Article published in Liberty, September 1995, pp. 41-47
Auditing the Income Tax
by
Pierre LemieuxA resident of, say, Butte, Montana, who earns $14,000 per year must surrender 15% of his income to the United States Treasury and another 6% to the State of Montana. His neighbor who earns $62,000 must surrender 34% of his income to the federales and another 11% to his state. In other words, the person who earns $15,000 must work for his state and federal governments for 10.4 weeks per year, while a person who earns $60,000 must work for his governments more than twice as long -- a total of 23.4 weeks per year.
Such discrimination is not always apparent in other demands that governments make on their citizens. There has never been a provision requiring young men with high incomes -- say, the gigantic gifted athletes of the National Basketball Association -- to be conscripted into military service for four years, while less affluent young men be drafted for only two. Nor have the courts forced high-income individuals to serve longer terms as jurors. The taxes embedded in the price of every gallon of gasoline, every bottle of wine, and every cigarette are the same for the rich as for the poor. The postage stamp sold by Canada Post costs 43 cents -- many, many times more than an e-mail message -- whether its buyer is wealthy or indigent.
Does discrimination become "progressive" when applied to an income tax, or is it merely the majority's way of forcing the better-off minority to pay a disproportionate amount of the cost of government? My intent here is to show not only that there is no economic justification for progressivity, but that there exists a strong moral and political case against any tax levied as a function of income.
To understand the economic argument against progressivity, one must first grasp the difference between a real cost and a mere transfer. Since some individuals necessarily receive more in government services than they pay in taxes, taxation operates transfers among individuals. Standard economic theory does not have much to say about transfers, for it assumes that the "marginal utility of income" is the same for all individuals, i.e., that everybody's last dollar is worth the same in terms of utility (satisfaction).
As non-voluntary and recurring transfers, though, taxes carry a real economic cost over and above the transfers they operate. The price of a good (or service) hit by a tax will increase compared to other goods. Individuals will consume less of the former and more of the latter. By distorting relative prices, taxes incite people to substitute goods that bring less utility for goods they actually prefer. This net utility lost -- or its money value -- is called the welfare cost, or "deadweight loss," of taxes. There is less to redistribute because taxes dampen incentives to produce and consume more valuable goods and services. This of course applies to income taxation, which reduces the price of leisure relative to other goods (bought with income). The standard economic case in favor of income taxation is that it is less distorting, more "neutral," than other kinds of taxes, because it hits more equally all economic activities. While personal income taxes only exclude leisure, payroll taxes discriminate against salaried employment, consumption taxes favor savings, etc.
The Economic Case Against Progressivity
Progressivity increases the income tax's welfare cost and cancels at least part of its less distorting effects on relative prices. An income tax levied at one single constant rate would still reduce the remuneration of work and the price of leisure, and would still generate welfare costs, but less than progressive rates would. For if a government wishes to raise the same amount of taxes with progressive rates as with a constant rate, it will have to compensate for lower rates at the bottom of the income scale with higher rates at the top. These higher rates will have a negative effect on work incentives and thus increase the welfare cost of taxation.
The only way that substituting a progressive tax for a flat tax could reduce the welfare cost of taxation (for a given level of government revenues) is if the low-income earners were to react to lower marginal rates by increasing their supply of labor more than the high-income earners were to reduce theirs. This is unlikely, though, for the high-income earners probably do not value leisure less than low-income earners. Those subjected to the largest disincentive effects are likely to be the most productive. Indeed, it has been estimated that the welfare cost of one dollar raised through the actual income tax system could be as high as $0.38, and that the shift to a constant marginal rate would raise GDP by 3%, or nearly $750 per person.[1]
A progressive income tax is discriminatory as it imposes differential burdens on different individuals. Now, this is not true if (contrary to what we have assumed thus far) the marginal utility of income is lower for the rich than for the poor. Then, one more tax dollar imposes a higher utility loss to the poor than to the rich. There is a net loss, and a real economic cost, in non-discriminatory taxes. Consequently, argue the supporters of tax discrimination, tax equality in terms of utility lost requires taxing the poor less than the rich.
This argument does have some intuitive appeal, if only because an individual experiences that, for himself, a dollar is worth more when he is poor than when he was rich. In other terms, for any given individual, the marginal utility of income decreases as he gets more of it. But the difficulty lies in comparing utility across individuals. Utility is subjective and cannot be measured, so the objection is impossible to prove or disprove. Moreover, one's intuition is not independent of one's own preferences. It may be true that one less Havana cigar for a rich man is worth less than a two-day milk supply for a poor man's child. But what if the poor man buys a case of beer and the rich man a recording of a Bach harpsichord concerto? Faced with these and similar considerations, the welfare economist usually assumes that the marginal utility of income is the same across individuals. This assumption may not be more satisfactory than an accounting convention, but it at least embodies the fundamental axiom that "Each man counts for one, and that is that," as James Buchanan puts it.[2]
A more subtle economic argument for discriminatory taxes is that if the government knew all individuals' preferences, it could impose higher taxes on those whose behavior is less responsive to relative prices -- those, for example, less inclined to reduce their work after being taxed higher. But if the government could graduate an individual's income tax according to his subjective demand for income (and conversely leisure), the ideal schedule to minimize disincentives would be a regressive one, i.e., from the highest marginal rate for the first hour of income-earning activities to lower rates as the marginal utility of income decreases.
So it may be that optimal discrimination would actually require regressive taxes. Such a system would be politically unacceptable, of course. Moreover, tax discrimination carries economic costs of its own, over and above the welfare costs considered earlier. In the real world of majoritarian democracy, as opposed to the benevolent-despot model of the state, coalitions of taxpayers will try to get on the right side of discrimination. This rent- seeking means that they will invest real resources (time, political contributions, lobbying, etc.) that could have been used for producing wealth instead of merely transferring it. Tax discrimination will also generate a complex tax system, with high administrative and compliance costs.[3] These efficiency costs of tax discrimination are likely to be higher than any of its uncertain benefits.
The standard alternative to the high economic costs of a graduated income tax is the "flat tax," which would tax all incomes at the same rate. In the U.S., this idea has been in the air since the '80s, and some proposals actually before Congress would replace the existing schedule with a single marginal rate of 17% or 19%, designed to be "revenue-neutral," i.e., to bring the same revenues into the government's coffers.
One problem with a flat tax is that it will be tempting for government to inflate it again. Look at the record. The U.S. federal income tax was introduced in 1913, with rates ranging from 1% to 6%. World War I rapidly brought the top marginal rate to 77%. It shot up to 94% during World War II, and was still 92% in 1952-53. John Kennedy initiated a reduction to 70%. The top rate then seesawed between 77% and 50%, until Ronald Reagan's reforms replaced the 11%-50%, 15-rate schedule with a three-tier structure: 15%, 28%, and 33%. George Bush and Bill Clinton have since added 31%, 36%, and 39.6% rates.
But a flat income tax that remains flat would certainly be less discriminatory and less costly than the present system. The problem with income taxation, though, is much deeper than its narrow economic aspects and, I am convinced, not amenable to such a simple solution.
The Moral Curse of Redistribution
The moral case for an income-based tax is closely related to the assumed desirability of redistributing income to the poor. Of course, even a flat rate would make the distribution of income more equal. As we saw, the economist does not have much to say about income redistribution, except to the extent than the process generates real economic costs. If $100 were to be taken from all women and redistributed among all men in a one-shot, lump- sum, and non-recurrent manner, there would be no welfare cost. From an ethical point of view, though, such redistribution would certainly be questionable. Transfers are not morally neutral.
One argument for redistribution proceeds from the notion of need: some people's needs are not satisfied on the market, while other people earn more money than they need. But how do we measure need? Any definition -- in terms of basic or primary needs, for example -- is necessarily arbitrary and a function of time and place. Otherwise, it would be a matter of justice for poor Americans to be coerced into making transfers to even poorer people across the planet.
Assessments of need are common in voluntary relations: when I give $10 to my son, I judge that he needs it more than I do. But the more removed we are from close personal relations or voluntary charity, the more uncertain the assessment is. Redistributing according to need across what Hayek calls the "Great Society" requires arbitrary appraisal and coercive action.
Yet, the idea that some needs have priority over others cannot be summarily dismissed. From the point of view of human accomplishment, the needs of a hungry child have priority over the swimming pools of the rich. Even the advocate of the minimal state wants to have his property rights protected more than his other wants fulfilled. And the anarchist would argue that people need to be freed from government more than they need electric toothbrushes. Of course, the more we move away from the most basic requirements of human accomplishment and social life, the fuzzier and the more conflictive the needs argument becomes. Let's avoid drawing the line, and just say that some needs may have priority over others, that people in dire need (either for protection or food) should be helped. Private charity will certainly provide help. But suppose it is not sufficient?
In such a case, a distinction can be made between "direct" (or intentional) and "indirect" redistribution. Direct redistribution aims at a more equal distribution of income. Indirect redistribution, on the contrary, is just a by-product of other actions, without any grand view to flattening income distribution. While direct redistribution violates individual rights, indirect redistribution cannot be disentangled from most voluntary relations, nor from production of "needed" public goods. If the minimal state's police spend more resources protecting more vulnerable individuals, this is indirect redistribution. Or consider a private hospital whose bad debts from poor patients are indirectly financed by higher prices charged to paying customers. Indirect redistribution does have the side effect of making utility somewhat more equal, but such is not its goal.
In other words, setting an income or utility floor, by whatever private or public means, is logically distinct from the purpose of equalizing incomes. The argument from need calls for indirect, not direct, redistribution. If the only tax levied were a head tax, indirect redistribution would ensue from the way the moneys are spent. Income taxation, then, is not required. Indirect redistribution is accomplished by the expenditure side of state activity.
Maximizing Social Welfare
Modern utilitarians justify redistribution with the goal of maximizing total utility (or "social welfare"). Since it is impossible to quantify individual satisfactions, let alone calculate their total, utilitarians fall back on the concept of the "social welfare function," which embodies society's preferences as regards the distribution of utility among individuals. The argument is often couched in terms of the "trade-off between efficiency and equity." Because of the welfare cost of taxation, redistributing income will move society under its efficiency frontier. But even with this efficiency loss, people might still prefer the new distribution to more efficient but more unequal outcomes.
The main analytical problem with the social welfare function is that it does not exist. Society is not a superindividual with a mind capable of harboring preferences. Political processes (or any other processes, for that matter) are demonstrably incapable of consolidating individual preferences into anything like an unambiguous, consistent utility function.[4]
Moreover, as powerfully argued by Bertrand de Jouvenel,[5] there is a blatant inconsistency between the objective of maximizing social utility through redistribution, and any post-redistribution intervention. Suppose government has redistributed income to maximize social utility. If income is redistributed from the rich to the poor, making everybody middle-class, demand for high-income goods and services (say, sports cars, classical concerts, or Ivy League educations) will fall, while demand for middle-taste goods (family sedans, baseball games, self-help books) will rise. Now, the same people who argue for income redistribution in order to increase social utility are also likely to propose that the state then support these very activities -- education, the arts, urban renovation, etc. -- that will decline absent a wealthy class.
If the state has to intervene to support what the rich were financing before redistribution, that means that social welfare was higher before. And then income redistribution did not increase social welfare as claimed. It will not do to reply that state financing will equalize access to what was formerly the preserve of the rich, for government will certainly not be able to produce more with the wealthy's money then the latter's demands were bringing on the market. The difference will be that, after redistribution cum intervention, some people will now get goods they are not willing to pay for, while those who would be willing are expropriated.
From a utilitarian point of view, the case for forced redistribution seems to boil down to a single factor: envy. The mere observation of higher incomes creates so much disutility among the less well-off that they gain more from redistribution than what the rich lose. Expediency and brute force provide a closely related justification: let the most powerful charge, as it were, what the market will bear. In his delicious little book, The Income Tax: Root of all Evil, Frank Chodorov quotes one economics text: "Yet it is inevitable that taxes should be levied in this [progressive and redistributionist] way because the state must get the revenues from people who have the money." This means, comments Chodorov, that "it is right to get where the getting is good."[6] More to the point, one is reminded of Willie Sutton's famous explanation of why he robs banks: "Because that's where the money is."
Contractarian Redistribution
Another argument for redistribution lies in contractarian equity or fairness. All individuals unanimously agree to redistribution at some fictitious constitutional stage -- "under the veil of ignorance," as John Rawls puts it. It is in each individual's interest to make sure that he cannot fall to the bottom of a very unequal distribution of income.
Parties to this social contract are very convenient creatures: Rawlsians can mold their preferences (risk aversion, for instance) to get any redistributive outcome they like. You wouldn't know it from reading Rawls, but the social contractors might not be completely ignorant of the costs and benefits of political society. Negotiating behind the veil of ignorance, some of them just might recognize the public-choice dangers of the welfare state. They may realize that granting redistributive powers to the state will invite exploitation of minorities by the majority, or even of the majority by minorities. Most of the actual redistribution carried out by the state benefits bureacracies and the "poverty industry" much more than the poor. A host of regulations, from minimum wages to occupational licensure, actually redistribute income opportunities away from the poor, who are not always members of the winning redistributive coalitions.[7] Consequently, the original parties to a social contract are just as likely to limit the state's redistributive powers as to expand them.
Perhaps the most serious argument for income-based, redistributive taxes is that the value one receives from government services is related to one's income. "The subjects of every state," wrote Adam Smith, "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."[8] The idea that one benefits from the state's existence in a way that is proportional to one's income probably explains why so many classical liberal thinkers accept proportional taxation as non-discriminatory and just.
In the context of voluntary exchanges, prices of goods and services generally bear no relation to the buyer's (or the seller's) income. Suppose a grocer offers you the following deal: "When you purchase a pound of beef, I will charge a price equal to X% your income." ("And here is the beef- income report to be filled each year.") Perhaps you will accept if X% amounts to less than the fixed prices offered by competing grocers; otherwise you will decline, or put an end to the deal when your circumstances change. The fact that everybody reasons the same way explains why grocers do not make such offers. If the state is considered a voluntary institution created by a social contract, why would the contracting parties to be any more sympathetic to this method of settlement? After all, they are also the state, and will not wish to be in the grocer's shoes.
The State as Insurer, the State as Pimp
One could argue that protection of life and property resembles an insurance contract. Just as an insurance company will charge you more to cover a castle than a shack, the state is justified to exact more payment from somebody whose protected property is more valuable. This argument might well be applicable to real property taxation, but does it apply to the state protecting one's own person? Other things being equal, a Pinkerton bodyguard will not charge you more if you are wealthier.
Other things are not always equal, though, as in ransom insurance, where the risk of being kidnapped presumably goes up with your wealth. It is not altogether inconceivable that prices charged by private protection agencies in an anarcho-capitalist society would bear some relation to a person's wealth or income.
The question now is, Why do we need the state? Assuming that we do need it, the answer is presumably because protection of individual rights is deemed too important to be left entirely to the market. This amounts to saying that, as far as one's own protection is concerned, one person is worth as much as any other, whatever his income or the value of his human capital. Otherwise, why should not the state charge more for protecting, say, a sexy woman than an old maid? Either the price of personal protection depends on the "value" of an individual, and we don't need the state, or else we need the state precisely because we think protecting all individuals' rights is equally important. If this reasoning is valid, the state may not tie the price of personal protection to an individual's wealth or income.
While insurance premiums are a function of covered property values, commissions compensate services rendered in proportion of income derived from the deal. Read Adam Smith's argument between the lines: the more income you earn, the more you owe in taxes because you would not have earned it without the state's protection. Perhaps, then, we pay the state on commission to help us increase our incomes. Perhaps the state is a pimp, and we are his prostitutes.
This argument makes sense only to the extent that production and incomes are made possible by the state's existence. Income taxation justified this way can apply only to that part of an individual's income which he could not have earned in anarchy. One implication is that the most efficient individuals in a peaceful society should be taxed more heavily, while the big tough brutes who would do better in a Hobbesian setting would be totally exempted. A line of the income tax form would ask for the size of your biceps. This does not make much moral sense, even for the IRS.
Assuming that there would be virtually no production or incomes without the state, is it still obvious that parties to a social contract would unanimously agree to pay the state on commission? Just as commission-paid employment faces competition from other compensation formulas, alternative proposals might be brought to the attention of the social contracting parties, and they may well choose a protection agency or association willing to accept a flat fee.
If the state does not offer protection insurance and is not a commission- paid broker or a pimp, perhaps we must look at it as an income insurance company. Back to our hypothetical grocer, suppose he offers you the permanent opportunity to buy beef at an income-related price. Some people might want to hedge against the possibility of being too poor to buy beef in the future. Such insurance-grocers do not exist, presumably because the business would carry a high moral hazard. Some people with a beef- insurance plan would stop working. Do we create the income-insurance state to correct this market failure? If the grocer can't do it, call 911.
Some forms of income insurance do exist on the market: they go under the names of permanent employment, nest-egg investing, and life in communes and religous orders. Another, non-market, form of income insurance is called slavery. The typical nineteenth-century American slave had a standard of living comparable to that of a free laborer. The master spent 88% of the slave's production on his slave's lifetime upkeep (lodging, food, clothes, medical care, etc.), and the slave enjoyed an income security that the free man did not have.[9] The price he paid for this, willy-nilly, was his liberty -- a very high price indeed. But in return for 12% of his earnings and his liberty, he got income insurance.
The point is that non-market income insurance can only be provided by a master who owns the human capital of a slave and is certain that he will forever control the flow of income from this capital. The only way the state can economically offer income insurance is for its customers to accept a slave-relation with their supplier. Income taxation, where the state takes the first cut on your income, institutionalizes such a relation. The argument against the state as a universal income insurer is the same as the general argument against slavery. Unless he is dead drunk during the social contract negotiations, no free man would accept the deal.
There is, then, no moral basis for a tax levied as a proportion of income. This conclusion applies whether the rate is regressive, proportional, or (à fortiori) progressive.
Income taxation is, however, a great tool in Leviathan's arsenal.
Optimal Exploitation
Thomas Hobbes compared the modern, sovereign, all-powerful state to Leviathan, the Biblical monster. "None is so fierce, explained Yahweh, that dare stir him up ... There is nothing on earth to be compared with him. He is made so as not to be afraid. He seeth every high thing below him; and is king of all the children of pride."[10] The Public Choice school of economics has combined the Hobbesian view of the Leviathan state with the rather realistic hypothesis that the children of pride, as parties to the social contract, will want to impose constitutional restraints on their protector. The state is not some benevolent despot, but (at best) a sleeping Leviathan who exploits its subjects when not kept in check.
Even if one dismisses the economic case against progressive income taxation, and the moral case against redistribution and income-based taxes, the most powerful argument -- the political case -- remains to be made: any tax based on income grants unacceptable powers to Leviathan.
The first reason for this is that income taxation allows Leviathan to maximize its exploitation of its subjects. When free to exert tax discrimination, Leviathan is in a position to levy the highest rates against those subjects who are least likely to respond to the disincentives of the tax system. This discrimination will be efficient from a narrow economic point of view, as it will minimize the welfare cost of taxes. But this is true only to the extent that the state is a benevolent despot financing the optimal amount of public goods. To the extent that the state is conceived as Leviathan, tax discrimination will allow it to raise "public" revenues and expenditures much above the optimal size of government and, therefore, to increase the economic cost of taxation.[11] When Leviathan cannot discriminate with rates, income taxation still allows him to exact more in absolute value from people who earn more money income. A flat tax is still discriminatory. Among two individuals who are identical except for the fact that one prefers leisure more than the other, the latter would bear a higher tax burden than the former.
The main danger in flat tax proposals is that they come with an enlargement of the tax base. Both the 1986 Reagan reforms and the current proposals are meant to be revenue-neutral, i.e., to keep government receipts unchanged. But Leviathan is always at work maximizing its revenue. In order to ensure that the marginal rate faced by bottom income earners does not increase too much, flat tax proposals require reduced exemptions and deductions. The advantage of so-called loopholes is that individuals use them to avoid confiscation. Other things (including discrimination powers) being equal, the larger the tax base, the more Leviathan can confiscate. So the citizenry won't necessarily benefit from trading high marginal rates for a larger tax base. Leviathan will be much tempted to raise the flat rate in the future - if not actually to reintroduce discrimination on its new, wider tax base.
Any income-based tax system offers Leviathan both opportunities for tax discrimination and access to a large tax base. When one door is closed, the monster comes in through another one. Only 2% of the American population was hit by the federal income tax introduced in 1913. Then, rates climbed up. When the children of pride became impatient, government yielded on the rates but enlarged the tax base. In the process, all of the American working population had been subjected to the income tax. The same trend can be observed in most countries.
The Rule of Law
The second source of political danger in the income tax is that it is an ideal tool for political persecution. The income tax requires reporting -- as we say in French, it is a "declaratory" tax: the taxpayer has to provide government with the information it needs to assess it.
Not all taxes are declaratory. The head tax, for instance, is not. The average government bureaucrat will normally notice that you have a head; in the worst case, the most you might have to declare is that you exist. Another example is the medieval French tax on house windows and doors: as Jean- Claude Martinez writes, "the civil servant could establish it without entering the homes, he would just walk in the street and count the number of windows and doors." To protect privacy, adds Martinez, it is necessary to keep "the bureaucrats in the street."[12]
With the income tax, the state breaks into your home. The state's obscene peeping gives it information it should not have that can be used against its subjects. It accustoms individuals to answering questions from the authorities concerning their most private affairs, and, on top of that, forces them to sign their returns as though they were contracts. This debasement of a man's privacy, signature, and honor has more disastrous moral effects than all the vices of capitalism one can imagine.
Moreover, a tax applied on such a wide and fuzzy base as income is bound to rely on the most arbitrary criteria. What is income? Presumably net income, i.e., what is left after you have incurred the necessary expenses to earn it. Now how in heavens can one sensibly determine which part of a four-course business meal topped with a cigar is pleasure, and which part is business? Or what kind of office do you need at home? (Why should not seduction of your boss provide deductible expenses?) One only has to read the Wall Street Journal " Tax Report" column about the arcane decisions of the IRS or tax courts on such matters to realize the arbitrariness, verging on stupidity, of income taxation. Or examine the instructions that accompany one's tax forms.
Try to make this consistent with the rule of law, and the result is abstruse complexity. Add the fact that it is in many people's interest that tax laws be recondite -- not only accountants and lawyers, but also all the beneficiaries of loopholes and privileges -- and what you get is a tax system that no specialist, not to mention any average citizen, can understand.
The U.S. Internal Revenue Code occupies 21 megabytes of disk space on the Internet, which makes for 2.8 million words, and would fill fifteen 3.5- inch diskettes if one dared to click "Download." Assuming that the average citizen can read these 11,200 pages of tax jargon at the rate of one page a minute, going through the Internal Revenue Code would take him more than one month full-time. The Swiss host who provides it in full text from his World Wide Web server warns the visitor: "Looking for something in that mass of verbiage can be daunting." You should, he adds cheerfully, "harness the free WAIS-sf indexing and retrieval engine."[13] Just click here.
What would the Founding Fathers have thought about the citizens harnessing the power of the WAIS-sf indexing and retrieval engine? Wrote Madison: "It will be of little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood ..."[14]
Corporate income taxation suffers from the same disease. Mobil Corp.'s 1993 income tax return comprised nine fat volumes totalling 6,300 pages and weighting 76 pounds; its preparation required 146,000 documents and cost $10 million. According to the House Ways and Means Committee's chairman, the compliance costs of the current income tax system reach $300 billion a year.[15]
Tyrannical Enforcement
To raise revenue by means of such an arbitrary and complex set of rules entails a tyrannical enforcement apparatus. At some point, tyranny has to come in the open, when armed men go to capture the recalcitrant taxpayer. But the government will try to hide tyranny under a priori controls -- payroll deductions, compulsory reports and forms, restricted currency denominations, etc. To the children of pride, Leviathan will issue ID cards in the name of "Social Security," and number the wandering cows lest their earning whereabouts escape the IRS.
For any free spirit in tune with the American dream, the ubiquity of the social insurance number is a tragic symptom of our times as well as an insult to personal dignity. Go visit the WWW site of Wells Fargo,[16] the bank hailed as the first to allow its customers to access their account on the Internet: the customer is asked for his secret password (given by Wells Fargo), and his social security number (compliments of Leviathan).
The U.S., of course, does not stand alone in this predicament. How much mentalities changed between the time the dynamics of liberty was on the rise and our disastrous twentieth century! About the possibility of taxing income, Adam Smith wrote: "An inquisition into every man's private circumstances, and an inquisition which, in order to accommodate the tax to them, watched over all the fluctuations of his fortune, would be a source of such continual and endless vexation as no people could support."[17] About corporate income taxation, he added: "It would have been impossible to proportion with tolerable exactness the tax on a shop to the extent of the trade carried in it, without such an inquisition as would have been altogether insupportable in a free country."[18]
If the income tax apparatus were used only to collect racket money, it would be unacceptable enough in a free country. Because an income taxation system is necessarily replete with arbitrariness and complexity, and because of the information-gathering powers given to the state, it would be surprising if Leviathan did not yield to the temptation of using it against his political enemies. This hypothesis does not require a grand conspiracy, only enterprising politicians and career-minded petty bureaucrats. Let a bureaucrat look far enough into anybody's taxes, and he will always find something. In the U.S. as elsewhere, many cases of tax audit persecution have been documented over the years. The IRS's current crackdown the NRA is only the latest.
We can't say we were never warned. In 1894, Rep. Robert Adams, among others, foresaw that an income tax "will corrupt the people. It will bring in its train the spy and the informer. It will necessitate a swarm of officials with inquisitorial powers."[19] All this is done under the guise of redistribution. "The more one considers the matter," wrote Jouvenel, "the clearer it becomes that redistribution is in effect far less a redistribution of free income from the richer to the poorer, as we imagined, than a redistribution of power from the individual to the State."[20]
There are a few great causes that have such symbolic and strategic value that, if they were won, we could probably live with the state that would ensue. Near the top of such a list would rank the constitutional prohibition of any tax that is at the same time direct, widely based, declaratory, and potentially discriminatory. This would settle the case of progressivity and all the problems of income taxation under its many forms. It is difficult to determine which taxes are the most acceptable - or least unacceptable -- taxes, but relatively easy to see which ones are utterly inconsistent with a free society.
Footnotes
1. See Raymond J. Keating, " The Great Tax Debate: Making Sense of Competing Tax Plans," Testimony at the House of Representatives Small Business Panel Hearing on Flat Tax, Tax Notes Today, May 19, 1995; and Alvin Rabushka and Robert E. Hall, "Testimony Prepared for the Subcommittee of Taxation and Finance," Federal Document Clearing House, May 18, 1995. [Return to main text]
2. James Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (University of Chicago Press, 1975), p. 2. [Return to main text]
3. James Buchanan, "The Political Efficiency of General Taxation," National Tax Journal, December 1993. [Return to main text]
4. The Arrow Impossibility Theorem is but one version of this impossibility. [Return to main text]
5. Bertrand de Jouvenel, The Ethics of Redistribution [1952] (Liberty Press, 1990). [Return to main text]
6. Frank Chodorov, The Income Tax: Root of All Evil (Devin-Adair, 1954), p. 29. [Return to main text]
7. Cf. Gordon Tullock, The Economics of Income Redistribution (Kluwer- Nijhoff, 1983). [Return to main text]
8. Adam Smith, The Wealth of Nations [1776] (Modern Library, 1965), p. 777. [Return to main text]
9. Robert William Fogel and Stanley L. Engerman, Time on the Cross (Little, Brown and Company, 1974), especially Chapter 4. [Return to main text]
10. Job, 41. [Return to main text]
11. Geoffrey Brennan and James Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution (Cambridge University Press, 1980). [Return to main text]
12. Jean-Claude Martinez, Lettre ouverte aux contribuables (Albin Michel, 1995), p. 113. [Return to main text]
13. At http://www.fourmilab.ch/ustax/ustax.html. [Return to main text]
14. James Madison, Federalist #62, in The Federalist Papers (Bantam Books, 1982). [Return to main text]
15. "Tax Report," The Wall Street Journal, June 7, 1995, p. 1. [Return to main text]
16. At http://www.wellsfargo.com. [Return to main text]
17. Adam Smith, op. cit., p. 800. [Return to main text]
18. Ibid., p. 804. [Return to main text]
19. Quoted by Frank Chodorov, op. cit., p. 63. [Return to main text]
20. Bertrand de Jouvenel, op. cit., p. 72. [Return to main text]
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