Is Historical Injustice A Justification For Taxation?

Libertarians tent to think that taxation is theft. Taking someone’s private property by force can hardly be called anything else, right? And yet, most people seem to find this argument rather unconvincing. Many probably have never thought about this issue very deeply and just accept taxation as normal and unavoidable and therefore legitimate.

But there are people who have thought about it and have tried to answer the libertarian theft claim. One popular argument they have come up with is that it is the state that enables the existence of private property. Without the state we would not have it. From this point of view, it is then easy to argue that the state does not really steal anything through taxes but merely withholds its own property, the property of society, instead. This argument however is little convincing. There are too many examples of non state societies that had some concept of property. In fact, I am not aware that there have ever been societies that did not know any type of private property.

Because this argument seems easily debunked, the advocates of taxation are increasingly moving towards a more subtle argument. Yes, they concede, there are very legitimate forms of property. If someone produces something with his own labour, it is hard to argue that this should not be his to keep. However, they also argue that there is one type of private property which seems difficult to justify and makes all other private property questionable. The property in question is private land ownership.

Land exists independent of human beings. With what right does someone claim sole usage of such a scarce resource? There have been, and still are, plenty of societies to whom the concept of individual land ownership is alien. Land clearly has to belong to everyone equally.

The most common libertarian answer to this objection comes from the philosopher David Hume. Hume argued that land can be legitimately, privately owned, if someone mixes his labour with it. He called this concept homesteading. Some of the extra value of this homesteaded land is now due to a person’s labour. So not letting him own that land means to free-load on that labour and therefore exploit him.

This is not a bad argument. However, I never found it entirely convincing either. It looks a bit like a fudge. It seems, the argument is used to somehow, almost forcefully, justify land ownership, a conclusion that really stands before the argument. In other words, land ownership does not seem to follow from the cheer force of the argument.

There are multiple convincing ways to attack homesteading. Firstly, one could argue, fine, the homesteader can keep the extra value he has created. But every land still has some value beyond this added labour value. For example, an import part of the value of land is location, location, location. It clearly matters, whether I build a house in the middle of flyover land or in the middle of Manhattan. Why would I alone be able to keep the full value? If the location is valuable to a lot of people, and I have not created that value, would it not be correct to argue that I still owe the others some compensation for my sole usage? This could be a good argument for taxation of land.

Another extra value the landowner might get is natural resources. I own some land because I have mixed my labour with it. Beneath that land is a lot of oil. Do I now have the sole right to exploit that oil, even though I did not create any of it? Again, would it not be at least fair to tax someone for the exploitation of natural resources?

The most obvious flaw with the homesteading argument however is that this is not how most land got into private ownership. Historically, the most common form of acquiring land was through conquest. Some government just took it and distributed it among its followers. In England for example, there is still a lot of land which is owned by royals. Most of the other land in private ownership was at some point acquired from royals. There is not much homesteading by the owners here, just a violent take over. Clearly that cannot be right. As a result, an increasingly popular argument for taxation in general is to say that, even though there might be a legitimate form of property, this does not apply to a lot of property today. Ownership of land and resources was historically almost universally acquired in not legitimate ways. Therefore, current property owners owe society compensation for the usage of this illegitimately acquired property.

Why the historical injustice argument does not work

This is not a bad argument and it deserves a detailed answer. In my view there are several flaws in it. The first is that it is automatically assumed that there is such an object like ‘society’ with a common will and interests. The existence of such a society seems necessary in order to argue for taxation on the basis of historical injustice. But such a society does not exist. Instead taxes are being paid to the state. The state however is a very different beast. It cannot solve the problem of scarcity, which is at the heart of this problem. Instead, the state runs into the exact same problem as the land owner.

Let us assume we could figure out exactly how much of the Manhattan house value is due to labour and how much to location. Of course, such an assessment is impossible. Valuations are inherently subjective and too many factors need to be considered. But for the sake of the argument let us assume we could obtain objective information. The taxes the house owner pays as compensation for the location would not go to benefit every other person on the planet. Instead the money is distributed towards specific groups of people.

So the question arrises, why do only these groups of people get that money and not everyone else? If we do give it to a group of people and not everyone equally, then the argument does not resolve the special interest at the centre of the problem. Instead of the Manhattan house owner getting the full benefit, we just have decided to use a different mechanism to distribute this special interest. But it is not clear why this is supposed to be more just. And even if it were just equally just, is it really a better, as in easier, solution to be preferred to private property? Given that we cannot even figure out how much of the value is exactly due to his labour, this solution looks in fact more arbitrary and vulnerable to abuse. In no way is this a justification for allowing a government to raise taxes and distribute them as it see fit. The idea that taxes benefit a society as a whole is simply factually false. Whenever people talk about society, they are trying to disguise special interests.

Still, the libertarian claim that taxation is always theft assumes legitimate property. And libertarians do not argue that property which is acquired by conquest is legitimate. Yet that is how most land ownership was acquired historically. Is property really legitimate when it stands in a tradition of illegitimate property claims? It looks to me like the answer is, it depends. But homesteading is probably not a good, or at least not a sufficient argument for land ownership today. We have to come up with something better.

Libertarians argue for a maximum of individual liberty. That means they argue that everyone should be left alone, by other people, to live their lives as they please. That is not to say that libertarians argue in favour of everyone being a lone wolf. Of course, everyone is free to interact with other people if that is what they choose to do with their lives. But ideally no one should proactively interfere with other people’s projects in life.

Since we live in a scarce world, absolute individual liberty unfortunately seems impossible. Sometimes we will have to involuntarily get into each other’s hair. But libertarians try to come up with rules that keep these involuntary interactions at a minimum. Private property is an example of such a rule. We need to respect certain types of ownership for it to become possible to leave people alone in a scarce world.

A scarce, desirable resource, by its nature, cannot be used by everyone. For example, if I burn this litre of petrol in my car, you cannot also burn it in yours. And we certainly cannot burn it for society as a whole. That means that collective ownership, as advocated by a lot of socialists, does not solve this problem. Nature forces us to come up with some form of special usage rights for desirable scarce resources.

I would argue that if we want to maximise liberty, that means if we want to minimise involuntary interferences of people with each other’s life projects, private property on these scarce resources looks like the best solution. Why is that?

Well, what would be the alternative? It seems the only alternative is either some form of collective ownership, or no ownership and the right of the strongest, or a rule that no one uses the recourse at all. I am not going to spend much time arguing why the last two solutions are bad, as that seems pretty obvious. In both cases, people would have massive interferences with their projects in life, either by not being able to use resources at all, or by constantly having to fear for the future of their projects.

But collective ownership also seems like a worse solution to private property. As we have seen above, collective ownership cannot mean that everyone enjoys the benefits of a resource or product equally. It is merely a different way of deciding, which individuals can use it. This could come in various forms. It could be decided democratically, in which case the minority never gets to engage in their projects in life. It could be by throwing a dice and let luck decide, in which case only the lucky get to engage in their favourite projects. Or it could be a rotation system, in which case everyone can occasionally realise their favourite project, but most of the time, we would be condemned to help others fulfilling theirs.

Private property seems superior to all of these solutions to maximise liberty. With private property, everyone can do what they like with their belongings. That way they can just pursue their projects as they like with at least some resources. That, on its own, makes it the clear liberty maximising solution out of all the other known solutions.

But there are extra benefits. The beauty of this solution is that no one is stuck with the property they already have. If you require a resource that is important to a project of yours, you can make the current owner an offer for that resource. The more important the project is for you, the more you are likely to bit for the resource you need. And the more you bit, the more likely you are to obtain ownership of it.

That way, markets have a tendency to get resources into the hands of people that have the most use for them. Consequently, these resources get used most effectively. In addition to that, private property also offers incentives to come up with solutions to make desirable resources and products less scarce. As a result, a side effect of private property is that it actually reduces the scarcity, which is at the centre of why we have this problem in the first place. No other solution has this extra benefit. It is these extra benefits which even make people support the libertarian solution who are not primarily interested in liberty.

What does this mean to our initial question, whether historical injustice justifies redistribution of wealth, or in other words taxation? It seems clear to me that if an individual can show a historic claim on a concrete property, then that needs to be respected.

Short of that however, what we want is that people have access to the resources they require for their important projects in life. Over time, free markets tend towards that solution. This is true independent of how resources came into private ownership. To put it differently, even if there is non libertarian property at the start, as in the example of royals owning land, over time, the right people are going to become the owners of the resources they need. Markets are great in solving problems, and they even solve the problem of illegitimate property over time.

The recent history of Zimbabwe is a good example of the relevance of this insight. It would be hard to argue that the white farm owners, who were owning most of the land in the country until not too long ago, acquired their farms with legitimate means. They indeed stole it from the locals. Because of the historical injustice, the Mugabe government started to randomly, meaning without any concrete individual historical claims, to redistribute these farms among their supporters. Did this make these new owners rich and happy? Not really. Few of them had any idea about farming. If they had had better farming skills than the white owners, they could have made the latter a very attractive offer to take over the farms on the market. But farming was not really any of their projects in life. The result is that the land changed ownership from people who had use for it to people who had no use for it. Zimbabwe went from being a big food exporter to starvation as a result. Everyone’s projects in life, except maybe for a small group of ruling class members, were disrupted.

Contrary to the myth, private property does not protect a class of wealthy people and their interests. It is a tool that serves everyone to pursue their interests in life. In the process, we can constantly see poor people becoming wealthy and wealthy people becoming poor. That means that property changes hands from people who cannot handle it to people who can. Even though, some people might go from wealthy to poor, overall everyone gets richer. Within this process, people actually have a very good chance of pursuing their most important projects in life. That means that private property on scarce, desired resources advances the cause of individual liberty better than any other known mechanism of distributing usage rights on these resources. It is unclear, what taxes have to add to all of this. They are no solution to the underlying problem of scarcity. In fact they make it worse.

Stability as a Business Model

Google is making the news in the UK for an agreement with the government to pay an additional £130 000 000 in taxes that it allegedly owes the state for past business in this country. While the government argues that this is a great deal, the opposition criticizes the arrangement as not nearly going far enough. According to them, google owes the state a lot more money than that. Numbers up to £700 000 000 are being discussed in the media.

To anyone who understands economics, all of this is of course terrible news. This huge amount of cash is being taken away from the great entrepreneurs at google, and it is being given to the unproductive, bureaucratic hands of the state. Google could have used the money to invent the next new exciting technology or improve their already existing excellent services. The result would have been an increase in life quality for pretty much all of us. Instead, all that capital is now being allocated by unproductive central planners. That means it will at best be used very inefficiently to produce things that aren’t completely useless, like for example roads. Things that would have most likely been produced anyway, but now they are probably being produced in a very inefficient way. More realistically however a lot of that capital will simply be destroyed, meaning it will be put to no productive use whatsoever by the gigantic wealth destroying machine that is the state. The worst case scenario, but unfortunately very realistic, is that the capital will not just be destroyed, but instead it will be used to prevent a lot of other entrepreneurs from creating wealth. It will be used to distort the free market and therefore produce misallocations of privately owned capital as well. In other words, the damage that is being caused to all of us from making people pay taxes, in particular very productive companies like google, cannot be overestimated.

And yet, it is only a small minority of hardcore libertarians who seem to object. Even people who are very sympathetic to free markets nevertheless often defend the state in principle for its ‘right’ to demand taxes. The argument here goes that in return for the taxes the state provides some services that are worth paying for. And the UK, so the argument, is a particularly good service provider. That is why so many companies want to have their headquarters and/or do business here. Clearly they benefit from the UK, and in return, it is only fair if they pay some taxes.

But I am confused. What services exactly are the UK providing to companies? Maybe security? That cannot really be it. Go into any office building, and you will observe the security there being run not by the police but by private companies. It is private security men that sit at the reception. Buildings are locked and secured by privately installed security and CCTV systems, bought from other private companies. It is no secret that the private security industry employs significantly more people than the state. That is because anyone who really has something worth protecting would be outright stupid to entrust that protection to the state.

So if it is not security, then what else is the UK offering that would justify a minimum service bill of £130 000 000. Servers? A phone network? All of these are privately owned, and we know from the past, and really just from good economic theory, that they are much better off in private than in state hands. So what is it that seems to attract companies to the UK?

The answer that one often gets is that the UK provides stability. You know what you are getting. You have to pay what the law says you have to pay, not more and not less. If you have the legislature on your site, you have a good chance of having it enforced in a state court. And the state laws are fairly stable. The UK is not known for doing revolutionary legal changes. So companies know what they get and that means they can calculate with it. This stability is very important to make long term investment decisions. And in many countries you do not get this stability. In a lot of states, legal rules and even whole political systems can change over night and often they are utterly corrupt. That means that what is advertised in the state’s legislature is often not really what you are getting. If you are brave enough to build up a company in a corrupt state like say Russia for example, you may find that after you have been successful, Putin’s thugs will come in and take it away from you. If you protest against this, the government might in addition to taking your assets throw you in a Siberian jail. No wonder there aren’t any world class companies coming out of places like Russia.

So the UK is, according to many in the stability business. That however seems like a fairly odd service model to me. Usually, providing a service means to actively produce something of value to the recipient of that service. But the service of stability that the UK is providing seems to be to refrain from not hurting the customer more than already advertised. The UK does not say that it won’t hurt people doing business here. Paying £130 000 000 certainly hurts, even for a big company like google. The UK does not even say that it will hurt companies less than other countries. It is a high tax jurisdiction. All it say it that you will always know in advance how much the state is going to hurt you.

Maybe I should get into that industry. I will charge everyone coming through my street £5 for the service of not breaking their nose. I will be fair to advertise the service in advance and will make sure that it is stable. What, you thing you are getting a bad service? Think again! The guy controlling the next street is charging £10 for the same service. And in the three streets after that you never know what you get. Some people might have gotten a better deal. There have been many reports however, of people getting more than their nose broken and still being charged for it. So given that, my stable service of £5 for a not broken nose seems fair and competitive. But believe it or not I still have customers complaining. They say they would be better off without anyone providing stability services. Luckily those are only a few weirdos called libertarians.

Being a libertarian, it is mind boggling to me why people are simply excepting, even praising this anti service from the state. Certainly, in some weirdly twisted logic I can see that stability can be preferable over other thugs. However, calling that a service that justifies charging people is an additional slap in the face of the victims. That however is the moral universe of statism that we live in. Suddenly being the least bad thug is seen as a service.

The real kicker in the google case however is that the UK did not even provide the stability service. Google is not a tax protester that was breaking the law to make a point. It used completely legal loopholes in the legislature to legally get around paying taxes. In other words, google was playing by the rules. Then the government came in and said, ‘yes, you were playing by the rules, but you have to pay anyway’. So it seems that the UK is more and more desperate enough to even abandon the stability service model. And all this is happening under the cheers of the vast majority of the public. What a crazy society this is.