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In the course of digging around in some of my notes from a few years ago, I ran across an essay I had started, titled Taxes. Particularly given the disturbing changes which have been made to the tax structure of the United States during the past year, the essay seems more relevant than ever. However, it needs some polishing, a bit of fleshing out, and the addition of a pile of references before it would make a reasonable candidate for mainspace. So I've uploaded it here, and plan to clean it up a bit in the near future.
I should also add that my knowledge of this subject -- as with most others -- is not nearly as deep as I would like, and whether I'm actually qualified to express the opinions on display here should be considered up for debate.

The author freely admits that this page is biased.

This page is extremely under construction!!

Intended title: Taxes

In a multi-employer state -- i.e., one in which the bulk of the employment and production is in the private sector -- the government's function is largely limited to providing services (e.g. police, army, and unemployment compensation, to name a few). The primary role of taxes in such a state is to provide the operating funds for the government.

In capitalist economic theory, the major incentive which keeps people working at the maximum of their ability is the desire to "advance" and become "more successful". That can only happen if there is somewhere to advance to, and if it's apparently possible to become richer. In short, the engines which drive a capitalist state are the gap between rich and poor and perceived social mobility. Consequently, in capitalist theory, taxes are least damaging to the economy if they do nothing to reduce the gap between rich and poor, and may, in fact, be most effective if they actively increase the income gap.

Note well, however, that this is an utterly amoral approach to the issue of taxes. Furthermore, it's one based on the false assumption that the State, as a monolithic entity, possesses wealth. The notion underlying it is that the wealth of a nation is its production, which is deeply flawed: A nation, as an entity, has no wealth. It is individuals who control wealth, not an abstract monolithic State, and if control of the wealth is concentrated in the hands of a few individuals, then the aggregate amount of such wealth is irrelevant to the mass of citizens. Such "wealth" is also irrelevant from a moral or ethical standpoint, since it provides no benefit to the bulk of the population. In short, if widening the gap between rich and poor makes the poor people work harder, the result may be less wealth and poorer quality of life for most of the residents of the nation, despite the overall increase in production, and hence increase in the "wealth of the State", which may result.

On this page we will be discussing several forms of taxation, and in each case we will consider the moral aspects of the tax. We will take as our definition of a "moral" tax that of one which is most burdensome on those who can best afford it.

A secondary aspect to taxation, which we will not be considering here, is as an instrument for controlling the behavior of the populace. A heavy tax on cigarettes, which could be intended to encourage reduction in smoking, would be one example of such a tax.

Confiscatory Taxes

When tax rates are set sufficiently high, taxation may be used as an instrument of wealth redistribution. For example, if the top income tax bracket is set at or above 100%, then all income which exceeds the top bracket amount will be confiscated, thus putting a cap on incomes, and limiting the gap between rich and poor.

The difficulty with such a scheme, when used in a single country, is that it's a lot like spraying for roaches in an apartment. The roaches just move next door until things are more to their liking. Thus, while a top bracket of 100% does something to limit salaries, it may also cause the best paid workers to move out of the country. It also tends to cause companies to pay their top people in kind rather than in cash (providing a company car, paying for an apartment, giving the use of the corporate jet, etc). Plugging the loopholes by declaring various things to be part of a salary then becomes a running battle with companies looking for ways around the tax.

The larger the country, or the more impermeable its borders are, the smaller is the problem of wealth flight in the face of confiscatory taxes.

It's possible to have confiscatory taxes in forms other than an income tax. As another example, a 100% tax on inheritances would "confiscate" all property at a person's death, thus reducing heritability of wealth to zero, and (presumably) increasing social mobility.

Income Tax

An income tax is a tax on income received by a taxpayer. Depending on its form, an income tax can be among the most moral of taxes.

Someone with a large income needs a small fraction of that income in order to live well. Conversely, someone with a smaller income needs a larger fraction of it to live. Thus, taking a given percentage of a poor person's income is more onerous than taking the same percentage of a rich person's income.

There are several main forms of income tax, which differ in the how the tax burden is distributed.

Progressive Tax

A progressive tax takes a proportion of income which increases as the taxpayer's gross income increases. Thus, an attempt at placing the burden where it can best be borne is built into the structure of a progressive tax. It is thus intrinsically a moral form of taxation.

Special purpose tax breaks may, of course, pervert the intent of a progressive tax, and the government may choose to set the brackets so as to defeat the purpose of the tax, but those are separate issues which don't bear on the fundamental structure of the tax.

Flat Tax or Proportional Tax

The term flat tax is usually used to mean a tax which levies the same proportion of each taxpayer's income.[1] Another name for it is a "proportional tax".

A proportional tax is income-blind -- it is applied equally to all levels of income. As previously noted, the poor need a bigger proportion of their income just to live than the rich do, as a result of which a proportional tax falls unevenly on taxpayers, hurting the poor more than the rich. As such, it's less "moral" than the proportional tax.

A number of U.S. states have proportional income taxes. In some cases this may be due to clauses in the state constitution which make any other tax structure illegal.

Regressive Tax

A regressive tax is one which may be broadly proportional but with a percentage which decreases as the taxpayer's income increases.

Most people would agree that this is the wrong way round -- the poor shouldn't be taxed more heavily than the rich.

The United States social security tax, which is proportional up to a cap, is an example of a regressive tax.

Head Tax or Hearth Tax

A head tax levies the same dollar amount from each taxpayer or household. It could be considered even less moral than a regressive tax, because it treats all taxpayers as though they have an identical amount of income from which to pay the tax.

A "head tax" helped to bring down Margaret Thatcher, when she attempted to push it through over the objections of the people of England.

Capital Gains Tax

A capital good is something which has monetary value, or which can be sold for money. Company stock provides one example. When a capital good is sold for more than the owner paid for it, the difference is a capital gain.

This is really just a form of income, but in the United States "capital gains" are taxed separately from other income. Historically, capital gains on goods which had been held for more than some fixed period (first a year, later reduced to six months) were taxed at a much lower rate than ordinary income. The rationale for this was that it encourages long term investment in companies, which is claimed to be beneficial to the economy, and consequently good for everybody. Whether or not that is true, it's certainly also true that special capital gains treatment is applied almost exclusively to sales of company stocks and corporate debt instruments, which are rarely owned by the poor. Thus, special capital gains treatment provides another form of tax break for rich taxpayers, and consequently shifts the tax burden onto the poor.

Property Tax

A property tax is a tax on real estate. Property taxes are typically levied by municipalities. Some towns may have no other source of income for supporting local police, fire, schools, and other services.

Wealth Tax

Inheritance Tax

Sales and VAT Taxes

A sales tax or its cousin, the Value Added Tax, are often proposed as alternatives to raising the income tax. A VAT is used heavily in both Canada and Europe. The major argument for a VAT or a national sales tax is that taxes on spending are considered less disruptive to the economy than taxes on income.

As a general rule, wealthy taxpayers spend a smaller proportion of their incomes than the poor. Consequently, since these are taxes on spending, the effect is very similar to that of a regressive income tax. From an ethical point of view, these taxes are therefore less desirable than a progressive income tax, which at least sets out to place the largest tax burden on those who can best afford it.


Well, no -- actually the subject of gambling as a "tax" is a great deal more complex than the author realized, as a bit of research has indicated. This section needs to be a whole lot more focused or just plain deleted.

Gambling is not always recognized as a form of taxation. However, that is exactly how it is treated by modern governments.

In many areas, private gambling games are tolerated but are none the less illegal. Only state sanctioned gambling is allowed (and taxed). Furthermore, in recent decades it has become common for the government to provide means to gamble directly, rather than just taxing gambling games operated by a third party. This most often takes the form of lotteries, though some governments have gone considerably farther than that.[2]

Gambling seems to be unique among forms of taxation in that those upon whom the burden falls most heavily are also those who would be the most strongly opposed to the elimination of the tax.

Lotteries, in particular, are a grossly regressive tax, with the burden falling disproportionately on the poor. Furthermore, studies have shown that, in fact, the burden of the "lottery tax" doesn't fall evenly on the poor, but rather most strongly affects those referred to by the industry as heavy users.[citation needed] Indeed, state-sanctioned gambling could be considered the "poster child" of immoral taxes: It specifically targets those least able to pay the tax, and hits them hardest.

On the other hand, though governments may view gambling as a straightforward revenue source, the topic is anything but simple, and an explanation of gamblers' behavior is beyond the scope of this essay (or this author's ability). This is shown most clearly by online "gambling" on smart phones. At the present time, it isn't really gambling because, by law, the users can never win anything -- it's just pictures. None the less, users of such "games" pay large sums to "gamble" in online casinos where they know they can never win, with one notable player having paid $22,000 in virtual gambling fees playing Big Fish Casino on in iPhone.[3]

Corporate Taxes

A peculiarity of some capitalist countries is the ability to create artificial entities called corporations. The basic idea is that a corporation can take risks which an individual would not be able to afford, because if the corporation loses everything, it doesn't matter -- it isn't a real person. But the consequences of such "artificial personhood" go far beyond risk management.

One very confusing consequence of the existence of corporations is that it raises the question of corporate taxes. In principle, it's people who spend money and people who benefit from it, so it might seem to make sense that money should be taxed when it's finally handed out to people. Thus, one might think that money earned by a corporation should be taxed only when it's handed over to a person, either in the form of a salary or in the form of dividends. But in practice, corporations are used for so much beyond their original intended purpose of limiting liability that such a scheme results in tax avoidance on a gross scale. For example, an individual with a large income can set up a corporation, have all his income go to the corporation, draw a small salary from the corporation, and have the corporation buy him nearly everything he needs out of its own funds. This is, or was, a common arrangement among consultants in the computer business.

Alternatively, one might think taxing corporations at the same rate as individuals would make sense. It does up to a point, but if you want to allow large corporations, then there is a problem, which is that the income of a large corporation is nearly always going to put it in the top individual tax bracket. With post-Reagan brackets topping out at 25% that may be acceptable, but with Johnson-era brackets, which hit 90%, it would lead to problems. Again, if one doesn't want to allow large corporations to exist, then this isn't an issue, and taxing them as individuals works just fine.


  1. [ "Flat Tax"].
  2. For example, Ontario Lottery and Gaming Corporation, owned by the government of Ontario, operates casinos and provides slot machines at race tracks in addition to running the Ontario lotteries.
  3. MSNBC the shocking truth about mobile gaming
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