Simple Liberty  

 

     
   
     

The American Income Tax

Chapter 18

Principles of Taxation

Written by Darrell Anderson.

To compel a man to furnish contributions of money for the propagation of opinions which he disbelieves and abhors, is sinful and tyrannical.

Thomas Jefferson, Virginia Statute of Religious Freedom, 1779

Taxation serves only one purpose, regardless of what arguments are used to justify taxation. That purpose is to forcibly transfer wealth from one group of people to another. All kinds of arguments might be offered to defend taxation, but those arguments cannot change the ultimate purpose of taxation. Taxation is a method of coercively sustaining energy flows without providing direct labor.

Within the boundaries of accepting or embracing taxation, people have devised certain principles of taxation in the hopes of providing equitable taxation. Ultimately, because all taxation is coerced theft under the color of law, equitable distribution is impossible.

Color of law: acting under the pretense that a statute or custom, whether or not necessary, provides justification to bypass, evade, or ignore known or accepted boundaries.

In the modern world, taxes are the nourishment of statism, even a limited state. Without explicit consent, taxation is the forced taking of wealth through extortion — that is, using the threat of violence or loss of property. Without explicit consent, taxation violates the fundamental concepts of property titles and voluntary exchange; and is therefore another method of attempting to bypass the natural laws of the universe to create perpetual motion through the captured labor of other people.[1] Nonetheless, through the hope of understanding this process, examining some definitions and rules that might apply toward taxation is helpful.

In theory, taxes are to be used solely to provide for the immediate purposes associated with the concept of social and political government. Specifically, the protection of rights and property. Additionally, once paid, all taxes serve the purpose of acting as a severance to any alleged, real, or perceived “debt” owed. Once paid, the “debt” is eliminated and the transaction terminated.

In the modern world, what exactly is a tax? The 1911 Encyclopedia Britannica provided the definition of taxation as “that part of the revenue of a state which is obtained by compulsory dues and charges upon its subjects.” However, John Dickinson, 18th century Pennsylvania legislator and participant in the 1787 Constitutional Convention, provided one of the most simple yet direct modern definitions: an imposition on the subject, for the sole purpose of levying (taking) money.[2]

By definition therefore, taxation is a coerced taking of property. If taxation were a voluntary process, the word taxation would transform into an association or user fee. Anyone who has been convicted for failing to pay a tax has discovered that taxation has nothing to do with “social contracts,” free association, or voluntary exchange, and has everything to do with sustaining the energy flows of other people.

Assuming that a political society of people is assembled completely by consent, and that such a society is limited to protecting rights and property of people, then when such people freely band together and decide that a few select individuals will be empowered to act on behalf of these people, those people in that community realize a process becomes necessary of financially supporting these empowered people. No individual is forced to participate in this political society, and only those people who provide their explicit consent actively participate. Because people volunteer to participate they also consent to voluntarily fund this support.

This is only a description about voluntary participation, not a statement about how “the state” evolved throughout history. A casual review of history shows that many political systems were formed by thugs and bullies who moved into peaceful communities and using the threat of violence forced those people to support the thugs and bullies. In return for this tribute, the new political system provided some minimal services to create the illusion of a “social contract.”[3]

Nor is this a statement about how taxes evolved, only a statement about one possible method of providing and paying for shared protection among a community. History shows that most taxes evolved because the same thugs and bullies who moved into the neighborhood demanded tribute. Thus, providing services became an excuse for taxes.[4]

Despite realizing that modern taxation as practiced is theft under the color of law, studying the world of taxes might help. If taxation is to be a mode for collecting revenues — even in a world honoring consent — then there must be some foundational rules to observe when levying a tax or collecting revenues. There are four general rules that appear to be popular:

  • Consent.
  • Equality/Uniformity.
  • By “benefits received.”
  • Apportionment or “ability to pay.”

Consent

Just as no individual should be forced to participate in any political society, so too must all revenue collection schemes begin with the rule of consent. Each individual being taxed must consent to being taxed. The concept of consenting to be taxed is at least as old as the Magna Carta.[5]

Taxation without consent is tyranny and extortion. One of the grievances in the Declaration of Independence against King George was “For imposing Taxes on us without our Consent.” Consent means explicit consent. Each individual paying a tax must pay that tax willingly, knowingly, and without coercion. Each individual being taxed must actively and consciously volunteer to pay the tax.

Legislators then, do not have power or standing to use force to extort property from people through taxation schemes. Legislators can only create taxation schemes and then hope people voluntarily participate. To do anything less is to violate the rule of consent and is an attack on liberty. Such tactics pervert the very purpose for the concept of government — protecting rights and property. No rule system for taxation has any meaning if explicit consent is ignored.

Some people might argue that a revenue collection system based upon consent and not coercion never will succeed because there always will be people who will refuse to volunteer. The statement has merit — at least regarding the observation about human nature. The statement also annunciates that if nobody pays, then in fact there really is no market demand for the “goods or services” supposedly purchased by those taxes, and is evidence of force and coercion being used.

Equality/Uniformity

One way people typically describe a “fair” tax system is horizontal equity.[6] Horizontal equity implies that considering all factors, each individual pays equally. That is, taxes are equal or uniform.

From Noah Webster’s 1828 American Dictionary of the English Language:

Equality: An agreement of things in dimensions, quantity; likeness; similarity in regard to two things compared. We speak of the equality of two or more tracts of land, of two bodies in length, breadth or thickness, of virtues or vices. The same degree of dignity or claims; as the equality of men in the scale of being; the equality of nobles of the same rank; an equality of rights. Evenness; uniformity; sameness in state or continued course; as an equality of temper or constitution.
Uniformity: Resemblance to itself at all times; even tenor; as the uniformity of design in a poem. Consistency; sameness; as the uniformity of a man’s opinion. Conformity to a pattern or rule; resemblance, consonance or agreement; as the uniformity of different churches in ceremonies or rites. Similitude between the parts of a whole; as the uniformity of sides in a regular figure. Beauty is said to consist in uniformity with variety. Continued or unvaried sameness of likeness.

Taxes must be equal and uniform. Not only does that mean geographically, but in application to people. That is, one set of rules cannot apply to one individual and another set of rules apply to another. All people are supposed to be equal before the law, therefore, from a revenue collection perspective, there can be no classes of people or exceptions, or graduated tax rates.

Without the rule of equality and uniformity, people tend to develop an “it’s not fair” attitude and then avoid and evade tax schemes.

Essentially then, without the rule of equality and uniformity, many people force other people to bear the burden of taxation. What happens is those people who enjoy the so-called benefits of a political system — the protection of rights and property — are avoiding the cost of that protection. Such tax schemes inherently violates the concept of equal protection of the laws. Furthermore, when some people are forced to pay the burden of other people — directly or indirectly, then the rule of consent is violated.

Benefits received

Although “benefits received” can be interpreted as goods and services received, that view is another way of saying politically granted “privileges.” Thomas Jefferson reasoned that taxes should be based upon ability to pay and not the rental-basis determined by economic privilege received from the process of government. Jefferson wrote that “Taxes should be proportioned to what may be annually spared by the individual.”[7]

Jefferson’s attitude reflects the concept of apportionment, but like the Hebrew prophet Moses, Jefferson measured this proportion by ability to pay. Of course, an “economic privilege received from government” is impossible in a true system of free association and voluntary exchange. Economic privileges is another way of saying politically granted monopoly. In accordance with the common law doctrine that no individual can be compelled to perform the impossible, “ability to pay” means if an individual cannot spare the expense then the person does not pay. Jefferson also seemed to be indirectly acknowledging the concept of consent.

There is a major flaw with the “benefits received” principle, at least as practiced in today’s coercive wealth redistribution environment. Taxes collected today are largely coercive wealth redistribution or transfer payments. Revenues collected are transferred from Peter, paid to Paul, and vice-versa. Yet, who receives the bulk of such payments? Who receives the most benefits under the current system? Shouldn’t these people then pay the most taxes?

Some people argue that this is an incorrect definition of “benefits received.” They argue that the more wealth an individual accumulates, the more protection that person expects. This perspective was indeed the prevailing interpretation of this theory. People who owned more property were thought to be receiving more benfits from the passive protective forces of the political machinery. Yet, this is the same illusory argument used by many to justify the expropriation of taxes. Furthermore, people who accumulate wealth often provide their own protection. Many wealthy people hire investment advisors, or secure their homes with alarm systems, or reside in secured locations. Lastly, whether an individual is wealthy and carries a $1,000 in his pocket or only $2, an armed robbery operates exactly the same against either person. Likewise, breaking into an individual’s home is the same whether that home is made of cardboard or bricks or contains 10,000 square feet. In other words, both people seek the same level of fundamental protection. Yet, because wealthy people tend to protect their own property, the question then must be asked what benefits are they exactly receiving to justify the higher cost of taxation?

The “benefits received” principle is flawed and limited to user fees and special assessments.

Apportionment

Another way people typically describe an equitable tax system is vertical equity.[8] Vertical equity implies that each individual pays according to ability; that is, the idea that people with higher revenue streams or consumption pay more taxes, or pay proportionally more.[9]

From Noah Webster’s 1828 American Dictionary of the English Language:

Apportionment: The act of apportioning; a dividing into just proportions or shares; a dividing and assigning to each proprietor his just portion of an undivided right or property.

In other words, the rule of apportionment seeks to proportionally share the tax burden by all people. Proportion is understood to mean “ability to pay.” With respect to taxation, this concept of “ability to pay” was accepted as early as the fourteenth or fifteenth century,[10] but likely has roots at least as far back as the Mosaic teachings.[11]

The modern concept of “ability to pay” is based upon the idea that marginal utility[12] decreases with succeeding acts of consumption.[13]

Marginal utility: The additional utility received by an individual from the consumption of an additional unit of a good with a given period.

The theory of marginal utility is based upon the idea that an individual can consume only so much. Early proponents of the income tax saw this theory as a tool to promote the income tax. An income tax could reach all forms of wealth. Spendable wealth had marginal utility and people with more disposable income were seen as suffering less from an income tax.[14] The income tax was more palatable and sellable under the ability to pay concept than the benefits received idea.

Exercise caution when using the concept of “ability to pay.” This concept is rooted in the political doctrine of “from each according to his ability, to each according to his need.” This concept is essentially the idea of progressive taxation which is found in the ten planks of the Communist Manifesto. Progressive taxation without consent and respect for property rights is nothing but coercive wealth redistribution and theft. Indeed, the entire Communist Manifesto rests upon the doctrine of abolishing most property rights. Progressive taxation through graduated tax rates is not a tax based upon proportionality.[15]

The question arises then, how is this proportional distribution to be defined? The “ability to pay” argument seems reasonable to many people, but the methods used often are festered with abuse and tyranny. Ability to pay often is defined arbitrarily or subjectively, and seldom objectively. The ability to pay often is interpreted by some people as the “ability to extort.” Just because the principle is considered traditional in no way justifies the current methods used. The current income tax system is riddled with different tax rates, exceptions, and exemptions that are political in purpose.[16]

The problem with current thinking is the rule of consent is ignored, as well as the rule of equality and uniformity. The rule of equality and uniformity requires all people to pay and discourages people from directly passing the cost to other people. Either everybody pays or nobody pays.

What should be emphasized when using the term “ability to pay” is proportionality, not progressivism. The two terms are not equivalent. Proportionality is a mathematically based term that is arguably objective. Progressivism is a subjective effort.[17] Any taxation scheme based upon subjectivism is prone to abuse and tyranny. Therefore, a method is needed to define a suitable proportion.

Be certain that proportions cannot be defined by subjective methods. For example, ad valorem systems are subjective because value is only perceived. The value of something cannot be defined objectively without a buyer and seller and an actual exchange. Beauty lies in the eye of the beholder. The general property tax is an example of such subjectivity and why the tax is prone to abuse.[18]

Some people have attempted to define apportionment by progressive means. That is, as an individual encounters a perceived increase in ability to pay, such people are then coerced into contributing progressively larger amounts, even if not proportional. The income tax is an example. Income is seen by many as an indicator of ability to pay.[19]

Attempting apportionment on a per individual basis, that is, a head or capitation tax is discriminating unless all people pay equally. If any individual is exempted then the tax violates equal protection of the law. Although today the terms head and capitation are used interchangeably, strictly speaking, there is a difference between the two terms. Both types of tax are levied directly on an individual. A head tax — sometimes called a poll tax — is strictly a tax on the individual, but a capitation tax — still levied directly on the individual — can be calculated by various external methods, such as property owned or assessed wealth. Some people might label the latter a property tax and would be correct — just change the name of the tax and notice what happens.

The only way apportionment can succeed is by proportionally taxing according to ability to pay, and taxing according to ability to pay can be performed only if all people pay equally and uniformly, and most importantly, pay through affirmative explicit consent.

The challenge is how to objectively measure “ability.” Using proportionality means somebody must define the reference point: proportional according to what? One method is according to “equality of sacrifice,”[20] that every individual pays the same proportion. Another reference method is by “benefits received.”

Tax administration

“. . . Taxes are what we pay for civilized society . . . .”[21] The cited words are hauntingly chiseled in stone above the entrance to the Internal Revenue Service building in Washington, D. C.

Hardly everybody agrees with the statement rendered by Justice Oliver Wendell Holmes, Jr. and with good reason. When honoring consent, taxes are limited to protecting rights and property. If the results of that protection provides people with a civilized community, then Holmes might be correct. Yet, history shows that a civilized community is certainly possible without a centralized political system and taxes. History also shows that often taxes are used for purposes other than protecting rights and property. Although rules are necessary to encourage an ordered community, if people choose to pay to centrally to provide that protection then revenues are needed to fund that protection.

Taxes are collected and spent to provide protection of rights and property, but according to some people might also provide for limited “common goods and services,” such as roads. In addition to establishing minimal foundation rules for taxation, are there other observations to make regarding taxes?

Thomas Jefferson established three principles for taxation:[22]

  1. A tax should be so framed as to reach every member of society, and to “draw from him his equal proportion of the public contribution; and if this is correctly obtained, it is perfection of the function of taxation.”
  2. With respect to taxation, it is “the most sacred of all duties of a government, to do equal and impartial justice to all its citizens.”
  3. To take from one, because it is thought that his own industry and that of his fathers has acquired too much, in order to spare others, who, or whose fathers have not exercised equal industry and skill, is to violate arbitrarily the first principle of association, “the guarantee to everyone of a free exercise of his industry, and the fruits acquired by it” . . . extra-taxation violates it [a law of nature].

Montesquieu, in his The Spirit of Laws, provided four principles of taxation:[23]

  1. Direct taxes against the person were dangerous and were natural to slavery; indirect taxes, as on merchandise, were more natural to liberty.
  2. Excessive taxes would be evaded, but evasion would lead to “extraordinary means of oppression, and then the country is ruined.”
  3. Excessive taxes deprive people of the rewards of nature for hard work and enterprise, and act as a disincentive, resulting in inaction, loss of jobs, and indolence.
  4. Men living in a state of liberty tend to grant excessive taxing powers to political systems; excessive taxation leads to slavery.

Lastly, Adam Smith, in his Wealth of Nations, declared what a bad tax system looks like:[24]

  1. The tax requires a large and expensive administration.
  2. The tax discourages “the industry of the people, and discourage them from applying to certain branches of business which might give maintenance and employment to great multitudes.”
  3. The tax encourages evasion.
  4. The tax subjects the people to “odious examinations of the tax-gatherer, and exposes them to much unnecessary trouble, vexation, and oppression.”

Smith stated that observing only one of these signs defined a bad tax. The income and general property tax schemes qualify as bad taxes through all four observations.

Therefore, based upon an understanding of human nature, and how a voluntary political system might succeed, the previous discussions can be summarized to create straightforward rules for any tax system where people respect and honor rights and property:

  1. Basic human rights and property must not be infringed or violated.
  2. People must actively, consciously, explicitly, and repeatedly consent to be taxed.
  3. Revenues cannot be obtained through force and coercion.
  4. All taxes must be paid voluntarily.
  5. Taxes must be fair, equitable, and uniform to all who voluntarily pay.
  6. Everybody pays or nobody pays.
  7. Taxes are collected and spent only for those items deemed essential and truly common to all.
  8. A majority of people must not be able to legally plunder from other people under the color of law or voting schemes.
  9. Tax collection and associated laws must be simple and straightforward.
  10. Administrative costs must be as low as possible.

Today, both the concepts of uniformity and apportionment are dead.[25] Uniformity once was understood to mean with respect to each person, but today is watered down to mean only within a geographical sense. Graduated tax rates are the norm. Apportionment was bypassed with the 16th Amendment. The result is a tax system without restraints, guidelines, or rules. Court judges routinely allow this tyranny, and for good reason — they benefit by the system. If history is any teacher, a revolt is just around the corner. What remains unknown is whether that revolt will be peaceful or violent.

Finis.

Terms of Use

Next: Chapter 19 — Robbing Both Peter And Paul

Table of Contents

Bibliography

Endnotes

[1] The concept of creating perpetual motion through the captured labor of other people is discussed in more detail in my book To Alter Or To Abolish.

[2] Letters from a Farmer in Pennsylvania, Letter IV.

[3] Oppenheimer, The State, Chapter 1, Theories of the State.

[4] Oppenheimer, The State, Chapter 2, The Genesis of the State.

[5] section 12. Although the Magna Carta eventually became a statement of liberty for most people, originally the charter was an agreement between King John and the noble class. That is, the concept of consent initially applied to the nobles, not the feudal serfs. Originally the charter was not a document proclaiming liberties for all people, but merely shifted some powers from the king back to the nobles; Rembar, The Law of the Land, pp. 167–171.

[6] Gwartney and Stroup, Economics, Private and Public Choice, p. 90.

[7] Nock, Jefferson, p. 202.

[8] Gwartney and Stroup, Economics, Private and Public Choice, p. 90.

[9] Gwartney and Stroup, Economics, Private and Public Choice, p. 91.

[10] Fisher, The Worst Tax?, p. 12, citing Edwin Cannan, History of Local Rates in England, 2nd edition, (1912, London: P.S. King and Son)

[11] Deuteronomy 16:17, King James Bible, “Every man shall give as he is able, according to the blessing of the Lord thy God which he hath given thee.” [emphasis added] But notice that the giving is in reference to blessings received; and one will notice with further reading of the Mosaic Law that no force or coercion is used to enforce giving.

[12] Gwartney and Stroup, Economics, Private and Public Choice, p. 353.

[13] Hayek, The Constitution of Liberty, p. 309.

[14] Crane, “The Income Tax and the Burden of Perfection,” p. 181.

[15] Wells, “The Communism of a Discriminating Income-Tax,” p. 239.

[16] Federal Income Tax, Its Harmful Side Effects, http://www.cats.org

[17] Hayek, The Constitution of Liberty, p. 308–323.

[18] A more detailed examination of the property tax is available in my treatise The General Property Tax.

[19] Crane, “The Income Tax and the Burden of Perfection,” p. 175.

[20] Hayek, The Constitution of Liberty, p. 310.

[21] Compania de Tabacos v. Collector, 275 U.S. 87 (1927). The context of the statement regarded insurance, which is what the case was about. At that time, federal judges paid no income tax, so Holmes comment could be taken tongue-in-cheek.

[22] Adams, Those Dirty Rotten Taxes, p. 21; citing Jefferson in “Prospectus on Political Economy,” 1816.

[23] Adams, Those Dirty Rotten Taxes, pp. 23–24, citing Montesquieu, The Spirit of Laws, Book XIII, 1751.

[24] Adams, Those Dirty Rotten Taxes, pp. 216–217, citing Adam Smith, Wealth of Nations, Book V, Chapter 2.

[25] Adams, Those Dirty Rotten Taxes, p. 57.