Acton Commentary

What’s “Just” about Taxes?


Everywhere, it seems, tax is in the news. At least two U.S. presidential candidates have signaled their intention to raise taxes on higher-income earners and specifically target oil companies if they are elected.

In Venezuela, Hugo Chavez is threatening to heavily tax any food company making “excessive profits” — whatever that means — as his “21st century socialist” economy falters in its ability to perform even basic tasks such as feeding Venezuelans.

Across the Atlantic, Germany is proposing “special” taxes on bank-transfers to Switzerland, Liechtenstein, and Monaco. Britain’s government recently suggested increasing taxes on non-domiciled foreigners, and only retreated after a public outcry. Even the Organization for Economic Cooperation and Development (OECD) has weighed in, recently telling Monaco, Liechtenstein, and Andorra that their low tax rates are anti-competitive. Oddly enough, by “anti-competitive,” the OECD means that these countries’ tax-rates are lower than everyone else’s.

Another bizarre development is that some American clergy and politicians now quote the Bible to justify raising taxes — as if the Bible expressively mandates high tax-rates.

Of course, there’s nothing intrinsically immoral or unjust about low tax rates for individuals and companies. It’s telling, however, that numerous interest groups, NGOs, and politicians treat any proposal to lower taxes as if it was the equivalent of homicide. Perhaps even more disturbing is the fact that most people in developed countries — especially Western Europeans — have simply become habituated to governments taking over 40 percent of their annual incomes.

In 1913, the highest American federal individual income-tax rate was 7 percent on $500,000. Today, the equivalent tax-rate is 35 percent on $357,700. It is not only the rate increase that is remarkable. One dollar in 1913 had considerably more buying power than a 2008 dollar. In other words, most Americans today pay more tax on money which itself is worth much less than it was 95 years ago.

In his Wealth of Nations, Adam Smith said that taxes were necessary to enable governments to perform three essential functions. One was national defense. Another was public security and the administration of justice. The third was public infrastructure needs, though Smith envisaged that governments could contract much of this to private companies.

Today’s reality, however, is that taxes are raised for purposes that go far beyond these limits. Many politicians, for example, do not even bother to disguise the fact that they regard high taxes as a means for massive wealth-redistribution and financing social engineering. The fact that high taxes destroy incentives for entrepreneurs and businesses to create the wealth that gradually improves everyone’s material well-being — including the poor — appears to escape many politicians’ attention. Likewise high tax rates are often justified by the need to fund government-provided social services that families, charities, private associations, and churches are invariably much better at performing.

Then there are the negative moral effects of high tax rates.

First, high taxes undermine respect for property rights. If the state routinely takes, say, 40 percent of peoples’ incomes, then we should hardly be surprised that some individuals become rather casual in the way they treat others’ private property. Second, the existence of high taxes helps facilitate a culture in which some political parties basically tell people that, in return for their vote, they will effectively transfer large amounts of others’ property to them via taxation. That’s surely a mild form of corruption.

Third, high taxes create what might be called “occasions of sin.” When the state takes such large amounts of people’s income, is it any wonder many are tempted to minimize the law’s effects through tax avoidance or actually break the law through tax evasion?

Lastly, high taxes have a distorting effect on how we think about our investment decisions. They encourage people to put their money into schemes that reduce taxes rather than activities which create more wealth for everyone.

Not surprisingly, low tax rates help to resolve many of these problems. Empirically, it’s well-established that low taxes diminish the rate of tax avoidance and tax evasion. This improves the quality of rule of law, a key ingredient for economic growth. An incidental effect is that those countries which have lowered their individual and corporate tax-rates in recent years, mainly through implementing flat taxes, have actually experienced increases in government revenues.

Low taxes also release more capital for productive investment, especially by reducing our need for tax lawyers and accountants. This benefits everyone over time, including the poor, by increasing living standards.

Capital is also freed up for private charity. When people keep more of their disposable income, they can be more generous instead of abdicating their responsibilities for their neighbor-in-need to politicians and bureaucrats. Lower taxes are not only just and economically smart; they’re good for our moral health as well.

Dr. Samuel Gregg is research director at the Acton Institute and author, most recently, of The Commercial Society (2007).