Because of an April 15 holiday, today is tax day, and Americans are presumably reflecting on whether our current level of taxation is in fact justified.
More than a century ago, Oliver Wendell Holmes, pictured above, quipped that "Taxes are what we pay for civilized society, including the chance to insure." The occasion was a challenge to a Philippine tax on insurance premiums paid by a foreign corporation exporting merchandise from that country. See Compania General de Tabacos v. Collector, 275 U.S. 87 (1927) (Holmes, J. dissenting). While the Supreme Court invalidated the tax as an effort to regulate contracts beyond the territorial jurisdiction of the Philippine government, cf. Allgeyer v. Louisiana, 165 U.S. 578 (1897), Holmes (joined by Justice Brandeis) would have sustained the tax, in part because the Philippine government protected the property that was insured, thereby making it reasonable for that government to levy a tax on the property.
Many have invoked the Holmes quote or a version thereof in support of the sort of increased taxes necessary to support the modern welfare state. See here, here, and here for just a few examples. The IRS has even inscribed the quote above the entrance to its headquarters in Washington.
Several years ago your humble blogger rebutted such reliance on the Holmes quip to justify even higher taxes than Americans were already paying, in the following letter to the Daily Press of Hampton Roads:
"The editorial on the Social Contract ("Envisioning 2004," Jan. 4) cites Justice Oliver Wendell Holmes for the proposition that "taxes are what we pay for a civilized society," and laments the "crass self-interest" that purportedly animates anti-tax sentiments. While memorable, the Holmes quip is of little relevance to modern disputes over the proper level of taxation and public spending, coming as it did at a time when taxes claimed only a small fraction of our national wealth. When Holmes penned this aphorism in 1904, taxes paid to local, state and federal governments accounted for about 6 percent of gross domestic product. Today these taxes account for about 30 percent of GDP -- a five-fold increase. At the same time, per capita GDP is more than eight times larger in real terms today than it was in 1900. Thus, in the 100 years since Holmes equated taxes with civilization, government has consumed an ever-increasing share of a constantly growing pie. Even after adjusting for inflation, the average American now pays 40 times more for government than he or she paid at the beginning of the 20th century. I doubt we have become 40 times more civilized as a result. Before we further expand government's dominion over the wealth we create, we may want to ask whether those who already remit enormous sums to the public fisc are receiving fair value in return. A just social contract demands no less."
It's certainly true that some taxes are a necessary element of what we properly call civilization. As James Madison put it in Federalist 10, "the first object of government" is the "protection of different and unequal faculties of acquiring property," which results in "the possession of different degrees and kinds of property." (Madison repeated this sentiment in his 1792 Essay on Property, stating that: "Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals"). Individuals once lived in the state of nature, where they enjoyed absolute freedom from coercion imposed by government which, by definition, did not exist. In this state, however, individuals, no matter how strong, were under constant threat from one another. As a result, men and women left the state of nature to form political society, each giving up a portion of his or her liberty on the assumption that similar forfeitures of liberty by others would, taken together, enhance each members' welfare.
"Society" as defined here entailed a legal system that recognized and enforced property rights (including rights in intellectual property), protected bodily integrity, enforced private contracts, and penalized fraud, all functions the private market cannot perform. This is where taxation comes in. Government cannot perform these various functions without hiring individuals --- police, prosecutors and judges, for instance --- who presumably will not work for free. Also, to the extent that enforcement of such rules requires the state to imprison offenders, such imprisonment will itself cost money. Moreover, the world is large enough that there are predictably several political communities, each with jurisdiction over different territory. If some such communities prey on others, a need will arise for "national defense" via an army, navy, air force, etc. Here again, providing such a defense will cost money, money which the state must raise by taxation. (Absent coercive taxation, individuals will "free ride" on contributions they hope others will make, and if all pursue this strategy, no individual will contribute.) In addition to national defense, there are other services that only government can provide, or at can provide more effectively than the private sector. Examples include the construction of highways and airports either directly or, instead, by delegating the (coercive) power of eminent domain to private parties who can then construct such roads.
The resulting common law baseline and community secure from external threats, supplemented by antitrust law, provides the sort of institutional framework necessary to free market competition and the resulting specialization and wealth-maximizing allocation of resources, i.e., labor, capital and technical know how. Such free market competition also promotes the individual opportunity necessary for persons to exercise fully the faculties of which Madison spoke. In short, taxation helps support various state activities necessary to give rise to the society that men and women seek upon leaving the state of nature and thus gives rise to "civilization."
State and national governments provided these necessary governmental services when Holmes penned his aphorism in the 1920s. However, as letter quoted above notes, per-capita taxes have, in real terms, risen by a factor of 40 since then. Are we today 40 times more civilized? Of course not. While some taxes are necessary for civilization, others have nothing to do with it. For instance, some taxes support regulatory schemes --- enforced by state employees (including judges) ---that unduly restrict economic liberty and opportunity and reduce society's economic welfare. Starting in the 1930s, that is, after the Holmes quip, many states and the national government began to impose coercive restrictions on prices, output, and entry, often creating the equivalent of cartels that would properly be deemed unlawful per se under the antitrust laws if imposed by private parties. Such state-imposed cartelization extended to labor markets. Thus, states and the national government imposed (and still impose) minimum wages, maximum hours, and other terms of employment contrary to those produced by free, competitive markets. Moreover, the National Government has empowered unions to "bargain collectively" with businesses operating in interstate commerce, a right enforced by a federal agency, the National Labor Relations Board, which employs, at taxpayer expense, more than 1500 individuals. After this and other exemptions, such "collective bargaining" over wages would violate the Sherman Antitrust Act, just as it would violate that Act for a jurisdiction's court-appointed lawyers to agree to boycott such appointments until the Court raised their fees. See FTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 411 (1990) (declaring such a boycot seeking higher wages under the Sherman Act unlawful per se).
These various price, wage and output fixing schemes, some of which survive to this day, all supported by tax rates higher than they would otherwise be, exceed the scope of governmental authority implied by rationale, outlined above, for leaving the state of nature and forming a political society. They enrich proponents of such schemes at the expense of others. Moreover, such "regulations" in no way enhance our civilization. Instead, such schemes raise prices and wages above the competitive level, reduce output in the industries governed by such schemes and induce the reallocation of resources to less productive uses, in industries not governed by such schemes. Indeed, far from advancing such civilization, Madison opined, again in Federalist 51, that such schemes are instead reminiscient of the state of nature that men and women left to form civilization:
"In a society under the forms of which the stronger faction can readily unite and oppress the weaker, anarchy may as truly be said to reign as in a state of nature, where a weaker individual is not secured against the violence of the stronger; and as, in the latter state, even the stronger individuals are prompted, by the uncertainty of their condition, to submit to a government that may protect the weak as well as themselves."
Madison also decried such "regulation" a few years later, in the 1792 Essay on Property cited above, viz:
"That is not a just government, nor is property secure under it, where arbitrary restrictions, exemptions, and monopolies deny to part of its citizens that free use of their faculties, and free choice of their occupations, which not only constitute their property in the general sense of the word; but are the means of acquiring property strictly so called."
Of course, these are not the only exercises of state authority that exceed the rationale for political society and seem to replicate elements of the state of nature. In some cases states and the national government simply raise taxes on some citizens and subsidize others for reasons unrelated to any valid public purpose. Agricultural subsidies are a prime example. Here again such programs have nothing to do with enhancing the quality of civilization.
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What does all this mean for those interested in the link between taxes and civilization? First, there is no doubt that some taxation is necessary to what we consider civilization. No one, so far as a I know, seeks to repeal those taxes necessary to create and enforce property rights, protect bodily integrity from invasion by others, enforce private contracts and provide national defense and similar goods that only government can provide. At the same time, the conclusion that taxes are necessary for civilization does not thereby justify any and all taxes and government programs that such taxes support. Indeed, some such taxes and resulting programs actually bear resemblance to the state of nature, as some members of the community employ state-backed coercion to advantage themselves at the expense of others. Repeal of the taxes necessary to support these programs and concomitant repeal of the programs themselves would make us MORE civilized. Those who invoke Holmes' quip in support of the current level of taxation and/or even higher taxes simply misunderstand the appropriate scope of government and thus the link between taxes and civilization.