31 July 2014

Why Progressive Taxation Abuses Tory Policies for the Common Good

Arguable it is that the traditional Tory is more amenable to the exercise of government and the financial burdens therein assumed than is the Whig; modern conservatism, arising from Burke’s pen and Peel’s practice (under the previous tutelage of Pitt the Younger and the 2nd Earl of Liverpool) were conscious steps away from the Toryism of paternalism and protection—Toryism which had its philosophical foundations in feudal society where the prince exercised charity through personal noblesse oblige but also through the State offices he assumed. Samuel Johnson, the idiosyncratic Tory par excellence, took the American colonists-in-rebellion to task for their Enlightenment views on taxation, arguing in ‘Taxation no Tyranny’ that

the supreme power of every community has the right of requiring from all its subjects, such contributions as are necessary to the publick safety or publick prosperity, which was considered by all mankind as comprising the primary and essential condition of all political society, till it became disputed by those zealots of anarchy, who have denied to the parliament of Britain the right of taxing the American Colonies.1

Progressive taxation builds on this notion, on the basis that those who earn more can afford to pay more.2 From Johnson a theoretical underpinning for graduated taxation can also be adduced, for he held that ‘A tax is a payment exacted by authority from part of the community for the benefit of the whole. From whom, and in what proportion such payment shall be required, and to what uses it shall be applied, those only are to judge to whom government is intrusted.’3 Johnson died in 1784, while the first income tax in the United Kingdom was introduced by Pitt thirteen years later, as a means of funding the nascent Napoleonic Wars.

Our understanding of political economy has evolved much since the time of Johnson; indeed, it was only in the year following Johnson’s essay that Adam Smith published his An Inquiry into the Nature and Causes of the Wealth of Nations,4 incidentally the same year that the Declaration of Independence was announced in Philadelphia. We now have a better understanding of capitalist enterprise, the importance of investment and entrepreneurship, and the limitations of the State in promoting, much less engaging in, productive activities. Far better for the marketplace to create wealth and employment opportunities than to have the State redistribute wealth ineffectually.

Yet beliefs that entrepreneurial activity behaves neutrally to disincentivising taxing policy still exist, nowhere more so than in the reborn idea of ‘progressive’ taxation, which takes the charitable precept that ‘from whom much is given, much is expected’ and enacts it into law. Taken to extreme lengths, it violates Laffer Curve analysis that shows that beyond a certain revenue maximising point—roughly 20-30 per cent—high marginal rates of taxation curb business incentives and, instead of raising more revenue for the State, actually raise less.5

To add insult to injury, though progressive taxation was introduced originally as a tax upon the rich, it now encompasses the middle class, both because ‘soak the rich’ policies can no longer fund the burgeoning Welfare State and due to pay rises (largely due to inflationary pressures) which float the earnings of the higher middle class into corresponding tax brackets.

As John Chamberlain wrote of the economic effects,

Psychologically speaking, there is obviously some point where the progressive tax must recoil upon itself, destroying the base from which it might hope to achieve a maximum of “take.” Just where the point is we cannot tell: there is no way of measuring businesses that are unborn, or energies and creative enthusiasm that simply fail to well up. But when a progressive tax dampens the impulse to generate income, then the tax base itself must narrow and diminishing returns set in.6

Whatever can be said in favour of progressive taxation as an historical artefact (rooted in feudal duties of noblesse oblige), in practice it has grown out of all proportion as a means of helping at the bottom by skimming more from the top. The appetite of the leviathan State knows no bounds.

Here endeth the first lesson; all which serves as preamble for my essay ‘Taxing the middle class to extinction’, published by courtesy of the Institute of Economic Affairs.

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#DMI_Reads Update — Here is a list of current reading for the month of July:

  • William Graham Sumner, The Challenge of Facts and Other Essays, Albert Galloway Keller, ed. (New Haven: Yale University Press, 1914) [insightful essays on politics and economics from the father of American sociology; I quote extensively from ‘What Makes the Rich Richer and the Poor Poorer?’ in the IEA essay above]; and
  • Albert Taylor Bledsoe, Was Davis a Traitor; or Was Secession a Constitutional Right Previous to the War of 1861? (Richmond, VA: Hermitage Press, 1907 [1866]) [an examination of the ‘compact’ theory of American Union (as opposed to the ‘nationalist’ theory) and the legitimacy of state secession, with a view to the Civil War actions of Confederate president, Jefferson Davis].

ENDNOTES

1. Samuel Johnson, ‘Taxation no Tyranny; an Answer to the Resolutions and Address of the American Congress [1775]’, in The Works of Samuel Johnson, LL.D., vol. 8 (London: Nichols and Son, 1816), 155-204; see 156.

2. For an excellent overview of progressive taxation, see John Chamberlain, ‘The Progressive Income Tax’, The Freeman: Ideas on Liberty, 11:11 (November 1961): 30-42.

3. ‘Taxation no Tyranny’, 162. Emphasis added.

4. Curiously, Smith too laid the theoretical groundwork for progressive taxation: ‘The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.’ See An Inquiry into the Nature and Causes of the Wealth of Nations, R.H. Campbell and A.S. Skinner, eds., Glasgow Edition of the Works and Correspondence of Adam Smith, vol. 2b (Indianapolis: LibertyClassics, 1981), V.ii.b.3.

5. Daniel J. Mitchell, ‘Taxation and government spending’, in A Beginner’s Guide to Liberty, Richard Wellings, ed. (London: Adam Smith Institute, 2009), 36-46; see esp. 42-43.

6. John Chamberlain, ‘The Progressive Income Tax’, 32.

30 June 2014

Speculation in light of Catholic Social Teaching

To-day the Institute of Economic Affairs posted my essay ‘Pope Francis should praise speculators, not spurn them’. Addressing a conference in Rome meeting to discuss the topic of impact investing, the Pope praised its work on behalf of the poor and marginalised, with a not-too-subtle condemnation of investment for self-interest.

Yet from the economic perspective, any legal investment is an investment toward the common good (barring criminal activities), as any successful enterprise will benefit not only the entrepreneur but also provide employment opportunities and make available a new good or service that serves a public need. At the same time, the increase in wealth makes additional charitable-giving possible. Asking the State to intervene in the investment process will only set up new bureaucratic obstacles, leading to economic decisions that are not motivated by the efficiency of free consumer-choice but by the wastefulness of political agendas.

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#DMI_Reads Update — Here is a list of current reading for the month of June:
  • Dwight R. Lee and Richard B. McKenzie, Failure and Progress: The Bright Side of the Dismal Science (Washington, DC: Cato Institute, 1993) [insightful analysis that economic growth also entails failure as innovation and competition jostle in the marketplace; fortunately, though, the failure of some usually means better opportunities for all]; and
  • S.C. Littlechild, The Fallacy of the Mixed Economy: An ‘Austrian’ Critique of Recent Economic Thinking and Policy, 2nd ed. (London: Institute of Economic Affairs, 2009 [1986]) [a lovely account of Austrian economic principles in relation to classical economic theory and planned economies, particularly in relation to the early years of the Thatcher ministry].
I have also been reading up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

And to-morrow, enjoy a peaceful Dominion Day!

30 May 2014

The perpetual protest against economic error

Just a single posting for review, ‘The Infernal Resilience of Economic Fallacies’, examining the British government’s 2014 Budget and various commentaries on it, good and less good. Frédéric Bastiat, the French classical economist, once wrote that confronting bad economics was a ‘perpetual protest’ — a point illustrated in the necessity to correct the recurrent errors inherent in Keynesian policies of state intervention and protectionist trade programmes.

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#DMI_Reads Update — Here is a list of current reading, since the last message in February; perhaps it will lead to some interesting discussion:
  • Frédéric Bastiat, Economic Sophisms—Second Series, in The Bastiat Collection, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2011) [masterful short essays that demolish mercantilism and protectionism];
  • Christopher Hibbert, The Destruction of Lord Raglan: A Tragedy of the Crimean War, 1854-55 (Boston and Toronto: Little, Brown, 1961) [I cannot read Hibbert’s account of Lord Raglan’s misadventures in the Crimea without picturing Sir John Guilgud’s marvellous portrayal in The Charge of the Light Brigade];
  • Henry Hazlitt, The Inflation Crisis, and How to Resolve It (New York: Arlington House, 1978) [Hazlitt’s writings on the illusions of inflationary salvation are an education in themselves];
  • C. Brad Fraught, The Oxford Movement: A Thematic History of the Tractarians and Their Times (University Park, PA: Pennsylvania State University Press, 2003) [a lovely overview of Newman, Keble, Froude, and Pusey and their impact upon the Victorian Church of England];
  • Friedrich Gentz, The Origin and Principles of the American Revolution, Compared with the Origin and Principles of the French Revolution, John Quincy Adams, trans., Peter Koslowski, ed. (Indianapolis: Liberty Fund, 2010 [1800]) [Gentz’s summary of the causes of the American revolt is seminal in understanding the War of Independence]; and
  • Stephen Macedo, The New Right v. The Constitution, 2nd ed. (Washington, DC: Cato Institute, 1987) [a fascinating critique of conservative attempts to read the U.S. Constitution according to ‘democratic’ principles].
I have also been trying to catch up on scholarly articles, listing them under the category of ‘Journal jottings’. Follow-up comments or suggestions for complementary reading are most welcome.

06 May 2014

The Infernal Resilience of Economic Fallacies

If only economic fallacies were characteristic of economic goods — and scarce! Unfortunately, this is not so, and fallacies in favour of protection and stimulus flourish and spread their noxious untruths. For Frédéric Bastiat, it was the task of political economists to do battle against them in a ‘perpetual protest’1.

Sometimes, though, the source of the economic fallacy surprises, as it did when reading a brief John Redwood commentary on Britain’s latest Budget from its Chancellor of the Exchequer, George Osborne.

Redwood, once a protégé to Thatcher and a respected scholar and politician, understands the dynamism which underpins the Laffer curve2, writing that ‘tax revenues are rising ... by allowing more tax revenue to arise naturally through the growth of the economy’, underlining the fact that higher taxes do not necessarily result in higher revenues:

Where the government has tried higher tax rates on income and capital gains it has actually damaged the revenues, not increased them. If any government tried to reduce the deficit quickly through a series of tax rate rises, considerable damage would be done to the economy and tax revenues might fall.

Plus, he advocates a route to balanced budgets through such growth, which ‘...has always been the main requirement to help correct the large imbalances in the economy without pushing it into deep recession.’ Yet in the same paragraph, Redwood lauds government fiscal interventions that are just as likely — depending upon the steps taken — to be impediments to the economic growth he favours. ‘We need more exports, more homes, more domestically produced goods to replace imports, ‘he asserts. ‘The budget seeks to help bring that about.’

Export expansion, for instance, can benefit from reductions in regulations that artificially raise the price of British goods. As for housing, such regulatory reform would doubtless be of more benefit than the Chancellor’s ‘help-to-buy’ initiative: ‘The chancellor’s sub-prime subsidies risk further inflating the housing market,’ warns Richard Wellings. ‘More households will take on debts that could become unaffordable should interest rates return to normal levels. Thus significant default risk has been loaded onto taxpayers. There are also potentially very serious implications for the banking sector should government policies ignite another boom-bust cycle.’

All things being equal, Redwood goes off the beam, though, in his condemnation of foreign trade which he views as a threat to domestic industry or, nearer the mark, British employment. The organic ramifications of trade are by no means static, as Geoffrey Wood outlines in Fifty Economic Fallacies Exposed:

Producers are guided by the prices they see confronting them to produce what is most profitable for them and to do so as cheaply as they can. Prices thus direct resources to where they are most useful, as those producers to whom they are most valuable will pay most for them. If an economy is trading freely, without tariffs, its resources are making the most of the opportunities prescribed to them by the patterns of prices in the rest of the world.

The economy’s resources will thus be used where it is most productive, relative to the rest of the world, for them to be. The economy will be making the most of the opportunities available to it.3

In an harmonious trading environment, then, countries produce according to their strengths, and buy from countries with respective productive advantages. Far from a zero sum transaction as Redwood suggests, this is an economic policy with positive sum benefits — and a respectable pedigree: David Ricardo called it ‘the law of comparative advantage’, whereas for Ludwig von Mises it was ‘the law of association’.

But for sheer entertainment in slaying this protectionist bugbear, one must return to Bastiat, who doubtless would have relished a go at Redwood’s economic faux pas. From his essay ‘Domination through Industrial Superiority’, we can imagine how he would set upon Redwood’s admonition against imports:

We produce at home neither tea, coffee, gold, nor silver. Does this mean that our industry as a whole thereby suffers some diminution? No; it means only that, in order to create the equivalent value needed to acquire these commodities by way of exchange, we employ less labor than would be required to produce them ourselves. We thus have more labor left over to devote to satisfying other wants. We are that much richer and stronger. All that foreign competition has been able to do, even in cases in which it has absolutely eliminated us from a particular branch of industry, is to save labor and increase our productive capacity.4

Bastiat acknowledged that even the best are tripped up by economic fallacies, due to their sheer tenacity (and controversy over balance-of-trade issues is among the most intractable). Fortunately for Redwood (and us), there remain those political economists who can diagnose these errors and prescribe the needful antidotes. The Chancellor of the Exchequer himself would do well to schedule an appointment.

ENDNOTES

1. Frédéric Bastiat, ‘Property and Law’, in Selected Essays on Political Economy, George B. de Huszar, trans., Seymour Cain, ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1995), 115.

2. See Arthur Laffer, The Laffer Curve and the Failure of Stimulus Spending, Lecture delivered to the Institute of Economic Affairs, London, 27 June 2012.

3. Geoffrey E. Wood, Fifty Economic Fallacies Exposed (London: Institute of Economic Affairs, 2002), 34.

4. Frédéric Bastiat, ‘Domination through Industrial Superiority’, in Economic Sophisms, Arthur Goddard, trans. & ed. (Irvington-on-Hudson, NY: Foundation for Economic Education, 1996), 268.

28 February 2014

Economic Laws Trump Political Prestidigitation

‘It is the highest impertinence and presumption ... in kings and ministers, to pretend to watch over the œconomy of private people,’ observed Adam Smith. ‘If their own extravagance does not ruin the state, that of their subjects never will (Wealth of Nations, II.iii.36).’

This theme is explored in two essays posted this month. The first, ‘No Crystal Ball Needed to Forecast Fundamentals of Sound Economics’, takes a look at what constitutes ‘wealth producers’ and ‘wealth destroyers’, and why government — when it goes beyond providing the basic framework of law and order, and acting as a service provider of last resort — is so often a member of the latter group and not the former.

The second essay, ‘Raising the minimum wage while debasing the currency: an illogical economic policy?’ (published courtesy of the Institute of Economic Affairs), argues that instituting minimum wage laws while engaging in quantitative easing of the money supply is a hopeless venture; each activity considered alone is less than innocuous, but pursing both at the same time is an exercise in futility as any doubtful benefits are cancelled out and nullified.

Smith recognised that ‘All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord (IV.ix.51).’ To-day, encouraged by social democrats and their Progressive ideology, governments are addicted to these systems, whether through the aforementioned minimum wage laws and currency debasement or other forms of welfare economics. But, in the end, economic laws trump political prestidigitation.
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#DMI_Reads Update — Two volumes are in the reading queue this month: The Case for Capitalism (E.P. Dutton, 1920) by Hartley Withers and Lectures on the French Revolution (Liberty Fund, 2000) by Lord Acton.

Do you know of a little-known and under-appreciated volume on the French Revolution that you’d like to recommend? Write and tell me about it. And do people still read Thomas Carlyle on the subject? I’ve looked at the first few pages of his massive tome and been daunted, but am game to have another look if anyone is willing to make an argument in its favour.