IV. Illustration: Income Transfers

CHANGING EXPERIENCE in the working of representative democracy has been largely conditioned by the failure to entrench (by constitution or powerful convention) what may be called ‘the Tocqueville principle’, namely, that majorities should have no right to enrich themselves at the expense of minorities via the voting mechanism. John Stuart Mill, in his classic advocacy of representative government, insisted that the beneficiaries of relief payments should be denied the franchise. Such viewpoints are not opposed in principle to the use of the proceeds of proportional taxation to assist persons who are needy ‘through no fault of their own’, i.e. whose relatively poor condition is not due to some remediable defect of character or incentive. Nor do economists who think that the essence of real democracy is being destroyed when the politically powerful can vote themselves part of the income of the politically weak necessarily condemn attempts through progressive inheritance taxes to mitigate the arbitrary advantage enjoyed by people ‘who have chosen their parents wisely’. In general, economists in the ‘classical’ tradition simply disapprove of the use of governmental power to transfer income from the provident to the thriftless, or from the industrious to the indolent, or from the competent to the incompetent, or from the enterprising to the risk-avoider, or from the politically weak to the politically strong. But the economists’ decisive dilemma has been that in practice it has often seemed unrealistic to expect governments to deny themselves power by promising majorities (or the politically powerful for other reasons) that, by voting correctly, they will be rewarded via income transfers as distinct from good government.

Income transfers before the franchise

Income transfers for the benefit of the destitute and the unemployed seem never to have depended solely upon the voting strength of the beneficiaries. Whether through enlightened self-interest¹ or the burgeoning humanitarianism evoked in Britain during the progress of the industrial revolution we found taxpayers’ acquiescence in material income transfers (well before the enfranchising of the masses). ‘Relief (money supplied by ratepayers) supplemented private charity and church alms-giving for the mitigation of dire distress. This was before politicians promising largesse had brought in the vote-acquisition factor; and it is relevant to notice aspects of experience under such conditions, in early 19th-century Britain, when considerations of good social morale or simple generosity and charitable altruism were the dominant incentives.

Many of the effects were remarkably similar to the phenomena which indiscriminate assistance is widely believed to be creating today. The harmful consequences were indeed being discussed and debated at length during the 1820s and 1830s. Problems of motivation and character deterioration had created heart-rending dilemmas for humanitarians not unlike those which plague well-meaning reformers of the present generation. A groping for remedies led public-spirited observers to press for the Poor Law amendments of 1834 which, harshly in the judgment of many, abolished ‘outdoor relief and provided generally that, while an unemployed person admitted to the ‘work-house’ should enjoy better food, clothing and shelter than could have been his lot outside, he would be denied gin, beer or even tobacco; deprived of the conventional amusements and excitements of his class; and subjected to an educative discipline intended to rehabilitate him – to reduce for him the likelihood of his having once again to apply for relief.

It is easy to represent reforms in that spirit as inhumane. Dickens did so with enormous success in an age in which the middle classes prided themselves on their righteous concern for the well-being of the ‘lower orders’. Professor Samuelson says, in his influential textbook, that the purpose of the reforms was to render unemployment ‘as uncomfortable as possible’.² Unqualified, that judgment is hardly just. There was nothing callous in the make-up of men like Nassau Senior or Edwin Chadwick who sponsored the amending Act or of humanitarians like Malthus and Archbishop Whately who advocated the reforms it embodied. Certainly the burden of local taxation was a major factor prompting demands for a change in the system. But taxpayers perceived that expenditures on ‘out-relief were aggravating the very evils they were intended to alleviate. The purpose of the Act was not to punish those who found themselves without employment.³ The aim was to reduce their number. The hope was that, under the ‘work-house’ regime, able-bodied persons would no longer refuse work because they could rely on relief, as they were believed to have been doing in large numbers.

The sincerity of many — perhaps most — of the contemporary critics who regarded the new Poor Law as oppressive is not questioned. But pure compassion in the middle and upper classes, undisciplined by sociological insights, had not been without responsibility for the deteriorating situation that had developed since the Speenhamland system of 1795. Illegitimacy and large families had for instance become, in the words of a contemporary Poor Law commissioner, ‘a source of emolument’, while the mothers receiving relief did not ‘in reality keep the children; they let them run wild’.⁴ It may be wholly coincidence, but steady annual increases in expenditure on public assistance in the United States between 1940 and 1967 were accompanied by equally steady annual increases in the percentage of illegitimate births to all live births — from about 17 per cent to 30 per cent for non-Whites and from about 2 per cent to 5 per cent for Whites.⁵ As Mr Henry Hazlitt has pointed out, the commissioners’ description of conditions in the 1830s ‘could easily pass as a description of conditions in, say, New York City in 1971’.⁶

Speenhamland in the Seventies?

How much more serious must we expect the consequences to be when politicians can batten on the natural desire for an easier life of those assisted as well as on the generous acquiescence of the taxed. In today’s affluent society, the ill-effects are necessarily different in many respects. Yet similarities, and the possibility of comparable consequences, if Mr Hazlitt’s view is substantiated, remain.

This century has witnessed continuously weakening inhibitions against vote-buying at taxpayers’ expense, as the parties have grown bolder through their desperate fight for votes and their recognition that early disaster has not followed the process. So far, at least, though there may be signs of a change in Britain, promises of ever-increasing income transfers have always gained more votes than they have lost. And progressive taxation has grown continuously. Beginning in Britain in 1910 and in the United States in 1913, with initial upper rates for Britain of 8¹/₂ per cent and for the United States of 7 per cent, the politicians found it not only ‘politically possible’ but highly profitable over the course of the following three decades to force the upper rates to 97¹/₂ per cent and 91 per cent, respectively.⁷ In the United States during the, decade following 1960, in spite of growing affluence and prosperity, expenditure on vote-buying via public assistance multiplied fourfold. And if we bring in food stamps, school meals, child welfare and other social services, aggregate expenditure nearly tripled within ten years – from about $7 billion to about $20 billion.⁸

Naturally, a government’s aim is to maximize the prospective yield in votes from any promised amount of income to be transferred, and experience seems to show that this can be best achieved when the process is clothed in phrases suggesting high moral rectitude, charity and generosity. Votes are most effectively purchased through financial support of what the public regard as ‘good causes’. Widespread and sincere altruism on the part of many taxpayers has remained powerful in supplementing the pseudo-altruism of the politicians. It has weakened resistance to income transfers in the form of ‘social services’. The beneficiaries of such transfers may include, in addition to ‘the poor’, ‘the deserving’ for other reasons. The United States Agricultural Assistance Program was put through on the grounds that there were large numbers of poor farmers; but all farmers were included in the programme (all farmers are always ‘deserving’) and most of the income transfers in this case have been enjoyed by persons with incomes well above the US average. As Professor Brozen has put it, ‘the program has been a poverty program for rich farmers’.⁹

In Britain council houses are occupied by relatively rich as well as by poor tenants, medical prescription charges are ‘exempted’ for rich as well as poor expectant mothers, pensions (only fractionally earned by social insurance contributions) are paid to rich as well as poor people in retirement, and so on. In general much or most of British social benefits are enjoyed by persons with incomes around or above the average.

It would be misleading to leave the impression that the lower income-groups are powerful as voters in inverse proportion to the size of their incomes. It was the votes of the lower-middle classes and not those of the poor which originally made it ‘politically possible’ to get progressive taxation adopted in Britain and the USA. What Professor Hayek has described as ‘the better-off working class and the lower strata of the middle class, who provided the largest number of voters’,¹⁰ constituted the group whose electoral support brought in the welfare state in Britain. Moreover, ‘independent studies in the United States, Great Britain, France and Prussia agree that, as a rule, it was those of modest income who provided the largest number of voters that were let off most lightly’ following the introduction of progression. The figures, with similar data for other countries, clearly show that, ‘once the principle of proportional taxation is abandoned, it is not necessarily those in greatest need but more likely the classes with the greatest voting strength that will profit’.¹¹

The political attractiveness of income transfers for the benefit of the lower income-groups appears, however, to have grown since the Second World War. In the United States, at least, and probably in Britain, pure generosity and altruism of an enormous number of acquiescent taxpayers seems to provide a partial explanation. But, more important, such transfers seem to have become more acceptable by one large sector of middle-income voters, organized labour. It has come to be believed in the USA that supplementation of the lower incomes, even at the initial expense to some extent of the middle incomes themselves, reduces competition (current or potential) from the poorer classes, in much the same way as unemployment benefit. In other words, because income transfers to the poor tend to replace wages for the poor, the latter can be permitted to demand without supplying, and hence kept off the labour market. The fact or illusion that this is to the advantage of the better-off workers to whom the TUC or the AFL-CIO (or similar organizations with powerful electoral influence) are responsible has probably been the chief reason why the poorest classes have been allowed (by the consensus of voters) to become apparent beneficiaries from income transfers during the last two decades.

‘Apparent’ beneficiaries first, because, although US families in the under $2,000 per annum income group now receive more in ‘hand-outs’ than they pay in taxes, the outcome must have been to dilute the real income of all in terms of the flow of wanted things;¹² second, the consequences upon the morale and productivity of the poorest classes have been deplorable;¹³ third, any redistribution effected through income transfers probably amounts to little more than a mitigation of the tendency of other policies (to which Professors George Stigler and Aaron Director have drawn attention) to batten on the poor at one end and on the upper incomes at the other for the benefit of those in the middle. Professor Stigler enunciates ‘Director’s Law’ as follows:

‘Government has coercive power which allows it to engage in acts (above all, the taking of resources) which could not be done by voluntary agreement of all the members of a society. Any portion of society which can secure control of the state’s machinery will employ that machinery to improve its own position. Under a set of conditions ... this dominant group will be the middle-income classes. Empirical investigation appears to establish that the necessary conditions for this law are created in the United States through farm policy, minimum wage laws, social security, public housing, public provision for higher education, tax exempt institutions, and “welfare expenditures”.... Public expenditures are made primarily for the benefit of the middle classes, and financed with taxes which are borne in considerable part by the poor and the rich.’¹⁴

It is because progressive income taxes have been seriously parasitic on an income source – the real capital stock – that we find an increasing pressure on governments in ‘welfarist’ communities to impose regressive taxation — indirect taxes (purchase or sales taxes, ‘employees’’ and ‘employers’’ social security contributions, and the like). A recent study by the head of the Population Division of the United States Bureau of Census¹⁵ shows that families with incomes below $2,000 per annum have about 44 per cent taken from them in federal, state and local taxes, which is a much larger proportion than is taken from all higher income-groups up to $50,000 per annum. What government takes in taxes from this income-group (under $2,000 per annum) is of course much less on the average than is handed back in various forms of hand-outs.¹⁶ But for no other income-group can this be said. Because of the regressive effects of state and local taxes, we find that for families over the wide income range, $2,000 to $15,000, the incidence of the aggregate tax load is approximately proportional at about 27 per cent; but even families in the $2,000 to $4,000 group must pay more in taxes than they receive back in the form of actual income transfers (as distinct from benefits in the form of government expenditures on education, justice, defence, etc).¹⁷ Moreover, when the consequences upon the magnitude and structure of the aggregate volume of wage-multiplying assets (pp. 39 et seq.) is brought into the reckoning, it is difficult to believe that the poorest classes are not the net losers by a formidable amount.

The gravest detriment of all may well be the character-destroying consequences upon the ‘beneficiaries’ of relief. A very small proportion of persons of conventional working age in the under $2,000 group would be incapable of earning much more than present gross family incomes (including hand-outs) if the incentives were there, and especially if minimum-wage and union-imposed barriers were removed.

Very important among the non-poor ‘deserving’ beneficiaries from income transfers are the voters employed as civil servants (national or local). When the proportion of civil servants to the aggregate number of voters is rapidly increasing (the number of public employees in the USA has grown three times as rapidly as the population growth rate), the temptation to buy their votes by largesse in salaries, wages and fringe benefits naturally increases in proportion. In this case the income transfers are disguised and do not appear as such in the statistics.

But people in this sector of the electorate are sometimes in a position to win more private gains through their power as voters than via resort to the strike-threat, when it is allowed them. The two sometimes support one another. Thus, the public transport workers and refuse collectors of New York provide, perhaps, the most notorious instance of voting power and strike power being able to force income transfers at taxpayers’ expense, as well as at consumers’ expense. (In Britain, the present Government’s resistance to pay demands in public services and nationalized industries may, conceivably, presage an important change of attitude.)

If all that had been involved in the income-transfer process had been the diversion of income from rich to poor, economists would have been mainly concerned with evaluating the criteria through which it is thought to be just to take from some and to give to others — in other words, the taxation formulae and the ‘hand-out’ formulae. They would have discussed such questions as: By what percentages should lower incomes at various levels be enhanced, and by what percentages should the higher incomes at various levels be subjected to differential taxation? Yet in the USA I can trace no rigorous investigations into justifiable or suitable scales, except for progression as a means of offsetting regressive taxes, and some discussion of the effects of ‘negative income tax’ proposals on incentive. Much more than simple income transfers are involved, however; and it is essential for us to face the whole question of the vote-acquisition imperative as the paramount factor in redistribution of income.

Income transfer and capital depletion

What are called ‘income transfers’ are initially transfers of capital. When the annual income of a rich man is reduced via taxation by $50,000 or $100,000, the sum transferred in any year remains capital until the state decides to devote it to consumption uses or to dole it out directly to voters who will, it is known, consume it.¹⁸ If it is invested in collectively-owned assets, and only the income therefrom transferred to the poor or the deserving, it will remain capital. Theoretically, this could occur. But it would be foolish for governments to regard capital transfers of that kind as capital and treat them as such; for that is not the purpose of the transfer. Most politicians would judge it to be very difficult, if not impossible, to buy votes with capital maintained in collective ownership. Electors want early, not deferred, payment. Hence, to be used effectively against political rivals, it is essential to allow the capital itself to be exterminated. Hence also the concentration on immediate personal services and the relative neglect of capital investment in the British National Health Service (and, to a lesser extent, state education).

Economists have to recognize this reality, and it is perfectly logical therefore for them to advocate, as the second-best policy or the lesser evil, progressive income tax plus ‘negative income tax’ (i.e. cash payments for the poor in proportion to their poverty).

‘Lesser evil’ because economists ought not to make such a recommendation without drawing explicit attention to the squandering of the people’s capital. This is how a British economist who was an MP and Chairman of the London Labour Party, the late Evan Durbin, clearly regarded it as long ago as 1940. He said:

‘The process of taxation has already halved our rate of saving and reduced the collective saving of the rich to nothing. If it goes much further, the increase of taxation will wipe out social saving altogether.... The continuous extension of the social services, and the steady rise in the proportion of the national income that is taken in taxation, imposes a strain upon the capitalist system that has already reduced its potential pace of development and will reduce it still further.’¹⁹

‘The people at large must be made to think about, and care for, something less immediate than better housing and family allowances.’²⁰

For political reasons, he thought, the electorate had to be pandered to. The rank and file of the Labour Party organization – ‘the main core of party intolerance and unwisdom and intransigence’²¹ had to be appeased, for without them a Socialist government could not retain power. It would be essential, however, for his party to ‘reduce their social service proposals to the minimum consistent with the retention of political power.’²²

The squandering Durbin alleged is the most pertinent attribute of both the ‘negative (or ‘reverse’) income tax’ policy and other (even less defensible) forms of income transfers with egalitarian objectives. It is one of the clearest cases in which, although the economist may feel impotent in any attempt to inculcate collective prudence, it is his duty to make crystal clear how the poor or other beneficiaries are encouraged to consume the sources that feed them. Reactions due to his disclosures of policy implications may begin, indirectly and eventually, to influence ‘swing voters’. It is true that Durbin’s exposure, published in 1940, of the enormous wastes due to the then British social services was, superficially considered at least, quite inert. But it may simply be that the time was not then ripe. He seemed to think at the time that a Labour government could ‘abolish’ the social services, except for a remnant (which he described as ‘jam’)²³ that would remain expedient because his own Labour Party (to say nothing of the other parties) had taught voters to expect this form of income transfer. He believed, however, that his scheme could be made politically acceptable by nationalizing a sufficient segment of the economy. This would ensure, he thought, that it could retain power by buying votes via promises of higher wages to an enhanced number of public servants.

Durbin’s purpose in his recommendations along these lines (as well as in his parallel insistence that the strike-threat, as the cause of wage-rate rigidity, had to be eliminated in a Socialist order) was precisely that of putting into circulation ideas which could be expected to influence opinion-makers only gradually – over a long future. He was not deterred by the apparent absurdity of his suggestions nor by fear of the ridicule and misrepresentation which were to be expected.

Negative/reverse income tax and the ‘disadvantaged’

In a humane age, the vote-gaining power of income transfers promised by candidates is (as suggested above) magnified when its advocacy can be clothed in phrases that suggest compassion and concern for ‘the disadvantaged’. That constitutes the strong political advantage of the social services in kind over ‘negative/reverse income tax’ in cash. Ceteris paribus $100 or $200 given to a poor voter is likely to win more votes if channelled through new social services ‘anti-poverty’ programmes than if simply paid to him by cheque or voucher.

On the other hand, at a roughly equal expense to taxpayers, that same voter might get $150 or $300 through reverse income tax because in that form most of the enormously wasteful expenses of administration of the social services could be cut out. As with so many private charities, administration costs absorb a large proportion of the sums collected. Moreover, ‘negative income tax’, as conceived by Professor Milton Friedman, reverse income tax in one form discussed by the IEA Study Group²⁴ and the British Government’s Family Income Supplement would not destroy work incentives to the extent to which public assistance does, because it would only partially (50 per cent in the FIS) offset the amount by which a family income fell below a stipulated figure. Moreover, the real value of the transfer could be higher because social services are not supplied to individual requirement; the cash transfer would be spent by the recipients. Thus, the case for replacing the social services by ‘negative/reverse income tax’ might appear to be overwhelming. But such a judgment ignores, firstly, the attractiveness of an appeal to the heart, and, secondly, the offsetting disadvantage of a threatened loss to many civil servants (who are also voters) of their jobs or of prospects of promotion. In the USA at least the votes of government employees may conceivably be rated even more important than those of ‘the poor’. From the standpoint of what is usually accepted as ‘the general good of society’, the economist can see that the ‘reverse income tax’ kind of income transfer is the lesser evil.

The crucial issue of this essay is encountered when for tactical reasons the ‘reverse income tax’ is advocated without the ‘evil’ in ‘the lesser evil’ being adequately and continuously stressed, and without the basic vote-acquisition consideration being enunciated with the utmost frankness. The policy requires handling with no inhibitions about the electoral aspects of economic reality which, one sometimes feels, have come to be regarded almost as though they were pornographic.

If it were ‘politically possible’ for ‘reverse income tax’ to be accepted solely as a substitute for all other forms of electoral vote-buying, the outcome of such a substitution would be a magnificent achievement. It would mean the abandonment of kinds of control of men which curb freedom and are an affront to human dignity. It was largely because of this virtue of his proposal that Professor Friedman was inspired to put forward his scheme (in his great book, Capitalism and Freedom). Its adoption on his terms would be welcomed by all concerned about the survival of liberty in a world in which political power-seekers increasingly appease the intolerant. But it would not cease to be a means through which candidates for election would compete in generosity at the expense of taxpayers. And its supporters must openly avow this as a serious calculated risk.

Professor Friedman has made no unjustified claims for his scheme. Yet it so resembles the notorious Speenhamland wage supplement of 1795 that it is impossible not to retain misgivings. The chief merit of the plan is one which he does not himself claim: that it exposes the vote-purchasing incentive for income transfers. He admits the danger of demagogues having ‘a field day’ under it. But, he says, we must evaluate ‘the world as it is, not in terms of a dream world’. The dangers, he insists, ‘are all present now and have clearly been effective. The crucial step is, how do we get out of the mess into which these pressures have driven us?’²⁵ ‘Dream world’ refers, in effect, to the ‘politically impossible’, namely, a world in which politicians cease to appeal to the have-nots with promises of transfers to them at the expense of the haves.²⁶ But if we are ever to have a better world, someone must dream; and he must dream of an era in which the masses are no longer bamboozled.

The ‘vote-buying’ process

Must such a dream necessarily remain impotent? The most urgent problem of our age for those who give most urgency to the preservation of democratic institutions is that of restraining the ‘vote-buying’ process. To state that any move in that direction would be extraordinarily difficult is a platitude. To assert that it is ‘politically impossible’ is to substitute ‘impossible’ for ‘unlikely’. Schumpeter would have been more inclined to accept the adjective ‘impossible’. He said:

‘Rational recognition of the economic performance of capitalism and the hopes it holds out for the future would require an almost impossible moral feat by the have-nots. That performance stands out only if we take a long-run view; any capitalist argument must rest on long-run considerations ... the long-run interests of society are so entirely lodged with the upper strata of bourgeois society that it is perfectly natural for people to look upon them as the interests of that class only. For the masses it is the short-run view that counts.’²⁷

Moreover, the easy path to prestige and political power, Schumpeter showed, is the flattery and virtual bribery of the masses. He did not exaggerate. Even John Stuart Mill, from the time he contemplated entry into politics, was guilty of flagrant flattery of ‘the working classes’.²⁸ And there is little doubt that the verdict of history will be that the British Tories of this generation bought the farmers’ votes, just as the Labour Party bought the council house tenants’ votes. Moreover, it can hardly be disputed that the British Tories (led by Disraeli) shamelessly bought the trade union vote in the 1870s just as the Liberal Party did between 1906 and 1914. I return to this question shortly.

Schumpeter’s persuasive argument leaves me less dogmatic than he was. The reasonableness of protecting the community’s capital (whether in ‘private’ or ‘collective’ ownership) from dissipation is capable of being brought effectively to the attention of the ‘independent opinion-makers’ in the intelligentsia. We have meticulous legislative provisions to secure the actuarial soundness of commercial insurance operations so as to guarantee that insurers’ capital is treated as such and not utilized as though it were income. Yet we have allowed increasing proportions of the people’s capital — the stock of assets the accumulation of which (together with the accumulation of knowledge) has alone multiplied the yield to human effort over the years — to be eaten up in the form of ‘welfare handouts’. The people are being deluded every bit as much as the policy-holders in an actuarially unsound life insurance venture.

Of course, economic growth has not been reversed. Research, inventive skills, entrepreneurial acumen and private thrift, although all too often discouraged, have not been suppressed and their fruits have continued to be enjoyed by all (including the classes for whom no credit can be claimed). That is, technological progress and managerial ingenuities have been making possible a rate of net accumulation of assets which, in the absence of squandering in vote-buying, could have prodigiously raised the real earning power and security of people with the lowest incomes.

Why should not the whole of the proceeds of the progressive element in income taxation and the whole of the proceeds of progressive inheritance taxes be utilized to write off the community’s collectively-owned ‘negative’ capital, namely, the national debt, thereby lightening the load of the proportional element in taxation? (for the interest burden would gradually decline). And when there is no further ‘negative’ capital to write off, why should not a fund of collectively-owned positive capital be accumulated and invested on the taxpayers’ behalf, again being utilized to lighten the load of the proportional element in taxation? There is nothing ‘starry-eyed’ about such ideas, however politically hopeless the prospect of the reform contemplated may now appear to politicians.

The Tocqueville principle

The notion of formal constitutional entrenchments is, of course, quite foreign to British traditions. But if there were some manner in which the right of politicians to defraud those who have elected them (knowingly, or recklessly, or otherwise) could be outlawed along the lines suggested, a whole range of what are today regarded as ‘politically impossible’ reforms would at once become conceivable.

Broadly, what needs to be entrenched is what has been named ‘the Tocqueville principle’. As I conceive of it, it goes beyond the scope discussed here. It would limit the power of legislators by denying them the right to discriminate against living persons on any grounds whatsoever — not only race, colour, ancestry, religion and sex but also property or income. But on a person’s death, a rule designed to render very costly the concentration of property-ownership in a few hands could mitigate the blatant arbitrariness of differential inheritance as a cause of differential incomes, with little harm to incentives and, if carefully thought out, with no encouragement — indeed positive discouragement — to private capital squandering.²⁹

Many ‘opinion-formers’ have become (wholly or partially) operators of the party apparatus and hence under some compulsion to advocate only what is calculated to be acceptable to electors who cannot be awakened to their long-run interests (pp. 12–13). Under this heading there are included, to quote Schumpeter, ‘groups to whose interest it is to work up and organize resentment, to voice it and to lead it.’³⁰ Moreover (Schumpeter added, referring to this group), ‘Capitalism inevitably ... creates, educates and subsidises a vested interest in social unrest.’³¹ In some measure, such groups appear to be parasitic upon the traditional party system of the ‘democracies’; and they can be powerful even when they do not resort to ‘activist’ methods but rely upon vote-acquiring tactics. These people are the real exploiters of the have-not classes whose blind envies they arouse. And it is because of the scope that the institutions of representative government and a free society offer them that the entrenchment of ‘the Tocqueville principle’ (by constitution or powerful convention) may yet prove to be indispensable for the survival of political and economic democracy.

Progressive taxation and inheritance

My chief teacher of economics, Edwin Cannan, strongly defended progressive taxation on the basis of the decreasing marginal utility of income (as had also economists of the calibre of Von Wieser, Carver and Edgeworth). My early writings show the extent to which I once uncritically accepted this politically popular viewpoint.³² It was a viewpoint which enabled economists to tell the working man: ‘We are your friend, you know,’ and allowed, for instance, the economist politician Hugh Dalton to claim to be a disciple of Cannan. But the faith of economists in the beneficence of the progressive principle was founded on the fallacious belief that the utilities of income to different persons can be compared. Subsequent recognition of this fallacy does not, of course, prevent perception of the injustice to the relatively poor of restraints on market-determined income-distribution imposed collectively or collusively by monopolies of employers and trade unions when they have a regressive effect by bearing more harshly on the lower incomes. Nevertheless, the breaking up and dispersion of ownership in property which would be gradually brought about by steeply progressive inheritance taxes without capital squandering could do something to mitigate the feeling that differential inheritances results in an obvious arbitrariness in the distribution of property, and hence causes market-determined distribution to be unjust.³³

The virtue in the democratic process is that the masses have the power to change rulers in a peaceful manner so that rule in the interests of a few is prevented. The vice is that, because the masses have not learned how to discern rulers who will legislate for their advantage, governments are today engaged in dissipating their people’s heritage. But if I seem to be disparaging the electoral wisdom of ‘the masses’, I am in effect criticizing the people who create mass opinion, both from within and outside the political arena. It is the persuadable among the editors, the columnists, the television and radio commentators, the academics, the clergy and the teachers generally who must be won over. I see no reason why it should be ‘impossible’ to demonstrate to them that, while redistribution of property ownership via progressive inheritance taxes could occur without serious harm to the society of which the masses are a part, currently effected income transfers with egalitarian intentions have gravely harmful effects, the consequences of which are likely to be felt mainly in the future, with their source then possibly undiscernible.

It ought not to be ‘impossible’ to demonstrate that, under proportional taxation, voters in the lower-income groups would be unlikely to approve of the mass of ‘free’ services and hand-outs which characterize modern democracies. Voters have fallen for the policy under the illusion that the burden is borne by the rich. But the proportion of aggregate tax revenues obtained from the higher incomes is so small as to make hardly any difference to the burden borne by the rest. Through the illusion that the weight of governmental ‘welfare’ expenditures falls wholly or mainly on the shoulders of the wealthy, the people have come to tolerate a much larger burden of taxation than they otherwise would have done. If it were understood that the costs of most of the social services fall principally on those who consume them, we should probably find the majority of people voting to show their preference for devoting their hard-earned income to ends of their own choice (and quite possibly to less wise ends).³⁴

In Britain, strong support for these opinions is available from two statistical sources: first, the Central Statistical Office, which has presented figures showing that (over a wide range of income, and including only the very highest and the lowest) people pay in taxes more or less as much as they receive in benefits;³⁵ and, secondly, the IEA Research Report, Choice in Welfare 1970, referred to on p. 8 above, which indicates a growing preference for privately purchased welfare services over state welfare services.

Moreover, among the voters there must be a large number of thrifty persons who could form an important ‘swing’ vote, in spite of contemporary policy and indoctrination tending to discourage providence. But if they could be shown that what is taken from them in taxes for the income transfers is not being so used as to assist any permanent raising of the earning powers of the needy, but consumed in petty short-term mitigations of their condition, is it beyond the bounds of the conceivable that they could be moved to vote against the system? Could they — a vested interest – not be led to perceive the dissipation (in ‘free’ services and unearned ‘doles’) of the stock of assets which magnify the yield of the people’s labour? Could not a taxpayers’ revolt be the consequence?

‘Live with ugly reality’

At this stage, it is likely to be objected that, whatever the disclaimers, this is dreaming of the ‘politically impossible’, asking for what is, under the opinion climate of the age, hopelessly impracticable. I expect to be told:

‘The adoption by economists of your recommendations about the “dual form” of exposition³⁶ can be expected to have no more effect upon what is “politically possible” than Canute’s commands could have upon the waves. You economists must learn to live with the ugly realities of political life.’

But the proposals do not exclude recourse to other strategies. They emphasize that, when economists begin to bring out into the open their political assumptions in policy espousal, two consequences may be expected to follow: first, a powerful educative effect on public understanding — especially among the truly independent opinion-formers — and, secondly, an improvement in the quality of the economists’ own thought.

I am probably as pessimistic about the likelihood of persuading economists generally to adopt the ‘dual form’ maxim as any among them who otherwise recognize the merits of the argument. Nevertheless, a widespread acceptance of the maxim, improbable though it may now seem, would have far-reaching repercussions. And circumstances can arise under which concrete realities force agonizing re-adjustments in the convictions of a sufficient number of opinion-formers to influence the beliefs and behaviour of the people (pp. 50–2). Constitutional changes to bring to an end the ability of candidates to offer the enrichment of the numerous at the expense of the few, or of the powerful at the expense of the weak, may (as has been suggested) eventually become essential if representative government is to survive assaults from the totalitarians of all kinds.

A new tax limitation to government

The constitutional-type enactment required is simple. It would assert the over-riding principle that, after a short, defined, transitional period, and subject to two apparent exceptions, governments shall have no power, through legislation or executive action, to enrich majorities at the expense of minorities, that is, no power to discriminate against living citizens on grounds of property or income. The enactment would provide also for the strictest independence of the courts responsible for its interpretation. The effect would be that all income taxation of living citizens would have to be proportional, falling with equal weight (the same percentage) upon all incomes down to the income level at which the sum collected would fall short of the cost of collection. But there would be two apparent exceptions. Firstly, a modification of the proportional principle in income tax would offset the regressive consequences of any surviving indirect taxes. Secondly, a degree of discrimination against the higher incomes would be permitted when their recipients explicitly authorized the higher proportional rates against their broad income-group through referenda in which the taxation proposals were submitted in detail to the groups affected together with specification of the collective objectives to be financed.

With such a constitutional-type rule, a wide discretion could remain with the legislators to levy sharply progressive inheritance taxes (their height depending on the sum received by each beneficiary and not upon the total sum bequeathed). But governmental discretion in using the proceeds would have to be constrained by a rule that the capital acquired would remain capital and be applied solely in alleviating the burden of proportional taxation – at first by the liquidation of the collectively-owned ‘negative capital’ (the national debt), and subsequently in the accumulation of a fund of collectively-owned positive capital, to be invested for the taxpayers’ benefit in profit-yielding (and wage-multiplying) assets.

Interim reforms

This brief enunciation of the fundamental reform which appears to be needed for the preservation of representative government must not be allowed to leave the impression that no reforms worth while are conceivable until such a basic change has come into being. One can certainly hope that some reforms in the required direction will come about, say, before the close of the century. But even if some leading statesman should take up the proposals in the two preceding paragraphs, no one would expect to see (this century) in Britain or the United States any such constitutional reforms. Because an economist frankly faces the unlikelihood of early success in ridding the political system of a basic vice, he is not debarred from suggesting other (less ‘difficult’ but still difficult) reforms in ‘the interests of the people’.

Changing age-composition in favour of the younger voters (and in Britain and the United States the boost to their numbers which will follow the extension of the franchise to 18-year-olds) is increasing the relative importance of the group which has most to gain in the long run from the abandonment of collective ‘squandermania’. It ought to be possible to bring home to this group the foolishness of current trends. But it is unfortunately possible that, through indoctrination in the schools, the younger the voter the less concerned he will be about the advantages for him of collective thrift over his whole life.

David Ricardo believed that attempts by majorities to transfer to themselves the fruits of thrift, capital, skill and enterprise would have such self-evidently adverse repercussions for the poorest classes that ‘men very little advanced beyond the very lowest stations in the country cannot be ignorant of it’. He thought indeed that

‘the man of small income must be aware how little his share would be if all the fortunes in the kingdom were equally divided among the people. He must know that the little he would obtain ... can be no adequate compensation for the overturning of a principle which renders the produce of his industry secure.’³⁷

Such optimism might be judged today to have reflected wishful thinking. But Ricardo was a shrewd, hard-headed business man. He was emphasizing a truth which is today inert simply because it is not being put to the people, not because it has been submitted to them and rejected. The point could be effectively communicated to electorates if the mass media presented all sides of the argument. The indoctrination barrier is indeed stronger among the intellectuals — the opinion-formers — than it is among the masses (pp. 13–14). Unless observable or demonstrable circumstances are explicable by them, economic theories will fall on barren soil. But the harm wrought to the masses by current policies, which is obvious to the economist, must be capable of demonstration.

It is easy to understand the pessimism of those who feel it would be hopeless to expect electors accustomed to receiving what they regard as income without effort to vote for income from work instead. But although the numbers of persons receiving ‘relief (‘public assistance’, ‘supplementary benefits’) have grown enormously in Britain and the United States³⁸ (as well as elsewhere), and although they often have the power of a ‘swing group’, the net short-term gainers must still form a minority. The pertinent problem is less how to communicate effectively with the recipients of ‘relief than how to do this with the majority who are standing on their own feet. As the politicians know, taxpayers’ acquiescence cannot be simply taken for granted. There are evidences of growing resentment at ‘squandermania’. If the independent economists made the consequences of current policies plain, the trend of policy might prove to be rapidly reversible.

The welfare system of the Western world has emerged not solely through the cynicism of vote-buying politicians. It has come into being largely because of the altruism and generosity of spirit on the part of many disinterested taxpayers who themselves make up a potential and formidable ‘swing vote’, including those key persons, the ‘independent opinion-makers’. Must this group be expected to react unfavourably to an effort to end the pauperization of a large segment of the less affluent? Why should it be ‘impossible’ for a convinced and inspired leader to make it clear that the recipients of ‘welfare’ are being wronged in so far as they are denied the inducement to work for a living? Suppose a British Prime Minister or an American President of the future announced a policy which replaced state aid by high-wage employment for all able-bodied men and women;³⁹ and suppose he emphasized and demonstrated the human degradation which the system has been observed to cause throughout the whole history of industrial society since the 18th century. Let us imagine, for instance, a future Prime Minister or President saying something like the following:

‘The lessons of history show conclusively that continued dependence on relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief is to administer a narcotic, a subtle destroyer of the human spirit. The Government must quit this business of relief.’

Some will object that no politician would dare to use such phraseology. Others will charge that the passage discloses lack of compassion — or heartlessness – on my part. Yet this passage consists entirely of phrases used by President F D Roosevelt in his State of the Union message in 1935;⁴⁰ and that was in a year in which the real wage-rates at which employment outlets for the unskilled were available stood at a mere fraction of those currently available in the United States. There is nothing harsh in the make-up of reformers who, like the Roosevelt of 1935, would like to eradicate a system which universally operates ‘to destroy the human spirit’. A platform with such objectives is not ‘politically impossible’.

FOOTNOTES TO PART IV

¹ Beggars may become vagrants, vagabonds or criminals.

² P Samuelson, Economics, 7th Edition, p. 31.

³ But it was earnestly held that persons should not be protected from the consequences of their own folly when the protection was observed to be encouraging its perpetuation.

⁴ Quoted in H Hazlitt, ‘The Poor Laws of England’, The Freeman, March 1971, p. 142.

⁵ H P Miller, Rich Man, Poor Man, Crowell, 2nd Ed., 1971, p. 60.

⁶ Hazlitt, op. cit., p. 142.

⁷ F A Hayek, The Constitution of Liberty, Routledge, p. 310.

⁸ Yale Brozen, ‘Towards an Ultimate Solution’, Saturday Review, May 23, 1970, p. 30.

⁹Ibid., p. 60.

¹⁰ Hayek, op. cit., p. 310.

¹¹Ibid., pp. 312–3.

¹² Pp. 40 et seq.

¹³ For instance, O W Gooley, Paying Men Not to Work, Ch. 5.

¹⁴ G Stigler, ‘Director’s Law of Public Income Distribution’, Journal of Law and Economics, April 1970.

¹⁵ Miller, op. cit., p. 17.

¹⁶ This group received back (in 1965) 126 per cent as income transfers (i.e. their net gain was 82 per cent): ibid.

¹⁷Ibid., p. 17.

¹⁸ This argument is unaffected by the theoretical possibility that the taxpayer’s consumption (not his savings) is reduced by the amount of the transfer.

¹⁹ E F M Durbin, The Politics of Democratic Socialism, 1940, p. 293.

²⁰Ibid., p. 298.

²¹Ibid., p. 289.

²²Ibid., p. 298.

²³Ibid., p. 298.

²⁴ Christopher, Polanyi, Seldon, Shenfield, Policy for Poverty, IEA, 1970. This study preferred ‘reverse’ to ‘negative’.

²⁵ Milton Friedman, Newsweek, October 7, 1968.

²⁶ He asks, ‘Will there not be continued political pressure for ... higher and higher rates of negative income? Will the demagogues not have a field day appealing to have-nots to legislate taxes on haves for transfer to them? ... These dangers clearly exist.’ (Ibid.)

²⁷ Schumpeter, op. cit., pp. 144–5.

²⁸Economists and the Public, op. cit., Chapter XI.

²⁹ A parallel and supplementary reform, perhaps essential for ‘political acceptability’, would be tax reform to discourage the private squandering of capital and the encouragement of thrift.

³⁰ Schumpeter, op. cit., p. 145.

³¹Ibid., p. 146.

³²Theory of Collective Bargaining, 1930, p. 107.

³³ The late F C Benham thought that progressive taxes on capital (‘wealth’) could be used for this purpose. Provided the proceeds were used as suggested here, the effect would be the same, if the incentive consequences could be assumed to be the same. (Agenda for a Free Society, ed. A Seldon, IEA, 1961, pp. 114–5).

³⁴ Anthony Barber, the British Tory Chancellor of the Exchequer, has been recently reported as describing the reversal of a trend towards rising taxes and increasing welfare expenditures (a trend which had lasted for more than a quarter of a century) as designed to increase the individual citizen’s ‘incentive to increase his earnings and to have greater freedom in how he spends and saves his income’.

³⁵ I have referred above to similar data for the United States.

³⁶ Above, pp. 24–5.

³⁷ Quoted by Hutchison, Markets and the Franchise, op. cit., p. 9, p. 10 (footnote).

³⁸ In the United States, they amount to about 12 million today, in the UK to half a million.

³⁹ This alternative could be achieved by abolishing minimum wage laws together with a law over-ruling strike-threat enforced barriers to any person currently receiving less than a certain income from increasing his income. The principle of ‘the rate for the job’ implies such a barrier when it prevents anyone from accepting any employment which managements would otherwise find it profitable to offer. The market-enforced minima for able-bodied men and women would soon be incomparably higher than any state aid at present available.

⁴⁰ Roosevelt’s phrases I have used here are quoted in a most impressive paper on the welfare state read to the Governmental Research Association by Dr Roger Freeman of the Hoover Institution. The text is printed in the Congressional Record of 5 October, 1970.