"Tax-Exempt" Status and Non-profit activity

Here’s a perennial, difficult question for classical liberals–how does a free society fund its collective choices? More specifically, the recent furor over the IRS’ alleged targeting of conservative political groups raises the question of what kinds of private activities should fund public decisions.

One view is that any kind of gainful activity should be subject to taxation. This view has the advantage of simplicity and generality. What’s more, it accords with a particular view about the division of burdens and benefits in society: because all the benefits we receive that enable all our types of productive activities have a social or collective dimension, all types of productive activity may be appropriately subject to taxation.

On this view, allowing certain kinds of activities to be “tax-exempt” is just a kind of political favoritism.   And this aspect is certainly true. But arguments about the political economy of taxation–how to make a tax code that’s more efficient, resistant to rent-seeking–occurs at a lower level of analysis than arguments about what a just or fair tax system looks like. These arguments are arguments about what principles should guide thinking about a tax system in the first place.

A free and open society is one that permits its citizens to employ and gain from productive activities. It should not make types of activity subject to taxation on the basis of the description of the activity, because a free society has an obligation not to use reasons that represent judgments between the kinds of activities in which citizens participate. So the simple fact that an activity is economic, or recreational, or philanthropic, or non-profit, or profit-based does not constitute a reason to tax or not to tax that activity. From the public point of view, there is nothing intrinsic to profit-based activity that renders it more, or less, defensible than than non-profit or philanthropic activity.

What is more, it is not enough to simply say that the beneficiaries of collective choices are morally obligated to support the choice. In the first place, benefits don’t create obligations. If someone washes my car while I’m at a stoplight without asking me, I have no obligation to pay them, even if my car’s aesthetics improve greatly from their labor. So is there something special about collective choices? I don’t think so. If collective choices really were things that we could not do individually, then it could be argued that the necessity of collective choices means that we consent, implicitly or explicitly, to the means necessary to support them. But most collective choices aren’t like that. As Locke recognized, collective provision of security and justice is more efficient than private provision, but security and justice would still exist without collective provision. So perhaps only if I prefer collective provision I have an obligation to benefit.

It seems then that classical liberals cannot appeal either to the type of social activity or simply ask “Who benefits?” I hope to develop a proposal for the distribution of burdens in a further post.

A bad libertarian argument against taxation

If you spend enough time in libertarian circles, you’ll hear the argument made that “taxation is slavery.” Libertarians aren’t claiming this is some analytic truth about taxation–rather, it is an argument about the moral status of the act of taxation. As I hope to show in this all to brief post, I think this argument doesn’t work. The argument goes something like this:

1. Slavery is involuntary subjugation to the will of another person, or entity
2. Taxation involves the involuntary taking of property by a government
3. Involuntary taking of my property is subjection to the will of another entity
4. So taxation is slavery.

The problematic step in this argument is premise 3. I think there are two specific problems with this premise. First, it is not necessarily true that the involuntary taking of property involves subjection to the will of another. In particular, norms of taxation involve taking property in accordance with an established, promulgated, and general legal regime rather than the will of particular individuals. Of course, dysfunctional governments come close to resembling organized theft when they allow particular officials to manipulate and threaten citizens using the taxing power. But a regular, orderly system of taxation, which may yet be onerous or unfair, does not subject citizens to the wills of particular individuals in the same way. It subjects them to a general scheme of confiscatory taxation.

The second problem with the third premise is that taxation is not automatically a “subjection,” either. “Subjection” here means the creation of some differential status between the object of the tax and the taxing power. When I say that taxation is not automatically a “subjection,” I am making a claim about the conceptual relationship, rather than a moral one, between taxation and subjection. The concept of taxation makes sense as a “subjection” if we think of taxation as a burden that is “added on” to membership in a political community. Call something that’s added on in this way a cost. Instead, I think taxation is closer to one element in a bundle of features involved as a condition of membership in a political body. This distinction between taxation as a cost and taxation as a condition shows why it’s mistaken to think that taxation “subjects” citizens in a political community. A tax is not the kind of thing that swoops in upon unsuspecting citizens and confiscates some percentage of their income or wealth. It’s rather in the deal all along. And because the bundle of features that we call “citizenship” constitutes a certain unitary status for its object, a person, it is odd to think that one element of that bundle could reduce the status of the person relative to the other elements.

To clarify, my second argument does not rule out that certain taxes could “subject” their subjects in virtue of other particularities. Nor does it mean that all taxes are morally indefensible. But it does mean that the usual slogan doesn’t cut it.