Two Types Of...

Editor's Note: Originally published at The Roots of Liberty February 2016. A recent conversation about the morality of taxation prompted this trip down memory lane.

There’s an old joke that goes “There are two types of people in the world – those who divide people into two types and those who don’t.” It mocks the common practice of bifurcating people, things, ideas and the like into binary “either-or” categories, a practice that usually oversimplifies matters, eliminates information and introduces inaccuracy.

Sometimes, though, such bifurcations do serve to illustrate sharp distinctions and to provide clarity and understanding. Taxation is such a case. We can bifurcate taxation into two broad categories (as I alluded just a couple weeks ago in Socialism’s Mad Men), and therein illustrate a fundamental disconnect between statist thought and libertarian thought.

Consider the broad spectrum of things our tax dollars are used for. Some things the government does, like defense, police, courts, firefighting, roads and bridges, customs and border control, etc. are services provided for the functioning of society, the protection of citizens and the defense of rights, both enumerated and implicit. Other things the government does, like Social Security, Medicare, Medicaid, food stamps, farm subsidies, oil subsidies, and foreign aid are wealth transfers from some people to others. Tax breaks and exemptions fall into the latter category, as do things like research funding, NASA, and education spending. Some categories of spending tend to straddle this bifurcation, and there’s room for debate on where some forms of spending fall. Some will argue that Social Security is a pension program, wherein one’s contributions are collected on the presumption of a future benefit. It’s certainly how the program is marketed, but analysis of its actual functioning contradicts this argument.

The wealth transfer forms of taxation are justified by those who advocate for them as betterment of society. In other words, public money directed at education, on food stamps, on housing support, and so forth benefits not only those who receive the benefit, but everyone in society. There are myriad problems with this argument, including opportunity costs, crowding out of alternatives, inefficiency and waste due lack of market discipline, negative incentives and so forth. More fundamentally, there is an underlying presumption regarding the ownership of wealth upon which this form of taxation rests.

Fee-for-service taxation is pretty simple. Something is being done for you, or you are using something that costs money, you pay for it. The form that such taxation takes is a matter for debate, but the principle is constant. Maintenance of the interstate highway system has long been funded by taxes on gasoline, but the advent of high-mileage and electric cars has elicited the criticism that such a funding scheme doesn’t distribute the costs equitably, and discussions of some form of mileage based funding system have started to happen. Nevertheless, the underlying principle is the same – if you use the roads, you contribute, by some mechanism, to their maintenance. Even if you don’t drive, the bus or taxi you pay to take pays to use the roads. We can extend fee-for-service to defense, law enforcement and the like. We can debate the form in which we pay for such services, but at the root of it, we are exchanging wealth for value. We pay to have police around to protect us and our property, we pay to have a system of national defense to protect us and our property, we pay to have a court system that supports law enforcement, criminal and civil, and so forth. Ultimately, we are paying some of what we earned and own in exchange for services we utilize.

Wealth transfers are a different matter. If money is taken from us and given to someone else, we don’t receive a service in exchange for some of what we earned. The justification I noted above is that we all benefit from that transfer, but this is not fee for service. It is taking without compensation, and it is at the root of the schism between those of a socialist bent and those of an individualist bent. The former consider wealth transfers legitimate, the latter do not. The former considers, by extension, the wealth that one earns as belonging to society, on the premise that, were it not for society, that wealth would not be earned. This line of thinking subordinates the individual to the collective. It also ignores the fact that history shows plenty of individuals who’ve created wealth before societies formed around them. The latter considers the wealth that one creates the property of its creator. Thus, government services are things that are paid for, and once paid for, the transaction is complete. If you pay your gas taxes, you get to use the road for as far as you can travel on that tank of gas, and should you never leave your property ever again after that, you’ve no further obligation to the roads. Of course, things like defense are on-going, but the key to this idea is that there is no eternal obligation to society merely because one has transacted within it at some point in time, and therefore there is no obligation to consider wealth transfers legitimate merely because society exists.

Why should we worry about this difference in forms of taxation? Why challenge the legitimacy of some forms of taxation while tolerating others? Because those of a socialist bent would conflate the two forms in order to undermine challenges against wealth transfers. There are memes bouncing around the internet nowadays that purport to tell us that police and defense and firefighters and roads are all benefits of socialism, and therefore we have no grounds to object to other forms of socialism like wealth transfers. Theirs is a tendentious argument, but also an insidious one which needs to be countered with a philosophically grounded rebuttal. Opposing the current efforts (prompted, in no small part, by Bernie Sanders’ embrace of the nonsensical term democratic socialism) to stretch the definition of socialism beyond all recognition works better when we can show grounds upon which to logically and consistently refute the false conflation of fee-for-service taxation and wealth-transfer taxation.

In the case of taxation, there really are two types.