≡ Menu

Quotation of the Day…

… is from page 97 of David McCord Wright’s 1948 volume, Democracy and Progress:

[A] high progressive tax may impose an unfair burden when considered over several years.  Suppose a man has inherited a small fortune and invested it in government bonds.  His steady income thereafter might be say $5,000 a year.  Suppose another individual is an active and self-made businessman struggling to establish a new concern.  His business brings him in $10,000 in some years and little or nothing in others.  Suppose that it also averages $5,000 a year.  But say incomes at $5,000 are taxed at 5 per cent and incomes at $10,000 are taxed at 10 per cent.  The man with a steady income will pay $250 a year right along.  But the man who makes a $10,000 income, every other year, will pay $1,000 in each good year, and even though he pays no income in his bad years his income tax will nevertheless average $500 a year – twice that of the coupon clipper – though their actual average income is exactly the same.

When we remember that it is precisely the vigorous new business – the business which gives the new opportunity – which is most likely to have a fluctuating income, we see how the American income tax frequently works against the very people it is trying to help, and how it discourages competition.

Wright (1909-1968) – a superb economist who today, sadly, is largely forgotten – explains here a point that the likes of Thomas Piketty, Bernie Sanders, and others who are keen on high marginal income-tax rates ignore.  Note that in Wright’s example the person suffering the greatest harm from progressive taxation of annual incomes isn’t the person who lives lazily off of inherited wealth; instead, it’s the person who, starting with very little, busily creates a business, bears risks, and daily works hard.  Over time, therefore, not only does progressive taxation of incomes artificially favor trust-funders (and, hence, ‘old’ wealth) over entrepreneurs (and ‘new’ wealth), in doing so it also dampens the creative destruction that is especially important at opening opportunities (“jobs”) for workers and new, innovative products and production processes that are the hallmark of capitalism.


Next post:

Previous post: