Back in November, I had the opportunity to learn a bit about the sociology of taxes, aka The New Fiscal Sociology, at a workshop organized by Monica Prasad, Isaac Martin, and Ajay Mehrotra (editors of the linked volume). During a discussion of the relative progressivity or regressivity of various tax systems (the US with its somewhat progressive income tax and small sales tax vs. some European countries with high sales taxes but very progressive income taxes), one of the workshop leaders (perhaps Ajay?) referenced a fascinating book review by Lawrence Zelenak. Ok, I know what you’re thinking, a fascinating book review? Huh? But bear with me.
In “The Myth of Pretax Income“, Zelenak reviews a book by Murphy and Nagel entitled The Myth of Ownership. As a caveat, I have only read the review, not the underlying book. Zelenak, drawing on and slightly reworking Murphy and Nagel, argues that, in some fundamental sense, there is no such thing as pre-tax income:
How can my pretax income be a myth, when I can read it on my W-2? Their argument goes as follows: Pretax income means income in the absence of taxes. But in the absence of taxes there would be no government, in the absence of government there would be anarchy, and in a state of anarchy no one would have any income. Pretax income, then, must be zero – or, equivalently, there is no such thing as pretax income. (Zelenak 2003:2261)
Because there is no such thing as pretax income, individuals cannot be “entitled” to that income. Thus, when discussing the relative fairness of different tax systems, we have been asking entirely the wrong questions. We take for granted that people have a pretax income and then ask how much of it is fair to take away in exchange for the services provided by society. But that doesn’t make any sense, becaue pretax income is not “pre” all the services paid for by the taxes. Rather, it depends on them. What matters is the justness of outcomes after all taxes and service provisions, not one of the intermediate steps.
The problem, according to Zelenak’s reading of Murphy and Nagel, is “everyday libertarianism”, the relatively unreflexive assumption “that one earns pretax income without any help from the government, so that the government bears a heavy burden of justification in taxing any of it away” (Zelenak 2003:2262)*. Zelenak connects this everyday libertarianism to the hyperfocus of tax authorities on cheating on the Earned Income Tax Credit (a rebate for poor workers), as compared to cheating on taxes by middle- and upper-income tax-payers, who are cheating in order to “keep” what they’ve earned. Zelenak argues that the success of the current system in part hinges on the withholding system, which to some extent counteracts this everyday libertarianism – the price of government is in some sense paid when you earn your income, not after it’s already in your grasp, for most wage-earners. But it’s not enough, and everyday libertarianism still has a strong hold on how we think and talk about taxes and the financing of government.
Zelenak goes on to discuss various issues relating to the tax system – how progressive it should be, whether it should be used to counteract growing income inequality (no under the old question about tax burdens, perhaps yes with the new questions about outcomes), and so on. Zelenak also notes the paucity of data on after-tax income distribution, and recommends that the analysis of the effects of laws should be instituted on those terms (which makes sense, though poses lots of practical difficulties). It’s very interesting, and I recommend the whole (14p) review. But I want to go in a slightly different direction: what does the myth of pretax income have to do with economic sociology more broadly, and the question of the autonomy of economics and politics?
I think the myth of pretax income is a close relative to the myth of a free market, a market that functions perfectly without the coercive backing of any sort of political authority. Such markets do not exist. Thus, no matter how much “deregulation” happens, markets are still inextricably tied to political systems, and thus deregulation can only be a utopic shibboleth, never a completed reality (cf. Block and Somers on “Free Market Utopianism”). Financial “deregulation” meant the removing of some restrictions on the activities of financial institutions, but in the context of a system where those financial institutions had significant institutional support (the Fed’s discount window, the court system for resolving disputes, the FDIC, and so on). Thus, “removing restrictions” really meant that the government agreed to affirmatively support many new undertakings. This was not the removal of government involvement, but rather a change in who was allowed to do what, and what various state actors promised to various businesses in terms of support. In turn, this “deregulation” led to a change in outcomes – the massive growth in incomes in the financial sector, among other things. Going back to Zelenak, and Murphy and Nagel, we should analyze these regulatory changes in the light of outcomes, not burdens. Just as there cannot be a pretax income (because without taxes, there is no government to produce those services necessary to make the income in the first place), there cannot be a regulation-free market against which to benchmark how much deregulation we’ve done (because without some sets of government regulations, rules, courts, etc. there cannot be a market at all). “Tax relief” is to individuals as “deregulation” is to corporations – powerful myths founded on everyday libertarianism, both of which are appealing, and both of which rest on a fundamentally flawed analysis of the interaction of governments and markets.
* An economist in the audience might helpfully comment on whether or not everyday libertarianism would be a good example of failing to take into account “general equilibrium”. I like the phrase, but I’m not sure I’m using it quite right. “General equilibrium” issues refer to the 2nd order or indirect changes resulting from a specified change – e.g. the change in a tax rate having ripple effects through its incapacitation of the government, say. Does that sound right?