Principles of Taxation II

In our first discussion on the principles of taxation I elaborated on the importance of the government’s ability to tax its citizens in order to finance the functions necessary to support the social contract. I also argued that greater clarity and transparency in the tax system would increase the public’s trust in the tax system that has been undermined by the current complexity and opaqueness of the tax code. In this second essay on the principles of taxation I want to discuss why I think it is impossible to create a “fair” tax system.

On Fairness

Dr. Daniel Kahneman in his book Thinking Fast and Slow (based on his research along with his long time partner Amos Tversky) asserts that the human brain consists of two systems but I could never keep them straight. I call System One (which is quick thinking and intuitive) our instinctual brain while I call System Two our rational and scientific brain that is controlled by reason (and justifies our species being called homo sapiens or wise man). The instinctual brain is more related to the survival instincts of our hominid and great ape ancestors. Kahneman further asserts that while the rational brain is what makes us human it is also lazy and is only called to action when necessary. The rest of time the instinctual brain is in charge.

The instinctual brain is the fast part of thinking fast and slow. For primitive man, hesitation on the savannah or the tundra could be the difference between life and death. If it were not for our instinctual brain we would not have survived as a species long enough to become rational. But many of our biases and prejudices lie in the instinctual brain because they were necessary for survival in the primitive world but are an impediment in our current more civilized world.

I believe that the concept of fairness lies deep within the instinctual brain. A pack animal that does not get its fair share of the hunt does not survive. This relation to survival also explains the visceral reaction to perceived unfairness. We have all seen the pack or pride consuming the fresh meat from the hunt, snarling and snapping at others in the pack (and any other interlopers like vultures or hyenas) to make sure they get their “fair’ share.

Humans do not initially learn about fairness in the pew or classroom. We learn it on the playground long before we become self-aware. Not a lot of snarling or snapping but a lot of crying and running to mommy to complain about perceived unfairness.

I have been told that the sense of fairness is part of our innate goodness as human beings and that it underlies many of our religious principles and perceptions of civilized behavior. That may be, but that does not alter its savage origins.

Whether it is innate or instinctual, fairness is subjective. There is no such thing as universal fairness. Fairness is personal. A sense of fairness can be shared by many people if it matches their specific circumstances or shared belief systems. But when their circumstances change or when there is a different belief system this shared sense of fairness can evaporate. A ref’s call can be fair or unfair depending on if you are a Packers’ or a Cowboys’ fan no matter if you share the same religious or educational background.

Tax Fairness

Drs. Kahneman and Tversky had many insightful revelations about how humans react to various situations that they elaborated into the Prospect Theory for which Kahneman won the Nobel Prize in Economics (having passed away Tversky did not receive a prize because these prizes are not awarded posthumously – hey! That’s not fair!). A critical aspect of Prospect Theory is the concept of loss aversion. Kahneman and Tversky asserted that people feel losses more than gains. Gains are pleasing but losses hurt – a lot.

Taxation is a taking of one’s personal property through the use of coercive force by government. It is inherently unfair from the perspective of the taxpayer. It takes a force of will to summon the rational brain to realize that this payment is for the greater good of society and that, as an individual, you benefit from a smoot