Seeking Alpha

Josh Dowlut's  Instablog

Josh Dowlut
Send Message
Regarding a fractional reserve banking system, the Rothschild brothers once said "The few who understand the system, will either be so interested from it's profits or so dependant on it's favors, that there will be no opposition from that class." I am that rare individual they didn't... More
My company:
Federal Fidelity Mortgage
My blog:
Josh Dowlut
  • The Classically Liberal Argument for Higher Taxes on the Rich 4 comments
    Sep 20, 2011 6:48 PM

     

    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.

     

     

Back To Josh Dowlut's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (5)
Track new comments
  • Josh Dowlut
    , contributor
    Comments (110) | Send Message
     
    Author’s reply » Matt Bruenig cites even more commie talk from Locke's First Treatise of Government. The poor have a RIGHT to the surplus of the rich:

     

    "God, the lord and father of all has given no one of his children such a property in his peculiar portion of the things of this world, but that he has given his needy brother a right to the surplusage of his goods, so that it cannot justly be denied him when his pressing wants call for it, and therefore, no man could ever have a just power over the life of another by right of property in land or possessions, since it would always be a sin in any man of estate to let his brother perish for want of affording him relief out of his plenty."

     

    and...man can't use his market power to grind down other men to subsistence wages:

     

    "And a man can no more justly make use of another’s necessity to force him to become his vassal by withholding that relief God required him to afford to the wants of his brother, than he that has more strength can seize upon a weaker, master him to his obedience, and, with a dagger at his throat, offer him death or slavery."

     

    http://bit.ly/FO57sE
    16 Mar 2012, 11:00 AM Reply Like
  • Josh Dowlut
    , contributor
    Comments (110) | Send Message
     
    Author’s reply » A response to multiple criticisms I've received to the effect of, "but they weren't talking about income taxes."

     

    That is true, but the method of tax (income, property, or consumption) is a completely separate issue from the structure of a tax (flat, progressive, regressive), and it is clear that classical liberals such as Adam Smith and Thomas Jefferson supported a progressive structure, regardless of the method.

     

    Thomas Jefferson would side with the 47%, and likely say their burden was too high given the payroll tax:

     

    "The rich alone use imported articles, and on these alone the whole taxes of the General Government are levied. ... Our revenues liberated by the discharge of the public debt, and its surplus applied to canals, roads, schools, etc., the farmer will see his government supported, his children educated, and the face of his country made a paradise by the contributions of the rich alone, without his being called on to spend a cent from his earnings." --Thomas Jefferson to Thaddeus Kosciusko, 1811. ME 13:41
    8 Oct 2012, 04:38 PM Reply Like
  • CharlesChandler
    , contributor
    Comment (1) | Send Message
     
    First of all, the Adam Smith quotes cited in no way support progressive taxation, and none of the comments at all support the idea of a redistributionist welfare state. The Locke comments allude to a Christian duty to give to the poor, but that in no way justifies enforced redistribution. Since I'm not a Christian, I'll just sit out participating in funding the welfare state.
    3 Apr 2013, 05:48 PM Reply Like
  • LinearCry
    , contributor
    Comments (2) | Send Message
     
    It is odd to say that the Incorporation Doctrine strengthens the federal government. It actually weakens the states in the same way the Bill of Rights weakens the federal government.
    1 Sep 2013, 03:24 AM Reply Like
Full index of posts »
Latest Followers

Latest Comments


Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.