Since the onset of the financial crisis in 2008, many states in the Western world have struggled with declining public revenues and rising expenditures. Throughout the Eurozone and beyond, ‘austerity measures’ are being introduced in an effort to combat the crisis. Included in these are fiscal measures. The crisis has also emboldened critics of various stripes to point out that over the last decades there has been a growing income inequality between the very rich and the very poor. Though real income in almost all Western states at all income levels has grown since 1970, the very rich, so these critics claim, have benefitted disproportionately. This is definitely the case in the USA where the top 1 % of income earners now earn more than 17 % of the total income compared to 7 % in 1973. While this trend is less strong in Europe, it remains the case that in general income inequality is increasing.¹ Thomas Piketty has recently argued that this rise in income inequality is accompanied by an increase in the returns on investments that are higher than the average growth of the economy, resulting in an ever-increasing concentration of wealth in the hands of a small number of people (Piketty 2014).

These income differences are enhanced by the way tax schedules are set up. Most Western countries aim at a progressive rate by taxing income on several scales. In practice, however, the rate of progression slows down so much that for the extremely rich the rate for the top incomes is virtually flat. For example, in the Netherlands—my home country—roughly the first € 20,000 of one’s income is taxed at a rate of 6 %; the next € 13,000 (so, up to € 33,000) at 11 %; the next € 23,000 at 42 %; and all income beyond € 56,000 is taxed at 52 %. This means that somebody who earns € 33,000 (the median income in the Netherlands) has an effective tax rate of 14,5 %; a person earning € 66,000 has an effective rate of 29,5 %—so almost double; and somebody who earns € 330,000, ten times the median, faces an effective tax rate of 44 %—only three times as high as the median wage earner (Tarieven—Belastingtarieven—Rijksoverheid.nl 2012).² If we add to this, first, the absence of a wealth tax, the fact that all personal wealth is taxed at the same (low) flat rate, and the fact that several forms of legally permitted tax evasion are feasible (and worth the effort) for those with high incomes and large wealth, the effective fiscal burdens for the extremely rich are considerably less than that 44 %, thus ‘flattening’ the rate of progression.

This lack of progressivity in the tax burden at the top end of the income distribution is widely regarded as yet another example of how the (extremely) rich have benefitted disproportionately (see Robeyns 2013). This has led in many countries to a plea for higher taxes for the extremely rich, the so-called “one percent”. From the “Buffet rule” in the USA, to François Hollande’s (failed) attempt to introduce a 75 % tax on incomes above 1 million €, all over the Western world the call to tax the 1 % is heard. The additional funds thus captured might help alleviate public debt and it would do something to redress the disproportionate benefits the 1 % receive.

These proposals have met with a lot of criticism, especially from the 1 % and their sympathizers. There are those who dispute the fact that income inequality is growing. Others claim that higher taxes would be inefficient and drive high-income earners away or provide an incentive to be less productive. Yet others dispute the idea that the current income inequality is unjust since such income differences surely reflect differences in effort and desert (Mankiw 2013).

This last objection is often answered with a specific type of argument and it is this argument that will keep us occupied for much of this chapter. The argument says that the extreme rich have amassed their wealth by taking advantage of economic opportunities that they did not create themselves. Other members of society created those opportunities and reciprocity therefore demands that the extremely rich ‘pay’ for these opportunities they have enjoyed.

A well known, if somewhat imprecise, version of that argument was formulated by Elizabeth Warren, senator for Massachusetts, who defended hefty increases in taxes for the extremely rich in a speech that went ‘viral’ on the internet as follows:

You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. (Warren 2012)

Warren is not alone in making this kind of argument, nor is she the first.³ Similar claims have been made by Barack Obama in the 2012 campaign and by politicians in Europe. However, it is not just politicians who like this argument, political philosophers often help themselves to it as well. Murphy and Nagel (2002) use an argument that is remarkably similar to this one.⁴

In this chapter I will argue, first, that arguments like that of Elizabeth Warren fail. They do not justify a marginally higher tax burden on the extremely rich. Secondly, I argue that this type of ‘Warren argument’ appeals to a principle according to which taxation is the price a citizen pays for the enjoyment of the benefits the state provides. Third, I will show not only that such a principle undercuts the ‘Warren argument’, but also that it mandates a completely flat tax rate if not a lump-sum tax. It is, therefore, a genuinely argumentative poison pill for those who wish to defend high taxes for the 1 %.

In the final part of the chapter, I suggest an argument for taxing the extremely rich that does not appeal to a benefit principle. This argument proceeds from the idea that justice demands that taxation is levied according to the ability to pay. I will defend this principle against objections formulated against it by Liam Murphy and Thomas Nagel in The Myth of Ownership and show how it justifies setting high marginal rates for the extremely rich (Murphy and Nagel 2002). Social-democrats and left-wing liberals who are concerned about extremely high incomes at the top end of the income distribution are better advised to adopt such a strategy, rather than sticking to Warren-like arguments.

Before I proceed with the argument, I should include a caveat. I take it as my task in this chapter to strengthen the claim against the 1 % in a way that echoes the sentiments of the Warren argument, in such a way that it does not fall victim to the same pitfalls as the Warren argument. However, I am not convinced by that argument either—nor am I convinced that the 1 % should pay a much higher effective marginal rate than median income earners. These doubts and qualifications will have to wait for another opportunity.

Consider Senator Warren’s argument again. We can reconstruct its main features in a couple of steps.⁵

Two claims stand out in this argument. First, there is the claim (4) that the extremely rich have benefitted disproportionately from the goods and services provided by the state. Secondly, the claim (5) that taxes should be levied according to benefits received. In this section and the next, I will be concerned with the first claim (4).

One benefits from something if one is better off than one would have been without that thing. A benefit, therefore, is a comparative notion. So in order to demonstrate that someone has benefitted, let alone benefitted disproportionately, one needs to establish a basis for comparison. The ‘Warren argument’ does just that. It identifies as the proper baseline for comparison the total absence of any tax-funded state institutions and activities. It explicitly states that all benefits a person receives are due to the goods and services provided by the state. However, it is questionable whether that is the proper baseline for comparison. Several libertarian commentators have argued that rather than a world where these institutions and activities are absent, one should compare to a world where such institutions, goods and services are produced and provided based on voluntary market transactions (e.g. Gordon 2002). Yet others argue that rather than making comparisons with such a state-less, non-institutionalized world, other states with other (laxer) tax regimes are the proper baseline for comparison. If either of these baselines is correct, it may turn out that the state is not benefitting us at all—it may very well be harming us. In other words, the choice of baseline is already a normative choice and the choice that Senator Warren and her sympathizers make, needs defending.

What is more, any attempt to defend this runs into the following problem. Suppose that we can identify a no-state, Hobbesian world as the proper baseline for comparison. Is there any plausibility to the claim in (4) that the extremely rich owe their excessively high incomes to the state and its activities? Take steps 1–2. These are extremely plausible. Consider what is needed for a modern market economy to produce the levels of wealth and income that we witness today. You need a well-functioning infrastructure to transport goods and raw materials to where they are needed. You need elaborate systems of education to train workers and entrepreneurs alike. You need institutions and rules, like contract law, arbitration, as well as the enforcement of these rules. In the absence of a legal system, you would not have money, stocks, or patents, let alone markets at which these can change hands. Without any of these, none of us would be able to seek out an existence beyond minimal subsistence farming. The required institutions, legal and otherwise, and the infrastructure needed to run a market economy organized along the principles of labour specialization, are typically financed through taxes paid by us all. So in a sense, one’s actual income is made possible by all members of the community of taxpayers.

However, from this one cannot infer (3) that, therefore, one’s income is due entirely to the goods and services provided by the state and paid for by one’s fellow citizens. Here is an analogy. It is true that without fertile soil, one’s efforts in tilling the soil will not result in a good harvest. However, no matter how fertile the soil, if you don’t put in any effort, you will not have any harvest either. Similarly with the goods and services provided by the state, without these you will not be able to realize any income, although, that does not mean that effort and initiative are unimportant and that all your income is entirely due to the state. Moreover, just because the presence of one factor is necessary in realizing the result, it does not follow that, therefore, the entire result is due to that factor. Claiming that it does commits something akin to the fallacy of composition. Therefore, from the fact that without the state, its institutions and the goods and services it produces paid for by all through taxes, one’s income would be approaching zero, it cannot be concluded that one’s entire pre-tax income equals the amount one has benefitted from the state’s activities. Hence, excessively high incomes are not sufficient proof that one has benefitted disproportionately.

The previous section dealt with the question ‘benefitting in comparison to what?’ and we saw that the Warren argument moves too quickly in identifying the baseline of comparison at a really low level of benefit. Suppose, however, that Warren is right and that the proper baseline of comparison is a non-state world in which all the governments goods, services and activities are absent and not provided in alternative, anarchic ways. Then it is still an open question whether the extremely rich benefit disproportionately. To see this, we have to discuss some aspects of the question ‘how much does one benefit from state activity?’ That is, even if we could identify a suitable baseline for comparison, we would need to find the right metric to determine whether the extremely rich have benefitted disproportionately relative to that baseline in comparison to others.

It might be suggested at this point that there is a perfectly neutral and theoretically simple measure to determine how much one benefits: simply look at someone’s utility index and compare this with the non-state world (or any other base-line of comparison) and then you know how much somebody has benefitted from the state. Since we have no direct access to somebody’s utility, taking someone’s pre-tax income would then be a reliable approximation of the extent of somebody’s benefit.⁶ However, this again makes the mistake identified in the previous section in that it ignores the contribution that a person’s own efforts have made towards his or her pre-tax income. We would need a way to tease apart from other factors the contribution that the state’s activities make to one’s income.

At this point it becomes necessary to look into the nature of the benefits that state institutions, activities, goods and services provide to citizens. How is it exactly that an efficient infrastructure, a legal system, an education system, the market, etc., benefit the extremely rich? Or, for that matter, how is it that any of us benefits from the state?

We should distinguish between those goods and services that benefit all and those that benefit only some. For example, a public pension plan, like social security benefits all, whereas, say, subsidy for the opera benefits only a few. Another useful distinction is between benefits that are provided directly through the state and those that the state provides indirectly. An example of the former would be income subsidies for the unemployed; an example of the latter is the legal institution of marriage. The benefits of marriage—recognition for children, the power to inherit from your spouse, etc.—are made accessible by the institution of marriage. That is, they come in the form of opportunities