Some say taxation is theft. Others say it’s a social contract. How do we explain taxation in a democracy?

Tax is something which many people agree is necessary but equally many will try and pay as little as possible. If taxation was optional, it’s quite likely that the amount of revenue collected by the state would be close to zero. So what’s going on?

The inheritance of feudalism

What we now think of as nation states have either been colonised in the past few hundred years, or they have been the result of turbulent histories involving power struggles, warlords and armed insurrections. In the UK, democracy was slowly introduced from 1215 when the monarch had to sign away powers to the nobles. The current state arguably dates from 1928 and the equal suffrage of men and women. Put differently, democracy in the UK took over 700 years to develop from nothing into something which stands up to modern scrutiny.

But through that period, the power of the state has been maintained. Before 1215 the king controlled the armies, through nobles and a feudal structure, where armies of peasants could be raised by the local landowner, who in turn swore allegiance to the noble in charge of the area etc. Now the armies are controlled by the democratic state, which is a structure maintained by an elected government.

The libertarian utopia of small government, no taxation and individual powers has never been allowed to flourish. Armies and their guns don’t simply go away. They are integral to the nation state, whoever controls it.

The authority of the state

Now we have established that the state controls the guns and the government manages the state on behalf of the people, we might also recognise that the main difference between a monarch and a democratic state is that to get rid of the former, you probably have to kill him (or her). To get rid of the government you just vote them out, although that might mean waiting until such time as an election comes around.

The state also controls the borders. And although one of the main purposes of the guns is to enforce those borders, the state exerts power to control people too. Try not paying your taxes if you don’t believe it.

A right to raise taxes

We can argue forever about the ethics of taxation. Libertarians will argue that taxation is theft, and that they have the right to retain the fruits of their labours. Frank Chodorov of the Mises Institute argues that taxation is robbery with a series of arguments that depend on recognising an individuals right to ownership of wealth and property. Other libertarians equate the gun-owning analogy of the state to an armed mob, while others still use the legal definition of theft to back up their point. Social liberals will talk about a social contract, a kind of implied agreement that because we all live together, we bear equal responsibility for the cost of running the nation. This is a view supported by Adam Smith, who advocates the system we have in place today – based on ability to pay whilst recognising that revenue earned in a nation is earned under the protection of the state. I shall return to this point. Marxists go much further and will advocate uncoupling the fruits of someone’s labour from the wealth they are allowed to retain. Each according to their need, each according to their ability.

So it’s not so much that the state has the right to raise taxes, as it has the power to raise taxes. Yes, to maintain its armies. But also so that people can exercise control over each other. These powers maintain internal security and justice structures, as well as social infrastructure and welfare. If there were no state control then be sure that nature abhors a vacuum and that gangs, foreign powers or militias will step in. Think Somalia or Syria. The people, or at least a majority of them, control the guns and decide how the nation state is governed. And that includes taxation. Any talk of the ethics of taxation becomes an interesting intellectual exercise but not a very pragmatic one. A better question might be: What should taxation in a democracy look like?

How might we structure taxation in a democracy?

Depending on the type of government we elect, we might have a high tax/high spend regime or a low tax/low spend regime. And the manner in which taxes are raised will vary too, taxing personal income, spending, company profits, moving house, inheritances, specific items like alcohol and fuel, and the value of one’s house.

Looking just at personal income tax, there are many ways that can be structured such as a flat tax (everyone pays the same rate) to a progressive tax rate, which rises with amount of income. Some see progressive taxation as a tax on hard work and success, a scenario described in this video:

The video doesn’t really describe how taxes are used, as the analogy is that our taxes add value to our properties. That’s fine when it comes to building roads or paying for council services and even state pensions. But most would agree that those that have more, have more to lose, and effectively have a higher stake in the success of the nation.

State Spending

We can perhaps break down state spending into three categories:

• Sustaining and defending the nation
• Redistribution of wealth
• Infrastructure improvements

I frequently argue that the first of these can justifiably be charged against someone’s wealth. Just as it costs more to fix a mansion than an apartment, so does someone’s stake in the defence of the nation increase with their wealth. The more someone has, the more they stand to lose. But is that the full story? Let’s bring back income into the equation, because a high earner wastefully gambling away their income surely shouldn’t be paying less tax than someone wisely investing their income. Yes, wealth is part of the equation, but the potential incremental wealth arising through income is another part. So a balance must be set. But that’s a topic for another day.

Redistribution of wealth might be scary for a libertarian, but it’s a fact of modern society. In the UK the largest part of this spending is on pensions, and few would advocate its reduction if for no other reason than it’s something which they will benefit from in years to come. As described earlier, income taxes can be raised at a flat rate and benefits paid – pensions too – from that revenue. Lastly infrastructure spending. We’re talking roads, public buildings and spaces, and the government and (in the UK) the Civil Service. Everything that the state pays for collectively so that we don’t have to individually. There is capital spending and there is current spending. The latter equates to income taxes, but what about capital spending? The trend in recent years has been for the private sector to pick up the cost of that, charging the state for its use. We haven’t seen any plans to privatise roads, but railways, ports, airports, water, electricity, gas and many other infrastructure providers are in the private sector. If that were to ever change, then I can see the government borrowing money to provide for capital expenditure, again charging the interest against income tax revenues.

Ethics of structuring taxation in a democracy

Although the state can raise taxes any way it chooses, are there any ethical principles the state should uphold? Consider a government elected by a green-skinned majority that decides the brunt of taxation should be borne by the blue-skinned minority. Would that be ethical? Well, it’s not fair at all. There has to be a principle that what applies to one person in the state also applies to another. What about the less well off majority deciding that the wealthy minority should pay the brunt of the taxes? Many people have less of a problem with that, and it’s very much the stuff of political debate. In fact the extent of wealth redistribution and the structure of the tax regime often separate the left wing from the right wing in democratic politics.

It’s tempting to think that taxation without prejudice should mean everyone paying the same amount. Not the same rate, but the same tax, like a poll tax. But let’s resist that temptation by realising that income is incremental wealth. And if we accept that someone’s wealth relates to their stake in the nation and consequently relates to their share of the nation’s maintenance then it follows that income tax too should be charged at a flat rate. Flat tax is not without its critics, though. Richard Murphy points out that the better off will benefit from a flat tax and indeed they will, compared to progressive tax systems. And the right want to use the consequent lower tax revenues as an excuse to cut government spending. But that doesn’t mean the current system is morally correct. It also ignores the fact that part of the revenue from flat tax can be redistributive. And in simplest terms, if everyone pays (say) 40% of their income as tax but receives (say) £10,000 back again each year then we address inequality and benefit fraud in one fell swoop.

Taxation in a democracy follows from power

It’s the power of the state, inherited from the old feudal and autocratic systems which give the state the power to raise taxes. And because the state is managed by a government elected by the people, it’s ultimately an exercise in how much we should be taxing each other. Consequently, the moral question is less about whether taxation is itself moral, because without it there will be no state, and more about how to structure the tax system. The structure should not disproportionately penalise any particular group in society for simply being that group. And society also needs to strike a balance between how much it is prepared to raise for redistributive purposes and how little it dare let taxes raised to maintain the state and its structures fall. After that its all about making sure taxes are collected.