Why do we collect taxes on income from labor?

Question

This question tries to illuminate why it is probably good if within a country/an economy there are more jobs rather than fewer jobs. I would agree, it seems to me that employment is likely to lower the chances of poverty and crime, and modern western societies have placed a lot of value on being employed (or working in general, as in being self-employed or even owning and running a business - but most people still work regular old jobs). Thus, as a society, we probably should be interested in as many people being employed as possible.

That being said, why do we levy taxes on income from labor, as most if not all countries seem to do?

I understand there are practical reasons to do so: It is relatively easy to do. It has been done for a long time and is widely accepted. It is not easy to get rid of the tax, because of its large share in government income. But I am interested in the justification, not the practical reason.

I am also (currently) not interested in the tax rate for income from labor compared to the one for income from investment, such as owning shares in a company or renting out housing. There are many great arguments to be had over them, but that shall not be the purpose of this question.

One possible answer is that the government provides a framework that must be paid for but allows an individual to work: enforcement of contracts, public safety, national defense etc. But this in itself is an argument for taxes, not an income tax on labor.

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For the purpose of this question, I would define labor as working for someone else, who is not a customer. Examples would be: Alice works in a retail store under a contract that is not limited in length. Bob works in a factory through a temp agency. Nonexamples would be: Eve works as a consultant, is hired for limited amounts of time by companies and renegotiates the terms every time. Kim is a lawyer, working in a one-person firm and looking to expand, not join another firm.

Further, I define taxes as payments that go into the general funds of the government, i.e. not the contribution to mandatory health care insurance, mandatory retirement insurance, mandatory accidental injury insurance etc. Some people see those as taxes - I do not, I consider them premiums.

Answer 1

In American history, income taxes were defended largely for practical reasons. That (unfortunately) contradicts your desire for "justification, not the practical reason". I hope the history below is still helpful to you.

Taxes in the Federalist Papers

Six of the federalist papers are dedicated to taxes. The authors are not shy about invoking moral arguments regarding the rights or obligations of citizens, and yet they don't offer a moral examination of this particular subject.

Taxes are to be established because they are necessary to run a government (Federalist #30). If you have a government, and it is to be sovereign, than it must have the ability to do the things that are necessary to sustain a government - including raise taxes.

There is no specific mention of income taxes at this point. However, we will see this reasoning is pervasive.

The Revenue Act

The first regular income tax in America was contained in the Revenue Act. The act was passed in 1861, in the early days of the civil war. The Act itself doesn't specify its purpose, but many sources indicate the reasons were entirely pragmatic. For example, The Library of Congress summarizes the purpose of the Act as being a mechanism to pay for the Civil War.

According to this article in the Pittsburgh Tax Review, one reason that the US decided to implement an income tax (in addition to the array of other taxes introduced at that time) was because Western states objected to taxes only on consumption. Those states would generally have had low per-household incomes, and consumption taxes were felt to unfairly tax the poor, who spend more of their money than do wealthy people. The addition of an income tax was a compromise to attract the support of these states - the income tax hits wealthy people more than poor.

The reasoning is still basically the same as it was in the Federalist Papers: the reasons are entirely practical, rather than moral.

16th Amendment

The 16th Amendment would eventually create a national income tax in the modern sense (prior taxes were struck down because they were not apportioned on a per-state basis).

By that time, the idea of a national income tax was being supported by moral arguments. According to the same article in the Pittsburgh Tax Review the argument was largely the same as before: an income tax forces the wealthy to pay their share of the nation's costs, instead of unfairly burdening the poor working-man. Although there was still an urgency to resolve our national debt, the argument had been "romanticized" (in the author's words) to the point that serious moral arguments were made, rather than practical ones.

A second reason that moral arguments developed at this time, was that contemporary governments did not have extensive experience with income taxes. The taxes at the time of the Civil War were relatively short lived, and only one part in a broad tax strategy. This would be the first permanent national income tax - and there was no good past evidence to reason from.

Not Everyone Agrees

Of course, not everyone agrees. One modern example is Sam Brownback, the current Governor of Kansas, and his "glidepath to zero" policy. The thought there is that income taxes unfairly burden the people who create value for society - business owners. Additionally, consumption taxes are fair because they are optional - you can choose to spend more or less money.

Answer 2

It probably works out fairer. There are basically two practical possibilities - taxes from labour, or taxes from consumption. The consumption tax may seem fairer on the surface, but it ignores the fact that those at the very top of the earnings pile spend comparatively less of their earnings on consumption. Hence, to raise $X to run a government, those who do not earn much would end up paying comparatively more tax simply on the things they require to survive.

As an example, there's a person that earns $10m a year. They live on $2m a year. If consumption tax is 30%, they end up contributing $600k per year in tax. Another person earns $30k per year. Their expenditures are $28k, so they end up contributing $8.4k per year in tax.

In this example, the first person ends up only contributing 6% of their income to the tax man, but the second contributes 28% simply buying the things they require to survive. Obviously this is not really fair.

Answer 3

Income tax is a global universal tax existing in pretty much every country. The list of countries without is small and consists mostly of tax heavens, failed states and a few oil dictatorships.

To me, there seem to be three main reasons why income tax is so successful:

1. Historically, taxes were collected from the peasants, i.e. the working class. An income tax is simply the continuation of historical taxes.
2. Power, employees are the weakest people who have something you can take. They aren't organised on a country-scale, they are easily divided against each other, and individually are almost entirely powerless compared to the government. They are the weakest link, the easiest prey. Industries, churches and other large-scale organisations have demonstrated that they have means to fight against taxes aimed at them. Raising the income tax or the VAT gives you a few weeks of angry headlines and no long-term impact on your votes or other political power.
3. Width, income tax targets the largest amount of your population with the smallest number of exceptions and the widest spread. More specific taxes allow people ways to circumvent them, or only affect a part of the population, raising questions of equality. Income tax affects almost everyone and is - like VAT - a universal tax.

Answer 4

It allowed the government to collect revenues from persons doing business within the US, who otherwise didn't have (or minimally had) the qualifying assets, mainly: land, property railroad, and a few investments etc.

Founders wanted citizens to have a stake in new America (articles of confederation drafting and usage timeframe forward), and it was personal property rights—land ownership including the rights for that protection and defense (self) thereof.

Leading up thru the civil war, the debate on what constituted as "property" extended to profits off [slave]labor and off slaves themselves.

Loopholes were abundant to avoid paying taxes and since it was done at a state/local level--like owning property in one state and labor in another, or having homes & business destroyed during the wars--the tax collected varied widely, to non-existent in badly torn areas.

I'd imagine it's difficult to uphold constitutional obligations of raising and funding a military, since the military was used during the Civil War to take down the confederate states; and those regions definitely had nothing to fork over for a while after that defeat.

Answer 5

I am also (currently) not interested in the tax rate for income from labor compared to the one for income from investment, such as owning shares in a company or renting out housing.

You should be interested in this tax rate too because often capital gains from selling shares can be as low as 15% whilst personal income taxes can be as high as 50%. Therefore in many situations an executive's pay will be a combination of salary + shares. The justification floated to the average man is it is an incentive for the executive to increase stock value for shareholders. However because of the timing involved (executive buys shares at time prices are low and sells when prices are high) profit is almost always guaranteed.

Not asked in your question is "do we need personal income taxes?". Under a gold based money system--yes you do. Under a FIAT currency system where debt is constantly expanding--no you don't. As long as other governments recognize your currency has value you can keep printing it and paying government employees, purchasing goods and paying citizens welfare, etc.