Herman Cain advertises his tax proposal as being revenue neutral—it would raise as much tax revenue, in a static sense, as does the current tax program that his 9-9-9 plan would replace. Arthur Laffer, writing in The Wall Street Journal, agrees with this. “Mr. Cain’s 9-9-9 plan was designed to be what economists call ‘static revenue neutral,’ which means that if people didn’t change what they do under his plan, total tax revenues would be the same as they are under our current tax code,” Laffer writes. Other attempts to change the tax code have been advertised as good at least in part because the changes would have been “revenue neutral:” the amount of revenue collected by the government after the change would have been the same as the amount collected before the change.
But this begs a number of important questions. Why must tax code changes—or even wholesale replacement of our Federal tax code—be revenue neutral? What goal is supported by this neutrality? One goal is continued government spending and borrowing at current levels. Is this a legitimate goal?
These questions hinge on two other sets of questions that must be answered before these can be usefully satisfied. The first of those sets of questions is this: “Whose money is it: whose money is being taxed, and whose money is the collected tax?”
After those questions have been answered, a second set can be addressed: “What is the purpose of government? Given a government, what is the purpose of its spending?”
With the answers to these, the answer to the question of the utility, if not the necessity, of tax change neutrality becomes clear. Herewith, then, I begin a short series of posts on the question of taxation. In this post, I’ll explore that first set of questions, questions that center on whose money it is. In a subsequent post, I’ll look into that second set of questions, concerning the nature of government and government spending. In a third post, I’ll answer the question of tax revenue neutrality.
Whose money is it that’s being taxed? John Locke, Jean-Jacques Rousseau, et al., asserted that all men, despite beginning in a state of lawless nature, had inherent in their existence certain properties, beginning with a property in their minds and bodies, meaning these were their own to control and no one else’s. From this property, men also had a property in whatever in their environment they might manipulate for their own good or that of their fellows, as well as the results of that manipulation—they owned, for instance, the wheat they grew and the land on which they grew it, or the metals they mined and the land from which they mined it, or the shelters they built and the land on which they built them, or the ideas they had for better ways of doing these things. No one else had any right to these things. From this, these men owned whatever they might obtain from an exchange of their property for that of another. A man who exchanged some of his wheat for some of another’s metal owned outright and exclusively that metal he obtained, and he gave up all claim to the wheat which he exchanged: that other man now had an exclusive property in that wheat.
And so it goes from a barter economy to a money economy. The goods we obtain in exchange for money become our exclusive property, the money we pay for those goods becomes the seller’s exclusive property, and vice versa. Our social compact’s principles statement acknowledges as much:
[All men] are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.
John Adams, as I’ve written elsewhere, explained “Happiness:”
All men are born free and independent, and have certain natural, essential, and unalienable rights, among which may be reckoned the right of enjoying and defending their lives and liberties; that of acquiring, possessing, and protecting property; in fine, that of seeking and obtaining their safety and happiness.
By the suite of our endowment and by our agreement in our American social compact, then, all property we gain from the sweat of our labor or the work of our mind is our exclusively owned private property. All property we gain by exchange of our property for that of another’s, including money, is our exclusively owned private property. Thus, the answer to our first question—whose money is being taxed—is straightforward: it’s our money. It is not the government’s money that it is collecting; it is our money that we allocate to government.
This brings us to the question on the other side of this…coin. Whose money is it after it’s been taxed and collected?
The answer to this is a resounding “it depends.” It depends critically on the nature of a government and of the social compact that created that government—indeed, on whether such a compact exists at all. There are three fundamental conditions here. One condition consists of a polity in which there is no social compact: government exists because the men who populate it rose to the pinnacle of power by wile or by superior strength. They govern because they can, not because the governed consent in any meaningful way to the governance. In such a polity, the money, once collected as tax, is government property, if only because the government is strong enough to enforce its claim with blood.
In a second fundamental condition, a social compact exists, and its terms essentially cede all power and control to the government created by that compact. It’s important to understand at this point that a social compact, even in a polity such as this one, is an agreement among the members of the compact; it is in no way an agreement between the compact’s members and their government. This is straightforward: men first exist without a government, thus they can only agree among themselves; there is no government at this early stage with which to agree. Any cessation of power to the government they create can only be by agreement of the collection of men among themselves. Having ceded power to their government, though, the question of ownership of money collected as taxes becomes clear: that money belongs to the government. When a polity cedes all power over itself to its government, it necessarily cedes (or tries to cede—see Locke and a Creator’s endowment—but functionally, trying to cede and ceding have the same result over the lifetime of the men involved) power over—ownership of—private property, including tax collections, to government. Money, having been collected as taxes, then, is government’s money in this case. (Of course, this condition implies that ownership of the money before it’s taxed also falls to government, but we’re considering here post-collected ownership.)
The third fundamental condition is our American social compact: we’ve assigned a short, explicit list of powers to a government which we have created through our compact, and that government, also by the design of our compact, is entirely subordinate to us and it serves at our pleasure. One of the things we explicitly have not ceded to our government is a thing that we explicitly retain for ourselves (that principles statement again, and additionally, our government’s blueprint, the Constitution): our exclusive ownership in our own properties. Among the places in our blueprint this is spelled out are Article I, Sections 8 and 9, and our Bill of Rights. Thus, our money, which is ours before we allocate it to government as taxes, remains ours and not government’s after it’s been collected as taxes. This is true through another pathway: by the terms of our blueprint, our government is permitted to spend money only on specific things; it cannot legally (not just may not, it can not, legally) spend that money for any purpose it pleases. I’ve been saying we allocate money to government, rather than we pay tax money to government, on purpose. We allocate money, in the form of taxes, for the specific purposes we’ve authorized the government and for no other. That we retain ownership of our money after a tax allocation is true through yet another path: our government exists as our common representative. Thus, things we allocate to our government, like our money, we are only allocating to ourselves.
Whose money is it after it’s been collected as taxes? It’s ours. We’ve only allowed our government to use it for a bit.