What about taxation?

Social contract theory implies that individuals have consented, either explicitly or implicitly, to surrender some of their freedoms and submit to the authority of the government. While this thought can seem plausible in theory, the historical evidence points us to countless cases of violence committed by states towards their own people. In most cases no human or even animal would consent to violence against himself. However through manipulation people can be led to the belief that oppression against them is justified because it's for their own good.

One of such forms of glorified oppression is taxation. In 1803 Jean Baptiste de Say, one of the most prominent thinkers of the Austrian school of economics showed that taxation can never be considered as a part of an some implicitly voluntary exchange between citizens and government, since it is always based on coercion. He concluded that, since the process of redistributing resources by taxation is based on incomplete knowledge of the market, it will naturally result in diversion of resources from productive uses into wasteful governmental expenditures.

Proponents of redistribution tell us that the man is selfish in his nature, and therefore only taxes imposed by the threat of violence can make him contribute to social causes. What they fail to mention is that taxation is always moving money from the hands of many (people) into the hands of the few (government officials), so if the selfishness argument was true then the ones in charge of handling this money would have all the incentives to be selfish too and we would never see any social benefit at all.

Instead, the taxation scam can happen precisely because people want to spend money on social causes, it's just more convenient to them to not think of it and simply send a lump sum every year to an abstract government entity. So the real question is not whether people are inherently selfish or altruistic, but whether taxation under threat of violence can provide better social outcomes than the free market, and if it does, is the benefit so big that we should ignore the obvious moral problem of violent coercion?

When people decide to trade with each other it is because the subjective value of what they get is higher than the value of what they agree to give up in exchange. Consequently, when people are not coerced by physical violence or by its threat, the trade benefits all the participants involved. On the other hand, any coerced trade must result in a loss to at least one participant. Taxation is the prototypical case in which this violation occurs, since it is the ultimate threat of imprisonment which convinces citizens not to resist tax collectors. It follows that taxation must benefit the tax consumer and penalize the tax payer.

Overall the tax system imposes a dead-weight loss on the economy, meaning that a large part of trade that would happen without taxation will not happen and marginal businesses, that would break even without tax will have to go out of business. Furthermore if the corporate taxes become too high, businesses start freezing investment, transferring capital into tax-havens, accumulating credit. In other words, there are huge negative externalities to taxation that are rarely mentioned (and evaluated against the benefits) in the public discourse. In my upcoming articles I will try to dive deeper into corporate income tax and its negative effects on economy.

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