© Springer International Publishing Switzerland 2015Helmut P. Gaisbauer, Gottfried Schweiger and Clemens Sedmak (eds.)Philosophical Explorations of Justice and TaxationIus Gentium: Comparative Perspectives on Law and Justice4010.1007/978-3-319-13458-1_14
14. Taxation: Its Justification and Application to Global Contexts
Department of social sciences, University of Eastern Finland, PO Box 111, 80101 Joensuu, Finland
School of Social and Political Philosophy, University of Tampere, Tampere, Finland
The article focuses on the justification of taxation, in other words the principled rather than the technical aspect of taxation. We first show how, on the one hand, democracy is required for taxation to be legitimate, and how on the other hand democratic communities are dependent on taxation, and argue that this does not constitute a vicious circle. We then present a typology of ways of justifying taxation, according to which taxation can base its legitimacy on (1) meeting basic needs, (2) financing public goods, (3) redistribution, or (4) (dis)incentivising certain types of conduct. We then discuss the applicability of each of these types of justification, arguing that all of them do apply at a global level. The article further concludes that different normative justifications guide us towards different designs of taxation in practice, so the background justification has to be made clear, especially when designing new taxation systems.
14.1.1 Global Economy and Global Morality Call for Global Politics—and for Global Taxation
The growing interest in global taxation reflects the observation that a worldwide economic system, which transcends the borders of any single political community—the traditional site of handling public finances—seems to have evolved. To put it crudely, economy is global, while political government, as it stands, is not. In addition, while within welfare states certain kinds of voluntary charitable activity are made almost redundant by institutions of social security, in the global setting moral or humanitarian concerns, although widely perceived as pressing, are addressed chiefly via voluntary NGOs, along with development aid interventions. In simple terms, humanitarian morality is global, while political government, as it stands, is not.
There are various reasons why the situation is unsatisfactory from the viewpoint of the aims which political communities are set to serve. The system of competing nation-states, engaging in a plethora of bilateral and areal treaties and a set of confusing semi-binding obligations, proves unsatisfactory for the growing number of global political concerns. The situation might also be unsatisfactory from the viewpoint of the economy: the economic system would work better if it was held more in check by political forces—this is one of the lessons of welfare societies. In addition, the situation is unsatisfactory for moral reasons: the shoulders of humanitarian aid are far too narrow to meet global needs. For such reasons, global taxation might be a fitting, even necessary, solution.1 It would help global politics to complement global morality and global economy, in order to better serve the constitutive aims not only of political communities, but also of economy and morality.
In this article, we analyse the justification of global taxation at the level of guiding principles. Thus, the main question is not what kinds of detailed systems of tax collection ought to be designed, how tax evasion ought to be tackled, or what the technically best process for deciding how to use the tax revenue is. Rather, our main question is on what kinds of grounds the legitimacy of a tax can be assessed.
This principled level is to a surprising extent neglected in the discourse on tax policy. Rather, governments aim to optimize their tax revenue, for example, by identifying the level at which increasing the capital gains tax percentage would decrease its revenue because of capital flight. Taxation becomes a technical issue, seen through the prism of economics and the rationale of filling the funding gaps in public finance. This leads to the risk of losing the fundamental understanding of what makes taxation desirable in the first place.
Awareness of the choice of justification of the taxation system is especially important when designing completely new tax regimes. Global taxation is a case in point. Even though no individual tax is designed without reference to other taxes, and to its effects in the overall taxation system—an inevitably complex system of money streams and incentives—the lack of certain basic economic functions in the global sphere forces the normative questions to the forefront. It is symptomatic in the political discussions on global taxation that they tend to begin by pointing out the need for a specific tax, such as the “Tobin tax” (Tobin 1978, Patomäki 2001), without first arguing for the justification of taxation, which would give the rationale for implementing the tax. This inverse political logic also tends to blur the design of ideas such as the Tobin tax, as the tax can take very different forms depending on which justification is given most weight.2
14.1.2 The Aims of this Chapter
So we need to start from the philosophical basis: first, as taxation presupposes a political society, presumably the basic legitimacy or permissibility of taxation (within a single political society) will partly depend on the legitimacy or authority of that political society. Democratic political society with its implied equality is a superior way of arranging human relations in comparison to subordination and dominance of some (14.2.1). But second, mere permissibility is not yet a reason in favour of doing something. What justifies taxation in the first place? One observation is that taxation is a way of creating economic and democratic community. Taxation is required to bring about legitimate political society in the modern form (14.2.2). Over and above that, we will discuss four further purposes that taxation is especially fitted to serve. First, some reasons derive from the universal human claims to a basic standard of living. Institutions funded by taxation provide a principled alternative to charity as a way of ensuring that everyone’s basic needs and entitlements are met (14.3.1). Second, taxation is needed to see to it that “public goods” are provided (14.3.2). Third, some reasons derive from distributive justice. Taxation—especially progressive—provides a means of promoting social justice and economic equality. (14.3.3). Fourth, taxation provides further normative guidance on people’s behaviour.3 Normative guidance can be understood as the collective self-direction of society: what kind of conduct does the political community choose to encourage or discourage amongst its members. Pigovian taxes are sometimes suggested as providing normative guidance on the behaviour of individuals. We will suggest that this needs to be understood to be an aspect of all taxes, affecting the reasons for or against certain kinds of taxation (14.3.4).
In the contexts of analysing each justification of taxation we will ask whether that kind of justification can also be applied at a global level. Our main argument is that none of the justifications for taxation “stop at the border”; in other words, they all provide a justification for implementing global taxation, were a global democratic community to set such taxation.
14.1.3 What do we mean by Taxation?
As for the definition of taxation, we need to note two things. First, taxation takes place within an established society or state. Private insurance schemes, in an (imaginary) state of nature, or for example land rent in an (equally imaginary) geoanarchistic context, do not count as taxes. Taxes are legally stipulated, mandatory, and universal. Universal does not mean that everyone is taxed an equal sum or necessarily even that everyone is taxed at all, but that the tax is not determined by the identity of the subject to be taxed: everyone in the same (legal, financial) position pays equally.4
Second, in the context of established societies, for example user fees of various stripes, are not taxes. This is because funds derived from taxation are (theoretically speaking) never earmarked. This does not mean that there could not be a wide consensus on always using public money for certain purposes. A tax can even be proposed for meeting a certain funding gap. It does mean, however, that being taxed is not identical to paying for using a service. For instance, one can pay a fee for seeing the doctor within a partially subsidised healthcare system. The public subsidisation of the healthcare system is paid for by money derived from taxes. Even though both amount to making a payment to the very same account (the health care facility), the fee is a direct payment for using a service and the collection of a tax is detached from its final use, and mediated by some political body.
The implication in regard to the global society is that membership fees are not taxes. The difference between the current state of affairs and global public finances is that currently all supranational bodies (UN, World Bank, EU) are funded by membership fees, not taxation. Thus proposing global taxation means proposing legally stipulated and mandatory taxes, which would bring funds to a body functionally independent of the decisions of individual nation-states.
14.2 The Chicken and Egg of Taxation and Democratic Community
14.2.1 Taxation Presupposes a Political Society, Legitimate Taxation Presupposes a Legitimate Political Society
For taxation to be justified, the ordered societies or states implementing taxation must themselves be justified. They must possess legitimate authority over individuals in general in order to tax these individuals. Everyone would agree that, at least in some cases, a putative government lacks legitimacy, even if there is disagreement about which cases would be such. For example, a colonial power after an unjust aggressive war may be a case of an illegitimate power-holder, so it does not have a proper right to force taxes on the colonized people (yet of course taxation has always been one of the chief interests of the colonisers). Alternatively, a local mafia can be strong, organised, and systematic enough to be seen as some kind of tax-collecting entity. It serves as a prime example of taxation which is unjustified on the basis of the illegitimacy of its implementer, even though it would succeed in producing social goods such as stability.
Legitimate authority derives not only from the beneficiality of the social arrangement to the individuals involved (say, when people are better off within a society than in a state of nature), but also from considerations of democratic participation: democratic decisions have content-independent authority (i.e. whatever the decision is, it binds everyone because it is democratically made) Raz 1986). This authority has certain normative limits: as long as the rights and entitlements of everyone involved are respected, and as long as the content of the decisions is not intolerably unreasonable, the public decisions are binding independently of their content (Christiano 2010).
Consequently, the justification for a given tax, or for a tax system, can be approached at two levels: first, a legitimate taxation scheme has content-independent justification as a result of the legitimacy of the community exercising its democratic authority—as long as the tax does not violate the fundamental rights of individuals, and as long as it is not too foolish. Second, a legitimate taxation scheme has content-dependent justification due to its purposes and actual content. Below we will discuss four basic purposes that taxation serves, and all these purposes are relevant at the global level. The content-dependent justification of any scheme will depend on its details: naturally, some ways of promoting the four purposes will be better, more justified by their content, than others.
However, before discussing these four purposes, let us tackle the permissibility of taxation in the light of the limits of democratic authority. So, first of all, does taxation violate fundamental rights of individuals? The libertarian and anarchist slogans “taxation is theft” and “taxation is slavery” protest against the legitimacy of all taxation exactly on the grounds of violation of individual rights (Nozick 1974; Narveson 1988; Schmidtz 1991). This interpretation of rights can be easily contested, though. Here it will suffice to briefly go through the line of argument provided by Liam Murphy and Thomas Nagel among others: private possession of money (or property in general) is possible only in the context of societal institutions. Such societal institutions need to be funded by taxation, and thus taxation is not a way of “stealing” existing private property, but rather an inalienable part of the institutions making private property possible in the first place.5
The very move that protects private property is at the same time constitutive of community. The move is familiar, for example, from the writings of Rousseau: either some individuals are dependent on and subordinate to some other individuals, or the subordination is cancelled by everyone being dependent on common norms whose co-authors they all are. The opponents of taxation sometimes take taxation to be a form of subordination, but precisely because it binds everyone, and in the legitimate cases where it expresses the general will, taxation is causally and constitutively relevant for the latter option. The contrast case of a democratic community is undemocratic, unprincipled subordination—say, in terms of economic or military power. In a world of unconnected individuals such subordination would not exist, so this kind of conditional argument for a democratic community (that it is needed to combat subordination and domination) would not get foothold. Nevertheless, as soon as there is dependence between individuals, a normative requirement rises to turn this into mediated freedom in mutual relations to others (Neuhouser 2000). Democratically agreed forms of taxation have by default content-independent justification, whereas a tyrant collecting money, for even what appears to the tyrant to be the collective good, is a case of an illegitimate use of force. This point applies directly to the global setting: global taxation has a prima facie content-independent justification if a global democracy sets it. If it is set by a global tyrant, it lacks such a justification (even when it is for what the global tyrant takes to be the good of the humankind).6
Naturally, while the content-independent justification will be part of the story of the legitimacy of taxation, it does not yet address the whole issue. Mere permissibility is not as such a sufficient reason in favour of something. The content of a proposed tax scheme is naturally relevant in answering such questions and in providing content-dependent justifications for some proposals. The evaluative features of the proposed content justify the decisions to impose taxes of the proposed kind. Below, in four subsections, we discuss four aspects of the point of taxation. However, before going to these purposes of taxation, we can point out an even more general consequence of taxation, which might be a desirable general telos as well, namely the fact that taxation is a way of creating economic and political community.
14.2.2 On the Other Hand, Taxation Goes to Create Economic and Democratic Community
The previous section argued that legitimate taxation presupposes legitimate democratic community. Yet curiously, in some sense the logical relation goes both ways. Taxation can indeed be seen as a condition of the creation of a democratic community in the modern sense.
Is this a vicious circle? If we need democracy (just) for legitimate taxation, and taxation (just) for democracy, why would it be better to have both rather than neither? Of course, democracy is desirable for various reasons over and above merely giving content-independent justification for taxation—for one thing, it is an intrinsically valuable realization of collective freedom and a desirable alternative to domination and subordination—and taxation is desirable for various reasons over and above promoting democratic community, or so we hope to argue below. But how is it that taxation promotes community?
First, taxation creates an economic community. By means of taxation, the members of a given community come to use the same currency. The monetary power of government lies exactly in the government’s capacity to enforce the use of the government’s currency by demanding tax payments in that currency. The subjects are free to use any currency of their preference, but needing government currency for tax payments creates a demand for the government’s currency, which makes it the general unit of exchange. This, in turn, creates an economy as a social unit: everyone can rely on other subjects, strangers included, accepting the same currency. This mutual trust fundamentally creates money.7 Thus taxation is the means of creating co-operation—by coercion, perhaps–but co-operation nevertheless (Wray 1998).
Second, taxation creates a political community. By paying taxes people bond in a political way, and become more mutually interdependent than they would be otherwise. Taxation creates a pool of public resources. This, ideally, creates solidarities, as there are resources the wise use of which is in everyone’s interest. But also, conflicting ideas and interests regarding the use of public money (and the question of to what extent taxes should be collected in the first place) create the political discourse on public finance. For politics to exist meaningfully, there has to be something at stake in politics. The use of public funds collected by taxation is perhaps the most important of such issues. In short, taxation strengthens, and to some extent even creates, membership in a political community, as it gives strong reasons to care about political decisions. By taxation, the public political sphere is created. (Of course, this is speaking about ideal cases, as political communities come in many forms and in some forms taxation can be totally irrelevant for democracy).
Curiously, such community—shared political institutions and discourse, the idea of a common market etc.—seems to be highly relevant functionally or instrumentally, and not only because of the intrinsic value of democracy and community. For instance, tax avoidance seems highly detrimental to the institutional core of the society, and not only because of the immediate lost funds.8 The existence of functioning, transparent and widely trusted “shared institutions” remains one of the most viable explanations of why some countries are rich while some are poor (Risse 2005, de Soto 2003). Further, democracy is often seen as the key to overcoming poverty9, implicating that the “political” problem of democracy and the “economic” problem of poverty might not be as distant as the disciplinary division insists.