Progressive Taxation Was Never About Fairness

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This is how we felt after reading over the details for last night’s Federal budget.

In today’s Daily Reckoning we take a merciless meat axe to the idea that progressive taxation has anything to do with fairness. Quite the contrary. There could be nothing more unfair than stealing from one man and giving to another based on his “ability to pay.” But first, what’s this about a budget deficit?

The fact that the budget is front page news (with extra sections of the newspapers) is a testament to how brainwashed and addicted to government the modern world is. Apparently we’re all wards of the State now.

Should we really take these clowns this seriously? Sadly, we must, because they are not only spending their way into perpetual deficits, they are borrowing (stealing) from the future to do so. Aside from being ham-fisted economic ineptitude, it is also cowardly, immoral, and intellectually offensive. It also affects markets and your investments. More on that in a moment.

Let’s get through this ugliness quickly. Next year’s budget (2009-2010) predicts a $58 billion deficit (5% of GDP) with over a million Aussies out of work (unemployment peaking at 8.5%). The government will spend $22 billion on ‘nation building’ projects, including $8.5 billion on roads, railways, and ports, $3.5 billion on ‘clean energy,’ $2.6 billion on universities, $3.2 billion on hospitals, and $4.2 billion as a down payment on the national broadband network. It will sell $60 billion worth of bonds by next June to pay for all of this.

The government also says that Australia’s net debt will peak at 13% of GDP in 2014, and that compared to 80% in other developed economies that is just awesome. And by then, spending can but cut to the bone because the economy will be ticking along at 4.5% annual growth with jobs returning. By 2015 or 2016-presumably in its third term-the government will return Australia’s public finances to surplus, or they will be utterly ruined. Place your bets.

We reckon that tax takings will be lower, unemployment higher, and economic growth much worse than the budget forecasts. The net debt figure will not stabilise at 14% of GDP. Australia’s entitlement mentality (remarkably like America’s, and also encouraged by both major political parties) will push spineless politicians down a path of spending increases financed by more and more borrowing and more and more taxes (think carbon, baby).

It’s not too late to stop the debt train and get off. But you’d have to challenge the idea that it is the proper role of government to ‘combat’ a recession by a ‘temporary’ slide into deficit spending. There is nothing temporary about it. Deficits are political animals and once born, they somehow keep growing to monstrous, productivity-destroying sizes.

Wayne Swan says cutting spending and government services during a recession would be ‘crazy.’ We say the whole idea of transferring billions of dollars to stimulate consumption is even more insane. If you want the economy to recover, let people keep more of their own money and do what they want with it. Then let the marketplace adjust and quit propping up businesses that can’t survive. This would restore the economy to a sustainable path of growth determined by consumer choices and not government intervention in household and corporate finances.

But hey, that would be a free market working like a free market. And that’s just ‘crazy.’

In other budget news, the $21,000 first home buyer’s grant for newly built properties has been extended past June 30th to September 30th. The $14,000 grant for existing homes has also been extended to September 30th. Between October 1st and December 31st, the grants will be reduced to $14,000 and $10,500 respectively. And next year, they will revert to measly $7,000 figure for each that John Howard set when he introduced the subsidy to the real estate and building industries in 2000.

Both the Howard and Rudd governments will rue the day they subsidised higher house prices with government handouts. It’s going to impoverish a whole generation of Australians, making them house poor and mortgage-debt rich. Why?

House prices do fall. They don’t double automatically every seven years. If we had a three-bedroom house for every time we heard that in 2004 we’d be incredibly house rich. In the U.S., the National Association of Realtors reported that median U.S. house prices fell 14% in the first quarter of 2009 compared to last year. Existing home sales also fell by 6.8%

It was the largest quarterly decline in U.S. house prices ever reported. Of the 152 metropolitan areas surveyed, prices fell in 134 of them. The price declines were especially shocking in places where the boom was greatest In the Cape Coral-Ft. Myers area of Florida, prices fell 59%. In Saginaw, Michigan they fell by 54%. In Akron, Ohio they fell by 48%. And in San Francisco, they fell by 43%.

There are people who tell you those sorts of declines could never happen in Australia. But those people are morons. A contraction in bank lending, a rise in unemployment, a restriction on immigration, and a rise in interest rates remove all the props that have supported the soaring Aussie property market up until now. If you don’t think it can happen here, you’re kidding yourself. And if you disagree, send us a note at dr@dailyreckoning.com.au and tell us what you think of the chart below.

Source: www.whocrashedtheeconomy.com

In resource-related news, did you see this number? Chinese urban fixed asset investment was up 30.5% in the first quarter. The National Bureau of Statistics said investment in rail and “other transport” was up 94.2% for the period. Could this stimulus spending account for the surge in Aussie iron ore exports we mentioned earlier this week? Hmmn.

Lots of mail about why we never write about silver or other rare metals. Oh but we have! We don’t usually do it here. But we have done it Diggers and Drillers, where we’ve also recommended a few ways to invest in it. Jim Rogers, incidentally, likes silver, platinum, and palladium as well.

Finally, if you are easily offended, you should remember that living a free society does not protect you from the offensive ideas of others. In fact, it’s just the opposite. It means that in a free society, you can’t shut people up just because you find their ideas challenging, offensive, or because, in the touchy-feely language of the day, they make you feel “uncomfortable.”

That’s all a preamble to the idea that societies that use tax law as a way to achieve political or social goals are societies based on envy and resentment. That is, how a nation treats taxes tells you something of the character of a nation.

So when you hear Wayne Swan-or anyone for that matter-say that the level of taxation in a country should be based on the “ability to pay” be very afraid. These people are not only coming for your money. They’re coming for your economic liberty too. Ultimately, that means they’re after your political liberty as well.

Progressive taxation is the idea the larger your disposable income, the larger percentage of that income you ‘should’ pay in taxes. Proponents of it-and these days nearly everyone one is-claim it is more ‘fair.” But let’s be honest and call things by their right names and say what progressive taxation is really about.

Even John Stuart Mill, who favoured it, called progressive taxation “a mild form of robbery.” That’s because progressive taxation about using the tax code to redistribute wealth. It’s base on the class-warfare idea that the rich get rich illicitly and conspire to keep the riches of society for themselves. It uses the law (coercion) to correct what some people see as the social and economic injustice meted out by the marketplace.

But how people treat private property (and wealth IS private property) determines the character of society. A society that promotes the idea of wealth accumulation and that everyone can get rich is one in which standards of living will rise over time. It doesn’t mean getting wealthy is the only or even the most important ambition in life. That’s a matter of personal choice and values. But it just means that if you want to raise standards of living over time, you should guard economic liberty and not use taxation to punish personal incentives.

The only fair argument for progressive taxation is that indirect taxes (consumption taxes) hit the poor harder than they hit the rich. This is certainly true for taxes on consumption goods. But it is not true for income taxes, most of which the poor do not pay anyway. A tax on Gucci handbags is less onerous than a tax on a slab of beer. But that doesn’t justify the argument that just because you can pay more taxes, you should.

When is it ever right for a man to come in to your home and take what’s yours simply because he’d decided that someone else needs it more? And how is the government arbitrarily deciding to raise income tax rates on only certain citizens, based on their ability to pay, any different? Yet that’s the argument for progressive taxation in the modern world. And most people seem to think it’s fair and just.

Mind you, that doesn’t mean that free people can’t use legislatures to levy taxes in order to pay for projects they believe should be provided by the State, like roads, bridges and other infrastructure. But there is a difference between that kind of public spending and public spending financed by wealth redistribution to achieve particular social and economic outcomes.

How did we get to the point in civil society where a democratic majority that does not pay taxes can, through its elected representatives, legally confiscate the wealth of a minority? Friederich Hayek gives the history in, “The Constitution of Liberty.”

“As is true of many similar measures, progressive taxation has assumed its present importance as a result of having been smuggled in under false pretences. When at the time of the French Revolution and again during the socialist agitation preceding the revolutions of 1848 it was frankly advocated as a means of redistributing incomes, it was decisively rejected. “One ought to execute the author and not the project,” was the liberal Turgot’s indignant response to some early proposals of this sort.

“When in the 1830’s they came to be more widely advocated, J.R. McCulloch expressed the chief objection in the often quoted statement: ‘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 a rudder or compass, and there is no amount of injustice and folly you may not commit.'”

“In 1848,” Hayek continues, “Karl Marx and Freidrich Engels frankly proposed ‘a heavy progressive or graduated income tax’ as one of the measures by which, after the first stage of the revolution, ‘the proletariat will use its political supremacy to wrest, by degrees, all capital from the bourgeois, to centralise all instruments of production in the hands of the state.’ And these measures they described as ‘means of despotic inroads on the right of property, and on the condition of bourgeois production…measures…which appear economically insufficient and untenable but which, in the course of the movement out strip themselves, necessitate further inroads upon the old social order and are unavoidable as a means of entirely revolutionising the mode of production.'”

If Marx and Engels are to be taken at their word, progressive taxation was never about fairness. It was about putting production “in the hands of the State” and “revolutitionising the mode of production.” In the world of State-run capitalism, this is what we seem like we’re headed towards.

Now, we can take a step back and ask whether a State-run, union owned Chrysler makes a better car than the shareholder owned management-run Chrysler. It’s a fair enough question. We’d argue that government-built and designed cars are going to be about as appealing as a leather boot for breakfast. But that is not really the point.

The point is that the politicians are lying to you about the goal of progressive taxation. The goal is not to produce more “fairness” or “social justice.” It’s to place the State at the centre of economic production, so it can regulate and tax with impunity.

There both a psychological and crassly economic motive to this movement to displace the free market with the State as the organiser of economic life. The smarty pants elitists in both political parties, with their ties to union and corporate money, really believe the world would be better off it was run be benevolent bureaucratic despots. Or maybe using coercive taxation to steal from the rich is simply envy-based class politics, a kind of populist theft conducted with the consent of a hi-jacked system for passing laws.

Once you go down this road of socking it to the rich instead of reducing spending, you get higher and higher rates of taxation that eventually shrink the economy. Britain adopted the income tax in 1910 and the U.S in 1913. At the time, the top tax rates on income were 8.25% and 7% respectively. Yet within 30 years, thanks to the Great Depression and the World Wars, those rates had risen to 97.5% and 91% respectively.

“Thus in the space of a single generation,” Hayek writes, “what nearly all the supporters of progressive taxation had for half a century asserted could not happen came to pass…All attempts to justify these rates on the basis of capacity to pay was, in consequence, soon abandoned and supporters reverted to the original, but long avoided, justification of the progression as means of brining about a more just distribution of income.”

How much a man should reasonably a pay to the State was no longer an economic question about his ‘ability to pay.’ It was revealed as the purely political decision it always was. Or as Hayek says, it’s “an attempt to impose on society a pattern of distribution determined by majority decision.”

That’s what we meant by the character of society. Do you want to live in a country where over 50% of a man’s income can be taken from him simply because the majority votes for it? In that kind of country you want to live in, where you have no real property rights and you don’t have equality before the law.

Upward income mobility is undermined in this kind of society. People don’t try to get rich because there’s no point in it if your gains are going to be confiscated. The net result of decades of progressive taxation is lower capital formulation, more consumption, less production, and ultimately a lower standard of living for everyone.

In that society, your only means of social and economic advancement is based on your personal connections and political patronage. Not surprisingly, in that society, politicians exercise enormous power. And decisions are not made by businesses who aim to offer consumers better products and services at lower prices. They are made by politicians who aim to cement their electoral position by favouring certain constituencies.

Progressive taxation has nothing to do with fairness, justice, or equality. It is unfair, unjust, an unequal. But hey, if that’s the kind of country you want to live in, or if you’re someone who’s getting the check instead of writing it, that might not seem like such a bad deal.

We’d just advise you to prepare for a lifetime of dependency on busy body politicians who become increasingly grasping, moralistic, and intrusive. If you’re a free man, you’d better pack your bags and look for some other luckier country.

This is not to glorify getting rich as the most important thing in this world (or any other world.) It isn’t. And there are much more important things in life. Whether you choose to pursue material gain is up to you.

And just as a government should not use the tax code to punish the rich, it ought to quit tinkering with it and providing so many deductions and rebates that allow anyone with a good accountant to avoid paying large income taxes. A much simpler taxation system based on consumption would be fairer for everyone and it would force the government to finally live within its means.

Of course that probably won’t happen. Ever. But it would be nice to think so. In the meantime, a society that discourages wealth creation and capital formation through so-called progressive taxation is eventually going to make itself a lot poorer and a lot less free.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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18 Comments on "Progressive Taxation Was Never About Fairness"

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Greg Atkinson
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The main problem I see with the budget is that the government is mixing in a bit of social engineering, a bit of climate change politics and a lot of “get us re-elected” antics. Quite simply Australia can do very little to escape the effects of a global recession. If China and Japan don’t start taking our commodities at top dollar prices we are going to have to adjust downwards. Adjusting downwards does not mean throwing billions at infrastructure and getting into a truckload of debt. As for the budget forecasts, can anyone take these seriously? Honestly if the Treasury… Read more »
moondoong
Guest

Never a truer word spoken than the ones in the article above.
The outlook for Australia is looking grim.

Michael
Guest

I have thought for a long time that our tax system was designed to keep everyone just above water financially and hence more sensitive to the pork barreling at election time. Parties of both sides do this – however Labour is more hit its symbolic rich. It’s time for both sides to move into the 21st century and out of the 19th.

On another note, as one drool acquaintance remarked – John Howard is to blame, he lost the election.

TC
Guest
Go Dan! The basic problem we average (rich or poor) men share is politicians who have, ironically, self interest vs public interest. All of their machinations are expressed for the “public”, the “poor”, the “children”, but the reality is under the table. The reality is the longer politicians hold office the more superior they feel towards the rest of society; the more important they feel about themselves. And of course in the end it is about the money. Even a politician needs to finance his/her ultimate goal – to be reelected. And to control the ballot box they need financing.
Dan
Guest

… and so we come to the point that our government is getting at. Did not Rudd claim that the Capitalist ‘experiment’ failed? I think we might be getting socialism with an ‘international’ in front of it coming our way.

Ross
Guest
This is an interesting discussion but it isn’t all a one way street. A comment by TC is that the politicians need financing – never a truer word. Political financing is now derived almost entirely from cronies expecting payback. Those that could deliver the most are those that were the primary beneficiaries of asset price inflation and rigged markets (classic Aussie duopolies that have built the wealth of the leading Australian families). You cannot deny that the rich have got richer and the poor have got poorer in what TC is claiming was a happier free market time in the… Read more »
Greg Atkinson
Guest
Dan, one thing I can say for certain is that Rudd will happily welcome “Capitalists” to Labor Party fund raising dinners. Anyway he has lost the plot, because how can he attack the capitalist system on one hand and then set the government up to own a telco to build the national broadband network? This company I assume will aim to make a profit and in the future the government will sell it’s stake to the private sector again at a profit. (it hopes) Or is Rudd planning to operate the NBN telco at a loss and provide discounted broadband… Read more »
Adam
Guest

Income tax was first introduced into the UK in the late 18th century as a ‘temporary’ measure to pay for the Napoleonic wars. I am reminded of one of the bon mots of the late (and much missed) jazz trumpeter Humphrey Littleton who, when he was in his eighties a few years ago, said “I recall during the war the army would put bromide in our tea to stop us thinking about sex all the time. I often wonder when its supposed to start working.”

JJM
Guest
Just a thought… We all know tax has to be paid as there are expensive things society feels are good ie justice system, defence, stable government etc…but we all want someone else to pay the taxes to support them. If we feel people on high incomes are suffering because of their tax burden…then let’s reduce it. And then we can reduce other things, like the 50% concessions on capital gains earnings. Or the concessions on investment borrowings. Or the concessions on superanuation contributions and earnings. Or the deductions on expenses relating to earned income. You see, often the people who… Read more »
Ren
Guest

“A tax on Gucci handbags is less onerous than a tax on a slab of beer” – is a matter of perspective! Beer attracts a 25% excise tax + all of the other taxes associated with running a business. Pity our poor Australian craft brewers trying to create an industry and employ people and dare we say create a relatively untapped export market! The WET (wine equalisation tax) has been retained, small wine producers are able to avoid the excise. http://www.fairgocraftbeer.com.au/

Jared
Guest

I always thought we *were* a somewhat socialist country, and plenty of us have/had socialist leanings, so this article isn’t really a surprise. The capitalist Howard years seem like the anomaly. Maybe as an outsider you were under some other impression prior to living here? :)

http://www.aph.gov.au/library/pubs/RN/2001-02/02rn28.htm

I’m not disagreeing with the principles, just saying…

Jon
Guest

Talking about financial and political liberty… does the change in the budget to payment of tax on overseas income (offsetting overseas tax against tax you would have paid in Aus) mean that we’re now all tax slaves? That no matter where we work we will be considered ‘resident for tax purposes’ in Aus (or alternatively, if you ever come back you’ll be shafted)? This seems like a very dangerous precedent, especially if the rules around what constitutes ‘ tax resident’ change at a future date.

Bertie
Guest

Rudd and co to win a third term? you’ve got to be kidding! Those goons will win one more and that’s it!

Rex Connor helped prepare some of those budget documents

Gold will rise to $1200US and no more

Bertie knows

Joe
Guest
Dan, Oh my dear you really don’t like tax do you. You claim progressive taxation is wrong and rally against it. I have to include a direct quote from your large throbbing piece to demonstrate your failed logic and also an inconsistancy in your argument. From above: The only fair argument for progressive taxation is that indirect taxes (consumption taxes) hit the poor harder than they hit the rich. This is certainly true for taxes on consumption goods. But it is not true for income taxes, most of which the poor do not pay anyway. A tax on Gucci handbags… Read more »
Daniel Newhouse
Guest
Let’s be respectful of Dan Denning’s argument. If I really thought that getting rid of income tax would cripple the welfare state, I’d be all for it. I think that until we abolish central banks, fiat currency, fractional lending, and credit cards that all the incentives that we have will push us towards a welfare state and focusing on income tax is a red herring. Some facts 1) Before income tax, the U.S. federal government funded itself primarily through tarriffs. Nothing is worse than tarriffs because nothing is worse than protectionism: the free trade (or “freer” trade, if you will)… Read more »
Nic Meredith
Guest
First comes Goverrnment debt then taxes and inflation to pay for it. War has got everything to do with international finance gaining the upper hand as Napoleon would put it. WWI gave birth to income tax and nations unable to balance their books with real money. So now we have worthless paper in our wallets and a centralised credit tallying system which is really nothing more than walking bankruptcy. Chapter 11 Government if you will. It is the complete enemy of individual freedom. Australia went bust in the 1930’s – that’s why our government can’t afford to let us have… Read more »
Keynes Evil Twin
Guest

Dan – I’m with you 100%

The government never saw the market meltdown coming – but somehow we are suppose to believe that these guys now know what’s install for us in the future and have come up with accurate figures.
The augment that no one could of seen this thing coming is rubbish. There were plenty of real economists yelling out that it was coming.

Don’t rely on the guys that didn’t see the train wreak coming – to get you out of trouble when it eventually gets here.

Maj
Guest
I’m leaning towards Joe’s view of this article (sorry fellow DR fans!) Although your argument essentially about “same fairness for all” definitely merits consideration, a second glance reveals its meretriciousness. (Well, at least to me). All you’re doing is slicing it up from your own vantage point. i.e.: Take $1,000 from someone wealthy — and sure, they wouldn’t be too pleased – but you know, they’ll live. Take from someone who’s close to the Henderson poverty line and it’s a much greater disproportion of their income. (A somewhat savage one too.) If taxation is philosophically theft (as I think some… Read more »
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