Tax Politics and Policy

Michael Thom

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781317293347
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Wirtschaftspolitik

Taxes are an inescapable part of life. They are perhaps the most economically consequential aspect of the relationship between individuals and their government. Understanding tax development and implementation, not to mention the political forces involved, is critical to fully appreciating and critiquing that relationship.

Tax Politics and Policy offers a comprehensive survey of taxation in the United States. It explores competing theories of taxation's role in civil society; investigates the evolution and impact of taxes on income, consumption, and assets; and highlights the role of interest groups in tax policy. This is the first book to include a separate look at "sin" taxes on tobacco, alcohol, marijuana, and sugar. The book concludes with a look at tax reform ideas, both old and new.

This book is written for a broad audience—from upper-level undergraduates to graduate students in public policy, public administration, political science, economics, and related fields—and anyone else that has ever paid taxes.

Part I
Theoretical Foundations

1
Philosophical and Constitutional Origins of Tax Policy in the United States

The United States of America is the indisputable product of tax resistance.

Indeed, while motives have varied, the American people have repelled taxes—both domestic and foreign—longer than they have been called “Americans.” A group of about three dozen residents of New Jersey refused to pay taxes in 1715 because the local tax assessor was Catholic. The War of the Regulation erupted in 1765 after citizens of the Carolina colonies grew incensed by corrupt officials and abusive tax collectors. And later, a succession of taxes imposed on the colonies by the British parliament, including the Plantation Duty Act (1673), the Sugar Act (1764), the Stamp Act (1765), the Townshend Acts (starting in 1767), and the Tea Act (1773), provoked distrust, boycotts, protests, the Boston Massacre, and ultimately the Revolutionary War.¹

Little changed following American independence. In 1786, opposition to tax burdens in Massachusetts catalyzed Shays’ Rebellion. A federal excise tax on alcohol enacted in 1791 incensed rural citizens and led to the infamous Whiskey Rebellion. Fries’s Rebellion sprang from Pennsylvania farmers opposed to the Federal Direct Tax of 1798, a form of property tax that was also known as the “window pane tax.” While the levy was unpopular to begin with, tensions boiled over when assessors went beyond land evaluation to also record the number of windows on each dwelling. Owners suspected that the government was secretly planning future taxes (Newman 2004).²

Tax resistance showed no signs of dissipating in the twentieth century. Following the end of World War I, some beverage consumers refused to pay the federal government’s wartime soft drinks tax. The New York Times dutifully informed its readership on September 11, 1919, that this particular tax was still law, and the failure to pay could result in a fine of $10,000 or one year in prison.³ In the mid-1920s, countless newly enfranchised Pennsylvania women refused to pay the taxes that, as voters, they owed the state government.⁴ Decades later, hundreds vowed to fight a proposed Vietnam War tax. From the late 1970s forward, dozens of citizen-led tax limitations became law, including California Proposition 13 (1978), Massachusetts Proposition 2 ½ (1980), and Colorado’s Taxpayer Bill of Rights (1992).⁵

And yet, from the period following the Civil War to the present day, American history is also marked by political movements in favor of taxation. As candidates and as presidents, progressive Democrats including Bill Clinton and Barack Obama are only two examples from a long record of elected officials that actively promoted “higher taxes on the rich.” Launched in late 2011, the Occupy Wall Street movement and its myriad progeny decried inequality and proposed, among other reforms, higher taxes on anyone that did not “pay their fair share,” especially high-income earners, the wealthy, and corporations. Fight for 15 Chicago, a group ostensibly formed to lobby for a higher minimum wage, entered the tax policy fray in May 2016 when, at a demonstration held outside the offices of asset management firm Citadel, protestors brandished signs that read “Millionaires, Pay Your Fair Share!”⁶

As interesting as these anecdotes may be, taxes are much more than the impetus behind conflicts that serve as guideposts to American political development. Taxation is an inescapable part of life in civil society. Taxation affects human behavior. Taxation makes government possible. And above all other considerations, taxes are coercive. “The messed up thing about taxes is you don’t ‘pay’ taxes. The government takes them” said comedian Chris Rock. “You get your check and money is gone. It was not an option!”

Comprehensive study of taxation in the United States requires investigating its origins, especially the political theories that shaped founding thought and how the emphasis placed on those and other theories has evolved over the nation’s history. Only within that context can the range of taxes levied on individuals and corporate entities, and all of the conflicts they inspire, be fully appreciated. This chapter addresses the relevant philosophical and historical developments.

Taxation in Political Context

Legal authority to impose taxes is vested in a decentralized system of state institutions.⁷ At each level of the United States federal system, the executive branch, the legislative branch, and the bureaucracy wield significant influence over tax policy. Judicial branch involvement is tangential, emerging only to administer dispute resolution, but court decisions can and have had a decisive impact on taxes. Regardless of the level or branch from which policy originates, each individual citizen and corporate entity is expected to abide by what the state demands.

Simply stated, taxation exists at the nexus of the individual and the state. Proper study of taxation should thus commence in principio with a review of the theories that structure and direct that relationship. Two aspects are the most important: the first is a statement of the ultimate source and content of individual rights, and the second is a definition of the bounds of state coercion. While the Declaration of Independence and the Constitution address each aspect, mere examination of their text is inadequate. Deeper reflection on the higher law principles that serve as the foundation of each document is more important. Those principles are of great consequence to all areas of public policy, but especially to areas that involve state coercion, like taxes.

What are higher law principles? Corwin (1928) offered this description:

Such principles were made by no human hands; indeed, if they did not antedate deity itself, they still so express its nature as to bind and control it. They are external to all Will as such and interpenetrate all Reason as such. They are eternal and immutable. In relation to such principles, human laws are, when entitled to obedience save as to matters indifferent, merely a record or transcript, and their enactment an act not of will or power but one of discovery and declaration.

The Declaration of Independence, the Constitution, and American founding thought broadly signal a recognition of one higher law principle, the theory of natural rights, and two applications thereof, classical liberalism and social contract theory. These philosophies have had an enduring influence on the individual’s relationship to the state and its reflection in American civil society.

Over time, however, the emphasis placed on those higher law concepts in tax policy has been attenuated by progressivism, a political theory that conceives a much different function of the state in civil society. Divergence between the tenets of classical liberalism on one hand, and the tenets of progressivism on the other, can be observed in nearly every debate over taxation. Exploring the precepts of each theory is critical to understanding those debates, not only to appreciate and understand their formative role in tax policy, but also for their influence on political and economic life.

Natural Rights and Classical Liberalism: Individuals as the Foundation of Civil Society

Natural Law and Natural Rights

Philosophers for millennia have contemplated the proper order of civil society. Many of history’s most influential political thinkers, including Plato, Aristotle, Cicero, Aquinas, and Montesquieu, believed in the existence of a higher, universal law of nature, or natural law, binding on all individuals.⁸ They believed that, as rational beings, humans could deduce the contours of natural law through observation and reason. Natural law was, in other words, self-evident and axiomatic. More importantly, the natural law that governed social objects was believed to be as much a part of the order of things as the laws that govern physical objects, such as the law of gravity and the law of conservation. Grounding civil society in any other foundation would therefore be irrational.⁹

What does nature reveal about natural law? At the most elemental level, human beings are directed by nature toward life. That each individual materializes and survives within a physical body is the result of natural, biological processes that the individual neither conceived nor can fully control. Humans are further endowed with the intellectual and physical abilities to perceive and obtain the necessities of survival. In defense of life, individuals harbor a powerful, instinctual survival impulse; we react strongly and often spontaneously to threats against our bodies. The collective implication of all of the above is that nature has endowed the individual with the mechanisms necessary to attain and preserve life. Correspondingly, the basis of natural law is a right of individual self-preservation.

The degree to which the concept of natural law influenced the structure of civil society has varied across time and place. Natural law was certainly embedded within the classical liberal philosophy that grew out of intellectual and political revolutions in seventeenth-century Europe. Classical liberalism and its greatest influencers, such as John Locke and Adam Smith, viewed the properly ordered civil society as one of extensive individual autonomy and minimal state interference. The ideal state was conceptualized as little more than an entity responsible for protecting individual rights.

The classical liberalism of American founding thought transcribed self-preservation into three explicit natural rights.¹⁰ First, each individual has a right to their own life without harm from an external cause. An individual cannot, for instance, be coerced into sacrificing their life in the service of any other. Second, each individual has a right to liberty. An individual is free to make their own decisions, limited only by ability and effort, and provided that they do not infringe on the natural rights of another individual.¹¹

Third and most significantly to tax policy, each individual has private property rights, i.e., the authority to acquire resources and exclude others from seizing those resources, provided that the acquisition does not infringe on another person’s natural rights.¹² Private property rights are held by the individual, and are distinct in theory and in practice from public or community property rights. Private property rights further subsume a right of property disposition. If an individual possesses legally acquired resources, then that individual has sole discretion over whether the resources are used, transferred to another individual, exchanged via contract for a different resource, or retained for future consumption.¹³

The most explicit statement of natural rights appears in the Declaration of Independence, which unequivocally affirms that each individual is endowed by God with an inalienable right to “Life, Liberty, and the pursuit of Happiness,” the latter indicative of private property rights.¹⁴ This assembly of natural rights pervaded founding thought but was not original to the Declaration (Becker 1922). In 1772, Samuel Adams wrote in The Rights of the Colonists:

Among the natural rights of the Colonists are these: First, a right to life; Secondly, to liberty; Thirdly, to property; together with the right to support and defend them in the best manner they can. These are evident branches of, rather than deductions from, the duty of self-preservation, commonly called the first law of nature.

George Mason went even further to include personal safety as a right. His 1776 Virginia Declaration of Rights affirmed the following:

All men are created equally free and independent, and have certain inherent rights, of which they cannot, by any compact, deprive or divest their posterity; among which are the enjoyment of life and liberty, with the means of acquiring and possessing property, and pursuing the obtaining of happiness and safety.

Importantly, classical liberal thought held that natural rights superseded the state. All individuals possessed natural rights regardless of personal characteristics, time, or domicile. Those rights existed prior to and would outlast the state. Once again, natural rights were believed to be as much a part of human existence as the law of gravity.

The Defense of Private Property Rights

Private property rights are the heart of civil society. “The reason why men enter into society,” wrote John Locke in his Second Treatise of Government, “is the preservation of their property.” As the Supreme Court declared in 1795:

the right of acquiring and possessing property, and having it protected, is one of the natural, inherent, and unalienable rights of man. Men have a sense of property: Property is necessary to their subsistence, and correspondent to their natural wants and desires; its security was one of the objects, that induced them to unite in society. No man would become a member of a community, in which he could not enjoy the fruits of his honest labour and industry. The preservation of property then is a primary object of the social compact.¹⁵

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