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Taxation: coercive and consensual
March 06, 2014
In theory, taxation is essentially coercive because taxes
are never paid voluntarily. However, taxes are supposedly collected not only
for purpose of collecting them but to finance public goods. Thus, consensual
taxation is possible since private taxpayers desire public goods (the reason
why they left the state of nature in the first place).
In comparing coercive and consensual or negotiated
taxation, Michael Moore of the University of Sussex, not the controversial
film-maker, argued that the latter constituted a better institutional
technology. Coercive taxation (largely in agrarian societies) is relatively
ineffective since it tends to generate resistance and because coercive tax
collectors were well placed to pocket a large part of the proceeds for
themselves. In contrast, consensual taxation offers (within the boundaries of
individual states) joint gains for both rulers and taxpayers.
In the late 18th century, the idea that citizens must
contribute to the upkeep of a state was developed. On of the political
economists of the time, Adam Smith forwarded four maxims of taxation (equity,
certainty, convenience, and efficiency). These maxim were also supported
subsequently by David Ricardo and John Stuart Mill:
1. “The subjects of every state ought to contribute to
the support of the government, as nearly as possible in proportion to their
respective abilities: that is, in proportion to the revenue which they
respectively enjoy under the protection of the state. In the observation or
neglect of this maxim consists what is called the equality or inequality of
taxation.
2. “The tax which each individual is bound to pay ought
to be certain, and not arbitrary. The time of payment, the manner of payment,
the quantity to be paid, ought all to be clear and plain to the contributor,
and to every other person. Where it is otherwise, every person subject to the
tax is put more or less in the power of the tax-gatherer, who can either
aggravate the tax upon any obnoxious contributor, or extort, by the terror of
such aggravation, some present or perquisite to himself. The uncertainty of
taxation encourages the insolence and favours the corruption of an order of men
who are naturally unpopular, even when they are neither insolent nor corrupt.
The certainty of what each individual ought to pay is, in taxation, a matter of
so great importance, that a very considerable degree of inequality, it appears,
I believe, from the experience of all nations, is not near so great an evil, as
a very small degree of uncertainty.
3. “Every tax ought to be levied at the time, or in the
manner, in which it is most likely to be convenient for the contributor to pay
it. A tax upon the rent of land or of houses, payable at the same term at which
such rents are usually paid, is levied at a time when it is most likely to be
convenient for the contributor to pay; or when he is most likely to have
wherewithal to pay. Taxes upon such consumable goods as are articles of luxury
are all finally paid by the consumer, and generally in a manner that is very
convenient to him. He pays them by little and little, as he has occasion to buy
the goods. As he is at liberty, too, either to buy or not to buy, as he
pleases, it must be his own fault if he ever suffers any considerable
inconvenience from such taxes.
4. “Every tax ought to be so contrived as both to take
out and to keep out of the pockets of the people as little as possible over and
above what it brings into the public treasury of the state. A tax may either
take out or keep out of the pockets of the people a great deal more than it
brings into the public treasury, in the four following ways. First, the levying
of it may require a great number of officers, whose salaries may eat up the
greater part of the produce of the tax, and whose perquisites may impose
another additional tax upon the people.” Secondly, it may divert a portion of
the labour and capital of the community from a more to a less productive
employment. “Thirdly, by the forfeitures and other penalties which those
unfortunate individuals incur who attempt unsuccessfully to evade the tax, it
may frequently ruin them, and thereby put an end to the benefit which the
community might have derived from the employment of their capitals. An
injudicious tax offers a great temptation to smuggling.
Fourthly, by subjecting the people to the frequent visits
and the odious examination of the tax-gatherers, it may expose them to much
unnecessary trouble, vexation, and oppression:” to which may be added, that the
restrictive regulations to which trades and manufactures are often subjected to
prevent evasion of a tax, are not only in themselves troublesome and expensive,
but often oppose insuperable obstacles to making improvements in the processes.
To Adam Smith’s mind, bad governance is excessive
taxation of capital and property. Not taxation per se, as he recognized the
need for public goods and the role of the state in the provision of such goods.
Bad governance discourages investment and owners of transportable assets can
readily change domiciles to jurisdictions with acceptable tax burdens. Smith
argued that a tax burden is acceptable to businessmen if the state is able to
provide an equally acceptable bundle of public goods.
----------The limits of public shaming
March 13, 2014
The controversy generated by BIR Commissioner Kim
Henares' shaming indictment of an entire profession reminds me of these words I
wrote earlier.
Taxation is “a compelling phenomenon precisely because it
is where the politics meets the economics” and because the “way in which a
nation taxes creates incentives that pervasively influence the way in which
political and economic life become organized”.
When a government collects taxes, it removes revenues out
of the private sector and therefore reduces the disposable income of private
economic actors. Taxes meanwhile are necessary so that public goods may be
supplied in adequate quantities and in a timely fashion. Thus taxes represent
the costs imposed by governments so they can provide public goods.
From the point of view of an average citizen, taxes
potentially can (and do not actually) change the public-private mix of goods
and services that she consumes. If no taxes were imposed (i.e., there is no
state), then a person’s consumption package composed solely of private goods.
However, as the English political philosopher Thomas
Hobbes reminded us, life in the ‘state of nature’ (i.e., the state of
statelessness) is “solitary, poor, nasty, brutish and short”. Thus a state is
created so public goods (in this case, recourse to a powerful Leviathan to
maintain peace and order and prevent people from simply taking the lives and
the property of others as they see fit) could be provided.
Bottom line, taxation is extortion even as voluntary
taxation is more productive than coercive taxation. It is ultimately backed by
the state's coercive instruments like the police, courts, and jails.
In this sense, while expected to provide to provide
public goods, the state itself can become a public bad. Indeed, while some
professionals (doctors, lawyers, accountants, etc.) do not pay the proper taxes
because of the lack of a paper trail (receipts, for instance), it is not right
right to condemn an entire group for the "sins" of some. One cannot
use logic to indict an entire profession; a more solid case against individuals
is needed.
It's true that the interests of cheating professionals
and their clients are quite aligned. The issuance of receipts could be reason
for passing the tax burden to the clients themselves. So clients make do with
no receipts for lower professional fees. However, a lower tax take (because of
these cases of tax evasion or under-assessment) harms the clients in the long
run as the practice diminishes the general fund for public goods.
The country's tax authorities, instead of conducting this
shame campaign, should allocate more time and resources, in convincing
consumers that they're better off with receipts from professionals. Of course,
the public must be convinced that tax revenues are indeed spent for the provision
of public goods and not for lining private pockets or for public empire
building.
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See also:Tax Cut 14: APTU Meeting in Bangkok, March 1-2, January 22, 2013
Tax Cut 15: Some Resistance to Reducing Personal Income Tax, May 04, 2013
Tax Cut 16: Conserving Fishery Resources by Taxing Demersal Fish Catch?, May 27, 2013
Tax Cut 15: Some Resistance to Reducing Personal Income Tax, May 04, 2013
Tax Cut 16: Conserving Fishery Resources by Taxing Demersal Fish Catch?, May 27, 2013
Tax Cut 17: BIR vs. Physicians, March 06, 2014
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