THE ETHICS OF TAXATION
Fred E. Foldvary
Department of Economics
Santa Clara University
Abstract
The judgment of taxation by ethical standards requires a universally applicable ethic. Such an ethic, natural moral law, can be derived using the Lockean framework based on equality. By this universal ethic, persons have property rights in their bodies and lives, and thus in their labor. The taxation of wages and of products of labor are therefore morally wrong. The equality premise, combined with the Lockean proviso on land, leads to the conclusion that public revenues may be justly obtained from the rental benefit of natural resources. Voluntary user fees and invasion penalties such as pollution charges are also morally proper sources for public finances.
The Ethical Basis
In judging the ethics of taxation, one requires an ethic by which to judge. An ethic is a set of rules by which acts are judged to be morally good, evil, or neutral. Since various cultures and individuals have differing ethical views, in order to have a non-arbitrary way of judging, one needs to use a universal ethic that is not derived from any particular practice or culture.
Such a universal ethic needs a foundation in what is common to humanity, human nature. The ontology, or basis for existence, of a universal ethic is in its satisfying criteria. Three criteria that seem both necessary and sufficient are universality, comprehensiveness, and non-arbitrariness. The ethic must apply universally to all humanity; it must apply comprehensively to all acts, and it must be based on non-arbitrary, empirical premises. If these criteria are accepted, then the ontology is such that if one can present an ethic which uniquely satisfies the criteria, then the universal ethic exists (Foldvary, 1980).
In his Second Treatise John Locke (1690) presented two basic premises from which a "law of nature" or natural moral law could be derived: independence and equality. Independence refers to the empirical fact that each person's mind is independent from that of all others. Equality places all persons on an equal moral basis, the empirical basis being that there is no biological basis for assigning to any class of persons the status of master and to the others the status of slave, hence equality as the default.
From the premises of independence and equality, Locke presented the basic rule that "no one ought to harm another in his health, liberty, or possessions." A more complete formulation of natural moral law requires a division of acts into the three categories: good, evil, and neutral.
The premise of moral equality not only places persons on an equal moral level, but also implies that there is no higher authority for judging what is good. The implication is that what is morally good is subjective to each person. The moral values of the universal ethic must therefore originate in the moral values of individual persons; there is no objective moral good. However, there is an objective rule for what is good: acts are morally good if (and only if) they are welcomed benefits. If the recipient deems an act to be agreeable or beneficial to him, and the donor voluntarily does it, then the universal ethic assigns the act the moral value "good" as consistent with equality and independence.
Acts which do not affects others can be designated as "neutral" without contradicting the criteria or the premises. These acts include acts that only affect oneself, and acts among a set of persons that do not affect those outside the set.
Acts that negatively affect others are labeled as "injuries" and split into two subsets. One subset is labeled "offenses" and the other "harms." Offenses are injuries whose effect depends entirely on the mentality of the affected person: his views, biases, attitudes, and beliefs. For example, if one is offended by some work of alleged art, it is due to one's prior beliefs, since others with different beliefs and values are not offended. If the universal ethic (u.e.) assigned the value "evil" to offenses, its moral designations would depend on the arbitrary views of individuals. This would contradict the non-arbitrary assignment. Hence, the u.e. assigns neither "good" nor "evil" so such acts, leaving the default designation, "neutral."
Harms do depend on something other than the recipient's predilections. Hence, to be a harm, there must be some entering from outside into the inside of the recipient's domain. A harm is thus a direct, actual, unwelcome invasion into a person's domain. The u.e. can in this case preserve the personal designation of evil and thus derive the u.e. rule for evil: all acts, and only those acts, which are invasive harms are evil.
The universal ethic thus has three basic rules:
1. Acts that are welcomed benefits are good.
2. Acts that are invasive harms are evil.
3. All other acts are neutral.
These rules are consistent with the criteria, and they uniquely formulate natural moral law. The u.e. then serves to provide meaning to various other concepts. "Voluntary" refers to any act that is either good or neutral. "Liberty" consists of law prohibiting and penalizing moral evil and not prohibiting good or neutral acts. A right can be defined as a correlative of a wrong, hence one has a natural right or moral right to an act or to some property when the negation of the act or property (by theft) is evil. For example, one has a property right in an automobile because it is evil for others to steal or destroy it.
Ethics Applied to Property
Because it is evil or wrong to invade the body of another person, a person is endowed with a property right in his own body and life. In this sense, every person is a self-owner. The ownership of one's self extends to one's activity, including labor, as recognized by Henry George (1879: p. 334): "As a man belongs to himself, so his labor put in concrete form belongs to him." Finally, the ownership of one's labor implies the proper ownership of one's wages and the products of labor.
The restriction of labor or wages as well as the taxation of wages is therefore designated as evil by the universal ethic. It is irrelevant to which uses the tax or public revenue is put. Forcibly taking away another's wage constitutes a coercive invasion into his domain, regardless of any good that is done with the proceeds. Since, economically, a wage is any return to human exertion, some profits constitute wages as well. Wages are also taxed when sales taxes are imposed on items purchased with wage income. Therefore, the general taxation of wages, profits, produced goods, and transactions is a morally wrong taking.
While the taxation of produced goods implies a taxation of wages, this does not extend to resources that exist apart from and prior to human action, namely natural resources. As Locke (1690) showed, unclaimed resources may be properly claimed, since this does not harm others. Locke's conclusion was that the products of unclaimed land may be claimed, but the land itself may be claimed only with the proviso that land of that quality is still freely available to others. By implication, once land of that quality is all claimed, the benefits of these claims may no longer be fully appropriated by the title holders. Who then should obtain such benefits? We fall back on the equality premise; the benefits belong to all equally.
Economically, the social benefits of land are reflected in its market rent, which is what users bid in order to use it. The rent arises after all land of a particular quality is claimed, and is a differential relative to less productive land (Foldvary, 1999). By paying rent, the title holders in effect compensate others for the exclusive use of that land. The system that preserves market incentives to use land, yet distributes the rent equally to the members of a community, is therefore that of private property rights to the possession of land, including its use and transfer, and the equal ownership of the rent. Government can be the collecting agency on behalf of the public, and the rent can then serve as a morally proper source of revenues for collective expenditures.
Some site rents are actually rental returns on capital goods attached to land, and their treatment differs from rents due purely to natural resources or sites values apart from human action. If the government provides infrastructure such as streets, parks, water, lighting, and security, these public works increase the demand for sites in that area, generating site rent. If government "taxes" the title holders by the amount of the generated rent, government is getting back value it created. But when the infrastructure and civic goods are provided by private-sector agencies such as residential associations and condominiums, then the association generates the rents and properly assesses the owners for the costs (Foldvary, 1994). Thus, while natural rents are properly shared, possibly via government expenditure, rentals due to privately provided civic works are properly collected by the providers.
Other Sources of Public Revenue
Some government goods and services, such as passports, are amenable to individual user fees, while other services can be charged as rentals, such as parking metered space (Wagner, 1991). User fees can include marginal-cost pricing for services and for congestion in transit (Vickrey, 1963). Government can also obtain revenue from charges on activities that are harmful to society, so that the charge internalizes and thus eliminates the externality, pollution being the most prominent example. The pollution is an invasive harm, and the pollution charge compensates society for that harm.
Ethically proper (i.e. not evil) sources of public revenue therefore include rents from natural resources including land sites, voluntary user fees, charges for pollution and other invasive externalities, and site rents generated by the provision of civic goods. Steven Cord (1991: pp. 1-2) estimated the annual economic rent of land in the U.S. in 1986 at $680 billion, 20% of national income, while Michael Hudson (1997) calculates it at 25%. Making up about one fifth of national income, rent would provide about 60 percent of current US federal, state, and local government revenue. Pollution charges could finance the balance, along with user fees. There is therefore no need for invasive taxation, such as income and sales taxes.
Other Ethical Considerations
One proposed ethical maxim for taxation is that if the public generally benefits equally from government services, such as national defense, then the members of the public should pay equally with a head or poll tax. This concept can be integrated with the concept of rent-based public finance. The rents and pollution charges are paid directly to the public as resident dividends, as Alaska does with its oil-revenue dividends. Then from those dividends, residents pay an equal poll tax, not to exceed the per-capita dividend. Citizens then have an incentive to keep government efficient, since a lower cost for the same level of services yields a greater resident dividend.
If citizens must pay the head tax but do not receive per-capita shares of the rent, then an injustice is committed. Most people end up paying twice for government services. The pay once when they are taxed. People pay again when they pay rent in order to be located in the territory impacted by the services. The landowner gets a subsidy in the form of the increase in the site rent generated by the public works. In effect, this forcibly transfers wealth from workers to landowners, and the poll tax invades the wage of the worker.
Another ethical standard is the "ability to pay," which extracts taxation wherever funds flow, tapping ever larger proportions the larger the flows of income or expenditure (McGee, 1998). One rationale is that the marginal utility of income is lower for high incomes than for low incomes. Even if that were so, the theft of properly obtained wealth is an invasion, hence evil, even if the owner does not value the item highly. If a taking is theft when an individual commits it, it remains theft when government takes it, since government is not endowed with special moral license, but is made up of human beings all subject to the same standards of the universal ethic, which is what makes it universal.
Rent-based public finance along with pollution charges is in the category of benefit taxation, where taxation is a quid pro quo for benefits received. In the case of landowners, the site rent is either generated by governmental public works, hence a benefit in the form of increased rental associated with valued civic goods, or else the site rent is due to natural advantages which are scarce, hence a payment to society for the exclusive use of that location, which was not created by human action.
Conclusion
This paper has presented a universal ethic derived from human nature, consistent with criteria for such an ethic. The universal ethic endows persons with the full natural right to their labor, wages, and the products of labor. Ethical public finance thus avoids any taxation of labor or capital goods and their returns. The remaining factor of production is land, and human equality endows persons with rightful claims to an equal share of natural rents. In addition, rentals due to public works are properly paid to the provider, whether governmental or a private-sector enterprise.
The ethics of taxation are a function of the origin of the income as well as of the expenditure. The category of expenditure does not by itself justify taxation. For example, just because there are needy folk who would benefit from welfare spending on shelter, this does not by itself morally justify takings even from those with high wages.
Those who posit an equalization of income as an ethical goal make an unwarranted factual assumption in claiming that such equalization requires a redistribution from the rich to the poor. Much of the inequality of income in society today comes from the highly unequal income from land rent. The use of these rents for public revenue would therefore also equalize income relative to the current distribution. This would not be a tapping of income just because the title holders are rich, but because rent is properly an equally shared resource, which today is improperly concentrated in a few wealthy hands. The equalization via rent sharing would not be a redistribution but rather a proper initial distribution.
The taxation of productive activity imposes an excess burden and social cost due to the costs of compliance and also as diverted and reduced production. The excess burden, i.e. in excess of the tax paid, for US federal taxation has been estimated to be about $1.5 trillion per year (Tideman and Plassman, 1998). Public finance based on rents and externality charges would thus both equalize income and increase efficiency as taxation is shifted away from sources for which taxation imposes an excess burden towards sources, such as natural resource rents, with no excess burden.
Rent-based public finance was analyzed by the French economists called Physiocrats in the 1700s, who called the rent a "net product" that could be taxed without harming the economy. It was later analyzed and proposed by Henry George as well as a number of contemporary economists (see Feder, 1994). The ethical basis of rent-based and other public finances has not, however, been fully analyzed, because usually economists begin with an assumption of moral rights or some ethical standard, without explaining how such rights or ethics come about. By presenting also a derivation of a universal ethic and natural rights, the ethics of public finance is placed on a more solid foundation.
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