philosophy of tax

Budget disregards social justice | Martin O'Neill | Comment is free | guardian.co.uk

The coalition claimed that George Osborne's emergency budget was both "fair" and "progressive". The opposition disagrees. What sense we can give to these much-abused terms depends crucially on our underlying understanding of the nature and purpose of taxation – of what we might call the "philosophy of tax".

On one view of taxation, the money that we receive in the market, whether as wages, profits or capital gains, belongs to us in some deep sense. When the government taxes this money, something morally troublesome seems to be going on. Taking "our money" may in the end be justifiable, if it is spent on sufficiently important ends. But at best taxation is a necessary evil.

Philosophers Liam Murphy and Thomas Nagel call this way of thinking about tax and property "everyday libertarianism". On the everyday libertarian view, tax is always and everywhere about the government appropriating what belongs to someone else, infringing on individuals' rights and freedoms. It's a popular view on the right, especially in the United States. But even some of those who would defend big government do so despite their sense that taxation is a form of taking that requires special justification.

According to everyday libertarianism, the most significant "baseline" for considering the fairness of a tax system is given by people's notional pre-tax income. Hence the language of the "tax burden" shouldered by some individual or group; that is, the gap between their pre-tax and post-tax income, viewed as an imposition. Such a view suggests that the standard for fairness in tax systems should be something like equalisation of tax burdens in relative terms. This seems to fit with everyone "doing their bit" to provide for the common good, where what counts as "their bit" is assessed in terms of their "tax burden" as a proportion of their overall income.

There is, however, a fundamental problem with this way of thinking about tax and tax fairness. The problem with everyday libertarianism is that it is incoherent. Market transactions and robust property rights are only possible given the existence of stable government – look at Somalia – and government requires taxation in order to function. Without a tax-supported legal system, we could not have banks, firms, stock exchanges, or any of the other economic institutions that enable us to make money. So it is incoherent to think that individuals are entitled to their pre-tax income, which could not exist without stable government. There is no moral significance to entirely notional pre-tax incomes as a "baseline" against which one can measure "tax burdens".

A second, social democratic way of thinking about taxation rejects the everyday libertarian view of tax as a necessary evil. Instead, the tax system is just one part of what the political philosopher John Rawls called "the basic structure of society" – the background set of legal and political institutions that fit together to create a working society. Taxation does not mean infringing or restricting individual property rights. Rather, the tax system is part of the structure that constitutes individual property rights.

On this second view, assessing tax fairness in terms of differential "tax burdens" no longer makes sense, as notional pre-tax incomes no longer have any special standing. Instead, "tax justice" dissolves into the broader question of overall social justice. The question to ask is not whether the "tax burden" is fairly spread, but whether the full set of economic and political institutions within a society leaves nobody unjustifiably badly off.

The move to a more holistic treatment of questions of social justice changes the framing of the question when we ask whether Osborne's budget is fair. On the everyday libertarian view, it is natural to think that the economic pain caused by the banking crisis and the resultant collapse in tax receipts should be spread throughout the population. On the social democratic view of taxation, there is no such presupposition. The question is, instead, whether anyone has a justifiable complaint of injustice in light of their treatment by the state, where the tax and benefit systems are taken together, and both are viewed against the level of provision of public services.

The answer to this broadened question is dispiritingly simple. Osborne and the coalition have chosen to respond to the current fiscal crisis by swingeing public service cuts rather than by raising tax levels on the better off, cutting down on tax avoidance, or finding ways for the banks to pay for their lavish levels of public protection. Public service cuts will hurt those already vulnerable people, and those already vulnerable parts of the country, that rely on the state for support. To worsen the position of those who have lost out in society, instead of protecting them from economic shocks by raising revenue from those who have done well, is the very paradigm of unfairness. It is an unfairness that runs deeper than any graph of the distribution of "tax burdens" could ever communicate. The fundamental injustice is to roll back the state at exactly the moment when the most vulnerable in society most need its protection.