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On the morality of taxation and how to minimize the harm it does

Moller 0010Yesterday I addressed a conference of the Young Britons’ Foundation at Churchill College in Cambridge.  The theme of my session was the morality of taxation, and I put forward the view that taxation is basically immoral when it is coercive, which it nearly always is.  To a libertarian, coercive behaviour is only justified to prevent people from harming others.  Taxation takes away our choice to allocate our resources according to our priorities and values, and makes us live by someone else’s, like pawns on someone else’s chessboard.  Sometimes taxation forces people to fund things they have moral objections to, such as war, bank bailouts or abortions.  It can undermine personal responsibility by making people think it is the state’s job to look after others, and it can crowd out private morality by pre-empting the funds people might otherwise have used for good purposes of their own.  Taxation often promotes internal divisions, with interest groups vying against each other to secure resources.  It gives politicians the money to buy votes with, and it makes society poorer by increasing the costs of the transactions that create wealth and prosperity.

All of that said, taxation might be immoral, but it is alas also necessary, and the question then comes down to minimizing its harmful consequences.  Adam Smith set out four canons for making a tax as fair as possible.  Firstly, the cost of collection must be low compared to its yield.  Secondly, the timing and amount must be known, without allowing tax collectors the discretion that can lead to corruption.  Thirdly, the means and timing of the payment must be convenient to the payer.  For example, when wages are made or a transaction takes place, a little of the money generated can be conveniently collected by the state.  And fourthly, Smith said that taxation should fall mainly on those who can pay.  Yes of course.  They can afford it more easily.

I add a fifth canon to Smith’s four: No tax should damage the economy out of all proportion to the revenue it raises.  I cite Corporation tax as an example.  It is not paid by corporations, but by employees, customers or shareholders.  And it seriously holds back the wealth creating process.


One Response

  1. That is a very useful discussion of what we should do on taxation in general. It clearly does not hold pragmatically to the view of the anarcho-libertarians, though it does seem to give them some accolades for the moral high ground.

    This chart of UK total government expenditure as a percentage of GDP shows how things have changed since the period up to the First World War. Prior to that, non-wartime expenditure was typically around 10% of GDP. It strikes me as doubtful that Adam Smith ever though of the later levels (typically, 30% between the world wars and 40+% since then) as part of his concept of ‘easy taxation’.

    I would like to add that there have been changes in population density, infrastructure needs and technological advances. These almost certainly mean that taxation at higher than 10% of GDP is appropriate in the modern (and first) world. Personally I would argue for a target of 33%, and a 10-year transition period to ease the pain for those most affected; perhaps only 7 years if there is strong economic growth. This 33% target fits broadly within Madsen’s view that taxation should avoid economic harm.

    The next question, rather important in my view, is what level of expenditure should be controlled by each level of government: and what are the advantages and disadvantages of more localism in our taxation?

    Best regards

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