On Everyday Libertarianism

I. When you look at your pay slip (in New Zealand as indeed anywhere else), you see that it details (1) your total gross income and (2) your total net income, the latter being the quantity received after “deductions” subtracted from the former. One of these deductions is (assuming an income tax) your tax contribution. Despite only ever receiving our net income as discretionary wealth, we often talk and act in terms of gross income. Jobs are advertised according to an hourly rate or salary based on the gross figure, and when we talk about what wages or salary we are paid, we often talk about this figure as well.

It is therefore easy to look around us, at the information we are provided when we get paid, or when we are looking for work, or when we talk about what we are paid, and think that (1) we are in some sense entitled to our gross income, but that (2) the government goes on to take some of that money in taxes, so that we are only left with a mere part of what we are entitled to. Thinking about our legal entitlement to income in gross terms becomes second nature to us. But this can quickly shift from the thought that we are legally entitled to our gross income (if we fulfil our contractual obligations), to the thought that we are morally entitled to it, that is, to the thought that we deserve our gross income, due to the work we’ve done. After all, that is the figure we are told we are paid, and thus the figure we worked for.

In their book, The Myth of Ownership, Liam Murphy and Thomas Nagel call this picture of things “everyday libertarianism” and argue that it has considerable sway over the public imagination, with unfortunate downstream effects for how we view questions of justice in tax policy and institutional design. (This is probably much more true in the United States, where the authors are writing from, than in New Zealand.) Why it might be unfortunate in a moment; for now, what does such a picture amount to, and what sway is it supposed to have over our imagination? The basic idea central to our everyday libertarianism, Murphy and Nagel claim, is that the pretax distribution of wealth provides a moral baseline from which taxation begins. In other words, it is the presumption that, legally and morally, we are each entitled to our gross income, and that any changes to the distribution which would result from giving everyone their gross income needs to be supported by a competing moral consideration if it is to be justified.

Note that we need not be entitled to our income in an absolute sense for everyday libertarianism to be operative in thought. Few but the most extreme libertarians would accept that the pretax distribution of wealth is ultimately the correct one. Nevertheless, it is enough that the pretax distribution of wealth is taken as a meaningful starting point for assessing the merits of a given approach to tax. For example, consider the following line of reasoning: progressive taxation is justified on the basis that taking more money from those with greater wealth to redistribute it directly to those with less wealth, or to provide public goods for all to enjoy, or both, are justified because there are diminishing marginal returns on the value of wealth as you become richer and increasing marginal returns on the value of wealth as you become poorer. I know many people that would endorse an argument like this, and there is obviously merit in it.

But, as can be seen from the statement that taxation is “taking” money from people, it is still conceptually reliant on the idea that marginal returns on the value of wealth to different individuals is something to be balanced against their presumptive right to their pretax income. In other words, by making this argument, we are judging that, in this particular case, the realisation of value through the redistribution of wealth outweighs the individual’s right to their gross income.

Murphy and Nagel argue that the last part of this view, that we are, in any sense, entitled to our gross income, is conceptually incoherent. This is because it assumes “That so long as government does not pursue redistributive expenditure policies, the pretax distribution of resources can be regarded as the distribution produced by a free market.” But this is clearly false, for “There is no market without government and no government without taxes; and what type of market there is depends on laws and policy decisions that government must make. In the absence of a legal system supported by taxes, there couldn’t be money, banks, corporations, stock exchanges, patents, or a modern market economy—none of the institutions that make possible the existence of almost all contemporary forms of income and wealth.”

In other words, if the actual government as it actually exists did not (or stopped) pursuing redistributive policies (e.g. through taxation or other means), then it could not exist in the way that it does, and all the things that the government does to create the specific, existing situation in which we are assigned our income (gross and net), such as the creation and “enforcement of criminal, contract, corporate, property, and tort law”, would be gone. Things, including our gross and net income, would be different. But if this is the case, then in any situation where a government relies on an income tax to fund its operation there is no such thing as a pretax distribution of wealth, because if there was no income tax then where would be no gross income, since our gross income is reliant on the existence and character of the particular system of government within which it is calculated. “It is therefore logically impossible that people should have any kind of entitlement to all their pretax income” because the entitlements are only possible if the system which makes possible those entitlements is funded by taxes in some way or other. We imagine that the income comes first, and then the tax comes afterwards, but it is the system that tax supports that makes the income we receive possible.

II. One might object to this in two different ways. First, it could be objected (as an anarcho-capitalist certainly might), that there can be markets without government, and it is the distribution that would be created by a world with markets but not government that we are evaluating taxation against. Two things can be said in response to this. First, suppose we concede that such a market was possible. Even if it were, it would not justify the common ways that taxes are thought and spoken about by most people, the sorts of ways I gestured at earlier.

When most people think and speak about the issue of taxation, they probably do not imagine that they are evaluating taxes against a market with no government whatsoever. It is more likely that they are simply imagining the world as it currently is, but where they directly receive their gross income, instead of their net income. However, if you went through an exercise with them where you tried to imagine the consequences of taking away the system that makes possible the existing state of affairs that determines what income they receive, you would end up with a very different world to that which we have now. And what (I believe) this exercise would reveal is that the distribution of wealth in such a world would be so different from our own that any judgments about the presumptive justice of the resultant distribution of wealth would not necessarily carry across from our initial (and ultimately incoherent) judgments about the presumptive justice of the distribution of income according to gross income.

Indeed, my guess is that most people would be much more squeamish about endorsing an anarcho-capitalist redistribution of wealth as the moral baseline for evaluating all tax policy. This of course depends on what distribution you would expect from such an arrangement, but all but the most radical libertarian and anarchist thinkers are relatively pessimistic on this point. They do not think the resultant distribution sans government is likely to be just. So, for most, the presumptive justice of this kind of pretax distribution of wealth would not survive critical scrutiny, even if genuinely anarcho-capitalist markets were possible. In all other worlds, which is to say all of the worlds that do have a market supported by a government, unless the government is wholly supported by charity (which is impossibly unlikely for beings with our motivational set in societies of our size), the initial argument still stands.

Second it could be objected that, independently of our legal entitlements that (it may be admitted) are created only under a specific legal system that determines those entitlements, there is nonetheless moral entitlement to a specific distribution of wealth based on our actions. For example, it might be thought that each person deserves wealth based on their labour, the value they create, the historical record of consensual agreements they’ve made with other agents, a combination of these, or whatever else the case may be. It is from this baseline, the objection goes, that questions of justice and taxation must be evaluated. Once we determine which is the right criterion for determining the moral entitlement to wealth, then any departures from this through taxation can simply be evaluated against that. 

The issue with this reply, however, is that it is largely irrelevant to the question at hand, namely, the question of whether the idea of a pretax distribution of wealth is a coherent baseline for evaluating tax policy. For even if we granted that people deserved a specific distribution of wealth based on how hard they work (or some other such criteria), crucially, such a view is agnostic on the best means for securing the desired state of affairs specified by the theory.

To see why this is a problem in the current context, suppose for simplicity that our objector believes that, ideally, wealth should be distributed to individuals proportional to how hard they work. (This is not to say that anyone would ever really accept this view and all of its implications.) This by itself only gives us a criterion for the just society, but not a procedure for bringing it or its closest possible approximation about. About this they must either think it is most likely that having a government would bring about this state of affairs, or that it is most likely having no government would bring it about. If they think the latter, they must be a sort of anarcho-capitalist to whom the moral baseline is a world without government. But as before, the plausibility of this approach to any given person will depend entirely on how plausible it is that having no government will bring about their desired distribution. For our objector, and for most of the rest of us, this is simply out of the question. Thus, for most, this is an unacceptable moral baseline from which to evaluate taxes.

But on the other hand, if the objector thinks that having a government is most likely to bring about the state of affairs that best approximates their ideal than not having one, then for the exact same reason as before, the idea that there is a pretax distribution of wealth is a fiction. By the objector’s own lights, the best way of approximating the just distribution involves the government, which necessarily involves some kind of taxation to fund it. Thus, the idea that we can coherently evaluate this taxation against our income before it is applied puts the cart before the horse. It presupposes that a government without taxation is a real possibility that could achieve their desired outcome, but this is precisely what we are assuming they have rejected. The argument still holds. So much for objections.

III. “This is all well and good,” one might say, “there is no such thing as the presumptive justness of pretax income. But so what? In what way should or does this materially change our understanding of or approach to taxation and justice?”

We should first reply that the conclusion is more severe than this: it is not just the presumptive justness of pretax income that is in question, but the very intelligibility of what is ordinarily thought of (by everyone other anarcho-capitalists) as pretax income itself. There is no such thing as a pretax income from which taxes are then deducted, there are only different distributions of wealth determined by different systems of governance within which specific transfers of wealth are made. Within any given system, your only legitimate entitlement is to your net income, not your gross income. (Note, and this is telling, that we only really think otherwise when it comes to income taxes, but not, for example, consumption taxes. No one I have ever witnessed has complained that the government is “taking” their money when they purchase groceries, or that they are presumptively entitled, morally or legally, to purchase them for their pretax price. Receiving a document with our name on it and a $ figure higher than what we receive is one hell of a drug.)

The upshot of this is that, as I suggested at the start, one of the persistent ways we unconsciously think about justice in taxation is incoherent, and we should banish it from our thought. As a start, this means we need to put a stop to any claims (and quash our feelings) that in any kind of taxation, the government (at any level) takes money from you. You are entitled only to the wealth you actually receive after tax; there is no hypothetical baseline from which they are taking that money from you. More importantly, it means that any argument which begins from the premise that people are in the first place entitled (even defeasibly) to some distribution of wealth “prior to” taxation rests of a false premise, as there is no such distribution (at least on the minimal assumption that the distribution resultant from an anarcho-capitalist society would not realise what people imagine to be the pretax wealth distribution). “We cannot start by taking as given, and neither in need of justification nor subject to critical evaluation, some initial allocation of possessions—what people originally own, what is theirs, prior to government interference.” This is Murphy and Nagel’s titular myth.

Of course, “This doesn’t mean that taxes are beyond evaluation—only that…we cannot evaluate the legitimacy of taxes by reference to pretax income. Instead, we have to evaluate the legitimacy of after-tax income by reference to the legitimacy of the political and economic system that generates it, including the taxes which are an essential part of that system.” “Taxes must be evaluated as part of the overall system of property rights that they help to create. Justice or injustice in taxation can only mean justice or injustice in the system of property rights and entitlements that result from a particular tax regime.” You could of course still think that the government should only collect taxes to the minimum possible extent required to make a market possible. However, once we accept Murphy and Nagel's argument, the undue credence such a view is lent by our everyday libertarianism—our presumption that there is a prima facie desirable state of affairs that such an arrangement would approximate—falls away, and we see that it is merely one arrangement among many, and that these can only be evaluated against each other as a whole.

IV. The Myth of Ownership represents a careful and, in my view, decisive (if minor) intervention into many of the ways of thinking to which we (the public) default to when considering taxation and justice. It seems to me that they are largely correct both overall, and in much of the detail. I am impressed by their careful dissection of the low-quality discourse around taxation and am in complete agreement with their constant reminders that questions of justice must be considered against the entire system of governance that makes any given distribution of wealth possible, rather than one part considered in isolation. But I am especially onboard with their injunction not to consider these questions against the fictional concept of a pretax distribution of wealth, and even more so the presumptive justness of such a distribution. Despite this, I have little hope that this deceptively minor and apparently inconsequential intervention will ever come to permeate public consciousness. I am undecided on how important I ultimately think this is, but it would no doubt mark an improvement over the existing state of affairs.