Taxation In a Least-Bad World

Sean's post below about the legitimacy of loopholes raises some interesting questions, some of which I've previously addressed in other contexts. (See "Freedom and Control in a Second-Best World," "Justice and the Rule of Law," and "Comparing the Uncomparable.")

The issue is this: given two scenarios, both of which libertarians consider unjust, how do we go about determining which option is "least-bad" or "second-best"?

One possible answer is to throw our hands up in the air and say that there is no legitimate method by which we can choose between two unjust choices. This greatly limits the relevance of libertarian criticism, since none of our optimal scenarios are on the table, nor will they be in the forseeable future.

Another possible answer, suggested by Robert Nozick in Anarchy, State, and Utopia (and held by David Boaz, as I discussed in my previous post, "David Friedman is a Hoot", is to adopt some kind of “rights-utilitarianism.” Under rights-utilitarianism, we attempt to minimize the total number of rights violations. Nozick rejected this doctrine on the grounds that rights are properly understood as side constraints on individual action, and not as something to maximized or minimized. Another problem is that it is difficult, if not impossible, to make interpersonal comparisons of rights violations. Is it better to rape X than to murder Y? Is it better to steal John's expensive but non-sentimentally valuable car than it is to steal Mary's relatively less expensive yet still highly valued ancient family heirloom?

With regard to taxation, this kind of comparison may be easier to make, but there are still some difficulties. Should libertarians favor a $100,000 tax break for Bill Gates if it comes with a $1000 tax increase for some poor average Joe? These tax changes, taken together, represent a total tax decrease as measured in dollars, but how do we know whether Joe values a marginal grand more or less than Gates values a marginal 100k? Short answer: we don't. (Longer, economist's answer: maybe we can get Bill Gates to give Joe $1000 or more in exchange for his much large tax break. This would be pareto optimal.)

Some Austrian economists want us to stop right here. Since we cannot make interpersonal comparisons of utility, we cannot know whether our proposed tax change is a net gain or a net loss, either measured in terms of subjective utility or measured in terms of libertarian notions of justice. But as Brian Caplan argues, this kind of extreme skepticism does not help us answer these difficult questions.

Strictly speaking, however, Rothbard could only claim the welfare effects of government intervention upon "social utility" are indeterminate; i.e., since the victim loses and the intervener gains, it is impossible to say anything about social utility without making a verboten interpersonal welfare comparison. This is an important point, because it shows that Rothbard's welfare economics provides a much weaker defense of the free market than usually assumed. In particular, Rothbard's own theory strips him of the ability to call any act of government "inefficient." By denying the ability to endorse state action in the name of efficiency, Rothbard also implicitly denies the ability to reject state action in the name of efficiency. This is no logical flaw in Rothbard's theory (although it does reveal a logical flaw in Hoppe's presentation of Rothbard's theory), but it's political implications are rather different than commonly assumed: Rothbard's welfare criterion justifies agnosticism about - not denial of - the benefits of statism.

Austrians seem to adopt a conservative response to second-best questions. Better to not make any changes at all, unless those changes are pareto optimal. As Murray Rothbard wrote in "Strategies For A Libertarian Victory,"

Similarly, if libertarians should ever call for reducing or abolishing taxes in some particular area, that call must never be accompanied by advocating the increase of taxation in some other area. Thus, we might well conclude that the most tyrannical and destructive tax in the modern world is the income tax, and therefore that first priority should be given to abolishing that form of tax. But the call for drastic reduction or abolition of the income tax must never be coupled with advocating a higher tax in some other area (e.g., a sales tax), for that indeed would be employing a means contradictory to the ultimate goal of tax abolition. Libertarians must, in short, hack away at the state wherever and whenever they can, rolling back or eliminating state activity in whatever area possible.

But why should we adopt the conservative position in response to skepticism? Skepticism doesn't tell us whether the status quo is better or worse than would be the case with the proposed change. So why prefer the status quo?

Some libertarians argue that we should prefer the status quo because if we advocate a change, we are morally responsible for any new injustices caused by this change, even if the total amount of injustice is thereby decreased. If we cut Bill Gates' taxes by 100k while at the same time increase Joe's taxes by $1000, so the argument goes, we are morally responsible for stealing from Joe, and the fact that we stopped an even larger injustice against Bill Gates doesn't make up for our sins against Joe.

The problem with this argument is that it ignores the fact that we are living in a second-best world. It is not the advocates of the new tax code who are morally responsible for Joe's unfortunate situation; rather, the advocates of taxation in general are morally responsible. If we had our way, neither would be taxed, but for now we must choose the lesser of two evils. We did not create these evils; we are merely choosing the least-bad option.

If libertarian ethics does not give us a clear answer, should we just stick with the status quo, as some Austrians suggest, or is there another option?

I believe there is. As Roderick Long observed in his important lecture, "Equality: The Unknown Ideal,"

Justice is only one virtue among many, and libertarianism is only one application of justice.

Other virtues worthy of consideration include --but are certainly not limited to -- equality, fairness, and reducing economic distortions. Suppose additional taxes were placed on Jews or other ethnic minority groups, as has been the case many times in the past. This is the equivalent of a tax loophole for non-Jews and other non-minority ethnic groups. Is there nothing we can say about this arrangement? Do we have no grounds on which to object to these loopholes and propose a more equal distribution of taxation in its place? Indeed, we do have grounds for objection. We can appeal to notions of fairness and equality. As I argued in "Justice and the Rule of Law,"

As long as we live in a second-best world, with a government which maintains a legal monopoly on the use of force, this government should treat people equally under the law, without regard for gender, race, ethnicity, country of origin, religion, sexual orientation, or any other factors that are not immediately relevant to the task at hand. Of course, there are exceptions to equal treatment under the law in a second-best world, and for good reason. For example, if the government must choose a private contractor to build a road, it is reasonable to allow the government to discriminate based on price - the contractor who offers to build the road for the lowest price can legitimately be favored over those contractors who are more expensive. But it is not reasonable for the government to discriminate among contractors based on race, as it did in Adarand Constructors, Inc. v. Pena, 515 US 200, 227 (1995).

Again, consider the fact that blacks and women did not always have the legal right to vote. Many libertarians, myself included, don't consider voting all that important, and don't think people have a moral right to make decisions about how their neighbors should be governed. But as long as we live in a second-best world in which people do have the legal right to make decisions for their neighbors, this legal right should be universally available. As bad as it is to allow people to make these sorts of decisions for each other, it is even worse to allow only white males to make these sorts of decisions for everyone.

Now back to the original question. What can we say about tax loopholes? Should certain segments of the population be punished or rewarded relative to everyone else? Should married couples, parents, teachers, homeowners, the wealthy, the elderly, and the non-self employed be given preferential tax treatment compared to unmarried couples, people without children, apartment dwellers, the poor, the young, and the self-employed? All of these special tax preferences lead to market distortions, encouraging behavior that would not occur in the absence of these preferences. Fewer people (on the margin) would get married, have children, become teachers, purchase a home, and purchase health care through their employer if these tax preferences were not in effect. These are all movements away from, and distortions of, what would take place in a truly free market. These distortions can lead to significant problems, especially in the case of health care, as Glen Whitman has discussed in detail (see the last three links at the bottom of his post on Gephardt's proposal).

I don't know whether a flat-tax or a sales tax would be preferable to the income tax. I do think the Georgist land-tax proposal would be less distortionary than all three (yet again, see Glen Whitman), and a head tax least distortionary of all. Besides the economic arguments in favor of it, a head tax is also closest to a service fee, at least insofar as government services are justified on public goods grounds. Of course, there are other arguments against a head tax, like the benefits of price discrimination and the additional unfairness of regressive taxation.

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Related question: in a world

Related question: in a world of second-bests, which would be libertarian-preferable - complete drug prohibition, or drug prohibition against some individuals but not others? A drug loophole, if you will. Or differential enforcement.

Now that I think about, that may not really be hypothetical.

"Argue for your limitations,

"Argue for your limitations, and you can have them".

[shrug]

We're two-hundred-odd years in, now, on the macro version of Least-Baddism. I'm unsure that forging ahead in the spirit of compromise is the best course of action, anymore.

This, I believe is why

This, I believe is why political action of any kind is a bad way to go towards securing liberty, It seems like an endless list of compromise on this, compromise on that, and an endles list of choosing the lesser of two evils. The points described in the post certainly make for difficult decisions and debate. Thats why I think, although this may sound simplistic, that one should veer away from any political methods of lowering the evil of taxation and simply focus on minimising its impact as much as possible for themselves and perhaps encouraging as many others to to likewise. This wouldnt solve the lesser of two evils problem from the political perspective but it is a way of making personal choices that lower taxation at least on the individual by individual level. Since most libertarians can agree that income taxation is bad whether its $100,000 directed at Bill Gates or $1000 directed at Joe Average then perhaps its best to avoid getting involved in the politics that decides which is less evil in the first place. Sort of a principled self exclusion if you will.

Jake

Why don't you want to tax

Why don't you want to tax the richest man in world? Or, why do you want to give him a tax break? Or, who should pay for the war in Iraq? And, who should fight in it? I'll give Bill Gates a tax break if he suits up and ships out for Iraq to fight in Falluja. DRAFT! DRAFT! DRAFT! You right-wingers need to serve your country instead of shitting on it!!

I'm not sure what the

I'm not sure what the problem is. If tax simplification results in the same or lower taxes, or higher taxes offset by reduced compliance costs, then it's either a win or at least a tie. I would think that the benefits of reducing social engineering through the state would be applauded, too.

- Josh