The Outcome of the Income Tax; S. Hahn

One of the most significant of these proposed measures was the applica tion of ((a heavy progressive or grad uated income tax." For more than half a century, our nation has been experimenting with such a tax. Objections would be strenuously raised if one concluded that these American social ((scien tists" were consciously working to implement Marxist ideology. Indeed such name calling usually produces more heat than light. It would not be Mr. Hahn, a recent graduate of Grove City College where he majored In economics, theology, and phi losophy, Is now studying at Gordon-Conwell Theological Seminary.

THE OUTCOME OF THE INCOME TAX 135 improper, however, to examine the effect that this graduated income tax has had upon the American soci ety. For I believe that Marx was right. This progressive tax truly represents CC a despotic inroad" which is cCeconomicallyinsufficient and un tenable," thus cCnecessitating further inroads" upon the estab lishment of American liberty. Therefore, it would be profitable to discern how the graduated income tax has worked to subtly erode the economic, legal, and moral pillars upon which our nation has long rested. Attacks on Income and Economy Especially as April fifteenth comes and goes, taxpayers across the country ache from the powerful one-two combination of inflation and graduated taxation. Through out the economy, there have ap peared signs of a sustained rate of double-digit inflation. This unfortu nate reality, coupled with the cur rently steep rates of the graduated income tax, works as a double poison which is slowly crippling private en terprise. This is no small cause for concern. It is crucial that we per ceive how this combination subtly erodes our economic substance. Such accurate perception is the prerequi site for proper action. And both are desperately needed to prevent our reeling economy from going down for the count. Let us then briefly examine the economic consequences of our graduated income tax in this age of inflation.

First of all, it is imperative that we recognize the current under standing and explanation of infla tion for what it is: an economic myth. All are agreed that inflation is a dreadful evil which short changes the moneyholders. (The mainstream economists even assent to this fact.) All the while, however, these economists wag their tongues at the alleged cCcauses" of inflation: big business or labor unions. (Which side is blamed usually depends, of course, on the individual econo mist's own special interests.) The accusations of these econ omists produce much legislation but little change in the inflation rate. Well, that's not quite true; the rate inevitably rises. So, everyone struggles to stay one step ahead of inflation. They hope to make a little profit or just break even. In order to do this, however, their money income must steadily rise at or above the present inflation rate.

Such income increases are main tained at no small cost to both labor and management alike. Social con flict also inevitably rises. The manner in which mainstream economists ignore the actual cause of this economic calamity is as baf fling as it is reprehensible. The his tory of economic thought must be unknown to these men, or else it has 136 THE FREEMAN March been rewritten. Whatever the case, the issue will remain obscure until it is clearly understood that the gov ernment's expansion of the currency and credit is truly the cause ofinfla tion. (Actually, such expansion should be identified as inflation, properly defined.) Thus, we wait for the ebb of economic ignorance and watch as moneyholders continue to get shortchanged in the meantime. If this reality only affected moneyholdings, it would be bad enough. However, insult is added to injury when people fill out their in come tax returns and discover that their brutal struggle to stay even with inflation has lifted them into higher and more confiscatory rates of taxation. If inflation were not harsh enough, the graduated rate of income tax serves only to rub salt into their economic wounds. Such abuse inescapably wreaks havoc on an individual's incentive to produce.

Inflation Speeds the Erosion Actually, the inflation is not necessary for the graduated income tax to effectively erode the nation's economic foundation. It only serves to expedite the process. But the gov ernment betrays both its impatience and immoral intention by continu ally boosting the rate of inflation. Throughout the economy, the crunch is felt by all. The whole time, the ravenous reapers of revenue in Washington clean up. One might think that Americans have always been subjected to this annual headache. Clearly, such is not the case. In fact, a Constitu tional amendment was necessary before the graduated income tax could be legally loosed upon the American taxpayers in 1913. This fact alone serves to confirm one's suspicion that such a revenue mea sure was far from the intention of the founding fathers. In fact, prior to the amendment, it was commonly understood that such a tax flew in the face of the direct and propor tioned taxes called for in the Con stitution. Specifically, the progres sive income tax marked a distinct break from the established principle of nondiscriminating uniformity in taxation. This principle had long been recognized as crucial to the balance and stability of the Ameri can market economy. It also was understood to be a necessary means to protect private property and sus tain voluntary exchange.

The first century of American in dependence saw the majority of rev enues coming from tariffs and duties. Taxation, when it occurred, was slight and proportioned so as to distribute the tax burden impar tially. This all changed in 1913, when the relatively young income tax was apportioned upon a graduated scale. The break from tradition has been widening as the graduated scale has become steeper.

1980 THE OUTCOME OF THE INCOME TAX 137 What was it that motivated such a distinctive break from the Constitu tion? It would be profitable to briefly examine the arguments put forth in favor of the graduated scale. ~~The rich should pay a greater proportion of taxes!" ~~Only such a measure will actually bring about greater equality of sacrifice!" Gen erally speaking, these arguments in favor of the graduated income tax have been exposed for what they are: expressions of egalitarian ideol ogy. There were very few arguments which gained any credence in economic circles as providing ~~scien tific justification" for this social dogma of reform. Punishing Those Who Have Been Most Productive One such case ostensibly provid ing rational grounds was the argu ment from ~~the decreasing marginal utility of successive acts ofconsump tion."1 In crude terms, this theory asserted that the rich entrepreneur, after making a cool million, would tend to value $10,000 less than would a typical American bread winner. Such arguments, however, are rendered invalid by a proper understanding of marginal utility and subjective value. (This under standing goes all the way back to the last century when BoehmlFriedrich A. Hayek, The Constitution of Liberty (South Bend, Ind.: Gateway Editions, 1972), p. 309.

Bawerk exposed the inadequate dis tinction between ~~use value" and (~exchange value."2) And recently, even the most dedicated econometri cians have abandoned the hope of being able to calculate and compare different subjective utilities be tween individuals. Such utility measurements are in fact as unde sirable as they are unscientific! Therefore, the ultimate foundation for the graduated income tax seems to have been the dogma of social equality. What, then, are the economic con sequences of implementing this so cial dogma by establishing a pro gressive income tax? Quite simply, this graduated tax structure works to burden the economy in general and the most productive members in particular. This is so beeause there is a heavier, disproportionate tax upon those who earn the higher in comes. And in a market economy, the more productive people make the higher incomes. Thus, a greater proportion of capital is diverted from the most productive channels of the marketplace. Instead of funding productive investments, this dispro portionate amount of income will find its way into the conspicuously consumptive hands of the federal government.

The graduated income tax will 2Eugen von Boehm-Bawerk, Capital and Interest (South Holland, TIL: Libertarian Press, 1959), II, p. 160.

138 THE FREEMAN March only serve to discourage initiative while dissolving incentive. For what man would be overly anxious to pool capital resources into a more pro ductive combination if his profits will only serve to lift him into a steeper tax bracket which offsets his gains? Only the confident, daring, or masochistic would be interested. I think we can then accurately con clude that the graduated income tax is at work, even now, slowly con suming our substance and eroding the economic base of our indepen dent republic. This parasite is as unnatural as it is unnecessary. Here Americans have gravely erred. We have sold our birthright of liberty for a mess of CCprogressive"pottage. The Distortion of Disproportion The market order has often been depicted by its opponents as resting upon the competitive savagery of the law ofthe jungle, where only the strong survive. An examination of this disparaging allusion is not within the scope of this essay.

Whether or not this was ever true, it could be more safely asserted that, with the dramatic reversal in social thought in this past century, we are now living in a society ensnarled in ajungle of law. The irony of it all is discomforting. The turning point came with an exchange of legal principles. For centuries, the conflict raged in Europe between serfs and lords, peasants and monarchs. The issue at stake: the nature of the individual and his rights before the law. The outcome of the conflict marked a decisive victory for human liberty. cCThe equality of all men before the law" represented a most significant step in the progress of justice. What did it all mean for America? The founding fathers viewed this hard-fought acquisition as the legal pillar which would support the re public. CCEquality before the law" meant that where an individual stood before the court, he could be assured that his guilt or innocence would be determined without regard to his economic status. The law would judge all men impartially. As Benjamin Franklin stated: cCThe same for every member of the soci ety; and the poorest continues to have an equal claim to them with the most opulent, whatever differ ence time, chance, or industry may occasion in their circumstances."

While the United States enjoyed legal stability within its land, Euro pean nations began toying with the notion ofthe progressive income tax. They seemed disinterested in under standing the legal struggle that their ancestors had undergone to establish impartiality within the rule of law. In 1891 Prussia began its social experiment with the graduated income tax. Many Ameri cans and Europeans perceived the danger. Dissent was raised by many 1980 THE OUTCOME OF THE INCOME TAX 139 who argued that ((the sacred princi ple of equality before the law" was ((the only barrier against the encroachment on private property."3 However, the argument fell on deaf ears as the progressive rate was too insignificant to render any force to the argument against graduated rates in principle. In the meantime, American and British social reformers were sound ing the battle cry for greater ((equal ity of sacrifice." With the opposi tion's arguments rendered ineffec tive by the very smallness of the tax burden, these reformers did their homework. Within less than twenty years of Prussia's experiment, Great Britain succumbed to the progres sive temptation.

America soon followed. So within one generation, the legal les sons learned and the advances made, after the centuries of strug gle, were forgotten. It was felt that a majority, by the mere fact of its numerical strength, could apply a burden to the wealthier minority without being affected itself by an equal load. At that point, any remainder of legal clarity was distorted beyond recognition. Granted, the graduated burden was seemingly light. How ever, any attempt to impose a limit in the future would be arbitrary and, inevitably, only temporary. 3Hayek, op. cit., p. 310. Thus, once the floodgate was opened, there no longer existed any principle which could prevent the trickle from becoming a deluge. So much was lost so quickly. Where the law had once been characterized by impartiality and predictability, it was now an arbi trary standard which was shifted by the will of the majority. A man's relation to the law was now greatly influenced, if not determined, by his economic status.

What can this produce but a con flict society? Suppose, after all, one man is taxed at one rate and his neighbor at a lower rate. Now this does not exactly create social har mony; rather it breeds suspicion and envy. So much of this confusion is brought about by a progressive in come tax. The Oppression of Progression The redistribution of income and property by progressive taxation is now universally recognized as a proper means to attain socialjustice. It has been argued in this essay that such a policy is at once economically unproductive and legally unjust. In addition, it is morally reprehensible, contradicting the principles which established the nation upon the foundation of freedom and justice. These principles were formulated by men who comprehended that a nation had to be built and sustained by individuals who understood both 140 THE FREEMAN self-discipline and self-development.

Anything less would not endure. So long as their actions did not violate the rights of another, men were free to pursue happiness according to the dictates of their· own conscience. Hence, men learned that individual enterprise and self-reliance were gifts of God which were to be culti vated and utilized. As they were developed, the American people prospered. In the midst of their prosperity, a subtle shift began to occur. The change was imperceptible at first. The results of the change, however, were most distinct. Per haps the prosperity led to economic fatness, and fatness in turn led to moral flabbiness. Whatever the causes, the effects remain with us. Where there was once individual enterprise and self-reliance, there is now a growing dependence upon the state and fed eral governments. Accompanying this shift came a growing distrust directed toward the more productive members of the society.

This distrust has blossomed into open hostility. With the instru mentality of the progressive tax structure, this hostility has led to an Frederic Bastiat IDEAS ON economic and legal assault upon the wealth of these productive members. Prior to 1913, such hostility surely existed. But once a disproportionate tax was permitted to burden some more than others, the government then became the means of economic, legal, and moral oppression. When a discriminating income tax is allowed to become the means of legal plunder, the spark of envy within the classes of men is fanned into a raging fire. No longer is the state able to restrain the fruits of covetousness; now it works to pro duce them. From the spark of envy to a conflagration of confiscation, the graduated income tax has led to democratic tyranny. The progressive income tax has come upon us gradually. It began with a seemingly harmless maxi mum rate of 7 per cent. Yet within less than a generation, this rate climbed higher than 90 per cent.

Of course ((progressive" is a mis nomer. ((Aggressive" might be closer to the truth. But alas, perhaps ((regressive" would be best, as this graduated tax policy has taken America back centuries-down the road to serfdom. @ LIBERTY THE STATE is and ought to be nothing whatever but community force organized, not to be an instrument of oppression and mutual plunder among citizens, but, on the contrary, to guarantee to each his own, and to cause justice and security to reign.