Do ¢â¬classical liberals¢â¬â¢ want to cut the top marginal rate of tax?

Andrew Norton had an interesting post on the different perspectives of ‘classical liberalism’ and ‘social democracy’ a week or so back on Catallaxy. He quoted this passage from Tim Colebatch’s article on cutting the top marginal rate.

There are good reasons to cut taxes, and bad ones. One of the worst is to forget that cutting taxes is one choice among many rival uses for public funds. Do it, and you sacrifice money that could be used for something far more important. (emphasis added).

He went on to use the quote as a jumping off point to argue that:

On the social democrat’s worldview, all Australia’s wealth is basically the government’s. . . . On the classical liberal’s worldview, Australia’s wealth is largely created and owned by private citizens and organisations.

Its certainly interesting to juxtapose the two views like this. Don Arthur challenged Andrew to point to any social democrat who’d said something like Andrew had alleged and Andrew’s response was that they hadn’t explicitly but that Colebatch’s language contained the claim implicitly.

Well maybe yes, maybe no, but it’s a reasonable point for Andrew to make. In any event, it seemed to me that in the discussion that followed particularly in the context in which it was set that of cutting the top marginal tax rate the claim that a ‘classical liberal’ would cut the top rate needs to be justified according to classical liberal principles, rather than just assumed as it often was.

To me there are two considerations in the argument.

1. How much government do we want? The ‘classical liberal’ is supposed to want to minimise this. I think even this step should be made with caution. Some do, some don’t.

2. But even given this step, let us assume that a democracy has decided that it wants tax revenue of about what we have. Given my assumption that the classical liberal will (somewhat reluctantly) accept this for the moment (though voting against it at the next election) how should the revenue be raised? In particular, how much should the rich chip in?

In both cases I think we should think through the positions, rather than assume that they’re given to us by classical liberal principles.

In the end, it turns out that most classical liberals that I respect I’m going to quote Adam Smith, JS Mill and Hayek below accept a role for the state that is quite substantial and also accept some responsibility to the poor, though not necessarily to egalitarianism. If one does this, as I think Andrew Norton would accept, it all boils down to questions of degree rather than kind when trying to demarcate the appropriate level of government and taxation. Likewise there’s plenty of room amongst classical liberals for progressive taxation.

I think that makes Colebatch’s way of putting it OK – because he’s essentially appealing to the idea of priorities – which makes sense when one is confronted with differences of degree rather than kind.

Below the fold I discuss the various views of Smith, Mill and Hayek.

Hayek was never one to argue that the distribution of income in a capitalist (or I think he would add any other actually existing) economy was fair. Hayek said this:

We will have to recognise that only a system where we tolerate grossly unjust differences of reward is capable of keeping the present population of the world in existence”. [Note he may be speaking of the disparities of wealth across countries here I’ve not been able to track down the quote from the Ebenstein’s biography in which it appears. Nevertheless Hayek was on record as arguing that capitalist outcomes should not be defended as necessarily fair except in the procedural sense.]

The issue becomes, how much might one try to alleviate this distributive unfairness. Hayek was in favour of poor relief and indeed of some minimum income, though one might imagine that minimum might have got relatively smaller as he got older.

On the subject of big versus small government, Adam Smith patron saint of classical liberals and certainly of Hayek is thought of as a small government man. He certainly came up with some good tag lines about leaving people to their own devices, setting ‘easy taxes’ and watching prosperity grow. He was passionate about the way in which the government of his day was subverted by wealth and power.

And if we take Smith at his eighteenth century word, he certainly wouldn’t have liked the share of taxation that characterises modern democratic societies (any of them). But it is at least worth noting that Smith proposed that the state involvement in the economy should be dramatically extended who knows perhaps doubled or more from its existing share of the economy. In addition to its core functions of provision of pure public goods like defence and slightly less pure public goods like domestic security and the rule of law Smith argued for state involvement in

  • Transport and communication
  • Education
  • Addressing certain diseases
  • As Gavin Kennedy, argues what he had in mind wasn’t modest by the standards of the day.

    Hayek was likewise far more concerned with arbitrary impositions on liberty than with the size of government (and so of the size of the tax take). I suspect that’s part of the set of reasons Ayn Rand referred to Hayek as “real poison”. Hayek’s views hardened against ‘big government’ with the passage of time, but as late as 1976 he wrote this (he was usually more courteous in debate):

    For Lord Kaldor to describe a country that for twenty-seven years has known no nationalisation, no price controls, no exchange controls, no investment controls and whose now governing ‘social democratic’ party has publicly committed itself to a market economy as ‘much ahead in “socialist policies” of either France, Britain or Italy suggests an ignorance of the policies he himself has been advising which is somewhat astounding.

    In the same year he wrote in a new preface to The road to serfdom that “Sweden is today very much less socialistically organised than Great Britain” because of Britain’s nationalised industries (despite its smaller welfare state). I expect Sweden’s government sector would have been a little short of fifty percent of Sweden’s economy in 1976 but I’m happy to be corrected. In 1980 30 percent of all workers were employed by the state compared with an OECD average of a little over half that. In 1979 Sweden’s top marginal rate was 87% compared with 60% (France), 75% (Italy) and 83% (Great Britain).

    Hayek became much less tolerant of big government as government grew larger, but as various people have commented, his philosophy not only accepts taxation but insists that there is no freedom except as protected by law and government. And in accepting taxation as part of that scenario his dividing line between big and small government is essentially one of relative priorities.

    On progressivity, FA Hayek was against it because, as I understand it, in his view it was arbitrary.

    Both Smith and Mill seem to have been in favour of progressive taxation though from what I’ve read Mill was more specific about the limits of such a principle. Both supported higher taxation of luxuries and lower taxation of the poor. Here’s Smith.

    When the toll upon carriages of luxury, upon coaches, post-chaises, etc. is made somewhat higher in proportion to their weight, than upon carriages of necessary use, such as carts, wagons, etc. the indolence and vanity of the rich is made to contribute, in a very easy manner, to the relief of the poor, by rendering cheaper the transportation of heavy goods to all the different parts of the country..

    And again.

    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 any thing 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.

    The justification of progressivity for Mill was utilitarian, though I think in this context one can see it, as I expect Mill saw it, as simultaneously the application of the ‘liberal’ principle of equal sacrifice of subjects’ liberty. A poor person makes a larger sacrifice of both utility and of liberty in surrendering any given portion of their income than a rich person does.

    Setting out, then, from the maxim that equal sacrifices ought to be demanded from all, we have next to inquire whether this is in fact done, by making each contribute the same percentage on his pecuniary means. . . . To take a thousand a year from the possessor of ten thousand, would not deprive him of anything really conducive either to the support or to the comfort of existence; and if such would be the effect of taking five pounds from one whose income is fifty, the sacrifice required from the last is not only greater than, but entirely incommensurable with, that imposed upon the first.

    Note Mill opposed general progressivity beyond this idea of a tax free threshold. But advocated as much progressivity as was compatible with low levels of evasion when it came to inheritance.

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    Andrew Leigh
    2022 years ago

    The other way of regarding the debate is that Colebatch is taking the status quo as his starting point, whereas Andrew Norton’s starting point is a situation where we have no government. I tend to side with Colebatch on this one. The Norton approach would prevent us ever labelling a tax reform as “regressive” if the final tax system was still progressive.

    Sinclair Davidson
    Sinclair Davidson
    2022 years ago

    ‘whereas Andrew Norton’s starting point is a situation where we have no government.’

    Andrew can speak for himself, but in general, I’m not convinced the classical liberal view is a choice between the status quo or anarchy. As I read Adam Smith, his argument is that the state should do what it can do well, and the market should do what it can do well. As markets become more sophisticated so the ‘share’ of the state should shrink. Yet, what we see is the state expanding…

    Andrew Norton
    Andrew Norton
    2022 years ago

    AL – My starting point wasn’t no government, it was that most wealth is created by private organisations and individuals, and it is then taken from them by government. As I said in that post, this is not inherently bad up to a point (and I agree with Nick that this point is both arguable and varies over time). I don’t think that money that is yet to be received by government should be regarded as ‘public’ money because, at some time in the future, existing marginal tax rates would see it collected.

    John Quiggin
    John Quiggin
    2022 years ago

    “I don’t think that money that is yet to be received by government should be regarded as ‘public’ money because, at some time in the future, existing marginal tax rates would see it collected.”

    Andrew, could you explicate. Are you referring to bracket creep here or making the stronger claim that next year’s tax revenue doesn’t belong to the government because it hasn’t been collected yet?

    Andrew Norton
    Andrew Norton
    2022 years ago

    The stronger claim.

    Vee
    Vee
    2022 years ago

    I’m no economist like you guys, presumably. I previously hadn’t considered the “classical liberal” ideology in the context of modern society until recently. Though in my opinion we are close to the near-perfect synthesis of capitalism and socialism (free markets and welfare).

    I find it interesting that Smith argued for further State Intervention to the public goods – this hints at socialism doesn’t it?

    As far as my minimal economic knowledge goes, I am a bit of a fan of Heilbroner and his teachers as they attempted to show a synthesis, well not even a synthesis, of Marx and Smith. They just attempted to show there was no contradictions in their theories. A slight tangent – so I would like to know who the current or natural successor to the late Heilbroner’s work is? Or maybe that was no contradiction in the Theory of Moral Sentiments and Wealth of Nations – please forgive my memory.

    Also isn’t wealth from an economic point of view, a reference to assets as opposed to money/income?

    Personally, I do see commonwealth money, the property of the people that should be distributed to public goods. The whole purpose of tax is to provide improved services isn’t it?

    Also, to argue that wealth – lets assume money – is created by private organisations and individuals – wouldn’t this eliminate the need for tax?

    As for our current society synthesis of free markets and welfare – some welfare reform is still required, I am not sure exactly what though and how to add some of the “classical liberal” stance to this synthesis needs to be decided but it should not be arbitrarily imposed but moderated just as the free markets and welfare moderate each other.

    Just a guess, but I’m guessing that regulations would be what moderates the “classical liberal” stance.

    Which leads me to conclude big corporations will attempt to avoid social responsibilities as they have done in the past which can lead to tying things up in extensive legal action.

    In turn that leads me to conclude regulations either aren’t sufficient for moderating the “classical liberal” stance or an alternative method to moderate it is needed. I’m currently leaning towards the latter but what?

    And sorry for the long post but I’m interested in this as much as a lay person can be.

    John Quiggin
    John Quiggin
    2022 years ago

    Andrew, given your response, I find it hard to see how you’re not taking a starting point of no government, unless your starting point is government of a size that you personally would approve of.

    John Quiggin
    John Quiggin
    2022 years ago

    Andrew, given your response, I find it hard to see how you’re not taking a starting point of no government, unless your starting point is government of a size that you personally would approve of.

    Andrew Norton
    Andrew Norton
    2022 years ago

    Less no government than no tax revenue. The point I was trying to make was that classical liberals start with a normative assumption that people are entitled to keep what they earned, while no such assumption was operating in Colebatch’s argument.

    John Humphreys
    John Humphreys
    2022 years ago

    The point is that the money starts as the workers, and is then taken by the government. Accepting this does not imply any preference about the size of government or the method of tax.

    The alternative view is that the government somehow has a pre-existing claim to your money… and just lets you keep it if you’re a lucky.

    To believe that the government has a pre-existing claim to your income is to imply that the government has a pre-existing claim to what you traded with your income, or that you have voluntarily entered into an agreement that when you swap labour/capital for green bills then you will give X% to the government. I don’t accept either option.

    For the record, I am a libertarian (classical liberal… whatever) and I support a progressive income tax. My preferred type of progressive income tax is a flat tax with a high tax-free threshold.

    Nicholas Gruen
    2022 years ago

    Seems pure theology to me. One lot says it’s ‘fundamentally’ the government’s (community’s) and the other lot says it’s ‘fundamentally’ the worker’s etc etc. It reminds me of a scene in Annie Hall where Woody Allen’s mother says to his father “Have it your own way. The Atlantic Ocean’s a better ocean than the Pacific Ocean”.