Taxation: Philosophical Perspectives 0199609225, 9780199609222

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Taxation: Philosophical Perspectives
 0199609225,  9780199609222

Table of contents :
Martin O'Neill and Shepley Orr: IntroductionPart I. On the Tax System: Normative and Conceptual Questions1: Alan Hamlin: What Political Philosophy Should Learn from Economics about Taxation2: Marc Fleurbaey: Welfarism, Libertarianism, and Fairness in the Economic Approach to Taxation3: Geoffrey Brennan: Striving for the Middle Ground: Taxation, Justice and the Status of Private Rights4: Laura Biron: Taxing or Taking: Property Rhetoric and the Justice of Taxation5: Peter Vallentyne: Libertarianism and Taxation6: Alexander Cappelen and Bertil Tungodden: Tax Policy and Fair Inequality7: Veronique Munoz-Darde and M. G. F. Martin: Beggar Your Neighbour (Or Why You Do Want to Pay Your Taxes)Part II. Tax Policy and Forms of Taxation: Philosophical Issues8: Barbara Fried: The Case for a Progressive Benefits Tax9: Stuart White: Moral Objections to Inheritance Tax10: Iain McLean: The Politics of Land Value Taxation11: Peter Dietsch: The State and Tax Competition: a Normative Perspective12: Gillian Brock and Rachel McMaster: Global Taxation and Accounting Arrangements: Some Normatively Desirable and Feasible Policy Recommendations

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Taxation

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ENGAGING PHILOSOPHY This series is a new forum for collective philosophical engagement with controversial issues in contemporary society. Disability in Practice Edited by Adam Cureton and Thomas E. Hill, Jr. Taxation Philosophical Perspectives Edited by Martin O’Neill and Shepley Orr Bad Words Philosophical Perspectives on Slurs Edited by David Sosa

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Taxation Philosophical Perspectives

E DI TED BY

Martin O’Neill and Shepley Orr

1

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Great Clarendon Street, Oxford, OX2 6DP, United Kingdom Oxford University Press is a department of the University of Oxford. It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide. Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries © the several contributors 2018 The moral rights of the authors have been asserted First Edition published in 2018 Impression: 1 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, by licence or under terms agreed with the appropriate reprographics rights organization. Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this work in any other form and you must impose this same condition on any acquirer Published in the United States of America by Oxford University Press 198 Madison Avenue, New York, NY 10016, United States of America British Library Cataloguing in Publication Data Data available Library of Congress Control Number: 2017963203 ISBN 978–0–19–960922–2 Printed and bound by CPI Group (UK) Ltd, Croydon, CR0 4YY Links to third party websites are provided by Oxford in good faith and for information only. Oxford disclaims any responsibility for the materials contained in any third party website referenced in this work.

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Advanced Praise “Theories of distributive justice have enormous implications for tax systems. Yet the topic of taxation itself has rarely been given systematic attention by philosophers. This timely and important volume is the first edited collection on philosophical approaches to taxation and sets a very high standard. It contains contributions from leading interdisciplinary political philosophers, who provide a range of rigorously argued perspectives both on general questions of the justification of taxation, and on the desirability of specific taxes. Showing that it is far from an abstract or merely technical issue, this essential volume makes a powerful case that taxation is a central concern for distributive justice.” —Jonathan Wolff, Blavatnik Professor of Public Policy, University of Oxford “Taxes are more than arithmetic; they inevitably raise questions of values. Yet, with few exceptions, philosophers have left taxes to economists and politicians. This excellent volume brings together a range of values, viewpoints and considerations that bear on taxes in general and on specific cases. It should be widely read by philosophers as well as by anyone interested in understanding what’s at stake in our debates about taxes.” —Debra Satz, Marta Sutton Weeks Professor of Ethics in Society and Professor of Philosophy, Stanford University “Myths, slogans, ideology—few topics are less understood than tax, and yet few areas of policy are more important for realizing justice. In this book experts from several disciplines interrogate taxation, from its philosophical foundations to how we should change our laws today. Rich in ideas, this collection will be essential for everyone who wants to understand what taxation really is and how it can be done right.” —Leif Wenar, Chair of Philosophy and Law, King’s College London

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Contents List of Figures, Table, and Box Notes on Contributors

ix xi

Introduction Martin O’Neill and Shepley Orr

1

Part I. On the Tax System: Normative and Conceptual Questions 1. What Political Philosophy Should Learn from Economics about Taxation Alan Hamlin

17

2. Welfarism, Libertarianism, and Fairness in the Economic Approach to Taxation Marc Fleurbaey

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3. Striving for the Middle Ground: Taxation, Justice, and the Status of Private Rights Geoffrey Brennan

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4. Taxing or Taking? Property Rhetoric and the Justice of Taxation Laura Biron

81

5. Libertarianism and Taxation Peter Vallentyne

98

6. Tax Policy and Fair Inequality Alexander W. Cappelen and Bertil Tungodden

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7. Beggar Your Neighbour (Or Why You Do Want to Pay Your Taxes) Véronique Munoz-Dardé and M. G. F. Martin

124

Part II. Tax Policy and Forms of Taxation: Philosophical Issues 8. The Case for a Progressive Benefits Tax Barbara H. Fried

147

9. Moral Objections to Inheritance Tax Stuart White

167

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CONTENTS

10. The Politics of Land Value Taxation Iain McLean

185

11. The State and Tax Competition: A Normative Perspective Peter Dietsch

203

12. Global Taxation and Accounting Arrangements: Some Normatively Desirable and Feasible Policy Recommendations Gillian Brock and Rachel McMaster

224

Index of Names Index

245 249

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List of Figures, Table, and Box Figures 3.1 Democratic equilibrium and maximin in tax rate determination 6.1 Unfairness and inequality over time

75 120

Table 11.1 Relation between the challenge presented by tax competition and the normative response

218

Box 2.1 Social objectives and their income tax implications

49

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Notes on Contributors L AURA B IRON studied Philosophy at Queens’ College, Cambridge, and at Harvard on a Kennedy Scholarship. She completed a PhD in Philosophy at St John’s College, Cambridge, before taking up a Junior Research Fellowship at Queens’ College. She has worked as a Greenwall Fellow in Bioethics and Health Policy at Johns Hopkins University, an assistant Professor of Philosophy at the University of Virginia, and a Lecturer in Philosophy at the University of Kent. Laura recently trained for ordained ministry in the Church of England, and currently works as a priest in Oxford Diocese. G EOFFREY B RENNAN is Professor Emeritus in the Philosophy Department, Australian National University and Visiting Research Professor at Duke University (in Political Science) and UNC-Chapel Hill (in Philosophy). An economist by training and for most of his academic life, he now self-identifies as a PPE scholar working at the intersection of Economics and Social & Political Philosophy. G ILLIAN B ROCK is Professor of Philosophy at the University of Auckland in New Zealand. Her publications include Global Justice: A Cosmopolitan Account (Oxford University Press, 2009); Debating Brain Drain: May Governments Restrict Emigration? (Oxford University Press, 2015, with Michael Blake); Cosmopolitanism versus Non-Cosmopolitanism (Oxford University Press, 2013, edited); The Political Philosophy of Cosmopolitanism (Cambridge University Press, 2005, edited with Harry Brighouse); and Global Health and Global Health Ethics (Cambridge University Press, 2011, edited with Solomon Benatar). A LEXANDER W. C APPELEN is Professor in Economics at the Department of Economics, NHH Norwegian School of Economics, and an associated researcher at the Centre for Applied Research at NHH. He co-directs the research group The Choice Lab, and is the Deputy Director of the Centre of Excellence FAIR (Centre for Experimental Research on Fairness, Inequality, and Rationality). His research areas are in behavioural economics, optimal taxation, experimental economics, distributive justice, and business ethics. P ETER D IETSCH is a full professor in the Department of Philosophy at the University of Montreal. He works on issues of economic ethics, with a focus on the distribution of income and wealth as well as on the evaluation of economic policies. His publications include Catching Capital: The Ethics of Tax Competition (Oxford University Press, 2015) and Do Central Banks Serve the People? (co-authored with François Claveau and Clément Fontan, Polity Press, 2018). Dietsch is a member of the College of New Scholars of the Royal Society of Canada.

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NOTES ON CONTRIBUTORS

M ARC F LEURBAEY is Robert E. Kuenne Professor in Economics and Humanistic Studies, and Professor of Public Affairs at the University Center for Human Values at Princeton University. He has been an economist at INSEE (Paris), a Professor of Economics at the Universities of Cergy-Pontoise and Pau (France), and a research director at the National Center for Scientific Research (CNRS) in Paris. He has also been a Lachmann Fellow and a visiting professor at the London School of Economics. He is the author of Fairness, Responsibility, and Welfare (2008), and co-author of Beyond GDP (with Didier Blanchet, 2013), and A Theory of Fairness and Social Welfare (with François Maniquet, 2011). He has been a coordinating lead author for the Intergovernmental Panel on Climate Change (IPCC) and is one of the initiators of the International Panel on Social Progress (IPSP). His research on normative and public economics and theories of distributive justice has focused in particular on the analysis of equality of opportunity, on fair allocation, and social choice theory, with applications to income taxation, health policy, and climate mitigation. B ARBARA H. F RIED is the William W. and Gertrude H. Saunders Professor of Law at Stanford University. She has written extensively on questions of distributive justice in the areas of tax policy, property theory, and political theory. She is the author of The Progressive Assault on Laissez Faire: Robert Hale and the First Law and Economics Movement (Harvard University Press). A collection of her essays on moral and political theory is forthcoming from Oxford University Press. ALAN HAMLIN is Emeritus Professor of Political Theory at the University of Manchester and Visiting Professor at King’s College, London. He was previously Professor of Economics and Dean of Law, Arts, and Social Sciences at the University of Southampton. He has written widely at the intersection of philosophy, politics, and economics, with recent work on expressive political behaviour, constitutional political economy, non-ideal theory, feasibility, and conservatism. I AIN M C L EAN is a Senior Research Fellow of Nuffield College, Oxford, and directs its Gwilym Gibbon Centre for public policy. He has been interested in property taxes since his time as elected member and committee (vice-) chair of Tyne & Wear metropolitan County Council in the 1970s. Other interests include land reform in Scotland and Wales, and the Scottish, American, and French Enlightenments. He has been a member of local tax policy working groups for the Scottish Parliament and the Welsh government. He was Vice-President for Public Policy of the British Academy from 2012 to 2016. R ACHEL M C M ASTER is a New Zealand-qualified solicitor currently practising commercial litigation in London. She holds a Bachelor of Arts (Political Studies/ Economics) and a Bachelor of Laws from the University of Auckland, and a Master of Laws from Harvard Law School. During her time at the University of Auckland, she worked as a research assistant under the supervision of Professor Gillian Brock.

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She has a particular interest in the application of global justice principles to public policy in the fields of taxation and health. M IKE M ARTIN is the Wilde Professor of Mental Philosophy at the University of Oxford, and Mills Adjunct Professor of Philosophy at the University of California, Berkeley. For many years, he taught at in the Department of Philosophy UCL. Much of his work is focused in the philosophy of perception, and he has keen interest in the work of David Hume, including his moral and political philosophy. V ÉRONIQUE M UNOZ -D ARDÉ is Professor of Philosophy at UCL and also teaches at the University of California, Berkeley. Her research is principally in practical reasoning, ethics, and political philosophy, as well as in eighteenth-century political thought, particularly that of Rousseau and Hume. M ARTIN O’N EILL is Senior Lecturer in Political Philosophy at the University of York. He was previously Hallsworth Research Fellow in Political Economy at the University of Manchester and, before that, Research Fellow in Philosophy and Politics at St John’s College, Cambridge. His work has appeared in journals such as Philosophy & Public Affairs and the Journal of Political Philosophy, and he is co-editor (with Thad Williamson) of Property-Owning Democracy: Rawls and Beyond (Wiley-Blackwell, 2012). He is a Commissioning Editor of Renewal: the Journal of Social Democracy. He is interested in social justice in both theory and practice, including various issues at the intersection of political philosophy, political economy, and public policy. S HEPLEY O RR is Lecturer in the Department of Civil, Environmental & Geomatic Engineering in the UCL Faculty of Engineering Sciences, and an affiliate member of the UCL Centre for Philosophy, Justice, and Health. He previously worked in the Department of Economics at the University of East Anglia. His work has appeared in journals spanning a number of disciplines, including Politics, Philosophy and Economics (PPE), Kyklos, Transportation Research, and the Journal of Risk and Uncertainty. He frequently consults for a range of public and private bodies on issues relating to decision-making, benefit valuation, and policy formation. B ERTIL T UNGODDEN is Professor in Economics at the Department of Economics, NHH Norwegian School of Economics, and an associated researcher at the Centre for Applied Research at NHH. He is the Scientific Director of the Centre of Excellence FAIR (Centre for Experimental Research on Fairness, Inequality, and Rationality) and co-directs the research group The Choice Lab. His research areas are in behavioral economics, normative economics, political philosophy, and development economics. He has published extensively in international journals in economics, philosophy, general sciences, and management science, and he is currently on the editorial boards of several international journals.

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P ETER V ALLENTYNE is Florence G. Kline Professor of Philosophy at the University of Missouri, USA. He writes on issues of liberty and equality in the theory of justice (and left-libertarianism in particular) and, more recently on enforcement rights (rights to protect primary rights). He is an associate editor of the Journal of the American Philosophical Association and of Social Choice and Welfare. S TUART W HITE is Tutorial Fellow in Politics at Jesus College, Oxford. He is the author of The Civic Minimum (2003) and Equality (2006), and co-author, with Rajiv Prabhakar and Karen Rowlingson, of How to Defend Inheritance Tax (2008). He is currently writing a book that is provisionally entitled Democracy Over Wealth? Liberal Republican Political Economy.

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Introduction Martin O’Neill and Shepley Orr

The tax system is central to the operation of states and to the ways in which states interact with individual citizens. Taxes are used by states to fund the provision of public goods and public services, to engage in direct or indirect forms of redistribution, and to mould the behaviour of individual citizens through incentivizing certain activities (such as charitable giving, or investment in new technology) through tax breaks, or to dissuade people from engaging in other activities by means of Pigouvian taxes, including ‘sin taxes’ (such as those associated with the consumption of alcohol or tobacco).¹ Given the absolute centrality of the tax system to some of the main functions of the state, the analysis of conceptual and normative issues relating to taxation should be at the heart of political philosophy. The shape of the tax system is an unavoidably and irreducibly normative matter, and one which implicates a number of core concerns of social justice.² When we think about issues of social justice in practice, we cannot avoid thinking at the same time about tax. Given that taxation is one of the most significant mechanisms for interaction between states and individual citizens, it is perhaps surprising that there has not been as much work on taxation within political philosophy as one might have expected. This is not, of course, to say that political philosophy has been silent about tax. But as the chapters in this volume show, there are a number of pressing and significant philosophical issues relating to the tax system, and these issues often connect in fascinating ways with foundational questions regarding property rights, democracy, public justification, state neutrality, stability, political psychology, and a range of other issues. Many of these deep and fascinating philosophical questions about tax have not always received as much sustained attention as they clearly merit. Our hope is that this book will advance the debate along a number of these philosophical fronts, and be a welcome spur to further work.

¹ For a general introduction to the economics of the tax system, see Stiglitz 2000; Hindriks and Myles 2006; Barr 2012; Atkinson and Stiglitz 2015. On Pigouvian taxes, see Pigou 1932; Baumol 1972. ² For a survey article on justice and taxation, see Halliday 2013.

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The book’s aim of advancing the debate about taxation in political philosophy has both general and more specific aspects, involving both overarching issues regarding the tax system as a whole (discussed primarily in Part I of the book), and more specific issues relating to particular forms of tax policy (which are the focus of Part II). Thinking clearly about tax is not an easy task, as much that is of central importance is missed if one proceeds at too great a level of abstraction, and issues of conceptual and normative importance often only come sharply into focus when viewed against real-world questions of implementation and feasibility. Serious philosophical work on the tax system requires an interdisciplinary approach, and this volume includes contributions from a number of scholars whose expertise spans neighbouring disciplines, including political science, economics, public policy, and law. We are fortunate indeed, as editors, to be able to present such a range of chapters from scholars with such an impressive range of scholarly expertise. Before briefly introducing each chapter, we will begin first by sketching something of the philosophical background against which the contributions made by these chapters can be viewed. One useful set of starting points for philosophical discussions of taxation are the polar contrasts provided by Robert Nozick and John Rawls, whose diametrically opposed views of the justice and legitimacy of the tax system had deep roots in their similarly contrasting views on the nature of property rights. Writing in Anarchy, State, and Utopia, Nozick famously (or perhaps infamously) declared that “Taxation of earnings from labor is on a par with forced labor” (Nozick 1974: 169), arguing that mandatory fiscal contributions should extend only to the support of the minimal state needed for the protection and enforcement of property rights, and that redistributive transfers to benefit the needy or disadvantaged should be achieved instead by philanthropic beneficence rather than by compulsory enforcement. Such views flowed from Nozick’s underlying view that property rights, including rights of selfownership, were fundamentally pre-political, creating constraints on what a state could legitimately do to interfere with the pre-existing property rights of the individuals on its territory. This stark and austere libertarian picture of the status of taxation continues to exert a strong influence over contemporary debates, both positively and negatively, as both inspiration and as a foil for opposing views. This engagement with libertarian ideas is accordingly very much present in this volume. Among the book’s chapters we have, from Peter Vallentyne in Chapter 5, a detailed examination of how we might think about tax given a libertarian understanding of pre-political property rights. Contrastingly, from Véronique Munoz-Dardé and Mike Martin in Chapter 7, we have an argument prosecuted directly against Nozick’s views regarding the superiority of charitable giving over compelled transfers via taxation; and in Chapter 8 we have a further critical engagement with the libertarian tradition of thinking about taxation, as Barbara Fried presents a powerful critique of the idea, sometimes advanced from the political right, that if we think of the ideal tax system as in some ways a

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INTRODUCTION



market-mimicking mechanism designed to charge people for benefits received, we would thereby be able to build a principled case against progressive taxation. Providing almost the starkest imaginable contrast to the Nozick’s libertarian approach to taxation there is the view of tax associated with John Rawls (Rawls 1999, 2001). For Rawls, property rights are not pre-political constraints on the operation of political and economic institutions, but rather they are themselves creations of the “basic structure” of society, that is of “the main political and social institutions and the way they hang together as a system of cooperation” (Rawls 2001: 8–9). On Rawls’s view the rules of the tax system, like any other set of public rules governing the distribution of material benefits and burdens within society, are also simply aspects of that basic structure. A tax system is just, on Rawls’s view, when it operates as part of an overall system of rules and institutions, including the full set of rules and institutions governing property, that taken together satisfy the principles of justice. The assessment of justice is, on a Rawlsian view, socially holistic, and the tax system is just one part of that whole. Thus, whereas for Nozick questions of the justice or legitimacy of taxation are questions about whether or how the state can interfere with certain pre-political property entitlements, for Rawls questions of tax justice are just one aspect of a broader set of questions about social justice. Rawls himself does not give a systematic account of the tax system that would be required within a just society, being fully aware of how difficult the task would be, given the holism of justice, and the fact that, in a just basic structure, everything depends on everything else. But he does make some “illustrative and highly tentative” remarks (Rawls 2001: 136) regarding the taxes that would be needed in a basic structure. Following James Meade (1964), Rawls endorses—as potentially the most important redistributive tool available to government—a highly progressive, recipient-oriented form of inheritance and capital transfer tax.³ Such aggressive forms of capital taxation would, Rawls thought, be necessary in order to break up the intergenerational transfers of relative advantage that would otherwise make it impossible to realize the fair value of the political liberties or fair equality of opportunity. Hence, Rawls’s sketch for the institutions of a just society which, following Meade, he described as a “property-owning democracy”, had this supercharged version of inheritance (and capital transfer) taxation as one of its key elements (see also O’Neill 2012; O’Neill and Williamson 2012; O’Neill 2015). (In Chapter 9, Stuart White defends the kind of inheritance tax endorsed by Meade and Rawls against a number of possible lines of normative objection.) The broadly Rawlsian approach to thinking about tax receives its fullest development in what is perhaps the most important treatment of tax within political

³ For more on Rawls’s remarks regarding the tax system that would be needed in a just society, including critical discussion of his (tentative) endorsement of a proportional expenditure tax, see O’Neill and Williamson 2015.

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philosophy during the past few decades, Liam Murphy and Thomas Nagel’s book, The Myth of Ownership: Taxes and Justice (Murphy and Nagel 2002).⁴ Murphy and Nagel’s book looms large in the background to the discussions pursued in the present volume, and it is therefore worthwhile to pause to present the central elements of their view. Murphy and Nagel begin from the core Rawlsian commitments to the primacy of the basic structure and the holism of justice. The legal rules of the tax system, on this view, are just one aspect of the rules of property, and the question of the justice of the rules of property are just one aspect of the holistic question of the justice of the basic structure. As Murphy and Nagel ingeniously show, this basic conceptual point carries with it a number of striking particular implications for how we think about the normative assessment of tax policy. Most importantly, on this broadly Rawlsian view, the idea of “pre-tax income” simply has no normative standing. It is not that we have some primitive entitlement to our market holdings, with which the state then interferes; rather, our property entitlements are simply what results from the operation of the rules of property taken together, of which the tax rules are simply one part. Pre-tax income is just a conventional accounting identity, denoting a useful but imaginary quantity of no normative significance. What follows from this is that much of the day-to-day vocabulary used to talk about the justice of the tax system, much of it grounded in the public finance tradition associated with the work of Richard Musgrave and others (Musgrave 1959), but which has since then become the quotidian common sense of tax policy discussions, is confused and incoherent. One often hears about the fair distribution of “the tax burden”, but the very idea of the tax burden involves making a comparison between the appropriately real figure of post-tax income and the merely phantasmagorical figure that is people’s pre-tax income. To even talk of the tax burden is to fall into the conceptual errors involved in what Murphy and Nagel call “everyday libertarianism”, which posits an unexamined and faulty assumption that one has a kind of primitive ownership claim over one’s pre-tax market income. But once the idea of the tax burden has been thrown into the conceptual dustbin, so too do the commonly discussed measures of “vertical equity” (i.e. relative tax burdens between individuals at different points in the distribution of pre-tax income) and “horizontal equity” (i.e. relative tax burdens between those at the same point on the distribution of pre-tax income), that are the mainstays of much discussion of fairness and equity in tax policy (see e.g. Slemrod and Bakija, 2017). What matters, on the Rawlsian view advanced by Murphy and Nagel, for the assessment of the justice of the tax system is not then vertical equity or horizontal equity or any other idea connected to the distribution of the tax burden, or any idea that gives any normative standing whatsoever to individuals’ notional pre-tax

⁴ On Murphy and Nagel’s arguments in The Myth of Ownership, see Gosseries 2005; Wenar 2005; Thomas and O’Neill 2015.

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INTRODUCTION



income, but simply the way in which the tax system meshes with the other parts of the basic structure of society to create just overall outcomes. As readers will see, Murphy and Nagel’s powerful and provocative arguments are an important presence in the first part of the book. The chapters by Alan Hamlin, Marc Fleurbaey, Geoffrey Brennan, and Laura Biron (Chapters 1–4) each in their own ways, more or less directly, engage with the main arguments of Murphy and Nagel’s book. One can see each of the four as attempting, in interestingly distinctive ways, to lay out a position that lies in between the poles presented by the libertarian and Rawlsian approaches to taxation, looking to find what Brennan describes as a “middle ground” between those starker approaches. Where Nozick’s libertarian view turns on giving a near-absolute normative authority to individuals’ pre-political market entitlements, and the view shared by Rawls, Murphy, and Nagel dismisses such notional entitlements outright, these four authors, as well as Alexander Cappelen and Bertil Tungodden in Chapter 6, explore some of the possibilities of the large territory in between. We turn now to a more detailed sequential introduction to each of the book’s chapters.

Part I. On the Tax System: Normative and Conceptual Questions The first part of the book contains seven chapters, and covers a wide variety of philosophical issues relating to the nature of the tax system, and its relation to questions regarding the theory of property, distributive justice, and individual rights. In doing so, these chapters also examine the relationship between the analysis of taxation in political philosophy and the way in which we think about taxes in neighbouring disciplines including political science and economics. In Chapter 1, Alan Hamlin provides a general answer to the question of what political philosophy should learn from economics about taxation. There are, broadly speaking, three distinct approaches to the economic analysis of taxation, which can be considered as falling under the headings of (a) the mainstream literature on optimal taxation, originating in the work of F. P. Ramsey (Ramsey 1927), the Cambridge philosopher and logician who also managed to be a brilliant economist in his spare time, and later developed by economists including Mirrlees, Diamond, and Atkinson and Stiglitz (Diamond and Mirrlees 1971a, 1971b; Mirrlees 1971; Atkinson and Stiglitz 1976); (b) a political economy tradition that builds from a Downsian model of democracy (Downs 1957), developed in the work of Foley, Romer, Roberts, and others (Foley 1967; Romer 1975; Roberts 1977) which attempts to make sense of the role of political factors in the determination of the tax structure; and (c) the tax constitution approach associated with the work of Geoffrey Brennan and James Buchanan and their collaborators (e.g. in Buchanan and Wagner 1977; Brennan

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and Buchanan 1980, 1985; Buchanan 1987, 2004; Brennan and Hamlin 1995) which concentrates on the idea of “the power to tax” and of the possibility of constitutional controls on the discretionary power of governing elites. Hamlin argues that, while there may be a place for a normative theory of taxation within ideal theory, we should see questions of tax policy as presenting an essentially non-ideal set of problems, where issues of limited information and the sometimes less-than-fully compliant motivations of agents need to be given serious attention. Therefore the “first-best” answers to questions of optimal tax policy design are largely irrelevant when we think about the real-world development of plausible and normatively attractive tax policies. Hamlin’s suggestion is that, when thinking about the design of real-world tax policies that meet standards for public justifiability, political philosophers should draw carefully on the insights of each of these three traditions within the economic analysis of tax systems. On Hamlin’s view, each of these three economic traditions addresses one part of the overall normative problem of designing a robust system of taxation. As Hamlin concludes, a more mature philosophical debate on taxation will require a realization of the non-ideal context in which tax policy operates, seeing that we need to move beyond the first-best proposals of excessively abstract economic models, and thereby taking seriously the range of economic and political trade-offs that need to be considered carefully in designing real-world tax policies. In Chapter 2, Marc Fleurbaey defends a version of the economic approach to optimal taxation associated with the work of James Mirrlees (see esp. Mirrlees 1971). The Mirrlees approach has been developed in recent years, in the work of Fleurbaey himself, together with his collaborator François Maniquet, as well as by Thomas Piketty and his collaborators Emmanuel Saez and Stefanie Stantcheva, in a direction that proposes the incorporation of ideas of fairness within the Mirrlees framework (see Fleurbaey 2008; Fleurbaey and Maniquet 2011; Piketty and Saez 2012; Saez and Stantcheva 2016). As both Fleurbaey and Hamlin point out, the work of Murphy and Nagel in some respects takes aim not at the more recent, post-Mirrlees orthodox economic approach to the analysis of taxation, but instead presents arguments against the earlier “public finance” orthodoxy associated with Musgrave and others. Fleurbaey argues that, while Murphy and Nagel give persuasive arguments against the ideas of horizontal and vertical equity used in that earlier public finance approach to the assessment of tax regimes, they underestimate the degree to which the post-Mirrlees economic approach actually manages to embody an approach to the tax system that they would accept—being holistic in terms of its assessment of outcomes, and being anti-libertarian in terms of its denial of any special normative significance to pre-tax market incomes. Intriguingly, then, Fleurbaey argues that his own development of the Mirrlees framework to give more of a role to considerations of fairness puts him on one side of an important argument against both Murphy and Nagel and Mirrlees; for, on the view defended by Fleurbaey, we should in fact give some normative authority to pretax incomes. As he puts it, the view he defends “retains an element of libertarianism”

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(albeit only a small element). Whereas the orthodox economic approach since Mirrlees has embodied a form of welfarist consequentialism, the “fair allocation” development of that tradition in the work of Fleurbaey and others has been influenced by luck egalitarian approaches to distributive justice, which give a greater normative weight to choice and responsibility within market outcomes. Thus, determination of the most appropriate economic approach to the assessment of tax systems is deeply entwined with philosophical questions about the normative significance of markets and the normative standing of market outcomes. By tracing these close connections between philosophical accounts of justice and economic frameworks for the analysis of tax policy, Fleurbaey gives both a defence of his own particular “fairness” approach, while also showing the general relationship between philosophical and economic approaches to tax. While both Hamlin and Fleurbaey touch upon areas of disagreement with Murphy and Nagel’s The Myth of Ownership, in Chapters 3 and 4 we have two more direct confrontations with the central ideas that Murphy and Nagel develop. One of the outstanding features of The Myth of Ownership is the way that it moves between relatively technical questions of tax design to fundamental questions regarding the nature and justification of property rights, the significance of market outcomes, and the role of the state in defining the limits of individual entitlements. These foundational issues, as raised by Murphy and Nagel, are addressed directly and illuminatingly in their chapters by Geoffrey Brennan and Laura Biron. In Chapter 3, Geoffrey Brennan makes use of an engagement with Murphy and Nagel to discuss foundational questions of what any “quasi-Rawlsian” (in Brennan’s terms) conception of justice would require of the tax system. Among Brennan’s conclusions is the claim that Murphy and Nagel go too far in outlining their thesis of the “myth of ownership”, whereby all property rights are seen as conventional entailments of a particular set of property rules, where these rules are viewed as including the tax code itself. Instead, Brennan looks to distinguish between two levels of rules within the economic system—the “constitutional” rules determined by the basic economic and political institutions of a society, and then the “in period” or quotidian rules that might include the more specific details of the tax system. On Brennan’s view, Murphy and Nagel’s account of the relationship between property rights and the tax system fails to mark the distinction between these two levels of analysis. Here Brennan, a leading proponent of the tradition of constitutional political economy, who was a co-author, along with James Buchanan, of the influential 1980 book The Power to Tax (Brennan and Buchanan 1980), is pursuing one of the central themes of the “tax constitution” approach discussed in Chapter 1 by Alan Hamlin. From this foundational disagreement with Murphy and Nagel, Brennan then draws a more particular conclusion at the level of tax policy design. Brennan argues that a principle of ‘anonymity’—i.e. a claim regarding the normative irrelevance, for purposes of justice, of permutations of individuals’ positions—should lead one to support a principle of horizontal equity, dismissed by Murphy and Nagel, as being a

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central requirement of any justifiable tax system. Whilst this is very far from a justification of a libertarian approach to taxation, it does mean that Brennan stands alongside Fleurbaey in questioning Murphy and Nagel’s view on the normative irrelevance of pre-tax distributions. In Chapter 4, Laura Biron further pursues deep-seated questions regarding the relationship between the way in which we think about the tax system and the way in which we think about the nature of property rights themselves. Biron points out that, although rhetorical appeals to property rights are highly prevalent in popular debates about taxation, there is a surprising lack of detailed work on taxation within the general jurisprudence of property. Her contention is that only by taking seriously philosophical and jurisprudential work on property can we think systematically and accurately about normative issues in the tax system. Biron is therefore sceptical with regard to the way that the idea of property seems almost to “drop out” of Murphy and Nagel’s picture of the tax system, with property rights seen as nothing more than the conclusive consequences of systems of independently justified institutional rules. As with Brennan, Biron does not agree that Murphy and Nagel’s “myth of ownership” really is such a myth after all. Biron’s overall salutary aim is to urge theorists of taxation to engage with conceptual questions about property rights in a more detailed way, while also encouraging theorists of property to bring their work to bear more directly on questions relating to taxation. In Chapter 5, following the engagement with themes from libertarian thought in the chapters from Fleurbaey and Brennan, Peter Vallentyne gives a general account of how libertarians of varying stripes might think about the tax system. While, thanks to Nozick, libertarian slogans associating taxation with forced labour are well-known, Vallentyne shows that the interest and diversity of libertarian thinking about the tax system is much greater than one might initially have imagined. Although some versions of libertarianism preclude just taxation of any (or almost any) kind, Vallentyne points out that a number of libertarian viewpoints can be consistent with taxes imposed on rights-infringers in order to support the costs of a system of rightsenforcement. Moreover, those who share the left libertarian position that Vallentyne himself defends can support a tax system that taxes those with an excessive share of the value of ownership rights over natural resources. Chapter 6 returns to some of the themes that were discussed in Chapter 2 by Marc Fleurbaey, regarding the relationship between liberal egalitarian approaches to taxation, informed by recent work in political philosophy, and the kind of welfarist approaches to taxation that have been dominant in economics at least since the work of James Mirrlees. In this chapter, Alexander Cappelen and Bertil Tungodden side with Fleurbaey in arguing for the superiority of the “fairness-based” liberal egalitarian approach over the post-Mirrlees welfarist orthodoxy in economic approaches to taxation. Cappelen and Tungodden argue that the liberal egalitarian approach manages, by focusing on a core idea of fairness, to avoid besetting problems of the welfarist approach regarding the possible slavery of the talented and the exploitation

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INTRODUCTION



of the hard-working. Picking up a theme in Alan Hamlin’s discussion of the nonideality of tax policy (in Chapter 1), Cappelen and Tungodden go on to explore informational problems as they affect the kind of liberal egalitarian approach to tax policy that they endorse, whilst nevertheless concluding that this liberal egalitarian “fairness” approach can still be used in the normative evaluation of tax policies. Cappelen and Tungodden show how a progressive income tax system can have a kind of dual effect regarding what they call “fair inequalities”—i.e. unequal outcomes that depend on differences in factors for which individuals ought, by the lights of the account of fairness the authors endorse, actually to be held responsible. An equalizing tax system can, on this account of fairness, have one kind of “fair” effect whereby it reduces inequalities due to factors for which individuals should not be held responsible, while having a parallel “unfair” effect whereby it reduces inequalities that are due to factors for which individuals should, in fact, be held responsible. Cappelen and Tungodden show how, using illustrative Norwegian data, one might go about investigating which effect predominates for any particular tax policy. In Chapter 7, Véronique Munoz-Dardé and Mike Martin offer an ingenious line of argument against broadly libertarian approaches to taxation, and in favour of state compulsion via the tax system as opposed to charitable provision for the needy. Munoz-Dardé and Martin examine the comparison between two cases: one a highly redistributive state in which the needs of the disadvantaged are met by mandatory redistribution, and the other a minimal state in which the level of charitable giving rises to a level at which the relatively disadvantaged are no worse-off in financial terms than they would be under the system of mandatory redistribution. MunozDardé and Martin argue that, even when compared to this imagined world of bounteous charitable giving, there are general reasons for citizens to prefer to live in societies in which their contribution to those in need is compelled via the tax system. But whereas we might be familiar with the justification for compulsion over charity based on the interests of the beneficiaries, Munoz-Dardé and Martin argue that there are weighty reasons to favour compulsory taxation from the perspective of the donors or taxpayers themselves. In order to make their case, Munoz-Dardé and Martin explore the structural parallels between being induced to make a donation to a beggar and being induced to make a donation to a charitable organization. Both involve, in their view, a kind of emotional manipulation that can be seen as demeaning and emotionally costly for both parties to the transaction. (And interestingly these social and emotional costs are greater in comparatively egalitarian societies, where no pre-existing social hierarchy can structure the relation between donor and beneficiary.) On their account, begging is a socially costly activity that demeans both beggar and donor, and charitable organizations set up to meet individuals’ fundamental needs are, in effect, a form of vicarious or deferred begging. The “fetishizing of choice” characteristic of libertarian approaches to public provision creates a set of intolerable social costs, not only on the needy but also on the relatively advantaged. By contrast, public provision

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through compulsory taxation frees donors from the need to participate in demeaning social interactions that they have strong reason to avoid.

Part II. Tax Policy and Forms of Taxation: Philosophical Issues The second part of the book, comprising five chapters, moves on from general issues regarding the tax system to investigate some more specific questions regarding different kinds of taxes, and specific issues regarding the operation of the tax system. These chapters address in particular philosophical issues relating to benefits taxation, inheritance tax, land tax, and the phenomenon of international tax competition. In Chapter 8, Barbara Fried extends the book’s engagement with the libertarian tradition of thinking about taxation by examining the idea of a “benefits tax”, that is, a form of taxation that looks to set rates of taxation in a way designed to mirror market outcomes, by taxing individuals for their consumption of public goods at a level that as closely as possible parallels the market prices of such goods. As there is no actually existing market for many such goods, such a benefits tax would look to tax individuals in a way that responded to the “shadow” market price for the goods consumed. An assumption on the political right has often been that the rate of consumption of public goods declines with income, and that therefore such a tax would be regressive (i.e. with the rich paying a benefits tax at a lower marginal rate than would those in the middle or at the bottom of the income distribution). Following on from a magisterial discussion of the significance and impact of Charles Tiebout’s work on jurisdictional sorting (Tiebout 1956; Oates 1969), its impact on the development of the literature on public finance, and the distributional dimensions of “Tieboutian sorting”, Fried shows that this influential assumption regarding the regressive character of a benefits tax is not on firm ground. The shadow market prices of various public goods would depend on a number of conceptually and normatively contestable assumptions about the nature and limits of what counts as a public good, and regarding the structure of the imagined shadow market that we would need in order to yield determinate prices. Hence, argues Fried, one can mount a kind of internal critique of the libertarian case for a “benefits tax” and, by putting pressure on these philosophical issues regarding the definition and scope of public goods and the structure of virtual shadow markets, one can make the case that endorsement of a regime of benefits tax could lead one not to a minimalist, regressive tax system, but to a scheme of strongly progressive taxation. In Chapter 9, Stuart White begins from Thomas Piketty’s recent work, which argues that we face evolving dynamics within capitalist societies that will drive up levels of income and wealth inequality, and deliver us to a social future of a rentier society, in which the share of income from inherited wealth rises significantly, and in which individual merit is swamped by the sheer fortune of inheritance and family background (Piketty 2014; see also O’Neill 2017). Alongside both James Meade

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(1964) and John Rawls (1999, 2001), White argues that one important form of public policy that can act to undercut the dynamics that Piketty describes is a high level of inheritance taxation. White’s primary aim is to show that the case for aggressive levels of inheritance taxation is robust, and can withstand four separate lines of “moral objection” to such taxes. He therefore sets himself the task of rebutting, in sequence, four lines of argument against inheritance tax (some of which are associated with the work of Edward McCaffery (1994)), which fall under the headings of: (a) the double tax objection; (b) the equity objection; (c) the virtue objection; and (d) what he calls “the wrong problem objection”. White concludes that the strong prima facie case in favour of high levels of inheritance taxation comfortably survives its encounter with the strongest available moral counter-arguments, and that therefore those worried about the emergence of a rentier society should strongly endorse an aggressive inheritance taxation regime of the kind favoured by Meade and Rawls. Following on from Stuart White’s discussion of one kind of progressive capital taxation, Iain McLean in Chapter 10 considers another approach as he examines the case for land value taxation. As McLean shows, such proposals have a distinguished pedigree, descending from Adam Smith and Thomas Paine via David Ricardo and Henry George. Moreover, land value taxation meets some of the key desiderata of a system of taxation, being a reliable way to raise considerable revenue with minimal economic distortion. As Peter Vallentyne discussed in Chapter 5, it is also the case that land value taxation is one form of tax that at least some libertarians (in particular those such as Henry George and Vallentyne himself who would count as leftlibertarians) can endorse without doing violence to their core normative commitments. “Descending from Olympia”, as he nicely puts it, McLean also considers, alongside the philosophical case for land value taxation, the question of the political palatability of such tax policies, and makes a number of suggestions for what a political programme might look like that could bring land value taxation into being. McLean also shows how, for those who might remain recalcitrantly opposed to the attractions of inheritance taxation, perhaps even after reading Stuart White’s foregoing chapter, and who might still cleave to the moral objections that White has dismissed, land value taxation could provide an alternative route for governments to tax capital without encountering the extraordinary levels of resistance that inheritance tax arouses in so many jurisdictions. In Chapters 11 and 12 we move on from issues relating to domestic systems of taxation to consider a number of concerns relating to the international context in which tax systems operate. A greater awareness has developed in recent years of the significance of tax competition and tax arbitrage as barriers to the achievement of social justice at either the national or international level, and issues of international taxation and international accounting arrangements have been further pushed to the fore in light of discussion of Thomas Piketty’s proposals for an international wealth tax (Piketty 2014). While fiscal transfers are generally a matter for national governments rather than transnational bodies, no normative discussion of taxation would be complete that did not consider the international context within which tax policies operate.

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In Chapter 11, Peter Dietsch examines the way in which international tax competition can generate something akin to a Prisoner’s Dilemma for individual states: fiscal policy can be used as a competitive tool to attract mobile capital from abroad, seemingly to the advantage of individual states, but the collective consequence of tax competition between competing states is to undermine the capacity of those states to make autonomous fiscal choices, thereby reducing states’ capacities to fund public services or to reduce domestic inequality. Dietsch argues that a solution to this problem should start from an account of the legitimacy of the state as the primary locus of fiscal authority, and then should show how tax competition undermines the principal objectives assigned to states under this understanding of their fiscal role. In finding an adequate response to the problem of tax competition, Dietsch argues that redistributive obligations between states can be generated as a form of compensation for the effects of tax competition. In Chapter 12, Gillian Brock and Rachel McMaster consider the ways in which forms of global tax avoidance connected to tax havens and forms of transfer pricing contribute to global injustice. Tax havens and transfer pricing schemes syphon revenues out of developing countries, denuding states of fiscal capacity and facilitating forms of political corruption. Brock and McMaster argue that, in order to deal with problems of international tax avoidance, and to reduce the global injustices that come in their wake, there is a pressing need to reconsider global accounting arrangements and to develop new methods of targeted global taxation. They consider the case in favour of implementing a number of carefully crafted global taxes, including air ticket taxes and currency transaction taxes, arguing that the implementation of new taxes of these kinds is both normatively desirable and practically feasible. . . . . . . In his review of Murphy and Nagel’s The Myth of Ownership, Leif Wenar described tax as “fundamental to justice, yet slighted by philosophers”, bemoaning the fact that “the philosophical literature shows scant grasp of, or even awareness of, the basic issues of tax policy” (Wenar 2005: 285). Wenar’s charge remains true even now, but we hope nevertheless that it will not remain true for much longer. The individual chapters in this book encompass a broad range of philosophical perspectives, and cover a rich set of issues. Taken together, they show just how serious work on the political philosophy of tax can be done, and how insights from neighbouring disciplines can be integrated into philosophical discussions of taxation. There is much in this volume, we hope, that will generate further discussion and debate. Our central aim is that taxation should take its place as a core concern of political philosophy, and that this volume will play its role in making that happen.⁵ ⁵ For their help and support along the way in the production of this volume, we are grateful to Judith Freeman, Axel Gosseries, Gerald Lang, Mary Leng, Vijaya Manimaran, Matt Matravers, Brian North, April Peake, Albert Stewart, and especially to Peter Momtchiloff and Jonathan Wolff. Most of all, we thank the authors of these essays for their wonderfully stimulating work, and for their patience and helpfulness during the process that brought this book into being.

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Bibliography Atkinson, A. B. and Stiglitz, J. E. (1976), The Design of Tax Structure: Direct Versus Indirect Taxation, in Journal of Public Economics 6/1–2: 55–75. Atkinson, A. B. and Stiglitz, J. E. (2015), Lectures on Public Economics, updated edition (Princeton University Press). Barr, N. (2012), Economics of the Welfare State (Oxford University Press). Baumol, W. J. (1972), On Taxation and the Control of Externalities, in The American Economic Review 62/3: 307–22. Brennan, G. and Buchanan, J. M. (1980), The Power to Tax: Analytical Foundations of the Fiscal Constitution (Cambridge University Press). Brennan, G. and Buchanan, J. M. (1985), The Reason of Rules: Constitutional Political Economy (Cambridge University Press). Brennan, G. and Hamlin, A. (1995), Constitutional Political Economy: The Political Philosophy of homo economicus? in The Journal of Political Philosophy 3/3: 280–303. Buchanan, J. M. (1987), The Constitution of Economic Policy, in The American Economic Review 77/3: 243–50. Buchanan, J. M. (2004), Constitutional Political Economy, in C. K. Rowley and F. Schneider (eds.), The Encyclopedia of Public Choice (Springer), Vol. 1, 60–7. Buchanan, J. M. and Wagner, R. E. (1977), Democracy in Deficit: The Political Legacy of Lord Keynes (Academic Press). Diamond, P. A. and Mirrlees, J. A. (1971a), Optimal Taxation and Public Production I: Production Efficiency, in The American Economic Review 61/1: 8–27. Diamond, P. A. and Mirrlees, J. A. (1971b), Optimal Taxation and Public Production II: Tax Rules, in The American Economic Review 61/3: 261–78. Downs, A. (1957), An Economic Theory of Democracy (Harper & Row). Fleurbaey, M. (2008), Fairness, Responsibility, and Welfare (Oxford University Press). Fleurbaey, M. and Maniquet, F. (2011), A Theory of Fairness and Social Welfare (Cambridge University Press). Foley, D. K. (1967), Resource Allocation and the Public Sector, in Yale Economic Essays 7/1: 45–98. Gosseries, A. (2005), Review of The Myth of Ownership: Taxes and Justice by Liam Murphy and Thomas Nagel, in Disputatio: Revista Semestral de Filosofia Analítica 19: 271–7. Halliday, D. (2013), Justice and Taxation, in Philosophy Compass 8/12: 1111–22. Hindriks, J. and Myles, G. D. (2006), Intermediate Public Economics (MIT Press). McCaffery, E. (1994), The Political Liberal Case Against the Estate Tax, in Philosophy & Public Affairs 23/4: 281–312. Meade, J. (1964), Efficiency, Equality and the Ownership of Property (Routledge & Kegan Paul). Mirrlees, J. A. (1971), An Exploration in the Theory of Optimum Income Taxation, in Review of Economic Studies 38/114: 175–208. Murphy, L. and Nagel, T. (2002), The Myth of Ownership: Taxes and Justice (Oxford University Press). Musgrave, R. (1959), The Theory of Public Finance: A Study in Public Economy (McGraw-Hill). Nozick, R. (1974), Anarchy, State, and Utopia (Basic Books). O’Neill, M. (2012), Free (and Fair) Markets without Capitalism: Political Values, Principles of Justice, and Property-Owning Democracy, in M. O’Neill and T. Williamson (eds.), PropertyOwning Democracy: Rawls and Beyond (Wiley-Blackwell), 75–100.

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O’Neill, M. (2015), James Meade and Predistribution: 50 Years before his Time, in the Policy Network series Classics of Social Democratic Thought, available online at: http://www.policynetwork.net/pno_detail.aspx?ID=4909&title=James+Meade+and+predistribution%3a+50 +years+before+his+time. O’Neill, M. (2017), Survey Article: Philosophy and Public Policy after Piketty, in Journal of Political Philosophy 25/3: 343–75. O’Neill, M. and Williamson, T. (eds.) (2012), Property-Owning Democracy: Rawls and Beyond (Wiley-Blackwell). O’Neill, M. and Williamson, T. (2015), Taxation, in J. Mandle and D. A. Reidy (eds.), The Cambridge Rawls Lexicon (Cambridge University Press), 825–7. Oates, W. (1969), The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis, in Journal of Political Economy 77: 957. Pigou, A. C. (1932), The Economics of Welfare, 4th edition (Macmillan). Piketty, T. (2014), Capital in the Twenty-First Century (Harvard University Press). Piketty T. and Saez, E. (2012), Optimal Labor Income Taxation, NBER Working Paper 18521. Ramsey, F. P. (1927), A Contribution to the Theory of Taxation, in The Economic Journal 37/145: 47–61. Rawls, J. (1999), A Theory of Justice, revised edition (Harvard University Press). Rawls, J. (2001), Justice as Fairness: A Restatement (Harvard University Press). Roberts, K. W. S. (1977), Voting Over Income Tax Schedules, in Journal of Public Economics 8/3: 329–40. Romer, T. (1975), Individual Welfare, Majority Voting, and the Properties of a Linear Income Tax, in Journal of Public Economics 4/2: 163–85. Saez E. and Stantcheva, S. (2016), Generalized Social Marginal Welfare Weights for Optimal Tax Theory, in American Economic Review 106/1: 24–45. Slemrod, J. and Bakija, J. (2017), Taxing Ourselves: A Citizen’s Guide to the Debate Over Taxes, 5th edition (MIT Press). Stiglitz, J. E. (2000), Economics of the Public Sector (W. W. Norton). Thomas, A. and O’Neill, M. (2015), Thomas Nagel, in J. Mandle and D. A. Reidy (eds.), The Cambridge Rawls Lexicon (Cambridge University Press), 543–5. Tiebout, C. (1956), A Pure Theory of Local Expenditures, in Journal of Political Economy 64: 416. Wenar, L. (2005), Review of The Myth of Ownership: Taxes and Justice by Liam Murphy and Thomas Nagel, in The Philosophical Review 114/2: 285–8.

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PART I

On the Tax System: Normative and Conceptual Questions

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1 What Political Philosophy Should Learn from Economics about Taxation Alan Hamlin

1.1 Introduction The aim of this chapter is to outline three broadly economic approaches to the analysis of taxation and discuss what, if anything, each has to offer to the more general normative political philosophy of taxation. The three approaches to be considered may be characterized as the mainstream Optimal Tax (OT) literature, the Political Economy (PE) literature, and the Tax Constitution (TC) literature. While all are economic in their basic approach, these three literatures differ from each other in many ways, and among the questions I will address is whether they are best viewed as complements or substitutes and how they might be combined in order to contribute to any more general and more philosophical discussion of taxation. The motivation for this chapter derives from the observation (or assertion) that normative political philosophy lacks any widely shared, systematic, or detailed account of taxation, or even any general approach to taxation, while often relying on very broad claims about progressivity, redistribution, or other aspects of taxation. Taxation is often regarded as a ‘black box’ technology that can be called upon to put into effect whatever distribution of economic benefits and burdens that is required by the normative theory under discussion, without the need to consider the more detailed internal properties of the black box itself. At the same time, there is a tradition of resisting the ‘economic’ analysis of taxation at a variety of levels, as exemplified in Murphy and Nagel’s (2002) discussion. The tactic in this chapter will be to start from a more detailed account of the range of contemporary economic approaches and attempt to show their value to normative political philosophy. Tax theory and tax policy are complex, multidimensional issues. We might focus on the overall progressivity of the tax system and its impact on the distribution and redistribution of income, wealth, resources, or some more general indicator of

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well-being; we might focus on the pattern of taxes across sectors and/or activities so as to consider impacts on patterns of production or economic activity; we might focus on the balance of indirect vs. direct taxation so as to address issues of personal responsibility and the visibility of taxation; we might focus on the relationship between taxation and levels and patterns of public spending to address issues of representation and the hypothecation of taxation; we might focus on the role of corporate taxes, in order to address issues concerning the role of non-natural agents in public life; we might focus on the taxation of capital and savings, in order to address issues concerning the intertemporal aspects of economic life; we might focus on international taxation, tax havens, and tax competition to focus on issues of global justice; and so on.¹ Clearly, we cannot hope to consider all of these matters here. In fact, we will refer explicitly only to issues concerning progressivity and distribution, and the balance between direct and indirect taxes. Rather than attend to the range of issues raised within the analysis of taxation, we focus on the basic approach to the analysis of taxation that might carry implications for all of the more particular issues listed above. The discussion presented here provides a basis for the more detailed exploration of the variety of issues within tax theory, since the general lessons drawn from the discussion here are relatively robust across particular settings. While there may be a place for taxation within ideal theory, tax policy may be argued to be an essentially non-ideal issue, for several inter-connecting reasons concerning the motivation of agents and the availability of information. In the political philosophy literature, the distinction between ideal and non-ideal theory is widely deployed despite there being no widely accepted definition of the precise nature of the distinction.² On some accounts, ideal theory is reserved for the analysis of social institutions under the assumption of full compliance with appropriate moral norms by (almost) all agents, so that problems associated with agent motivation are absent. At the same time, ideal theory is often taken to apply only in circumstances in which (almost) all agents are fully informed. If these positions are adopted, so that an ideal account of taxation would take all political and economic agents as well motivated and fully informed, then it might be argued that the widespread use of an essentially coercive instrument like taxation would have at most a minor role to play in an ideal setting, since ideally informed and motivated agents would surely know what they should contribute and be willing to make that contribution voluntarily.³ In this way, the general topic of genuinely coercive taxation seems more at home in the context of non-ideal theory.

¹ Many of these aspects of taxation are discussed in Kaplow (2011). For discussion of progressivity. see Diamond and Saez (2011); for discussion of the balance between direct and indirect taxation, see Cremer, Pestieau, and Rochet (2001); for discussion of tax competition, see Wilson (1999), and Keen and Konrad (2013). ² See, for example, Mills (2005), Robeyns (2008), and Simmons (2010); for discussion and further references, see Hamlin and Stemplowska (2012) and Stemplowska and Swift (2012). ³ Some apparently coercive taxation might be relevant even in an almost ideal context, for example where it was difficult for individuals to assess their own contribution and where the tax authority plays the

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A second aspect of taxation that suggests its generally non-ideal nature relates in more detail to the epistemic context in which taxation operates and focuses on the information available to the tax authorities. In the economics literature a distinction is commonly made between first-best tax policy and second-best tax policy (where second-best is taken to include third-best and so on). The point of this distinction is simply that in a first-best (or ideal) world the taxing authority is assumed to have full, perfect, and costless information on all economic agents and activities and is itself perfectly motivated to pursue the public good. In such a first-best world tax policy is relatively simple. The taxing authority could achieve almost all of its ends, including those relating to the distribution and redistribution of resources, by a set of agentspecific, lump-sum taxes. So that each economic agent would simply be assessed as owing a particular amount in tax, or entitled to a particular amount of additional income in the form of benefits or negative tax payments, without those taxes/benefits being expressed as taxes on any particular economic variables or activities. Such lump-sum taxes are argued to be first-best or ideal in the sense that they have no impact on decision making by agents at any margin and so do not distort economic activity away from its first-best or ideal outcome.⁴ To the extent that the taxing authorities may legitimately wish to have an impact on decision making at the margin in some specific cases (for example, in order to internalize externalities such as pollution assuming such externalities persist in an ‘ideal’ world) specific non-lump-sum taxes and subsidies could be used alongside lump-sum taxes, but such regulatory or corrective non-lump-sum taxes and subsidies would not be used in a first-best world as a means of revenue raising.⁵ Almost all of the economic analysis of taxation therefore relates to the discussion of taxation in the non-ideal setting in which tax authorities lack sufficient information to implement first-best or ideal policies. The third and final point relating to the non-ideal nature of most economic discussion of taxation picks up on the motivation of the tax authority or government itself. If decision making on tax matters is in the hands of agents motivated by considerations that depart from, or go beyond, some agreed idea of the public

role of providing information to individuals which allowed individuals to coordinate their actions (although in a wholly ideal world, citizens would be taken to be fully informed). This assumes that the tax authorities have full information, even if citizens do not; an assumption discussed in the next paragraph. ⁴ The basic idea is that a tax on an activity will generally have two effects: one to raise the relative price of the taxed activity thereby causing taxpayers to substitute away from that activity, the other to reduce the real income of the taxpayer. Roughly, a non-distortionary (lump-sum) tax is one in which there is an income effect but no substitution effect. For a textbook discussion, see Myles (1995). ⁵ Of course, regulatory measures other than taxes and subsidies could also be employed to internalize relevant externalities in at least some cases. Following on from the previous footnote, a perfect corrective tax is one that has the desired substitution effect, but no income effect. This means that any revenue raised by a corrective tax should be returned to the taxpayer as a lump-sum, so that ideal corrective taxes raise no revenue.

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interest, or if there is some risk that this will be the case; or if tax decisions are influenced by some political process (democratic or otherwise) that is not guaranteed to track the public interest perfectly, then we might expect the tax system to depart from the ideal. And in guarding against such an outcome we might wish to put in place structural or other constraints to limit the extent of such departures. But such constraints will themselves be costly and so will place the system as a whole in nonideal territory. In each of these senses, which will be explored in more detail in what follows, the specifics of tax policy are a matter that will be influenced by a multitude of non-ideal factors and considerations. And it is precisely because of the relatively complex nature of taxation in a non-ideal world that normative political philosophy may need to attend to the lessons that can be drawn from the economic analysis of nonideal taxation. The remainder of this chapter is organized as follows: sections 1.2, 1.3, and 1.4 outline the OT, PE, and TC approaches to taxation respectively, sketching their basic characteristics. Section 1.5 then offers discussion of the three approaches, addresses the issue of the relationship among the approaches, and considers the lessons that may be drawn for a more general normative political philosophy of taxation.

1.2 The Optimal Tax Approach The OT approach is now firmly established as the mainstream approach within the economics literature, although it is important to note that this has only been the case since the 1970s. The previous ‘Public Finance’ orthodoxy was based on a more ad hoc range of normative principles and analytic ideas including ‘taxable capacity’, ‘horizontal and vertical equity’, ‘willingness to pay’, and ‘ability to pay’.⁶ Optimal tax theory is essentially normative and essentially holistic. Normative because it derives its claim to optimality from the explicit specification of a value function; holistic because it attempts to design an entire tax and benefit system, rather than treating individual taxes and benefits separately.⁷ Although it is known as the optimal tax approach, the approach is not restricted to the study of taxes but includes the distribution of benefits and subsidies (which might be construed as negative taxes). The OT approach conceives of the basic problem of designing a tax and benefit system as a form of double maximization problem. Government is

⁶ For a presentation, see Musgrave (1959) or Allan (1971). It is worth noting that it is this earlier orthodoxy, rather than the OT approach, that provides the target for many of Murphy and Nagel’s (2002) criticisms. In the UK context the Meade Report (1978) was the last major review of tax structure that employed the Public Finance view. The most recent review, led by James Mirrlees, IFS (2010), adopts the OT approach. ⁷ By contrast the previous Public Finance orthodoxy might be considered to be rather piecemeal in its approach, typically analysing the implications of specific normative principles for specific forms of tax/ benefit, or comparing two or more forms of tax/benefit.

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modelled as choosing a tax/benefit system to maximize a value function subject to the fact that agents (both individuals and any non-individual economic agents) will take the tax/benefit system as given when making their own maximizing choices. In this way, the OT approach builds the optimizing behaviour of economic agents into the structure of the tax design problem. More specifically, it does not assume that there exists some pre-tax situation in which all economic agents have a right to their income (or wealth or consumption), so that taxes and benefits have to be justified relative to that baseline. Rather, the tax/benefit system is seen as one of the factors that shape the behaviour of economic agents and so influence economic outcomes (including both pre-tax and post-tax levels of income, wealth, and consumption). To put the same point otherwise, economic outcomes are determined in part by the social rules and norms in place (including tax and benefit rules) and in part by the behaviour of agents under those rules. In the absence of specific tax/benefit rules, or if alternative rules had been in place, behaviour would have been different and both pre- and post-tax allocations of economic burdens and benefits would also have been different. In recognizing this point, the OT approach attempts to look through the optimizing behaviour of economic agents in order to put in place that set of tax/ benefit rules which can be expected to yield the optimal outcome in terms of the specified value function, once all agents have reacted to those rules.⁸ OT theory is concerned with constrained (second-best) optimality rather than full (first-best) optimality; that is, it explicitly identifies constraints that might be expected to prevent us from reaching the ideal or first-best situation and seeks to identify the best available tax/benefit system given those constraints. Most fundamentally, as already sketched, the exercise is constrained by the nature of the behaviour of economic agents and by the information available to the tax authority or government. In relation to the first of these, the intention is to model economic agents as they are rather than as they should be; although, as with any modelling exercise there is inevitably a degree of abstraction from reality. Agents are typically modelled as rational rather than moral, in that they are assumed to pursue their own interests rather than the social value function that underlies the normative status of the OT approach itself. In this way, the overarching purpose of the OT approach is to determine the pattern of tax/benefit rules which maximally serves the defined public interest on the assumption that economic agents operate rationally under those rules. In relation to the second set of informational constraints, as already noted, if all information were fully and freely available to government, the first-best tax/benefit system, involving lump-sum taxes on, and benefit payments to, individual agents, would be available. But these optimal lump-sum transfers will typically depend on

⁸ Among the classic papers in the development of the optimal tax approach are Ramsey (1927), Mirrlees (1971), Diamond and Mirrlees (1971a, 1971b), and Atkinson and Stiglitz (1976). For influential surveys, see Stiglitz (1987) and Slemrod (1990). For a specific focus on fair income taxation, see Fleurbaey and Maniquet (2006). For a recent book-length discussion, see Tuomala (2016).

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underlying characteristics of individual agents and specifics of economic activity that are unobserved.⁹ Exactly what details are observable, and therefore which tax/benefit systems are feasible in informational terms will vary from time to time and place to place, and we will return to this point below. The unobservable or unobserved nature of potentially relevant information may be seen as a key aspect of the non-ideal nature of the OT approach. We may now turn to the structure of OT theory itself. As already indicated, the normative nature of this approach derives from the requirement to specify the value function that is taken to represent the public interest or social welfare. In practice, the value functions actually employed in the OT literature are generally welfarist in nature, defined in terms of the levels of utility or welfare of each individual in society with parameters to reflect inequality aversion. Clearly the interpretation of ‘utility’ or ‘welfare’ is very flexible, as is the degree of inequality aversion that may be specified; indeed, one of the points of the exercise is to see how responsive the design of the optimal tax system is to different detailed specifications of the social value function. Once a value function is specified the next step is to model the population of agents and it is here that the potential complexity of the model is most apparent. In the simplest possible model we might assume that all agents are essentially identical, so that no issue of (re)distribution can arise. In moving away from this extreme case we might introduce heterogeneity in just one dimension, so that individuals differ only in respect, say, of their productivity. The next step might be to allow individuals also to differ in their preferences; and so on. As already noted, everything then depends on what information is assumed available to government and so what types of taxes are taken to be feasible. In some situations, perhaps particularly relevant in less developed countries, it might not be possible or practical to monitor all employment, so that an income tax might not be feasible. In such cases the only feasible taxes might be a range of commodity taxes, including taxes on imports and exports, since transactions in commodities are relatively easy to monitor. In more advanced economies, which have invested in the infrastructure of data collection, a much wider range of taxes might be feasible.¹⁰ Since commodity taxes are usually thought of as less informationally demanding than income or wealth taxes, the simplest, benchmark example of the OT approach is one in which only commodity taxes are considered and all individuals are assumed to be identical. This is the setting of Ramsey’s original 1927 paper which first introduced the structure of the double maximization problem and so marked a distinct step from ⁹ Some relevant information may be unobservable in principle; other information may be observable only at high cost, where that cost may be financial or in terms of other aspects of relevance to overall social value (e.g. in relation to the value of privacy). An example of the former might be an individual’s true ability (rather than proxy measures such as educational attainment); an example of the latter might be each individual’s consumption of particular goods such as tobacco or alcohol. ¹⁰ For discussion of issues concerning taxation in developing countries, see Burgess and Stern (1993) and Gordon and Li (2009).

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the prevailing literature which operated on the normative basis of a number of relatively ad hoc principles rather than an integrated value function, and which tended to treat taxes individually rather than the whole tax system. In this context, where we are only concerned with efficiency, since the issue of distribution does not arise, the optimal tax structure will involve a set of differentiated commodity taxes, with higher tax rates on those commodities that are relatively price insensitive and lower taxes on commodities that are more price sensitive. In this way, the marginal distortion associated with taxing each commodity can be equalized and the total efficiency distortion minimized. To illustrate the way in which assumptions on the heterogeneity of the population and the feasibility of alternative taxes affect the optimal design of a tax system, we should consider cases which differ from each other in just one respect. For example, if we continue to assume that income taxes are infeasible and only commodity taxes are available, but allow heterogeneous agents, so that distribution becomes an issue, we must now use our commodity taxes not only to raise revenue with as little efficiency loss as possible, but also to influence the distribution of welfare. In this case, the optimal tax system would still exhibit differential commodity taxes, but the pattern of tax rates would now reflect two forces: one, as before, reflecting price responsiveness and efficiency loss, the other placing higher tax rates on commodities that might be thought of as luxuries, and lower rates on necessities, so as to generate a degree of progressivity into the system.¹¹ Since there is no guarantee that these two forces will pull in the same direction, it is generally the case that the desirable redistributive impact of the tax system will imply greater distortions to efficiency. The greater the inequality aversion built into the underlying value function, the greater the emphasis on the redistributive aspect of taxation and the greater the resultant loss in efficiency. Even in this very simple case, then, we see that the OT approach is essentially concerned with balancing the various costs associated with a necessarily imperfect tax system, so as to produce the optimal overall result.¹² If now we consider a situation in which both income taxes and commodity taxes are available, a progressive income tax will typically be the optimal means for addressing distributional issues, with commodity taxation addressing efficiency issues. This will typically imply a wide commodity tax base with a uniform tax rate, although higher rates may be levied on goods that are complements with leisure and to internalize specific externalities (such as specific taxes to address issues such as environmental pollution). While the tax/benefit system that is revealed as optimal may vary considerably from case to case, reflecting both different informational constraints and different specifications of the social value function, OT theory provides a framework in which ¹¹ Where ‘luxuries’ are those goods and services whose consumption is strongly positively correlated with income, and ‘necessities’ those where consumption is largely independent of income. ¹² See, for example, Kaplow (2008).

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an explicit normative value function is set in the context of relevant feasibility constraints to derive the appropriate overall tax and benefit structure. There are a number of practical implications of the OT approach that are relatively robust across detailed settings. Mankiw, Weinzierl, and Yagan (2009) identify eight general, structural lessons from OT theory and discuss the extent to which these lessons have influenced actual tax policy. The eight are: (1) Optimal marginal tax rate schedules should depend on the distribution of ability (rather than merely the distribution of income or wealth); (2) The optimal marginal tax schedule could decline at very high levels of income (even in systems which are overall progressive); (3) A flat tax, with a universal lump-sum transfer, will often be close to optimal; (4) The optimal degree of redistribution rises with wage inequality; (5) Direct taxes should depend on personal characteristics as well as income; (6) Only final goods (rather than primary or intermediary goods used in the production of final goods) ought to be taxed, and typically they ought to be taxed uniformly; (7) Capital income ought to be untaxed, at least in expectation; (8) In stochastic, dynamic economies, optimal tax policy is complex. Merely listing these lessons is sufficient to indicate that while tax reforms in many countries have moved in the direction indicated by some of these lessons, the pattern is by no means uniform or complete. It is certainly the case that in many advanced economies the top marginal rates of income tax have declined, direct tax profiles flattened, and commodity taxation moved toward uniformity often via versions of value added tax (VAT); but the patterns of reform in capital taxation and universal benefits are much less clear. Of course, the eighth and final lesson is that optimal tax systems will be complex and different across settings, but even so the impact of the OT approach on tax reform in practice has been rather slow and partial; perhaps for reasons to be discussed below and in the following sections. Common criticisms of OT theory focus on the specification of the value function employed, issues surrounding the identification of relevant agents, and the lack of political analysis. I will touch on each area in turn. At the most basic level, the specification of a value function, whatever its details, indicates that the OT approach is essentially teleological in its structure, seeking to maximize overall net benefits, whatever the detailed account of benefits and costs may be.¹³ While it is true that the OT literature is presented in teleological and consequentialist terms, this does not imply that OT is incapable of recognizing at least some more deontological claims: specifically, those that can be expressed as constraints which may be built into the OT exercise of constrained maximization. ¹³ For a discussion of the consequentialism/deontology distinction in the context of taxation, see Murphy and Nagel (2002: 41–5).

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Of course, to the extent that such constraints dominate, there may be little scope for optimization within the permissible set of tax policies, so that the optimization idea will lose much of its force. But the idea that deontic considerations (almost) fully determine tax policy seems extreme, and the OT structure seems to be a suitable means of balancing those deontic considerations that can be modelled as sideconstraints with more teleological and consequentialist considerations. Within the teleological structure of the OT approach, one might also criticize welfarism as an appropriate basis for identifying social value.¹⁴ And it is true that, in the OT literature there is a general assumption that efficiency and equity in relation to welfare are the only relevant normative categories, but again, this does not seem essential to the OT approach per se. All that is essential here is that there should be an explicitly specified value function. Now, of course, the requirement that the value function be explicit forces clarity and, if the intention is to perform a practical exercise, the need to specify the value function in terms that are tractable may force a degree of simplification, but there is nothing in the structure of the OT approach (as opposed to any particular application of that approach) that involves a deep commitment to welfarism or any other substantive view of the nature of the value to be maximized. In principle, at least, the OT approach is capable of working with any well-specified value function, whatever its more philosophical underpinning. On the question of the identification of the relevant agents for the purposes of tax policy formulation, OT theory, and all other approaches to taxation, face significant issues. One obvious problem lies in the treatment of individuals and families (or other groupings of individuals); another issue revolves around the status of corporations and other institutional agents. OT theory is sometimes criticized for being too individualist and ignoring corporations. Now, any practical tax policy will have to come to some view on these questions—but it is not obvious what that view should be or how the factors that influence our choice of position on these questions interact with the OT approach (or any other approach). Whether we treat individuals or families or households as the appropriate units for tax and benefit purposes is a complex issue, and our answer may be different in different parts of the same system (e.g. we might tax individuals, but provide benefits based on families), and much may depend on issues of information availability and reliability (as is stressed by the OT approach). Similarly, whether we view corporations and other institutions as taxable units in themselves or treat profits and other such variables as accruing to individual shareholders is a complex matter, and will again depend on a variety of factors. And these questions would have to be answered, at least provisionally, in order to provide a starting point for designing a tax system, but once they are answered, and however they are answered, there is still a need to design the tax system on the basis of those ¹⁴ The debate here is wide-ranging and the literature huge; see, for example, Dworkin (2002), Kaplow and Shavell (2002), Cohen (2008), and Sen (2009).

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answers, and this seems to be the point at which the OT approach becomes relevant.¹⁵ In other words, the OT approach does not in itself answer all of the questions that require answering about a tax/benefit system; it merely provides a structure of analysis that both helps to identify the relevant substantive questions and organizes the answers to those questions in a manner that balances all of the concerns identified as important. The final criticism of OT theory to be considered here is that it ignores politics. This criticism has two aspects; first, that the OT approach adopts the heroic assumption that government itself is ideally motivated (while economic agents are modelled in non-ideal terms as rational rather than moral), and second, that while focusing on informational feasibility, it ignores any notion of political feasibility.¹⁶ These criticisms clearly carry weight, but might also be said to be criticizing the OT approach for failing to do something which it does not set out to do. OT theory is not intended as a model of the process of tax design or reform; rather it is a framework for articulating the normative standards relevant to the design of tax/benefit systems. The political challenge is taken up by the PE and TC approaches to be considered below.

1.3 The Political Economy Approach By contrast with the OT approach, the PE approach may be seen as broadly positive rather than normative in nature and focused on providing an analysis of a tax/benefit system seen as the outcome of a democratic political process. While the analysis of the political process is broadly economistic, in the sense that it builds on the ‘public choice’ school of rational actor political analysis, the analysis does not depend on any specific economic analysis of the tax/benefit system itself.¹⁷ The essential question addressed by the PE process is, what tax structure might emerge from, and be supported within, a democratic political process, and how might the answer to this question depend on the details of the democratic process. The PE approach typically builds on the Downsian model of democracy.¹⁸ In this setting neither the tax authority nor individuals are modelled as ideal moral agents. Politicians are taken to be motivated by the prospect of winning elections, so that they offer whatever expenditure, tax, and benefit package will maximize the probability of winning the next election; while individuals, as voters, are assumed to vote

¹⁵ Another area in which genuine questions arise relates to the specification of time periods for tax purposes. In the context of income taxation, for example, should we be concerned with weekly income, monthly income, annual income, or lifetime income? See Fennell and Stark (2005); for the specific issue of the taxation of savings, see Atkinson and Sandmo (1980). ¹⁶ For a discussion of aspects of feasibility, see Hamlin (2017) and references therein. ¹⁷ For an overview of the public choice literature, see Mueller (2003); for a review of its application to tax policy, see Holcombe (1999). ¹⁸ See Downs (1957); for extension to representative democracy, see Besley and Coate (1997).

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rationally in pursuit of their self-interest. A benchmark case in this literature is the case of majoritarian voting for a purely redistributive tax and benefit system involving a simple flat-rate income tax which finances equal lump-sum payments to all citizens. The argument here brings together three points. First, a simple analysis of the logic of the tax system under discussion: if, for simplicity, one assumes that the tax system itself is costless to operate, so that all taxes raised are returned as benefit payments, and (for a moment) that pre-tax incomes are independent of the tax rate, it is clear that anyone with pre-tax income below the mean level will gain from a system which taxes income proportionately and distributes benefits as lump-sums, while anyone with pre-tax income above the mean will lose. The second point derives from the basic idea of the Downsian median voter theorem, which indicates that, in a simple majoritarian election between two candidates or parties we can expect the policy offered by the candidates to converge on the policy that would be chosen by the median voter. The third point is then an empirical claim, that the typical distribution of income is skewed so that median income is less than mean income. Taking these three points together indicates that the majority would vote for a redistributive tax scheme: indeed, in the simple case sketched, the majority would vote for full equalization of post-tax incomes by imposing a 100 per cent tax rate and redistributing all revenues equally.¹⁹ Of course, moving away from this simple and extreme case in the direction of realism modifies the result. Most obviously, if one drops the assumption that pre-tax incomes are independent of the tax rate, so that the tax rate will have a disincentive effect on income generation, it is clear that 100 per cent tax rates would never be chosen. Nevertheless, the simple model will still give rise to redistributive taxation, limited by the extent of the disincentive effects. In essence, redistribution will occur up to the point where the marginal benefit to the median voter associated with any further increase in the tax rate is zero. This type of analysis can be extended to consider commodity taxes and other taxes alongside income taxes. The models become more complex, but the essential structure remains: as part of political (i.e. electoral) competition, rival parties will face incentives to design tax structures that, for any given level of total tax revenue, maximize political support. The basic result is that the tax structure that arises as a political equilibrium is such that the marginal loss of political support per £ of tax revenue raised is equalized across all taxes, and across all tax payers.²⁰

¹⁹ Among the classic papers in this tradition are Foley (1967), Romer (1975), Roberts (1977), and Meltzer and Richard (1983). ²⁰ The point here is that, if this marginal loss were not equalized, it would always be possible to increase political support at no cost in terms of tax revenue by marginally increasing the tax in the area with the lower marginal loss and decreasing the tax in the area with the higher marginal loss. Thus, equalization of marginal loss is a necessary condition for the maximization of political support for any given level of tax revenue.

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Of course, full equalization of political support at all relevant margins may not be feasible in practice; it may be necessary, for reasons of information availability, cost, and convenience, to group commodities and individuals and treat elements of each group equally. However, grouping of this sort implies political losses, so the question of how to group in order to minimize these political losses arises; that is, how many tax bands for income tax, how many groups of commodities with different tax rates, are politically sustainable? The logic of the PE approach on such questions is that political parties seeking election will simply balance administrative costs against political costs, and so offer the pattern of grouping that minimizes total costs as they perceive them.²¹ The PE approach predicts complex tax structures with the number of rate bands and commodity groups being constrained by administrative costs and political considerations. Tax structures, rates, and exemptions are all determined jointly in political equilibrium and so will reflect the relative voting power of groups in society. Political parties, in this approach, can be seen as playing groups of voters off against each other in attempting to raise revenue at minimal political cost in terms of votes lost. This approach also suggests that the tax/benefit system may not be stable over time. Shifts in underlying technical, economic, demographic, and political variables will induce shifts in the political equilibrium. Tax reform will be politically driven, rather than responsive to more fundamental economic, social, or normative analysis. The tax and benefit system will be open to political manipulation by special interest groups, so that we would expect to see log-rolling and other political manoeuvres. In particular we would expect to see relatively small well-organized groups lobby successfully for tax breaks at the expense of relatively large but disorganized groups. There is certainly no guarantee that the tax/benefit system that emerges as a political equilibrium will satisfy any particular efficiency criteria, or any more general normative criteria. The PE approach is not directly normative in its approach; it seeks to explain the observed pattern of taxes and benefits and the processes that drive changes in that pattern, rather than make proposals for reform. However, to the extent that it provides the basis for a diagnosis of political failure in the tax and benefit setting process, it might be taken to provide a counterbalance to the OT approach’s identification of an optimal tax and benefit system. The extent to which the PE approach actually explains the observed pattern of taxes and benefits, how tax systems evolve, and how they differ across jurisdictions, is limited by the relative paucity of detailed empirical studies, but it is hardly surprising that there is at least considerable evidence that political factors and the operation of the democratic process itself does influence both the structure and the detail of tax policy.²² ²¹ For a detailed analysis that considers the grouping of taxpayers and economic activities, see Hettich and Winer (1988). ²² See, for example, Steinmo (1989), Slemrod (1999), and Hettich and Winer (2005).

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1.4 The Tax Constitution Approach The TC approach returns to a more explicitly normative standpoint but one that emphasizes the political dimension, albeit in the more contractarian, constitutionalist perspective associated with the constitutional political economy literature.²³ While the PE approach stresses the impact on tax policy of electoral competition, the TC approach focuses more broadly on the possibility of constitutional controls on the discretionary power of government elites, whether those controls operate via electoral competition or otherwise. In contrast to the OT approach, the TC approach does not assume that governments are benignly motivated to maximize an appropriate value function, but rather assumes that government will pursue its own objectives (which will include, but may not be limited to, the seeking of re-election) constrained by binding constitutional arrangements. From this perspective, then, the TC approach argues for a fiscal constitution that limits governmental discretion, both by restricting the set of tax policies that the government can implement and, perhaps, by imposing substantive limits on tax revenues, or fiscal deficits, or other relevant variables.²⁴ In common with the OT and PE approaches, the TC approach models individuals as rational rather than moral. The benchmark case in this literature assumes that government is a revenue maximizer and then investigates the constraints on the power to tax that would be supported by a representative citizen behind an appropriate constitutional veil of ignorance.²⁵ The general observation is that the incentive to limit exploitation of tax bases cuts across many of the arguments from OT theory. For example, standard economics and the OT approach tends to support broadly defined tax bases (a comprehensive definition of income, a wide range of commodities, etc.) on the grounds that the broader the tax base, the less distortionary will be the optimal tax rate structure associated with any given level of revenue to be raised. However, the TC approach points out that, in the absence of well-motivated government, broader tax bases clearly provide greater opportunities for tax exploitation, so that constitutional restrictions on allowable tax bases might be motivated despite their narrowly economic inefficiency.²⁶ One way of viewing this point is that by restricting access to certain tax bases, a tax constitution would ensure that there are some tax-free areas ²³ For an overview of the constitutional political economy literature, see Brennan and Buchanan (1985), Brennan and Hamlin (1995), and Buchanan (2004). ²⁴ The classic reference in relation to the tax constitution is Brennan and Buchanan (1980). The tax constitution might be seen as part of a more general fiscal constitution that also applies constitutional controls to expenditure policies and, importantly, borrowing. See Buchanan and Wagner (1977) and Buchanan (1987). The TC approach may be seen as an example of the ‘Principal–Agent’ approach to constitutional politics, where citizens are the principals, politicians the agents, and the constitution is the ‘contract’ that seeks to limit the agents power to exploit the citizens. ²⁵ The logic is extended in Brennan and Buchanan (1985). See also Hamlin (2014). ²⁶ One possible restriction on the set of allowable tax bases that might meet generally shared moral intuitions as well as limiting the scope for tax exploitation might involve disallowing a commodity tax on basic food.

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of the economy to which citizens can escape, or exercise an exit option, so limiting governmental power. Similarly, the TC approach might motivate restrictions on rate structures aimed at reducing the monopoly power of government: imposing a requirement of a common rate of tax on different commodities, and/or a common rate of tax on different individuals will reduce the ability of government to ‘discriminate’ and so raise additional revenue; equally, a requirement that the rate structure be progressive will typically reduce the maximum revenue that a government can raise, since unconstrained revenue maximization will normally imply regressive taxation. In some cases these conclusions run counter to the mainstream OT theory (e.g. on the broad vs. narrow tax base), but in other cases they are consistent, although derived from very different logic (e.g. on progression, or on uniform rates). A further aspect of a tax constitution concerns the allocation of taxation powers across levels of government. In the OT approach, it is standard to think of a single government designing the entire tax/benefit system; not least since (given the assumption of a well-motivated government) there will be efficiency gains from an integrated approach to tax policy. But in the TC approach the separation of tax raising powers across multiple agencies within a broadly federal structure may be appropriate to reduce an effective monopoly power and to set up forms of internal tax competition.²⁷ The constitutional nature of the controls envisioned implies that the controls must be relatively general, and this in turn implies that they cannot hope to achieve finegrained control. If constitutional requirements are thought of as applying equally at all times, but tax policy is thought of as varying over time both cyclically and in response to particular economic events, it is clear that any constitutional controls motivated by the TC approach face a trade-off. If they constrain government too tightly, they will disallow the flexibility that may be required for tax policy to respond to circumstances, but if they are loose enough to allow governmental discretion to manage in the face of varying circumstances, they will also allow at least some tax exploitation. In this way, a tax constitution has to balance inefficiency (and/or ineffective redistribution) against greater insurance against political exploitation. There is also the question of the most appropriate nature of the constitutional controls to impose in attempting to limit governmental power. If, as in the benchmark case, the central concern is that government may overuse its tax raising powers, it might seem natural to specify the relevant constitutional control in terms of a maximum scale of tax revenues (perhaps as a percentage of GNP), leaving the details of how this tax is raised flexible. Although if the concern is with over-expansion of government expenditure, such a constitutional constraint may simply incentivize ²⁷ Tax competition may take a number of forms, some relying on mobility of agents between regions/ jurisdictions, others relying on voters using practice in other jurisdictions as a yardstick against which to judge their own government: see Wilson (1999) and Keen and Konrad (2013).

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public borrowing, so that it might be more appropriate to place the constitutional control directly on expenditure levels rather than on taxation. However, if the concern is with the generally invasive nature of government power, any control on either taxation or expenditure might simply incentivize regulatory activity by government which may have still more damaging effects than taxes or expenditures. At a broader level, we can see that there is a clear relationship between the PE and TC approaches, in that both recognize the constitutional control of government power. In the PE case, the focus is on the effects of electoral competition or other procedural aspects of the policymaking process, while in the TC case the focus is on the normative justification of constitutional constraints over and above the idea of electoral competition that attempt to restrict specific powers of government. In considering the constitution as a whole, it is clear that both forms of control may have a part to play. Just as invoking specific substantive controls on the tax-raising power of government limits governmental discretion and so provides insurance against exploitation, so specifying the nature of the political process (voting systems, frequency of elections, term limits, etc.) will reduce governmental discretion by effectively empowering the electorate; but, as we have seen, there is no guarantee that either reducing governmental discretion or empowering the electorate necessarily results in a tax system that is optimal in the sense of OT theory.

1.5 Normative Political Philosophy of Taxation In an ideal world, tax policy would be relatively simple. If all agents are fully informed and fully compliant with relevant moral standards in their motivations and behaviour, and other ideal institutional arrangements are in place, it is conceptually straightforward to translate from the relevant normative principle (whatever it may be) to the financial contribution required from each agent to the state (if any), or from the state to particular agents (if any). As all three of the economic approaches to taxation agree, the tax and benefit system in such an ideal world would consist mainly of lump-sum taxes and benefits, with little or no need for taxes levied on particular economic activities—no general income, wealth, or property taxes, no general commodity taxes.²⁸ But such an ideal is scarcely a guide for a tax system in a non-ideal world. The OT approach makes the points that even if governments and their agencies are well motivated, first-best lump-sum taxes are informationally infeasible and that second-best tax systems must account for the reactions of economic agents, so that second-best tax systems will generally be very different in structure and character to first-best systems. The PE approach makes the further point that if we consider tax and benefit systems as the outputs of political processes, rather than as the direct products of normative theorizing, we should expect the ²⁸ As noted previously, it is possible that there might still be a need for some corrective taxes, to the extent that these were not rendered redundant by the ideal conditions.

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properties of the relevant political processes, and the motivations of the agents that operate within them, to be reflected in the tax system which is then very unlikely to achieve even the standard of the second-best. The TC approach builds on this political point to identify a range of constitutional controls on the political system as a primary means by which we might structure and constrain the power to tax, particularly when there can be no guarantee that those in political control of day-today tax policymaking will be well motivated. Identifying the key points of each of the three economic approaches to taxation in this way serves to underline the claim that these three approaches are best understood as complements rather than substitutes. Of course each approach focuses on a different aspect of the general problem of the design and operation of a tax and benefit system and offers distinctive insights; and it is sometimes claimed that the approaches are in opposition—particularly where the OT and TC approaches seem to offer contrary recommendations, for example in relation to whether tax bases should be defined as broadly as possible to minimize inefficient distortions or restricted to constrain governmental discretionary power. But there is no deep conflict here. Rather, the approaches differ in terms of the extent to which they factor in political as well as informational and motivational constraints on the ideal. The OT approach focuses on the narrowly defined economic relationship between government and tax payers, while the PE approach focuses on the essentially political relationship between voters and political candidates when tax policy is seen as part of the political agenda. The OT approach then adopts a normative position that attempts to structure the political and constitutional environment in such a way as to favour the interests of citizens in general rather than political elites. Thus, to return to the apparent conflict between the PE and TC approaches in relation to the breadth of tax bases, combining the insights of the two approaches allows us to identify the trade-off that is most relevant in determining the optimal overall configuration: the broader the tax base, the lower the costs of inefficient distortions associated with raising any given amount of tax revenue, but broader tax bases also increase the extent (or the risk) of excessive taxation. Balancing these two costs (as well as others) is the key to identifying the tax system that is optimal, all things considered. It is this idea of explicitly identifying the constraints that are most salient to the tax design problem, recognizing the nature of the costs associated with each such constraint (whether those costs are economic, social, or political in nature), and balancing these various costs at the margin, that identifies the essence of the economic approach. The three economic approaches to taxation broadly correspond to three relatively familiar approaches to normative political philosophy: the direct derivation of institutional or policy implications from explicit normative criteria; the explication of legitimate policy through an analysis of democratic procedures; and the use of constitutional devices to constrain and channel political behaviour. The essential complementarity of the three economic approaches reflects the essential complementarity of these general approaches to normative political philosophy.

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Of course, a hallmark of all of the economic approaches to taxation canvassed here is that they are optimizing approaches—differing in the detailed specification of the constraints that combine to limit the attainment of normative ideals. It is always open to the political philosopher to reject the optimizing approach altogether as evidence of a mistaken consequentialism. But it is difficult to believe that there is no place for at least some consequentialist considerations within the domain of political philosophy, and it should be very clear that the emphasis of the second-best economic approaches to taxation lies very much on understanding and investigating the constraints that restrict the domain of optimization rather than on optimization per se.²⁹ While the optimizing approach may not exhaust the normative political philosophy of taxation, it must surely be a very significant part of it. If we accept that taxation is essentially a non-ideal topic, then at least a major part of the normative political philosophy of taxation has to operate in the imperfect context implied by recognizing at least the major constraints imposed by the real world.³⁰ An important question then is what are the most salient constraints and imperfections to incorporate into our normative political philosophy of taxation? The three economic approaches to taxation outlined here pick out several leading candidates: the motivations of individuals subject to taxation, the motivation of governing elites, the availability of relevant information, and the political and constitutional structures that shape the policymaking process. Furthermore, they offer an analytic framework within which these various constraints and their interactions can be studied in some detail. In so doing, they offer valuable lessons to the normative political theorist. Optimal Tax theory stresses the significance of specifying the optimand explicitly and delimiting the feasible set. The Political Economy approach stresses additional procedural constraints and the necessity of embedding the normative within a positive model of the political process. The Tax Constitution approach stresses additional substantive constraints and the issue of the motivation of political agents. All stress the importance of defining the issue at the level of the tax and benefit system taken as a whole (not, for example, tax by tax, or separating tax analysis from benefit analysis). A key point here is that the tax and benefit system cannot properly be seen in isolation from other aspects of the institutional structure of society. Most obviously, the tax and benefit system has to be seen as being operated within the overall political system, so that details of the political system such as the structure of representation, the pattern of delegation of tax and benefit matters across

²⁹ It would be entirely possible to include within the economic approaches formulations other than simple maximization subject to identified constraints—for example, by considering satisficing models that might relate to sufficientarian ideas. For discussion of sufficientarianism and further references, see Gosseries (2011) and Shields (2012). ³⁰ The suggestion that political theory should take a more realistic stance in order to contribute more forcefully and directly to debates on public policy is, of course, not restricted to the area of taxation. See, for example, Swift (2008) and Wolff (2012).

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sub-national jurisdictions, or the voting system, are likely to carry implications for the tax regime that is supported and sustained under those political arrangements. Causal influence may also run in the opposite direction with tax systems influencing voting, campaigning and lobbying coalitions, and political outcomes that may go well beyond the tax system itself. At the same time, other institutional and regulatory aspects of society may bear on both the political and economic aspects of tax theory. One obvious and direct way in which wider issues relating to the institutional and policy arrangements surrounding healthcare, education, overseas aid, and all other major areas of policy concern will bear on tax theory is by influencing the overall level of public spending, and hence the overall demand for tax revenues, but it may also be the case that these other structural aspects of society impact less directly on tax policy through the operation of the political system. While the three economic approaches to taxation outlined here go some way to embed the discussion of the design of the optimal feasible tax and benefit system in a more political setting, and to make that process explicit by being clear as to exactly which economic and political factors are being identified as relevant constraints on feasibility, it is clear that one might wish to recognize rather different constraints in order to analyse their impact on the design of a tax and benefit system. None of the three economic approaches outlined here offers a straightforward answer to the question of the design of the best feasible tax system; and even the combination of the three approaches will fall short of such an ambition. Nevertheless, I would suggest that, taken together, they do offer valuable lessons to the normative political philosopher who wishes to adopt a less than ideal approach to the design of social and political institutions including, but not limited to, a tax system. Looking inside the ‘black box’ of tax theory, recognizing that second-best proposals may differ markedly from first-best proposals, and being explicit about the many potential economic and political trade-offs that operate to identify second-best proposals, are important steps towards a more mature and general debate on the role of taxation.³¹

References Allan, C. M. (1971), The Theory of Taxation (Penguin Books). Atkinson, A. B. and Sandmo, A. (1980), Welfare Implications of the Taxation of Savings, in The Economic Journal 90/359: 529–49. Atkinson, A. B. and Stiglitz, J. E. (1976), The Design of Tax Structure: Direct Versus Indirect Taxation, in Journal of Public Economics 6/1–2: 55–75. Besley, T. and Coate, S. (1997), An Economic Model of Representative Democracy, in Quarterly Journal of Economics 112/1: 85–114.

³¹ This chapter benefitted from discussion at the Conference on Political Philosophy and Taxation at UCL and at the Social and Political Theory Seminar in the Research School of Social Sciences at ANU. I particularly thank Geoffrey Brennan, Marc Fleurbaey, Martin O’Neill, Shepley Orr, Henry Richardson, Alex Rosenberg, and Jonathan Wolff for helpful comments.

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Brennan, G. and Buchanan, J. M. (1980), The Power to Tax: Analytical Foundations of the Fiscal Constitution (Cambridge University Press). Brennan, G. and Buchanan, J. M. (1985), The Reason of Rules: Constitutional Political Economy (Cambridge University Press). Brennan, G. and Hamlin, A. (1995), Constitutional Political Economy: The Political Philosophy of homo economicus? in The Journal of Political Philosophy 3/3: 280–303. Buchanan, J. M. (1987), The Constitution of Economic Policy, in The American Economic Review 77/3: 243–50. Buchanan, J. M. (2004), Constitutional Political Economy, in C. K. Rowley and F. Schneider (eds.), The Encyclopedia of Public Choice (Springer), Vol. 1, 60–7. Buchanan, J. M. and Wagner, R. E. (1977), Democracy in Deficit: The Political Legacy of Lord Keynes (Academic Press). Burgess, R. and Stern, N. (1993), Taxation and Development, in Journal of Economic Literature 31/2: 762–830. Cohen, G. A. (2008), Rescuing Justice and Equality (Harvard University Press). Cremer, H., Pestieau, P., and Rochet, J. C. (2001), Direct Versus Indirect Taxation: The Design of the Tax Structure Revisited, in International Economic Review 42/3: 781–800. Diamond, P. A. and Mirrlees, J. A. (1971a), Optimal Taxation and Public Production I: Production Efficiency, in The American Economic Review 61: 8–27. Diamond, P. A. and Mirrlees, J. A. (1971b), Optimal Taxation and Public Production II: Tax Rules, in The American Economic Review 61: 261–78. Diamond, P. A. and Saez, E. (2011), The Case for a Progressive Tax: From Basic Research to Policy Recommendations, in Journal of Economic Perspectives 25/4: 165–90. Downs, A. (1957), An Economic Theory of Democracy (Harper & Row). Dworkin, R. (2002), Sovereign Virtue: The Theory and Practice of Equality (Harvard University Press). Fennell, L. A. and Stark, K. J. (2005), Taxation over Time, in Tax Law Review 59/1: 45–51. Fleurbaey, M. and Maniquet, F. (2006), Fair Income Tax, in The Review of Economic Studies 73/1: 55–83. Foley, D. K. (1967), Resource Allocation and the Public Sector, in Yale Economic Essays 7/1: 45–98. Gordon, R. and Li, W. (2009), Tax Structures in Developing Countries: Many Puzzles and a Possible Explanation, in Journal of Public Economics 93/7: 855–66. Gosseries, A. (2011), Sufficientarianism, in E. Craig (ed.), Routledge Encyclopedia of Philosophy (Taylor & Francis). Hamlin, A. (2014), Reasoning about Rules, in Constitutional Politcal Economy 25/1: 68–87. Hamlin, A. (2017), Feasibility Four Ways, in Social Philosophy and Policy 34/1: 209–31. Hamlin, A. and Stemplowska, Z. (2012), Theory, Ideal Theory and the Theory of Ideals, in Political Studies Review 10/1: 48–62. Hettich, W. and Winer, S. L. (1988), Economic and Political Foundations of Tax Structure, in American Economic Review 78/4: 701–12. Hettich, W. and Winer, S. L. (2005), Democratic Choice and Taxation: A Theoretical and Empirical Analysis (Cambridge University Press). Holcombe, R. G. (1999), Tax Policy from a Public Choice Perspective, in J. Slemrod (ed.), Tax Policy in the Real World (Cambridge University Press), 397–409. IFS. (2010), Dimensions of Tax Design: The Mirrlees Review (Oxford University Press).

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Kaplow, L. (2008), Optimal Policy with Heterogeneous Preferences, in The BE Journal of Economic Analysis & Policy 8/1: doi: https://doi.org/10.2202/1935-1682.1947. Kaplow, L. (2011), The Theory of Taxation and Public Economics (Princeton University Press). Kaplow, L. and Shavell, S. (2002), Fairness Versus Welfare (Harvard University Press). Keen, M. and Konrad, K. A. (2013), The Theory of International Tax Competition and Coordination, in A. Auerbach, R. Chetty, M. Feldstein, and E. Saez (eds.), Handbook of Public Economics (North Holland), Vol. 5, 257–322. Mankiw, N. G., Weinzierl, M., and Yagan, D. (2009), Optimal Taxation in Theory and Practice, in The Journal of Economic Perspectives 23/4: 147–74. Meade, J. E. (1978), The Structure and Reform of Direct Taxation (Allen & Unwin). Meltzer, A. H. and Richard, S. F. (1983), Tests of a Rational Theory of the Size of Government, in Public Choice 41/3: 403–18. Mills, C. W. (2005), “Ideal Theory” as Ideology, in Hypatia 20/3: 165–84. Mirrlees, J. A. (1971), An Exploration in the Theory of Optimum Income Taxation, in Review of Economic Studies 38/114: 175–208. Mueller, D. C. (2003), Public Choice III (Cambridge University Press). Murphy, L. B. and Nagel, T. (2002), The Myth of Ownership (Oxford University Press). Musgrave, R. A. (1959), The Theory of Public Finance (McGraw-Hill). Myles, G. D. (1995), Public Economics (Cambridge University Press). Ramsey, F. P. (1927), A Contribution to the Theory of Taxation, in The Economic Journal 37/145: 47–61. Roberts, K. W. S. (1977), Voting over Income Tax Schedules, in Journal of Public Economics 8/3: 329–40. Robeyns, I. (2008), Ideal Theory in Theory and Practice, in Social Theory and Practice 34/3: 341–62. Romer, T. (1975), Individual Welfare, Majority Voting, and the Properties of a Linear Income Tax, in Journal of Public Economics 4/2: 163–85. Sen, A. K. (2009), The Idea of Justice (Harvard University Press). Shields, L. (2012), The Prospects for Sufficientarianism, in Utilitas 24/1: 101–17. Simmons, A. J. (2010), Ideal and Non-Ideal Theory, in Philosophy & Public Affairs 38/1: 5–36. Slemrod, J. (1990), Optimal Taxation and Optimal Tax Systems, in The Journal of Economic Perspectives 4/1: 157–78. Slemrod, J. (ed.) (1999), Tax Policy in the Real World (Cambridge University Press). Steinmo, S. (1989), Political Institutions and Tax Policy in the United States, Sweden, and Britain, in World Politics: A Quarterly Journal of International Relations 41/4: 500–35. Stemplowska, Z. and Swift, A. (2012), Ideal and Nonideal Theory, in D. Estlund (ed.), The Oxford Handbook of Political Philosophy (Oxford University Press), 373–89. Stiglitz, J. E. (1987), Pareto Efficient and Optimal Taxation and the New New Welfare Economics, in A. Auerbach and M. Feldstein (eds.), Handbook of Public Economics (North Holland), Vol. 2, 991–1042. Swift, A. (2008), The Value of Philosophy in Nonideal Circumstances, in Social Theory and Practice 34: 363–87. Tuomala, M. (2016), Optimal Redistributive Taxation (Oxford University Press). Wilson, J. D. (1999), Theories of Tax Competition, in National Tax Journal 52: 269–304. Wolff, J. (2012), Ethics and Public Policy: A Philosophical Inquiry (Routledge).

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2 Welfarism, Libertarianism, and Fairness in the Economic Approach to Taxation Marc Fleurbaey

2.1 Introduction This chapter provides an introduction to and a defense of the economic theory of optimal income taxation, with a focus on the Mirrlees (1971) approach, which has been dominating the field for decades, and the more recent efforts by Fleurbaey and Maniquet (2011) to incorporate notions of fairness into the Mirrlees framework. Although hegemonic in public finance, the Mirrlees approach does not similarly dominate philosophical and political debates about taxation, and in such debates economic analysis is often portrayed in a pre-Mirrlees form. For instance, in their celebrated The Myth of Ownership—Taxes and Justice, Liam Murphy and Thomas Nagel (2002) launch an attack against an economic approach for which taxation should minimally interfere with property rights and should seek to preserve the market distribution of wealth and income. Instead, they propose an approach that focuses on the consequences of any form of public intervention for the distribution of welfare, without any particular ethical concern for the values emerging from the market. It is true that such “economic” approach is vocal (even vociferous) in some corners of the public debate. Actually, in the United States, such corners are now moving farther to the libertarian extremes of condemning any form of taxation as evil. And it is also true that the old public finance literature on taxation had little to say apart from vague principles of horizontal and vertical equity. In particular, as Murphy and Nagel rightly argue, the vertical equity principle has remained empty for a long time because beyond the idea that the better endowed should pay more, it did not say much, and in particular it did not say how much more. The equal sacrifice principle was sometimes invoked, but, as they rightly say again, there is little reason to seek to preserve the distribution of utility that comes out of the unfettered market, so that this principle appears groundless.

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This old approach is no longer prominent in academic economics, however. After James Mirrlees (1971) introduced the incentive compatibility approach to the taxation problem, combined with a utilitarian social welfare function, what economists do about the taxation problem is exactly what Murphy and Nagel suggest should be done. Economists invoke an objective defined in terms of a final distribution of utilities, and they try to determine what tax system would induce the best distribution after individual agents react to the incentives laid out by the tax formula. Murphy and Nagel strangely ignore the Mirrlees approach until, around page 135, they discuss the issue of the optimal progressivity of the tax rate. Less than four pages of the book are devoted to the Mirrlees approach. The paradox is that the Mirrlees approach, arguably, went too far in the direction advocated later by Murphy and Nagel. By relying on a utilitarian social welfare function, or some generalized form of it, it embraces a narrow form of consequentialism that focuses on utility and completely disregards the way in which utility is generated. In addition to defending the standard economic theory of taxation, the second aim of this chapter is to advocate enriching the Mirrlees framework in order to incorporate certain ethical views about the distribution that cannot be captured by a classical social welfare function. Although the proposed reform obviously does not go back to equal sacrifice and vertical equity principles, it does reintroduce some respect for the free market and a mild form of libertarianism. The motivation for this partial return to the market comes in part from political philosophy. At the same time as Mirrlees was publishing his seminal contribution, John Rawls published another seminal work that sparked interest for the distribution of resources and for a moral division of labor between individuals and society. It is not society’s job, according to Rawls, to maximize a certain distribution of utility, because individuals have to assume some responsibility for their own utility. After Rawls, several philosophers and most notably Dworkin, Arneson, and Cohen have developed this idea of a division of labor in which individual responsibility plays a key role, and that came to be called the luck egalitarian view. Economists have not ignored this new line of thought, and in fact they have recreated it more or less independently.¹ As it turns out, in this decidedly special year of 1971, Serge Kolm published the working paper version of a (seminal) monograph on equity that generated a literature on fairness in the distribution of resources. In this approach, fairness principles govern the distribution of resources and, while individual preferences are taken into account so that the allocation may be efficient, no attention is paid to utilities, which remain a private matter. This literature, until recently, said

¹ The link between philosophy and economics is complex here. Kolm (1972) quoted Rawls but gave a welfarist interpretation of the difference principle. More to the point, Varian (1975) explained how Rawls’ idea of equality of resources was embodied in some of the economic concepts. But the general motivation of the economic study of fair allocation in the 1980s and 1990s did not appear to come from the philosophical literature.

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very little about the taxation problem because it focused on the “first-best” context, i.e., the case of a perfectly planned economy with no incentive problem. But applications to taxation have now been made, which deliver a somewhat different outlook from the Mirrlees–Murphy–Nagel approach. The idea of going beyond the narrow form of welfare consequentialism and reintroducing some form of libertarianism or some concepts of fairness is now gaining momentum in the public economics community.² After having introduced the Mirrlees tradition and the more recent fairness approach, the conclusion of this chapter comes back to the interesting general question of whether market values have a special moral significance. An important restriction will be adopted throughout the chapter. It will be assumed that the only source of income for individuals is labor earnings, and only income taxation will be examined. There is obviously a literature on other forms of taxation (e.g., capital, commodity, inheritance),³ but it will be simpler to focus here on the taxation of labor earnings.

2.2 Mirrlees and Optimal Taxation 2.2.1 The incentive problem There are two important features in the approach initiated by Mirrlees. The first is a rigorous analysis of the incentive problem. It was long known that taxing earnings may have a discouraging effect on labor supply, although the effect is on the whole uncertain because the fact that a tax impoverishes people may induce them to work more to maintain their consumption level. It is a standard balancing act in consumer– worker theory between a substitution effect (the tax makes leisure less expensive in foregone consumption, therefore they work less) and an income effect (the tax makes one poorer, and people may want to share this scarcity between a lower consumption and a lower leisure, therefore they work more). The Mirrlees approach brought a better understanding of the fact that when only earnings and taxes are observed, and not the effort and the labor hours that generate earnings, it is impossible to distinguish people who earn the same earnings with different quantities of work or effort. The important fact is then that the more talented an individual, the easier it is for her to obtain any given level of earnings. Therefore, those who have better hidden talents (i.e., who have access to more rewarding jobs) are necessarily better off than the others, for given preferences. Incentives act as a constraint on redistribution. It is simply impossible to equalize

² See Piketty and Saez (2012), Saez and Stantcheva (2016), and Weinzierl (2012). ³ State-of-the-art introductions to this literature can be found in the four volumes of the Handbook of Public Economics published by Elsevier (a fifth volume is in preparation). More accessible presentations are available in textbooks such as Myles (1995).

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utilities unless one neutralizes the impact of effort on net income by imposing a 100 percent marginal tax rate—a recipe for economic collapse. This problem is now described in economic theory as the “self-selection” constraint. Public policy amounts to proposing a menu of earnings and taxes to individuals, and they choose what they prefer in this menu. It is impossible to make some of the options accessible only to low-talented individuals, because the more talented individuals can always pretend they have low talent and mimic the low-talented by choosing the same options. Murphy and Nagel criticize the Mirrlees approach for emphasizing the incentive problem. They argue that labor supply is rather insensitive to taxes for most people. They also consider the view that declarations of earnings, not just earnings levels, may be sensitive to taxes, but then note that it is a problem more for the design of a good tax monitoring administration than a real incentive problem. The incentive problem is, however, more serious than they acknowledge. First, labor supply is sensitive to taxes for the second breadwinner more than the first one in many households, for which the choice is not just to work a few hours less but also to move from full-time to part-time, or from part-time to homemaking. Second, the issue is not so much about labor hours but also about effort at work. When marginal taxes are high, people may feel less eager to exert a lot of energy to improve their career track. Third, people may also be affected in their choice of jobs. High taxes may induce people to choose jobs with greater intrinsic rewards and less monetary payoffs, as in the choice between academia and the finance sector for talented people. Taxation then affects the distribution of workers between industries and jobs, bringing potential distortions.⁴ In any case, the real problem with the incentive constraint is not so much that people would earn much less if taxes were somewhat higher, but that it is hard to achieve substantial equality because private information about personal talents gives an edge to the better endowed.

2.2.2 The optimization The second important feature in Mirrlees’ approach is the technical feat of solving a double optimization program. The difficulty is indeed that one should choose a tax formula that maximizes the value of a social welfare function, under the constraint that every individual in the population will solve his or her own optimization problem when choosing his or her own level of earnings. In the age of computers, this achievement may appear less important because one can always incorporate this double problem into a program and obtain a numerical solution. But finding a

⁴ Lockwood et al. (2017) argue that, actually, different jobs and industries generate externalities and taxation may help internalize them, correcting market distortions. For instance, if finance generates negative externalities and academia generates positive ones, taxing the high bonuses in the financial sector helps generate a more efficient allocation of people between these two sectors.

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theoretical solution provides a useful way to understand how the optimal tax formula depends on the data of the problem, namely, the distribution of skills in the population, the preferences, and the degree of priority for the worse-off in the social welfare function. After Mirrlees, the theoretical solution has found a simpler and elegant formulation in the work of Atkinson and Stiglitz (1980), Diamond (1998), and Saez (2001). An issue that has attracted nervous interest is the theoretical result that the individuals with the greatest skill (i.e., those who have access to the greatest wage rate in the labor market) should be submitted to a zero marginal tax rate, i.e., should pay no tax on the last dollar earned. This has appeared in contradiction with the tradition of increasing marginal tax rates for high incomes. This result, however, is not particularly shocking. Even with declining marginal tax rates over the whole range of earnings, it is possible to have increasing average tax rates. And the redistributive efficacy of the tax system depends on increasing average rates, not on the marginal rates. To illustrate, consider the simple case of a constant marginal tax rate. When the tax formula involves a negative tax for low incomes, the average tax rate is initially negative and then slowly increases toward the level of the marginal rate. Therefore, when the marginal tax rate decreases it is also possible to have constantly increasing average rates. It is true, though, that when the marginal tax rate falls to zero, the average tax rate will fall at some point for very high incomes, but the range over which it falls may be quite small. Indeed, simulations have been made and show that the range over which the marginal (not just the average) tax rate falls may be small and affect only the highest incomes (Tuomala 1990). Diamond (1998) and Saez (2001) noted that if the upper tail of the distribution of skills is fat enough, marginal tax rates never fall (this, however, requires that there be infinite skills).

2.2.3 Qualities of the approach, and two limitations In summary, the Mirrlees approach to optimal taxation has the appealing feature that it evaluates the tax policy by its consequences on the distribution of well-being, not by any narrow principle of tax fairness. This is important not just because it avoids the flaws and indeterminacy of the vertical equity approaches criticized by Murphy and Nagel, but also because it makes the analysis of tax policy congruent with the analysis of any other public policy. If education policy, health policy, and so on, are evaluated with the same social objective as the tax policy, one obtains a consistent setting in which all instruments are aimed at the same direction. Another nice feature of the approach is that the social welfare function is increasing in each individual’s utility, so that it fully embodies the Pareto principle. At the same time, it may incorporate aversion to inequality, or a degree of priority to the worse off. This did not appear in Mirrlees’ original formulation, which adopted the sum-utilitarian objective, but soon other authors have explored other objectives,

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including the maximin that gives absolute priority to the worse off (Atkinson 1975). This combination of the Pareto principle and a priority for the worse off means that one is not trapped in the dilemma of having to choose between efficiency and equity. Both concerns will be optimally balanced in the selected policy. The policy will be efficient given the feasibility constraints, in particular the incentive constraints, but it will also take care of the worse off and, again, produce the best distribution that is possible given the feasibility constraints. Of course, economists may still want to compute the deadweight loss due to taxation, as compared to the laissez-faire allocation.⁵ But, while the laissez-faire is in the set of feasible allocations (“no tax” is a particular tax policy), the objective function does not give any particular role to the market. The distribution of wellbeing is the only argument of the social welfare function, and this same function could be used in a planned economy just as well as in a market economy. Institutions are considered mere instruments in the pursuit of the welfarist objective. There is, however, an important limitation to the Mirrlees tradition. It generally assumes that individuals have the same preferences, so that the same utility function can be used to represent their interests in the social welfare function. Attempts to allow for heterogeneous preferences in the population have generally involved arbitrary weights for each type of utility function featuring in the social welfare function, and therefore no specific result about the desirable direction of redistribution. Introducing multiple preferences in the optimization problem also makes the incentive problem intractable. While there is no difficulty in extending the definition of the self-selection constraint to this case, and no difficulty in seeing that incentive compatibility is still satisfied when the same tax formula is offered to all and the tax depends only on their earnings, the problem is that the analysis of incentive compatible allocation becomes complex. In a nutshell, it is then hard to guess who will want to mimic whom. Let us explain why. To do this, let us first look at the case of uniform preferences, which is much simpler. The better skilled are then always less averse to earning more (i.e., they need less extra consumption to accept earning an additional dollar), and if the social objective is redistributive, we know that the constraint is that the better skilled may want to mimic the less skilled. In order to avoid that, the less skilled must be induced to work less than would be efficient at their wage rate, a move that appears less attractive to the better skilled who are less averse to earnings and therefore less interested in leisure. Therefore the distortion induced by the tax is well understood. In contrast, with diverse preferences, making the less skilled work less will make their situation more attractive to the talented who are, by their different preferences,

⁵ Roughly defined, the deadweight loss is the total inefficiency produced by tax distortions, measured in terms of an equivalent loss in money.

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strongly averse to work. Incentive constraints may then operate in all directions of skills. The structure of the set of incentive compatible allocations is then hard to analyze, and no theoretical solution has yet been found to the double optimization problem in this context. In order to avoid this difficulty, authors routinely assume that the distribution of skills and preferences is such that the heterogeneity of individuals can still be described as depending on a single parameter, which is not a realistic solution. But the problem of diverse preferences is not just about feasibility and incentives. It is also normative, because the social objective must then involve interpersonal comparisons of individuals with diverse preferences. In the welfarist tradition of welfare economics and social choice theory, there is no principle on which such comparisons can be grounded. This tradition always assumes that the relevant utility functions are provided by some external authority. Economists who want to say something about the optimal tax therefore can only consider the various possible results that can come for the various possible weights attached to different utility functions. Saez (2001, 2002) has proposed an ingenious way to bypass the difficulty. It consists in considering a social welfare function that directly evaluates people’s situations in terms of net income. The degree of priority assigned to people earning a certain level can then be viewed as the average weight that a standard social welfare function would assign to the various categories of people (with different skills and preferences) earning that level. The problem is that, if one derived these average weights from a sensible social welfare function, these weights would vary in a complex way when the allocation under consideration changes. In other words, while one can say that in theory there exist weights that can be applied to people earning any given level, in practice it is hard to determine such weights in a reasoned way. Saez and Stantcheva (2016) provide examples of cases in which the determination of these weights in an intuitive fashion is possible. Fleurbaey and Maniquet (2016) discuss cases, taken from the fairness approach discussed later in this chapter, in which this determination is harder. In conclusion, one can say that the problem of multiple preferences is an important limitation of the Mirrlees tradition. It calls for a deeper normative analysis of the social objective. As it turns out, the diversity of preferences is precisely the main focus of the fair allocation approach introduced in section 2.3. The fair allocation approach, when it is compared to the Mirrlees approach, also reveals that a complete neglect of the market in the objective that is maximized may be excessive. Indeed, in a perspective of a division of labor between social institutions and individual responsibility, fairness principles may bear on the distribution of transfers between individuals with certain characteristics, not just on the distribution of final well-being. The neglect of transfers in the objective function is, perhaps, another important limitation of the Mirrlees approach. This is more debatable and will be discussed in more detail in the following sections.

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2.3 Fair Optimal Taxation 2.3.1 Fair allocation theory The reader who is familiar with Rawls’ and Dworkin’s theories of justice (Dworkin 2000; Rawls 1971) knows that one can conceive the just institutions as focusing on the distribution of resources rather than well-being. Once the resources are suitably distributed, individuals may use them as they wish, and derive whatever welfare they want or can from them. The transformation of resources into well-being is considered a private matter, not an issue of social justice. Recall that personal talents can be treated as internal resources that must be counterbalanced with transfers in external resources (as in Dworkin’s approach), so that inequalities in capacities to transform external resources into well-being are not always neglected in this approach. This approach to social justice has raised many objections, of course, but the emphasis in this chapter will simply be on the similarity between this approach and the economic theory of fair allocation. The economic theory of fairness has initially been developed around the concept of no-envy. The idea is to produce a situation in which no one would prefer to have the resources (including, possibly, the internal resources) of anyone else. One of the important observations made by economists has been that, when there are no differences in internal resources, i.e., when all relevant resources are transferable, then a competitive market in which everyone has the same wealth not only guarantees no-envy (because everyone has the same budget constraint, therefore the same opportunities for resources, and could have chosen whatever any other individual has) but is the only way to achieve no-envy when there is sufficient diversity of preferences. An egalitarian market allocation, however, is not the only way of conceiving equality of resources. It has some important drawbacks, most notably with respect to solidarity regarding changes in general circumstances. Suppose that the available resources increase, for instance. Then the market moves to another allocation, with new prices. If the relative prices of some goods go up, then the individuals who like these goods more than other individuals may end up being worse off than in the former equilibrium which had less total resources. This may occur in spite of keeping the full equality of budgets between all individuals. It appears undesirable that a change in general circumstances that is potentially good for all may hurt some individuals. Solidarity is easier to preserve when one resorts to another approach to resource equality, named egalitarian-equivalence. This alternative approach consists in seeking to achieve a situation that gives individuals the same utility level as an allocation in which they would consume the same bundle of goods, or, in a more general form of the approach, in which they would choose from the same opportunity set. This may sound more welfarist than the egalitarian market, but it is not really. In fact utilities play no role here, only ordinal preferences matter. The goal is to have every

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individual being made indifferent between her current bundle and some bundle (or opportunity set) that serves as the reference for all. It is easy to see how this guarantees solidarity. When more resources become available, the reference bundle (or opportunity set) can be improved for all, which implies that everyone’s satisfaction will necessarily rise. But no-envy is not generally guaranteed. It may even happen that what Jack deems equivalent to the reference bundle contains more of every good than what Jill deems equivalent to the reference bundle. Therefore, resource equality in the sense of egalitarian-equivalence is compatible with some consuming more of every good than others. This is not particularly shocking because this is still equivalent to everyone consuming the same bundle. But what it suggests, and which is indeed true as a general theorem, is that it is impossible to combine no-envy and solidarity into a single approach that also satisfies the Pareto principle. (It is always possible to satisfy no-envy and solidarity by giving the same bundle to everyone, but this ignores the diversity of preferences and is therefore inefficient.) Let us now see how fair allocation theory applies to the Mirrlees problem of redistributing income between individuals who have different productivities (i.e., different earnings per hour worked). Unlike Mirrlees, let us allow for heterogeneous preferences as well. In order to keep this chapter short, we will focus on egalitarianequivalence and ignore the no-envy perspective.⁶ An individual who works full-time and earns $4,000 a month might feel equally well-off if he didn’t have to work and got a lump-sum support of $2,500. This equivalent amount of leisurely income can be used as a measure of advantage, and one can seek to obtain an efficient allocation in which equality is achieved with respect to such equivalent amounts. For instance, the allocation could have low-paid workaholics who work more than full-time and earn $3,000, as well as work averse but talented individuals who earn $4,000 by working part-time, and many intermediate situations, but all would be indifferent between their situation and getting a certain quantity $X without having to work. A nice feature of such an allocation is that individuals who have the same preferences would then have situations that they mutually consider equally good, even when their earnings potential differs widely. Therefore this neutralizes the differences in earning abilities, which may be deemed unfair if they come from individual circumstances for which individuals should not be held responsible. Another nice feature of this particular allocation is that it does not penalize the individuals who are work averse. On the contrary, they typically end up at situations that are advantageous in terms of income and leisure. This is because, in order to make them as well off as at the same $X (with no labor) as the others, they must either earn more than the others or work less. It is nice not to penalize work-averse ⁶ The fair allocation approach described in this section is developed in great detail in Fleurbaey (2008: chs. 4–5).

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individuals when one suspects that their preferences are influenced by family responsibility and time constraints. This is only an example and many variants can be imagined, including variants that hold individuals partly responsible for their earning ability. One such variant deserves to be introduced because it is relevant to the discussion about the moral value of the market. It consists of taking as reference not a situation in which the individual does not work, but a situation in which he obtains a lump-sum transfer $X and can work at the minimum wage. For instance, our individual who earns $4,000 working full-time might feel equally satisfied with working part-time, earning $1,000 at the minimum wage, and getting $2,130 as a lump-sum transfer every month. The goal is then to obtain an allocation in which this equivalent lump-sum transfer (associated with the possibility of working at the minimum wage) is the same for all individuals. The reason why the minimum wage is taken as the reference is, again, to avoid punishing work-averse individuals. The greater the reference wage, the more one obtains an allocation in which work-averse individuals obtain low income. The previous example that involved zero work is, obviously, even more favorable to work-averse individuals, and could be described as being based on a null reference wage (being offered the opportunity to work at a null wage rate, anyone with the slightest aversion to work would choose not to work).

2.3.2 From transcendental to comparative These are just two examples of the egalitarian-equivalence approach applied to the income redistribution problem. The advantage, compared to the Mirrlees approach, is that a diversity of preferences is possible. But a very important limitation of the examples provided in section 2.3.1 is that they have neglected incentive constraints. Equalizing the equivalent lump-sum transfers, and giving more income and more leisure to some individuals just because they have greater aversion to work, is impossible if preferences are private information. Everyone would pretend to be work-averse if this were a way to obtain better tax treatment. In order to cope with incentive constraints, the most convenient method is to reformulate the objective into a ranking of all possible allocations. In Sen’s (2009) terminology, the theory of fair allocation described so far is “transcendental,” describing an ideal state of society that is totally efficient and totally fair at the same time. But what one needs is a “comparative” approach that evaluates all possible allocations and enables the policymaker to choose the best in the set of feasible allocations that is delineated in particular by incentive constraints. The transformation of the theory of fair allocation into a theory of fair social orderings has been initiated in the last decade and is still in progress.⁷ An advantage ⁷ See Fleurbaey and Maniquet (2011) for a general theory of fair social orderings, and Fleurbaey (2008) for the treatment of unequal internal resources. Thomson (2011) gives the most up-to-date overview of the theory of fair allocation prior to the move to social orderings.

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of the egalitarian-equivalence approach, in contrast with the no-envy approach, is that it lends itself naturally to such a transformation. Indeed, individual situations are evaluated in terms of an equivalent bundle or opportunity set. In the examples given in section 2.3.1, they are evaluated by an equivalent lump-sum transfer $X. Instead of simply seeking to equalize $X perfectly, one can introduce the equivalent $X of every individual into a social welfare function, and proceed as if these values of $X were like utilities in the social welfare function. These equivalent transfers $X can be used like utilities because they are faithful indicators of preference satisfaction. To see this, consider again the first example that involved zero work and the transfer $X. If the individual moves to another situation that he deems better, that will necessarily be equivalent to no work and a greater transfer. Therefore a better satisfaction is associated with a greater transfer. The same occurs with the second example that involves the possibility of working at the minimum wage. Again, this possibility has to be associated with a greater lumpsum transfer if the individual is more satisfied. The fact that these are good indicators of satisfaction does not mean that they are just like the standard utilities of the welfarist approach. Recall that the standard utilities are unspecified. Their numerical calibration is a mystery in the welfarist approach; these functions have to be provided from outside the theory. In contrast, the equivalent transfers discussed here are quantities that can be computed on the sole basis of ordinal non-comparable individual preferences. Moreover, choosing one indicator (e.g., no work and $X) or another (e.g., working at the minimum wage and $X) may be discussed in terms of the kind of equality one seeks to achieve and how this favors individuals with particular preferences. A theory of the selection of the indicator is made possible with this approach and it involves considerations of social equality and fairness, not an exploration of the nature of the human good. This feature of the approach echoes Rawls’ claim that, for interpersonal comparisons, “the problem is not how to specify an accurate measure of some psychological or other attribute available only to science. Rather, it is a moral and practical problem” (1982: 184–5). Once such indicators of advantage are adopted, one can simply put them in a social welfare function and seek to maximize the value of social welfare by selecting the tax formula. Obviously, there remains the ethical issue of choosing the social welfare function. As it turns out, there seem to be good reasons in the theory of fair social orderings to give absolute priority to the worse off. These reasons have to do with satisfying simple transfer properties, such as the following: if two individuals have the same preferences, work the same amount, but have different levels of net income, it improves the situation to transfer some amount of income from the better off to the worse off. A social welfare function that measures individual advantage by an equivalent lump-sum transfer and does not give absolute priority to the worse off necessarily fails this property in some cases. This is because the transfer required by the property may be equivalent to taking a lot from the equivalent transfer of the better off and adding little to the equivalent transfer of the worse off. As the social

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welfare function measures their situation in terms of their equivalent transfers, this can be considered an improvement only if the worse off has much more priority. And as, considering all possible preferences in the population, there is no limit to the ratio between the loss of the better off and the gain of the worse off (in terms of their equivalent transfers), only an absolute priority for the worse off guarantees the desired property.

2.3.3 Tax results We are now equipped with a well-defined social objective: maximizing the lowest individual value of the equivalent transfer, where the equivalent transfer is accompanied with zero labor (objective 1) or with the possibility of working at the minimum wage rate (objective 2).⁸ This objective differs from the Mirrlees approach only by the specific indicators of individual advantage, the specific “utilities” that are put into the maximin social welfare function. This is, in a sense, a small difference, but it makes it possible to deal with heterogeneous preferences without having to worry about arbitrary weights for different utility functions. Maximizing this social objective when individuals may widely differ in their preferences and in their earning abilities does not easily yield a general theoretical solution. This is due to the fact, explained in section 2.2.3, that it is extremely hard to understand the structure of the set of incentive-compatible allocations in this context. Fortunately, a few things can be said nevertheless. First, it is relatively easy to compare tax formulae and therefore to address the problem of evaluating a reform. This problem is, in real political life, actually much more relevant than the quest for an optimal formula that, generally, stands no chance of being applied. There is even sometimes a danger in finding a general formula. When one finds, for instance, that the optimal formula involves decreasing marginal tax rates, it is tempting to conclude that any reform that moves in the direction of decreasing marginal tax rates would improve the situation. But, of course, nothing can be less true. The evaluation of a reform should not rely on a vague comparison with a stylized fact about the optimum. A rigorous and precise criterion must instead be used. In the examples at hand, a precise criterion is easy to formulate when the population is sufficiently diverse in preferences. For objective 1, a reform is a strict improvement if it increases the income support granted to those who have no earnings. For objective 2, a reform is a strict improvement if, over the range of earnings below the minimum wage, it reduces the greatest tax (or increases the lowest subsidy, when all levels of earnings in this range are submitted to negative taxes). These two criteria are valid under various conditions on the diversity of preferences. The simplest of such conditions consists in assuming that in the status quo (to which the reform is compared), there are some individuals with zero earnings

⁸ For the reader’s convenience, Box 2.1 lays out these objectives alongside other standard approaches.

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BOX 2.1: Social objectives and their income tax implications Utilitarianism (Mirrlees): maximize the sum of utilities. When the population has identical preferences but unequal earning abilities, the marginal tax rate (i.e., the tax paid on the last dollar earned) at any given level of earnings depends on the sensitivity of labor supply to taxation, on the relative proportion of people earning that level to the subpopulation earning more, and on the average marginal utility of income of this subpopulation. When the population has heterogeneous preferences, little is known because the different utility functions will play an important role. Prioritarianism: a generalization of utilitarianism that maximizes the sum of a concave transform of utilities. When the population has identical preferences and unequal earning abilities, the marginal tax rate depends, in addition to the factors listed for utilitarianism, on the average social weight of the utility of the people earning more than the level under consideration. Fairness approach (objective 1): Individual situations are evaluated in terms of leisurely equivalent income (how much income would give the same satisfaction in the absence of work). The optimal tax then maximizes the lowest income. This in general induces high marginal tax rates for low incomes. Fairness approach (objective 2): Individual situations are evaluated in terms of equivalent lump-sum transfers that would give the same satisfaction if one was free to work at the lowest wage rate per hour. The optimal tax then maximizes the lowest income, under the condition that income below the lowest wage is tax exempted. Roemer’s equality of opportunity criterion: The optimal tax maximizes the average outcome of the subpopulation with the worst circumstances. If the relevant outcome is utility, and utility functions are distributed independently of earning ability, it then maximizes the average utility of the subpopulation with lowest earning ability. Resource criteria: One can seek to minimize the income poverty rate (Besley and Coate 1995) or a similar target in terms of incomes. Such objectives ignore the burden of labor and population preferences about consumption and leisure.

and some individuals who pay the greatest tax (or receive the lowest subsidy) in the low income bracket below the minimum wage. Such criteria transform the problem of maximizing a particular social welfare function into that of maximizing (or minimizing) a particular point of the tax formula. This is very convenient for the evaluation of reforms as it requires very little information about the characteristics of the population. The tax code itself suffices. Note that the objective of maximizing income support is congruent with the basic income idea promoted by van Parijs (1995).

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One can also say something about the optimal tax; although it is not very informative for objective 1, it is better than nothing. It is that no individual should receive a greater income subsidy than those who have no earnings. This is quite intuitive, as giving such other individuals a greater subsidy than the basic grant would be a waste of resources, given that the worse off individuals, for objective 1, are those who have no earnings. This last point requires an explanation. For any tax formula, everyone is at least as well off (as viewed by her own preferences) as in the situation of earning nothing and living on the basic grant. This means that for everyone the equivalent transfer associated with no work is at least as great as the basic grant. And it is necessarily equal to the basic grant for those who are already in the situation of not working. This explains why the worse off, as measured by the equivalent transfer, are those who earn nothing. For objective 2, a similar conclusion is obtained but it is more striking. The marginal tax rate can be set to zero for the low income bracket below the minimum wage. That is, all individuals earning the minimum wage or less may receive the basic grant with full tax exemption for their earnings. Moreover, once again no one in the whole population should receive a subsidy greater than the basic grant. A tax exemption for low incomes is quite unusual in the Mirrlees setting with homogeneous preferences. This result is of course driven by the way in which individual indicators are computed, in reference to working at the minimum wage. These results, clearly, do not say much about the optimal tax beyond the low income range. It is possible to do numerical simulations in absence of a theoretical formula for the optimal tax, with the computing power now available in computers. Such simulations have not yet been done for lack of data on the joint distribution of skills and preferences in the population. Traditional simulations in the Mirrlees tradition only require a distribution of skills and some estimate of the elasticity of labor supply, or some estimate of the average preferences in the population. Dealing more fully with the diversity of preferences is now possible in the fairness approach, but this is more demanding in terms of data. Let us take stock. Compared to the Mirrlees tradition, the fairness approach to taxation can be viewed as providing a different kind of social objective, in which the exogenous utility function is replaced by an indicator of material advantage that reflects individual preferences but is based only on preferences and on nothing else about utility. The analysis of incentives is not changed at all; it only becomes more complex when the diversity of preferences is added to the inequalities in earning potential. The specific social objectives, which typically adopt the maximin form, deliver simple criteria for the comparison of arbitrary tax formulae, which may be very handy in the evaluation of reforms. Conclusions about the general shape of the optimal tax are, so far, limited but nevertheless striking when they recommend a zero marginal tax rate for all incomes below the minimum wage.

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2.3.4 Limitations and extensions There remain some limitations to the approach. The theory of fair social orderings is often criticized for involving reference parameters, like the minimum wage in the case of objective 2. One could indeed take other values for the reference wage rate. But reference parameters are a virtue rather than a drawback of the approach. They make it possible to develop an ethical theory of such parameters, and clarify the underpinnings, in terms of fairness, of the various measures of individual advantage. The limitation is, perhaps, that this ethical theory is somewhat less advanced than the rest of the theory. While, for instance, one understands rather well why an absolute priority to the worse off is obtained, the choice of a reference wage rate involves a series of considerations that are not homogeneous. For instance, it has been said earlier that taking a low wage rate as the reference protects the individuals with a high aversion to work. A related, but different consideration, is that taking a reference wage rate that is greater than the minimum wage rate will sometimes produce optimal allocations, in a perfectly planned economy with no incentive constraints, in which some work-averse individuals are worse off than in the situation of zero work and zero consumption, a situation which is a violation of what is usually called the “participation constraint” (such individuals would rather opt out of the economy and migrate to a desert island). Another consideration is that taking a wage rate that is below the minimum wage rate makes it impossible to satisfy the property that when all individuals have the same earning ability, the laissez-faire allocation is the best allocation of labor and consumption for the social ordering. This property seems desirable if, in such a configuration in which individuals differ only in their preferences, all reasons to redistribute vanish. The literature also contains considerations formulated in terms of transfers between individuals with unequal wage rates. In conclusion, the problem is not that a reference parameter has to be arbitrary, but that the theory of the good parameter appears to be a work in progress. More serious limitations have to do with the fact that the model is too abstract. This is also a criticism that can be leveled against the Mirrlees approach, of course. In particular, an essential feature of tax formulae, in practice, is that there is a different formula for different types of households. The model described deals only with individuals. Introducing households is a very complex issue when one deals with adults and children. The different needs of children must be taken into account, but there is no convenient basis for their evaluation in the theory of fairness. This theory is able to deal with any difference in needs that can be assessed by individual preferences. For instance, one can compare healthy individuals to paraplegic individuals if any individual can compare her situation to the other situation. Preferences may differ (and may be influenced by the situation one is in), but this is an issue that the theory is designed to deal with. But it seems much harder to ask an adult to compare her situation to that of a child, and to ask a child to compare her situation to that of an adult. There seem to be only two solutions to this difficulty. One consists in

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relying on the parents’ preferences over the situation of their children, thus considering children as a mere extension, or consumption, of the parents. The other consists in looking at individual situations from the lifetime perspective, but then the design of the tax becomes very complex. Another feature of the existing theory that, it is usually said, calls for further explorations is that it assumes a stark difference between skills, for which individuals are not held responsible at all, and preferences, for which they are deemed fully responsible (although a concern for work-averse individuals can be part of the theory). The suggestion is to explore variants in which individuals are partly responsible for their wage rate, or partly non-responsible for their preferences. I believe that one should be careful in developing such variants. If one follows a suggestion made in the last chapter of Fleurbaey (2008), there is nothing problematic in trying to respect preferences (when they are respectable), even if they are influenced by elements of the social background. So, the proper way to consider a partial responsibility for preferences might be either to be careful about the object of preferences or to correct preferences which are not respectable. The former case is relevant, for instance, for the assessment of the situation of individuals who are apparently work-averse but in fact simply try to balance household duties with professional goals. Instead of saying that they are only partly responsible for their work-aversion, one should correctly model the dimensions of their decisions, which involve not just consumption and leisure, but also the fulfillment of caretaking duties, for instance. Then one can seek to fully respect their preferences over this more complex depiction of their life. The latter case (correcting preferences) occurs when one judges that the process of formation of preferences is too biased in favor of unfair conventions. For instance, if it appears that women are attracted by caretaking or homemaking activities because they are indoctrinated from youth that this is their social role, one can then seek to evaluate their situation with other preferences, even though it may be quite hard to estimate the proportion among them who are authentically attracted to becoming a caretaker and the proportion who are victims of social manipulation. But one should be careful about this sort of preference laundering. In the example of homemaking, one may wonder if women are pushed toward such social roles because they are less noble or if, conversely, they are considered less noble because they are traditionally the realm of women. There is probably no nobler activity than raising young human beings, for instance. So, perhaps in some cases the problem is not so much to correct preferences but to correct the disadvantages associated with certain objects of preferences. In the application of the taxation model, this is embodied in two options. Certain individuals who appear work-averse may deserve to have their situation evaluated with more authentic, less work-averse preferences— this is the laundering option. The alternative is to consider that those individuals are actually working a lot, and are not work-averse at all, but their work is not marketed and they are not decently paid! Then it is not difficult to reach the conclusion that they are disadvantaged.

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So much for preferences. As far as skills are concerned, it appears interesting to explore the fact that individuals have preferences not just about consumption and leisure, but also about their specialization, the contents of their job tasks. When individuals choose a specialization at the end of their studies, they consider earning prospects in different jobs and industries but also the genuine appeal of certain issues, certain forms of interactions with others, certain social roles. It would be very nice to enrich the model and to see what respecting individual preferences and choices over such choices would imply for income redistribution. As explained in Fleurbaey (2008: ch. 5), if one assumes that individuals should not be held responsible for failing to go beyond high school, but can be held responsible for their wage rate beyond a certain level, then the worse off remain the unskilled in the analysis of taxation and nothing is changed in the evaluation of tax reforms and the design of the optimal tax, when the objective is the maximin applied to egalitarian-equivalent indicators of individual advantage.

2.4 Does the Market have any Moral Value? 2.4.1 Luck egalitarianism and the market Whether one refers to no-envy or to the egalitarian-equivalent approach, the theory of fair allocation revolves around the idea of equality of resources and gives a role to market allocation. This role is somewhat muted in the case of egalitarianequivalence, but not completely, and it is in particular possible to combine the egalitarian-equivalence approach to the measurement of individual advantage with the ethical requirement that, when all individuals are equally skilled and vary only in their preferences, laissez-faire is the best allocation and there is no need for a redistributive tax at all (ignoring the costs of running the government and providing public goods). This certainly goes against a narrow form of consequentialism that would evaluate social states only by looking at individual well-being, without any account of how individual situations are generated by transfers or by their own talent and effort. This feature of the economic theory of fair allocation seems well-suited to philosophical developments in the same area. Indeed, all theories of justice that appeal to individual responsibility require going beyond narrow consequentialism and in the direction of laissez-faire. This is explicit in almost all of the main theories. Rawls is willing to rely on the market and on the income metric for the measurement of all-purpose means. Dworkin formulates the ideal allocation in terms of equilibrium of a particular insurance market with equal endowments. Arneson initially formulates the ideal of equal opportunity for welfare as involving a restraint on transfers: “Distributive justice does not recommend any intervention by society to correct inequalities that arise through the voluntary choice or fault of those who end up with less, so long as it is proper to hold the individuals responsible for the voluntary choice or faulty

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behavior that gives rise to the inequalities” (1990: 176). Cohen similarly advocates that “we should . . . compensate only for those welfare deficits which are not in some way traceable to the individual’s choices” (1989: 914). Sen famously recommends looking at capabilities rather than achievements, which directly suggests looking at wealth rather than income, consumption, or leisure. According to this school of thought, however diverse, a responsibility-sensitive form of egalitarianism lies somewhere between a simple form of welfare egalitarianism and a simple form of libertarianism. The theory of fair allocation and its application to taxation seems well in line with this general approach. It seeks to respect preferences but at the same time has a very strong concern for equality in the means offered to individuals. Murphy and Nagel do not say much about luck egalitarianism in general, but they discuss Dworkin’s approach, under the name of “equal libertarianism,” which seems apt (Murphy and Nagel 2002: 104). They correctly argue that this approach does not justify an equal sacrifice conception of fair taxation, but they seem to miss the point that it does involve giving some moral stature to market outcomes and transfers in the evaluation of the distribution.

2.4.2 The arguments in favor of market allocations There are, however, two exceptions in the group of luck egalitarian theories that suggest an interesting debate could take place about whether transfers have any role to play in the evaluation of a social state. Arneson (2000) has proposed an alternative form of responsibility-sensitive prioritarianism that makes no direct recommendation about transfers, and simply gives greater priority to individuals who are worse off, who can benefit more from help, and who are less responsible for their disadvantage. Roemer (1998) has proposed a social welfare function that is strongly averse to inequalities due to circumstances for which individuals are not held responsible but behaves like sum-utilitarianism within subgroups of individuals sharing the same circumstances. These two approaches appear to locate luck egalitarianism somewhere between welfare egalitarianism and utilitarianism, rather than libertarianism. Critics of market-oriented approaches generally argue that it is arbitrary to rely on market institutions because the only thing that matters is the distribution of wellbeing, not the process by which it is obtained. There is no reason, it is said, to give a special preference to market institutions as opposed to other forms of coordination of production and consumption. Such institutions are mere instruments in the service of well-being. There is a grain of truth in this argument, but it involves a narrow form of consequentialism and confuses institutions with the outcome of institutions. At a deep level, no one (as least in the egalitarian forum) cares about the market as an institution. What some conceptions of justice care about is not the market itself, but the allocations that the market is able to generate. If some form of perfect planning was able to reproduce market allocations without infringing on people’s autonomy,

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that would be fine. What is special about market allocations is not that they emerge from the market, but that they satisfy a certain pattern of activities and transfers, in relation to individual preferences. The theory of fair allocation is helpful to understand how market allocations can be justified on the basis of extended forms of consequentialism. Consider first the no-envy property. It cannot be formulated with a classical social welfare function depending on individual utilities, because it involves the exercise of checking what utility everyone would get with the others’ bundles. This exercise has nothing to do with the market as an institution. But it turns out to be strongly connected to the idea of offering individuals the same set of bundles from which they can choose, and this, combined with some concern for efficiency, converges to a strong presumption that market allocation (not the market itself) is particularly interesting. Another notion that has played a role in the theory of fair allocation is the idea that when an allocation is obtained, nothing needs to be changed if preferences change in a way that everyone is even more satisfied than before with what he gets. This idea can be justified in terms of personal responsibility, because it means that nobody should be punished because he becomes even more satisfied with this current bundle, and it also means that the allocation that is selected should not depend too much on individual preferences. It can also be justified in terms of incentive compatibility, but this is not an ethical consideration and it will be left aside here. As it turns out, this weak form of independence of preferences, when it is combined with a concern for efficiency and a minimal form of impartiality, again delivers a strong presumption in favor of the egalitarian market allocation (not the market itself ). There are other justifications for market allocations. For instance, take the fairness requirement that nobody should feel worse off than at the per capita endowment. This requirement is based on the idea that everyone has a kind of right to the per capital endowment, and the allocation that is selected should be at least as good as that for everyone. This simple requirement, combined with a concern for efficiency and for subgroup consistency, once again vindicates the egalitarian market allocation.⁹ The upshot is that, while it is true that the market institution is a mere instrument in the service of fairness and justice, it may happen that market allocation, with its particular pattern of earnings and transfers, satisfies conditions of fairness that cannot be satisfied by a classical social welfare function that measures individual advantage in a narrow welfarist fashion. Fairness is more than a distribution of wellbeing narrowly defined.

⁹ Subgroup consistency means that for any subgroup of the population, the allocation that this subgroup receives when the whole population is considered remains optimal when one considers the possibility of redistribution within this subgroup, and ignores the existence of the rest of the population. See Thomson (2011) for more details about the justification of market allocation in fair allocation theory.

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Now, one may of course disagree with the notions of fairness that justify the pattern delivered by market allocation. Having a preference for the egalitarianequivalence approach over more market-leaning approaches in the context of income redistribution, because it is better for the neutralization of inequalities due to circumstances, I can only sympathize with a cautious attitude about market allocations. But one cannot claim that a moral preference for market allocations is completely arbitrary. It is debatable, but it has serious arguments. In particular, in the context of the Mirrlees problem of redistributing earnings, it is hard to resist the appeal of laissez-faire when individuals have the same earning ability. This satisfies all the arguments listed here. Alternative approaches generate envy, make some people worse off than the average bundle, and are excessively sensitive to small changes in people’s preferences. None of these considerations is fully compelling, but they add up to a strong presumption in favor of (perfectly equal) laissez-faire.

2.4.3 In the second-best, all approaches are market-oriented There is a French proverb that says that all cats are grey in the dark. It is an ironic twist to the ethical debate about the moral stature of market allocation that incentive constraints tend to blur the difference between market-oriented criteria and other criteria. Take the result that the marginal tax rate should be null in the low income bracket (below the minimum wage). This property of the tax formula, which in a sense means that market earnings will be respected (up to a lump-sum transfer, because everyone gets the basic grant), is obtained with a certain specific egalitarian-equivalent criterion, one that takes the minimum wage rate as the reference. It is also obtained with a wider class of criteria that more heavily lean on the market and involve a general preference for submitting all individuals sharing a same skill level to an equal amount of transfer. The literature on the fair compensation of unequal skills has highlighted the difference between the egalitarian-equivalence approach, which is good at neutralizing inequalities due to skill differences, and the alternative approach that focuses on the concern about equal transfers for equally skilled individuals. But this difference, which appears clear-cut in axiomatic analysis, becomes much less stark when one looks at the best taxes, that is, when one takes incentive constraints into account. Another example of the graying of ethical differences under incentive constraints is offered by Roemer’s examples of optimal taxation. Roemer often takes specific forms of utility functions that are called quasi-linear in economics (see, e.g., Roemer 1996: 297–301). Such utility functions represent preferences that have the special property that the willingness to pay for extra leisure does not depend on one’s level of consumption. Moreover, with such utility functions, utility is equal to net income, and can be measured in dollars, with a deduction for the “cost” of working. This measurement of utility, for such special preferences, is exactly identical to the transfer equivalent with zero work that was defined in section 2.3.2 (the difference is that the transfer equivalent can be computed for all kinds of preferences).

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It turns out that when all individuals have the same skills, which is a case in which Roemer’s approach does not recommend laissez-faire but the maximization of the sum of utilities, the best allocation for the utilitarian sum is laissez-faire. So, this is another example in which the difference between market-oriented approaches and non-market-oriented approaches vanishes. This does not mean that ethical differences no longer matter. There are cases such that, even under incentive constraints, the various approaches described here deliver different policy recommendations. It is not the same to advocate maximizing the basic grant (recommendation from objective 1), the uniform grant given to low incomes (recommendation from objective 2), the average utility of the unskilled (recommendation from Roemer’s approach), or the more complex formula that emanates from the more market-oriented luck egalitarian criteria. There is still some room and relevance for moral debate. A brief conclusion can be offered here. This was meant to be a defense of the economists’ work on taxation. Economists are less naïve, and less libertarian, than is often thought and is, for instance, suggested by Murphy and Nagel.¹⁰ They are divided into welfarists (Mirrlees’ tradition) and luck egalitarians (the fair allocation tradition). The former are probably closer to what Murphy and Nagel would like to see, but the latter are closer to what political philosophy has been advocating over the last two decades. The purpose here was also to highlight this current divide between different normative schools in economic theory. The welfarist approach and the fairness approach, in general, evaluate income taxes differently and advocate different tax formulas. In particular, it is almost impossible to obtain tax exemption for low incomes with the welfarist approach (it would require very specific characteristics of the population). But they sometimes make similar recommendations, because maximizing the minimum income can be the practical objective for both when a strong form of egalitarianism is adopted by the welfarist approach and objective 1 is retained in the fairness approach. It is not surprising that the less libertarian objective of the fairness approach can converge with the welfarist approach. The fairness approach is not immune from normative criticism. One may disagree with the way it seeks to respect individual preferences and holds individuals responsible for them. But it shows that studying a variety of social objectives inspired by current philosophical and political debates in the economic analysis of taxation is possible and that uncovering the concrete implications of ethical principles is a challenging task that requires taking careful account of incentive constraints. What Mirrlees has done for utilitarianism, namely, deriving its implications for taxation, can be done for all the relevant conceptions of social justice. ¹⁰ Perhaps it should be stressed, finally, that Murphy and Nagel’s critique of conservatism in taxation debates is excellent, and that their book was taken as the sparring partner of this chapter just to say that economists are actually on their side of the barricade.

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References Arneson, R. J. 1990, “Liberalism, Distributive Subjectivism, and Equal Opportunity for Welfare,” Philosophy and Public Affairs 19: 158–94. Arneson, R. J. 2000, “Luck Egalitarianism and Prioritarianism,” Ethics 110: 339–49. Atkinson, A. B. 1975, “La ‘Maxi-Min’ et l’imposition optimale des revenus,” Cahiers du Séminaire d’Econométrie No. 16, Paris: Editions du CNRS. Atkinson, A. B. and J. E. Stiglitz. 1980, Lectures on Public Economics, London: McGraw-Hill. Besley, T. and S. Coate. 1995, “The Design of Income Maintenance Programs,” Review of Economic Studies 62: 187–221. Cohen, G. A. 1989, “On the Currency of Egalitarian Justice,” Ethics 99: 906–44. Diamond, P. 1998, “Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates,” American Economic Review 88: 83–95. Dworkin, R. 2000, Sovereign Virtue: The Theory and Practice of Equality, Cambridge, MA: Harvard University Press. Fleurbaey, M. 2008, Fairness, Responsibility, and Welfare, Oxford: Oxford University Press. Fleurbaey, M. and F. Maniquet. 2011, A Theory of Fairness and Social Welfare, Cambridge: Cambridge University Press. Fleurbaey, M. and F. Maniquet. 2016, “Optimal Income Taxation Theory and Principles of Fairness,” forthcoming in Journal of Economic Literature. Kolm, S. C. 1972, Justice et équité, Paris: Editions du CNRS (translated as Justice and Equity, Cambridge, MA: MIT Press, 1997). Lockwood, B., C. Nathanson, and G. Weyl. 2017, “Taxation and the Allocation of Talent,” Journal of Political Economy 125(5): 1635–82. Mirrlees, J. 1971, “An Exploration in the Theory of Optimum Income Taxation,” Review of Economic Studies 38, 175–208. Murphy, L. and T. Nagel. 2002, The Myth of Ownership: Taxes and Justice, New York: Oxford University Press. Myles, G. 1995, Public Economics, Cambridge: Cambridge University Press. Piketty, T. and E. Saez. 2012, “Optimal Labor Income Taxation,” NBER Working Paper 18521. Rawls, J. 1971, A Theory of Justice, Cambridge, MA: Harvard University Press. Rawls, J. 1982, “Social Unity and Primary Goods,” in A. K. Sen and B. Williams (eds.), Utilitarianism and Beyond, Cambridge: Cambridge University Press, 159–85. Roemer, J. E. 1996, Theories of Distributive Justice, Cambridge, MA: Harvard University Press. Roemer, J. E. 1998, Equality of Opportunity, Cambridge, MA: Harvard University Press. Saez, E. 2001, “Using Elasticities to Derive Optimal Income Tax Rates,” Review of Economic Studies 68: 205–29. Saez, E. 2002, “Optimal Income Transfer Programs: Intensive Versus Extensive Labor Supply Responses,” Quarterly Journal of Economics 117: 1039–73. Saez, E. and S. Stantcheva. 2016, “Generalized Social Marginal Welfare Weights for Optimal Tax Theory,” American Economic Review 106/1: 24–45. Sen, A. K. 2009, The Idea of Justice, London: Allen Lane. Thomson, W. 2011, “Fair Allocation Rules,” in K. J. Arrow, A. K. Sen, and K. Suzumura (eds.), Handbook of Social Choice and Welfare, Amsterdam: North Holland, Vol. 2, 393–506. Tuomala, M. 1990, Optimal Income Tax and Redistribution, Oxford: Clarendon Press.

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van Parijs, P. 1995, Real Freedom for All, Oxford: Clarendon Press. Varian, H. 1975, “Distributive Justice, Welfare Economics, and the Theory of Fairness,” Philosophy and Public Affairs 4: 223–47. Weinzierl, M. 2012, “Why Do We Redistribute So Much But Tag So Little? Normative Diversity, Equal Sacrifice and Optimal Taxation,” NBER Working Paper 18045.

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3 Striving for the Middle Ground Taxation, Justice, and the Status of Private Rights Geoffrey Brennan

The most significant point that emerges from this very general discussion is the interdependence among the several elements in the constitutional mix. Contrary to orthodox economic methodology, the rights of persons to property, the rights to do things privately and individually with physical resources, cannot be treated in isolation from those rights which are indirectly represented by membership in a collectivity that is constitutionally empowered to make decisions under predetermined rules. Consider, for example, the position of a person who holds nominal ownership rights to an income stream from a scarce and highly valued resource (human or nonhuman). This private ownership claim may be tempered by the membership rights in the collectivity, the governmental institutions of the community, that are held by other persons, membership rights that may offer other persons some indirect claims on the differentially higher income stream in question. J. M. Buchanan, The Limits of Liberty, ch. 4

3.1 Formulating the Issues The current essay can be conceived as an engagement with Liam Murphy and Thomas Nagel’s [hereafter MN] 2002 book, The Myth of Ownership. That book is notable because it represents an incursion by moral philosophers into normative tax analysis—an area that has traditionally been treated as the province of public finance economists and tax lawyers. Any such incursion is thoroughly to be welcomed. For a variety of reasons, however, I do not think The Myth of Ownership is a very good book. Or better put, there are some important aspects of what I take to be the central argument that I think are misleading—not so much because they are totally off the mark but because they are either overstated or under-argued. I have tried to set out some of my misgivings elsewhere,¹ but the issues at stake strike me as ¹ See my review in Constitutional Political Economy (Brennan 2005).

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sufficiently significant and of enough independent interest that it is worth taking them up in a different manner and at somewhat greater length. That is my objective in this paper. One of the problems in doing so is to fix the target—because MN are not always totally clear or consistent in laying out their central argument. But I think it fair to attribute to them the following general line. (1) Within a properly constructed account of distributive justice, property rights are mere conventions; and hence (2) The distribution of income that emerges from a given private property rights structure is morally arbitrary; so (3) Tax arrangements that seek to respect the prevailing distribution have no special moral status; and specifically (4) The principle of “horizontal equity” (HE) as a tax norm—the principle that the tax system should ‘treat equals equally’—has no normative grounding. Here is what MN say themselves by way of summary of their basic argument: Private property is a legal convention, defined in part by the tax system; therefore the tax system cannot be evaluated by looking at its impact on private property conceived as something that has independent existence and validity. Taxes must be evaluated as part of the overall system of property rights that they help to create. Justice or injustice in taxation can only mean justice or injustice in the system of property rights and entitlements that result from a particular tax regime. (Murphy and Nagel 2002: 8)

In what follows I want to interrogate certain aspects of this line. (a) Is it true that the relation between the tax system and private property is that the former helps “define” the latter? (b) What does it mean to deny that private property has “existence independent” of the tax system? (c) Is “independent existence” the same thing as “independent validity”? (d) Is “justice in taxation” entirely exhausted by “justice in the system of property rights” that result? (e) How is the idea of a “system of property rights and entitlements” to be understood within a justice-based theory? It is worth noting that MN have several important precursors, from whom their argument takes off and/or borrows. One of these is of course John Rawls. MN explicitly see one key ambition of their treatment as being to lodge tax analysis within the structure of a more encompassing theory of justice. In part, my interest here is to query whether the MN account is consistent with broad Rawlsian architecture. More particularly, I am interested in the question of where, if at all, specific tax norms (and for that matter the private property rights structure) might appear in the Rawlsian scheme. A second influence is Louis Kaplow (1989) who also mounts an

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attack on the principle of horizontal equity—a criterion “in search of a principle”, as he puts it in the title to his paper. Kaplow’s argument is in some respects clearer and more focused than MN’s version and I shall address it in more detail in section 3.3. A third precursor is Stephen Holmes and Cass Sunstein in their (1999) book, The Cost of Rights—a book that develops the argument that an effective private property rights regime (both in its legal decision-making and enforcement aspects) depends on the institutions of government and in that sense logically requires some exercise of the taxing power. I basically accept the Holmes–Sunstein point. It may be that some libertarians would dispute it. But I do not self-describe as a libertarian—and perhaps even if I did, I would find the Holmes–Sunstein argument convincing. But, of course, the question of how much ‘effective recognition’ of property rights would emerge in the absence of government enforcement is ultimately an empirical one.² It is also, I think, not the relevant one, at least within the Holmes–Sunstein framework, because provided the optimal level of government enforcement is non-zero, then optimal enforcement of private property will require some power to tax. Conceivably, MN think that the stronger version of the conclusion is justified—that without government, nothing in terms of property rights would be conceivable, so that for example the very notion of theft would be meaningless. But this is, as I see it, an empirical claim not an a priori truth; and MN do not provide any relevant evidence. And even if one did accept the claim, it is by no means obvious that the kind of tax system required for the definition/existence exercise is anything like the tax systems we actually have. One could, for example, imagine that courts operate to define rights but that there are minimal public police resources for enforcement. The rights would exist; they would be as well-defined as it is possible for them to be; but those rights would not translate into the prevailing distribution of income because the tax system would not be providing adequate resources for enforcement. Perhaps MN have in mind a connection between the existence/definition/validity of rights and the tax system that lies in something other than the Holmes–Sunstein direction. But if so, I am not sure what they have in mind. On its face, the idea that changing the tax system redefines, or threatens the existence or the validity (different things, I think) of the private property rights structure, is sufficiently non-self-evident that it requires greater elaboration and defence. My suspicion is that MN run together two things that ought to be kept separate. One is the property right itself—the kind of element that can be defended in court. The other is the income level³ to which the structure of property rights gives rise. My income level depends on all sorts of market conditions that emerge by virtue of others exercising their own rights. That is, my income level can change by virtue of changes ² On which see, for example, Leeson (2009) and in a slightly different context, Ostrom (1990). ³ Or level of well-being, or whatever the appropriate base for distributional assessments is. I will take up that issue briefly in section 3.3.

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in the preferences of my customers, or the technology available to my competitors, or changes in exchange rates, or any number of other factors, none of which require any change in the property rights structure. In this sense, rights represent as much a permission to inflict losses on others as they do a restriction on the kinds of losses one can inflict! Simply put, whether a reduction in income involves a violation of property rights or not depends on how that change in income comes about. This seems to me fundamental. Note that on this reading, no one has an entitlement to her existing income level—even if the property rights structure qua property rights is ideally just. But, MN might ask: What can it mean to say that a property rights structure is ideally just, apart from the properties of the distribution of income to which that structure gives rise? If the principle of justice is a principle of distributive justice, then the only thing that matters for justice is the distribution. I think this is an implausible view—for reasons that bear not just on MN but also on Kaplow. I do not think it is a Rawlsian view. And I shall try to defend my judgment in the ensuing sections of this paper. This issue—of what makes a property rights structure just in a Rawls-like scheme—might be pointed up in a different way. MN make two claims that seem to me to be unexceptionable: (a) That changes in the property rights structure (say the definition of who ‘owns’ what) affect the distribution of income. (b) That the status quo property rights structure is not exempt from critical evaluation and justification. From these claims MN seem to draw two conclusions that are neither logically entailed nor as far as I can see independently valid. These are: (c) That changes in the property rights structure are equivalent to any other change that has an identical effect on the income distribution. (d) That there is no property rights structure as such that would or could be endorsed within a theory of justice. As I see it, a Rawlsian theory of justice involves a distinction between the “basic institutions of society” and the outcomes that emerge under those institutions. If the principles of justice were to apply exclusively to the outcomes, then it is difficult to see why the derived principles should be conceptualized as applying to the “basic institutions”. And if one takes the distinction between “institutions” and “outcomes” seriously, then the institutions endorsed under the principles of justice must have some independent status. Accepting this independent status includes among other things acknowledging the normative force of democratically made collective decisions (if democracy is one of the institutions so endorsed) as well as the normative force of the maximally just private property rights structure. There is then a question: If both the maximally just private property rights structure and democratically made collective decisions have independent normative force, what are the appropriate

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terms on which these two normatively grounded elements should interact? That issue is, as I see it, the issue of taxation. To conceptualize normative tax analysis in this way does not make one a ‘libertarian’: there is no presumption that the private property rights structure is to be lexically ordered above democratic decision-making. But equally, there is no presumption that democratic decision-making is lexically prior either. No presumption, that is, that “private property is a myth”! Between these two extremes, there lies the “middle ground” of my title—and it is that middle ground that I seek to defend. If there is any presumption at all arising from this middleground position, it is that conflicts between these two normatively grounded elements should be resolved in a manner that maximally respects them both. In what follows, I begin with horizontal equity. I lay out the case for identifying horizontal equity questions as occupying a central role in a theory of justice (section 3.2). I then examine the argument underlying the critique of horizontal equity as a desideratum in tax design/reform (section 3.3). In section 3.4, I attempt to lodge HE in the ‘constitutional architecture’ that I take to be one aspect of the Rawlsian scheme. I consider the implications of this constitutional architecture in general terms in section 3.5 and in terms of the ‘fiscal constitution’ more particularly in section 3.6. In section 3.7, I underline the difference between outcomes likely to emerge under the most just basic-institutions on the one hand and outcomes that are maximally “just” using the maximin principle to assess actual distributions, on the other. Section 3.8 offers some general conclusions.

3.2 Horizontal Equity and the Distribution of What? Consider two questions: A: what is the ideal overall tax base? B: what is the ideal index of ability to pay? Within traditional tax theory literature, these two questions have been seen as related: the second is taken to supply the answer to the first. There are several grounds on which this ‘equivalence’ claim might be questioned; but these are not relevant at this point in the argument. I want instead to make two points: first, that in fact most of the horizontal equity literature is focused on B: and second, that B is connected to another question that every theory of distributive justice must answer if it is to be operational—namely the “distribution of what?” question. To be sure, the “distribution of what?” question often appears in a slightly different form, because it typically focuses on the bottom end of the relevant distribution. So, we might want to add to B: B’: what is the ideal index of ‘claim to receive’? Actually, the “equality of what?” question strictly assumes that B and B’ have the same answer. One might question this. Conceivably, what makes a claim on our

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moral attention in relation to demanding support is not the same as what constitutes the proper basis for dividing the cost of supplying that support among the taxpaying public. However, since the “equality of what?” question finesses that distinction, so shall I. My point here is simply to observe that HE, insofar as it sets itself to answer B/B’, is an indispensable element in any account of distributive justice. And, as I have asserted, B/B’ occupies much of the HE territory. So, for example, the HE literature has long been concerned with the question as to whether income or consumption represents the superior tax base and/or whether wealth as well as income/consumption is an appropriate object of tax. It has long been recognized that HE and so-called vertical equity are related—though sometimes the thought has been that HE is less controversial and hence (perhaps) a more fundamental ethical norm. But vertical equity requires a specification of what the basis for transfers is and that in turn requires an answer to B/B’ questions. Rawls famously specified an index of primary goods; Sen (1979) notes the index number problems associated with the Rawlsian recommendation and urges supplementation by measures of ‘capacity’; the older economist tradition was attracted to utility as the conceptual ideal; though in the taxation context, Simons (1938) makes a pragmatic quasi-aesthetic case for focusing on aggregate income differences. But whatever the range of answers to B/B’, the general point remains: answering the core HE question is a necessary feature of any substantive theory of distributive justice. This is not, of course, necessarily to endorse HE as a substantive norm for tax design. It is rather a warning against sweeping the HE literature totally into the dustbin. It is to acknowledge the status of HE as an intrinsic conceptual element in a complete “theory of justice.”

3.3 The Critique of Horizontal Equity The stipulation that the tax structure should be such as to “treat equals equally” requires that the rank ordering of individuals by well-being (or whatever stands as the appropriate index of ability to pay/claim to receive) should remain unaffected by the tax–transfer system. In that sense, HE has the effect of structuring the tax–transfer system around the prevailing distribution of ability to pay; and this, MN think, is to dignify that distribution excessively. HE makes it an aim of the tax structure that it should minimally affect the prevailing distribution, at least in respect of individuals who have similar taxable capacities. But, declare MN, the aim of justice is precisely to modify existing distributions. So, they imply, to treat the prevailing distribution as sacrosanct in any aspect whatsoever is to defy the requirements of justice. This is an argument that I associate with Louis Kaplow (1989)—and I think it is an argument worth taking seriously. As Kaplow observes, HE is an objective that seems to run directly in the face of strong intuitions about appropriate dynamics in relevant distributions. In particular, HE stands against widespread preferences for socio-economic

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mobility, since a necessary feature of such mobility is that it changes relative positions in the distribution. The point here is quite independent of the particular account of distributive justice. As Kaplow observes, unlike efficiency and vertical equity (egalitarianism), which have a direct connection to the “social welfare tradition”, horizontal equity has no such connection and indeed HE seems in many cases to be in explicit conflict with that tradition. The same point, Kaplow thinks, might be made about the relation between HE and utilitarianism. The most general way of specifying the issue is, I think, in terms of the literature on axiomatic egalitarianism. (See, for example, Tungodden (2003).) As a point of departure, Tungodden makes the following claim: I will assume that our framework satisfies a minimal condition of anonymity, saying that the identity of an individual should not influence our reasoning (if we consider two alternatives x = (1, 2, 3) and y = (2, 1, 3), then the minimal condition of anonymity says that we should be indifferent between x and y). (Tungodden 2003: 2)

Now, it should be self-evident that the HE principle denies the anonymity axiom. HE effectively indexes each person by her ‘pre-tax’ income: it requires that the same tax rate should be applied to individuals with the same tax base, while the anonymity axiom is tax base/tax rate blind. But of course anonymity would be violated by any principle that involved any form of property rights. Suppose the transformation from x to y comes about because individual 1 steals the equivalent of one unit of well-being from individual 2. In this transformation, 1’s well-being increases by one unit and 2’s falls by one unit. Then the degree of equality will be the same before and after the theft—but this mental experiment shows that x and y are normatively equivalent only if the final distribution is the only thing that matters. Anonymity expressly denies that process matters. So, interpreting HE as a general distributional principle does indeed set it against social mobility, and against all process-independent norms of which simple egalitarianism and an unmediated utilitarianism and the ‘social welfare’ tradition are three examples. But no one has ever thought that HE’s function was to render sacrosanct the status quo distribution of income in general—only to protect it against changes of a very specific kind. That is why the ‘theft’ analogy is useful. Not because there is any suggestion that all taxation is theft, but because the theft analogy reminds us that not all transfers of well-being are normatively equivalent. The right way to interpret the HE requirement is as a specific restriction on the taxing power—not as a general distributional principle. And frankly, I think that this is obvious. For a start, there is nothing in the existing property rights structure that guarantees anyone a specific level of income. No one has a right to a given income level as such. The content of the right (if she has one) is a set of talents and pieces of human and physical capital, all of which have a certain value within the institutional framework of markets within which her income is determined. Changes in others’ tastes and new discoveries and entrepreneurial activity by others and climate and all sorts of other

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factors combine to translate her particular assets into a given income within a particular period. Perhaps she can use insurance markets to secure greater stability in her realized income. Perhaps she cannot; or does not. But her income is not guaranteed. She has, by virtue of her property rights, no right to a given income stream as such. Changes in income (and hence socio-economic mobility) will occur— and indeed any such mobility may well be generally regarded as a “good thing”. But only if those changes come about in a specific way—or better put, only if they do not come about in ways that are normatively unsatisfactory. Theft is one of those unsatisfactory ways. Laws against theft (too) involve treating the existing property right structure as having some intrinsic normative authority— normative authority over and above the virtues (or otherwise) of the pattern of distributions that result from it. HE is to be interpreted in the same spirit—as a procedural requirement imposed on the manner in which the tax system is to operate. It is designed to limit the extent to which governments can discriminate between persons through the tax system—either explicitly or implicitly. It is to be conceived as a tax-specific procedural norm. It is not a general principle of distribution—and it is hardly surprising that those (like MN and Kaplow) who see it in such terms dismiss it. When I say that HE is a tax-specific procedural norm, that characterization is a bit too narrow. I take it that HE would also apply to public transfers and to the provision of certain public services, where discrimination between equally qualified beneficiaries is ruled out for similar reasons. Of course, none of the foregoing means that HE, even understood as a tax-specific procedural norm, cannot be criticized. Nor does accepting HE in these terms imply that it trumps other norms (such as the norms of distributive justice). The only point to be made here is that HE ought to be understood in appropriate terms—in order to do the HE principle “justice”, as we might put it.

3.4 The Constitutional Architecture of a Theory of Justice? I am no Rawls expert. I am much more familiar with the constitutional political economy tradition associated with the work of James Buchanan and followers. But I am taking it that Rawls and Buchanan share much the same ‘constitutional architecture’, even if the substantive accounts and/or the normative ambitions are somewhat different. As I identify that architecture, there are, in a Rawlsian theory of justice, three elements: • the principles of justice • the ‘basic institutions’ of society • the social outcomes that will emerge from agent interactions under those basic institutions.

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The central objects of choice in this scheme are the basic institutions. However, these basic institutions are to be evaluated by reference to the pattern of social outcomes to which they give rise. So although the features of the emergent world are the things to which the principles of justice apply in the first instance, the exercise of normative evaluation works backwards, as it were, to the basic institutions under which the actual world emerges. Accordingly, there is embedded in the theory a core conceptual distinction between the ‘basic institutions’ and the outcomes that emerge under them—between “rules of the game” and “plays of that game”. It is this feature that gives the theory its ‘constitutional’ character. To take an analogy, rules of the road are chosen in the light of the capacity of interdependent road-users to make the journeys they desire to take with maximal success. No one supposes that different rules of the road are objects of value in themselves: their value is totally parasitic on their success at the level of their operation—the number of journeys, the time taken, the inconvenience endured, and the likelihood of accident, to which the prevailing rules and possible alternatives are expected to give rise. Nevertheless, the rules have a certain status. A world without rules is one where there would be more accidents and fewer journeys, taking more time. And of course, to say that we need rules means that those ‘rules’ have a certain structural stability—a world in which the rules change on a daily basis is a world without rules! In the case of market institutions, the distinction between rules and plays-withinrules is clear enough: the ‘rules of the game’ include the structure of personal and property rights and rules of contract governing market exchange. With those institutional arrangements in place, the actual market process operates, and outcomes “emerge”. There is therefore an ineradicable expectational element in the selection of rules—a necessary indeterminacy about the actual outcomes that will emerge. Nevertheless, different rules will give rise to different expected outcomes; and the ‘best set of rules’ will be that set which yields the best results when the principles of justice are applied to the whole sequence of possible outcomes. I have said that the distinction between rules and plays—between the constitutional and in-period level of choice—is readily identifiable in relation to market processes (and rules of the road). The same distinction applies no less in relation to political processes, but is easier to overlook. In the political case, there are rules about how collective decisions are to be made—say, universal adult franchise, with representative institutions whose members are selected by majority rule (somehow applied, so perhaps rules for determining electoral boundaries or specifying proportional representation or whatever), perhaps restrictions on the domain of those collective decisions. But political decision-making under the constitutionally chosen rules may look rather like the choice of constitutional rules itself—presumably similar processes apply at the level of rule selection. Nevertheless, and perhaps precisely for this reason, a clear conceptual distinction should be drawn between constitutional and in-period politics—between the selection of the rules of political process and their operation.

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Within a Rawls-like theory, the relevant domain of collective decisions will include taxes and transfers that redistribute among individuals. In this sense, the rights that individuals exercise as members of the polity in shaping the tax–transfer system are no less authoritative than the rights that generate the market incomes on which the tax–transfer system will operate. As Buchanan states in the epigraph, individuals’ rights of franchise and their rights under the private property system overlap and jointly determine the final distribution of income (and/or primary goods). No ascription of primacy of the one process over the other—either way—seems called for.

3.5 Implications of the Constitutional Account of Justice MN declare—in the first sentences of their book—that: In a capitalist economy, taxes are . . . the most important instrument by which the political system puts into practice a conception of economic or distributive justice. (Murphy and Nagel 2002: 1)

In the final section of this paper (3.7), I want to interrogate that particular claim more or less on its own terms. In this section and the next, I seek to develop the implications of the constitutional framework already laid out. And it will be useful to begin that development by offering an alternative rendering of the MN sentence: within a capitalist constitution, designed according to the requirements of justice, the conception of justice is realized via the emergent overall distribution of income (or primary goods) net of taxes and gross of public benefits. That distribution will reflect: (a) The maximally just structure of private property rights. (b) Rules for collective decision-making that maximally realize expected justice via their in-period operation. (c) Rules for the interaction between (a) and (b). (d) The extent to which considerations of justice enter into the motivational structure of agents in their roles as participants in in-period market and electoral processes. Several aspects of this rendering are worth emphasis. First, there will be a basic property rights structure that scores best according to the principles of justice. That property right structure (call it PJ) has no less normative status within the theory than any other element—including, say, the rules that specify democratic processes. Ownership, under PJ, is not a myth—or if it is, so must be the MN account of justice that undergirds it!

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Of course, PJ may differ from the status quo structure and perhaps significantly so. MN may well be perfectly right when they observe that the existing set of property rights is ethically arbitrary and has emerged ‘purely conventionally’. But the implications of that claim are not that “ownership is a myth”. The claim implies, rather, that the status of the property rights structure is as one of the “basic institutions of society”. In short, to assert that ownership as such is a myth is to declare that there is no private property rights structure that a theory of justice can endorse. If that is so, then a regime of justice “in a capitalist system” is a contradiction in terms. And nothing MN say in their book supports such a conclusion. On the contrary, their concern with taxation rather presupposes it. Moreover, to return to a point of issue raised in section 3.1—changes in the property right structure do not have the same status as other policy changes that have an identical effect on the distribution of income. A change in the property rights structure is a change in the basic institutions of society; whereas a change in tax arrangements (even if not quite like other policy decisions—see section 3.6) is an operation under the rules of in-period politics. Second, and relatedly, the rules—including PJ specifically—deserve proper respect by virtue of their status as part of the ‘constitution of justice’. It seems to me that this entails a presumption of ‘institutional coherence’—a principle that should govern specifically the interactions between political and market institutions. One important application of that principle involves the tax system—that the tax system should, other things being equal, be designed to pursue its redistributive tasks with minimal conflict with PJ. And as I see it, this requirement amounts to something very close to the HE criterion. Institutional coherence will of course involve additional restrictions on political action—restrictions like principles of due compensation in relation to governmental “takings”; or requirements to uphold laws against theft (independent of the income status of the accused and/or the original property holder). All these ‘restrictions’ involve a violation of the “principle of anonymity” as articulated by Tungodden (2003)—and for that matter, a violation of utilitarianism or the “social welfare tradition”. But that should not surprise us. None of egalitarianism, utilitarianism, or the social welfare tradition (at least as standardly applied) is consistent with the constitutional approach, because all are exclusively end-state principles that pay no attention to the status of rules. Third, I want to register an issue concerning the “moral division of labour”—item (d) above. Certainly in Buchanan’s constitutionalism, a critical element in the rationale for the ‘constitutional move’ is that it “economizes on virtue”. That is, the fact of considerable uncertainty about an individual’s future position under the chosen rules encourages that individual to take a more general viewpoint—to triumph over the narrow self-interest that prevents generalized gains from exchange being appropriated at the in-period level. This difference between predominant selfinterest and general interest amounts, in the Buchanan scheme, to the chief argument for the constitutional level of decision-making.

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It is not entirely clear how far Rawls follows Buchanan in this respect. Nor how far MN follow Rawls. One might interpret principles of justice as providing normative guidance for the evaluation of government policies—or of the distributive outcomes produced under alternative policy regimes. On this view, the division of moral labour falls not so much across the constitutional/in-period divide but rather across the private/public divide. That is, individuals are not supposed to have in mind the principles of justice in the conduct of their market relations; but they are supposed to do so in the conduct of their political actions. Ordinary citizens when they vote, and political agents when they exercise their delegated powers, are taken to be influenced in a significant way by the requirements of justice, as derived from reflection behind the veil of ignorance. But if this is so, then it is natural to ask what normatively relevant work the “basic institutions of society” are supposed to do. Why, for example, do we need “democracy” if all political agents can be supposed to be motivated by the principles of justice? Buchanan is quite clear on this point. On his view, the motivation of individuals in their in-period roles as voters and as market participants remains the same— predominant self-interest applies equally in both settings. Democratic institutions are required insofar as electoral competition encourages political agents to act in the interests of the general citizenry. Just how far democratic process is successful in this respect is of course a matter for analysis and empirical investigation—hence the whole enterprise of “public choice theory” in the Buchanan scheme. But in this respect Buchanan stands in explicit opposition to a long tradition, in economics and elsewhere, which has tended to ascribe quite different motivations to agents in their political and market roles. Characterized by Buchanan (disparagingly) as the “benevolent despot” tradition, many economists have just taken it for granted that the role of policy advisors (including advisors on the appropriate structure of tax systems) is to indicate what policies would be best according to relevant normative criteria. Simply put, the domain of normative evaluation is taken to be specific policies rather than the “basic institutions of society” from which policy decisions would emerge. And the implicit assumption has been that such policy advice would indeed prove compelling to presidents and prime ministers and cabinets who were charged with the business of making ultimate decisions on such matters. In this picture, political constraints are taken either to be irrelevant (hence the “despot” reference) or to somehow compel action that tracks the normative evaluation. The latter claim, if true, surely needs some fairly detailed argument! So a question: If there is a division of moral labour, where does the ‘dividing line’ lie? Does it lie across the constitutional/in-period divide? Or does it lie across the market/politics divide? Or both, in some measure? I incline towards the final (perhaps more complicated) answer. I think, that is, that there are good reasons for thinking that agents will be less self-interested both at the constitutional level of decision-making compared with the in-period level and, at

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the in-period level, when acting as voters than when acting as consumers/producers.⁴ This fact does not, however, necessarily obliterate all self-interested action from inperiod democratic processes. Nor does it ensure that the departure from selfinterested behaviour in in-period politics is reliably a “good thing”. The expressive account of voting that I favour is hospitable not only to more “moral” behaviour but also to more “moralized” behaviour—of which racism, sexism, and xenophobia are notable examples. What we can say is that appeals to justice are likely to have more purchase in political than in market settings. But so are appeals to affective considerations other than justice.

3.6 Fiscal Constitutionalism? The rendering of constitutional architecture in the preceding sections has characterized the constitutional/in-period divide as . . . well, a divide. I want to complicate that aspect of the picture as well. For among the “basic institutions of society”, some are more basic than others. And among the emergent outcomes of in-period politics, some are more ‘constitutional’ than others. The tax system occupies this middle ground (a second point of reference implied by the title of this section). For one thing, the tax system distributes the cost of public spending across different individuals and in that respect sets the prices that different voter-citizens have to pay for increased public spending.⁵ Decisions about whether to embark on a specific spending proposal are made in the context of the cost-sharing arrangements that the given tax system embodies. As a matter of fact, tax systems tend to be relatively stable—the basic lineaments of base definition and broad rate structure typically remain in place over many electoral cycles. “Tax reform” exercises are occasional: and they tend to be undertaken in quasi-constitutional style (say by semiindependent ‘committees of enquiry’ or Royal Commissions in the British tradition⁶). The fact that spending decisions are taken via a democratic process in which tax arrangements are relatively stable imposes a structure on collective decision-making that helps to suppress majoritarian ‘cycles’—and thereby could be seen to help democratic processes to ‘work better’.⁷ Both as emergent fact and as normative principle, then, the tax system is an important element in the democratic structure. It occupies a ‘middle ground’ somewhere between the constitutionally determined “basic institutions of society” and the in-period operation of collective decision-making processes—somewhere between ⁴ For an extended defence, see Brennan & Lomasky (1993). ⁵ This is an aspect of ‘tax justice’ emphasized by Wicksell (1896), from which Buchanan’s work can be seen as taking off. ⁶ The Carter Commission in Canada in the 1960’s, or the sequence of such ‘committees of enquiry’ in the Australian system, as exemplified by Asprey et al. (1974); Matthews (1975); and Henry (2009). ⁷ The problem posed by majoritarian cycling has been a special focus of rational actor political theory in both its ‘public choice’ and ‘social choice’ variants. See, for example, Mueller (2003).

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basic rules of democracy (electoral competition, majority rule, universal franchise, etc.) and the operation of collective decision-making processes in relation to day-today public policy. When MN assign primary status to the tax system as an instrument of distributive justice, they claim too much. As I have been at pains to emphasize, the conception of justice is “put into practice” by the entire set of basic institutions. And though, as I have argued, democratic processes are likely to give greater voice to the egalitarian values of the citizenry than those same individuals’ market choices, the tax system is not simply an articulation of individuals’ conceptions of justice: there is much else that goes into the democratic construction of the tax system (including doubtless a good dose of thinly disguised self-interest!). On the other hand, prevailing rules of tax justice do have some additional normative status, borrowing from the fact that those rules have a quasi-constitutional character. And in that connection, the principle of horizontal equity—the principle that, other things equal, the tax structure ought to respect the constitutionally endorsed structure of private property rights—has an honourable place.

3.7 The Democratic Justice Gap In sections 3.5 and 3.6, I have tried to develop my critique of the MN argument by reference to the first sentence of their book. I now want to interrogate that sentence more or less on its own terms. In its entirety it reads: In a capitalist economy, taxes are not just a method of paying for government and public services: They are also the most important instrument by which the political system puts into practice a conception of economic or distributive justice. (Murphy and Nagel 2002: 1)

The most natural interpretation of this claim is that, among the many factors that bend the distribution of income in the direction required by principles of distributive justice, the tax system is the one that has the most impact. I think this claim is false. I believe that the factor that has the most egalitarian impact is the total tax take. Consider the following simple thought experiment. Suppose there is a proportional tax system under which the revenue obtained is distributed equally among all citizens. It is, I think, intuitively clear that what is best by reference to the maximin criterion is the situation under which the tax rate is set at the revenue maximizing level, and is imposed on that tax base that generates maximal revenue. (This is the folk version of a proposition laid out in Phelps (1973): in advancing the proposition, I do not claim originality.) To see the proposition’s intuitive force, consider a tax base such as ordinary income, broadly defined (say in the Haig–Simons manner to include all gifts received, all capital gains, imputed rent on owner-occupied housing, and so on). Let the revenue maximizing uniform tax rate be t*. The (maximal) revenue so obtained is R* and each individual receives a total return of (Yi(1 t*) + 1/nR*), where Yi is that agent’s income and n is the number of individuals in the relevant society. Now ask how the person with the lowest Yi in the society could be made better off.

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One immediate thought is that the tax rate structure may be made progressive— lower the rate of tax on low-income persons and raise the rate of tax on high-income individuals. But when one lowers the rate of tax over low-income ranges (holding other rates constant) one reduces the revenue obtained from every taxpayer. A simple example illustrates. Suppose the rate structure is zero to income level Y and t* beyond that level. Compared with a flat proportional tax of t*, there is a reduction in revenue of t*Y from every individual with income above Y, and t*Yj from every individual whose income is below Y. If Y  Ymin, then there is no gain to ‘min’; and if Y  Y(min + 1) then min will lose because a very small fraction of the revenue garnered from (min + 1) goes to min as a slightly higher grant. (Min is the minimal income earner; (min + 1) is the next highest person in the income ranking.) One might think that one might do better by increasing the tax rate levied on high incomes beyond t*. But by hypothesis, t* is the revenue-maximizing tax rate and pushing the tax rate above t* for any income group serves only to reduce the income they earn and hence the tax they pay. Of course, if it is more difficult for high-income individuals to avoid tax and/or to substitute leisure for income-generating activity than low-income individuals, it will pay to have higher tax rates for the richer persons. If the revenue-maximizing tax rate differs at different income levels, or for different classes of taxpayers, it will increase total transfers (and hence the income of the poorest) to vary the income tax rate according to such considerations. But then, the tax system will reflect differential elasticities of leisure–effort substitution and differential ease of tax avoidance/evasion more generally rather than considerations of justice. For example, if individuals aged between 60 and 70 have greater capacity to vary their hours of work in response to the income tax rate (they can choose whether or not to retire), then it will increase total revenue to impose a lower rate of tax on this group even if they are richer on average than individuals in different age groups. The rate structure of income taxation will not in itself reflect a ‘conception of justice’ so much as a revenue-maximizing response to differential behavioural sensitivity to tax rates. Suppose however, for simplicity, that the revenue-maximizing tax rate is indeed constant across income levels: the proportional rate structure will then be maximally just, insofar as it is levied at the revenue-maximizing rate. What achieves the maximal redistributive effect here—the element that drives the egalitarian impact of the fiscal system—is the total tax take, not the way in which the tax system discriminates in terms of differential rates across different income classes. Equally, in relation to tax base, what is relevant for the overall egalitarian impact is to secure that tax base that generates maximal revenue. Doing so may well require some departure from a broad income base (for example differentially heavy taxation of goods that are complementary with leisure), but for the purposes of the discussion here we can set such complications aside. It is useful at this point to contrast the arrangement that is required for Rawlsian maximin with the arrangement that can be predicted to emerge from democratic political processes under similar conditions. That is, suppose we retain the assumption

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of a proportional tax rate and a broad income base together with the equal distribution of tax revenue across all citizen-voters. These restrictions are sufficient to ensure the applicability of the simple median voter result arising from electoral competition—following the model devised by Buchanan (1975b) and Meltzer and Richard (1981). In that model, the level of transfers in political equilibrium will be that most preferred by the median income earner. Under the condition that the income distribution is skewed towards the bottom end (a highly robust property of countries’ actual income distributions) the fact that voting power is distributed equally while income is distributed unequally ensures that there will be positive transfers from richer to poorer. The extent of such transfers will be determined by the skewness of the distribution (the difference between average and median income) and the size of the substitution effects (excess burdens) induced by the tax–transfer system. The (political) equilibrium tax rate will be that where the median income earner’s total tax burden (revenue plus excess burden) on the marginal dollar raised equals average income (which determines how much each—including the median income earner specifically—receivers in transfers). The results here can be depicted conveniently in terms of a simple diagram. In Figure 3.1, the (uniform) tax rate is measured along the horizontal axis and marginal costs and benefits measured along the vertical axis. The marginal cost of taxation to the median voter, at various tax rates, is indicated by the convex upward-sloping line, starting at Ym. The tax paid by the median income-earner/voter is given by t.Ym marginal cost/benefit

marginal cost to m

m

– y

M marginal excess burden

ym

1 Σy n

tax paid by m

–t

t* (R*)

tax rate

Figure 3.1 Democratic equilibrium and maximin in tax rate determination Source: compiled by the author

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while the benefit received by that voter is t.Y. At m, the marginal net value of transfers t’(Y Ym) is equal to the marginal excess burden per dollar of revenue raised. If the tax rate is increased beyond t’, then the median voter will be enduring a total loss larger than the net benefit she receives. Accordingly, the political equilibrium level of transfers is given at m, with tax rate t’. However, the maximin level of transfers is at M, which corresponds to the maximal total revenue derivable from the tax system. The difference between m and M reflects the difference in the outcome that emerges from ‘constitutionally chosen’ democratic process, and what would emerge if those agents were to treat the difference principle as a compelling moral norm to be applied to the emergent in-period distribution. If the division of moral labour falls across the constitutional/in-period divide, then m is the level of redistribution that agents choosing from behind the veil of ignorance can ensure “within a capitalist system”. In that sense, it is the principle of one person, one vote, and the resultant aggregate level of taxation, rather than the structure of the tax system as such, that is doing most of the work in securing distributive justice! Of course, m is derived on the assumption that individuals vote entirely on the basis of self-interest. The analysis effectively derives the level of transfer activity that leaves individuals in different income positions best off. If all voters (including the median) are motivated to some extent by a desire to redistribute to the worst off (if they have internalized to some extent the Rawlsian conception of what justice requires) then the equilibrium of transfers will be somewhat higher than m. And perhaps the maximal level of revenue will also be increased, as individuals internalize the effects of their working harder on the extent to which the worst-off flourish. However, as perhaps recognized by Rawls (and less by Cohen), there is an asymmetry between a vote for increased transfers and a decision to work harder/longer and produce higher taxes for redistributive purposes. When a voter decides to vote for higher taxes (and larger transfers), this will, if successful, increase the tax-levels for all taxpayers. When she continues her working patterns in response to higher taxes, she is acting unilaterally: her paying more tax than she otherwise would does not affect whether others will follow suit. It is of the essence of the ‘prisoners’ dilemma’/public goods logic underlying political action that these two decisions invoke different incentives! We might term the difference between m and M the ‘democratic justice gap’. But the gap so understood focuses on just one aspect of the democratic delivery of justice—the failure of the democratic process to push transfer activity to the level that maximin requires. There are other aspects to this “gap”—other dimensions in which the median voter outcome fails to track the requirements of justice. For one thing, the median voter outcome is responsive to the degree of skewness in the distribution of market income, but not to its variance. We can hold the difference between median and mean income constant and vary the dispersion in the tails of the distribution—but that latter variance will have no effect on the equilibrium level of transfer. In this spirit, consider the effects of a natural disaster that affects only the

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bottom 10 per cent of the income distribution—entirely wiping out their capacity to earn income (because of the flooding of their lands perhaps). Such a catastrophe will serve to reduce average income somewhat—but by construction it will leave median income entirely unchanged. So the difference between average and median income will decrease and so pari passu will the political equilibrium level of transfers. Just at the point where justice would seem to require larger transfers, the political process produces smaller transfers. The general lesson is that the forces of democratic politics, rather than tracking the requirements of justice, can operate in perverse directions. (Note, however, the obverse case, in which the richest 10 per cent receive a bonanza that increases their incomes significantly. This bonanza will increase average income while median income remains unchanged: and transfers will increase in political equilibrium. To that extent at least, there is some ‘trickle down’ aspect to the justice that democratic institutions produce—providing of course that the richer 10 per cent do pay taxes at the same rate as others in the income distribution.) We should, finally, note a rather different possible interpretation of MN’s phrase concerning the role of the tax system in “put[ting] into practice a conception of economic or distributive justice”. In the foregoing discussion, we took that phrase to mean: “has the largest impact on the income distribution (of all those policies/ institutions that affect the distribution of income in the direction justice requires)”. That interpretation places the emphasis on “putting into practice a distributional outcome”. But perhaps emphasis should instead be placed on putting into practice a conception. Perhaps MN have in mind less the actual effects of the tax system and more what the tax system is taken to signify. Under this alternative interpretation, things like the degree of progressiveness in the rate structure might be seen to articulate a conception of justice, even when (as indicated earlier) the effects of rate structure progression are actually to diminish the total tax take and hence the well-being of the worst-off. This possibility is redolent of Nozick’s (1994: 27) remarks about the ‘expressive rationality’ of supporting minimum wage legislation even when one believes that, other things being equal, a higher minimum wage increases unemployment and worsens the lot of the marginal workers for whom the minimum wage is supposed to be a measure of support. Whether and in what sense such action can be rational is an interesting and contestable issue; but one thing that seems clear (to me at least) is that expressing such support is more likely to be ‘rational’ in settings where the connection between action and consequence is least tight. And I think that electoral politics is characterized by just such ‘loose connections’.⁸ It is certainly plausible that voters may be led⁹ to support a tax system that expresses their egalitarian sentiments—and indeed do so entirely rationally. But whether such expressive action is entirely consistent with the ⁸ This is the essence of the ‘expressive voting’ argument elaborated in Brennan and Lomasky (1993). ⁹ I would be tempted to insert here “as if by an invisible hand”—were it not that “as if by an invisible foot (or backhand)” might be more apt.

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demands of justice is a much more dubious proposition. Presumably, an agent motivated by a Rawlsian conception and in full possession of the relevant ‘facts’ would have some difficulty in supporting features of the tax system that she believed to have consequences inimical to her cause. On the basis of the earlier discussion, I think there are good reasons for thinking that progression in the rate structure has that perverse feature. Raising this interpretative possibility, and indicating its plausibility in the electoral context, serves another function. It suggests that the Meltzer–Richard assumption about voter motivation is questionable. The Meltzer–Richard notion is that the egalitarian basis of the franchise in a democratic system bends the ultimate distribution of well-being in the direction of greater equality, via the application of electoral power. That argument seems to depend critically on the idea that those enfranchised will use their voting power to their material advantage to some extent— and it is that feature which the Meltzer–Richard model seeks to capture. Perhaps the right way to think about expressive considerations in these models is as an important complicating (but not totally vitiating) factor. It is, however, clear to me that the decision-theoretic structure of electoral behaviour does not support self-interested voting in the manner that Meltzer and Richard (and most early public choice theorists) suppose.

3.8 Conclusions In this paper, I have used the Murphy–Nagel treatment of “taxes and justice” as a point of departure for my own interpretation of what a quasi-Rawlsian conception of justice would require of the tax system. I say “quasi-Rawlsian” here because I do not conceive of the discussion as a piece of Rawls scholarship in the normal sense. I have simply done what economists often enough do—namely, take what are commonly held to be some central elements of the Rawlsian scheme, and see whether those elements justify the claims that MN make. In that connection, I have been concerned to take seriously what I have called the ‘constitutional architecture’—the notion that the “basic institutions of society” constitute the primary domain of choice, even though the principles of evaluation refer to the in-period distribution of primary goods. I fully accept the MN claim that that in-period distribution is influenced by a variety of factors, of which the tax system is one important component. But the tax system operates alongside other, yet more basic, institutions of society: the specification of democratic procedures, the extent of the franchise, and the structure of private rights including those of property. In that connection, the question of how these more basic institutions are to interact is a significant piece of the normative scheme; and it is in these terms I believe that principles of taxation are properly understood.

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Within that formulation, it seems to me that much of what MN claim relating to taxes and justice is either misleading or just plain wrong. In particular: (1) There exists a structure of private property rights under the ‘constitution of justice’ that is the set that justice requires. The various claims MN make—that “ownership is a myth”; or that the property rights structure and the distribution of well-being that emerges from that structure is ‘conventional’; and (hence?) is totally lacking in ‘independent validity’—seem inconsistent with this basic fact. This is not of course to say that the status quo set of property rights, whatever they happen to be, is the set that would be chosen under the requirements of justice. It is rather to insist both that (a) the latter “ideal” set must exist if justice is to be pursued within a “capitalist economy”, and (b) that the determination of the “just private property structure” is a matter for ‘constitutional’ rather than in-period policy determination. (2) There are then normative grounds for ensuring that the interaction between the tax–transfer system and the rules of democratic process on the one hand and the private property rights structure on the other involve minimal conflict. All these elements are sources of normative authority in the sense that all are pieces of an overall ‘constitution of justice’ and each element deserves a certain respect and an appreciation of its independent integrity.¹⁰ One implication is that the principle of ‘anonymity’—the claim that permutations of position are normatively irrelevant for justice purposes—is inappropriate to a ‘constitutional system’. In particular, the principle of ‘horizontal equity’ does have some normative status within a Rawlsian theory of justice. Neither of the foregoing claims is to be understood as a defence of ‘libertarianism’— at least insofar as libertarianism is interpreted as a restriction on the size of the fisc. The ‘constitution of justice’ as I have described it is perhaps better thought of in terms of a maximal than in terms of a minimal state, in the sense that the Rawslian maximin principle requires tax rates to be set as close as possible to their revenue-maximizing levels.¹¹ But a ‘maximal state’ is not an unconstrained state! It operates under a constitutional regime in which the private property rights structure is an intrinsic element, and the principle of horizontal equity in the tax system a derivative one. Moreover, the maximal state is not one likely to be realized under democratic processes—so there is an unavoidable tension between the maximin principle and

¹⁰ For example, the integrity of the democratic system needs to be preserved against the gratuitous intrusion of ‘private property’—as in the sale of votes or the purchase of political influence. ¹¹ One might think that the Rawlsian position so described is a long way from the “middle ground” my title claims to defend—that the proper compromise between the private property rights structure and the claims of distributive justice lies somewhere between minimal and maximal statism—not at the maximal extreme. I have not sought to take a stand on this latter question. My claim here is that, pretty much whatever position one takes on that question, the authority of the private property rights structure and the principle of horizontal equity survive.

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what majoritarian democracy is likely to deliver. In that sense, the set of ‘basic institutions of society’ that maximally realize the Rawlsian principles of justice “in a capitalist system” will not fully realize those principles. But of course it may be that that “capitalist” set of institutions will realize Rawls’ principles better than any alternative set. Rawls’ utopia is supposed to be a ‘realistic’ utopia—and I take it that the force of the “realistic” proviso here is that the best that can be reliably achieved is likely to fall short of the best that might be imagined.¹²

Bibliography Asprey, K. et al. (1975), Full Report. Canberra: Government Printer. Brennan, G. (2005), “ ‘The Myth of Ownership’: Liam Murphy and Thomas Nagel”, Constitutional Political Economy 16: 239–51. Brennan, G. and L. Lomasky (1993), Democracy and Decision, New York: Cambridge University Press. Buchanan, J. (1975a), The Limits of Liberty, Chicago: University of Chicago Press. Buchanan, J. (1975b), “The Political Economy of Franchise in the Welfare State”, in R. Selden (ed.), Essays in Capitalism and Freedom, Charlottesville: University Press of Virginia. Carter, K. (1966), Report of the Royal Commission on Taxation. Canadian Government Cohen, G. (2008), Rescuing Justice and Equality, Cambridge, MA: Harvard University Press. Henry, K. (2009), Australia’s Future Tax System, Canberra: Government Printer. Holmes, S. and C. Sunstein (1999), The Cost of Rights, New York: W. W Norton. Kaplow, L. (1989), “Horizontal Equity: Measures in Search of a Principle”, National Tax Journal 42: 139–54. Leeson, P. (2009), “The Laws of Lawlessness”, Journal of Legal Studies 38: 471–503. Mathews, R. (1975), Committee of Enquiry into Inflation and Taxation, Canberra: Government Printer. Meltzer, A. and S. Richard (1981), “A Rational Theory of the Size of Government”, Journal of Political Economy 89: 914–27. Mueller, D. (2003), Public Choice III, Cambridge: Cambridge University Press. Murphy, L. and T. Nagel (2002), The Myth of Ownership, Cambridge, MA: Harvard University Press. Nozick, R. (1994), The Nature of Rationality, Princeton: Princeton University Press. Ostrom, E. (1990), Governing the Commons, Cambridge: Cambridge University Press. Phelps, E. (1973), “Taxation of Wage Income for Economic Justice”, Quarterly Journal of Economics 87: 331–54. Rawls, J. (1999), A Theory of Justice [revised], Cambridge, MA: Harvard University Press. Sen, A. (1979), “Equality of What?” Tanner Lectures on Human Values, Stanford University. Simons, H. (1938), Personal Income Taxation, Chicago: University of Chicago Press. Tungodden, B. (2003), “The Value of Equality”, Economics and Philosophy 19: 1–44. Wicksell, K. (1896), Finanztheorische Untersuchungen, Jena: Gustav Fischer. ¹² The final version of this paper was written while I was a Fellow of the Swedish Collegium for Advanced Science in Uppsala. I am grateful to SCAS for exemplary intellectual hospitality; and to Laura Valentini for extremely helpful conversations on these and related topics.

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4 Taxing or Taking? Property Rhetoric and the Justice of Taxation Laura Biron

This chapter draws attention to a puzzle about the relevance of the concept of property to studies of taxation. On the one hand, rhetorical appeals to property rights are prevalent in popular debates about taxation. On the other hand, property theorists do not tend to apply their work directly to the analysis of taxation. Moreover, some theorists of taxation have suggested that the concept of property is neither important nor relevant to the study of taxation (Murphy and Nagel 2002: 4). What are we to make of this mismatch between popular rhetoric and theoretical argument? In the following chapter, I illustrate some ways in which conceptual work on property is directly relevant to the study of taxation, arguing that taxation should occupy a more prominent place in the jurisprudence of property than it currently does.

4.1 Property and Taxation: Popular Debates and Theoretical Perspectives Property is an enormously powerful concept. As Blackstone famously put it, ‘There is nothing which so generally strikes the imagination, and engages the affections of mankind, as the right of property . . . and yet there are very few, that will give themselves the trouble to consider the original and foundation of this right’ (in Broom and Hadley 1869: II: 1). This powerful, striking, and sometimes underanalysed concept can easily influence a political debate. To take a parallel area of law, rhetorical appeals to the concept of property are also prevalent in discussions of intellectual property. Calling a patented invention ‘property’ seems to endow it with powers it does not possess as a mere ‘statutory monopoly’ (Spence 2007: 14).¹ I do not mean to suggest that the term intellectual property is purely rhetorical, of course,

¹ For a historical perspective on this matter with respect to patent law, see Machlup and Penrose (1950: 16).

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but it is interesting to consider the psychological difference that can be brought about by such a label. In the same way, the concept of property often seeps rhetorically into debates about tax justice. In The Myth of Ownership, Liam Murphy and Thomas Nagel argue that ‘serious public discussion of economic justice has been largely displaced by specious rhetoric’ about property rights (2002: 4), enabling those on the political right to argue that taxation is unfair expropriation of property. It is about big government taking away ‘your’ hard earned money, or giving back what rightfully belongs to you if taxes are cut. There appears to be some kind of link to be drawn between a tax and an expropriation of property, then, and political rhetoric picks up on this way of thinking, as the concept of property seeps into ideologically loaded debates about tax policy that are, they put it, the ‘bread and butter’ of politics and yet, for various reasons, have not yet made contact with more abstract philosophical discussions of distributive justice (Murphy and Nagel 2002: 4). And, of course, if debates about taxation are framed around the question of the extent to which the state can legitimately interfere with the property rights of its citizens, this has a remarkable effect on the perceived legitimacy of the tax system—placing the burden of proof on the state to justify such ‘expropriation’. Given that appeals to the concept of property in debates about taxation are widespread at the popular level,² it is puzzling that theorists of property have not discussed taxation in any depth.³ At the very least, we might expect theorists of taxation to discuss the concept of property in their work. The study of taxation is still an undeveloped area of political and legal philosophy, so we might not expect to find much work on taxation and property as yet. But in Murphy and Nagel’s influential study, an argument is put forward urging theorists of taxation to focus their attention elsewhere. Since they believe that the ‘everyday libertarian’ view that taxes encroach upon private property is mistaken,⁴ they argue that sophisticated discussions of taxation should move away from arguments about property rights, and turn instead to broader questions about taxation and socio-economic justice. If the authors are correct, then, we have a good explanation for the fact that works on the jurisprudence of property do not devote much, if any, of their discussion to taxation; contrary to the

² See, for example, John Boehner’s remark on the proposed US government spending cuts: ‘how much more money do we want to steal from the American people to fund more government?’ (New York Times, 3 March 2013, p. A1). ³ Though see Christman (1994: 133–4) and Munzer (1990: 320–2). ⁴ According to ‘everyday libertarianism’, ‘each person has an inviolable moral right to the accumulation of property that results from genuinely free exchanges’ (Murphy and Nagel 2002: 31). This means that ‘no compulsory taxation is legitimate; if there is to be government, it must be funded by way of voluntary contractual arrangements’ (2002: 31). This ‘unreflective’ form of libertarianism about property rights is said to have ‘cast a shadow over much discussion of tax policy’ (2002: 27), leading to the ‘assumption that pretax market outcomes are presumptively just, and that tax justice is a question of what justifies departures from that baseline’ (2002: 15).

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focus of popular debates, taxation is not really about taking an individual’s property, but about just or unjust distributions of the collective social product. However, it is my contention that, pace Murphy and Nagel, theorists of taxation cannot jettison the concept of property from their work, even if their ultimate goal may be to broaden the focus of debates about taxation away from questions about state interference with property rights. I argue for this claim in three stages. First, I discuss some prima facie similarities and differences between taxation and expropriation, in order to understand what is at stake in rhetorical arguments that draw an analogy between these two governmental powers. Second, I analyse Murphy and Nagel’s argument for removing the concept of property from our analysis of taxation, and find it unpersuasive. Finally, since property theory may well have relevance to the study of taxation, I turn directly to some conceptual work on property and apply it to some of the questions at hand. The aim of this chapter, then, is to urge theorists of taxation to address conceptual questions about property more carefully and, likewise, to encourage theorists of property to apply their work more directly to the study of taxation.

4.2 Taxing or Taking? I shall begin by discussing the distinction between taxation and expropriation in more detail.⁵ As noted above, if popular rhetoric is anything to go by, it is commonplace to view taxation and expropriation as somehow, to use Nozick’s self-admittedly ambiguous phrase, ‘on a par’ with one another (1974: 169–70). This means that it is important to clarify what is at stake in equating a tax with a taking of property, and look descriptively at the ways in which these two governmental powers— expropriation and taxation—differ and overlap, in order to understand how or why the two might be assimilated. My discussion of expropriation will focus on the technical, legal sense in which the term is used to describe governmental powers of compulsory purchase or eminent domain, where private property is taken by the state in return for monetary compensation. How does a government’s power to tax differ from its power to expropriate property in this way? There are some obvious prima facie differences between taxation and expropriation. For example, expropriation usually takes place with regard to a specific item of property which is needed for some public purpose—to build a highway, a block of council flats, and so on—and only that token plot of land will suffice. Indeed, an expropriation of property can only take place if I surrender the specific item of property in question to the state, because that item is specifically needed for the claim in question. Taxation, however, operates at a much more general level as a claim for money—the medium of exchange with which we acquire specific items of ⁵ For further, more detailed discussion of the distinction between taxation and expropriation, see Kades (2002) and Penner (2005).

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property—but not as a claim for a specific item per se. This way of distinguishing taxation from expropriation might not lead us to think that they are completely separate powers, however. After all, my actions and decisions with regard to specific items of property can be affected by taxation—my potential liability to stamp duty might make me think differently about buying a house, for example. But at the very least, there appears to be an intuitive difference between a state’s claim for money and its claim for a particular tangible resource. I return to this difference in section 4.2. There are other ways in which we might draw a distinction between taxation and expropriation—for example, by focusing on the relative spread of the financial burden across the group of individuals affected by the government action in question.⁶ But it is not the purpose of my chapter to enter into a detailed discussion of the similarities and differences between taxation and expropriation. Rather, I wish to compare these two governmental powers in order to understand rhetorical arguments that attempt to draw some kind of analogy between them. Even though there are some obvious and intuitive differences between taxation and expropriation, then,⁷ I think there are two interesting comparisons we can highlight, both of which have relevance to debates about tax justice. First, both taxation and expropriation are usually carried out in the name of the public interest, to provide a particular kind of public benefit. In the case of expropriation, the benefit is something specific and tangible such as the provision of a road or a public utility; in the case of taxation, on the other hand, the benefit might range from the provision of public services through to state assistance for the needy. But the important point to note is that, since expropriation claims limit or interfere with private property rights in the name of the public interest, it might be argued that this is the relevant comparison to focus on when debating whether or not particular taxes are justified. The second area of comparison between taxation and expropriation surrounds the notion of compensation. For the comparison I have in mind to be valid, a few further points are needed. First, I am assuming that compensation in the case of expropriation is a matter of individuals receiving monetary compensation, based on their property’s market value. Further, I am assuming that, provided that expropriation decisions are made fairly, and individuals are adequately compensated for the economic losses that result from their property being taken, governmental powers of expropriation are essentially legitimate. Of course, a hardened libertarian might take issue with the very idea of a government’s power to expropriate, even if compensated; but if we set this position aside for the time being and assume that

⁶ Kades (2002) suggests that we might call a tax a ‘taking’ when it impacts a small number of persons and provides no benefits for those persons who are liable for it. ⁷ Penner argues that the differences are so ‘glaring’ that it would be ‘conceptual nonsense’ to equate them (2005: 79–80). Whilst I agree that the two should not be completely equated, I argue here that they do in fact overlap in interesting ways.

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compensated expropriation is legitimate in certain cases, how does this affect the comparison with taxation? At first sight, there appears to be a clear difference: after all, as Penner notes, the person who has their property expropriated ends up with the same amount of wealth following the expropriation as they had before it, whereas the point of taxation is to transfer wealth to the authority in question (2005: 83). We might take a slightly less literal approach to the question of compensation, however. With expropriation, the state provides an individual with monetary compensation for the loss of a specific item of property; with taxation, it might be argued, the state spends the money it receives to provide various public services from which taxpayers benefit. In the case of expropriation, then, the compensation is obvious and direct. But in the case of taxation, the promise of compensation is implicit; the government will spend tax revenues on projects benefiting its citizens (meaning that in certain cases, compensation for taxation collapses into the more general notion of public benefit, discussed above). So when tax revenue is spent in ways that benefit all taxpaying individuals, taxation works like a form of compensated expropriation— money is exchanged for the provision of services. We can now see that calling a tax an expropriation of property need not automatically lead to the claim that taxation is unjust, since expropriation of property is not necessarily unjust—in fact, provided individuals are adequately compensated, governmental powers of expropriation are generally said to be legitimate. However, the comparison between taxation and expropriation becomes more complex when we consider the case of redistributive taxation. In most jurisdictions, income tax is wealthsensitive: the tax rate is set according to a person’s wealth, and those who earn more will pay more, with redistributive consequences. And although we could imagine a redistributive system of expropriation, which set the compensation level according to an individual’s wealth, expropriation in most legal systems is generally wealth-insensitive. This means that compensation functions in a different way with regard to redistribute taxation, where only a proportion of the amount of tax an individual pays will fund services they directly benefit from. And perhaps this is the key to understanding some interpretations of the libertarian argument that taxes are unfair takings of property: namely, that redistributive taxation is uncompensated expropriation. Just as it would be unfair if my land were taken away from me without receiving monetary compensation from the state, so also it would be wrong for the state to demand a certain percentage of my income without providing me with direct compensation in return. Everyday libertarians may well accept that some forms of taxation are compensated forms of expropriation and therefore legitimate—taxes that fund services such as defence and law enforcement, for example. Taxes that redistribute wealth, on the other hand, appear to be uncompensated forms of expropriation. If it is unfair to expropriate property without providing an individual with some form of compensation, then redistributive forms of taxation appear unjustified when put in these terms. This is among the reasons why Murphy and Nagel are so keen to move debates about tax justice away from discussions of property, as we shall now go on to see.

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4.3 Mistaken Libertarian Rhetoric? The Myth of Owning Pre-Tax Income I have sketched two possible ways in which taxation and expropriation might be said to overlap: in their compensatory aspects, and because both can be seen as governmental actions which limit private property in the name of the public interest. With this in mind, we can turn to Murphy and Nagel’s discussion. It is interesting that their analysis of everyday libertarian rhetoric about property does not focus on the possible connection between taxation and compensation I drew attention to above. Rather, they attempt to sidestep all possible analogies between taxation and expropriation by arguing that ‘private property is a legal convention, defined in part by the tax system’ (Murphy and Nagel 2002: 8). Debates about tax justice are not debates about the impact of taxation on private property, then, because ‘taxes must be evaluated as part of the overall system of property rights that they help to create’ (2002: 8). Murphy and Nagel’s assertion that private property is a legal convention is a ‘dominant theme’ of their book (2002: 8). But in fact, it is difficult to find an explicit argument for this claim. Perhaps they feel it is so ‘perfectly obvious’ (2002: 8) that it is not worth arguing for explicitly. The conclusion of their argument is that property rights are dependent on the legal system that defines and creates them—including the tax system. And it soon becomes clear that the real target of their attack is a particular kind of natural or pre-institutional property right—specifically, ownership of pre-tax income. As they put it: . . . there are no property rights antecedent to the tax structure. Property rights are the product of a set of laws and conventions, of which the tax system forms part. Pretax income, in particular, has no independent moral significance. It does not define something to which the taxpayer has a prepolitical or natural right, and which the government expropriates from the individual in levying taxes on it. (2002: 74)

One premise they rely on in support of this conclusion is the claim that, without the existence of the (tax-supported) state, it would be impossible for us to earn our income in the first place: . . . the modern economy in which we earn our salaries, own our homes, bank accounts, retirement savings, and personal possessions, and in which we can use our resources to consume or invest, would be impossible without the framework provided by government supported by taxes. (2002: 8)

Since the existence of the state is a precondition for us being able to earn our salaries, then, our pre-tax income is not ‘ours’ in the way a libertarian might wish to argue; the state already has some claim to it, prior to taxes being levied. If this is correct, then taxation of our pre-tax income is not expropriation, because our pre-tax income is not really our property. According to Murphy and Nagel, then, there is no private property in a full, fixed sense to be taken from individuals except insofar as legitimate income taxes have been paid.

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By putting their argument in these terms, however, Murphy and Nagel do not address the core feature of libertarian rhetoric about taxation I drew attention to above. In fact, their argument for the conventionality of pre-tax income implicitly appeals to compensatory aspects of taxation with which libertarians are likely to agree. They argue that: In the absence of a legal system supported by taxes, there couldn’t be money, banks, corporations, stock exchanges, patents or a modern market economy—none of the institutions that make possible the existence of almost all contemporary forms of income and wealth. (2002: 32)

But a libertarian could accept all of this, and still focus debates about tax justice on the connection between taxation and compensation (thus framing the debate around the question of the extent to which taxation is a form of expropriation). Intuitively, we could imagine a very minimal state making possible the private acquisition of income and wealth: enforcing employment contracts, insuring corporations, stock exchanges, and so on. These are all services a libertarian may well be happy for a state to underwrite and support. Let us then call taxes advance fees for the services the state provides, charged at a certain percentage of my salary. This looks very much like a system of compensated taxation (with the payment and compensation being provided ex ante), and is perfectly compatible with Murphy and Nagel’s argument quoted above that, without the existence of the state, it would be impossible for individuals to earn their salaries. But of course, this libertarian account of taxation is exactly the sort of picture Murphy and Nagel want to reject. On the basis of their ‘conviction . . . that there are no property rights antecedent to the tax structure’ (2002: 74), they want to move discussions of taxation away from questions about property, compensation, and so on, and towards broader conceptions of ‘social justice and the legitimate aims of government’. For one thing, broadening the analysis in this way allows us to make room for a discussion of redistributive taxation, which seems difficult to do when the discussion focuses solely on the compensatory elements of taxation. And Murphy and Nagel’s desire to broaden discussions of tax justice may well be admirable. I am merely pointing out that nothing in their claim about the conventionality of property rights, or the alleged myth of pre-tax income, seems to support this move. It is clear that they need to appeal to broader conceptions of social justice to open up questions about redistribution, but their argument about the conventionality of pre-tax income does not automatically broaden the discussion in this way.

4.4 Property Revisited: Two Further ‘Myths’ of Ownership We have seen that one problem with Murphy and Nagel’s argument is that it threatens to prove too little, since it appears to rest on a premise about the compensatory elements of the tax system that libertarians could likely accept, and it gives us no obvious reason to broaden the discussion to focus on wider issues of

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socio-economic justice. And the argument also threatens to prove too little in another way since, on their analysis, property rights are just one of the many private rights we have, whose boundaries are defined by the legal system. This means that we have no real grasp on what is distinctive of the concept of property. In their rejection of property-talk, that is, Murphy and Nagel are in danger of leaving us with no concrete idea about how the concept should be understood (see section 4.4.2). But in my view, more direct analysis of the concept of property can help us to understand what really lies behind the property-talk of the everyday libertarian, and therefore respond to it in its own terms. And I do not see why we should reject property rights as mythical creatures of the state, before we know in more detail what it is we are supposed to be rejecting as mythical. As Penner notes, if property really is a dead concept, as some authors think, we ought to at least give it a decent burial (1997: 4). Given that Murphy and Nagel’s attempt to ‘emancipate’ tax policy debates from the concept of property seems unpersuasive, it is clear that property theorists still have some work to do. Accordingly, I now turn to some conceptual work on property and see if it can shed light on some of the issues raised by the everyday libertarian comparison between taxation and expropriation. As we have seen, the myth of ownership that Murphy and Nagel question is about the argumentative order of appeals to ownership in debates about tax justice; and, in addition, the very nature of ownership itself which they think is so obviously conventional they wonder why anyone would have reason to think otherwise. But interestingly, there are at least two so-called ‘myths of ownership’ in the jurisprudential literature on property that are not explicitly brought up by Murphy and Nagel. One myth involves ‘totality ownership’, or the notion that owning something involves absolute dominion over it. The second myth—which is linked to the first—is that property should be defined as ownership of a ‘thing’ as opposed to a complex bundle of rights.

4.4.1 Totality ownership The first myth about ownership I wish to draw attention to has been termed ‘totality ownership’ (Harris 1996: 132–8), according to which ‘to own’ something entails that one can use it in any fashion, and property is defined as ‘that sole and despotic dominium which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe’ (Broom and Hadley 1869: II: 1). Blackstone’s hyperbole is often quoted in discussions of totality ownership, and it is a view about ownership that has had a remarkable influence on the way in which we view the concept. Understandably, many commentators have been critical of totality ownership since, on certain interpretations, it appears to imply that to own something would entail that one could use it in ways that were anti-social or even lethal; and of course, we know that nobody ever ‘owns’ anything in this sense.⁸ After all,

⁸ See e.g. Honoré (1961: 123) for discussion of ‘the prohibition of harmful use’ of property.

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one only needs to think of the various planning and noise restrictions that encroach on property rights to land, let alone the point that a person may not stab somebody with a knife they own, in order to realize that totality ownership is ‘more a figment of academic imaginations than a feature of existing property institutions’ (Harris 1996: 11). How might totality ownership enter into debates about taxation? If people think that they are in an absolute sense morally entitled to their income, taxation becomes difficult to justify, and perhaps even efforts to evade tax appear legitimate. This would, of course, be an absurd view to hold about what we are entitled to do with our money, simply because it is our property. But it is important to draw attention to the myth of totality ownership for two reasons. First, we can note that, even though it is easy to refute totality ownership by pointing to the various moral restrictions that set limits to ownership interests, there is a conception of ownership at play in jurisprudential discussions which can sometimes (misleadingly) be interpreted as a form of totality ownership, when in fact it is a perfectly standard way of referring to paradigm cases of ownership. Harris terms this full-blooded ownership, or ‘the assumption that, prima facie, the person is free to do what he will with his own, whether by way of abuse, use or transfer’ (1996: 29). Full-blooded ownership is not the same as totality ownership. Full-blooded ownership entitles those in the proper legal relation to a thing to do much more than anyone else may legitimately do with respect to that thing, but it does not imply there are no limitations whatsoever on such ownership. This gives us a paradigm conception of ownership as something relatively strong, though not absolute. We can distinguish ‘full-blooded’ ownership, then, from the mythical notion of ‘totality’ ownership. Second, we can return to Murphy and Nagel’s discussion of everyday libertarianism. Although they do not explicitly acknowledge it, they come close to discussing totality ownership when they attempt to explain away the intuitive appeal of the libertarian view that we have natural ownership of our income. As they put it: At the everyday level of what it feels like to live and work in a capitalist economy . . . we are inclined to feel that what we have earned belongs to us without qualification, in the strong sense that what happens to that money is morally speaking entirely a matter of our say-so. . . . (2002: 35)

For Murphy and Nagel, then, natural ownership of our income and an intuition of totality ownership seem to go together. Yet, as we have seen, they attempt to argue that natural ownership of pre-tax income is a myth and that there is no private property until income taxes have been paid—our property rights are not encroached upon by the tax system but created by it. In light of this view, it is important to ask: what do Murphy and Nagel say about the rights we have to our income after taxes have been paid, which are ‘created’ by the tax system? Interestingly, they suggest that the property rights in question are ‘full-blooded’ rights, just like any other property right: We all know that people have full legal right to their net (post-tax) income; subject to contractual or family obligations, their money is legally theirs to do with as they wish. (2002: 34)

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But Murphy and Nagel also seem to agree that ‘full-blooded’ ownership of our income is not the same thing as the mythical notion of totality ownership, since: A legal property right to net income is obviously not an absolute moral property right to anything (let alone to pretax market returns), but in daily life it is hard to prevent the strong sense of legal rights from sliding into a much more fundamental right or entitlement. (2002: 34)

Using the terminology above, we can clarify Murphy and Nagel’s argument by noting that there may be an illegitimate slide from the fact that we have ‘full’ ownership of our net income to the view that we have ‘total’ ownership of it. Libertarian arguments might well conflate these two forms of ownership to imply that ownership of our income is stronger than it really is. However, Murphy and Nagel go a step further in the passage quoted above, and suggest that the intuition that we own our pre-tax income is simply a manifestation or expression of the false belief that we have an absolute or ‘total’ right to our net income, as opposed to merely a ‘full-blooded’ right. But here their argument seems highly confused. For one thing, their above suggestion that individuals’ post-tax income is ‘legally theirs to do with as they wish’ despite them not having an ‘absolute moral property right’ to it indicates that no other forms of taxation on income (such as sales tax, inheritance tax, and so on) would be allowed. At the very least, they suggest in the above quotations that post-tax income has a different moral status from pre-tax income. Yet Murphy and Nagel immediately start talking about the various restrictions that a tax system can place on our post-tax income, such as the so-called ‘obligation to pay applicable sales tax’.⁹ Presumably, then, on their picture, our post-tax income is just as subject to taxation as our pre-tax income. But if there are also limits on our post-tax income, then why go to such trouble to discuss our pre-tax income? Murphy and Nagel assume that the only possible way in which we could own our pre-tax income is to own it absolutely. But where does this assumption come from? Why is it not possible to have less than ‘full-blooded’ ownership of our income (both prior to and after income tax) which makes its susceptibility to all forms of taxation (income, sales, inheritance, etc.) just one of the ways in which it is less then ‘full-blooded’? This makes it clear that the real issue at stake here is not whether or not we have natural ownership of our pre-tax income: rather, it is whether the relevant comparison for ownership of our income in general should be the paradigm case of ‘fullblooded’ ownership. The real myth of ownership at stake, then, is that simply because

⁹ I am assuming that in the majority of cases when individuals pay sales tax on a particular item they are doing so either with post-tax income, or with money that has been taxed in other ways such as through inheritance. But since sales tax is a tax on a specific item rather than on income directly, there could be examples where the money used to pay sales tax has not already been taxed in other ways (e.g. money received by gift). The point I am making is about Murphy and Nagel’s inconsistent treatment of pre- and post-tax income; assuming that sales tax is generally paid using post-tax income (which the authors also assume), the argument goes through.

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the law currently protects tangible property objects with ‘full-blooded’ property rights, the rights of ownership protecting all our resources (such as our income) should be of the same nature and strength. It is unfortunate that Murphy and Nagel come close to suggesting that we do own our net incomes in such a strong way. In fact, there is no obvious reason to think that such a comparison should be made. Of course, the libertarian might wish to make this comparison, and argue that the rights we have to our income should be just as ‘full-blooded’ as the rights we have to our land. But this cannot simply be stipulated without further argument. After all, we noted above that there is an intuitive difference between a state’s claim for a particular item of tangible property and its claim for money. Given the apparent difference between these types of resource, why expect there to be such a strong comparison or analogy between taxation and expropriation of tangible property? We would only have such an expectation if we thought that the type of ownership in question was ‘full-blooded’. But the onus is now on the libertarian to explain why ownership of our income should be construed in such a way.

4.4.2 Thing-ownership and the bundle picture The second myth of ownership I wish to discuss is more complex though I think fairly well established in the literature. This is the alleged myth of ‘thing-ownership’, which often arises in discussion of the distinction between lay and sophisticated conceptions of ownership. The lay conception of ownership, it is said, focuses on the sorts of things we naturally speak of as property objects, such as cars, houses, or buildings. The lawyer, on the other hand, being ‘scientific’ and ‘sophisticated’,¹⁰ argues that using the term ‘property’ to stand for a thing rather than rights over things is at best a figure of speech. Rather than speaking of owning ‘things’, then, most property theorists prefer the commonplace metaphor that property should be characterized as a ‘bundle of rights’. In the literature on the bundle theory of property, many draw attention to Honoré’s discussion of the ‘standard incidents’ of ownership, which include: the rights to possess, use, manage and receive income; the powers to transfer, waive, exclude, and abandon; the liberties to consume or destroy; immunity from expropriation; the duty not to use harmfully; and some expectation that, when rights that other people have in the thing come to the end of their term, those rights will naturally return to the owner (Honoré 1961). Honoré’s list is not to be viewed as a list of necessary or sufficient conditions for ownership, or a set of jural relations which, when all present, constitutes ownership. Indeed, the strength of his analysis rests on the fact that ‘ownership’ is still doing some conceptual work, even when the list of incidents is incomplete. To take a pertinent example, the fact that a person’s income from property is subject to taxation does not prevent us from calling

¹⁰ This is the terminology of Ackerman (1977: 28) and Munzer (1990: 74) respectively.

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that person a property owner; it just means that the incidents of ownership protecting their property fall short of ‘full-blooded’ or (to use Honoré’s phrase) ‘liberal’ ownership. Viewing ownership as a bundle of rights has many advantages. Most notably, it allows us to clarify and develop the insight noted above, that ownership interests often differ in variety and strength, depending on the sort of property resource in question. But despite its advantages, the bundle theory of property is far from a complete account of the concept of property, and it has led theorists to be sceptical about whether there is really anything distinctive about the concept of property. Since property is just a bundle of rights, there is a sense in which it has no real definable essence and the justice of the distribution of property rights is part and parcel of the justice of the distribution of all entitlements. And if property-talk can be rephrased into rights-talk in general, property seems to collapse as a distinctive area of private law. Thomas Grey has put forward an argument of this sort which he terms the disintegration of property—a view according to which property law is so fragmented that it lacks any kind of definable essence and might as well be seen as a species of contract, tort, or gift, rather than a distinctive legal category (Grey 1980: 69). Interestingly, as I noted above, there is nothing in Murphy and Nagel’s analysis to suggest that they disagree with this picture. They do not want us to focus on property rights specifically, but rather want us to focus on how all our private rights—property rights included—might be shaped, moulded, or even created by institutional arrangements like taxation. One challenge to Murphy and Nagel, then, is to tell us what is distinctive of the concept of property. After all, it might be argued that their failure to tell us what is distinctive of the concept of property leads to a further problem for their account— namely, their failure to tell us what is distinctive of the concept of taxation. Since on their account taxation is just one of the various governmental transactions that results from a more general theory of justice, it seems difficult to explain why taxation is a distinctive sort of transaction, different from, say, a state raising revenue by changing interest rates or selling government bonds. Likewise, on their account, how is my obligation to pay tax any different from my obligation to pay a parking fine?¹¹ I raise these questions as instances of a more general gap in their theory for an account of what is distinctive of the concept of property. In addition to the problem that such a gap may eliminate the concept of taxation from their analysis, there is a more pressing problem for them: without such an account, a libertarian could just as equally argue that the justice of the distribution of property rights is part and parcel of the justice of all valuable entitlements, and add the premise that to affect any valuable entitlement, so broadly defined, is to take property. To make such an

¹¹ These challenges are posed and discussed in more detail by Penner who asks: ‘if you start by denying the independent validity of any of my private entitlements, then what is it to tax someone?’ (2005: 90).

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argument, they need look no further than certain interpretations of the bundle theory of property. Although some theorists have used the bundle theory of property to illustrate the point that property has no definable essence, then, others have used it as a basis from which to argue that all rights are property rights. The bundle theory was originally put forward as a theory about the incidents of ownership—the rights and other jural relations that characterize ownership. However, it has been developed by some theorists in a particular direction, so as also to become a theory about the objects of ownership. That is, keen to distance themselves from the layman’s thing-centred view of property, some theorists have claimed that the objects of ownership are just the property rights themselves. Having eliminated the layman’s ‘thing’, it has become customary to posit a new kind of thing to be owned: the right itself. Harris defines this expansive property concept as follows: At its widest, the extended property concept appears as follows: the term ‘property right’ includes any right—whether Hohfeldian claim-right, power or privilege—concerning the use of a resource, where resource includes all bodily and mental capacities of the right-holder. In other words, all rights are property rights. Not all deployments of property-concept expansion go this far; but once conventional property-talk is explicitly disavowed, stopping-points tend to be ad hoc and unexplained. (1996: 148)

By ‘conventional property-talk’, Harris means the lay view that there is some ‘thing’ to be owned, which mediates the various property rights in question. An excessive focus on ‘rights’ at the expense of ‘things’, then, has led some theorists to adopt the expansive position that all rights are property rights. This ‘broad’ conception of property, according to which rights are property, has implications for the libertarian comparison between taxation and expropriation, discussed above. If all rights are property, then it seems to follow that each stick in a property bundle is the property of individual rights-holders. If each stick in a property bundle is property, then removing a stick must count as a taking of property. The range of actions that count as takings of property then becomes implausibly large, although that is not to stop somebody with a libertarian agenda from using such a theoretical picture to argue for an increase in the number of government actions that might be said to take property (Wenar 1997: 1923). Indeed, Ackerman interprets the takings clause of the US constitution along exactly these lines (1977: 28–9). Previous views on how to interpret a taking of property relied on taking possession of some privately owned thing. But of course, if the law of property concerns itself with bundles of rights, a taking of property can never really be the taking of a particular item. This means that government actions which alter the incidents of ownership in any way—taxation included, presumably—count as takings of property, worthy of clear and direct compensation. However, this conceptual picture of property is highly confused. There is an important distinction to be drawn between the rights that constitute ownership

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(the incidents of ownership) and the things to which those rights relate (the objects of ownership). On the libertarian picture discussed above, the incidents of ownership— granted by the law to various owners—have somehow (wrongly) been turned into the objects of ownership. Yet this bundle of incidents may well be what ownership consists in, but it is not what ownership is of. And what is missing from the bundle theory of property in the view of some recent commentators—a view which I endorse—is a role for the objects of ownership (see Lametti 2003; Merrill and Smith 2001: 36; Penner 1997: 431). If we put an account of the objects of ownership at the heart of our account of the incidents of ownership, we resist the temptation to argue that each of the ‘sticks’ in the bundle is property. The real myth of ownership at stake, then, is not the view that property is a ‘thing’, but the view that simply because ownership is comprised of various entitlements, each of these entitlements is the property of the person who holds them.¹² Responding to this myth allows us to argue against (potentially) sophisticated libertarian arguments that taxes constitute takings of property. Bringing an account of the objects of ownership to bear on the incidents of ownership in this way also allows us to state more clearly why property relations occupy a distinct area of private law and do not collapse into other categories such as contract or tort. More importantly, we pave the way for an analysis of the sorts of ‘things’ that can be the objects of property relations; the case at hand in this analysis, of course, being money or income. Intellectual property scholars have recently carried out work on the ontology of intellectual objects—analysing exactly what sort of ‘thing’ owners of intellectual property have rights to, and the ways in which the nature of intellectual objects place normative constraints on the incidents of ownership governing their use and control (see Biron 2010; Scott, Oliver, and Ley Pineda 2008; Wilson 2010; Wreen 2010). In a similar way, I submit that theorists of taxation could benefit from further analysis of the ontology of money as a potential object of ownership. Such analysis may draw on some of the insights that Murphy and Nagel draw attention to, about the importance of the state in making possible the accumulation of wealth. But it is not clear that we need to get into a debate about the conventionality (or otherwise) of pre-tax income to carry out such conceptual work. The important distinction to focus on is the distinction between government actions which modify or affect property rights, and those that actually constitute a taking of private property. As it stands, Murphy and Nagel’s argument appears to go too far in its suggestion that, contrary to modifying property rights, states themselves actually create our property rights.

¹² Munzer agrees that paying closer attention to ‘things’ allows us to link the popular and sophisticated conceptions of property: ‘ . . . the idea of property will remain open-ended until one lists the kinds of ‘things’ open to ownership . . . The reference to ownable things is a link between the sophisticated and popular conceptions of property’ (1990: 23–4).

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4.5 No Taxation without Compensation? I shall finish with some brief remarks about the connection between taxation and compensation, because it raises a broader question about the perceived legitimacy of the tax system, and the underlying motivation theorists have to steer debates about tax justice away from property rhetoric and towards broader questions of socioeconomic justice. Murphy and Nagel conclude their discussion of tax justice by focusing on the so-called ‘public and private’ motives that individuals have for paying tax. As private individuals, they agree that taxpayers are motivated by economic self-interest—treasuring their right to mitigate their tax liability, and favouring systems that minimize their overall share of tax. Yet as ‘public citizens’, or supporters of the political system, individuals may well accept governmental policies that aim to redistribute wealth and support broader societal goals. But this means that debates about tax justice are often caught between these two conflicting and perhaps even inconsistent motivations. As they put it, it does not seem reasonable for policymakers to appeal to the ‘better angels of our nature’ when developing tax policy (Murphy and Nagel 2002: 72). This raises a broader question for theorists of tax justice, namely, how far do individuals pursue privately the ideals they believe should be promoted in a just society? Implicit in the design of most tax policy (and the property rhetoric which often supports it) is the assumption that, whatever taxes people face, they will consider primarily their own interests when making economic decisions. It does not seem reasonable to expect people to work equally hard, whatever the tax rate, simply in order to generate revenue for the purposes of general taxation. In a typical system of liberal government, then, there is a fundamental division assumed between an individual’s private and political motives. As supporters of the political system, it often asks people to accept policies whose aim is to promote socio-economic and redistributive justice; yet as private individuals, it assumes they will be motivated by considerations of economic self-interest. These considerations help to explain why taxation is such a politically charged topic, since it is assumed that individuals will desire to maximize their income on the one hand, yet also allow the government broad powers to bring about social reform on the other. It would be well beyond the scope of my chapter to enter into a detailed discussion of the difficulties that such conflicting motivations raise for tax policy. But it does have some relevance to my discussion of property rhetoric, since it raises questions about the motives individuals have for paying tax. If individuals really are motivated by considerations of economic self-interest when going about their tax planning, and find their intuitions about property to be a compelling way of justifying this motivation, perhaps it is important to focus debates about tax justice more specifically on the compensatory aspects of taxation, to make it clearer why it may be in their selfinterest to pay tax. Discussions of compensation still fall under the rubric of property rhetoric, but may have a more positive impact on the perceived legitimacy of the tax

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system. That is, rather than focusing on the extent to which taxes ‘take away’ property, which only reinforces the perceived unpopularity of taxation, why not focus debates about tax justice on the ways in which tax revenue is being spent, by hypothecating or earmarking taxes for particular purposes? If people are told, for example, that a specific share of their National Insurance contributions will go to some specific cause, such as the NHS, they may well be forced to make more informed decisions about the trade-offs between taxes and public services. Likewise, even redistributive policies might be justified through appeals to self-interest—perhaps by pointing to the ways in which a reduction in unemployment leads to stronger economy, from which all taxpayers benefit. Thus, if property rhetoric continues to be powerful in debates about tax justice, despite egalitarian warnings about its dangers, perhaps one solution to this problem is to respond to it in its own terms.¹³

4.6 Conclusion In this chapter, I have illustrated some ways in which conceptual work on property is relevant to the study of taxation. I agree with Murphy and Nagel that taxation is about a lot more than property. It is about age-old battles between the individual and collective. It raises dilemmas about the extent to which liberal democratic government can constrain its citizens in some ways whilst also leaving them free in others. And in widening their vision to address broader questions of socio-economic justice, Murphy and Nagel help us remember this insight. But that is not to say that the concept of property has no relevance to debates about taxation. Property should not be expanded to such an extent that libertarian arguments can be put forward to suggest that all modifications of rights are somehow takings of property. But equally, it should not be excluded from our analysis altogether.

References Ackerman, B. (1977). Private Property and the Constitution, New Haven: Yale University Press. Biron, L. (2010). ‘Two Challenges to the Idea of Intellectual Property’, The Monist 93(3): 382–95. Broom, H. and Hadley, E. (eds.) (1869). William Blackstone’s Commentaries on the Laws of England, London: William Maxwell & Son, Henry Sweet, and Stevens & Son. Christman, J. (1994). The Myth of Property, Oxford: Oxford University Press. Grey, T. (1980). ‘The Disintegration of Property’, Nomos 22: 69–85. Harris, J. W. (1996). Property and Justice, Oxford: Oxford University Press.

¹³ It might be argued that responding to debates about taxation using the language of property rights simply reinforces that language in ways that critics would find unacceptable. In response, I believe that conceptual clarification of the sort I have attempted in this chapter enables property language to be used rationally and carefully in debates about taxation, and in ways that clarify its deeper meaning and potential misapplication. This is better, in my view, than simply avoiding it altogether.

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Honoré, A. M. (1961). ‘Ownership’, in A. G. Guest (ed.), Oxford Essays in Jurisprudence, Oxford: Clarendon Press, 107–47. Kades, E. (2002). ‘Drawing the Line between Taxes and Takings’, Northwestern University Law Review 97: 189–265. Lametti, D. (2003). ‘The Concept of Property: Relations through Objects of Social Wealth’, University of Toronto Law Journal 53(4): 325–78. Machlup, F. and Penrose, E. (1950). ‘The Patent Controversy in the Nineteenth Century’, Journal of Economic History 10(1): 1–29. Merrill, T. W. and Smith H. E. (2001). ‘What Happened to Property in Law and Economics?’, Yale Law Journal 111: 357–98. Munzer, S. (1990). A Theory of Property, Cambridge: Cambridge University Press. Murphy, L. and Nagel, T. (2002). The Myth of Ownership, Oxford: Oxford University Press. Nozick, R. (1974). Anarchy, State and Utopia, New York: Basic Books. Penner, J. (1997). The Idea of Property in Law, Oxford: Oxford University Press. Penner, J. (2005). ‘Misled by Property’, Canadian Journal of Law and Jurisprudence 18: 75–93. Scott, D., Oliver, A., and Ley Pineda, M. (2008). ‘Trade Marks as Property’, in L. Bently, J. Davies and J. Ginsburg (eds.) (2008), Trade Marks and Brands: An Interdisciplinary Critique, Cambridge: Cambridge University Press, 285–306. Spence, M. (2007). Intellectual Property, Clarendon Law Series, Oxford: Oxford University Press. Wenar, L. (1997). ‘The Concept of Property and the Takings Clause’, Columbia Law Review 97(6): 1939. Wilson, J. (2010). ‘Ontology and the Regulation of Intellectual Property’, The Monist 93(3): 450–64. Wreen, M. (2010). ‘The Ontology of Intellectual Property’, The Monist 93(3): 443–9.

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5 Libertarianism and Taxation Peter Vallentyne

In this chapter, I shall discuss the implications of libertarianism for just taxation. Libertarianism holds that agents fully own themselves and have certain moral powers to appropriate natural or abandoned resources. Some versions of libertarianism preclude the possibility of just taxation, but others, I claim, can, under very limited circumstances, endorse two kinds of taxes as just: taxes on right-infringers for the cost of rights-enforcement and taxes on those with excess shares of the value of ownership rights over natural resources. Other kinds of taxation, such as income taxes, human resource wealth taxes, and artifactual wealth taxation are not just on any version of libertarianism.

5.1 Taxation, Justice, and Libertarianism Our topic is the justice of taxation according to libertarianism. Let us start, then, by clarifying the notions of taxation, justice, and libertarianism. A tax is, roughly speaking, a financial charge made by a state upon an entity (e.g., individual or corporation) for the support of state operations and programs and subject to forcible extraction and perhaps penalty if not paid. For accounting or legal purposes, taxes are sometimes distinguished from: (1) compulsory payments for social insurance (e.g., unemployment insurance, health insurance, or pension plans), (2) user fees for state-provided services (e.g., for using parks, sewage disposal, or roads), and (3) miscellaneous other revenue (e.g., fines). I shall, however, understand taxes broadly to include all of these, so that the justice of forcibly requiring such payments to the state can be assessed. Taxes in this broad sense include enforceable payments owed to the state to fund basic government (legislative, judicial, and executive) operations or to fund state-provided goods and services. If taxation requires a state, and, if, as many libertarians claim, no non-consensual state can be just, then there can be no just taxation. I believe, however, that something resembling a state can be just according to libertarianism. The basic idea is that a private rights-enforcement organization can effectively rule a territory and claim a

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monopoly on the use of force in that territory without acting unjustly, if it enforces only prohibitions of activities that violate someone’s libertarian rights. If the enforcement organization protects everyone’s rights in the territory, then it is, in at least several important respects, a state. (See Vallentyne 2007 for elaboration.) In what follows, I shall assume that it is a state and focus on the question of whether such an organization could justly finance its operations. It could in principle, since it might receive enough charitable donations. We shall focus, however, on the question of whether such a state-like organization can justly tax individuals in its territory. Our main question then is: What kinds of taxation, if any, can be just according to libertarianism? The term “just” is used in different ways by different authors. Sometimes it means “distributively fair” (e.g., in accordance with comparative desert); sometimes it means “infringes no duty owed to someone” (i.e., wrongs no one); and sometimes it means “infringes no enforceable duty,” where an enforceable duty is one that someone is permitted to forcibly ensure compliance (e.g., the duty not to kill, but not the duty to keep your promise to your mother). I shall here understand “just” in the second sense. It is important to keep in mind that my arguments do not automatically apply to the other senses. If, however, one holds, as I do, that all and only duties owed to someone are enforceable (in principle), then the arguments will also apply to the third sense. Our focus is on the justice of taxation according to libertarianism. Libertarianism, as I shall understand it here, is the moral doctrine that individuals initially fully own themselves, that natural resources are initially unowned, and that individuals initially have certain unilateral moral powers (requiring no consent from others) to use and appropriate unowned natural resources.¹ For present purposes, libertarianism can be understood to include both the view that this is a matter of basic natural right and the view that this is derivatively true on the basis of theories such as rule consequentialism or rule contractarianism. In order to assess libertarianism’s stance on taxation, we must address its views about self-ownership, the ownership of natural resources, and the ownership of artifacts. First, however, I shall suggest that there is one kind of taxation that almost all forms of libertarianism can endorse.

5.2 Taxing Right-Infringers for Enforcement Costs Although it is possible for libertarians to be radical pacifists and to hold that the use of force is always unjust, almost no libertarian holds this view. Most hold that an individual is permitted to use appropriate force to protect her rights (both primary rights, such as the right against bodily assault, and rectificatory rights, such as the right to compensation for a past bodily assault). Moreover, most hold that at least ¹ I here set aside views according to which natural resources are initially privately owned, either by some individual (e.g., God’s designated king) or jointly (e.g., by all under some collective decision-making procedure).

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some other individuals are also permitted to use such force on behalf of the individual. If we make these assumptions (as I think we should), I would argue that those who enforce rights are permitted to extract the costs of enforcement from the individual who infringed, or attempted to infringe, the rights of others. Rightsinfringers, that is, have an enforceable duty not only to compensate their victims, but also to pay for the enforcement costs associated with their rights infringement. (The relevant rights, of course, are libertarian rights, which are self-ownership and ownership rights over other things.) This is much more plausible than the view that the victim must bear these costs or the view that other members of society must somehow bear them. If this is correct, then non-pacifist libertarianism can endorse the justice of at least this form of taxation.² This is admittedly not a tax in the strict accounting sense. Still, it is a payment owed to the state that may be forcibly extracted and used to finance the enforcement of rights. There are, of course, many important questions here. Does the person whose rights are enforced have to consent to the enforcement of those rights by others, or is it enough (as I would argue) that she not dissent and that she not be disadvantaged by the enforcement? Are the recoverable costs of enforcement limited (as I would argue) to something like the market value of the provided enforcement services (as opposed to the actual cost for a given enforcer, which might be more, if she is an inefficient enforcer)? Do the costs of enforcement include a mark-up (as I think they should) for the expected losses in cases where the enforcement costs are not fully recoverable? These are all important questions, but I won’t attempt to address them here.³ The important point is simply that, on this (plausible, I claim) view, the state has a moral liberty to forcibly extract some of the costs of providing enforcement services. This, then, is one tax (in the broad sense) that all non-pacifist libertarians can endorse in principle. There are, however, two important qualifications. First, the state is not at liberty to enforce an individual’s rights, and hence has no liberty to extract enforcement costs from a rights-infringer, in cases where the individual has not authorized such enforcement (e.g., by consenting, or at least by not dissenting). Second, even where the state is at liberty to enforce the rights and collect the costs of doing so, the state may have no moral monopoly on this. Others (e.g., the agent herself, other individuals, private enforcement organizations) may also be authorized to provide the enforcement services. If so, the state may only collect the costs of the enforcement services that it provides.⁴ ² Otsuka (2003, ch. 2) argues that those who violate the rights of others may be taxed to help meet the needs of those unable able to meet them on their own. Although I agree with this in the special case where the victim of the violation is no longer capable of being compensated (e.g., because dead or incapable of well-being), I would argue that once infringers have fully compensated their victims and those who enforce the rights of their victims, they have no further special duty to aid others. ³ I address these issues in more detail in Vallentyne (2007). ⁴ Nozick (1974), of course, argued that even a state with these stronger moral liberties and powers can be judged just by libertarianism, but almost no one thinks that his argument is successful. For discussion, see Vallentyne (2006).

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Thus, taxation of rights-infringers for the cost of enforcement services against them can be just. This, however, will be enough to finance, at most, the judicial branch of the state and the military protection and law enforcement functions of the executive branch. It would not be enough to also finance the legislative branch, public goods, or transfer programs to promote distributive fairness (e.g., satisfying basic needs or promoting suitable equality of opportunity). Let us therefore now consider whether there are other kinds of taxation that libertarianism can judge just. This will require looking at libertarian views about self-ownership, ownership of artifacts, and ownership of natural resources.

5.3 Limitations on Taxation from Self-Ownership and Ownership of Artifacts Because libertarianism is committed to full self-ownership (the thesis that each agent, initially, fully owns herself), it rejects any taxation for the use of one’s own person, or for the exercise or possession of the rights of self-ownership. Thus, it rejects user fees for the use of one’s person (either by oneself or by those to whom one has granted permission), per capita taxation (the same amount for all), human resource taxation (e.g., based on the market value of one’s human endowment), taxation of income from labor, taxes on the transfer of rights of self-ownership (e.g., transfer ownership of one of one’s kidney’s to someone else), and taxes on the exercise of enforcement rights. Let us now consider the taxation of artifacts, which are things created by agents from natural resources and other artifacts (i.e., products of human labor). It is often thought that libertarianism is committed to the “right to the fruits of one’s labor” understood as a right to the marginal product of one’s labor (the fruits). So understood, this right does not entail that one comes to own a plot of land merely by mixing one’s labor with it and producing some orange juice. It merely asserts that, under the right conditions, one owns the orange juice (the product). It is generally supposed (e.g., Nozick 1974: 224–7) that the right to the fruits of one’s labor follows logically from full self-ownership, but this is a mistake. Selfownership concerns rights over the use of one’s person, whereas ownership of the (artifactual) fruits of one’s labor typically concerns rights over the use of external things. There is nothing incoherent in the notion of everyone being a full self-owner but the products of their labor remaining in the commons. Even though the right to fruits of one’s labor does not follow from full selfownership, it might still be an independent commitment of libertarianism. This, however, is not so. Libertarianism denies that a trespasser owns the orange juice that she produces by secretly growing an orange tree on your land without your permission. She has simply forfeited her labor. Libertarians only claim that an agent has the right to what she produces (or at least the value thereof ) when she has a right to all the factors (natural resource capital, artifactual capital, human capital) that went into

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its production (because she owns or rented them, or because they were freely given to her by others). The right that libertarians endorse is the moral right to the products (or fruits) of one’s moral property (human capital or otherwise). This need not involve one’s labor at all. Suppose that I acquired the full moral ownership of a factory as a gift from someone I had never interacted with and that a trustworthy friend kindly donates his services to run the factory. In this case, the products of the factory are not the product of my personal labor, but libertarians still hold that I have a right to them, as long as I have a right to all the factors of production. (See Attas 2005 for enlightening discussion of this issue.) The core of the right to the products of one’s property concerns the case where one has full ownership of the factors of production. Full ownership is the strongest bundle of property rights over the thing that is compatible with someone else having the same bundle of property rights over everything else (other than one’s person and the space that one occupies).⁵ Simplifying somewhat, the core right to the product of one’s property is this: If you fully own all the factors of production, then you fully own the product. More carefully: If each factor of production is such that either (1) you fully own it, or (2) the owner of the factor, if any, has (implicitly or explicitly) validly transferred all rights to the product to you (as a gift or for a payment), and the conditions for morally permissible use of the factor have been met (e.g., payment made), then you fully own the product.⁶ There are, of course, many cases where this condition does not hold for a given artifact. In what follows, I shall simply ignore such cases. Dealing with them would be complex, and I doubt that they would shed any new light on the justice of taxation. Because libertarianism is committed to the full ownership of products when one fully owns each factor of production, it rejects the following kinds of taxation in those cases where the agent fully owns the factors of production: taxation of artifactual wealth, taxation of income from artifactual wealth, user fees when an artifact is used by the owner or those to whom she gives permission, taxation on the transfer of the artifactual ownership rights (by sale or by gift), and taxation on the exercise of the associated enforcement rights.⁷ ⁵ The qualification about the other person not having rights over one’s person or the space one currently occupies is needed to rule out the possibility that one is infringing the rights of the other by using one’s person or occupying that space (and thus perhaps losing some rights). In addition, strictly speaking, the definition of full ownership should characterize it as a strongest set of property rights rather than at the set of such rights. This is because there is some indeterminacy in with respect to compensation rights, enforcement rights, and the corresponding immunities to loss. For elaboration, see Vallentyne, Steiner, and Otsuka (2005). ⁶ What would be the situation if the owner of a factor has simply renounced his rights to the product rather than transferring them to you? In this case, the rights, like all abandoned rights, “revert to the commons” and are treated as natural resources, which can be appropriated under certain conditions discussed in section 5.4. ⁷ It’s worth noting that many libertarians, right and left, reject intellectual property rights. They restrict the full ownership of products to physical products.

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We shall now see that some forms of libertarianism deny that agents ever fully own one of the factors of production: natural resources (“land” in a generic sense).

5.4 Taxing the Value of Ownership of Natural Resources So far, then, we have found only a very limited basis for taxation in libertarian theory: the enforceable duty of rights-infringers to pay for the enforcement costs associated with their infringements. In addition to self-owning agents and the artifacts they produce, however, there is a third kind of resource: natural resources. These are things that have no moral standing (i.e., not protected by morality for their own sake) and that have not been transformed (e.g., improved) by any (non-divine) agent. Thus, land, air, seas, minerals, etc. in their original (unimproved) states are natural resources, whereas such things as chairs, buildings, and land cleared for farming are artifacts (composed partly of natural resources). Many forms of libertarianism, as we shall see, hold that those who appropriate more than their fair share of natural resources owe a payment to others for their excess share. This, I shall claim, can provide a further basis for just taxation. Different versions of libertarianism result from different views about the moral powers that agents have to appropriate natural resources. Radical right libertarianism— such as that of Rothbard (1978, 1982) and Narveson (1988: ch. 7; 1999)—holds that that there are no fair share constraints on use or appropriation. The first person to stake a claim in the appropriate manner (e.g., with labor mixing) over specified natural resources fully owns them. This view rejects any duty to compensate others for any resulting disadvantage or to share with others the benefits that appropriation brings. Thus, on this view, the ownership of natural resources provides no basis for taxation. All other versions of libertarianism accept that there is some kind of fair share condition restricting appropriation. After all, no human agent created natural resources, and there is no reason that the lucky person who first claims rights over a natural resource should reap all the benefits that the resource provides. The standard fair share condition on appropriation is the Lockean proviso, which requires that “enough and as good be left for others.”⁸ Indeed, as long as this clause is allowed to be interpreted loosely, the Lockean proviso simply is the requirement that some kind of fair share condition be satisfied. Throughout, we will interpret the Lockean proviso (following Nozick 1974: 174–82) to allow that individuals may appropriate more than their fair share of natural resources as long as they compensate others for their loss from the excess ⁸ For simplicity, I here interpret the Lockean proviso as applying only to acts of appropriation (acquisition of ownership rights). I believe, however, that the proviso also applies to mere use (e.g., using a bench that remains in the commons). For defense, see Roark (2013).

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appropriation. The Lockean proviso is a requirement that a fair share of the value of natural resources be left for others. It thus provides the basis for a duty for some to make payments to others. We shall now consider the main versions of libertarianism that accept a Lockean proviso on appropriation. Each interprets the proviso differently. Throughout, I shall assume that the duty imposed by the Lockean proviso is enforceable, that is, one for which force may permissibly be used to ensure compliance. Nozickean right-libertarianism (e.g., Nozick 1974) interprets the Lockean proviso as requiring that no individual be made worse off by the appropriation compared with non-appropriation. It holds that those who appropriate have an enforceable duty to compensate those made worse off by the appropriation. Although it recognizes an enforceable duty to make payments to others, the total payment owed by a given individual is determined simply by summing the specific payments owed to specific others. These are private debts and thus provide no basis for taxation. State enforcement of a private debt is not a tax, since it is not a payment to the state. Sufficientarian (centrist) libertarianism interprets the Lockean proviso as requiring that others be left an adequate share of natural resources (on some conception of adequacy) to the extent that this is compatible with one having an adequate share.⁹ Adequacy might, for example, require enough for basic subsistence or perhaps enough for “minimally decent” life prospects. Is the payment owed a private debt, or does it provide the basis for taxation to fund distributive justice programs? That depends on whether the appropriator has discretion with respect to the issue of to whom the payment must be made. Different versions of sufficientarianism can take different positions on this. If the appropriator’s excess share (beyond her adequacy share) is sufficient to compensate fully each of those who is not left enough for an adequate share, then the appropriator has no discretion over to whom to make payments, and the debts are simply private debts. Consider, however, a case where the appropriator’s excess share is not sufficient to give everyone his adequate share. If she is required to pay each person the same proportion of his shortfall from his adequate share, then she has no discretion over whom to pay, and these are merely private debts. If, however, the appropriator can discharge her debt by making shortfall payments to anyone who has less than his adequate share, then she has discretion over to whom she makes payments, and this is not a straightforward private debt. In this case, I claim, the payment owed for appropriation provides a basis for taxation. As we shall see later in this section, there are various further conditions that must be provided in order for this to be just taxation, but if the state forcibly requires such payments from appropriators, it is, I claim, a form of taxation in the broad sense.

⁹ Simmons (1992, 1993) defends a position roughly of this sort.

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Let us now consider left-libertarianism.¹⁰ It holds that the value of natural resources belongs to everyone in some egalitarian manner. There are two main versions. Equal share left-libertarianism—such as that of Henry George (1879) and Hillel Steiner (1994)—interprets the Lockean proviso as requiring that one leave an equally valuable per capita share of the value of natural resources for others. By contrast, equal opportunity left-libertarianism—such as that of Otsuka (2003)¹¹— interprets the Lockean proviso as requiring that one leave enough for others to have an opportunity for well-being that is at least as good as the opportunity for well-being that one obtained in appropriating natural resources. The latter view requires that those with less advantageous internal endowments (e.g., capacity for intelligence) receive a larger share of the value of natural resources. Indeed, it can require that individuals with internal endowments that are especially conducive to well-being receive none of the value of natural resources (if there is not enough to equalize opportunities for well-being). On both views, individuals who appropriate more than their fair share are required to pay the full competitive value of their excess share to those deprived of their fair share (equal share or equal opportunity share). As with sufficientarian-libertarianism, some versions leave appropriators no discretion over to whom the payments must be made (e.g., if each person is owed the same proportion of her shortfall), and some versions leave appropriators discretion (e.g., shortfall payments can be made to anyone who has a shortfall). The appropriation payments of the latter, but not the former, versions provide a basis for just taxation. I have claimed, then, that some versions of sufficientarian-libertarianism and leftlibertarianism provide a basis for taxation. They do this if they (1) recognize an enforceable duty of appropriators to make payments to others for the value of their excess share, and (2) leave appropriators some discretion over the matter of to whom they must make these payments. Below, we shall address the question of whether such taxation can be just. Above, I represented, as is common, the libertarian positions as holding that it is only appropriators that owe the payment for their excess share. I believe, however, that a more plausible view is that the rights acquired in appropriation are always conditional upon periodic payment for the rental value of these rights, rather than a one-time payment. In agreement with Nozick (1974: 180), I claim that the Lockean proviso is an on-going limitation on acquired property rights rather than a one-time requirement at the time of appropriation. (This aspect of Nozick’s view on the proviso is generally underappreciated. For discussion of Nozick’s view, see Vallentyne (2011).) This reflects the fact the value of natural resources changes with the circumstances ¹⁰ Left-libertarian theories have been propounded for over three centuries (although not under that title). For selections of the writings of historical and contemporary writings, see Vallentyne and Steiner (2000a, 2000b). ¹¹ Van Parijs (1995) is in the same spirit as equal opportunity left-libertarianism, but he denies that moral ownership of things includes the unrestricted right to transfer them to others without taxation. He holds that both gifts and job rents (wages in excess of the market-clearing wage) are fully taxable.

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(e.g., drought or the invention of oil technology) and the fact that new people may later come into existence with claims to their fair share of the value of natural resources. Thus, a periodic payment, based on the current value of the rights for the period, is needed. Moreover, if the rights are transferred to someone else (e.g., by gift or sale), the rights remain conditional upon making the periodic payment. Thus, this provides the basis for an annual wealth tax on the value of the excess share of the rights over natural resources. I have claimed that wealth taxation on the value of the excess share of rights over natural resources can provide the basis for taxation on certain libertarian views. This does not mean, however, that such taxation is always just according to these libertarian views. First, if the person having the enforceable duty to pay for the value of her excess share makes that payment directly to relevant individuals on her own, then the state cannot justly tax her for that purpose. Second, even where the person still has not discharged her duty to make the payment, the state can justly extract that payment only to the extent that it will distribute the funds to those with less than their fair share. If the state will use the funds for other purposes, it cannot justly tax the individual owing the payment. Likewise, if the state is inefficient in distributing the funds to the relevant persons (compared with actually existing alternatives, such as leaving the funds with the individual or some non-state organization taking charge of them), the state cannot justly tax the individual for her natural resource wealth. Thus, the justice of the taxation of natural resource wealth is highly contingent on the effectiveness of the state in distributing the revenues appropriately. Still, if the state will distribute the funds in the appropriate manner, relative to a given left-libertarian theory, then the taxation will be judged just. Above, I wrote as if those with natural resource shortfalls were entitled to cash payments, but there is no reason not to allow payment in kind, where the goods provided have the requisite competitive value. This raises the question, however, of whether the state could provide services (police services, road services, park services, etc.) of comparable value instead of payment. There is no problem with the state providing a transferable right to a service (e.g., ten visits to a park), since that right has a competitive value and can be sold just as goods can be. More problematic, however, are non-transferable rights (e.g., the right to use certain police and court services), since they have no competitive value. Still, a version of equal-share libertarianism could hold that, when an individual exercises a non-transferable right to use state services, the amount owed to the individual is reduced by the maximum cash value that she would pay for that particular exercise of the right. Individuals who do not exercise the right have no associated reduction, and individuals who exercise the right but wouldn’t much pay to exercise the right would have only a small reduction. A similar problem arises when the state simply bestows certain benefits on individuals with no associated rights (e.g., when the military protects the country from invasion or when beautiful flowers are planted on state-owned land that are clearly

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visible from nearby private land). Here too a version of libertarianism could hold that the amounts owed to individuals are reduced by the actual cash value to them of the benefits provided. Above, I focus on equal-share left-libertarianism, but a similar move is possible for equal opportunity left-libertarianism. Here, the individual is not owed some amount of competitive (cash) value. Instead, she is owed a certain increase in the (well-being) value of her opportunity for well-being. This value of opportunity for well-being debt can be decreased by the value for such opportunities generated by the goods or service provided. Of course, there are many questions about how exactly this might be done, but the general idea should be clear enough for present purposes. It thus seems that a suitably specified version of left-libertarianism can judge just a certain kind of taxation (roughly, wealth taxation on the excess value of rights claimed over natural resources), as long as the taxes are efficiently spent by providing cash, goods, or services to those who are owed payments. There is, however, another hurdle to overcome. If the state is to provide services as a way of discharging the claims of those with natural resource shortfalls, then typically it must first invest in various goods (e.g., equipment for police, materials for roads, or buildings for schools). If individuals are owed periodic (e.g., monthly or annual) payments for their natural resource shortfalls, it would seem unjust to invest the funds rather than making the payments directly. Thus, there may seem to be no basis for state investment to provide public services. This problem arises if individuals with natural resource shortfalls are entitled to immediate periodic payments for the value of their shortfall during the period in question. A version of left-libertarianism could, however, endorse a slightly weaker right. Instead of a right to immediate payment (in cash or kind) of a given amount, individuals may only be entitled to a stream of benefits for which the expected present value (i.e., discounted for probability of payment and lost interest for delayed payment) is no less than the specified amount. On this approach, a suitable investment can discharge a debt. My claim here is that a version of libertarianism could, with some plausibility, adopt this position, not that it must. Obviously, the plausibility of such an approach depends on the exact form that it takes. Here, as a way of flagging some issues that require more careful treatment, I shall simply note some features of one possible approach. The credit for investment could be available to anyone who owes a natural resource rental payment, not just the state. The credit could be only for the benefits provided by those owing natural resource payments to those owed payments (i.e., no credit for benefits provided by those not owing payments or to those not owed payments). The credit could be based on the investment’s expected present value of benefits, not on the amount invested, and thus there could be no credit for investments with a negative expected value to those owed payments. The credit for benefits provided could include direct benefits (e.g., from investments in polices services, roads, or schools) and indirect benefits from increased natural resource revenues

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generated (e.g., due to vicinity to a park). Finally, an individual owing a payment, net of any credits, would have an obligation to make an immediate payment to some individual(s) owed payments. Above, I have written as if the duties that states have to compensate individuals for their natural resource shortfalls concerned individuals who reside within the state’s territory. This is certainly a possible version of libertarianism, but it is not the most standard one, at least for contemporary left-libertarianism. More common is a cosmopolitan version, according to which state borders have no intrinsic moral significance (although lots of practical significance). On this view, residents of one state (e.g., a resource-rich one) may owe natural resource payments to residents of other (e.g., resource-poor) states. If this is so, then it will be more difficult for the state to invest to provide direct benefits to such individuals (e.g., since they will be far from the roads and schools constructed). It is still possible, however, for the state’s investments to benefit them indirectly by increasing the rents owed by others for natural resources near the services provided by the state. Thus, there is no fundamental problem if there is a duty to compensate residents of others countries. Indeed, the situation is similar to that within a country, where a local jurisdiction provides local services that increase the rent owed for natural resources.

5.5 Conclusion We have explored the possibility of just taxation according to libertarianism. Pacifist versions of libertarianism (which are possible but almost never endorsed) reject all enforceable duties and hence reject the possibility of a just state and a fortiori of just taxation. For non-pacifist versions, I have claimed that something approximating a state can be just on libertarian theory, but only if the state limits its use of force to enforcing libertarian prohibitions. This leaves open, however, whether the state can justly tax. Throughout this paper, I have limited myself to the question of whether it is possible for reasonably plausible versions of libertarianism to endorse certain kinds of taxation. I have not addressed the question of whether plausible versions must endorse such taxation. The latter topic requires much more elaborate analysis than that provided here. I have claimed that right-libertarianism, sufficientarian-libertarianism, and leftlibertarianism can hold that it is just to tax those who infringe libertarian rights for the reasonable costs of enforcement provided by the state. (This tax, however, is unlikely to finance the full costs of enforcement provided by the state, since some enforcement cost will be unrecovered.) Because all forms of libertarianism endorse full self-ownership and the full right to the products of that which one morally fully owns, they hold that it is unjust to tax (non-consensually) individuals for the use of their person or artifacts they own, or for the possession or exercise of the rights that they have over these entities. This rules

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out the justice of taxes (except perhaps for rights-infringing negative externalities) on these resources in the form of income taxes, wealth taxes, consumption/use taxes, or transfer taxes (e.g. gift taxes, sales taxes, and excise taxes).¹² The only possible source of just taxation, beyond the tax on rights-infringers, is a tax on the possession or exercise of rights over natural resources. Radical rightlibertarianism rejects the justice of such taxes because it rejects any fair-share proviso on appropriation. Nozickean right-libertarianism accepts a Lockean proviso on appropriation, but it holds that payments owed for excess shares are owed to specific individuals (those who are disadvantaged by the appropriation). Thus, the payments owed are private debts and not taxes. Left-libertarianism, by contrast, can view such payment as forms of taxation. To this, it must view (as is plausible) the proviso on appropriation as an ongoing limitation on the rights over the natural resources (i.e., the rights are conditional on the payment of competitive value). It must view the payment owed as dischargeable by making the payment in cash or in kind (goods or services) to anyone who has less than their fair share of the value of natural resources. The payment is thus not a private debt, since it is not owed to any specific individual (as it would be, for example, if anyone with less than her fair share were owed an equal proportion of her debt). Finally, in order for the state to be able to justly invest for the provision of goods and services, the payment owed must not be owed immediately. Instead, the debt must be a stream of benefits the expected present value of which is at least as great as some specified amount. If all these conditions are met, then the enforceable duty to make a periodic payment for the value of one’s excess share of rights over natural resources can, according to left-libertarianism, provide a basis for just taxation. The just tax base for libertarianism is limited (at most) to (1) the costs of rightsenforcement imposed by rights-infringers and (2) the competitive value of the natural resource use or appropriation. Moreover, the taxes so generated are morally “earmarked” according to libertarianism. Tax revenue spending is limited to (1) spending the rights enforcement taxes on rights-enforcement, and (2) spending the natural resource taxes (if any) to compensate those with less than their fair share of rights over natural resources. Moreover, taxation will be just only if the state efficiently uses the funds for the “earmarked” purpose. If the state is inefficient in this regard, or just plain corrupt, the taxation will not be just. Although it is possible for libertarianism, and left-libertarianism in particular, to judge some taxation as just, it probably condemns all existing systems of taxation as ¹² Corporate taxation is not necessarily unjust. Corporations are morally artificial legal persons (with limited liability for shareholders) recognized by the state. The state may impose taxation requirements as a condition of legal incorporation. Of course, limited liability is problematic within libertarian theory. Although there is no problem with limited liability being imposed as a contractual condition (e.g., of an employment, sale, or purchase), libertarianism holds that third parties retain their moral right to compensation when their rights are infringed (e.g., when a factory toxically pollutes the environment).

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unjust. No existing system limits taxes to (1) taxes on rights infringers for the associated enforcement costs provided by the state and (2) payments by individuals who have excess share in the value rights over natural resources. Moreover, no existing state limits state spending to (1) compensating those who enforce rights and (2) compensating those with less than their fair share of rights over natural resources. Libertarianism is thus inconsistent with the justice, even approximate justice, of any modern state. Some will view this as a compelling reason to reject libertarianism. Others will view this as a reason to radically change the structures of actually existing states.¹³

References Attas, D. (2005). Liberty, Property, and Markets: A Critique of Libertarianism (Ashgate Publishing Company). George, H. (1879). Progress and Poverty (Robert Schalkenbach Foundation). Narveson, J. (1988). The Libertarian Idea (Temple University Press). Narveson, J. (1999). “Original Appropriation and Lockean Provisos,” Public Affairs Quarterly 13: 205–27. Nozick, R. (1974). Anarchy, State, and Utopia (Basic Books). Otsuka, M. (2003). Libertarianism without Inequality (Clarendon Press). Roark, E. (2013). Removing the Commons: A Lockean Left-Libertarian Approach to the Just Use and Appropriation of Natural Resources (Lexington Books). Rothbard, M. (1978). For a New Liberty: The Libertarian Manifesto, revised edition (Libertarian Review Foundation). Rothbard, M. (1982). The Ethics of Liberty (Humanities Press). Simmons, A. J. (1992). The Lockean Theory of Rights (Princeton University Press). Simmons, A. J. (1993). On the Edge of Anarchy (Princeton University Press). Steiner, H. (1994). An Essay on Rights (Blackwell Publishing). Vallentyne, P. (2006). “Robert Nozick: Anarchy, State, and Utopia,” in J. Shand (ed.), The Twentieth Century: Quine and After (Vol. 5, of Central Works of Philosophy) (Acumen Publishing), 86–103. Vallentyne, P. (2007). “Libertarianism and the State,” in Social Philosophy and Policy 24: 187–205. Vallentyne, P. (2011). “Nozick’s Libertarian Theory of Justice,” in R. Bader and J. Meadowcroft (eds.), Anarchy, State, and Utopia—A Reappraisal (Cambridge University Press), 145–67. Vallentyne, P. and Steiner, H. (eds.) (2000a). The Origins of Left Libertarianism: An Anthology of Historical Writings (Palgrave Publishers Ltd.). Vallentyne, P. and Steiner, H. (eds.) (2000b). Left Libertarianism and Its Critics: The Contemporary Debate (Palgrave Publishers Ltd.). Vallentyne, P., Steiner, H., and Otsuka, M. (2005). “Why Left-Libertarianism Isn’t Incoherent, Indeterminate, or Irrelevant: A Reply to Fried,” in Philosophy and Public Affairs 33: 201–15. Van Parijs, P. (1995). Real Freedom for All (Oxford University Press).

¹³ For helpful comments, I thank Dani Attas, Martin O’Neill, Mike Otsuka, Hillel Steiner, and an anonymous referee.

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6 Tax Policy and Fair Inequality Alexander W. Cappelen and Bertil Tungodden

6.1 Introduction The standard economic approach to tax policy has to a large extent relied on welfarist theories of justice. This welfarist framework has proved a productive point of departure for much economic analysis, partly because it is able to accommodate distributive concerns. It has, however, an important limitation in its inability to take into account considerations of personal responsibility. Welfarist theories evaluate policies solely on the basis of their consequences for individual welfare, and thus do not assign any intrinsic importance to how a specific situation came about. The inability to take account of personal responsibility implies that the welfarist framework is unable to distinguish between different kinds of inequalities. By way of illustration, the standard Pigou–Dalton principle of inequality aversion states that the elimination of welfare inequality between two persons always is just, at least as long as it does not contribute to a decrease in overall welfare. The disregard for personal responsibility puts welfarist theories at odds with commonly held moral intuitions. The principle that people should be held personally responsible for the consequences of their choices is a fundamental moral ideal in Western societies (Greenfield 2011), and figures prominently in political debates on redistribution (Moffitt 2015). It has also been shown in surveys (Gaertner and Schwettmann 2007; Schokkaert and Devooght 2003) and economic experiments (Almås et al. 2010; Cappelen et al. 2007; Cappelen et al. 2010; Cappelen et al. 2013; Frohlich et al. 2004; Konow 2000) that people view some inequalities, those arising from differences in the number of hours worked, for example, as fair, and others, such as inequalities arising from gender or race, as unfair. The intuition that it is necessary to distinguish between inequalities that individuals are responsible for and inequalities that people are not responsible for is at the core of liberal egalitarian theories of justice (Arneson 1989; Bossert 1995; Cappelen and Tungodden 2017; Cohen 1989; Dworkin 1981; Fleurbaey 1995, 2008; Roemer 1996, 1998). In this chapter, we discuss the implications of a liberal egalitarian approach to tax policy and argue that such an approach avoids two fundamental challenges faced by

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the standard welfarist approach.¹ We further argue that liberal egalitarian approach is able to capture the distinction between fair and unfair inequalities in a way that the welfarist approach fails to do. A major challenge for the liberal egalitarian approach to tax policy, however, is that it requires information that typically is unavailable to tax authorities in order to be implemented. We argue that this approach still can be used in the evaluation of tax policies. More specifically, we present a framework for inequality measurement that incorporates the distinction between fair and unfair inequalities and illustrate how this framework can be used to evaluate tax policy analyzing the pre-tax and post-tax income distribution in Norway from 1986 to 2005 (see Almås et al. 2011). The defining feature of this approach is that, for a given interpretation of fair income distribution, it measures how much actual income distribution deviates from fair income distribution. The paper proceeds as follows: section 6.2 introduces the moral intuitions behind liberal egalitarian theories of justice and presents a specific principle of income distribution that respects these intuitions. Section 6.3 discusses two dilemmas in welfaristic tax policies, and section 6.4 considers some important implications of the liberal egalitarian view for optimal tax policy. Section 6.5 presents a generalized version of the Gini coefficient that measures unfair inequality and illustrates how this measure can be used to evaluate policy. Section 6.6 provides some concluding comments.

6.2 What is Fair Income Distribution? Liberal egalitarian theories of justice seek to combine an ideal of equality with an ideal of personal freedom and responsibility. The contemporary focus on this relationship can be traced back to the seminal work of Rawls (1971). The ideas of Rawls have been developed further, notably by Arneson (1989), Bossert (1995), Cappelen and Tungodden (2009, 2017), Cohen (1989), Dworkin (1981), Fleurbaey (1995, 2008), Roemer (1996, 1998), and Tungodden (2005), where the main achievement has been to provide a more precise analysis of how considerations of personal responsibility can be incorporated in egalitarian reasoning. The dominant modern egalitarian view is that people, within a framework offering equal opportunities and respecting personal freedom, should be held responsible for their accomplishments. A key feature of liberal egalitarian theories of justices is that they draw a distinction between responsibility factors and non-responsibility factors and argue that inequalities arising from non-responsibility factors are illegitimate, whereas inequalities arising from responsibility factors are considered legitimate. There are several competing versions of liberal egalitarian ethics and the purpose of this paper is not to ¹ See also Chapter 2 in this volume, Marc Fleurbaey, “Welfarism, Libertarianism, and Fairness in the Economic Approach to Taxation,” and Fleurbaey (2008); Fleurbaey and Maniquet (2006); Fleurbaey and Maniquet (2011).

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defend a particular position. However, in order to fix ideas for the later discussion and application of liberal egalitarianism, we present a specific responsibility-sensitive fairness principle, the generalized proportionality principle. This principle, as developed in Bossert (1995), Cappelen and Tungodden (2017), and Konow (1996) can be seen as a generalized version of the classical proportionality principle.

6.2.1 The generalized proportionality principle To provide a precise formulation of the generalized proportionality principle we assume that all factors that affect a person’s pre-tax income can ab be classified either as a responsibility factor or as a non-responsibility factor. The pre-tax income of an individual, i, can then be written as f ðxiR ; xiN R Þ, where xiR and xiN R represent the vectors of responsibility and non-responsibility factors. The generalized proportionality principle holds that an individual’s fair claim, gðxiR ; Þ, is given by what would have been the average income in a hypothetical situation where everyone had the same responsibility vector as this individual, gðxiR ; Þ ¼

1X R NR f ðxi ; xi Þ : n j

ð1Þ

Accordingly, individual i’s fair income, zi GPP , is proportional to his fair claim relative to the other individuals’ fair claim, ziGPP ¼

gðxiR ; Þ X y: ∑j gðxjR ; Þ i i

ð2Þ

where yi is the actual pre-tax income of individual i. The generalized proportionality principle treats all individuals as if they were identical with respect to all non-responsibility factors. The principle can be said to be egalitarian because it eliminates all inequalities arising from non-responsibility factors, i.e., unfair inequality. The generalized proportionality principle can also be said to be responsibility sensitive because it preserves inequalities that only arise from responsibility factors, i.e., fair inequality. The generalized proportionality principle satisfies the classical minimal requirements of unfair inequality elimination and fair inequality preservation proposed by Bossert and Fleurbaey (1996). First, any two individuals with the same responsibility factors are assigned the same fair income. Second, in any situation where all individuals have the same non-responsibility factors, each individual’s fair income is equal to his pre-tax income.²

² A complete characterization of the generalized proportionality principle, using very reasonable liberal and egalitarian requirements, is provided in Cappelen and Tungodden (2017). See also Cappelen and Tungodden (2006a, 2013) for a discussion of challenges in combining the liberal and egalitarian ideals underlying liberal egalitarianism.

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In sum, the generalized proportionality principle is an attractive formalization of a responsibility-sensitive fairness principle. There are also other responsibility-sensitive fairness principles, such as the egalitarian equivalent principle (see Fleurbaey 2008; Fleurbaey and Maniquet 2011), but the discussion in the rest of this chapter does not rely on the choice between these different theories. In the application to Norwegian tax policy, we apply the generalized proportionality principle, but the results are robust in using the egalitarian equivalent principle and other reasonable formulations of this approach (see Almås et al. 2011).

6.3 Two Dilemmas in Tax Policy In this section, we discuss two dilemmas facing standard welfarist reasoning about tax policy, namely the “exploitation of the hard working” and “the slavery of the talented.” Consider first a situation in which all individuals in the economy face the same hourly wage rate, but differ in their preferences and that they therefore choose to work different hours. As a result of these choices the “hard-working” person ends up with a high level of income and the “lazy” person with a low level of income. How should we evaluate this situation? According to liberal egalitarian reasoning, the answer depends on whether we view hours worked as something individuals are responsible for. If hours worked is viewed as a responsibility factor, then there is no reason to worry at all. The liberal ideal that income inequalities due to responsibility factors should be accepted implies that pre-tax income distribution in this situation is fair and that there should be no redistributive taxation.³ In contrast, the optimal welfaristic tax policy may have very different implications. In an interesting study, Sandmo (1993) shows that utilitarianism may justify redistribution from the “hard working” to the “lazy,” i.e., from those who have a low marginal disutility of work towards those with a high disutility of work. The utilitarian justification for this is easily seen if we assume that the marginal utility of consumption is independent of how many hours a person works. In such situations, the sum of utility would be maximized by a tax policy that encouraged the hard-working to work more than those who are lazy and then transferred income from the hard-working to the lazy. We name this the “exploitation of the hard-working”. If we believe that people should be held responsible for their preferences (or their choice of hours worked when they face the same income opportunities), then such a conclusion should be considered a problem for utilitarian reasoning (see also Sandmo 1993: 162). To illustrate the second dilemma, consider the kind of situation analyzed by Mirrlees (1971), where all individuals have the same preferences but differ in earning

³ This is what is referred to as the laissez-faire criterion in Fleurbaey and Maniquet (2006).

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capacity. In particular, let us consider a case where the Marshallian labor supply is inelastic, such that all individuals make the same choice of labor effort, but face different hourly wage rates. If we believe that people’s earnings capacity is largely outside individual control and therefore should be viewed as a non-responsibility factor, a liberal egalitarian would object to such a situation on egalitarian grounds. Income inequality is due to a non-responsibility factor and thus liberal egalitarians would aim at equalizing incomes as much as possible in such a situation.⁴ Utilitarians may also endorse a redistribution from the more talented to the less talented, but this would again depend on the properties of the individuals’ utility functions. Utilitarians would in this type of situation also be concerned with the level of effort exercised by the different individuals. Specifically, utilitarians would aim at having the more talented exercising more effort than the less talented, because this would increase the total amount of utility in society. The more talented individuals, because of the high alternative value of their leisure time, are less efficient “utility machines” than the less productive individuals. This is the well-known problem of the “slavery of the talented” (see Arneson 1989; Roemer 1985). In sum, utilitarianism and the standard welfarist framework more generally face the problems of “the exploitation of the hard working” and “the slavery of the talented”, which we believe shows that this framework violates basic moral intuitions in society. Liberal egalitarianism, on the other hand, avoids both these conclusions, and moreover presents a less instrumental justification of redistributive tax policies. Income inequalities are seen as intrinsically justifiable if they reflect differences in responsibility factors, and an equal income distribution is seen as intrinsically justifiable if it reflects that individuals differ in non-responsibility factors. Hence, in the process of justification, no reference is made to other larger goals, like the total amount of welfare in society, which income inequality may or may not contribute to.

6.4 Optimal Tax Policy The welfarist framework has a simple solution to the optimal tax problem. To achieve the first-best solution, the government should impose differentiated lump-sum taxes. A lump-sum tax is a fixed amount and does not depend on the choices or the income of the tax-payer. Importantly, lump-sum taxes would not interfere with efficiency concerns since it does not create a wedge between marginal pre-tax income and marginal post-tax income. Differentiating lump-sum taxes on individual characteristics, such as talent, the government could in principle achieve whatever distribution of income that maximizes social welfare distribution. A fundamental problem with lump-sum taxation is that the government typically cannot observe each person’s talent directly (see Stiglitz 1987). Thus, the government ⁴ Fleurbaey and Maniquet (2006) formalize this intuition as the transfer principle, which is a modified version of the Pigou–Dalton principle.

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cannot introduce a differentiated lump-sum transfer from more talented individuals to less talented individuals. To introduce tests in order to reveal talent would be self-defeating, since a person could pretend to be less talented than she really is. Differentiated lump-sum transfers therefore do not represent a practically feasible tax policy. But still, in theory, it represents the first-best ideal within a welfarist framework. In contrast, in a liberal egalitarian framework, differentiated lump-sum taxes are insufficient in order to ensure a first-best income distribution. This follows from the simple fact that equalization of income opportunities requires that everyone faces the same income opportunity set. However, giving everyone the same income opportunity set would require that marginal post-tax income was the same for all individuals. A system of lump-sum taxes cannot achieve this since it does not affect what a person earns on the margin. This first-best analysis thus provides a nice illustration of an important distinction between standard welfarist and liberal egalitarian reasoning in redistributive questions. The fact that the standard welfarist perspective focuses solely on differences in welfare, implies that the opportunity set offered to any individual only is instrumental in giving this person a certain level of welfare (see also Sen 1988). Hence, the shape of the opportunity set offered to each individual is irrelevant. The liberal egalitarian ideal, however, is concerned with equalizing opportunities, which cannot be guaranteed by a set of differentiated lump-sum transfers. This difference is also important in second-best analysis, where the tax system has to rely only on income information. The standard welfarist framework views the possibility of an efficiency loss as the only problem of progressive taxation, where the efficiency loss is assumed to be traded-off against the gain of transferring resources from people with low marginal welfare to people with high marginal welfare (possibly discounting for differences in total welfare). The liberal egalitarian approach, on the other hand, is concerned with two opposing effects of fairness in a progressive tax system. First, a progressive tax system may reduce unfair inequalities between individuals who are identical with respect to their responsibility factors; second, it may eliminate fair inequalities between individuals who differ with respect to their responsibility factors (Barth et al. 2013). The first effect contributes to reduced unfairness, whereas the second effect contributes to increased unfairness. Hence, in the design of an optimal income tax system, a liberal egalitarian would have to balance these two considerations.⁵ One might argue that the informational requirements of liberal egalitarian considerations are too demanding, since individual information on responsibility factors and non-responsibility factors typically is not available to tax authorities. In this respect, it is important to notice the difference between using such information in the ⁵ A liberal egalitarian would further need to take into account the concern of Pareto-optimality in the design of an optimal tax policy, as is carefully discussed in Marc Fleurbaey’s chapter in this volume.

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operation of a tax system and in the evaluation of a tax system (see also Atkinson and Stiglitz 1980: 358). Even if information about individual effort cannot be used directly by tax authorities, there is statistical information available that can be used to evaluate how close post-tax income distribution comes to the liberal egalitarian ideal. Such evaluations could in turn be used to modify the tax rules. It should also be noted that it is far from inconceivable that information about responsibility or non-responsibility factors are used in the operation of tax systems. In principle, tax authorities could, for example, condition tax rates on information about hours worked. Collecting information about hours worked or finding reliable proxies would, however, be demanding. In section 6.5 we shall therefore focus on the evaluation of tax systems and illustrate how this can be implemented in a study of the Norwegian framework.

6.5 Evaluating a Tax System There are three normative steps necessary when applying the liberal egalitarian approach to evaluate whether an income tax system contributes to a fairer distribution of income in society. First, one needs to determine where to draw the responsibility cut, that is, what to include as responsibility factors and non-responsibility factors, respectively. Second, one needs to specify the specific liberal egalitarianism principle determining what is a fair distribution of income in any particular situation. Third, one needs to decide on how to aggregate individual deviations from fair distribution into a measure of overall unfairness in society. With this in place, one can evaluate the tax system by simply comparing overall unfairness in pre-tax and post-tax income distribution. In the following, we apply this framework to a study of the income tax system in Norway in the period 1986–2005.⁶

6.5.1 The responsibility cut Norwegian register data provide us with individual data on a number of dimensions that may potentially affect an individual’s pre-tax income: hours worked, years of education, whether one works in the private or public sector, gender, age, and county of residence.⁷ The liberal egalitarian framework requires us to assign each of these factors to the responsibility set or the non-responsibility set. If one assigns all factors

⁶ This framework is developed with co-authors in Almås et al. (2011). Alternative approaches also introducing the distinction between fair and unfair inequalities are given in Bourguignon et al. (2007), Devooght (2008), and Roemer et al. (2003), where our framework is closest to Devooght (2008). ⁷ Our measure of pre-tax income is annual labor earnings. It includes all earnings from work activities but excludes pensions, transfers that are not direct replacements of labor income, and any capital income. We deflate all labor earnings to 1998 prices using the Consumer Price Index constructed by Statistics Norway. For a theoretical discussion of how the responsibility cut affects fair income distribution, see Cappelen and Tungodden (2006b).

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to the non-responsibility set, this framework collapses to strict egalitarianism where all pre-tax inequalities are considered unfair. At the opposite extreme, if one assigns all factors to the non-responsibility set, then it collapses to libertarianism where pretax income distribution is considered fair. We would argue that the majority view in most societies is in-between these two extreme positions, where one holds people responsible for some factors and not responsible for others. Still, it is a difficult task to pin down exactly where to draw the responsibility cut in any particular society, and in Almås et al. (2011) we therefore highlight the importance of examining how the evaluation depends on which factors that are included among the responsibility factors. In the main part of the analysis, we adopt what we consider the majority view in Norway, where individuals are held responsible for hours worked, years of education, whether they work in the private or public sector, and county of residence, but not for gender and age. We show, however, that our results are robust compared to alternative plausible specifications of the responsibility cut. In empirical analysis, observable factors can only explain a fraction of the overall variation in pre-tax income, in the Norwegian case less than 50 percent, and thus a crucial question is how to treat the unobservable factors. We respond to this question by appealing to the basic egalitarian intuition that deviations from an equal distribution can only be justified if individuals differ with respect to some responsibility factors. In principle, some of the unobservable factors may be responsibility factors, but it is not possible to determine whether individuals differ with respect to these factors. We therefore find it attractive to treat all unobservable factors as non-responsibility factors. Thus, when calculating each individual’s fair income, we do not hold people responsible for the unexplained part of their pre-tax income and treat it in the same way as we treat age and gender.

6.5.2 Calculating fair income Based on a specific responsibility cut and a liberal egalitarian fairness principle, in our case the generalized proportionality principle, one can derive each individual’s fair income from the estimated labor earnings equation. The estimated labor earnings equation shows the extent to which each factor contributes to explaining pre-tax income, and we can then estimate the average pre-tax income function in society. A person’s fair share of the total income is determined by considering the counterfactual situation where all individuals are identical in terms of non-responsibility factors and only differ in their non-responsibility factors. Applying this procedure to the Norwegian data, we show that individuals with different responsibility vectors may have very different fair incomes. To illustrate, it follows from the estimated labor earnings equation that the highest fair income in 2005 in Norway was close to five times as high as the lowest fair income. Overall, fair inequality, measured as the difference between fair income distribution and perfect

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equality, decreased slightly from 1986 to 2005. The standard Gini for the fair income distribution fell from 0.176 in 1986 to 0.149 in 2005. Differences in hours worked justify much of the fair inequality, but other responsibility factors also played an important role. The labor earnings estimates for 2005 show that it may be fair to give one person two and a half times more income than another who worked the same number of hours if they differ maximally with respect to the other responsibility factors. The remaining step is now to develop an aggregate measure of how much pre-tax and post-tax income distributions differ from fair income distribution.

6.5.3 Unfairness Gini The standard Gini measure for income inequality measures how much actual income distribution in a situation deviates from a completely equal distribution of the same total income. Our concern, however, is the distance between actual income distribution, pre-tax or post-tax income, and fair income distribution, and for this we introduce the unfairness Gini. To formalize the unfairness Gini, let a situation, A, contain a set of individuals, N ¼ f1; :::;ng, where each individual, i, is characterized by the pair, ðyi A ; zi A Þ, where yi A  0 is the actual income and zi A  0 is the fair income of individual i in A. Hence, a situation A is characterized by A ¼ ½ðy1A ; z1A Þ; :::; ðynA ; znA Þ)], where the X average income is denoted as μðAÞ ¼ n1 i yiA : In this framework, it can be shown that the unfairness Gini can be written as Gu ðAÞ ¼

X 2 iuiðAÞ : nðn  1ÞμðAÞ i

ð3Þ

where ui(A) is the absolute difference between a person i’s actual income and her fair income. The standard Gini is given by the case where zi A ¼ μðAÞ for all individuals, but the unfairness Gini allows for individual-specific fair incomes that, in the liberal egalitarian framework, reflect differences in observable responsibility factors.

6.5.4 Evaluating the tax system By using the unfairness Gini, we can evaluate the performance of the income tax system in Norway from 1986 to 2005.⁸ In particular, we can establish which of the two opposing fairness effects are more important. Does the progressive Norwegian income tax system primarily eliminate fair inequalities between people who are similar on responsibility factors, or does it primarily eliminate unfair inequalities reflecting differences in non-responsibility factors? We observe from Figure 6.1 that the overall effect of the Norwegian income tax system is a reduction in unfairness throughout the period, since the pre-tax curve is ⁸ Details of this analysis can be found in Almås et al. (2011).

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Pre−tax

Post−tax

0.25

0.25 Gini

0.3

Gini

0.3

0.2

0.2

0.15

0.15 1985

1990

1995 Year

2000

2005

Standard Gini

1985

1990

1995 Year

2000

2005

Unfairness Gini

Figure 6.1 Unfairness and inequality over time The figure (which is identical to Figure 4 in Almås et al. 2011), shows the development of the standard Gini and the unfairness Gini in the period 1986–2005. The estimates of fair income are based on the responsibility set containing hours worked, years of education, sector (public versus private), and county of residence.

below the post-tax curve. But the effect of the tax system is larger in 1986 than in 2005; the tax system reduces the unfairness Gini with 22.6 percent (from 0.204 to 0.158) in 1986, and with 16.6 percent in 2005 (from 0.220 to 0.184). Hence, the tax reforms that have taken place in Norway between 1986 and 2005 seem to have made the tax system less capable of reducing overall unfairness in society. The figure also shows that there has been an increase in both pre-tax and post-tax unfairness in Norway from 1986 to 2005: the pre-tax unfairness Gini has increased from 0.204 to 0.220, and the post-tax income distribution has increased from 0.158 to 0.194. In contrast, the standard Gini shows reduced pre-tax inequality in this period, but, in line with the unfairness Gini, increased post-tax inequality. As discussed in Almås et al. (2011), there are two trends that explain most of this development. First, in line with what has been observed for a number of other countries in recent decades (see Piketty and Saez 2010), there has been an increase in top labor incomes in Norway; the pre-tax income share of the top percentile increased from 3.41 percent in 1986 to 4.87 percent in 2005. The concentration of income at the top of the distribution increases both the standard Gini and the unfairness Gini, and can, in fact, account for almost all of the increase in the unfairness Gini. Second, we observe important changes in the situation of females in the period, and as a result the average pre-tax income of females is much closer to the average

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pre-tax income in society in 2005 than in 1986. These changes, however, do not bring females much closer to their fair income, since the increase in working hours and education among females also translates into an increase in females’ fair income of almost the same size as their increase in pre-tax income. Thus, the increased role of females in the labor market impacts the standard Gini and the unfairness Gini differently. It causes a substantial decrease in the standard Gini that outweighs the effect of the increase in top pre-tax incomes, whereas it has almost no impact on the unfairness Gini. As a result, the development of the two measures diverges for pre-tax distribution, where we observe an increase in the unfairness Gini and a reduction in the standard Gini.

6.6 Concluding Remarks In this paper, we have argued that a liberal egalitarian approach to tax policy respects some fundamental intuitions about personal responsibility and the need to distinguish between different types of inequality. As a result, it avoids two fundamental challenges to the standard welfarist approach to tax policy: the “exploitation of the hard-working” and the “exploitation of the talented.” The liberal egalitarian approach also highlights that a progressive income tax system may have two opposing effects on fairness. It may increase the level of unfairness in society by eliminating fair inequalities reflecting differences in responsibility factors, but it may also reduce the level of unfairness in society by eliminating unfair inequalities reflecting differences in non-responsibility factors. We illustrate, by using Norwegian data, how one can investigate empirically which effect is more important by using the unfairness Gini to study whether the level of fairness is lower in post-tax income distribution than in pre-tax income distribution. The use of the liberal egalitarian framework can be extended in a number of directions. First, our empirical approach can be generalized to cover more robust tax policy comparisons not only relying on an unfairness Gini, but more generally on the comparison of unfairness Lorenz curves. Second, it can be extended theoretically, as shown in Fleurbaey (2008), to ensure that it can be combined also with a concern for Pareto optimality in the design of redistributive tax systems. Thus, we believe that the liberal egalitarian approach represents a promising and plausible normative foundation for modern tax debates that respects fundamental principles prevalent in most modern societies.

References Almås, I., Cappelen, A. W., Lind, J. T., Sørensen, E. Ø., and Tungodden, B. (2011). “Measuring Unfair (In)Equality,” Journal of Public Economics 95(7–8): 488–99. Almås, I., Cappelen, A. W., Sørensen, E. Ø., and Tungodden, B. (2010). “Fairness and the Development of Inequality Acceptance,” Science 328(5982), 1176–8.

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Arneson, R. J. (1989). “Equality and Equal Opportunity for Welfare,” Philosophical Studies 56(1): 159–94. Atkinson, A. B., Piketty, T., and Saez, E. (2013). “Top Incomes in the Long Run of History,” Journal of Economic Literature 49 (1): 3–71. Atkinson, A. B. and Stiglitz, J. (1980). Lectures on Public Economics, New York: McGraw Hill. Barth, E., Cappelen, A. W., and Ognedal, T. (2013). “Fair Tax Evasion,” Nordic Journal of Political Economy 38: 1–16. Bossert, W. (1995). “Redistribution Mechanisms Based on Individual Characteristics,” Mathematical Social Sciences 29(1): 1–17. Bossert, W. and Fleurbaey, M. (1996). “Redistribution and Compensation,” Social Choice and Welfare 13(3): 343–55. Bourguignon, F., Ferreira, F. H. G., and Menéndez, M. (2007). “Inequality of Opportunity in Brazil,” Review of Income and Wealth 53(4): 585–618. Cappelen, A. W., Hole, A. D., Sørensen, E. Ø., and Tungodden, B. (2007). “The Pluralism of Fairness Ideals: An Experimental Approach,” American Economic Review 97(3): 818–27. Cappelen, A. W., Konow, J., Sørensen, E. Ø., and Tungodden, B. (2013). “Just Luck: An Experimental Study of Risk Taking and Fairness,” American Economic Review 103(4): 1398–1413. Cappelen, A. W., Sørensen, E. Ø., and Tungodden, B. (2010). “Responsibility for What? An Experimental Approach to Responsibility,” European Economic Review 54(3): 429–41. Cappelen, A. W. and Tungodden, B. (2006a). “A Liberal Egalitarian Paradox,” Economics & Philosophy 22(3): 393–408. Cappelen, A. W. and Tungodden, B. (2006b). “Relocating the Responsibility Cut: Should More Responsibility Imply Less Redistribution?” Politics, Philosophy & Economics 5(3): 353–62. Cappelen, A. W. and Tungodden, B. (2009). “Rewarding Effort,” Economic Theory 39(3): 425–41. Cappelen, A. W. and Tungodden, B. (2013). “Reward and Responsibility: How Should We Be Affected When Others Change Their Effort?” Politics, Philosophy & Economics 2(2): 191–211. Cappelen, A. W. and Tungodden, B. (2017). “Fairness and the Proportionality Principle,” Social Choice and Welfare 49(3–4): 709–19. Cohen, G. A. (1989). “On the Currency of Egalitarian Justice,” Ethics 99(4): 906–44. Devooght, K. (2008). “To Each the Same and to Each his Own. A Proposal to Measure Responsibility-Sensitive Income Inequality,” Economica 75(298): 280–95. Dworkin, R. (1981). “What is Equality? Part 2: Equality of Resources,” Philosophy and Public Affairs 10(4): 283–345. Fleurbaey, M. (1995). “Equality and Responsibility,” European Economic Review 39(3–4): 683–9. Fleurbaey, M. (2008). Fairness, Responsibility, and Welfare, Oxford: Oxford University Press. Fleurbaey, M. and Maniquet, F. (2011). “Compensation and Responsibility,” in K. J. Arrow, A. Sen, and K. Suzumura (eds.), Handbook of Social Choice and Welfare, Amsterdam: Elsevier, vol. II, 507–604. Frohlich, N., Oppenheimer, J., and Kurki, A. (2004). “Modeling Otherregarding Preferences and an Experimental Test,” Public Choice 119(1–2): 91–117. Gaertner, W. and Schwettmann, L. (2007). “Equity, Responsibility and the Cultural Dimension,” Economica 74(296): 627–49.

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Greenfield, Kent (2011). The Myth of Choice, New Haven: Yale University Press. Konow, J. (1996). “A Positive Theory of Economic Fairness,” Journal of Economic Behavior and Organization 31(1): 13–35. Konow, J. (2000). “Fair Shares: Accountability and Cognitive Dissonance in Allocation Decisions,” American Economic Review 90(4): 1072–91. Mirrlees, J. A. (1971). “An Exploration in the Theory of Optimum Income Taxation,” Review of Economic Studies 38(2): 175–208. Moffitt, Robert A. (2015). “The Deserving Poor, the Family, and the U.S. Welfare System”, Demography 52(3): 729–49. Piketty, T. and Saez, E. (2014). “Inequality in the Long Run,” Science 344(6186): 838–43. Rawls, J. (1971). A Theory of Justice, Cambridge, MA: Harvard University Press. Roemer, J. E. (1985). “Equality of Talent,” Economics and Philosophy 1(2): 151–88. Roemer, J. E. (1996). Theories of Distributive Justice, Cambridge, MA: Harvard University Press. Roemer, J. E. (1998). Equality of Opportunity, Cambridge, MA: Harvard University Press. Roemer, J. E., Aaberge, R., Colombino, U., Fritzell, J., Jenkins, S. P., Marx, I., Page, M., Pommer, E., Ruiz-Castillo, J., Segundo, M. J. S., Tranaes, T., Wagner, G. G., and Zurbiri, I. (2003). “To What Extent do Fiscal Systems Equalize Opportunities for Income Acquisition Among Citizens?” Journal of Public Economics 87(3–4): 539–65. Sandmo, A. (1993). FinanzArchiv/Public Finance Analysis. New series, Bd. 50, H. 2, 149–63. Schokkaert, E. and Devooght, K. (2003). “Responsibility-Sensitive Fair Compensation in Different Cultures,” Social Choice and Welfare 21(2): 207–42. Sen, A. (1988). “Freedom of Choice: Concept and Content,” European Economic Review 32 (2–3): 269–94. Stigliz, J. E. (1987). “Pareto Efficient and Optimal Taxation and the New New Welfare Economics,” in A. J. Auerbach and M. Feldstein M. (eds.), Handbook of Public Economics, Amsterdam: Elsevier, vol. II, 991–1042. Tungodden, B. (2005). “Responsibility and Redistribution: The Case of First Best Taxation,” Social Choice and Welfare 24: 33–44.

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7 Beggar Your Neighbour (Or Why You Do Want to Pay your Taxes) Véronique Munoz-Dardé and M. G. F. Martin

7.1 Introduction According to the defenders of the minimal state, even if we grant that the poor and destitute have moral claims on us, still we are not thereby required to favour a redistributive state, for we should be equally happy if their needs are met through the activities of charities and other such free associations as through state action. Indeed it is sometimes claimed that the combination of the minimal state with private charities brings two advantages over the alternative of the robust, redistributive state: (1) there is a lack of state coercion of those who lack appropriate motivation to give the money for redistribution that they provide through paying taxation; (2) there is greater opportunity for people in general to participate in charitable activity and to give to charities, thereby increasing opportunities for all to exercise the virtue of benevolence. Of course, defenders of the minimal state often make a further assumption about the terms in which the justification of social policies can be made: typically, they emphasize the centrality of individual consent. If actual uncoerced consent from all were required to render broadly based tax regimes just, then it might be a short step to demonstrating that the social policies seen by many of us as attractive, and as appropriate ends for the state, are in fact illegitimate and unjust. Indeed, that short step may lead one to question the priority of actual consent in justifying state action.¹ However, it would be a mistake to suppose that the question about why we should prefer state taxation over charitable giving is of interest only within disputes over the priority of individual consent. Even once we have laid aside libertarian challenges to

¹ For a classical version of a focus on hypothetical rather than actual consent, see Rawls (1971). For doubts on actual consent, see Raz (1986: chs. 1–4). For a distinction between two types of consent theories, actual and hypothetical, and their respective perspective on political obligation, see Scanlon (1976: 17ff.). And for a further discussion of the limits of Nozick’s challenge concerning the threat to liberty of state taxation see Scanlon (2018) ch. 7.

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the non-minimal state, we can still ask: What makes a social order in which there is significant redistribution of wealth preferable to the minimal state conjoined with charitable giving? And, indeed, what might make it preferable despite the advertised advantages of charitable giving? Someone moved by this challenge might direct his or her attention in one of two ways. On the one hand, they may focus on the situation of the potential targets of such charity, the poor and destitute themselves, and argue that their concerns rule out meeting morally required provisions by means of charitable donation. On the other, they may focus on those who will be expected to provide the resources of the charities which are to distribute welfare, those who presumably would otherwise be subject to coercive taxation. Perhaps the commonest political response to the advocates of the minimal state takes the former course. It argues that arranging social institutions so that the only social agents dedicated to meeting the needs of the destitute are private, charitable organizations is demeaning to the needy. More specifically, a common complaint is that so organizing distribution of welfare ignores the fact that the individuals in question have a right to their needs being met, a right which is appropriately recognized only by the action of the state. In a world in which such needs are met through charitable action, so the argument goes, such people must rely on the whims of others, variably driven by feelings of benevolence, and hence these people are not properly respected, their rights as members of political society are violated by the lack of due regard by state institutions. Below we will sketch a couple of reasons for finding this line of argument unpromising as a theoretical justification of the robust state, as effective and motivating as it may have been in political debate. (Of course, whether it is better to see it as ineffective politically is a moot point. It was commonly given voice in the UK during the 1980s and early 1990s when its government engineered steps to bring about the most significant increase of street living and destitution in the last sixty years.²) Such a strategy typically presupposes some account of the special relation between citizens and political society which can lay the foundation of the right that an individual bears against some specific state to furnish their needs. It is preferable to explain the attractions of a substantial tax system without presupposing any such resources; and with that in mind, we’ll look to justifications for taxation which relate to the interests of those being taxed, rather than those who might benefit from the disbursement of resources thereby raised. So our principal concern will be to explore the second strategy, looking at the costs or concerns of donors or taxpayers, and seek to tease out a key reason individuals have for preferring to pay taxes over donating to charitable institutions.

² Youth homelessness and sleeping rough increased dramatically in the UK in the late eighties and early nineties, following the decision by the then Conservative government in 1985 to cap board and lodging allowances for the under 26s, and to remove it entirely after eight weeks in cities such as London. For a study of the consequences of this policy, see Smith (1998: 67).

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The best known version of this alternative strategy occurs in Thomas Nagel’s review of Robert Nozick’s political theory. He writes: Most people are not generous when asked to give voluntarily, and it is unreasonable to ask that they should be. Admittedly there are cases in which a person should do something although it would not be right to force him to do it. But here I believe the reverse is true. Sometimes it is proper to force people to do something even though it is not true that they should do it without being forced. It is acceptable to compel people to contribute to the support of the indigent by automatic taxation, but unreasonable to insist that in the absence of such a system they ought to contribute voluntarily. The latter is an excessively demanding moral position because it requires voluntary decisions that are quite difficult to make. Most people will tolerate a universal system of compulsory taxation without feeling entitled to complain, whereas they would feel justified in refusing an appeal that they contribute the same amount voluntarily. This is partly due to lack of assurance that others would do likewise and fear of relative disadvantage; but it is also a sensible rejection of excessive demands on the will, which can be more irksome than automatic demands on the purse. (Nagel 1982: 199–200)³

Nagel focuses on the motivational costs to an individual in voluntarily giving to charity instead of being compelled through state action to pay taxes. As we shall see in section 7.5, there are obvious problems with Nagel’s particular strategy. But, we want to argue, Nagel is on the right track. One can construct an appropriate argument which focuses on what it would be reasonable or unreasonable for us to demand of other potential donors in arranging payments. In this chapter we want to suggest that this line of argument best explains the attitudes we should have towards paying taxes beyond the prudential concerns which lead to paying for armies, diplomats, health and employment insurance, and police forces.⁴ We highlight certain deep theoretical problems with the first strategy and then elaborate the form we think the second strategy ought to take. While Nagel is on the right track in looking to the motivational costs of giving, his concerns need to be put in the wider context of situations in which we are ³ Nagel returns to these themes in his own work in a couple of places: first Equality & Partiality (Nagel 1991) where Nagel is concerned again with privileged concerns for self; and then again in The Myth of Ownership (Murphy and Nagel 2002). Here the focus is on the moral status of initial distributions: a concern that one equally finds in Rawls and Scanlon. We find these latter discussions complementary to the points we raise here. ⁴ Although the welfare state as it has flourished in much of Western Europe is often seen as justified by redistributive concerns, it is to be doubted whether that explains the extent to which it has flourished since the nineteenth century. It may be more appropriate to see welfare state systems as combining two kinds of justification: (1) a form of mutual assurance for those who pay for it through taxation to avoid potential future hardship brought about through unemployment or illness; (2) a form of modifying the threat of radical politics or violent action from a deprived underclass. Certainly, the latter motivation dominated Bismarck’s thinking; the former motivation was central to the ideology of the National Insurance scheme in the UK, and the extension of the Welfare State in several countries post-1945. One should keep in mind, therefore, that as things stand, the debate about the redistributive aims of the state concerns a very small element of the resources raised through taxation. (On the historical character of welfare measures, and different attitudes and values which affect them, see e.g. Rimlinger (1966). For different models of Welfare State systems, and their rationale, see Esping-Andersen (1990).)

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motivationally compelled to do that which we think is a benevolent or charitable way to respond. An experience of variable frequency for those who live in well-heeled, urban habitats is that of being begged at. In many contexts, it is clear that the person begging is certainly deserving of some help or other. Whether or not one gives money in such a situation, one may feel unhappy with the kind of exchange involved. Charitable giving, we shall argue, takes over certain structural features of begging, and with it certain costs. Charities are a form of vicarious begging. Once we face up to the costs that charitable demands place on us, particularly the level of cost if sufficient resources are to be raised, then it is clear that it would be unreasonable of some to demand that all potential tax payers should be faced with the imposition of such vicarious begging. In other words: it is unreasonable for some to insist on imposing on all their preference for a minimal state, and the opportunity of choosing whether or not to give to charity given the costs this preference imposes on us all. In section 7.2, we briefly address the political arguments about the rights of the needy and point out certain limitations of this style of argument. That leads us to focus from there on the claims of donors or tax payers. In section 7.3 we introduce the example of beggary and highlight certain essential features of this kind of transaction. In section 7.4, we apply this model to the activity of charities, arguing that we should understand such activity as a form of vicarious or deferred begging. And then we derive, in section 7.5, an explanation from this of why it is reasonable for us to wish to limit the activity of charities and thereby to prefer taxation; in outlining this argument we contrast it with Nagel’s account sketched above. The concluding section 7.6 then returns to the question of the status of consent and voluntary choice in social policy.

7.2 The Rights of the Indigent With our eye on the recipients of aid, there seem to be two main considerations on the basis of which one might seek to claim the superiority of state aid over that of charities. The first concerns the relation of the destitute to charitable organizations: is there something demeaning, and need there be something demeaning, in seeking for, or receiving, aid from a charitable organization in contrast to the state? The second looks at the relation of the destitute to the state and the state’s lack of activity if the destitute’s needs are being met through charity rather than state activity: are the rights of individuals being violated if the state does not act? If so, what is the ground or basis of these rights directed against the state? Consider the first ground: Is there something problematic in the way that charities interact with their potential beneficiaries? Before one affirms too quickly the charge that charity is inherently demeaning for its targets, note that there are charities which provide benefits to individuals which we don’t tend to think of as humiliating for one to receive. Many academics are grateful to private grant-giving bodies for funding research, or research leave (in the UK most notably the Wellcome

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Trust and the Leverhulme Trust). Few would think it more demeaning to receive these funds from such institutions than from the government. On the other hand, one might point out that, whatever academics may claim, they do not approach the charities out of a bare concern with their own needs—this is a competition where much esteem is associated with the gift of research resource—and the charities in turn do not raise the resource they distribute through these competitions from individual donations. Do these two differences alone explain why in the more general case of charitable aid there should be something demeaning for recipients of charity? One way in which one might seek to tease out the potential problem here is to look to a more informal manner by which the destitute seek to raise funds: begging. For, one might think, it is fairly salient that begging is a demeaning activity for those who engage in it. So, if charities directed at the servicing of needs do no more than provide us with an institutional form of begging, the demeaning status of beggary carries over from the informal activity to the institutional form. More specifically, the concern can be put like this: begging typically involves a beggar demeaning him or herself before a potential donor, offering him or herself as a supplicant. But the institution of charity does not remove this status of being a supplicant for aid, so a destitute recipient of charitable aid may feel him or herself to be in the position of a beggar, and thereby feel demeaned by the exchange. It certainly is plausible to think that there is an essentially demeaning element in begging: that is, that there is something inherently demeaning in having to present oneself as supplicant, and so as socially inferior to the person to whom one begs. In begging one is put in a position of inferiority, so if charity is no more than institutionalized begging, the same may be true of it. And this thought, that charitable handouts necessarily involve social hierarchy, is certainly one of the powerful images behind the idea that the needy have a right to aid, and that it should not merely be a matter of whim on our part to look after them. But however powerful the image is, and however forceful it may have been in criticizing the organization of some charitable associations in, for example, the nineteenth century, it is puzzling why it should be thought to apply of necessity to any aid-giving activity by charities. That is, even if begging is essentially a demeaning activity, the case for thinking of charity as simply institutionalizing the role of supplicant has not been established. An officer of a charity who acts to meet one’s urgent needs, be they housing or subsistence, does not necessarily have to be the person who is making the donation to the charity in the first place; nor are they obviously acting in any way as the officer or representative of that person. Indeed, in direct opposition to this worry about the demeaningness of benevolent aid, one might point out that one of the great advantages of charitable organizations is precisely that they allow the possibility of someone asking for funds through a relatively anonymous functionary. The functionary does not have to pretend to social superiority, and the needy person does not have to act out any social inferiority in putting his or her case.

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Of course, quite consistently with this, one might complain that, as a matter of fact, the charitable organizations we actually have regularly demean or patronize their destitute clients. This is something we think open to dispute;⁵ but there is still a more significant point to note from a philosophical perspective: that there seems no good reason to think that charities have to act in ways which necessarily are demeaning to the individuals to whom aid is offered. Without any argument to show that charities inherently debase their clients, we have no grounds as yet to show that the robust state is necessarily superior to the combination of minimal state and private charity. On the other hand, the idea that there are parallels between the activity of begging and the institutions of charitable aid is one we think should be taken very seriously. Although there are significant contrasts between being the recipient of charitable aid and being a beggar; we will argue in section 7.3 that there equally important similarities between the role of raising funds for a charity, and acting as a beggar. But that anticipates our discussion of the concerns of donors. If the destitute are not essentially demeaned in receiving charitable aid, we need to look to the second ground for supposing a privileged role for taxation: the alleged rights of the destitute against the state. The complaint here seems to be that all the destitute have a right to have their needs met, and the failure of the state to act on behalf of these rights indicates a lack of respect for the destitute, thereby demeaning them. Certainly, the talk of rights and rights violations here have been politically potent, and may encourage us to feel appropriate sentiments of fraternity and outrage at the neglect of fellow humanity. Nonetheless, the line of reasoning which results from these thoughts when one tries to articulate it properly in terms of the rights of the destitute against the state is a puzzling one. The problem here is to understand the precise way in which the needs of the destitute give rise specifically to rights, and moreover do so not against specific individuals, but against the state. Start first with the idea that has moved so many utilitarians, from the radical philosophers of the nineteenth century on, that it is one’s duty to do more good rather than less. Where needs are present at all in the world, there will be overriding demands on us to meet those needs; or at least there will be so given the further empirical assumption that meeting those general needs will promote happiness more than other courses of action. This will get us that each with sufficient resources is under a moral requirement to provide for the destitute. But that is not yet what the argument requires: the argument requires not only that we have a duty to help the poor, which the requirement would establish, but also that in turn the poor have a right against us to have that aid. Even were it true that every right issues in a duty, it certainly does not follow that every duty establishes a right.⁶

⁵ There are, after all, a wide range of charitable bodies, funded in diverse ways and with diverse aims. Many of the housing charities in the UK concerned with the plight of the homeless, for example, display a keen awareness of the power relations involved in offering aid to the destitute. ⁶ And the most notorious of the radicals, Bentham, famously dismissed all talk of right as nonsense on stilts.

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Moreover, the idea that we have an absolute duty to bring about the best result is, to say the least, a controversial one. Among the many who reject this theoretical commitment, it is more commonly accepted that we have instead imperfect duties of benevolence which we owe to the rest of humanity. Rather than saying we are required in every situation to do that which brings about the most good or happiness, many suppose that we simply have a duty to help others in need, and to do good where we can. Duties are imperfect, as opposed to perfect, in as much as there is no way of acting such that in so acting one has discharged exactly what one owes. A perfect duty specifies what it takes to be compliant with that duty, an imperfect duty does not. If duties of benevolence are imperfect duties, then there is no upper, nor any lower bound, on what is required of us in aiding the needy. On this conception of imperfect duties of benevolence, these duties are not typically restricted just to one’s family or the widening circle of interest around one. Rather we recognize that in as much as anyone is in need, they have some claim against us. So, the primary duty of benevolence that we all have is not directed to any one individual. If Mabel or Harry is in need, then one may have a duty to give to either, or to both, but not because one had a more fundamental duty to Mabel to meet her needs, or to Harry to meet his. One has a duty to meet needs where one can, and as it turns out Mabel and Harry both have needs which one can meet. This suggests an asymmetry between agents who have duties for meeting needs on the one hand, and any right that those receiving benefit would have back against them on the other. Given that duties of benevolence are imperfect duties, a person who will benefit from the giving of aid normally does not have a right with respect to any given individual who may meet their need. (Perhaps one should think that within families, such specific rights and duties are generated, but that is not our concern here.) It is not that Harry, deprived of all resources and means of acquiring them through effort, has a right against you, a particular individual, that you should provide for his wellbeing. Or so, typically, we think. Rather we recognize that each of us, and hence all of us, have duties to help Harry and others in their need. We also recognize that probably we could do more than we do, perhaps much, much more, and we can recognize this without necessarily affirming the kind of overriding demands on our actions which Peter Singer, or Peter Unger, insist on.⁷ Even while we recognize that there are duties that we all have towards the poor, there is reason to deny that corresponding to these duties are rights that the poor have against any one individual or against each of us. So, the initial case for insisting that the destitute’s rights have been violated is not established simply by pressing the intuitive thought that there are requirements or duties on us of aid to the needy. What more can be added?

⁷ See e.g. Singer (1993) and Unger (1996). These perspectives notoriously draw on consequentialist considerations to argue for quite surprisingly high demands on each every one of us to redistribute wealth. However, the growing popularity of effective altruism in recent years reflects a different way of thinking how we can all better use resources at hand to make a real difference; see, most notably, MacAskill (2015).

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So far, we have left out of account one essential element of this political argument: that the right in question is not against any one person or group of people, but rather against a distinctive political agent, Leviathan himself, the state. So, the next move is to ask whether there is a way of showing that given the existence of the state, there is thereby an additional right against that entity for welfare, beyond the duties that we all have of benevolence. Rather than assessing all the arguments that one might employ at this point to generate an answer, we want to raise a more general concern about this strategy of argument. Given the absence of rights against people in general, this strategy will be successful only if we can show that there are specific states (or state institutions) against which the destitute have a right that has been violated. But what kind of grounds can be established which show that the destitute have rights against some one specific state as opposed to any other? There is a concern both about generating a sufficiently wide range of destitute individuals as the bearers of rights, and about finding suitable target states as the unique bearers of the corresponding duties. The simplest way of illustrating this worry is to think in contractual terms, as the rhetoric of so many welfare insurance schemes encourages us to. If you have entered into some kind of contract with the state, or the collection of people who make it up, where in return for certain activities (being a good citizen, or member of the workforce, or such like), you have an entitlement to your needs being met, then talk of a specific right makes sense. You may claim that the contract in question grounds the specific claims that you have against others. The contractual image of our relation to the state makes it easy to think in terms of having rights against it. At the same time, the image immediately raises precisely the problems raised above concerning scope of coverage and specificity of target. What counts as entering the contract with a specific state in the first place? How should we characterize a remotely plausible account of the kind of action which could count, at least tacitly, as entering into the contract? Correspondingly, how can we get this picture to apply sufficiently generally to those we think are owed aid? For there are a broad range of people who we think should have their needs met, even if they do not seem to have acted in ways which amount to a contract with the state or other citizens—from new-born babies, to the travelling destitute who pass through a country’s borders, to distant strangers whose geographical distance from us does not deprive them of a claim on our concern. The more concrete we can make the suggestion that someone has entered a contract, the easier it is to make sense of a specific right directed at some particular state. But the cost of this is to exclude many of the destitute of having any such right—being too young, infirm, or fleet of residence to have enacted the contractual bond. So, the more that we press the breadth of needy to be covered, the less clear the fiction of a contract becomes, and with it our grip on the idea of any specific right. That is, one can make good the claim that the rights of some individuals have been ignored, only if one supposes that they bear a special relation to a given state,

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and not to any other social organization, nor to any other state. But, as is notorious in the discussion of political obligation and the social contract, the grounding of such a specific relation to just one state is rather murky. Many more people are affected by the activity of any given state than are candidates to be its citizens. The choices that particular societies make as to who qualifies for the various forms of welfare provided seem to be determined through variable historical factors, and not a general recognition of the rational conditions under which individuals belong within its net of care. While the claims of need of others may be very salient to us, and the duties we all bear to act so as to meet needs are fairly obvious, the right that any individual has to have a need met is rather more obscure. We move from the entirely intuitive thought that there is a moral demand on all of us to meet the needs of the badly off, to the rather more slippery idea that there must be some entity against which the needy have a right. There seems to be no clear theoretical account of how the state institutions which have actually come about do so in a way to give rights against them to the needy. Nor do we have a clear overview of the legitimacy of the state such that were states instituted in such a way then they would bear the duty which would mirror that right. It seems better, then, to recognize the more basic thought that we all as individuals bear an imperfect duty in this realm, without seeking to strengthen it by the additional problematic idea that there is in addition a right. Of course, this is not to demonstrate that individuals don’t have a special relation to the state which grounds a right. What has been thrown into doubt is rather the centrality of any such right in explaining our reaction to the destitute by reference to such a right. It is clear to us that people have a claim on our resources and that this feeds into questions of how social institutions should be organized. It is not clear that people have a right through being needy to demand that social institutions operate one way or another. Although claims of right seem to have a special force in political debate, in our theorizing they bring with them heavy burdens of justification. It would be better if we could explain the appeal of non-minimal systems of taxation without having to rely on such substantial assumptions. Before we rest everything on the existence of such rights, we would do better to look for other, more evident, grounds for preferring a system of redistributive taxation. Can one find another ground for defending the use of taxation? We suggest that it is best at this point to shift our concern from the beneficiaries of welfare distribution to the interests of those from whom resources are claimed either through charitable giving or coercive taxation.

7.3 Begging and Charity Our suggestion will be that those with resources to answer their moral duties to aid the destitute have an interest in the existence of a system of redistributive taxation

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over one where aid is provided solely through charitable action and donation to charities. To develop the case, we need now to turn more focus on one issue which was briefly raised at the outset of section 7.2: the similarities and contrasts between begging and charitable organizations. Typically, acts of begging require the beggar to make him or herself supplicant to another in demand of alms, or more abstractly, resources to meet his or her needs. Where a beggar is successful, the person begged at will act out of charity, and from a motive of benevolence provide something towards the beggar’s manifest needs. It is common to view begging as an activity that is demeaning to both parties, and to think that there are good reasons for societies to organize themselves so as to minimize or eliminate begging as a public activity. Here it is noteworthy to compare and contrast begging with usury and prostitution. In many societies for a long time the provision of money at interest to others was thought to be a shameful activity. It was either officially outlawed or tolerated only for some groups in society who were then treated as engaged in something shameful. For us now, in a society in which the provision of credit is recognized both as a necessity and as a vehicle of economic activity, it is difficult to see how there could be anything inherently wrong in the transactions of money lending, independent of the general attitude to usury. Typically, now we recognize a difference between a morally neutral notion of money lending, and those forms, the activities of the ‘loan sharks’, which involve exploitation or other forms of wrongdoing.⁸ Where money lending is now a central activity of all commerce, prostitution is generally still thought to be a demeaning activity (again for both parties). Yet, while one may find the actual development of prostitution within our society something which requires action to alter, it is not obvious that what is wrong with prostitution can be located in the idea simply of exchanging sexual favours for benefit. That is, even if there is something inherently shameful in prostitution as it has developed in our societies and as it is liable to develop, still that element may not reside essentially in the interaction between prostitute and client. So, it is correspondingly unclear that one would require of the just society that there should be no market in exchange of sexual favours for profit, even if the only such permissible markets would not be what we thought of as traditional prostitution.⁹ In contrast to both of these examples, we want to suggest that there is something about the very act of begging that involves something demeaning for beggar and person begged at. There could not be a society with an institution of begging that did ⁸ For an ambitious survey of the history and varieties of structures of debt and lending, see Graeber (2011). ⁹ Of course, some philosophers have sought to argue that there is something intrinsically wrong in at least female, heterosexual prostitution. But it is difficult to find more in these discussions of the wrong of prostitution than the expression of the social disapproval of the trade; and that may be essential to the social practice of prostitution per se, but not necessarily market labour in sexual favours. See Véronique Munoz-Dardé, ‘The Priest, the Liberal and the Harlot: Liberalism and Sexual Desire’ (in preparation) for a more elaborated discussion of the issues raised here.

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not systematically involve demeaning beggars and those begged at; if not on each occasion (a beggar may feel triumphant in his skills at extracting money; a donor merely indifferent to the display), then still typically or generically. In respect of the beggar, we have already noted one key element in what is problematic here. One aims to gain resources from someone else in begging by calling on their human feeling, their recognition of need, in such a way that the motivational force of feelings of sympathy and benevolence will lead the donor to sufficient a state of emotional distress that giving alms is the only way of relieving this distress, and returning them to equilibrium. In order so to entreat someone, one has to indicate one’s lack of power and resource relative to them. In general, it is not enough for the beggar simply to indicate that he or she has a need. There are, after all, many needs with a claim to be met in the world; and few of us feel that we must devote all our time to meeting these needs. For the beggar to be effective, their needs must be suitably displayed so that the donor both has the keen feeling of lack on the part of the beggar and a sense of their own ability to act so as to make good the lack in a way that no one else is saliently placed to do. In general, to succeed in this, the beggar must present him or herself as socially inferior to the one begged at, since the donor must have the sense in their interaction of possessing power in relation to resources to solve problems which the beggar is incapable of doing. Ironically, perhaps, begging is a worse phenomenon in egalitarian societies than in hierarchical ones. In societies with great social division and hierarchy, in which some are considered very much superior to others, the act of begging itself need not particularly demean the beggar. For in a situation in which the beggar is manifestly socially inferior to the donor, and this is common knowledge, then there is little that the beggar would have to do, other than to display this manifest fact, in order to make their claim on the donor. Conversely, in societies with ideologies concerning the absence of social hierarchy, and with an emphasis on equality of peoples (or at least with an emphasis on how close the different social strata are), then a beggar may well have to make salient their inferiority; and thereby feel more keenly themselves the lowering of their social status through this act. It is so much easier for us to beg from princes than from our fellow subjects or citizens. It should be remarked that over the ages, begging has been heavily regulated and often banned (even if with limited success). Although part of the purpose of outlawing begging may have been a concern with the plight of beggars, at least as important has been a concern with the costs of begging on society at large. Poor laws and other provision for the destitute have often been introduced precisely with the aim of controlling and removing begging from the social sphere. This highlights something that is as important for our purposes as the demeaning feature in begging for beggars: the costly and often demeaning element of begging for those begged at, the potential donors. Why is it costly to be begged at? Note our starting assumption: in general, we all agree that we have duties to meet the needs of the poor and destitute (without, as we have remarked already, any corresponding right); but despite this general agreement, our motivational effectiveness in so giving is variable at best. A beggar cannot

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assume, therefore, that in general simply informing a passer-by of their needs will lead to the necessary donation. As we claimed earlier: if someone is to be effective in begging, they must not only make salient the thought to the donor that they have the resources with which to help them, but also find some way of moving the donor to a motivational state in which they feel the urgent desire to help. In this case, effective begging requires that the donor be manipulated in their emotional responses: moved into a position of feeling distress or guilt such that the act of giving will lessen the distress felt. This kind of manipulation can certainly lead a donor to feel somewhat demeaned in the transaction. Even if one ends up doing something which one feels it right to do, one is also keenly aware that one hasn’t done this just because it was right: one has done it because on this occasion the beggar has stirred one’s emotions such that one acted right now and for the benefit of this individual. One will be liable to view one’s action as not entirely rationally motivated but as having been manipulated through the way in which one’s feelings have been engaged. Some philosophers talk of emotional manipulation as always involving morally inappropriate behaviour, but we do not intend such censure here. We leave open the possibility that there are situations in which emotional manipulation is not wrong. Often in the context of begging, however, such manipulation does leave the donor in a position of having been exploited. And in recognition that the kind of exchange involved in begging will cost the donor in this way (as much as it may also demean the beggar), we have a general reason to seek to expunge such activity from the just society, independent of any further consequences it has on society. Suppose, then, that begging is essentially an unwanted social activity, imposing costs on both beggars and their targets. One way of viewing the activity of many charities (those focused on alleviating the needs of the poor and destitute) is as a substitute for such begging, and one which might remove unwanted elements inherent in begging itself. For example, when we replace individuals’ acts of begging by the operation of charitable organizations, we can thereby lessen the element which is demeaning to the beggar in manifesting one’s claims of need. Since the agent of a charity who acts to meet the indigent’s needs does not have to be convinced beyond appraisal of the facts (already possessing the relevant motivation), and since they are not the person who has property rights in the resources being provided, there is no reason for this agent to present him or herself as socially superior, or the indigent to demonstrate themselves as inferior in the provision of resources. (One should not deny, however, that there remains a considerable cost to people in raising money for charities. Lord Levy makes clear that he was so successful as a fund-raiser in the UK because he did not mind asking for money on behalf of others and was unusual in this characteristic.¹⁰) ¹⁰ ‘I was extraordinarily good at raising badly needed funds . . . most other people in most charitable or voluntary organisations positively detest raising funds. Some are dismissive and cynical about it, preferring to take credit for charitable work, as if any charity could run without the money to fund its good deeds.

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Is there a parallel benefit in relation to the targets of begging through the activity of charities? In general, charitable organizations have resources to provide to the poor only because they raise resources from individual donors. It is for this reason that we can think of charities as a kind of deferred, or intermediate, begging, supplicating the wealthy on behalf of the indigent. The deferral allows for the possibility of removing the need for the destitute to demean themselves to gain rewards, and this indicates a definite advantage of organizing welfare through charities rather than encouraging a market in begging. But does that remove all of the disadvantages manifest in begging? Do charities nonetheless still demean donors in order to gain funds? Charities face a market situation that parallels that of beggars: there are more needs to be met than there are likely to be acts of spontaneous charity by donors. In general, it will not be sufficient to guarantee an income for a charity that it should simply disseminate the information that it has concerning potential clients who are needy. It rather needs to stir the emotions of potential donors to move them to feel the urgency of these needs here and now that will lead to a donation. The shift to vicarious begging can help insulate the needy from the costs of raising funds, but it does little to reduce the costs on their donors. Now the institutionalization of begging in charitable activity certainly alters the impact of the demand on donors. The charity does not have to take the form of a particular individual pressing on a donor. Even if some money raising by charities looks very close to aggressive begging (think of the so-called ‘charity muggers’ that fill the streets of large cities from time to time), it is certainly not essential that money be raised in that manner. So, it is not of the essence of fundraising that it involves manipulation of one individual by another. Nonetheless, in having charities press urgent needs on us we are still faced with certain costs to ourselves. There is the cost simply of acquiring the information of the existence of needs, but in addition there is cost involved in having one’s feelings moved by the plight of others, moved in ways which are intended to increase the return in income for a charity given the campaigns they run. Even if one doesn’t in this case end up feeling that there is some particular individual manipulating one, and hence there need be no occasion of resentment, still one can feel that it would be better for one not to have to have been pressed in this way. Consider some of the costs that are normally imposed on you by the approach of a charity. Some charities, it is true, contact people only where they have antecedent Others are simply uncomfortable with asking for money, particularly approaching their friends or colleagues, or perhaps scared of rejection if they do. Yet I soon found that I was good at it, that I liked doing it, and was—and very much still am—proud of doing it well. At the height of the “cash for peerages” controversy, even media profiles often implied there was something not quite wholesome about it— portraying me as some kind of confidence trickster who would manipulate hapless donors into parting with their cash. [T]hese slightly sneering portrayals missed the absolutely central point about fundraising, why I excelled at it, and why it mattered to me. It is this: having made money for myself . . . my fundraising was for other people, other causes, in which I believed and which simply couldn’t have operated without the contributions I helped to bring in’ (Levy 2008: 79–80).

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reason to believe that the person has an interest in donating to them. The advertising used by such charities is therefore aimed principally at providing the potential donor with the information required for them to do what they already wish to do. Yet much of the advertising and other forms of approach by charities are less discriminating than that. They are intended not only to provide people with information, but also to engender appropriate emotional reactions. As with begging, there is the recognized end of engaging sufficient motivation on the potential donor’s part that they act on the advertising. Like all advertising, charities’ bids for our attention take up our time; also, in being effective, they may well distress us in various ways. Charities can adopt different strategies in attempting to raise money. Compare again the case of beggary: often beggars treat potential donors as one-off targets. In such cases, that there should be lingering resentment at the intrusion and manipulation is of less concern than maximizing the chance of a donation. In other cases, the beggar recognizes the possibility of further funds and so modulates the manner of demand. Charities face the same strategic concerns: for some charitable organizations, the possibility of repeated interaction with a donor requires that the donor think of the charity as being sensible and honest in the demands they make; for others, the urgency of a specific case, and the need to broaden their appeal to the widest possible range of donors requires as intrusive and as emotionally a manipulative campaign as they can manage. In sum, the replacement of casual begging by institutionalized charities leads to a beneficial reform of society. Many of the ills associated with begging, for example, the imposition on the needy to plead their case in a demeaning manner, are, or at least, can be removed in a well-run civil society with a suitable plurality of charities providing for the needs of the poor. But this is not to say that charities abolish all the costs associated with begging. And what our discussion so far has highlighted is how many of the costs on donors of begging remain once we have supplanted begging with institutionalized charity. Thinking clearly about these costs, the costs on donors, bears directly on the question of how reasonable we should find it to be faced with the prospect of providing for the needs of others solely through the activity of charities. Or so we shall now press.

7.4 The Costs of Charity In the societies in which we live, charitable foundations make only a small contribution to the meeting of needs which we all, or pretty much all, agree should be provided for. In some societies, this may just reflect that the provision for the poor is woefully low from both state institutions and private resources. In others, the provision may still be an embarrassment but involves all the same a significant distribution of resources, one that is much higher than charitable organizations have ever had either to raise or distribute. What would occur, then, if we were to turn the raising of resources and their distribution over to such organizations?

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On the one hand, all of us would have much higher levels of personal income to distribute. One should not ignore, perhaps, the pleasures that can come with such greater resources. At the same time, the requirements that charities would have would require them to attract a very high level of donation to meet even the level of provision that we now have for the indigent. The level in question would mean that such charities would have to target the population as a whole with demands, and make their demands at an insistent level. It is not clear whether charities would succeed in raising the required level of funds in such a situation. If that turned out necessarily to be the case, then the argument for taxation would be settled directly. There simply would be no possibility of our moral duties of benevolence being met in a world which contained a minimal state; since the meeting of needs through charity would not be feasible. But let us suppose that they can in fact be met in that way. The question we need to face is how desirable such a circumstance would be, and how that question can bear on the reasonableness of taxation. In such a situation, we suggest, you would be faced by continuous and repeated demands from many charities to provide increasing levels of donation to the causes they pursue. Even if you, as a well-meaning individual who keeps their life in good order, manage to provide a large amount in donations to various charities, still it is likely that you will be bothered in some way or another by further charitable organizations looking to raise their income to meet the demands on them. In such a world, the irritations of the double-glazing salesman, or the mortgage salesman, or the new phone deal, would pale in comparison with the campaigns run by the major charities seeking to meet the needs of the poor. Given this, we suggest that it is reasonable for one to reject a world in which benefit for the poor was collected in this kind of way. Even if a given individual does not find it particularly irksome to be constantly bombarded with demands for donation (perhaps they like the attention), still it would be unreasonable of them to impose what for others would be a great cost, just so that they could have the choice of donating to the needy or not, rather than being compelled to pay through taxation. And this gives our basic explanation of why we should accept the taxation of the many to meet the needs of the poor. On the assumption that we are all committed to there being a scheme which sufficiently distributes resources to the least well-off, our choices will involve a range of options in which distribution happens partly or solely through private charities, and in which funds are raised for state distribution in terms of compulsory taxation. The challenge with which we started was why, given the possibility of meeting these needs through private organizations, we should ever deem it reasonable to suppose funds should be provided through centrally raised taxation. A salient answer to this, we suggest, is that reflection on the kind of world in which charities provide all of the resources for the destitute, imposes emotional and time costs on the rest of us which could be easily avoided through a scheme of redistributive taxation. Even if some prefer always to have the choice whether to give or not, the burden that this imposes on the rest of us makes it unreasonable to insist on having only a minimal state.

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7.5 Self-Indulgence and Reasonable Rejection The account we offer parallels Nagel in focusing on the costs imposed on the many by making contribution to the needy a matter of voluntary contribution rather than coerced taxation. But there are key differences between the two strategies of argument. We think that this strengthens the kind of case that can be made for taxation on the basis of the interests of taxpayers. These are best highlighted through considering the objections to Nagel. There are typically two ripostes to Nagel’s argument. The first, perhaps more empirically directed, focuses on the claims about motivational cost involved in Nagel’s original complaint. As G. A. Cohen puts it: Nagel appears to ignore the individual’s ability to avoid such recurrent difficult voluntary decisions: I can bind my own will, once and for all, or once in a long while, by signing an appropriate banker’s order. I do not need the state to make me give, since, through various contractual devices, I can make myself give. . . . In considering the present question, we must distinguish between the cost of doing something and how difficult it is to do that thing. (Cohen 2000: 171)

That is to say, if my complaint against the lack of a system of coercive taxation is based on the burdens imposed on me, we had better be sure that the burdens in question really are as weighty as Nagel initially suggests. And Cohen’s complaint is in fact that the burden cannot be so great: there are ways of reducing the motivational burden which might otherwise keep you from doing what you would otherwise concede would be the best thing to do. The second, and more theoretical, point is slightly more delicate. Nagel wishes to question whether there could be any duty to make contributions in the absence of a taxation system, given that we do find the motivational costs so high. But, of course, this is intended to be consistent with our recognition of the general moral imperative that the needs of the destitute should be met; after all, it is the recognition of this demand on us which will warrant the system of compulsory taxation as an alternative to the demands of voluntary contribution. This suggests, despite Nagel’s careful avoidance of explicitly articulating any such claim, that he supposes it unreasonable that we should be forced to meet those demands (which we recognize, at least given a taxation system) through voluntary contribution when a taxation system is available, since the costs on one of contribution are so great. And putting Nagel’s point in this way is liable to raise a certain unease (which is presumably why he carefully avoids stating the point in this way). For it seems to rely on a question of cost to oneself as a justification for imposing the costs of a system of coercion on others. And this gives the air, which Cohen exploits, of a certain self-regard or indulgence in the line of thought, a kind of preciousness. In fact, taking that appearance at face value is not at all fair to the basis of Nagel’s position. While it is true that the point can be made in the first person, it is equally forceful when one takes up the point of view of others. Nagel’s point is one about the impositions on us, each in turn.

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But that this is not a question of indulging oneself is all the more salient when we focus not on one’s own motivational resources but the cost that typically will fall on relevant parties. Suppose you yourself are happy to give as much and more as is required of you, the costs avoided by taxation would still be a burden on you. In general, it is true of humanity that many people will not have suitable motivation to provide sufficient resource for charities without intrusive advertising which cannot effectively be selectively targeted. So, we must all be polluted with the attentiongrabbing and emotion-manipulating activities of charities in a society without significant centralized redistribution of resources. In turn, because this clearly is a cost borne by all of us, regardless of how we contribute to the needs of the poor, it is no excuse for someone to say that, in their own twisted way, they enjoy the attentions of charity volunteers as they seek to extract funds. Even if one has a strong preference in one’s own case to have one’s time taken up in this way, and to have one’s emotions so roused, still it would be unreasonable to expect of one’s fellow victims that they should have to put up with this simply because of the pleasure you obtain, or because of the value that you so place, in the opportunity of choosing whether to give the money or not. And this, we suggest, makes the argument immune to a complaint like Cohen’s. Nagel’s own strategy is to emphasize the impossibility of giving enough without a system of taxation. Perhaps Cohen’s riposte is sufficient to show that it is not, strictly speaking, impossible to set up a system without taxation in which people do give enough. Our focus has not been on the impossibility of pure charity, but how unreasonable is the cost it imposes on us. Given human nature, charities would have to be motivationally effective with those that possess suitable resources for redistribution: one way or another, burdens of attention and motivation would be placed on those people. Given the practical inevitability of these costs, the question why they should be imposed is an urgent one. And it is in the light of this that we question the weight that otherwise might be given to a libertarian preference for a minimal state and the right to choose. The strategy here has been to highlight a cost inherent in a system of redistribution provided solely through charitable activity: a burden on those who must exercise their choice in donating charitably. Since such a cost will unavoidably exist, the question arises whether it is unreasonable to insist that this cost be avoided through a system of coercion, the central raising of taxes. And the fundamental claim here is that however much one values the opportunity of choosing whether or not to give to some charitable cause, the insistence that these choices be maximized (i.e. that no necessary meeting of needs be derived from general taxation) is unreasonable in the face of this cost.

7.6 Conclusion The final comment we wish to make relates to this appeal to the reasonableness of requiring all to submit to a requirement and forgoing the possibility of exercising

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choice. It is clear in certain cases of dire need that people should sacrifice their choices where survival depends upon it. For example, imagine a wagon train which has developed haphazardly as it heads out West. At a certain stage, the train passes through dangerous country. If any one of the settlers decides to set out on his or her own and make a bid for freedom and safety back East, then the train will be discovered by hostile forces and the whole company slaughtered. In such a case people find there to be no difficulty in the supposition that no one can insist on their right to choose whether to stay put with the wagon train rather than light out on their own. And here, one might suggest, cooperation and the forsaking of individual choice is a rational requirement of safety. Yet, in the arguments we have been considering, we have not focused on whether it is rational for an agent to insist on choice and to reject taxation, but rather whether it is unreasonable of them to favour choice over such a system.¹¹ That indicates a different and indeed, broader attitude towards the justification or explanation of social principles. Were it irrational not to agree to have a system of redistributive taxation, then any agent, whatever their general interests or principles, however selfish they were, would have a prudential requirement to prefer a society with powers of raising taxes and redistributing wealth. We doubt that one could demonstrate that there is such a prudential requirement. And we have certainly not sought to offer such a case here. At the same time, we also want to question whether we should in political theory be interested in securing such claims in the first place. Is our task one of offering prudential justifications to all rational agents regardless of their moral outlook? Few now suppose that one can get a useful account of the foundations of ethical thought in purely prudential terms, such that one could demonstrate to the wicked but rational that they were acting not only badly but irrationally. Why, then, should we suppose that the purpose of justifying our political institutions is to convince the wicked or amoral of their prudential virtues? Rather than supposing the task to be one of showing why all rational agents have a requirement to affirm the policies of a state, we might rather be interested in understanding why we should take the policies in play to be legitimate. That is, one might focus our concerns on ourselves and people like us who recognize the moral demands on all of us. The duties we bear towards others and our own interests often require us to coordinate our actions with those of others. State institutions are of concern to us not least in the ways in which they may either help or hinder this kind of coordination. Against this background, the point of asking about the legitimacy of the state is to connect its actions to the general ends we all share. The question is, given these general ends, what policies may the state legitimately pursue? We are interested in the question of what kinds of institutions would be just for people like us. And our assumption in this is that such people are, broadly speaking,

¹¹ For this distinction, see Rawls (1993) and Scanlon (1998).

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morally concerned, and recognize and acknowledge the moral claims on them. Such people are not entirely selfish and lacking in any moral scruple. In asking about the justification of political society, we are not principally concerned with the question how we can socialize egoists into moral behaviour. Rather, we are to see the just society as an instrument for meeting our agreed shared ends. For such people as most of us are, it is easy to recognize that there are some moral imperatives and some ends which we can identify in common, and hence to see the context of social policy as one in which we can, at least tacitly, cooperate in the pursuit of these shared goals. It is relative to such sharing and cooperation that we judge people to be reasonable or unreasonable. Against this background we have sought to establish a series of considerations. First, as compelling as the duty to provide for the destitute and needy is, that requirement is obscured if it is first framed in terms of rights possessed by the destitute and needy, not least if that right is supposed to hold not against any group of moral agents, but the state. We do better in our political theorizing if we can start from weaker assumptions. Second, while there is something right in the thought that there can be something demeaning in being supplicant and getting a handout, the key parallel between begging and charity lies not in the costs imposed on the needy, but the costs imposed on donors. Even where charities act as an institutionalized, vicarious form of beggary, they work at best to insulate the needy person from representing him or herself as supplicant, but they do not (after all, how could they?) move away from the need to manipulate the emotions of donors to engage their motivations sufficiently to bring resources to bear. We suggest that it is here that one of the great advantages of a tax system resides: we all avoid the costs associated with having to make the choice, and act on it, of substantial charitable giving. Note that this is not to argue that private charities should be abolished or even that their role should be severely limited. The conclusion we arrive at is, rather, that the privileging of the libertarian’s choice imposes a severe burden on the rest of us, and it is that which renders unreasonable the insistence on a minimal state. We have argued only against the proposition that the burden of meeting the needs of the poor should fall on the shoulders of charitable giving alone. We have resisted the fetishizing of choice that is commonly offered in favour of this position. Of course, the libertarian may feel that this does not really engage their concerns. We have assumed throughout that they can recognize the demand shared by all of us to meet the needs of the destitute. But if, instead, they simply insist that they have no interest in this question, that they have interests which engage them, that the state and other social structures should not hinder the pursuit of these interests, and that the poor can do the best that they can for themselves, then it is not clear why we should be bothering to argue with them in the first place.¹² ¹² This paper was first conceived in the streets of Naples where among its Baroque splendours the opportunities for begging, prostitution, and usury were all too salient. The paper was presented at a

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References Cohen, G. A. (2000). If You Are An Egalitarian, How Come You’re So Rich? Cambridge, MA: Harvard University Press. Esping-Andersen, Gøsta (1990). The Three Worlds of Welfare Capitalism. Cambridge: Polity Press. Graeber, David (2011). Debt: The First 5000 Years. London: Melville House Publishing. Levy, Michael (2008). A Question of Honour: Inside New Labour and the True Story of the Cash for Peerages Scandal. London: Simon and Schuster. MacAskill, William (2015). Doing Good Better: Effective Altruism and a Radical New Way to Make a Difference. London: Guardian Faber Publishing. Nagel, Thomas (1982). ‘Libertarianism without Foundations’, in Jeffrey Paul (ed.), Reading Nozick: Essays on Anarchy, State and Utopia. Oxford: Basil Blackwell, 191–205. Nagel, Thomas (1991). Equality and Partiality. Oxford: Oxford University Press. Murphy, Liam and Nagel, Thomas (2002). The Myth of Ownership: Taxes and Justice. Oxford: Oxford University Press. Rawls, John (1971). A Theory of Justice. Cambridge, MA: Harvard University Press. Rawls, John (1993). Political Liberalism. New York: Columbia University Press. Raz, Joseph (1986). The Morality of Freedom. Oxford: Oxford University Press. Rimlinger, Gaston V. (1966). ‘Welfare Policy and Economic Development: A Comparative Historical Perspective’, The Journal of Economic History 26(4): 556–71. Scanlon, Thomas [T. M.] (1976). ‘Nozick on Rights, Liberty, and Property’, Philosophy & Public Affairs 6(1): 3–25. Scanlon, T. M. (1998). What We Owe To Each Other. Cambridge, MA: Harvard University Press. Scanlon, T. M. (2018). Why Does Inequality Matter? Oxford: Oxford University Press. Singer, Peter (1993). Practical Ethics [second edition]. Cambridge: Cambridge University Press. Smith, Joan (1998). ‘Youth Homelessness in the UK: A European Perspective’, Habitat International 23(1): 63–77. Unger, Peter (1996). Living High and Letting Die. New York: Oxford University Press.

workshop on taxation organized by the think tank Policy Exchange in November 2006; a conference on Philosophy and Taxation, organized by the ESRC Preference Elicitation Group in November 2007; and graduate seminars at the University of Berkeley and the University of London. The authors are grateful to the audiences of those occasions for comments and questions. We thank the editors and reader for Oxford University Press for their helpful directions too. Regarding the title of this paper, the Oxford English Dictionary defines ‘beggar-my-neighbour’ as ‘a simple game at cards often played by children’; Wikipedia notes: ‘The game was probably invented in Britain and has been known there since at least the 1840s. It appears in Charles Dickens’s 1861 novel Great Expectations, as the only card game Pip, the book’s protagonist, as a child seems to know how to play.’

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PART II

Tax Policy and Forms of Taxation: Philosophical Issues

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8 The Case for a Progressive Benefits Tax Barbara H. Fried

8.1 The State as Market Actor At first cut, the question whether we should take the preferences of taxpayers into account in deciding how tax revenues are raised and spent seems hardly worth asking. Of course we should, and in a democracy we automatically will, in the same fashion that we take citizen preferences over most other governmental affairs into account: by deferring to a majority (or in some cases, supermajority) vote of their elected representatives. What more is there to say? There are a lot of other things to say, of course. The issue I want to pursue here is whether a majoritarian, or even supermajoritarian, decision rule is the appropriate one to use for determining fiscal policy. All constitutional democracies take certain categories of decisions out of the hands of voters and their elected officials, and turn them over to the unilateral control of individuals likely to be most affected by the outcome. There are a host of reasons why this might be thought a good idea, but most of them fall into one of two camps: because decentralized decision-making will lead to better outcomes for society at large (the welfarist argument), or because it gives individuals control over decisions that are thought to trench on individual entitlements (the rights-as-trumps argument). In the case of fiscal policy, both arguments have been marshaled to support replacing a majoritarian decision rule with some mechanism that tracks preferences at the individual level (hereinafter, “devolution”). Not surprisingly, however, the two camps seek to harness information about individual preferences over public goods to different ends. Public finance theorists have focused on the role such information could play in determining optimal output levels of public goods. In contrast, political philosophers— and in particular libertarians on the right—have focused on its role in the just distribution of whatever aggregate tax burden is necessary to finance public goods. Starting with the Hobbesian/Lockean premise that the just state exists solely to provide public goods that private markets undersupply, libertarians have argued that

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the state should limit its functions to solving that problem, and not use its taxing powers for other ends—in particular, the redistribution of wealth. That view implies a quid pro quo relationship between the taxpayer and the state, in which each individual’s tax burden functions as the shadow price for the public goods he or she actually wants and gets from the government. Tax schemes that peg an individual’s tax rates to the benefits he or she derives from publicly provided goods are generally referred to as “benefits taxation.” Efforts over the years to read into the US Constitution any constraints on the government’s taxing powers have gotten nowhere, as American courts, even in the heyday of laissez-faire constitutionalism, have been highly deferential to legislative determinations about fiscal policy. This is true not only of challenges from the right to redistributive policies (e.g., rent control and progressive taxation), based on the government’s claimed violation of property rights, but also challenges from the left (Michelman 1969; Cashin 1999) that seek to read into the constitution an affirmative obligation on the part of the government to aid the poor. As a consequence, arguments for the distributional fairness of benefits taxation have largely been the province of libertarian-minded political theorists, although in recent decades they have found a surprisingly receptive audience among US voters.¹ While the term “benefits taxation” is associated solely with the libertarian right, the constructivist, social contractarian literature on the left has developed its own version of a fair price for social cooperation (Rawls’s being the most famous example). I start by summarizing the welfarist arguments for using individual-level demand for public goods to set the optimal level of production, as it is an important backdrop to the distributional issue. But my ultimate interest is in the distributional issue—that is, in the case for pegging individual tax rates to the benefits individuals derive from public goods. In that regard, I argue the following. (1) Determining a just price for public goods runs into many of the same difficulties that arise in determining a just price in private exchanges, and for the same reasons. While ‘just price’ suggests a search for a price that is substantively fair, most commentators ultimately conclude that the answer to that question turns on a procedural question: Whether the parties (would have) ‘voluntarily’ accepted the terms of the exchange. ¹ In the US, tax protest movements have scored a number of notable electoral victories over the past thirty years, including state-wide referenda constitutionally limiting tax rates and imposing supermajority voting rules to increase taxes or pass bond measures (e.g., California’s Proposition 13). Most of these measures have not been cast as “class-based” issues, appealing instead to a more widespread dissatisfaction with the government. There are some notable exceptions at the federal level, however. The steady decline in top federal income tax rates over the past forty years, and the significant rollback in the estate tax in 2001, have been justified in part as a matter of fairness to the wealthy (see Hall and Rabushka 1985). That justification has played surprisingly well with the median voter. (See Graetz and Shapiro 2005 on the politics of the estate tax repeal.) Indeed, the repeated failure of median voters in the US to vote to ‘soak the rich,’ as public choice theory predicts they will do in their own self-interest, has been one of the perennial mysteries of US tax politics and policy.

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(2) In evaluating voluntariness in the context of private contracts, most commentators have gone minimalist: provided that the other side has done nothing illegal to constrain the background set of choices, we treat consent as presumptively voluntary. In evaluating it in the context of a hypothetical social contract for public goods, in contrast, almost all have gone maximalist, arguing that a properly moralized bargain among would-be citizens would have to enlarge and/or constrict the exit options people face in the real world, in a number of respects. (3) Depending on the idealized exit options the parties are endowed with, almost any taxes-for-public-goods scheme that anyone has seriously entertained, from complete equality of outcomes at one end to a head tax to finance the minimal public goods supplied by the nightwatchman state at the other, could be described as a voluntary (and hence ‘just’) price for benefits received. (4) In arguing that a just price for public goods implies proportional or even regressive tax rates, benefits tax proponents on the right have assumed an idealized market for government services, in which the parties face almost none of the constraints on exit that substantially limit their bargaining power in the real world. In particular, parties are assumed to be able to unbundle explicit public goods from the location-specific social capital that a particular jurisdiction affords. The result of that unbundling is to strip the US and other developed countries of a very important source of bargaining power they actually enjoy in setting tax rates in the real world: The ability to leverage the considerable social and economic advantages of living in a particular geographic area in order to charge the wealthy much more for the right to live there than the cost of producing the explicit public goods they consume. (5) The same benefits tax proponents who have argued for a maximalist approach to the taxes-for-public-goods social contract have been the strongest advocates of a minimalist approach to fairness in private contracts. Whether that irony is apparent or real depends on whether the markets for private and public goods are analogous in normatively relevant ways. I will suggest they are—or, at least, much more alike than benefits tax proponents implicitly assume.

8.2 The Welfarist Case for the State as Market-Mimicking Actor Most social welfarist arguments for harnessing devolution to set output levels for public goods trace back to Charles Tiebout’s famous 1956 article, “A Pure Theory of Local Expenditures.” In general, the market is presumed to be the most efficient mechanism for determining output of goods and services and allocating them among consumers

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based on strength of preference. True public goods are an exception. One of the defining properties of such goods—that they are non-excludible, making it technologically infeasible to deny (nonpaying) users access to them—guarantees that they will always be undersupplied by the private market (Samuelson 1954: 387–9).² Only the government can solve that free-rider problem, because only the government can compel payment (via taxation) to finance the provision of public goods. But the government’s advantage in solving the free-rider problem on the revenue side does not obviate the informational advantages of the private market in setting output levels for public goods. The ideal solution from a welfarist perspective would be for the government to mimic the market in setting output levels for public goods and then use its compulsory powers of taxation to extract the funds needed to pay for them (Schwinn 2005). The former task, however, requires a mechanism in lieu of market exchange to force citizens to reveal the prices they would be willing to pay for different levels of the various public goods on offer. Starting with the pioneering work of Richard Musgrave and Paul Samuelson in the 1950s, public finance theorists generally assumed that no such mechanism could exist because of the same free-rider problem that forced the government into the business of supplying public goods in the first place: If citizens thought that their tax rates would be pegged to their consumption preferences over public goods, they would understate their true preferences, since— however little they contributed—they could not be excluded from unlimited consumption of whatever public goods were produced. Lacking any mechanism to force taxpayers to reveal their true preferences, governments therefore had to rely instead on the imperfect mechanism of politics. Politics, it was conventionally assumed, would reflect the preferences of the median voter, resulting in half the population ending up with more public services than it was willing to pay the cost of, and the other half with fewer (see Bergstrom and Goodman 1973; Wildasin 1986). That conventional wisdom prevailed until Tiebout’s seminal article. Largely unnoticed when it was first published, the article became a focal point of academic debate after it was resurrected by Wallace Oates in 1969.³ Tiebout’s article was, in a ² A standard definition of public goods—and the one adopted by Samuelson—requires that they exhibit not only “nonexcludibility” but “non-rivalrous consumption” as well. Noting that the latter requirement would exclude highways, police protection, and many other traditional public expenditures, Tiebout and other economists opted for the broader definition that requires only nonexcludibility. Given that what public finance theorists most care about is the allocative efficiency of government expenditures, an even broader definition is arguably appropriate here: all goods and services that are provided free of a user charge by the government, whether they could have been (or are) provided by the private market as well. ³ The failure of the Tieboutian argument to penetrate academic consciousness prior to Oates’s revival is evident in Hirschman (1969: 33, 76, 121). Hirschman, in framing the trade-offs between exit and voice as a mechanism for disciplining institutions, took it for granted that exit was “very nearly unavailable” in basic social organizations such as the family, the state, and the church, leaving voice as the only option for members to register their dissatisfaction. Hirschman, it is true, was concerned primarily with disciplining lazy (slack) producers—a problem not even acknowledged as a possibility in neoclassical economic models, which presupposed (in Hirschman’s terms) a “taut [market] economy.” Public finance theorists like

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sense, a friendly amendment to the conventional view that governments could not ascertain efficient output levels for public goods. While leaving that view unchallenged at the national level, Tiebout argued that a very different mechanism might operate at the local level to produce much more encouraging outcomes. Tiebout’s basic intuition was simple—so simple, really, that it is hard to see in retrospect how it could ever have been overlooked. He argued, in effect, that economists had failed to find a market mechanism at work in the public sector because they were looking for it in the wrong place. They were looking for something that would force the given citizenry of a given jurisdiction to disclose their true preferences over public goods, measured by their willingness to pay—in Albert Hirschman’s famous terms, they were looking for “voice.” If, instead, they had focused on the process by which each citizen chooses her place of residence in the first instance, they would have realized that an alternative mechanism already existed. In choosing among different jurisdictions offering different packages of taxes-for-public-goods, each citizen was in effect voting with her feet for the package that came closest to meeting her true preferences—in Hirschman’s terms, she was voting by “exit.” In Tiebout’s world, jurisdictions thus function as a kind of public goods club, which bundles together various public services and then puts the entire bundle on offer to potential members (would-be residents). Each individual accepts a particular club’s taxes-for-publicgoods package by moving to the jurisdiction (and once there, staying put). Assuming an infinite variety of taxes-for-public-goods packages on offer, zero costs of relocation, perfect information on the part of consumers/voters and no externalities between communities, each consumer should be able to secure his or her optimal bundle of public goods at each governmental level, simply by choosing to establish residence in the polity in which it is on offer.⁴ Indeed, as one commentator noted, in the world of perfect Tieboutian sorting, we would have no reason to limit ourselves to the existing menu of vertical options (federal, state, and city governments, in the case of the US). We could in theory ensure that all services were unbundled, allowing each to be optimized separately, by having a “custom-tailored government . . . [to] match [ . . . ] each collective purpose” (Donahue 1997a: 73). In the real world, of course, none of these assumptions holds perfectly. To the extent they don’t, almost everyone will have to settle for a package that is suboptimal from their perspective (more public art or public transit than they want, not enough invested in quality public schools or public parks, etc.). The question is whether Tiebout, in contrast, assumed a “taut economy” in the private market realm, and sought a mechanism to mimic that result in the market for public goods. But for present purposes, that distinction is immaterial. The Tieboutian argument, if known to Hirschman, would have been an important qualification to his assumption that voice was the only mechanism for registering disapproval with the government. ⁴ This is a claim about optimization of consumption efficiency, not optimization of social welfare. The former implies the latter only if (inter alia) perfect Tieboutian sorting doesn’t inflict other sorts of social costs, such as the loss of positive peer effects. (See Summers and Wolfe 1977; Arnott and Rowse 1987; Brueckner and Lee 1989.)

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competition functions well enough to approximate an efficient market. In Tiebout’s model, the answer essentially boils down to whether a given resident of a given jurisdiction has adequate exit options, such that when she chooses to stay put, we are confident she is not just choosing the best of a bad lot of alternative packages on offer. Thus, Tiebout’s model made two important contributions to the public finance literature. The first was to show that voting was not the only way for citizens to register preferences over public goods. With any degree of mobility among (horizontal) jurisdictions, citizens’ power to exit one jurisdiction for another functions much as consumer choice does in the private market. It devolves decision-making to the individual level, allowing each citizen (and not just the median voter) to optimize his or her preferences. As Donahue (1997a: 73) put it, perfect Tieboutian sorting presents a vision of a world in which “every citizen can stage a personal revolution armed only with a moving van.” The second contribution of Tiebout’s model was to suggest that at the local level, where mobility is fairly high, we might be able to come much closer to the optimal provision of public goods than previously thought. That possibility has important practical implications in the US, where a substantial percentage of government expenditures are made at the state and local level,⁵ as well as in other countries (e.g., Canada and Switzerland) that have federal systems that devolve a significant portion of fiscal power to local governments (see Ross and Yinger 1999). In the past four decades, the Tieboutian model has given rise to an enormous body of empirical work on the extent of interjurisdictional sorting in the US, as well as debates over whether that sorting has triggered a “race to the bottom” or a “race to the top” in various areas of government responsibility, including regulation of corporations, tax rates, welfare reform, and environmental regulation (see Brown and Oates 1987; Ross and Yinger 1999: 205–6). Although Tiebout focused on competition between local governmental units, horizontal competition among jurisdictions could theoretically operate at any governmental level. But as an empirical matter, exit is likely to get more costly as one moves up the hierarchy of jurisdictions. Tiebout assumed that in the US, the option of exit was, practically speaking, nonexistent at the federal level. In the case of individual citizens—the focus of Tiebout’s article—that assumption is not unreasonable. For most people in the US, immigration to another country is often legally unavailable (entry, not exit, is the problem here) and prohibitively costly because of all one leaves behind: family connections, friends, job, linguistic fluency, cultural familiarity, and so on. But if one extends the Tiebout model to corporations and other business entities, the picture looks quite different. It is essentially costless for many businesses to move their legal residence from one state, or even one country, to another. As a result, not surprisingly we observe ⁵ At the time of Tiebout’s article, roughly half of non-defense governmental expenditures were at the state or local level (see Fischel 2006: xiv). Since then, the relative size of state and local governmental expenditures (not including defense) has, if anything, increased.

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wide-scale jurisdiction shopping by businesses, resulting in substantial tax and regulatory competition between jurisdictions to attract them (Donahue 1997b: Appendix). In assessing the effects of interjurisdictional competition, Tiebout confined his attention to allocative efficiency, ignoring distributional consequences. That choice did not reflect indifference on his part to distributional issues, but rather the conventional view that efficiency and equity were analytically and institutionally separable issues, and should be treated separately. As Musgrave (1956) had argued, the sensible division of labor is for the government to focus solely on allocative efficiency in determining output levels, and to address distributional issues on the tax side in choosing between benefits taxation and some version of “ability to pay” to allocate the total tax burden necessary to finance total output. But as many quickly recognized, jurisdictional competition at the local level was likely to push local governments not just towards efficient output but also towards some version of benefits taxation to finance it. Since the demand for public goods is positively correlated with income, if citizens distribute themselves among jurisdictions based on their desired level of public goods, they will automatically end up sorting by income class as well. In addition, wealthy residents wishing to help that sorting along could do so through the visible hand of zoning laws. By mandating minimum lot size and setbacks, maximum number of bedrooms, aesthetic requirements for buildings, and so on, local governments could set a high floor on the cost of residents’ housing consumption per family member, and hence on their wealth (see Hamilton 1975; Fischel 1995). Wealthy communities had the incentive to use their zoning powers in such a fashion in order to solve what was, from the perspective of their richer residents, two different forms of market failure: poorer residents freeriding on the higher level of public goods provided in rich communities (“fiscal zoning”); and dilution of the positive externalities from resident characteristics that are believed to correlate positively with income level and to enhance the value of local services financed by the tax base (prepared and highly motivated students, lawabiding residents, similar aesthetic tastes, etc.). At the extreme, Tieboutian sorting pointed to a world of “high income communities walled off by zoning ordinances that effectively prevent entry by low-income households” (Oates 2006: 41). In short, competition among local governments was predicted to yield a market for public goods that mimicked the private market not just in allocative efficiency, but in distributional effects as well. With perfect sorting, residents would pay only for the local public services they actually wanted, at a price that reflected the average or marginal cost of providing them—that is, what most people mean by a benefits tax. Even with imperfect sorting, however, it has been widely assumed that the possibility of exit precludes significant redistribution at the local level. As a result, the conventional wisdom post-Tiebout is that in a federal system, ambitious redistributive programs have to be pushed up to the highest governmental level (in the US, the federal government), from which exit is assumed to be costly. Local governments, constrained by market forces from doing any extensive redistribution, should instead

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concentrate on what they can do best: the efficient provision of public goods (Stigler 1957; Brown and Oates 1987; Musgrave and Musgrave 1989). Most empirical tests of the Tiebout hypothesis over the past thirty years have found significant Tieboutian sorting among individual taxpayers where the model predicts it is most likely to occur: in major metropolitan areas comprising numerous separate jurisdictions in close proximity. In such geographical areas, it can be relatively costless to optimize on one’s preferred public goods package, because of the possibility of changing legal residence without having to change job, friends, and so on (see Dowding, John, and Biggs 1994; Mueller 2003: 199–202). In the US, sorting produced by jurisdictional competition is even more pronounced in the case of medium-sized and large corporations, many of which can change their legal residence and place of operations relatively costlessly to minimize state tax and regulatory burdens.⁶ While there is some evidence that Tieboutian sorting increases efficiency in the production of public goods, it is highly unlikely that it has produced anything close to an optimal result from the perspective of overall social welfare. There are myriad issues here, explored in detail in the massive local public finance literature Tiebout’s article spawned (see Ross and Yinger 1999: 2042–9). Some concern dimensions of social welfare left out of the Tiebout model in its single-minded focus on achieving efficient output levels for public goods. To take one much-discussed example, the homogeneity that Tieboutian sorting produces, while it could conceivably optimize productive efficiency, imposes other social costs, including the loss of positive peer effects that could arise in more heterogeneous communities (Summers and Wolfe 1977; Arnott and Rowse 1987; Brueckner and Lee 1989; Schwab and Oates 1991). Others concern the real-world obstacles to perfect Tieboutian sorting: the existence of interjurisdictional externalities; the fact that the property tax base that localities use to fund public goods does not directly track residents’ differential consumption tastes or the differential use they make of public goods; and various constraints on mobility. Constraints on mobility are particularly important here. In thinking about the forces that would keep someone in a given jurisdiction notwithstanding a more attractive taxes-for-public-goods package on offer elsewhere, Tiebout principally

⁶ For traditional corporations doing business in multiple states, apportioning income among the various states for state tax purposes is a complicated affair. Some states use allocation formulas that track functional operations; others rely on very formalistic tests. In either case, however, most interstate corporations can (and do) arrange their operations so as to minimize their aggregate state tax burden, at a minimal cost. For the new generation of IP-driven companies, optimizing locational choice for tax purposes is even cheaper, since under existing tax laws, income from ‘intellectual property’ is sourced to the jurisdiction in which the corporation holding title to the intellectual property is incorporated, within the US or outside of it. For both traditional corporations and IP-driven ones, minimizing regulatory burdens is generally costless, as many regulatory burdens track the formal state of incorporation of the corporation— an absolutely costless choice. Hence the “Delaware effect” in the US, where most corporations are incorporated in Delaware, wherever they are actually doing business, so as to take advantage of Delaware’s corporation-friendly regulatory system.

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had in mind the transactions costs of relocation (the costs of moving, finding a new job or enduring a longer commute, etc.). But many of the factors that keep people from moving could more accurately be described as the location-specific social capital a place of residence affords: family, friends, cultural opportunities, economic ties, aesthetics, a sense of place, and so on. Residents contemplating exiting (or entering) a given jurisdiction cannot unbundle its taxes-for-public-goods deal from its location-specific social capital: it is a take-it-or-leave-it package deal. This reality not only undercuts efficient output of public goods; it also has important distributional implications, as it gives jurisdictions leverage to extract the value of that location-specific social capital in the price they charge for explicit public goods. The rich are the only ones in a position to pay significant amounts to obtain or retain social capital. That reality suggests that if jurisdictions use their bargaining leverage to the hilt, the result will be a rate structure that price-discriminates on the basis of income—that is, a progressive tax structure. This result depends on (the subjective value of) location-specific social capital increasing faster than income. It is hard to guess a priori whether it does. Wealth may bring much greater mobility (the financial means to commute long distances; comparable job opportunities in other locations; less emotional attachment to immediate neighborhood, etc.), which would, all other things being equal, reduce a locality’s bargaining leverage. On the other hand, it may bring less mobility, to the extent that desirable jobs are disproportionately clustered in high-tax metropolitan areas or the marginal disutility of taxes decreases as taxpayers’ income increases. Assuming that (the value of ) location-specific social capital increases at a faster rate than income, the normative argument that benefits taxation implies proportional or even regressive tax rates assumes that jurisdictions ought not to be allowed to use the bargaining leverage they get from location-specific social capital to pricediscriminate against the wealthy. There may be an argument to be made to that effect, but it needs to be made, and, I will suggest, is not so easy to make. I turn to these issues now.

8.3 The State as Market-Mimicking Actor for Distributional Purposes As stated at the outset, the underlying normative assumption behind benefits taxation is that the state is in a quid pro quo relationship with each taxpayer, in which each individual’s tax burden functions as the shadow price for the public goods he or she actually wants and gets from the government. Recognizing that the state cannot arrange for those payments through voluntary agreements because of the same freerider problems that necessitated the creation of the state in the first place, all libertarians (other than the most radical anarcho-libertarians) acknowledge that the state has the right to extract them through compulsory taxation. But, they

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argue, consistent with the limited rationale for creating the state in the first place, the state should set each individual’s tax rates at a just price for the benefits she, individually, derives from public goods. In short, the state should mimic the behavior of the private market not just in deciding what public goods to provide (the efficiency concern that we allocate collective resources to their highest and best use) but also in deciding how to divide the costs of providing them among its citizens (the distributional concern). Here, we immediately run into a difficulty: What exactly is a ‘just price’ for goods or services?

8.3.1 The private market In the context of private contracts for goods or services, most of the efforts to give substantive content to the notion of a ‘just price’ have come from those whose political sympathies are on the left—most famously in the (socialist) labor theory of value, but also from the anti-monopoly movement and other Progressive critiques of “economic rents” that were ascendant in the late nineteenth and early twentieth centuries (see Fried 1998: 108–59). In contrast, most free-market liberals and libertarians have dismissed the search for a “just price” as analytically incoherent and/or morally unpersuasive. Beyond a very narrow exception for ‘extortionate’ pricing of essential goods and services, a just price, they have argued, is whatever price happens to result from a bargain fairly entered into.⁷ Anglo-American contract law has largely followed suit. In the US, while the Uniform Commercial Code gives courts broad discretion to police the substantive fairness of individual contracts, with a very few exceptions courts have declined to exercise that power.⁸ Legislatures, enjoying even wider latitude to regulate contracts, have stepped in only sparingly to mandate ‘fair terms’ ex ante, generally in sectors of the economy thought to face some sort of systemic market failure (e.g., urban housing markets, public utilities, consumer insurance contracts). Instead, courts and legislatures have focused on the procedural fairness of the deal—in particular, on ensuring that consent was given knowingly and voluntarily. If the court concludes it was, then the substantive terms of the contract will generally ⁷ “Essential” has been strictly construed in the legal and philosophical literature, and the sorts of nightmare scenarios that drive even die-hard free market libertarians to balk at letting the free market set the price are rare. Rescue services and food and water essential for survival are standard exceptions here (Nozick 1969: 449–50; Nozick 1974: 179–80). Different rationales have been offered for deferring to the workings of the free market. Some have defended the sanctity of whatever price results from a voluntary exchange on the grounds that it is a necessary byproduct of freedoms independently worth protecting. In Nozick’s case, the relevant freedom is the freedom of the buyer to give away her money to whomever she wishes. In Hayek’s case, it is the freedom of the seller of goods and services to “use his knowledge for his own purposes” (Hayek 1973: 69). Others have defended the price itself as just, because it rewards all individuals in accordance with their marginal product—that is, with the value they have bestowed on others. For a discussion of John Bates Clark, a prime expositor of this view, see Fried (1998: 131). ⁸ The relevant provision here is UCC }2-302 (dealing with unconscionability): https://www.law.cornell. edu/ucc/2/2-302.

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be upheld. While the kinds of ignorance and mistake that suffice to void a contract have been debated at length in the legal and philosophical literature, for the most part the parameters of that debate—if not the appropriate resolution—are clear. Not so with voluntariness. The word suggests that what we are looking for is a showing of volition, meaning that the parties consciously chose to bind themselves to the terms of the agreement. But aside from relatively rare cases involving direct physical compulsion that deprives an individual of all choice or mental incapacity that prevents her from making a meaningful choice, volition in this sense is never in doubt. When people describe an agreement as involuntary or “coerced,” they generally mean something else entirely: that people are driven to assent to the offered terms because all of their other options are even worse. Consider the classic example of duress in the common law. A gunman offers his victim the choice of ‘your money or your life.’ As Oliver Wendell Holmes, Jr., famously argued, when the victim opts for the first alternative, he does not lack volition in the narrow sense. He had a choice, and he knowingly and deliberately chose the former. Indeed, the worse the alternative on offer (‘your life’), the more eagerly he will embrace the former.⁹ If there is a reason not to hold him to that choice—and everyone will surely agree there is—it lies instead in the intuition that the victim was entitled to a better set of choices. Holmes’s reformulation of the problem a century ago has become the standard point of departure for analyses of coercion in the legal and philosophical literature. While Holmes’s reformulation forces us to ask the right question—is there some problem with the set of background choices a person is given?—it doesn’t itself point to an answer. All choices are constrained by available alternatives, and available alternatives are always limited. In that sense, one could describe every agreement as coerced (on both sides) by the fact that all other available options were even worse (see Hale 1923). When should those constraints lead us to conclude that the agreement is “coerced” in a moral or legal sense, and hence unenforceable? The free-market libertarian response has been, ‘almost never,’ and once again, Anglo-American contract law has by and large followed free-market instincts here. Everyone would make an exception for bargains in which one side has constrained the other’s background options through illegal means.¹⁰ This takes care of Holmes’s gunman. It is true that his victim had a choice, albeit between two bad alternatives. But by law, the victim had a right to a third and better alternative, which the gunman wrongly took from him: to keep both his money and his life. Similarly, it takes care of agreements extorted through blackmail. But it doesn’t touch the standard commercial ⁹ Union Pacific R. Co. v. Public Service Comm’n, 248 U.S. 67, 70 (1918): https://supreme.justia.com/ cases/federal/us/248/67/. ¹⁰ Making an exception for terms extorted through illegal threats arguably just pushes the moral difficulties down a level, to the decision what to declare illegal. But here, unlike the concept of coercion itself, we have a well-developed set of norms to fall back on and moral intuitions to support them. There are hard cases, of course. Blackmail is one: the norms and moral intuitions against it are clear, but the logical justification for those intuitions has proved more elusive.

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contract, in which the constraints on the next best alternative available to each party are imposed by the natural, social, and legal world (the market, property rights, personal endowments, tastes, etc.) without any help from the other side. In short, we are generally not permitted to put the other side over a barrel ourselves. But if we come upon the other side already over a barrel through no fault of our own, we are generally entitled to exploit any bargaining advantage their misfortune might give us.¹¹ Thus, in the context of private agreements, the law, like the free market libertarian, has resisted importuning from the left either to police the substantive fairness of contract terms or to inquire whether the options available to the parties were sufficiently robust that we should attribute moral agency to their assent. With very few exceptions, both have treated each party’s available alternatives, however unappealing they might be as an absolute matter, as a morally neutral fact, and have treated any agreement reached against the backdrop of those alternatives as, in Nozick’s famous phrase (1974: 163), a “capitalist act [ . . . ] between consenting adults.”

8.3.2 The market for public goods When it comes to assessing the fairness of the taxes-for-social-cooperation deal between the state and its citizens, however, political theorists of all stripes have gone maximalist. Right libertarians, who have been the most skeptical that courts and legislatures should police the substantive or procedural fairness of private exchanges, have been the strongest advocates of the notion that there is a ‘just price’ for public goods (Buchanan and Tullock 1962; Nozick 1974; Buchanan 1984; Epstein 1985). Some political theorists have sought to deduce a substantively ‘just price’ directly from the relative or absolute market values of public goods and private contributions. Notable examples include (on the right) Richard Epstein’s argument for setting tax rates to achieve a “proportionate division of the social surplus” ¹¹ In the legal context, the difficult cases at the border typically involve situations in which, partway through performance of a contract, one side, lacking any viable exit options, finds itself facing a demand for much more than the original contract price. The most straightforward example concerns contract modifications extracted by one side under threat of breach. The cases have proved problematic, because the threat of breach is halfway between legally and illegally obtained monopoly power. In American contract law, parties are generally free to breach, provided they pay damages to make the other side whole (instantiating the Holmesian view of a contract as a promise in the alternative). They are also free to agree to modify the terms of their deal at any time. But modifications extracted by one side under threat of breach have on occasion been thrown out as coercive. The best explanation of the intuition here, I think, is something like the following. When we agree to be bound by a contract, we agree to forego all alternative deals we might have entered. Where, having forgone all other alternatives at the time of signing the contract, party A cannot easily recapture them should party B breach, B thereby obtains transitory monopoly power over A. While B did not obtain that power through illegal means, B did play a critical role in generating it. In such cases, courts will sometimes balk at allowing B to exploit its monopoly power by threatening not to perform unless A agrees to new terms that are more favorable to B. Other examples concern contracts in which there is a defect in performance on one side, which can be remedied only at enormous cost, because work already completed must be undone and then redone. Where the defect is trivial, the party that has received defective performance is in a position to extort a large amount of money from the other side, by threatening to force the breacher to undo and redo the work unless a large settlement is paid.

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(Epstein 1986: 49; see Fried 1999: 172–81) and (on the left) left-libertarians’ arguments for setting tax rates to appropriate anything in excess of the product of a sharply curtailed notion of self-ownership (Vallentyne and Steiner 2000; see Fried 2004). Others have argued that a substantively just price is whatever price happens to result from a fairly constructed social contract (see Fried 2003). The two approaches are, in any given theorist’s hands, typically two routes to the same end, each resting on the same normative presuppositions. Since I am interested here in the underlying logic of the devolution argument (that is, the argument that individual tax burdens ought to track the individual preferences of taxpayers), I will focus on the latter here—the constructivist, social contractarian derivations of a ‘just’ tax scheme. In Gregory Kavka’s words (1986: 200), the implicit aim of any social contractarian thought experiment is to “understand [ . . . ] the State as an artifact created and chosen by independent individuals.” In other words, social contractarian justifications for the state are, at root, an exercise in hypothetical devolution at the level of the broad social compact. The implicit question to be answered, then, is: What arrangements would all the members of a given state have voluntarily agreed to, under fair bargaining conditions, and given normal human motivations? The answer is, it depends in the first instance on the alternatives available to them. The taxes-for-public-goods deal that the US offers Bill Gates looks pretty good from Bill Gates’s perspective if the only other choice is whatever deal he can get from Iraq. On the other hand, it looks a lot worse when compared to the deal he could get if he were able to legally secede from the US costlessly and then have his newly created tax haven of Gatesiana (a one-square-mile duchy in the middle of the State of Washington) negotiate separately with the US, in a hypothetical competitive market, for every public good it needs. So the question is, what set of imaginary exit options is Bill Gates entitled to? To guarantee that the terms of the bargain are not “essentially ‘rigged’ by a political society that creates in us the very reason we use to choose it” (Hampton 1988: 271), social contractarians would insist that the parties be at liberty to walk away from the bargain if they so choose. At a minimum, that would require us to suppress, or at the very least closely interrogate, any state-imposed restrictions on exit. But this requirement is relatively modest and easily met (and perfectly consistent with a ‘minimalist’ approach to policing contracts). Most social contractarians have concluded that something more is required to give consent moral force. This is hardly surprising, as any other conclusion would pretty much put them out of a job, since it leads directly to the conclusion that whatever is, is just, provided that when they choose to stay put, citizens are legally free to leave (see Fried 2003: 47–8). To put it another way, the purpose of undertaking the social contractarian thought experiment in the first place is to improve on whatever outcomes the push and pull of history happens to have produced at any given moment in time. Social contractarians on the left—at least when focusing on the obligations of the wealthy to their fellow citizens—have generally argued for making exit more difficult

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than it is in real life, leading to the conclusion that the fortunate would consent to a deal much less favorable to them than what they currently have in most societies. Rawls’s argument is illustrative in this regard. Rawls constrains socially available exit options in two ways. He does so directly, by treating every society as closed—that is, by forbidding external exit. (He does, however, leave on the table the possibility of internal exit from the deal, through shirking/substitution of leisure for labor, the threat of which leads him to abandon strict equality or strict prioritarianism in favor of the difference principle.) And, in a kind of belt-and-suspenders operation, he does so indirectly, by stripping each individual of knowledge as to whether she is (or is likely to become) a member of the class of the more fortunate. The latter amendment illustrates the importance of Tiebout’s stipulation that proper (Tieboutian) sorting requires knowledge of one’s exit options. Tiebout was focused on knowledge of the options themselves. In contrast, Rawls’s target in imposing a thick veil of ignorance is knowledge of the value those options have to one’s self in particular. But the two forms of ignorance are just different routes to the same end: the fortunate lack a selfinterested motive to threaten exit in order to extract a larger share of the surplus from social cooperation if they stay put. Having thereby reduced each bargainer’s socially available options to two—reach unanimous agreement on a “general scheme of cooperation” with the bargainers who are now at the table or do without a state entirely—Rawls (1971: 103) concludes that the fortunate, ignorant of their good fortune, would find it in their self-interest to sign on to his highly redistributive difference principle as the better of the two alternatives.¹² But, as Nozick (1974: 193) pointedly remarked, if that conclusion is plausible at all, it is only because Rawls has limited his bargainers to those two choices. If Rawls were forced to expand the menu of available options to include “less extensive schemes of partitioned social cooperation in which the better endowed cooperate only among themselves and the worst endowed cooperate only among themselves,” then the better-endowed group could extract the lion’s share of the benefits from a scheme of general cooperation simply by threatening to leave the bargaining table and opt instead for partitioned social cooperation.¹³ Nozick’s rejoinder presupposes that the fortunate could self-segregate relatively costlessly—that is, that each could stage a Tieboutian “one-man revolution armed only with a moving van.” But just as exit is generally not impossible in the real world, contra Rawls, it is also generally not costless, contra Nozick. To get to the Nozickean result, therefore, social contractarians on the right have to amend the realistic bargaining situation in the opposite direction: to insist that a ‘fair’ bargaining situation requires us to suppress various natural and social factors that make exit costly in the

¹² Rawls abandoned this argument in the revised edition of A Theory of Justice, in favor of a vaguer appeal to the injustice of rewarding “the more fortunate twice over” (1999: 88). ¹³ Nozick here is equating the “better-endowed group” with those who can be expected to “accomplish something of great economic advantage to others” Nozick (1974: 193).

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real world. This includes the transactions costs of relocation that Tiebout was concerned with (search costs to identify a superior tax-and-benefits package and locate a new job, new house, etc., as well as the out-of-pocket costs of relocation). But it also includes the positive benefits of staying put (familiarity with one’s surroundings, proximity to family, friends, cultural, social, and work opportunities, etc.) James Buchanan’s argument in “The Ethical Limits of Taxation” (1984) is illustrative in this regard. Buchanan proposes suppressing real-life constraints on exit in two respects. The first is to suppress “the potential barriers to political secession that would be imposed by the costs of organizing coalitions.” That ‘correction’ pushes the hypothetical bargain in the direction of Tiebout’s limit case, where we can costlessly sort ourselves into homogeneous groups based on preferences about consumption of public goods, thereby obtaining our optimal taxes-for-public-goods package. The second is to give citizens the option of “internal exit.” Buchanan means by this that individuals should be imagined to have the capacity to secede from one polity and form a new one without actually having to physically move, which would necessitate their giving up whatever location-specific non-public goods their actual place of residence affords. That is to say, he endows individuals with the imaginary option of Gatesiana. His two corrections to realistic markets for public goods yield Buchanan the opposite conclusion from Rawls: the taxes-for-public-goods bargains actually on offer in most modern societies compel the fortunate to pay more than their fair share for political membership.

8.4 What Imaginary Alternatives are we Entitled To? If the outcome of any social contractarian thought experiment is determined in substantial part by the alternatives imagined to be available to the parties should they fail to reach agreement, defending any particular outcome requires defending the exit options with which the parties are endowed. This is true whether exit options are enlarged (as proponents of a benefits tax would have us do) or constricted (as Rawlsians would have us do) from what they would typically be in most contemporary, reasonably well-ordered societies. Since I am focusing on the case for benefits taxation, I will concentrate on possible arguments for enlarging them. Some of the things that keep people put are path-dependent—that is, they are a function of where they start in life. If Alix were moving to the US with no ties to any particular location, she might choose to live in Chicago, all things considered. But she was born and raised in Cincinnati, and her preference for living in Chicago over Cincinnati is not great enough to entice her to give up family and friends, job, attachment to old haunts, and so on, and go through the hassle and expense of moving there. Other factors that tie people to a given location inhere in the intrinsic attractions of the place itself (cultural, social, and work opportunities, ambiance, aesthetics, weather, proximity to recreational areas, etc.).

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In either case, to the extent that such benefits are tied to staying put in a particular geographic area, they are bundled in with the taxes-for-public-goods deal in whatever jurisdiction encompasses that area. For places like Manhattan that have significant location-specific attractions for many people, the fact that those attractions cannot be unbundled from legal residence means that the local taxing jurisdiction that contains Manhattan (New York City) is in the position of a de facto monopolist: it has the market power to set tax rates high enough to extract the entire surplus value of living in Manhattan rather than, say, Newark or whatever other place represents Manhattanites’ next best alternative. Writ large, the same is true of the choice to live in the US rather than another country, which explains why the top one percent of the income distribution in the US has not upped and moved en masse to the Cayman Islands, the Bahamas, or any other tax haven. In contrast, places like Detroit or Alabama, whose location-specific attributes are unlikely to give them a comparative advantage in attracting or retaining most residents, will probably have to set tax rates pretty close to the average or marginal cost of explicit public goods in order to be competitive. To attract residents who generate positive externalities for the community (e.g., industry and other businesses that boost employment), they may have to reduce the tax rate to zero or even lower. (To put it another way, residents who bestow positive externalities on the community can act as monopsonists, offsetting the tax price they would normally be charged for the public goods they consume with the surplus value they generate for the community.) So the question facing benefits tax proponents is this: If the state is morally required to peg taxes to the shadow market price of the ‘goods’ that each taxpayer gets in return, of the many markets that we observe in the real world of jurisdictional competition, which is the right market to use as a benchmark? The market in which jurisdictions have the bargaining leverage to set tax rates high enough to extract a significant portion of the location-specific surplus value their residents derive from living there (Manhattan)? The market in which some potential residents have the bargaining leverage to get public goods for free or even be paid to move there (businesses contemplating moving to Alabama)? Or the market faced by localities (say, Cincinnati) that possess average intrinsic attractiveness to potential citizens, and are therefore limited to charging a competitive market price for explicit public goods, equal to the average or marginal cost of producing them? As I suggested in section 8.3.2, benefits tax proponents on the right have opted for an idealized market that approximates the last of these alternatives. That is, they would have us imagine a world of perfect Tieboutian sorting, in which explicit public goods are disaggregated from all other location-specific values, limiting jurisdictions’ de facto taxing power to the price each could command for the public goods on offer in a well-functioning, transactions-costless, competitive market.¹⁴ The question is, ¹⁴ Whether benefits theorists would permit taxpayers to pay less than that (viz., Alabama) is a separate question. I assume most benefits theorists would say yes.

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what justifies that choice? What exactly is wrong with letting a polity exercise its monopoly power via the normal political process to offer a public goods/tax package that expropriates some or all of its locational value? Why can’t New York City charge whatever premium the market will pay for living in New York City? If it is generally permissible for private parties to exploit their locational and other advantages in pricing goods or services (e.g., the premium charged by the only gas station for forty miles around, or by Gucci in leveraging its snob appeal to price goods at many times the cost of producing them and many times the price of identical knock-offs), why is it not permissible for the state to do the same? One obvious answer concerns the greater degree of monopoly power exercised by the state than by private producers. That difference, however, is easily overstated. Many of the impediments to a perfectly competitive market in public goods (search costs, imperfect information, externalities, a paucity of attractive alternatives) have analogues in the private market, causing people to settle for a “voluntary” exchange that is suboptimal from their point of view. And on the other side, even when exit from a jurisdiction is very costly, the rich have another valuable exit option available to constrain tax rates: substituting leisure for work. As a practical matter, the threat of exit from the labor force may, at the margin, be as powerful a constraint on the majority’s taxing powers as the threat of exit from the taxing jurisdiction. But this is not to deny that even in free societies, people typically have fewer feasible options when shopping for a country of residence than when choosing among goods or services in the private market. Is that difference in degree great enough to constitute a difference in kind, such that we are justified in controlling the (tax) price of membership in a given polity where we would not seek to control the price of private exchanges? If so, what shadow market do we envision in setting that price? Ought we to treat locational advantages that come from (say) the costs of relocation differently from locational advantages attributable to the intrinsic attractions of a particular community? These are hard questions. But I think there are powerful reasons to reject the answer implicitly given by benefits tax proponents on the right: in pricing public goods, we should assume a jurisdictional market with zero exit costs, and hence perfect Tieboutian sorting. As I have argued in prior work (Fried 2003), benefits tax proponents’ willingness to assume away any de facto constraints on exit is hard to reconcile with their commitment to a minimal state with limited obligations to ameliorate its citizens’ social, biological, or historical circumstances. In addition, their choice of which constraints on exit to assume away and which to take as given seems morally arbitrary. Until proponents of benefits taxation can explain how they get from general libertarian principles to this particular idealized market for public goods, a commitment to benefits taxation gives us no reason to reject progressive taxation, or indeed almost any tax scheme, including whatever happens to result at any given time from the various market forces actually in play in interjurisdictional competition.

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There is an additional, more fundamental, question that has to be answered if one accepts the conventional (libertarian) conception of a benefits tax: What counts as a public good (benefit) for which the state can rightly charge? In general, proponents of benefits taxation have equated public goods with goods financed by the government, and up until this point I have assumed this definition. But I believe it is much too narrow a conception. Many of the reasons people value living in a particular community have to do with its built social and physical environment: norms of civility and trust, cultural institutions, good restaurants, job opportunities, transportation and housing infrastructure, architecture, good teachers, skilled doctors, well-functioning hospitals, and all the other working parts that go into making a city, state, or country a place that works, a place in which people want to live.¹⁵ Some of these working parts can be traced back to public expenditures in the form of exemptions for nonprofits, tax credits, or cash expenditures. But the larger share comes from social capital built up by the private, interdependent actions of residents and local businesses over many generations. That is why the wealthy, who typically make no use of the most expensive public goods (public schools, mass transportation, public hospitals) are nonetheless willing to pay a very high (tax) price to live in Manhattan, Chicago, London, Paris, and so on. Why shouldn’t the members of a polity who have collectively generated and maintained its social capital be entitled to charge for the right to enjoy it, along with the explicit public goods that the jurisdiction supplies? And if the unique value of its social capital gives a polity quasi-monopolistic power, why shouldn’t its members be free to price discriminate, setting membership fees in accordance with a means-tested sliding scale? After all, no one is forcing anyone to move to Manhattan or forbidding anyone from leaving. From a libertarian perspective, what more is required to justify charging whatever the market will bear?

Bibliography Arnott, R. and Rowse, J. (1987), “Peer Group Effects and Educational Attainment,” Journal of Public Economics 6: 409–23. Bergstrom, T. and Goodman, R. (1973), “Private Demands for Public Goods,” American Economic Review 63: 280–96. Brown, C. and Oates, W. (1987), “Assistance to the Poor,” Journal of Public Economics 32: 307–30. Brueckner, K. and Lee, K. (1989), “Club Theory with a Peer Group Effect,” Regional Science and Urban Economics 19: 399–420. Buchanan, J. (1984), “The Ethical Limits of Taxation,” The Scandinavian Journal of Economics 86: 102–14. Buchanan, J. and Tullock, G. (1962), The Calculus of Consent (Michigan University Press).

¹⁵ I am grateful to Shepley Orr for pushing me on this point.

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Cashin, S. (1999), “Federalism, Welfare Reform, and the Minority Poor: Accounting for the Tyranny of State Majorities,” Columbia Law Review 99: 552–627. Donahue, J. (1997a), “Tiebout? or Not Tiebout? The Market Metaphor and America’s Devolution Debate,” Journal of Economic Perspectives 11: 73–81. Donahue, J. (1997b), Disunited States (Basic Books). Dowding, K., John, P., and Biggs, S. (1994), “Tiebout: A Survey of the Empirical Literature,” Urban Studies 3: 767–97. Epstein, R. (1985), Takings (Harvard University Press). Epstein, R. (1986), “Taxation in a Lockean World,” Social Policy and Philosophy 4: 49–74. Fischel, W. (1995), Regulatory Takings: Law, Economics and Politics (Harvard University Press). Fischel, W. (ed.) (2006), The Tiebout Model at Fifty (Lincoln Institute of Land Policy). Ford, R. (1999), “Law’s Territory (A History of Jurisdiction),” Michigan Law Review 97: 843–930. Fried, B. (1998), The Progressive Assault on Laissez Faire (Harvard University Press). Fried, B. (1999), “The Puzzling Case for Proportionate Taxation,” Chapman Law Review 2: 157–95. Fried, B. (2003), “ ‘If You Don’t Like It, Leave It’: The Construction of Exit Options in Social Contractarian Arguments,” Philosophy and Public Affairs 31: 40–70. Fried, B. (2004), “Left-Libertarianism: A Review Essay,” Philosophy and Public Affairs 32: 66–92. Graetz, M. and Shapiro, I. (2005), Death By a Thousand Cuts (Princeton University Press). Hale, R. (1923), “Coercion and Distribution in a Supposedly Noncoercive State,” Political Science Quarterly 38: 470–8. Hall, R. and Rabushka, A. (1985), The Flat Tax (Hoover Institution Press). Hamilton, B. (1975), “Zoning and Property Taxation in a System of Local Governments,” Urban Studies 12: 205–11. Hampton, J. (1988), Hobbes and the Social Contract (Cambridge University Press). Hayek, F. (1973), Law, Legislation and Liberty (Routledge & Kegan Paul). Hirschman, A. (1969), Exit, Voice, and Loyalty (Harvard University Press). Kavka, G. (1986), Hobbesian Moral and Political Theory (Princeton University Press). Michelman, F. (1969), “On Protecting the Poor through the Fourteenth Amendment,” Harvard Law Review 83: 7–59. Mueller, D. (2003), Public Choice III (Cambridge University Press). Musgrave, R. (1956), “A Multiple Theory of Budget Determination,” Public Finance Analysis 17: 333–43. Musgrave, R. and Musgrave, P. (1989), Public Finance in Theory and Practice (McGraw-Hill). Nozick, R. (1969), “Coercion,” in S. Morgenbesser, P. Suppes, and M. White (eds.), Philosophy, Science, and Method: Essays in Honor of Ernest Nagel, 440–72 (St. Martin’s Press). Nozick, R. (1974), Anarchy, State, and Utopia (Basic Books). Oates, W. (1969), “The Effects of Property Taxes and Local Public Spending on Property Values: An Empirical Study of Tax Capitalization and the Tiebout Hypothesis,” Journal of Political Economy 77: 957–71. Oates, W. (2006), “The Many Faces of the Tiebout Model,” in W. A. Fischel (ed.), The Tiebout Model at Fifty, 21–45 (Lincoln Institute of Land Policy). Rawls, J. (1971), A Theory of Justice (Harvard University Press). Rawls, J. (1999), A Theory of Justice [rev. edn.] (Harvard University Press).

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Ross, S. and Yinger, J. (1999), “Sorting and Voting: A Review of the Literature on Urban Public Finance,” in P. Cheshire and E. S. Mills (eds.), Handbook of Regional and Urban Economics, Vol. 3, 2001–60 (Elsevier Science). Samuelson, P. (1954), “The Pure Theory of Public Expenditure,” Review of Economics and Statistics 36: 387–9. Schwab, R. and Oates, W. (1991), “Community Composition and the Provision of Local Public Goods: A Normative Analysis,” Journal of Public Economics 44: 217–37. Schwinn, S. (2005), “Toward a More Expansive Welfare Devolution Debate,” Lewis & Clark Law Review 9: 311–46. Stigler, G. (1957), “The Tenable Range of Functions of Local Government,” reprinted in W. Oates (ed.), The Economics of Fiscal Federalism and Local Finance (1998) (Edward Elgar). Summers, A. and Wolfe, B. (1977), “Do Schools Make a Difference?” American Economic Review 67: 639–52. Tiebout, C. (1956), “A Pure Theory of Local Expenditures,” Journal of Political Economy 64: 416–24. Vallentyne, P. and Steiner, H. (eds.) (2000), Left-Libertarianism and Its Critics (Palgrave Macmillan). Wildasin, D. (1986), Urban Public Finance (Harwood Academic Publishers).

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9 Moral Objections to Inheritance Tax Stuart White

9.1 Introduction In his influential Capital in the Twenty-First Century, Thomas Piketty argues that there is an inherent tendency in capitalist societies for wealth to grow in relation to national income.¹ This tends to push up the share of capital in national income, which in turn, given the highly unequal distribution of capital, exerts upward pressure on income inequality. At the same time, the same underlying dynamic tends to increase the share of wealth that is inherited. Left to itself, therefore, a capitalist society can all too easily evolve so that more and more income goes to holders of capital, where this capital is very unequally held and increasingly reflects the effects of inheritance rather than individual effort: a very unequal, rentier society. These dynamics are not fate, however. In particular, tax and social policy can play an important role in mitigating or preventing the emergence of such a society. One obvious tax instrument, of course, is the taxation of inherited wealth itself. Why not tax such wealth and spread it around? While this might seem an obvious response, taxation of inherited wealth is unpopular in affluent capitalist democracies such as Britain and the USA.² The tax is opposed resolutely (perhaps more resolutely)

¹ See Thomas Piketty, Capital in the Twenty-First Century, trans. Arthur Goldhammer (Cambridge, MA: Harvard University Press, 2014), especially pp. 377–429. According to Piketty, the key variables are the rate of economic growth (g) and the rate of return on capital (r). Empirically, r tends to be greater than g. This exerts upward pressure on the ratio of capital to income and, in turn, on capital’s share of national income. In addition, if r exceeds g, it is then ‘all but inevitable that inheritance . . . predominates over saving. . . . wealth originating in the past grows more rapidly, even without labor, than wealth stemming from work, which can be saved’ (Piketty, Capital, 278), so that an increasing share of capital becomes inherited wealth. ² See the Fabian Society Commission on Taxation and Citizenship, Paying for Progress: A New Politics of Tax for Public Spending (London: Fabian Society, 2000), p. 55, Table 2.5, reporting that 51% of those polled thought that ‘no inheritances should be taxed’. See also Miranda Lewis and Stuart White, ‘Inheritance Tax: What do the People Think? Evidence from Deliberative Workshops’, in Will Paxton and Stuart White with

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by those who are least likely to pay it.³ Opposition to the tax tends to be articulated in moral terms.⁴ It is widely felt that this type of tax is distinctively unfair.⁵ In this paper I aim to tease out some of the main moral objections to the tax. Responding to the objections, I shall show that the moral case for inheritance tax (hereafter, IHT) is much stronger than critics allege. I begin in section 9.2 with some preliminary remarks on what I mean by IHT and by a ‘moral objection’ to the tax. Since it is important in considering the moral objections to the tax to know something of the arguments that are used to support it, section 9.3 then introduces some of these arguments appealing to considerations of tax justice, equality of opportunity, and political equality. Sections 9.4–9.7 then respectively consider four moral objections to IHT: the double tax objection (section 9.4); the equity objection (section 9.5); the virtue objection (section 9.6); and what I term the wrong problem objection (section 9.7). Section 9.8 offers some conclusions.

9.2 Some Definitions I use the term ‘inheritance tax’ in this paper to refer to any tax mechanism that seeks to tax the transfer of wealth across the generations including (but not necessarily exclusively) wealth transferred at death. This can be done in various ways. First, as at present in the UK, tax can be placed on estates at death, the level of the tax varying with the size of the estate. Gifts that take place within a certain number of years before death might also be included as part of the estate. An alternative is to tax not the amount that is given away at death, but to tax the amount that people receive. Thus, if a large estate is broken up into lots of small amounts, the tax paid would depend not on the size of the estate, but on how big each particular inheritance is. Moreover, this approach can be taken further in two ways. First, such a tax can apply not only to inheritance but to gifts. Second, the tax can be based not only on how much someone receives in a particular inheritance or gift, but also on how much they have already received in these ways. At the limit, this points towards a lifetime capital receipts tax, in which people might be able to receive wealth by gift or inheritance up to some threshold lifetime amount, and then pay tax, perhaps at an increasing rate, on all gifts and inheritances above this threshold. This paper does not seek to defend any specific form of IHT, but it will be helpful in the course of

Dominic Maxwell, eds., The Citizen’s Stake: Exploring the Future of Universal Asset Policies (Bristol: Policy Press, 2006), pp. 15–36. ³ Polls such as that conducted by the Fabian Society tend to show higher levels of opposition among less affluent socio-economic groups. Though the sample size is extremely small, Lewis and White’s study using focus groups found a similar pattern of opposition. ⁴ See Lewis and White, ‘Inheritance Tax: What do the People Think?’ ⁵ Unfairness and moral wrongness are not identical terms, of course, but I work here on the assumption that they are typically coterminous in this debate.

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the discussion to take note of the basic distinction between an estate tax and a capital receipts tax. The term ‘moral objection’ to IHT is used in this paper to refer to objections which focus on the alleged intrinsic fairness of the tax independent of its incentive effects. Clearly, any overall evaluation of IHT has to take into account the possible impact that such a tax might have on incentives to work and save. However, much of the opposition to IHT seems to be driven by considerations of moral wrong and fairness that have nothing to do with the supposed impact of the tax on economic behaviour and outcomes. My aim in this paper is to clarify and consider these objections. For the record, I should add that the force of the incentives-based objections is unclear. Economic theory gives no clear prediction as to how such a tax will affect saving and/ or work, and the relevant empirical research has not shown conclusively that there are substantial negative effects.⁶ Doubtless there is some level of IHT which will have detrimental incentive effects, but there is much uncertainty as to what level this is, and those who think there is something morally wrong with there being any IHT, as many do, cannot base their opposition plausibly on such alleged effects. Rather, they think there is something morally wrong with IHT per se, independent of these supposed effects, and it is this claim with which this paper engages.

9.3 Why Inheritance Tax? Before turning to the moral objections to IHT, it may help to clarify the main arguments for some form of IHT. Here I outline three such arguments, the tax justice, equal opportunity, and political equality arguments. Let’s begin with the argument from tax justice. By ‘tax justice’, I mean fairness in the distribution of the tax burden.⁷ One basic thought is this: If someone receives a significant sum, say £300,000, from earnings, and this is subject to taxation, then why should someone who receives the same sum as a wealth transfer, such as an inheritance, not also pay tax? The objection is well stated by Liam Murphy and Thomas Nagel: Looked at in this light, the idea that a large gratuitous receipt should not be taxed seems absurd: It would mean that the person who works, gives up leisure, and contributes to economic life

⁶ See Douglas Holtz-Eakin, ‘The Uneasy Empirical Case for Abolishing the Estate Tax’, Tax Law Review 51, 1996, pp. 495–515. ⁷ Here I follow Liam Murphy and Thomas Nagel, The Myth of Ownership (Oxford: Oxford University Press, 2001). All too easily, talk of tax justice tacitly assumes the essential justice of the free market distribution of income and wealth and then asks how the pain or burden of taxation can be fairly extracted from people’s pre-tax entitlements. It is, however, a mistake to regard the tax system as external to entitlement in this way. Principles of social justice, such as the principle of equality of opportunity, provide guidance as to how to design the tax system. When taxes are such as to satisfy these principles of social justice, people are entitled to what they get under the resulting tax system. Tax, set at a just level, helps to define entitlement rather than being an imposition on a pre-tax entitlement.

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must share in society’s collective burdens, while the person who gains a windfall without doing anything need not.⁸

There are in fact two distinct objections here. One objection is that the failure to tax inheritances (and other wealth transfers) creates what tax economists call a ‘horizontal inequity’. It means that there is an arbitrary inequality in the way citizens are treated for tax purposes depending on whether they get transfers from others as earnings or as gifts and inheritances. The second objection is that the failure to tax inheritances (and other wealth transfers) means that the tax system penalizes relatively virtuous behaviour. Somebody who works and contributes to the social good in this way is doing something virtuous. Somebody who just receives an inheritance or gift is not, as such, doing anything virtuous. But the former person, who is clearly doing something virtuous, pays tax, while the latter person, who is not doing anything virtuous merely in their capacity as a receiver of a gift or inheritance, does not pay tax. How is this fair? A second argument for IHT appeals to the value of equal opportunity. By ‘equality of opportunity’ I mean something like this: two children of equal natural ability should have equal chances to develop and benefit from their skills regardless of the social background of their family.⁹ Now wealth confers opportunity in the relevant sense. A person with more wealth has greater opportunity to set up a business, to purchase further and higher education, to undertake unpaid internships so as to get a first step into an area of work, or to travel and make connections and gain inspiration, and so on.¹⁰ Of course, this does not necessarily mean that he or she will have greater overall opportunity in the relevant sense. For it is conceivable that inequalities in wealth inheritances might, say, compensate for inequalities in educational opportunity or some other unequally distributed asset. However, if inheritance is correlated with other advantages, inheritance tax can be seen as a way of neutralizing inequality in wealth inheritances so as to secure greater equality of opportunity. In the UK, a 2005 study found some evidence that likelihood and size of inheritance correlates with social class.¹¹ A more recent study by researchers at the Institute for Fiscal Studies concluded that while people in younger generations are more likely to receive an inheritance than in the past, the distribution of inherited wealth is likely to be very

⁸ Murphy and Nagel, Myth of Ownership, p. 147. ⁹ Here I roughly follow John Rawls, A Theory of Justice [revised edition] (Cambridge, MA: Harvard University Press, 1999), p. 63. ¹⁰ For relevant theoretical and empirical work on how financial inheritance can affect opportunities for business formation, see Karla Hoff, ‘Market Failures and the Distribution of Wealth: A Perspective From the Economics of Information’, in Samuel Bowles and Herbert Gintis, with Erik Olin Wright, eds., Recasting Egalitarianism (London: Verso, 1998), pp. 332–57, and David Blanchflower and Andrew Oswald, ‘What Makes an Entrepreneur?’, Journal of Labor Economics 16, 1998, pp. 26–60. ¹¹ See Karen Rowlingson and Stephen McKay, Attitudes to Inheritance in Britain (Bristol: Policy Press, 2005). The report on which the book is based can also be downloaded from: https://www.jrf.org.uk/ report/attitudes-inheritance-britain.

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unequal and to correlate with income.¹² As noted in section 9.1, Piketty’s Capital in the Twenty-First Century argues that in the absence of corrective public policy wealth inequality is likely to increase in future decades with inherited wealth accounting for a growing share of this wealth: a picture of a society in which economic opportunity is increasingly dependent on inherited wealth.¹³ On the face of it, it looks as if inheritance tax promotes equality of opportunity in a purely negative or ‘levelling down’ way, by taking wealth and opportunity from those who stand to inherit large amounts. The first thing to say in response to this is that it is important to distinguish between levelling down in the space of wealth and in the space of opportunity. If an individual’s absolute level of opportunity depends on relative wealth, then mere levelling down of inherited wealth will expand the opportunity of those who would otherwise be at a greater disadvantage in terms of inherited wealth. For example, imagine three people—Alf, Betty, and Carl—who all want a career in journalism. The three have similar abilities, but Betty and Carl use inheritances to finance periods of unpaid internship work which enable them to get valuable work experience and so gain a clear edge over Alf when the three compete for a given job. Imagine now that Betty and Carl do not have these inheritances. The three will now compete on a more level playing field for the available jobs. Alf might still not get a job, or the job he most wants. But there is a clear sense in which he has more opportunity to get a particular job than in the case where Betty and Carl use their inheritances to get a competitive advantage over him.¹⁴ Much also depends here on the precise form of the inheritance tax and on what other policies it is combined with. For example, under a lifetime capital receipts tax even a very large estate will pass to others without any tax if the donor transfers the wealth to a large number of people who have not yet received much wealth in this way. For this reason, some argue that it can be expected to have not only a ‘levelling down’ effect with respect to inherited wealth (preventing the emergence of large inherited fortunes) but a ‘levelling up’ effect on inherited wealth (promoting a wide dispersion of modest inheritances).

¹² See Andrew Hood and Robert Joyce, Inheritances and Inequality across and within Generations (London: Institute for Fiscal Studies, 2017), available at: https://www.ifs.org.uk/uploads/publications/bns/ bn192.pdf. ¹³ Piketty, Capital, especially pp. 377–429. Piketty shows that the flow of inherited wealth as a share of national income fell in the twentieth century in France, the UK, and Germany, but has rebounded somewhat since 1980. Piketty also finds that the distribution of inherited wealth in France is less unequal today than in the nineteenth century due to the rise of a ‘patrimonial middle class’, but nevertheless remains highly unequal. Piketty estimates that about one sixth of the cohort born in 2010–20 will inherit a sum at least equal to the lifetime earnings of those in the bottom 50% of earners, and he points out that this group of low-earners ‘largely coincides with the half of the population that inherits next to nothing’ (Piketty, Capital, p. 421). ¹⁴ Alf has more opportunity in the sense that he has a higher probability of getting any particular job in competition with Betty and Carl than in the world where they are able to use inheritances to gain a competitive edge over him.

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Second, we should distinguish between inheritance as an isolated policy, and inheritance tax as one side of what we may call a citizens’ inheritance scheme.¹⁵ We are used to thinking in terms of a familial model of inheritance: we organize the transfer of wealth across the generations via networks of family and friends. But one can also imagine a model of socialized inheritance in which the community takes (some) wealth left on a person’s death and uses it to finance the payment of a capital grant to everyone on maturity (or at birth, or at some other point or points in life). Again, under this model there is both a ‘levelling down’ and a ‘levelling up’ quality to the overall policy with respect to inherited wealth. A third argument relevant to IHT concerns political equality. There are numerous ways in which wealth can be used to influence political decision-making in a capitalist democracy, and large-scale inheritance can potentially create a situation in which effective political power becomes skewed towards particular, very wealthy families, so contradicting basic democratic principles. The distributional mechanisms just set out can also be seen as ways of securing political equality against this danger, as well as equality of opportunity.¹⁶

9.4 The Double Tax Objection Perhaps the most frequent moral objection to IHT is that it is unfair because it is a ‘double tax’: DOUBLE TAX OBJECTION:

It is unfair for someone who has already paid tax on an income to then have to pay a second tax on assets which have been saved out of the already-taxed income.

What can be said in reply to this objection? Here I note some of the possible replies.¹⁷ The double tax objection seems to suppose that IHT falls on the same person who has previously paid tax on income from which he or she has made some savings which he or she is now passing on to another as an inheritance. But if IHT is a capital receipts tax, this assumption obviously doesn’t hold.¹⁸ The tax is paid by the recipient, not by the donor. So how can the tax be a second tax of the donor?

¹⁵ See Bruce Ackerman and Anne Alstott, The Stakeholder Society (New Haven, CT: Yale University Press, 1999), and Thomas Paine, Agrarian Justice, in Michael Foot and Isaac Kramnick, eds., The Thomas Paine Reader (Harmondsworth: Penguin, 1987 [1797]), pp. 471–89. See also Cedric Sandford, Taxing Personal Wealth (London: Allen & Unwin, 1971); David Nissan and Julian Le Grand, A Capital Idea: StartUp Grants for Young People (London: Fabian Society, 2000); and Paxton and White with Maxwell, eds., The Citizen’s Stake. ¹⁶ Along with equality of opportunity, this consideration is emphasized by Rawls in terms of maintaining the ‘fair value of the political liberties’. See Rawls, Theory of Justice, pp. 245–6 and pp. xiv–xv. ¹⁷ For further helpful discussion, see Martin O’Neill, ‘Death and Taxes’, New Statesman online, 8 October 2007, available at: https://www.newstatesman.com/politics/2007/10/inheritance-tax-iht-death. ¹⁸ On this and the following point, see also Ruth Patrick and Michael Jacobs, Wealth’s Fair Measure: The Reform of Inheritance Tax (London: Fabian Society, 2003), p. 9.

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To come at the point another way, consider the following Plumber Case: The Plumber Case: I earn £x on which I pay some tax. I now employ Jones as a plumber to fix a pipe in my kitchen. I pay her £y for this, and she pays a tax on this £y. Does the fact that the plumber pays tax on a transfer she got from me, a transfer out of income which had already been taxed, make this a case of double taxation? It seems implausible to say so. But structurally the case does not seem significantly different to the case in which the £y is, say, a capital receipt out of somebody else’s estate (which has been saved out of taxed earnings). So if there is no double taxation in the Plumber Case, it is hard to see how there is double taxation in the case where a recipient of a gift or inheritance pays a tax on the transfer they have received. A follow-up point to the first reply is this: in fact, whether the IHT takes the form of a capital receipts tax or an estate tax, it is always in effect the recipient who pays it. This is obvious in the case of the capital receipts tax, but what about the estate tax? Quite simply, the ‘donor’ under an estate tax cannot pay the tax because he or she is dead. Dead people don’t do very much, and that includes paying taxes.¹⁹ Even under an estate tax, the tax itself is still in effect paid by the recipients of the estate. It might be argued that the foregoing analysis is too static: that it ignores the way people might change their behaviour in anticipation of a tax that will be paid by recipients of a wealth transfer. If I know that my children will pay tax on a wealth transfer then I might increase the amount I transfer to them to offset this, curtailing my own consumption (or saving for other purposes) by this offsetting amount. Am I not then, in effect, carrying the burden of the tax even if I am not, strictly speaking, the one who pays it? In which case, couldn’t there be a substantial germ of truth in the double tax objection? To begin with, note that even if we accept that what is going on here is double taxation, whether double taxation occurs now depends on how people choose to behave in response to the tax. There is double taxation if, and (I think) only if, the person wishing to transfer wealth chooses to increase their saving in a tax-offsetting way. It is still true, at the very least, that inheritance tax is not necessarily double taxation, since people are free to choose to respond to the tax in other ways. Note also that the assumption that one must apparently make to float this version of the double tax objection (people save more to offset tax) is the opposite of the assumption one must make to float the usual incentives-based objection to inheritance tax (people save less because their bequests will be taxed). This suggests that there may be a tension involved in trying to press both objections simultaneously.²⁰

¹⁹ A point also effectively made by Iain McLean, ‘Opinion: “Dead People Pay No Tax” ’, The Observer, Money section, 21 October 2007, available online at: https://www.theguardian.com/money/2007/oct/21/ inheritancetax.tax. ²⁰ Of course, it also implies that there could be a tension in simultaneously denying that there is double taxation altogether and downplaying the negative incentives effects of an inheritance tax.

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Moreover, characterizing what happens in the tax-offsetting donor case as ‘double taxation’ has at least one odd implication. Let us return to the Plumber Case. Imagine that the pipe-fixer is someone whom I want to help (perhaps she is a friend down on her luck) and so I pay her extra to offset the tax she will have to pay on the transfer she gets from me for fixing the pipe. This is also a case where I adjust my consumption possibilities down to carry the burden of a tax that someone else will pay. Yet I still do not think we would call this a case of ‘double taxation’. Structurally, however, the case seems essentially the same as the earlier case of tax-offsetting behaviour, except that in this case the transfer to which tax-offsetting behaviour applies is related to a labour service which it is not in the earlier case. But why should this difference matter to whether or not there is ‘double taxation’? If this version of the Plumber Case is not, intuitively, a case of double taxation, then why is the original tax-offsetting donor case? ‘Common sense’ intuitions seem to get us into a hopeless tangle here. When, if ever, IHT is a double tax is unclear. It is certainly not intrinsically a double tax. Even if we generously put all the foregoing points to one side, the double tax objection faces another problem. Those who press the objection typically press it against IHT without considering whether the logic of the objection implicates other taxes and without explaining why the objection is less important in relation to these other taxes. As it is usually presented, and even if we accept the (questionable) characterization of IHT as a double tax, the objection is arbitrarily selective in its focus on IHT in particular. In a recent paper, Rajiv Prabhakar shows how people respond to this point.²¹ One possible response, which some people are willing to take, is to argue that all other taxes that apparently involve double taxation (e.g. sales taxes) are equally (seriously) objectionable as IHT. This response might itself take either a weak or a strong form. In its strong form, the response holds that the government may never adopt a tax if it involves double taxation (because it involves double taxation). But in view of the range of taxes it would rule out (e.g. sales taxes), this is clearly an absurd conclusion. In its weak form, the response holds that all taxes that involve double taxation are, for this reason, equally undesirable, but that some of them might nevertheless be adopted if the overall balance of reasons favours this. In other words, it counts against adopting a given tax that it involves double taxation, but it doesn’t necessarily count decisively against it if the tax serves some other, sufficiently important public interest. If this is so, however, then the double tax objection would, of course, no longer necessarily count decisively against IHT. It would be open to the supporter of IHT to argue that the reasons favouring the tax—such as equality of opportunity—are strong enough public interests to justify the tax even though it is a double tax and, in this specific respect, undesirable. ²¹ See Rajiv Prabhakar, ‘Wealth Taxes: Stories, Metaphors and Public Attitudes’, Political Quarterly 79(2), 2008, pp. 172–8.

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There is, however, another possible response to the point that taxes other than IHT involve double taxation. Since double taxation is apparently ubiquitous, implicating all kinds of taxes, this might prompt one to reconsider whether it really is objectionable as such after all. The point is put very well by Liam Murphy and Thomas Nagel: Taxes are not like punishments, which may not be imposed twice for the same crime. . . . Multiple distinct taxes often tax people’s assets “twice,” as when a sales tax is imposed on the expenditure of someone’s after-tax income, or a property tax is collected on an asset that was bought with income subject to tax. Any issues of fairness in such cases would have to be about the cumulative effect of multiple taxes, not about double taxation per se.²²

To conclude: in reply to the double tax objection we can say: (a) IHT does not necessarily involve double taxation; and (b) even if it does, there is little reason to regard double taxation, as such, as unfair.

9.5 The Equity Objection Perhaps what people who make the double tax objection are trying to get at is the thought that IHT is in some sense an inequitable tax. There has historically been a big debate about double taxation in the context of applying income tax to interest on savings out of after-tax income, and in this debate the central issue is sometimes presented as being about equity between spenders and savers out of a given amount of after-tax income.²³ Here I am referring to some version of what tax specialists call ‘horizontal equity’, which involves treating similarly situated tax-payers—those with the same level of income or wealth or consumption—in the same way. The objection can be brought out using an example.²⁴ Imagine two people, Spender and Bequeather, each of whom has a fortune of £10 million. Each knows that he or she has about a year to live. Spender chooses to consume all of his wealth before his death. Bequeather chooses to save all of her fortune to pass on to her children at her death. Now imagine that there is an IHT, an estate tax set at a rate of 20 per cent. In making her choice, Bequeather knows that a goodly chunk of her wealth will disappear in tax. But Spender’s will not. Why, the critic might say, should she pay more tax on her accumulated fortune just because she wishes to use it one way (bequest) rather than another (consumption)? (Once again, let us put to one side the point that the dead cannot literally pay taxes.) This, in its most basic, general form, is the equity objection to IHT.²⁵

²² Murphy and Nagel, Myth of Ownership, p. 143. ²³ For a meticulous discussion, see Barbara Fried, ‘Fairness and the Consumption Tax’, Stanford Law Review 44(5), 1992, pp. 961–1017, specifically pp. 963–4, 967–8, 970–6. ²⁴ This example is substantially the same as that presented in Edward McCaffery, ‘The Political Liberal Case against the Estate Tax’, Philosophy and Public Affairs 23(4), 1994, pp. 281–312, specifically p. 296. ²⁵ For discussion of this objection, see also Murphy and Nagel, Myth of Ownership, pp. 153–4.

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THE EQUITY OBJECTION:

IHT is an unfair tax because it leads to unequal tax burdens on people with equal amounts of wealth but who choose to use their wealth in different ways. What can be said in reply to this objection? To begin with, let us recall from section 9.3 (the tax justice argument) that the failure to tax inheritances can also lead to an apparent inequity. Imagine that Smith earns £300,000 and pays income tax on this, while Jones receives a bequest of £300,000 on which no tax is paid. Why should Smith pay tax on his receipt of £300,000 but not Jones? Isn’t this an inequity?²⁶ If so, then even if one thinks the equity objection just presented is a forceful objection, one may not conclude that inheritance tax is straightforwardly undesirable on equity grounds. It looks as if there might be equity arguments for and against it. But is the equity objection to inheritance tax, as presented above, as forceful as it appears? There are a number of reasons to question this. First, it is a mistake to look at any particular tax in isolation from the tax system as a whole—or, indeed, the whole pattern of taxation and public spending.²⁷ Even if there is an IHT, this need not mean that the tax system as a whole burdens someone like Bequeather relative to Spender because other taxes in the system could hit Spender harder than Bequeather. For example, perhaps there is a sales tax that absorbs a percentage of all Spender’s consumption so that both pay 20 per cent of their wealth in tax. For the sake of argument, however, let’s assume that in fact the tax system as a whole does burden Bequeather more than Spender. Let us also assume for the moment that in and of itself this differential burden in tax is inequitable—that it is, in itself, an unfair inequality. Even if we grant these two assumptions, it does not necessarily follow that IHT is, on balance, in an all-things-considered sense, an unjustified policy. Here we need to return to the distinction we implicitly made above between a valid moral objection to a policy and a decisive moral objection. Valid moral objections are not necessarily decisive because they can be overridden to some extent by other, valid and countervailing moral considerations. In this case, for example, the supporter of IHT might argue that although the horizontal equity concern raised by the critic is a valid concern, IHT is still justifiable on balance because of the way it serves other, more important concerns, such as equality of opportunity. Merely pointing to the (supposed) unfairness between Bequeather and Spender is not enough to defeat the case for IHT. One must also show that this (supposed) unfairness is serious enough to outweigh the gains to other important moral concerns that arguably come from IHT. It is by no means clear that the critic of IHT can plausibly argue that this (supposed) unfairness is so serious, relative to the fairness-related goals advanced by IHT, as to make any IHT unjustified in an allthings-considered sense.

²⁶ See Murphy and Nagel, Myth of Ownership, p. 147. ²⁷ See Murphy and Nagel, Myth of Ownership, pp. 13–19.

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If we press the ideas in the above reply further, however, we can in fact question the assumption that the posited unequal tax burden between Bequeather and Spender due to IHT is in fact inequitable—that it is, in itself, an unfair inequality. The mere fact that a tax leads to an unequal tax burden between two people of equal incomes, or wealth, or consumption cannot in itself be sufficient for an unfairness. To see this, imagine we have two Spenders, Spender A and Spender B (both spending down an accumulated fortune of £10 million). Spender A spends all her wealth on environmentally friendly goods. Spender B spends all his wealth on environmentally damaging private flights around the globe. Imagine also that in the world of Spenders A and B, governments have enacted a rigorous system of green taxes. As a result, Spender B pays more tax in pursuing his preferred consumption than Spender A does in pursuing hers. So there is an unequal tax burden between them. But is there an inequity? Surely not. Why is it that the inequality in the tax burden between Spenders A and B is not an inequity? One answer is that the difference has adequate justification: there is a good enough moral reason (protection of the environment) for the difference in tax treatment of the two patterns of consumption. An inequality in tax burden between two similarly situated people (in terms of income, wealth, or consumption) is an inequity if it lacks adequate justification—that is, if it lacks an appropriate and sufficiently strong rationale in terms of a legitimate public interest.²⁸ If we now go back to the original case of Spender and Bequeather, the question then arises as to whether or not the assumed unequal tax burden between them lacks adequate justification. In other words, are there strong enough reasons related to a legitimate public interest to justify the assumed difference in tax treatment? Here, again, we return to the reasons which supporters of IHT give for the tax, such as equality of opportunity. If these are genuine values, which carry some weight, then the unequal tax burden between Spenders and Bequeathers that might result from an IHT might have adequate justification and so does not necessarily constitute an inequity at all.

9.6 The Virtue Objection Let’s return again to the case of Spender and Bequeather. Recall that Spender consumes his fortune up to his death while Bequeather leaves it to her children. Intuitively, many people would regard Spender’s behaviour as rather selfish (at least if he too, as we may assume, has children), whereas Bequeather’s behaviour appears loving and, therefore, as much more virtuous. Yet, so the argument goes, IHT hits Bequeather, who apparently acts virtuously in saving her wealth for her children, while Spender remains free selfishly to consume his wealth without any tax. Hence

²⁸ See Murphy and Nagel, Myth of Ownership, pp. 38–9.

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we get the idea that IHT is distinctively objectionable because it is a ‘tax on virtue’ or a ‘tax on love’.²⁹ THE VIRTUE OBJECTION:

IHT is unfair because it penalizes virtuous behaviour relative to selfish/‘vicious’ behaviour.

What can we say in reply to this objection? First, again recalling the tax justice argument from section 9.3, we should point out that the failure to tax inheritances can also lead to an apparent penalty on relatively virtuous behaviour. Recall the contrast between Smith who pays tax on £300,000 earnings and Jones who pays no tax on a £300,000 wealth transfer. Smith, in earning this money has presumably made a social contribution. Jones, merely in her capacity as a recipient of a bequest, has not. Yet it is Smith, the one who is clearly engaged in a form of virtuous behaviour, who pays tax.³⁰ Second, we should also recall that what we need to focus on is the impact of the tax system (or, indeed, tax-spending system) as a whole, not just the impact of one specific tax. For the unequal burden implied by one tax might be balanced by the unequal impact of some other tax, so that the tax system as a whole might not burden virtuous behaviour relative to selfish behaviour even if IHT by itself does. Third, we should question the assumption that saving/bequest behaviour is clearly virtuous and consumption behaviour is clearly selfish. Returning once more to Spender and Bequeather, imagine the story goes like this. Spender lives modestly for most of the year except for one memorable weekend when he throws a huge farewell party for his family and friends. Over many years, Bequeather has subtly, but effectively, threatened to cut her children out of her will if they choose careers different to the ones she thinks suitable. Her subtle threats have had their desired effect: in middle age, they are embedded in careers that they would not have chosen were it not for the threat of disinheritance, though they have adapted their preferences to their lot. (Of course, their situation is even worse if inheritance law allows Bequeather to set conditions on the receipt of her estate, allowing the threat of disinheritance a zombie-like afterlife when she is dead.) Now, where do we think the balance of ‘selfishness’ and ‘virtue’ lies? Bequeather’s manipulative use of her estate to control others—surely a far from implausible scenario when it comes to the family politics of inheritance—seems far more ‘selfish’ and lacking in virtue than Spender’s life-affirming choice to throw his family and friends a great farewell party. Moreover, the institution of private inheritance can in various other ways encourage selfish or otherwise ‘vicious’ motivation and behaviour. It can lead to unpleasant competition between family members to secure favoured standing in the eyes of the

²⁹ McCaffery, ‘The Political Liberal Case’. The objection is also discussed and rejected in Murphy and Nagel, Myth of Ownership, pp. 153–4. See also Daniel Halliday, ‘Is Inheritance Morally Distinctive?’ Law and Philosophy 32(5), 2013, pp. 619–44, specifically pp. 636–42. ³⁰ Murphy and Nagel, Myth of Ownership, p. 147.

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parent or grandparent with a large estate. Some argue that it can underpin, and so encourage, lives of underachievement by those who inherit large fortunes. As Karen Rowlingson points out, this is one reason why some commentators on the right have historically criticized the institution.³¹ Insofar as an IHT diminishes what is at stake in such cases, it can be expected to dampen down, to help discourage, these particular ‘vicious’ feelings and behaviours. So far I have challenged the assumed link between saving/bequest behaviour and virtue by appealing to what I think are rather uncontroversial ideas about what is virtuous, selfish, and so on. However, the reply to the virtue objection is strengthened if we bring into the discussion values like equality of opportunity and consider what they imply for our understanding of virtue and vice. To get at the point, let’s pose a question: Putting issues of manipulation and so on to one side, does a parent necessarily act virtuously in wishing to leave as much wealth as possible to his/her children? In answering the question we have to balance two plausible intuitions. The first intuition is that the parent–child relationship is properly constrained by demands of justice, including the demand for equal opportunity, and that this sets some limits on how parents can act to provide advantage for their children. Widely shared norms against ‘nepotism’ in employment reflect this idea. The second intuition is that it is morally incredible to suppose that parents should not be allowed to do anything which results in their children having relative advantage over other children, or even to suppose that they always do something morally wrong when their actions have this effect. To cite the example used by Harry Brighouse and Adam Swift in their exploration of this issue, we should not prevent parents from reading bedtime stories to their children, or even criticize them on moral grounds for doing so, even if the effect of this is to give their children advantage relative to other children.³² In the case of IHT, we should indeed acknowledge that in order to express and enjoy the kind of special intimacy that characterizes family relationships, family members do need to be able to pass certain items of emotional significance down the generations. Family members surely ought to have some freedom to pass on such items, without the shadow of tax liability, even if the effect is to cause some inequality in wealth inheritances. The critical question, however, is how much we should be allowed to pass on and/or receive. If the concern for family intimacy supports a movement away from a notional policy of 100 per cent taxation of wealth transfers, this does not mean a policy of zero per cent taxation is therefore appropriate. I would argue that the intimacy interest in wealth transfers identified here does support a policy of exempting some level of bequest or capital receipt from tax, but that the

³¹ Karen Rowlingson, ‘Is The Death of Inheritance Tax Inevitable? Lessons from America’, Political Quarterly 79(2), 2008, pp. 153–61. ³² See Harry Brighouse and Adam Swift, ‘Legitimate Parental Partiality’, Philosophy and Public Affairs 37(1), 2008, pp. 43–80.

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exemption should also be limited in order to accommodate (albeit partially) the claims of equal opportunity. If parents complain that such limits penalize the ‘virtuous’ desire to benefit their children, then, at this point, we can reply that the desire is not to do something virtuous at all. It is a desire lacking in virtue precisely because it intends, or can reasonably be expected, to put their children at a serious relative advantage compared to others’ children, thereby placing undue strain on society’s achievement of equality of opportunity. If people have an unsatisfied desire to accumulate wealth for the benefit of the next generation, then they can give expression to this virtuous aspiration by transferring the wealth to funds that will be used to help all children or children in particular need.

9.7 The Wrong Problem Objection A further objection to IHT, which one encounters much more in academic literature than in popular discussion, is that IHT is directed at the wrong problem. According to proponents of this objection, such as Edward McCaffery, supporters of IHT are erroneously fixated on inequality in the possession of wealth. But what matters, in fact, is only unequal consumption. It is not the inequality of owned wealth as such that is the problem, but the gross inequalities in spending to which it might (or might not) lead. McCaffery argues that high levels of spending by the rich can indeed have all sorts of negative social effects: for example, bidding up the prices of some vital goods; distorting the political process through high levels of spending on political campaigns; or indulging in conspicuous consumption which demoralizes the less wealthy who simply can’t keep up.³³ But, McCaffery argues, we do not need an IHT to tackle this problem. Indeed, an IHT might well make the problem of excessive expenditure by the rich even worse because, recalling the Spender–Bequeather example, it (allegedly) gives an incentive to the rich to act like Spender rather than Bequeather.³⁴ The right tool for the job is a consumption tax: a tax, that is, on income with a full exemption for all income that is saved. To discourage high spending by the wealthy, McCaffery argues that the consumption tax should be progressive (the rate of tax increasing as the level of consumption rises).³⁵ McCaffery’s claim that it is unequal consumption out of wealth which matters for justice, rather than unequal ownership of wealth per se, carries a clear echo of another argument which, like the double tax argument, has its origins in the debate over the relative merits of income and consumption tax (a tax on income minus savings). This is often referred to as the ‘foundational argument’, which, as Barbara Fried summarizes it, ‘asserts that wealth ought not to be regarded as appropriated for ³³ McCaffery, ‘The Political Liberal Case’, pp. 291, 301–2. ³⁴ McCaffery, ‘The Political Liberal Case’, p. 296. ³⁵ McCaffery, ‘The Political Liberal Case’, pp. 300–10.

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private purposes until withdrawn for personal use from the “common pool” of national savings’.³⁶ But McCaffery goes a little beyond this standard argument, I think, by pointing to ways in which high spending by the wealthy might cause specific harms of a kind that excite the concern of liberal egalitarians. Most notably, perhaps, McCaffery tries to take on board the Rawlsian concern about how wealth inequality can undermine political equality. The example of a Ross Perot spending millions to buy their way into a position of political standing and potential influence is one to which McCaffery frequently alludes in describing the dangers of high spending by the wealthy. By arguing that a progressive consumption tax can tackle this problem instead of, if not better than, an IHT, McCaffery directly confronts and seeks to displace one of the main liberal egalitarian arguments for IHT.³⁷ However, the central contention of the argument—that all that really matters for justice is inequality of consumption rather than unequal ownership of wealth as such—is highly implausible. As critics of the ‘foundational argument’ have pointed out in the debate over the merits of income and consumption tax, wealth confers many benefits of relevance to justice other than the capacity for high consumption.³⁸ Responding directly to McCaffery’s case against IHT and for a progressive consumption tax, Anne Alstott puts the basic point as follows: The unavoidable difficulty is that private wealth remains a source of current social, economic and political power that goes beyond the potential use of wealth for consumption. In addition to the social and political influence that wealth creates, the possession of wealth confers significant economic security; one need not consume wealth to bask in its benefits. The result is that Professor McCaffery’s proposal would leave significant leeway for the exercise of economic privilege by the rich.³⁹

To see what critics like Alstott are getting at, consider another simple example, this one an example of how things would work under a McCaffery-style ‘consumption tax without IHT’ system. Imagine, on the one hand, Alf, who has no inherited wealth, but who earns £50,000 a year from employment and who spends all of this income. On the other, imagine Betty, who has received a large inheritance of £2 million. She does not work, but she takes £50,000 in interest from her inheritance each year and spends this. Under the McCaffery tax system of ‘progressive consumption tax with no IHT ’, there is no IHT, but there is a consumption tax which, let us assume, is set at 20 per cent on consumption between £25,000 and £50,000 (and at zero per cent below

³⁶ Fried, ‘Fairness and the Consumption Tax’, p. 962. ³⁷ According to McCaffery, ‘ . . . large-scale use [of wealth for spending] as in the example of Perot’s running for President out of his own funds, squarely implicates the Rawlsian concern with power “detrimental to the fair value of political liberty and fair equality of opportunity.” ’ See McCaffery, ‘The Political Liberal Case’, p. 302. ³⁸ See Fried, ‘Fairness and the Consumption Tax’, pp. 962–3, including note 7. ³⁹ See Anne Alstott, ‘The Uneasy Liberal Case against Income and Wealth Transfer Taxation: A Response to Professor McCaffery’, Tax Law Review 51, 1995/6, pp. 363–402, specifically p. 371.

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consumption of £25,000). Since both spend £50,000 per year, each will pay, given the tax rules, £5,000 in consumption tax. There is surely something very counterintuitive going on here. Because Alf and Betty consume the same amount, they pay the same amount of tax. But this ignores enormous differences in their underlying situations, differences that are surely significant from the standpoint of social justice. Let us list some of the significant ways in which their positions differ, differences which are not addressed by a tax system which only targets consumption flows. First, even at equal levels of consumer spending, there are very substantial differences in opportunity between Alf and Betty due to the inequality of (inherited) wealth between them. Given her inheritance, Betty has real freedom to choose not to work; Alf does not. Given her inheritance, Betty probably has readier access to loans than Alf (she can use her wealth as collateral, which I am not sure would count as taxable spending), and so has greater opportunity to set up her own business. Second, inequality in the (inherited) wealth that Alf and Betty possess could easily translate into a morally significant inequality in security and health. Given his lack of wealth, Alf has to keep working to maintain his consumption level. His consumption level is therefore vulnerable, for example, to illness and unemployment. Betty’s consumption stream is not vulnerable in this way. So long as she spreads her investments fairly sensibly, she has much greater security of consumption. This inequality in consumption security could in turn lead to inequality in health. Alf ’s relative insecurity might lead to greater stress, for example, which might increase his risk of some other illnesses. Third, the inequality in wealth between Alf and Betty can translate into inequality of power, both within the formal political process and in wider social relationships. McCaffery tends to assume that wealth has to be spent for it to be translated into the actual exercise of power—the ‘Ross Perot model’ of exercising power. But this is mistaken. Shifting investments around can be a way of exercising power.⁴⁰ To take another kind of case, a rich employer confronting a propertyless employee does not have to spend out of his/her personal fortune to exercise power over the worker. If the worker’s exit options from the employment relationship are very bad, and the rich employer can get a ready replacement for an individual worker’s labour power, then the rich employer has power over the worker. In these circumstances, the employer can say: ‘Do what I say or I’ll sack you’, and expect to be obeyed.

⁴⁰ See Fried, ‘Fairness and the Consumption Tax’, p. 963, including note 8. Alstott, ‘The Uneasy Liberal Case against Income and Wealth Transfer Taxation’, pp. 371–5, helpfully discusses how the rich can exert political influence using their wealth without spending it. This objection is anticipated by McCaffery, who proposes that we handle it by requiring the wealthy to hold their wealth in ‘blind trusts’. Alstott criticizes this proposal for handling the problem in the aforementioned article. McCaffery returns to the defence in Edward J. McCaffery, ‘Being the Best We Can Be (A Reply to My Critics)’, Tax Law Review 51, 1995/6, pp. 615–37, specifically pp. 628–9. I am not currently aware of any reply by McCaffery to the points about unequal opportunity, security, and health.

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I conclude that the attempt to dismiss the case for IHT by arguing that it is not inequality of wealth per se that matters, but only unequal consumption, is not persuasive. However, the critic might argue that insofar as high spending by the rich does have the sort of negative effects that McCaffery points to, and IHT does encourage higher spending out of savings, then there is still a reason—moreover, a liberal egalitarian reason—to oppose IHT. The question then becomes one of how weighty this reason is: Is it weighty enough to count decisively against IHT in an ‘all things considered’ analysis? Relevant factors to consider in this all things considered analysis would be: (1) How large are the negative social effects of higher spending specifically induced by IHT? (2) Are there alternative ways of countering or preventing these effects other than by not having an IHT (ways that would not have greater negative social effects)? (3) Are there alternative ways of attacking inequality in wealth endowments— addressing the sort of inequality in wealth and advantage we saw in the Alf– Betty case above—other than by using an IHT (ways that do not produce negative social effects greater than those we are seeking to avoid by using alternative methods to an IHT)? Until these questions have been explored, and the appropriate answers are supported by the investigation, the case against IHT on McCaffery-style grounds must be considered at best incomplete.

9.8 Conclusion Inherited wealth appears to be an important source of inequality, and its significance might grow in many countries in the future. Yet taxing inheritance is unpopular. The estates tax was provisionally repealed in the USA under President George Bush, and inheritance tax has been substantially cut in the UK. Opposition to the tax stems from—or, at least, is rationalized in terms of—perceptions that it is intrinsically immoral. This paper has set out and considered four sets of moral objections to the tax. None of them, however, has proved to be compelling. So far as the double tax objection is concerned, we have seen that it is not clear whether and in what sense IHT is a double tax, or why, if it is a double tax, this would matter. Nor does IHT necessarily involve any horizontal inequity between taxpayers. The virtue argument might give us a reason to avoid very high levels of IHT, but not to eschew any such tax at all. Finally, the wrong problem objection seems almost certainly off target: unequal possession of wealth does matter in addition to unequal consumption, and so IHT cannot be dismissed on the grounds that its proponents are focusing on the

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wrong problem (possession of wealth rather than consumption). Of course, in the midst of the political battle, it can be hard to point out the weaknesses in the common moral objections to IHT. However, if the analysis in this paper is correct, supporters of IHT should feel confident that the moral case is indeed theirs. Perhaps with this knowledge, there might come more confidence to try to make the moral case.⁴¹

⁴¹ This chapter draws on an earlier discussion of the issue in Stuart White, ‘What (if Anything) is Wrong with Inheritance Tax?’ The Political Quarterly 79(2), 2008, pp. 162–71. For particular points that I have incorporated and/or for other very helpful guidance, I would like to thank Matthew Clayton, John Cunliffe, Keith Dowding, Barbara Fried, Kieran Oberman, Michael Otsuka, Rajiv Prabhakar, Andrew Reeve, Jonathan Riley, Karen Rowlingson, Hillel Steiner, Karl Widerquist, and Andrew Williams. I also thank the editors of this volume and an anonymous referee for helpful comments.

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10 The Politics of Land Value Taxation Iain McLean

This chapter aims to show that land value tax has both theoretical and practical merit. I trace the classical normative arguments for land tax in Adam Smith, Tom Paine, David Ricardo, Henry George, and Lloyd George, and the current academic literature. I then show how some of the difficulties of inheritance (estate) tax can be resolved by a land tax. In the final sections I address the issues of practicability, and of winners and losers. The examples almost all come from the United Kingdom, but the arguments are intended to be general. This chapter is organized as follows. In section 10.1, I present the classical arguments in favour of a progressive, neutral system; and the classical anti-argument (there is only one). In section 10.2, I review the switch from indirect to direct taxation between Adam Smith’s time and now, before discussing the special properties of land in section 10.3, followed by a discussion of the political and administrative practicality of land value taxation in section 10.4. The chapter concludes with a brief examination of property, theft, and estate or inheritance tax in section 10.5.

10.1 Classical Justifications of Taxing Land Values It may seem perverse to open a section on classical justifications with a review published in 2011, but Sir James Mirrlees and his colleagues (Mirrlees et al. 2011) stand on the shoulders of giants. Sir James is no dwarf, having won a Nobel Prize in economics for his work on the theory of optimal taxation. Mirrlees and his colleagues recommend a progressive, neutral tax system. Each of the three key words of that formula—‘progressive’, ‘neutral’, and ‘system’—is important. . . . A good tax system should be structured to meet overall spending needs. . . . [N]ot all taxes need to address all objectives. . . . A tax system that treats similar economic activities in similar ways for tax purposes will tend to be simpler, avoid unjustifiable discrimination between people and economic activities, and help to minimize economic distortions. . . . Third, achieve progressivity as efficiently as possible. (Mirrlees et al. 2011: 471–2)

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The Mirrlees Review was published by the UK’s leading public finance think tank, the Institute of Fiscal Studies (IFS), which had earlier published a similar review chaired by another Nobel Laureate, Sir James Meade (Meade 1978). These reports build on classic insights by Adam Smith, Tom Paine, David Ricardo, and Henry George among economic thinkers; by Winston Churchill and Lloyd George among campaigners; and by William Pitt the Younger, Sir Robert Peel, George Goschen, Sir William Harcourt, H. H. Asquith, and Lloyd George (again) among finance ministers. The philosophical issues have been set out in recent left-libertarian writings which themselves have an important heritage that I have no space to explore separately (but see, e.g., Steiner 1994; Steiner and Vallentyne 2000, 2001; Otsuka 2003). If intellectual authority counted for everything, then the case for taxation of land values would be indefeasible. It does not count for everything. Politics counts for a lot. Louis XIV’s finance minister, Jean-Baptiste Colbert (1619–83), reportedly said that “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Colbert led the mercantilist school which is the special target of Adam Smith’s anger in The Wealth of Nations (Smith 1981 [1776]). Smith’s four maxims of taxation are set out in Book V of the Wealth of Nations. Each maxim is introduced in a single sentence, which Smith proceeds to gloss (glosses not copied here): I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. II. The tax which the individual is bound to pay ought to be certain, and not arbitrary. III. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. IV. Every tax ought to be so contrived as to take out and to keep out of the pockets of the people as little as possible, over and above that which it brings into the public treasury of the state. (Smith 1981 [1776] V.ii.b.3–6; pp. 825–6)

Smith does not claim that his maxims are original. He says that their ‘evident justice and utility . . . have recommended them more or less to the attention of all nations’ (V.ii.b.7). Smith is a very careful writer. He says what he means and means what he says. The maxims (‘canons’, as Henry George and many since have called them) had been recommended to the attention of all nations; but all nations were tempted down Colbert’s path, or down the path of favouring rent-seeking special interests (about which Smith is savage), or both. A Smithian tax system is progressive and neutral (I shall defend the “progressivity” of Smith’s maxims in a moment). It is also transparent. A Colbertian system is as non-transparent as possible—the goose must not know that it is being plucked—and

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in general is neither progressive nor neutral. Perhaps the most Colbertian tax in the UK is Employer’s National Insurance contributions. They are big, contributing about 9 per cent of the total UK tax yield (Mirrlees et al. 2011: Table 1.1). The real incidence of these is on the employee, not the employer. To the employer they are just part of the cost of employing somebody, and therefore the employee’s wages are reduced pro rata. But almost no employee knows how much he or she pays by this indirect route. Therefore there is no hiss. One of the most certain, and also most tansparent, taxes is the tax on domestic property, called Council Tax in the UK. Although it violates Smith’s maxim I, it satisfies the others. In the UK, it is only half the size of employer’s contributions (4.6 per cent of tax yield). But its very certainty makes it conspicuous. Bills are issued direct to households once a year, and the tax is usually taken by monthly Direct Debit out of the householder’s current account. The hissing is tremendous. As I hope to show below, it is not hard to redesign Council Tax to satisfy Maxim I: it then would look remarkably like a land value tax. There would still be hissing, but quieter. Why is Maxim I ‘progressive’? The technical definition of tax progressivity is that the marginal rate is always higher than the average rate. Thus, for instance, personal income tax is progressive in every jurisdiction I am aware of. In the UK, that is obvious because there are higher rates of tax which each kick in when the taxpayer’s taxable income exceeds a certain threshold. Above that, the taxpayer’s marginal rate is 40 per cent or 45 per cent: for every extra pound that she earns, she pays 40/45 pence in income tax. Her average income tax bill is, however, less than 45 per cent of her income. But a moment’s thought reveals that even a flat rate of income tax is progressive: provided that, as is surely the case in every jurisdiction, there is a tax-free allowance for those who earn too little to come into the net. If the UK had a flat rate of income tax of 25 per cent, then every taxpayer’s marginal rate of tax would be 25 per cent. But her average rate (tax paid as a proportion of income) would always be below 25 per cent because of the tax-free allowance. Now let us revert to Adam Smith’s world. The kick in Maxim I is in the phrase after “that is”. As before, read him with the attention he gave to writing: that is, in proportion to the revenue which they respectively enjoy under the protection of the state. Rich people enjoy more revenue under the protection of the state than poor people. Some people are too poor to pay any tax, except perhaps regressive taxes such as excises. (An excise duty, say on tobacco, always takes a higher proportion of the income of the poor than of the rich. If poor people smoke more than rich people, an excise may take absolutely more per head from the poor than from the rich.) Therefore a tax that obeys Maxim I is a progressive tax. The tax system may not be progressive, if regressive excise duties outweigh progressive taxes (such as, in Smith’s day, land tax: the poor owned no land). But any tax that obeys Maxim I is progressive. If still in doubt, consider what Smith says specifically about land taxes.

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Both ground-rents and the ordinary rent of land are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expences [sic] of the state, no discouragement will thereby be given to any sort of industry. . . . Ground-rents seem, in this respect, a more proper subject than even the ordinary rent of land [which is] . . . owing partly at least to the attention and good management of the landlord. . . . Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign. (Smith 1981 [1776] V.ii.e.10–11)

Tax on ground rent therefore fits Maxims I and IV beautifully. It also does not distort economic activity, unlike any other practicable tax. Adam Smith is not as much a friend of Margaret Thatcher is he is often made out to be, nor vice versa. I come to Baroness Thatcher’s view on land tax later in this chapter. In the next generation, Smith had two influential readers: Tom Paine and David Ricardo. Paine (1737–1809) was at the heart of both the American and the French Revolutions. He was lucky to escape from the latter with his life. His reputation has always been more as a pamphleteer than as an original thinker. Nevertheless he was a great synthesizer. His most remarkable publication in this context is Agrarian Justice (Paine 1995 [1797]). He proposes a scheme of universal benefits, to be given to each citizen at the ages of 21 (‘to enable HIM or HER to begin the World!’) and 50 (‘to enable them to live in Old Age without Wretchedness, and go decently out of the World’). Paine takes Smith’s idea about the special character of ground rent further and mixes it with John Locke’s idea that originally the earth was the “common property of the human race”: the value of the improvement only, and not the earth itself, . . . is individual property. Every proprietor therefore of cultivated land, owes to the community a ground-rent. (Paine 1995 [1797]: 418)

Paine wants ground rent to be extracted in the form of an inheritance or estate tax: the subtraction will be made at a time that best admits it, which is, at the moment that property is passing by the death of one person to the possession of another. (Paine 1995 [1797]: 421)

David Ricardo (1772–1823) was a very different sort of writer, whose work nevertheless has implications as radical as Paine’s. One of the pioneers of the marginal principle in economics, he builds up his theory of rent from the observation that land is brought into production just up to the point that the most marginal land from which a marketable crop can be raised is brought into use. Beyond that point, land is left uncultivated. All the land more productive than the most marginal parcel earns extra, some of which is kept by the landlord in the form of rent. Like Smith and Paine, Ricardo insists that “rent”, as usually described, must be broken into two components: the rent for unimproved land, and the rents for improvements, such as

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drainage, roads, and buildings put up by the landlord. The latter are payments for services; the former are not. Like his predecessors, Ricardo argues that taxation of the rent on unimproved land is the least distorting tax. Rent, so properly defined, is that portion of the produce of the earth, which is paid to the landlord for the use of original and indestructible powers of the soil (Ricardo 2004 [1817]: 67). Many thinkers less subtle than Smith and Ricardo drew the conclusion that the tax on land values should be the only tax. One of these was the American journalist Henry George (1839–1897). Having observed that the only people whom the San Francisco gold rush made rich were land speculators, he concluded that ‘We must make land common property’ (George 1929 [1879]: 433; emphasis in original). He reached back to the French physiocrats (contemporaries of Smith, who criticized them heavily) for the view that the way to do this was by a single tax on land. Quoting Smith’s maxims without attribution (George 1929 [1879]: 408), he maintained that the single tax on land was the tax most compatible with them. George anonymized Smith’s maxims, and may have been the first person to label them the “canons of taxation”. George’s ideas peaked in influence in the first two decades after his death. They helped to drive the politics of the “People’s Budget” of 1909. The most eloquent Georgeite was the young Winston Churchill, a minister in the Liberal government that introduced the People’s Budget. Young Winston’s statement of the case has never been bettered: Roads are made, streets are made, railway services are improved, electric light turns night into day, electric trams glide swiftly to and fro, water is brought from reservoirs a hundred miles off in the mountains—and all the while the landlord sits still. . . . To not one of those improvements does the land monopolist as a land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced. . . . [T]he land may be unoccupied, undeveloped, it may be what is called ‘ripening’—ripening at the expense of the whole city, of the whole country, for the unearned increment of its owner. (Churchill 1970 [1909]: 118–19)

However, the People’s Budget was defeated in the House of Lords and its land tax provisions were never implemented. The long switch from indirect to direct taxation, to be discussed in section 10.2, has obscured the importance of the insights of all the land-taxers from Adam Smith to Winston Churchill. Only recently have they emerged blinking into the limelight. The case made by Smith, Paine, and Ricardo has never been effectively contradicted. Section 10.4 explains what has happened to the political case.

10.2 The Switch from Indirect to Direct and from Opaque to Transparent In Adam Smith’s time, the main taxes in Europe were nominally land taxes, although they were very far from being taxes on Ricardian rent. There were also tithes or teinds

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(church taxes paid as a proportion of the produce of the land) and excises and customs duties, which it became Smith’s job as Commissioner of Customs for Scotland to oversee. One of his subordinates for a time was Robert Burns, author of The de’il’s awa’ wi’th’exciseman and exciseman in Dumfries (McLean 2006: 21, 39–40). These are all indirect taxes, as is any other tax on purchases (e.g. value added tax in the EU). Ultimately, the burden of all tax is borne by the consumer (Kay and King 1990; Mirrlees et al. 2011; Institute for Fiscal Studies 2016). An indirect tax is one where the ultimate consumer pays indirectly, because an input has been taxed and the producer of that input gets the money back from the ultimate consumer. By contrast, direct taxes are levied on each consumer’s income, property, or profits. Indirect taxes are generally less transparent than direct taxes, because they are rolled into the prices that consumers ultimately pay. War brought change to the UK tax system. Prime Minister Pitt the Younger, a devotee of Smith (McLean 2006: 22–3), first introduced income tax in his budget speech of 1798, as a device to pay for the Napoleonic wars. He commended the ‘equality of the tax, and the general efficacy of the measure’—language that suggests he had his mentor’s maxims in mind. As William Hague summarizes it: Income tax would thus be fair, collectable, and would provide for the more rapid repayment of the greater debts now being incurred. It would be applied on a sliding scale, zero on incomes below £60 a year, and then one twentieth on those over £60, rising to one tenth on incomes over £200. (Hague 2004: 434)

The foundation for a progressive neutral tax system had been laid. Pitt’s income tax was obviously progressive. It was also neutral in that it was intended to apply to all sources of income, with a separate schedule and separate collectors for each. (The schedules remained until the 2000s; separate collection did not.) However, it expired at the end of the war. It was revived by Pitt’s disciple Sir Robert Peel, as announced in one of the great Budget speeches: [Y]ou must so adapt and adjust your measures as not to bear on the comforts of the labouring classes of society. My conviction further is, that it would not be expedient, with reference to the narrow interests of property, that that should be done. Well then, Sir, I must, with my sense of public duty, abandon the hope of realising in the present year any revenue from the post-office. Shall I revive the taxes which were laid upon great articles of consumption, and which were very productive? Shall I revive the taxes upon salt, upon leather, and upon beer? . . . Shall I increase the taxes on railways? I confess nothing but a hard necessity would induce me to derive revenue from locomotion in the present state of this country, when it is a great object to facilitate the transfer of labour, and to enable those to whom labour is capital to bring it to the best market. . . . [T]o those who in small communities turn their attention to financial affairs, and who fancy they have made some discovery that pretty nearly puts them on a level with Archimedes; when finding that piano-fortes, umbrellas, or such articles are not subject of taxation, they immediately suggest them to the Chancellor of the Exchequer, accompanied with a claim for a very large percentage on the ground of the novelty of their discovery and the

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certain success of its application,—I shall take this opportunity, of discouraging all such suggestions. . . . I propose, that for a time to be limited, the income of this country should be called on to contribute a certain sum for the purpose of remedying this mighty and growing evil. I propose, that the income of this country should bear a charge not exceeding 7d. in the pound. . . . I shall propose, that from the income-tax I now recommend all incomes under 150l. shall be exempt. (Hansard 11 March 1842, from http://hansard.millbanksystems.com/commons/1842/ mar/11/financial-statement-ways-and-means#S3V0061P0_18420311_HOC_23, consulted 28.09.11)

Peel’s income tax was to be levied under the five schedules previously defined by Pitt, of which the financially significant ones were Schedule A, ‘the property which was derived from land’, and schedule D, ‘income derived from the profits of trades and professions’. Schedule E, then defined as ‘the income of all public officers’ was insignificant, although it came to cover the vast majority of income subject to income tax, which is deducted at source on the pay as you earn (PAYE) system. Like its predecessor, therefore, Peel’s income tax was progressive and neutral. Despite all efforts by that great Peelite and Pittite Chancellor of the Exchequer, W. E. Gladstone, it never proved possible to abolish income tax. In the worlds of Pitt and Peel, the tax-and-expenditure regime was progressive on the tax side, but not on the expenditure side. What would now be called social protection and was then called the Poor Law was financed out of local taxation. This might be locally progressive but it was globally regressive after the Industrial Revolution. As every commentator from Charlotte Brontë to Dickens to Disraeli to Engels noted, unemployment in industrial areas could be both cyclical (in trade depressions) and structural (among trades like handloom weaving that were made obsolete by innovation). A consequence of this is that local support for local social protection could not work. The areas that had most expenditure needs had least tax capacity, and vice versa. One of the first, and curiously overlooked, great UK finance ministers to understand this was George (Viscount) Goschen, Chancellor of the Exchequer in the Unionist government of 1886–92. The Unionists hated the idea of devolution (Home Rule) to Ireland. Faced with a phalanx of Irish Party MPs determined to achieve just that, they resorted to what one of them, Gerald Balfour, described as killing Home Rule with kindness: i.e. by redistributive expenditure on social protection and public works in Ireland. Goschen’s Budget of 1888 initiated formula funding for Ireland and Scotland. The following year, he initiated estate duty, which his Liberal successor Sir William Harcourt made more progressive in 1894 to the fury of landowners. The next Liberal government (1905–10) was the most redistributive in British history to that date. Successive chancellors H. H. Asquith and David Lloyd George expanded social protection with non-contributory and nationally uniform old age pensions (1908) and a contributory National Insurance scheme against inability to work through sickness or unemployment (1911) (Braithwaite 1957).

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However, the government’s fiscal programme was overturned by the House of Lords, who defeated the 1909 Budget by 350 votes to 75: [A]s is so often the case when the House of Lords is engaged in reaching a peculiarly silly decision, there were many comments on the high level of debate and on the enhancement it gave to the deliberative quality of the chamber. (Jenkins 1968: 100–1)

It was peculiarly silly because the counter-revolutionary action of voting down supply, which had been reserved to the Commons since the English Civil Wars ended in 1648, led to the Parliament Act 1911 and a substantial restriction on the Lords’ veto power. Nevertheless, in defending the material interest of the landed class, it proved effective. The Lords’ ire was directed not at progressive income tax, nor at increases in excise, but at the trivially yielding land tax structure in the 1909 Budget. Although the Liberals were re-elected in both of the 1910 elections forced on them by lordly and royal veto plays (McLean 2012; McLean and Nou 2012 [2010]), they lost their overall majority. They now depended on the Irish Party, which was in a position to insist first on the Parliament Bill and then on Home Rule. Because the Parliament Act required a Commons bill to be passed three times before it could be enacted without Lords’ consent, Home Rule (and the similarly placed Welsh disestablishment) occupied most of the sessions of 1912, 1913, and 1914. The only (though not trivial) social protection legislation of the Liberals’ third term was the enactment of National Insurance in 1911. Lloyd George retuned to land tax in 1914, but his plans were defeated by a backbench revolt of landed Liberals just before the First World War broke out. The subsequent history of land value taxation in the UK is equally negative. When the Attlee Labour government (1945–51) introduced a regime of land-use planning (Town and Country Planning Act 1947 c. 51), they recognized that by increasing the scarcity of what young Winston had called ‘ripening’ land, government was increasing its price relative to that of unripe land, and that it was legitimate for the public to reclaim in tax some of the betterment in value that they had granted in planning permission. However, both then and in later iterations, property developers simply waited for a change of government, successfully betting that a Conservative administration would repeal betterment taxes. The ghost of a betterment tax lingered on in “Section 106 Agreements” (the reference is to Town and Country Planning Act 1990 s.106), by which a developer could be required to spend money on infrastructure as a condition of being granted planning permission. Section 106 Agreements were an interesting example of a tax that demonstrably violates all four of Adam Smith’s maxims, although they satisfy Colbert’s. In a Colbertian move noticed only by tax specialists and backbench Conservatives, the Macmillan Conservative administration (1957–63) abolished Schedule A of income tax in 1963. Schedule A was, by Peel’s calculations, the highest-yielding of the five schedules in 1842 (from http://hansard.millbanksystems.com/commons/ 1842/mar/11/financial-statement-ways-and-means#S3V0061P0_18420311_HOC_23,

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table in text at col. 444: Schedule A was expected to contribute £1.6 million (42 per cent) of the £3.771million total yield). The campaign to abolish it came from Conservative backbenchers such as the newly elected Margaret Thatcher. In 1960 she was reported to be in favour of the abolition of Schedule “A” and said a number of people in Parliament had been campaigning for its abolition. It dated back to 1842, when one could not get at individual incomes and the assessment of property was the only way. The campaign against Schedule “A” was now getting very strong and if nothing was done about it in the Budget speech, she thought an amendment would be put down to deal with the matter. (Finchley Times, 19 February 1960 at http://www.margaretthatcher.org/document/100947)

By 1960, Schedule A had become a tax on the imputed income from owneroccupation of houses. It led to much hissing, not only in Finchley, because the income stream that it taxed was invisible but the tax chargeable was visible. However, its abolition violated the principle of tax neutrality. One form of investment (owneroccupation of houses) was then favoured in the tax system twice over compared to others: by the non-existence of Schedule A and by tax relief on mortgage interest payments (another favourite cause of Mrs Thatcher, who vetoed its removal). The latter anomaly has been removed; the former has not. Thus in 200 years the UK tax system has become more transparent and relies more on direct taxation than formerly. However, transparency is not all to the good from the point of view of designing a fair tax regime. Taxes on domestic property and on bequests are transparent. Those liable to pay know that they are liable. This has consequences, to be explored now.

10.3 Special Properties of Land As a tax base, land has some desirable properties. It doesn’t move. They aren’t making it any more. As Smith and Ricardo both noted, a tax on the unimproved value of land is the least distorting of all taxes. This is because, with any other tax, the taxpayer may adjust her activities so as to pay less. The tax authority receives less than it expected, and economic activity is distorted. In addition, any land tax may be philosophically justified (Young Winston again) while the landlord sits still. In fact, Young Winston, together with Lloyd George and Attlee’s ministers, was primarily making a different point to Ricardo’s, a point that is independently valid. Much of the value of land derives from the uses to which it can be put. Land which would otherwise be useful only for agriculture, or not even for that, becomes useful as the electric trams and the far-off water are brought to it. These utilities are nowadays mostly supplied by the public sector, which gets none of the consequent revenue stream from the improved value of the land. Where they are introduced by the

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private sector, it makes a smaller return than it otherwise would, unless it gets hold of the land into which it develops. The only conspicuous UK example of coordinated development of transport and housing by the same company is Metroland, the area in north-west London and beyond served by the Metropolitan Line from Baker Street, and immortalized by Sir John Betjeman. It is no surprise that one of the leading Georgeites in contemporary UK politics is Dave Wetzel, a Labour politician who helped to run Transport for London when Ken Livingstone was mayor. Therefore there are good philosophical (Smithian and/or Ricardian) arguments for not one, but two, land value taxes. One (call it the Ricardo tax) is a tax on the value of the ‘original and indestructible power’ of land before improvement. The other (call it the Churchill tax) is a tax on the proportion of the improved value of land that has been brought about by public investment. This could also be prospective: a tax on the increment of value that will accrue once permission for a high-value development is granted. It is this last version of the Churchill tax that Section 106 agreements palely shadow.

10.4 The Practical Politics of Land Tax 10.4.1 Land tax on domestic property However, as the first review of the Mirrlees report ruefully states, ‘those who lose from tax reforms tend to be vengeful while those who gain from them tend to be ungrateful’ (Johnson and Myles 2011: 323). The rest of this chapter descends from Olympia (District Line and Overground) into the subterranean world of practicality and trade-offs. As in the UK in 1909, tax reform can be blocked by vested interests. The House of Lords was then, by construction, a landed house, which blocked the reforms to land tax (and only those). This cannot recur, because the character of that house has changed and because the Parliament Act 1911 restores the Commons’ monopoly of supply. Why then have all subsequent attempts at land taxation also failed, and what could philosophers and policymakers combine to do about it? The favoured treatment of owner-occupation of housing over other asset classes arises because the median voter is an owner-occupier or aspires to be, but does not know that she owns any other assets. (On the Colbert principle, the taxation of pension funds, where voters’ unknown assets reside, fluctuates violently.) Of the two gross distortions favoured by Baroness Thatcher, one has gone (mortgage interest relief). The other remains (non-taxation of the income stream from owner-occupation). There are two other taxes on housing, both bad: Council Tax, and Stamp Duty Land Tax (which is also levied on transfers of commercial property). Council Tax, which pays for some local government services, was introduced in a hurry after politicians discovered that the Community Charge (poll tax) introduced in 1986–8 was the disaster that every informed commentator, including Chancellor Nigel Lawson, had predicted (Butler, Adonis, and Travers 1994). It marks a partial

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return to the pre-poll tax system of domestic rates. But, presentationally, it had to be called something different and work differently. It is therefore a worse tax than its predecessor-but-one. Rates still exist in Northern Ireland, whose citizens, consistently with Johnson and Myles 2011, show no gratitude for that. Under Council Tax, each house is in a band determined by its value in 1991. Yes, 1991; that is not a typing error. (In Wales the reference date is 2005.) The bands are coarse and the tax is regressive. House values correlate very closely with household income (I deal with the apparent “Devon widow” exception later). Every house is taxed, so that there is no zero rate; and the tax per pound of 1991 valuation goes down jerkily from the lowest 1991 valuation to the highest. Not every tax need be progressive, so long as the system as a whole is (Kay and King 1990; Mirrlees et al. 2011). But when a tax is regressive, there needs to be some independent reason for levying it, as each regressive tax makes the aim of achieving a progressive system that much harder. For example, some ‘sin taxes’ such as those on beer, spirits, and tobacco, are regressive because poor people tend to consume more of those sinful goods than rich people—perhaps absolutely more, and certainly more as a proportion of their incomes. For another example, the scope of VAT in the UK is unusually narrow by international standards, with zero-rating of food and children’s clothing, and reduced rating of domestic fuel. These exemptions are perverse. They are an inefficient way of protecting the poor, because they depend on people’s tastes. Poor people who like VAT-free foie gras do better than poor people who like VAT-able takeaway burgers. The reduced rating of domestic fuel flatly contradicts the rest of the UK’s carbon taxes. A broader base for VAT would increase welfare, but the losers would have to be compensated in the progressive part of the system by a reduction in their direct taxes and/or an increase in benefit rates. The regressiveness of Council Tax is as perverse as the reduced rate of VAT on domestic fuel. Neither serves any policy goal except helping to win the next election. Brave politicians have allowed a revaluation (as in Wales in 2005). Less brave ones have promised not to revalue (as in Wales for 2015) or frozen rates (as in Scotland in 2011). How then could a brave government make Land Value Tax (LVT) for housing acceptable to the median voter? I suggest four answers, which are not mutually exclusive. • Abandon stamp duty land tax (SDLT) on house sales. Taxes on transactions are inherently bad, as they discourage economic activity. The yield of SDLT, which is chargeable on both domestic and commercial transactions, is currently 1.8 per cent of the UK tax yield; Council Tax and business rates yield about 4 per cent each (Institute for Fiscal Studies 2016: Table 1). It would therefore be trivial to recoup the yield from SDLT in redesigned land taxes on houses and businesses. • Set a zero rate of LVT for the first, say, £100,000 of house values, and then set an annual rate of, say, 0.5 per cent of each house’s sale value. (This is approximately

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the rate that would recoup the existing yield of Council Tax and domestic SDLT.) This not only makes LVT progressive, but is nicely Ricardian. In an old industrial town or former mining village, one might pick up a house in good physical condition for about the limit of the zero rate of SDLT, £125,000. This house is an analogue of the most marginal farming land in Ricardo’s model. The land it is on has effectively a zero value, so that it should bear zero tax. The same argument applies to countries such as Ireland and Spain where there were vast speculative developments of now-unsaleable apartments on land that, therefore, likewise has zero value. Since the price of building or repairing a house in Tow Law is little different from the price of doing the same thing in Chelsea, almost all the difference between the prices of similar houses in Tow Law and Chelsea is simply the difference in the Ricardian rent of the land they stand on. It is appropriate that this difference should bear a Ricardian tax. • Make local zoning authorities less afraid of NIMBYs (Not in My Back Yard protesters). In the UK, the zoning authorities, except in National Parks, are elected local authorities (‘councils’). For elected members, the decision whether or not to allow a development is unbalanced. A council will get into no trouble for refusing a development; it may get NIMBY trouble for permitting it. The extra Council Tax an authority would gain from permitting new houses tends to get lost in the elaborate block grant formula which pays for most of local authorities’ expenditure. A robust LVT on houses would allow councils to keep all their domestic LVT; align the incentives facing them more appropriately; and enable the grant system to be simplified. • Make an offer to Devon widows. Much of the opposition to domestic LVT focuses on the plight of the asset rich/cash poor household: stereotypically, a widow who continues to live alone in the former family home in Devon. A householder who is unable to pay her LVT after all relevant benefits have been taken into account may, therefore, defer her tax liability until she dies or her house is sold. This idea reaches back to Tom Paine’s insight that the easiest point at which to collect the tax is at a transaction. Note that this is conceptually quite distinct from saying that the transaction itself will be taxed. Deferred LVT would not be the same as either SDLT or Inheritance Tax. Those who would do less well under such arrangements are not Devon widows but the sons and daughters, nephews and nieces, of Devon widows, a less generically deserving class.

10.4.2 Land tax on commercial property The present property taxes on commercial and industrial property in the UK are SDLT, Section 106 Agreements, and Business Rates (officially National NonDomestic Rates). Business Rates yield about the same as Council Tax in each year. Although collected by local authorities, the proceeds are pooled and

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redistributed as part of grant arrangements. This is done for equity reasons: the capacity of councils to attract business varies even more than their capacity to attract housing. But it means that the incentives to face down NIMBYs are even weaker than for domestic developments. The reward for facing them down is extra business rates, which, since 1990, have been immediately equalized away. UK governments have recognized this problem, and in 2015 Chancellor George Osborne announced that by 2020 the proceeds of business rates would be returned to the council that raised them. This solves the NIMBY problem but worsens the equity problem, as the councils with a robust Business Rate base are all in London. An equalization scheme, the details of which are not yet known, will certainly be needed as the complement of localization. Mirrlees et al. (2011: Chapter 20) argue that the structure of business rates is inefficient, as they tax an intermediate input (business premises). [T]here is a strong case for levying a land value tax, which is a tax on pure rent—if the practical difficulty of valuing land separately from the buildings on it can be overcome. (Mirrlees et al. 2011: 477)

Can it be overcome? That difficulty was a sufficient reason for the failure of Lloyd George’s land tax in 1914 (Offer 1981; McLean and Nou 2012 [2010]). It is admittedly not easy. There are some purchases and sales of bare land: for example, forest land, farmland with no structures on it except dirt-cheap barns, or empty brownfield sites. But none of these is exactly Ricardo’s ‘original and indestructible powers of the soil’. Planted forests have had money spent on them; both they and natural woods may attract future subsidy (which is capitalized into sale prices), and need year-toyear management. Farmland has been ploughed, drained, and fenced. Empty brownfield sites have been cleared, and have infrastructure (utilities, sewage, transport) on site or at their edges. LVT for non-domestic land would certainly require a beefed-up valuation agency. But the task would not be as intimidating as in Lloyd George’s time. Satellite mapping of all the land in developed countries is now available. Valuation in principle requires less work on the ground than it did. There is an existing UK government valuation agency which could be expanded and, perhaps, integrated with the Ordnance Survey. An important step, which could be taken before the national valuation register was ready, would be to remove the anomalies and exemptions in the present structure. Farmland is exempt, as are empty buildings and empty brownfield land. These exemptions result from lobbying, not from first principles. There is no reason why farming should be taxed more lightly than other ways of making money, and the existing exemption gives rise to multiple opportunities for tax avoidance. As to unoccupied land, owners should be given an incentive to develop or to sell it; and councils should be given an incentive to help its development or sale. A further point, which applies to both domestic and business LVT, is that it is the best tax to fund local and subnational government, for the very simple reason that

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land does not move, and therefore there is no scope to avoid tax by moving to a lower-tax jurisdiction. LVT could revive local government in England by giving it more fiscal responsibility, aligning taxing and spending decisions better. There would still need to be an equalization regime, but it urgently needs (in any case) to become less baroquely non-transparent. LVT could help here. Scotland, Wales, and Northern Ireland are gaining more devolution within the UK. Scotland has had Scottish National Party (SNP) governments since 2007. The SNP is committed at least in the long term to Scottish independence and in the interim to what the SNP calls “devolution max”, which would entail devolution of all taxation and most spending to Scotland. The Calman Commission of 2009 (Independent Expert Group 2008, 2009; Calman 2009) proposed a much more limited degree of tax devolution (its terms of reference prevented it from going further). But based on the principle that land does not move, it proposed a range of small land and quasi-land taxes (landfill tax, aggregates duty, airport passenger duty) for devolution; gently reminded the Scottish Parliament that it already controlled Council Tax and Business Rates; and encouraged policymakers to think anew about land taxation. The depressing immediate response was an auction among the parties in the 2011 Scottish Parliament election as to how totally and for long they would freeze Council Tax. This situation changed as a result of the Scottish independence referendum of 2014. In the last week, when the pro-independence side was surging in the polls, the anti-independence parties joined in a so-called ‘Vow’ that they would greatly increase Scotland’s tax powers in the event of a ‘No’ vote to independence. The No side won by a margin of 10 percentage points, and accordingly the Smith Commission was set up (Smith of Kelvin 2014). Reporting at great speed, this recommended the devolution of almost the whole of income tax, and the assignment of half of VAT revenue in Scotland to the Scottish Parliament. The effect on land taxes has been indirect. Because the Scottish Parliament is closer than before to being fiscally responsible—that is, responsible for raising what it spends—it has to look in a grown-up way, for the first time, at all of its tax powers. The freeze on Council Tax has ended, and SDLT in Scotland has been replaced by a Land and Buildings Transaction Tax. In fact, SDLT has been amended in the rest of the UK to be more like the Scottish tax, and some of its most objectionable features have disappeared. In Wales, politicians were deafened by the hissing when Council Tax values were updated in 2005, and an extra Council Tax band was added for very high-value properties. But the number of properties falling into the new Welsh Band I is tiny, and those who do not live in Castell Coch may not notice Council Tax as being any more progressive there than in Scotland or England. Nevertheless, it is fair to say that both the Scottish and Welsh governments have taken some baby steps towards a more proportionate system of property taxes.

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Northern Ireland never abandoned rates, and therefore starts from a better place, or would do if its politicians could focus their attention away from sectarian issues.

10.5 Property, Theft, and Inheritance There is one more property tax to consider—estate tax, known misleadingly in the UK as inheritance tax. The philosophical issues surrounding it have not changed since Paine. The politics have. In every developed economy, the main component of the estate of those who die is their land and property. ‘Property is theft’ was the self-contradictory slogan of the French anarchist Pierre-Joseph Proudhon (1809–1865). In the steps of Rousseau, Proudhon wished to counter the idea that property owners had a legal and moral right to keep all their property free of tax, and to hand it on intact to their heirs at death. Proudhon, and some of his followers, wished to see an estate duty of 100 per cent. A non-contradictory version of Proudhon’s slogan is that land values are socially constructed. As the thinkers reviewed in this chapter all knew, land is valuable only because human beings do things with it. Some of what they do could exist without government: Ricardian rent would arise even in an anarchist society because some land is naturally more productive than other land. But even the most laissez-faire country needs a system of property rights before agriculture can get going, as otherwise a strong man need only wait until someone else’s crops have ripened and then help himself. Smith discussed the co-evolution of agricultural and legal property codes at considerable lengths in his Glasgow law lectures. These were intended to become a book which would have filled in the territory between Theory of Moral Sentiments and Wealth of Nations. But the project was unfinished at Smith’s death. On his deathbed he asked his executors to destroy his manuscripts, which they did. However, almost 200 years later, two versions of the law lectures turned up in lecture notes taken by two students in successive years (Smith 1982). So Smith’s arguments about the evolution of property have now become well known to scholars. All this lies behind Smith’s innocent-looking half sentence in Maxim I: that is, in proportion to the revenue which they respectively enjoy under the protection of the state. Even the most minimal state maintains courts and police officers, which have to be paid for. A non-minimal state provides other public goods, including utilities, and private or semi-private goods such as education and social protection. These are financed out of tax; and they contribute to the socially constructed value of land. The twentieth-century addition to this edifice was zoning (planning permission). The right to refuse planning permission confers extra value on land that has it. It creates a scarcity of land available for high-yield uses. No politician since, and including, the young Winston Churchill has found out how to tax the betterment value of land that is either serviced by publicly funded utilities, or has planning

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permission for a high-yield activity, or both. Therefore land owners have capitalized their untaxed gains into the price of their assets. For most householders, their home is their only real asset of any consequence. Furthermore, most homeowners paid the recently inflated prices that have characterized the housing market in most developed economies in recent decades. Not they, but previous owners, capitalized their untaxed capital gain into the price of houses. This explains why the politics of estate duty (known as Inheritance Tax—IHT—in the UK) is so toxic. Any politician who proposes to raise, or even to maintain, it is immediately assailed by slogans such as “inheritance tax is a death tax” and “inheritance tax is double taxation”. A promise by the Conservatives to raise the threshold for IHT in 2007 knocked Labour Prime Minister Gordon Brown off balance, a balance he never recovered. He scrambled to put a “me too” threshold increase into his budget, but this did not restore his credibility. And yet, IHT is only paid on a tiny proportion of estates, depending on the ratio of house prices to tax thresholds. In the UK since 1993, the proportion of estates liable for IHT has varied from 2.5 per cent to 6.8 per cent (Institute for Fiscal Studies 2016: Table 14). In the USA, where the politics of protest against so-called ‘death tax’ has been even more acute, the proportion of estates liable for federal estate tax dropped to 0.2 per cent (Tax Policy Center 2016). Two things are necessary to break this impasse. One is to look at tax and transfers from a whole-of-life basis. The other is to dispel myths about “death taxes” and “double taxation”, and at the same time to allay the reasonable fears of householders who think that their only real asset may be needed in old age to pay for their care. As all tax specialists including the Mirrlees team insist, tax and benefits should be studied over the taxpayer’s life cycle. As an accounting identity, my lifetime income and expenditure must be equal, plus bequests received, minus bequests given. At some stages in my life I earn more than I spend; at others, vice versa. For most people, at some stages in life they pay more in tax than they receive in benefits; at others vice versa. Household saving to meet the needs of old age and dependent children is very important, and it needs to be done in a stable framework (another reason why changing taxes, even bad taxes, can be difficult). Rapidly increasing longevity means that the burden (on somebody) of health and social care for those no longer able to live independently is highly likely to increase. As owner-occupiers get older, they come to see more and more that their house is the main asset which could defray whatever part of these costs is not met by the state. The value of their house has been raised by past public investment and public policy, especially restrictions on planning permission for new housing. How is this vicious circle to be broken? First, by tax reformers winning a battle of rhetoric. Inheritance taxes are not death taxes. Dead people do not do much. One thing they do not do is pay taxes. The real incidence of all inheritance, bequest, and estate tax is on those who receive the proceeds. Therefore also, IHT is not double taxation. Those who pay the tax have not already paid tax on the bequest. For the inheritors, the bequest is a windfall that stands outside the accounting identity lifetime income  lifetime expenditure.

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An ageing person has a reasonable interest in what Paine eloquently called ‘liv[ing] in Old Age without Wretchedness, and go[ing] decently out of the World’. Paine proposed to fund this by a cash transfer. Nowadays, it is funded by a mixture of taxfinanced and private provision for health and social care. Although the tax system should include a land tax which both reduces the value of the ageing person’s house, and requires payment from a cash income stream that she may not have, the remedy can be adapted from one that also occurred to Paine: viz. that the tax liability may accrue until the person dies or the house is sold. In a well-designed tax system it should accrue at zero real interest. Of course this arrangement leaves losers compared to the present situation. But those losers are not the elderly, but their heirs. If, at the extreme, the tax liability on their mother’s house, plus the money she has spent on social care, completely eat up the inheritance they were expecting, that is sad. But at least they will have no IHT to pay. And no moral issues arise: there can be no moral right to demand, or expect, an untaxed inheritance. Property is not theft. But it could be taxed in a more rational way than at present. In the long run, everybody would gain.

References Braithwaite, W. J. (1957). Lloyd George’s Ambulance Wagon. London: Methuen. Butler, David, Adonis, Andrew, and Travers, Tony (1994). Failure in British Government: The Politics of the Poll Tax. Oxford: Oxford University Press. Calman, Sir Kenneth [chair] (2009). Serving Scotland Better: Scotland and the United Kingdom in the 21st Century. Edinburgh: Commission on Scottish Devolution. Churchill, Winston S. (1970 [1909]). The People’s Rights. Ed. Cameron Hazlehurst. London: Jonathan Cape. George, Henry (1929 [1879]). Progress and Poverty: An Inquiry into the Cause of Industrial Depressions and of Increase of Want with Increase of Wealth. New York: The Modern Library. Hague, W. (2004). William Pitt the Younger: A Biography. London: HarperCollins. Independent Expert Group (2008). First Evidence from the Independent Expert Group to the Commission on Scottish Devolution. Edinburgh: Heriot-Watt University. Independent Expert Group (2009). Final Report: The Consultation Response. Edinburgh: Heriot-Watt University. Institute for Fiscal Studies (2016). A Survey of the UK Tax System: IFS Briefing Note BN09. London: IFS: https://www.ifs.org.uk/bns/bn09.pdf, accessed 15 December 2016. Jenkins, Roy (1968). Mr Balfour’s Poodle [2nd edn.]. London: Collins. Johnson, Paul and Myles, Gareth (2011). ‘The Mirrlees Review’, Fiscal Studies 32(3), 319–29. Kay, J. A. and King, M. (1990). The British Tax System [5th edn.]. Oxford: Oxford University Press. McLean, Iain (2006). Adam Smith, Radical and Egalitarian: An Interpretation for the 21st Century. Edinburgh: Edinburgh University Press. McLean, Iain (2012). What’s Wrong with the British Constitution? [2nd edn.]. Oxford: Oxford University Press.

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McLean, Iain and Nou, Jennifer (2012 [2010]). ‘Why Should we be Beggars with the Ballot in our Hand? The 1909 Budget and the House of Lords’. In I. McLean, What’s Wrong with the British Constitution? [2nd edn.]. Oxford: Oxford University Press, pp. 86–99. Meade, J. (1978). The Structure and Reform of Direct Taxation: Report of a Committee Chaired by Professor J. E. Meade for the Institute for Fiscal Studies. London: George Allen & Unwin (http://www.ifs.org.uk/publications/3433). Mirrlees, J, Adam, S., Besley, T., Blundell, R., Bond, S., Chote, R., Gammie, M., Johnson, P., Myles, G., and Poterba, J. (2011). Tax by Design. Oxford: Oxford University Press. Offer, Avner (1981). Property and Politics 1870–1914: Landownership, Law, Ideology and Urban Development in England. Cambridge: Cambridge University Press. Otsuka, Michael (2003). Libertarianism without Inequality. Oxford: Oxford University Press. Paine, Thomas (1995 [1797]). Agrarian Justice. In Mark Philp, ed., Thomas Paine: Rights of Man, Common Sense, and Other Political Writings. (Oxford: World’s Classics), pp. 409–33. Ricardo, David (2004 [1817]). On the Principles of Political Economy and Taxation. In P. Sraffa and M. Dobb, eds., The Works and Correspondence of David Ricardo, Vol. 1. Indianapolis: Liberty Fund. Smith, Adam (1981 [1776]). An Inquiry into the Nature and Causes of the Wealth of Nations [2 vols.]. Indianapolis: Liberty Fund. Smith, Adam (1982). Lectures on Jurisprudence. [Originally delivered in 1762/3 and 1763/4.]. Indianapolis: Liberty Fund. Smith of Kelvin, Lord [chair] (2014). Report of the Smith Commission for Further Devolution of Powers to the Scottish Parliament. Edinburgh: Smith Commission: http://www.smithcommission.scot/wp-content/uploads/2014/11/The_Smith_Commission_Report-1.pdf, accessed 15 December 2016. Steiner, Hillel (1994). An Essay on Rights. Oxford: Blackwell. Steiner, Hillel and Vallentyne, Peter, eds. (2000). The Origins of Left-Libertarianism: An Anthology of Historical Writings. London: Palgrave. Steiner, Hillel and Vallentyne, Peter, eds. (2001). Left-Libertarianism and Its Critics: The Contemporary Debate. London: Palgrave. Tax Policy Center (2016). Briefing Book. Washington, DC: Urban Institute/Brookings Institution: http://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax, accessed 15 December 2016.

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11 The State and Tax Competition A Normative Perspective Peter Dietsch

Fiscal policy is a central topic of political philosophy. Most theories of social justice turn to redistributive tax-and-transfer regimes in one form or another when it comes to implementing their ideal of a just society. Conversely, evaluating the justice or injustice of any particular fiscal measure in isolation is misleadingly incomplete. While one can make a pro tanto judgement about the progressive or regressive impact of a particular fiscal measure, a judgement about its being just or not always has to be an all things considered judgement that applies to the fiscal policy of a jurisdiction as a whole.¹ This chapter focuses on an additional dimension of tax justice that has largely escaped the attention of political philosophers. Where differences exist in the tax rates and tax bases of different jurisdictions, the ensuing dynamics will raise normative questions in their own right.² In recent decades, governments have started to actively compete for mobile capital through low rates and favourable regulation. Tax competition, that is, the interactive tax-setting by independent governments in a non-cooperative, strategic way, has become one of the principal policy variables employed by governments to shore up the “competitiveness” of their economy—to attract capital and jobs as well as the economic growth this capital brings in its wake. Tax competition raises normative questions of two kinds. First, following the rationale set out in the first paragraph, one may ask how to evaluate the distributive consequences of tax competition from the perspective of one’s overall theory of distributive justice. Second, one can inquire whether the current institutional structure governing fiscal interdependence between states, which is one that tolerates and

¹ This argument is convincingly made by Murphy and Nagel (2002). Their book is one of the rare contributions to the literature in political philosophy in recent years that goes beyond taking fiscal policy for granted as a tool of distributive justice, and provides an analysis of various economic concepts of tax equity. ² For a more comprehensive treatment of these issues, see Dietsch (2015) as well as Dietsch and Rixen (2016).

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even encourages tax competition, is conducive to promoting the wider goals of fiscal policy. The principal objectives of this chapter are twofold. It aims, first, to spell out these two normative dimensions of tax competition between states and, second, to put forward a conceptual framework designed to address them. A project of this sort risks having the carpet pulled from under its feet if it does not provide a satisfactory account of the legitimacy of the state as the locus of substantial fiscal control. In other words, any normative judgement on tax competition between states needs to be grounded in a convincing story about why states, as opposed to a world government for instance, should form part of our institutional landscape in the first place. Unsurprisingly, this is a question that political philosophers disagree about. My goal here is not to overcome this disagreement. It is rather to posit what I consider a pluralist account of the grounding of the state that rests on relatively weak normative premises, and to then analyse the implications of this view for our perspective on, and our response to, tax competition. Laying out the conceptual groundwork for justifications of the state will be the task of section 11.1. In section 11.2, I will provide a summary account of how tax competition works. Building on the role of the state set out in section 11.1, I will then describe in more detail the two normative challenges tax competition presents. Whereas sections 11.1 and 11.2 largely consist in weaving together existing contributions to the literature on the foundations of the state on the one hand and on tax competition on the other, section 11.3 aims to break new ground. Here, I will present a normative framework designed to address the problems tax competition raises.

11.1 The Foundations of the State We mostly take it for granted that states are the institutional centrepiece of our political world. Even though the modern state is a relatively recent invention, we have trouble even imagining a world without states. And yet, a plausible case can be made that states not only conserve but sometimes even promote some of the most egregious injustices suffered by human beings around the globe. As an example, think of the way in which state borders limit mobility between countries.³ Before engaging in a normative evaluation of tax competition between states, it is therefore useful to ask if and how states would form part of an ideal global institutional structure in the first place. The response can then serve as a normative benchmark against which to evaluate current (fiscal) practices and institutions. Let me emphasize that I do not intend to discuss a comprehensive list of potential justifications of the state here. Instead, I will consider a mixed justification of the state that rests on what I believe to be a relatively weak normative assumption.⁴ Of course, ³ For a normative assessment of international borders, see Carens (1987). ⁴ It is worth pointing out that there are also pragmatic reasons for accepting states as part of the given. Views of this kind emphasize that normative arguments with practical ambitions have to hold constant

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there will be people who do not share this normative assumption, and I will come back to the question of who might fall into this category further down. The normative assumption I have in mind is the basic liberal “commitment to the principle of equal respect for persons qua autonomous, self-directing, agents”.⁵ While different theoretical currents within liberalism will disagree as to the precise implications this commitment has for questions of both distributive justice and institutional design,⁶ there is sufficient consensus to arrive at a justification of the state. Starting from the normative premise of equal respect for persons, it is obvious that the role assigned to the state from this perspective will be an instrumental one.⁷ States and other institutional schemes are to be designed such that they respect the status of individuals as ultimate units of moral concern. So what is it that guarantees such respect? What are the more specific objectives that such respect translates into? In short, they are distributive justice and democratic participation. Some moral cosmopolitans appeal exclusively to the former, some concentrate on the latter. The most plausible position is a mixed view.⁸ Let me explain.

11.1.1 Justice-based justifications of the state For justice-based views, “the sole consideration when determining what kind of political structure is best is: ‘Which best realizes the best view of justice?’ ” (Caney 2006: 726). Prima facie, it may seem counterintuitive for someone who is concerned with a distribution that respects individuals globally as ultimate units of moral concern to rely on states to attain this distribution. Given global inequalities, actual states today are arguably doing a lousy job at this task. However, the relevant question is a comparative one. Is there an alternative institutional structure that will do better? Robert Goodin provides a classic formulation of the view that the best way of discharging “the general duties that everyone has towards everyone else worldwide” (Goodin 1988: 681) is to partition them into special duties that states have towards their citizens. Two kinds of objections can be raised against such a view. The first is an empirical one. Even given ideal states, rather than today’s imperfect instantiations, assigning

some variables to satisfy conditions of feasibility. An example for such a pragmatic perspective on the state is Levy (2008). Pragmatic reasons for accepting states are compatible with a variety of normative commitments, including for instance the libertarian position held by Levy. ⁵ Valentini (2011: 4; emphasis in the original). Valentini provides an insightful discussion of equal respect as the hallmark of contemporary liberalism. ⁶ As an illustration, note that a utilitarian, a liberal egalitarian, and a libertarian will all endorse the commitment to equal respect for persons, but differ in the institutional and distributive recommendations they draw from this commitment. ⁷ As opposed to a position, for instance, that assigns intrinsic value to a state because it is the deciding organ of a national community. ⁸ The distinction between distributive justice and democratic participation is inspired by what Simon Caney calls instrumental versus democratic principles of institutional design for cosmopolitan justice (see Caney 2006). Caney, too, is sympathetic to a mixed view.

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special responsibilities may not in fact be the best way to discharge global duties.⁹ The second objection, by contrast, is theoretical. Purely justice-based views cannot adequately deal with pluralism. In the absence of an Archimedean point to arbitrate between different accounts of global justice, imposing one substantive view of the content and scope of global duties “can be accused of failing to show respect to other reasonable persons.” (Caney 2006: 731) This latter weakness of pure justice-based views is one that democracy-based views are able to address.

11.1.2 Democracy-based justifications of the state “[I]ndividuals must be acknowledged to have an interest in procedural control over the social institutions which shape values, goals, options and expectations” (Follesdal 1998: 210).¹⁰ Whereas justice-based approaches focus on whether individuals receive a fair share of social goods, democracy-based approaches emphasize the importance of controlling the rules that determine the distribution of social goods. From this perspective, the democratic control that individuals have over decisions that affect them is valued in its own right rather than for instrumental reasons.¹¹ Democracy-based justifications of the state come in negative as well as positive formulations. The former see the decentralization of power to states as a safeguard against the potential abuses of power by a world government as well as against decisions made by outsiders that are either irresponsible or insensitive to local particularities or both (see Follesdal 2001: 252; Pogge 1992: 65). The focus of the latter explicitly lies on the value of letting people decide for themselves. The tighter the connection between those whose interests are concerned and the polity making the collective decision, the better. A tight connection of this sort is not only a value in its own right, but it will also create incentives for people to invest themselves in their political community (see e.g. Cohen 2008: 589). In addition, as already highlighted by John Stuart Mill, there is a positive value in the diversity and institutional experimentation encouraged by decentralized decision-making (see Mill 1977 [1859]: 260–7). A closer look at the arguments reviewed in the preceding paragraph reveals that they are not necessarily arguments in favour of the state, but rather for a multilayered global governance structure of which states may or may not be a part.

⁹ Goodin himself makes this point against his earlier position by arguing that alternative forms of international cooperation like international organizations or NGOs provide channels to discharge global duties at a distance, and more effectively so (see Goodin 2002). ¹⁰ Follesdal attributes the cited passage to Scanlon (1978: 102). Cf. also Caney (2006: 727), who notes that what he calls “the democratic approach is one example of a more general approach to institutional design, what might be termed ‘procedural approaches’ ”. He attributes the most nuanced formulation of a democracy-based view to Pogge, who he cites as stating that “persons have a right to an institutional order under which those significantly and legitimately affected by a political decision have a roughly equal opportunity to influence the making of this decision—directly or through elected delegates or representatives” (Pogge 2008: 184; footnotes omitted). ¹¹ For example, on other accounts, democracy may be valued because it promotes justice. I thank an anonymous referee for asking me to clarify this point.

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Political decision-making should be as centralized as necessary to guarantee that those whose interests are concerned have a democratic input, but beyond this constraint political decision-making should be as decentralized as possible.¹² Note that the need to centralize is positively correlated with the socio-economic interdependence between the respective subunits. The maxim just set out is a close relative of the principle of subsidiarity, which is frequently invoked in debates on how to organize the European Union.¹³ It is also intimately connected with the structure of federalism. The latter can be read as aiming specifically at balancing out the benefits and costs of autonomous subunit decision-making against the benefits and costs of moving them to a higher, more centralized level.¹⁴ For lack of space, I will not discuss the literature on subsidiarity or on federalism in any detail here. Even though democracy-based views do not specifically call for states, a plausible case can be made that the multi-layered governance structure they call for will involve entities like states. We can interpret the state as a placeholder for one salient level of governance that strikes a balance between addressing certain issues at as centralized a level as necessary and as local a level as possible. Despite its obvious appeal, it is hard to think of anyone who defends a pure democracy-based view, that is, a justification of the state that appeals exclusively to the considerations just set out. Why? Simon Caney believes the answer lies in what he calls the “wrong priorities objection” (Caney 2006: 732). In a world in which people are starving, it would seem misplaced to establish democratic participation as the only relevant criterion to evaluate governance structures. This objection suggests that a democracy-based justification has to be complemented with some component of a justice-based justification in order to pass muster.

11.1.3 A mixed view and its implications for the fiscal context Given the pros and cons of justice-based and democracy-based views respectively, several moral cosmopolitans opt for a mixed view of some sort (e.g. Caney 2006: 733; Pogge 1992: 67). The precise formulations of such a view vary. For the purposes of this chapter, I will take a mixed view to be defined as follows. The most robust defence of the state as part of a multi-layered structure of global governance appeals to two complementary arguments. First, the state has a role to play from the perspective of distributive justice where it represents the most effective way to discharge duties of global justice—in particular those that a consensus can be reached upon in the face of pluralism.¹⁵ Second, the state can be defended on grounds of

¹² I borrow this useful distinction from Pogge (1992: 65). ¹³ “The principle of subsidiarity holds that an allocation of authority must satisfy a condition of comparative efficiency. The central unit must secure the desired outcomes better than the sub-units, due to differential ability or willingness or both” (Follesdal 1998: 193). ¹⁴ Follesdal (2001) provides an excellent overview of the normative issues at stake here. For a survey of the literature on fiscal federalism, which is of particular relevance to this chapter, see Oates (1999). ¹⁵ Caney (2006) suggests that protecting the fundamental interests of individuals is a duty of this kind.

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political participation as a tool to strike a balance between necessary centralization and desirable decentralization. Note two kinds of trade-offs that characterize mixed views of this kind. First, intravalue trade-offs. Depending largely on empirical matters, the state may or may not turn out to be the most suitable layer of governance to realize the goals of justice and/ or of political participation. Second, there are inter-value trade-offs, that is, situations where the two values of distributive justice and political participation pull in opposite directions when it comes to determining the adequate layer of governance on a given issue. For instance, consider a scenario where democracy-based considerations recommend that state polities should be able to determine the character of their health insurance independently, whereas justice-based considerations suggest this issue be moved up to a higher, e.g. regional or global, level of governance. These trade-offs will be central to my argument later on. Two issues remain to be addressed in this section. First, having characterized the basic features of mixed views of justifying the state, I want to add three brief comments on the mixed view defended here. Second, given the focus of this chapter, it is necessary to comment on the implications of a mixed view in the fiscal context. The first of my remarks on the mixed view defended here is negative in nature, that is, it aims to show what my argument is not. The argument presented here is about states, not nations. Considerable ink has been spilled between cosmopolitans and their critics on the question whether principles of justice can be extended from the national to the global level. Critics of cosmopolitanism maintain that there are certain features of national communities that render such an extension impossible.¹⁶ The position defended here bypasses this debate. I agree with those who believe that the focus of our attention should be on states as political actors, rather than on nations.¹⁷ Second, the mixed view on the legitimacy of the state has implications for the concept of state sovereignty. The justice-based component of the mixed view implies that sovereignty understood as a norm governing interstate relations is necessary limited. If one of the reasons to hand the state substantial powers of governance is to promote global justice, the resulting notion of sovereignty is one that entails not only rights, but also duties.¹⁸ As we shall see in section 11.3, the duties that flow from the ¹⁶ A prominent formulation of this position can be found in Miller (2007). For surveys of this debate between cosmopolitans and their critics, see van Parijs (2007) as well as Barry and Valentini (2009). ¹⁷ For two authors who share this opinion, consider Thomas Pogge and Jacob Levy. Writing on the question at which layer of government the power to make decisions should rest, Pogge states that “ . . . commonalities of language, religion, ethnicity, or history are strictly irrelevant. Such commonalities do not give people a claim to be part of one another’s political lives, nor does the lack of such commonalities argue against restraints” (Pogge 1992: 68). Jacob Levy notes that “[e]ven if nations value, they do not decide. Even in a democratic nation-state, the decision procedure just is the state . . . ” (Levy 2008: 488). He goes on to propose “that we reject any moral teleology of the basic form of political organisation” (494). ¹⁸ See Dietsch (2011a). Note that the limited character of sovereignty as a norm governing interstate relations is not contingent on the view of the state defended here. See Shue (2004: 15) on this point: “Without a partially rule-governed society, there are no duties; and with no duties, there are no effective

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mixed view are either duties to promote just international institutions or duties of redistribution, or both. The challenge lies in formulating a well-founded theory of what these duties are. My third and final comment aims to highlight the conditionality of both state legitimacy and state sovereignty that emerges if one accepts the account of the role of the state presented above. The state is granted power for the twin reasons of promoting a minimal notion of global justice and of allowing citizens to participate politically in their respective subunits. If an actual state fails to serve these objectives, its legitimacy suffers and the foundations of its sovereignty are undermined. If the state system as such fails to serve these objectives, it in turn will have to be revisited. In other words, the legitimacy of the state is conditional on its playing the role(s) assigned to it.¹⁹ For present purposes, I bracket the question of what should happen if the antecedent of this conditional is violated. Instead, I focus on spelling out what it means for the fiscal policy of a state to play its role of promoting the twin goals of justice and participation. This last point brings us back to the fiscal context, and to the final question of this section: If the mixed view assigns the state a role to play as part of a multi-layered governance structure, what will be its prerogatives in the fiscal context? In other words, we turn from the issue of whether states should exist at all to the question of what their fiscal role should be. The relevant considerations to answer this question flow directly from the two components of the mixed view defended above. (1) The democracy-based justification of the state entails that states are granted autonomy with respect to certain collective choices that concern their citizens. In fiscal matters, a stylized definition of this autonomy covers two basic choices regarding the size of the public budget (the level of revenues and expenditures) and the question of relative benefits and burdens (the level of redistribution) (e.g. Avi-Yonah 2000). Call this the autonomy prerogative.²⁰ (2) The justice-based justification of the state imposes a constraint on this prerogative. While, as we have seen, a thick or substantial notion of global justice fails the test of pluralism, it is reasonable to assume that there are some global institutions and some level of deprivation that any plausible theory of global justice views as unjust.²¹ This thin or minimal notion of global justice creates obligations for the state and its citizens that trump its fiscal prerogatives rights. This is nothing specifically to do with sovereignty but is a matter of what a right is. Thus, if sovereignty is a right, sovereignty is limited.” For another account that considers placing “restrictions on the type of effects that we allow changes in policies in one country to have on other countries”, see Cappelen (2005: 226). ¹⁹ The idea of a conditional conception of sovereignty akin to the one outlined here is gaining ground notably in the literature on human rights. See, for instance, Buchanan (2004: 56). ²⁰ For a detailed analysis of the content of the autonomy prerogative, see Dietsch and Rixen (2014a: 150–77). ²¹ This chapter explicitly brackets the question of what the threshold for these injustices should be.

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outlined under point (1). In other words, this minimal notion of global justice takes priority over both the value of local (e.g. state) political participation and over the more substantial theory of justice that prevails at the local (e.g. state) level. Call this the global justice constraint. In the introduction, I emphasized the importance of distinguishing two facets of fiscal policy: Fiscal policy as a means to realize local (e.g. state) autonomous political choices on the one hand, and fiscal policy as a means to promote (global) distributive justice on the other. As the discussion of the mixed view illustrates, both of these facets fit under the ideal of liberalism we started out with. The two points just made show how the two relate to one another: Citizens enjoy the twin fiscal prerogative of choosing the size of their state budget and the level of redistribution, subject however to a global justice constraint. The next section will show why such a detailed discussion of the foundations of the state is essential to an adequate understanding of the impact of tax competition.

11.2 The Double Impact of Tax Competition In order to assess its impact, it is useful briefly to review how tax competition works.²² As already mentioned, tax competition is defined as the interactive tax setting by independent governments in a non-cooperative, strategic way. For tax competition to exist there must be fiscal interdependence. This condition holds when the fiscal policy of one country creates externalities for other countries in the sense that it affects their tax base. Tax competition takes a variety of forms. It operates not only through lower rates, but also through the definition of the tax base, preferential tax regimes for foreigners, loopholes, or other regulative measures like bank secrecy. Due to its mobility, capital is the prime target of tax competition. Three types of capital can be distinguished to illustrate different aspects of tax competition. First, classical tax havens target individual or corporate portfolio capital through a combination of low or even zero rates with legal provisions such as bank secrecy or trusts. The latter make it impossible for the revenue agencies entitled to tax the capital in question to trace it. Tax evasion of this kind is obviously illegal, which makes it hard to come up with reliable estimates of the magnitude of these activities. However, the figures that do exist as well as recent scandals such as the revelations of the Panama Papers suggest that it is significant.²³

²² Given the objectives of this chapter, this review will be brief. For a comprehensive discussion, see AviYonah (2000) as well as Rixen (2008). My discussion of tax competition in the next four paragraphs is closely modelled on Dietsch and Rixen (2014a). ²³ Estimates for the annual revenue loss to governments from this kind of tax competition range between US$155 billion and US$255 billion (Owens 2007; Tax Justice Network 2005). Zucman (2013) estimates that 8 per cent of global wealth is held offshore. Some regulatory progress to curtail tax competition for portfolio capital has been made in recent years, notably with the OECD’s Common

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Second, there is competition for so-called paper profits. Multinationals are able to shift profits from high-tax jurisdictions to low-tax jurisdictions by using a number of techniques.²⁴ Since these possibilities allow multinationals to reduce their tax bill without actually relocating business activities, they are thought to reduce the competition for real investment discussed under the next point. Estimates for the magnitude of tax competition for paper profits are hard to come by, but the fact that an important share of international trade is intra-firm suggests that it is significant.²⁵ Third and finally, governments use their fiscal policy to attract real investment from multinationals. This can be done either through a low corporate tax rate or by creating so-called preferential regimes for foreign corporations (‘ring-fencing’), which has the advantage of protecting the revenue stream from domestic firms. Ireland is a classic example for a country that had a preferential tax regime for a long time, and as a result benefited from a large inflow of foreign direct investment.²⁶ Foreign direct investment obviously depends on a number of other factors, too, such as the quality of infrastructure and of human capital. Yet, empirical studies confirm that fiscal policy plays an important role. In practice, multinationals frequently “shop around” for a favorable tax arrangement among a number of potential locations that satisfy their business needs (Palan 2002). So much for a brief overview of how tax competition works. Against this background, I will now argue that the phenomenon of tax competition interferes with the state in fulfilling both of the fiscal roles assigned to it at the end of section 11.1. First, tax competition undermines the autonomy prerogative to set fiscal policy through a downward pressure on tax rates on mobile capital, thereby reducing government revenues.²⁷ Moreover, this process tends to result in a more regressive fiscal regime, which is not necessarily in line with citizens’ democratic judgements concerning the level of redistribution. Second, tax competition is in conflict with the global justice

Reporting Standard, which was adopted in response to a G20 request in July 2014; see http://www.oecd. org/tax/automatic-exchange/common-reporting-standard/, accessed 27 January 2017. ²⁴ Transfer pricing and thin capitalization are two prominent examples. Under transfer pricing arrangements, the subsidiary in the high-tax country will buy goods or services from the subsidiary in the low-tax country, thereby shifting profits to the latter. Thin capitalization occurs when the high-tax subsidiary takes out a loan from the low-tax subsidiary, in order to then deduct the interest from its tax bill. The OECD’s base-erosion and profit-shifting (BEPS) initiative and its fifteen-point action plan (see http:// www.oecd.org/tax/beps/beps-actions.htm, accessed 27 January 2017) are designed to enable governments to fight corporate tax avoidance. However, there are serious doubts about the effectiveness of the OECD strategy (see Dietsch 2016: 240). For an insightful survey of corporate tax avoidance practices, see Clausing (2016). ²⁵ This statistic is provided by the OECD (2002): https://www.oecd.org/eco/outlook/2752923.pdf, accessed 27 January 2017. ²⁶ See The Economist (2004). ²⁷ As Rixen points out, the rules of today’s international double tax treaty regime—originally designed to avoid double taxation—are central in facilitating tax competition and in undermining fiscal autonomy, which corresponds to the autonomy prerogative in this chapter (see Rixen 2011b).

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constraint, since it exacerbates inequalities between individuals globally.²⁸ Let us look at these influences in somewhat more detail. The impact of tax competition on the autonomy prerogative is both predicted by economic theory and corroborated by economic practice. Economic theory predicts a so-called “race to the bottom” in capital taxation and, as a consequence, the underprovision of public goods in all jurisdictions (e.g. Wilson and Wildasin 2004). Yet, while both corporate tax rates and rates on the top income tax brackets have fallen across OECD countries over the last thirty years,²⁹ they have clearly not hit rock bottom. The explanation for this discrepancy from the predictions of economic theory lies in the way these countries have reacted to tax competition. They have broadened the tax base, mainly to immobile factors such as consumption and labour, and have thus been able to prevent a significant loss of revenue. However, this fiscal policy response has a regressive effect. It shifts the tax burden from capital to labour, from direct taxation on revenue to indirect taxation on consumption, and from highincomes to low-incomes. One way to assess this development, then, is to say that OECD countries have bought fiscal stability in terms of revenue at the cost of a less redistributive system. In other words, they have bought the first element of their autonomy prerogative (the size of the public budget) at the price of the second (the level of redistribution). Note that the situation in developing countries differs slightly. While the pressures tax competition exercises on the public purse are parallel to those in developed countries, developing countries usually do not have the administrative resources to stabilize their revenues by broadening the tax base. As a result, what we observe in developing countries is closer to the economic prediction of a race to the bottom (e.g. Christian Aid 2008). Here, tax competition undercuts both elements of the autonomy prerogative. By putting downward pressure on rates on mobile capital, it dents revenues. Meanwhile, the feeble attempt to shore up government finances usually falls on the poor through regressive taxes on consumption or labour. The public budget shrinks and the level of redistribution falls.³⁰ This brings me to the relation between tax competition and the global justice constraint. First, even in the absence of the asymmetry between rich and poor countries just discussed, the mere fact that tax competition encourages more regressive tax regimes means that it has adverse consequences for the poor in developing countries. Provided, which is very plausible, that the poor in developing countries fall

²⁸ For an analysis of the impact of tax competition on inequality, see Dietsch (2011b) as well as Rixen (2011a). ²⁹ In OECD countries, nominal corporate tax rates have fallen from an average of around 50 per cent in 1975 to an average below 30 per cent in 2005. Over the same period, nominal top income tax rates have fallen from around 70 per cent to well below 50 per cent. ³⁰ On the issue of how international tax competition affects developing countries in particular, see also Chapter 12 in this volume, Gillian Brock and Rachel McMaster, ‘Global Taxation and Accounting Arrangements’.

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under the threshold that triggers the global justice constraint as set out at the end of section 11.1, tax competition is in conflict with this constraint. Second, note that the asymmetric impact of tax competition on rich versus poor countries exacerbates this conflict further. Developing countries are deprived of government revenues vital to fight extreme poverty.³¹ The principal upshot of this analysis is, once again, that tax competition undermines both of the pillars of state legitimacy in fiscal matters. It makes states less responsive to the democratic judgements of its citizens in terms of the size of the state budget and the desired level of redistribution, which is in tension with the autonomy prerogative; and it exacerbates inequalities both within states and across borders, thereby violating the demands of the global justice constraint. The question that arises at this point is what should be done about this. What should the institutional response to tax competition be? There are two kinds of possible responses. First, one may consider the aforementioned arguments sufficient to call for abandoning the state altogether. Advocates of such a position are likely to believe that moral cosmopolitanism in fact requires legal cosmopolitanism, that is, a world state.³² Second, one may argue that states should instead be reformed in order to restore legitimacy. The rationale of the latter approach has been discussed in section 11.1. The mixed view of the legitimacy of the state based on considerations of both political participation and justice suggests that an intermediate level of governance akin to states is in fact morally desirable. If this is so, then the best we can hope for is an institutional design that fulfils the conditions of state legitimacy. More specifically, restoring state legitimacy in a world of tax competition requires institutional reform to regulate the latter such that fiscal policy respects the autonomy prerogative and the global justice constraint. The last section of this chapter sketches the principal outlines of such institutional reform.

11.3 A Two-Pronged Normative Response to Tax Competition Recall the two facets of fiscal policy distinguished in the introduction: Fiscal policy as a means to realize local (e.g. state) autonomous political choices on the one hand, and fiscal policy as a means to promote distributive justice globally on the other.

³¹ It is another, and important, question whether the governments of developing countries actually use their public funds to this end. For the purposes of the present chapter, I limit myself to the claim that tax competition partially deprives them of the capacity to do so. ³² See Pogge (1992: 49) as well as Follesdal (2001: 242) for a consideration and rejection of this view. The reasons for rejecting such a position overlap with the reasons for rejecting a pure justice-based justification of the state—see section 11.1. Moral cosmopolitans inclined to stop short of legal cosmopolitanism will favour some kind of institutional cosmopolitanism, which focuses on the design of the institutions of global governance to respect its commitment to the equal moral standing of all human beings (see Cabrera forthcoming).

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The mixed view discussed in section 11.1 illustrates how these two facets relate from a liberal perspective: Citizens enjoy the twin fiscal prerogative of choosing the size of their state budget and the level of redistribution, yet this prerogative is subject to a global justice constraint. Section 11.2 showed how tax competition undermines both the autonomy prerogative and the global justice constraint. As we shall see now, the normative response to tax competition again reflects both of these facets. I shall argue in this section that an adequate response to tax competition will rely on both a jurisdictional component and a redistributive component.³³ This may suggest that the former serves to guarantee the autonomy prerogative, while the function of the latter is to satisfy the global justice constraint. While this does reflect the relative emphasis of the two components, I will show that this perception is simplistic and misleading. The section is divided into two parts. First, I will define and explain the jurisdictional and redistributive components of the normative response to tax competition. In a second step, I will make a series of observations on this normative account of international taxation and on how it relates to other contributions to the literature. Let me begin by discussing the jurisdictional component. As shown in section 11.2, tax competition undermines the autonomy prerogative. By setting its taxes strategically to attract capital from abroad, a state in effect depletes the tax base of other countries. However, note the following complication. Even in the absence of strategic tax setting, the diversity of tax regimes is a sufficient condition to ensure that the fiscal policy of one country creates externalities for the citizens of other countries. Suppose the citizens of country A, say, Sweden, have a preference for a larger state with a higher level of redistribution that the citizens of country B, say, the United Kingdom. Sweden accordingly taxes high-income earners as well as corporations at a higher rate than the UK does. As a consequence, there will exist an incentive for the owners of part of the Swedish tax base to shift their capital to the UK through the various mechanisms described in section 11.2. In an economically and fiscally interdependent world, such spill-over effects of the fiscal policies of one country to others are simply inevitable. It would seem wrong to condemn all types of migration of tax base between countries. The crucial question then becomes which portion of fiscal interdependence should be considered benign from a normative viewpoint, and which portion should be condemned as problematic. Prima facie, it is not clear that the latter category will necessarily be identical in scope with tax competition as defined above. The analogy with individual liberty is instructive here. For example, one might take the view that individual liberty is protected in its most extensive form compatible with guaranteeing the same liberty for everyone else. This does not imply that all actions that have an effect on others are off limits. Such a demanding criterion would ³³ One constructive way to conceive of these components is as duties that states are required to respect in their fiscal policy. See also my remarks on sovereignty at the end of section 11.1.

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make life in society rather difficult. What it requires instead is the identification of where that maximum level of liberty compatible with the same liberty for others lies. The challenge in the fiscal context is a parallel one. What is needed are jurisdictional rules that allow us to distinguish normatively benign fiscal interdependence from normatively problematic kinds of tax setting, where the latter will presumably include at least some forms of strategic tax setting and therefore tax competition. These jurisdictional rules define the precise boundaries of the autonomy prerogative. A particularly useful way of conceiving of the jurisdictional rules invoked here is as “standards for assessing the ground rules and practices that regulate human interactions”.³⁴ They are not principles that apply directly to the actions of economic or fiscal agents, but ones that should govern the fiscal structure under which these agents operate. In other words, they are second-order principles that inform the institutional design and constraints under which states set their fiscal policy and under which, ultimately, individuals or corporations face a certain set of incentives to shift their capital from one country to another. It is beyond the scope of this chapter to discuss the content of these second-order principles.³⁵ I will now turn to the redistributive component of the normative response to tax competition. Under certain conditions, so I will argue, states have an obligation to redistribute part of their tax revenues to other states. To help our understanding, two scenarios can be distinguished here: (a) The autonomy prerogative is violated by tax competition practices.³⁶ In other words, the jurisdictional rules just discussed are either not well defined, or defined but not respected. As we have seen in section 11.2, tax competition tends to exacerbate inequalities both within countries and globally between the developed world and developing countries. In the absence of the first-best solution when faced with a violation of the autonomy prerogative—which would be multilateral or global reform and proper enforcement of jurisdictional rules—states incur an obligation to correct for the additional inequalities their tax competition practices generate.³⁷ ³⁴ See Pogge (1992: 50). Both Pogge and, more recently, Ronzoni (2009) put forward institutional or background conceptions of justice. The ultimate inspiration for both of their accounts lies in Rawls’ notion of the basic structure of society. Ronzoni explicitly discusses tax competition as an example for a context where her concept of background justice is particularly relevant. Note that in the present chapter, the standards for assessing the ground rules have explicitly been standards of both justice and of autonomy. As mentioned before, I follow Caney (2006) in this respect. ³⁵ Dietsch and Rixen (2014a) put forward two such principles. First, the membership principle, which requires natural and legal persons to pay taxes where they either reside (individuals) or are economically active (corporations). This principle is in line with the residence and source principles governing international tax governance today, but its implementation suffers from multiple loopholes. Second, the fiscal policy constraint, which declares a fiscal policy illegitimate if it is both strategically motivated and succeeds in attracting a net inflow of capital. ³⁶ Under this scenario, whether or not the global justice constraint is respected is irrelevant. ³⁷ The benchmark for this compensation is the hypothetical situation in which the autonomy prerogative is respected. Determining the level of compensation raises important measurement problems. I address some of these in chapter 5 of Dietsch (2015).

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Why should redistribution play this role of a default obligation when institutional reform is not feasible? The answer is straightforward. While the reform of jurisdictional rules requires a multilateral if not global effort of cooperation, redistribution is unilaterally possible. Someone might object that instead of an obligation to redistribute to correct for inequalities generated by tax competition, it would make more sense to simply require states to disengage from tax competition practices in the first place. Such a step is unilaterally possible, and therefore not subject to the feasibility constraint of jurisdictional reform. This is indeed an alternative, but note two problems with this solution.³⁸ First, and most importantly, it would do nothing to better the situation of a country that loses out due to tax competition, since other countries are by assumption still competing and drawing away its tax base. Second, whereas the redistributive obligation put forward here asks states to correct for their share of contributing to a collectively suboptimal practice, an obligation to unilaterally desist from tax competition in effect requires them to pick up the slack for the other states’ unwillingness to reform. Arguably, this is too demanding an obligation to impose on the winners from tax competition.³⁹ A state that unilaterally disengages from tax competition would pay a price in terms of capital outflow that is likely to be higher than the compensation for inequalities generated by its tax competition practices required here. (b) The autonomy prerogative is respected, but tax competition violates the global justice constraint. In other words, despite the existence and enforcement of adequate jurisdictional rules, the inequalities created by residual tax competition practices are problematic from the viewpoint of a minimal notion of global justice.⁴⁰ Under this scenario, the countries benefiting from these inequalities have an obligation to redistribute up to the threshold where the demands of minimal global justice are met.⁴¹ It is worth mentioning that a redistributive obligation that arises from a violation of the global justice constraint can of course be due to factors other than tax competition. There are other potentially unjust institutions, or levels of deprivation that no one can be held responsible for, that trigger redistributive obligations. When we say that a state has a redistributive obligation to another state due to practices of tax competition, this does not imply that this particular obligation exhausts the redistributive obligations this state might have. Having analysed the jurisdictional and the redistributive component of a normative response to tax competition, I should point out that some instruments of fiscal

³⁸ I thank an anonymous referee for pushing me to be more precise on this point. ³⁹ In this sense, my proposal here can be viewed as a fair share theory (see Murphy 2003). ⁴⁰ As already mentioned, I presuppose here that there are forms of tax competition that do not violate the autonomy prerogative. ⁴¹ For simplicity, I do not treat separately the special case where tax competition exacerbates an already existing violation of the global justice constraint.

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policy blur the line between the two. This can happen, for instance, in situations where states share a given tax base, that is, where they jointly levy a certain tax and then distribute the proceeds based on a prior agreement. One prominent example for such an arrangement is the so-called Unitary Taxation with Formulary Apportionment for taxing multinational enterprises (see e.g. Avi-Yonah 2016). Under this regime, the accounts of multinationals are consolidated across countries before a formula is used to assign participating states the right to tax certain shares of the consolidated activity.⁴² Potential formulae to determine these shares are based on factors like the sales, payroll, and assets of a multinational in a given country. To illustrate, suppose the formula determines that 45 per cent of the relevant activity of Toyota takes place in Japan. Then Japan has the right to tax 45 per cent of Toyota’s consolidated profits at whichever rate it sees fit. It is easy to see how a redistributive element can be introduced in a consolidated tax base of this kind. If one is preoccupied with inequalities between the developed versus developing world, for instance, it is possible to introduce a factor into determining the shares states have a right to tax that is inversely correlated with per capita income (Musgrave and Musgrave 1972: 74). A similar mechanism could be used to spread the benefits of natural resources more evenly across the globe.⁴³ In both cases, the fiscal measures in question are hybrids in the sense that they combine jurisdictional and redistributive elements.⁴⁴ This concludes the first part of this section. The remainder of the chapter is dedicated to a series of observations about the merits of the two-pronged normative response to tax competition just laid out. As mentioned at the beginning of the section, it may be tempting to conceive of jurisdictional reform as the fix for violation of the autonomy prerogative, while redistribution represents the response to violation of the global justice constraint. While this is partly correct, this impression is misleadingly incomplete. Table 11.1 relates the content of the three sections of this chapter to show how the normative responses to tax competition map on to the challenges this practice poses. Two complementary insights can be read from this table in conjunction with the argument presented thus far. First, each of the components of the normative response to tax competition in fact addresses, or at least can address, the violation of both the autonomy prerogative and the global justice constraint. While jurisdictional reform represents the principal remedy for shoring up the autonomy prerogative, it is bound to curtail tax competition to some extent and therefore likely to have ⁴² The European Union is getting closer to implementing a consolidated tax base for multinationals. For more information, see http://ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/ index_en.htm, accessed 27 January 2017. ⁴³ See, for example, Pogge (1994) and Steiner (1994) on the idea of a global resource fund. ⁴⁴ Some have criticized my argument in Dietsch (2015) for its deliberate focus on jurisdictional reform (e.g. Van Apeldoorn 2016). The argument presented here shows that jurisdictional reform and crossborder redistribution are not only compatible but complementary.

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Table 11.1. Relation between the challenge presented by tax competition and the normative response Mixed justification of the state (section 11.1)

Justice-based

Democracy-based

Impact of tax competition (section 11.2)

Violates global justice constraint

Violates autonomy prerogative

Jurisdictional component

Side-effect

Principal remedy

Redistributive component

Principal remedy

Default obligation

Normative response to tax competition (section 11.3)

the side-effect of dampening global inequality. While redistribution represents the principal remedy to address the violation of the global justice constraint, I have argued that it should also serve as a default obligation where the required jurisdictional reform proves elusive. Second, given that both fixes to tax competition address both of the challenges it raises, one may be forgiven to think that exclusively relying on one of them may be sufficient. This is not so, albeit for different reasons in the two cases. Consider a proposal to deal with tax competition exclusively through redistributive measures.⁴⁵ Such an approach ignores the counterproductive effect that unsatisfactory jurisdictional rules have on the inequalities for which one is trying to correct. This is like swimming against the current when the calmer waters a few feet across would require much less of an effort to achieve the same goal. If jurisdictional reform were implemented, the exacerbating effect of tax competition on inequalities would be reduced, and less redistribution would be necessary.⁴⁶ There is a further potential danger in neglecting the jurisdictional component. Doing so risks obscuring the fact that all those who participate in an institutional regime that lacks legitimacy incur a negative duty to push for reform.⁴⁷ Conversely, consider a proposal to rely on the jurisdictional component alone. As we have seen, reforms of this sort require multilateral agreement, which is usually (even) harder to come by than a unilateral decision to redistribute. For reasons of ⁴⁵ Unfortunately, an exclusive focus on redistribution is more common than one may think. Consider the following statement by Angel Gurria, Secretary-General of the OECD: “Developing Countries are estimated to lose to tax havens almost three times what they get from developed countries in aid” (Gurria 2008). Cynics about development aid may take this as confirmation of the fact that the developed world does not really take an interest in economic convergence. However, one does not have to be a cynic to agree that pursing a policy of redistribution in the face of heavily biased jurisdictional rules is a Sisyphean task. ⁴⁶ Dietsch and Rixen (2014b) argue that for any given level of redistribution, achieving it through institutional reform of global tax governance is subject to fewer feasibility constraints than achieving it through direct cross-border redistribution. ⁴⁷ This point is emphasized by Pogge (1992: 52).

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feasibility, then, it is prudent to complement efforts for jurisdictional reform with redistributive measures to pick up the slack in the short term. My second observation concerns a question that is vigorously debated by writers on global justice. Which inequalities, and of what magnitude, are compatible with a just world order? Let me give some indication as to where the position defended here stands on this issue. I wish to make two points in this context. The first identifies a kind of inequality that is in principle compatible with my normative framework. The second adds the qualifier that our current world is far removed from the conditions necessary for this compatibility to obtain in practice. The democracy-based component of the mixed justification of the state presented in section 11.1 values autonomous local decision-making and, in the fiscal context, gives rise to the autonomy prerogative of section 11.2. Under this prerogative, the citizens of a state may, for a variety of reasons, adopt policies that will raise their standard of living above that of individuals elsewhere. They may for instance have a higher-than-average propensity to save and invest, or they may simply come up with a particularly efficient design for their public institutions. In principle, the inequalities that flow from such collective choices are legitimate. However, following the lead of contemporary liberal egalitarianism and its position on legitimate inequalities between individuals, while we want to hold states accountable for their choices, we do not want to hold them accountable for circumstances that lie beyond their control.⁴⁸ Two types of circumstances seem particularly relevant in the present context. First, the international fiscal regime is, by and large, beyond the control of individual states. If tax competition in combination with inadequate jurisdictional rules introduces the kinds of bias into this regime that were discussed in section 11.2, then, in the absence of jurisdictional reform, some people will have to be compensated for the undeserved inequalities this bias generates. Second, past injustices and their effects should equally count as circumstances that call for compensation.⁴⁹ Since both institutional bias and past injustices are very common, the resulting redistributive duties put an important constraint on the extent to which the choices of today’s states can give rise to legitimate inequalities. As to my third and final observation, distinguishing the jurisdictional and redistributive component of our response to tax competition potentially has the following advantage. Global redistributive efforts today, mainly channelled through development aid, present the relation between rich and poor countries largely as one of charity. This perspective suggests that rich countries are not directly at fault for the ⁴⁸ For an illuminating discussion on the choice–circumstance distinction applied internationally, see Cappelen (2005: 218ff.). ⁴⁹ Colonial practices and their long-term effects represent one such injustice. The maxim that governed tax collection as well as other areas of colonial power was indirect rule through traditional authority. The resulting abuse of this outsourcing of taxation to tribal chiefs instilled a deep mistrust of the state and of taxation that is very hard to undo (see Mamdani 1996). I thank my colleague Bob White for drawing my attention to this argument.

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deprivation elsewhere. It allows them to feel good about themselves, even if they also have reason to feel bad about not giving enough. Taking seriously the jurisdictional component, by contrast, implies attributing a negative responsibility to rich countries for participating in, and perpetuating, a set of ground rules that are blatantly unjust. From this viewpoint, mere redistribution, though it may represent a default obligation in the absence of jurisdictional reform, is decidedly not enough. In order to put jurisdictional reform on the political agenda, the first task is one of communication. Those who are disadvantaged by the status quo need to understand how the bias against them operates in order to formulate effective arguments for reform.

11.4 Conclusion The aim of this chapter has been to ground our understanding and regulative response to the phenomenon of tax competition in a normative account of the state and its fiscal powers. The argument has proceeded in three steps. First, I have analysed the fiscal implications of a mixed justification of the state that appeals to the values of distributive justice and political participation. According to this view, while the polity of a state enjoys the twin fiscal prerogative of determining the size of the state budget and the level of redistribution, this autonomy prerogative is subject to a global justice constraint. The latter requires that the fiscal policy of a state—and the externalities this policy generates for individuals elsewhere—respect a minimal conception of global justice. Second, I have demonstrated that tax competition directly undermines both facets of fiscal policy. The strategic setting of fiscal policy has the effect of draining the tax base of other countries, and thereby sabotages the exercise of the autonomy prerogative. At the same time, to the extent that tax competition leads to a level of inequalities incompatible with a minimal conception of global justice, it violates the global justice constraint. Third, I have argued that understanding this double impact of tax competition is important for formulating an adequate normative response to tax competition. On the one hand, tax competition needs to be regulated by jurisdictional rules that protect the autonomy prerogative. Such regulation is bound to also mitigate the exacerbating effect tax competition has on inequalities. On the other hand, the effects of tax competition should be compensated for by redistribution between states. If jurisdictional rules are adequate, this compensation exclusively serves to respect the global justice constraint. If jurisdictional rules are inadequate, it represents a form of redress for the unjust bias they contain. In formulating our normative response to tax competition as we experience it today, and to avert the threat it poses to both democracy and justice, it is key to combine jurisdictional reform with increased redistributive efforts.⁵⁰ ⁵⁰ Acknowledgements: Versions of this chapter have been presented at the International Studies Association (Montreal, March 2011) and the Canadian Political Science Association (Waterloo, May

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Bibliography Avi-Yonah, R. (2000), ‘Globalization, Tax Competition, and the Fiscal Crisis of the Welfare State’, Harvard Law Review 113/7: 1573–676. Avi-Yonah, R. (2016), ‘A Proposal for Unitary Taxation and Formulary Apportionment (UT +FA) to Tax Multinational Enterprises’, in P. Dietsch and T. Rixen (eds.), Global Tax Governance: What is Wrong With It and How to Fix It (Colchester: ECPR Press), 289–306. Barry, C. and L. Valentini (2009), ‘Egalitarian Challenges to Global Egalitarianism: A Critique’, Review of International Studies 35: 485–512. Buchanan, A. (2004), Justice, Legitimacy, and Self-Determination (Oxford: Oxford University Press). Cabrera, L. (ed.) (forthcoming), Institutional Cosmopolitanism (New York: Oxford University Press). Caney, S. (2006), ‘Cosmopolitan Justice and Institutional Design: An Egalitarian Liberal Conception of Global Governance’, Social Theory and Practice 32/4: 725–56. Cappelen, A. (2005), ‘Responsibility and International Distributive Justice’, in A. Follesdal and T. W. Pogge (eds.), Real World Justice (Dordrecht: Springer), 215–28. Carens, J. (1987), ‘Aliens and Citizens: The Case for Open Borders’, The Review of Politics 49/2: 251–73. Christian Aid (2008), Death and Taxes: The True Toll of Tax Dodging (London), http://www. christianaid.org.uk/images/deathandtaxes.pdf, accessed 29 January 2017. Clausing, K. A. (2016), ‘The Nature and Practice of Tax Competition’, in P. Dietsch and T. Rixen (eds.), Global Tax Governance: What is Wrong With It and How to Fix It (Colchester: ECPR Press), 27–53. Cohen, J. L. (2008), ‘Rethinking Human Rights, Democracy, and Sovereignty in the Age of Globalization’, Political Theory 36/4: 578–606. Dietsch, P. (2011a), ‘Rethinking Sovereignty in International Fiscal Policy’, Review of International Studies 37: 2107–20. Dietsch, P. (2011b), ‘The Effect of Tax Competition on Domestic and Global Justice’, in A. Banai, M. Ronzoni, and C. Schemmel (eds.), Social Justice, Global Dynamics: Theoretical and Empirical Perspectives (London: Routledge), 95–113. Dietsch, P. (2015), Catching Capital—The Ethics of Tax Competition (Oxford: Oxford University Press). Dietsch, P. (2016), ‘Whose Tax Base? The Ethics of Global Tax Governance’, in P. Dietsch and T. Rixen (eds.), Global Tax Governance: What is Wrong With It and How to Fix It (Colchester: ECPR Press), 231–52. Dietsch, P. and T. Rixen (2014a), ‘Tax Competition and Global Background Justice’, Journal of Political Philosophy 22/2: 150–77. Dietsch, P. and T. Rixen (2014b), ‘Redistribution, Globalisation, and Multi-level Governance’, Moral Philosophy & Politics 1/1: 61–82.

2011). I would like to thank participants at these sessions for their comments, in particular David Wiens and Colin Farrelly. Martin O’Neill, as well as an anonymous referee, also provided constructive feedback. Many discussions with Thomas Rixen have allowed me to think about the issues of the paper more clearly. I am grateful to the Humboldt Foundation for a fellowship and to the members of the Social Science Center Berlin (WZB) for their hospitality. I also thank the Social Sciences and Humanities Research Council of Canada (SSHRC) for a research grant.

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Dietsch P. and T. Rixen (eds.) (2016), Global Tax Governance—What is Wrong With It and How to Fix It (Colchester: ECPR Press). The Economist, ‘A Survey of Ireland’, 16 October 2004. European Union (2017), Common Consolidated Corporate Tax Base (CCCTB), http:// ec.europa.eu/taxation_customs/taxation/company_tax/common_tax_base/index_en.htm, accessed 27 January 2017. Follesdal, A. (1998), ‘Survey Article: Subsidiarity’, The Journal of Political Philosophy 6/2: 190–218. Follesdal, A. (2001), ‘Federal Inequality among Equals: A Contractualist Defense’, in T. Pogge (ed.), Global Justice (Oxford: Blackwell), 242–61. Goodin, R. (1988), ‘What is So Special about Our Fellow Countrymen?’ Ethics 98/4: 663–86. Goodin, R. (2002), ‘Justice in One Jurisdiction, No More’, Philosophical Topics 30/2: 29–48. Gurria, A. (2008), ‘The Global Dodgers’, The Guardian, 27 November 2008. Levy, J. T. (2008), ‘National and Statist Responsibility’, Critical Review of International Social and Political Philosophy 11/4: 485–99. Mamdani, M. (1996), Citizen and Subject: Contemporary Africa and the Legacy of Late Colonialism (Princeton: Princeton University Press). Mill, J. S. (1977 [1859]), On Liberty, Vol. 18 of Collected Works of J. S. Mill, ed. J. M. Robson (Toronto: University of Toronto Press). Miller, D. (2007), National Responsibility and Global Justice (Oxford: Oxford University Press). Murphy, L. (2003), Moral Demands in Nonideal Theory (Oxford: Oxford University Press). Murphy, L. and T. Nagel (2002), The Myth of Ownership (Oxford: Oxford University Press). Musgrave, R. A. and P. B. Musgrave (1972), ‘Inter-Nation Equity’, in R. M. Bird and J. G. Head (eds.), Modern Fiscal Issues: Essays in Honour of Carl S. Shoup (Toronto: University of Toronto Press), 63–85. Oates, W. E. (1999), ‘An Essay on Fiscal Federalism’, Journal of Economic Literature 37/3: 1120–49. Organisation for Economic Co-operation and Development (2002), ‘Intra-Industry and IntraFirm Trade and the Internationalisation Of Production’, special chapter of the OECD Economic Outlook 71, https://www.oecd.org/eco/outlook/2752923.pdf, accessed 27 January 2017. Organisation for Economic Co-operation and Development (2014), Common Reporting Standard, http://www.oecd.org/tax/automatic-exchange/common-reporting-standard/, accessed 27 January 2017. Organisation for Economic Co-operation and Development (2015), Base-Erosion and ProfitShifting, http://www.oecd.org/tax/beps/beps-actions.htm, accessed 27 January 2017. Owens, J. (2007), ‘Written Testimony of Jeffrey Owens, Director, OECD Center for Tax Policy and Administration before Senate Finance Committee on Offshore Tax Evasion, 3 May 2007’, http://finance.senate.gov/imo/media/doc/050307testjo1.pdf, accessed 27 January 2017. Palan, R. (2002), ‘Tax Havens and the Commercialization of State Sovereignty’, International Organization 56/1: 151–76. Pogge, T. W. (1992), ‘Cosmopolitanism and Sovereignty’, Ethics 103/1: 48–75. Pogge, T. W. (1994), ‘An Egalitarian Law of Peoples’, Philosophy and Public Affairs 23/3: 195–224. Pogge, T. W. (2008), World Poverty and Human Rights (Cambridge: Polity).

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Rixen, T. (2008), The Political Economy of International Tax Governance (Basingstoke: Palgrave MacMillan). Rixen, T. (2011a), ‘Business Tax Competition and Inequality: The Case for Global Tax Governance’, Global Governance: A Review of Multilateralism and International Organizations 17: 447–67. Rixen, T. (2011b), ‘From Double Tax Avoidance to Tax Competition: Explaining the Institutional Trajectory of International Tax Governance’, Review of International Political Economy 18/2: 197–227. Ronzoni, M. (2009), ‘The Global Order: A Case of Background Injustice? A PracticeDependent Account’, Philosophy and Public Affairs 37/3: 229–56. Scanlon, T. (1978), ‘Rights, Goals, and Fairness’, in S. Hampshire (ed.), Public and Private Morality (Cambridge: Cambridge University Press), 93–112. Shue, H. (2004), ‘Limiting Sovereignty’, in J. M. Welsh (ed.), Humanitarian Intervention and International Relations (Oxford: Oxford University Press), 11–28. Steiner, H. (1994), An Essay on Rights (Oxford: Blackwell). Tax Justice Network (2005), Tax Us If You Can. The True Story of a Global Failure, http:// www.taxjustice.net/cms/upload/pdf/tuiyc_-_eng_-_web_file.pdf, accessed 27 January 2017. Valentini, L. (2011), Justice in a Globalized World: A Normative Framework (Oxford: Oxford University Press). Van Apeldoorn, L. (2016), ‘BEPS, Tax Sovereignty and Global Justice’, Critical Review of International Social and Political Philosophy, online first, http://dx.doi.org/10.1080/ 13698230.2016.1220149, accessed 27 January 2017. Van Parijs, P. (2007), ‘International Distributive Justice’, in R. E. Goodin, P. Pettit, and T. W. Pogge (eds.), A Companion to Contemporary Political Philosophy, Vol. 2 (Oxford: Blackwell), 638–52. Wilson, J. D. and D. E. Wildasin (2004), ‘Capital Tax Competition: Bane or Boon’, Journal of Public Economics 88/6: 1065–91. Zucman, G. (2013), La richesse cachée des nations: enquête sur les paradis fiscaux (Paris: Seuil).

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12 Global Taxation and Accounting Arrangements Some Normatively Desirable and Feasible Policy Recommendations Gillian Brock and Rachel McMaster

12.1 Introduction 12.1.1 Overview The extent of global poverty remains staggeringly high. The World Bank estimates that about 13 per cent of the world’s population—some 900 million people—subsists below the international poverty line (World Bank 2016: 3). Yet as Kofi Annan, ex-UN Secretary General has said: “even this statistic fails to capture the humiliation, powerlessness and brutal hardship that is the daily lot of the world’s poor” (Annan 2000). Their lives are characterized by severe material deprivation such as lack of access to safe drinking water, basic sanitation, adequate shelter, or severe undernourishment. What is needed to address global poverty in a meaningful way? This is an enormous question on which we make a start elsewhere (e.g. Brock 2009; Brock 2014; Brock and Blake 2015). At least one important component involves improving various existing institutions and creating equitable ways of funding reforms necessary to address poverty. Thomas Pogge offers one of the most significant recent discussions on this issue in political philosophy. In a series of very influential articles and books, he argues that we could begin to address this issue by introducing a “Global Resources Tax” (later renamed as a “Global Resources Dividend”) to be levied on the extraction of natural resources which he estimates would raise a figure of around $300 billion, and which would make an enormous difference to those living in desperate poverty (Pogge 1994, 2001a, 2001b, 2002). His arguments skilfully connect those in the developed world with the misery experienced by those in the developing world, through showing how the former uphold various practices and arrangements that have the result of perpetuating deprivation in developing countries.

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In the first part of this article, section 12.2, we follow Pogge’s lead in showing further ways in which those in developed countries continue to contribute to the misery of those in developing countries through upholding unjust taxation and accounting arrangements. We discuss the role of tax havens and transfer pricing schemes in facilitating the flow of revenue out of developing countries, tax escape, and corruption. We show how putting a stop to the most egregious forms of these practices would raise a similar amount as the Global Resources Dividend. Ultimately, it is possible to raise revenue to address the worst forms of poverty, without any new taxes being introduced, but rather by revising key regulations around transparency in resource sales and concerning the permissibility of mechanisms that facilitate tax escape, for which there is also significant support, as we discuss. However, we also argue that there is more than one robust case for some carefully crafted new global taxes to be introduced. In section 12.3, we examine how the idea behind the Global Resources Dividend—taxing global transactions to alleviate global poverty—might be implemented in other forms. We show how some global taxes are both normatively desirable and feasible, by outlining some policy arrangements that can take account of several concerns people might have about implementation. Indeed, there are interesting opportunities worth exploring, given events that triggered the global recession of 2008. This paper explores these current taxation opportunities in more detail, along with some other initiatives for global taxes begun some time earlier. Finally, we examine why a case can be made that failure to reform our global taxation and accounting arrangements may well mean that an unjust global basic structure exists. Those concerned with remedying global injustice should consider reforms in the area of taxation and accounting as a high priority.

12.1.2 Thomas Pogge’s account: a brief synopsis There is no more influential argument concerning global taxation in the philosophical literature than that of Thomas Pogge. Because of its dominance in the literature we must discuss the main features and we briefly review the central points here. Pogge argues that there are a number of relevant connections between people in affluent, developed countries (“us”) and those in absolute poverty in developing nations (“them”).¹ For instance, our relative positions have arisen from the same historical process that included pervasive grievous wrongs (Pogge 2001b: 14–15). Historical injustices have a role to play in explaining both our affluence and their poverty. Furthermore, we all rely on a single natural resource base. We have fostered international arrangements concerning the distribution of these resources that benefit us and disadvantage them enormously. More generally, we all “coexist within a single global economic order that has a strong tendency to perpetuate and even to ¹ We continue to use this shorthand terminology since it is widely used in the literature and does generally pick out the relevant groups, even though there are clear exceptions.

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aggravate global economic inequality” (Pogge 2001b: 15). By failing to take steps to reform the international order, we may certainly be failing in some of our positive duties to help those in acute distress. However, and more significantly, we may be “failing to fulfill our more stringent negative duty not to uphold injustice, not to contribute to or profit from the unjust impoverishment of others” (Pogge 2001a: 60). According to Pogge, two international institutions are particularly worrisome in this regard: the international borrowing privilege and the international resource privilege.² Any group that exercises effective power in a state is recognized internationally as the legitimate government of that territory, and the international community is not sufficiently concerned with how the group came to power or what it does with that power. Oppressive governments may borrow freely on behalf of the country (the international borrowing privilege) or dispose of its natural resources (the international resource privilege) and these actions are legally recognized internationally. These two privileges have enormous implications for prosperity in poor countries. For instance, these privileges provide incentives for coups, influence what sorts of people are motivated to seek power, and facilitate the stability of oppressive governments. Furthermore, should more democratic governments gain power, they are saddled with the debts incurred by their oppressive predecessors, thus significantly draining the country of resources needed to firm up its fledgling democracy. All of this is disastrous for many poor countries. Because foreigners benefit so greatly from the international resource privilege, they have an incentive to refrain from challenging the situation (or worse, to support oppressive governments). For these sorts of reasons, the current world order largely reflects the interests of wealthy and powerful states. Local governments have little incentive to attend to the needs of the poor as their continuing in power depends more on the local elite, foreign governments, and corporations. Pogge maintains that we (in affluent, developed countries) have a responsibility to stop imposing this unjust global order and to mitigate the harms we have already inflicted on the world’s most vulnerable people. If we make no reasonable efforts at institutional reform, benefiting from unjust institutional schemes implicates us in the misery of those who suffer under the injustice. Pogge offers suggestions concerning reforming the two international privileges, the thrust of which is that we should only bestow these privileges on democratically elected governments (Pogge 2002). In addition, a central positive proposal that he offers has been very influential in shaping discussions on global justice. Pogge presents a moderate proposal that aims to make a start on better discharging this negative duty not to uphold injustice. ² As Allen Buchanan defines the term, “an institution is a kind of organization, usually persisting over some considerable period of time, that contains roles, functions, procedures, and processes, as well as structures of authority” (2004: 2). We use the term “institution” slightly more broadly to include also significant practices which set up authoritative norms for interaction between individuals and groups, even if no one formal organization oversees the practices’ operations, including enforcement of the rules (which might take diffuse forms).

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The proposal is to implement what he calls the “Global Resources Dividend” (GRD) (Pogge 2001a). For any resources states or governments decide to use or sell, they must share a very small part of the value of those resources, and as an initial suggestion he proposes the GRD be set at about 1 per cent of the global product.³ Such a tax could be largely collected through strategic placement on key activities or resources, such as the extraction of oil. Pogge carefully marshals the case for how this could be done, with keen appreciation of how to circumvent regressive effects for the global worst off. Although governments will be responsible for collecting the GRD payable in their territories, costs can be passed on to the consumers of these resources, who overwhelmingly reside in wealthy states.⁴ A 1 per cent tax would, he estimates, raise about $300 billion annually.⁵ Provided it is well spent, such a sum could make an enormous difference to helping the poor. In Pogge’s view, the projects that should be given high priority in funding are those that try to ensure “all human beings will be able to meet their own basic needs with dignity” (2001a, 67–8). In this paper we will not consider the details of Pogge’s proposal, which would anyhow be an extensive task and is partially undertaken elsewhere (Brock 2009). Rather, our focus here is to show continuity with Pogge’s project and some further ways in which reforms to international practices are also recommended. In section 12.2, we highlight ways in which those in developed countries continue to contribute to the misery of those in developing countries through upholding unjust taxation and accounting arrangements. We first discuss the role of tax havens, transfer pricing schemes, and double accounting standards in facilitating tax escape, corruption, and the flow of revenue out of developing countries. We then show how putting a stop to the most egregious forms of these practices by revising key regulations would raise a similar amount to Pogge’s Global Resources Dividend while avoiding the introduction of new taxes.

³ In World Poverty and Human Rights, Pogge suggests that the figure be set at “1 percent of aggregate global income, currently about $312 billion annually. This corresponds to the income shortfall that separates the 2801 million human beings living below the World Bank’s $2/day poverty line . . . from this line” (2002: 205). Updating this estimate for 2010 statistics suggests the current figure may be closer to $600 billion (International Monetary Fund 2010). Since much of the data that is available and on which we rely for the following analysis is for different years, some focused around 2005, others much more recent, it is difficult to settle on a particular year which should form the basis of comparison. We therefore accept that Pogge’s proposal would probably yield between $300 billion and $600 billion. The main point is that many of the suggestions we explore here yield similar amounts, even if we cannot be as precise as we would like in making direct comparisons about how much revenue some of the proposals we recommend would yield. ⁴ The details of how much the tax should be, what should be taxed, who should be exempt, and so forth will be determined by an interdisciplinary group consisting of economists, international law experts, and the like. ⁵ Updating this estimate for 2010 statistics suggests the current figure may be closer to $600 billion (International Monetary Fund 2010). Many of the suggestions we explore here yield roughly similar amounts.

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12.2 Tax Escape Reforms to our global taxation and accounting arrangements could have much needed and profound effects for developing countries. In this section we discuss the problem of massive tax escape. Tax escape is rampant all over the world, but is an especially pressing concern in developing countries where development revenue is badly needed. It is estimated, for example, that at least $255 billion in tax revenue is lost worldwide through tax havens each year (Addison 2009). It is further estimated that about half of all world trade passes through tax haven jurisdictions, as profits are shifted to places where tax can be avoided (Christensen, Coleman, and Kapoor 2005). Tax havens provide an important channel for tax evasion and constitute a significant reason why many corporations pay little, or even no, income tax. Economic activity is often declared as occurring in places where taxes are low, rather than accurately recorded where it actually takes place. “Transfer pricing” is a recognized accounting term for sales and purchases that occur within the same company or group of companies. For example, it is not uncommon for a company to produce goods in one country, “sell” them to a subsidiary in a tax haven at cost price, then sell them again at an inflated price to a third subsidiary. The end result is that when the product is finally sold to a consumer, it registers as a tax loss. Because these transactions occur within the company, there is wide scope to trade at arbitrary prices instead of market-attuned ones. While some degree of transfer pricing is unavoidable, these transactions create significant opportunities to disguise profits and report instead losses that attract no fiscal obligations, and indeed often entail tax refunds. Transfer pricing and other complex financial structures reduce transparency, thus facilitating tax evasion.⁶ Through such schemes, developing countries are estimated to lose revenue far greater than the annual flow of aid. Consider that for each dollar of aid that flows into a country, 6–7 dollars of corporate tax evasion flows out (Baker 2005). Consider, also, Ray Baker’s analysis according to which of the $500 billion to $800 billion of illicit annual financial outflows from developing countries, only about 3 per cent relates to bribery and corruption of public officials, whereas 60 per cent to 65 per cent is corporate tax evasion (Baker 2005). It is worth remarking that using even the conservative estimate we see that collecting 60 per cent of $500 billion would be enough to raise $300 billion, without the need to introduce any new taxes, while using the less conservative estimate would raise approximately $480 billion. Tax evasion and avoidance threatens both development and democracy, especially in developing countries (Oxfam GB 2009). Because large corporations and wealthy individuals are effectively escaping taxation, the tax burden is frequently shifted onto ordinary citizens and smaller businesses. Governments thereby collect much-reduced ⁶ For further accessible accounts of transfer pricing see, for instance, http://www.taxresearch.org.uk/ Blog/2007/08/10/transfer-pricing-2/.

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sums insufficient to achieve minimal goals of social justice, such as providing decent public goods and services, which can also have a dramatic effect on developing or maintaining robust democracies (Vigueras Hernández 2005). Furthermore, because most developing countries are in competition in trying to entice foreign capital, offering tax-breaks or tax havens may seem to provide an attractive course. However, as states compete to offer tax exemptions to capital, the number of tax havens increases, thereby making developing countries worse off. Corporations pay much reduced, if any, taxes, and ordinary citizens have to bear more of the cost of financing the social and public goods necessary for sustaining well-functioning communities. It is often suggested that developing countries need to provide tax incentives to attract foreign direct investment (FDI), and so there are important benefits that accrue to developing countries when they offer favorable taxation arrangements. Many developing countries compete for FDI and seem to encounter pressure to provide tax incentives or exemptions. But evidence suggests there are limited, if any, net benefits from such incentives, and that these tax incentives play little part in investors’ decisions, so their use may be futile (Oman 1999). As Van Parys and James (2010) have identified, it is highly problematic to assume the effects of tax incentives will be identical in both the developed and the developing worlds. Much more important to investment in developing states are fundamental factors such as quality of institutions, basic infrastructure, stable government, sound fiscal conditions, available labour force, respect for the rule of law, good accountability, and so forth (Oman 1999).

12.2.1 Natural resources and lost taxation In many cases, the revenue that poor, developing countries could obtain from resource sales would be more than enough to finance necessary reforms to address poverty, that is to say, if the revenue were actually received and appropriately disbursed. Assisting countries in receiving such revenue seems especially important and here developed country multinationals and governments have been especially negligent. We explain why in this section. How widespread is the problem of corruption in the sale of African resources? McFerson (2009) makes the following estimates of losses from corruption in Africa: $1 billion a year has been stolen from the Angolan people since 1996; one third of the Democratic Republic of Congo’s oil revenue is not shown in the country’s budget; and despite $7 billion in annual oil profits, 60 per cent of Guinea’s population live on less than $1 per day. It is readily apparent that tax losses from resource sales decrease the money available for development spending. Without a minimum level of government investment in basic infrastructure, economic growth is impossible. Corrupt resource sales harm more than just the economy: for instance, corruption is strongly linked to severe restrictions on political and civil rights (McFerson 2009). Governments (and individuals within governments) who stand to gain from corrupt deals are apt to take

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extreme measures to retain their positions. This is confirmed by indicators published by Freedom House (2006) showing an important negative correlation between corruption and freedom. How has the international economy facilitated corruption? Unethical oil companies are often to blame for executing corrupt deals (McFerson 2009; Southern Africa Resource Watch et al. 2009). However, these companies have been aided by both governments and international organizations. For example, in the 1990s the World Bank sought to implement the so-called Washington Consensus in Africa. To achieve this, bank loans were made contingent on the adoption of structural adjustment programmes. A typical condition imposed through these programmes was privatization of state assets which often entailed selling off such assets to foreign multinational corporations, thereby facilitating wealth transfer from developing to developed countries. More generally, the focus on neo-liberal policy in this period undermined African citizens’ ability to access the profits from resource extraction. Initiatives addressing this problem have focused on achieving legitimacy through transparency. The “Publish What You Pay” campaign, for example, centres on pressuring companies to “publish what you pay” and governments to “publish what you earn”. Founded in 2002, the initiative aims to “help citizens of resource-rich developing countries hold their governments accountable for the management of revenues from the oil, gas, and mining industries” (Publish What You Pay 2010). A significant outcome of this campaign has been the Extractive Industries Transparency Initiative (EITI) founded in 2003 at the instigation of the UK government. Governments that elect to join must publish all revenues from extractive companies, and in return, mining companies must submit reports to the government for public dissemination. As at June 2016, fifty-one countries had implemented the EITI, thirtyone of which were fully compliant with EITI requirements.⁷ Both the World Bank and International Monetary Fund (IMF) have officially endorsed the EITI scheme. However, the EITI has also been the subject of criticism from those who feel it is overly focused on the disclosure of revenues as opposed to contract transparency, and has failed to ensure meaningful civil society participation (Bank Information Centre and Global Witness 2008). On a more positive note, some individual states have achieved notable progress towards such goals. For instance, the Cardin–Lugar Transparency Provision of the Dodd–Frank Wall Street Reform and Consumer Protection Act, passed into US law in 2010, requires all energy and mining companies registered with the US stock exchanges to disclose their payments to foreign oil, gas, and mineral-producing countries (§1504). The International Accounting Standards Board (IASB) has recently considered an Extractive Industries proposal to require corporations to disclose country-specific information on “reserve quantities, production quantities, development and

⁷ A useful video explaining the scheme is available at https://eiti.org/.

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production costs” (International Accounting Standards Board 2009). In comparison to the voluntary EITI scheme, the IASB has greater power to compel acceptance, giving this initiative a greater chance at success. Unfortunately, however, this project was discontinued in 2012 and subsumed into a broader IASB investigation regarding intangible assets.

12.2.2 Tax havens: characteristics, scope, and effects A typical tax haven is a state with nominal taxes, lack of transparency, and no substantial economic activity (Addison 2009). Dharmapala (2008) observes that tax havens play a disproportionate role in the global economy. Protected by national sovereignty and unwilling to accommodate the desires of the world’s powerful states, tax havens are an immensely disruptive force in international taxation. Due to the impossibility of identifying the point at which a low-tax state becomes a tax ‘haven’, it can be difficult to assess the exact scale of this problem. Further, lists of tax havens published by international bodies are often subject to criticism on the basis that they exclude many developed states for political reasons (Tax Justice Network 2016). We see value in the approach adopted by the Tax Justice Network, which focuses instead on a continuum of “tax haven-ness”. What is undisputed, however, is the extent to which major corporations take advantage of the opportunities such states offer. A December 2008 US Government Accountability Report claims eighty-three of the top 100 US companies and sixty-three of the top 100 US federal contractors operate subsidiaries in tax havens (US Government Accountability Office 2008). American taxpayers may be distressed to learn that many of these tax-avoiding corporations received bailout money from the US government during the global financial crisis (Keeler 2009). Indeed, the scale of corporate deception can take on an almost farcical aspect. In the Cayman Islands, one building—Ugland House—is supposedly home to 12,748 US companies (Keeler 2009). Further, the Task Force on Financial Integrity and Economic Development et al. (2010) estimates that the four largest banks in the UK have 5,400 subsidiaries between them, and that 1,200 of these subsidiaries operate in recognized tax havens. The problems created by tax havens are threefold. First, and primarily, such havens divert revenue from governments: in 2016, it was estimated that tax havens are costing poor countries at least $170 billion in lost tax revenues every year (Oxfam GB 2016). In addition to this direct impact, governments incur further indirect losses when attempts are made to defend the tax base (Addison 2009). Furthermore, it should also be noted that proper payment of taxes in developed states would significantly increase the funds available for aid. Secondly, tax havens support illegal activity including bribery, organized crime, and tax evasion. The World Bank estimates the annual flow of illicit money across borders to be $1 trillion to $1.6 trillion (Baker 2005). Tax havens play a crucial role in facilitating these flows, and addressing this problem has the potential to significantly increase the revenues of developing states. Reducing “the flow of illicit flight capital

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out of poor countries by even 25 per cent, a modest goal, would leave more money in poor countries than the total of overseas development assistance provided by richcountry donors” (Baker and Joly 2009). Furthermore, stemming the flow of illicit money would promote stability and security in developing states. In the decade before the September 11 attacks, approximately $30 million to $50 million a year is estimated to have been passed to al-Qaeda through “fake foundations, disguised corporations, and bankers based in tax havens” (Baker and Joly 2009). Thirdly, tax havens destabilize the international economy. This was evidenced in the acknowledgement throughout the April 2009 G20 meetings that tax havens were linked to the global crisis (Keeler 2009). The IMF agrees with this diagnosis, claiming in a 2010 report that “tax distortions . . . encouraged the development of complex financial instruments and structures”, ultimately leading to the culture of “excessive risk taking” that fuelled the global crisis (International Monetary Fund 2010). Both instability in general, and the crisis in particular, have negative impacts on the relatively fragile economies of developing states.⁸ To date, attempts to combat tax havens have focused on ‘information-sharing’; encouraging tax haven states to disclose information. These include the OECD ‘Harmful Tax Practices’ initiative, ongoing since 1998. These attempts have drawn a great deal of criticism, however, and are widely considered to have been ineffective (Spencer and Sharman 2007; Addison 2009). Despite this, there are signs that the present state of the global economy represents a unique opportunity to address the problem of tax havens. The change in institutional attitudes towards havens can be seen in the IMF’s decision to argue for a controversial and challenging increase in tax cooperation (International Monetary Fund 2010). Coming from an institution that has previously favoured neo-liberal policy, such comments are indicative of a post-crisis willingness to try new solutions. It seems that certain key actors have finally been persuaded of Spencer and Sharman’s assertion that “a world in which a global plutocratic class pays little or no tax . . . will prove unsustainable” (Spencer and Sharman 2007). In addition, Keeler (2009) suggests that the crisis has turned public opinion sharply against tax havens, which now represent “the perfect embodiment of suddenly unfashionable capitalist greed”. Some suggestions for the future direction of tax haven reform are discussed below.

⁸ There are some who argue for a more positive view of tax havens. According to Dharmapala (2008) the existence of tax havens allows high-tax countries to differentiate between mobile and immobile firms and thus tax immobile capital at a higher rate. The reasoning behind this is that all countries tax both mobile capital and immobile capital. If tax havens are not allowed, one tax level will be set for both categories in order to remain competitive. If preferential regimes are allowed, countries can set high rates on immobile capital and only compete on the taxes imposed on mobile capital. Therefore “preferential regimes can thus mitigate tax competition by restricting its effects to a subset of the tax base” (Dharmapala 2008). However, this idea is not expanded upon by other scholars.

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The first issue to consider is which body should take responsibility for driving change. In April 2009 the G20 states founded the Financial Stability Board with a mandate to “assess vulnerabilities affecting the financial system” (Financial Stability Board 2010). This Board is intended as a ‘fourth pillar’ in the global economic system after the IMF, WTO, and World Bank. To date, its work has focused on coordinating the development and monitoring of financial sector reforms across G20 states. At present, the Board is not considering any proposals relating specifically to tax havens. However, it seems this body is ideally placed to examine this issue. Firstly, the G20 are an appropriate group to take action against tax havens—many of their member states are adversely affected by havens. As their combined GDP makes up 85 per cent of the world total, the group has significant potential to implement changes if desired. Secondly, the work the Board is presently doing, particularly in the area of “shadow banking”, suggests they have the necessary expertise to address tax havens. The second issue is how tax haven reform could occur. While information-sharing and domestic tightening of tax rules have a useful role, we believe that international measures stand the best chance of success in minimizing the harms of tax havens. The US Treasury has proposed several international reforms, including the ‘worldwide formula apportionment’ model. This involves assigning the corporate tax base across jurisdictions according to a formula reflecting the global dispersion of firm activity, thus denying corporations the opportunity to choose where their profits are taxed (Kudrle 2009). A similar model is being considered by the EU. Under this proposal, companies could choose a single tax base from member states and a formula would be used to distribute profits across countries (Mintz and Weiner 2003). While the technical details of such a scheme are outside the scope of this paper, such reforms are deserving of further attention.

12.3 Global Taxes In recent decades a number of global taxes have been proposed. These include: carbon taxes, currency transaction taxes (e.g. Tobin taxes), air-ticket taxes, immigration taxes, taxes on arms trading, e-mail taxes, and taxes on the sale of luxury goods. In assessing which are worthy of further consideration, we consider both normative and pragmatic arguments.⁹ Along with the normative force of the case for the tax, we also discuss practical issues such as the volume of the expected revenue, its proposed uses, the political feasibility of the tax, anticipated levels of compliance or opportunities for non-compliance, and potential externalities. Tax is, of course, a complex and specialized area, and for this reason it is often seen as the exclusive domain of accountants and financial advisers. However, we believe political philosophy can make an invaluable contribution to tax debates. Decisions on ⁹ We show how normative and pragmatic issues might sometimes overlap in section 12.4, in addition to there being clear differences between such considerations.

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who and what to tax have global impacts, and the ethical implications of these choices cannot be ignored. Further, unlike major corporations, the world’s poor cannot afford lobbyists to advocate for a tax system that favours their interests. By discussing and promoting new methods of taxation based on normative aims, political philosophy can help to redress this imbalance. Indeed, issues concerning domestic or more local taxation have long concerned philosophers. While some maintain that all taxation is theft, on a par with forced labour, or violates self-ownership (e.g. Nozick 1975: 169–72), others argue that taxation is much more like a fair contribution to collective goods and community maintenance, or required to distribute the fruits of our collective efforts more justly (Rawls 1971). Issues of taxation have been central concerns of political philosophy, invoking core questions about the legitimacy of governments, the nature of freedom, coercion, property rights, and the appropriate functions of government. The issue of global taxation has not received anything like the same attention as state taxation issues, and this is odd since arguments for global taxation, in many cases, mirror arguments for the permissibility of local taxation: for instance, concern with paying fair shares of public goods at the local level seem at least as relevant at the global level. Global taxation could be an important tool in shaping policy and raising revenue to tackle significant global justice problems, especially those posed by inadequate resourcing for global public goods and poverty elimination. Taxes on carbon emissions might be one important policy response to threats posed by climate change. Taxes on speculative currency trading could reduce instability in developing countries and promote beneficial development. Taxes on airline tickets currently support global efforts to reduce burdens of disease, such as malaria, HIV/AIDS, and tuberculosis. And recent events that triggered the global recession of 2008 have generated increasing public support for the permissibility of more financial transaction taxes, as we see with the “Robin Hood Tax” proposals (Robin Hood Tax 2010). We have also already seen how reforms to our global taxation and accounting arrangements could have profound effects for developing countries in other ways. For instance, tax havens provide an important channel for tax evasion and facilitate vast tax escape, especially from developing countries. Failure to collect taxes has damaging effects for development and democracy. Issues of taxation should therefore be of interest to anyone concerned with matters of global justice. We have noted already that there are a number of specific proposals for levying global taxes. Here we discuss very briefly only a few: first the air-ticket tax and second, currency transaction taxes (of which Tobin may be the most well known).

12.3.1 Air-ticket tax The air-ticket tax represents the most successful example to date of a ‘global’ tax levied with the intention of raising poverty-fighting funds. The concept of such a tax is to levy a small “solidarity contribution” on airplane tickets at the point of sale.

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The tax is intended to pass unnoticed due to the disparity between its small size and the significantly larger cost of the ticket. At present the largest air-ticket tax initiative is that run by Unitaid. Since November 2008, ten countries have implemented a small compulsory airline tax under this scheme: Cameroon, Chile, Congo, France, Guinea, Madagascar, Mali, Mauritius, Niger, and South Korea. Norway gives part of its emissions tax, while other member countries have chosen to implement voluntary airline ‘taxes’. Unitaid also accepts contributions from states and institutions that wish to give lump-sum payments (Gumbel 2009). The funds raised are used to finance medicines required to assist poor countries struggling with the burdens of diseases such as malaria, AIDS, and tuberculosis. To date, the project has been very successful, raising over $2.5 billion (Unitaid 2016). Approximately 60 per cent of funding to date has been raised by air-ticket taxes, making the tax a clear success. Statistics provided by Unitaid show the concrete effect even a small tax can have—the €4 tax levied on international flights out of France, for instance, funds treatment for one HIV-positive child (Unitaid 2010). The achievements of the project are further reflected in the powerful supporters it has attracted, including the WHO, the Clinton Foundation, and the Global Fund. However, there is scope for further expansion. While Unitaid has proved the viability of the air-ticket tax model, it has not to date attracted widespread international cooperation. This could be achieved by various institutional design innovations, such as making it a requirement that states implement this tax as a condition of belonging to the International Civil Aviation Organization (ICAO) (the UN body tasked with oversight of international air transport). Alternatively, it could be made a condition of membership of the WHO that one’s state agrees to the air-ticket tax. There is also reason to believe that the tax could be substantially increased. A study conducted by Brouwer, Brander, and Van Beukering (2008) on consumer willingness to pay for an additional airline tax found that the average willingness to pay was very high—up to approximately €20. It is notable, however, that consumers stated they only supported such a programme on the grounds that it was mandatory. This suggests voluntary ‘opt-in’ schemes are less likely to succeed.¹⁰

12.3.2 Currency transaction tax Unlike the air-ticket tax, which is actually in operation, the Tobin tax has not yet been implemented anywhere. Originally proposed by James Tobin in the 1970s, this proposal would impose a miniscule tax on every currency trade. The central benefits of such a tax are twofold. First, a Tobin tax could bring greater stability to the financial system. It is estimated that well over half (on some estimates, 95 per cent) of the $4 trillion in currency transactions that occur every day are speculative and as such are potentially ¹⁰ However, unlike the Unitaid programme, in this study the proposed tax revenue was used to offset environmental costs. This may have influenced responses.

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destabilizing to local economies (Wahl and Waldow 2001). Local currencies can devalue rapidly, causing major financial crises such as occurred in Argentina in 2001, greatly harming millions of people. Tobin’s original idea was premised on the suggestion that a small tax on currency trading would reduce speculation and promote more long-term investment, thereby preventing such crises (Tobin 1974). Secondly, such a tax has the potential to raise immense sums of money that could be targeted towards global poverty programmes. Because the foreign exchange market is the largest in the world (at least $900 trillion in 2009) a tax on this market has the potential to raise vast sums (Task Force on Financial Integrity and Economic Development et al. 2010). While estimates vary according to the size of the tax and the methodology used, most serious studies have predicted revenue of approximately $30 billion to $100 billion (Baker 2008; Schmidt 2008; Baker et al. 2009). It is this benefit, rather than the stability argument discussed above, that has been emphasized in recent discussions on currency transaction taxes. Current thinking dictates a minimal tax that raises significant revenue without disrupting markets is likely to be the most effective model (Robin Hood Tax 2010). In our view, the currency transaction tax is likely to prove practically and politically workable. Currency deals already carry an administrative charge in the main currency exchange countries, so the administrative feasibility of such a tax is already plain. Because foreign exchange markets tend to be concentrated, a currency transaction tax can be effective even if it is only imposed on a limited number of states. In Europe, for example, 97 per cent of all such trading occurs in either the UK or Germany, so taxes in other states would not be necessary (Schulmeister 2009). Politically, the tax has considerable support not just from NGOs but also from politicians. In September 2010, sixty nations, including Britain, Japan, and France, jointly proposed a currency transaction tax before the UN (Irish 2010). Since the financial crisis, the concept of such taxes appears to have gained popularity with the general public. For example, the ‘Robin Hood Tax’ campaign, launched in 2010, is proving effective in reinvigorating debate around currency transaction taxes. In April 2011, one thousand economists including Jeffrey Sachs and Dani Rodrik signed an open letter to the G20 Finance Ministers encouraging them to adopt a Financial Transaction Tax (Stewart 2011). While it is unhelpful to view a currency transaction tax as a ‘punishment’ for banks, post-crisis sentiment means the objections of banks are unlikely to definitively stall a tax proposal. Opponents of a currency transaction tax raise two main objections. First, it is argued that banks will simply alter their systems to avoid the tax. While this is possible, particularly if the tax is imposed in only a few countries, we believe it is an unlikely outcome. The taxes proposed are remarkably low—a fraction of 1 per cent. Further, there are notable benefits from conducting transactions in established commercial centres. For example, London is widely accepted as holding a “time zone advantage” over other financial centres. In addition, the extreme concentration of financial markets in the UK and Germany suggests the presence of positive network externalities

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(Schulmeister 2009). It is unlikely traders would weigh the small cost of a currency transaction tax to be greater than these existing benefits. On the other hand, there are important costs associated with choosing less secure alternative routes. Financial and foreign exchange settlement systems such as SWIFT currently assist in the coordination of many millions of financial transactions each day (SWIFT 2011). If a currency transaction tax were incorporated into these services, traders would have little choice but to pay it. Any alternative route would be both “difficult and unprofitable” (Schmidt 2008). The UK “stamp duty”, imposed on stock transactions, provides support for these arguments. Despite the relatively high rate of that tax—0.5 per cent—London continues to operate as a major financial centre (Schulmeister 2009). Second, it is argued (e.g. Dolphin 2010) that banks will not be able to afford the tax, resulting in costs being unfairly passed on to consumers. In our opinion, this debate should not be given undue weight. The crucial aspect of a currency transaction tax is its potential to raise revenues that can be used for development purposes. For this reason we should not be too focused on whether those revenues are sourced from the profits of banks or from the incomes of their consumers (who, by global standards, are still highly advantaged). Though this concern about passing costs on to consumers is frequently raised within developed countries, such as the United Kingdom, adopting a more global perspective, its force should not derail the proposals, since even if these relatively small costs are passed on to consumers, it is not unreasonable for the relatively affluent in developed countries to assist the severely disadvantaged of developing countries in these tiny ways. The argument for a currency transaction tax has only been intensified by data that suggests the economic crisis has had a disproportionate impact on the developing world. The Task Force on Financial Integrity and Economic Development et al. (2010) write: “the financial crisis has done significant economic damage around the globe, but has had the most immediate human impacts in the developing countries which bear least responsibility”. As a direct result of the crisis, it is estimated that an extra 120 million people were living on less than $2 a day in 2010. Further, the World Bank has conservatively estimated that the crisis would cause an additional 30,000–50,000 infant deaths in sub-Saharan Africa alone (Task Force on Financial Integrity and Economic Development et al. 2010).

12.4 Normative Desirability and Feasibility: Analysis of Prospects and Opportunities 12.4.1 The normative desirability and feasibility of proposals further considered Throughout the body of this article, we have suggested various considerations that make for the normative desirability of a tax and a further set of considerations that enhance a tax’s feasibility. We collect some of these next.

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The issue of normative justifications for taxation is a huge topic, which we cannot explore in detail here. What makes a tax normatively desirable in our view is that it meets at least the following, sometimes partially overlapping, desiderata: (N1) the tax complements or promotes important social, political, economic (and the like) objectives; (N2) it is compassionate in that it takes account of the capacity to pay and does not disproportionately burden those whose position makes it particularly difficult for them to bear more of the cost than others far better positioned (i.e. it is not regressive); (N3) it is competitive, that is to say it does not importantly undermine appropriate, fair, and non-destructive competition or prevent activities communities should otherwise encourage; and (N4) is one that is competently collected, administered, and disbursed. We have suggested various considerations are relevant to whether a tax should be considered feasible. These include: (F1) Support: (i) there is good public support for the tax, at least in good pockets well-positioned to influence implementation decisions; and/or (ii) there is strong backing from influential figures well-placed to make progress in advancing tax proposals; (F2) Administrative ease: the tax can be collected easily, which can ensure administrative simplicity (and also good compliance); (F3) Precedent: how many other similar kinds of tax proposals have already met with success, showing that similar taxes work reasonably well in other domains; and, relatedly, (F4) Institutional assistance: The availability of already existing, or partially existing, institutional mechanisms that could facilitate compliance or enforcement. Of these, (F1) is probably the most important, since if there is good support, institutional structure and administration of the tax can easily be created. Armed with our list of criteria for judging normative desirability and feasibility of taxes we discuss the ways in which our central tax proposals meet our normative and feasibility criteria reasonably well. The air-ticket tax clearly promotes important social and political objectives, (N1). Improvements in the health of the global worst off will assist those people to better meet a range of basic human needs, not the least of which is their physical health. Better meeting the needs of the global poor is a key concern for the Millennium Development Goals, a political objective that has widespread commitment. A tax on air tickets, especially those in business class, would satisfy (N2) as those purchasing or funding the tickets are typically not drawn from the global worst off (nor are there likely to be important effects for the global poor, of the sort that would undermine entire industries that form an important support basis for the global poor). It is likely that this tax does not have important anti-competitive effects, and if a case can be clearly marshalled that such taxes are having an important anti-competitive effect in a particular industry (especially ones that have important negative repercussions for the global poor), it is possible that exemptions could be allowed in those cases.¹¹ ¹¹ We doubt that the air-ticket tax has any detrimental effect on the level of air traffic, but even if this is the case, such an effect is not entirely unwelcome since carbon emissions could be reduced.

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The air-ticket tax seems to be a model of competent collection, administration, and disbursement: collected at the point of settlement for the air ticket, there is no compliance gap, and since the proceeds are spent on specific goals which have had clear health outcomes, there is no genuine concern about inadequate disbursement. Turning then to how well the air-ticket tax meets the feasibility criteria, the case is really straightforward: an actually existing tax proposal that has been implemented in the world is clearly one that is feasible. Reflecting now on the feasibility of extending the scope of the air-ticket tax, we believe the tax does meet (F1)–(F4) reasonably well. There is important support for the tax, with strong backing growing from both citizens and influential public figures. We saw how the scheme has gained backing from (for instance) the Clinton Foundation and the Global Fund. We have already seen how the tax meets the criteria of administrative ease (F2) and excellent precedent (F3). There is good institutional framework availability and indeed, the WHO, UNITAID, and ICAO are well-positioned to develop more, as needed. We examine now the case for the currency transaction tax (CTT) through the lens of (N1)–(N4) and (F1)–(F4). In aiming to reduce economic volatility and instability, and to promote long-term investment and raise revenue to meet the needs of the global poor, CTT payers would be promoting a range of worthy social, political, and economic objectives. Since currency speculation, which makes up the vast amount of currency trading, is an activity engaged in by the global advantaged, the direct activity is not regressive. While it is possible that much more indirect effects of the tax could be regressive we have not yet found any convincing evidence that this is the case. However, if currency conversion taxes in a particular industry are proving to be regressive, there is scope for exempting such transactions from the CTT. The minuscule amount of the tax (in the order of 0.1 per cent) is not anticipated to have important anti-competitive effects. And the arrangements proposed for collection, even if limited simply to the main currency trading centres, would qualify as plausibly competent. The arrangements for disbursing the funds are not typically as clearly outlined, though there is no reason why such arrangements cannot be modelled on those used for disbursement of the highly effective air-ticket tax. The CTT has a tremendous advantage in the amount of support it enjoys. Since there are really only a few core currency trading sites that deal with the vast majority of currency trades (and, as discussed above, traders are unlikely to change sites following the imposition of a tax), (F2) seems well satisfied. The stamp tax and commissions on currency trades show that there is relevant precedent. No new institutional innovations are required to implement the tax and so (F4) seems satisfied as well. All in all, then, the two positive global tax proposals of an air-ticket tax and a CTT do satisfy the requirements of normative desirability and feasibility reasonably well. We believe some of the other proposals argued for in section 12.2, which support fair collection of revenue owed to governments and clamping down on tax avoidance, would also bear up well when evaluating whether they meet (N1)–(N4) and (F1)–(F4).

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More briefly, we indicate why this is the case for two central proposals discussed in section 12.2, the first concerning more transparency in resource sales, and the second concerning fair transfer pricing schemes and related tax haven reform. Proposals aimed at promoting transparency in resource sales allow governments to collect more of the revenue they are owed with which they can provide more of the public goods and services necessary for development and maintaining democracies, money which currently inappropriately escapes to the advantaged in the global economy. Eliminating inappropriate revenue escape is therefore a compelling normative consideration. Some proposals to address the issues are already partially underway or being considered by relevant authorities, such as the International Accounting Standards Board, which could ensure good compliance, collection, and administration, if the decision to require more disclosure is made. We believe proposals concerning transparency, therefore, satisfy our normative and feasibility criteria reasonably well. As we also saw in section 12.2, tax havens and the transfer pricing schemes they enable inappropriately divert revenue from government, support illegal activity, undermine security, and destabilize the international economy. The global recession has, however, led to a post-crisis willingness to take action on the “shadowy underworld” that tax havens help facilitate. The creation of the Financial Stability Board to address vulnerabilities in the financial system is a positive sign that the relevant institutions are being established to implement proposed changes effectively, and several proposals that aim at distributing profits among the countries in which businesses are transacted are being considered. There is therefore good support, and administrative and institutional structures are also potentially available. We believe these proposals are therefore normatively desirable and feasible, according to our criteria.

12.4.2 Final reflections on problems, prospects, and opportunities We have seen that there is at least one global tax already in place, namely the airticket tax, and that it has resulted in not insignificant gains already. This case is important for several reasons. First, perhaps it is worth reflecting on why this tax has been so successful. Perhaps at least part of the success is attributable to the fact that it has very clear goals for disbursement: what exactly the money is spent on is quite clearly advertised. If that is right, we could probably replicate this feature in the case of other global taxes. Second, the implementation success of this tax provides a nice response to one commonly voiced objection concerning scepticism on achieving universal agreement in tax matters. Though universal support is desirable, we do not need it to make progress in the right direction. As the air-ticket tax demonstrates, substantial progress is possible with just a few countries’ cooperation. Even when we do not have universal support at first, in due course, non-participating states may eventually join a tax regime for several reasons: citizens of non-participating states may pressure their governments to join, or non-participating states might lose

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influence in policies related to spending revenue raised. Furthermore, once a successful scheme is in place, there might be pressure from the international community to join as well. Also, most states have now come to appreciate that it is in their interests to agree on common standards in financial and taxation arrangements. Opaque tax and financial systems, and lack of cooperation, make it difficult to stop money laundering, financing of terrorist organizations, and tax evasion (Baker 2005). Many forums that aim to eliminate harmful tax practices have been put in place, including the OECD’s Forum on Harmful Tax Practices and the Financial Action Task Force. Action to target terrorist financing has strengthened these initiatives. We have seen that a case can be marshalled for imposing carefully crafted financial transaction taxes and, in addition, a strong case can be made for imposing some taxes given recent events; in some cases, as fair compensation for harm caused. In virtue of compensatory justice, those who are heavily implicated in the origins of the financial crisis have causal responsibility for the resultant harm to many in the developing world and should bear a large share of the remedial responsibility. Furthermore, in virtue of having received public assistance when in dire straits, the compensatory justice argument is strengthened. (An argument can also be made that part of the proceeds should go to protecting us from future crises of this kind as well, and that building up a protective fund through a CTT, or more generally through Financial Transaction Taxes, is a prudent form of insurance against future risks of similar events.) It is worth underscoring again that in order of magnitude, most of these global taxes pale into insignificance when we consider the vast amounts of taxable revenue that currently escape taxation through innovative accounting manoeuvres, such as the opportunities presented through transfer pricing schemes and tax havens discussed earlier. It is important to emphasize that the reforms aimed at prohibiting vast tax escape could yield vast sums. If captured, these funds would considerably reduce the need to find alternative sources of revenue to fund necessary social programmes, and could provide all the funds governments need to run their countries reasonably well. Returning to the comparison with Thomas Pogge’s Global Resources Dividend, as we have emphasized, clamping down on tax escape could yield similar amounts of revenue. Furthermore, carefully crafted financial transaction taxes, especially currency transaction taxes, could raise vast sums as well. We cannot undertake here a full assessment of the comparative merits of the GRD as opposed to a currency transaction tax. There may, for instance, be enormous environmental benefits that accrue from a GRD that are absent from a CTT. However, here we point out at least some of the prima facie advantages of a CTT over a GRD. First, current momentum is such that it has an enormous advantage in terms of prospects for implementation. Second, a CTT is not likely to be regressive (unlike even a skilfully crafted GRD, which is ultimately a consumption tax). Third, as discussed elsewhere, the gendered effects

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of consumption taxes are not insignificant (Brock 2010). Currency transaction taxes are likely to have better effects for women than consumption taxes (Brock 2010). Throughout this article we have seen numerous ways in which the developed world is implicated in the misery of those in developing countries. Three prominent examples are: (1) a failure to reform practices in the developing world that are recognized in the developed world to be unjust, such as practices of non-disclosure and secrecy surrounding asset sales; (2) schemes are sanctioned that perpetuate tax escape, such as those that enable the payment of no taxes in any of the jurisdictions in which corporations do business, thereby encouraging free-riding on the services and public goods of all the countries involved; and (3) conditions are imposed on those in developing countries, such as in the case of structural adjustment programmes, which facilitate transfer of wealth from the people of developing countries to elites within developed ones. Failure to reform global accounting and taxation arrangements leaves in place a global basic structure that is unjust.¹²

Bibliography Addison, T. (2009), ‘War on Tax Havens’, Indiana Journal of Global Legal Studies 16/2, 703–27. Annan, K. (2000), Secretary-General’s Message on International Day for the Eradication of Poverty, https://www.un.org/sg/en/content/sg/statement/2017-10-17/secretary-generals-video-messageinternational-day-eradication. Baker, D. (2008), The Benefits of a Financial Transactions Tax (Centre for Economic and Policy Research). Baker, D., Pollin, R., McArthur, T., and Sherman, M. (2009), The Potential Revenue from Financial Transactions Taxes (Centre for Economic and Policy Research). Baker, R. (2005), Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System (Wiley). Baker, R. and Joly, E. (2009), ‘Illicit Money: Can it Be Stopped?’ New York Review of Books, 3 December. Bank Information Centre and Global Witnesss (2008), Assessment of International Monetary Fund and World Bank Group Extractive Industries Transparency Implementation, https:// www.globalwitness.org/en/archive/assessment-international-monetary-fund-and-world-bankgroup-extractive-industries/. Brock, G. (2009), Global Justice: A Cosmopolitan Account (Oxford University Press). Brock, G. (2010), ‘Reforming our Taxation Arrangements to Promote Global Gender Justice’, Philosophical Topics 37: 141–60. Brock, G. (2014), ‘Global Poverty, Decent Work, and Remedial Responsibilities: What the Developed World Owes to the Developing World and Why’ in D. Meyers (ed.), Poverty Coercion, and Human Rights (Oxford University Press), 119–45.

¹² It is worth remarking that this essay was originally written around 2010. It was updated in January 2017 to reflect some current developments and recent data. We regret the long delay between the writing of this essay and its eventual publication.

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Brock, G. and Blake, M. (2015), Debating Brain Drain: May Governments Restrict Emigration? (Oxford University Press). Brouwer, R., Brander, L., and Van Beukering, P. (2008), ‘“A Convenient Truth”: Air Travel Passengers’ Willingness to Pay to Offset their CO₂ Emissions’, Climate Change 90/3: 299–313. Buchanan, A. (2004), Justice, Legitimacy, and Self-Determination: Moral Foundations for International Law (Oxford University Press). Christensen, J., Coleman, P., and Kapoor, S. (2005), ‘Tax Avoidance, Tax Competition and Globalisation: Making Tax Justice a Focus for Global Activism’, in J. Penttinen, S. Ville-Pekka, and M. Ylonen (eds.), MORE TAXES! Promoting Strategies for Global Taxation (ATTAC). Christian Aid (2005), The Shirts Off their Backs: How Tax Policies Fleece the Poor, https://www. christianaid.org.uk/resources/about-us/shirts-their-backs-2005. Dharmapala, D. (2008), ‘What Problems and Opportunities are Created by Tax Havens?’ Oxford Review of Economic Policy 24/2: 661–79. Dodd–Frank Wall Street Reform and Consumer Protection Act 2010, https://www.sec.gov/ about/laws/wallstreetreform-cpa.pdf. Dolphin, T. (2010), Financial Sector Taxes (Institute for Public Policy Research). Financial Stability Board (2010), Mandate. Freedom House (2006), Countries at the Cross Roads (Freedom House). Gumbel, P. (2009), ‘New Airline-Ticket Tax to Aid the Developing World’, TIME Magazine, 18 September. International Accounting Standards Board (2009), Extractive Activities (Draft) Discussion Paper. International Monetary Fund (2010), World Economic and Financial Surveys, http://www.imf. org/external/pubs/ft/weo/2010/01/. Irish, J. (2010), ‘60 States to Lobby U.N. for Currency Transaction Tax’, Reuters World News, 1 September, https://www.reuters.com/article/us-france-tax-currencies/60-states-to-lobbyu-n-for-currency-transaction-tax-idUSTRE6806F220100901. Keeler, R. (2009), ‘Tax Havens and the Financial Crisis’, Dollars & Sense (May/June): 21–5. Kudrle, R. (2009), ‘Ending the Tax Haven Scandals’, Global Economy Journal 9/3: 1–11. Larudee, M. (2009), ‘Sources of Polarization of Income and Wealth: Offshore Financial Centres’, Review of Radical Political Economics 41/3: 343–51. McFerson, H. (2009), ‘Governance and Hyper-Corruption in Resource-Rich African Countries’, Third World Quarterly 30/8: 1529–49. Mintz, J. and Weiner, J. (2003), ‘Exploring Formula Allocation for the European Union’, International Tax and Public Finance 10: 695–711. Nozick, R. (1975), Anarchy, State, and Utopia (Blackwell). Oman, C. (1999), Policy Competition for Foreign Direct Investment: A Study of Competition among Governments to Attract FDI (OECD Development Centre). Oxfam GB (2000), Tax Havens: Releasing the Hidden Billions for Poverty Eradication (Oxfam International). Oxfam GB (2009), Money for Nothing (Oxfam International). Oxfam GB (2016), Ending the Era of Tax Havens: Why the UK Government Must Lead the Way (Oxfam International). Pogge, T. (1994), ‘An Egalitarian Law of Peoples’, Philosophy and Public Affairs 23/3: 195–224. Pogge, T. (2001a), ‘Eradicating Systematic Poverty: Brief for a Global Resources Dividend’, Journal of Human Development 2: 59–77.

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Pogge, T. (2001b), ‘Priorities of Global Justice’, Metaphilosophy 32/1–2: 6–24. Pogge, T. (2002), World Poverty and Human Rights (Polity). Publish What You Pay (2010), http://www.publishwhatyoupay.org. Rawls, J. (1971), A Theory of Justice (Harvard University Press). Robin Hood Tax (2010), http://www.robinhoodtax.org/. Schmidt, R. (2008), The Currency Transaction Tax: Rate and Revenue Estimates (United Nations University Press). Schulmeister, S. (2009), WIFO Working Papers: A General Financial Transaction Tax: A Short Cut of the Pros, the Cons, and a Proposal (Austrian Institute of Economic Research). Southern Africa Resource Watch, Tax Justice Network for Africa, Action Aid, Christian Aid, Third World Network Africa (2009), Breaking the Curse: How Transparent Taxation and Fair Taxes Can Turn Africa’s Mineral Wealth into Development, http://www.taxjustice.net/ cms/upload/pdf/TJN4Africa_0903_breaking_the_curse_final_text.pdf. Spencer, D. and Sharman, J. (2007), ‘International Tax Cooperation’, Journal of International Taxation 18/12: 35–49. Stewart, H. (2011), ‘Robin Hood Tax: 1,000 Economists Urge G20 to Accept Tobin Tax’, The Guardian, 13 April, https://www.theguardian.com/business/2011/apr/13/robin-hood-taxeconomists-letter. SWIFT (2011), https://www.swift.com/. Task Force on Financial Integrity and Economic Development, Christian Aid UK, Tax Justice Network International, Trade Union Congress of the UK (2010), Taxing Banks (Tax Research LLP). Tax Justice Network (2016), Will the OECD Tax Haven Blacklist be Another Whitewash?, https://www.taxjustice.net/2016/07/20/oecd-another-go-hopeless-politicised-tax-haven-blacklisting/. Tobin, J. (1974), The New Economics, One Decade Older, The Eliot Janeway Lectures on Historical Economics in Honor of Joseph Schumpeter (Princeton University Press). Unitaid (2010), https://unitaid.eu/#en. Unitaid (2016), Unitaid at 10: Accelerating Innovation in Global Health, https://unitaid.eu/ assets/Unitaid-at-10-booklet-EN.pdf. US Government Accountability Office (2008), International Taxation: Large US Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions, https://www.gao.gov/products/GAO-09-157. US Senate Committee on Homeland Security and Governmental Affairs (2008), Tax Haven Banks and U.S Tax Compliance, https://www.hsgac.senate.gov/search/?q=tax+haven+banks &search-button=Search&access=p&as_dt=i&as_epq=&as_eq=&as_lq=&as_occt=any&as_oq= &as_q=&as_sitesearch=&client=hsgac&sntsp=0&filter=0&getfields=&lr=&num=15&numgm= 3&oe=UTF8&output=xml_no_dtd&partialfields=&proxycustom=&proxyreload=0&proxystylesheet= default_frontend&requiredfields=&sitesearch=&sort=date%3AD%3AS%3Ad1&start=0&ud=1. Van Parys, S. and James, S. (2010), ‘The Effectiveness of Tax Incentives in Attracting Investment: Panel Data Evidence from the CFA Franc Zone’, International Tax and Public Finance 17: 400–29. Vigueras Hernández, Juan (2005), Tax Havens: How Offshore Centres Undermine Democracy (Akal). Wahl, P. and Waldow, P. (2001), Currency Transaction Tax: A Concept with a Future- Chances and Limits of Stabilizing Financial Markets through the Tobin Tax (WEED). World Bank (2016), Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change, http://www.worldbank.org/en/publication/global-monitoring-report.

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Index of Names Ackerman, B. 91n.10, 93, 172n.15 Addison, T. 228, 231–2 Adonis, A. 194 Allan, C. M. 20n.6 Almås, I. 111–12, 114, 117n.6, 118, 119n.8, 120 Alstott, A. 172n.15, 181, 182n.40 Annan, K. 224 Arneson, R. J. 38, 53–4, 111–12, 115 Arnott, R. 151n.4, 154 Asprey, K. 72n.6 Asquith, H. H. 186, 191 Atkinson, A. B. 1n.1, 5, 21n.8, 26n.15, 41–2, 117 Attas, D. 102 Attlee, C. 192–3 Avi-Yonah, R. 209, 210n.22, 217 Baker, R. 228, 231–2, 236, 241 Bakija, J. 4 Balfour, G. 191 Barr, N. 1n.1 Barry, C. 208n.16 Barth, E. 116 Baumol, W. J. 1n.1 Bentham, J. 129n.6 Bergstrom, T. 150 Besley, T. 26n.18, 49 Betjeman, B. 194 Biggs, S. 154 Biron, L. 5, 7–8, 94 Blackstone, W. 81, 88 Blake, M. 224 Blanchflower, D. 170n.10 Boehner, J. 82n.2 Bossert, W. 111–13 Braithwaite, W. J. 191 Brander, L. 235 Brennan, G. 5–8, 29nn.23–5, 60n.1, 72n.4, 77n.8 Brighouse, H. 179 Brock, G. 12, 224, 227, 242 Brontë, C. 191 Broom, H. 81, 88 Brouwer, R. 235 Brown, C. 152, 154 Brown, G. 200 Brueckner, K. 151n.4, 154 Buchanan, A. 209n.19, 226n.2 Buchanan, J. M. 5–7, 29nn.23–5, 60, 67, 69–71, 72n.5, 75, 158, 161 ‘The Ethical Limits of Taxation’ 161

Burgess, R. 22n.10 Burns, R. 190 Bush, G. 183 Butler, D. 194 Calman, K. 198 Caney, S. 205n.8, 206–7, 215n.34 Cappelen, A. W. 5, 8–9, 111–13, 117n.7, 209n.18, 219n.48 Carens, J. 204n.3 Cashin, S. 148 Christensen, J. 228 Christman, J. 82n.3 Churchill, W. S. 186, 189, 199 Clark, J. B. 156n.7 Clausing, K. A. 211n.24 Coate, S. 26n.18, 49 Cohen, G. A. 25n.14, 38, 54, 76, 111–12, 139–40, 206 Colbert, J.-B. 186, 192 Coleman, P. 228 Cremer, H. 18n.1 Devooght, K. 111, 117n.6 Dharmapala, D. 231, 232n.8 Diamond, P. A. 5, 18n.1, 21n.8, 41 Dickens, C. 143n.12, 191 Dietsch, P. 12, 203n.2, 208n.18, 209n.20, 210n.22, 211n.24, 212n.28, 215n.35, 217n.44, 218n.46 Disraeli, B. 191 Dolphin, T. 237 Donahue, J. 151–3 Dowding, K. 154 Downs, A. 5, 26n.18 Dworkin, R. 25n.14, 38, 44, 53–4, 111–12 Engels, F. 191 Epstein, R. 158–9 Esping-Andersen, G. 126n.4 Fennell, L. A. 26n.15 Fischel, W. 152n.5, 153 Fleurbaey, M. 5–8, 21n.8, 37, 43, 45n.6, 46n.7, 52–3, 111–14, 115n.4, 116n.5, 121 Foley, D. K. 5, 27n.19 Follesdal, A. 206, 207nn.13–15, 213n.32 Fried, B. H. 2, 10, 156, 159, 163, 175n.23, 180, 181n.36, 181n.38, 182n.40 Frohlich, N. 111

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INDEX OF NAMES

Gaertner, W. 111 Gates, B. 159 George, H. 11, 105, 185 Gladstone, W. E. 191 Goodin, R. 205, 206n.9 Goodman, R. 150 Gordon, R. 22n.10 Goschen, G. 186, 191 Gosseries, A. 4n.4, 33n.29 Graeber, D. 133n.8 Graetz, M. 148n.1 Greenfield, K. 111 Grey, T. 92 Gurria, A. 218n.45 Hadley, E. 81, 88 Hague, W. 190 Hale, R. 157 Halliday, D. 1n.2, 178n.29 Hall, R. 148n.1 Hamilton, B. 153 Hamlin, A. 5–7, 9, 18n.2, 26n.16, 29n.25, 29n.23 Hampton, J. 159 Harcourt, W. 186, 191 Harris, J. W. 88–9, 93 Henry, K. 72n.6 Hettich, W. 28nn.21–2 Hindriks, J. 1n.1 Hirschman, A. 150n.3, 151 Hoff, K. 170n.10 Holcombe, R. G. 26n.17 Holmes, O. W. 157 Holmes, S. The Cost of Rights 62 Holtz-Eakin, D. 169n.6 Honoré, A. M. 88n.8, 91 Hood, A. 171n.12 Irish, J. 236 Jacobs, M. 172n.18 James, S. 229 Jenkins, R. 192 John, P. 154 Johnson, P. 194–5 Joly, E. 232 Joyce, R. 171n.12 Kades, E. 83n.5, 84n.6 Kaplow, L. 18n.1, 23n.12, 25n.14, 61–3, 65–7 Kapoor, S. 228 Kavka, G. 159 Kay, J. A. 190, 195 Keeler, R. 231–2 Keen, M. 18n.1, 30n.27

King, M. 190, 195 Kolm, S. C. 38 Konow, J. 111, 113 Konrad, K. A. 18n.1, 30n.27 Lametti, D. 94 Lawson, N. 194 Lee, K. 151n.4, 154 Leeson, P. 62n.2 Le Grand, J. 172n.15 Levy, J. T. 205n.4, 208n.17 Levy, M. (Lord) 135, 136n.11 Lewis, M. 167n.2, 168nn.3–4 Ley Pineda, M. 94 Li, W. 22n.10 Livingstone. K. 194 Lloyd George, D. 185–6, 191–3 Lockwood, B. 40n.4 Lomasky, L. 72n.4, 77n.8 MacAskill, W. 130n.7 Machlup, F. 81n.1 Macmillan, H. 192 Maniquet, F. 6, 21n.8, 37, 43, 46n.7, 112n.1, 114, 115n.4 Mankiw, N. G. 24 Mathews, R. 72n.6 Maxwell, D. 168n.2 McCaffery, E. 11, 175n.24, 178n.29, 180–3 McFerson, H. 229–30 McKay, S. 170n.11 McLean, I. 11, 173n.19, 190, 192, 197 Meade, J. E. 3, 10–11, 186 Meltzer, A. H. 27n.19, 75, 78 Merrill, T. W. 94 Michelman, F. 148 Mill, J. S. 206 Mills, C. W. 18n.2 Mirrlees, J. A. 5–8, 20n.6, 21n.8, 37–9, 41, 45, 49, 57, 114, 185, 187, 190, 195, 197, 200 MN (Murphy and Nagel) 60–3, 65, 67, 69–71, 73, 77–9, see also Murphy, L., Nagel, T. Moffitt, R. A. 111 Mueller, D. C. 26n.17, 72n.7, 154 Munoz-Dardé, V. 2, 9, 133n.9 Munzer, S. 82n.3, 91n.10, 94n.12 Murphy, L. 5–6, 8, 17, 20n.8, 24n.13, 38–41, 54, 57, 61, 69, 73, 78, 81, 83, 85–92, 94–6, 169, 175, 177n.28, 203n.1, 216n.39 The Myth of Ownership 4, 7, 12, 37, 60, 82, 126n.3, 169n.7, 170n.8, 175n.22, 175n.25, 176nn.26–7, 177n.18, 178nn.29–30 see also MN (Murphy and Nagel) Musgrave, P. B. 154, 217 Musgrave, R. A. 4, 6, 20n.6, 150, 153–4, 217 Myles, G. D. 1n.1, 19n.4, 39n.3, 194–5

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INDEX OF NAMES

Nagel, T. 5–6, 8, 17, 24n.13, 29n.6, 38–41, 54, 57, 61, 69, 73, 78, 81, 83, 85–92, 94–6, 126–7, 139–40, 169, 175, 177n.28, 203n.1 The Myth of Ownership 4, 7, 12, 37, 60, 82, 126n.3, 169n.7, 170n.8, 175n.22, 175n.25, 176nn.26–7, 177n.18, 178nn.29–30 see also MN (Murphy and Nagel) Narveson, J. 103 Nissan, D. 172n.15 Nou, J. 192, 197 Nozick, R. 2–3, 5, 8, 77, 83, 100n.4, 101, 103–5, 124n.1, 126, 156n.7, 158, 160, 234 Oates, W. 10, 150, 152–4, 207n.14 Offer, A. 197 Oliver, A. 94 Oman, C. 229 O’Neill, M. 3, 4n.4, 10, 172n.17 Osborne, G. 197 Ostrom, E. 62n.2 Oswald, A. 170n.10 Otsuka, M. 100n.2, 102n.5, 105, 186 Paine, T. 11, 172n.15, 185–6, 189, 196, 199, 201 Agrarian Justice 188 Palan, R. 211 Patrick, R. 172n.18 Peel, R. 186, 190–2 Penner, J. 83n.5, 84n.7, 85, 88, 92n.11, 94 Penrose, E. 81n.1 Perot, R. 181–2 Pestieau, P. 18n.1 Phelps, E. 73 Pigou, A. C. 1n.1 Piketty, T. 6, 10–11, 39n.2, 120 Capital in the Twenty-First Century 167, 171 Pitt the Younger, W. 186, 190–1 Pogge, T. W. 206–7, 208n.17, 213n.32, 215n.34, 217n.43, 218n.47, 224–7, 241 Prabhakar, R. 174 Proudhon, P.-J. 199 Rabushka, A. 148n.1 Ramsey, F. P. 5, 21n.8, 22 Rawls, J. 2–3, 5, 11, 38, 44, 47, 53, 61, 63, 65, 67, 69, 71, 76, 78, 80, 112, 124n.1, 126n.3, 141n.11, 148, 160–1, 170n.9, 172n.16, 215n.34, 234 A Theory of Justice 160n.12 Raz, J. 124n.1 Ricardo, D. 11, 185–6, 188–9, 193, 196–7 Richard, S. F. 27n.19, 75, 78 Rimlinger, G. V. 126n.4 Rixen, T. 203n.2, 209n.20, 210n.22, 211n.27, 212n.28, 215n.35, 218n.46 Roark, E. 103n.8 Roberts, K. W. S. 5, 27n.19



Robeyns, I. 18n.2 Rochet, J. C. 18n.1 Rodrik, D. 236 Roemer, J. E. 49, 54, 56–7, 111–12, 115, 117n.6 Romer, T. 5, 27n.19 Ronzoni, M. 215n.34 Ross, S. 152, 154 Rothbard, M. 103 Rousseau, J.-J. 199 Rowlingson, K. 170n.11, 179 Rowse, J. 151n.4, 154 Sachs, J. 236 Saez, E. 6, 18n.1, 39n.2, 41, 43, 120 Samuelson, P. 150 Sandford, C. 172n.15 Sandmo, A. 26n.15, 114 Scanlon, T. 124n.1, 126n.3, 141n.11, 206n.10, 236–7 Schokkaert, E. 111 Schulmeister, S. 236–7 Schwab, R. 154 Schwettmann, L. 111 Scott, D. 94 Sen, A. K. 25n.14, 46, 54, 65, 116 Shapiro, I. 148n.1 Sharman, J. 232 Shavell, S. 25n.14 Shields, L. 33n.29 Shue, H. 208n.18 Simmons, A. J. 18n.2, 104n.9 Singer, P. 130 Slemrod, J. 4, 21n.8, 28n.22 Smith, A. 11, 185–90, 192–3, 199 The Wealth of Nations 186, 199 Theory of Moral Sentiments 199 Smith, H. E. 94 Smith, J. 125n.2 Smith of Kelvin 198 Spence, M. 81 Spencer, D. 232 Stantcheva, S. 6, 39n.2, 43 Stark, K. J. 26n.15 Steiner, H. 102n.5, 105, 159, 186, 217n.43 Steinmo, S. 28n.22 Stemplowska, Z. 18n.2 Stern, N. 22n.10 Stewart, H. 236 Stigler, G. 1n.1, 5, 21n.8, 41, 115, 117, 154 Summers, A. 151n.4, 154 Sunstein, C. The Cost of Rights 62 Swift, A. 18n.2, 33n.30, 179 Thatcher, M. 188, 193–4 Thomas, A. 4n.4 Thomson, W. 46n.7, 55n.9

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

INDEX OF NAMES

Tiebout, C. 10, 150–4, 160–1 ‘A Pure Theory of Local Expenditures’ 149 Tobin, J. 234–6 Travers, T. 194 Tullock, G. 158 Tungodden, B. 5, 8–9, 66, 70, 111–13, 117n.7 Tuomala, M. 21n.8, 41 Unger, P. 130 Valentini, L. 205n.5, 208n.16 Vallentyne, P. 2, 8, 11, 99, 100nn.3–4, 102n.5, 105, 159, 186 Van Apeldoorn, L. 217n.44 Van Beukering, P. 235 van Parijs, P. 49, 105n.11, 208n.16 Van Parys, S. 229 Varian, H. 38n.1 Vigueras Hernández, J. 229

Wagner, R. E. 5, 29n.24 Wahl, P. 236 Waldow, P. 236 Weinzierl, M. 24, 39n.2 Wenar, L. 4n.4, 12, 93 Wetzel, D. 194 White, S. 3, 10–11, 167n.2, 168nn.3–4, 172n.15, 184n.41 Wicksell, K. 72n.5 Wildasin, D. E. 150, 212 Williamson, T. 3 Wilson, J. D. 18n.1, 30n.27, 94, 212 Winer, S. L. 28nn.21–2 Wolfe, B. 151n.4, 154 Wolff, J. 33n.30 Wreen, M. 94 Yagan, D. 24 Yinger, J. 152, 154

OUP CORRECTED PROOF – FINAL, 28/6/2018, SPi

Index ability to pay 20, 64–5, 153 accounting arrangements 11–12, 224–5, 227–8, 234, 242 identity 4, 200 manoeuvres 241 purposes 98 sense 100 standards 227 administration 40, 192, 238–40 administrative costs 28 ease 238–9 feasibility 236 practicality 185 resources 212 simplicity 238 structures 240 advertising 137, 140, 240 Africa 229–30, 237 African citizens 230 resources 229 agent motivation 18 agents 6, 18–19, 21–6, 29n.24, 30n.27, 31–2, 33, 38, 69, 71, 76, 98, 101, 103, 125, 130, 141–2, 205, 215 aggregate deviations 117 duty 198 global income 227n.3 income differences 65 level of taxation 76 tax burden 147, 154n.6 air-ticket tax 233–5, 238–40 allocation 7, 38, 42–6, 48, 51, 207n.13 of benefits 21 of economic burdens 21 of taxation powers 30 see also fair allocation, laissez-faire allocation, market allocation allocative efficiency 150n.2, 153 al-Qaeda 232 American contract law 158n.11 courts 148 people 82n.2 taxpayers 231 see also United States American Revolution 188 anarchist society 199

anarcho-libertarians 155 Anglo-American contract law 156–7 Angolan people 229 anonymity 7, 66, 70, 79 anti-competitive effects 238–9 anti-independence parties 198 anti-monopoly movement 156 appropriation 103–5, 109 Argentina 236 artifacts 99, 101–3, 108, 159 artifactual capital 101 ownership rights 102 wealth 98, 102 assets 67, 170, 172, 175, 194, 196, 200, 227, 230–1, 242 Australian system 72n.6 autonomous decision-making 207, 219 fiscal choices 12 political choices 210, 213 self-directing agents 205 autonomy 54, 214, 216 prerogative 209, 211–20 average bundle 56 costs 153, 162 income 75, 77, 113, 118–21 income tax bill 187 marginal utility of income 49 preferences in the population 50 tax rates 41, 187, 212n.29 utility of the subpopulation 49 utility of the unskilled 57 weight 43, 49 willingness to pay 235 axiomatic analysis 56 egalitarianism 66 Bank Information Centre and Global Witness 230 banks 87, 210, 224, 230–3, 236–7 beggars 9, 128–9, 133–7 beggary/begging 9, 127–9, 132–7, 142 benefits 2–3, 19–21, 24–5, 27–8, 31, 75–6, 84–5, 94, 96, 103, 106–9, 125, 127, 130, 133, 135–6, 138, 148–9, 156, 160–4, 170, 180–1, 188, 195–6, 200, 207, 209, 217, 225–6, 229, 236

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

INDEX

benefits (cont.) analysis 33 package 26 payments 21, 27 purposes 25 rules 21 structure 24 systems 20–3, 26–8, 30–4 tax/taxation 10, 147–9, 153, 155, 161–4 theorists 162n.14 benevolence 71, 124–5, 127–8, 130–1, 133–4, 138 bequeather 175–8, 180 bequests 173, 175–6, 178–9, 193, 200 black box of tax theory 34 technology 17 blackmail 157 bonds 92, 148n.1 bonuses 40n.4 borrowing 29n.24, 31, 73, 226 bribery 228, 231 Buchanan scheme 70–1 bundles 44–5, 47, 55–6, 88, 91–4, 102, 151 burdens 3–4, 17, 21, 49, 75–6, 82, 84, 132, 138–40, 142, 147–8, 153–5, 159, 169–70, 173–4, 176–8, 190, 200, 209, 212, 228, 234–5, 238 businesses/companies/firms 152–3, 154n.6, 162, 164, 194–5, 211, 228, 230–1, 232n.8, 233, 240, see also corporations Calman Commission 198 Cameroon 235 campaigns 34, 136–8, 180, 186, 193, 230, 236 Canada 72n.6, 152 capital 12, 18, 39, 66, 101–2, 149, 155, 164, 167, 190, 203, 210–11, 214–15, 229, 231, 232n.8 endowment 55 gains 73, 200 grant 172 income 24, 117n.7 outflow 216 receipts tax 168–9, 171–3, 179 taxation 3, 11, 24, 212 transfer tax 3 capitalist act 158 constitution 69 democracies 167, 172 economy 69, 73, 79, 89 greed 232 set of institutions 80 societies 10, 167 system 70, 76, 80 Carter Commission 72n.6 Cayman Islands 162, 231 centralization 140, 207–8

charitable action 125, 133 activity 124, 136, 140 aid 128–9 associations 128 bodies 129n.5 cause 140 demands 127 donations 99, 125, 133 foundations 137 giving 1–2, 9, 124–5, 127, 132, 142 handouts 128 institutions 125 organizations 9, 125, 127–9, 133, 135–8 provision 9 response 127 work 135n.10 charities 124–5, 127–9, 133, 135–8, 140, 142 charity 9, 125–9, 132–3, 136–8, 140, 142, 219 muggers 136 volunteers 140 Chile 235 Churchill tax 194 citizens 1, 9, 19n.3, 27, 29–30, 32, 71–3, 75, 82, 85, 95–6, 125, 131–2, 134, 147, 149–53, 156, 158–9, 161–3, 170, 188, 195, 205, 209–11, 213–14, 219, 228–30, 239–40 citizens’ inheritance scheme 172 Clinton Foundation 235, 239 coalitions 34, 161 coercion 124, 139–40, 157, 158n.11, 234 coercive taxation 18, 125, 132, 139 Colbertian principle 194 system 186 tax 187 collective burdens 170 choices 119, 209 consequences 12 decision-making/decisions 63, 68–9, 72–3, 99n.1, 206 efforts 234 goods 234 purpose 151 resources 156 social product 83 suboptimal practice 216 colonial practices 219n.49 commercial centres 236 contract 157–8 property 194, 196 transactions 195 committees of enquiry 72 commodities 22–3, 28–30, 39 commodity taxation/taxes 22–4, 27, 29n.26, 31

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INDEX

community charge, see poll tax companies, see businesses/companies/firms compensated expropriation 85 taxation 87 compensation 12, 56, 70, 83–7, 93, 95, 99, 100n.2, 102n.5, 109n.12, 195, 215n.37, 216, 219–20, 241 competitive advantage 171 market 44, 159, 162–3 value 105–7, 109 competitiveness 12, 162, 203, 232n.8, 238, see also anti-competitive effects compulsory enforcement 2 payments 98 powers 150 purchase 83 taxation 9–10, 82n.4, 126, 138–9, 155, 235 conceptual assumptions 10 distinction 68 element 65 errors 4 framework 204 ideal 65 nonsense 84n.7 picture of property 93 questions 5, 8, 83 tax analysis 64 work 91, 94 work on property 81, 83, 88, 96 Congo 229, 235 consequentialism 7, 24–5, 33, 38–9, 53–5, 99, 130n.7 consequentialism/deontology distinction 24n.12 constitution of justice 70, 79 constitutional account of justice 69 approach 70 architecture 64, 67, 72, 78 arrangements 29 character 68, 73 constraint 30 controls 6, 29–32 democracies 147 devices 32 divide 71–2, 76 environment 32 framework 69 level of decision-making 70–1 mix 60 move 70 nature 30 policy determination 79



political economy 7, 29, 67 politics 29n.24, 68 regime 79 requirements 30 restrictions 29 rules 7, 68 structures 33 system 79 constitutionalism 29, 70, 72 constructivist derivations 159 literature 148 Consumer Price Index 117n.7 consumers 72, 149, 151–2, 156, 182, 190, 227–8, 235, 237 consumer–worker theory 39 consumption 21, 39, 42, 49, 51–4, 56, 65, 114, 153, 173, 175–7, 180, 182–3, 190, 212 behaviour 178 efficiency 151n.4 level 39, 182 of alcohol or tobacco 1 of goods 10, 22n.9, 23n.11, 161 possibilities 174 preferences 150 security 182 tastes 154 taxes 109, 180–2, 241–2 contract law 156–7, 158n.11 contracts 29n.24, 68, 87, 92, 94, 131–2, 149, 156–9, 230 contractual arrangements 82n.4 bond 131 condition 109n.12 devices 139 obligations 89 terms 131 corporate deception 231 portfolio capital 210 tax base 233 tax evasion 228 tax rates 211–12 taxation/taxes 18, 109n.12 corporations 25, 87, 98, 109n.12, 152, 154, 211, 214–15, 226, 228–34, 242, see also businesses/companies/firms corrective public policy 171 taxes 19, 31n.28 corruption 12, 109, 225, 227–30 cosmopolitan justice 205n.8 libertarianism 108 cosmopolitanism 208, 213 cosmopolitans 205, 207–8, 213n.32

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

INDEX

Council Tax 187, 194–6, 198 courts 62, 106, 148, 156, 158, 199 cultural familiarity 152 institutions 164 opportunities 155, 161 currency conversion taxes 239 deals 236 exchange 236 speculation 239 trade/trading 234–6, 239 transaction tax (CTT) 12, 233–7, 239, 241–2 transactions 235 death tax 200 decentralization 206–8 decentralized decision-making 147, 206 decision-making 19, 62, 64, 68–73, 99, 147, 152, 172, 206–7, 219 declarations of earnings 40 Delaware effect 154 democracies 3, 147, 167, 172, 226, 229, 240 democracy 1, 5, 26, 63, 71, 73, 80, 206–8, 209, 218–20, 228, 234 democratic construction of the tax system 73 control 206 decision-making 64 delivery of justice 76 equilibrium 75 governments 96, 226 input 207 institutions 71, 77 judgements 211, 213 justice gap 73, 76 nation-state 208n.17 participation 205, 207 political processes 26, 74 politics 77 principles 172, 205n.8 procedures 32, 78 processes 20, 26, 28, 69, 71–3, 76, 79 structure 72 system 78, 79n.10 demographic variables 28 deontic considerations 25 deontology 25n.13 deontology/consequentialism distinction 24n.12 deprivation 209, 216, 220, 224 destitution 124–5, 127–32, 134–6, 138–9, 142 developed countries 22, 149, 197, 212, 218n.45, 225–7, 229–30, 237, 242 developing countries 12, 22n.10, 212–13, 215, 218n.45, 224–5, 227–30, 234, 237, 242

devolution 147, 149, 152, 159, 191, 198 Devon widows 195–6 direct taxation/taxes 18, 24, 185, 189–90, 193, 195, 212 distributive concerns 111 consequences 203 fairness 101 justice 5, 7, 53, 61, 63–7, 69, 73, 76–7, 79n.11, 82, 104, 203, 205, 207–8, 210, 213, 220 outcomes 71 Dodd–Frank Wall Street Reform and Consumer Protection Act 230 domestic developments 197 firms 211 fuel 195 inequality 12 land value tax 196–7 property 187, 193–5 rates 195 stamp duty land tax 196 systems of taxation 11 taxation 234 tightening of tax rules 233 transactions 195 donors 9–10, 125–9, 134–7, 142, 171–4, 232 double maximization problem 20, 22 double tax/taxation 11, 168, 172–5, 180, 183, 200, 211n.27 Downsian median voter theorem 27 model of democracy 5, 26 earning abilities 45–6, 48–9, 51, 56 capacity 114–15 potential 50 prospects 53 earnings 39, 42–3, 46, 49–50, 178, see also income economic activities 18–19, 22, 31, 133, 185, 188, 193, 195, 228, 231 advantages 149, 160n.13 agents 18–19, 21, 26, 31, 215 analysis 17, 28, 57, 111 analysis of non-ideal taxation 20 analysis of tax systems 6 analysis of taxation 5–6, 17, 19, 57 analysis of the tax/benefit system 26 approach 6–7, 37 approaches to tax policy 111 approaches to taxation 7–8, 17, 31–4, 37 approach to optimal taxation 6 aspects of tax theory 34

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INDEX

behaviour 169 benefits 17, 21 burdens 17, 21 collapse 40 concepts of tax equity 203n.1 constraints 32 convergence 218n.45 crisis 237 damage 237 decisions 95 discussion of taxation 19 distortions 11, 185 events 30 experiments 111 factors 34 frameworks 7 growth 167n.1, 203, 229 inefficiency 29 inequality 226 instability 239 institutions 3, 7 justice 69, 73, 77, 82 life 18, 169 losses 84 methodology 60 models 6, 150n.3 objectives 238–9 opportunity 171 order 225 outcomes 21, 169 power 181 practice 212 prediction 212 privilege 181 relationships 32 rents 156 security 181 self-interest 95 system 7, 233 theory 57, 169, 212 theory of fair allocation 44, 53 theory of fairness 44 theory of taxation 37–8, 40 thinkers 186 ties 155 trade-offs 6, 34 traditions 6 variables 19, 28 economics 2, 8, 29, 38, 43, 56, 71, 185, 188 about taxation 5, 17 community 39 literature 19–20 of the tax system 1n.1 economists 5, 26, 38, 42–4, 57, 60, 65, 71, 78, 150n.2, 151, 170, 227n.4, 236 education 22n.9, 34, 41, 117–18, 120–1, 170, 199



egalitarian approaches 7–9, 111–12, 117 arguments for inheritance tax 181 criteria 57 equivalence 44–7, 53, 56 equivalent principle 113–14 ethics 112 forum 54 impact 73–4 intuition 118 markets 44, 55 reasoning 112, 114, 116 sentiments 77 societies 9, 134 theories of justice 111–12 values 73 warnings 96 egalitarianism 54, 57, 66, 70, 78, 105, 113, 118, see also liberal egalitarianism, luck egalitarianism elections 26–9, 31, 40, 42, 192, 195, 198 electoral behavior 78 boundaries 68 competition 27, 29, 31, 71, 73, 75 context 78 cycles 72 politics 77 power 78 processes 69 victories 148n.1 elites 29, 32–3, 226, 242 emissions/pollution 19, 23, 109n.12, 238n.11 emissions tax 234–5 employment 22, 109n.12, 162, 179, 181 contracts 87 insurance 126 relationships 182 enforcement 62, 238 aspects 62 costs 99–100, 103, 108, 110 of a private debt 104 of jurisdictional rules 215–16 of property rights 2 of rights 8, 98, 100–2, 108–9 of rules 226n.2 of the law 85, 101 organizations 99–100 services 100–1 England 198 environmental benefits 241 costs 235n.10 friendly goods 177 pollution 23 regulation 152

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

INDEX

equality of opportunity 3, 49, 53, 101, 105, 107, 112, 116, 168–72, 174, 176–7, 179–80, 181n.37, 182n.40, 206n.10 equality of what? 64–5 equals 61, 65, 75 equal-share left-libertarianism 105–7 equity 4, 25, 38, 153, 175, 197, 203n.1 objection 11, 168, 175–6 see also horizontal equity, vertical equity estate duty 191, 199–200 estate tax 148n.1, 169, 173, 175, 183, 185, 188, 199–200, see also inheritance tax ethical issues 37–8, 47, 51, 53, 55–7, 65, 141, 161, 234 European Union (EU) 190, 207, 217n.42, 233 exit 30, 149, 150n.3, 151–3, 158n.11, 159–61, 163, 182 expenditure 3n.3, 26, 29n.24, 30–1, 175, 180, 191, 196, 200, see also spending exploitation 31, 133 of tax 29–30 of the hard-working 8–9, 114–15, 121 of the talented 121 expropriation 82–8, 91, 93, 163 externalities 19, 23, 40n.4, 109, 151, 153–4, 162–3, 210, 214, 220, 233, 236 Extractive Industries Transparency Initiative (EITI) 230–1 Fabian Society 168n.3 Fabian Society Commission on Taxation and Citizenship 167n.2 fair allocation 7, 38n.1, 43–6, 53–4, 55n.9, 57, 154n.6 bargaining 159–60 claim 113 collection of revenue 239 compensation 241 distribution of income 117–18 distribution of tax burden 4 equality of opportunity 3, 181n.37 income 113, 118–21 income distribution 112, 117n.7, 118–19 income taxation 21n.8, 190 inequalities 9, 111–13, 116, 117n.6, 119, 121 optimal taxation 44 price 148 share 103, 105, 118, 161, 206, 216n.39, 234 share of natural resources 103–4, 106, 109–10 social compensation 56 social orderings 46–7, 51 tax regime 193 taxation 54 terms 156

transfer pricing 240 value 3, 172n.16, 181n.27 fairness 4, 6, 8, 37, 44, 47, 51, 55–7, 101, 116, 175–6 approach 7, 9, 39, 43, 49–50 effects 119, 121 of benefits taxation 148 of contracts 149, 156, 158 of private exchanges 158 of taxes 158, 169 principles 38, 41, 43, 113–14, 118 to the wealthy 148n.1 farming/farmland 103, 196–7 feasibility 2, 26, 34, 43, 205n.4, 219, 233, 237 constraints 24, 42, 216, 218n.46 criteria 238–40 of proposals 237 of taxes 23, 236, 238 federalism 207 fetishizing of choice 9, 142 financial affairs 190 burden 84 centres 236–7 charge 98 contribution 31 costs 22n.9 crises 231, 236–7, 241 exchange 237 inheritance 170n.10 markets 236 means 155 sector 40n.4, 233 structures 228, 232 systems 235, 240–1 terms 9 transaction taxes 234, 236, 241 Financial Action Task Force 241 Financial Stability Board 233, 240 firms, see businesses/companies/firms fiscal agents 215 authority 12 autonomy 211n.27 capacity 12 conditions 229 constitutionalism 72 constitutions 29, 64 context 207–9, 215, 219 contributions 2 deficits 29 federalism 207n.14 institutions 204 interdependence 203, 210, 214–15 measures 203, 217 obligations 228 policy 12, 147–8, 203–4, 209–17, 220

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INDEX

powers 152, 220 prerogatives 209–10, 214, 220 programme 192 regime 211, 219 responsibility 198 roles 209, 211 stability 212 structure 215 system 74 transfers 11 zoning 153 foreign capital 229 corporations 211, 230 countries 230 direct investment (FDI) 211, 229 exchange 236–7 governments 226 foreigners 210, 226 France 171n.13, 235–6 franchise 68–9, 73, 78 Freedom House 230 French physiocrats 189 French Revolution 188 funding 127, 191, 224, 227, 235, 238 funds 106–7, 109, 128–9, 135n.10, 136–8, 140, 150, 180, 181n.37, 194, 213n.21, 228, 231, 234–5, 239, 241 G20 211n.23, 232–3, 236 Gatesiana 159, 161 generalized proportionality principle 113–14, 118 Germany 236 Gini coefficient 112, 119 global accounting 12, 242 economy 231–3, 240 financial crisis 231–2 governance 206–8, 213n.32, 218n.46 impacts 233–4 income 227n.3 inequalities 205, 212, 218, 226 injustices 12 institutions 204, 209 justice 18, 206–11, 213, 216, 219–20, 226, 234 justice constraint 210, 212–14, 215n.36, 216–18, 220 plutocratic class 232 poor/poverty 224–5, 236, 238–9, see also poverty public goods 234 recession 234, 240 reform 215 regression 191 resource fund 217n.43



standards 237 tax avoidance 12 taxation/taxes 12, 218n.46, 224–5, 228, 233–4, 239–42 transactions 225 Global Fund 235, 239 Global Resources Dividend (GRD) 224–5, 227, 241 Global Resources Tax 224 governance 208, 213, 215n.35, 218n.46 structure 206–7, 209 Government Accountability Office 231 governmental actions 86 affairs 147 discretion 29–32 expenditures 152n.5 institutions 60 level 151–3 policies 95 powers 30, 32, 83–5 takings 70 transactions 92 units 152 governments 11, 29, 31, 67, 150–3, 177, 197–8, 203, 210–11, 213n.31, 226–31, 234, 239–41 grants 50, 56–7, 74, 127, 172, 192, 196–7 gross national product (GNP) 30 Guinea 229, 235 Haig–Simons manner 73 health 126, 182, 200, 238 care 34, 200–1 insurance 98, 208 outcomes 239 policy 41 heirs 199, 201 heterogeneity 22–3, 43 heterogeneous agents 23 communities 154 preferences 42, 45, 48–9 hierarchy 9, 128, 134, 152 Hobbesian/Lockean premise 147 Hohfeldian claim-right 93 holistic justice 3–4 tax system 6 tax theory 20 Holmesian view 158n.11 Holmes–Sunstein argument 62 horizontal equity (HE) 4, 7, 61–2, 64–7, 70, 73, 79, 170, 175–6 householders 187, 196, 200 housing 73, 128, 129n.5, 153, 156, 164, 194–5, 197, 200

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

INDEX

ideal theory 6, 18, see also non-ideal theory immobile capital 232 factors 212 firms 232n.8 impoverishment 39, 226 incentives 27, 29, 38–40, 42–3, 46, 48, 50–1, 55–7, 76, 153, 169, 173, 180, 196–7, 206, 214–15, 226, 229 income 19, 21, 29, 31, 40–1, 43, 47, 50, 54, 65, 76, 91, 94–5, 136, 138, 154n.6, 155, 171, 173, 177, 180, 195, 200, 217, 227n.3, 237 distribution 10, 27, 61, 63, 66, 69–70, 73, 75, 77, 112, 114–21, 162, 169n.7 earners 74–5, 214 effect 19n.4, 39 fair 112–13, 118–21 inequalities 10, 114–15, 119, 167 level 62–3, 66, 74, 153 national 167, 171n.13 opportunities 114, 116 post-tax 4, 27, 112, 115–16, 119–20, 175 pre-tax 4–6, 27, 66, 86–7, 89–90, 113–15, 118, 121 redistribution 17, 46, 53, 56 stream 60, 67, 193–4, 201 subsidy 50 support 48–9 tax/taxation 9, 21n.8, 22–4, 26n.15, 27–8, 37, 39, 49, 57, 74, 85, 89, 98, 101–2, 109, 116–17, 119, 121, 148n.1, 172, 175–6, 181, 187, 190–2, 198, 212, 214, 228 see also earnings Independent Expert Group 198 indirect taxation/taxes 18, 190, 212 Industrial Revolution 191 industries 40, 53, 162, 188, 191, 196, 230, 238–9 inequitable tax 175–7 inequity 170, 176, 177, 183 inheritance 3, 10, 39, 90, 167–72, 178–9, 181–2, 199, 201 inheritance tax (IHT) 3, 10–11, 90, 168–81, 183–5, 188, 196, 199–201, see also estate tax inherited wealth 10, 167, 170–2, 181–3 Institute for Fiscal Studies (IFS) 20n.6, 170, 186, 190, 195, 200 institutional agents 25 arrangements 31, 34, 68, 92 aspects of society 34 attitudes 232 begging 128, 136, 142 bias 219 charities 137 coherence 70

cosmopolitanism 213n.32 design 205, 206n.10, 213, 215, 235 experimentation 206 framework 66, 239 implications 32 innovations 239 mechanisms 238 reform 213, 216, 218n.46, 226 regime 218 rules 8 schemes 205, 226 structures 33, 203–5, 238, 240 insurance 53, 67, 96, 98, 126, 131, 156, 187, 191–2, 208 intellectual property 81, 94, 102n.7, 154n.6 international borders 204n.3 borrowing 226 community 226, 241 cooperation 206n.9, 235 double tax treaty 211n.27 economy 230, 232 fiscal regime 219 flights 235 institutions 209, 226 law 227n.4 order 226 organizations 206n.9, 230 poverty line 224 practices 227 privileges 226 reforms 233 resource privilege 226 social justice 11 standards 195 tax avoidance 12 tax competition 10, 12, 212n.30, 215n.35 tax/taxation 11, 18, 214, 231 trade 211 wealth tax 11 International Accounting Standards Board (IASB) 230–1, 240 International Civil Aviation Organization (ICAO) 235, 239 International Monetary Fund (IMF) 227n.3, 227n.5, 230, 232–3 investment 1, 22, 86, 107–9, 151, 182, 193–4, 200, 206, 211, 219, 229, 236, 239 Iraq 159 Ireland 191, 196, 211, see also Northern Ireland Japan 217, 236 jobs 39–40, 53, 105n.11, 152, 154–5, 159, 161, 164, 171, 180, 203 jurisdictional competition 153–4, 162–3 component 214, 216, 218–20

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INDEX

elements 217 externalities 154 market 163 reform 216–20 rules 215–16, 218–20 sorting 10, 152 jurisdictions 12, 28, 30n.27, 34, 85, 108, 149, 151–5, 162–4, 187, 198, 203, 211–12, 228, 233, 242 jurisprudence 8, 81–2, 88–9 labour 2, 9, 38, 43, 45, 48, 51, 71, 102, 160, 163, 167n.1, 190, 212, 229 division 70, 153 earnings 39, 117n.7, 118–19 effort 115 forced 2, 8, 234 hours 39–40 income 101, 117n.7, 120 market 41, 121 mixing 103 power 182 preferences 49 service 174 supply 39–40, 49–50, 115 theory of value 156 labouring classes 190 laissez-faire 56–7, 114n.3, 199 allocation 42, 51, 53 constitutionalism 148 land 83, 85, 89, 91, 101, 103, 106–7, 187–91, 193–4, 196–9 speculators 189 tax 10, 185, 187–9, 192, 194–8, 201 taxers 189 value tax/taxation (LVT) 11, 185, 187, 192, 194–8 values 185–6, 189, 199 Land and Buildings Transaction Tax 198 landfill tax 198 landowners 191, 200 left-libertarian theories 105n.10, 106 writings 186 left-libertarianism 105, 107–9, see also libertarianism, right-libertarianism legislatures 156, 158 Leverhulme Trust 128 liability 84, 95, 109n.12, 179, 196, 201 liberal egalitarian approach 8–9, 111–12, 116–17, 121 approach to tax policy 111 arguments for inheritance tax 181 considerations 116 ethics 112 fairness principle 118 framework 116–17, 119, 121



ideals 113n.2, 116–17 principle 117 reasoning 114, 116 theories 111–12 liberal egalitarianism 8–9, 112–13, 115–19, 121, 183, 219, 295n.6 liberal egalitarians 115–16, 181, 205n.6 liberalism 205, 210 libertarian account of taxation 87 agenda 93 approaches 3, 5, 8–9, 68 arguments 85, 90, 94, 96 challenges 124 conceptions 164 extremes 37 ideas 2 picture 2 positions 105 preferences 140 principles 163 rhetoric 86–7 rights 99–100, 108, 148 slogans 8 theory 103, 106, 108, 109n.12 thinking 8 tradition 2, 10 views 82, 89, 101, 106 see also anti-libertarian libertarianism 4, 37, 82n.4, 98, 106, see also left-libertarianism, right-libertarianism libertarians 64, 84, 88, 91, 99, 142, 147, 158 lifetime capital receipts tax 168, 171 earnings 171n.13 expenditure 200 income 26n.15, 200 perspective 52 loans 133, 182, 211n.24, 230 lobbying 28, 34, 197, 234 Lockean/Hobbesian premise 147 Lockean proviso 103–5, 109 loopholes 210, 215n.35 Lorenz curves 121 lost tax 229, 231 luck egalitarian approaches 7 criteria 57 theories 54 view 38 luck egalitarianism 38, 53–4 lump-sum payments 27, 235 support 45 taxes 19, 21, 31, 115–16 transfers 21, 24, 46–7, 49, 56, 116 luxuries 23, 233

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

INDEX

Madagascar 235 majoritarian cycling 72 decision rule 147 democracy 80 election 27 Mali 235 marginal benefits 10, 27, 75 costs 75, 153, 162 distortion 23 disutility of taxes 155 disutility of work 114 dollar 75 excess burden 76 land 188, 196 loss 27 net value of transfers 76 post-tax income 115–16 pre-tax income 115 principle 188 product 101, 156n.7 tax rates 24, 40–1, 48–50, 56, 187 tax schedule 24 utility of consumption 114 utility of income 49 welfare 116 workers 77 market actors 147 allocation 44, 53–6 choices 73 conditions 62 distortions 40n.4 distribution of income 169n.7 distribution of wealth 37 economy 42, 87 entitlements 5 exchange 68, 150 failure 153, 156 for public goods 151n.3, 153, 158, 161, 163 forces 153 holdings 4 impacts 121 incomes 4, 6, 69, 76 institutions 54–5, 68, 70 mechanism 151 outcomes 7, 10, 54, 82n.4 participants 71 politics 71 power 162 prices 10, 162 processes 68–9 relations 71 returns 90 roles 71

settings 72 undersupply 147 values 35, 39, 84, 100–1, 158 market-clearing wage 105n.11 market-mimicking actor 149, 155 mechanism 3 market-oriented approaches 54, 56–7 criteria 56 markets 7, 10, 37–8, 41–4, 53, 55, 66–7, 133, 136, 149–50, 151n.3, 152–3, 156, 158–9, 163–4, 190, 200, 228, 236, see also private markets Marshallian labor supply 115 Mauritius 235 maximin 42, 48, 50, 53, 64, 73–6, 79 Meade Report 20n.6 Meltzer–Richard model 78 membership 60, 161, 163, 235 fees 164 principle 215n.35 rights 60 Metroland 194 military protection 101, 106 Millennium Development Goals 238 minimal income earner 73 minimum wage 46–51, 56, 77, see also wages Mirrlees approach 6, 37–41, 43, 46, 48, 51 framework 6, 37–8 problem 39, 42–3, 45, 50, 56, 57 Mirrlees–Murphy–Nagel approach 39 Mirrlees Review 186, 194 mobile capital 12, 203, 211–12, 232n.8 monopolists 162, 189 monopoly 81, 99–100, 156, 194 power 30, 158n.11, 163–4 moral agency 158 agents 21, 26, 142 attention 65 behaviour 72, 142 claims 124, 142 concerns 176, 205 cosmopolitanism 213 cosmopolitans 205, 207, 213n.32 counter-arguments 11 debate 57 demands 132, 141 division of labour 38, 70 duties 132, 138 force 159 imperatives 139, 142 individuals 29 intuitions 29n.26, 111–12, 115, 157n.10 issues 201

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INDEX

labour 71, 76 liberty 100 monopoly 100 norms 18, 76 objections 11, 167–9, 172, 176, 183–4 outlook 141 ownership 102, 105n.11 philosophers 60 position 126 powers 98–9 preference 56 problem 47 property 102 property rights 90 requirement 129 restrictions 89 rights 82n.4, 102, 109n.12, 199, 201 significance 39, 86, 108, 182 standards 31 standing 103 stature 54, 56 status 61, 90, 126n.3 teleology 208n.17 value 46, 53 wrongness 168n.5, 169, 179 multinationals 211, 217, 229–30 myth about death taxes 200 of ownership 7–8, 70, 79, 87–91, 94 of pre-tax income 86–7 of private property 64 of property rights 88 Naples 142n.12 Napoleonic wars 190 national communities 205n.7, 208 governments 11 income 167, 171n.13 jurisdictions 34 principles of justice 208 savings 181 social justice 11 sovereignty 231 valuation register 197 National Health Service (NHS) 96 National Insurance 96, 126n.4, 187, 191–2 National Parks 196 natural resources 8, 98–9, 101, 102n.6, 103–10, 217, 224–6, 229 negative correlation 230 duty 218, 226 effects 169, 173n.20, 183 externalities 40n.4, 109 impacts 232 incentives 173n.20



repercussions 238 social effects 180, 183 social responsibility 220 taxes 19–20, 41, 48 value 107 Niger 235 no-envy 44–5, 47, 53, 55 non-ideal theory 18, see also ideal theory Northern Ireland 195, 198–9, see also Ireland Norway 112, 117–20, 235 Norwegian data 9, 117–18, 121 framework 117 income tax system 119 pre-tax income 118 tax policy 114 Not in My Back Yard (NIMBY) 196–7 Nozickean approach to taxation 3 right-libertarianism 104, 109 optimal tax/taxation (OT) 5–6, 17, 20–6, 28–33, 39, 41, 43–4, 49–50, 53, 56, 112, 115, 116n.5, 161, 185 Organisation for Economic Co-operation and Development (OECD) 211n.25, 212, 218n.45 base-erosion and profit-shifting (BEPS) initiative 211n.24 Common Reporting Standard 210n.23 Financial Action Task Force 241 Forum on Harmful Tax Practices 241 Harmful Tax Practices initiative 232 ownership 87, 89–90, 92–4, 102, 105n.11 claims 4, 60 interests 89 myth 7–8, 69–70, 79, 87–8, 90–1 of artifacts 99, 101 of income 86, 89–91 of natural resources 99, 103 of wealth 180–1 rights 8, 60, 91, 93, 98, 100, 102, 103n.8 see also self-ownership Oxfam GB 228, 231 Pareto optimality 116n.5, 221 principle 41–2, 45 Parliament Act 192, 194 patents 81, 87 pay as you earn (PAYE) 191 People’s Budget 189 Pigou–Dalton principle 111, 115n.4 Pigouvian taxes 1 planning 54, 89, 95, 192 permission 192, 199–200

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

INDEX

police 62, 106–7, 126, 150n.2, 156, 199 political action 70–1, 76 agenda 32, 220 agents 18, 33, 72, 131 analysis 24, 26 arguments 127, 131 campaigns 180 challenge 26 choices 210, 213 community 206 competition 27 constraints 71 corruption 12 debates 37, 57, 81, 111, 125, 132 decision-making 68, 172, 207 economy (PE) 5, 7, 17, 20, 26, 28–9, 31–3, 67 elites 32 environment 32 equality 168, 172, 181 equilibrium 27–8, 75–7 exploitation 30 factors 5, 28, 34 failure 28 influence 79n.10, 181 institutions 3, 7, 34, 70, 141 liberties 3 life 48 losses 28 manoeuvres 28 objectives 238–9 outcomes 34 palatability 11 participation 208, 210, 213, 220 parties 28 philosophers 6, 33–4, 147, 203–4 philosophy 1–5, 8, 12, 17–18, 20, 31–3, 38, 57, 82, 203, 224, 233–4 power 172, 181 processes 20, 26, 31–3, 68, 74, 77, 163, 180, 182 programme 11 psychology 1 rights 2, 10, 82, 86, 229 science 2, 5 secession 161 society 125, 142, 159 structures 33, 205 support 27–8 system 32–3, 69, 73, 95 theorists 33, 148, 158 theory 33n.30, 72n.7, 126, 141–2 trade-offs 6 variables 28 politicians 26, 29n.24, 194–5, 198–200, 236

politics 26, 29n.24, 68, 70–2, 77, 82, 126n.4, 148n.1, 150, 178, 185–6, 189, 194, 199–200 polity 69, 151, 161, 163–4, 206, 220 poll tax 194–5 pollution, see emissions/pollution Poor Law 191 poor laws 134 post-tax income 4, 27, 90n.9, 112, 115–16, 119–20, 175 poverty 49, 213, 224–5, 227n.3, 229, 234, 236, see also global poor/poverty pre-tax income 4–6, 27, 66, 86–7, 89–90, 113–15, 118, 121 prioritarianism 49, 54, 160 prisoner’s dilemma 12, 76 private acquisition of income 87 actions 164 agreements 158 charities 124–5, 129, 138, 141 contracts 149, 156 contributions 158 debts 104, 109 exchanges 148, 158, 163 flights 177 goods 149, 199 grant-giving bodies 127 individuals 95 information 40, 46 inheritance 178 land 107 law 92, 94 markets 147, 150, 151n.3, 152–3, 156, 163 matters 38, 44 motives 95 organizations 100, 125, 138 ownership 60 parties 163 producers 163 property 61, 64, 82–3, 86, 89, 94 property rights 61–4, 69–70, 73, 79, 84, 92 property structure 79 property system 69 purposes 181 resources 137 rights 60, 78, 88, 92, 98 sector 117–18, 120, 194 wealth 181 private/public divide 71 profits 25, 133, 164, 190–1, 211, 217, 226, 228–30, 233, 237, 240 progressive benefits tax 147 critiques 156 impact of fiscal measures 203 inheritance 9

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INDEX

rate structure 77 taxation 3, 10–11, 23–4, 30, 74, 116, 119, 121, 148, 155, 163, 180–1, 185–7, 190–2, 195–6, 198 progressivity 17–18, 23, 38, 185–7 property 47–8, 51, 55–6, 78, 81–4, 86, 88, 93, 102, 185, 187–91, 193–4, 196, 199, 201 bundle 93–4 developers 192 entitlements 3–4 entitlements 61 expropriation 82–3, 85 holders 70 institutions 89 objects 91 owners 92, 199 relations 94 resources 92 rhetoric 81, 95–6 rights 1–3, 7–8, 37, 60–3, 66–70, 73, 79, 81–4, 86–94, 102, 105, 135, 148, 158, 234 rights structure 61–4, 67, 69–70, 79 rules 4, 7 talk 88, 93 taxes 31, 154, 175, 196, 198–9 theorists 81, 91 theory 5, 83, 93–4 value 84 prostitution 133, 142n.12 public activity 133 assistance 241 benefit 69, 84–5, 164 borrowing 31 budget 209, 212 choice 26, 71, 72n.7, 78 debate 37 discussion 82 duty 190 economics community 39 expenditure 164 figures 239 finance 4, 6, 10, 20, 37, 60, 147, 150, 152, 154, 186 goods 1, 10, 19, 53, 76, 101, 147–56, 158–9, 161–4, 199, 212, 229, 234, 240, 242 institutions 219 interest 19–22, 84, 86, 174, 177 intervention 37 investment 194, 200 justifiability 6 motives 95 officers 191 officials 228



opinion 232 police resources 62 policy 2, 33n.30, 40–1, 73, 171, 200 provision 9 purpose 83 rules 3 sector 117–18, 120, 151, 193 services 1, 12, 67, 73, 84–5, 96, 107, 150–1, 153, 229 spending 18, 34, 72, 176 support 234, 238 transfers 67 utilities 84, 156 works 191 public/private divide 71 Publish What You Pay 230 Rawlsian approaches 3, 5 architecture 61 commitments 4 conception 76, 78 concerns 181 maximin 74 principles of justice 80 recommendation 65 scheme 61, 64, 78 theory of justice 63, 67, 79 view 3–4, 63 redistribution 1, 9, 24, 27, 30, 39, 42, 46, 55n.9, 56, 76, 87, 111, 114–15, 124, 153, 209–14, 216–18, 220 of income 17, 46, 53 of resources 19, 140 of wealth 125, 147–8 redistributive benefit system 27 components 214–16, 218–19 consequences 85 difference principle 160 duties 219 effect 74 efforts 219–20 elements 217 expenditure 191 expropriation 85 impact of the tax system 23 justice 95 measures 218–19 obligations 12, 216 policies 96, 115, 148 programs 153 purposes 76 questions 116 regimes 203 state 9, 124 system 212

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

INDEX

redistributive (cont.) tasks 70 taxation 23, 27, 41, 53, 85, 87, 114–15, 121, 132, 138, 141 tool 3 transfers 2 regressive activity 239 effects 212, 227 fiscal measures 203, 211 taxation 10, 30, 149, 155, 187, 195, 212 regulatory activity 31 aspects of society 34 burdens 154 competition 153 progress 210n.23 subsidies 19 system 154n.6 taxes 19 rents 73, 105n.11, 108, 148, 156, 186, 188–9, 196–7, 199 revenue 11–12, 32, 34, 75, 85, 96, 98, 150, 186–8, 190, 198–9, 209, 212–13, 215, 228–30, 233–4, 235n.10, 236, 240 agencies 210 distribution 106 escape 240–1 flow 225, 227 from governments 231 generation 95, 107–8 maximization 29–30, 73–4, 79 raising 19, 23, 27–8, 76, 92, 147, 237, 239, 241 redistribution 27 spending 109 stream 193, 211 Ricardian arguments 194 rent 189, 196, 199 tax 194, 196 right-libertarianism 103–4, 108–9, see also left-libertarianism, libertarianism right-libertarians 158 ring-fencing 211 Robin Hood Tax 234, 236 Royal Commissions 72 sales tax 90, 109, 174–6 San Francisco gold rush 189 savings 18, 26n.15, 86, 167n.1, 172, 175, 180–1, 183 Scotland 190–1, 195, 198 Scottish National Party (SNP) 198 Scottish tax 198 self-indulgence 139

self-interest 27, 70–3, 76, 78, 95–6, 148n.1, 160 self-ownership 2, 99–101, 108, 159, 234, see also ownership self-selection constraint 40, 42 shareholders 25, 109n.12 sin taxes 1, 195 Smith Commission 198 Smithian arguments 194 tax system 186 social activity 135 agents 125 analysis 28 background 52, 170 capital 149, 164, 255 care 200–1 choice 43, 72n.7 contract 132, 149, 159 contractarians 148, 159–61 cooperation 148, 158–60 costs 9, 151n.4 division 134 effects 180, 183 environment 164 equality 47 goods 206, 229 hierarchy 9, 128, 134 inferiority 128 influence 181 institutions 3, 18, 34, 43, 132, 206 insurance 98 interactions 10 justice 1, 11, 44, 57, 87, 169n.7, 182, 203, 229 manipulation 52 mobility 66 norms 21 objectives 41, 43, 48–50, 57, 238–9 opportunities 161 order 125 orderings 46–7, 51 organizations 132, 150n.3 outcomes 67–8 policies 11, 124, 127, 142, 167 principles 141 product 83 programmes 241 protection 191–2, 199 reform 95 relationships 182 roles 52–3 rules 21 states 53–4 status 134 strata 134 structures 142

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INDEX

surplus 158 value 25 value function 21–3 welfare 22, 47, 66, 70, 115, 149, 151n.4, 154 welfare function 38, 40–3, 47–9, 54–5 socio-economic groups 168n.3 interdependence 207 justice 82, 88, 95–6 mobility 65–7 solidarity 44–5, 234 South Korea 235 Southern Africa Resource Watch 230 sovereignty 208–9, 214n.33, 231 spender 176 spending 18, 34, 72, 82n.2, 85, 109–10, 175–8, 180–3, 185, 192, 198, 200, 229, 241, see also expenditure stamp duty 84, 237 stamp duty land tax (SDLT) 194–6, 198 Statistics Norway 117n.7 stock exchanges 87, 230 transactions 237 sufficientarianism 33n.29, 104 sufficientarian-libertarianism 104–5, 108 Sweden 214 Swedish tax base 114 SWIFT 237 Switzerland 152 Task Force on Financial Integrity and Economic Development 231, 236–7 tax authorities 18n.3, 19, 21, 26, 112, 116–17, 193 avoidance 12, 74, 197–8, 211n.24, 239 base 23, 29–30, 32, 64–6, 73–4, 109, 153–4, 193, 203, 210, 212, 214, 216–17, 220, 231, 232n.8, 233 breaks 1, 28, 229 burden 4, 75, 147–8, 153, 154n.6, 155, 159, 169, 176–7, 212, 228 competition 10–12, 18, 30, 203–4, 210–20, 232n.8 constitution (TC) 5, 7, 17, 20, 26, 29–33 escape 225, 227–8, 234, 241–2 evasion 89, 228, 231, 234, 241 havens 12, 18, 159, 162, 210, 218n.45, 225, 227–9, 231–4, 240–1 justice 3, 72n.5, 73, 82, 84–8, 95–6, 168–9, 176, 178, 203 policies 2, 4, 6–7, 9, 11–12, 17–20, 24–5, 26n.17, 28–32, 34, 41–2, 82, 88, 95, 111–12, 114–16, 121 protest movements 148n.1



rates 23–4, 27–9, 38, 40–1, 48–50, 56, 66, 73–6, 79, 85, 95, 117, 148–50, 152, 155–6, 158–9, 162–3, 203, 211–12 reforms 24, 28, 53, 72, 120, 194, 200 system 1–11, 17, 20, 22–5, 27–8, 31–2, 34, 38, 41, 61–2, 67, 70–4, 76–9, 82, 86–7, 89–90, 95, 116–17, 119–21, 125, 142, 169n.7, 170, 176, 178, 181–2, 185–7, 190, 193, 195, 201, 234 theory 18, 20, 34, 64 tax/benefit system 21, 26–8, 30–4 taxes-for-public-goods 149, 151, 154–5, 159, 161–2 Tax Justice Network 210n.23, 231 Tax Policy Center 200 teleology 24–5, 208n.17 theft 62, 66–7, 70, 185, 199, 201, 234 Tieboutian argument 150n.3 model 152 sorting 10, 151–2, 154, 160, 162–3 Tobin tax 233, 235 Town and Country Planning Act 192 Transport for London 194 unemployment 77, 96, 98, 126n.4, 182, 191 unfair conventions 52 double taxation 175 effect 9 expropriation of property 82, 85 inequalities 112–13, 116, 117n.6, 118–19, 121, 176–7 inheritance tax 172, 178 tax 168, 176 unfairness 45, 111, 116–17, 119–21, 168n.5, 176–7 Gini 119–21 Uniform Commercial Code 156 Unionists 191 Unitaid 235, 239 Unitary Taxation with Formulary Apportionment 217 United Kingdom (UK) 20n.6, 125, 126n.4, 127, 129n.5, 135, 168, 170, 171n.13, 183, 185, 187, 190–200, 214, 230–1, 236–7 United Nations (UN) 224, 235–6 United States (US) 37, 82n.2, 93, 148–9, 151–4, 156, 159, 161–2, 210n.23, 230–1, 233, see also American usury 133, 142n.12 utilitarian justification 114 objective 41 reasoning 114 social welfare function 38 sum 57

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

INDEX

utilitarianism 49, 54, 57, 66, 70, 114 utilitarians 115, 129, 205n.6 utopia 80 value added tax (VAT) 24, 190, 195, 198 value function 20–5, 29 vertical equity 4, 6, 20, 37–8, 41–2, 65–6 virtue 51, 70, 124, 141, 178–80 argument 183 objection 11, 168, 177–9 voters 26–8, 30n.27, 32, 71–2, 75–8, 147–8, 150–2, 194–5 voting 26–8, 31, 34, 71–2, 75–6, 77n.8, 78, 147, 148n.1, 151–2, 192, 198 wage increases 77 inequality 24 legislation 77 rate 41–2, 46, 48–9, 51–3, 56, 114–15 wages 46–8, 50–3, 56, 105n.11, 187, see also minimum wage Wales 195, 198 Washington Consensus 230 wealth 17, 21, 24, 37, 44, 54, 65, 85, 87, 98, 102, 147, 153, 155, 167, 175–7, 179–80, 210n.23, 242 accumulation 94, 180 inequalities 10, 171, 181, 183 inheritance 10, 167, 170–2, 179, 181–3 ownership 180 possession 180, 183 redistribution 95, 125, 130n.7, 141, 148 tax/taxation 11, 22, 31, 98, 106–7, 109, 168 transfers 169–70, 172–3, 178–9, 230, 242 wealthy 136, 148n.1, 149, 155, 159, 164, 180–1, 182n.40 communities 153 families 172 individuals 228 residents 153 states 226–7

welfare 22, 25, 44, 53, 115–16, 131, 136, 151n.4, 154, 195 consequentialism 39 deficits 54 distribution 23, 37, 115, 125, 132 economics 43 egalitarianism 54 function 38, 40–3, 47–9, 54–5 inequality 111 insurance 131 reasoning 114 reform 152 state 126n.4 tradition 66, 70 welfarism 25, 37 welfarist 22, 44 approach 8, 47, 57, 112, 121 arguments 147–9 case for the state 149 consequentialism 7 fashion 55 framework 111, 115–16 interpretation 38n.1 objective 42 orthodoxy 8 perspective 116, 150 reasoning 114 tax policies 112 theories of justice 111 tradition 43 well-being 18, 41–4, 53–5, 62n.3, 65–6, 77–9, 100n.2, 105, 107, 130 Wellcome Trust 127–8 Welsh disestablishment 192 governments 198 willingness to pay 20, 56, 151, 235 World Bank 224, 227n.3, 230–1, 233, 237 World Health Organization (WHO) 235, 239 wrong problem objection 11, 168, 180, 183 zoning 153, 196, 199