You load sixteen tons, and what’da ya get?
Government keeps a spendin’ so we’re deeper in debt.
St. Peter don’t you call me ’cause I can’t go ─
the IRS man done stole my dough!
With all due apologies to the late great Tennessee Ernie Ford, I think the slight alteration of his well-known hit song pretty much sums up the feelings of most Americans. To quote a line from a more recent hit song, “You work hard for the money” and you want to keep it, as rightfully we all should. Retaining the “fruits of our labor” is the principle of property rights as championed by John Locke, heralded by our founders as sacrosanct, and infused within the precepts of our Declaration of Independence and Constitution. Yet as I have been setting forth in the previous five essays in this series, the income tax shreds every fiber of this principle. Last week I began to set before you the consequences of our current income tax system with its onerous progressive rates, which the Obama administration and the democrat-controlled Congress seem determined to raise. None of the consequences I covered in that essay are compatible with a free society governed by a constitutional representative republic and based upon the principles of federalism, and neither are the remaining ones that I shall try and conclude in this week’s post.
As I did in last week’s essay, I shall share with you the wisdom and insight of two of the twentieth century’s greatest economists, Nobel laureates in economics and Presidential Medal of Freedom recipients ─ F.A. Hayek and Milton Friedman. By way of reminder, you will recall that both men pointed out that not only will progressive income taxation fail to promote prosperity in any economy, but it is a total fraud, of which the inherent danger is it contains no logical stopping point. The central government has the authority to lay claim to 100% of your income if it so chooses, and during two spans of time in the middle part of the last century, it has come close to just that. The highest marginal tax rate reached 94% for the two years of 1944-45 and 91% for almost a decade following those two years. You cannot get much closer to slavery than that. I am confident those who were subjected to such confiscatory rates during those years must have felt as though they lived under the ancient Roman Republic instead of the modern-day Republic of the United States!
One of the most hotly contested aspects today regarding the extension of the tax cuts enacted in 2001 is the cutoff point of income above which the income tax rates will be raised. It is completely an arbitrary, subjective decision made by Obama and his fellow fascists with no objective criteria given to substantiate their drawing the line at that level. This is what Hayek said was a result of progressive taxation, namely that it creates within the minds of the majority of people what they consider to be an “acceptable” level of income ─ a level above which is thus decadent and excessive, yet one completely without foundation:
“One of the chief reasons why progressive taxation has come to be so widely accepted is that the great majority of people have come to think of an appropriate income as the only legitimate and socially desirable form of reward” (The Constitution of Liberty).
Obviously, so long as an individual is part of that “great majority”, whatever level that is set is acceptable ─ that is until they exceed that income level, and then suddenly “it’s not fair!” It also ignores another major issue, which is, what is “wealthy” for one person or in one region of the country may be considered middle-class to another individual or in another region. Thus the cry for a fair and equal taxation system cannot be had by a progressive income tax unless built into it are considerations for the cost of living in different regions of the country ─ a factor which our current system fails to incorporate. In fact, it is due to higher levels of cost of living and the subsequent higher levels of tax rates into which those incomes push people that wages are pushed even higher, thus resulting in a never ending upward spiral of wage inflation and taxation!
Another negative impact of this form of taxation is how it disheartens individuals from being more productive. As a certified payroll professional, employees will tell me that they do not want to work a lot of overtime because the IRS will just take most of their extra earnings in greater taxes. It simply isn’t worth the extra time, labor, and absence from their families to put forth the extra effort to earn more income. Returning once more to Hayek’s previously quoted work he commented on this problem thus:
“…progressive taxation necessarily offends against what is probably the only universally recognized principle of economic justice, that of ‘equal pay for equal work.’…A man who has worked very hard, or for some reason is in greater demand, may receive a much smaller reward” [i.e., after taxes] “for further effort than one who has been idle or less lucky.”
As a line from a movie which has come to be used in our popular phraseology, if you want me to produce more, then “show me the money”! And, if I can’t keep the lion’s share of the money I earn, then “I’m not interested.” Why do you go to work and give up time away from your family or from engaging in activities that you would rather pursue? Is it not because you want to provide for your family or to have the means wherewith to pursue those other activities (provided you can find the time to pursue them)? Yet if the government is going to step in and demand its “pound of flesh” before you “pocket” those increased earnings, what incentive do you have to sacrifice even more of your limited time if by doing so you experience what economists term the effect of “the law of diminishing returns”? The obvious answer is that you don’t, and so not only is your earning potential suppressed, but since there is less income to be taxed so is the revenue to the government. In effect, the system has the very opposite effect for which it is intended, namely to raise revenue. Thus it is that whenever tax rates on income have been reduced, total revenues to the government have increased. So why the debate over extending the lower tax rates ─ why is Obama and the Democrat Fascists insisting on raising the rates? That will be the topic for either next week’s post or perhaps the one after.
However, before going on to the next consequence I will allow Dr. Friedman to weigh in with his evaluation in respects to this consequence of a negative impact on productivity.
“By general consent, the personal income tax is sadly in need of reform. It professes to adjust the tax to ‘ability to pay,’ to tax the rich more heavily and the poor less heavily and to allow for each individual’s special circumstances. It does no such thing….the law is riddled with so many loopholes, so many special privileges, that the high rates are almost pure window dressing….
The corporate income tax, too, is highly defective. It is a hidden tax that the public pays in the prices it pays for goods and services without realizing it. It constitutes double taxation of corporate income ─ once to the corporation, once to the stockholder when the income is distributed. It penalizes capital investment and thereby hinders growth in productivity. It should be abolished” (Free to Choose) [emphasis added].
This penalization in the matter of capitalization leads to yet another negative consequence of a progressive income tax system. How many times have you heard government officials bemoan the lack of savings on the part of the American people? How often have we been castigated for not being as thrifty as the citizens in some other nation, the implication being that we are too much interested in spending on ourselves? If that is the government’s criticism of us it has no one to blame but itself because its tax system discourages and even penalizes us for saving. If we are going to be taxed on the income generated by our savings, thus reducing what meager return we may earn (I say meager because constant and inept government intervention in our economy and free markets has the effect of impeding the economy from generating greater returns on our investments), then why save? Spend what you have so that you might “enjoy the fruits of your labor!” Dr. Hayek addressed this issue as well:
“We can also briefly mention the very serious effect of progressive taxation on the supply of savings….The socialist answer to those who are concerned about this effect on savings is, in fact, no longer that these savings are not needed but that they should be supplied by the community, i.e., out of funds raised from taxation. This, however, can be justified only if the long-term aim is socialism of the old kind, namely, government ownership of the means of production.”
And just how does the “community”, i.e. the central government, supply the funds to run businesses if not from the savings of investors? Why by confiscating the funds by taxing the income generated by those savings, or by taxing it away before it could be invested and saved! Either way, you lose!
If individuals do not save and thus do not either supply banks with the funds to loan businesses or aid businesses in raising capital by investing in those businesses’ stocks and bonds, then again the economy will contract instead of expanding because businesses do not have the capital to expand. If businesses cannot expand, then neither does the economy ─ the only thing that will see expansion is the nation’s unemployment rate. In his book “Good to Great”, Jim Collins studied companies to see what separates good companies from great ones, and one of his observations was that in the companies considered to be great, they exhibited a high level of entrepreneurial method of operation. When we think of those who are entrepreneurs, we typically think of those who step outside of their comfort zone to take risks in order to produce a new or better product or service. The result of the efforts of these individuals is the expansion of goods and services for society as a whole, as well as expanded employment opportunities for those they hire to produce and provide those products and services. Yet progressive income taxation kills this kind of initiative by making it difficult and costly for these entrepreneurially minded individuals. These individuals are wealth-producers, and they pay the price of a graduated income tax system, not those who are already wealthy who seldom touch their “stock” of accumulated wealth, but rather live off of the returns that wealth generates, which returns are taxed at half the rate of the income of those wealth-generators!
Hayek ties together this fact of progressive taxation on income being restrictive of capital formation with the consequences of it also blunting overall business expansion by both entrepreneurs and larger corporations and an introduction of inequality and discrimination into the business of the economy:
“Closely connected with this problem is the effect of progressive taxation on an aspect of capital formation….It is one of the advantages of a competitive system that successful new ventures are likely for a short time to bring very large profits and that thus the capital needed for development will be formed by the persons who have the best opportunity of using it….The taxation of such profits, at more or less confiscatory rates, amounts to a heavy tax on that turnover of capital which is part of the driving force of a progressive society.”
Note these points Hayek makes regarding just who generates growth and the attitude manifested by a government, namely ours, which punishes those generating this capital. It is necessary if an economy is to be based upon a competitive free-market foundation that individuals be able to generate the capital necessary to establish and sustain a fledgling venture through greater profits. He further states that those who best know how to put this increase of capital produced by these profits to use are those behind the venture from which it came; yet to tax these profits at the rates that are normally used amounts to thievery and strangles this turnover of capital which is essential to the life and growth of companies. Contrast that with the attitude of our government which believes that there is a level of profits above which it deems to be excessive and that therefore it should confiscate those profits as it knows better how to use those funds than those who generated them! That is fascism, pure and simple – “Tutto nello Stato, niente al di fuori dello Stato, nulla contro lo Stato” (everything for the state, nothing outside the state, nothing against the state) - Benito Mussolini, the father of Fascism.
Continuing with Hayek’s comments on this point, he went on to say
“The most serious consequence, however, of the discouragement of individual capital formation where there are temporary opportunities for large profits is the restriction of competition. The system tends generally to favor corporate as against individual saving and particularly to strengthen the position of the established corporations against newcomers. It thus assists to create quasi-monopolistic situations. Because taxes today absorb the greater part of the newcomer’s ‘excessive’ profits, he cannot, as has been well said, ‘accumulate capital; he cannot expand his own business; he will never become big business and a match for the vested interests. The old firms do not need to fear his competition: they are sheltered by the tax collector. They may with impunity indulge in routine, they may defy the wishes of the public and become conservative. It is true, the income tax prevents them, too, from accumulating new capital. But what is more important for them is it prevents the dangerous newcomer from accumulating any capital. They are virtually privileged by the tax system. In this sense progressive taxation checks economic progress and makes for rigidity’” (L. Von Mises, Human Action, quoted by Hayek here in his work, The Constitution of Liberty).
Today all we hear from Obama and his cohorts is how these greedy corporations must be punished by levying higher tax rates against them. Yet all this, as Hayek so ably exposes, is just fine with these large, established corporations as these tax policies, though aimed at them, are ones they can survive, whereas those who would in the future become their competitors, cannot. Hence the corruption we witness among elected officials and the financial payoffs they receive from these companies (yet again another reason for the establishment of term limits within our Constitution).
So who really suffers from such a consequence as this? It is the consumer who suffers. Because competition is squelched by the tax code, innovation, new inventions, and progress in countless areas that would benefit society generally will never see the light of day. It is truly a remarkable achievement that we have witnessed as much advancement as has occurred in spite of our prejudicial system of taxation ─ just imagine how much more could and would be achieved it this noose around our necks was removed! Colin Clark echoed this fact in his work, “Welfare and Taxation”:
“Many upholders of high taxation are sincere opponents of monopoly; but if taxation were lower and, especially if undistributed profits were exempt from taxation, many businesses would spring up which would compete actively with the old established monopolies. As a matter of fact, the present excessive rates of taxation are one of the principal reasons for monopolies now being so strong.”
Lionel Robbins, in a paper titled “Notes on Public Finance”, written in 1955, also concurred with Clark and Hayek:
“The fact that it has become so difficult to accumulate even a comparatively small fortune must have the most profound effect on the organization of businesses; and it is by no means clear to me that these results are in the social interest. Must not the inevitable consequence of all this be that it will become more and more difficult for innovation to develop save within the ambit of established corporate enterprise, and that more and more of what accumulation takes place will take place within the large concerns which ─ largely as a result of individual enterprise in the past ─ managed to get started before the ice age descended?”
Today President Obama is touring the country campaigning for Democrat candidates and trying to make the case that to vote against these individuals who in the past two years have supported his fascist agenda would be to “return us to the failed policies of the past that got us into this mess in the first place.” Yet it is significant to point out that the quotes of the three men I have just shared with you were all written in the time period in which the highest marginal tax rate was at either 94% or 91%, and what policies does Obama want us to turn to instead of the lower tax policies of the past? He wants us to return to the past policies which were in place when these men wrote, when as they all proclaim, capital accumulation and innovation, both of which would have benefited society, was all but snuffed out! Growth, prosperity and advancements in all areas have always abounded when tax rates were lowered, so just imagine what would happen if all taxes on income, personal and business, were eliminated?! (This will be the solution I will expound upon when I reach the conclusion of this series of essays.)
Yet there is one more consequence brought forth by Hayek that I want to mention in passing, and that is our graduated income tax system promotes inequality despite the claims made in favor of it “redistributing wealth” so that all share more equally in the wealth:
“An even more paradoxical and socially grave effect of progressive taxation is that, though intended to reduce inequality, it in facts helps to perpetuate existing inequalities and eliminates the most important compensation for that inequality which is inevitable in a free-enterprise society.”
Perhaps this was best stated by the renowned political statesman from Florence, Italy, who in 1538 wrote in opposition to the tyrannical reign of the Medici family who instituted a high, progressive tax system that
“The equality which we must aim at consists in this, that no citizen can oppress another, and that the citizens are all subject to the laws and authorities, and that the voice of each who is admissible to the Council counts as much as that of any other. This is the meaning of equality in liberty, and not that all are equal in every respect….It is not liberty when one part of the community is oppressed and maltreated by the rest, nor is it the end for which we have sought liberty, which was that each should with security be able to preserve his proper state” [emphasis added].
So the question which remains to be answered is, if all these negative consequences are what a progressive income tax produces, how and why did it come about and why does it survive? The answer to this question will be the topic of next week’s essay.
In closing, let me give as a final evaluation of the income tax this one posited by Hayek, namely that this system of progressive taxation is the tool of a government which is acting in an unethical and unjust manner:
“In the last resort, the problem of progressive taxation is, of course, an ethical problem, and in a democracy the real problem is whether the support that the principle now receives would continue if the people fully understood how it operates. It is probable that the practice is based on ideas which most people would not approve if they were stated abstractly. That a majority should be free to impose a discriminatory tax burden on a minority; that, in consequence, equal services should be remunerated differently; and that for a whole class, merely because its incomes are not in line with those of the rest, the normal incentives should be practically made ineffective ─ all these are principles which cannot be defended on grounds of justice. If in addition, we consider the waste of energy and effort which progressive taxation in so many ways leads to, it should not be impossible to convince reasonable people of its undesirability. Yet experience in this field shows how rapidly habit blunts the sense of justice and even elevates into a principle what in fact has no better basis than envy“ [emphasis added].
This is why, my fellow citizens, if we are to throw off the chains that keep us enslaved to the central government we must educate all of the citizenry of just how heinous the income tax system of our nation is. Ayn Rand once said, “…political freedom cannot exist without economic freedom”. To this I would add economic freedom cannot exist under a progressive income tax system.
- Epaminondas
