The notion that taxation should be based on "ability to pay" is a bedrock of progressive principles. We owe our notions of "progressive taxation" to early economists like Edwin R.A. Seligman (1861-1939) who advanced the theory and popularized this notion. He pushed progressive taxation over more conservative and regressive principles:
- Taxes as a duty versus solely as a payment for Benefits.
- Taxes should be proportionate to the "faculty" or ability to pay of taxpayers.
- Taxation as a duty of Citizenship
Progressive taxation is based on humanist, progressive, liberal and commonwealth notions. It pushes back against selfish (conservative) notions that
- 1. those who benefit from a thing should pay for it.
- 2. No one should pay for another person's benefits.
- 3. A person earns whatever he gains, however he gains.
- 4. The exception is the poor, who never deserve to keep what they earn.
- 5. Taxation is the government stealing from the privileged.
- 6. Taxation should be a "fee for service," and no more.
Sadly Progressive notions of taxation are gradually being shoved aside and replaced with the older and regressive notion that reformers like Seligman were pushing against. taxation should be like a fee for service, based on "benefits received". This notion that taxes should be paid to pay for the benefits we receive from government, as parsed by modern (anti) reformers, tends to favor the wealthy and connected over labor and what is left of the middle class. It's return provides a theoretical tool that is degrading the middle class and subjugating labor -- because "benefits" theory essentially says "if you can't pay you can't benefit." From the debit side of taxation benefits theory thus seems a justification for oppression.
Convergence of Benefits and Faculty Theory
However, when one factors in the fact that most of the "benefits" that are the basis for "benefits" theory are a common heritage and the less explicit fact that much of such benefits are based on privatized government privileges or even usurped properties, then the choice between "benefits theory and ability to pay is revealed as a false choice; The money privilege, land privilege, private ownership of nature's bounty, commodification of labor, and corporate privilege, etc... are all privileges associate with either duties to provide a public benefit or the duty to pay for those privileges. Thus the notion of taxes being on "benefits received", especially unearned benefits, is also part of progressive taxation. Privilege is a grant of temporary ownership so that property can be turned into public goods. Taxing unearned privilege thus is is not only based on "ability to pay" but is also the stick required to ensure that those given privilege do the duties associated with grants of privilege from the rest of us; that they either do a duty or pay a duty.
For Seligman and other avatars of progressive taxation:
"The benefits doctrine stood for the antiquated proposition that taxation was justified as a price paid for the goods and services provided by government in exchange for tax payments. Citizens, in essence, traded tax payments solely for the benefits they received from the state." [Seligman]
The Faculty theory wasn't their invention:
"Seligman and other Progressive Era economists like Richard T. Ely and Henry Carter Adams did not invent the faculty theory. Neither the benefits principle nor the faculty theory was created or destroyed in the early 20th century.1 Rather, American public finance theorists, building on the works of other thinkers, attempted to delineate those rationales in an effort to question what they believed to be the antiquated social theory supporting the benefits principle." [Seligman]
In their formulation:
"the notion of faculty or ability to pay required that each citizen contribute to the common welfare of the state based on his taxpaying capacity. Although accurately measuring a citizen's capacity to pay taxes was a controversial issue that remained elusive -- then and now6 -- Seligman and the other progressive economists resolutely believed that their primary, pragmatic goal in advancing the income tax agenda was to demonstrate the social and political limitations inherent in the benefits principle." [Seligman]
Duty and Virtue versus Privilege
Seligman's arguments represent the distinction between Tory economics and Whig or Commonwealth notions. He writes about the Benefits Theory:
"It is now generally agreed that we pay taxes not because the state protects us, or because we get any benefits from the state, but simply because the state is a part of us. The duty of supporting and protecting it is born with us. In a civilized society the state is as necessary to the individual as the air he breathes; unless he reverts to stateless savagery and anarchy he cannot live beyond its confines. His every action is conditioned by the fact of its existence. He does not choose the state, but is born into it; it is interwoven with the very fibers of his being; nay, in the last resort, he gives to it his very life. To say that he supports the state only because it benefits him is a narrow and selfish doctrine. We pay taxes not because we get benefits from the state, but because it is as much our duty to support the state as to support ourselves or our family; because, in short, the state is an integral part of us." [Seligman]
In the Tory view of politics we pay taxes because unless we get an equal benefit from what we pay, taxation is mere "robbery." And the Tory view of economics is win/lose; my win is your loss and vice versa. The idea that such politics is harmful to society as a whole never occurs to them because they see the world as a hostile place where we pay taxes to the State solely to protect us or provide us personal benefits. Any benefits going to others is "robbery." In that view others are out to rob us if we let them and so we need a strong police force to protect us against fellow citizens and a strong military to protect us from rival Tories who hate us because they have the same feelings about their own nation. Seligman was writing at the beginning of the USA Exceptional period when nationalism and commonwealth were an identity and his views represented those of progressives and also a Prussian influence. To him, and other progressives:
"Progressive economists also disapproved of the benefits doctrine because it was framed in an idiom of market relations. With their emphasis on the importance of ethical duty and social bonds, those theorists loathed how the benefits doctrine commodified the relationship between citizens and the state." [Seligman]
Ability to Pay and Paying for Privilege
Both criticized the others. But this was the debit side of the accounting. Neither were looking at the question of whether those benefits were "earned or unearned." Because the question of whether we are being taxed for the benefits we receive or because we can afford to pay them ignores the question of "what is ours in the first place." If these theorists had paid more attention to Henry George's arguments about "nature's bounty" they'd have reasoned that the other reason we want to tax based on "ability to pay" is that we also want to tax based on whether the property being taxed is our property by rights or something we have custody of for some public reason but really isn't ours alone. That taxation to pay for benefits is all well and good, but those benefits include the very base from which the taxes come. We should be taxed to recapture at least part of the unearned privileges that gave us the ability to pay more taxes.
On the Credit side, we have a property right in some incomes and not in others. and that right comes as a privilege granted by government, or as a privilege associated with "private" government as opposed to public government. As Henry put it, talking about wages:
""Being created individuals, with individual wants and powers, men are individually entitled (subject of course to the moral obligations that arise from such relations as that of the family) to the use of their own powers and the enjoyment of the results. There thus arises, anterior to human law, and deriving its validity from the law of God, a right of private ownership in things produced by labor — a right that the possessor may transfer, but of which to deprive him without his will is theft." [Condition of Labor]
And since a good portion of the incomes of those with "the ability to pay" come from "nature's bounty", government granted privileges such as "land, telegraph, water supplies, invention and scientific investigation." Not to mention "mineral rights" and other properties that have traditionally been acquired by fraud, sleaze and bribery. Or privateering privatized powers like the money power (banking) itself and corporate privilege. All these are the 'credit' side of taxation. People should pay for their privileges. And in many of these cases the monopolies and public goods involved need to be run under democratic-republican principles and not as private separate kingdoms.
Seligman's argument was between wealth and privilege unchecked (the advocates of taxation as being tied to benefit) and how to pay for government. George dealt with the credit side of the equation -- he included in his notion of "benefits taxation" the unearned benefits that come from privilege. Once one factors that in, the whole argument becomes clearer and less susceptible to sophistry.
My friend was digging into Seligman's arguments with Georgists after Henry George had died. They had revolted from George's principles even as they ran with his "single tax idea". The result was that holders of many privileges were perfectly willing to support some of their land value taxation ideas as long as they were going to exclude financial capital and the fruits of capital from taxation (which would have excluded a good portion of their real money generating properties) and do away with income taxation, which would have excluded the bulk of their unearned income. Based on the Georgist plank after the revolt of the Georgists in 1894, this seemed to be unfair criticism. But Seligman was criticizing unsound supporters, not George himself. There is no real conflict between income taxation and other taxes -- so long as they fall on unearned income, privileged income and are on income that is beyond what people need to make a living and live. Sadly many modern "Georgists" are still part of that revolt.
Times change and understanding evolves. Those who would turn a founder into a myth, and his ideas into dogma, should be aware that times change, and humans play "telephone" with ideas. I'm firmly in the "Post Keynesian Camp." I spotted the fraud of Friedman, monetarism and the Austrians, early on. But now I'm realizing that even the dogma's I'd accepted when I was younger were faulty too. If a sixty year old amateur can learn something new. Any of us can too. Something similar happened between Seligman and the Georgists. Henry George's warning about "unsound supporters" can apply to any of us, and not just to his theories. Life is ever a learning and unlearning game.
But taxes should be based on both ability to pay, and the principle that we are paying for our privileges. Those with more privilege should pay more.
- Reference to "Revolt of the Georgists"
- Primary Sources: Edwin R.A. Seligman
- http://www.taxhistory.org/thp/readings.nsf/ArtWeb/EB941FE0419B0DDC852570BA0048848C?OpenDocument [quotes taken 9/27/2015
- bibliography of articles: http://onlinebooks.library.upenn.edu/webbin/book/lookupname?key=Seligman%2C%20Edwin%20R.%20A.%20(Edwin%20Robert%20Anderson)%2C%201861-1939