James Wheatcroft's Blog

UK phone mountain "worth a billion quid"

James Wheatcroft — Tue, 07 Aug 2007 17:54:37 GMT

UK phone mountain "worth a billion quid"

Waste not want not

By: INQUIRER newsdesk Tuesday 07 August 2007, 14:57

ACCORDING TO NEW research by phone merchant T-Mobile, us Brits here in Blighty have a stockpile of unused mobile phones hidden away in our homes that totals Â£1.1 billion.
Altogether, of the 37 million mobile phone users in the UK, we've got an average of 1.39 old handsets just laying around doing nothing. That means there's a staggering 52.3 million mobiles out of action.

T-Mobile is urging users to collect their old handsets and recycle 'em, which the company says could save on landfill waste as well as generating millions of pounds for charities, individuals, or possibly T-Mobile.

T-Mobile's got a recycling scheme going, you see: under the program, anyone with an old phone is free to trot down to their local T-Mobile shop and pick up a recycling bag. Which you can fill with phones. All new phone boxes are going to come with a free recycling bag, too. Once returned T-Mobile will give a customer or a charity of their choice up to Â£80, making now a perfect time to become involved in petty theft.

A PR chap told us that with the Â£1.1 billion that all the phones together are worth, we could collectively pay nearly 39,000 nurses, plant over 3.4 billion trees in a developing nation or buy the entire Chelsea football squad nearly four times over.

Or we could buy some new tanks and bombs and stuff.

UK phone mountain "worth a billion quid"

James Wheatcroft — Tue, 07 Aug 2007 17:51:02 GMT

UK phone mountain "worth a billion quid"

Waste not want not

By: INQUIRER newsdesk Tuesday 07 August 2007, 14:57

Or we could buy some new tanks and bombs and stuff.

UK phone mountain "worth a billion quid"

James Wheatcroft — Tue, 07 Aug 2007 17:50:54 GMT

UK phone mountain "worth a billion quid"

Waste not want not

By: INQUIRER newsdesk Tuesday 07 August 2007, 14:57

Or we could buy some new tanks and bombs and stuff.

UK phone mountain "worth a billion quid"

James Wheatcroft — Tue, 07 Aug 2007 17:48:55 GMT

UK phone mountain "worth a billion quid"

Waste not want not

By: INQUIRER newsdesk Tuesday 07 August 2007, 14:57

Or we could buy some new tanks and bombs and stuff.

Microfinance 2.0

James Wheatcroft — Sun, 22 Apr 2007 08:24:46 GMT

'Microfinance 2.0': New Tools, New Goals and New Ways to Lift People out of Poverty
Published: April 04, 2007 in Knowledge@Wharton
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1701

Some of the major misconceptions about microfinance -- small loans of under $100 that enable Third World residents to become entrepreneurs -- can be summed up by what happened roughly a decade ago, when the pioneering Grameen Bank decided to help female villagers in Bangladesh enter the mobile phone business.

Alex Counts -- CEO of the related Grameen Foundation and keynote speaker at the recent Wharton Social Impact Conference 2007 -- said the idea met with the same concerns that have dogged the steady growth of microfinance ever since the concept emerged in the 1970s. "I remember hearing that ... this was going to be a disaster," noted Counts, an associate of Muhammad Yunus, founder of the Grameen Bank and co-winner of the 2006 Nobel Peace Prize. Critics said that when poor rural women hear a voice on the phone for the first time, "they are going to think that there is a ghost in the phone, and they are going to throw it away." If the women managed to get past that hurdle, the critics said, they wouldn't be able to understand the technology that modern cell phones use.

Critics also predicted the women would never earn money quickly enough to repay a loan to purchase the cell phones, which cost between $200 and $300. But, according to Counts, when Yunus returned to the village a year later, the first woman he spoke to said it took her about 10 minutes to master the device. "She said, 'Dr. Yunus, to ask me that question, you must have a very complicated phone!'"

Another woman in the same village had already memorized the country code for every nation on the planet. The Grameen program has since launched 220,000 phone businesses in Bangladesh and is expanding to Rwanda, Uganda, the Philippines and elsewhere.

The story illustrates the types of criticism leveled at advocates of microfinance, despite the Nobel Prize and Grameen's 30-year record of aiding millions of poor people, primarily in Bangladesh. But according to Counts, the nay-saying has not stopped Grameen -- and a growing number of similar banks devoted to microfinance in more than 23 Third World nations -- from taking this revolutionary concept to a wider audience.

In fact, Counts, whose non-profit Washington, D.C.-based group supports the Grameen Bank, outlined what could be called Microfinance 2.0 -- a new generation of more accurate tools that can be used to overhaul the loan making system and apply the infrastructure of microfinance to other social woes.

Counts seemed particularly excited about the new frontier for microfinance, noting that the Grameen Bank and other microfinance organizations already have an infrastructure of offices, a brand name, and a trained staff that has built up relationships, as well as trust, with poor people. "Relationships are important because the poor are used to being lectured to or yelled at," Counts said. "They are not used to people delivering hard cash to their doorsteps in the amount they need and in the timeframe they need. That creates a trusting relationship that can lead to many other business and social ventures."

As an example, he cited the story of Grameen Energy, an offshoot of the bank that was started in the late 1990s with the lofty ideal of bringing solar energy as a source of power to isolated villages that are not on the main grid. The venture -- which began with modest goals and with considerable obstacles, including tight demand for available solar panels -- is now delivering electricity to some 90,000 homes, well ahead of expectations, while already taking in more money than its expenses. "We had close relationships with three million people when we started. That allows us to jumpstart a lot of things," Counts noted.

$27 to 42 Families

The story of Grameen Bank is now the stuff of legend, and it is closely intertwined with the history of the idea of microfinance itself. Muhammad Yunus is a Bangladeshi who earned a doctorate in economics from Vanderbilt University in the United States and who came up with the idea after a devastating flood in his homeland in 1974; he loaned some $27 to 42 families to help them sell small items to make it through the crisis, and two years later started the Grameen Bank.

The bank targets women from the poorest households. Today, with branches in more than 75,000 villages, or more than 90% of all the localities in Bangladesh, it has about $500 million in outstanding loans to its seven million borrowers. Together, the bank and Yunus received the Nobel Peace Prize last year, because the prize committee noted that their campaign to support society's poorest had boosted democracy and human rights as well.

The mission of the Grameen Foundation, which was created in 1997, is primarily to take the microfinance model that has been so successful in Bangladesh and spread it to other nations. After just 10 years, working with a network of microfinance providers and financial supporters, the foundation serves three million people in 22 different countries.

Counts is a 1988 Cornell graduate who went to Bangladesh as a Fulbright scholar and has headed the Grameen Foundation since its inception. The Foundation started with $6,000 that Yunus had won for an earlier award. Counts has also taken on the role of chief evangelist for the microfinance model. His job, he said, involves wooing multi-millionaires and even billionaires, but "we're trying to promote thousands upon thousands of multi-hundredaires," he said, "and it's the most satisfying thing you can ever imagine. For me, those are the stock options."

Counts' role also makes him the chief defender of microfinance, which had come in for some criticism even before the Nobel Prize. Most notably, a 2001 article in the Wall Street Journal claimed that Grameen Bank used unconventional accounting methods to ensure a high loan repayment rate and that, in reality, about one in five of the bank's loans were delinquent. "You'll hear that microfinance does not work with the poorest, that there are no macro effects that have ever been measured and that women often give any money they get to their husbands," said Counts, ticking off criticisms that are frequently lodged against microfinance in general and Grameen in particular.

Some of the issues facing microfinance institutions were also discussed during a second conference at Wharton, this one organized by Penn's undergraduate microfinance club around the theme "Microfinance: Poverty's Macro Solution." A keynote speaker was Mary Ellen Iskenderian, president of Women's World Banking, an organization that supports a global network of more than 50 microfinance institutions and banks in 43 countries throughout Africa, Asia, Eastern Europe, Latin America and the Middle East. In an interview with the Philadelphia Inquirer before the conference, Iskenderian noted that the major challenges facing microfinance include the need to "reduce operational costs and reach more rural populations," especially in Africa, and also the goal of instituting better "credit-reporting systems."

In addition, Iskenderian expressed concern over the role of commercial banks in microfinance now that these banks have seen that lending to the poor can, indeed, be profitable. While welcoming and acknowledging the resources they can bring to microfinance, she also noted that "the product [commercial banks] are offering may not be microfinance, but loans for consumer purchases, like buying a television. The overindebtedness of this low-income population," she said, "would be a terrible tragedy."

Borrowers -- and Voters

In a brief interview after his presentation at the Social Impact Conference, Counts said while the cost of microfinance often remains too high for many of the poor, "it's not so high that we should stop providing it, because it's the best we can offer. But we need to really hurry up. If we're going to be politically sustainable with the regulators and the populist politicians, we're going to need to bring the costs down and wring more inefficiencies out of the system."

Five years ago, the Yunus-led organization launched a program called Grameen 2, which aimed to improve the performance of the bank and its affiliates even as the program greatly expanded its reach. Counts said that "Grameen totally took apart its lending methodology and put it back together again and re-invented itself," while roughly tripling its loan portfolio.

Another key feature of Grameen's re-invention, Counts added, is greater accountability through a program of social-performance management. The Grameen Foundation has developed a tool it calls the Progress Out of Poverty index, in which loan recipients can rate their progress in a series of simple, yet carefully developed, questions. The index should help the microfinance movement reach its goal of both accountability and transparency, he said.

One particular reform Counts described is a program to offer assistance to smaller banks that are willing to give poor people four- to five-year loans in the local currency. The goal is to encourage more involvement by established local financial institutions. But the greatest potential advance, he said, involves expanding the core principles of microfinance to other anti-poverty programs.

He described a Grameen program, still in its early stages, that has a remarkable goal: To help some 80,000 Bangladeshi beggars -- the poorest of the poor -- begin to escape from poverty with the help of loans as small as $14. The concept, Counts explained, is to "graduate" these beggars into the more traditional microfinance program. In just 18 months approximately two thousand people have made that leap, he noted.

But even beyond these economic gains, Counts spoke of the vast potential for social change that was also cited by the Nobel committee. Economic development and empowering people in Third World nations can arguably reduce the long-term threat of terrorism.

He cited what happened in 1996, when Bangladesh nearly erupted into a civil war. Ultimately, a caretaker government -- including Yunus -- was named until an election could be held, and Counts said that Yunus decided to craft a program to encourage every loan recipient to cast a ballot. The result was a high voter turnout among men but even higher among women -- an astounding 75% -- and also a defeat for an Islamic fundamentalist party that went from 18 seats in the parliament down to just two.

"We're leveraging a network of millions of women who are changing the fabric of society through the microfinance channel," Counts said. "It's a huge opportunity, and we are at the tip of the iceberg outside of Bangladesh."

Cellphones, Maxi-Pads and Other Life-Changing Tools

James Wheatcroft — Sun, 22 Apr 2007 08:20:04 GMT

Cellphones, Maxi-Pads and Other Life-Changing Tools
By THOMAS L. FRIEDMAN
Published: April 6, 2007
Fred R. Conrad/The New York Times
NAIROBI, Kenya

For decades, the world has asked: How do we free Africa from its yoke of poverty, disease and misgovernance? In asking Kenyans that question, Iâ€™ve been struck at the simple, common-sense solutions they offer. Four in particular stand out: transparency, telephones, Tergat and Kotex.

Naisiae Tobiko is a 28-year-old dynamo who grew up in Kenyaâ€™s Masai region. She runs a public relations firm, but when we met all she wanted to talk about was Kenyaâ€™s shortage of sanitary napkins for girls. Hereâ€™s why, she explained: Her family could afford to send her to school, where she thrived. As she got older, though, she started to notice something about the less well-off girls â€” they missed four days of class every month, â€œand I could not understand why.â€ When she finally asked, they confided that they did not come to school when they were menstruating â€” because their parents could not afford sanitary napkins.

â€œThey would say, â€˜How can I come to a place when I am bleeding?â€™ â€ she recalled. â€œSome were using rags or soil or mud.â€ Because of those lost school days, many eventually dropped out. So Ms. Tobiko recently teamed up with the Girl Child Network and other N.G.O.s here and started a project in the countryside to distribute free sanitary napkins. They have targeted 500,000 girls, and so far have reached 189,000. More school days means more educated women and better mothers.

â€œWeâ€™re keeping girls in school,â€ said Ms. Tobiko. If women get education, â€œwe want nothing else,â€ she added. â€œWe will fight our way into every field, but we need the main key â€” which is education.â€

Kenya first began holding multiparty elections in 1992, and its next national election is slated for December. (By the way, Kenyans love the fact that Barack Obama, whose father was Kenyan, is running for president of the U.S. since, they joke, someone from his Luo tribe could never get elected president of Kenya!) The field here is already crowded with presidential wannabes. But the most revealing conversation I had on this subject was with someone not running.

Vimal Shah owns an oil services company in Kenya, Bidco, and he was eager to tell me that with eight months until the election he had decided to make a big investment to expand his business. So what? I said. â€œPeople here never invest in the year before an election,â€ he explained. The fear is always that the new guy will change all the rules â€” often for his cronies. But Mr. Shah, like others here, believes Kenyaâ€™s evolution to democracy, with more transparent rules, has now reached a point where â€œeven if the government changes, it wonâ€™t change the rules. The politicians canâ€™t stop this.â€

It is striking how just the little improvement in governance here can start a torrent of cash flowing in. But so could more cellphones.

Rose Lukalo Owino, a Kenyan author, told me this story: â€œI was recently in Ngutani, east of Nairobi. I was reporting for a book and interviewing these women who raised goats.â€ The women complained that for years they had been swindled by middlemen who would get them to sell their goats for a pittance, because the women didnâ€™t know the price in the Nairobi markets. â€œBut when I interviewed them, these women were holding so much money,â€ said Ms. Owino. Why? Fourteen villages got together and bought one cellphone, which they now share to check the market prices in Nairobi for goats before they sell. â€œThey were talking to me about opening a microlending bank with their profits,â€ she said.

But Africa doesnâ€™t just need more phone models. It needs more role models. I met one of the best here â€” Paul Tergat, the great Kenyan distance runner whoâ€™s earned five world cross country championships and two Olympic silver medals. Mr. Tergat recently won a contract from the government to promote anticorruption themes. For starters, he organized some of Kenyaâ€™s greatest distance runners to carry a torch from Mombasa to the Ugandan border. The torch represented a spotlight on corruption. Kenyans turned out to cheer them all along the route.

He used Kenyaâ€™s runners, Mr. Tergat said, because unlike politicians, when they win a medal it â€œis open, and genuine, and clean, and they practiced for 10 years to get it. The message is to say to young people, â€˜Look here, you donâ€™t have to be corrupt. You can do it if you are patient.â€™ â€

Add all this up and you have what impresses me most here: the way Kenyaâ€™s emerging democracy is unlocking Kenyaâ€™s best minds to find Kenyan solutions to Kenyaâ€™s problems.

LUNCH WITH THE FT: No problem

James Wheatcroft — Sun, 22 Apr 2007 05:34:32 GMT

FT WEEKEND MAGAZINE - LUNCH WITH THE FT: No problem
By Chris Giles

I am due to meet Jeffrey Sachs in his choice of restaurant, La Porte des Indes, on a quiet central London backstreet. It's an unremarkable entrance, but once inside the space opens up to give the impression of colonial India, complete with wicker furniture and palm trees growing from the floor below.

The Columbia University economics professor, and director of the Earth Institute, is already there, in conversation with his assistant, Margot. I realise that Sachs is no longer just an eminent academic, he is a brand, and travels the world with an assistant in tow, spreading his economic gospel. I introduce myself, and Margot goes off to have some lunch at another table while ensuring that we don't overrun our tight schedule.

Sachs is in London to deliver the first of five BBC Reith Lectures, a sought-after honour for academics. The lectures give a chance to talk to a worldwide radio audience. "[The lecture] is unique as a global discussion. It's hard to think of another way to reach such a wide audience," Sachs says, and then pauses. Referring to the BBC, he says: "They quote a 100 million audience - rather more than that, a 150 million audience." Then he asks me if I know how many people will listen. I haven't a clue, I admit, but tell him that the audience figure might need an "up to" added before the numbers. This first encounter persuades me instantly that his voice - courteous, engaging and persuasive - will work well on radio. Even his slightly unshaven neck, a crime on television, will go unnoticed.

Audience size clearly matters to Sachs. His website says he is "widely considered to be the leading international economic adviser of his generation", and his mission is to solve the problems of poverty, disease, global warming and globalisation. Although his current views are highly controversial, he knows that the bigger the audience, the bigger the impact.

Economics splits analysis into the "positive", describing and explaining the world as it is, and the "normative", articulating how it should be. Now in his early fifties, Sachs has left positive economics behind. He is proud to have been listed among the 100 most influential people in the world by Time magazine in 2004 and 2005. He campaigns for a better world, and is certain he knows how to get one. With such meaty topics to discuss, there is little time for chitchat. As we discuss the colonial feel of the restaurant, Sachs launches into a quick destruction of the view that the British Raj was good for India: "The rail[way] is quite useful... but most of the good things could have come from the diffusion of good ideas without all the downsides of empire."

I change the subject as I don't want to get bogged down in matters of British history. I want to talk first about his role in advising governments on economic reforms in Latin America and eastern Europe. There was a time, particularly in the late 1980s and early 1990s, when no self-respecting government of a middle-income or ex- communist country would instigate a reform programme without Sachs's advice. So, as our starters of lentil soup and one juicy scallop in a mild saffron sauce arrive, I rather blunder into my first question: "Looking at the countries you advised in the early 1990s, those countries are not now doing very well, are they?"

"Oh, no. That's not right," he retorts. "And, by the way, the advisory work started on July 10 1985 in Latin America when I worked on the Bolivian hyperinflation." I make a mental note to try to be more precise. We embark on a tour of the world's economies, starting in Latin America. I fear Sachs will tell me that the success stories are all a product of his advice, and that the failures are a result of more complex issues beyond his control. But his arguments are subtler than that. Latin America is doing much better than is often thought, he argues: "I'm optimistic about Brazil. And if you look at a map, being optimistic about Brazil takes you a long way to being optimistic about the whole of Latin America. I don't lose huge sleep over Latin America - it's at peace, it's not riven by terrorism, it's democratic and it has made huge strides in human development. What have been hugely unequal and divided societies are becoming slowly more equal, and even very deep ethnic and racial divisions are being ameliorated through democratic politics."

The same cannot be said about Russia, I say. Sachs replies by telling me how Poland was a case of successful reform, which has now led to a normal country embraced within the European Union. How did it achieve success? "The essence of what they wanted to do was right, it was based on sound fundamentals. What I tried to do was to add the economics to go around it."

I am pleased to note he credits Poland's geography and attitude primarily for its success. I bring the subject round to Russia again. "I advised Russia for two years from December 1991 to January 1994," Sachs says defensively. "It was an extremely frustrating period for me." The problem, he says, was not that good ideas were tried and failed, but that neither the US nor the powerful elites in Russia wanted to try sensible economic reforms. The US, he says, failed because it wanted a weak Russia, while the Kremlin's corrupt efforts to stop the communists' re-emergence in the mid 1990s led to the transfer of the Russian state's assets into the hands of a tiny elite.

"When I watch all of this now," Sachs says, "it is the legacy of disengagement of serious reform, the triumph of politics over economics." He is warming to a theme that forms the backbone of his thinking on almost every issue - good economic solutions will work if only politics doesn't get in the way.

The main course arrives. Two beautifully prepared curries are placed in front of us with spinach the main ingredient of both. Mine includes lamb and is reasonably spicy, while Sachs has opted for a milder vegetarian version with cottage cheese. He manages to eat and talk with ease.

The theme continues as we move on to talking about poverty in Africa. This has been the focus of his more recent work. Immediately, he shows his anger at those who claim aid fails because Africa remains desperately poor, even after some $2,300bn of aid - the figure comes from Professor William Easterly of New York University. Sachs manages a masterly dismissal; he calculates the amount as only $16 per poor person per year over the past 60 years. "I see the number and say, well, that's a pretty modest sum. The rest of the world sees the same number and says that's a horrendous failure that's nearly bankrupted us."

Worse, Sachs thinks that Easterly's criticisms of aid are having an impact on giving. "The difference between Mr Easterly and myself is that I'm actually trying to get something done practically... But I know that since he has launched this tirade, it makes it harder to do." He insists that for $16 a person a year, aid has "done extremely well". Trying not to fall into either the "aid works" or "aid fails" camp, I try to challenge Sachs, and say that just as it is probably wrong to pin African failure on aid, success stories are also not necessarily the result of aid. Sachs doesn't engage. He is now on a mission and wants to ram his point home.

"People are dying in large numbers. The triumph of politics over economics is not that money is being lost in Africa, it is that money is not going in." He vehemently denies that big aid has been tried before and not worked, and challenges me to name studies proving him wrong, knowing full well that I can't.

We move on to talk about a specific project Sachs is currently involved in, Millennium Villages, where his ideas on fertilisers, malarial bed-nets and the like are tried on the ground. My less- than-ecstatic reaction to his reports of their success is clearly the same as that of many aid agencies. It instantly raises his hackles. I suggest there are many examples where success in pilots does not translate into something that can be replicated on a large scale, and that you don't necessarily need to try something to know it won't work. "I'm sorry," he is almost shouting now. "That, I disagree with completely. That's preposterous."

I realise I have exaggerated for effect, and counter that it is equally preposterous to insist they will work. "I know," he says, "but how do you actually do something in life? Do you list all the things that may go wrong and then decide we won't do it, or do you actually try?"

We talk about global warming. It's easily solvable, Sachs insists, because the costs of doing something about carbon emissions are exaggerated - so people will soon realise that they can cut carbon emissions without much pain. We talk about global trade - all the US has to do is offer an aid, trade and climate change deal to the rest of the world and a solution is within reach. We talk about US healthcare - within a few years, people will see sense and the uninsured will be covered, he predicts.

As coffee arrives, I wonder aloud whether economics really can solve these big global challenges. In Sachs's world, problems aren't really problems because there is always an easy solution. I suggest vested interests, national differences and the fact that reforms tend to throw up winners and losers make issues rather more intractable than he believes. Bringing the subject full circle back to his lectures, he says: "The key word of all of these lectures is 'choice'. A generation has a choice, and we have choices we make collectively... We have some absolutely terrific opportunities... but we miss opportunities all the time. That's why it is really important to understand what these choices are - and that is what I'm trying to explain in these lectures."

The conversation drifts into small talk, and Margot reappears, telling us our time is up. Sachs leaves, telling me the conversation was fun. As I pick up the very reasonable bill and leave, I feel more positive about the world. A few minutes later I get snarled up in London's creaking public transport system and realise that some problems really are intractable.

Chris Giles is economics editor of the Financial Times.

The Reith Lectures begin on Wednesday on BBC Radio 4 and online at bbc.co.uk

La Porte des Indes, London W1

1 x sea scallops Pondicherry

1 x Dakshin lentil soup

1 x palak ghosh

1 x saag paneer

2 x rice and naan bread

2 x large sparkling water

2 x coffee

Total: Â£39.16

Philanthropy â€˜can eclipse G8â€™ on poverty

James Wheatcroft — Sun, 22 Apr 2007 04:43:02 GMT

Philanthropy â€˜can eclipse G8â€™ on poverty

By Leyla Boulton and James Lamont

Published: April 8 2007 22:04 | Last updated: April 8 2007 22:04

Wealthy philanthropists have the potential to do more than the Group of Eight leading nations to lift Africa out of poverty, according to Jeff Sachs, special adviser to the United Nations secretary-general.

Mr Sachs told the Financial Times that the financial clout of the likes of Microsoftâ€™s Bill Gates and international investor Warren Buffett, who have pledged billions of dollars to global health and education, could eclipse flagging governmental initiatives.

â€œThe Rockefeller Foundation was the worldâ€™s most important development institution of the 20th century, and the Gates Foundation can be that of the 21st century,â€ he said. â€œGates can make a huge difference if they hit the right model.â€

The Bill and Melinda Gates Foundation was already the biggest charitable group in the world before Mr Buffett last year pledged to give it the bulk of his $40bn-plus (â‚¬30bn, Â£20bn) fortune.

Mr Sachs proposed that other, less wealthy people could contribute to a new private sector foundation that could help speed the elimination of diseases and tackle specific challenges.

â€œThere are 950 billionaires whose wealth is estimated at $3.5 trillion [$3,500bn]. An annual 5 per cent â€˜foundationâ€™ payout would be $175bn per year â€“ that would do it. Then we donâ€™t need the G8 but 950 people on the Forbes list,â€ said Mr Sachs. â€œMaybe private philanthropists will champion solutions to individual problems rather than the G8,â€ he said.

He was speaking as the Organisation for Economic Co-operation and Development reported last week that aid from rich countries to Africa remained static last year even though G8 leaders promised in 2005 to spend $50bn more each year to 2010 on aid, with half the rise going to sub-Saharan Africa. The so-called Gleneagles commitments were championed by Tony Blair, UK prime minister, and Gordon Brown, his chancellor.

Mr Sachs, complaining about the failure of governments to keep their aid promises, was answering a question about the potential impact of a new wave of philanthropic giving by wealthy individuals and corporations

â€œGroups like Rotary have done a lot, have brought down polio 100-fold,â€ he said, referring to a public-private partnership started in 2003 to eradicate polio also involving the UN, the World Bank and the Gates Foundation. This work is all based on the principle that â€œeconomic development is about applying technology on a mass scaleâ€.

But Mr Sachs also criticised what he described as the shrinking role of the World Bank as it had pursued a single-minded focus on fighting corruption under its president, Paul Wolfowitz. â€œThey behave like thereâ€™s an ogre out there called corruption and we [the World Bank] canâ€™t do anything because we have to tackle the beast first.â€

Last week, Mr Wolfowitz announced a review of World Bank operations, giving Francois Bourguignon, chief economist, the job of drawing up a new strategy.

â€œIf you take any programme and make it practical and give it specific accountability, that is the way to battle corruption.â€

Can There Be a "Just Tax"?

James Wheatcroft — Sun, 22 Apr 2007 04:38:44 GMT

Can There Be a "Just Tax"?
By Murray N. Rothbard
Posted on 4/14/2007
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This article is excerpted from Power & Market (now included in the Scholar's Edition of Man, Economy, and State) where it was originally titled "Canons of 'Justice' in Taxation."

A. The Just Tax and the Just Price

For centuries before the science of economics was developed, men searched for criteria of the "just price." Of all the innumerable, almost infinite possibilities among the myriads of prices daily determined, what pattern should be considered as "just"? Gradually it came to be realized that there is no quantitative criterion of justice that can be objectively determined.

Suppose that the price of eggs is 50Â¢ per dozen, what is the "just price"? It is clear, even to those (like the present writer) who believe in the possibility of a rational ethics, that no possible ethical philosophy or science can yield a quantitative measure or criterion of justice. If Professor X says that the "just" price of eggs is 45Â¢, and Professor Y says it is 85Â¢, no philosophical principle can decide between them. Even the most fervent anti-utilitarian will have to concede this point. The various contentions all become purely arbitrary whim.

Economics, by tracing the ordered pattern of the voluntary exchange process, has made it clear that the only possible objective criterion for the just price is the market price. For the market price is, at every moment, determined by the voluntary, mutually agreed-upon actions of all the participants in the market. It is the objective resultant of every individual's subjective valuations and voluntary actions, and is therefore the only existent objective criterion for "quantitative justice" in pricing.

Practically nobody now searches explicitly for the "just price," and it is generally recognized that any ethical criticisms must be leveled qualitatively against the values of consumers, not against the quantitative price-structure that the market establishes on the basis of these values. The market price is the just price, given the pattern of consumer preferences. Furthermore, this just price is the concrete, actual market price, not equilibrium price, which can never be established in the real world, nor the "competitive price," which is an imaginary figment.

If the search for the just price has virtually ended in the pages of economic works, why does the quest for a "just tax" continue with unabated vigor? Why do economists, severely scientific in their volumes, suddenly become ad hoc ethicists when the question of taxation is raised? In no other area of his subject does the economist become more grandiosely ethical.

There is no objection at all to discussion of ethical concepts when they are needed, provided that the economist realizes always (a) that economics can establish no ethical principles by itself â€” that it can only furnish existential laws to the ethicist or citizen as data; and (b) that any importation of ethics must be grounded on a consistent, coherent set of ethical principles, and not simply be slipped in ad hoc in the spirit of "well, everyone must agree to thisâ€¦." Bland assumptions of universal agreement are one of the most irritating bad habits of the economist-turned-ethicist.

This book does not attempt to establish ethical principles. It does, however, refute ethical principles to the extent that they are insinuated, ad hoc and unanalyzed, into economic treatises. An example is the common quest for "canons of justice" in taxation. The prime objection to these "canons" is that the writers have first to establish the justice of taxation itself. If this cannot be proven, and so far it has not been, then it is clearly idle to look for the "just tax."

If taxation itself is unjust, then it is clear that no allocation of its burdens, however ingenious, can be declared just. This book sets forth no doctrines on the justice or injustice of taxation. But we do exhort economists either to forget about the problem of the "just tax" or, at least, to develop a comprehensive ethical system before they tackle this problem again.

"There is no quantitative criterion of justice that can be objectively determined."
Why do not economists abandon the search for the "just tax" as they abandoned the quest for the "just price"? One reason is that doing so may have unwelcome implications for them. The "just price" was abandoned in favor of the market price. Can the "just tax" be abandoned in favor of the market tax? Clearly not, for on the market there is no taxation, and therefore no tax can be established that will duplicate market patterns. As will be seen further below, there is no such thing as a "neutral tax" â€” a tax that will leave the market free and undisturbed â€” just as there is no such thing as neutral money. Economists and others may try to approximate neutrality, in the hopes of disturbing the market as little as possible, but they can never fully succeed.

B. Costs of Collection, Convenience, and Certainty

Even the simplest maxims must not be taken for granted. Two centuries ago, Adam Smith laid down four canons of justice in taxation that economists have parroted ever since.[1] One of them deals with the distribution of the burden of taxation, and this will be treated in detail below. Perhaps the most "obvious" was Smith's injunction that costs of collection be kept to a "minimum" and that taxes be levied with this principle in mind.

An obvious and harmless maxim? Certainly not; this "canon of justice" is not obvious at all. For the bureaucrat employed in tax collection will tend to favor a tax with high administrative costs, thereby necessitating more extensive bureaucratic employment. Why should we call the bureaucrat obviously wrong? The answer is that he is not, and that to call him "wrong" it is necessary to engage in an ethical analysis that no economist has bothered to undertake.

A further point: if the tax is unjust on other grounds, it may be more just to have high administrative costs, for then there will be less chance that the tax will be fully collected. If it is easy to collect the tax, then the tax may do more damage to the economic system and cause more distortion of the market economy.

The same point might be made about another of Smith's canons: that a tax should be levied so that payment is convenient. Here again, this maxim seems obvious, and there is certainly much truth in it. But someone may urge that a tax should be made inconvenient to induce people to rebel and force a lowering of the level of taxation. Indeed, this used to be one of the prime arguments of "conservatives" for an income tax as opposed to an indirect tax. The validity of this argument is beside the point; the point is that it is not self-evidently wrong, and therefore this canon is no more simple and obvious than the others.

Smith's final canon of just taxation is that the tax be certain and not arbitrary, so that the taxpayer knows what he will pay. Here again, further analysis demonstrates that this is by no means obvious. Some may argue that uncertainty benefits the taxpayer, for it makes the requirement more flexible and permits bribery of the tax collector. This benefits the taxpayer to the extent that the price of the bribe is less than the tax that he would otherwise have to pay. Furthermore, there is no way of establishing long-range certainty, for the tax rates may be changed by the government at any time. In the long run, certainty of taxation is an impossible goal.

A similar argument may be levelled against the view that taxes "should" be difficult to evade. If a tax is onerous and unjust, evasion might be highly beneficial to the economy, and moral to boot.

Thus, none of these supposedly self-evident canons of taxation is a canon at all. From some ethical points of view they are correct, from others they are incorrect. Economics cannot decide between them.

C. Distribution of the Tax Burden

Up to this point, we have been discussing taxation as it is levied on any given individual or firm. Now we must turn to another aspect: the distribution of the burden of taxes among the people in the economy. Most of the search for "justice" in taxation has involved the problem of the "just distribution" of this burden.

Various proposed canons of justice will be discussed in this section, followed by analysis of the economic effects of tax distribution.

(1) Uniformity of Treatment

a. Equality Before the Law: Tax Exemption

Uniformity of treatment has been upheld as an ideal by almost all writers. This ideal is supposed to be implicit in the concept of "equality before the law," which is best expressed in the phrase, "Like to be treated alike." To most economists this ideal has seemed self-evident, and the only problems considered have been the practical ones of defining exactly when one person is "like" someone else (problems that, we shall see below, are insuperable).

All these economists adopt the goal of uniformity regardless of what principle of "likeness" they may hold. Thus, the man who believes that everyone should be taxed in accordance with his "ability to pay" also believes that everyone with the same ability should be taxed equally; he who believes that each should be taxed proportionately to his income also holds that everyone with the same income should pay the same tax; etc. In this way, the ideal of uniformity pervades the literature on taxation.

"The just price is the concrete, actual market price, not equilibrium price, which can never be established in the real world, nor the 'competitive price,' which is an imaginary figment."
Yet this canon is by no means obvious, for it seems clear that the justice of equality of treatment depends first of all on the justice of the treatment itself. Suppose, for example, that Jones, with his retinue, proposes to enslave a group of people. Are we to maintain that "justice" requires that each be enslaved equally? And suppose that someone has the good fortune to escape. Are we to condemn him for evading the equality of justice meted out to his fellows? It is obvious that equality of treatment is no canon of justice whatever. If a measure is unjust, then it is just that it have as little general effect as possible. Equality of unjust treatment can never be upheld as an ideal of justice. Therefore, he who maintains that a tax be imposed equally on all must first establish the justice of the tax itself.

Many writers denounce tax exemptions and levy their fire at the tax-exempt, particularly those instrumental in obtaining the exemptions for themselves. These writers include those advocates of the free market who treat a tax exemption as a special privilege and attack it as equivalent to a subsidy and therefore inconsistent with the free market. Yet an exemption from taxation or any other burden is not equivalent to a subsidy. There is a key difference. In the latter case a man is receiving a special grant of privilege wrested from his fellow men; in the former he is escaping a burden imposed on other men. Whereas the one is done at the expense of his fellow men, the other is not. For in the former case, the grantee is participating in the acquisition of loot; in the latter, he escapes payment of tribute to the looters. To blame him for escaping is equivalent to blaming the slave for fleeing his master.

It is clear that if a certain burden is unjust, blame should be levied, not on the man who escapes the burden, but on the man or men who impose it in the first place. If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone. The exemption itself cannot be considered unjust unless the tax or other burden is first established as just.

Thus, uniformity of treatment per se cannot be established as a canon of justice. A tax must first be proven just; if it is unjust, then uniformity is simply imposition of general injustice, and exemption is to be welcomed. Since the very fact of taxation is an interference with the free market, it is particularly incongruous and incorrect for advocates of a free market to advocate uniformity of taxation.

One of the major sources of confusion for economists and others who are in favor of the free market is that the free society has often been defined as a condition of "equality before the law," or as "special privilege for none." As a result, many have transferred these concepts to an attack on tax exemptions as a "special privilege" and a violation of the principle of "equality before the law." As for the latter concept, it is, again, hardly a criterion of justice, for this depends on the justice of the law or "treatment" itself. It is this alleged justice, rather than equality, which is the primary feature of the free market. In fact, the free society is far better described by some such phrase as "equality of rights to defend person and property" or "equality of liberty" rather than by the vague, misleading expression "equality before the law."[2]

In the literature on taxation there is much angry discussion about "loopholes," the inference being that any income or area exempt from taxation must be brought quickly under its sway. Any failure to "plug loopholes" is treated as immoral. But, as Mises incisively asked:

What is a loophole? If the law does not punish a definite action or does not tax a definite thing, this is not a loophole. It is simply the lawâ€¦. The income tax exemptions in our income tax are not loopholesâ€¦. Thanks to these loopholes this country is still a free country.[3]

b. The Impossibility of Uniformity

Aside from these considerations, the ideal of uniformity is impossible to achieve. Let us confine our further discussion of uniformity to income taxation, for two reasons:

because the vast bulk of our taxation is income taxation; and
because, as we have seen, most other taxes boil down to income taxes anyway.
A tax on consumption ends largely as a tax on income at a lower rate.

There are two basic reasons why uniformity of income taxation is an impossible goal. The first stems from the very nature of the State. We have seen, when discussing Calhoun's analysis, that the State must separate society into two classes, or castes: the taxpaying caste and the tax-consuming caste. The tax consumers consist of the full-time bureaucracy and politicians in power, as well as the groups which receive net subsidies, i.e., which receive more from the government than they pay to the government. These include the receivers of government contracts and of government expenditures on goods and services produced in the private sector. It is not always easy to detect the net subsidized in practice, but this caste can always be conceptually identified.

"The hue and cry should not be to extend the tax to everyone, but on the contrary to extend the exemption to everyone."
Thus, when the government levies a tax on private incomes, the money is shifted from private people to the government, and the government's money, whether expended for government consumption of goods and services, for salaries to bureaucrats, or as subsidies to privileged groups, returns to be spent in the economic system. It is clear that the tax-expenditure level must distort the expenditure pattern of the market and shift productive resources away from the pattern desired by the producers and toward that desired by the privileged. This distortion takes place in proportion to the amount of taxation.

If, for example, the government taxes funds that would have been spent on automobiles and itself spends them on arms, the arms industry and, in the long run, the specific factors in the arms industry become net tax consumers, while a special loss is inflicted on the automobile industry and ultimately on the factors specific to that industry. It is because of these complex relationships that, as we have mentioned, the identification in practice of the net subsidized may be difficult.

One thing we know without difficulty, however. Bureaucrats are net tax consumers. As we pointed out above, bureaucrats cannot pay taxes. Hence, it is inherently impossible for bureaucrats to pay income taxes uniformly with everyone else. And therefore the ideal of uniform income taxation for all is an impossible goal. We repeat that the bureaucrat who receives $8,000 a year income and then hands $1,500 back to the government is engaging in a mere bookkeeping transaction of no economic importance (aside from the waste of paper and records involved). For he does not and cannot pay taxes; he simply receives $6,500 a year from the tax fund.

If it is impossible to tax income uniformly because of the nature of the tax process itself, the attempt to do so also confronts another insuperable difficulty, that of trying to arrive at a cogent definition of "income." Should taxable income include the imputed money value of services received in kind, such as farm produce grown on one's own farm? What about imputed rent from living in one's own house? Or the imputed services of a housewife? Regardless of which course is taken in any of these cases, a good argument can be made that the incomes included as taxable are not the correct ones. And if it is decided to impute the value of goods received in kind, the estimates must always be arbitrary, since the actual sales for money were not made.

A similar difficulty is raised by the question whether incomes should be averaged over several years. Businesses that suffer losses and reap profits are penalized as against those with steady incomes â€” unless, of course, the government subsidizes part of the loss. This may be corrected by permitting averaging of income over several years, but here again the problem is insoluble because there are only arbitrary ways of deciding the period of time to allow for averaging. If the income tax rate is "progressive," i.e., if the rate increases as earnings increase, then failure to permit averaging penalizes the man with an erratic income. But again, to permit averaging will destroy the ideal of uniform current tax rates; furthermore, varying the period of averaging will vary the results.

We have seen that, in order to tax income only, it is necessary to correct for changes in the purchasing power of money when taxing capital gains. But once again, any index or factor of correction is purely arbitrary, and uniformity cannot be achieved because of the impossibility of securing general agreement on a definition of income.

"The tax-expenditure level must distort the expenditure pattern of the market and shift productive resources away from the pattern desired by the producers and toward that desired by the privileged."
For all these reasons, the goal of uniformity of taxation is an impossible one. It is not simply difficult to achieve in practice; it is conceptually impossible and self-contradictory. Surely any ethical goal that is conceptually impossible of achievement is an absurd goal, and therefore any movements in the direction of the goal are absurd as well.[4] It is therefore legitimate, and even necessary, to engage in a logical (i.e., praxeological) critique of ethical goals and systems when they are relevant to economics.

Having analyzed the goal of uniformity of treatment, we turn now to the various principles that have been set forth to give content to the idea of uniformity, to answer the question: Uniform in respect to what? Should taxes be uniform as to "ability to pay," or "sacrifice," or "benefits received"? In other words, while most writers have rather unthinkingly granted that people in the same income bracket should pay the same tax, what principle should govern the distribution of income taxes between tax brackets? Should the man making $10,000 a year pay as much as, as much proportionately as, more than, more proportionately than, or less than, a man making $5,000 or $1,000 a year? In short, should people pay uniformly in accordance with their "ability to pay," or sacrifice made, or some other principle?

(2) The "Ability-To-Pay" Principle

a. The Ambiguity of the Concept

This principle states that people should pay taxes in accordance with their "ability to pay." It is generally conceded that the concept of ability to pay is a highly ambiguous one and presents no sure guide for practical application.[5] Most economists have employed the principle to support a program of proportional or progressive income taxation, but this would hardly suffice. It seems clear, for example, that a person's accumulated wealth affects his ability to pay. A man earning $5,000 during a certain year probably has more ability to pay than a neighbor earning the same amount if he also has $50,000 in the bank while his neighbor has nothing. Yet a tax on accumulated capital would cause general impoverishment.

No clear standard can be found to gauge "ability to pay." Both wealth and income would have to be considered, medical expenses would have to be deducted, etc. But there is no precise criterion to be invoked, and the decision is necessarily arbitrary. Thus, should all or some proportion of medical bills be deducted? What about the expenses of childrearing? Or food, clothing, and shelter as necessary to consumer "maintenance"? Professor Due attempts to find a criterion for ability in "economic well-being," but it should be clear that this concept, being even more subjective, is still more difficult to define.[6]

Adam Smith himself used the ability concept to support proportional income taxation (taxation at a constant percentage of income), but his argument is rather ambiguous and applies to the "benefit" principle as well as to "ability to pay."[7] Indeed, it is hard to see in precisely what sense ability to pay rises in proportion to income. Is a man earning $10,000 a year "equally able" to pay $2,000 as a man earning $1,000 to pay $200? Setting aside the basic qualifications of difference in wealth, medical expenses, etc., in what sense can "equal ability" be demonstrated? Attempting to define equal ability in such a way is a meaningless procedure.

McCulloch, in a famous passage, attacked progressiveness and defended proportionality of taxation:

The moment you abandon â€¦ the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit.[8]

Seemingly plausible, this thesis is by no means self-evident. In what way is proportional taxation any less arbitrary than any given pattern of progressive taxation, i.e., where the rate of tax increases with income? There must be some principle that can justify proportionality; if this principle does not exist, then proportionality is no less arbitrary than any other taxing pattern. Various principles have been offered and will be considered below, but the point is that proportionality per se is neither more nor less sound than any other taxation.

"The goal of uniformity of taxation is not simply difficult to achieve in practice; it is conceptually impossible and self-contradictory."
One school of thought attempts to find a justification for a progressive tax via an ability-to-pay principle. This is the "faculty" approach of E.R.A. Seligman. This doctrine holds that the more money a person has, the relatively easier it is for him to acquire more. His power of obtaining money is supposed to increase as he has more: "A rich man may be said to be subject â€¦ to a law of increasing returns."[9] Therefore, since his ability increases at a faster rate than his income, a progressive income tax is justified. This theory is simply invalid.[10] Money does not "make money"; if it did, then a few people would by now own all the world's wealth. To be earned, money must continually be justifying itself in current service to consumers. Personal income, interest, profits, and rents are earned only in accordance with their current, not their past, services. The size of accumulated fortune is immaterial, and fortunes can be and are dissipated when their owners fail to reinvest them wisely in the service of consumers.

As Blum and Kalven point out, the Seligman thesis is utter nonsense when applied to personal services such as labor energy. It could only make sense when applied to income from property, i.e., investment in land or capital goods (or slaves, in a slave economy). But the return on capital is always tending toward uniformity, and any departures from uniformity are due to especially wise and farseeing investments (profits) or especially wasteful investments (losses). The Seligman thesis would fallaciously imply that the rates of return increase in proportion to the amount invested.

Another theory holds that ability to pay is proportionate to the "producer's surplus" of an individual, i.e., his "economic rent," or the amount of his income above the payment necessary for him to continue production. The consequences of taxation of site rent were noted above. The "necessary payments" to labor are clearly impossible to establish; if someone is asked by the tax authorities what his "minimum" wage is, what will prevent him from saying that any amount below the present wage will cause him to retire or to shift to another job? Who can prove differently?

Furthermore, even if it could be determined, this "surplus" is hardly an indicator of ability to pay. A movie star may have practically zero surplus, for some other studio may be willing to bid almost as much as he makes now for his services, while a disabled ditch-digger may have a much greater "surplus" because no one else may be willing to hire him. Generally, in an advanced economy there is little "surplus" of this type, for the competition of the market will push alternative jobs and uses near to the factor's discounted marginal value product in its present use. Hence, it would be impossible to tax any "surplus" over necessary payment from land or capital since none exists, and practically impossible to tax the "surplus" to labor since the existence of a sizable surplus is rare, impossible to determine, and, in any case, no criterion whatever of ability to pay.[11]

b. The Justice of the Standard

The extremely popular ability-to-pay idea was sanctified by Adam Smith in his most important canon of taxation and has been accepted blindly ever since. While much criticism has been levelled at its inherent vagueness, hardly anyone has criticized the basic principle, despite the fact that no one has really grounded it in sound argument. Smith himself gave no reasoning to support this alleged principle, and few others have done so since. Due, in his text on public finance, simply accepts it because most people believe in it, thereby ignoring the possibility of any logical analysis of ethical principles.[12]

The only substantial attempt to give some rational support to the "ability-to-pay principle" rests on a strained comparison of tax payments to voluntary gifts to charitable organizations. Thus Groves writes: "To hundreds of common enterprises (community chests, Red Cross, etc.) people are expected to contribute according to their means. Governments are one of these common enterprises fostered to serve the citizens as a groupâ€¦."[13] Seldom have more fallacies been packed into two sentences. In the first place, the government is not a common enterprise akin to the community chest. No one can resign from it. No one, on penalty of imprisonment, can come to the conclusion that this "charitable enterprise" is not doing its job properly and therefore stop his "contribution"; no one can simply lose interest and drop out. If, as will be seen further below, the State cannot be described as a business, engaged in selling services on the market, certainly it is ludicrous to equate it to a charitable organization. Government is the very negation of charity, for charity is uniquely an unbought gift, a freely flowing uncoerced act by the giver. The word "expected" in Groves' phrase is misleading. No one is forced to give to any charity in which he is not interested or which he believes is not doing its job properly.

The contrast is even clearer in a phrase of Hunter and Allen's:

Contributions to support the church or the community chest are expected, not on the basis of benefits which individual members receive from the organization, but upon the basis of their ability to contribute.[14]

But this is praxeologically invalid. The reason that anyone contributes voluntarily to a charity is precisely the benefit that he obtains from it. Yet benefit can be considered only in a subjective sense. It can never be measured. The fact of subjective gain, or benefit, from an act is deducible from the fact that it was performed. Each person making an exchange is deduced to have benefited (at least ex ante). Similarly, a person who makes a unilateral gift is deduced to have benefited (ex ante) from making the gift. If he did not benefit, he would not have made the gift. This is another indication that praxeology does not assume the existence of an "economic man," for the benefit from an action may come either from a good or a service directly received in exchange, or simply from the knowledge that someone else will benefit from a gift. Gifts to charitable institutions, therefore, are made precisely on the basis of benefit to the giver, not on the basis of his "ability to pay."

"The reason that anyone contributes voluntarily to a charity is precisely the benefit that he obtains from it."
Furthermore, if we compare taxation with the market, we find no basis for adopting the "ability-to-pay" principle. On the contrary, the market price (generally considered the just price) is almost always uniform or tending toward uniformity. Market prices tend to obey the rule of one price throughout the entire market. Everyone pays an equal price for a good regardless of how much money he has or his "ability to pay." Indeed, if the "ability-to-pay" principle pervaded the market, there would be no point in acquiring wealth, for everyone would have to pay more for a product in proportion to the money in his possession. Money incomes would be approximately equalized, and, in fact, there would be no point at all to acquiring money, since the purchasing power of a unit of money would never be definite but would drop, for any man, in proportion to the quantity of money he earns. A person with less money would simply find the purchasing power of a unit of his money rising accordingly. Therefore, unless trickery and black marketeering could evade the regulations, establishing the "ability-to-pay" principle for prices would wreck the market altogether. The wrecking of the market and the monetary economy would plunge society back to primitive living standards and, of course, eliminate a large part of the current world population, which is permitted to earn a subsistence living or higher by virtue of the existence of the modern, developed market.

It should be clear, moreover, that establishing equal incomes and wealth for all (e.g., by taxing all those over a certain standard of income and wealth, and subsidizing all those below that standard) would have the same effect, since there would be no point to anyone's working for money. Those who enjoy performing labor will do so only "at play," i.e., without obtaining a monetary return. Enforced equality of income and wealth, therefore, would return the economy to barbarism.

If taxes were to be patterned after market pricing, then, taxes would be levied equally (not proportionately) on everyone. As will be seen below, equal taxation differs in critical respects from market pricing but is a far closer approximation to it than is "ability-to-pay" taxation.

Finally, the "ability-to-pay" principle means precisely that the able are penalized, i.e., those most able in serving the wants of their fellow men. Penalizing ability in production and service diminishes the supply of the service â€” and in proportion to the extent of that ability. The result will be impoverishment, not only of the able, but of the rest of society, which benefits from their services.

The "ability-to-pay" principle, in short, cannot be simply assumed; if it is employed, it must be justified by logical argument, and this economists have yet to provide. Rather than being an evident rule of justice, the "ability-to-pay" principle resembles more the highwayman's principle of taking where the taking is good.[15]

(3) Sacrifice Theory

Another attempted criterion of just taxation was the subject of a flourishing literature for many decades, although it is now decidedly going out of fashion. The many variants of the "sacrifice" approach are akin to a subjective version of the "ability-to-pay" principle. They all rest on three general premises:

that the utility of a unit of money to an individual diminishes as his stock of money increases;
that these utilities can be compared interpersonally and thus can be summed up, subtracted, etc.; and
that everyone has the same utility-of-money schedule.
The first premise is valid (but only in an ordinal sense), but the second and third are nonsensical.

The marginal utility of money does diminish, but it is impossible to compare one person's utilities with another, let alone believe that everyone's valuations are identical. Utilities are not quantities, but subjective orders of preference. Any principle for distributing the tax burden that rests on such assumptions must therefore be declared fallacious. Happily, this truth is now generally established in the economic literature.[16]

"If the 'ability-to-pay' principle pervaded the market, there would be no point in acquiring wealthâ€¦"
Utility and "sacrifice" theory has generally been used to justify progressive taxation, although sometimes proportional taxation has been upheld on this ground. Briefly, a dollar is alleged to "mean less" or be worth less in utility to a "rich man" than to a "poor man" ("rich" or "poor" in income or wealth?), and therefore payment of a dollar by a rich man imposes less of a subjective sacrifice on him than on a poor man. Hence, the rich man should be taxed at a higher rate. Many "ability-to-pay" theories are really inverted sacrifice theories, since they are couched in the form of ability to make sacrifices.

Since the nub of the sacrifice theory â€” interpersonal comparisons of utility â€” is now generally discarded, we shall not spend much time discussing the sacrifice doctrine in detail.[17] However, several aspects of this theory are of interest. The sacrifice theory divides into two main branches: (1) the equal-sacrifice principle and (2) the minimum-sacrifice principle. The former states that every man should sacrifice equally in paying taxes; the latter, that society as a whole should sacrifice the least amount. Both versions abandon completely the idea of government as a supplier of benefits and treat government and taxation as simply a burden, a sacrifice that must be borne in the best way we know how. Here we have a curious principle of justice indeed â€” based on adjustment to hurt. We are faced again with that pons asinorum that defeats all attempts to establish canons of justice for taxation â€” the problem of the justice of taxation itself. The proponent of the sacrifice theory, in realistically abandoning unproved assumptions of benefit from taxation, must face and then founder on the question: If taxation is pure hurt, why endure it at all?

The equal-sacrifice theory asks that equal hurt be imposed on all. As a criterion of justice, this is as untenable as asking for equal slavery. One interesting aspect of the equal-sacrifice theory, however, is that it does not necessarily imply progressive income taxation! For although it implies that the rich man should be taxed more than the poor man, it does not necessarily say that the former should be taxed more than proportionately. In fact, it does not even establish that all be taxed proportionately! In short, the equal-sacrifice principle may demand that a man earning $10,000 be taxed more than a man earning $1,000, but not necessarily that he be taxed a greater percentage or even proportionately.

Depending on the shapes of the various "utility curves," the equal-sacrifice principle may well call for regressive taxation under which a wealthier man would pay more in amount but less proportionately (e.g., the man earning $10,000 would pay $500, and the man earning $1,000 would pay $200). The more rapidly the utility of money declines, the more probably will the equal-sacrifice curve yield progressivity. A slowly declining utility-of-money schedule would call for regressive taxation. Argument about how rapidly various utility-of-money schedules decline is hopeless because, as we have seen, the entire theory is untenable. But the point is that even on its own grounds, the equal-sacrifice theory can justify neither progressive nor proportionate taxation.[18]

The minimum-sacrifice theory has often been confused with the equal-sacrifice theory. Both rest on the same set of false assumptions, but the minimum-sacrifice theory counsels very drastic progressive taxation. Suppose, for example, that there are two men in a community, Jones making $50,000, and Smith making $30,000. The principle of minimum social sacrifice, resting on the three assumptions described above, declares: $1.00 taken from Jones imposes less of a sacrifice than $1.00 taken from Smith; hence, if the government needs $1.00, it takes it from Jones. But suppose the government needs $2.00; the second dollar will impose less of a sacrifice on Jones than the first dollar taken from Smith, for Jones still has more money left than Smith and therefore sacrifices less. This continues as long as Jones has more money remaining than Smith. Should the government need $20,000 in taxes, the minimum-sacrifice principle counsels taking the entire $20,000 from Jones and zero from Smith. In other words, it advocates taking all of the highest incomes in turn until governmental needs are fulfilled.[19]

"If taxes were to be patterned after market pricing, then, taxes would be levied equally (not proportionately) on everyone."
The minimum-sacrifice principle depends heavily, as does the equal-sacrifice theory, on the untenable view that everyone's utility-of-money schedule is roughly identical. Both rest also on a further fallacy, which now must be refuted: that "sacrifice" is simply the obverse of the utility of money. For the subjective sacrifice in taxation may not be merely the opportunity cost forgone of the money paid; it may also be increased by moral outrage at the tax procedure. Thus, Jones may become so morally outraged at the above proceedings that his marginal subjective sacrifice quickly becomes very great, much "greater" than Smith's if we grant for a moment that the two can be compared. Once we see that subjective sacrifice is not necessarily tied to the utility of money, we may extend the principle further.

Consider, for example, a philosophical anarchist who opposes all taxation fervently. Suppose that his subjective sacrifice in the payment of any tax is so great as to be almost infinite. In that case, the minimum-sacrifice principle would have to exempt the anarchist from taxation, while the equal-sacrifice principle could tax him only an infinitesimal amount. Practically, then, the sacrifice principle would have to exempt the anarchist from taxation. Furthermore, how can the government determine the subjective sacrifice of the individual? By asking him? In that case, how many people would refrain from proclaiming the enormity of their sacrifice and thus escape payment completely?

Similarly, if two individuals subjectively enjoyed their identical money incomes differently, the minimum-sacrifice principle would require that the happier man be taxed less because he makes a greater sacrifice in enjoyment from an equal tax. Who will suggest heavier taxation on the unhappy or the ascetic? And who would then refrain from loudly proclaiming the enormous enjoyment he derives from his income?

It is curious that the minimum-sacrifice principle counsels the obverse of the ability-to-pay theory, which, particularly in its "state of well-being" variant, advocates a special tax on happiness and a lower tax on unhappiness. If the latter principle prevailed, people would rush to proclaim their unhappiness and deep-seated asceticism.

It is clear that the proponents of the ability-to-pay and sacrifice theories have completely failed to establish them as criteria of just taxation. These theories also commit a further grave error. For the sacrifice theory explicitly, and the ability-to-pay theory implicitly, set up presumed criteria for action in terms of sacrifice and burden.[20] The State is assumed to be a burden on society, and the question becomes one of justly distributing this burden. But man is constantly striving to sacrifice as little as he can for the benefits he receives from his actions. Yet here is a theory that talks only in terms of sacrifice and burden, and calls for a certain distribution without demonstrating to the taxpayers that they are benefiting more than they are giving up.

Since the theorists do not so demonstrate, they can make their appeal only in terms of sacrifice â€” a procedure that is praxeologically invalid. Since men always try to find net benefits in a course of action, it follows that a discussion in terms of sacrifice or burden cannot establish a rational criterion for human action. To be praxeologically valid, a criterion must demonstrate net benefit. It is true, of course, that the proponents of the sacrifice theory are far more realistic than the proponents of the benefit theory (which we shall discuss below), in considering the State a net burden on society rather than a net benefit; but this hardly demonstrates the justice of the sacrifice principle of taxation. Quite the contrary.