Thursday, July 19, 2012

Should the "Rich" Pay Even More?

Understood the Social Contract

Wants to Breach It

Earlier this week the President defended his plan that would raise taxes on individuals who earn more than $250,000 per year.  Explaining why such individuals should pay more income taxes than they already do, the President opined as follows:

"There are a lot of wealthy, successful Americans who agree with me [that taxes should be higher] because they want to give something back. If you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something -- there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business, you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.”

As others have noted, the President's remarks basically repeat similar arguments made by Harvard Professor and Massachusetts Senate candidate Elizabeth Warren.  As Professor Warren colorfully put it:

"You [businesspersons] didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did."

The President's characterization of the relationship between business success and government contains some germs of truth.  After all, individuals leave the state of nature and enter civil society precisely because they believe they are better off with some government than with no government at all.  Moreover, by consenting to live in a civil society, individuals necessarily cede to the larger community a portion of their liberty and a portion of any property they might create or acquire.   In particular, no member of society can exercise his or her liberty or right of property in a way that interferes with similar rights held by others.  As James Madison noted over two centuries ago in Federalist 10, the primary function of government is to protect the liberty and property of each member of society from invasion by others.  Moreover, the same State that protects liberty and property can also execute public works projects that confer benefits on the larger community, projects that no individual or collection of individuals can complete on their own.  Finally, it is not enough that the State protect individuals from each other; the State must also protect itself from external threats by other states.

These various activities implied by the Madisonian social contract are not free; they require the expenditure of real resources. To protect property rights against theft or invasion the state must hire police, judges and prison guards. To enforce contracts the state must hire judges and sheriffs, the latter of whom enforce judicial judgments. To provide national defense or build roads, bridges and other infrastructure governments must levy taxes on individuals and business and enforce those levies with coercion if necessary. Without such coercion, the state would have to rely upon voluntary contributions to pay employees of the State and provide the resources necessary for various infrastructure projects.  It thus seems irrefutable that government and governmental expenditures are necessary conditions for the creation of wealth in the private sector and that government plays a role in the success of every business. (As Professor Warren would say, Ford Motor company cannot make and sell automobiles unless the State protects Ford’s property from trespass by others.  Though it should be noted that individual states, and not the national government, are primarily responsible for protecting factories from "marauding bands.")  

Still, the fact that free enterprise depends upon a well-functioning State that enforces property rights and builds infrastructure does not mean that business owners should feel duty-bound to "give something back" to the State or the larger community.  This assertion, made by the President and many of his supporters, is a non-sequitur.   For, as previously explained on this blog, a State that recognizes and enforces property rights is simply fulfilling its pre-existing obligation under the Madisonian social contract described above; if the State declined to protect property rights and bodily integrity from invasion by others, individuals would have no duty to obey the State's commands.    Moreover, the State does not perform the various functions described above for free, gratuitously showering its citizens with such protections and infrastructure.  Instead, the State levies taxes on individuals and businesses, employing a portion of the proceeds to pay for these various activities.  Indeed, in 2009, individuals in  the top 1 percent of the nation's income distribution paid over 36 percent of all Federal income taxes, that is, 36 times their pro-rata share of government expenses.  Such individuals also paid billions of dollars in state and local sales, property and income taxes.  All in all, then, the "rich" individuals that President Obama and Senator Warren wish to tax even more are already paying their share of governmental expenses several times over.  While such individuals might create more wealth within the free enterprise system than others, such economic success does not alter the terms of the social contract or the rationale for taxation derived therefrom. The state's performance of its pre-existing obligations under the social contract does not thereby justify whatever tax rates the majority might wish to impose.

To be sure, some individuals might sincerely believe that they have an obligation to "give something back."   If so, such individuals should feel perfectly free to increase their donations to charity, overpay their taxes, or both.  However, the fact that some individuals believe they are undertax does not thereby entitle the polity to impose higher taxes on other individuals who already pay far more than they receive in return.