Wednesday, October 26, 2005

The Master Speaks

"The subjects of every state ought to contribute toward the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state ....[As Henry Home (Lord Kames) has written, a goal of taxation should be to] 'remedy inequality of riches as much as possible, by relieving the poor and burdening the rich.'"

-Adam Smith, Wealth Of Nations

This quote does not, I grant you, offer any support for top marginal tax rates above 80% (a state of affairs that obtained in this country during the prosperous days of the Eisenhower administration), but I think it's an important point of departure for thinking about whether neo-classical economics has outgrown the sturdy moral constraints that once characterized its proponents.

UPDATED:

I've added this bit from Wealth of Nations for reference here rather than in the comments due to its length, but my response to Mark is in the comments.

"The proportion of the expense of house-rent to the whole expense of living is different in the different degrees of fortune. It is perhaps highest in the highest degree, and it diminishes gradually through the inferior degrees, so as in general to be lowest in the lowest degree. The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."

10 Comments:

Blogger mkchicago said...

"in proportion to the revenue which they respectively enjoy"

I see nothing in this quotation which endorses progressive taxation. It seems to me that if everybody pays a flat rate, they are still paying "in proportion". A 20% rate means 100,000 pays 20K and and 1,000,000 pays 200K. Nice and proportional.

10:26 AM  
Blogger Jeff said...

I think the last sentence of the first quote makes it clear that Smith is getting at progressive taxation, though it may be that decontextualizing Smith in a forum like this will inevitably cause confusion. For that reason I've added a longer quote that deals with taxes on house rents, though it's clear from Smith's discussions of tax equity elsewhere that he's elucidating a general principle of taxation, rather than just a principle about house rent taxation.

The Wealth of Nations and the Theory of Moral Sentiments are filled with a sense of social morality and concern for the poor that is completely absent from the works of many current neo-classical and libertarian economists, which I think can easily lead to a misinterpretation of ambivalent concepts.

11:07 AM  
Blogger Germanicu$ said...

Jeff hits the nail on the head - as does Smith in his choice of titles for his book, which makes use of the term "moral," taboo among modern economists.

Flat-taxers seem to be hell bent on making the system "fair," meaning equally advantageous or disadvantageous to rich and poor, and equate this with "moral." But as Smith points out, the rich already have it better by dint of their being rich ("a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess"); fairness doesn't enter the picture.

"Nice and proportional," says MKChicago regarding his two guys taxed 10%. What they're left with sure isn't: guy #1 has $80K, while guy #2 has $800K. His expensive boat payments notwithstanding, guy #2's $800K goes a lot farther towards enjoying those vanities and luxuries. If "fairness" is to be applied to what they give, shouldn't it also apply to what they keep?

Those of us in favor of progressive taxation don't necessarily also advocate eliminating the rich; like the poor, the rich will always be with us, even in the best of all possible communist societies. The social disadvantages - and more important, the moral pitfalls - of a tax code that lets the rich get richer are well-documented, if not intuitively apparent.

11:42 AM  
Blogger mkchicago said...

Touche (how the hell do you make accent marks?). Upon further examination Mr. Smith definitely seems to favor progressive taxation. Excellent use of relevant quotation.
With regards to social morality circa 1840 I would suggest that if faced with today's tax rates (or WW2 top rate of over %90) Smith might not be as gung ho about (heavily) progressive rates. Purely conjecture on my part, of course. If I had to face London poverty of the time (see Calcutta today) I might be more ammenable to soaking the rich. Hell, I've always thought Smith's (and Marx's for that matter)analysis of poverty wasn't half bad. It's just Marx's remedy I find repugnant.

12:04 PM  
Blogger Jeff said...

é = Alt-130!

12:31 PM  
Blogger Jeff said...

If Germanicus ever pisses me off, I'm sending a copy of his comment to his boss.

12:33 PM  
Blogger Germanicu$ said...

OK, so maybe not intuitively apparent to my boss.

2:55 PM  
Blogger sexyretard said...

I Why not tax consumption at a somewhat progressive rate rather than income? Don't get me wrong; I have no problem sticking it to the "two yachts" crowd, but it seems that loopholes are the problem, but closing them might very well curtail some good things some rich people do (take, for example, David Robinson's inner city programs).

7:11 AM  
Blogger Jeff said...

"I have no problem sticking it to the "two yachts" crowd..."

S-Tard's repeated advocacy of class warfare on this list is beginning to trouble me. Uh, whoever "S-Tard" is. Never met the guy, Judge Gonzalez.

9:56 AM  
Blogger sexyretard said...

Alberto?

What's wrong with a little class warfare? What's good for the working class is rarely, if ever, good for the wealthy. When I ponder the economic stratification in this country, it becomes clear that a whole lot people could get by with a whole lot less, quite well really, and a whole lot more people could eat.

What makes me say this AND be a Republican is that I wholeheartedly don't believe that either side much cares to ameliorate this. The Democrats are happy to spend lots of money and quite reticent to actually demand results from that money.

And of course I like God and guns. But the excesses of the wealthy could and really should be limited. The problem is that when you have two candidates for President who are white, wealthy, ivy league Patricians, it's kind of hard to get that kind of idea actually implemented. I don't need to tell you of the great tax advantages of people who own expensive homes, of far greater "subsidy" than, say, section 8.

The plan, though, is to eliminate those tax advantages, but also to lower and flatten the income taxes, with high exemptions. Make the whole process clearer for everyone. Eliminating this housing deducation would take care of some revenue concerns.

10:45 AM  

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