Global discussions about domestic tax policy are increasingly dominated by one conceptual framework: tax as part of a “social contract,” or “fiscal social contract.” Moore, Prichard and Fjeldstad describe the rise of this idea in their 2018 book:
Arguments in favour of the expansion of taxation are often linked to a belief in the potential of such an expansion to contribute to state-building and increased government accountability. A particular narrative about these links has become relatively widespread in recent years… expansion of taxation may prompt processes of ‘tax bargaining’ and the construction of new ‘fiscal social contracts’ as tax payers resist taxation, make demands for reciprocity and enter into constructive interaction with governments. This narrative is grounded in the history of taxation and state-building in early modern Europe, but appears to be supported by the results of recent research in Africa and elsewhere in the developing world.
The notion of a contract also aligns well with the modern idea that effective taxation is not mainly about coercion, but must involve a considerable degree of quasi-voluntary compliance, where norms of behavior encourage taxpaying even when the risk of sanction is small. The motivating force for such compliance is that there is an underlying contract: I pay taxes in exchange for needed public services, so I do not need to be actively strong-armed.
As a framework that accurately describes the history of taxation, the social contract has much to commend it. For this reason, the concept has begun to appear in various fora as a desideratum of capacity building and advocacy around tax. For example, Oxfam describes their fiscal justice work as rooted in the social contract: “Tax systems, the budget cycle and public spending are the most visible and tangible expression of the social contract between citizens and state.”
We at the International Budget Partnership (IBP) also use the term regularly in our tax work. Even academic work, mainly focused on empirical assessments of how tax systems work, makes the case for social contracts as an end, not only an historical means. As the abstract of one article on tax in Nigeria states: “An important part of every country’s development process is the building of a social contract in which citizens pay tax and, in turn, receive public goods and services.”
But there are risks when we treat this positive concept (that is, a concept that describes how the world is) as a normative concept (that is, as a guide to how the world should be). Among the most important is that the central conceit of bargaining means that there is a direct link between what people are giving up in exchange for what they are getting. This ineluctably leads to the conclusion that those who have more to give can expect to receive more.
Understood in this way, a social contract approach does not appear to provide a solid foundation for progressive or redistributive taxation. If tax is about putting resources into the pot in exchange for services, poor and lower income groups with less to give are also not able to get very much out. At the same time, the rich can justify demanding policies that benefit them in exchange for their larger contributions. Some research suggests this is exactly what happens in modern states: states that tax lower income residents more tend to provide more social services, while those that rely more heavily on taxing the rich provide more property protection. New research also finds that in some contexts, poor citizens operating in the informal sector pay very little if any tax, which would seem to preclude them from participating in the “fiscal social contract.” Emphasizing a social contract approach to tax, then, seems to undercut the policy positions of many advocates for equitable taxation.
The surprising thing about this conclusion is that it is at odds with a powerful tradition in moral and political philosophy that emphasizes social contracts as a foundation for justice. Contract theory in political philosophy dates back to Thomas Hobbes and John Locke. They notoriously came to divergent conclusions about the nature of the contract, but their core idea, and indeed the core principle for all social contract theorists, is that the basis of a just system is consent of the governed to political institutions.
In the last century, contract theory was further developed by John Rawls in A Theory of Justice. Rawls used the social contract, and this same notion of consent, to derive highly egalitarian principles that justified significant redistribution. Other “contractualist” moral philosophers, such as T.M. Scanlon, have built on this framework, arguing that it provides special consideration for those who are worst off under any social arrangement.
Why does this Rawlsian social contract differ from the kind of bargaining that is at the heart of the modern tax framework? Why does it appear to invite progressive taxation while the “fiscal social contract” seems to undercut it?
The normative project that Rawls undertook with his social contract was not meant to describe the rise of modern states, as the “fiscal social contract” framework in tax scholarship is meant to do. The differences between these two ideas about social contracts emerge in the first instance from the use of the same term to describe both what is and what should be. History is dominated by “might makes right” bargains among powerful interests, but our vision of the world going forward is one in which the social contract should be based on ideas of equality and fairness.
This relates to the second and more important difference between these “contracts.” In the long tradition of moral and political philosophy that leads up to A Theory of Justice (and beyond), the social contract is not between citizens and the state. It is rather among citizens to create the state. In other words, the very nature of the contract is one between free persons in some “state of nature,” before the state exists, and not between an existing institution and “taxpayers.”
What we owe to each other as free persons is inherently a different matter from what we owe the state. In this conception of the social contract, the contract is truly social (between people) and the state is the executor of that contract.
This is a fundamental distinction. The principal question is one of collective action: what can we do together in what Rawls called a “fair system of cooperation” to live our lives well? It seems clear that this question cannot resolved by simply asking some form of free trade question: what will you give me if I give you X? We want to know instead what constraints we might put on our individual liberties in order to live together and prosper.
Because we are free and equal people coming together to make this decision, and because a social contract is something we consent to (otherwise it is not a contract), the terms must be such that they can be justified to everyone as fair and reasonable. Or, as Scanlon would put it, we must come to a set of principles that no one could reasonably reject. It follows that many people, and particularly those people who are less well off, will not reasonably give up any of their own rights or claims to others without something in return. As a pact between free and equal citizens in a moral sense (regardless of their power and influence in material terms), it lays the groundwork for straightforward bargaining, but also for redistributive claims that ensure a degree of equality in material terms. Redistribution is warranted by our moral duty to ensure that all enjoy at least the minimal material well-being necessary to be full participants in society.
In summary, there are two different sorts of object at play here that go by the same name. One is a positive construct that describes how states and citizens interact, characterizing this interplay as a bargain over access to resources. The other is a normative construct that describes how citizens should bargain with each other, and how they ought to create a society and state institutions to implement their agreements. The first of these is a useful guide to how the world is, but it is less useful as a frame for how we want the world to be. The second is more fertile ground for progressive taxation to take root.
What is to be done about this conceptual confusion? One possibility is that we refer to the “fiscal social contract” rather as a “state-citizen contract,” reserving the term “social contract” for the idea of a contract among members of the public. This might help. Perhaps a better option is to focus on two subsidiary concepts: “tax bargaining,” which is the central mechanism (e.g., tax for services) at work in the fiscal social contract, and “social justice” or “fiscal justice” which is the more relevant concept (e.g., agreeing to terms for fair cooperation) for the social contract.
Ultimately, advocates for fair and equitable taxation must construct a broader narrative around the social contract, one that spells out more clearly the social and normative commitments they have in mind: the social contract as a fair agreement among free and equal people that can be justified to all who pledge to uphold it. Only when we have made this position clear will we be able to build effective coalitions for tax justice that explicitly endorse redistribution through the tax system.