Libenter quibus nos vincant epulamur

I’m not saying, “Oh, poor rich people”—that’s not the point. It’s natural that the rich pay more than others for government, not only because they benefit in special ways, but because they can and somebody’s got to.

Here’s the issue. This is well known to economists: taxing any activity tends to reduce the incentive to engage in that activity. Taxing sales makes some exchanges no longer mutually beneficial. Taxing income reduces the incentive to engage in economically productive activity. Taxing rents and capital gains reduces the incentive to put land and capital to the uses most valued by the public. Taxing total wealth deters accumulation and retention capital, which is known generally to promote wage growth for workers. That last one’s a bit of a bugbear for me: people imagine “the rich” having these huge cash holdings that can be easily split up and moved around, which is generally not true—the overwhelming majority of “wealth” in the world is capital being put to productive use for the benefit of consumers and workers. The point is that taxation is always inherently destructive—it always reduces the total amount of value being generated and distributed. It’s not that we just annually get a big pie we can split up however we want; different ways of splitting the pie can result in a much smaller and much more weirdly-shaped pie.

I don’t have a complete tax theory or anything. Luxury consumption is arguably the least socially harmful thing to tax. VATs, with exemptions for subsistence goods, make good sense, as do certain kinds of excise taxes. Progressive household income tax makes some sense, on the assumption that households don’t have dramatically different subsistence needs and any income above that tends to go toward luxury consumption—but we should be cautious with this assumption, because household income can also be saved, and in a modern economy most savings take the form of capital accumulation which, as I said, promotes income growth for workers. It makes sense to treat all household income the same, whether it comes from employment or capital gains. For pretty much every tax, it has to be an ever-open question whether whatever we do with the revenue we generate from it justifies the losses we create just by the act of taking hold of that revenue in the first place.

From a liberal point of view, I think we should probably not approach the question of tax by starting with the question, “How do we maximize the government’s revenue?” (the question that led Mises to call a roomful of Mont Pèlerin attendees “a bunch of socialists”), though I suppose there are also worse starting points. It seems to me the right way is to start with the question, “What do we need from government, and what’s the least destructive way of getting the revenue that would cover it?”