Freeman

ARTICLE

Liberty and Taxes

MARCH 01, 1963 by BRADFORD SMITH

Liberty & Taxes

A fundamental tenet of the collectivistic philosophy is best expressed in the words of Karl Marx, "From each according to his abilities, to each according to his needs."

No devotee of individual liberty objects to volun­tary gifts and charity. The evil to which he objects is its imposition by some on others, coercively, with these consequences:

1. The victim is deprived of what he produces, which removes his incentive for production.

2. The one who receives unearned rewards is relieved of the need to produce, which likewise removes his incentive for production.

3. Hence, as production declines, this coercive col­lectivism must inevitably lead to arbitrary and dicta­torial Punishment. With voluntary production aban­doned there is always sought a way to "whip up" Production among the ever-increasing nonproducers and among those who the authorities think are in­sufficient producers. Even the original "beneficiaries" become the victims of the thing they helped contrive.

The following essay by an outstanding business economist examines progressive taxation, that is, "From each according to his abilities," from the standpoint of its harmony or disharmony with the principle of individual liberty.

LEONARD E. READ

Liberty & Taxes

The American society is founded on the idea of individual liberty. It is an abnormal society, for most of the social organizations of his­tory are of the authoritarian form in which a ruling class exploits the governed.

Individual liberty is definable only as the absence of coercion be­tween men. It means not only that no man must initiate physical in­jury or confinement of another, or take his property or good name, without his consent; but also and most especially it means that not even government must do these things except to punish those who do them to others, provided pri­vate property may be taken for public use if just compensation is given in return. Individual liberty is thus obtainable only when gov­ernment’s superior power to co­erce is employed only to cancel out fraud, predation, coercion, and monopoly abuse between men.

If this definition is observed, one may note the following:

1. Freedom of worship, freedom of speech, freedom from man-im­posed fear or want are automatic because there is no way that one may restrict such freedom to an­other.

2. Markets are automatically voluntary and free, for if no man may take another’s property with­out his consent, then each man is free to enjoy the fruits of his own efforts and dispose of them as he sees fit in voluntary exchange for the fruits of others’ efforts.

3. Production and marketing are automatically competitive for no one has power (unless backed by government) to prevent an­other from engaging in pursuits similar to his own; as a corollary monopoly is automatically ruled out unless the government’s power to coerce is invoked in its behalf as in franchises, cartels, and labor unions.

4. The sanctity of contract is automatically implied because one who takes property and does not fulfill his contract takes it without the consent of him with whom he contracted.

The right to work for and quit working for one’s neighbor (within whatever contractual terms are established) is also au­tomatic; as is also the co-equal but often unrecognized right to hire and to stop hiring one’s neighbor (within the contractual terms).

These matters may seem remote from rather than relevant to fed­eral taxation in America; yet they are fundamental, for taxation is the systematic taking, without spe­cifically definable quid pro quo, of the individual’s substance for the support of government. Taxation, because it is necessary and be­cause it is taking under con­straint, is a principal danger to the maintenance of individual lib­erty in America.

With Consent of the Governed

The key to federal taxation that is in conformity with individual liberty is epitomized in the phrases "with the consent of the governed" or "taxation by repre­sentation." Taxation that is truly with the consent of the taxpayers, as distinguished from being im­posed by some on others, is fully within the definition of individual liberty. "No taxation without rep­resentation" was one of the slo­gans of the Revolutionary War out of which came our society. It could only have meant representa­tion of the taxpayers, for the tax tyranny of a foreign king does not differ essentially from the tax tyr­anny of a domestic group. The de­termination of the principles of taxation in consonance with lib­erty thus becomes one of ascer­taining just how true "consent" is steadfastly to be secured.

Taxes cannot be determined by everybody in a mass meeting. They are determined by elected repre­sentatives. Specifically, taxes are originated in the House of Repre­sentatives where the representa­tion is according to population. The task then is to see to it that this body is truly representative of the taxpayers.

This Tyranny Foreseen

This adjustment was provided in the Constitution (before the adoption of the Sixteenth Amend­ment in 1913) by providing that all direct taxes (of which income taxes are the most direct) should be apportioned among the states in exactly the same way that rep­resentation is given in the House—that is, according to population. That way it was impossible for a majority to get together and sup­port a direct tax that fell more heavily upon a minority than by the same act it bore upon the ma­jority. The principle of the volun­tary was preserved. The majority had to assume a tax burden vol­untarily before it could impose one (but not a greater one) on a minority. Those in the minority were constrained to pay, it is true, but only as much as those of the ma­jority imposed on themselves. Each voter had one vote in elect­ing representatives to decide the tax and each was therefore to pay the same tax his representatives levied.

No better protection for identi­fying federal taxation with liberty could have been devised; there is no surer way to re-identify them than to repeal the Sixteenth Amendment which granted unlim­ited power to majorities to im­pose direct taxes on minorities not paid by themselves, and which has made possible an orgy of dema­gogic tax exploitation under the slogan, "Soak the rich." There is, of course, no freedom but only tax tyranny when the mass of the elec­torate supports heavy taxation of a small minority, while itself es­caping the burden.

Contrary minded people say those of greater means "can af­ford to pay more" or have "great­er ability to pay." To some extent this is undoubtedly true and to it consideration will shortly be giv­en. But it still remains true that tampering with the identity be­tween voting and paying is tam­pering with individual liberty in America. It is far better that the majority surely and voluntarily vote taxes on itself while a minor­ity escapes, for that is freedom, than that a majority impose taxes on a minority which the majority escapes, for that is tyranny. The majority has power to protect it­self, the minority does not, as pointed out by Madison in the Tenth Federalist paper.

Proportional Taxation

If everyone paid the same tax, then it is conceivable that the tax would equal the whole of some small incomes and be but a frac­tion of some large incomes. It would deprive some of the whole fruit of their exertions and others of diminishing fractions of the fruits of theirs. It is apparent that equality in taxation does not ne­cessarily mean equality in relative burden or sacrifice. If we distrib­uted taxes so as to make the tax burden, rather than the tax amount, equal to voters, would we then still have tax paying and tax voting equated? Would the iden­tity be even closer? There are cer­tain reasons and precedents for supposing this would be the case. But what is an "equal burden"? Perhaps the closest to the funda­mental that we can get is to rec­ognize that when man is born into the world he has only his limited life span at his disposal. It is the element of man’s time in­volved that gives value to things. Air is necessary but has no value because it is abundant. Condi­tioned air has value because it in­volves the time of men to provide and operate the mechanisms to produce it. Gold and diamonds take time to discover and mine. An equal burden to men of un­equal capacity can then be deemed a burden that conscripts an ap­proximately equal amount of each person’s time. The earning power of men may differ but an equal proportion of each person’s in­come tends to represent an equal conscription of time or enjoyment and hence an equal burden.

This recognizes that a spoonful of food to the well-fed would yield more human satisfaction if fed to the hungry—the law of di­minishing utility; but it holds that a 10 per cent of each person’s income tends to be equally prized.

The Moral Precedent

If direct taxes are apportioned in proportion to income instead of in proportion to population, while the voice in determining the tax is in proportion to population, we then have established, in the light of the preceding, a reasonable identity between tax determina­tion and human disinclination to pay it. This recognizes equality between men in terms of their each having one life to live, with­out denying the obvious inequality in their capacities; it protects freedom to live by providing that taxes shall substantially infringe equally upon each person’s life­time.

In support of proportional, di­rect taxation there is much moral and legal precedent. Tithing started with Moses and has had religious sanction ever since. There are no exemptions. Sales taxes, excises and customs are col­lected in proportion to the means expended in purchasing; property taxes are percentages of valua­tions. These would be the princi­pal sources of revenue were the Sixteenth Amendment repealed, and so its repeal would automati­cally give us approximate propor­tional taxation. Military conscrip­tion takes the same time from each subject to it. Business assessments and distributions are apportioned according to value participation. Proportional taxation of income is the only taxation that leaves the relative distribution of income un­changed. That distribution as de­termined in a society by the vol­untary decisions of its members is the one which represents the maximum attainable human satis­faction in terms of sacrifice to se­cure it. Thus no one receives a money income in a free society except that he or his property ren­der the community a service vol­untarily paid for by the commun­ity at its own price. He who secures greater income renders greater service. The community purchases his products or serv­ices in greater measure than those of others (thus giving him greater income) only because it wants to,—because the shoes he makes, for example, give the greater satis­faction. To redistribute the in­come under coercion is to cross the community’s voluntary decision and thus necessarily to diminish the sum of human satisfaction.

Straight proportional taxation is the only practical and definite, arithmetic principle of direct tax­ation that there is between the principles of (a) everybody pay­ing the same amount of tax and (b) income equalization, that is, taxation, coupled with subsidy, which results in everyone having the same income after the tax and subsidy.

If anything, proportional taxa­tion takes too much rather than too little of larger incomes, if we consider taxes as payment for the cost of benefit conferred by gov­ernment. It costs no more to light, clean, and maintain order in the streets for the benefit of those of larger income than for those of lesser; or to maintain courts or count votes; or to provide schools. Many government costs are per capita costs and justify per capita taxes. It is, of course, erroneous to hold that one’s income—what­ever it is—is a benefit conferred by the community on the individ­ual, for it is as much a measure of the service rendered the com­munity by the individual; they are quits. It is only from the view­point of equal sacrifice, of equal disinclination to pay a levied tax, of equal infringement on one’s "living," of equal burden, that proportional, as distinguished from equal, direct taxation may be justified under the principle of taxation by representation.

Progressive Taxation

Progressive taxation of income by the federal government, which is currently practiced in the ex­treme, provides, first, that many voters of small income are either exempted entirely from paying, or pay very little, and, secondly, that successive increments of larger in­comes are taxed at progressively increased rates that become confis­catory.

There is no justification in morals or in the principles of in­dividual liberty for progressive taxation. It is the simple looting through law of the more produc­tive by the more numerous but less productive. Its appeal is demagogic, and its result is com­munism, which in turn is but a transitory stage in the evolution away from liberty into dictator­ship. The endorsement of progressive taxation is, knowingly or un­knowingly, the endorsement of communism, and sincere endorse­ment of progressive taxation, mo­tivated often by generosity, is unwittingly one of the worst forces undermining individual lib­erty in America.

Those defending progressive taxation have no principles to rely upon short of taxation which equates all incomes after taxation. That is why they unwittingly sup­port communism. The progressive taxation argument boils down to vague assertions that the poor cannot pay much and the rich "ought to pay" higher rates. When asked how much higher, there is no answer save that it is a matter of judgment—which in practice comes down to the venal philos­ophy of plucking the goose just short of killing it. Acceptance of the idea of progressive taxation thus transforms the legislative process of tax levying into pres­sure group demand to make the "other fellow" pay the tax in ex­change for the group’s political favor, instead of united and uni­form decision of proper burden to be placed equally on all constitu­ents.

The shaded portion of each symbol represents the federal income tax for individuals. Other taxes, direct and indirect, are not included.

Progressive tax payments shown above are those for 1946, for a married man with two de­pendent children. The rates shown for the other two concepts would have produced the same total revenue as was collected in 1946. (Though the figures would be different for 1963, the relationships and principles would not have changed.)

Punitive Measures

Some hold that large incomes have got to represent exploitation of others or luck, simply because they are large, and that tax con­fiscation is a just punishment. This overlooks:

1. No one gets a money income in our society unless it is volun­tarily paid him by the community at its own appraisal of the service he or his property renders in ex­change. The community is quits with the individual at that point. The argument is weird which holds that he whose industry pro­vides the community with 100 pairs of shoes, for example, should be punished as compared with him who provides but 10 pairs.

2. No one constrains competi­tors through monopoly except with the support of government. Mo­nopoly income should be corrected by withdrawing the support rather than by taxation to include also non-monopolistic income.

3. The thought that it is just to deprive people by taxation of "un­just" income is a travesty on jus­tice. Were income unjustly se­cured, justice would require its re­turn to those from whom it was received. To loot the "looter" through taxation is to engage in "highjacking," not justice.

Care of the Poor

Those favoring progressive tax­ation claim that those of small in­come should pay little or no tax (be exempted). They can’t afford to pay, it is claimed. But if so, then they can’t afford to pay for anything else either. There is no reason why, in proportion to their means, they should not pay for government as for other things; there is vital reason why they should if they vote. Thus the argu­ment is essentially an appeal to charity; but the practice is some­thing with an uglier name unless it also provides that the man who pays insignificant or no tax shall have no vote in selecting repre­sentatives in the tax-determining body. For otherwise the body de­generates into levying taxes not on those it represents but on others. This is tax tyranny, not taxation by consent, not liberty.

The care and the relief of the unfortunate in a voluntary society must be voluntarily undertaken by those who care for them, if the voluntary society is to be pre­served. If that care is constrained (as through taxation) then we no longer have a voluntary society. When a man voluntarily gives something to another, we have a voluntary society, but when one man votes benefit to himself at compulsory cost to others, then even though there is the same transfer of value, the morals of the robber have been substituted for those of charity. Charity and co­ercion, that is, government, cannot be mixed and freedom remain un­impaired.

Tax Principles

From the foregoing there emerges one central principle that transcends all others: If we are to have individual liberty in Amer­ica, then taxation by representa­tion of the taxpayers must ever be jealously preserved. With taxation initiated in a body where repre­sentation is per capita this means that direct tax burdens must be equally distributed among the peo­ple. An equal burden is deemed one which consumes an equal pro­portion of each person’s life, which in practice means an equal propor­tion of income. The one thing al­ways to dread is the laying of a tax burden on minorities by ma­jorities which the majority itself escapes. That is tax despoliation. From this central principle more detailed principles derive:

No Exemptions

1. If individual income is to be taxed, all of it, from whatever source derived, by whomever re­ceived, in whatever amount, should be taxed at the same rate. This neither "soaks the rich" nor "bur­dens the poor"; it is the only even­handed principle that is practical.

No Complications

2. Taxation should be simple in principle and in application in order that there shall constantly be general understanding of it, for otherwise there can never be sur­ety that the consent of the tax­payers is truly rather than mis­guidedly secured. By the same token federal taxes should never be hidden, and it is preferable that their payment be painful rather than painless. The levying of hid­den taxes is a practice more fitting to an authoritarian state where a ruling class endeavors to keep the governed contented like cows reg­ularly to be milked. In America the preservation of taxation by representation requires that those whose consent is requisite under that principle should at all times be distinctly aware of the tax.

No Punishment

3. Federal taxation should be uniform geographically and with respect to the tax base. This means that if there is to be a sales tax on consumption, all things should be taxed, and at the same rate. If so-called luxuries are taxed and so-called necessities are not, this is but an evasion of the principle of equalized burden. It is obviously an effort by a majority to make a minority endure a greater tax bur­den than the majority is willing to assume. If the buying of to­bacco, liquor, and fur coats is "sin­ful," then taxing them rather than forbidding them, is not the prac­tice of virtue but the commerciali­zation of sin for revenue.

No Handouts

4. The federal government should make no expenditures of any kind for which in return the government does not receive an equivalent quid pro quo. The dis­pensing of gifts by the govern­ment lightens the net cost of gov­ernment to the recipients. By giving back part (or more) than was taken in taxes the result is the same as if the burden of taxa­tion had been lightened for the selected group. Moreover, the pow­er to make gifts of other people’s money is the power to command political obeisance and a most dangerous instrument in the hands of power-hungry politicians. This means, for example, that "social security" costs should be volun­tarily assumed and financed ex­clusively by the benefited group—never at the expense of the gen­eral taxpayer.

No Gift or Estate Taxes

5. Taxation of estates or gifts by the federal government is in­compatible with the principles of liberty here enunciated. To tax estates or gifts is to deny to the individual the right to possess, dispose of, or exchange the fruits of his efforts as he sees fit.

No Double Taxation

6. There is no place in the framework of liberty for the direct federal taxation of corporate income. Since corporate income is taxed again when paid to stock­holders, the corporation income tax represents an attempt doubly to tax a minority group. This does not mean that corporations or any other form of business enterprise should not be employed in the col­lection of taxes. They may repre­sent the points at which taxes may be collected most conveniently, economically, and promptly.

No Deficit Financing

7. The voters of one period should not tax those of a later pe­riod. Those of the later period are not represented in the instant tax­ing body, and hence today’s taxa­tion of the citizens of tomorrow distinctly violates the principle of taxation by representation of those who pay the taxes. This means that to increase its expendi­tures government should not incur debt, because the burden of its re­demption is thereby imposed on future taxpayers.

Prospects

Few individuals perceive the danger to individual liberty in America in progressive direct tax­ation, or who, perceiving, have the courage to denounce the principle and its practice. This is thorough­ly understandable for a number of reasons: It is a long time since we fought a war to get taxation by representation, and the realiza­tion of the meaning of the phrase, its vital importance to liberty, its relation to "the power of the purse" have grown dim. The ap­peal of progressive taxation is double-edged—it appeals to the mass voter’s greed that the "rich" should pay the taxes, and simul­taneously the greed is glossed over by invoking the spirit of generos­ity and Christian charitableness of the more productive, for which Americans are notable.

The disappearance of liberty in America through tax despoliation is so natural an evolution that it has been feared and predicted by statesmen and historians down through our history: Madison rec­ognized the danger in the Tenth Federalist paper, but pointed out it would be unlikely to happen un­der the Constitution then proposed for adoption—nor could it until the Sixteenth Amendment, a cen­tury and a quarter later. Lord Macaulay in 1857 predicted it would happen in the course of the next century, when in hard times, the mass of the voters would listen to the demagogues who promised, if elected, to despoil the more pro­ductive for the benefit of the less productive.

The real hope for the recovery of individual liberty in America lies with millions of individual citizens and in the prospect that they may rediscover the nature of gov­ernment. It lies in their rediscov­ery that government wields the monopoly in coercion; that it has in the past and will in the future be ever subject to awful tempta­tion to employ or delegate its co­ercive power for seemingly benev­olent purposes beyond the limits compatible with the maintenance of individual liberty; that the Em­its once broken, its power tends to feed upon itself; that government tends always toward becoming master and always away from re­maining as servant; and that per­sistently these tendencies must be jealously and rigidly checked if individual liberty is to be pre­served.

The foregoing article is slightly con­densed from a 1947 publication of the same title, copies of which may be ob­tained from the Foundation for Eco­nomic Education, Irvington-on-Hudson, New York, at 2.50 each.

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March 1963

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