So I was in a discussion and someone asked me why a progressive tax system was a bad idea. I’m just a layman but is this an accurate, Austrian, economic argument?
Thanks!
"OK. There are only two ways to get wealth - you can steal it, or you can create it. Really there’s three ways actually, someone can give it to you as well. OK. So a highly progressive tax system punishes those who create the most wealth - it encourages them to create less wealth. Further, it enables big government (by raising a lot more money for the state), which is bad.
It does not help the poor to hurt the rich - it simply hurts the rich. Indeed, it generally hurts the poor as well. To understand why, you must understand what determines wages. It is not unions, or minimum wage laws, or other such nonsense - it is productivity; so if you want to increase wage rates for the poor, you need to increase productivity. How do you do that? Capital accumulation. Capital accumulation is decided by the level of savings in the economy… the more savings, the more capital accumulation, the more productivity, the higher wage rates for the poor.
A highly progressive tax system makes it more difficult to save money, which makes it much harder to raise wage rates. The effect of our highly progressive tax system has been to retard productivity, and to hurt not just the rich, but also the poor."
That’s one effect and it makes sense, but I believe the advantages of progressive taxation outweigh the disadvantages. After all, there is no strong correlation between the progressivity of a nation’s taxation and either short or long-run production. If the argument above was the only effect or if the progressive income tax only had negative effects on production, that shouldn’t be the case.
If you’re interested, the economic arguments for and against it are outlined here:
Progressive taxation systems are actually protectionist schemes for the rich, as they prevent the poor from earning enough income to become rich and compete with them for luxury goods.
I don’t see why. The progressive income tax could have only bad effects, and yet be correlated with increased prosperity. Here’s one explanation for this - an increase in prosperity means a longer production cycle, and more people doing work that can’t be seen to directly contribute to production - i.e. working in a cubicle. It also increases leisure time, and while it decreases inequality as a proportion, increases it as an absolute number. These factors together cause members of the society to be more willing to fund welfare schemes, and willing to accept a progressive income tax. So then the observer notices that richer societies have more progressive tax structures.
It’s a good thing we have a priori economics to avoid these mistakes.
Overall, I’d say this is a very nice argument, and certainly has an Austrian flair to it. The above, though, seems to be a rhetorical device. Technically, a progressive income tax does not encourage people to create less wealth, but rather decreases the incentive to create more wealth. Also, even that only holds if we make some reasonable assumptions about people’s utilities - such as that people would rather make more money, and do not benefit from having money taken away from them.
Another point is that progressive taxation is never really progressive in a rigid sense. The very rich at the top will have lower marginal rates than those below them. One reason is that progressive taxation doesn’t generally apply to wealth or investment, but to labor income, and the very rich make their money through investment. Another is their greater ability to pay off the officials or to hire accountants or lawyers. It works primarily to protect the rich, by taxing the most from those who threaten to become rich soonest.
Even accounting for the fact that wealthier nations can more easily afford the bad effects of welfare and progressive tax schemes, there isn’t a substantial difference in the growth of more laissez-faire western nations versus more social market western nations. The Nordic welfare states are frequently cited as evidence that welfare doesn’t have to come at the cost of economic growth.
Even if you believe in a priori economics, it still seems that it must be capable of coming up with a rational explanation for conflicting evidence, in order to avoid being pseudoscience. A priori economics cannot be used as a factory for red herrings and still be called a science.
From the point of view of the government a purely progressive tax doesn’t make sense. Generally speaking if you want to steal money you don’t go to the poor because they have no money, but you also don’t go to the rich either, or at least not those rich enough to cause problems or buy their way out of being victims. You go after those with enough resources to loot but who will not have enough left afterward to buy their way out of being victims or otherwise fight the looting. In other words you go after the middle and upper middle classes and leave the top x% and bottom x% alone. That’s why you find ‘the rich’ may pay nominally more than middle and upper middle income people, but the middling people get audited far more. That’s the demographic where people really get the screws put to them in a marginal sense. Below that income demo there’s nothing to steal, above that demo people weild too much power in the form of wealth.
Replace “tax” by “theft”, then it’s self explaining. Basically it does not matter if a cent or a 1000$-bill is stolen. Theft is theft, looting is looting, mo matter which euphemism you’ll use.You can smear lipstick on a pig, but it won’t be anything but a swine.
Rhotair, You hit the nail on the head. The original United States tax on import/ export was the best system to contain limited government I can think of, short of no government at all.
Those who are currently profiting most are those who are most efficiently filling economic “holes.” Whether this is a result of foresight, luck or Pokemon cards (or any combination thereof) makes no difference.
Any increased tax on labor decreases the marginal utility of the next unit of that same labor (provided that the unit of labor in question is the “means” toward the “ends” of increased money…for the actor in question)
Most “actors” (i.e., working people in this case) fit the above description.
It should be easy to see that any kind of tax increase on labor will decrease productivity to the degree to which people fit the description in #2. Going one step further, we see that a specifically progressive income tax acts a scaled productivity demotivator to the degree to which your skills are valued by (and are being used in) the economy.
For the kids: We punish the smart people. And by punishing the smart people, we punish everybody.
“but I believe the advantages of progressive taxation outweigh the disadvantages. After all, there is no strong correlation between the progressivity of a nation’s taxation and either short or long-run production.”
two things about the above. first, leaving aside what wikipedia might think, what do you think the merits of progressive taxation are? second, your methodology for drawing conclusions about how the tax structure affects productivity concerns me. are you comparing countries with differing regimes? let me put it to you in another way…which is better, an apple or a pear, and why?
you should be comparing like and like, that is the same country under a different tax regime. cast your mind back to great britain in 1979. top marginal rate of 98% (ie 83% on wages plus 15% on “unearned income”). is that progressive enough for you? surprise, surprise, artists like the rolling stones left the uk for recording in jamaica, sean connery for spain, and the list goes on. all talent lost to other domiciles. note the uk was also one of the poorest of the common market at this time. thatcher eventually reduced to top rate to 40%. i’m not going to say that britain’s enormous leap forward in the wealth stakes since is proof positive of the damage of fiscal progressivity, but give me a more compelling explanation.
by the way, where does hong kong’s dramatic rise up the wealth ladder fit into your model? dubai? and why do expatriates from high tax jurisdictions flock to these low-tax destinations? for the clean air? i think not.
The game is not played by taking two countries, with different cultures, different histories, and different resources, one with a relatively free market and one with a relatively more controlled market, and asking “who has more economic growth?” Even if you insist on being a positivist, this would be a fallacy since you’d have no control and no attempt to control for confounding variables. The question that we’re interested in is, under what circumstances would an individual country, all else being equal, do better - with a freer or less free economy? You simply are not going to answer that with empirical data, unless you happen to have a time machine (and even then, that might not work, depending on your philosophical approach to free will.)
Further, it is not all that clear a libertarian is committed to arguing that a mixed economy is preferable to a socialist one. I have argued, after my years of observing our health-care system, that a socialist system might actually work better. This does not stop me from saying that a true free-market system would be light-years ahead of either a mixed or socialist system. I do think, though, that the mixed economy does produce some problems which would not exist in a socialist system. The mixed economy maintains some incentives in very confusing ways. For example, the mixed economy retains, from the free market one, the desire to make more money - but puts you in a position where you can best make money by gaming the system or skimming off the top (i.e. government or highly government-connected corporation.) The socialist system does away with the incentive altogether, and having no incentives might be better than perverse incentives.
Also, you won’t catch me saying that economic growth is the goal. The goal is the right amount of growth - that is, consistent with the savings and investment levels. Too much growth is not good - it leads to a bust. This is called the business cycle. So, if people don’t save, the government can cause economic growth to increase through inflation - but at the cost of causing a recession.
Finally, on your last sentence, you need to remember that data do not come with their own interpretation. For any data, there is always an a priori component involved in how you will interpret the data. Thus, there can be no “conflicting evidence” against an a priori claim, only a conflicting demonstration. The a priori claim is what you use to make sense of the data. (Yes, this sounds impositionist, and I’m not an impositionist, but I don’t want to get further into it here.)