Taxation is one of those practices in modern society that become rather questionable and ambiguous, the more you think about them. At its core, taxation is the involuntary enforced appropriation of private property (in most cases money) by a government organization in order to fund government functions, components and individuals according to social redistribution policies.

Taxation has been steadily increasing for most of the years since World War I in the western countries and there are no concrete indications that it will decrease in the near future. It's certainly playing a major part in our lives - income tax, corporate tax, capital gains tax, VAT, excise, property tax, inheritance tax, gift tax, tariffs... It's safe to say that virtually all economic exchanges outside of the black market, whether private or public, are taxed. Is this needed?

It is a fact that taxation, being a coercive and involuntary financial charge on voluntary economic exchanges, reduces the incentives for production, investment, and saving. It also indirectly raises the cost of everything, which in turn reduces the standard of living, ununiformly for all taxpayers. Put plainly, its involuntary nature makes it oppressive and thus a society that tolerates taxation is a society that tolerates oppression. While it may be true that taxation may help those in need, this does not in any way change its oppressive nature in the first place.

It is clear that with taxation the taxed individuals are relatively worse-off and are impoverished compared to a situation where taxation does not exist. Why is it that the vast majority of people take taxation as given or have come to accept it as a standard and legitimate aspect of society?

In this post I would like to summarize the main sociological reasons behind the existence of taxation. This has been studied thoroughly and expressed very well by professor Hans-Hermann Hoppe in his book The Economics and Ethics of Private Property. His arguments seem very logical and for this reason I will state (and quote from) them here.

The reason behind the steadily increasing taxation throughout the years is a slow but dramatic change in the idea of justice that has taken place in public opinion.

Since the only institution which has the power of taxation is the state and since any entity – including the state – prefers higher income to lower income, the answer to the question “Why has taxation been increasing throughout the years?” is the same as the answer to the question “What controls and constrains the size and growth of the government?”.

Productive enterprises – those which acquire their income either by homesteading (being the first to engage in a certain novel activity), production, or voluntary contracting – have their sizes constrained by consumer demand and producer competition. The demand for the goods and services produced by such firms is only finite and thus acts as a limit towards their sizes. Even if a firm does not face competitors, it cannot increase its size (and revenues) more than that supported by the voluntary transactions in which consumers engage in when they buy its products. Likewise, competition forces each firm operating in the market to strive to provide the highest quantity of products, of the highest quality and produced at the most efficient way simply to stay solvent. Thus, consumer demand and producer competition are what determines the size of productive enterprises.

When it comes to states however, obviously it is not consumer demand and competition that limit the size and power of states. States can increase in size irrespectively of demand (as there is no demand from the side of producers and contractors for the expropriation of their incomes) and irrespectively of competition (as they can operate on above-minimum costs by taxing and regulating their competitors). What constrains the size of states is public opinion and public support. While the state can certainly make a small group of people obey it by force, regulating and appropriating from a large group of people requires the general consent and approval of the majority. Therefore, public opinion is what makes the states’ actions legitimate. The required acceptance of the states’ action can unfortunately range from active enthusiasm to passive resignation.

Another important aspect that constrains the size of the state is competition between governments operating in different territories. This has a limiting effect on the state size because any exploitation considered too big or too much can result in people leaving one state and immigrating in another. States want to avoid this as obviously any citizen who has immigrated is one less citizen to be exploited. Importantly, open borders and freedom of movement increase this competition between governments.

Public opinion also plays an important role in interstate aggression. States often go to war in order to secure new territories (along with the to-be tax victims living there) and to win wars and defend itself against foreign aggressors the state needs a productive population that can produce all military equipment and can finance the war. If the war is not justified through public support, the probability of winning will be diminished.

Lastly, public opinion is pivotal also in ensuring the cohesion among state employees themselves. There is no institution with higher authority that can impose the internal order of the state apart from the state itself. Thus, public support of the government among government officials, employees, judges and public-dependents is a necessary prerequisite for the general support of the state.

Importantly, the rise and increasing role of states in our daily lives has been relatively recent on a big historical scale. It was not until the mid-nineteenth century in Western Europe and after World War I everywhere else that a consistent positive support and approval of the state actions took place. What has legitimized the expanding actions of the states is the emergence and adoption of new statist ideologies as well as different factors for the periodic solidifying and reinvigoration of their support. While there are many such factors, the four most important are:

  • The organizational transition of the state from a military or police state to a redistributive one. A military state is characterized by a small ruling class (much like a monarchy or aristocracy) that uses the expropriated resources exclusively for its own personal betterment. A redistributive state on the other hand is a state that can afford to buy its support from citizens outside of the state apparatus itself. This happens through a system of transfer payments to privileged individuals and groups as well as the production of “civilian” goods and services (like education, roads, defense, law, etc.) which makes exploitation blurry and unobvious because some people are now benefactors of such services. Through redistribution in the form of welfare reforms and business cartelization and regulations egalitarian socialism as well as conservatism can be turned implicitly into statist ideologies.

  • The change in the states’ constitutions from having a restricted access to the government to an unrestricted access to it. This change erodes the feeling of injustice that people feel when they are expropriated and makes it seem less bad because of the fact that everyone can now enter the government apparatus and live off of the unobvious exploitation of others. People are less likely to view certain actions as bad if they are given the opportunity to eventually reap the rewards of these actions. By democratizing its constitution, the state corrupts substantial parts of public opinion into gradually losing sight of the fact that an act of exploitation is nonetheless taking place.

  • Expansionist wars and aggression on foreign states are facilitated through the identification of the population with a given state. Redistribution, regulation and democratization, combined with powerful rhetoric and the worrying concern that the country is in an emergency, fuel nationalism which in turn gives greater approval and justification of the state’s actions. Each won war or each successfully-avoided crisis is said to be due to the nationalistic vigilance and to the increased role of the government in almost all aspects of the private lives of the populace.

  • The exploitation of knowledge and tradition accumulated from the past. The world dominance of the countries from Western Europe and North America can be traced to their superior intellectual tradition – that of rationalism with its central ideas of individual freedom and private property – which has been responsible for the vast amount of wealth necessary to fuel expansionist and imperialist wars all across the globe. Countries with no real traditions in liberalism and private property tend to imitate and mimic the western statist ideologies (socialism, conservatism, democratism, nationalism) which prohibits them from attaining any prominent role in international politics. Importantly, when it comes to conflicts between liberal countries, all else being equal, those countries which are more liberal tend to outperform and thus win the war against those which are less liberal. While both regulation and taxation are harmful to production, it is only taxation that provides a monetary influx to the state. Thus, countries following a policy of taxation without regulation will outperform those following a policy of taxation and regulation.

These are the main reasons behind the steady rise of the state in the past hundred or so years. Today there is virtually no area of life and no economic exchange that is not monitored to some extent by the state. Certainly, life is, in some aspects, much better today than it was 100 years ago, but has it ever occurred to you that this is not because of the state, but despite it?