Romney and Obama Agree on Progressive Taxation: Are They Correct?

Thinking Things Over              March 4, 2012

Volume II, Number 9:  Romney and Obama Agree on Progressive Taxation: Are They Correct?       

By John L. Chapman, Ph.D.                                                                                                                     Washington, D.C.

Do we want to keep these tax cuts for the wealthiest Americans?  Or do we want to  keep our investments in everything else – like education and medical research, a  strong military, and care for our veterans?  Because if we’re serious about paying down our debt, we can’t do both.  It’s time the nation’s wealthiest citizens pay their fair share to help lower our mounting debt.   Now, you can call this class warfare all you want.  But asking a billionaire to pay at least as much as his secretary in taxes?  Most Americans would call that common sense.     – Barack Obama, State of the Union Address, January 25

The problem with the Forbes flat tax is that it isn’t flat at  all–it’s a zero tax on the wealthy and a 17 percent tax on working  Americans.  I’m hoping that voters will realize the Forbes flat tax is a gimmick, a  phony, and not what it pretends to be….I want to make sure that we maintain the  progressivity of the code.  And I want to help people  who I think have been most hurt by the Obama economy–and that’s middle  income Americans….. We have a progressive tax code right now, and I’m not trying to change the progressivity of the code.  I’m not trying to say that one group or another is going to get  a better deal. But what I’m trying to do is to make sure that under no  circumstances is the middle class going to end up with a larger share of  the tax burden.          – Mitt Romney

One of the ironies about this season of political discontent, with its high-intensity verbal combat and contentious policy debate, is the degree to which the likely Presidential opponents this fall, Barack Obama and Mitt Romney, actually agree on fairly major things.  ObamaCare, for example, is explicitly modelled on RomneyCare, according to the President himself — both men see a rationale for the government having a significant role in the health care sector.  Both have given implicit support to the current Federal Reserve and its Chairman, Ben Bernanke, and in related fashion, criticized the monetary and trade policies of China.  Both support federal intervention in industries that “need help,” such as the auto sector; while Governor Romney has recently criticized the government’s oversight of Chrysler and GM bankruptcies, he was previously advocating a $20 billion ”rescue fund” to help revitalize Detroit with federal dollars.

And then there is the issue of taxation.  On the corporate tax, both Messrs. Obama and Romney are in favor of aspects of the Bowles-Simpson approach to reform, in which lower rates and a flatter structure are traded off for closing of loopholes and deductions.  While they differ on specifics, both men assert that this flatter structure and the lower rate levels would be more economically efficient.  That is to say, flatter, lower rates would be less distortive of investment decisions (by making them dependent on the merits of the market opportunity rather than for any tax-advantaged rationales), and in theory a Bowles-Simpson scheme would incite greater work effort and productivity as a result of the flatter and lower rates.  Additionally, both men realize that the United States currently has the second highest nominal corporate tax rates in the world, and will be the highest when Japan lowers its rates next month.  The ability to attract foreign capital is of course impeded in a high-tax environment, and hence the U.S. is in an inferior position now in terms of global competition for investment.  And when no less than the Chairman of Coca Cola complains that in many ways it is now easier to do business in China than here, including because of the uncompetitive taxation that diminishes returns on capital in the U.S., even the Obama Administration — not known for being very investor-friendly — takes notice.

The Obama-Romney axis of agreement extends in part to personal taxation as well.  While the two men differ substantially on the rate structure and levels that should be in place, both are in favor of a progressive scheme.  For both of them, higher marginal rates should apply to higher incomes.  This begs two questions, one positive, the other normative, that are always asked pertaining to economic policy:  is the policy consistent with efficiency?  And also, in terms of equity, is it a “just” scheme?  While investors are most concerned with (objective) efficiency in order to optimize returns to capital, the (subjective) equity question cannot only not be ignored, it may ultimately be more important.  Indeed, in the long run, only a tax system that is seen to be morally just — by the taxed citizens themselves — will be sustainable at optimal levels of efficiency (those who do not appreciate this fact need look no further than the current destruction of civil society in Greece for confirmation).

In the following we address this latter issue (and will write on the former, the tax system’s economic efficiency, later this year). First, supporters of progressivity often cite none other than Thomas Jefferson, who seemingly had sympathy for progressive taxes.  Initially, it is true, Jefferson came to a favorable opinion on progressivity while in pre-revolutionary France, where he saw great income disparities in an unfree society ruled by an oligarchic class:

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. – Thomas Jefferson to James Madison, 1785.

His position, however, has been misconstrued as unqualified support for progressive taxation, when what he really objected to was the forced regressivity imposed upon French citizens by the ruling oligarchs — a condition that hardly pertains to the outcome in a constitutional polity that guarantees individual liberty.  For the oligarchs and land-owners in France paid no taxes, foisting collections for government burdens upon the merchants and the serfs.  Given this, Jefferson’s favorable predisposition toward progressivity was in many ways a reaction to the illiberal exploitation that was soon to beget the turmoil of 1789.

However, later in life Jefferson still seemed to find merit in progressivity:

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 General Tadeusz Kościuszko, 1811.

An income tax did not exist at the time, and the taxes Jefferson referred to – that supported a much smaller federal government as a percentage of the total economy back then — were all import duties and tariffs and/or excise taxes.  And by definition, import tariffs are in essence a tax on consumption, and not income, a tax regime virtually no one, and certainly not Jefferson, would not find “equitable.”  And as modern economic theory has subsequently demonstrated, from the vantage point of economic growth, taxing consumption is far more “capital-friendly”, that is, conducive to investment and prosperity, than taxing income.  It is therefore a stretch to assume that Jefferson would support the contention of Messrs. Obama and Romney today that progressive income taxes are morally just.

What can we say about this, then, since it is by definition a normative issue?  First let us stipulate that taxation in America is already steeply progressive.  The top 1% of all wage income-earners paid 17% of all federal income taxes in 1980, but today that share is up to 39% (for 2010 — and that figure has been over 40% in recent years).  This is an interesting fact in and of itself since President Reagan initiated a round of tax-rate cutting that has left rates far lower than they were in 1980, a demonstration of the Laffer Curve effect.

Of course proponents of progressive rates argue that this is not an issue, because the top 1% also consume and own vast amounts of wealth.  And in any case, they say, total taxation, including payroll and excise taxes as well as income from other sources than wages is on the whole more regressive.  Perhaps, but as economists Harvey Rosen and Ted Gayer pointed out in their 2005 (post-Bush tax cuts) book, the top one percent of income earners nonetheless paid 27.6% of all federal taxes (including payroll, excise and corporate shares) in 2004, a figure a 2010 Congressional Budget Office report said had climbed to 28.1% by 2007 (increasing during the Bush years, evidently!).  Meanwhile, nearly half of all Americans pay no federal income taxes at all, and Rosen and Gayer show that the average tax rate (for, again, all federal taxes) on the bottom quintile is 4.3%, while it is 31.2% for the top 1% of all income earners.  So the unambiguous empirical fact is that the U.S. is a highly progressively-taxed country. Is this a good thing from a moral perspective, that in turn has bearing on wealth-creating economic activity, by which we mean rising investment, job creation, output, and equity values?

It is ultimately a subjective evaluation, but clear thinking on morality can inform our analysis of the positive effects of progressive taxation (after all, Adam Smith’s best book, perhaps, was not the Wealth of Nations,  but rather his 1759 tome with the title Theory of Moral Sentiments — classical writers well-understood the thesis that ultimate “fact” and “value” cannot be distinguished, and that a proper moral framework for an economy, embodied in a deep respect for property rights, rule of law, and individual liberty was both necessary and sufficient for long-term prosperity).  The great progenitor of modern theories of public finance, A.C. Pigou (Keynes’ teacher and later critic), pointed out in his 1951 textbook on the subject that the oft-used theory used to support tax progressivity, that of diminishing marginal utility, was not appropriate for this discussion.  That the marginal dollar of income has less utility for a millionaire than it does for an unemployed welfare recipient is axiomatic, but of course the millionaire is, appropriately, already the recipient, pari passu, of a proportionately higher tax bill.   To prove the moral case for progressivity — that, in President Obama’s exact words, the rich should pay “their fair share”, it would have to be shown that the marginal utility of the last $100,000 of income for the millionaire was providing less satisfaction than the last $1,000 for the worker making $10,000 in income.

To say this colloquially, Messrs. Obama and Romney feel that the millionaire should feel as much pain from losing his last 10% of income — should bear as much burden from this loss — as does the worker who loses his last 10%.  President Obama and evidently Governor Romney both posit that this is not the case with flat-rate taxation; they believe that the loss of the last 10% is not equiproportional for both without progressive rates.  But there is of course no way to know that empirically, and indeed, there are sound reasons to think the opposite is true — that progressive taxation is “unfair” to the higher-income earners by taking an “unjust” amount of their property from them, that ultimately harms the economy as a whole.

In 1845 Ramsay McCulloch wrote:

The moment you abandon . . . the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit.  The reasons that made the step be taken in the first instance, backed as they are sure to be by agitation and clamor, will impel you forwards . . . . why not take 50 per cent from the man of two thousand pounds a year, and confiscate all the higher class of incomes before you tax the lower? . . . . Graduation is not an evil to be altered with . . . . The savages described by Montesquieu, who to get at the fruit cut down the tree, are about as good financiers as the advocates of this sort of taxes.

In other words, McCulloch pointed out that once the “nose went under the camel’s tent” of progressive taxation, it would be a slippery slope pursued by the political class as they sought to commandeer ever more resources from the private sector. And indeed, in terms of historical timing, just three years later, in 1848, Karl Marx and Friedrich Engels came out with the Communist Manifesto, which recommended steeply progressive taxes for the express purpose of the redistribution of wealth and confiscation of property from the bourgeoisie.

And here is where the question of morality meets up with economic efficiency.  Because as soon as the producer class comes to believe that their property, which includes the right to the just fruits of their labor, is at some level to be abnegated, they will rein in productive, wealth-creating activity.  As McCulloch described it, indeed, a process of decapitalization sets in.  This in fact is why the well-known empirical correlation between liberty — in which we include the protection of property rights and lower rates of marginal taxation rather than higher — and prosperity has existed in a statistically significant way from the time of Adam Smith’s more casual observations.

Our own view, in short, is that it is unfortunate from the vantage point of economic growth that the debate over progressive taxation is evidently closed now in the United States, and for the sake of the investor class, jobs, economic growth, and wealth creation, hope that it is one day revisited.  For steep progressivity is, at root, an attack on both property and blindness in the application of law.  Marginal rates of taxation now approach 60% in states like New York, and “the rich”, rather than acquiesce to Mr. Obama’s concept of paying their “fair share”, are simply vacating the state and/or ceasing in the taxable production of goods and services: chronic deficits leading to fiscal collapse then appear on the horizon in such cases.  Greece is a current exemplar of the extreme end to which this situation leads, and no amount of moralizing about “fairness” is relevant on the streets of Athens today.

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, John Chapman can be reached at john.chapman@alhambrapartners.com.  The views expressed here are solely those of the author, and do not necessarily reflect that of colleagues at Alhambra Partners or any of its affiliates.  

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10 Responses to Romney and Obama Agree on Progressive Taxation: Are They Correct?
  1. Socrates said the unexamined life is not worth living, and, after forcing myself through this post, I’m inclined to add that the unreflective author is not worth reading. I’m sure most of the current and potential clients of Alhambra Investment Partners will find a critique of the progressive income tax (ill-informed as it is) pleasing. But, for anyone interested in an impartial discussion of tax policy, this is very thin gruel.

    Let me simply invite the author to consider the following fact: if you leave aside the top 1% of income receivers in the U.S. and France (which has higher tax rates than the U.S.), the average growth of French GDP over the last 20 years is actually higher than the U.S. growth rate. And this doesn’t even take account of the fact that the French work fewer hours per year than Americans do.

    When the top 1% have captured something 80% of the total increase in national income over the last quarter century, while median wages have stagnated, anyone claiming that if the 1% are granted an even larger share via a flat tax, everyone will benefit — well, this writer requires a lot more than a reference to Montesquieu (whose Spirit of the Laws I’m quite confident the author of this insidious piece has never read).

    Reply
  2. John L. Chapman
    March 11, 2012 at 12:50 am

    Mr. Hill,

    I appreciate your reading this essay and your comment. I do not know how to respond since you offer facts without citation that in any case are not even remotely true. For example, real GDP in the U.S. was about $6.34 trillion in 1992 and will be about $15.1 trillion this year. For 80% of that to go to the top 1% of wage earners would mean they got $7 trillion of the increase, and would now commants about $8.5 trillion of the national output this year, or 55% of it. That is absurd by a factor of more than 2.

    The French economy on a per capita basis is about 75% as productive as the US, they have chronically higher unemployment, prices are higher, and it is a 9-to-5, not a 24/7 society. For you to hold the French economy out as an exemplar for the U.S to emulate is as non-sensical as reading the proto-socialist Montesquieu is a waste of time versus (say) Smith or Hume.

    Reply
  3. Mr. Chapman,

    You write, “I do not know how to respond since you offer facts without citation that in any case are not even remotely true.” In response, let me say that I had assumed you’d be familiar with the literature you were writing about. But apparently you’re not. So, permit me to introduce you to this literature. Uwe E. Reinhardt, a professor of economics at Princeton, points out (here) that if you exclude the top 1%, then average United States real incomes grew by 17.9 percent during the period, 1975-2009, while average French real incomes, excluding the top 1%, grew by 26.4 percent.

    You go on to say, “For you to hold the French economy out as an exemplar for the U.S to emulate is as non-sensical [sic] as reading the proto-socialist Montesquieu is a waste of time versus (say) Smith or Hume.” Well, to begin with, I didn’t recommend “the French economy as an exemplar for the U.S. to emulate,” I simply pointed out that while the U.S. economy looks very productive in the aggregate, a disproportionate share of these gains have gone to the top 1%.

    Granted, I was a bit off regarding the 1%’s share of total income growth in the U.S. Between 1993-2010, the top 1% “only” captured 52% of the total increase in national income (here), and “only” 93% during the 2009-2010 recovery.

    In your original post, you cited Montesquieu as a critic of progressive taxes; now you call him a “proto-socialist,” which simply confirms my claim that you’ve never read Montesquieu.

    You write, “We are very happy to engage in dialogue with our readers at any time, Mr. Hill, even those embittered academic failures forced to go into government service, who advocate policies of immiseration such as yourself.”

    Wow, where did you come up with this screed? I’m happily retired, not at all embittered. I’ve published a book and more than twenty papers in journals like Cambridge Journal of Economics, Rationality & Society, Review of Politics, Critical Review, Economic Issues, Philosophy and Literature, and many more. If you regard the progressive income tax as a policy of immiseration, then how do you explain the economic success of the Scandinavian countries?

    If you need to flatter the rich to expand your client base, that’s fine, just don’t fob it off as some kind of intellectual exercise.

    p.s. The phrase, “thin gruel,” refers to lack of content, not lack of popularity.

    Reply
  4. Joseph Y. Calhoun
    March 13, 2012 at 12:35 pm

    Mr. Hill,

    We at Alhambra are happy to debate readers of our blog but we also expect the debate to be informed and polite. Your initial comment does not qualify and if John had asked me, I would have told him to ignore you. But since he responded, let me just add a few observations.

    First of all, John did not quote Montesquieu. That was part of a quote from Ramsay McCullough and the reference to Montesquieu has nothing to do with progressive taxation. Maybe you should actually read and comprehend the post before criticizing.

    Second, the post is about the morality of the progressive income tax, not its efficiency. Whether French GDP excluding the top 1% grew faster or slower than the comparable US segment is irrelevant to the discussion at hand. As John said, we will discuss the efficiency of the tax at a later time. By the way, I actually feel the efficiency argument against progressive taxation is better than the moral one. I look forward to hearing your response to that post.

    Third, taxation has become nothing more than a raw exercise of power by various interest groups. Property is taken from one group for the benefit of another. Which groups have the upper hand is dependent primarily on which political party has the upper hand. Maybe that sounds moral to you. It doesn’t to us.

    Fourth, the issue of real income growth for the middle and lower classes in the US is an important issue. Unfortunately, as the very progressive tax system in the US seems to prove, you won’t solve it through the tax code. The ability of the wealthy to shift income (from corporate to personal for instance) makes it impossible to capture and redistribute this income as some would like without resorting to methods all Americans would find repugnant. There are ways to correct this problem but they have nothing to do with the tax code.

    Lastly, if you want to debate on this blog, I would hope that you can be civil. If not, we’ll just ignore you. I expect the same from the people who work for me here at Alhambra. I apologize if John was not polite in his response to you (although I do not see the comment you reference in his reply).

    By the way, most of our clients are not wealthy enough to fall into the top 1%. We feel that high quality investment management is something that should be available to all investors.

    Reply
    • John L. Chapman
      March 13, 2012 at 2:29 pm

      Mr. Hill:

      I echo my colleague Joe Calhoun’s statements above and apologize for any seeming rudeness on my part; such was not my intent. I actually enjoy debating Leftists such as yourself and only wish I had more time.

      I will take your “thin gruel” comment about my discernment of economic phenomena as a compliment, in any case, and would assert to you that it it you who need go back and review both history and theory. Of course I know Professor Reinhardt well and he is consistently wrong about most everything, particularly in his advocacy of European-style healthcare, which consistently fails the test of efficacy when compared to outcomes data in the United States. And as for the relative wealth gains by income quintiles in the U.S. versus France, you and Reinhardt are wrong, as the OECD data clearly show. As poorly as the U.S. has done in the last 20 years, all-in, the gap has WIDENED with France, not narrowed. Further, the French economy is the very definition of *sclerotic* — you have inferred you could prove me wrong by naming all the great technological innovations or new consumer items that were developed in France, the thriving venture capital sector there, world class universities, the 24/7 — whoops I mean 9-to-5, for France — lifestyle? I will look forward to that list but know I will await it a long time.

      What you and other collectivists who are blinded by false understanding cannot seem to appreciate is how the ONLY reason these welfare states do as well as they do is because they are able to import American innovation, new technologies, management methods, and the like.

      As for Montesquieu, I daresay I have forgotten more of his works than most people will ever know, and regret your unfortunate understanding of the subtleties of his work. Yes it is true Madison and others were admirers of his early writings especially. It is true he understood in crude form the republican form of government. But he was a fan of monarchy and there are collectivist tilts in his writings, as evinced in Paul Rahe’s “Soft Despotism, Democracy’s Drift: Montesquieu, Rousseau, Tocqueville, and the Modern Prospect”, the lack of reading of which is an embarrassment for anyone who pretends to be a scholar of Montesquieu.

      And anyone with a proper understanding of American history would appreciate that it is Locke and not Montesquieu who is the far better exemplar of the theoretical basis for a constitutional republic AND THE INVIOLABLE RIGHTS TO PROPERTY that inhere in such a polity. For Locke, anything other than a flat tax regime would, ipso facto, be an assault on property rights, and THAT is the correct answer on this issue.

      Perhaps in your retirement you would prefer to move to France, and enjoy fully the standard of living there that you advocate and wish to see brought here to the United States. I’d wholeheartedly support such a move, in fact, because perhaps then you would see first hand what “thin gruel” really is.

    • Dear Mr. Calhoun,

      You’re right: my initial comment was impolite and I was in error regarding the place of Montesquieu in John’s argument. I apologize. Let me turn to your substantive arguments.

      You write, John’s post “is about the morality of the progressive income tax, not its efficiency. Whether French GDP excluding the top 1% grew faster or slower than the comparable US segment is irrelevant to the discussion at hand.” But you ignore my point about the top 1% receiving 52% of the total increase in U.S. income between 1993-2010, and 93% of the total increase during the 2009-2010 recovery. And this is quite relevant.
      (See http://elsa.berkeley.edu/~saez/saez-UStopincomes-2010.pdf for the income data).

      Consider John Rawls’s theory of justice where free and equal persons, who are ignorant of their income-earning ability, choose principles of justice. They begin with an equal distribution of income, which provides no incentive for productivity. They then consider incremental increases in inequality and their incentive effects until they reach the point at which further inequality leaves some worse off. Hence, Rawls’s arrives at his general conception of justice: “inequalities are just insofar as they work to everyone’s advantage.” (See http://works.bepress.com/greg_hill/3/).

      Given plausible empirical assumptions, the distribution of income and wealth in the U.S. is surely unjust when measured against either Rawls’s general principle of justice, or his special conception, which holds that “inequalities are just insofar as they maximize the income of the least well off over the long run.” It’s hard to imagine a just society along Rawlsian lines without a progressive income tax (or, alternatively, a progressive consumption tax). The same is true of the conceptions of justice advanced by Ronald Dworkin, A. K. Sen, Brian Barry, G. H. Cohen, Thomas Nagel, and a great many more.

      You write, “Taxation has become nothing more than a raw exercise of power by various interest groups. Property is taken from one group for the benefit of another. Which groups have the upper hand is dependent primarily on which political party has the upper hand. Maybe that sounds moral to you. It doesn’t to us.” No, that doesn’t sound moral to me either, but neither does the fact that six Wal-Mart heirs have more wealth than the 150 million Americans at the bottom of the pile. Unlike Robert Nozick and many Austrians, I’m not convinced by the argument that any distribution of wealth and income that results from free exchange is beyond criticism. (See T. Nagel and L.B. Murphy, “The Myth of Ownership: Taxes and Justice” (Oxford University Press).

      You write, “The issue of real income growth for the middle and lower classes in the US is an important issue. Unfortunately, as the very progressive tax system in the US seems to prove, you won’t solve it through the tax code.” First, the U.S. tax code is less progressive than many European tax codes and is also less progressive than the optimal income tax in several recent economic models (one by Nobel Laureate, Peter Diamond).
      (See http://elsa.berkeley.edu/~saez/piketty-saez-stantchevaNBER11thirdelasticity.pdf; http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.25.4.165).

      Second, high income inequality is correlated with low intergenerational income mobility, and the U.S. now ranks below many advanced economies in the degree of economic opportunity. (See http://www.slideshare.net/whitehouse/the-rise-and-consequences-of-inequality-in-the-united-states-charts). Third, the fact that real income growth for the middle and lower classes (in fact, the bottom 80%) in the U.S. has been weak is not proof that a more progressive income tax couldn’t be part of the solution. When you cut Pell Grants, tutoring programs for low-income children, etc., rather than raising taxes on very high-income households, you’re adding to the problem, not correcting it.

      Thank you for taking the time to respond. I’ll get back to you and John regarding Montesquieu.

  5. Joseph Y. Calhoun
    March 13, 2012 at 6:20 pm

    One final note on this little contretemps.

    The Montesquieu quote has been nagging at me all afternoon. I know I’ve heard the quote before but could not remember the context.The full quote is this:

    “When the savages of Louisiana want fruit’, he wrote, ‘they cut down the
    tree and gather the fruit. There you have despotic government’.

    Despotic government is one that destroys the very thing that sustains it. It is a government without moderation. I am not a great fan of Montesquieu but many of our current politicians could learn a thing or two by reading his passages on the virtues of moderation in government.

    “They who receive nothing expect nothing; they who receive a little soon covet more, till at length their desires swell to an exorbitant height.”

    A few more quotes I found interesting:

    “The public revenues are a portion that each subject gives of his property, in order to secure or enjoy the remainder.

    To fix these revenues in a proper manner, regard should be had both to the necessities of the state and to those of the subject. The real wants of the people ought never to give way to the imaginary wants of the state.

    Imaginary wants are those which flow from the passions and the weakness of the governors, from the vain conceit of some extraordinary project, from the inordinate desire of glory, and from a certain impotence of mind incapable of withstanding the impulse of fancy. Often have ministers of a restless disposition imagined that the wants of their own mean and ignoble souls were those of the state.”

    “….a duty on merchandise is more natural to liberty, by reason it has not so direct a relation to the person….The natural tax of moderate governments is the duty laid on merchandise.”

    “The very worst Roman emperors were those who were most profuse in their largesses; for example, Caligula, Claudius, Nero, Otho, Vitellius, Commodus, Heliogabalus, and Caracalla. The best, as Augustus, Vespasian, Antoninus Pius, Marcus Aurelius, and Pertinax, were economists.”

    One last thing I ran across. Writing about John Law and his “system”, Montesquieu said that he was “one of the greatest promoters of despotism that had until then been seen in Europe”. And that, Mr. Hill, is a very large clue as to the source of our current troubles and an explanation of how we have arrived at this moment in our history.

    Reply
  6. Mr. Chapman,

    You write, “As for the relative wealth gains by income quintiles in the U.S. versus France, you and Reinhardt are wrong, as the OECD data clearly show. As poorly as the U.S. has done in the last 20 years, all-in, the gap has WIDENED with France, not narrowed.”

    Two points. First, you don’t specify which “gap” has widened. Are you claiming that the average income of the “bottom 99%” in the U.S. has grown faster than the average income of the “bottom 99%” in France, or something else? Second, Reinhardt was citing work appearing the JEL by three of the foremost experts in this area, which you can find at http://elsa.berkeley.edu/~saez/atkinson-piketty-saezJEL10.pdf. The article reviews tons data and virtually all of the literature, so, at in light of this, I think you must now carry the burden of proof.

    You write, “the French economy is the very definition of *sclerotic*.” As I said before, I wasn’t claiming that the French economy is more dynamic than ours, I was simply pointing out that the benefits of this dynamism should not be measured by the growth in average income when a disproportionate share of these benefits accrue to the 1%. Insofar as income is not a good measure of “lifestyle” as you suggest, I can only say that many people would prefer the small specialized shops of Paris to the Wal-Mart experience.

    You write, “What you and other collectivists who are blinded by false understanding cannot seem to appreciate is how the ONLY reason these welfare states do as well as they do is because they are able to import American innovation, new technologies, management methods, and the like.”

    I’m not quite sure how to assess this ambitious claim, but instead let me suggest a similarly ambitious claim: the primary reason the U.S. economy did as well as it did during the period leading up to the crisis was because the bottom 80%, with stagnant incomes, financed their consumption on the housing bubble, abetted by American innovation in the form of securitized mortgages and non-trivial amount of fraud.

    You write, “As for Montesquieu, I daresay I have forgotten more of his works than most people will ever know, and regret your unfortunate understanding of the subtleties of his work.” I don’t know what you mean by my “unfortunate understanding” of Montesquieu’s work. I only suggested that your characterization of Montesquieu as a “proto-socialist” was wildly off the mark. Can you cite the place where Rahe advances your interpretation?

    You write, “Anyone with a proper understanding of American history would appreciate that it is Locke and not Montesquieu who is the far better exemplar of the theoretical basis for a constitutional republic AND THE INVIOLABLE RIGHTS TO PROPERTY that inhere in such a polity. For Locke, anything other than a flat tax regime would, ipso facto, be an assault on property rights, and THAT is the correct answer on this issue.”

    Several points in response: 1) There are many different interpretations of Locke’s conception of property rights that differ from yours; 2) Locke said people may acquire rights to property provided there is enough and as good left over [is this constraint satisfied?]; 3) Locke stressed that labor gives people rights to what they produce – did you know that between 1989-2010, output per hour of labor has increased by more than 60%, yet employee compensation has only increased by 15%? and 4) Does your conception of “The Inviolable Rights To Property” give restaurants the right to deny service to black people or businesses to deny employment to qualified job applicants who are women?

    Finally, you write, “Perhaps in your retirement you would prefer to move to France, and enjoy fully the standard of living there that you advocate and wish to see brought here to the United States. I’d wholeheartedly support such a move, in fact, because perhaps then you would see first hand what “thin gruel” really is.”

    I didn’t “advocate” the French “standard of living” (see above). Perhaps you don’t find five weeks of vacation appealing, perhaps you’re fond of American-style “at will” employment, perhaps you’d rather buy wine, cheese, and pastries at Wal-Mart rather than on the Rue Mouffetard. I don’t share your preferences in these particular matters, but to call it “thin gruel” probably reveals more about you than about France.

    Reply
  7. Joseph Y. Calhoun
    March 14, 2012 at 6:17 pm

    Mr. Hill,

    Thank you for the apology and comment.

    As I said in my earlier comment, the distribution of income in the US is likely a problem that should be addressed. The question at hand though, again, is whether a progressive income tax is moral. Your point about the distribution of income in France is not relevant to the discussion because it relies on an assumption, mainly that the more equitable distribution of income in France is a result of a more progressive tax code. While on the face it may seem that this is true, it is quite hard to establish in fact. It may merely be an illusion of equality and I, like you I’m sure, am not interested in merely making things look better.

    How much of the income of the upper classes of France has merely been shifted to other jurisdictions? It is surely not coincidence that France – and Germany – have led the charge in Europe to pierce the Swiss bank secrecy laws. As the tax burden in France rose, how much capital and the income it produced was shifted to Switzerland? Unless one can answer that question, it is impossible to know whether the highly progressive income tax produced the more equitable distribution of income or whether upper class French citizens have merely shifted their capital and the income it produces to jurisdictions outside the reach of the French tax authorities. If that is the case, it might appear that income distribution has become more equitable when in fact it hasn’t changed at all.

    The same could be said about shifting income within the French tax system. With the corporate tax rate 7% below the top tax rate, isn’t it possible that wealthy individuals have shifted income to corporations to escape the individual income tax? If we can’t quantify that shift, again, we can’t say whether wealth or income distribution has improved or whether it is a statistical illusion.

    Another potential escape for high income French citizens is to emigrate to another country where the tax burden is lower. We have seen this in high income soccer players who have switched to Swiss citizenship to avoid French taxes. Another example would the exodus of many in the financial industry to the City in London. Again, can we quantify this? If not, we can’t say that the progressive income tax code of France has accomplished what you obviously believe it has.

    I would also argue that much of what appears to be an increase in inequality in the US is a product of the tax code but not because it is insufficiently progressive. The wealthy have the ability to rearrange their affairs to avoid excessive taxation and no doubt have. If the corporate tax rate is significantly less than the top individual tax rate – as it is in France now and was in the US in the 70s for instance – more income will get reported as corporate income. As the top tax rate came down over the last 40 years, more income was reported as individual rather than corporate. Hence the proliferation of companies organized as pass through entities such as sub chapter S, LLCs and partnerships. With little difference in the two tax rates now, tax revenue from corporate taxes is at an all time low. Part of that is no doubt due to the efforts of tax attorneys but a significant portion is due to income shifting. So the rise in inequality is likely not what it seems.

    My point is that the question of the morality of progressive taxation is separate from the issue of the morality of unequal income distribution. My personal belief is that we shouldn’t be taxing income at all and that there are much better ways to produce a more equitable distribution of income.

    I don’t have time right now to address your other points but you might be interested in this post of mine from January of last year which elaborates on my hint about one source of the rise in inequality:

    http://www.alhambrapartners.com/2011/01/09/is-income-redistribution-the-key-to-economic-growth/

    Reply
    • Mr. Calhoun,

      Thanks for the reply and the link to your very interesting piece on redistribution. I’ll try to keep my response short because you’ve got work to do and I’ve got none.

      1. Surely the morality of the progressive income tax can’t be judged in isolation from everything else, but rather depends, at least, on: a) the degree of economic opportunity; b) the degree of income and wealth inequality; and c) the existence of alternatives to address both excessive inequality and stagnant income growth for the bottom 80%. If there’s lots of income mobility, not too much variance in market incomes, which, in turn, are growing across income quintiles, and a decent safety net, then, granted, the case for a more progressive income tax isn’t as strong.

      2. I think you mentioned some of these factors, but it’s worth reiterating that a) U.S. per capita income growth was faster in the 1950′s and 1960′s than after; b) there was less inequality and more economic mobility during this period; and c) marginal tax rates were much higher.

      3. You make a very provocative claim in saying that the end of the Golden Age coincided with the end of the “Bretton Woods currency system where the dollar was pegged to gold and the other major currencies were pegged to the dollar,” and “there is ample empirical evidence that the monetary inflation that followed our abandonment of this stable currency system is a direct cause of the rise in inequality over subsequent decades.”

      I’d ask you [or someone else familiar with your argument] to a) provide references to the “empirical evidence” linking post-Bretton Woods monetary inflation to rising inequality [bearing in mind that inflation has been less than 3% for almost all of the last 20 years]; and b) provide a description of the causal links between the end of dollar convertibility and rising inequality because, as I’m sure you’d agree, correlation isn’t enough.

      I’ll conclude with an historical point, which is that during the Great Depression, the quicker a country abandoned the gold standard, the quicker it’s economy recovered; and also invite you to read my brand new blog post on the Austrian Business Cycle at http://www.the-human-predicament.com/


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