II. The Liberal Egalitarian Justification for Taxation

Liberal egalitarianism is the political paradigm most closely associated with analytical philosophy. While ultimately a broad school with many individual variations, several characteristics are closely associated with the tradition. This includes an attempt to divide questions of fact from opinion as well as an emphasis on conceptual analysis—reflecting on and refining the meaning of words used in ordinary language to explain social facts and ethical positions.Footnote ⁹ Facts about the physical world are presumed to be discoverable through empirical science. When it comes to normative theorizing, this means taking moral intuitions as the data to be analyzed.Footnote ¹⁰ The underlying motivation for this approach was to clear out unwarranted references to untestable metaphysical assumptions without losing the ability to discuss normative claims altogether.

This division of epistemic labor (See Figure 1) lends itself to philosophical approaches to the social sciences that attempt to distinguish technical from normative questions. For example, legal positivism is a doctrine that holds that valid law takes the form of commands issued by a legitimate authority independently of the character and content of the commands.Footnote ¹¹ A normatively bad law, at least on the classic legal positivist account, can be perfectly valid. Similarly, neoclassical economics became influential through its proponents presenting it as a strictly positive science.Footnote ¹² It promises to offer a technical language and set of predictions based on evidence that policymakers could use to achieve their ends, however chosen.

Figure 1. Theorizing from Intuitions.

For example, moral intuitions might establish basic principles like commitment to free and equal citizenship, or equality of concern and respect for all persons, and what that might mean for obligatory social and economic outcomes. This might be egalitarianism, prioritarianism, sufficientarianism, limitarianism or any other doctrine that is argued to best instantiate the meaning of freedom and equality. This approach puts any existing social institutions, such as voluntary contracting and property rights, on notice. Whatever their origins, they certainly have not been established based on explicit moral foundations in conditions of equality.Footnote ¹³ These institutions, as well as the resource allocations and transfers they have legitimized up until now, must be justified afresh in the light of the theorist’s normative baseline.Footnote ¹⁴ Hence, for many liberal egalitarians, it is not taxation that needs justification, but rather any unequal property holdings that are otherwise liable to be taxed.Footnote ¹⁵ Taxation levied by a legitimate authority aiming to achieve distributive justice is pro tanto justified.

This is where some political philosophers finish their work and defer on the question to social scientists and policymakers; although some, notably Rawls among them, offer a broader framework with the institutional implications thoroughly spelled out.Footnote ¹⁶ When theorists do offer institutional proposals, however, it is with the normative underpinnings driving the analysis. For example, democratic theory in the radical formulation starts with the assumption of freedom and equality between people, then asks what this means for appropriate democratic institutions. The answer is normally along the lines that democratic institutions should give everyone an equal say in all issues that affect them, and that policymaking should be responsive to the interests and values of the whole community while respecting the separateness of all persons.Footnote ¹⁷ This is then taken as the baseline by which to judge existing political institutions.

Of course, all existing political regimes fall far short of offering everyone an equal share in collective governance. Even stable democratic regimes sanction violence against vulnerable minorities while failing to prevent a great deal of violence in civil society. Income and wealth inequality persists for morally arbitrary reasons. Even formally democratic regimes are more responsive to the ideas and interests of the wealthy and connected. The questions that radicals then face is:

1. 1. Why do political arrangements fail to instantiate moral commitments that are inherent to our everyday understanding of moral language such as fairness? and

2. 2. How can we establish a preferred regime where power and resources are more equally distributed?

A Marxian answer is that existing arrangements work well enough for the ruling class who, in addition to hoarding formal political power and wealth, disseminate divisive and false information through education systems and the mass media to prevent people from recognizing that existing arrangements are an affront to their moral intuitions. The only solution, and an inevitable outcome, on this account, is an eventual revolution.

For a variety of reasons, including an aversion to violent conflict and concern about the probability of a genuinely successful revolution, many normative theorists seek more nuanced solutions.Footnote ¹⁸ Economists like Arthur Okun, James Meade, and, most recently, Thomas Piketty offer help with this enterprise in the form of technical expertise that explains the emergence of inequality using a mechanistic account of capitalism as well as strategies for addressing it.Footnote ¹⁹ Meade is the most explicit about the role of economic science and its relationship with radical reform. In one of his books, he addresses the “intelligent radical”— radical because she is committed to changing social institutions in a substantively egalitarian direction but intelligent because she will listen to the economist when figuring out what policies will work.Footnote ²⁰

What this approach to economics purports to offer is a technical explanation for how capitalist institutions produce relative prosperity while also inevitably increasing inequality, the trade-offs associated with taxing the relatively advantaged, and ways of navigating around these trade-offs. Although all three of these economists offer a similar account of inequality, Okun is early and influential in terms of debates about taxation. He identifies the naturally accumulating and compounding nature of income differences as the source of wealth inequality.Footnote ²¹ On his account, most people spend as they earn, relying on compulsory social insurance for old age and ill-health. The difference between the income of the working and the middle class amounts to the capacity to consume more durable goods, such as cars, housing, and furniture. By contrast, the wealthy can consume much less than their income and are thus able to grow their assets, especially financial investments in business and real estate, indefinitely into the future.Footnote ²²

Okun’s realistic concern is with the long-run political implications of a small class amassing ever more wealth. Correlatively, Okun also acknowledges F. A. Hayek’s criticism of public ownership from the perspective of civil liberties. If the state is the sole employer in a society, then critics, dissenters, and the otherwise disfavored can be deprived of the ability to earn an income, while in market economies with many independent firms, people can be politically sidelined but with fewer implications for their broader employability.Footnote ²³ For this reason, Okun finds the prospects of introducing a socialist economy to the United States unpromising. Instead, he sees piecemeal reforms aimed at bringing about greater equality of opportunity as more compatible with liberal commitments. Progressive tax reforms are a central feature of what we might characterize as this social-democratic agenda.

While attempting to establish a middle-ground position between capitalism and socialism, Okun relies on several controversial foundational assumptions that align with the liberal egalitarian conception of society. First, he conceptualizes the market as a complete system that accomplishes the technical task of transforming resource inputs into outputs that are goods for consumption. He sees this allocative function of markets, the function that calculates the most valuable use of these given resources, to be only loosely connected to the distributive outcomes that markets produce. The only connection is the incentive required, absent a command economy, to call an efficient amount of labor into existence and ensure it is allocated to appropriate tasks.

Second, Okun presumes a similarly holistic account of political institutions and a positivistic notion of legal constitutions. Drawing on social contract theory, he describes the political process as establishing a domain of civil rights that cannot be alienated through commercial transactions. By contrast, economic rights are excluded from this domain of protection because there is no explicit constitutional constraint on state intervention in the economic sphere. The democratic process can legitimately make almost any claim on the income and wealth of citizens subject to it. The collective citizenry has priority over individual moral claims to the assets they have acquired:

Finally, at least at the first stage of idealization, the market and the state operate as distinct independent spheres of human activity for Okun. The market’s function is to produce goods for consumers and allocate capital, while the state decides the size and scope of public goods provision and how to distribute the gains from collective cooperation. Incursions from one domain into the other are deviations from this model. Hence, the use of private wealth to game a political system is problematized. Correlatively, the use of the political system (such as excessive professional licensing) to restrict legitimate market competition is also to be discouraged.

This paradigm certainly has its strengths in terms of clarifying the way people use normative concepts, including the implications of prioritizing democratic decisions. As an enterprise for discovering sound institutions for living well together, however, I believe it has some notable weaknesses. One weakness is the limited scope this approach gives to alternative conceptions of institutions developed through empirical analyses and historical assessments. For example, normative discussion of political freedom and equality does not necessarily tell us very much about the difference between real-world democracies and autocracies. Increased wealth inequality, virtually by definition, represents a departure from a radical conception of democracy. However, levels or increases in wealth inequality might not explain or even predict a transition from a competitive democracy to autocracy in the real world.Footnote ²⁵ Somewhat perversely, given the overall aims of philosophical analysis, the result is some confusion between facts and norms. The failure of institutions, even comparatively successful ones, to conform to normative theory is presumed to be a problem that should engender urgent reform rather than a moment to revisit the model of appropriate institutions.Footnote ²⁶

Another weakness is excessive positivism when it comes to the examination of economic phenomena. The neoclassical approach treats entities such as income, wealth, capital, employment, and leisure as tractable objects that can be objectively measured and that exhibit systematic tendencies that can be predicted. Observations of rising wealth inequality over time imply that inequality will continue to grow unless deliberately stopped. By contrast, other important parts of the economic process that cannot be directly observed, such as the subjective beliefs, valuations, and intentions of economic actors, as well as the norms and institutions in which they act, are relatively neglected. This is a problem because it is subjective beliefs both about fairness and the prospective gains of ongoing cooperation that play an important role in legitimizing existing tax and property arrangements. A final weakness is a presumption that market society and politics typically exist apart from one another. This does not necessarily represent either a realistic normative aim or an empirical reality.

III. A Comparative Justification for Taxation

There is an alternative approach to normative theorizing for realistic settings. Like the analytic tradition, it is broad and comes under several labels, which today include philosophy, politics and economics, moral science, as well as what Brennan describes as “non-ideal non-theory.”Footnote ²⁷ It has a characteristic interest in explaining the mechanisms by which people are or can become morally motivated as well as the inclusion of strategic aspects of cooperation. In terms of intellectual tradition, it represents an attempt to revive the Scottish Enlightenment approach to political economy that combines what became the separate disciplinary enterprises of moral philosophy, jurisprudence, politics, and economics.

The starting point for this sort of theorizing is different from the analytic tradition. It begins with the observation that the historical and, more controversially, natural condition of humanity is one of poverty, vulnerability, and violence.Footnote ²⁸ Moreover, the natural capacities of isolated persons are extremely limited. In particular, we know little directly about the world through our perception outside our immediate circumstances.Footnote ²⁹ In fact, we start without even the categories of thought we use to order our perceptions and must be acculturated, through shared language, even to these basic understandings. Yet some societies, increasingly a majority, have grown to become comparatively prosperous and peaceful. Moreover, people are now capable of using knowledge and resources from outside their area of personal knowledge and control.Footnote ³⁰ In other words, in developed societies there is widespread cooperation at a remarkable scale. Perhaps surprisingly, many successful forms of cooperation appear to have emerged without people having a clear idea of how they work, with substantial disagreement about how they work even once observed, and with disagreement over how long they will continue to work.Footnote ³¹ This suggests that a great deal of variations in social outcomes have been hitherto the result of the unintended consequences of people aiming to achieve something else or alleviate some other ill.Footnote ³²

The comparative approach (See Figure 2) takes the relative success and failures of social arrangements as the data for analysis. The idea is to propose and, when possible, test, generalizable theories about what explains the difference between successes and failures. Conjectures about the value of hitherto uninstantiated regimes, including theoretical regimes such as liberal socialism or property-owning democracy, can also be included in this analysis. However, on the comparative account, these regimes ought to be assessed partly based on their capacity to solve challenges of social cooperation where some regimes have succeeded and others have failed in the real world.Footnote ³³

Figure 2. Theorizing from comparison.

What has this approach to theorizing come up with in terms of institutions that produce relatively attractive outcomes? One repeated discovery is the significance of secure property rights, voluntary exchange, enforceable contracts, and the widespread legal capacity to establish firms and associations.Footnote ³⁴ These institutions allow people who do not know each other well, and in some cases not at all, to cooperate at a significant scale over time and space. This means that people can rely less on close personal relationships when engaged in self-protection or cooperation but instead make use of abstract rules to which everyone is subject.Footnote ³⁵

The importance of institutions that incentivize widespread cooperation through competition for willing consumers is part of the mainstream consensus in institutional economics. Somewhat more controversially but still within the comparative framework, market process theorists add an epistemic dimension.Footnote ³⁶ It is not only the case that people require incentives to contribute to economic production. People also do not know what particular attempts at cooperation—which enterprises and which ventures—will ultimately prove to make effective use of social resources. This can be discovered through the trial and error of continuous attempts to reconcile plans with the reality of available resources and the demands of consumers in a competitive market.Footnote ³⁷ Which plans among innumerable possibilities should even be attempted? Private-property markets allow investors to make this decision by putting their own capital at risk, facing loss for failures, and realizing profit with successes.Footnote ³⁸ In other words, what market processes permit is the internalization of much of the risk and costs of failed ventures. It is on this epistemic basis that the allocative and distributive aspects of markets cannot be unbundled. You cannot remove the loss and reward associated with investment, as opposed to effort as a worker, without also losing a great deal of the epistemic value of private enterprise.

What does the comparative approach indicate when it comes to collective action, such as the provision of common and public goods, including, of course, the state? Stable institutions of collective governance are those that can be self-enforcing when they are at a relatively small scale,Footnote ³⁹ or involve the distribution of selective benefits to those tasked with enforcement at a larger scale.Footnote ⁴⁰ One way of looking at this would be to say that politics at scale is inevitably an elite enterprise. A more neutral way of looking at it would be to suggest that governance is subject to similar gains from trade and specialization as other sorts of enterprises.Footnote ⁴¹ Just as we cannot all be good bakers, neither can we all be good and alert legislators.Footnote ⁴² On this account, what distinguishes contemporary consolidated democracies from authoritarian regimes is not equality of political participation or power but rivalry and competition between elites in the relative absence of violence.Footnote ⁴³ Democracy works by constraining governance specialists (including administrators, legislators, judges and executive officials) in such a way that their pursuit of ambition and personal success aligns with the broader interests of the people. Formal equality of political participation, in terms of rights to vote, speak, associate in groups and parties, and stand for office, are key parts of that institutional framework as they expose incumbents to viable competition from wider civil society. However, as in markets, this competition does not take place against a substantively egalitarian baseline. Better resourced candidates for office have distinct advantages but ultimately win through satisfying more voters than their competitors.Footnote ⁴⁴

Although those directly involved in political activity derive personal benefits from their work, coalitions in democracies win by supplying public goods.Footnote ⁴⁵ For this reason, it is plausible to conceptualize real democracy as polyarchy.Footnote ⁴⁶ Its defining characteristic is contestability.Footnote ⁴⁷ In contrast to the ideal type of separate spheres between government and markets, this comparative approach suggests that the relationship between markets and politics varies significantly within different capitalist regimes. In all cases, however, they are substantially entangled, and sometimes in more problematic ways than others.Footnote ⁴⁸ Like other service providers, states perform better when subject to competition and accountability. States, where ordinary citizens have the right and practical capacity to exit and join other jurisdictions, are disciplined to provide more public goods and protect people’s rights.Footnote ⁴⁹

What does this comparative approach imply for justifying taxation specifically? It justifies taxation not according to fundamental moral principles but through comparison with feasible alternatives. Following Nozick, many libertarians object to taxation because it violates natural rights.Footnote ⁵⁰ Moore, for example, argues that taxation is equivalent to forced labor and is therefore clearly objectionable.Footnote ⁵¹ On a comparative and realistic account of social order, acknowledging the ineliminable coercion inherent to social relations and all forms of governance, this parallel between taxation and forced labor makes it a beneficial institution. Taxation provides a procedurally transparent substitute for forced labor as well as other more unpredictable and violent means of elite predation such as banditry. It creates a source of rents that can be used to compensate potentially predatory actors in return for subjecting themselves to law.Footnote ⁵²

When the implications of this pessimistic perspective are acknowledged, then there is also room for optimism from a sturdier base.Footnote ⁵³ Once the initial social dilemma has been solved, peace generally produces enormous mutual gains because of the substantially reduced costs of people not having to manage their own security. This means only a small portion of taxed resources need to be distributed upward to the elite to keep them satisfied. As a result, liberal and social democracies with developed economies dedicate greater portions of taxed resources to the provision of public goods and social insurance. Although the origins of taxation, as well as contemporary means of its enforcement, might be objectionable according to some classical liberal ideal theory, a realistic comparison of the alternatives is sufficient to justify it in the circumstances in which we find ourselves. Tax is the way that states raise revenue in ways that are compatible with maintaining stable expectations of ordinary citizens engaged in commercial and civic life.

IV. Wealth Inequality and Democracy

An egalitarian theorist might propose that this comparative account is simply giving away too much normatively. A society without substantive political equality is in an important sense unjust on their account. In response, I acknowledge that this might be true for ideal normative theorizing, but it does not pass the threshold of realistic concerns so easily. It is important to distinguish between real-existing democracy, which I take to be enormously valuable, and the radical conception of democracy against which it is often measured less favorably. A Rousseauian vision of political equality, where everyone participates and is subject equally to the same laws in a total absence of private corruption of the policy process is tantalizing. However, it is also austere and severe even by the way many of its proponents describe it.

The recent realist turn in political theory attempts to fill in this gap. The central claim is that emerging wealth inequalities are not merely unjust from an ideal standard, but that they systematically distort democratic accountability in realistic settings. On this account left unchecked, the continuous accumulation of wealth will create a new plutocratic class that will permanently undermine democracy. The solution on this view is not just to tax income in increasing proportions to raise revenue for the states, but to tax in a manner designed to proactively reduce existing wealth holdings and to prevent wealth from becoming so concentrated again.

How persuasive are these concerns and related solutions? The principal evidence for this approach comes from Piketty and colleagues who have collected data comparing the distribution of wealth and income over time and, increasingly, between a range of countries.Footnote ⁵⁴ They find that both income and wealth inequality has increased substantially in the last fifty years. Their accounts, although compelling and robust in many respects, are still somewhat controversial—and the normative implications even more so. Deciding whether wealth inequality has increased depends on which part of the distribution scholars take to be the most salient.Footnote ⁵⁵ More substantively, there is a question of what changes in wealth inequality mean for the experience of citizens and imply for the future institutional character of regimes. Acemoglu and Robinson suggest that Piketty’s assumption of capital as self-accumulating through the simple compounding of interest does not explain historical wealth holdings very effectively.Footnote ⁵⁶ They point out that the history of both Sweden and South Africa, when considered exclusively through the lens of Piketty’s economic data, are quite similar. Of course, Sweden is an inclusive social democracy with a high standard of living and strong social and legal protections for all, while South Africa was a non-democracy and a violent segregationist regime for much of the period studied. It remains a society struggling with discrimination and a substantial racial wealth gap. Sweden has inclusive economic institutions while South Africa has a history of extractive institutions based on property seizure and labor coercion.

This means that aggregate inequality statistics miss relevant detail about the economic structure of the societies being evaluated. The different experience of citizenship and economic participation in Sweden and South Africa is not found in the outcomes in terms of wealth distribution, but in the process by which those outcomes come about, namely differences in the degree of security of persons and property, the rule of law, and equal treatment.

Moreover, the relationship between wealth inequality and democratic stability is weak.Footnote ⁵⁷ Neither a particular level of wealth inequality, nor an increase in wealth inequality, are predictive of democratic failure. This presents a puzzle. There are intuitive reasons to believe that responsive democracies will engage in egalitarian redistribution. This means it is also plausible that the rich will try to capture the political system to protect their advantages. So why does neither happen consistently given the persistence of democratic regimes characterized by wealth inequality?

I believe that part of the answer is that people’s notions of fairness tend to focus on procedural justice.Footnote ⁵⁸ People are content with inequality so long as the process that causes it to emerge is relatively transparent and resistant to manipulation or domination by a controlling entity. Market processes, that no one personally controls and where no one can predict their outcomes ex ante, satisfy this everyday understanding of fairness. This psychological disposition might be especially prominent at the scale of a commercial society where much of the wealth of the rich is not explicitly flaunted in front of people but exists mostly as mundane legal entitlements to stocks and bonds, besides additional goods and services that are consumed in private settings. While the link between democracy and redistribution is limited, there is substantially better evidence for the connection between democracy and economic growth.Footnote ⁵⁹ It could be that growth, and the prospect of improvements in future income and consumption, is more attractive to citizens than redistribution. The prospect of doing well without making a direct claim on the resources of others appears to be more attractive.Footnote ⁶⁰

A second part of the explanation could be that Piketty’s approach emphasizes static snapshots of inequality. It is easy to imagine when looking at data on aggregate distributions of income that citizens generally remain in one income bracket throughout their lives and that existing capitalist systems are rigidly class-bound. However, individual citizens might not view their own conditions as a snapshot but rather consider their past and future prospects as well. Life-course analyses of income find that the majority of the measured increase in inequality in the United States disappears once individuals changing income levels at different points in their lives is taken into account.Footnote ⁶¹ That is not to deny the persistence of class. Rather a life-course lens merely suggests that capitalist societies may not have become more class-bound in the twenty-first century and that people tolerate income inequality around them because they have either experienced higher income levels in the past or expect to do so in the future.

When considering wealth at the very top, a similarly dynamic picture is in evidence.Footnote ⁶² A specific concern of Okun and Robeyns is that today’s entrepreneurs will produce tomorrow’s rentiers. Certainly, from a normative egalitarian standpoint, or even a standpoint that values hard work and fair contributions from those capable, the idea of multiple generations living off unearned wealth is problematic. But is this a complete picture of the super-rich? At least in the United States, the “old money” billionaires did not prevent the emergence of a new generation of even wealthier technology billionaires who came from multiple income classes and, indeed, from all over the world. So, it is possible, in a consolidated democracy with open markets like the United States, that the more likely outcome is a cycle of new billionaires consolidating their wealth into old money passed on to their children who dominate for a time, followed by a new generation of new money when new ways of doing business emerge.Footnote ⁶³

A third part of the explanation for why inequality persists in consolidated democracies is that the very wealthy may not have a particularly cohesive political project. The impact of the policy views of the wealthy on the political process is contested. In broad surveys, admittedly those less able to single out the very rich, national variations on policy issues are more determinative than class identity. For example, working-class citizens in the United States are, on average, more likely to oppose redistribution than many middle-class citizens of European countries.Footnote ⁶⁴ Page, Bartles, and Seawright argue that the rich are more conservative in the United States, especially when it comes to economic issues, and that a small percentage of the one percent are particularly conservative.Footnote ⁶⁵ On the other hand, Goss identifies a group of younger active policy philanthropists who hold socially liberal views and are dedicated to progressive causes such as protecting the environment, the legality of abortion, and gun regulation.Footnote ⁶⁶ So, those with private wealth hold a variety of political views. The one thing the rich tend to agree on systematically is fiscal conservativism.Footnote ⁶⁷ In other words, unsurprisingly they generally want to keep more of their wealth and income. From a radical standpoint, this is precisely the problem because the rich are using their means to resist distributive justice. But from the standpoint of real-existing democracies, it is not so problematic because apart from the issue of wealth itself, the rich are not consistently pushing the political process in any particular direction. Wealth inequality appears in some times and some places to be less problematic than egalitarians and limitarians predict.

Finally, amassing financial wealth does not come at a cost to everyone if and when financial assets are used to coordinate production that transforms resources into valuable goods and services, rather than to support the consumption of the wealthy. The pertinent question is whether capital investment leads to greater consumption opportunities for everyone, and especially the disadvantaged. Whether it does so is substantially a supply-side question. In other words, are entrepreneurs permitted to produce goods and services that benefit everyone, and especially the less advantaged? The most successful entrepreneurs tend to be those that produce goods within the price range of ordinary consumers and subject to increasing returns to scale. For example, industrialization permitted new levels of wealth at the very top but also reduced consumption inequality by making a range of essential and luxury goods accessible to many more people.Footnote ⁶⁸ When people save and invest in productive enterprises that meet consumer needs, their observable wealth may rise, but possessing that wealth does not come at the expense of anyone else’s consumption.Footnote ⁶⁹ For this reason, a more predictably progressive tax is one levied on the income and consumption of the wealthy rather than their capital.

V. Implications for Tax Systems

Comparative analysis indicates how tax policy should be designed to augment the protective and productive aspects of state activity while minimizing levels of predation.Footnote ⁷⁰ Radical conceptions of government precede from an assumption of positive state sovereignty where any legal formulation is technically possible and practically implementable both to do good and bad. On this account, states ultimately have no one but themselves (and possibly diffuse social norms) as constraints on their power.Footnote ⁷¹ By contrast, insights from comparative political economy suggest that states perform well and respect rights when constrained by independent actors in civil society and where citizens can choose different jurisdictions in which to locate.Footnote ⁷²

On the understanding that states work best when facing external constraints on their power, how should tax systems be implemented? The principal way to proceed is to acknowledge the monopolistic character of tax authorities and constrain the way they relate to citizens on that basis. Geographic monopolies are often the most efficient providers of certain goods and services, and this is probably the case for many of the goods that states provide, especially security and the rule of law.Footnote ⁷³ Nevertheless, monopolies can behave badly and partially toward their customers. They can underproduce and overcharge for their services. An important way to constrain monopolists is to oblige them to offer the same service for the same price equally to all. Unlike providers of private goods, it is appropriate to prohibit monopolists from turning away customers and bargaining individually over prices. There is no market to ensure such negotiations are voluntary. To reduce the harm of monopoly power, tax systems should be based on simple, transparent, and general rules publicized well in advance of people becoming liable to pay taxes based on their activities and property holdings. This limits the tendency of tax to become a source of predation.Footnote ⁷⁴

These constraints of equity can be interpreted quite broadly to include some forms of progressivity. A monopolist charging proportionately more for a different service in a transparent and general way can be acceptable. A public railway network can charge more for a first-class ticket or to use a faster train route. A postal monopoly can charge more for a parcel rather than a letter, or for expedited delivery. This is permitted even if the price differential has little relationship to the marginal cost of provision. Similarly, citizens ultimately benefit from the bundle of goods and services supplied by states in different ways. The relatively disadvantaged may benefit more from welfare services and direct transfers, but the advantaged arguably benefit relatively more from use of the civil legal system to protect their larger and more complex property entitlements, education and infrastructure that improves their productivity, and very often subsidies for their economic activities. So, it is reasonable for states to vary tax rates that reflect different abilities to pay among income groups. Tax schedules are minimally compliant with classical liberal constraints so long as they are applied based on general rules that do not allow prejudicial or discriminatory implementation at the individual level or of vulnerable minorities.Footnote ⁷⁵

Taxing wealth, as opposed to income, is associated with additional costs and uncertainties but can be feasibly implemented in a few areas. While income, by definition, is the result of a voluntary transaction with a price agreed by the recipient, a great deal of wealth is held in forms that are hard, occasionally impossible, to value. Capital goods, including tangible and intangible assets, might produce enormous value when employed in a productive enterprise but be rendered worthless should the enterprise fail for unpredictable reasons. This means that generalized wealth taxes are either going to overlook a great many kinds of assets or will involve delegating a dangerous degree of discretion to tax authorities for assessing taxable wealth. A more feasible approach to addressing wealth inequality is to expand the tax base to include more income derived from assets. This can be applied to things like the private enjoyment of real estate by the relatively advantaged, which can be taxed based on imputed rent.Footnote ⁷⁶

On the other hand, this approach rejects tax policies that effectively target particular individuals or households at particular rates. A confiscatory income tax—for example, one pursuing limitarian ends—is essentially an invitation for states to exercise their monopoly power to engage in price discrimination. When asking how much the rich should pay, the monopolist’s answer is: “What have they got?” However, this is not a practical prohibition on receiving an income or maintaining wealth above a certain threshold. It is only a denial that the state will legally protect economic compensation above a certain level, thus raising the costs of securing that income for firms and individuals. This makes informal alternatives to engaging openly in mutually beneficial transfers relatively more attractive. There are a range of extralegal strategies for channeling resources to compensate people whose official compensation is lower than what an open market rate would command. Employees and contractors can accept in-kind compensation, choose who to work for based on their social network or preferred colleagues, or deal with people who are prepared to help their friends, family, and trusted associates. In a liberal tax regime where contracts are enforced without discrimination, the incentive to engage in these inefficient side-payments is reduced. In a punitive tax regime, however, these indirect means of compensation not only become common but, because of their illegality, generate opportunities for broader corruption that connected insiders can leverage for both greater wealth and power.

A response to this criticism is that this is an enforcement problem that is ultimately surmountable, especially for a powerful state and a committed citizenry. On a comparative account, successful and enduring rules tend to be those that are substantially self-enforcing—that is, rules that make sense for relevant parties to follow. By contrast, market prohibitions create valuable rents that powerful actors, whether state officials tasked with enforcing tax rules, or organized crime, will pursue and consolidate.Footnote ⁷⁷ The spiraling costs associated with drug prohibition —corruption and external social impacts, both domestic and global—illustrate how dangerous a prosecutorial approach against economic forces can be.Footnote ⁷⁸ In attempting to prevent mutually agreeable transactions for distributive ends, confiscatory tax reforms encourage the state to retreat from regulating and facilitating a large range of voluntary exchanges, thus expanding the likely reach of the shadow economy that can itself become a site for violent conflict. Attempts to use the tax system to generate egalitarian or limitarian patterns of wealth undermine the unique strength of modern states: their capacity to ensure ongoing cooperation among relative strangers.