated with an event in the lifecycle of the resource
2013-10-11
Format
The file format, physical medium, or dimensions of the resource
mp3
Description
An account of the resource
Audio recording of a lecture delivered on October 11, 2013 by William Peirce as part of the Formal Lecture Series.
Publisher
An entity responsible for making the resource available
St. John's College
Coverage
The spatial or temporal topic of the resource, the spatial applicability of the resource, or the jurisdiction under which the resource is relevant
Annapolis, MD
Rights
Information about rights held in and over the resource
A signed permission form has been received stating, "I hereby grant St. John's College permission to: Make an audio recording of my lecture, and retain copies for circulation and archival preservation in the St. John's College Greenfield Library. Make an audio recording of my lecture available online. Make a typescript copy of my lecture available for circulation and archival preservation in the St. John's College Greenfield Library. Make a copy of my typescript available online."
Type
The nature or genre of the resource
sound
Subject
The topic of the resource
Taxation
Fairness. Economic aspects.
Language
A language of the resource
English
Identifier
An unambiguous reference to the resource within a given context
Bib # 81119
Relation
A related resource
<a title="Typescript" href="http://digitalarchives.sjc.edu/items/show/44">Typescript</a>
Friday night lecture
Deprecated: Directive 'allow_url_include' is deprecated in Unknown on line 0