I. Introduction
This essay is concerned with taxation, the state, the community, and the approach of public finance to these topics. By “public finance” I mean the expert consideration of how revenue is and should be raised from private interests and then translated into public goods and/or direct redistribution by the state.1
For the public finance perspective, see, for example, Richard A. Musgrave and Alan T. Peacock, eds., Classics in the Theory of Public Finance (London: MacMillan, 1958), x. See also Richard A. Musgrave, “The Nature of the Fiscal State: The Roots of My Thinking,” in James M. Buchanan and Richard A. Musgrave, Public Finance and Public Choice: Two Contrasting Visions of the State (Cambridge, MA: The MIT Press, 1999), 29–49.
First, public finance has historically segregated the revenue-raising and revenue-spending functions of the state. An explanation for this failure to integrate lies in public finance's underlying assumptions about the state and the community it serves. While contemporary theories of public finance have developed abstract models of revenue-raising and its distributional effects, no serious accounts of the political process and its effects have been integrated into the models to any substantial degree.
Second, no persuasive theory of what the state is or how it operates has been offered by public finance. A rather unsophisticated model of a unitary entity imbued with the scientific method of decision making is presumed, but this model cannot withstand close scrutiny.
Third, the failure to provide an account of “communities” within the state is also a striking oversight of public finance. In fact, within the political bounds of the state, constituents find themselves routinely affiliated with multiple communities of interest. These communities compete for state largesse made possible by the process of taxation and redistribution.
Fourth, an emerging global community, generated by the free flow of capital and, to an increasing degree, labor, poses a direct threat to the unbridled process of taxation and redistribution and thus to the state itself. This is especially true to the extent that states engage in tax competition and lower entry barriers, which have the effect of weakening existing national communal affiliations and dependencies and depleting local sources of capital that sustain the impulse toward social welfare. However, majoritarian democracy can hardly be expected to modify these increasingly nonviable policies. A severe dichotomy thus emerges between political community on the one hand and economic and social communities on the other hand. Furthermore, latent contradictions in the social welfare and justice agenda surface as conflict and competition arise between the welfare of domestic dependents and the welfare of persons in need beyond the state's political bounds.
Fifth, the two philosophical underpinnings for modern redistributive states—utilitarianism and social welfare/social justice—suffer from the same shortcoming as does public finance: an unwillingness to inquire seriously into the state, its operation, and its interaction with constituents and their communities.
Finally, individuals organized into communities of special interest compete in the political marketplace made possible by the availability of private resources to bureaucratic and political agents. These bureaucratic and political agents make reduced tax burdens and redistributive transfers available at a price. This political-marketplace model calls into question the underlying premises and the attainability of the goals of public finance—social welfare and “justice” throughout the sovereign nation.
II. The Failure to Integrate the Allocation of Tax Burdens with the Provision of Public Goods and Redistributive Transfers
An ongoing debate in the United States over the appropriate tax structure, particularly with respect to the income tax, has been waged since the passage of the Sixteenth Amendment permitting an income tax. The debate has focused myopically on the allocation of the tax burden. There has been a striking disregard for the distributional side of the equation. This fixation with allocation has been so obsessive that it suggests a deeper significance than mere path dependence.
One explanation is that the allocation of the tax burden, the revenue-raising function, has been deemed to be distinct from the state's “obligation” to provide public goods and, more recently and controversially, to further the general social welfare through redistribution. The habit of conceiving of revenue raising and revenue spending as entirely distinct functions, deserving of discrete rather than integrated analysis, reflects a particular view of the state. This perspective, long unchallenged, beginning in the nineteenth century and continuing through the heyday of twentieth-century liberalism, might be characterized as “scientific.” The state would apply principles from the discipline of public finance to ascertain the optimal allocation of the tax burden and, in like fashion, to allocate resources optimally for public goods and direct transfers for the greater good of all the constituents of the political community.2
See Musgrave and Peacock, eds., Classics, xi. Initially, the determination of public expenditures was regarded as a political matter (see ibid.). See also Adolf Wagner, “Three Extracts on Public Finance,” in Musgrave and Peacock, eds., Classics, 1, 5. This is not to say that contemporary public finance ignores the linkage between taxation and distribution. For example, optimal tax theory takes account of the effects of different tax-rate structures on individual utilities. It is a highly stylized mathematical approach. Thus, it, too, fails to take account of patterns of social-political behavior and self-interest that inevitably affect distributional decisions. For an excellent discussion of the optimal tax theory, see Lawrence Zelenak and Kemper Moreland, “Can the Graduated Income Tax Survive Optimal Tax Analysis?” Tax Law Review 53 (1999): 51.
See note 1 above. Even Musgrave recognized the problem with an unquestioning faith in expertise. See Buchanan and Musgrave, Public Finance and Public Choice, 34. Nevertheless, according to Musgrave, the “vision of efficient government” is required as a standard by which performance can be measured. Furthermore, it should be regarded as attainable with the proper leadership. Musgrave emphasized that it is not “beyond the capacity of representatives and officials to seek the public interest” (ibid.).
See, for example, James M. Buchanan, “Response,” in Buchanan and Musgrave, Public Finance and Public Choice, 85–86. See also James M. Buchanan and Roger D. Congleton, Politics by Principle, Not Interest: Toward Nondiscriminatory Democracy (Cambridge: Cambridge University Press, 1998); James M. Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Ann Arbor: University of Michigan Press, 1962); and Geoffrey Brennan and James M. Buchanan, “The Tax System as Social Overhead Capital: A Constitutional Perspective on Fiscal Norms,” in Dieter Biehl et al., eds., Public Finance and Economic Growth: Proceedings of the Thirty-seventh Congress of the International Institute of Public Finance, Tokyo, 1981 (Detroit: Wayne State University Press, 1983), 41.
As I observe in Section III below, communities take shape at every level of human social interaction. This does not preclude the possibility of a national community, but it does suggest that constituents have many other affiliations, any number of which may involve more significant interests and thicker loyalties.5
Charles Jones, “Patriotism, Morality, and Global Justice,” in Ian Shapiro and Lea Brilmayer, eds., NOMOS XLI: Global Justice (New York: NYU Press, 1999), 125, 148.
If individuals' primary allegiances are to communities other than that exemplified by the state, and if these are communities with quite divergent interests, then it will not be surprising that these communities of special interest will vie to be net gainers rather than net losers. It will also mean that differential treatment will be harder to justify on the basis of some social welfare function—such as the good of us all, when we are not really all in it together. If there is really not a “community” but rather a subset of communities competing within historically constructed political boundaries, then the pursuit of the utilitarian grail of the greatest aggregate good for the greatest number (or of social welfare, however defined) is the pursuit of a chimera. For example, a state committed to impartiality will inevitably act, notwithstanding its rhetoric, in ways that benefit some at the expense of others, both in the short term and over the long term. The sociopolitical structure dictates this.
A focus on community would serve us well at present, if only because conceptions of political community are presently being challenged and promise to be challenged more strongly in the future. If capital and, to a substantial but lesser degree, labor are globalizing, they may actually be giving rise to dichotomous national-political and world-economic communities. The global economy, dominated by profit-maximizing private contractors, ignores national boundaries, while the political community strives to regulate economic relationships within those boundaries. The emerging cross-border linkages of individuals and groups weaken further the social welfare claims that support taking one person's property for the benefit of “the community.” The closer affinities that individuals experience as members of communities formed at local and state levels enhance the legitimacy of these taxing authorities and generate ongoing struggles with competing units operating within a federal system. Thus, a progressive/redistributive public finance system at the national level is challenged by developing affiliations beyond the nation as well as intense, persistent affiliations with more geographically compact and responsive political units.
In theory, a net-benefits approach that accounts for outputs as well as inputs in an integrated fashion is more harmonious with social organizations, as well as superior from an economic-efficiency standpoint. Unfortunately, success at achieving a reliable accounting seems unattainable.6
There are other substantial problems with a net-benefits approach as well. These are discussed in Jeffrey Schoenblum, “Tax Fairness or Unfairness? A Consideration of the Philosophical Bases for Unequal Taxation of Individuals,” American Journal of Tax Policy 12 (1995): 221, 225.
See Lionel Roberts, “Interpersonal Comparisons of Utility,” Economic Journal 48 (1938): 635, 637–40. See generally Stephen Utz, “Ability to Pay,” Whittier Law Review 23 (2002): 867, 930.
One tax scholar has argued for a more communitarian approach to tax equity. See Reuven Avi-Yonah, “Why Tax the Rich? Efficiency, Equity, and Progressive Taxation,” Yale Law Journal 111 (2002): 1391. However, the only community Avi-Yonah apparently sees is the mythic national community (ibid., 1402).
Still, a more realistic description and discussion of taxation/redistribution and its net beneficial consequences for particular individuals and communities would be helpful, despite the absence of absolute precision. For example, the contention that redistributive transfers have a net positive effect ought to be held up to a serious burden of proof before property is taken and redistributed. The inquiry might reveal that current policies, though intended sincerely as a tool for the achievement of the social betterment of the “community,” actually do the opposite and create severe moral hazards,9
Michael C. Dorf and Charles F. Sabel, “A Constitution of Democratic Experimentation,” Columbia Law Review 98 (1998): 267, 341. A particularly intriguing discussion of this topic is presented in the context of the resistance to the private purchase of terrorism insurance. See Jeffrey Manns, “Insuring against Terror?” Yale Law Journal 112 (2003): 2542–43.
III. The Individual and the Community
A. The formation and nature of communities
Alone, each individual is inevitably self-centered and egoistic. To be must involve some concern with the self.10
Indeed, the argument has been made that the liberal conception of the unencumbered self is mistaken, that human nature is social, and that human beings necessarily define themselves in terms of their culture. In other words, association is not merely motivated by conscious pursuit of self-interest. See Michael Sandel, Democracy's Discontent: America in Search of a Public Philosophy (Cambridge, MA: Belknap Press of Harvard University Press, 1996).
Daniel Bell, Communitarianism and Its Critics (Oxford: Clarendon Press, 1993), 31–39.
See, e.g., Stephen Holmes, “The Structure of Antiliberal Thought,” in Nancy L. Rosenblum, ed., Liberalism and the Moral Life (Cambridge, MA: Harvard University Press, 1989), 227, 228, where Holmes concedes “that concepts such as the pre-social self who enters civil society with a fully-formed identity were never meant to be metaphysical or ontological descriptions of psychological reality, but were instead mere rhetorical devices developed to demonstrate the injustice of certain political arrangements.”
As social interactions multiply in pursuit of cooperative self-interest, a massive social network evolves. Associations, comprising this burgeoning network, are of varying intensity. Intensity may be influenced, for example, by the number of interactions over a concentrated or extended period of time, shared skills or beliefs, mutual financial gains to be had through exchange, physical attraction, and familial/biological bonds. The affinity an individual feels toward a particular other or others may oscillate over time and circumstance. Generally, the fewer the number of associates and the greater the extent or intimacy of the interaction, the greater the intensity and sense of “community” is likely to be.
Each of the social interactions a person has arguably constitutes a “community.”13
See note 11 above. Daniel Bell refers to communities of place, communities of memory, and psychological communities.
Recognition of certain associative relationships can have important legal and tax consequences. For example, can a gay couple form a marital community under the laws as heterosexuals do, including the right to community property? Can that gay couple file joint tax returns, avoid taxable gain on transfers of appreciated property, or claim the marital deduction on the transfer of property at the death of a companion?14
The Internal Revenue Code affords a number of tax benefits to married couples. By filing a joint return, they may be able to split income even when only one works and thus avoid some of the effects of progressive rates. They can also transfer wealth and gains between them, including by sale, without the recognition of income for taxation purposes. Finally, they can make unlimited transfers between them by gift or inheritance without gift tax or estate tax.
B. The emergence of authority over the community
Although not all complex social relationships evolve in the same manner, a reasonable hypothesis is that at some point a “community” becomes too complex to rely exclusively on individual social interactions. Interactions produce negative externalities. Investments require minimization of risk through a reliable system of predictable and uniformly applied rules of law. Overutilization of the commons must be regulated. Defense against outsiders and antisocial activity within the community must be provided. The demand for infrastructure must be answered so that further socioeconomic development will not be forestalled. Collective action problems, notably free-riding, discourage private provision of these goods and must be addressed by some other collective means.
A hierarchical structure with a leader having overall authority emerges. Commands are carried out by agents. Whether lords or bureaucrats, these agents transmit the commands across segments of the community. The number of agents and the extent of agents' powers affect private interactions of members of the community and eventually give rise to conflict, so that the friction at the margin of private and public is an inevitable theme in complex social interaction. In response, another set of intermediaries emerge: politicians, who translate from the leader to the community and from the community to the leader. The means by which the politicians are selected and their relative power vis-à-vis the leader differ from place to place, depending on culture, history, point in time in the evolution of the community, and the composition and size of the community.
The foregoing description of the emergence of hierarchical authority required to overcome collective action difficulties and assure common well-being differs from the Hobbesian model. That standard contractarian model begins with fearful individuals exhausted by their existence in a violent state of nature. They voluntarily submit to the coercive power of the state for their own security, contracting to surrender substantial autonomy in the process.
There does not, however, appear to be any compelling historical support for this Hobbesian account.15
Anthony de Jasay, The State (Oxford: Basil Blackwell, 1985), 42–43.
Musgrave takes issue with contractarian accounts, but acknowledges their essential role in tax theory as a result of the inability to make reliable interpersonal utility comparisons. See Buchanan and Musgrave, Public Finance and Public Choice, 45–46.
The significance of the foregoing is that the authority to tax and redistribute is often justified by a disputable premise—that the constituents of the community have ceded a certain degree of autonomy and say over their property voluntarily and once and forever for mutual benefit via a social contract. Arguably, this may be true in certain unique instances and in certain limited respects. While these instances may be rare or nonexistent, their incorporation into a mythology serves the purpose of ameliorating concerns in a liberal state about state intrusions on liberty and differential treatment of its constituents.
The notion that individuals fear the state of nature and cannot associate profitably in it is also dubious. The contention is at least indirectly called into question by the interactions of nations, which have a long history of bilateral and multilateral relationships without any regulatory authority. While there have certainly been many instances of violence and coercion to achieve particular state interests, on the whole, nations have coexisted with each other and continue to do so. Nations have been prepared to surrender to a limited degree their sovereignty to a higher authority, such as the World Trade Organization (WTO). However, they have done so in a very measured way, while still preserving their autonomy and relatively cost-free exit options. Their complex interactions, involving trade, security, communications, and the rights of their respective citizens while on other nations' territory, suggest that individuals, too, could create a complex civil community in which at least some public goods would be produced without a strong state.
Assuming that there is some evidence that distinctive communities of persons—nations—enter into largely constructive bilateral and multilateral relationships without an overarching communal authority, the claim within a domestic political system that regulation of a variety of interpersonal relationships is necessary for the members to do better than they would without an intrusive, overarching authority deserves, at a minimum, careful scrutiny and a dose of skepticism. After all, the original purpose for establishing the overarching authority was to facilitate private interactions, not to supplant them.
C. The state and the community
The overarching authority previously referred to is commonly described as “the state.” What precisely is the state? Strikingly, public finance has been uninterested in pursuing this line of inquiry. This reluctance to inquire into the nature of the state and its relationship to other participants in ongoing social interactions can be understood by reflecting upon the consequences for public finance if the state's neutrality, its independence, its wisdom, its synonymity with the community, and its contractarian origins, were called into question. If these premises were to be cast in doubt, the very “science” of public finance would be cast in doubt. Thus, the question of what the state is has vital consequences for public finance and its progeny—progressive taxation and redistributive policies.
There are any number of ways of regarding the state, and it may best be conceived in terms of some admixture of the following five models:
1. The standard public finance vision is of an unbiased, omniscient, independent actor that pursues enlightened, objective inquiry and policies to achieve net gains on behalf of the social welfare of the community. To secure these gains, it requires revenues, which must be derived from the private property of its constituents.17
For Edgard Allix, a leading pre–World War II French public finance scholar and political economist, the foundation of the state's “right” to tax rests on its very sovereignty. The state is a historical necessity. It has a right, indeed obligation, to tax in order to secure its existence: “Le premier droit et le premier devoir de l'Etat est d'assurer son existence et son fonctionnement et, à cet effet, d'exiger de ceux qui vivent sous sa loi les moyens nécessares.” (“The primary law and duty of the state is to secure its existence and its functioning and, with these purposes, to require from those who live under its law, the necessary means.”) Edgard Allix, “La Condition de Etrangers au Point de Vue Fiscal,” in Recueil des Cours, Académie de Droit International de la Haye 61 (1937): 545, 559. See also Rutsel Silvestre J. Martha, The Jurisdiction to Tax in International Law: Theory and Practice of Legislative Fiscal Jurisdiction (Deventer: Kluwer Law and Taxation Publishers, 1989), 18–22.
2. This standard public finance account, however, is contested by a less sympathetic model of the state. It may be viewed as an organic, evolving entity that inevitably accumulates more and more authority over private resources and their selective redistribution. Pursuant to this model, the state invariably morphs from the benign facilitator of communal interactivity to an antagonist, its own existence increasingly dependent on the taking of private property from some in order to redistribute it to others, thereby purchasing the support that the state requires to survive.18
See, for example, de Jasay, The State, 240–41, 247–48.
The state maintains its power under this model by a variety of techniques, depending on whether it is authoritarian or a majoritarian democracy. In either case, state takings and payoffs eventually become so prevalent that the constituents cannot ascertain whether they are net overall gainers or losers. The costs of rent-seeking are spread so broadly that there is little resistance. This process eventually produces constituents who are largely dependent on the state's tax, allocative, and redistributive schemes. Private transactions are squeezed out, and civil society shrinks in its significance in daily life.19
See Robert D. Putnam, Bowling Alone: The Collapse and Revival of American Community (New York: Simon and Schuster, 2000). For a critique of civil society revivalists, see, e.g., Christopher L. Eisgruber, “Civic Virtue and the Limits of Constitutionalism,” Fordham Law Review 69 (2001): 2131; and Linda C. McClain and James B. Fleming, “Some Questions for Civil Society Revivalists,” Chicago-Kent Law Review 75 (2000): 30. However, even the critics acknowledge the decline of civil society.
The foregoing model of the state, though perhaps extreme, suggests state action that is not always well-informed, benign, and successful, contrary to what the traditional public finance literature would suggest. To the extent that this second, more pessimistic model of the state is even a partly accurate one, it calls into question the assumption that the state's interests are harmonious with those of its constituent communities. If the state has an essence of its own, then its portrayal as a tool for achieving the worthy goals of social scientists seems mistaken. It cannot be relied upon to serve community interests—first, because there is no one community, and second, because even if there were one community united in its means and ends, these would not necessarily correspond to those of the state.
3. The state is the bureaucracy. The prior model of the state in esse is difficult to conceptualize once we get beyond the abstraction. The abstraction does not imagine action through persons. References are to the state “doing this” or “doing that,” but the state is no personage. It cannot achieve its goals other than through agents. The principal agents of the modern state are the members of its bureaucracy. Through the individual acts of such agents, the identity and character of the state takes shape. Because they wield power in the name of the state, these agents are peculiarly positioned to capture the state and turn it to the service of their interests. And this bureaucratic community does have its own interests, a distinctive worldview, a definitive way of doing things, and a pronounced faith in its own expertise.20
Kenneth Minogue uses the term “philosopher bureaucrat.” See Kenneth Minogue, “Ideal Communities and the Problem of Moral Identity,” in John W. Chapman, ed., NOMOS XXXV: Democratic Community (New York: NYU Press, 1993), 41, 58.
For the version of the bureaucracy as “experts” faithful to rules and rationality, see Max Weber, Economy and Society: An Outline of Interpretive Sociology (New York: Bedminster Press, 1968), 217–26, 956–1003.
If the bureaucracy has its own interests and biases, then the state, as the embodiment of its agents, cannot be expected to act for the general community. The bureaucracy has every interest in making dependency the social norm and promulgating regulations and rules that legitimize redistributive practices implemented under its watchful eye.22
In the view of some administrative law scholars, and casting them in a more positive light, the “experts” are obligated to take into account the social morality of rulemaking. See Jerry L. Mashaw, “Small Things Like Reasons Are Put in a Jar: Reason and Legitimacy in the Administrative State,” Fordham Law Review 70 (2001): 17, 33.
The state as bureaucracy, however, may be an incomplete account. There are other agents besides bureaucrats, notably politicians. They are increasingly achieving, at least at the federal level in the United States, some modicum of the job security enjoyed by bureaucrats. Though they do not enjoy civil service protections as bureaucrats do, many legislators, especially those on the tax and budgeting committees, can achieve job security by selling tax loopholes, “public goods,” and redistributive transfers.
In the end, the entire legislative body must vote. Even those who are not committee members can sell their support or engage in logrolling and other cooperative techniques with fellow legislators. No doubt some decisions by some politicians do rest on principle. Still, citizens grasp the susceptibility of politicians to “wheeling and dealing.” This conduct is possible because these agents of the state can take private assets virtually without legal constraint by simply legislating taxes. Without that revenue, there would be much less to sell.23
Politicians may actually impose an expiration date on tax savings legislation and at each session may debate making the savings permanent so as to extract campaign contributions. One example is the debate in the U.S. over the repeal of the estate tax and the scheduled phase-out of tax benefits in 2010. See Linda Cohen, Edward J. McCaffery, and Fred S. McChesney, “Shakedown at Gucci Gulch: A Tale of Death, Money, and Taxes,” USC-Caltech Center for the Study of Law and Politics, Working Paper No. 22, available at http://lawweb.usc.edu/cslp/papers/cslp-wp-022.pdf (accessed November 11, 2005). See generally Fred S. McChesney, Money for Nothing: Politicians, Rent Extraction, and Political Extortion (Cambridge, MA: Harvard University Press, 1997); and Elizabeth Garrett, “Harnessing Politics: The Dynamics of Offset Requirements in the Tax Legislative Process,” University of Chicago Law Review 65 (1998): 501, 545–55.
Why does the politician participate? Simply put, politics is a business like other vocations. The politician needs to secure his or her position. He or she needs security to reap the rewards of office: remuneration, direct and indirect, present and future; community status; influence and the psychic rewards that come from receiving attention and praise; and even the sincere need to serve his or her represented community. The conception of a political marketplace is anathema to public finance, which depends on the purity of policymaking and the state's bureaucratic and political agents. But why assume that individuals in this business are more likely to surrender their self-interest than individuals in any other business? No evidence, in fact, has been presented that self-interested individuals abruptly abandon their self-interest upon being sworn into office or abandon it when exposed over the years to opportunities for substantial personal gains. The very process of getting elected involves the need to finance a campaign. Financial support does not come in large part from selfless souls but from savvy, intensely self-interested, and not entirely altruistic constituents and their interest groups. In many instances, they seek through the democratic process to achieve gains to substitute for losses in the private market, and they regard both political activity and market activity as one seamless pursuit for the acquisition and preservation of gains.24
Robert Dahl, “Why All Democratic Countries Have Mixed Economies,” in Chapman, ed., NOMOS XXXV: Democratic Community, 259.
One might argue that a self-selection process is at work, whereby those who are most disinterested in gain, most unbiased, most committed to the social welfare, and most knowledgeable in the methods of achieving good for the community enter “public service” in each generation and at each level of government. However, this author is unaware of data that supports this proposition. There is considerable evidence, though, that these agents of the state are as biased, misinformed, and self-interested as are other individuals.
The reality of the political marketplace challenges the underlying assumptions of public finance. Not only do agents of the state act in their own self-interest rather than for all of us, but there is no independent actor capable of ascertaining the path to the general social welfare or the greatest good. A most fatuous conceit is that through committee hearings, the consideration of “expert” reports, and the commitment of the bureaucracy, the proper allocation of tax burden, investment in public goods, and redistribution can be accomplished. However, once the self-interest of the actors is appreciated, the rest is performance art.
4. There are a number of competitive states, not just “the state.” Even if each state's agents could fit the public finance mold, the self-interest of their own states could clash and compete with each other, complicating the achievement of domestic welfare policy. In the federal system of the United States, for example, different political units compete with each other and in some cases reach accommodations as to the allocation of the spoils. In certain instances, efforts to appeal to the same voters result in overmining, resulting in particularly significant tax takings and redistributions in the aggregate.25
Francis Edgeworth, “The Pure Theory of Taxation,” in Musgrave and Peacock, eds., Classics, 119.
In addition to vertical national-state-local competition, states and localities compete with each other horizontally. These states and localities make efforts, based on expansive assertions of tax jurisdiction, to increase the tax base at the expense of their coequals. Compacts are entered into to allocate revenue among them. Nevertheless, vast concessions may also be granted to certain taxpayers because, unlike the federal government, the states lack a captured tax base. Taxpayers can choose to move to another state.26
See Sheryll D. Cashin, “Federalism, Welfare Reform, and the Minority Poor: Accounting for the Tyranny of State Majorities,” Columbia Law Review 99 (1999): 552, 598–99, 621–22.
While, in some nations, the judiciary must fall into line behind the other state actors, in other countries such as the United States, this is considerably less true. Nevertheless, taxation has largely been removed from the domain of the judiciary in the U.S. The legitimacy of tax takings and differentiated tax burdens is simply not subject to serious legal challenge any longer. As for the executive and legislative branches, there are not so much institutional struggles for control between them as there are conflicts generated by capture of these branches by divergent special interests.
5. The “state” simply describes a process. The process contemplated is one already alluded to, in which special interest communities compete. At the heart of this process is majoritarian democracy. By purchasing majority support, a majority coalition of communities can accomplish its members' ends. Majority coalitions do not last. As coalitions constantly shift, gains enjoyed today may be lost tomorrow and vice versa. This cycling of benefits and losses emphasizes the need to stay in the game to be a net winner, and the importance of the game affords the state referees a continuous stream of product to sell. The game reaches its ultimate perfection in direct churning, whereby resources are taken from individuals and then redistributed back through public goods or direct transfers to those same persons, but only after the subtraction of administrative charges.
One example of how this process works is the current allocation of income tax burdens in the United States. Massive numbers of income earners have been relieved from any obligation to pay income tax at all. The top 1 percent of income earners in the United States were projected by the Congressional Budget Office to pay 21.5 percent of all federal tax liabilities in 2005, down slightly from actual payments of 22.7 percent in 2001. The top 10 percent of income earners were projected to pay 48.8 percent of federal tax liabilities in 2005. The top 20 percent were projected to pay 64.3 percent. Their share of income was projected to be approximately 52.4 percent.27
No figures on their share of total wealth are available.
That is not to say that an intelligent defense of this situation cannot be mounted. See, e.g., Ramesh Ponnuru, “Tax Cuts for the Poor,” National Review Online, May 20, 2005, available at http://www.nationalreview.com/ponnuru/ponnuru200505200751.asp. For example, gaps in income may be explained by life-cycle effects, so that nontaxpayers can be expected one day to age into taxpayers.
By no means do these statistics establish that all revenue raised is redistributed to the low income and lower middle income earners. That is hardly the case. As I have noted, there might be some direct churning going on. Moreover, not all upper, middle, and high income earners carry the burden. It is not distributed to achieve horizontal equity.
The state, conceived as a “process of redistribution,” is limited, however mildly, by the vestigial protection accorded to private property in the United States.29
These vestigial protections may have been substantially narrowed by the recent U.S. Supreme Court decision in Kelo v. City of New London, 125 S.Ct. 2655 (2005) (holding that the state can take property from one private owner and redistribute it to another for a “public purpose”; the property need not be taken by the state for “public use”).
Liam Murphy and Thomas Nagel, The Myth of Ownership: Taxes and Justice (Oxford: Oxford University Press, 2002).
IV. The Emerging Global Community
As I have noted, an individual typically claims membership in a number of communities that command different levels of participation and allegiance. These communities might be comprised of spouses or companions, immediate family members, extended family members, ethnic or religious groups, business, professional, or labor organizations, or ideological and political associations.
In addition, there are also communal affinities primarily defined by geography. It is less costly and more efficient to interact with those closer by. Neighborhoods, villages, and towns are the centers of most individuals' daily lives. Not uncommonly, within these boundaries there thrives a civil society that is central to the identity and well-being of the individual.31
But see, e.g., Putnam, Bowling Alone. Putnam raises doubts about the continuing vibrancy of civil society at the local level.
In this regard, theories that hypothesize that the spreading of tax costs across the polity reduces opposition to redistribution are questionable. Constituents recognize the long-term threat to their wealth inherent in taxation and cannot be certain that they will recover (or have the time and resources to recover) it all by involvement in the redistributive political process. Each time the tax option is exercised, it confirms the state's potential to do it again.
Historically and conceptually, the power to tax effectively stops at the nation's borders and is limited to persons and property over which the state exercises control. Yet why should the goal of social welfare or justice be denied to those who by the happenstance of birth or other contingency find themselves the nationals of one nation rather than another?33
Thomas Pogge, Realizing Rawls (Ithaca, NY: Cornell University Press, 1989), 246. Pogge, indeed, takes Rawls to task for, first, emphasizing that only persons matter, but then recognizing, as a second principle, that on international matters, nations, not persons, would decide behind the veil of ignorance. Thomas Pogge, “An Egalitarian Law of Peoples,” Philosophy and Public Affairs 23 (1994): 195–224. See John Rawls, A Theory of Justice (Cambridge, MA: Harvard University Press, 1971), 378.
If the argument is that the community enables those who are well-off to prosper and, thus, can demand of them a contribution (even a disproportionate one) to the general social welfare,34
Thomas Hill Green, Liberal Legislation and Freedom of Contract: A Lecture (Oxford: Slatter and Rose, 1881).
Even if this were not the case, there might be a superior “justice” claim of the poorest, which would have to be balanced against the “special claims” of those with whom we have the closer affiliations. See Samuel Scheffler, “The Conflict between Justice and Responsibility,” in Shapiro and Brilmayer, eds., NOMOS XLI: Global Justice, 86, 95.
Not surprisingly, a number of scholars have made specific proposals for raising taxes globally and for the redistribution of resources.36
See, for example, Charles Beitz, Political Theory and International Relations (Princeton, NJ: Princeton University Press, 1979), 143–53.
See Pogge, Realizing Rawls.
Hillel Steiner, “Just Taxation and International Redistribution,” in Shapiro and Brilmayer, eds., NOMOS XLI: Global Justice, 171. Steiner has his own proposal of a global fund (ibid., 176).
Ibid.
Ibid.
The arguments for global taxation are not all altruistic. First, proponents argue that such taxation is in the developed world's interest. It could mollify foreign communities that otherwise could pose a mortal external or even internal threat. Second, it might actually generate demand for local production and open up new avenues for profitable foreign investment. Third, it represents a step forward in the cosmopolitan agenda to create institutions and a funding source for universal governance.
Nevertheless, proponents of the global tax overlook the weakness of the attachment of taxpayers to their membership in the global community. Unless symbols can be created to engender deeper commitment to their fellow human beings whom they do not know and who live in places they may be afraid to even visit, majoritarian support seems unlikely.41
Liam B. Murphy, “Comment on Scheffler's ‘The Conflict between Justice and Responsibility’,” in Shapiro and Brilmayer, eds., NOMOS XLI: Global Justice, 116–17. Murphy recognizes the problem but suggests that there is enough to go around by taking from the Western “rich.” As to how much might be required, see Jeffrey Sachs, The End of Poverty: Economic Possibilities for Our Time (New York: The Penguin Group, 2005).
Bell, Communitarianism and Its Critics, 150–51.
The cosmopolitan who supports the global tax likely conceives of himself or herself as part of an international movement of enlightened elites, who have transcended arbitrary political boundaries often established by coercive means. He or she seeks out the Kantian ideal43
Immanuel Kant, “Perpetual Peace: A Philosophical Sketch,” in Kant, Political Writings, ed. Hans Reiss, trans. H. B. Nisbet (New York: Cambridge University Press, 1991).
Cosmopolitan proponents of global taxation evidence the same abstract faith in the idea of the state (and in their own expertise in the name of the state to further the interests of the “universal” community) that the proponents of public finance do with respect to the “national” community. Overlooked by both are the thickness of political markets, the competition of interest groups, the absence of a unitary national or international community, and the real-life inability of “experts” to identify what is proper redistribution and to successfully implement it. Without a clear connection between the global governors and the local taxpayers, and with too much distance between them for accountability, much of the revenue raised will inevitably go to the political and bureaucratic arbitrageurs and the most adept global rent-seekers. While the system of global regulation will not be pure majoritarian democracy, there will still be a marketplace that answers to the usual forces of supply and demand. Even if severe institutional constraints and oversight are imposed, as with the United Nations' oil-for-food program in Iraq, the opportunities for net gain will attract participants to the marketplace, even ones prepared to act illegally.
Despite the foregoing considerations, the cosmopolitan global intuition is not entirely off the mark. There is something going on internationally, but it is competitive in nature—specifically, tax competition. This phenomenon has always been present but has recently been accelerated by the enhanced mobility of capital and labor. Assume that profit is ordinarily derived from intangible capital assets, labor, and tangible immovable capital assets. With respect to intangible assets, the barriers to capital's free flow worldwide have now almost entirely fallen. A Tiebout-type phenomenon spurs the mobility of this capital.44
Charles M. Tiebout, “A Pure Theory of Local Expenditures,” Journal of Political Economy 64 (1956): 416. Tiebout was concerned with the efforts of competing municipalities to attract consumers of public goods, recognizing that consumers were limited to voting within their municipality, but could “vote with their feet” by physically moving to another municipality.
David J. Hayton, ed., Extending the Boundaries of Trusts and Similar Ring-fenced Funds (The Hague: Kluwer Law International, 2002).
Internal Revenue Code, section 865(a).
Fillman v. United States, 355 F.2d 632 (Cl. Ct. 1966). See Jeffrey A. Schoenblum, Multistate and Multinational Estate Planning, vol. 2 (Gaithersburg, MD: Aspen Publishers, 1999), 151–52. There are a variety of ways that Europeans can avoid taxation in their home countries, some legal and some illegal but not effectively enforced (see ibid.).
Joel D. Kurtz and Robert J. Peroni, U.S. International Taxation (Boston: Warren Gorham & Lamont, 2005), paragraph A2.03[1].
See, for example, William G. Hill, The Passport Report, 11th ed. (Hants, England: Scope International Ltd., 1996). Corporate-related techniques, such as transfer pricing and back-to-back loans, abound. See, e.g., Terrence R. Chorvat, “A Different Perspective on Tax Competition,” George Washington International Law Review 35 (2003): 501, 510.
In response to this serious challenge to the sources of revenue for high-tax states with substantial social welfare obligations, the Organization for Economic Cooperation and Development (OECD) has coerced some tax havens into dropping their ring-fenced regimes whereby foreign investors are not taxed, but their own residents are. The OECD has also insisted on exchange of information. The outcome of this struggle for retention of capital and access to information is not yet finally settled. However, one emerging response of tax havens has been simply to impose the same low tax (or no tax) uniformly on locals and nonresidents.50
Robert T. Kudrle and Lorraine Eden, “The Campaign against Tax Havens: Will It Last? Will It Work?” Stanford Journal of Law, Business, and Finance 9 (2003): 37.
Many of the current tax havens have suffered from widespread poverty. The transfer of capital on account of tax competition has resulted in gains to members of those communities through service fees and employment.51
Reuven Avi-Yonah, “Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State,” Harvard Law Review 113 (2000): 1573. Of course, the gains may not be equitably or efficiently distributed among the populace of the tax haven.
Ibid. Avi-Yonah argues that international tax competition has been a drain on welfare state resources and also claims that the low-tax or no-tax regimes of tax havens deprive their citizens of much-needed resources. Accordingly, on the basis of economic efficiency and equity grounds, he urges significant limitations on international tax competition.
The second facet is the availability of cheap, competent labor outside the national community. The uproar over outsourcing to India of various English-language customer service centers from the United States is representative of this development. Again, communications technology assures provision of services at an increased profit by cutting overall labor costs. Not only does this pit foreign communities of laborers against each other, but it creates intensified fissures within the exporting nation, with consumers arrayed against the displaced labor. Again, the simplistic vision of public finance is exposed. Private market forces can no longer be contained once they skip beyond the political boundaries within which those making the decisions operate.
The third facet of the labor problem is the inflow of cheap labor from less developed countries. This inflow is a striking indication of the competitive nature of conflicting communities within the nation. The importation of foreign labor serves as a check on domestic laborers' wages, thus representing a distributive policy in favor of producers and consumers at the expense of the displaced labor. Tools outside the tax and redistributive policymaking system, such as lenient immigration policies, are employed. Not only does this reveal the immense difficulty in arriving at any final accounting of winners and losers within the society, but it also demonstrates the impossibility of any scientific approach to public finance that limits its concern to the design of an efficient or just tax system.
Of course, labor is not as mobile as capital.53
Janice R. Bellace, “Labor Law for the Post-Industrial Workplace: Breaking the New Deal Model,” in Benjamin Aaron et al., eds., Labor Law at the Crossroads: Changing Employment Relationships (The Hague: Kluwer Law International, 1997), 22.
Immovables would at first appear to be safely within the control of the state as a tax resource. Real property cannot be transferred beyond political boundaries. It is not mobile. However, even here, clever strategies associated with equitable conversion can be employed. The real property is transferred by the owner to a corporation or limited liability company in exchange for equity ownership in the entity.54
Schoenblum, Multistate and Multinational Estate Planning, section 19.05[I].
The foregoing discussion of the globalization of capital and labor, though rudimentary, demonstrates the severe challenge confronting majoritarian democracies with heavy commitments to unequal tax and redistributionist policies. Tax and other price competition exacerbates the conflict of communities within the nation and between nations.
Essentially, those with resources who remain within the nation's political boundaries are called upon to fund the commitment to the nation's multiplying dependents. This, in turn, encourages more capital and labor to exit in search of climes more respectful of private wealth. As dependents seek to influence policy through their natural advantage based on “one man, one vote,” the state and/or its agents increasingly lose their ability to mediate among communities of rent-seekers. The state pursues increasingly contradictory and self-defeating policies. Labor is imported, but the savings are neutralized by the immigrants' own social welfare demands and those of displaced nationals and domestic interest groups. As immigrant communities grow, their affirmative welfare demands must be taken more seriously. The perception of national community weakens further.
The alternatives for the state and its agents are severely limited. They cannot cut back on redistributive policies, because that means the end of their power and the political market opportunities that it affords. Another more viable alternative is to eliminate tax competition. Yet, with a multitude of nations and the free flow of capital and labor to the most beneficial ones, this appears to be an unlikely source of long-term relief. In sum, the globalization of the economic community poses a direct challenge to the survivability of those Western social welfare states that continue to pursue progressive tax and redistributive policies. The fundamental tension between realistic economic communities and artificial political communities will have to be resolved, if only gradually.55
The divergence, more generally, was identified by Karl Marx in “On the Jewish Question,” in Robert C. Tucker, ed., The Marx-Engels Reader, 2d ed. (New York: Norton, 1978).
Some globalists, then, are not universalists. Rather, they are self-interested individuals who, in pursuit of their self-interest, challenge state claims to their capital by exercising the exit option. Other globalists may be of the previously described cosmopolitan type. They carry Western liberal thought to its logical end point. All persons, wherever situated and however talented, deserve at least a bare minimum decent existence precisely because they are human beings. The cosmopolitan, by insisting on faithfulness to the social welfare/justice ideology, exerts pressure on the public finance system (just as the global individualist does). However, the cosmopolitan's threat is principally an ethical challenge. The cosmopolitan exposes the parochialism of the social welfarist, whose concern for the needy stops with the needy within his or her own borders.
V. The Implications for Traditional Theories
Differentiated tax and redistributive policies are only sustainable by an untested faith in the ability of certain actors to arrive at sound decisions affecting the general welfare of an altruistic community whose members have all bought in. Plausible theories are required to afford a rational and ethical basis for acting in favor of some constituents at the expense of others. Two theories in particular have provided the philosophical foundations for tax progressivity and redistribution—utilitarianism and social welfare limited by Rawlsian justice. Yet neither theory has seriously considered the nature and operation of the state or its communities.
A. Utilitarianism
Although there are numerous schools of utilitarian thought, the central premise is that state policies must seek the greatest good for the greatest number in the aggregate. For the utilitarian, the fact that a particular person suffers is unfortunate, but acceptable in view of the net gains that are achieved by the policies pursued.
While presented as a highly scientific and neutral theory for formulating and implementing tax and redistributionist policies, utilitarianism is built on quicksand. For example, tax burdens are allocated on the basis of ability to pay, which itself is determined by marginal utility analysis. Marginal utility analysis, in turn, requires the assignment of value in terms of utils (units of utility) to the preferences of each individual. These then would have to be summed up.
Importantly, there is no standard for valuing subjective preferences. The individual himself or herself does not know these values finally, except at the decision point. But who makes the valuations? Who has the skills and objectivity to do so? Absent the fiction of such an ultimate authority, the measurement called for simply cannot be made. Even if we assume that one additional dollar is more useful relatively to the poor person than to the rich person, that does not say anything about the absolute utility value of the dollar; nor does it permit us to make interpersonal comparisons at all.56
See note 7.
Frank Hahn, “On Some Difficulties of the Utilitarian Economist,” in Amartya Sen and Bernard Williams, eds., Utilitarianism and Beyond (Cambridge: Cambridge University Press, 1982), 195.
Moreover, utilitarian theory generally ignores the question of the greatest good for whom. The concern could be, and perhaps ought to be, the greatest good for all mankind. If applied, this analysis would at some point leave the domestic poor to be taxed at the margin for the benefit of the even poorer elsewhere.
B. Social welfare theory limited by Rawlsian justice
This theory posits that policies pertaining to taxation burdens, the allocation of revenues for public goods, and redistribution should be employed to achieve general social welfare/justice. Again, the theory is commendable as long as the assumption is that an unbiased state and/or its agents are at the helm, guiding a unitary community toward a general welfare which is within the agents' expertise to identify and achieve. In this essay, I have challenged the component elements of that vision. If the vision is flawed, then the danger is that justice will not be done and the general social welfare will not be advanced. Rather, the parochial interests of certain individuals and communities, private and public, will be advanced.
A community in which altruism exists can certainly assist those in relative need on a private basis. Indeed, a considerable amount, in the range of $250 billion, is transferred annually through charitable intermediaries in the United States.58
The precise figure is $248.52 billion for 2004. See Giving USA Foundation—AAFRC Trust for Philanthropy, Giving USA (Indiana University, 2005), with relevant data available online at http://aafrc.org/gusa/index.cfm?pg=giving.htm (pie charts), and http://aafrc.org/gusa/GUSA05_Press_Release.pdf (for a press release offering a detailed summary of the data).
A number of political philosophers have sought to constrain the taxing and redistributive tendency. John Rawls is, of course, the preeminent example. His proposal that a just system should emerge from behind a veil of ignorance, while properly subject to much criticism, has an indisputably fair quality to it, since it is a principle of general application. However, his abandonment of Pareto optimality in favor of the difference principle59
“Pareto optimality” embodies the principle that members of a collectivity enjoy maximum ophelimity (economic satisfaction), such that any small departure from that position “necessarily has the effect of increasing the ophelimity which certain individuals enjoy, and decreasing that which others enjoy, of being agreeable to some, and disagreeable to others.” Vilfredo Pareto, Manual of Political Economy (1927), ed. Ann S. Schwier and Alfred N. Page, trans. Ann S. Schwier (New York: August M. Kelley Pub., 1971), 261. In contrast, the difference principle tolerates distributive gains to some in the collectivity at the expense of others if these gains enhance the condition of the worst off. See Rawls, A Theory of Justice, 76–83.
With respect to taxation, Rawls ultimately endorses proportionality, whereby taxpayers each pay tax in the same proportion to their respective incomes. However, as with most proponents of the social welfare approach, he focuses little attention on the link between the tax burden and redistributive sides of the equation. He also does not call into question the likelihood of successful implementation of efforts to achieve enhanced social welfare, notwithstanding much experience to the contrary.60
The deficiencies of the recipients may make failure in implementation inevitable. Joel F. Handler, “Discretion in Social Welfare: The Uneasy Position in the Rule of Law,” Yale Law Journal 92 (1983): 1270, 1271–73; Jerry L. Mashaw, “Welfare Reform and Local Administration of Aid to Families with Dependent Children in Virginia,” Virginia Law Review 57 (1971): 818, 833.
An alternative approach, recently presented by Murphy and Nagel, reflects an egalitarian take that dismisses the Rawlsian approach in preference for a frontal assault on private property.61
See Murphy and Nagel, The Myth of Ownership: Taxes and Justice.
By persisting in the myth of the scientific state and refusing to come to grips with the messier version of the interaction among the individual, the state, and the community, public finance proponents need not confront the fundamental tensions that have already been highlighted in this essay. Clean models can be created that produce ideal outcomes. The experts/theorists can be mega–problem-solvers and can “discover” solutions. Complicating factors and reality-based data can simply be discarded as exogenous to the model.
Public finance rests on an unshakeable faith in the post-Enlightenment modern state. An elite “community” conceives and administers the programs. To doubt the public-finance proponent's neutrality and capacity to achieve results calls into question his or her work and the scientific nature and worth of the proponent's very professional activity.
There is no question that elementary models can prove critical in identifying issues and potential solutions. However, the complex interactions that occur in any community with a highly developed network of manifold and overlapping rights, obligations, contracts, and relationships cannot be easily modeled. At a minimum, more serious inquiries into individual, communal, and state behavior are needed, rather than placid assumptions.
VI. Defining the End Product
Even if the possibility of disinterested “expertise” were conceded, the “end product” tax policy problem would persist. The expert can design a program of redistribution but must first know what the end product is. Experts must know what end must be produced. A central question, then, is this: What is the proper application of tax revenues? There is no answer to this question that can be arrived at through rational analysis. The end sought is fundamentally a political and moral issue.62
The early ability-to-pay theorists certainly regarded the determination of public expenditures as political in nature, rather than economic. See Musgrave and Peacock, eds., Classics, xi.
The debate over taxation and redistribution that has raged since the nineteenth century leaves no doubt but that there are widely divergent viewpoints on how revenue collected via taxes should be expended. The answer does not rest in positive science because there is no agreement as to what the “public good” or “social welfare” means, or even what is the appropriate “community” or “communities” to be benefited. Thus, if we were to suspend disbelief and even grant the expertise of certain selfless public finance experts, we would still be at sea as far as the programmatic ends on which they would bring their expertise to bear.
Even assuming that the conceptualizers and the bureaucrats are pure and entirely capable, this would still leave the politicians. The actual design and implementation of the program would depend on them as well. Their fealty to neutral principles would be unlikely in light of the inherent nature of politics and the nonexistence of neutral principles. In short, the attainment of a “just redistribution,” even if the outlines of the program and the conception of justice were universally agreed upon, would still prove impossible.
VII. Conclusion
The purpose of this essay has been to focus attention on shortcomings in the public finance approach to taxation. There are a number of reasons for the prevalence of this approach, including path dependence, the European traditions inherent in the discipline as it was transmitted to American scholars, the intellectual appeal of pristine conceptions that are easy to model, a liberal-modernist faith in the efficacy of the state and its capacity to represent the interests of the entire community, and the romantic vision of a just and unitary (or, perhaps, universal) community with “experts” leading the way.
This essay argues that a more realistic and nuanced portrayal of social-political-economic interactions must be the foundation of any attempt to explain and possibly improve the present public finance system. Unfortunately, these interactions make reform from within virtually impossible. Admittedly, one nascent force for reform is global tax competition. Whether or not it eventually does foster reform from within, or actually precipitates an outflow of capital and labor and eventual decay from within in those countries that choose to adhere to the public finance myth, remains to be seen. Either way, intense pressures are being exerted on the previously unquestioned “public” capture by the “state” of private property and its redistribution for the general welfare of the “community.” In the end, unbiased expertise will not and cannot be found to save the day. Even if it could, the expert would still require guidance as to the ends to be produced. Those ends would be highly disputed by multifarious and shifting communities. The achievement of those ends against the backdrop of the political marketplace would be even more dubious. What all this should make clear is that taxation for the achievement of the “social welfare” is, indeed, a chimera.
