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 2^nd 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.

Speculation in light of Catholic Social Teaching

To-day the Institute of Economic Affairs posted my essay ‘Pope Francis should praise speculators, not spurn them’. Addressing a conference in Rome meeting to discuss the topic of impact investing, the Pope praised its work on behalf of the poor and marginalised, with a not-too-subtle condemnation of investment for self-interest.

Yet from the economic perspective, any legal investment is an investment toward the common good (barring criminal activities), as any successful enterprise will benefit not only the entrepreneur but also provide employment opportunities and make available a new good or service that serves a public need. At the same time, the increase in wealth makes additional charitable-giving possible. Asking the State to intervene in the investment process will only set up new bureaucratic obstacles, leading to economic decisions that are not motivated by the efficiency of free consumer-choice but by the wastefulness of political agendas.

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

• Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993) [insightful analysis that economic growth also entails failure as innovation and competition jostle in the marketplace; fortunately, though, the failure of some usually means better opportunities for all]; and
• S.C. Littlechild, The Fallacy of the Mixed Economy: An ‘Austrian’ Critique of Recent Economic Thinking and Policy, 2^nd ed. (London: Institute of Economic Affairs, 2009 [1986]) [a lovely account of Austrian economic principles in relation to classical economic theory and planned economies, particularly in relation to the early years of the Thatcher ministry].

I have also been reading up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

And to-morrow, enjoy a peaceful Dominion Day!

Public Choice and the Free Press

Although freedom of the press does not usually occupy a central theme in introductory Public Choice Theory texts, it is an essential part of keeping government, politicians, and the bureaucracy honest. Without constant scrutiny and accountability, the political class is apt to become careless and equate their private interests with the public good — one of the key warnings elaborated in the Public Choice philosophy.

This independent oversight is threatened, therefore, when the State believes it has the right to oversee the modus operandi of the press (beyond the general legal norms which are prescribed for all citizens). Will the Fourth Estate be punished with legal coercion for publishing information that uncovers official malfeasance? Or will it tailor its reporting to satisfy its political masters, enabling future acts of impropriety?

Students of Public Choice, then, believe a free press is a necessary safeguard to individual liberty.

My full argument for the Institute of Economic Affairs is here.

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#DMI_Reads Update — Two volumes are in the reading queue this month:  A Humane Economy (Regnery, 1960) by Wilhelm Röpke and Economic Sophisms—First Series (Ludwig von Mises Institute, 2011) by Frédéric Bastiat.

DMI Omnibus Update on Disraeli’s Birthday

Earl of Beaconsfield

While research and writing at DMI continue unabated, I have been remiss at sending out update notices for several published columns over the last several months. And so without further delay — and in honour of Benjamin Disraeli’s 208th birthday! — here are links to recent postings at the Institute of Economic Affairs and the Adam Smith Institute to get you caught up:

• ‘The organic roots of oaks and free markets’ takes a tongue-in-cheek Telegraph column and illustrates why the Conservative party’s modern icon of an oak tree is an excellent exemplar of the organic dynamism of free markets, and why a return to the ‘Thatcher torch’ — representing the light of liberty — is a bad omen if taken to mean more robust government intervention in the economy.


• ‘Tax Freedom for the Poor!’ is an appeal to raise the threshold at which the low-paid begin to pay income tax — allowing them to keep more of what they earn will build their self-respect and act as a work incentive, while at the same time curbing the extent of government redistribution. (A second theme of this posting is that while the poor who earn less than the threshold will necessarily be removed from the income tax register, they nevertheless still do pay any number of ancillary taxes, which may itself be considered a good thing: An esprit de corps is fostered with their fellow citizens while making them conscious of the true costs of government.)


• ‘Without capitalism, can there be culture?’ argues that we owe much of our cultural attainment because of the free market and the division of labour which it encourages — not despite of them. (I will admit that other factors contribute to culture, too.) This avenue of defence will be familiar to students of Adam Smith and to admirers of Josef Pieper’s small classic Leisure: The Basis of Culture.


• ‘America’s Chief Magistrate and the Spirit of ’76’ looks at American politics from the perspective of the Founders’ vision of individual liberty and limited government. Intended to be a rather minor position, the Presidency has assumed powers never intended either for the Chief Executive or the Washington establishment. Intrusions into the actions of individuals and the marketplace are hallmarks of ‘government failure’ that only a spirited return to constitutionalism can avert.


• ‘Can Americans afford compromise on the fiscal cliff?’ demonstrates that, à la Laffer Curve analysis, if higher tax revenues are the object, then raising the marginal tax rate on the wealthy is not the answer; though Aristotle taught that compromise as a mean between deficiency and excess is oftentimes the route to realising the common good, when the options are between right and wrong there is only one option. (Cross-posted at Public Finance International.)

Well, that’s a wrap. A reminder, too, to join the discussion on DMI’s Facebook page (please sign-up if you are not already a member) and tell your friends and neighbours about us.

Wishing you a very Merry Christmas, Season’s Greetings, and all best wishes for 2013!

From Doctrine to Detail: Why Conservatism Is Doomed

In this week’s essay, I examine some of the implications for British Toryism arising from recent local elections — extrapolating from a Telegraph column by Ed West, ‘Conservatism is doomed. Head for the hills’.

West looks at three factors affecting the decline of the Conservative party: its loss of identity, the voting pattern of its supporters, and the relationship between its MPs and the electorate. These are key ingredients of study for public choice theory, and I argue that one step in the right direction is for Toryism to return to first principles. Paraphrasing Sir Ernest Benn, a Conservative renaissance must begin with a return from detail to doctrine.

Click here for my full argument at the Institute of Economic Affairs.

Electoral High-Jinks Mar Canadian Politics

A national controversy that first reared up in late February continues to simmer in Canadian politics: Revelations that, during the federal electoral campaign in May 2011, numerous constituents across the Dominion were subjected to harassing telephone calls in the late of night and directed to non-existent polling stations on election day.

These are disconcerting developments, regardless of the political parties involved and the final outcome of the ballot results. Nevertheless, for students of public choice economics, such shenanigans are unsurprising; the gains from winning high office are great, and never more so in the age of the all-encompassing Welfare State. When the possibilities for self-enrichment and aggrandising one’s friends are so tempting, is it any wonder that our political class behaves so badly?

Click here for my full argument at the Institute of Economic Affairs.

Mapping the Dangers of Competitive Harm

Last week a Cato Institute report caught my eye, about a French commercial court awarding damages to a map-maker for losses incurred through potential customers’ use of Google Maps.

Serendipitously, at the time I was reading Richard Epstein’s Free Markets Under Siege, where he examines ‘competitive markets and compensation for competitive harms’. In the free market system, sellers compete for buyers, who base their purchases on such qualities as price and quality. If the seller can meet consumer demands, free exchange will occur; if not, consumers will go elsewhere and the seller must either improve his business model or close up shop.

Yet the practice of competitive harm means that successful businesses must compensate businesses that are unable to attract trade — a practice that, if followed to its logical conclusion, means that the dynamic free market must ultimately succumb to the deadened economics of socialism.

Click here for my full argument at the Institute of Economic Affairs.

America’s Sublime Debt Ceiling Crisis

For many watching the ongoing debate in American politics about raising the level of the debt ceiling, the experience has been sublime — to use Edmund Burke’s definition to describe ‘whatever is in any sort terrible, or is conversant about terrible objects, or operates in a manner analogous to terror’.

At the heart of the debate are fundamental questions of politics: How much government do Americans want? Are they willing to pay for it? What are the socio-economic repercussions of the Welfare State?

Democrats see more government as an aid to individual freedom and self-realisation, whereas Republicans argue that more government is a detriment to those ends and will benefit primarily the political class alone. It becomes an existential contest between equality and liberty, respectively.

In the short term, the issue of increasing the federal government’s borrowing limits has been an opportunity for partisans to mount their favourite hobby horses, whether it’s spending cuts to grow the economy or in taxing the rich to make them pay their fair share — rationalising expenditure priorities and the possibility of the U.S. defaulting on its debt obligations have been relegated to the periphery.

One side only, I offer, has economic fundamentals in its favour, and they manifest themselves in the long-term consequences for capitalism and the free economy.

Click here for my full argument at the Institute of Economic Affairs.

ADDENDUM: The negative impact of tax rises beyond the ‘governing optimum’ of the Rahn curve — and more specifically, the ‘tax burden’ of the Laffer curve — has been brilliantly summarised by Harvard economist Jeffrey A. Miron: ‘By reducing the income of households and the profits of businesses, higher tax rates discourage consumption and investment, slowing the economy in the short run. By reducing hiring, savings, and investment, they reduce economic growth in the long run. And higher tax rates are undermined by tax evasion and avoidance, making them an inefficient way to raise revenues.’

Public Choice Theory and Lords Reform

While preparing my partial study, Reform of the Senate of Canada: A Progressive Conservative Perspective, it struck me how amenable public choice theory is for Anglo-Canadian proponents of appointed upper chambers. This appeared to be an unexplored avenue well-worth following up, and the result is House of Lords reform: lessons from public choice theory.

Public choice — the application of economics to politics — has two main principles:

First, it argues that we are all motivated primarily by self-interest, whether in our private or public personas. An elected upper chamber, therefore, will not automatically be more selflessly devoted to the commonweal than an appointed chamber — indeed, on this point, who can fault the existing body? — and, given the incentives to solicit votes by offering electoral inducements, may be an even worse example of institutional democracy.

Second, in acknowledging the fact that markets are imperfect, public choice teaches that the answer is not necessarily to be found in the State: that ‘government failure’ is a more intractable problem than its market counterpart. Elected upper chambers, therefore, are no panacea for what ails us politically. In fact, they are probably a far worse option than the appointed chambers in the Westminster parliamentary tradition, especially for those who favour limited government and fear ever-more State intrusion into personal liberty.

(It puzzles me why libertarians disproportionately advocate for an elected upper chamber, unless, as anarcho-capitalists, they mischievously wish to undermine the political process through a ‘scorched-earth-policy’ approach, where the legislative work in both lower and upper houses grinds to a halt through deadlock.

Significant, too, is the tension between utilitarian, majoritarian democracy versus deontological questions of natural rights, to which more government will contribute and which libertarians — theoretically at least — should oppose in the name of freedom.)

I apply these public choice principles to the composition of the House of Lords, in my blog column for the British think-tank Institute of Economic Affairs. My thanks to Richard Wellings and Philip Booth for their assistance. An in-depth analysis will be published in Economic Affairs this autumn.

Click here for my full argument.