The Economics and Politics of Taxation

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Recently, in his annual State of the State Address, California Governor Jerry Brown congratulated the California legislature on balancing the state’s budget. How was this done? It was accomplished by budget cuts and tax increases. Standing before the state legislature Brown said, “Against those who take pleasure in seeing our demise, California did the impossible. You, the legislature, did it. You cast difficult votes to cut billions…. Then the citizens of California … embraced the new taxes of Proposition 30 by a healthy margin of 55 to 40 percent.”

As Governor Brown pointed out, the budget could not have been balanced without a tax increase – to be enforced at a time of general economic contraction. This latter fact casts a dark shadow over Brown’s declaration of victory. Given the circumstances, any tax increase probably guarantees further revenue shrinkage. Instead of paying the higher taxes, businesses may simply leave California for Texas or Nevada. Sadly, the governor of California does not understand economics. What he understands perfectly well, however, is politics; for the logic of the situation is easy to apprehend insofar as modern democracy is concerned.

In 1896 the Irish historian and political theorist William Hartpole Lecky wrote, “Nothing is more characteristic of the new democracy than the alacrity with which it tolerates, welcomes, and demands coercive Government interference in all its concerns.” For Lecky, democracy was not a system of freedom but a mechanism by which labor might gradually squeeze the life out of capital. Lecky continued: “Accompanying this movement, and naturally growing out of the great change in the disposition of power, is the marked tendency to throw taxation to a greater extent on one class of the community, in the shape of graduated taxation.”

Previously, the English-speaking peoples were long accustomed to a soak-the-rich system which focused on luxury taxes. As Lecky explained, “The doctrine that revenue should be raised chiefly from luxuries or superfluities has been very largely recognized in English taxation, and since the great fiscal reforms instituted by Sir Robert Peel it has been carried out to an almost complete extent.”

However, there is a grave problem with the principle of soaking the rich if one initiates a program of direct taxation (i.e., not simply taxing luxury items). According to Lecky, “especially when those who are exempted [from direct taxes] form the bulk of the electorate, and are thus able to increase this taxation to an indefinite extent, without any manifest sacrifice to themselves.” And now, 117 years after Lecky wrote on this subject, we have arrived at the place in question. That is to say, the present political/economic system allows the majority of taxpayers to vote for politicians and programs that can effectively redistribute wealth from one class of persons to another. As Lecky warned, “[There is] another conception of taxation, which has of late years been rapidly growing. It has come to be regarded as a socialistic weapon, as an instrument of confiscation, as a leveling agent for breaking down large fortunes, redistributing wealth, and creating a new social type.” This system is known as graduated income tax, which both California and the United States government employ for raising revenue.

At present, the changes to society that Lecky feared have already occurred. In fact, our entire society has been transformed by the introduction of progressive income taxes and the resulting redistribution of wealth. Though this point is often missed by the makers of our tax policies, Lecky spells it out: “It is obvious that a graduated tax is a direct penalty imposed on saving and industry, a direct premium offered to idleness and extravagance.”

Therefore, we should not be surprised to find our work ethic in decline. Neither should there be puzzlement at the rapid indebtedness of individual citizens, towns and states. Even more, economic contraction is to be expected. “Under such a system,” wrote Lecky, “all large properties may easily be made unsafe, and an insecurity may arise which will be fatal to all great financial undertakings.” Furthermore, he warned, “The most serious restraint on parliamentary extravagance will … be taken away, and majorities will be invested with the easiest and most powerful instrument of oppression.”

As Lecky knew from studying human nature, “The ascending scale may at first be very moderate, but it may at any time, when fresh taxes are required, be made more severe, till it reaches or approaches the point of confiscation.” In other words, once you begin a system of graduated income tax the tendency will be toward the confiscation of wealth. This is especially true when the voting public is called upon to approve the tax. As Lecky noted, “Highly graduated income tax realizes most completely the supreme danger of democracy, creating a state of things in which one class imposes on another burdens which it is not asked to share, and impels the State into vast schemes of extravagance, under the belief that the whole cost will be thrown upon others.”

The voting public believes many foolish things. There is a positive belief, for example, in the “free lunch.” Well, it’s free for some people. Others, however, must pay. The injustice and arbitrary practice thus engendered, plunders the investing classes – leaving society without investment, and without an economic future. As Lecky pointed out, “Far-seeing men hesitate to commit themselves to undertakings which can only slowly arrive at maturity when they see the strong bias of popular legislation against property….”

The question might be asked, “How does society backtrack? How do we fix this problem?” The answer requires a re-examination of democratic assumptions. Our Constitution was not intended as a pure democracy. It was intended as a system of checks and balances within which democracy was only an element. Until this point is accepted once again, we will continue down the present road. Taxation will increase even as the economy fails to expand.

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About JR Nyquist

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