What tax is justifiable?

One of the characteristics distinguishing libertarians from market anarchists is that libertarians accept the presence of the state as a mechanism to protect individual liberty from coercion and enforce private property rights and contracts, whereas anarchists reject the existence of the state all together. This naturally entails the existence of law enforcement, courts of justices, the military, and (for those who accept the existence of the nation state) border enforcement. Some libertarians with more consequentialist concerns (such as myself) may advocate the state's provision of services that serve either as preconditions to the maintenance of liberty, that enhance the functioning and bolster the consequences of a system of liberty, or both. Such services would/may include public transportation infrastructure, public education, and/or border enforcement.

A conundrum for libertarians arises, however. Many libertarians adhere to the idea that taxation is inherently coercion, as it compels agents to submit a certain proportion of assets acquired or value traded in a transaction or face consquences for failure to do so. The income tax, for instance, is considered theft: enforced at gunpoint, one must either submit property acquired or face the consequence of jail time and loss of liberty. A broad-based consumption tax, such as a sales tax, does not entail the same level of compulsion for consumers, as individuals may affect the level of tax paid by changing their consumption behaviors (and, in cases where a consumption tax only applies to new goods, by purchasing old goods). However, it still establishes the fundamental idea that a consumer (or a producer, who is usually responsible for collection and submission of consumption taxes, and in the case of a value-added tax, is the party directly responsible for payment) must transfer a proportion of their existing assets to a third party in order to undertake an activity that they already have a right to pursue without precondition established by others. Excise taxes also suffer from this fundamental problem; however, because, the amount of coercion relative to the broad-based consumption tax is much lower, as the tax applies to far few goods and there is much greater ability of agents to avoid the tax.

Thus, the problem exists: by what just means should a libertarian advocate funding the functions of government he or she accepts should exist?

Clearly, on initial inspection, the revenue source which would be most often considered justified in a libertarian framework would be voluntary contributions. If one is completely entitled to use or distribute one's property however they wish, then if they voluntarily contribute a portion of it to government for the purpose of financing services, then I really can't view any sort of libertarian opposition to the property holder's decision.

User fees would naturally follow as an acceptable form of revenue generation, and they are usually the first point made by libertarians when discussing just taxation. If the government provides a service, then those who use it can directly pay a fee for doing so. This is especially true if a service is tradable. A perfect example is postal service, for which consumers must pay a stamp fee to use. The principle may even be extended, for instance, to gasoline taxes: if drivers want to travel on public highways, then they can pay a fee (the gas tax) while driving on them for when for their availability and maintenance. Local property taxes may also be considered user fees, if the revenues are devoted toward the funding of law enforcement and courts of justice that are responsible for protecting private property rights. (However, the distortionary effect of property taxes can be significant. Perhaps this problem could be alleviated if the tax was in the form of a Georgian land value tax.)

The a similiar foundation for the justification of both voluntary contributions and user fees exists for the use of lotteries. The concept of a lottery entails that services (entertainment, potential prizes, etc.) are awarded by the government, and the fees paid to the provider (the government), after covering operating costs, finance other services (usually public education). If one values the entertainment from playing a lottery enough to voluntarily transfer a portion of his assets that would go to other purposes to gain it, then I could no more see libertarian opposition to state lotteries than I could to profit-earning entrepreneurs appropriating their earnings to other purposes than the production of their goods and services. It amazes me, for example, that in North Carolina, the GOP Party line on the recent institution of a state lottery was opposition. I'm sorry, but isn't the conservative position on fiscal policy supposed to be that the mandatory tax burden should be as low as possible and that people have the right to do with their money as they please? Granted, there was a lot of impropriety in the implementation of the lottery, but that is a separate issue. (Of course, the main reason why the NCGOP opposed the lottery was unrelated to finances and individual liberty. Scroll down to Article V, Section 3)

But if it is the case that voluntary contributions, user fees, and lotteries cannot fund all of the necessary functions of government and to an adequate level to protect individual liberty, property rights, and enforce contracts? What other forms of taxation are acceptable on libertarian grounds?

Certainly income (including wage/payroll taxes) and broad-based consumption taxes would be ruled out by many libertarians (including me), for philosophical reasons I stated above. But furthermore, these taxes penalize the very activities that generate growth: work, saving, investment, creativity, entrepreneurship, and consumption. Not only are these the most unjust forms of taxation, but they are also the most economically inefficient.

Excise taxes do suffer from the same problem that broad-based consumption taxes do, which is that effectively coerce agents to hand over a certain proportion of their property in order to carry out a particular transaction. Granted, this effect is not nearly to the degree of that created by broad-based consumption taxes, as the consumer has much more power to avoid the tax (via the availability of tax-free substitutes). On economic efficiency grounds, however, there can be serious distortions caused by excise taxes. This is effectively the same effect as that caused by subsidization of the production of private goods: an inefficient redistribution of resources toward production and consumption of certain goods and away from others. If, for instance, an excise tax on the sale of oil was instituted, this would eventually drive up market prices for oil. This could cause, for instance, substitution in consumer's energy consumpiton patterns toward corn ethanol-based fuel, which would lead to inefficient levels of corn production and higher corn prices. This would squeeze lower-middle income consumers who must then face higher prices of corn and corn-based products. The efficiency effects of excise taxes vary across the board, however.

If we operate on a "choose the least evil" principle, certain excise taxes may qualify. For instance, luxory taxes are unlikely to cause great distortion in consumer decision-making, since the goods for which they will apply are likely to face inelastic demand curves in their markets. (Since buyers, namely upper-middle-to-upper income consumers, will generally have high purchasing power.) Given that these goods are luxories and not essentials for life, the power to avoid them would be high. Furthermore, a luxory tax could even be considered a user fee, of sorts, as they could be used to fund policy protection for these luxory goods.

But there is one other form of taxation that I don't hear many libertarians discuss, which is Pigovian taxation. Pigovian taxes levy penalties for the negative externalities of a market activity; for instance, pollution. Pigovian taxes can be quite justified on libertarian grounds. Negative externalities of market activities (or at least most of them) ultimately represent damages to private property, either directly through physical damage or indirectly by decreasing property values. If we believe that government exists to protect private property rights, then levying a tax on negative externalities to effectively penalize property damage would perform this mandate. Pollution taxes would protect property rights by levying penalties for damaging other people's property. Cigarette taxes could even be considered Pigovian taxes, as by taxing cigarette purchases, they charge penalties for the harmful health externalities of second-hand smoke, protecting people's property rights to their labor and productivity. Furthermore, Pigovian taxes can be justified on efficiency grounds, as levying a Pigovian tax reduces the cost of negative externalities of an activity and provides an incentive for the producer of the negative externality to reduce it. This brings the level of the market activity to a socially optimal level.

So by my count, at least, here are the government revenue sources that are justifiable, livable, and absolutely unjust in a libertarian framework:

Justifiable

* Voluntary Contributions
* User Fees
* Lotteries
* Pigovian Taxes

Livable

* Excise Taxes

Unjustifiable

* Income Taxes
* Broad-based Consumption Taxes

What are your thoughts?