The rise of democratic socialism on the left and populism on the right have each produced a surge in proposals to raise taxes on the wealthiest people. So-called progressive tax codes, in which the wealthy pay a higher percentage of their income in taxes and/or face additional taxes that poorer people do not, date back to the Roman Republic, when property taxes affected only those wealthy enough to own property. The idea was revived in modern times by British Prime Minister William Pitt the Younger in 1798 to pay for war against Napoleonic France. War would likewise be the impetus for the beginning of income tax in America under the Revenue Act of 1862. Over time, progressive tax schemes have been implemented in many countries.
The common arguments from each side are well-known. The leftists advocating increased progressive taxation believe that this will address income inequality, provide more revenue for social programs, and curtail elite influence over politics without taking from those who cannot afford it. Meanwhile, some elements of the right are advocating that the rich be taxed more because many of the current elites ask for higher taxes, and the growing national debt should be addressed by those most capable of doing so. Those who oppose raising tax rates on the highest earners may believe that taxation is an act of aggression that violates property rights, governments waste much of the taxes they already collect, taxes disincentivize productivity and alter economic behaviors to dodge taxes, and disparate tax rates contribute to class warfare. But there are reasons to encourage those who wish to bring the economic elites down a peg which have nothing to do with their face-value motivations. Let us see why taxing the rich can undermine both left- and right-authoritarians, and thus why one might agree with statists for the wrong reasons.
First, critics of progressive taxation will point out that the rich are the most capable of leaving a high-tax environment and taking their wealth with them to protect it. For example, people are moving away from New York state, and over 63 percent of those who leave have incomes over $100,000. But what happens next? They must go somewhere, and their presence in their new location will have effects on that place’s economy. A place that has low taxes for the purpose of attracting financial expatriates can experience economic gains that are not possible in places with high taxes. A third-world country that lacks the governance structure to enforce high taxes provides even more opportunity. These countries are in dire need of capital, knowledge, and leadership to help their populations escape a degree of poverty that people in advanced countries can no longer imagine. Business elites from advanced countries can provide this better than anyone else, and high taxes in their native lands can drive them to move there and do that.
That being said, some of the most prominent advocates of raising taxes on the rich are rich themselves, such as Warren Buffett. These people tend to be hypocrites as well, calling for higher taxes while doing whatever they can to avoid paying the taxes that already exist. Though it may give pause to those who lack a proper understanding of the non-aggression principle, to raise taxes on such leftist elites is to give them what they are asking for, and their own advocacy estops them from complaining about it. There is nothing wrong with turning the system against its own supporters, and doing so may convince some of them to be less statist.
Of course, targeting a certain group with state power will not always work as intended. Given the inflationary environment created by central banking and fiat currency, a tax that only affects the rich today may hit the middle class or even the poor in future. In the United States, this happened with the Alternative Minimum Tax. However, an unintended tax hike on the average person can provide a valuable lesson that using state violence always carries a risk of backfire. Furthermore, although a proper governance structure would have nowhere near the size and scope of a modern nation-state, the governance structures that do exist should be paid for in the present and not used to put future generations into debt slavery. If the masses had to pay more now for the government they have, they would probably be less inclined to expand it. A tax designed only for the elites today may accomplish this in the long-term.
But let us suppose that this does not work. In a variant of the Jevons paradox, suppose that increased tax revenue actually balloons the national debt because statists on both sides mistakenly believe that their visions for new government programs have finally acquired a funding source. The data and mathematics clearly say otherwise, but reality rarely intrudes into Western politics until it does so with a vengeance. Politicians are pathologically incapable of restraining themselves, so an outside force in the form of non-suppressible rising interest rates, falling credit ratings, and an unwillingness of creditors to lend in the form of buying bonds is required. A new wave of spending that is encouraged by new tax revenue but not fully funded by it could hasten this reckoning.
Finally, and perhaps most importantly, attempting to turn the current system against its elites may reveal its true nature and lead to its doom. In any civilization, there will be a small minority that hold a disproportionate amount of power. These people tend to have similar interests as a result of their common backgrounds and values. They also have the strongest incentive to maintain the system that is serving their purposes. By contrast, the masses lack the ability to pay for political influence, the time and relationships needed to learn how to play the political game, and the means to overthrow the system if it should turn against them. An effort to use tax policy to attack the elites will do much to break the illusions of liberal democracy regardless of its primary success. If efforts to enact changes that a majority of the population supports fail repeatedly, then they will expose democracy as an ineffective illusion, for the chattering classes can only ask why for so long without reaching the inevitable answer. If the masses manage to create enough trouble for the elites, then the rich will leave for greener pastures as previously discussed. If the elites come to believe that democracy no longer serves their interests and there is no exit, then they will use their resources to abolish democracy and install a governance structure that is more favorable to them. All of these potential results bring official reality closer to actual reality and thereby improve governance.
Raising taxes on the wealthy is an unsound fiscal policy that squeezes the productive part of the economy to fuel wasteful and inefficient state programs, but the various side effects of doing so may be just what is needed to create prosperity for those who most lack it, punish hypocrisy, make people pay for the government programs they want instead of running up debt, collapse the system faster, and bring about much-needed changes in governance. Therefore, we may agree with statists for the wrong reasons when they advocate taxing the rich.
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