Posted by: davidlarkin | June 26, 2008

L.T. Hobhouse – Taxation is Recognition of the Social Element in the Creation of Wealth

Taxes represent the social element of income and wealth, neither of which are possible without the interdependent society and its infrastructure, markets, and people who participate. The amount of the social element is negotiated politically. This is not socialism or communism because the elements of production are privately owned. However, this does recognize that wealth and income cannot be created on a desert island. Creativity and initiative must reap a fair reward, but the social element cannot be ignored.

The best articulation of the principles of this truth I have read is from L.T. Hobhouse, the British journalist, scholar and political theorist, writing in 1911, his words still true today, from his work, “Liberalism and other Writings, Cambridge University Press (1994), from Chapter VIII, “Economic Liberalism”:


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“Wealth, I would contend, has a social as well as a personal basis. Some forms of wealth, such as ground rents in and about cities, are substantially the creation of society, and it is only through the misfeasance of government in times past that such wealth has been allowed to fall into private hands.” p. 90

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“The ground problem in economics is not to destroy property, but to restore the social conception of property to its right place under conditions suitable to modern needs. This is not to be done by crude measures of redistribution such as those of which we hear in ancient history. It is to be done by distingushing the social from individual factors in wealth, by bringing the elements of the social wealth into the public coffers, and by holding it at the disposal of society to administer to the prime needs of its members.

“The basis of property is social, and that in two senses. On the one hand, it is the organized force of society that maintains the rights of owners by protecting them against thieves and depredators. In spite of all criticism many people still seem to speak of the rights of property as though they were conferred by Nature or by Providence upon certain fortunate individuals, and as though these individuals had an unlimited right to command the State, as their servant, to secure them by the free use of the machinery of law in the undisturbed enjoyment of their possessions. They forget that without the organized force of society their rights are not worth a week’s purchase. They do not ask themselves where they would be without the judge and the policeman and the settled order which society maintains. The prosperous businessman who thinks that he has made his fortune entirely by self help does not pause to consider what single step he could have taken on the road to his success but for the ordered tranquillity which has made commercial development possible, the security by road, and rail, and sea, the masses of skilled labour, and the sum of intelligence which civilization has placed at his disposal, the very demand for the goods which he produces which the general progress of the world has created, the inventions which he uses as a matter of course and which have been built up by the collective effort of generations of men of science and organizers of industry. If he dug to the foundations of of his fortune he would recognize that, as it is society that maintains and guarantees his possessions, so also it is society which is an indispensable partner in its original creation.

This brings us to the second sense in which property is social. There is a social element in value and a social element in production. In modern industry there is very little that the individual can do by his unaided efforts. Labour is minutely divided; and in proportion as it is divided it is forced to be co-operative. Men produce goods to sell, that the rate of exchange, that is, price, is fixed by relations of demand and supply the rates of which are determined by complex social forces. in the methods of production every man makes use, to the best of his ability, of the whole available means of civilization, of the machinery which the brains of other men have devised, of the human apparatus which is the gift of acquired civilization. Society thus provides conditions or opportunities of which one man will make much better use than another, and the use to which they are put is the individual or personal element in production which is the basis of the personal claim to reward. To maintain and stimulate this personal effort is a necessity of good economic organization . . . an individualism which ignores the social factor in wealth will deplete the national resources, deprive the community of its just share in the fruits of industry and so result in a one-sided and inequitable distribution of wealth. Economic justice is to render what is due not only to each individual but to each function, social or personal, that is engaged in the performance of useful service, and this due is measured by the amount necessary to stimulate and maintain the efficient exercise of that useful function. This equation between function and the sustenance is the true meaning of economic equality.”

p. 91-92

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The true function of taxation is to secure to society the element in wealth that is of social origin, or, more broadly, all that does not owe its origin to the efforts of living individuals. When taxation, based on these principles, is utilized to secure healthy conditions of existence to the mass of the people it is clear that this is no case of robbing Peter to pay Paul. Peter is not robbed. Apart from the tax it is he who would be robbing the State. A tax which enables the State to secure a certain share of social value is not something deducted from that which the taxpayer has an unlimited right to call his own, but rather a repayment of something which was all along due to society.” p. 97

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“The distinction that I would claim for economic Liberalism is that it seeks to do justice to the social and individual factors in industry alike, as opposed to an abstract Socialism which emphasizes the one side and an abstract Individualism which leans its whole weight on the other. By keeping to the conception of harmony as our clue we constantly define the rights of the individual in terms of the common good, and think of the common good in terms of the welfare of all the individuals who constitute a society. Thus in economics we avoid the confusion of liberty with competition, and see no virtue in the right of a man to get the better of others. At the same time we are not led to minimize the share of personal initiative, talent, or energy in production, but are free to contend for their claim to adequate recognition.”
p. 101

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Responses

  1. David, the material you posted seems intuitively obvious to me – but certainly, and strangely, not to many of our “supply-side” and libertarian friends. I wonder if you ever had the thought I had on my first job in 1970. The company paid me $10,000 a year, and I was surprised to find that only about 70% of that amount showed up in my paycheck. Then it hit me – companies pay for a standard of living – whatever would enable me at that age to get my own place and buy food and transportation. Without taxes, the company would simply have paid me $7,000. So, I naively thought at age 21, it’s all a game of funny money. Doesn’t matter a bit. Transfers among individual, corporate, state, and federal entities – with my wages inflated to compensate. All so that I can shop for a job that I qualify for, and will support the best standard of living within my qualification-space.

    What was wrong with that thinking?

    JWC

  2. As a former tax professional, I think of one thing wrong with the thinking is that what is withheld from your paycheck may not actually correspond to your tax liability such that if what is withheld is greater than your liability to the government, then you are giving the government a tax free loan of your money which you get back as a refund the following year without interest.

    You could negotiate for the net pay, and people sometimes do in their mind when deciding whether to take the job, but you have to pretend that you are actually getting the gross when negotiating the wages, because the employer’s accounting shows it as paid to you in gross, with deduction made after it pays you, to be sent to the government, to the insurance company, into your 401K etc.

    I suppose psychologically, and as a matter of reality with the adjustment for over withholding, what you propose works.

  3. This is a great treatise! His p.90 analogy is simple and concise. Of course, there is a social factor in the creation of wealth. Having just returned from the UK, it would appear that they recognize this to some extent. I guess you and “W” took different courses. Keep doing what you’re doing.

  4. Tahnks for posting


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