Capital Commentary is the weekly current-affairs publication of CPJ, written to encourage the pursuit of public justice.
Justice, Productivity, and the Basics of Tax Reform
July 1, 2011
by Ryan Streeter
The American public is used to having debates about tax rates. It is now getting used to a newer debate about the nature and complexity of the tax code itself.
Our tax code has grown so confusing, unfair and costly that we are now forced to deal with it as we look at our burgeoning deficit. The way we do taxes in America is having a deleterious effect on our economy and way of life.
We come a long way since, in James Madison’s words, the end of a just government is that “which impartially secures to every man, whatever is his own.” For this reason, when “taxes are again applied, by an unfeeling policy” to favor one kind of property over another, raid the “domestic sanctuaries of the rich,” and impose excessive taxes that “grind the face of the poor,” you have a blatant violation of justice and have undercut the purpose for which government was instituted.
Madison’s views were consistent with those of Adam Smith, who published his Wealth of Nations the same year the Declaration of Independence was written. Smith upheld four maxims in applying taxes: equity so that those who enjoy more protection from the state pay more, certainty rather than arbitrariness, simplicity for the payer rather than burdensome requirements, and efficiency so that revenues do not support non-productive activities such as unnecessary government programs and functions.
These views sat well with a biblical worldview that was tethered tightly to both a strong notion of justice and a belief in productive endeavor as a bedrock for a good society. Today, our debate about tax fairness is grounded more in notions of class and redistribution, and our tax code resembles an ongoing Houdini act in which various interests attempt to wriggle out from under the tax burden that has been hoisted upon them.
To recapture the Madisonian-Smithian-biblical worldview, it’s worth getting back to the basics.
Taxes should be proportionate, fair, and suited to productive activity. Let’s look at these one at a time.
Proportionate. Smith’s view was not that the rich should pay more out of some class-based sense of justice, but rather that the rich benefit the most from the protections of the state, and therefore should pay more. Progressive taxes and a free, commercial society go hand-in-hand. You can support progressive taxes but still be opposed to broad-based redistribution.
Fair. There are two principles of fairness that we need to keep in mind, though we usually only think of one. The first, most commonly heard, is that proportionality is fair. At the end of the day, richer people benefit more from the state’s protection, in Smith’s terms, and also enjoy more disposable income after life’s necessities are paid for. The second, less-discussed principle, is that everyone who enjoys the protections of the state, however little they earn, should also pay taxes. Fairness is not a friend to free riders, even those with low incomes.
Suited to productive activity. A common concern on both sides of the Atlantic in the 18th century was the effect of taxation on a productive citizenry. Both higher taxes and the complexity that results from the “unfeeling policy” that applies taxes arbitrarily to this or that activity affect how people view and engage in work. Higher taxes remove incentives to work longer and harder. And a complex code encourages all sorts of behaviors aimed at escaping tax liability. Lower, simpler rates encourage productivity. We see this not just in individual taxes, but in the rates businesses pay, as the Organization of Economic Cooperation and Development (OECD) has shown: the single greatest factor in boosting the number of jobs in a society is lowering a country’s corporate rate.
These principles are fortunately still with us, however hard it might be to make them the center of our tax debates. There is a growing consensus that America needs lower rates, with a broader base of taxpayers, together with an elimination of the vast web of exemptions and deductions that have made our tax code nearly unintelligible.
Both Paul Ryan’s plan and President Obama’s deficit commission have both proposed consolidating tax brackets and setting top rates in the mid-20% range and bottom rates in the 10% range. And they both agree that these lower rates should be matched by eliminating deductions and credits. This is a healthy start to what will hopefully be a reformed tax code that is better-suited to the kind of republic we have always aspired to be.
—Ryan Streeter is the Editor of www.conservativehome.com.
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Capital Commentary is a weekly current-affairs publication of the Center for Public Justice. Published since 1996, it is written to encourage the pursuit of justice. Commentaries do not necessarily represent an official position of the Center for Public Justice but are intended to help advance discussion. Articles, with attribution, may be republished according to our publishing guidelines.”