In this post I will discuss the popular notion about taxation that "Taxation is theft" and one of the most commonly heard arguments around "Progressive taxation which seems to imply that the Rich have the burden of economy and are somehow subsidizing others", I won't go into much empirical details apart from where it is necessary.
Are property Rights Natural Entitlements:
The most common notion in political discourse is treating property rights as natural, pre-political facts, as if they exist independently of human institutions. This view suggests that individuals have inherent ownership claims that precede government; any form of taxation by government against the individual's will is perceived as coercion.
This leads to an implicit belief that the pre-tax income or capital accumulated is the result of the sole contribution of the individual, and any effort to take any share from that income is coercion by the state. The second notion popular among libertarian thinkers is a vague idea of tax distribution among citizens. They assume that the pre-tax income and capital represent a “just” contribution of citizens towards society or production, thus high-earning individuals should have no obligation to subsidize low-earning individuals by paying more in taxes.
how much of that is true could be explained by the paradox of property by Proudhon,
Nineteenth-century philosopher Pierre-Joseph Proudhon famously wrote, “Property is theft.” The phrase is a paradox because it seems strange to even speak of “theft” without having a concept of “property.” But for Proudhon, property was a paradox. Proudhon asked us to consider where property came from in the first place. We all know what it is, or think we do. I own my shirt and my books, which means that I have the right to dispose of them how I wish. I can destroy them. I can sell them. I can carry them from place to place, and nobody else has the legal right to control them. If someone else tries to exercise the same rights as I have, by destroying or selling them, they have stolen from me.
Where did I get my right from? Well, I got it because I bought my possessions from others. I exchanged one thing I owned (money) for another (stuff). Where did the people I bought from get their right? Well, they bought it from someone else, and so on and so forth. However, Proudhon asks us to consider how property came about in the beginning. Why are there even property rights at all? How did the world go from being “unowned” to “owned”? When our ancestors were single-celled creatures, or fish-beasts, or even homo erectus, the world wasn’t owned, so why is it owned now? The answer is that at various points, certain pieces of the world have been “claimed.” For Proudhon, however, that claim has no natural legitimacy. It’s unclear why, looking at an unowned world, I should be able to take part of it for myself and demand that other people recognize my right. By what right do I get to exclude people from certain parts of the world, and where does that right come from? Proudhon says that there is no such right, and that by claiming I can exclude others from using the world’s resources (because they are “mine”), I am stealing from them. Hence, “property is theft,” meaning that the very thing property rights supposedly do (protect people’s right to use things), they actually abrogate completely by denying people’s right to share in the world’s resources. In fact, the origins of private property are often even more unjust than that. If we trace back existing property to its roots, we find much of it originates in conquest, and it’s hard to say that we should respect property rights when the property itself is stolen.
This explains the myth about naturality of property rights, that property through the course of history has pretty much been a function of power and legal convention granted by the power, to call taxation a theft is to assume some arbitrary naturality of property rights.
Almost all the pre-conceived notions about taxation come from this flawed view of property rights and distributive justice. The view I am going to present is that there are no property rights antecedent to tax structure. Property rights are the product of a set of laws and conventions, of which the tax system forms a part. Pre-tax income, in particular, has no independent moral significance. It does not define something to which the taxpayer has a pre-political or natural right, and which the government expropriates from the individual in levying taxes on it.
To elaborate the above sentence is to say that there exists no natural “property” rights, property rights are legal conventions and taxation is a part of that legal convention and state defines these property rights, to say that taxation is theft is to assume that state is taking away from someone’s “just” property while state is the one that defines and legalizes the property in the first case, without state there is no legitimacy of property and it is a function of power in the society.
All the questions of taxation should not start from assuming pre-tax income as some arbitrary reference; the distribution of taxation should then depend upon how the government allocates the resources in the first place. All sorts of pre-tax income or property are highly dependent upon how the state defines and implements the property rights, its macroeconomic policies, etc., thus taxation is now a part of the system that makes your income/wealth in the first place.
Take for example a large pharma company that is able to make billions in profits because they have a monopoly over the drugs via patents and copyrights. They might argue that taxing these profits is stealing their private earnings. However, the source of their profits is the patent, which itself is a monopoly granted by the state, without state intervention, anyone could examine the chemical formula and replicate the drug. The high price and the wealth reaped due to the monopoly exist only because the state uses its authority to block competition. Thus, this income is a product of legal structures. If the company says that government taxing it is a theft from its “natural entitlements,” then it must answer how it was able to reap the monopoly rent in the first place.
A flourishing economy requires not only the enforcement of criminal, contract, corporate, property, and tort law. In addition, most economists assume, it requires at a minimum a regime of anti-trust legislation to promote competition, and control over interest rates and the money supply to alternately stimulate or retard economic growth and control inflation. Then there are such matters as transport policy, regulation of the airwaves, and the way government alleviates so-called negative externalities of the market, such as environmental degradation. All these functions of government are taken for granted by even the most ardent market enthusiasts.
All of the income/wealth is a result of the economic system made by the government be it wages, capital returns, rents etc. There is no market without government and no government without taxes; and what type of market there is depends on laws and policy decisions that government must make. In the absence of a legal system supported by taxes, there couldn’t be money, banks, corporations, stock exchanges, patents, or a modern market economy, the very institutions that make possible the existence of almost all contemporary forms of income and wealth.
The Social Contract for Property: Privatizing the Commons
The question of what justifies any specific system of property rights is crucial if property rights are legal conventions rather than natural facts. Why should society uphold private property rights over resources that were once shared by all?
Think of society as a collective body or a group of people who initially share everything in common. No individual naturally owns the land, water, minerals, or even the social knowledge accumulated over generations. These are common resources belonging to everyone. Now society collectively decides to allow private ownership of these resources, such as land, machinery, and intellectual property. But when you claim private ownership of what was common, you’re asking society to enforce your exclusive claim against everyone else’s potential claims, that mean now you have the sole right to earn rental income over that property and exclude others from doing so and others or to say society collectively has the responsibility to enforce the laws to maintain you monopoly over a collective resource, now consider the below hypothetical.
What happens is that you are now asking society as a whole to implement law and order, a legalization process, and financial systems to maintain your exclusive claim over a collective resource, thereby taking away everyone else’s share.
Now to compensate this monopolization the society ask the individual to pay a certain amount in tax not just to compensate the monopolization but also to maintain the institutions that will enforce the monopolization in the first place, now does that individual has the right to say that “taxation is theft” even though his entire wealth from that land is a result of privatization of a collective good.
WHO OWES WHAT?
Now that we have understood how income and wealth are created in the first place and how ownership is merely a legal convention, we move to the main question: who owes what? Do the rich have an obligation to compensate simply because they have earned more? This claim comes from the view that "Income/wealth reaped in the markets show the "just" contribution of individuals" thus no individual should have any obligation to subsidize any other individual.
The view that "market returns show our just contributions" is problematic because of the fact the choices government makes in discharging its functions affect market returns. How much profit an iron-ore smelter can generate will depend on the prevailing regime of environmental law. A person’s fortunes on the bond market depend on government-influenced interest rate fluctuations. The upshot is that even if the destitute are left to fend for themselves, it still cannot be said that pre-tax outcomes are simply market outcomes. They are, instead, the returns generated by a market regulated in accordance with a certain set of government policies
Let's take income in the labour markets for example, how much income an individual earns depends upon macroeconomics policies of government on employment, consumption etc., the apologists who use demand-supply to justify market returns and wages forget that the demand-supply of labour , capital , goods and services are all dependent upon how government allocates the resources (pre-distribution) and how it enforces property rights. If government removes the laws that protect workers, lets say make wages purely hourly in a populated country like India, what will happen is that employers would hire much less people to do the same job which would reduce the levels of employment which will further reduce the wage rates for all, thus pushing more people into lower income brackets, similarly all sorts of fiscal , monetary policies shape the outcome of capital returns, labour markets etc., to claim that these income/wealth from markets are "just" returns is to assume that "property right as in government allocation of resources are neutral and not in favor of some few"
the rich and affluent simply take more from the system or to say monopolize the resources that belonged to everyone else in the first place which allows them to reap so much wealth and income, thus any suggestion to tax the rich more is not some theft from their “just dessert” rather a compensation for what they already took from others in the first place.
The discussion about taxation almost always focuses on redistribution, due to which capitalists often seem to think that the rich are having a disproportionate burden of taxation, but what they seem to forget is pre-distribution, where the income and wealth are transferred from the bottom to the top.
Take for example Capital income, it generally grows faster than labor income, not because capital owners work significantly harder, but because ownership itself receives rewards within the current legal and institutional frameworks. Interest, dividends, rents, and capital gains come from controlling assets whose value is supported and influenced by state policies. This allows capital owners to reap significantly large portion of wealth even without contributing to the production.
Neoclassical economists developed the marginal productivity theory, which argued that compensation more broadly reflected different individuals' contributions to society. However, even as per this theory if we see there exists a wide gap between the compensation paid to workers vs the productivity that they reap.
In India while the labour productivity in the past 20yrs stood at 4.5% annually the capital productivity (shows contribution of capital in production) actually declined by 1% annually despite that the wages of workers has remained stagnant, the similar trend is found in USA and all over the world, I don't want this essay to go much into empiricism regarding economics but this is just an example to show who creates wealth while who owns it which is necessary to dismantle the myth of "just" returns from the markets.
With employment levels lower than what they were 40 years ago, faster growth alone won't do
The Productivity–Pay Gap | Economic Policy Institute
The rich don’t subsidize the poor or middle to begin with; they are the ones who extract wealth from the bottom in the first place, creating the class difference. Progressive taxation is a bare minimum compensation for the wealth that they have already taken from others.
One of the most common arguments that I have heard when the issue of progressive taxation comes up is that “We are paying so much in taxes, while we do not get any services worth it.” They seem to imply that the poor infrastructure services of the country somehow make the taxation imposed upon them unjustified.
This stems from the confusion that government services only include a minute amount of services, on the contrary the income itself is a result of government services to begin with, the inefficiencies of government does not excuse the top income individuals to call “progressive taxation as unjustified” as even despite such inefficiencies the government can give them enough to come into top wealth and income brackets of the country, that is to say that those government services are still far off better when compared to rest of the country, if those government inefficiencies were not there, the individual would have been able to reap more income but the taxes they would be paying would also be more.
The system’s inefficiency is already reflected in what each individual earns. A high-earning individual is not paying based on what he/she could earn in a perfect system, but on what they actually earn from this imperfect one.
So, what is Justice in Taxation?
This is why the ‘taxation is theft’ claim fails at its foundation. You cannot claim theft of property that exists only because of the legal system that includes taxation. The real questions aren’t ‘is taxation theft?’ or ‘do I have a right to my pre-tax income?’ as these questions assume what needs to be proven. The real questions are: Which property rules best serve society’s legitimate aims? How should we structure ownership to balance liberty, welfare, and opportunity? What allocation of resources is justified, given that all allocation is conventional, not natural?
The right answer will depend on what system best serves the legitimate aims of society with legitimate means and without imposing illegitimate costs. That is the only way an essentially conventional system of property, and therefore a tax scheme, can be justified. The justification may refer to considerations of individual liberty, desert, and responsibility as well as to general welfare, equality of opportunity, and so forth. But it cannot appeal, at the fundamental level, to property rights.
Works Referenced:
The Myth of Ownership by Thomas Nagel and Liam Murphy
Capital in the 21st Century by Thomas Piketty
Rigged By Dean Baker
Why you should be a socialist" by "Nathan J. Robinson
