31 July 2014

Why Progressive Taxation Abuses Tory Policies for the Common Good

Arguable it is that the traditional Tory is more amenable to the exercise of government and the financial burdens therein assumed than is the Whig; modern conservatism, arising from Burke’s pen and Peel’s practice (under the previous tutelage of Pitt the Younger and the 2nd Earl of Liverpool) were conscious steps away from the Toryism of paternalism and protection—Toryism which had its philosophical foundations in feudal society where the prince exercised charity through personal noblesse oblige but also through the State offices he assumed. Samuel Johnson, the idiosyncratic Tory par excellence, took the American colonists-in-rebellion to task for their Enlightenment views on taxation, arguing in ‘Taxation no Tyranny’ that

the supreme power of every community has the right of requiring from all its subjects, such contributions as are necessary to the publick safety or publick prosperity, which was considered by all mankind as comprising the primary and essential condition of all political society, till it became disputed by those zealots of anarchy, who have denied to the parliament of Britain the right of taxing the American Colonies.1

Progressive taxation builds on this notion, on the basis that those who earn more can afford to pay more.2 From Johnson a theoretical underpinning for graduated taxation can also be adduced, for he held that ‘A tax is a payment exacted by authority from part of the community for the benefit of the whole. From whom, and in what proportion such payment shall be required, and to what uses it shall be applied, those only are to judge to whom government is intrusted.’3 Johnson died in 1784, while the first income tax in the United Kingdom was introduced by Pitt thirteen years later, as a means of funding the nascent Napoleonic Wars.

Our understanding of political economy has evolved much since the time of Johnson; indeed, it was only in the year following Johnson’s essay that Adam Smith published his An Inquiry into the Nature and Causes of the Wealth of Nations,4 incidentally the same year that the Declaration of Independence was announced in Philadelphia. We now have a better understanding of capitalist enterprise, the importance of investment and entrepreneurship, and the limitations of the State in promoting, much less engaging in, productive activities. Far better for the marketplace to create wealth and employment opportunities than to have the State redistribute wealth ineffectually.

Yet beliefs that entrepreneurial activity behaves neutrally to disincentivising taxing policy still exist, nowhere more so than in the reborn idea of ‘progressive’ taxation, which takes the charitable precept that ‘from whom much is given, much is expected’ and enacts it into law. Taken to extreme lengths, it violates Laffer Curve analysis that shows that beyond a certain revenue maximising point—roughly 20-30 per cent—high marginal rates of taxation curb business incentives and, instead of raising more revenue for the State, actually raise less.5

To add insult to injury, though progressive taxation was introduced originally as a tax upon the rich, it now encompasses the middle class, both because ‘soak the rich’ policies can no longer fund the burgeoning Welfare State and due to pay rises (largely due to inflationary pressures) which float the earnings of the higher middle class into corresponding tax brackets.

As John Chamberlain wrote of the economic effects,

Psychologically speaking, there is obviously some point where the progressive tax must recoil upon itself, destroying the base from which it might hope to achieve a maximum of “take.” Just where the point is we cannot tell: there is no way of measuring businesses that are unborn, or energies and creative enthusiasm that simply fail to well up. But when a progressive tax dampens the impulse to generate income, then the tax base itself must narrow and diminishing returns set in.6

Whatever can be said in favour of progressive taxation as an historical artefact (rooted in feudal duties of noblesse oblige), in practice it has grown out of all proportion as a means of helping at the bottom by skimming more from the top. The appetite of the leviathan State knows no bounds.

Here endeth the first lesson; all which serves as preamble for my essay ‘Taxing the middle class to extinction’, published by courtesy of the Institute of Economic Affairs.

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#DMI_Reads Update — Here is a list of current reading for the month of July:

  • William Graham Sumner, The Challenge of Facts and Other Essays, Albert Galloway Keller, ed. (New Haven: Yale University Press, 1914) [insightful essays on politics and economics from the father of American sociology; I quote extensively from ‘What Makes the Rich Richer and the Poor Poorer?’ in the IEA essay above]; and
  • Albert Taylor Bledsoe, Was Davis a Traitor; or Was Secession a Constitutional Right Previous to the War of 1861? (Richmond, VA: Hermitage Press, 1907 [1866]) [an examination of the ‘compact’ theory of American Union (as opposed to the ‘nationalist’ theory) and the legitimacy of state secession, with a view to the Civil War actions of Confederate president, Jefferson Davis].

ENDNOTES

1. Samuel Johnson, ‘Taxation no Tyranny; an Answer to the Resolutions and Address of the American Congress [1775]’, in The Works of Samuel Johnson, LL.D., vol. 8 (London: Nichols and Son, 1816), 155-204; see 156.

2. For an excellent overview of progressive taxation, see John Chamberlain, ‘The Progressive Income Tax’, The Freeman: Ideas on Liberty, 11:11 (November 1961): 30-42.

3. ‘Taxation no Tyranny’, 162. Emphasis added.

4. Curiously, Smith too laid the theoretical groundwork for progressive taxation: ‘The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.’ See An Inquiry into the Nature and Causes of the Wealth of Nations, R.H. Campbell and A.S. Skinner, eds., Glasgow Edition of the Works and Correspondence of Adam Smith, vol. 2b (Indianapolis: LibertyClassics, 1981), V.ii.b.3.

5. Daniel J. Mitchell, ‘Taxation and government spending’, in A Beginner’s Guide to Liberty, Richard Wellings, ed. (London: Adam Smith Institute, 2009), 36-46; see esp. 42-43.

6. John Chamberlain, ‘The Progressive Income Tax’, 32.