The Encyclopaedia Britannica defines taxation as “that part of the revenues of a state which is obtained by the compulsory dues and charges upon its subjects.” That is about as concise and accurate as a definition can be; it leaves no room for argument as to what taxation is. In that statement of fact the word “compulsory” looms large, simply because of its ethical content. The quick reaction is to question the “right” of the State to this use of power. What sanction, in morals, does the State adduce for the taking of property? Is its exercise of sovereignty sufficient unto itself?

On this question of morality there are two positions, and never the twain will meet. Those who hold that political institutions stem from “the nature of man,” thus enjoying vicarious divinity, or those who pronounce the State the keystone of social integrations, can find no quarrel with taxation per se; the State’s taking of property is justified by its being or its beneficial office. On the other hand, those who hold to the primacy of the individual, whose very existence is his claim to inalienable rights, lean to the position that in the compulsory collection of dues and charges the State is merely exercising power, without regard to morals.

The present inquiry into taxation begins with the second of these positions. It is as biased as would be an inquiry starting with the similarly unprovable proposition that the State is either a natural or a socially necessary institution. Complete objectivity is precluded when an ethical postulate is the major premise of an argument and a discussion of the nature of taxation cannot exclude values.

If we assume that the individual has an indisputable right to life, we must concede that he has a similar right to the enjoyment of the products of his labor. This we call a property right. The absolute right to property follows from the original right to life because one without the other is meaningless; the means to life must be identified with life itself. If the State has a prior right to the products of one’s labor, his right to existence is qualified. Aside from the fact that no such prior right can be established, except by declaring the State the author of all rights, our inclination (as shown in the effort to avoid paying taxes) is to reject this concept of priority. Our instinct is against it. We object to the taking of our property by organized society just as we do when a single unit of society commits the act. In the latter case we unhesitatingly call the act robbery, a malum in se. It is not the law which in the first instance defines robbery, it is an ethical principle, and this the law may violate but not supersede. If by the necessity of living we acquiesce to the force of law, if by long custom we lose sight of the immorality, has the principle been obliterated? Robbery is robbery, and no amount of words can make it anything else.

We look at the results of taxation, the symptoms, to see whether and how the principle of private property is violated. For further evidence, we examine its technique, and just as we suspect the intent of robbery in the possession of effective tools, so we find in the technique of taxation a tell­tale story. The burden of this intransigent critique of taxation, then, will be to prove the immorality of it by its con­sequences and its methods.

By way of preface, we might look to the origin of taxation, on the theory that beginnings shape ends, and there we find a mess of iniquity. A historical study of taxation leads inevitably to loot, tribute, ransom: the economic purposes of conquest. The barons who put up toll-gates along the Rhine were tax-gatherers. So were the gangs who “protected,” for a forced fee, the caravans going to market. The Danes who regularly invited themselves into England, and remained as unwanted guests until paid off, called it Dannegeld; for a long time that remained the basis of English property taxes. The conquering Romans introduced the idea that what they collected from subject peoples was merely just payment for maintaining “law and order.” For a long time the Norman conquerors collected catch-as-catch-can tribute from the English, but when by natural processes an amalgam of the two peoples resulted in a nation, the collections were regularized in custom and law and were called taxes. It took centuries to obliterate the idea that these exactions served but to keep a privileged class in comfort and to finance their internecine wars; in fact, that purpose was never denied or obscured until constitutionalism diffused political power.

All that is long passed, unless we have the temerity to compare such ancient skullduggery with reparations, extraterritoriality, charges for maintaining armies of occupation, absconding with property, grabbing of natural resources, control of arteries of trade and other modern techniques of conquest. It may be argued that even if taxation had an unsavory beginning it could have straightened itself out and become a decent and useful citizen. So, we must apply ourselves to the theory and practices of taxation to prove that it is in fact the kind of thing above described.

First, as to method of collection, taxation falls into two categories, direct and indirect. Indirect taxes are so called because they reach the state by way of private collectors, while direct taxes arrive without by-pass. The former levies are attached to goods and services before they reach the consumer, while the latter are in the main demands upon accumulations of wealth.

It will be seen that indirect taxation is a permission-to-live price. You cannot find in the marketplace a single satisfaction to which a number of these taxes are not attached, hidden in the price, and you are under compulsion either to pay them or go without; since going without amounts to depriving yourself of the meaning of life, or even of life it­self, you pay. The inevitability of this charge on existence is expressed in the popular association of death and taxes. And it is this very characteristic that commends indirect taxation to the state, so that when you examine the prices of things you live by, you are astounded by the disproportion between the cost of production and the charge for permission to buy. Somebody has put the number of taxes carried by a loaf of bread at over one hundred; obviously, some are not ascertainable, for it would be impossible to allocate to each loaf its share of taxes on the broom used in the bakery, on the axle-grease used on the delivery wagon. Whiskey is perhaps the most notorious example of the way products have been transmuted from satisfactions into tax-gatherers. The manufacturing cost of a gallon of whiskey, for which the consumer pays around twenty dollars, is less than a half-dollar; the spread is partly accounted for in the costs of distribution, but most of the money which passes over the counter goes to maintain city, county, state and national officials.

The hue and cry over the cost of living would make more sense if it were directed at taxation, the largest single item in the cost. It should be noted too that though the cost-of-living problem affects mainly the poor, yet it is on this segment of society that the incidence of indirect taxation falls most heavily. This is necessarily so; since those in the lower earning brackets constitute the major portion of society they must account for the greatest share of consumption, and therefore for the greatest share of taxation. The state recognizes this fact in levying on goods of widest use. A tax on salt, no matter how small comparatively, yields much more than a tax on diamonds, and is of greater significance socially and economically.

It is not the size of the yield, nor the certainty of collection, which gives indirect taxation preeminence in the State’s scheme of appropriation. Its most commendable quality is that of being surreptitious. It is taking, so to speak, while the victim is not looking. Those who strain themselves to give taxation a moral character are under obligation to explain the State’s preoccupation with hiding taxes in the price of goods. Is there a confession of guilt in that? In recent years, in its search for additional revenue, the State has been tinkering with a sales tax, an outright and unequivocal permission-to-live price; wiser solons have opposed this measure on the ground of political expediency. Why? If the State serves a good purpose the producers will hardly object to paying its keep.

Merely as a matter of method, not with deliberate intent, indirect taxation yields a profit of proportions to private collectors, and for this reason opposition to the levies could hardly be expected from that corner. When the tax is paid in advance of the sale it becomes an element of cost  which must be added to all other costs in computing price. As the expected profit is a percentage of the total outlay, it will be seen that the tax itself becomes a source of gain. Where the merchandise must pass through the hands of several processors and distributors, the profits pyramided on the tax can run up to as much as, if not more than, the amount collected by the State. The consumer pays the tax plus the compounded profits. Particularly notorious in this regard are customs duties. Follow an importation of raw silk, from importer to cleaner, to spinner, to weaver, to finisher, to manufacturer, to wholesaler, to retailer, each one adding his mark-up to the price paid his predecessor, and you will see that in the price milady pays for her gown there is much more than the tariff schedule demands. This fact alone helps to make merchants and manufacturers indifferent to the evils of protection.

Tacit support for indirect taxation arises from another byproduct. Where a considerable outlay in taxes is a prerequisite for engaging in a business, large accumulations of capital have a distinct competitive advantage, and these capitalists could hardly be expected to advocate a lowering of the taxes. Any farmer can make whiskey, and many of them do; but the necessary investment in revenue stamps and various license fees makes the opening of a distillery and the organizing of distributive agencies a business only for large capital. Taxation has forced the individually-owned and congenial grog-shop to give way to the palatial bar under mortgage to the brewery or distillery. Likewise, the manufacture of cigarettes is concentrated in the hands of a few giant corporations by the help of our tax system; nearly three-quarters of the retail price of a package of cigarettes represents an outlay in taxes. It would be strange indeed if these interests were to voice opposition to such indirect taxes (which they never do) and the uninformed, inarticulate and unorganized consumer is forced to pay the higher price resulting from limited competition.

Direct taxes differ from indirect taxes not only in the manner of collection but also in the more important fact that they cannot be passed on; those who pay them cannot demand reimbursement from others. In the main, the incidence of direct taxation falls on incomes and accumulations rather than on goods in the course of exchange. You are taxed on what you have, not on something you buy; on the proceeds of enterprise or the returns from services already rendered, not on anticipated revenue. Hence there is no way of shifting the burden. The payer has no recourse.

The clear-cut direct taxes are those levied on incomes, inheritances, gifts, land values. It will be seen that such appropriations lend themselves to soak-the-rich propaganda, and find support in the envy of the incompetent, the bitterness of poverty, the sense of injustice which our monopoly-economy engenders. Direct taxation has been advocated since colonial times (along with universal suffrage), as the necessary implementation of democracy, as the essential instrument of “leveling.” The opposition of the rich to direct taxation added virulence to the reformers who plugged for it. In normal times the State is unable to overcome this well-knit, articulate and resourceful opposition. But, when war or the need of ameliorating mass poverty strains the purse of the State to the limit, and further indirect impositions are impossible or threaten social unrest, the opposition must give way. The State never relinquishes entirely the prerogatives it acquires during an “emergency,” and so, after a series of wars and depressions direct taxation became a fixture of our fiscal policy, and those upon whom it falls must content themselves to whittling down the levies or trying to transfer them from shoulder to shoulder.

Even as it was predicted, during the debates on the in­come tax in the early part of the century, the soak-the-rich label turns out to be a wicked misnomer. It was impossible for the State to contain itself once this instrument of getting additional revenue was put into its hands. Income is income whether it stems from dividends, bootlegging operations, gambling profits or plain wages. As the expenses of the State mount, as they always do, legal inhibitions and considerations of justice or mercy are swept aside, and the State dips its hands into every pocket. So, in Philadelphia, the political power demands that the employer shall deduct an amount from the pay envelope and hand it over. The soak-the-rich principle has been applied on a large scale to the lowliest paid worker, not only by deductions from wages, but more so through the so-called social security taxes. These, by the way, show up the utter immorality of political power. Social security taxation is nothing but a tax on wages, in its entirety, and was deliberately and maliciously misnamed. Even the part which is “contributed” by the employer is ultimately paid by the worker in the price of the goods he consumes, for it is obvious that this part is merely a cost of operation and is passed on, with a mark-up. The revenue from social security taxes is not set aside for the payment of social “benefits,” but is thrown into the general tax fund, subject to any appropriation, and when an old-age pittance is ultimately allowed it is paid out of the then cur­rent tax collections. It is in no way comparable to insurance, by which fiction it made its way into our fiscal policy, but it is a direct tax on wages.

There are more people in the low income brackets than in the high brackets; there are more small bequests than large ones. Therefore, in the aggregate, those least able to meet the burden of soak-the-rich taxes bear the brunt of them. The attempt to offset this inequity by a system of graduations is unreal. Even a small tax on an income of one thousand dollars a year will cause the payer some hardship, while a fifty percent tax on fifty thousand dollars leaves something to live on comfortably. There is a vast difference between doing without a new automobile and making a patched-up pair of pants do more service. It should be remembered, too, that the worker’s income is almost always confined to wages, which are a matter of record, while large incomes are mainly derived from business or gambling operations, and are not so easily ascertainable; whether from intent to avoid paying the full tax, or from the necessary legal ambiguities which make the exact amount a matter of conjecture or bookkeeping, those with large incomes are favored. It is the poor who are soaked most heavily by soak-the-rich taxes.

Taxes of all kinds discourage production. Man works to satisfy his desires, not to support the State. When the results of his labors are taken from him, whether by brigands or organized society, his inclination is to limit his production to the amount he can keep and enjoy. During the war, when the payroll deduction was introduced, workers got to figuring their “take home” pay, and to laying off when this net, after taxes, showed no increase comparable to the extra work it would cost; leisure is also a satisfaction. A prize fighter refuses another lucrative engagement because the additional revenue would bring his income for the year into a higher tax bracket. In like manner, every business man must take into consideration, when weighing the risk and the possibility of gain in a new enterprise, the certainty of a tax-offset in the event of success, and too often he is discouraged from going ahead. In all the data on national progress the items that can never be reported are: the volume of business choked off by income taxes, and the size of capital accumulations aborted by inheritance taxes.

While we are on the subject of discouragement of production by taxation, we should not overlook the greater weight of indirect taxes, even though it is not so obvious. The production level of a nation is determined by the purchasing power of its citizens, and to the extent that this power is sapped by levies, to that extent is the production level lowered. It is a silly sophism, and thoroughly indecent, to maintain that what the state collects it spends, and that therefore there is no lowering of total purchasing power. Thieves also spend their loot, with much more abandon than the rightful owners would have spent it, and on the basis of spending one could make out a case for the social value of thievery. It is production, not spending, that begets production. It is only by the feeding of marketable contributions into the general fund of wealth that the wheels of industry are speeded up. Contrariwise, every deduction from this general fund of wealth slows down industry, and every levy on savings discourages the accumulation of capital. Why work when there is nothing in it? Why go into business to support politicians?

In principle, as the framers of the Constitution realized, the direct tax is most vicious, for it directly denies the sanctity of private property. By its very surreptition the indirect tax is a back-handed recognition of the right of the individual to his earnings; the State sneaks up on the owner, so to speak, and takes what it needs on the grounds of necessity, but it does not have the temerity to question the right of the owner to his goods. The direct tax, however, boldly and unashamedly proclaims the prior right of the State to all property. Private ownership becomes a temporary and revocable stewardship. The Jeffersonian ideal of inalienable rights is thus liquidated, and substituted for it is the Marxist concept of state supremacy. It is by this fiscal policy, rather than by violent revolution, or by an appeal to reason, or by popular education, or by way of any ineluctable historic forces, that the substance of Socialism is realized. Notice how the centralization hoped for by Alexander Hamilton has been achieved since the advent of the federal income tax, how the contemplated union of independent commonwealths is effectively dissolved. The commonwealths are reduced to parish status, the individual no longer is a citizen of his community but is a subject of the federal government.

Republished from the Mises Institute.