The Case for Fixed-Percentage Income Taxes in a Capitalist Economy: A Rational Perspective

In the economic realm, capitalism and government operate as distinct yet interconnected entities. Capitalism thrives on individual freedom, competition, and the pursuit of wealth. Conversely, government plays a role in regulating society, providing public goods, and ensuring overall welfare. A key challenge arises when the government attempts to integrate moral or ethical considerations into its fiscal policies. This article explores the rationale behind fixed-percentage income taxes in a capitalist economy, emphasizing the role of moral choices and the legitimacy of fiat currency.

Eliminating Moral Choices in Taxation

Allowing the government to make moral choices with tax money poses significant risks. If the government can selectively allocate funds to deserving individuals, it opens the door to abuse. Imagine a scenario where the government declares that only party members are entitled to certain perks. This notion of an equality society is attractive until the realities of taxation come into play. In practice, everyone in society wants someone else to pay for what they want, leading to a selfish and divisive mindset.

From a practical standpoint, keeping moral decisions out of government ensures that policies are transparent and fair to all. Individuals should be responsible for their own moral choices, while the government should focus on providing essential services and maintaining economic stability. This separation enhances trust in the government and prevents potential conflicts of interest.

Corruption and Manipulation of Economic Systems

The problem lies not in the economic system itself or the form of governance, but in corruption. The system is constantly manipulated by various forces, making each vote merely a tool for selecting the entity that will exploit the system to the individual's advantage. This insidious behavior undermines the integrity of the entire economic and political framework.

The Role of Fixed-Percentage Income Taxes in Establishing Fiat Currency Legitimacy

A common perception of fairness in taxation suggests that everyone should pay the same percentage of their income. However, fixed-percentage income taxes serve a more pragmatic purpose: they help establish the legitimacy and widespread acceptance of fiat currency issued by the central bank.

Everyone who earns income must essentially convert their earnings into a standardized currency—such as dollars—to pay their tax bills. This process reinforces the acceptance and use of fiat currency, which is necessary for a functioning capitalist economy. Without a stable and universally accepted currency, economic transactions would be severely hampered.

Tax Progression and the Tiebout Model

While fixed-percentage income taxes may seem arbitrary, they reflect a deeper economic principle: the justification for taxing everyone at a fixed rate is rooted in the operational realities of government. In a Tiebout environment, where the cost of switching between different governments is very low, a more progressive tax system would emerge. Under this model, taxation would be progressive in absolute amounts but regressive in proportional terms.

For example, a person making $50,000 per month would pay a larger absolute amount of tax compared to a person making $5,000 per month. However, the proportional tax rate would be lower, so the higher-income individual would pay less as a percentage of their income. This tax pattern mirrors the way other expenses are structured: high-income individuals pay more in rent or mortgage but less as a proportion of their income.

The absence of sufficient competition among governments, as evidenced by existing tax structures, suggests that the current system may be inefficient and lacking in accountability. Greater competition among governing entities could lead to more rational and equitable tax policies, better public services, and ultimately a more stable and prosperous society.

By maintaining a fixed-percentage income tax system, the government ensures transparency, trust, and stability in the economic framework, allowing the market to operate efficiently while the government fulfills its role in creating a conducive environment for both economic and social development.