Can We Rationalize Taxation?

     One of the sticking points between ideological libertarians and American conservatives who have largely embraced what was once called classical liberalism is whether taxation can ever be morally justified.

     David L. Burkhead thinks not:

     A common theme among folk of a libertarian bent is “Taxation is theft.” “But…but…but…” others reply, “no it isn’t.”

     Well, they’re right. Technically, it’s extortion. The government doesn’t sneak into your house when you’re not home and grab money from your dresser. No, instead they say “Nice little freedom you have there. Be a shame if something happened to it.” and so you pay (or your employer in the case of withholding).

     If someone with the de facto ability to enforce his will upon you says “Give me $X or else,” and others’ experiences have given you a fair to middlin’ notion that the “or else” would be unacceptably unpleasant, then taxation is extortion, which is just one more form of theft: the taking of your property against your uncoerced will. No case can be made that “the government” has any more right to do that than Sneaky Pete and his leg-breakers down the block. All arguments for taxation are premised on practical considerations.

     Burkhead concedes this:

     We do need funds for certain minimum functions that allow society to function. And yes, even for roads. And not all of those things are well managed by a market of voluntary exchanges with prices determined by supply and demand....

     This, however, is not an argument that taxation is not theft. And the circular argument that the law demands taxation therefore making it not-theft is no better. I’ve discussed before how “government does it” does not make something right and rights, which here I include property rights, must exist independent of government or the concept becomes meaningless. So, it’s not an argument that taxation is not theft but perhaps it’s an argument that theft is sometimes necessary.

     Arguments about necessity are practical arguments. They contend that the consequences of not doing the thing proposed would be worse than those from doing it. So there are value judgments involved. Therefore people will argue about the values in the political kitty. Such arguments are inherently insoluble; they can only be ended by political means.

     The impasse can be broken only by what the late Milton Friedman called essential consensus: the willingness of an overwhelming majority – say, enough to write and ratify a Constitution – to agree that these things shall be permitted, but no others.

     Reaching that consensus was the core genius of the Founding Fathers.

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     A long, long time ago, at the old Palace of Reason, I wrote:

     Economists tend to partition the world's goods into:

• Capital goods (made because they help to produce something else),
• Consumption goods (made because they're desirable in and of themselves).

     This is an incomplete partition, and its failings have cost us dearly.

     There is a third category: overhead. Overhead goods aren't made for productive purposes, nor are they satisfactions of any positive desire. We make them because, without them, we'd suffer losses or be seriously impeded in our more positive activities.

     Insurance is an obvious example of an overhead good. No one wants insurance for its positive features. No one buys insurance because with it he can produce something else. We buy insurance because, without it, we'd be exposed to an undesirable degree of risk from some more positive activity, such as driving or owning a house.

     With the exception of postal service, the activities permitted to the federal government by the Constitution are all overhead activities. They're also all goods with pronounced externalities -- that is, once these goods have been produced, everyone gets the benefit of them, not merely the people who've paid for them. This is no coincidence.

     When such goods are left to the free market, they tend to be under-produced. Their overhead nature means that people won't experience any positive lure to produce them. Their externalities mean that there will be an incentive to "free ride" on the contributions of others, and that some appreciable fraction of the beneficiaries will do so if possible.

     The proper sphere of government, if it has one, can be seen in the light of this insight. Indeed, if there were no such things as these overhead-cum-externalities goods and services, there would be no conceivable justification for government. Individuals pay for their own overheads all the time, provided they don't thereby pay for the overheads of others. And individuals and corporations produce goods with strong externalities as well -- broadcast television is an example -- so long as there's a sufficient prospect of gain to the producer.

     The great question of political economy is how to confine government to its proper activities -- the production of overhead-cum-externality goods and services -- and how to ensure that those things will be produced in sufficient quantities. Suffice it to say that, as of yet, no satisfactory solution has been found.

     I somewhat regret using the word solution in the above. Solutions are only available when the problem being discussed has the characteristics of mathematics: that is, that all the terms therein are exactly known, and the conventions regarding their permissible manipulation are unanimously agreed upon. We don’t seek a solution but a sufficiently strong and enduring consensus.

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     The following are overhead expenses that are also externalities:

1. Armed forces;
2. Justice system;
3. Roads and bridges;
4. The Bureau of Weights and Measures;
5. The diplomatic apparatus of the State Department.

     There are people who would disagree with the necessity of tax-funding some of those. But there’s an excellent prospect of a 90% consensus around them. At the time of the Founding there was at least that strong a consensus around the powers granted to Congress in Article I Section 8, which, by a strict-construction reading of the Constitution would be the only activities legitimately funded through taxation.

     In reading Article I Section 8 afresh, I find very little that’s not included or strongly implied by the five-item tabulation above:

• Federal borrowing;
• Federal establishment of post offices;
• Patents and copyrights.

     What other activities share the overhead-cum-externality combination that seems apparent in the five items I tabulated initially? How much of a consensus would form around them – and should that consensus prove insufficiently strong for them to be added to Article I, Section 8, would they be “under-produced” by your standards? And what are those standards, and how did you come by them?

     Discuss – and be polite about it.