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The Classically Liberal Argument for Higher Taxes on the Rich

 

Since the days of the pharaohs, there has always been a small minority of the population that has functioned as the ruling class and done incredibly well for itself.  Even as late as 18th century Europe it was the prevailing view that the wealth of a nation was best measured by how much gold the ruling class had amassed.  The Enlightenment rejected most of the underpinnings of the social order, and its culminating intellectual work, The Wealth of Nations squarely rejected the idea of measuring an economy based on the wealth of a few, and replaced it with measuring it based on the wealth and income of the many.  Adam Smith, the father of free market capitalism and great influencer of Thomas Jefferson, did not advocate a free market for either its own sake, or for the sake of the rich getting even richer.  He advocated it so that the average working man could better himself while inevitably leading to a relative loss of income and power by the ruling class.  Capitalism was only a means to what would be seen today as a very socialist end:  increased wealth and income equality.

 

Both Adam Smith and Thomas Jefferson explicitly advocated progressive taxes.  I’ve hit on these points before, but they are worthy of repeating.  Adam Smith saw the main purpose of government as creating a degree of civil order that enforced and protected natural rights, among those, life, liberty, and property.  Most important to Smith was property:

 

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all. 

 

To this end, Smith saw that those who had the most property to secure, were also those who most benefited from the core function of government, and therefore those who should pay the most to maintain the very order they so much benefited from.  Smith also understood that there were basic necessities to life, and that it was wrong to take those necessities in the form of taxation.  He goes into much detail over how while luxury items should be taxed, necessities should never be taxed.  Simply put, it is wrong to take food off a man’s table, but it is not wrong to take the 3rd BMW out of his garage, especially if doing so lightens or eliminates the tax burden on the first man.  Smith’s clear support of progressive taxes is best exhibited by:

 

It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more.

 

Speaking of natural rights, John Locke explains how taxes may exist at all by the limits he places on natural rights in his Second Treatise on Civil Government.  Locke first asserts that man has certain natural rights with:

 

"Man…hath by nature a power…to preserve his property, that is, his life, liberty and estate, against the injuries and attempts of other men…”

 

But Locke also realizes that without certain limits on these rights, one could never levy taxes, or throw murderers in prison, so he slips in a public good disclaimer:

 

"…no body has an absolute arbitrary power…to take away the life or property of another…having in the state of nature no arbitrary power over the life, liberty, or possession of another…Their power, in the utmost bounds of it, is limited to the public good of the society.”

 

One can also use the public good constraint to argue that public money should never be spent on private consumption, thus unraveling the welfare state, to include Social Security and Medicare as we know it.

 

Thomas Jefferson was also far more anti-aristocracy and pro-progressive taxes than any modern Tea Partier would ever let on.  While Jefferson shared Smith’s inequality and fairness concerns, Jefferson’s main reason was to guard against the rise of a permanent ruling class that could challenge or control the government.  Smith had a similar concern and explicitly cautioned against electing the Mitt Romney and Herman Cains of the world.  The Founding Fathers understood that liberty could be threatened by 3 distinct sources:

 

1. unlimited government

2. unlimited aristocracy, or

3. unlimited majority rule

 

Preserving liberty requires a nuanced balance of guarding against the ascendancy of all three. Unfortunately, modern pro-liberty types have lost sight of guarding against all but the government component. If it were that simple, eliminating all government would be the path to liberty, but there is not a constant, inverse relationship between the size of government, and the amount of individual liberty.  Government, especially limited, self-government, is an artificial construct to guard against anarchy’s trend towards rule by force.  Broadly speaking, we would probably be more free if there were less government relative to what we have now, but we would also probably be much less free were we to eliminate it all together.  While granting government the power to crush aristocracy may be blasphemy to anti-government types, it should be supported by pro-liberty types who understand all of this.  By focusing only on the government component, modern Tea Party types switch from being pro-liberty, to merely being anti-government, while simultaneously being pro-aristocracy.

 

Jefferson’s best outtakes on the subject:

 

I hope that we crush ... in its birth the aristocracy of our moneyed corporations, which dare already to challenge our government to a trial of strength and bid defiance to the laws of our country. 

 

Challenge our government…kind of like being able to control the government through bailing out everyone who is too big to fail.

 

Bid defiance to the laws of our country…kind of like certain Fortune 100 companies paying zero corporate income tax on literally hundreds of millions, and sometimes billions of dollars of profit.

 

Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.

 

There are many more of these nuggets and the full context is available in the Jeffersonian Cyclopedia.

 

Consider a few other big government, pro-liberty conundrums:

 

McDonald v. Chicago, clearly this is a Supreme Court precedent that strengthens the authority of the federal government, but it also allows the citizens of Chicago the right to defend themselves.

 

The entire Incorporation Doctrine, clearly strengthens the federal government, but ask the Mormons what they think of it.

 

Abolishing slavery, which is the more free society, the one with a central government small enough to allow slavery, or strong enough to stop it?

 

Finally, most who are opposed to the idea of increasing taxes on the rich identify themselves with the small or smaller government side of the political spectrum.  I ask what is the core, fundamental force or idea such people are truly advocating.  I submit that it is merely an aversion to concentrated, centralized, unbalanced power.  Balancing, and decentralizing power is the fundamental reason behind the right to keep and bear arms which is also a pro-liberty principle.  Does it matter what you label that power, or even by what means that power came to be?  Permanent aristocracy is very much a form of concentrated, centralized, unbalanced power, and anyone who is truly pro-liberty should support measures to guard against it.

 

Final statistical support, consider the following graph overlayed with the following data.

 

Notice the spike on the graph of the top 1%'s share of total national income starting in about 1987. Notice that in 1982 the top rate was lowered from 70-50% and then in 1986 it was lowered from 50 to 38%, and then in 1987 it was lowered from 38 to 28%.  Also notice the left side of the graph, the long-run decline starting after the top marginal rate was increased to 63%, at approximately the same slope as the recent long-run incline.  Anyone who tries to tell you higher top marginal rates won’t reduce the power the top 1% exerts over the rest of us is simply shilling for the top 1%.  Additionally, there is a slightly positive relationship between the top marginal rate and total economic growth.  In other words, the economy as a whole tends to grow slightly faster when the top marginal rates are highest.  The long-run differential comparing the 30 years prior to the Reagan tax cuts with the 30 years after the Reagan tax cuts shows the pre-tax cut years averaged just over 1% faster GDP growth.  That compounds to a 35% total differential, in other words, had the US maintained the pre-Reagan long-run growth rate, every household would be 35% wealthier on average.

 

It may at first seem completely counter-intuitive for overall economic growth to be faster with higher top marginal tax rates, but thinking it through beyond the surface shows it makes a lot of sense.  First, concentrated wealth causes and correlates with economic or monopoly power.  The more concentrated wealth and power there is, the more the economy as a whole drifts away from perfect competition and towards monopolistic competition.  Monopolistically competitive markets produce less total wealth than perfectly competitive markets do, and that wealth is also more concentrated.  Second, by the very definition of the accounting, personal income is that which was not put to productive use.  It represents resources that have been diverted towards conspicuous consumption rather than productive capital investments.  If the income were going to hire an additional employee, purchase a new piece of equipment, or invest in some more research and development, it wouldn’t be showing up as personal income.

***The total size of government disclaimer to this entire piece***

 

Please don’t mistake any of this as an advocacy for more government.  On the contrary, our country would be better with less government, namely much less regulation, drastically reducing military spending, drastically bringing government contractor and employee compensation inline with the private sector, ending welfare as we know it, and raising the full eligibility age for Social Security and Medicare to 71, roughly the age that they would be inline with the demographics of the time Social Security was created.

 

Additionally, empirical evidence shows that the economy grows faster when the government spends less.  Harvard’s Robert Barro showed that for every additional dollar the government spent, total economic output was reduced by roughly 30-40 cents.  But the total level of government spending and taxation is a completely different issue that the top marginal tax rate.  It is completely possible, and highly desirable to have much lower spending than we do now, a much lower total tax burden as a percentage of GDP than we do now, AND increase the top marginal tax rate.