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Tax tyrannies

By Richard W. Rahn
March 27, 2008

Justice Oliver Wendell Holmes famously said, "Taxes are what we pay for civilized society," while his predecessor on the U.S. Supreme Court, Chief Justice John Marshall, also correctly noted, "The power to tax is the power to destroy."

At what point does taxation move from that necessary for proper government to tyranny?

The American Founding Fathers, in the Declaration of Independence, state as one of their grievances against King George III, that he imposed "taxes on us without our Consent." "No taxation without representation" was a rallying cry of the Revolution, and from that time it has been widely agreed that imposition of a tax without the consent of the governed is a form of tax tyranny. This is a reason why taxation under democratic regimes has greater moral legitimacy than taxation under nondemocratic regimes.

As democracy has spread throughout the world, fewer people are subject to this form of tax tyranny. However, in recent years some countries — primarily in the European Union — have tried, under the guise of "tax harmonization" and "unfair tax practices," to impose their desire for higher taxes on low-tax states. International organizations such as the United Nations and the Organization for Economic Cooperation and Development (OECD) have also made attempts to impose taxes on others without their just consent.

Another form of tax tyranny exists when governments impose tax rates above the revenue maximizing rate. It has been known for centuries that every tax has a rate above which it will be bring in no further revenue because people will cease engaging in the taxed activity, whether it is work, saving, investment or consumption of the taxed goods and services. Such high tax rates encourage development of underground or "black" markets, and/or the exodus of the particular activity.

For instance, high rates of taxation on capital cause people to move their money to lower tax rate jurisdictions. Extremely high rates of taxation on labor can cause people to even move from a given country or state. There are many well-known cases where highly paid movie stars, athletes and others have moved from their oppressive high tax rate home countries to more tax friendly places.

Unfortunately, many governments, including that of the United States, still have taxes and tax rates above the revenue maximizing rate. When this is known to be true, as it frequently is, it is nothing more than a form of tax tyranny imposed by a group of envious or mean-spirited officials. Occasionally, governments deliberately use taxation to alter certain behaviors, such as taxes on tobacco products, for which purposes tax revenue considerations are secondary.

Another form of tax tyranny exists when coercive taxation is used to fund government programs of little or no value, or where the expenditure programs are rife with corruption or mismanagement.

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