The Worldly Philosophers
Tax Justice Reconsidered
Liam Murphy and Thomas Nagel
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Cutting taxes has been the religion of free market conservatives ever since the days of Ronald Reagan and Margaret Thatcher. Now others, including President Jacques Chirac of France, Edmund Stoiber in Germany, and even Sweden's socialists have joined the call for lower taxes. Economic efficiency is the main argument used to justify tax cuts, but confused claims of tax "fairness" have always played an important role as well. Surprisingly, the same confusion afflicts both supporters of tax cuts and their opponents.
Taxes are a society's most important instrument for enacting its overall conception of justice. But most debates about tax justice consist merely in conflicting claims concerning the fairest way to share out tax burdens among different income groups. This approach is hopelessly myopic, because there is no way to evaluate the fairness of any distribution of tax burdens relative to income if you consider this distribution in isolation from the values that a society esteems and aims to uphold.
Consider the controversy about whether graduated income taxes should be replaced by a single-rate or "flat" tax. Russia's 13% flat tax, introduced last year, has been much praised by American conservatives, including President Bush, and the idea enjoys significant support in the US Congress.
While the official case for the introduction of a flat tax in Russia was largely one of economic efficiency, with a particular emphasis on increasing compliance, flat tax advocates in the US play up the fairness of taxing everyone at the same percentage. To many people, a flat or equal tax seems intrinsically fair.
Others, however, contend that a flat tax is intrinsically unfair. Fairness in taxation, on this view, does not require equal treatment. Rather, fairness requires that people pay taxes at a higher percentage if they have more money: a fair share of the tax burden is one that reflects the taxpayer's ability to pay. Some countries--including Germany, Italy, and Spain--have even enshrined the principle of "ability to pay" in their constitutions.
These competing principles of fairness underlie not only the political debate. With notable exceptions, they are found in legal and economic writings on tax policy. But extracting the "right" view from these conflicting principles is impossible, because the entire framework--that is, the search for a standard of fairness in the distribution of tax burdens--is based on a fundamental mistake.
Any claim about the fair distribution of tax burdens must make use of a baseline of comparison--something in relation to which the burden of each taxpayer is measured. Almost without exception, the baseline used is pretax income.
At first glance, this seems appropriate. People earn wages or acquire income in other ways; then the government takes some of it away from them in taxes. The only question is how much of each person's income is it fair for the government to take.
But it is a mistake to assume that the pretax distribution of income is a morally significant starting point, and that the fairness of tax burdens depends on how they depart from it. In fact, the distribution of pretax income has no moral significance at all, and therefore the distribution of tax burdens assessed against that baseline can have no moral significance either.
This is a matter of simple logic. The distribution of pretax income would have moral significance if everyone owned their pretax income until taxes took some of it away. But we couldn't possibly have a property right in the whole of our pretax incomes. Our incomes are earned in a world with government, which is necessarily a world that already has taxes in it.
Without the legal and economic institutions, supported by taxes, that make a market economy possible, we would have nothing--or at any rate nothing resembling what we have now. What we earn before taxes is the result of what we and others do against the background of governmental policies and institutions, taxation included. Pretax income can't be an independent moral baseline for tax fairness because it makes no sense to evaluate taxes as departures from a baseline that taxes themselves helped to create .
To reject the spurious debate about fairness in the distribution of tax burdens is not to deny the moral significance of tax questions. But the real questions about justice and taxes are different. Instead of treating taxes as government incursions on preexisting property rights, we should see taxes as part of the legal and economic structure that is needed to create and design a system of property rights.
Justice in taxation lies with the goals and implementation of government's overall economic policy, including tax policy. Whether we believe those goals are just will depend on the extent to which they reflect our commitments to human welfare, liberty, equality, and individual responsibility--or whichever other values we may think deserve recognition in our society.
That is what political arguments over tax policy should be about--not whether the rich should be taxed at a higher rate than the poor. Traditional debates about tax fairness address an illusory issue, and draw attention away from the true moral importance of taxes: that justice in taxation is inseparable from the justice of the overall economic and social system whose existence taxation supports.
Liam Murphy and Tom Nagel are both Professors of law and philosophy at NYU and are the co-authors of "The Myth of Ownership: Taxes and Justice" (Oxford University Press).
Copyright: Project Syndicate, September 2002
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