Why direct wealth taxation is unconstitutional: Debunking SA’s latest tax proposal

Illegitimacy of a Wealth Tax

By Robert Vivian of the Free Market Foundation

Despite the fact that South Africa is known to be the highest taxed nation on the African continent, it has been suggested that yet another direct “tax” be imposed on wealth, payable on the value of assets accumulated by persons over a lifetime and paid for from their already over-taxed income. Two points about this proposal are made.

Firstly, it is impossible to levy a legitimate direct wealth “tax” in a constitutional democracy such as South Africa.

Secondly, the legitimacy of the decision to impose such a “tax” rests on the concept of might is right. Therefore arguments against the introduction of a wealth tax will not succeed. Indeed if parliament, or the more recent concept of the “governing party”, is of the view that it has the authority to impose a direct wealth “tax”, then there is no rational argument that could dissuade against doing so.

Rational arguments against a wealth “tax” may be sound and interesting but will not achieve the purpose of preventing or dissuading these characters from doing what they believe they have the power to do.

The reasons are straight forward: Direct “Taxation” of wealth is not a legitimate possibility.

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Any institution which has the power to pass laws will inevitably pass all manner of laws. Some of these laws may well not be constitutionally legitimate, even though they may be complied with. What can be done and what is actually done should not be confused with what is legitimately done. Ultimately, might is not right.

This point can be illustrated by the classical constitutional conundrum formulated by Leslie Stephen, Englishman of letters, historian, critic and philosopher: If parliament is a sovereign law making institution, which the UK parliament declared itself to be in 1767, does that mean a law which commands that all blue-eyed babies be put to death is a valid, legitimate law? Stephen and later his more famous cousin AV Dicey, British jurist and constitutional theorist, declined to answer this question (Dicey, 1915; Stephen, 1882). But at least twice in ancient history it is recorded that babies were institutionally murdered. What we can say about those events is that the murders were not legitimately carried out. It can thus be said that it is impossible to legitimately murder all blue-eyed babies. In the same vein, it can be said that in a constitutional democracy, it is impossible to legitimately impose a direct “tax” on wealth.

This is because where a person possesses something valuable including a home or jewellery, innumerable others will try to take it from them. The things people possess includes life, bodily integrity, liberty, valuable assets and the like. Understanding this reality, the question then is how do individuals protect themselves from being deprived of these things by others?

Society’s solution is to form an institution, a government, and commission that government with the obligation to preserve and protect these things from others. As John Stuart Mill put it “To prevent the weaker members of the community being preyed upon by innumerable vultures, it was needful that there should be an animal of prey stronger than the rest, commissioned to keep [the vultures] down.” (Mill 1859) The obvious danger then is that this animal of prey, created and commissioned with the obligation of protecting society, could itself become the main vulture. The expedient to control the main vulture was, as Mill noted “the establishment of constitutional checks.” (Mill, 1859) The modern constitutional democracy was thus born, with the duty of the state being inter alia to protect people’s property. Itself. Accordingly it, itself, cannot take property. It cannot do so by way of a “tax” or the pretext of a tax, take property, assets or wealth. To do so would simply be to expropriate property without compensation. To call these takings a “tax” is an obvious abuse of words, little more than sleight of hand.

Direct taxes on property have thus never been imposed in countries influenced by the Magna Carta. Taxes have always been levied on income. It is a sharing with the state of income earned under the protection of that state. It was of course clear from the beginning, that to protect things would involve costs and that these costs would be borne by the society which established the government for its own protection. Individuals within that society would bear the cost of that protection. Each member of society would need to contribute towards that cost. The cost is an ongoing expense to be borne from the ongoing income generated within that society. Covering this ongoing expense was achieved by way of imposing taxes. This taxation however, could only be imposed on income generated within that society. The property itself could not be taken. The very purpose of creating the institutional protection was to prevent the plunder of accumulated property and other assets, not to facilitate it.

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This reality can be traced back to the origins of society itself. In the Old Testament Deuteronomy 14:22 “Thou shalt truly tithe all the increase of thy seed, that thy field bringeth forth year by year.” One does not tithe the field itself nor any portion of the increase of the seeds beyond the initial tithe The quantum of the takings was also limited to 10%.

In Ancient Greece: “At Athens the people were divided into four classes. Those who drew five hundred measures of liquid or dried fruit from their estates paid a talent to the public; those who drew three hundred measures paid half a talent; those who had two hundred measures paid ten minæ; those of the fourth class paid nothing at all.” (Recorded by Montesquieu 1748).

The tax was levied on what was drawn from the income produced by the estate. It should be noted that those who drew less than what was required to live on, paid nothing at all. Adam Smit (1776) eventually codified the general principles of taxation into what is today referred as the four canons of taxation: (Equality, certainty, convenience and economy) (Smith, 1776). The most important is the first:

“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion … to the revenue which they respectively enjoy under the protection of the state.”

Taxes are in proportion to the revenue individuals earn from their labours and their belongings whilst under the protection of the state. Once the tax is paid, the duty of the state is to provide protection of life, limb and belongings.

It was not until 1799 that William Pitt the Younger’s government moved for the introduction of a tax on Income. Most of the countries round the world eventually followed suit. American introduced its 14th Amendment in 1913, “Congress shall have power to lay and collect taxes on incomes …” South Africa followed the UK and US and the basis essentially remains as articulated by Adam Smith, UK and US legislation. It remains captured in law in the definition of Gross Income in the Income Tax Act 1962:

“Gross income … means … total amount received by or accrued … excluding receipts or accruals which are of a capital nature …” :

Thus it has always been clear, even before being articulated by Adam Smith in 1776 and subsequently codified in 1799 into statute, a direct tax is levied against income, not capital. No tax can legitimately be levied on accumulated belongings (“wealth”). Tax is the sharing of income earned to help cover government expenses. In such circumstances, a tax on property is little more than theft, “expropriation without compensation”, so to speak.

Prohibition against a wealth tax is therefore a well established matter of law.

The prohibition against taking property has existed since the beginning of time. But, the natural reaction against any proposed course of action is to provide
rational reasons why the proposed cause of action should not be followed. What then happens is the process becomes a series of competing arguments. But the issues is not competing arguments. In some cases the wisdom of the law is inherent in the law itself. In these cases the law does not require reasons or rest on those reasons. This was the approach adopted when the American Declaration of Independence was accepted in 1776. It articulated the above position. The Americans accepted that all individuals are endowed with certain unalienable rights. They accepted that governments are instituted to secure these unalienable rights. Furthermore, they accepted that should any government be destructive to the protection of these rights, that government should be altered or abolished. And so the first modern constitutional democracy was born. In a constitutional democracy property cannot be taken by governments nor is it necessary to defend property with persuasive arguments.

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If the matter is clear, why then provide reasons against a wealth tax? Three obvious reasons can be suggested. The first is that given by Hayek (Hayek, 1960):

“If old truths are to retain their hold on men’s minds they must be restated [to] successive generations”

Hayek is correct. The fundamental principles of taxation discussed above were settled over 200 years ago. It is possible these issues are no longer as well-known as they were and thus it is worth restating them.

Another reason is that previously when governments of the day violated the fundamental principles of taxation, the outcome was civil unrest and civil war. These issues gave rise to the Magna Carta (1215), the English Civil War (1642-51), the American War of Independence (1776) and the introduction of Income Tax (1799). This was introduced to avert a second English Civil War. The fundamental principles of taxation have been enforced by rivers of blood. Living in terms of a Constitutional Democracy upholding the Rule of Law is preferable to another bout of violence.

Thirdly, many governments have an insatiable appetite for money. This has consequences. There will always be those clamouring for additional sources of taxes. The Constitution and its Rule of Law is the constraint against this. It is important to point out when proposals cross the line. If this is not done the line will be crossed and then might becomes right. If fundamental constitutional rights are not upheld the view will evolve that it is legitimate to operate on the wrong side of the line. The Constitution and the Rule of Law will then have failed.

Reference list:

  • Dicey, A. (1915). Introduction to the study of the Law of the Constitution (8thed.). Liberty Fund.
  • Hayek, F. (1960). The Constitution of Liberty. Routledge & Kegan Paul Ltd.
  • Mill, J. S. (1859). On Liberty. Batoche Books Kitchner.
  • Smith, A. (1776). An Enquiry into the Nature and Causes of the Wealth of Nations. University of Chicago Press. Stephen, L. (1882). Science of Ethics. Ballantyne Press.

Robert Vivian is Professor of Finance & Insurance, School of Business Sciences, Wits University, and a member of the Free Market Foundation’s Rule of Law Board of Advisors. The views expressed in the article are the author’s and not necessarily shared by the members of the Foundation.