An Alternative Approach to a Wealth Tax
Cristian Dimitriu
In the last forty years or so, the US tax system has reinforced extreme economic inequality. Three progressive taxes created to compensate for economic inequalities are the individual income tax, the corporate income tax, and the estate tax. However, as Saez and Zucman explain[1], together, these taxes have been watered down in recent years. The top marginal federal income tax has declined from more than 70 percent every year between 1936 and 1980 to 37 percent in 2018. Corporate taxes have declined from 50 percent in the 1950s to 16 percent in 2019. According to estimates, only 0.2 % of the population in the US will pay estate tax because of loopholes and weak enforcement. Consequently, the government has almost no tools left to redistribute wealth from the top income group to the bottom. The absence of a strong progressive taxation system takes place in the background of a US more unequal than ever.
I defend a justification for a wealth tax here. My justification differs from traditional justifications, and it avoids some of their problems. Specifically, the justification is sensitive to the fact a wealth tax (and, indeed, many other taxes) might burden agents who do not deserve to pay (or, who do not deserve to pay as much as other agents).
Existing Arguments for a Wealth Tax
Existing literature[2], defends a wealth tax mainly on the grounds of its incompatibility with the core liberal value of equality. This defense has two different versions.
First, one of the primary principles of liberal societies is equality. A few people amassing so much wealth, while the vast majority having little or nothing, undermines equality. Therefore, we should implement a wealth tax. The wealth tax will simply rectify the condition where there are very rich and very poor people. A society that prides itself of being egalitarian simply can’t accept the big wealth gaps we observe in current societies.
Second, those who have inordinate amounts of money can use it to unfairly tailor rules of society in their favor. For the rich, it is easier, tempting, and feasible to shape the rules of the game in favor of themselves. The new rules they help create will, in turn, presumably increase their wealth even further. Whenever this happens, equality is also undermined, but in a different way. The problem here is the already existing economic inequality creates the possibility of unequal access to political participation. This situation is morally unacceptable, as members of a political society should have equal access to the decision processes that affect them. The purpose of the wealth tax would be, precisely, to prevent this kind of interference. With less wealth, the power of the rich weakens.
A prominent defender of this view is Liam Murphy, who claimed “we cannot directly draw conclusions about justice from the distribution of taxes alone. Justice in taxation is not a matter of some fair distribution of tax burdens as measured against pretax income. It is about how well or badly the tax system, together with the other elements of the economic and welfare system, secures just results, which is a matter of absolute and relative levels of welfare, the absence of social stratification and concentrations of power, and so on[3]”. Here we see, for Murphy, the taxing scheme should be instrumental to certain results, or outcomes. Society should aim toward a pre-existing ideal of justice, and taxes are just or unjust depending on whether they successfully approximate, or not, that ideal. The ideal, in this case, would be equality.
The liberal-egalitarian view puts forward a powerful strategy to justify a wealth tax (or any tax). However, the justification has serious limitations. Because of these limitations, the liberal-egalitarian view will have to be combined with what I call a procedural approach. This combination will generate an enhanced justification for a reasonable and fair wealth tax.
Shortcomings of Existing Arguments
First, the justification for a wealth tax based on outcomes is it ignores or neglects the question of how taxed wealth was created in the first place. This question is not irrelevant. To understand this point, we can imagine an analogy. Racism can be considered a human rights issue if Blacks are discriminated against in a certain moment in time in society X (for example, they are excluded from universities); or it can be considered a human rights issue if society X has oppressed Blacks for centuries, and this historical oppression has led to a situation where Blacks are disadvantaged with respect to other social groups in contemporary society. In this case, injustice emerges from two different points of view. First, society X does not meet certain human rights standards in a certain moment in time. Second, society X has been historically unjust, and this history of injustice has led to a human rights deficit in the present. The first kind of injustice would be a synchronic one, and the second kind of injustice would be diachronic.
We can compare the case of racism with the case of taxation. Taxation can be an issue of justice from two different points of view. First, it can be an issue of justice from the point of view that a society’s wealth is not distributed fairly in a certain moment in time (for example, because the gap between the poor and the rich is too big, or because taxes are too high in general). Second, it can be an issue of justice from the point of view the tax system in that society has been historically unjust, and this injustice created huge disparities in contemporary times. If a society’s tax scheme has favored business owners for decades, and created salubrious conditions for them to become even richer, the problem with the tax scheme is not simply that it falls short of being egalitarian in a certain moment in time, but also that it falls short historically, of being egalitarian. So, the question “why are taxes unjust?” can be answered in two different ways: first, because they are not egalitarian. Second, because they have not been egalitarian in the past. Both answers are not, of course, exclusive. Both can be true.
Now, the liberal-egalitarian view has typically ignored or neglected the historical view. That is, it is interested in inequality at the present, but not in historical structural inequality. The consequences of neglecting the historical approach are twofold. First, proposed tax reforms put all taxpayers in the same group. That is, the reforms treat every taxpayer equally. Regardless of how wealth is created in each case, tax laws consider that taxpayers should all pay the exact same amount of money. This treatment generates unfair results. An individual who has profited for years from a company paying below-standard wages abroad, for example, would be treated the same way as someone who has gained from a company that has created new vaccines forecast to benefit millions of people. Or an individual who has benefitted from a company that received preferential fiscal treatment (bailouts, or the possibility of sending profits to tax heavens), would be treated the same way as someone who has benefitted from a company that designs new technology to protect the environment. Consider also the case of someone who inherited a huge amount of money, versus someone who has obtained the wealth by profiting from structural market injustices. In the former case, the heir must pay estate taxes (if the tax exists) and, on top of that, the regular wealth tax. In the latter case, the taxpayer will have to pay the wealth tax only, at the same rate as in the former case. The direct application of the liberal-egalitarian view is obvious: the burden of paying the tax will be unfairly distributed among taxpayers.
The second consequence of ignoring historical injustice is that applying this conception to real life will create additional and unjust tax burdens on the taxpayers who have not benefitted from unfair structural conditions. If a company A gets rewarded from unjust transactions, while company B does not obtain gain from unjust transactions, and they both pay the same taxes, we can conclude company B is being burdened unfairly with taxes. The taxes company A are not paying are compensated with taxes distributed generally. This kind of wealth transfer is similar to the wealth transfer we see when taxpayers compensate for others who evade. Here the government would compensate tax evasion by creating an extra-burden on taxpayers, which is plainly unfair.
To make clear the problem associated with the outcome approach we can introduce here the moral notion of “desert”. The outcome approach seems to be unfair, as it ignores the fact not everybody deserves to be treated equally under taxing laws. The liberal-egalitarian approach, in other words, is at odds with the value of desert.
A Procedural Approach
To avoid these problems, we should combine the liberal-egalitarian approach with what I call a procedural approach. I will not be able to fully justify this approach here, but I wall say a few words about it. The main intuition that underlies the procedural approach is wealth that results from unjust transactions is undeserved, and therefore those who benefit from these kinds of transactions should not be taxed the same way as those who obtained their wealth through just transactions. As a result of applying this approach, a wealth tax would not be a means of restituting stolen goods, or a means of compensating for past injustices. Rather a revised version of the wealth tax—a version that incorporates a procedural dimension, is more apt. Defending the procedural version of the tax requires the following steps. First, defining “unfair” transactions. Second, explaining how the procedural approach strengthens the liberal-egalitarian view. Third, discussing its feasibility in public policy.
Markets involve millions of transactions per day. Clearly, some of these transactions are exploitative, illegal, abusive, reflect domination, and so on. These kinds of transactions can result in unjust concentration of wealth. People who benefit from unjust concentration of wealth have another reason to pay taxes in addition to the reasons that apply generally to everybody. The proposed wealth tax should target people who benefitted from unsavory transactions and should be aimed at ensuring these kinds of transactions no longer happen in the future. The notions of ‘domination’, ‘exploitation’ and ‘biased market rules’ are of course highly contested, so it will be important to clarify them.
Take, for example, the case of a big corporation that exploited children in sweatshops, or the case of a big pharmaceutical company that profited from unethical research standards abroad. Injustices also happen at the domestic level. Some corporations do not respect basic workers´ rights (such as rights to create unions), pay low wages even by US standards (for example seasonal workers, or illegal immigrants typically are paid less than legal workers). Some companies profit by selling products that do not meet environmental standards (whatever the standards). There are tourist agencies that benefit from low wages and devaluated currencies abroad.
Additionally, as Dean Baker notes[4], the market is structured in such a way that creates unjust “before-tax” income that goes to the top. Baker mentions the patent and copyright monopolies, which benefit “overwhelmingly those at the top of the income distribution”. Bill Gates would likely be working for a living if these monopolies did not exist, says Baker. He also mentions the financial sector, which pays less taxes than other sectors of the economy. This privileged situation has even called the attention of the IMF, which has suggested tax reforms in their reports. The financial sector has also been enriched by other political decisions, such as bailouts. The general point Baker makes, in a nutshell, is inequality doesn’t simply result from how markets work, but also from specific kinds of transactions that could have been avoided. According to Baker, “the market is structured in ways that have caused an enormous share of national income to be diverted to those at the top. There was nothing about the intrinsic workings of the market that led to an increased share of income to the top one percent; it was the result of a set of deliberate policies”[5].
According to the procedural approach I am defending, taxpayers who have benefitted from these kinds of unjust market biases or unfair treatment should be treated differently from those who have not benefitted from them. The argument becomes even more compelling when we see the enormous gains that flow from market biases, exploitation, tax evasion and unfair treatment accumulates over time. If the argument for taxing wealthy corporations is compelling when a company has benefitted from unjust market conditions for only one year, the argument for taxing this same corporation which has benefitted from unjust market conditions for 40 years, becomes even more compelling.
Objection to the Procedural Approach
A possible objection to the procedural approach I am proposing focuses on it’s unfeasible. Ethical standards are generally blurry, or highly contested; and theories of domination and exploitation, although well-developed these days, are hard to apply to specific cases. A government that needs to implement a tax on the basis of past exploitation would not know whether or not a specific taxpayer should be burdened with the procedural wealth tax, because it is not even clear what exploitation is in the first place. Thus, governments find it nearly impossible to single out taxpayers who are benefitting from unfair practices from those who are not. Corporations and taxpayers may argue in their own defense that: (1) rather than exploiting people they are creating job opportunities; (2) it is not even clear what exploitation or domination is; and/or (3) they are paying wages, or following union rules, in accordance with domestic laws.
But this objection does not seem to work. A government that applies a hypothetical wealth tax based on procedural reasons would not face the burden of clarifying a highly abstract philosophical theory of exploitation or domination. Nor would the government need to solve the well-known philosophical dispute on whether capitalism creates wealth, or exploits workers. This is a task that they cannot and should not do, and that probably not even philosophers can do. Law and public policy would face a much easier task. This task would be to identify and define areas where there are structural market injustices. Once this task is done, taxpayers will be informed that whoever profits from these structural market conditions, will be burdened with an additional wealth tax. The justification for this additional tax would be that a portion of their wealth was generated because of these unfair market conditions, and these were market conditions that did not benefit everybody. It is up to domestic governments to identify and define areas were markets generate biased benefits. However, possible candidates would be companies that profit from non-unionized wages, tax evasion, low wages in other countries, preferential tax treatments and others. Once these areas are clear and public, and there are standards taxpayers would know how to follow, there will be good justification for an additional wealth tax.
Conclusion
Many scholars, economists, and politicians claim current wealth inequalities are incompatible with the core liberal value of equality, and the US should implement a wealth tax to compensate for these inequalities. I have argued that this view, although compelling, ends up burdening some agents unfairly, as it fails to identify the origin of the wealth that is being taxed. In some cases, burdening all agents equally seems unjust, as not all of them deserve equal treatment. While some agents have obtained wealth by benefitting from unjust market conditions, others have obtained it by contributing to fair market conditions. An alternative approach to a wealth tax should be sensitive to the fact that origin and history behind wealth creation matters.
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Endnotes
[1]See Emmanuel Saez and Gabriel Zucman. “For the sake of justice and democracy, we need a progressive wealth tax”, in “Forum, Taxing the Superrich”, Boston Review, March 17, 2020. https://bostonreview.net/forum/gabriel-zucman-taxing-superrich/
[2]See for example Murphy, L., & Nagel, T. (2002). The myth of ownership: Taxes and justice. Oxford University Pres; or Robeyns, I. (2019). What, if anything, is wrong with extreme wealth?. Journal of Human Development and Capabilities, 20(3), 251-266; or O’Neill, M., & Orr, S. (Eds.). (2018). Taxation: philosophical perspectives. Oxford University Press.
[3]Murphy, L., & Nagel, T. (2002). The myth of ownership: Taxes and justice. Oxford University Pres
[4]See Dean Baker, “A wealth tax distracts from the causes of inequality: pre-tax income”, in “Forum, Taxing the Superrich”, Boston Review, March 17, 2020. https://bostonreview.net/forum/gabriel-zucman-taxing-superrich/”.
[5]See Baker, op. cit.