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Article Excerpt
THE MYTH OF OWNERSHIP: TAXES AND JUSTICE. By Liam Murphy and Thomas Nagel. New York: Oxford University Press. 2002. Pp. ix, 228. $25.
I. EXPOSING THE MYTH
What constitutes a fair distribution of the burdens of taxation among the members of a society? Even as politicians and academics vigorously debate the answer to that question, there is widespread agreement that all are asking the right question. In The Myth of Ownership, however, Liam Murphy (1) and Thomas Nagel (2) claim that everyone has been asking the wrong question. To ask about the fair distribution of tax burdens is to take the distribution of pretax incomes as "presumptively just," so that justice in taxation "is a question of what justifies departures from that baseline" (p. 15). But Murphy and Nagel claim that pretax income is a myth, and, as such, has no moral significance.
How can my pretax income be a myth, when I can read it on my W-2? Their argument goes as follows: Pretax income means income in the absence of taxes. But in the absence of taxes there would be no government, in the absence of government there would be anarchy, and in a state of anarchy no one would have any income. (3) Pretax income, then, must be zero--or, equivalently, there is no such thing as pretax income. If there is no such thing as pretax income, obviously people cannot be entitled to it. Instead, "[a]ll they can be entitled to is what they would be left with after taxes under a legitimate system, supported by legitimate taxation--and this shows that we cannot evaluate the legitimacy of taxes by reference to pretax income" (pp. 32-33). In brief, justice in taxation is a matter of the distribution of after-tax incomes, not a matter of the distribution of tax burdens. More briefly still: "Outcomes, not Burdens" (p. 98).
To Murphy and Nagel, their way of framing the question is obviously correct and the burden formulation is clearly wrong--so much so that they find it "puzzling how anyone could have been attracted to [the dominant way] of thinking about tax justice" (p. 34). Their explanation of the puzzle is that people are enthralled by "everyday libertarianism"--"an unexamined and generally nonexplicit assumption" (p. 36) that one earns pretax income without any help from the government, so that the government bears a heavy burden of justification in taxing any of it away. (4)
I am persuaded that Murphy and Nagel are right and that everyday libertarianism is wrong--not as a debatable question of policy, but as an inescapable matter of logic. (5) I share their frustration that "the robust and compelling fantasy" (p. 176) of pretax income has such deep roots that it probably cannot be dislodged by logical arguments. That their efforts to refocus the debate are doomed is suggested by the fact--not noted by Murphy and Nagel--that the prominent economist Carl Shoup made precisely the same point as Murphy and Nagel in his public finance treatise more than thirty years ago, to no discernible effect. (6) For that matter, the point is implicit in Justice Holmes's famous remark, "I like to pay taxes. With them I buy civilization." (7) Perhaps times have changed, or perhaps the point will prove more persuasive when expanded to book length; but more likely, everyday libertarianism is here to stay. Murphy and Nagel agree with that gloomy prediction, (8) and their resulting frustration is evident in the way they repeat their basic point--by their own admission, "ad nauseam" (p. 164)--throughout the book. Cassandra-like, they know they are right, but that few will believe them.
A striking example of the influence of everyday libertarianism (not mentioned by Murphy and Nagel) is Congress's disproportionate concern about earned income tax credit ("EITC") cheating relative to concern about other forms of income tax cheating. In 1997, Congress directed the Treasury to spend up to $716 million over the next five fiscal years (1998 through 2002) on EITC "enforcement initiatives." (9) As a result, returns claiming the EITC accounted for 44 percent of all audits in 2000, and in 1999 taxpayers with incomes below $25,000 were more likely to be audited than taxpayers with incomes above $100,000. (10) Cheating on the EITC probably represents less than 10 percent of the total income tax gap (i.e., the amount of tax owed but not collected), (11) so it is virtually inconceivable that such a heavy emphasis on the EITC gives the government the most bang for its enforcement dollar. What, then, explains the EITC crackdown? The EITC is refundable, which means it results in a net transfer from the government to the person claiming the credit if the EITC exceeds the person's precredit income tax liability (as it usually does). Thus, cheating on the EITC typically results in an unwarranted payment from the government to the cheater. Other (more traditional?) forms of tax cheating result in a taxpayer's failure to make a legally mandated payment to the government. Both results are contrary to law, of course, and one might suppose that one person's receiving a dollar too much EITC is no worse than another person's paying a dollar too little tax. Under the influence of everyday libertarianism, however, Congress seems to believe that a dollar too much EITC received is worse than a dollar too little tax paid. An underpayment of tax merely allows the taxpayer to keep more of his pretax income, and the government's right to take away any of his pretax income was dubious to begin with. By contrast, the everyday libertarian has no sympathy for the EITC cheater's attempt to obtain an illegal transfer payment.
To a reader persuaded by the book's critique of everyday libertarianism, two questions present themselves. How would the tax system change if Murphy and Nagel succeeded in replacing the current debate about...
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