The Liberty Papers

There is an interesting discussion over at David Friedman’s blog, Ideas, involving the anchient Athenian tax scheme (particularly the comment thread).

The Athenian model was purely

a tax on wealth, whereas “modern democracies” (democracy is dangerous, by the way) favor a progressive tax scheme, which is a graduated tax, primarily on income, i.e. “from each according to his ability…”. In fact, the proponents of progressive taxation are quite varied. For instance, the following comes from the aforementioned Wikipedia article:

Thomas Jefferson: “We are all the more reconciled to the tax on importation, because it falls exclusively on the rich…In fact, the poor man in this country who uses nothing but what is made within his own farm or family, or within the United States, pays not a farthing of tax to the general government…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…”

Karl Marx: “In the most advanced countries the following will be pretty generally applicable:..a heavy progressive or graduated income tax.”

It might appear, at first blush, that progressive taxation is intuitively rational. After all, it’s only fair, right? Those with more means ought to “give back” to society, so the thinking seems to go. Beyond that, there are economic arguments in favor of a progressive tax:

“As income levels rise, levels of consumption tend to fall. Thus it is often argued that economic demand can be stimulated by reducing tax burden on lower incomes while raising the burden on higher incomes.”

The idea that government ought to seize and redistribute wealth is not new. Arguably, it’s most notable proponent is John Maynard Keynes, who, in 1935, wrote: “I believe myself to be writing a book on economic theory which will largely revolutionize — not, I suppose, at once, but in the course of the next ten years — the way the world thinks about economic problems”. In short, his theory goes something like this:

Keynesians' belief in aggressive government action to stabilize the economy is based on value judgments and on the beliefs that (a) macroeconomic fluctuations significantly reduce economic well-being, (b) the government is knowledgeable and capable enough to improve upon the free market, and (c) unemployment is a more important problem than inflation.

Seventy years later, after innumerable examples of its failure (e.g. western Europe, socialist and communist countries world-wide and to some extent, post WWII America), folks still hope against hope that progressive taxation (i.e. coercive confiscation) is the solution to the problem of poverty and so-called “social injustice”.

Don’t misunderstand…I’m not suggesting that all taxation ought to be eliminated. I’m not an anarchist, so I believe that some form of government is necessary, albeit an irreducibly small one. That is, government ought to be empowered to do that which the market, in conjunction with free individuals, cannot do… nothing more. In such an environment, the best possible mechanism by which the basic functions of government could be funded is a tax on consumption, like the Fair Tax, for example. That way, taxation would be almost entirely voluntary, in that one is taxed only when one chooses to spend, as opposed to having an ever-increasing percentage of one’s income ravaged for the benefit of others; those who do nothing whatever to earn that which they receive from the beneficent hand of government.

Needless to say, the current paradigm creates a disincentive to create wealth, for the rich and poor alike. The former are punished for being successful, while the latter are rewarded for a lack of economic success. How did this become the

prevailing wisdom?