Ase very child in American schools learns “No taxation without representation” was a battle cry that summarized a primary grievance of the colonists in the original Thirteen Colonies. This grievance was one of the major causes of the War of Independence. These days the battle cry often seems to invert the sense of the original 18th century slogan. Today’s attitude is often more like “No taxation thanks to my representation” in which well paid lobbyists handle the representation. Lawyers who represent the most villainous defendants can justify their actions on the grounds that one of the cardinal principles of our legal system is that everyone is entitled to a defense. Lobbyists who agree to work for anybody who will pay them have no such excuse (Qaddafi’s Libya is just one example). It is unfortunate that the role and influence of amoral lobbyists-for-hire is one of the few truly bipartisan activities of Washington D.C.
The subject of taxation is as vexatious and controversial today as it has ever been. What is or should be the purposes and priorities of the tax system, and how can we best ensure that the revenues collected are used as efficiently, effectively and honestly as possible? Answers to these questions depend on opinions about the proper and legitimate roles of government and the impact of the levels and structure of taxation (and all the other revenue sources of government that are not necessarily called taxes (e.g. “fees”) but have the same effect in decreasing the disposable financial resources of individuals) on the nation’s economic and social well-being.
According to Oliver Wendell Holmes, “Taxes are the price we pay for a civilized society.” This famous quote does not address the question of what constitutes a “civilized” society. Some people give priority as part of the “ordered liberty” of our society to the effectively untrammeled right under the Second Amendment, which is in the U.S. Constitution, to own and bear arms almost everywhere, but deny that there is a comparable right to access to health care. The right to health care is not in the U.S. Constitution although it is included in the U.N. Declaration of Human Rights (Article 25(1)). Yet in other wealthy countries the ways in which sicknesses and sick people are treated are regarded as a more important indicator of whether a society is “civilized” than is citizens’ unrestricted access to automatic weapons.
One of the most the most complex of all thinkers on economic and political matters was the 19th century English philosopher and economist John Stuart Mill. Despite the vast differences between the England of over 150 years ago and the U.S. of today Mill’s insights and wisdom are still very relevant. These ideas include his views on tax policy, particularly respecting income distribution and inequality, provided a number of key historical empirical factors are taken into account relating to the actual British tax structure and income distribution in the mid-19th.century compared to the U.S. in the early 21st. century.
The issue of inequality and the related role of taxation have recently become increasingly prominent in the U.S. Inequalities in income and wealth have been growing significantly over the last three decades, reversing the trend from the 1930s to the 1970s. There are fundamental differences of opinion about both the causes of inequality and whether or not or the extent to which inequality is a “good” or a “bad” thing or justifiable or not. One side argues that growing inequality is the inevitable result of technological progress and globalization that reduce the number of well paying “middle class” jobs and increase the premiums that a few remarkably skilled individuals can command. Others argue that inequality is if not entirely at least partly the result of perverted public policies that have been aggressively distorted in their formulation and implementation by the richest among us solely for their own benefit. Some argue that there is a dichotomy between growth and innovation on one hand and inequality on the other. According to this school of thought growth and innovation lead inexorably to inequality and if public policy tries to eliminate or reduce the latter it will erode growth and innovation. Furthermore a rising tide lifts all boats so even the least advantaged benefit to some extent from growth and innovation even if they foster inequality.
Mill’s positions on public policy do not fit neatly into either typical contemporary “conservative” or “liberal” recommendations for the role of government in the U.S. On one hand for example he worried that the poor might tyrannize the rich and therefore argued that people who do not pay income (not sales) taxes should not be entitled to vote, i.e. the assembly that votes taxes should only be elected by those that pay them or “No representation without taxation.” A counter argument to this position is that since everybody is subject to the laws that an assembly enacts they do nevertheless have a right to elect its members independently of their tax status. On the “liberal” side of the equation Mills was troubled by the highly skewed and fundamentally feudal system of wealth and income distribution in England despite phenomenal economic growth in his lifetime. Countries in contemporary Continental Europe were in frequent revolutionary turmoil (1830, 1848, 1871) against autocratic governments sparked by the inequalities and other conditions created by the First Industrial Revolution). Creating more opportunities for more people was seen as one way to head off bloody rebellion, in which tax policy should play a part. Among other polices Mill advocated public ownership of natural resources, women’s suffrage, birth control and mandatory education. Power through school doors was part of his creed.
Economics, as Mill perceived it, is not limited to the study of commerce. It must also address freedom and fairness. He argued that there was no simple rule appropriate for government interference or non-interference but that some broad guidelines for state intervention could be specified. His priority was to preserve and enhance the concept of individual liberty, which could be done sometimes by removing government intrusion. and at other times through government action designed to help individuals pursue their own interests more effectively. One person’s rights can sometimes be upheld only by limiting the rights of another. For example the right to smoke has been progressively restricted to protect the right of non-smokers (and of smokers themselves) to breathe fresh air.
Mill’s concerns included ex ante inequality (i.e. inequality of opportunity, not inequality of outcome), the diffusion of property, and a workable inter-temporal or inter-generational concept of capitalism. The tax structure in England of his day was complex and filled with anomalies, although these anomalies were very different from those that dominate the 21st. century U.S. tax code (such as the treatment of “carried interest” income as capital gains not as ordinary income). Despite sustained opposition income taxes were becoming a permanent part of the English tax structure. Nevertheless substantial remnants of a medieval tax structure, especially the taxes on land and other forms of property remained, and the government derived a preponderance of its revenues from indirect taxes, such as customs duties and excise taxes.
Mill wished to protect savings at all costs because savings is the fountain from which investment and improvement of the laboring classes derives. In testimony before Parliament in May 1852, Mill was adamant in presenting the classical view, clearly distinguishing between “productive” and “unproductive” uses of spending money. Mills consistently defended modes of taxation that suppressed consumption (value-added tax anyone?) and encouraged savings.
A second central aspect of Mill’s thought regards taxation and income distribution. A functioning and “just” capitalism as interpreted by Mill demanded ex ante but not ex post equality. The inter-temporal or inter-generational nature of this view of justice is critical to Mill’s policy views. In order to obtain economic growth and personal (human capital) growth in society, incentive structures that encouraged initiative and work had to be put in place in the tax structure and elsewhere. But an appropriate incentive structure would not be enough. Progress requires “fluidity” and “mobility” within society at any given time and across time. This fluidity has traditionally been viewed as a distinguishing and admirable feature of American society compared to the comparatively sclerotic or class-ridden Europe. But many researchers have recently reached a conclusion that turns conventional wisdom on its head – Americans enjoy less economic mobility than their peers in Canada and much of Western Europe. This finding has been accepted across a wide spectrum of opinion in the U.S. from the New York Times to National Review.
Mill’s policy stance was intimately related to his advocacy of the microeconomic diffusion of property rights within British society. Within this context, Mill faced, despite phenomenal economic growth in his lifetime, a highly skewed and fundamentally feudal system of wealth and income distribution. Mill’s inter-temporal view of justice (fostering ex ante (opportunity) but not ex post (outcome) equality) is one that is highly relevant to the U.S. today. He took a negative view of progressive income taxes, on the grounds (like some of today’s right wing economists) that progressive taxes discourage effort. Instead, he proposed an almost confiscatory inheritance (or estate) tax, to establish a level playing field which would mean that only an individual’s own diligence and ability would limit his or her capacity to succeed. Absent an inheritance tax, Mill supported a proportionate or “flat” tax, which taxes everyone at a stable tax rate, with however an exemption for those whose incomes fall below some specified amount. This structure is similar to that of the Massachusetts state income tax.
The preceding remarks do not do anything like justice to the richness and value of Mill’s contributions to political philosophy and economics. These contributions expose the sterility of the simplistic and one-sided positions that characterize much or most of what passes for debate and arguments about public policy in today’s United States. None of us will agree with all of Mill’s proposals and recommendations, but all of us should agree with some of them, and perhaps enough of us will find that we agree on enough of them to be able to make progress. On pragmatic grounds Mills established the basis of the “mixed and balanced” economy and its intimate connections to ideas of justice and fairness that should be the hallmarks of a civilized society.