An earlier political philosopher put the same principle this way: from each according to ability, to each according to his need. It of course was Karl Marx. The progressive income tax was part of the program outlined in the Communist Manifesto. Seligman undoubtedly would have objected to being called a Marxist. You don’t have to be a Marxist to embrace the progressive income tax. Abraham Lincoln, an earlier income taxer, was not a Marxist. Nevertheless, he shared a core principle with Marx: that one’s ability to create wealth should be the criterion for how much a person should be forced to surrender to the state. Marx at least was perceptive, or honest, enough to acknowledge that the faculty principle leads to total government.
What of this ability-to-pay principle? We must not lose sight of Rothbard’s point that if taxation is unjust per se, the ability-to-pay principle cannot be a principle of justice. Besides, it doesn’t prove what its exponents want to prove. You don’t need progressive rates for the rich to pay more than the nonrich. Under a flat rate, the rich would also pay more. Even under regressive rates the rich could pay more: 10 percent of $100,000 is more than 25 percent of $10,000.23
Finally, the principle is not as clear as it may seem. For example, the income tax hits only income; but someone could have a small income and great accumulated wealth. Who has more “ability to pay”? (Switching to a wealth tax would sabotage the economic system in the name of justice.) Seligman defended the principle on the grounds that the more money someone has, the easier it is to make money. Here he was suggesting that wealthy people don’t have to exert effort to satisfy consumers. We know that is not true. Fortunes can be lost.24
Rothbard notes that the ability-to-pay principle implies that we can compare the value of a dollar for different people and conclude that someone with more dollars values each one less than someone with fewer. That may have some intuitive appeal. But there is no scientific way to establish that claim. The ranking of values is subjective for each person.25
Related to ability-to-pay is the benefits principle: people who make more money get more protection from government and therefore should pay proportionately more in taxes. But even if we could measure subjective benefits, one can as easily argue the opposite of what is usually assumed. People with many resources would be better able to take care of themselves in the absence of government protection than those with meager resources. Rothbard points out that a rich man’s assets could be more compact and less costly to protect than a poor farmer’s land. Poor people therefore arguably gain proportionally greater benefits from government than wealthy people. Does the benefits principle mean that poor people pay more than the rich?26
The only system that really links (subjective) benefits to payment is the free market, where freedom of choice is the rule. People are free to abstain from buying something if its expected benefits rank beneath those provided by some other use of the money. Government is based on the opposite principle — coercion.
Are We the State?
In the end, the benefits principle undercuts the ability principle. And Seligman knew it. If he was to win people over to the ability principle, he would have to argue against the benefits principle. He wrote that a person “does not measure the benefits of state action to himself … because … such measurement implies a decidedly erroneous conception of the relationship of the individual to the modern state.” Demonstrating a presumptuousness not uncommon among certain economists, Seligman proclaimed that “it is now generally agreed that we pay taxes not because the state protects us, or because we get any benefits from the state, but simply because the state is part of us.”27
That is a remarkable statement. The state, in Seligman’s view, is not a dispenser of useful public services, payment for which is to be based on benefits received. The state is something else, an almost-mystical part of ourselves. That idea can be traced to the philosophy of Jean Jacques Rousseau and others, whose theory of the general will as embodied in the state has done so much to shape modern thinking about democracy. According to that view, collective decision-making through the polity represents the true will and common good of the people as a whole. The implication is that when people act individually in the market they are “selfish” and possibly detrimental to the common good. But when they act as members of the political community, they are mysteriously led to behave as faithful wards of the public interest. You can see the same sentiment expressed in newspaper editorials and syndicated columns after every election day.
That view of the political world has been shown as naive by the public-choice school of political economy, which argues that voters, officeholders, and bureaucrats are the same kind of people as those who exist in the marketplace: they tend to seek personal benefits at the lowest cost. What distinguishes the marketplace from the political arena is not the motives of the actors, but rather the incentives they face. In the market, people understand that they face the costs of their actions. In the political arena, the objective is to get someone else to pay for your benefits. Two great political philosophers have summed up that point: Frederic Bastiat, the nineteenth-century political economist, wrote that the state is the great fiction by which everyone tries to live at everyone else’s expense.28 H. L. Mencken, an equally astute observer, wrote in the twentieth century that “government is a broker in pillage, and every election is a sort of advance auction sale of stolen goods.”29 Both understood that the state, rather than being a service provider for society, is primarily a machine for the transfer of wealth from the many to the favored interests and that the tax system is the principal method of carrying out that function.
Notice that Seligman claims that most people agree with his corporativist view of the state. (The corporativist view holds that society, with the state at the head, is analogous to a single organism, with one set of interests that constitute the common good. That view underlies all statism, including the most virulent forms, fascism and communism.) Was he correct? In the first decades of the twentieth century most people probably did not believe that the government, particularly the federal government, was part of them and vice versa; they were still essentially individualists in the spirit of the American Revolution. Corporativism is a profoundly un-American idea, since it denies individual sovereignty. When Seligman was touting corporativism, Mencken was exciting throngs of readers with a far different position on the nature of government. For Seligman, government was part of us. For Mencken, government “is really something imposed from without.… Its interests and those of the people it governs are the same only occasionally, and then usually accidentally.”30
Of course, Seligman was writing in the Progressive Era, when the intellectual class turned to the corporativist view of the state. The Progressive Era was a watershed in American history, when intellectuals, politicians, and bureaucrats, enamored of Bismarck’s welfare state in Germany, fundamentally changed American society by systematically expanding the coercive power of government while shrinking the power of people over their own lives.31
The progressive income tax was part of a campaign to redefine the moral and political relationship between the American citizen and the federal government. Before the Progressive era, the U.S. government played a small role in the lives of Americans. But beginning in the late nineteenth century, with the rise of Progressivism, that role grew dramatically. Economic relations were managed from Washington as never before. The Interstate Commerce Commission, Food and Drug Administration, Federal Trade Commission, Federal Reserve System, and other agencies were set up. The permanent income tax was the crowning achievement of the Progressive movement.
A few voices, such as that of the economist David A. Wells, morally objected to the progressive tax. They said it was socialistic. Seligman replied that the “cry of ‘socialism’ has always been the last refuge of those who wish to clog the wheel of social progress or to prevent the abolition of long-continued abuses.”32
Seligman also responded to constitutional objections to the income tax by invoking what is
now known as the “living Constitution” argument. He said our view of the Constitution must change with the needs of political and social life. “Sooner or later,” he said, “we shall outgrow many of the notions of extreme individualism and of exaggerated [States’] rights which dominated the country at the time of the formation of the constitution. They are bound to disappear as they have disappeared in every other great federal republic.”33
Thus, for Seligman, a father of the U.S. income tax, the principles that inspired the founding of the great American republic were antiquated and in need of replacement. The power to tax incomes could not be denied to the U.S. government because of those extreme notions. He went so far as to suggest that opponents of the income-tax amendment were close to advocating national suicide. “But surely no patriot,” he said “can afford to object to conferring upon the United States a power … without which its prosperity — nay, even its very existence — might possibly be menaced.”34
Seligman did not feel obliged to explain why the ability principle was the right basis for taxation. For him it was enough to merely assert that it was modern and progressive, as though that were self-evident. That strategy is used by welfare-state activists to this day. Call something progressive, and many people will be afraid to oppose it for fear of being called reactionary. Advocates of the income tax are confident they can portray their opponents as apologists for the rich. Their own interests are never called into question.
Thus it is worth noting that those who argued most strongly for the tax and the corporativist view of government had the most power, wealth, and prestige to gain. The intellectuals who spoke of the need to expand state power could count on manning or advising the bureaus that would exercise that power. Some prominent businessmen, apprehensive about the rigors and uncertainty of free-market competition, joined them in the crusade for bigger government.35
Seligman’s defense of the income tax — that the state is us — is better looked on as public-relations rhetoric. It is hard to believe that the Progressives really took it seriously. Surely they understood that their programs were devised by a small subset of society — not the whole people — and had the effect of taking decision-making power from the hands of individuals. They might have sincerely thought that government agencies would act in the interest of the people; but surely they realized that the people themselves would not exercise the power. How was that consistent with the claim that the people are the state?
Envy As the Basis of the Income Tax
In reality, what the ability principle means is simply that people who have more should pay more — because they have more. Such is the belief of organizations like Citizens for Tax Justice, which, as economist Roy E. Cordato has noted, never get around to defining “tax justice.”36 From their opposition to a flat-rate tax, we can infer what it means: it isn’t enough for the rich to pay more; they must pay a lot more. Why? Devotees of the ability principle might like the classic obscurantist response: for those who understand, no explanation is necessary; for those who don’t, no explanation is possible.
The upshot is that some people take it for granted that those who have more should be forced to share with those who have less. The Progressive Policy Institute, a so-called moderate think tank tied to the Democratic Party, says, “The point of progressive taxation is not to penalize those who succeed, but to protect those who have not.” PPI doesn’t want the tax system to treat people equally, because they “may be dealt very different resources with which to compete.”37 Note the misunderstanding. In the free market people aren’t “dealt” resources like cards. Many individual voluntary transactions bring about the arrangement of resources in a free society. If by “resources,” PPI means intelligence, talent, and ambition, it is not the fault of those who have more that others have less. Despite what PPI says, the only way to “protect” those with less is to take from — that is, penalize — those with more.
PPI goes on to argue, with an interesting twist, that progressive taxation is the appropriate price to pay to have a free market. Since hard work is not the only reason people succeed — talent and things like culture play a role — PPI says, “Our commitment to free markets, while disposing the United States to harsher economic inequalities, also can oblige those who benefit so much from them to contribute more as well.”38 To paraphrase, since wealth might require more than effort, successful people must buy their freedom by paying off the less successful. That is a non sequitur. Even if hard work were the only cause of success, there would be income inequalities. How exactly do the other causes “oblige” the successful to pay more? And how do the successful benefit more from free markets than the less successful? On the contrary, the less successful benefit proportionally more from economic freedom than do the well-off. It was the free market that ushered in production for large numbers of people and raised their living standards to unprecedented heights. Besides, as already pointed out, the rich would pay more even under some regressive tax rates. So PPI has not made a case that fairness requires progressivity. Yet such nonsense is typical for the phony fairness crowd.
It is one thing to hold charity as a virtue; it is quite another to turn it into a political principle. How easily people slide from thinking that charity is good to thinking that charity ought to be compelled by government. They apparently never grasped George Washington’s reputed statement, “Government is not reason, it is not eloquence; it is force. Like fire, it is a dangerous servant and a fearful master.” Because of its coercive nature, government transmogrifies commonplace activities into something hideous. At the hands of the government, trade becomes extortion, religion becomes the Inquisition, and education becomes brainwashing. Forced charity is theft, regardless of motive.
Worse than using the tax system to force some to pay for government services for others is the attempt to use it to level incomes and combat inequality. A well-known economist of decades ago, Henry C. Simons, wrote that income taxation is an “instrument of economic control, a means of mitigating economic inequality.” He called for “drastic progression in taxation” because he was offended ethically and even aesthetically by “the prevailing distribution of wealth and income.”39 Many people believe this today. But to repeat: in a market economy, income is not “distributed” in any real sense. No central distributor ladles it from a common pot. Rather, it is obtained through countless voluntary transactions, each of which must be regarded as grounded in justice. Once that fact is grasped, the rhetoric of fairness in taxation is revealed as demagoguery. One is hard-pressed to see how an income “distribution” that resulted from voluntary exchange can be, in Simons’s word, “unlovely.”40 He had a right to his ethical and aesthetic judgments, of course; but he was not justified in calling on the force of law to impose his judgments.
Where there is freedom there is disparity of incomes. That is true because of the ever-present principle of natural diversity. People are different in all kinds of ways, inborn and environmental — and those differences will generate differences in incomes. Government attempts to iron out those differences will not only interfere with personal freedom; they will also discourage people from using their talents and resources to satisfy consumers. As Adam Smith wrote in The Wealth of Nations, it is not from the benevolence of others that we expect goods and services but from their regard for their own interests. In that case, then, all people, particularly those with lower incomes, will be worse off when people good at producing wealth are taxed. (Chapter 4 will explain this point in more detail.)
To put this another way, higher incomes do not come at the expense of those with lower incomes. No injustice, or unfairness, is indicated by income disparities generated in the marketplace. On the contrary, justice (if that is what fairness means) entails letting people keep and control their property. All the obfuscation concerning tax fairness is intended to hide that piece of common sense.
Another wrinkle in the fairness issue is the concern over whether income groups pay their “fair shar
e.” Again, the fair-share advocates refuse to reveal their standard of judgment. All we know is that they think the top groups should pay more.41
But how much is enough? IRS data show that the top filers already pay most of the tax. In 1994 the top 1 percent of filers paid as much as the bottom 80 percent.42
You would think that the fair-share advocates would be delighted that upper-income people pay so much. But they aren’t delighted. No amount is enough for them. Besides, what seems to disturb them is that the high portion of tax paid resulted from cuts in marginal tax rates. It seems the more that marginal rates are cut for the top filers, the larger their share of tax paid. The converse is also true: raise rates and the top filers as a group pay less.
The top marginal rate dropped twice between 1979 and 1988: from 70 percent to 50 percent in the early 1980s and to 28 percent in the late 1980s. The fair-share advocates opposed those cuts. Yet that is when the percentage of total revenues paid by the rich began to rise after decades of decline. Presidents Bush and Clinton both raised the top rate, to 31 percent and nearly 40 percent, respectively. Predictably, the share of taxes paid by the top earners fell slightly.43
The fair-share advocates scoff at those numbers by pointing out that the top filers also made more money. Oh horror! But isn’t that the point? Income taxes discourage the creation of wealth. It is hard to avoid the conclusion that so-called tax fairness is really motivated by envy toward those who earn more. The rhetoric of fairness shrouds something far less attractive: a resentment against people with the talent, foresight, and ambition to succeed beyond the average and to be rewarded for it. When you come right down to it, envy is a major reason for the income tax.
A final dimension of the morality issue: more than one observer has noted that the income tax may well erode personal morality. People have a natural interest in keeping as much of their income as they can. Deep down, many do not believe it is wrong to hide information or income from the IRS. The problem is that that attitude may not be directed only to the tax authorities. People who think less than carefully may feel that if it isn’t really wrong to “cheat” the taxman, maybe it isn’t wrong to cheat others either. If so, part of our cultural decline can be attributable to the income tax.44
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