Tuesday, February 17, 2009

A Question of Taxation

The following post is based upon an email exchange I recently had with a friend of mine (and since he's one of the few people who check out my posts, I'm sure he'll recognize it). He asked me whether or not I thought I was taxed too much. The more I thought about the question from a historical perspective, I was intrigued by it. Anyway, here's the response....

I wanted to get back to you on the question you posed earlier, whether or not I think I pay too much in taxes. In short, my answer is no -- I do not pay too much in taxes, considering what taxes are necessary to maintain a somewhat stable society that exhibits highly advanced job specialization and interdependence.

Let me explain. From the time that people abandoned small-scale and egalitarian hunter-gatherer ways of life for larger, more centralized and stratified agricultural societies, there has always been an increasing need for government intervention to maintain political order.

One of the biggest problems faced by any society is social stratification. Those toward the lower end of the scale want more of what those in charge have. Those in charge will want to retain their advantages however they can. The problem is in how do you reconcile these unequal classes in an orderly fashion?

The most common means through which this was accomplished in ancient history was the rise of a centralized monarch who held the very real power of meting out physical violence at their command. However, force alone was never enough. The monarchy, in order to become a dynasty rather than rise and fall with one generation, had to ally itself with some sort of religious or quasi-religious justification for their dominance. In China, this was the "Mandate of Heaven" claimed by emperors. In the Middle East, it was exemplified by the Islamic Caliphate that unified disparate peoples under one rule for centuries. The medieval Christian Church legitimized rulers who followed its religious demands. The attitude of medieval rulers toward excommunication demonstrates the seriousness with which people took the dictates of the Church.

There is another important commonality between these three examples. They helped unify their diverse subjects under a common script, often infused with a divine inspiration. China's uniform ideographic script, initially imposed by Qin Shi Huangdi around 221 B.C., was a political tool that allowed diverse spoken tongues to continue around a single script (a situation that continues to this day). For Islam, the script was Arabic -- the language in which the archangel Gabriel delivered the Quran to Mohammed in the early 600s. For Christendom, the language was Latin -- the only written language learned through much of the European Middle Ages, because it was the language of the Church's sacred scriptures. Medieval Europeans viewed Latin literally as a means of talking to God, infusing the bilingual Church intelligentsia with significant social power.

What does all of this have to do with taxation? Well, for all of these entities, the larger and more centralized they became, the larger and more bureaucratic their governing apparatus became, primarily out of necessity. This trend hits a spike at about the same time to which we can trace the origins of capitalism. This is due to several factors.

The first is the spread of news as a commodity among the merchant class. The first literal "news letters" were letters circulated among Renaissance Italian merchants that detailed political and economic developments in distant ports. After all, a good merchant could not make good business decisions without knowledge of those events.

The philosophy of humanism developing from the re-discovery of Greek philosophy was also more readily accepted by a merchant class whose orientation was toward rationalism and away from tradition founded upon religious belief. Merchants became successful by paying attention to worldly events, not by attending extra prayer and confession. This meant that the gathering of news itself and selling "news letters" gradually became a market in itself -- news developed as, and continues to be, largely a commodity.

However, there was one advance from the period surrounding the beginnings of capitalism that was more incendiary than the others -- movable type printing. The explosion of ideas enabled by Gutenberg's printing press expanded literacy enabled the Protestant Reformation to succeed, brought down the dominance of the Catholic Church, precipitated the Scientific Revolution, furthered the Enlightenment, and encouraged the development of societies ruled by dominant bourgeois (Western Europe, North America, Japan) or intellectual classes (Soviet Union, Communist China) that overthrew (United States, France, Russia) or controlled (Britain, Germany) the old tradition of dynastic rule.

It was movable type priinting that allowed the creation of an imagined community of bourgeois individuals. Print enabled a writer and reader to have a conversation of sorts, thus creating an imagined social bond between two people who may never meet face to face, and who may even be living during different time periods. I can appreciate this point of view in light of how the death of Kurt Vonnegut, a writer whom I never met but all of whose books I read, made me feel as if I had lost a personal friend. It was this "imagined community" among bourgeois merchants that allowed the formation of the joint stock venture, perhaps the most important economic development in the history of capitalism.

The Virginia Company of England was a joint-stock company formed specifically for the colonization of the Americas. It was the only way that they could raise the capital required for such a venture, and it also insulated shareholders against risk. However, investors would not be willing to invest without certain guarantees -- namely, government guarantees for political and military support. These guarantees require a standing army and navy. Standing armies and navies required a constant flow of funds, which meant higher (and more regular) taxes. Regular taxation required an expansion of the government bureaucracy, especially around the treasury.

Business interests get increasing governmental guarantees for open markets through diplomacy and military force, which allows them to expand their business, which means that the government collects more revenue in taxes. It's a situation that benefits both those in government and business. It is also a system organized around the idea of constant growth. It is this expectation of growth that permits banking to take on increased levels of debt -- something done only when future growth can be expected to pay it back. However, it can also lead to greater social unrest due to widening inequality between those with access through contacts and/or capital, and those left on the outside looking in.

In my estimation, this was the means for the Progressive and New Deal periods in American history -- a need to reduce the level of social unrest due to widening inequality. The solution wasn't to eliminate Western capitalism as was done in Russia (for reasons specific to Russian demographics and history, that I won't go into here), it was to spread its benefits around a bit. Since business had proven unwilling to do so (resulting in violent confrontations and increasing radicalism on the part of workers), the government had to intervene. Thus, we see that government and business both grew in concert with each other AND in competition with each other.

Higher levels of taxation have arisen because not only has government expanded in order to guarantee markets for business, it has also has expanded to provide a counter to unbridled capitalism and the inequality and social unrest it has engendered. In summary, our modern levels of taxation continue to be for three purposes: to provide business interests with access to more markets thus enabling constant growth, to expand the scope of government and empower those individuals within its highest ranks, and to maintain some level of welfare state to keep a lid on social disorder as a result of capitalism's inequalities and extreme levels of specialization and interdependence. We can debate the merits of such a system in and of itself, but that doesn't change the fact that this is the system we have right now. In my own estimation, if we were to remove any of the three purposes I outlined above, we would risk social chaos -- but the end of our expectation of growth may make all of those impossible within a certain frame of time anyway.

Considering that I think that significant social unrest may be a result of reducing my tax burden because of sharpened inequality, I do not think that my tax burden is too high. Sometimes I wonder if it is enough, especially in regards to reorienting ourselves away from what John Kenneth Galbraith described as afflicting 1950s Amerca: "private opulence and public squalor."