How to Kill Capitalism

September 14, 1953

There has lately been a rising protest against the tremendous tax burden now placed on the American people. The protest is most impressive when it rests, not primarily on the argument that our present tax structure is inequitable (though that is true enough), but on the ground that existing taxes are killing incentives and thereby undermining the productiveness of the entire economy.

An excellent speech on what taxes have been doing to incentives was delivered this spring at a conference of the National Industrial Conference Board by David McCord Wright. Professor Wright devoted himself particularly to assailing the alleged “statistical proof” on the part of some of his academic colleagues “that incentives are unnecessary, that the harder you tax the businessman the harder he will work; and that. . . the American ‘rags to riches’ myth is mostly bunk anyhow.”

Wright did not have too much trouble in disposing of the alleged “scientific basis” of these statistics, or in revealing the bias behind them. He caught some of his colleagues arguing in the same breath that the destruction of capitalistic opportunity has been a good thing, and, anyway, that such opportunity never existed. And he found that they failed also to distinguish between the effects of present onerous taxes on the incentives of the older generation, who formed their working habits and ambitions in an earlier era, and the effects of such taxes on a younger generation who are forming their habits and ambitions now. “The older men,” he concludes, “may stick in hectic business or professional life under present taxes, because, already caught in the rat race, they may still work hard in order to keep their accustomed standard. The younger men, I believe, will increasingly just say: ‘What the hell!’”

Wright’s argument is mainly negative. He shows, that is, that the alleged statistical proof that business executives “will work harder if you tax them more” is spurious and worthless, just as the proposition itself is on its face contrary to common sense.

But he could have gone on to show, if he had wished, that there is plenty of statistical evidence, of a far less dubious nature, that excessive taxes destroy incentives.

In the case of personal income taxes, for example, it is notorious that higher tax rates have failed to yield proportionately higher revenue. In fact, in the highest income brackets there is the strongest statistical evidence for the conclusion that present confiscatory rates have actually reduced Federal revenues. In these brackets, in other words, lower rates would increase revenues.

These results occur because excessive tax rates reduce the income to which they apply. They reduce it by destroying the incentives to earn it. The consequences of this trend, if long continued, are very grave for the future of our economy. Our present taxes are both undermining the incentives, and destroying the funds, for new investment. And it is precisely on these funds that the nation depends for increasing its productivity, which means the productivity, wages, and welfare of its workers.

All this should be obvious from a glance at present tax rates. Corporations pay the government a basic rate of 52 cents out of every dollar of earnings. Corporations that make “excess” profits pay the government 82 cents out of every dollar of them, or as high as 70 cents on every dollar of total earnings. This means that every individual who invests in a corporation, no matter if his own income is $5,000 or less, pays a 52 to 70 percent tax on his earnings out of that corporation before he even gets them . If the corporation pays out all of its earnings in dividends, the stockholder may be taxed anywhere from 22.2 to 92 percent, in accordance with his personal income, out of what remains over from the first tax! Out of a corporate investment that would otherwise return him $1,000 a year, say, a taxpayer in the highest brackets might have just $24 left over for himself. What is that going to do to incentives to new investment?