It is commonly believed that taxes are collected so that governments can fund their spending. While this is true in some cases, it is not a legitimate concern for governments who have the authority to have money created upon their instruction. This includes most national governments who use fiat money.
Many people may be surprised to learn that many national governments already create new money every time they spend. Some would argue against this fact, citing the absence of hyperinflation as proof, but this is easily debunked by asking a few straightforward questions.
So, how do these governments inject large amounts of money into an economy without causing prices to rise?
Hidden tax
If the amount of money being spent in the economy were to grow too large, prices would increase, thus devaluing the currency and making those who hold assets automatically better off than those who hold money.
In other words, the purchasing power of all money would be reduced. This would be beyond the control of the individual and would very clearly be unfair. Some say that inflation is like a hidden tax.
Why tax?
The main purpose of taxation in these nations is to control inflation (though it can be used for other purposes, as is the case with ‘sin taxes’). By forcing a certain amount of money to be taken out of circulation, economists can ensure that there isn’t enough spending power available to allow people to bid up the prices in the areas being taxed, but not so little that deflation occurs.
Regardless of whether you’re losing out because of inflation or taxation, both situations are unfair. While taxation isn't fair, it's often seen as the least unfair of the two, which is why we continue to pay taxes.
Libertarian taxes?
Libertarians are those who believe in personal freedom, so when people are coerced into paying taxes so that money can be spent on what other people want, they view this as immoral and a violation of the non-aggression principle (the idea that aggression or coercion is inherently illegitimate).
While some libertarians oppose taxation entirely, others accept that it’s going to be inevitable in the current political and economic environment and advocate for the use of taxes which lean towards the libertarian end of the spectrum.
You may be wondering how this could be possible. After all, authoritarians demand strict obedience to authority and taxes are collected under the threat of punishment.
Pay-to-play
What many libertarians have recognised is that the concept of ‘pay-to-play’ applies to some forms of taxation. This is where the individual only pays tax on what they use, thus empowering them with the ability to limit their tax liability in line with their interaction with the money-using economy. Thus, all taxes are inherently authoritarian, but some yield a degree of control to the individual.
Taxing consumption (thus, production)
There are two main types of pay-to-play taxes. The first is consumption tax, which is also called sales tax, VAT or GST. Some people view these as being less unfair than income taxes or corporate taxes, which punish people for being economically productive and create economic distortions.
However, consumption and production are opposite sides of the same transaction, which means that consumption taxes are also distortionary and inefficient.
Taxing economic privilege (monopolies)
The other main pay-to-play tax, land value tax, doesn’t punish people for working or consuming goods and services. Instead, it recognises that everyone either lives or works on land that they didn’t produce themselves, but may exclude others from using.
Effectively, the economic privilege that they have over that land is what gets taxed and they only have to pay for the land they use or prevent others from using. LVT is the pay-to-play tax which is preferred by libertarians, which is why Milton Friedman described it as “the least bad tax”.
Land Value Tax
LVT is a tax on the value of land before any improvements have been made, such as the addition of buildings. This means that landlords who don’t do any work to earn their income would no longer get a free ride on the backs of those who work to pay rent for the land they occupy. This is how LVT combats inequality growth, which appeals to those on the left side of politics.
There are increasing calls from the left to increase taxation on corporations and the rich. Not only would LVT be the least unfair way of taxing them, but it’s inescapable as they can’t repatriate land to tax havens like the Cayman Islands the way they can with revenues.
Why don’t we have it already?
If the benefits of land value tax appeal to a broad range of people, then why hasn’t it already replaced income taxes, corporate taxes and consumption taxes? Why don’t we already have a tax that shackles the ability of the privileged few to take money from the many who work for a living? Why are we taxing production/consumption instead of economic privilege?
Perhaps the answer is simply that not enough people have heard about LVT.