Fairness is a key question in taxation. Nobody likes taxes, but nearly everyone wants some level of government services. Yes, a few Libertarians would leave everything but public safety and national defense to private markets. Most other people, however, also want roads, schools, parks and at least some programs to meet the needs of children, the elderly and needy households.
If we want such government services, we have to decide on the best way to raise the necessary money. When considering tax alternatives, economists customarily consider two criteria, efficiency and equity.
Efficiency deals with how well we use resources in producing some good or service. If you have different ways to produce some good or service, which way consumes fewer productive resources? That is the more efficient alternative.
Equity deals with what others might call fairness or justice. If there are different ways to produce some good or service, which is the more fair, more just way?
Economists generally prefer dealing with efficiency because they deem it something one can measure objectively. Fairness and justice, on the other hand, involve value judgments. What one person considers fair another may not.
Implicitly, economists prefer to leave the question of fairness to philosophers, theologians and legal scholars. But it is hard to talk about taxes without getting into questions of fairness. Indeed, fairness looms far more important than efficient resource use for most people and this enters most discussions of tax policy.
There are two historic approaches to taxation, the “benefits-received” principle and “ability-to-pay.”
The benefits-received approach links taxes paid to the government services used. Someone who drives a lot should pay more taxes to fund roads than someone who drives little. Someone with extensive property should pay more for police and fire protection than someone owning little.
Excise taxes on motor fuels and airline tickets are examples of taxes that best conform to the benefits-received principle. Revenue from those taxes is earmarked for road or airport construction and maintenance.
One problem, however, is that benefits received are not always measurable. Their allocation is contentious. Do national parks benefit each citizen equally? Poor people use such parks much less than families with higher incomes. Do we all benefit equally from national defense? Or do people like Warren Buffett or Carl Pohlad with much at stake benefit more than a widow on Social Security?
The benefits-received principle eventually causes outcomes that many reject. Should low-income retirees in poor health pay high taxes to fund public hospitals or Medicare while healthy workers in their 20s pay little? Again, a few Libertarians would respond yes, arguing that health care is not a necessary function of government anyway. But most people don’t buy that completely, if at all.
That brings us to “ability to pay.” The idea is that those with a greater ability to pay should pay more in taxes. The historic justification is that providing for public goods and services should cut into meeting household necessities as little as possible. Those with greater income or wealth can pay more without reducing their food, shelter, or clothing. Those with less income cannot pay as much without sacrificing some necessities.
This is an old discussion, going back millennia. And for centuries, most people have accepted that the question of ability to pay is a legitimate one for society to address. Raising the question does not constitute “class warfare.” Nor is it inherently a question of “forced income redistribution.” And discussing it does not make one a Marxist.
Unfortunately, the intemperate rhetoric that dominates much political discourse today obscures the legitimacy of the question. Anti-tax demagogues are quick to wave the bloody shirt of “class warfare.”
Greek and Roman philosophers examined fairness in paying for meeting the common needs of society. So do several Old Testament books, particularly in the Minor Prophets, that Jews and Christians treat as sacred texts. So does the Quran.
Some conservative Christians and Jews argue that government as we know it did not exist in ancient times. When a prophet like Hosea thunders against societal injustice, they argue, he is criticizing the sins of individuals. There are no implications for modern government. Few theologians, even at conservative evangelical seminaries, buy that argument.
Most secular philosophers don’t reject the legitimacy of debating who should pay how much in taxes. They may dispute the range of appropriate functions of government, but few argue that fairness is off the table.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.