The Causes of Wealth Inequality (22): Non-Progressive Taxation and Weak Transfers

This post applies to the U.S., but I guess the same conclusion are valid for a number of other countries as well. In the case of the U.S., very high levels of income inequality could, in theory, be reduced in several ways:

Unfortunately, very little of this is happening. Let’s focus on the last two options. The tax system in the U.S. is not progressive at all. As you can see from this graph, taxation in the U.S. hardly influences income shares.

The poor only get a little bit more thanks to taxes, and the rich only lose a little bit. This is all the more regrettable given the fact that the rich have done very well over the last decades.

Higher tax rates for the wealthy and other more progressive taxes such as a higher inheritance tax, a higher capital gains tax, a Tobin tax etc. are politically impossible it seems.

Increased benefits for the poor are equally unrealistic given the fiscal situation and the predominant ideology. Although the poor in the U.S. do profit from the existing benefit system in absolute terms (unemployment insurance for example saves millions from absolute poverty), income inequality barely moves because of it. Income shares after benefits are hardly less unequal than before. This graph shows the influence on income shares of the sum of taxes and transfers, but you get the picture.

Taxes and transfers result in the poor having a bit more and the rich having a bit less, but fundamentally they don’t change the distribution of income.

More posts in this series are here.

The Causes of Wealth Inequality (13): Deliberate Policy?

Some say that the increase in income inequality in countries such as the U.S. has been the result of deliberate government policy. That’s quite an accusation. It’s not controversial to assume that tax policy under right wing governments tends to be less burdensome on the rich, and that social welfare policy under such governments tends to be more stingy. If you look at it like this, it’s not crazy to argue that right wing policies can aggravate income inequality. But it’s quite another thing to claim that right wing governments use these policies in order to deliberately aggravate income inequality. That accusation is incompatible with right wing ideology, which claims that the preferred policies also and ultimately help the poor (trickle down economics etc.), and that left wing policies supposedly favoring the poor are in fact self-destructive (unemployment benefits create labor disincentives, taxes create production disincentives, etc.). However, it’s possible that this ideology is just a smokescreen for anti-poor policies. But I guess that’s somewhat difficult to prove.

If we look at the tax rates, it’s true that the rates for the wealthy tend to go down under Republican presidents:

In 1979, the effective tax rate on the top 0.01 percent (i.e., rich people) was 42.9 percent. … By Reagan’s last year in office it was 32.2 percent. (source)

However, things aren’t as simple as that:

From 1989 to 2005, … as income inequality continued to climb, the effective tax rate on the top 0.01 percent largely held steady; in most years it remained in the low 30s, surging to 41 during Clinton’s first term but falling back during his second, where it remained. The change in the effective tax rate on the bottom 20 percent (i.e., poor and lower-middle-class people) was much more dramatic, but not in a direction that would increase income inequality. Under Clinton, it dropped from 8 percent (about where it had stood since 1979) to 6.4 percent. Under George W. Bush, it fell to 4.3 percent. (source)

The tax rate for the rich dropped somewhat around 2005 following the Bush tax cuts, but all the tax effects over the last decades taken together don’t really make a good case that tax policy is the major cause of rising income inequality. So it’s even more difficult to make the case that tax policy was part of a conscious strategy to aggravate inequality. The increase in inequality has been too big compared to the possible impact of taxation. That’s corroborated by the fact that pre-tax inequality in the U.S. rose faster than after-tax inequality.

What’s interesting, however, is that pre-tax inequality in the U.S. tends to rise much faster under Republican rule. So inequality can still be the result of policy, but policy expressed in other ways than taxation. Other policies that may have contributed – deliberately or not – to rising income inequality are anti-labor union policies, decreases in the minimum wage, etc.

More posts in this series are here.

Is Taxation Akin to Theft and Slavery?

The notion that taxation is theft and a violation of property rights is quite common, especially in libertarian circles. (A less extreme version of the argument claims that taxation may be a justified limitation of property rights but its level should be kept as low as possible because of concerns for economic incentives).

The classic justification of this rejection of taxation is a reduction ad absurdum: if a state can tax its citizens, how much can we reduce the group of people and still hold that this group can impose taxes on its members?

There are many variations of [this argument], but one begins, for instance, with the example of a man stealing a car, which most people would regard as unethical. It then proceeds to make slight changes to the story, with the identity of the thief gradually shifting from one man, to a gang of five men, to a gang of ten men who take a vote (allowing the victim to vote as well) on whether to steal the car before stealing it; … to one hundred men who take the car and give the victim back a bicycle; to two hundred men who not only give the victim back a bicycle but buy a poor person a bicycle as well. It ultimately challenges the reader to say how big a group needs to be, and what characteristics it needs to have, before the immorality of theft becomes the alleged morality of taxation. (source)

Taxation is not only rejected because it’s viewed as a form of official and legalized theft. It’s also viewed as a form of slavery. Robert Nozick, a famous libertarian, has argued that taxation of earnings from labor is on a par with forced labor.

Nozick starts from the reasonable assumption that people own themselves. Self-ownership also means that people own their talents and labor power. He then continues with the Lockean argument for private property: we produce goods by mixing our labor power and talents with elements of the material world, and by this mixing we generate ownership of those modified elements of the world. If the government taxes our income, it takes away – or steals – parts of what we own through our labor. But the government doesn’t just steal things from us. Because our labor and talents have been incorporated in the things we own – and we own them because of this incorporation – taking them from us means effectively that the government owns our talents and labor, and hence owns us. Taxation means that the government takes away our self-ownership. And that’s slavery. It also means that the government uses people as means rather than ends, violating Kant’s maxim.

If you’re convinced by this kind of reasoning and agree that taxation is slavery, forced labor and theft, then you’re morally allowed or even obliged to resist taxation and rebel against government. And you’re likely to be a libertarian.

However, you may also want to consider a few counter-arguments.

1. There’s first the issue of value pluralism. Private property and self-ownership are undoubtedly important, but not so important that they trump all other values. Hence, they can be limited to accommodate a balancing with other concerns.

2. The rejection of taxation becomes morally difficult when we consider the purpose of taxation, or better the – substantial – part of taxation which serves the welfare state and the realization of economic rights. Economic rights are primarily a duty of charity, as I’ve argued here. The state, with its welfare mechanisms, should only intervene when citizens don’t (sufficiently) help each other. And it needs taxes to do that. Taxes are the enforcement of the duty to charity. Which is why tax fraud, tax evasion and certainly the principled refusal to pay taxes are particularly reprehensible: the existence of taxes is already a stain on the reputation of mankind, because taxes exist as a consequence of the fact that people deny their responsibilities. Denying the duty to pay taxes is a double moral failure.

However, some libertarians go along with the first part of this argument and accept that people have a moral duty to help others (others who are starving for example). However, they deny that this creates a right. So, ideally, these libertarians would not commit the first prong of this double moral failure, in which case the second prong could not occur. And yet, in the non-ideal world, libertarians – and others – do commit the first moral failure, i.e. do not live up to their responsibilities to help others. Subsequently, libertarians and others who follow Nozick, are doomed to commit the second moral failure as well. What’s more, they can’t even call it a moral failure because according to them starving people don’t have a right to demand our help (the fact that we have a duty to help doesn’t necessarily give them a right to our help). Such a right would be incompatible with self-ownership. It would mean stealing our goods and our labor power and talents. It would mean using us as a means for their survival. In my view, the claim that the duty of generosity doesn’t create a right to generosity is a simple artifact invented to guarantee the supremacy of property rights.

3. Nozicks reasoning about self-ownership and property is shaky, as he himself admitted:

why isn’t mixing what I own with what I don’t own a way of losing what I own rather than a way of gaining what I don’t? If I own a can of tomato juice and spill it in the sea so its molecules… mingle evenly throughout the sea, do I thereby come to own the sea, or have I foolishly dissipated my tomato juice? (source)

4. Given the importance of talents in the libertarian argument, and the refusal to have people’s talents “harvested” for the sake of the minimal welfare of those without talents or otherwise unable to fend for themselves: is it not evident that there’s an injustice involved in the distribution of talents? Nobody decides freely to be born without talents, so the absence of talents is nobody’s fault. Should you be forced to suffer for something that is not your fault? In addition, is there not a small possibility that people are rewarded for the wrong talents and that some talents are not sufficiently rewarded? If all that’s the case, then the claim that the state can’t use the proceeds of your talents for the benefit of others becomes a lot weaker: if those proceeds could just as well have gone to other talents or the talents of others (in part at least), and if your talents are just a matter of luck, why should you have a right to keep those proceeds?

5. And finally, is it not somewhat gross to compare the fate of a taxpayer to the fate of a slave? A taxpayer retains many of the freedoms a slave can only dream of.