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A Moral Basis for Income Taxation May 9, 2009

Posted by federalist in Social Politics, Taxation.
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Barry Bennett proposes a coherent moral basis for taxation:

Wealth is created primarily by the vast societal infrastructure that we take for granted. Nobel prize-winning economist Herbert Simon estimated that at least 90% of wealth derives from social capital — the trust, shared values and behaviors that allow a society to function effectively — and therefore concluded that a 90% tax was morally justified.

A 2005 World Bank study concluded that most of a nation’s wealth derives from intangible capital; that is, from human capital and the quality of institutions, especially the rule of law. The wealthier the nation, the more this is so. The study concluded that 82% of America’s wealth derives from intangible capital, and a full 56% from the rule of law. There’s a reason American entrepreneurs don’t invest in failed states. Average talent allows one to live a very good life in the U.S. Without the web of social and governmental institutions, however, even our greatest entrepreneurs would have nothing. High taxes concentrated on the wealthy may raise legitimate issues of public policy. They raise no moral issues.

This does seem reasonable.  Unless you live alone on an island you benefit from social capital.  If you really object to implicit social contracts it is possible to opt out of society to a large degree and thereby avoid a large degree of taxes.  (The Amish come to mind as a measured example.)

Several writers objected to this argument.  The core moral objections seem to be:

  1. Government is not the sole source of social capital, so government does not have an unmitigated moral claim on taxing the dividends of social capital.
  2. Even though income taxation may be justified in principle, governments can and do levy taxes that are structurally immoral.

As Laura Sozio suggests: the only moral tax on social capital would be a flat tax (or more accurately, I would argue, a head tax) on the assumption that every person in a society enjoys the same social capital.  The fact that one person makes more wealth from it than another should not obligate the former to pay more for it than the latter.  Indeed, any disproportions in the taxation of social capital reward the lazy and incompetent at the expense of the productive and diligent.

Unfortunately, this argument can quickly bog down in practical details.  Does every person in a society truly enjoy the same social capital?  Are “fortune” and “misfortune” structural defects in the allocation of social capital that taxation should mitigate?  These are fair questions that deserve lengthy treatment, though I aver that in general we should not take unprincipled or immoral actions in an attempt to mitigate practical problems.

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