The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or of their property, you are at sea without rudder or compass, and there is no amount of injustice and folly you may not commit . . .
—J. R. McCullough
More than a century ago, a young radical proposed the notion that the specter of communism would inevitably rise up and conquer the world. However, several measures had to be taken before this proletarian utopia could be ushered in. Young Marx admitted that these necessary measures could not be brought about
except by means of despotic inroads on the rights of property, and on the conditions of bourgeois production; by means of measures, therefore, which appear economically insufficient and untenable, but which, in the course of the movement, outstrip themselves, necessitate further inroads upon the old social order, and are unavoidable as a means of entirely revolutionizing the mode of production.
One of the most significant of these proposed measures was the application of “a heavy progressive or graduated income tax.”
For more than half a century, our nation has been experimenting with such a tax. Objections would be strenuously raised if one concluded that these American social “scientists” were consciously working to implement Marxist ideology. Indeed such name calling usually produces more heat than light. It would not be improper, however, to examine the effect that this graduated income tax has had upon the American society. For I believe that Marx was right. This progressive tax truly represents “a despotic inroad” which is “economically insufficient and untenable,” thus “necessitating further inroads” upon the establishment of American liberty. Therefore, it would be profitable to discern how the graduated income tax has worked to subtly erode the economic, legal, and moral pillars upon which our nation has long rested.
Attacks on Income and Economy
Especially as April fifteenth comes and goes, taxpayers across the country ache from the powerful one-two combination of inflation and graduated taxation. Throughout the economy, there have appeared signs of a sustained rate of double-digit inflation. This unfortunate reality, coupled with the currently steep rates of the graduated income tax, works as a double poison which is slowly crippling private enterprise. This is no small cause for concern. It is crucial that we perceive how this combination subtly erodes our economic substance. Such accurate perception is the prerequisite for proper action. And both are desperately needed to prevent our reeling economy from going down for the count. Let us then briefly examine the economic consequences of our graduated income tax in this age of inflation.
First of all, it is imperative that we recognize the current understanding and explanation of inflation for what it is: an economic myth. All are agreed that inflation is a dreadful evil which shortchanges the moneyholders. (The mainstream economists even assent to this fact.) All the while, however, these economists wag their tongues at the alleged “causes” of inflation: big business or labor unions. (Which side is blamed usually depends, of course, on the individual economist’s own special interests.)
The accusations of these economists produce much legislation but little change in the inflation rate. Well, that’s not quite true; the rate inevitably rises. So, everyone struggles to stay one step ahead of inflation. They hope to make a little profit or just break even. In order to do this, however, their money-income must steadily rise at or above the present inflation rate. Such income increases are maintained at no small cost to both labor and management alike. Social conflict also inevitably rises.
The manner in which mainstream economists ignore the actual cause of this economic calamity is as baffling as it is reprehensible. The history of economic thought must be unknown to these men, or else it has been rewritten. Whatever the case, the issue will remain obscure until it is clearly understood that the government’s expansion of the currency and credit is truly the cause of inflation. (Actually, such expansion should be identified as inflation, properly defined.) Thus, we wait for the ebb of economic ignorance and watch as moneyholders continue to get shortchanged in the meantime.
If this reality only affected moneyholdings, it would be bad enough. However, insult is added to injury when people fill out their income tax returns and discover that their brutal struggle to stay even with inflation has lifted them into higher and more confiscatory rates of taxation. If inflation were not harsh enough, the graduated rate of income tax serves only to rub salt into their economic wounds. Such abuse inescapably wreaks havoc on an individual’s incentive to produce.
Inflation Speeds the Erosion
Actually, the inflation is not necessary for the graduated income tax to effectively erode the nation’s economic foundation. It only serves to expedite the process. But the government betrays both its impatience and immoral intention by continually boosting the rate of inflation. Throughout the economy, the crunch is felt by all. The whole time, the ravenous reapers of revenue in Washington clean up.
One might think that Americans have always been subjected to this annual headache. Clearly, such is not the case. In fact, a Constitutional amendment was necessary before the graduated income tax could be legally loosed upon the American taxpayers in 1913. This fact alone serves to confirm one’s suspicion that such a revenue measure was far from the intention of the founding fathers. In fact, prior to the amendment, it was commonly understood that such a tax flew in the face of the direct and proportioned taxes called for in the Constitution. Specifically, the progressive income tax marked a distinct break from the established principle of nondiscriminating uniformity in taxation. This principle had long been recognized as crucial to the balance and stability of the American market economy. It also was understood to be a necessary means to protect private property and sustain voluntary exchange.
The first century of American independence saw the majority of revenues coming from tariffs and duties. Taxation, when it occurred, was slight and proportioned so as to distribute the tax burden impartially. This all changed in 1913, when the relatively young income tax was apportioned upon a graduated scale. The break from tradition has been widening as the graduated scale has become steeper. What was it that motivated such a distinctive break from the Constitution? It would be profitable to briefly examine the arguments put forth in favor of the graduated scale.
“The rich should pay a greater proportion of taxes! . . . . Only such a measure will actually bring about greater equality of sacrifice!” Generally speaking, these arguments in favor of the graduated income tax have been exposed for what they are: expressions of egalitarian ideology. There were very few arguments which gained any credence in economic circles as providing “scientific justification” for this social dogma of reform.
Punishing Those Who Have Been Most Productive
One such case ostensibly providing rational grounds was the argument from “the decreasing marginal utility of successive acts of consumption.” In crude terms, this theory asserted that the rich entrepreneur, aider making a cool million, would tend to value $10,000 less than would a typical American breadwinner. Such arguments, however, are rendered invalid by a proper understanding of marginal utility and subjective value. (This understanding goes all the way back to the last century when Boehm-Bawerk exposed the inadequate distinction between “use value” and “exchange value.”) And recently, even the most dedicated econometricians have abandoned the hope of being able to calculate and compare different subjective utilities between individuals. Such utility measurements are in fact as undesirable as they are unscientific! Therefore, the ultimate foundation for the graduated income tax seems to have been the dogma of social equality.
What, then, are the economic consequences of implementing this social dogma by establishing a progressive income tax? Quite simply, this graduated tax structure works to burden the economy in general and the most productive members in particular. This is so because there is a heavier, disproportionate tax upon those who earn the higher incomes. And in a market economy, the more productive people make the higher incomes. Thus, a greater proportion of capital is diverted from the most productive channels of the marketplace. Instead of funding productive investments, this disproportionate amount of income will find its way into the conspicuously consumptive hands of the federal government.
The graduated income tax will only serve to discourage initiative while dissolving incentive. For what man would be overly anxious to pool capital resources into a more productive combination if his profits will only serve to lift him into a steeper tax bracket which offsets his gains? Only the confident, daring, or masochistic would be interested. I think we can then accurately conclude that the graduated income tax is at work, even now, slowly consuming our substance and eroding the economic base of our independent republic. This parasite is as unnatural as it is unnecessary. Here Americans have gravely erred. We have sold our birthright of liberty for a mess of “progressive” pottage.
The Distortion of Disproportion
The market order has often been depicted by its opponents as resting upon the competitive savagery of the law of the jungle, where only the strong survive. An examination of this disparaging allusion is not within the scope of this essay. Whether or not this was ever true, it could be more safely asserted that, with the dramatic reversal in social thought in this past century, we are now living in a society ensnarled in a jungle of law. The irony of it all is discomforting. The turning point came with an exchange of legal principles.
For centuries, the conflict raged in Europe between serfs and lords, peasants and monarchs. The issue at stake: the nature of the individual and his rights before the law. The outcome of the conflict marked a decisive victory for human liberty. “The equality of all men before the law” represented a most significant step in the progress of justice.
What did it all mean for America? The founding fathers viewed this hard-fought acquisition as the legal pillar which would support the republic. “Equality before the law” meant that where an individual stood before the court, he could be assured that his guilt or innocence would be determined without regard to his economic status. The law would judge all men impartially. As Benjamin Franklin stated: “The same for every member of the society; and the poorest continues to have an equal claim to them with the most opulent, whatever difference time, chance, or industry may occasion in their circumstances.”
While the United States enjoyed legal stability within its land, European nations began toying with the notion of the progressive income tax. They seemed disinterested in under standing the legal struggle that their ancestors had undergone to establish impartiality within the rule of law. In 1891 Prussia began its social experiment with the graduated income tax. Many Americans and Europeans perceived the danger. Dissent was raised by many who argued that “the sacred principle of equality before the law” was “the only barrier against the encroachment on private property.” However, the argument fell on deaf ears as the progressive rate was too insignificant to render any force to the argument against graduated rates in principle.
In the meantime, American and British social reformers were sounding the battle cry for greater “equality of sacrifice.” With the opposition’s arguments rendered ineffective by the very smallness of the tax burden, these reformers did their homework. Within less than twenty years of Prussia’s experiment, Great Britain succumbed to the progressive temptation.
America soon followed. So within one generation, the legal lessons learned and the advances made, aider the centuries of struggle, were forgotten. It was felt that a majority, by the mere fact of its numerical strength, could apply a burden to the wealthier minority without being affected itself by an equal load.
At that point, any remainder of legal clarity was distorted beyond recognition. Granted, the graduated burden was seemingly light. However, any attempt to impose a limit in the future would be arbitrary and, inevitably, only temporary. Thus, once the floodgate was opened, there no longer existed any principle which could prevent the trickle from becoming a deluge.
So much was lost so quickly. Where the law had once been characterized by impartiality and predictability, it was now an arbitrary standard which was shifted by the will of the majority. A man’s relation to the law was now greatly influenced, if not determined, by his economic status.
What can this produce but a conflict society? Suppose, after all, one man is taxed at one rate and his neighbor at a lower rate. Now this does not exactly create social harmony; rather it breeds suspicion and envy. So much of this confusion is brought about by a progressive income tax.
The Oppression of Progression
The redistribution of income and property by progressive taxation is now universally recognized as a proper means to attain social justice. It has been argued in this essay that such a policy is at once economically unproductive and legally unjust. In addition, it is morally reprehensible, contradicting the principles which established the nation upon the foundation of freedom and justice.
These principles were formulated by men who comprehended that a nation had to be built and sustained by individuals who understood both self-discipline and self-development. Anything less would not endure. So long as their actions did not violate the rights of another, men were free to pursue happiness according to the dictates of their own conscience. Hence, men learned that individual enterprise and self-reliance were gifts of God which were to be cultivated and utilized. As they were developed, the American people prospered.
In the midst of their prosperity, a subtle shift began to occur. The change was imperceptible at first. The results of the change, however, were most distinct. Perhaps the prosperity led to economic fatness, and fatness in turn led to moral flabbiness. Whatever the causes, the effects remain with us. Where there was once individual enterprise and self-reliance, there is now a growing dependence upon the state and federal governments. Accompanying this shift came a growing distrust directed toward the more productive members of the society.
This distrust has blossomed into open hostility. With the instrumentality of the progressive tax structure, this hostility has led to an economic and legal assault upon the wealth of these productive members. Prior to 1913, such hostility surely existed. But once a disproportionate tax was permitted to burden some more than others, the government then became the means of economic, legal, and moral oppression.
When a discriminating income tax is allowed to become the means of legal plunder, the spark of envy within the classes of men is fanned into a raging fire. No longer is the state able to restrain the fruits of covetousness; now it works to produce them. From the spark of envy to a conflagration of confiscation, the graduated income tax has led to democratic tyranny.
The progressive income tax has come upon us gradually. It began with a seemingly harmless maximum rate of 7 per cent. Yet within less than a generation, this rate climbed higher than 90 per cent. Of course “progressive” is a misnomer. “Aggressive” might be closer to the truth. But alas, perhaps “regressive” would be best, as this graduated tax policy has taken America back centuries—down the road to serfdom. 
1. Friedrich A. Hayek, The Constitution of Liberty (South Bend, Ind.: Gateway Editions, 1972), p. 309.
2. Eugen von Boehm-Bawerk, Capital and Interest (South Holland, Ill.: Libertarian Press, 1959), II, p. 160.
3. Hayek, op. cit., p. 310.
Copyright © 2010 Foundation for Economic Education. Used with permission.