Sanjeev Sabhlok's blog

Thoughts on economics and liberty

Flag burning – the test of a free society

(This is a small extract from 'Discovery of Freedom'. I will publish a few of these extracts periodically to test my ideas. Look forward to your response.)

Must a free society tolerate the burning or desecration of its national flag as a political act of civil disobedience? We begin by asking: if this act was banned, would it maximise equal freedom subject to accountability? Clearly, no one comes to the stage of burning their national flag unless they feel that a great many freedoms have been already trampled upon. And so the general environment of the society would need to be considered. If someone burns the flag without any reason, though, then that person’s intellectual ability is surely too feeble, and could ask: what harm could such a mentally feeble person do by burning the flag? After all, to that person it is merely a piece of coloured cloth he is burning without any reason. If that person doesn’t understand the value the flag represents, then so be it. Such an action is not a crime. In other words, if someone is seriously burning the flag, then the society needs to examine itself. If someone is stupidly burning it, it doesn’t matter.

India has not taken any chances, though, and has enacted The Prevention of Insults to National Honour Act, 1971 providing for imprisonment of up to three years, or fine, or both, for anyone who, in public view, mutilates, defaces, defiles, disfigures, destroys, tramples on or otherwise brings the National Flag into contempt. In addition, The Emblems and Names (Prevention of Improper Use) Act forbids the use of the flag in any trade mark or design.

Unlike India, though, which has a fragile sense of identity, and virtually no sense of freedom, the US has ruled that while desecrating its flag is deplorable, people are free to burn the flag as part of their freedom of expression. Its citizens are free to even make underwear bearing the flag’s image. Since many people’s patience with flag burning for political purposes was running thin in the USA, a flag burning amendment to the United States Constitution was proposed in 2006. But the US Senate rejected it, albeit narrowly. Senator Daniel K. Inouye – who lost an arm in World War II, and whose patriotism was unquestioned – said that flag burning ‘is obscene, painful and unpatriotic’, … ‘[b]ut I believe Americans gave their lives in the many wars to make certain that all Americans have a right to express themselves – even those who harbor hateful thoughts.’ Such a resounding commitment to freedom defines the US of America, the world’s only major bastion of freedom today. Three cheers to this brave land which seriously respects freedom by allowing its people to burn its own flag! Liberty expects no less.

India must aim to become a free country and learn to tolerate political protest including peaceful flag burning. Burning symbols, no matter how offensive and distasteful, does not amount to violent expression (it is not exactly non-violent, but it is not violent either, not affecting the human body). If freedom and equal opportunity were available to all, then flag burning would become thing of the past, anyway. It is only if India has something to hide that it will prohibit protest. In any event, it is preferable to let protests be public than to force them underground, for at stage terrorism can become a distinct possibility. More generally, it is inappropriate for a free society to invest any symbol with a hallowed status, for then there would be no end to such encroachments on our freedoms.


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Is Ian Plimer on the right track?

My  review of Ian Plimer's book, 'Heaven + Earth: Global Warming: the Missing Science'.

The areas of knowledge covered by climate science are enormous, with an almost endless number of questions to be asked. Addressing these questions then requires an excellent understanding of many disciplines of science as well as of statistics, since extremely complex multivariate analyses and models are necessary to identify various marginal effects. Therefore it is very hard for a lay person with limited time to form an informed opinion on this subject. Most of us tend to, therefore, become 'believers' in this area, not thinkers. We either accept man-made climate change or we don't. Neutral, inquiring positions are becoming harder to find.

But truth has never given up its secrets to groups. No major advance in history ever emerged from group think. Individual analysis and independent opinion is mandatory for science to advance. Most advances in science take years if not centuries to be fully understood and internalised. For instance, the theory of evolution was proposed by a single individual, not by a committee, and has taken 150 years to be confirmed as a plausible representation of reality. Doing so has been relatively easy since of the millions of observations made, not one contradicted the theory. But one cannot say the same of climate science which is not only tens of times more difficult than evolution but has been marked by contradictory observations and data (or claims of such contradictions). The fact that no major Australian publisher was willing to publish Plimer’s book indicates the increasing dominance of group think in this area, and is surely a matter of concern.

Excellent compendium of issues
The book brings together a vast number of seemingly unrelated streams of science and shows that there are literally hundreds of diverse factors at work on the earth's climate, not simply greenhouse gases. It thus provides a wide range of information and educates the layman in the many complexities of climate science. Irrespective of how valid Plimer's conclusions are, his wide coverage of issues is good enough reason to have this book as part of one's personal library.

Polemical style
The book is somewhat repetitive and could have done with a couple of more revisions. However, having myself published a book (, with another on the way, I am sympathetic towards people who write books over and above their day time job. But the polemical style followed by Plimer almost becomes aggressive in places. Plimer could have achieved a more persuasive result through understatement (advice easier given than followed: I must make a note to follow this in my own writings as well!). But if you can ignore his rhetorical approach, you'll find considerable value in this book.

Does his story come together?
My preliminary research through the internet has convinced me that CO2 is a potential threat to mankind, but probably not as much as is hyped to be. However, I'm not an expert in this area and have no time to explore this issue further. Plimer's book assists by rapidly increasing one's knowledge of the vast number of issues involved in this area. Consider this: “The measurement of CO2 in the atmosphere is fraught with difficulty… [F]or much of the 19th century … the atmosphere CO2 was higher than at present and varied considerably” (p.416). That’s surely a shock ‘discovery’. The greater shock is the fact that current CO2 levels are close to the lowest ever in the Earth’s history. How true is this? Well, read for yourself.

While CO2 and its effects are an areas on which the jury is still out, I do know a fair bit about mathematical modeling. I therefore have strong reservations against mathematical models of 'everything', which is what climate models essentially are. Only God can know the precise model that runs the world. Therefore even imagining that we will be able to predict climate 200 years hence through computer modeling is a delusion. There are almost no linearities found in this world, and with hundreds of variables involved with complex non-linearities, uncertainties, feedback loops, interactions, automatic stabilisers and adjustments, the very idea that we can predict climate 200 years out is fantasy. Plimer raises similar concerns in his book, which lends it considerable credibility, at least from my perspective. Today, climate science can barely predict the weather three days out, so perhaps we shouldn’t get bowled over by computer models.

Plimer has thus offered a very strong and well-researched book that will take quite some serious refutation. If nothing else, this book demonstrates that climate science is far from settled.

Having said that, while Plimer makes a strong case against man-made global warming, I'm not ready to 'believe' one way or the other since I believe that the truth often takes its own sweet time to emerge – over the course of centuries. There is therefore perhaps no need to rush to judgement. Of course, if CO2 is (ever) unequivocally proven to be a major pollutant (which is perhaps not the case today), then various economic models could be used to enforce accountability and internalise the externalities involved.

In the end, strongly recommended weekend reading.


Here's an article published in The Australian today by Ian Plimer which summarises his arguments very well. I'm copying the entire article here for my reference in case the URL of the above link changes in the future.

Vitriolic climate in academic hothouse
Ian Plimer | May 29, 2009
Article from: The Australian

IT is well known that many university staff list to port and try to engineer a brave new world. The cash cow climate institutes now seem to be drowning in their own self-importance.

In a wonderful gesture of public spiritedness, seven academics who include three lead authors of the Intergovernmental Panel on Climate Change and a former director of the World Climate Research Program wrote to Australian power generating companies on April 29 instructing them to cease and desist creating electricity from coal.

In their final paragraph, they state with breathtaking arrogance: "The unfortunate reality is that genuine action on climate change will require the existing coal-fired power stations to cease operating in the near future.

"We feel it is vital that you understand this and we are happy to work with you and with governments to begin planning for this transition immediately.

"The warming of the atmosphere, driven by human-induced emissions of greenhouse gases, is already causing unacceptable damage and suffering around the world."

No evidence is provided for this statement and no signatory to this letter has published anything to support this claim.

These university staff are unctuously understanding about the plight of those who face employment extinction in the smokestack towns of Australia.

They write: "We understand that this will require significant social and economic transition that will need to be managed carefully
to care for coal sector workers and coal-dependent communities.". This love for fellow workers brings tears to the eyes.

The electricity generating companies should reply by cutting off the power to academics' homes and host institutions, forcing our ideologues to lead by example.

Some 80 per cent of Australia's electricity derives from coal, large volumes of cheap electricity underpin employment and our self-appointed concerned citizens offer no suggestion for alternative unsubsidised base-load power sources to employ Australians.

The Emissions Trading Scheme legislation poises Australia to make the biggest economic decision in its history, yet there has been no scientific due diligence.

There has never been a climate change debate in Australia. Only dogma. To demonise element number six in the periodic table is amusing. Why not promethium? Carbon dioxide is an odourless, colourless, harmless natural gas. It is plant food. Without carbon, there would be no life on Earth.

The original source of atmospheric CO2 is volcanoes. The Earth's early atmosphere had a thousand times the CO2 of today's atmosphere. This CO2 was recycled through rocks, life and the oceans.

Through time, this CO2 has been sequestered into plants, coal, petroleum, minerals and carbonate rocks, resulting in a decrease in atmosphericCO2.

The atmosphere now contains 800billion tonnes of carbon as CO2. Soils and plants contain 2000 billion tonnes, oceans 39,000 billion tonnes and limestone 65,000,000 billion tonnes. The atmosphere contains only 0.001 per cent of the total carbon in the top few kilometres of the Earth.

Deeper in Earth, there are huge volumes of CO2 yet to be leaked into the atmosphere. So depleted is the atmosphere in CO2, that horticulturalists pump warm CO2 into glasshouses to accelerate plant growth.

The first 50 parts per million of CO2 operates as a powerful greenhouse gas. After that, CO2 has done its job, which is why there has been no runaway greenhouse in the past when CO2 was far higher.

During previous times of high CO2, there were climate cycles driven by galactic forces, the sun, Earth's orbit, tides and random events such as volcanoes. These forces still operate. Why should such forces disappear just because we humans live on Earth?

The fundamental questions remain unanswered. A change of 1 per cent in cloudiness can account for all changes measured during the past 150 years, yet cloud measurements are highly inaccurate. Why is the role of clouds ignored? Why is the main greenhouse gas (water vapour) ignored? The limitation of temperature in hot climates is evaporation yet this ignored in catastrophist models.

Why are balloon and satellite measurements showing cooling ignored yet unreliable thermometer measurements used? Is the increase in atmospheric CO2 really due to human activities?

Ice cores show CO2 increases some 800 years after temperature increase so why can't an increase in CO2 today be due to the medieval warming (900-1300)?

If increased concentrations of CO2 increase temperature, why have there been coolings during the past 150 years?

Some 85 per cent of volcanoes are unseen and unmeasured yet these heat the oceans and add monstrous amounts of CO2 to the oceans. Why have these been ignored? Why have there been five significant ice ages when CO2 was higher than now? Why were warmings in Minoan, Roman and medieval times natural, yet a smaller warming at the end of the 20th century was due to human activities? If climate changed at the end of the Little Ice Age (c.1850), is it unusual for warming to follow?

Computer models using the past 150 years of measurements have been used to predict climate for the next few centuries. Why have these models not been run backwards to validate known climate changes?

I would bet the farm that by running these models backwards, El Nino events and volcanoes such as Krakatoa (1883, 535), Rabaul (536) and Tambora (1815) could not be validated.

In my book, I correctly predicted the response. The science would not be discussed, there would be academic nit-picking and there would be vitriolic ad hominem attacks by pompous academics out of contact with the community.

Comments by critics suggest that few have actually read the book and every time there was a savage public personal attack, book sales rose. A political blog site could not believe that such a book was selling so well and suggested that my publisher, Connor Court, was a front for the mining or pastoral industry.

This book has struck a nerve. Although accidentally timely, there are a large number of punters who object to being treated dismissively as stupid, who do not like being told what to think, who value independence, who resile from personal attacks and have life experiences very different from the urban environmental atheists attempting to impose a new fundamentalist religion.

Green politics have taken the place of failed socialism and Western Christianity and impose fear, guilt, penance and indulgences on to a society with little scientific literacy. We are now reaping the rewards of politicising science and dumbing down the education system. If book sales, public meetings, book launches, email and phone messages are any indication, there is a large body of disenfranchised folk out there who feel helpless. I have shown that the emperor has no clothes. This is why the attacks are so vitriolic.

Ian Plimer is emeritus professor of earth sciences at the University of Melbourne. His book Heaven and Earth is published by Connor Court.

ADDITIONAL NOTES. I'm going to add a few links that are useful in this area:

A paper that summarises key data:

Fielding-Wong debate

Review of Plimer's work in The Spectator 8 July 2009.

A summary of 9 peer reviewed papers disproving anthropogenic global warming (AGW)

Australian Govt. issues paper (by Allen Consulting Group)

Scientists opposing AGW arguments.

A speech by Aynsley Kellow

Need to read: Climate of Extremes: Global
Warming Science They Don't Want You to Know by Patrick Michaels

Interview with Pat Michaels

Addendum, 25 October 2009. The book is a best seller!

Addendum Seeing through hoax of the century, by Janet Albrechtsen. The Australian.

Addendum 7 November 2009: Science is in on climate change sea-level rise: 1.7mm, The Australian. [evidence that sea levels have been rising VERY SLOWLY near South Australia]

Addendum 7 November 2009. Freaking Out over Global Warming. Mises Daily.

Addendum 9 December 2009: Climate claims fail science test by Michael Asten. The Australian.

Addendum 8 January 2009. Mr Rudd, your misguided warming policies are killing millions. Full open letter at here (PDF).

Here's something hilarious: Kenneth Davidson in his 8 February 2010 article in The Age (here) said, "Britain's Met Office says the world is on a path towards a potential increase in global temperatures of 4 degrees as early as 2060. If this occurs, only about half a billion people out of about 9 billion will survive, according to Professor Kevin Anderson, director of the Tyndall Centre for Climate change and adviser to the British government". I explored this further and came across this article. I'm amused beyond belief at such atrocious 'science'.

Addendum 12 Feb 2010: Came across this useful summary.

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Equal opportunity in the free society

Sanjeev Sabhlok

(This article was published in the May 2009 issue of Freedom First.)

Everyone must be equally free. On that everyone is agreed. But the fact that this equality of freedom translates to equal opportunity (EO), a major plank of the liberal platform, is an area of considerable contention and calls for careful consideration.

The erstwhile Swatantra Party committed, as the first of its 21 principles[1], to “equality of opportunity for all people without distinction of religion, caste, occupation or political affiliation”. Similarly, the Liberal Party of Australia believes “in equal opportunity for all Australians”. But wherefrom do these conceptions about EO arise, and what exactly do they mean?

Meaning of equal opportunity

The most important connotation of EO, on which there is general agreement, has to do with political equality – things like equal citizenship, universal franchise, the uniform application of laws, and absence of discriminatory obstacles to achieving higher (public) office. But as Friedrich Hayek noted, this conception does not mean “that … the chances of the different individuals [will] be made the same.”[2] EO does not imply equal prospects, leave alone equal outcomes. It is an enabling provision, with prospects and outcomes squarely determined by the efforts and demonstrated ability of each citizen.

The second part of EO is the social minimum – a connotation not at all agreed to by all people who advocate liberty. I side with Hayek and most classical liberals on this matter. Thus, Hayek noted in The Road to Serfdom that the (free) society assures everybody of “some minimum of food, shelter and clothing, sufficient to preserve health and capacity for work”. It must be noted that providing for a social minimum must be considered by a government only after adequately providing for defence, police, and justice. In my terminology, EO is a second order function.

It is worth mentioning that the social minimum outlined above has nothing in common with John Rawls’s difference principle which asks “social and economic inequalities are to be arranged … so that … they are to be of the greatest benefit to the least-advantaged members of society”. Rawls’s principle leads to illiberal outcomes and severely distorts property rights. In my view, his is a step towards socialism.

The equal opportunity social contract

But you could ask: Why is the conception of social minimum above not merely another socialist ruse for cross-subsidising the poor? Surely we are not responsible for others (for we didn’t bring them into the world). So why are we being asked to take on responsibility for their existence, even if it is set at a frugal level?

In response, note that equal freedom is meaningless to a sick and starving person or illiterate tribal. If our body and brain doesn’t function or we can’t think critically, we can’t be free. Everyone in the free society must therefore be minimally healthy and possess some basic knowledge.

But consider now the imperatives of our strategic (enlightened) self-interest. A moment’s reflection will show that EO is in our long term interest because it leads to a stable and aspirational society.

We know that our life energy springs from Nature. Therefore, at some point the laws of the jungle could well apply to us. The poor man who steals bread to feed his starving family, or kills a rich man who has denied him even a menial job, thus taking him to the brink of existence, is governed at that moment only by the brutal laws of nature. To construct a moral society we must get away from this precarious ‘state of nature’. We must create incentives to prevent amoral behaviour.

The problem is that Thomas Hobbes’s whimsical Leviathan allowed the rich to gain enormously at the expense of the poor. But this supercilious sovereign soon bit the dust with the beheading of Charles I. Out of this defeat (and the subsequent Glorious Revolution) arose the Equal Opportunity Leviathan where equal political freedom was assured more widely, and individual powers better balanced. Indeed, Kaldor and Hicks show us clearly that if we want stability then those who gain from the social contract must compensate those who l
ose. Buchanan and Tullock (Calculus of Consent, 1962) and other theorists have also thrown useful light on this matter. Robert Axelrod, in The Evolution of Cooperation, showed us how a tit-for-tat rule (balance of powers) leads to stability and cooperation.

The EO society with a social minimum thus acts as a strategic balance-of-powers society in which petty criminals, Naxalite revolts, and beggars sprawled on footpaths are absent because all of them have been empowered to make an honest living. It is important to emphasise that this contract is not motivated solely by the fear of the rich being attacked by the poor. There are untold benefits for everyone from having a healthy, well-educated citizenry. And, of course, we all gain deeply by ridding society of poverty. EO is really good for our soul.

This (EO) society is particularly stable (and optimal). The rich can reap the rewards of their efforts without the state confiscating their wealth. The poor prefer it because merit and hard work are rewarded, thus enabling their upward mobility, even as they can take shelter, if the need so arises, under the social minimum. The EO society thus motivates everyone to work hard (and ethically) to achieve their highest potential.

An equal opportunity package

The EO package has to start with an EO law to eliminate discrimination in opportunities for public office on grounds of religion, caste, sex, physical handicap, economic status, domicile, and the like. This law must necessarily abolish affirmative action and subsidies for religious groups, as both these things violate EO principles by discriminating on the basis of religion and caste, and by going well beyond the requirements of the social minimum (which is applicable to the basic physical and education needs of the poor, not to their desire for religious pilgrimage).

The social minimum (insurance) package includes universal school education delivered through private channels funded by the state in the form of top-up vouchers determined by parental income and assets. Health insurance vouchers as appropriate (not direct health care provided by government!), and emergency care entitlements, come next. Finally, the incomes of the poor are topped up through a negative income tax scheme[3] (NIT) to eliminate poverty without distorting work incentives.

This social minimum has to be paid through an actuarially fair premium raised through taxes, with all calculations made public. My preliminary calculations show that NIT would eliminate poverty in India by redirecting existing (and ineffective) subsidies directly to the poor. For good quality school education some supplementation will be needed through borrowings, but these can be recovered through higher taxes from the well-educated citizens of the future.

In closing, it is important to note that delivering EO will need the resolution of numerous public choice, moral hazard, and public administration problems, some of which I will discuss in the coming months.

Freedom Team of India (FTI)

The FTI ( has now started developing many policies to make India a free country. These will be released for public comment in late 2009. In the meanwhile I look forward to your continuing support of this nascent liberal effort.


[2] In his essay, Liberalism (1973). []

[3] []

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The case for the progressive tax


To me the proof for a progressive tax (not on income which is a random cash flow issue, but on net worth – which contains both income and wealth) is open and shut. I will aim to record it in DOF. This is merely a sketch, and I’ll keep using this blog as part of my research.

‘No tax system can be evaluated without reference to a theory of political economy or public  choice’ [Cited in Kornhauser, Marjorie E., ‘The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction’,Michigan Law Review, Vol. 86: 3 (Dec., 1987), p.485.] but ‘economic analysis has had a "long tradition" of obscuring the normative underpinnings of economic theories of tax’ [Cited in Kornhauser, Marjorie E., ‘The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction’, Michigan Law Review, Vol. 86: 3 (Dec., 1987), p.486].

Hettich and Winer list the following essential elements required for a "complete normative theory of taxation":
1. a philosophical foundation which permits quantification of value judgements;
2. an explicit treatment of tradeoffs between major objectives in tax reform;
3. a well developed public choice analysis;
4. a complementary view concerning the private sector of the economy and;
5. an explicit treatment of partial tax reform [ [Cited in Kornhauser, Marjorie E., ‘The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction’, Michigan Law Review, Vol. 86: 3 (Dec., 1987), p.481].

(1) There has only been one major contribution to the public finance model from liberals yet – that taxation should be through representation. We must get to vote on our own taxes.

2) a) As far as other contributions go, these include Bastiat and Nozick who oppose all forms of taxation in principle, calling it theft (thus contradicting (1) above, since they are supposed to vote on their taxes themselves).

b) The other is Rawls who has a very strong inheritance tax model that I reject in DOF with reasons why that is antithetical to freedom.

c) The one I advocate is essentially an Adam Smith-Milton Friedman model of taxation, but with much greater clarity on the foundational principles.

The liberal theory of public finance in a nutshell (based on 1 and 2c):
Once you sign up to the social contract and get to vote on your taxes then these principles must apply:
i) People (citizens) must pay for the services they want
ii) The taxation must be based on a price-discriminating monopoly model since the state is a the only monopoly the liberal deliberately creates through the social contract.

Note that if artificial entities like companies pay taxes, that would violate (i) and someone or some entity would be paying without representation. What should happen is this: All fully untaxed incomes should flow back to their owners through dividends/capital gains who should then pay the relevant tax. The government will get the same amount of money, but in the form of a tax on net worth (for foreign owners, you can have a flat and competitive corporation tax to attract investment and remain competitive with the world on this issue, say 25%).

The company is owned by real people. They get income. They pay tax. A citizen, not a company, signs the social contract. So what is our basis for asking a company to pay tax? Is it a citizen? Does it vote? Does it fight a war? Why does it pay taxes without representation? But the corporate tax is also a very high indirect tax. Let's say I'm a poor person with nothing but 1000 shares in a company on the dividend of which I run my life. Except where a franking (or imputation) system is followed (as in Australia), I end up paying huge amounts of tax: the corporate tax AND my income tax. On the other. I'm quite happy if we have an imputation system and corporation tax in India. That essentially comes down to the same thing – that individuals will pay tax, not companies.

The flat tax violates 2(b). It essentially amounts to MC=MR=P which would be legitimate if there were more than 10 competitive governments, and you could choose to buy the services of governance from any of these 10 or more. But we have a monopoly and we want a monopoly. We don't want to create 10 competitive governments with 10 defence forces and 10 police forces (Nozick's model is close to that, by the way!). Now, if we are a monopoly, then the monopoly's ideal solution is to price discriminate perfectly. Since it can't ever do that, it uses a variety of tools to raise differential prices from different consumers for the same service. That is what a government must do, ie. extract the entire consumer surplus (or as much as possible) from every citizen.

What I'm saying is that the theory of tax must be derived from first principles, else it is a whimsy not a theory. Progressive taxation, in my theory, sits as part of a broader theory of freedom. We need to run the economy on income and wealth taxes alone, since the citizen is the signatory to the social contract and must pay directly for the services he/she wants, not be hitting the poorest the hardest. Arguing against a net worth based tax (which includes income and wealth) is an advocacy for a feudal system.

The liberal model is thus: Maximise equal freedom subject to accountability where equal freedom comprises:

a) equal treatment (rule of law)
b) equal opportunity (absence of discrimination in public office, and a frugal social minimum as part of social insurance); and
c) equal disutility from taxes.

That makes up the entire theory of (equal) freedom, in a nutshell.

The basic question before us
The liberal must have a theory to help him choose between options. We need to know where we are going. Once we are agreed on roles of government, the big debates are over. But the small debate remains: how are we to actually collect the money needed for the performance of these roles. There are at least the following tax options to collect the money a government needs to perform its role. There are thus tens if not hundreds of ways to tax people. We need a model to tell us how we would (as free citizens) pick some in favour of others, and why.

PERSONAL TAX (direct tax)
1) Fixed amount per person taxes
– poll tax

2) Share of income (flow)
– Income tax
– chauth
– jaziya

3) Share of wealth/ assets (stock)
– land tax (including in some cases, capitalised value)
– land revenue (varying on a complex formula based on type of possession/ownership
– property tax
– municipal rates (usually based on asset value)

COMMERCIAL TAX (all are indirect taxes)
1) Production taxes (during production)

a) Registration of business and renewals
– registration fee
– license fee, e.g. license fee for access to public resources (e.g. fisheries)

b) Share of imported value
– customs tax

c) Share of payroll
– payroll tax

d) Share of output
– VAT (incremental output tax)
– excise

2) Trade taxes (on the final sale)
a) Sales taxes
– GST (goods and services tax)

b) A registration fee on completion of sale
– stamp duty
– annual (or periodic) registration fee

– e.g. Fees for entering a national park, and so on.

– just print more money and reduce real wealth, through deficit financing

Once you've given me your answer which can theoretically discrminate between these and a range of other potential taxes, we can discuss.

Each of these taxes creates a range of specific outcomes, related to incidence, feasibilty of collection (including transaction costs), and the inevitable distortion of incentives.

Some thinkers who favour a progressive tax
The man who first propounded a view on justice, Plato wrote: ‘When there is an income tax, the just man will pay more and the unjust less on the same amount of income.’ (in The Republic).

Jean Baptiste Say, the great classical liberal: "Say, in his work on political economy written in I803, argues that "if it be desired to tax individual income, in such manner as to press lighter in proportion as that income approaches to the confines of bare necessity, taxation must not only be equitably apportioned, but must press on revenue with progressive gravity.""

Adam Smith: "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more in proportion".

Ronald Green: "to subject a poor individual to the same tax as a millionaire … [is] the height of absurdity" ("Ethics and Taxation: A Theoretical Framework", The Journal of Religious Ethics, Vol. 12, No. 2 (Fall, 1984), p. 152)

Mill seems to have a mix of progressive and minimum tax: "Whatever sacrifices it [a government] requires from them," he said, "should be made to bear as nearly as possible with the same pressure upon all, which, it must be observed, is the mode by which least sacrifice is occasioned on the whole.' [pressure, it can be argued, is the same as perceived disutility]

Public goods charges must price discriminate (and this is efficient as well)
Not many (indeed none that I can find) philosophers have connected the dotted line on first principles between (a) demand for life and liberty, (b) a specific form of social contract, and (c) a specific public finance system. The state is a monopoly. This concept of the monopoly state has nothing to do with its form, ie. whether it is democratic or autocratic, local or state or federal. It simply says that if there is one and only one defence force in a country, then the monopoly kicks in.

This is what I've written in Breaking Free of Nehru (online notes): "As a constitutional monopolist, a government can, and should, price-discriminate for its services based on a citizen’s the ability to pay. The rich actually receive a disproportionately higher protection of their assets from the armed forces and police, and cost our justice and security system relatively more. During war, the army tends to protects large factories to the relative neglect of the houses of the poor. The rich also use our airports, electric supplies and roads far more, and pollute more than others. Further, the marginal utility of money declines steeply: a rich man cares far less for Rs.1000 than does a poor person. Therefore, income and wealth tax will continue to be progressive, not flat. The general taxation principle would be: the poor should pay no tax, the moderately well-to-do should pay modest levels of tax, and the rich should pay relatively higher levels of tax."

I quote Adam Smith (Richard and Peggy Musgrave, Public Finance in Theory and Practice, 5th edition (1989) footnote at p.219) "The subjects of every state ought to contribute towards the support of the government as nearly as possible in proportion to their respective abilities; that is in proportion to the revenue which they respectively enjoy under the protection of the state" (Wealth of Nations)

This converts into two basic principles that I advocate:
a) It is individuals who must pay (not artificial entitles like corporations)
b) These individuals must pay in proportion to their ability to pay (which is proxied by their net 'revenue' or stock plus flow (wealth plus income). This is nothing but prefect price discrimination under the theory of monopoly.

The view that Adam Smith (and I) are advocating is simple: "as nearly as possible in proportion to their respective abilities". This model can be read in two ways: The simplistic way will read this as a prescription for flat tax – which is what you are suggesting: everyone pays in direct proportion to their incomes. The other (and the view that a careful reading of Adam Smith will substantiate) is it should be a proportion of the ability to pay.

Now, one's "ability to pay" increases proportionately with net wealth, given (and this is VERY important to understand!) the diminishing marginal utility of money (ie. the increment of Rs.1 becomes less valuable to a person the wealthier he gets). Therefore to get the very rich (say Bill Gates) to 'feel' the same at the end of his tax payment as the poor man, the rich will have to pay proportionately higher for the same proportional effect on their ability to pay. This, Adam Smith's model, is therefore nothing but that of the price discriminating monopolist.

Given perfect monopoly and total information re: the preferences of the consumer, the monopolist is most efficient by charging different prices for each consumer. As Frank Knight notes at p.418 of the third edition of "Microeconomics and Behaviour", "In general, the more finely the monopolist can partition her market under the hurdle model, the smaller the efficiency loss will be." He then discusses "What about the fairness problem?" He gives a roundabout (and in my view a somewhat imperfect answer) to conclude: "it is by no means clear that the economic profit with natural monopoly creates distributional inequities of the sort commonly perceived." For the government, my answer, above, is clear: there is no inequity involved in the progressive tax regime since the rich can pay far more as a proportion of their income – their ability to pay therefore increases with their income.

Hence ideally there would be an infinity of 'slabs'. The reality is that no monopolist (government) can ever have perfect information, and imposing slabs under an imperfect information regime increases the deadweight loss of unnecessary transaction costs to discriminate, and calculate. Hence most governments have adopted 3 to 4 slabs, and coupled it with a range of wealth taxes.

The price discriminating model (first order price discrimination) of a monopoly leads to the 'perfect' price (MC=P) for every individual (Hal Varian's Microeconomic Analysis 3rd edition, p. 243). Also, "the monopolist in this market produces the same level of output as would a competitive industry". In other words, you get the benefit of maximum output even as you get the maximum revenue, and the price (that the individual is willing to pay) equals the marginal cost to the monopolist.

Of two people who want a particular good (say defence), but want it in different quantities (the rich one R wants it more than the poor one P), the good will not get provided because P will free ride. The optimal solution is through "Lindahl prices" where the each individual pays (a different price) equal to what the good is worth to him, at the margin (see The Economics of Collective Choice by Joe Stevens, 1993, p. 106). That is a price discrimination solution as well.

A precise model of taxation for public goods is shown in Microeconomics and Behaviour in Robert Frank (3rd ed. p. 622-23). That is the closest anyone has got (in all my readings so far) to a precise theoretical model of taxation – even though Frank has not yet gone into the linkages with the social contract and the broader theory of equal freedom.

Frank uses a very similar model to the Joe Stevens model I've cited above (two different 'willingness to pay' demand curves for the same public good), and concludes that "a tax structure that levies the same tax on all citizens cannot in general be Pareto efficient". (note that in economic theory 'willingness to pay curves' are the same as 'abilty to pay' – both being related to consumer surplus. In plain English, at the margin, willingness to pay and abilty to pay become the same).

Thus we note that a progressive tax model (which tries to proxy people's ability to pay) is Pareto efficient as well (noting that the only efficiency relevant to an economist is Pareto efficiency).

I now need to know if there has been any thinker in human history who has linked the Hobbsean monopoly social contract to a monopoly's perfect price discrimination model that I have linked together, along with the demand side links as well with marginal utiltity. That is the only missing link in my research so far. Someone is likely to have said exactly what I'm saying (that's what I always find, much to my chagrin!) if only I keep searching.

Equal disutility Equal disutility from tax is the only harmonious way for free society. The flat tax creates a very large disutlity on the poor and middle classes but a much lower disutlity on the rich. Theoretically, the poor will then be forced to remain poor for ever (paying, say, a 25% tax rate on Rs. 1 lakh, thus losing out all potential chance of capital formation, while the rich will pay the same rate on an income of Rs. 10,000 crores, of the balnce Rs.7,500 crores they will consume, say, Rs. 10 lakhs, leaving them with a massive amount to keep reinvesting and growing hugely rich.

The richer one gets, one consumes less and invests more. Thus the rich man’s income works for him even when he is not working. The rich man also cares much less for that last Rs. 25,000 if he earns Rs.10,000 crores each year. The rich must therefore pay an amount equal to their marginal disutility.

Every citizen must be 'given' equal disutility from taxes. That is the essence of the theory of taxation. This is also the completely mirror image of Adam Smith's 'ability to pay' argument. Note that this is perfectly "fair" as well. Everyone gets to feel equally bad about taxes. Note that equal feeling is easily modelled through the utility theory and the theory of consumer surplus; the point being that everyone's share of consumer surplus is equally captured by the government in a 'fair' system (though I don't like using the word 'fair' for it is most subjective and thus problematic). This is a general principle that treats everyone in society perfectly equally.

Joining up the two arguments
We can now join up two things from both sides:
– a) the monopoly is most efficient when it price discriminates
– b) the citizen must pay based on ability to pay

IF we choose a single state (one government for India, not ten), then it is fully justified for the government to price discriminate and establish a progressive income tax (but more correctly a progressive 'net present value of net wealth' regime).

Progression must be on net worth
If we agree that individuals create a state through a social contract and that they must pay based on their ability to pay for the services they demand of their government, then the question is: what does the ability to pay mean? Is the individual to pay only from the 'flow', or the income, or from the changes in stock, as well? I argue that the ability to pay of the individual is a function of net present value of the individual's net worth.

If we don't agree with the above principle, we’ll create strong incentives for the rich to purchase assets on which capital gains taxes are not imposed, and we’ll create a feudal society. Let's say I am as rich as Bill Gates. In my society there are only income taxes, no capital gains taxes nor property taxes (note that wealth tax is called by many names, not necessarily 'wealth tax'). This particular society would tax dividend from shares and rental income from landed property (being income) but not the capital gains on my shares and land (being change in value of 'stock').

To circumvent paying taxes, I will then immediately:

a) buy up billions of dollars worth of gold and diamonds and sell these in small lots – thus paying a small income tax – to feed myself and family for 1000 generations, without working – ie. we get the feudal outcome.

b) buy a lot of land – say half of Uttar Pradesh, and sell it in small lots – thus paying a small income tax – for my next 1000 generations to live (again, a feudal outcome).

c) buy companies with only one condition – that they NEVER pay dividends, and sell my shares in small lots – thus paying a small income tax – for the next 1000 generations to live (again, a feudal model).

Without wealth tax we will end up at once with feudalism. We will create an English aristocracy, or the great Zamindars or Princes of India, who, despite their huge wealth, were never taxed appropriately. The serfs paid their share of taxes.

The case against indirect taxes
Indirect taxes are regressive and impact the poorest the most, even those who should be receiving a negative income tax. I oppose all forms of sales and indirect taxes. In brief, these hurts the poorest of the poor the hardest. That is not an acceptable position for us to take.

Corporation tax only acceptable with dividend imputation
Corporate taxation is acceptable if dividend imputation (franking) is included, which means that ultimately the individuals pay the taxes through the income tax system.

The progressive tax sits squarely in the classical liberal traditon
There can be essentially three 'freedom' based parties: (a) Nozickians – the libertarians; (b) classical liberals like us based on Smith, Mill, and Hayek; and (c) social democrats based on Rawls. FTI is firmly classical liberal. Green primarily cites Nozick, Smith (and utilitarians), and Rawls as representing three different views on taxation. Unfortunately, I Rawls or Nozick did not have a consistent theory of tax. If we have the Nozickian feudal state with (perfectly) competitive protection associations, we would then perhaps have a flat tax model since it would be allocatively more efficient [I've changed my mind on that as well; it would be a poll tax instead].

These theoretical arguments have led the entire West (and East) to follow progressive taxation. Except for one or two countries, no one has the flat tax system; and none that is purely a flat tax. All existing flat tax systems are digressive. This model (progressive tax only on individuals, and on their net worth) is far simpler model than the one currently used in most countries with a myriad of taxes. It will reduce the complexity of taxes significantly even as it broadens the base by forcing everyone to lodge their accurate tax return (which must be accurate else they would be committing perjury and go to jail) every year.

The other basic requirement of a tax system is that taxes collected should be sufficient to operate an efficient government. The government should NOT go into deficit (and thus place the bill on future generations) unless absolutely essential (for investment in education, for instance).

a) The social insurance scheme must be paid through the tax system and while its premiums will be transparently (and separately) accounted for, based on a publicly disclosure of the calculations, the actuarially fair premium in this case will be subject to the same monopoly price discrimination outlined above.

b) Since there is a negative income tax for people below the social minimum, there is simply no point in setting indirect taxes. What that does is to force the people below the social minimum even further below the minimum (while creating transaction costs for government to collect indirect taxes) merely to somehow re-assess their income and bring them back to the social minimum through the social insurance scheme. However, it may well be that in the transition to the 'perfect' model, indirect taxes will continue given they are very easy to collect, even though iniquitous (indirect taxes are highly regressive).

A progressive tax is based on the theory of the diminishing marginal utility of money. Same thing applies to wealth tax. It is ridiculous for someone sitting on a property worth Rs. 30 crores in the middle of Mumbai to pay no tax because of a taxable income of Rs.3 lakhs, say. A small tax on wealth is legitimate in this case.

An argument I don't invoke but which makes sense in the strategic setting of the social contract:

Reciprocal altruism

‘we can view the progressive tax as a form of  reciprocal altruism: we help the less fortunate by paying more tax when we have surplus income, anticipating that they will do the same if the situation is reversed. … Because the tax is based on my ability to pay, I never sacrifice, I never even greatly inconvenience myself, when I pay taxes to help meet his or her needs. Yet to the extent the tax is redistributive, I recognize and meet my connection to the other’[1]

[1] Kornhauser, Marjorie E., ‘The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction’, Michigan Law Review, Vol. 86: 3 (Dec., 1987), p.518.

A note on why the inheritance tax violates freedom

Inheritance tax violates the first principle of taxation: it is a double taxation of net worth. A flat inheritance tax will fall unequally on people depending on their relative longevity. Imagine two families A and B, each with a total land of 1000 hectares initially, members of one with a long-lived gene (A) and the other with a particularly short-lived gene (B). It is obvious on the slightest reflection that members of family A will soon become wealthier than members of family B, particularly if there is a flat tax on inheritance, i.e. unrelated to the size of wealth. If, however, inheritance tax is progressive, then members of family A will generally pay a higher inheritance tax each time it is applied on one of their members, than members of family B with smaller land holdings. That would at least make the incidence of inheritance tax equal.

An argument I don’t agree with but which has some merit (benefits principle)

What is it? ‘The tax should equal the price of the benefit (governmental goods and/or services) that the taxpayer willingly would pay.’[1] ‘Clearly, those with property to protect receive greater benefit from property protection than those with less (or no) property.’[2]

‘While I cannot discover and prove the exact schedule of progressive rates, there is evidence that benefits rise geometrically with income. If this lack of definiteness makes the case for progressive taxation based on a benefit theory uneasy, it is still less uneasy than the case for a flat tax which ignores the basic curve altogether’[3]

Some people have argued that taxes must be charged based on the benefits received. This, indeed, underpins the user-pays principle, and to an extent it is valid for small services such a toll road where the charge must be fixed regardless of one’s total wealth, else we will find it virtually impossible to administer the road. But more broadly speaking, ‘[i]t is difficult … to show that greater benefits are received from government by people having greater incomes.’[4] He most obvious problem is that this argument flies in the face of the principle of economies of scale. ‘If attention is directed to the costs of protecting property, it would be preposterous to assume that such costs increase more rapidly than the value of the property being protected.’[5]Clearly is cheaper at the margin to protect larger property than smaller property. This chain of thought would clearly lead us, instead, to a highly regressive taxation principle.

[1] Cited in Kornhauser, Marjorie E., ‘The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction’, Michigan Law Review, Vol. 86: 3 (Dec., 1987), p.491.

[2] Kornhauser, Marjorie E., ‘The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction’, Michigan Law Review, Vol. 86: 3 (Dec., 1987), p.492.

[3] Kornhauser, Marjorie E., ‘The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction’, Michigan Law Review, Vol. 86: 3 (Dec., 1987), p.497.

[4] Blum, Walter J., and Harry Kalven, Jr., The Uneasy Case for Progressive Taxation, The University of Chicago Law Review, Vol. 19:3, 1952, p. 454.

[5] Blum, Walter J., and Harry Kalven, Jr., The Uneasy Case for Progressive Taxation, The University of Chicago Law Review, Vol. 19:3, 1952, p. 454.

Tax by Murray Rothbard []

[9] The Case Against the Flat Tax by Murray Rothbard []

[10] The Case Against the Flat Tax by Murray Rothbard []

[11] The Case Against the Flat Tax by Murray Rothbard []

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