Opus 1, Second movement: On taxation
“Servers, labourers, and workmen of different kinds make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged.”
I left off with a statement which suggested taxation for a progressive purpose, for redistribution purposes is an issue of reason and not mechanics. That is not to say understanding the mechanics is not necessary. Such knowledge however can only be the means to achieve the goal but, not the reason for the goal. Mr. Avi-Yonah sets up his second phase of discussion by quoting Does Atlas Shrug editor Mr. Slemrod:
“ [h]ow much and how to tax high-income individuals are questions at the core of many recent proposals for incremental as well as fundamental tax reform. The right answers depend in part on value judgments to which economic analysis has little to contribute.
Let me give a little bit of my philosophy here. A long time ago I figured out that in the end, after all the pros and cons are lined up, the research is done, the discussion had, the reason anyone does anything is because they wanted to do it. Why did I do X? Because that is what I wanted to do – period. Decisions are made based on values held at the time of decision not on changing values during the decision. Secondly, I am only as free as I allow you to be. Before someone starts thinking “libertarian talking here”, I understand that if in my freedom I accumulate enough money such that you have to rent a toilet from me verses buying your own, I’m not free because now I have to make sure the toilet is always available at the time of your need. If I don’t accommodate your timing, then I am at risk of retaliation by you (and maybe a few of your friends).
I have presented in the past that the goal of our economy is defined in the Constitution:
We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.
Specifically but not exclusively “domestic tranquility”, “general welfare” and “posterity”. An economy has been developed to serve our purpose. In the crudest terms of economic purpose; to create capital, as in “a company exists to create profit”. But for me, the crude answer begs the question: why create capital? Because I want to… because of my values. I see taxation as how money comes into play in meeting the goals as stated.
Mr Avi-Yonah starts the second part of his argument with a review of other lawyers’ work concerning the question of progressive taxation:
…Walter Blum and Harry Kalven published a classic article entitled The Uneasy Case for Progressive Taxation. [They] used most of the article to demolish systematically all previous arguments for progressivity made in the name of “ ability to pay” and “ equal sacrifice.” …they concluded that any remaining case for progressivity must be made in the name of redistribution, or an inherent objection to social inequality,…This is the same type of “ aesthetic” argument that motivated Henry Simons’s oft- quoted conclusion in Personal Income Taxation (published in 1938 at the height of New Deal progressivism) that sharply graduated rates are defensible only because there is something inherently “ unlovely” about inequality.
Next up was the introduction in 1987 by Joseph Bankman and Thomas Griffith of optimal tax theory “developed by economist James Mirrlees”. Mr. Avi-Yonah describes the theory as:
“Optimal tax theory seeks to answer the following question: Given that income taxes generate a disincentive effect on work, what is the ideal tax and transfer system if the ultimate goal is to maximize the sum of the utilities of individuals with identical preferences?
As described here, considering the findings suggested in the first post, there is a problem with the assumption. At least as it relates to the tippy top of the earning pile. Googling “optimal taxation theory” will bring up lots of information so I leave more in-depth discussion to you. Surfice-it-to-say, there are issues with the theory when one like Mr. Avi-Yonah is looking for reasoning in support of progressive taxation. He quotes Larry Zelenak and Kemper Moreland:
Regardless of the results of any simulation, optimal tax analysis can never prove that the income tax should have progressive marginal rates. Even if a simulation indicated gradual rates were optimal, and even if the simulation’s factual assumptions were unassailable, an opponent of progression could still dismiss the results by rejecting the philosophical basis of the simulation. If the premises of the simulation are utilitarian or Rawlsian, no amount of sophisticated mathematics will convince someone who objects to those premises.
Fundamentally, the problem with optimal tax theory is that, like any welfarist theory, it focuses completely on the well-being of individuals.
Before we go further, let me introduce you to this paper: Taxes and Torts in the Redistribution of Income by David A. Weisbach, THE LAW SCHOOL THE UNIVERSITY OF CHICAGO
He puts the issue of law vs economics as a bases for redistribution discussion thusly:
The thesis is that the presence or absence of the tax system completely changes how one thinks about basic subjects.
The reason why this is so is because the tax system plays a central role in the redistribution of income or wealth. In thinking about legal rules, we must ask whether they should be designed to redistribute or whether they should merely be efficient…Taking these arguments altogether, the double distortion argument and the problems with contracting around and haphazardness, I believe the case against using legal rules to redistribute to the poor becomes almost overwhelming. The tax system is a dedicated system designed to measure the variables relevant to redistribution and act only on those margins. It is hard to imagine that legal rules are likely to do a better job. One key point to note is that I have not argued that legal rules should be efficient. All the argument has shown so far is that legal rules should not be used to redistribute income.
But income is not the only source of inequality. Race, gender, disability, or health all mightbe sources of inequality in our society. If we value equality of all sorts not just income equality, we might want to redistribute based on other sources of inequality.
We are talking 2 different aspects of equality and redistribution as the morality applies to life. One concerns our relationships to each other as individuals exclusive of money. It is nature. It is the place for law. The other concerns our relationship inclusive of money. It is a human added event to nature. Money is based on value which is from our inherent concept of values, but I argue that there is no inherent concept of money. All else being equal, money is the only thing that can create an inequality not found in nature. There is nothing that can substitute for money when trying to equalize the effect of money. This is the place for taxation. I believe the conflating of these two distinct relationships becomes the means to argue against redistribution/progressive policy related to income. The conflation is in denying that collectively we have agreed on, consequently assigned the properties of money within the scheme of life unlike an event of nature.
Mr. Avi-Yonah leads into his reasoning in support of progressive taxation with:
A society is a community with a shared culture and shared interests that transcend the interests of its individual members and extend back to its historical roots and forward into its future. Thus, it is necessary to look for affirmative reasons for taxing the rich that are rooted in a broader social and historical understanding of the vital function of taxation in maintaining such a community over time.
Sounds to me that Mr. Avi-Yonah is talking about the founding ideology manifest in our constitution: We the people…
To be continued…