To quote Benjamin Franklin, “Nothing is certain in life except death and taxes”. While Franklin was referencing the newly ratified US Constitution, the debate around taxation in our societies has been prominent for all of civilized human history. Under the lens of Social Contract Theory, taxation is a ‘right and just’ part of life to make a society work for everyone, by providing the means for societies to build and maintain social and infrastructure benefits critical to societal well-being.
In simple terms, Social Contract Theory could be considered as a mutually understood set of social agreements, and importantly, moral rules and obligations, that the populous (and government) follows to maintain a sense of social harmony that benefits all. We agree to follow moral rules because we benefit from living in a place where the rules of a civilized society are universally understood and accepted for the betterment of all. However, importantly, we also follow the rules - we keep our end of the bargain - because the rules will be enforced, and it is rational for us to avoid punishment. In simple terms, “Why don’t you rob a bank or kidnap your boss?” Because you might get caught! (Rachels & Rachels, 2022)
Taxes have always been a hot-button issue throughout all of history, even being referenced in the bible in the books of Matthew and Luke. It is historically important to note that the bible does not oppose the payment of taxes saying, "Well, then, pay to the Emperor what belongs to the Emperor, and pay to God what belongs to God". Having a direct quote and section from the bible telling people to pay taxes has been a valuable tool in Christian societies, as people feel more comfortable and willing to pay their taxes if it is in line with their religious beliefs.
Personal taxation is a legal obligation to anyone who earns money through any means within an economy. In most advanced economies, taxation also extends to consumption taxes (GST / VAT), and payment or earnings in kind (FBT, capital gains, interest etc). This is also often managed via a progressive taxation system, increasing the amount of tax payable across various income thresholds to provide social relief for citizens who earn lower incomes (for example, no personal income tax is payable in NZ for those that earn under $2,340 per year). However, many people feel that paying taxes (or at least higher levels of taxation) interferes directly with their own happiness, or very commonly, that they don't agree with their government's choices in how tax revenue is spent.
Increasingly targeted progressive tax regimes against very high earners, commonly called a ‘wealth tax’, is one of the most hotly debated issues in the current era. This has largely been caused by the rapid and significant increase in income disparity across many societies, the increasing costs associated with maintaining a cohesive, equitable, and functioning social state, and the widespread abuse’ of the complex taxations laws to enable high-net-worth individuals, companies, and corporations to pay tax at much lower rates than what the overall social contract had intended.
President Biden has recently indicated the potential for a tax targeting the top 1% of earners in the United States, stating, “My proposal is for a billionaire minimum tax rate because no billionaire should pay a lower indicated tax rate than a school teacher or a firefighter.”
Advocates for a wealth tax say that it will benefit all of society by providing greater government revenue from those that have the wealth to spare, which falls in line with the social contract theory framework. However, critics of a wealth tax state that it is unfair to directly penalize someone on their individual success, arguing that the top 1% provide jobs, economic growth, and ‘trickle down’ benefits to society as a whole and that taxing them more would cause their businesses to suffer, and in turn reduce overall economic output, working against the mutual benefit model in the social contract. This argument could be considered in the framework of the libertarian tax model, placing more emphasis on the individual, and individual choices in how taxes are raised and spent, typically through a greater societal orientation toward a user pays economy. However, this largely works against the social contract model in that social outcomes, opportunities, and shared infrastructure tend to sit with those with the economic means of contributing to them directly, resulting in high levels of societal inequality.
So knowing all we do around the benefits of living in a modern functioning society, why do we have to have a social contract to pay taxes? Surely with all the information we know about taxes people would pay them out of the goodness of their hearts!
Unfortunately, one of the cornerstones of the social contract theory is that without a social obligation, people just wouldn't do it. In the words of Jean-Jacques Rousseau,
“In the state of nature, it is foolish to look out for others and put one’s own interests in jeopardy; there, it is every man for himself. The social contract, however, creates a society in which we can afford to care about others; there, altruism becomes possible. By releasing us from “the continual fear of violent death,” the social contract frees us to take heed of others”.
Taxes will continue to be a divisive politically and socially charged aspect of our society. However, they are also one of the single most important cornerstones of the overall social contract that determines how a society operates, grows, and supports its citizens. The mutual societal benefit that comes from providing a direct and individual contribution to society, and in that society providing its citizen members with shared opportunities for support and security, has created many of the quality of life benefits we enjoy in modern society. However, the ongoing strength of this mutual agreement depends on all parties feeling they are fairly and equitably represented in the social contract[
;. This is of particular interest in the world of today, with a rising perception of acute inequality creating significant dissatisfaction and debate.
References
Rachels, James., and Stuart Rachels. The Elements of Moral Philosophy, McGraw-Hill US Higher Ed ISE, 2022. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=7017975.It was created from aut on 2023-08-18 23:35:06.
Entralgo, R. (2023) Biden is right: You shouldn’t pay a higher tax rate than billionaires, Inequality.org. Available at: https://inequality.org/great-divide/biden-billionaire-tax-state-of-the-union-sotu/ (Accessed: 20 August 2023).
Ghosh, U. (2023) What countries do not have an income tax? Global Citizen Solutions. Available at: https://www.globalcitizensolutions.com/countries-with-no-income-tax/ (Accessed: 20 August 2023).
Ferguson, N., & Schularick, M. (2023, March 21). Life’s certainties: death, taxes, and bailouts. WSJ. https://www.wsj.com/articles/lifes-certainties-death-taxes-and-bailouts-fed-fdic-silicon-valley-bank-insurance-btfp-run-ab46d1a8
Rachels, James., and Stuart Rachels. The Elements of Moral Philosophy, McGraw-Hill US Higher Ed ISE, 2022. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/aut/detail.action?docID=7017975.
It was created from aut on 2023-08-20 01:03:53.
Munro, A. (2015, July 28). State of nature | Definition, Hobbes, Locke, Rousseau, & Social Contract. Encyclopedia Britannica. https://www.britannica.com/topic/state-of-nature-political-theory
Work, T. O. (2023, February 23). Paying taxes (Matthew 17:24-27 and 22:15-22). Theology of Work. https://www.theologyofwork.org/new-testament/matthew/tales-of-two-kingdoms-matthew-11-17/paying-taxes-matthew-1724-27-and-2215-22/#:~:text=In%20Jesus'%20day%2C%20Jews%20paid,whether%20Jesus%20pays%20that%20tax.