For conservatives who go around repeating that more taxes are always equivalent to less individual freedom, two researchers recall Montesquieu’s opposite teaching. And demonstrate, with the support of the numbers, that the French philosopher’s observation still holds true two and a half centuries later.
In Book XIII of his work, “The Spirit of the Laws” (1748), Montesquieu enounces the following principle: “General Rule: one may raise higher taxes in proportion to subjects’ freedom; and one is forced to moderate them to the extent that servitude increases.” In other words, only democracies may allow themselves to raise significant taxes and high levels of taxation are a sign of democracy.
Wanting to have a clear conscience, André Barilari and Thomas Brand collected statistical data on the levels of compulsory taxation (from the IMF) and the level of individual freedoms (from Freedom House) for a group of 130 countries to see whether the correlation held. The study is published in the latest issue of the “Revue française de finances publiques” (No. 108, October 2009).
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The result is that Montesquieu’s rule still holds: the greater the share of taxation in GDP, the more democratic a country is. The authors sort the countries into three groups:
• Those in which the fiscal share of national wealth is relatively weak, less than 12-15 percent, are often dictatorial countries.
• Those in which the fiscal share is relatively more significant, between 12-15 percent and 25 percent of GDP, are semi-democratic.
• Those in which the share of taxes is at least 28 percent of GDP are almost always democratic.
To introduce the recognition of criteria for social equity and equality of opportunity, the two researchers subsequently resorted to the United Nations Development Program’s index of human development. There also, the correlation holds perfectly and one finds more or less the same three country groupings.
How is one to explain these connections between the level of taxation, development and democracy? The two authors take off from an old article by Schumpeter on “The Crisis of the Fiscal State,” originally published in 1918 and reprinted in “Impérialisme et classes sociales” (republished in the Champs Flammarion collection; an article, let me say in passing, in which Schumpeter shows that he was aware of tax havens! A subject he unfortunately did not cover, since he was concerned with the capitalist system as a whole “and not with the concrete problem of the state per se, we can, in fact, not take into account the tendency of capital and labor to migrate towards countries or sectors where fiscal pressure is lightest.” And that’s how one sidesteps an important subject!).
Reinterpreting the Austrian economist, the two researchers emphasize that taxation “materializing the separation between the individual and the state is also the indicator of a social system that allows the individual to exist … Objectively, taxation is the clearest sign of the preservation of a space for individual freedoms.” Once his taxes are paid, each person is free to organize his life as he proposes – which is not the case for those who practice fraud and tax evasion …
This reasoning makes the connection between taxes and individual freedom, but says nothing about the connections between the level of taxation and the level of democracy. Could one say, for example, that a country with a compulsory tax rate of 80 percent is more democratic than a country with a 40 percent tax rate? No, the authors respond. The state needs resources to finance “existential” public spending (defense, security, justice) development spending (infrastructure, education, research, environment …) and the spending that allows it to assure social cohesion. Beyond that, according to the two researchers, “a layer of obesity” of unproductive expenses (inconsequential redistribution and bureaucratic inefficiencies) develops. As the study wisely states, an estimate of the respective shares of the different kinds of spending “may result only from an analysis by country combining appraisals of public policies with audits of institutional performance, informed by sufficiently detailed performance comparisons.”
There is nothing obvious about the definition of an optimal tax threshold from economic, social and political perspectives. Nonetheless, it is certain that the more a country embarks on a race to the fiscal bottom, the more it distances itself from the democratic norm.
Truthout French Language Editor Leslie Thatcher dedicates this translation to her late father, Thomas, who always maintained that “paying taxes is a privilege.”