As the saying goes, nothing is inevitable but death and taxes, and hopefully not in that order. That being the case, how should taxation (for we don’t claim any power over death) be made as fair and just as possible? We have some suggestions, consistent with the Just Third Way of Economic Personalism.
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| Adam Smith |
In The Wealth of Nations (1776), Adam Smith listed four principles of taxation. To some people Smith’s principles may sound simplistic, possibly even hostile to human interests. Given the sole valid purpose of taxation is to meet legitimate costs of government, however, a summary of Smith’s “four canons of a good tax” come across as common sense:
· Efficiency. The tax system should ordinarily generate sufficient funds for the government to meet legitimate expenditures.
· Understandability. An adult of ordinary intelligence should be able to understand the tax code.
· Equity. People should be taxed on their ability to pay.
· Benefit. People should be taxed in accordance with the benefits they receive.
When “Equity” and “Benefit” come into conflict, Equity trumps benefit. That is, if a tax is levied on the rich to help the poor in an emergency, the rich receive only indirect benefits from the tax, while the poor receive the direct benefits. This is not proportional or in accordance with the benefits received, but it is common sense, for how could the poor pay a tax to relieve their own (hopefully temporary) distress?
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| Mayer Amschel Rothschild |
We dismiss all proposals to eliminate taxation by allowing the government to create the money it needs. As is shown by the mounting U.S. debt and the power wielded by Putin, when government controls money and credit, it controls virtually all life. As Mayer Amschel Rothschild purportedly said, “Give me control of a nation’s money and I care not who makes the laws.” Abolishing taxes or imposing them unjustly as in the proposal of the agrarian socialist Henry George ensures most people will be trapped in a condition of permanent dependency — slavery.
We also dismiss Thomas Hobbes’s view in Leviathan (1651) of taxation as the exercise of the State’s purported ultimate right of property. This is an application of Hobbes’s doctrine the State is a “Mortall God” which must be obeyed on Earth as the Immortal God is obeyed in Heaven.
We accept John Locke’s view of taxation as a grant from sovereign people to the government to meet legitimate expenses. As Locke explained in his Second Treatise of Government (1689),
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| John Locke |
’Tis true, Governments cannot be supported without great Charge, and ‘tis fit every one who enjoys his share of the Protection, should pay out of his Estate his proportion for the maintenance of it. But still it must be with his own Consent, i.e., the Consent of the Majority, given it either by themselves, or their Representatives chosen by them. For if any one shall claim a Power to lay and levy Taxes on the People, by his own Authority, and without such consent of the People, he thereby invades the Fundamental Law of Property, and subverts the end of Government. For what property have I in that which another may by right take, when he pleases to himself?
To be practical — for economic and social justice must always be effective — tax policies must reflect and be consistent with the goal of turning as many people as possible into capital owners. John Locke hinted at this (as have seemingly countless others), but Louis Kelso demonstrated how it could be done — but that has already been covered many times on this blog, so we will stick to taxation for today.
CESJ therefore advocates legislative initiatives be introduced to encourage businesses to finance growth and expansion in ways which grow and expand the base of capital ownership in an economy. Tax policy must make it possible for those who own little or no capital to use pre-tax (i.e., tax-deferred) future savings to accumulate a capital stake in as short a time as possible.
This can be done by making all dividends tax deductible at the corporate level. This would effectively abolish the double tax on corporate profits if all earnings were paid out. To encourage widespread capital ownership, there would be a tax deferral to recipients if they use the dividends to acquire capital assets up to a predetermined level of capital self-sufficiency.
To avoid disrupting an entire economy by introducing a new system all at once, an industry or region could be used as a test case. Once the test case has proved the concept and demonstrated its desirability for the whole economy — accelerated non-inflationary economic growth, expanded purchasing power, increased government revenues from a restored tax base consisting of new capital owners — there could be an overhaul of the national tax system to support and maintain the State and the common good.
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| Louis O. Kelso |
Kelso’s Employee Stock Ownership Plan (ESOP) illustrates the power of just tax reform. Prior to the tax advantages enacted in the mid-1970s, there were relatively few ESOPs. Once, however, dividends from future profits became tax-deductible at the corporate level if paid through an ESOP, and lenders could exclude from taxable income a portion of the interest earned, the number of ESOPs increased dramatically. Today in the United States thousands of companies with millions of employees have become worker-owned whole or in part without the workers putting up their own savings or taking reductions in pay or benefits.
Also, given all taxes are ultimately income taxes (what else do you pay them with?), all current taxes should be replaced with a single rate income tax. To eliminate today’s bizarre political game of taxing people on what they need to live and returning it to them in the form of government-controlled benefits and entitlements, the single rate tax would be imposed only on income above a meaningful exemption sufficient to meet ordinary domestic needs adequately.
Inheritance taxes should be imposed on recipients instead of on the estate and only when what an individual heir receives exceeds a generous exemption, say, U.S.$1 million. This would encourage the broad distribution of large accumulations and equalize wealth in society. It would also potentially and effectively eliminate inheritance taxes.
The question then becomes not why we should have tax reform along these lines (and the Economic Democracy Act), but why is it taking so long for the world’s leaders to act on it?
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