Liberty and Taxation

Under an Endowment Taxation system, people are taxed on what they could earn rather than what they actually earn. The argument is rooted in the principle that those who are better off should bear greater tax burdens. The questions then, is what presents the best metric for such a determination? For example, a person that prefers working over leisure is disproportionally taxed for contributing more to our economy. Hence unsurprisingly, the idea of endowment taxation hasn’t taken off. Leaving aside practical questions such as, where would you find the money to pay off a tax liability you could have had, the most burning issue is with regards to liberty. Primarily the notion that taxing someone according to their potential that is an intrusion on basic human liberties. The argument to the effect is this- taxing people on their earnings capacity would force them into a type of slavery in order to pay the tax. Robert Nozick argued that seizing the results of someone’s labor is equivalent to seizing hours from him and directing him to carry on certain work, for a certain period of time. This entire process gives someone else part ownership in you, a property right in you.

Most social scientists would agree that having a property right in someone else is akin to slavery, and while we’ve come to an agreement that a certain amount of taxation is acceptable, shouldn’t we try to find a better alternative? The alternative that has in recent years gained the most traction is a shift from the traditional ways of taxation such as labor, wealth, capital to a greater emphasis on consumption. Dan Shaviro argues that as a society we should move to such a system because “it imposes a more uniform burden on consumption.” It’s an argument that has had some backers even amongst the founders. For instance, Hamilton argued in federalist 21,” that the signal advantage of taxes on articles of consumption is that they contain in their own nature a security against excess. They prescribe their own limitation without defeating the end proposed that is an extension of the revenue. When applied to this object, the saying is as just as it is witty, that, in political arithmetic, two and two do not always make four. If duties are too high, collections are eluded and the revenue decreases. This forms a complete barrier against any material oppression of citizens by taxes, and limits government power.”

The economic argument itself is fascinating given the high amounts of debt financing that the federal government engages in, approaching almost 80 percent and $23 trillion. One argument definitely goes for raising more revenue by raising taxes, but that might not necessarily be the (classical) liberal argument. We could also go about the federal government spending less, which would decrease the crowding-out effect its spending has on private consumption and increase individual liberties.

For example, Rawls being first and foremost a liberal egalitarian wouldn’t necessarily argue against endowment taxes because it might be a practical matter of concern, but rather because it violates the lexical theory of human beings enjoying “free choice of consumption.” Hence, the primary argument around taxation isn’t that it’s inherently illiberal, which it is, but rather what form of taxation protects our liberties the most. As Oliver Wendell Holmes once said, “Taxes are the price we pay for living in a civilized world.” It is after this acceptance that we might finally see the benefits of a consumption tax. If we agree that like endowment taxes, taxes on labor, socially engineers certain behavior that allows others to have ownership in you and limits free choice, we must then pick a form of tax that allows us the most choice. It is here where a consumption tax is a clear favorite because it gives us the most control over how we choose to live.

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