Taxation, Civic Identity, and the Future of Consumption Taxes

Thanks again to Matt Bodie and Prawfsblawg for hosting this discussion of my book, and for the commentators for their thoughtful questions and critiques.  As I mentioned in my previous post, I thought I’d try to address some of the more specific questions raised by the readers and comments in their earlier posts. But before I do that I also want to reply to Matt Lindsay’s fascinating comment about the historical relationship between the rise of progressive taxation and consumer citizenship.

Matt makes the brilliant observation that the progressive critique of the tariff as a regressive consumption tax became more salient at the turn of the twentieth century, and not earlier, because by then one’s capacity to consume became more central to new notions of civic identity.  I think Matt is absolutely correct, and this is a parallel that is, admittedly, rather under-developed in my book.

I do make reference, as Matt notes, to the neo-Jacksonian critique of the tariff as the “mother of all trusts,” and thus as a form of “state capitalism” that many nineteenth-century reformers adamantly opposed.  But I don’t do enough with the literature on shifting notions of civic identity between production and consumption.  Part of the reason was because I had a hard time squaring my periodization with the historiography which frequently contends that the rise of consumer citizenship came later, generally in the mid-twentieth century.  Matt is quite right that the movement for a living wage, which many of the progressive economists I study supported, is the early version of this shift in civic identity.  I just didn’t see many of my historical actors making this connection.

What I tried to do, instead, was frame this change in civic identity as part and parcel of a broader shift in visions of state power.  Unlike the neo-Jacksonians who were critical of government from a “classical liberal” perspective, the reformers in my book were more open to the exercise of public power.  The University of Wisconsin political economist famously noted that he and his cohort of “new school” economists believed that the state was “an ethical agency whose positive aid was an indispensable condition of human progress.” In this sense, these reformers were an essential part of what historian Mary Furner has referred to as the rise of a “new liberalism” in American law and political economy. Progressive taxation based on the principle of “ability to pay” was, I argue, a key element of that new liberalism.

Matt’s observation also reminds me that part of what I’m trying to do in the book is stress the importance of pre-WWI foundations.  Nick Parrillo also draws attention to this pre-crisis institution-building.  I try to show in the book that these pre-war tasks – from laying the intellectual and emotional spadework, to creating the constitutional and legal foundations, to implementing administrative innovations (like a crude form of withholding) – were all absolutely crucial to the accelerating development of the modern fiscal state during the war, and also responsible for its resiliency after the war.  Thus, what might appear as comparatively small-scale changes (though amending the constitution was hardly small scale), were in the long duree quite significant.

Reuven Avi-Yonah raises another important, historically-specific question about Edwin Seligman and how he seemed to take an inconsistent position on the different theories underlying early twentieth-century tax policy.  Reuven rightly notes that Seligman played a major role in the 1920s and later in shaping the international tax regime based on the benefits principle of taxation, not ability to pay.

This is a critical observation.  Although I do not deal directly in the book with the development of 1920s international tax policy, I can say that Seligman and his cohort of “new school” economists did not believe that any one theory could be used transhistorically to support all tax policies everywhere.  As German-trained historicists, they firmly believed that policy was a function of changing contexts and conditions, and they were quite clear in arguing that while the ability to pay rational was appropriate in supporting progressive income and wealth-transfer taxes at the national level, benefits theory still had an important part to play at other levels of government, particular the local level.

From this, I think we can extrapolate that the new school economists led by Seligman would have been more than comfortable in using benefits theory for international tax policy, without seeing their move as somehow intellectually inconsistent.  International tax policy was fundamentally different from national tax policy, especially during the height of industrial capitalism, and thus they would have been open to alternative theoretical justifications.

Let me conclude by addressing a couple of questions raised by Susie Morse, Reuven, and Matt Lindsay about what my tale may tell us about today’s tax debates.  In the conclusion, I gesture to how the “fiscal myopia” I trace in the book may be partially responsible for why American tax theorists and policy analysts continue to fixate on the progressivity of our tax system, while neglecting how a more holistic view of the tax-and-transfer system could address issues of inequality and regressive taxation.  Susie, Matt, and Reuven each wonder whether the bias I identify has locked us into a resistance to consumption taxes and a neglect of how progressive spending can outweigh regressive revenue extraction.  The book has a rather pessimistic view, listing several reasons why we might be locked-into this bias – not the least of which is the kind of American exceptionalism that Matt identifies.

Recently, though, I’ve become slightly more optimistic about this issue.  If we’ve learned anything from American political or policy history, it’s that moments of crisis can lead to transformative changes.  And if the policy analysts are correct that the U.S. is about to face a major fiscal imbalance when entitlement spending far outstrips revenue projections, perhaps we will be able to overcome this fiscal myopia – perhaps we will see something like a VAT that can generate the revenue necessary to underwrite our commitment to a modern regulatory, administrative, social-welfare state.

We’ll have to see.  My book is just a humble story about the past – it’s not a bold prediction about the future.

Thanks again to Matt and PrawfsBlawg for hosting this discussion.