The main instrument it uses for this purpose is the graduated income tax. In the United States this tax has been imposed since 1913. In the beginning it seemed innocent enough. The top rate was only 7 per cent. But in 1925 the top rate had gone to 25 per cent; in 1935 to 63 per cent; in 1940 to 81 per cent; in 1945 to 94 per cent. In the tax cut of 1964 the top rate was reduced to 70 per cent. With the 1968 surcharge it went up again to 77 per cent.
In today’s world these confiscatory rates are not exceptional. The First National City Bank of New York recently compiled a table comparing the highest marginal income tax rates in fifteen countries. The rates (after rounding out fractions) are: Italy 95 per cent, United Kingdom 91, Canada 82, United States 77, France 76, Japan 75, Netherlands 71, Austria 69, Australia 68, Belgium 66, Sweden 65, West Germany 55, Denmark 53, Norway 50, and Switzerland 8.
It would be misleading to assume that these top-rate figures necessarily reflect the overall comparative tax levels in these countries. Italy’s 95 per cent rate applies only to incomes above $800,000, whereas Norway’s 50 per cent rate applies to all incomes above $13,000. Though Sweden’s top income tax rate is in the lower half of the list, Sweden imposes the heaviest comparative tax load in the world.
What the comparisons do show graphically is how almost universal the soak-the-rich tax philosophy has now become. An elaborate rationalization, on grounds of “social justice” and “ability to pay,” has been built up for progressive tax rates since the beginning of this century; but economists are at last beginning to recognize that all arguments in support of progression can be used to justify any degree of progression.
Certainly there is no evidence that the steeply progressive rates have helped the poor. On the contrary, these confiscatory rates clearly undermine incentives, reduce production and capital accumulation, and leave less to be shared by everybody.
The earliest sponsors of the progressive income tax recognized this, but they had other aims in mind. In the Communist Manifesto of 1848, Marx and Engels frankly proposed “a heavy progressive or graduated income tax” as an instrument by which “the proletariat will use its political supremacy to wrest, by degrees, all capital from the bourgeois, to centralize all instruments of production in the hands of the State,” and to make “despotic inroads on the right of property, and on the conditions of bourgeois production.”
Progressive rates of income taxation are not necessary to raise great revenues. A simple calculation, based on the Treasury’s own figures for 1966, shows that, with the same existing exemptions and deductions, a flat rate of 19.6 per cent would have raised all the revenue raised from the scale of rates ranging from 14 to 70 per cent.
On a similar calculation, if all the rates now above 50 per cent were reduced to that level, then (on the basis of 1965 income tax returns) a maximum of $373 million would be lost. This is not enough to run the government, at present spending rates, for a single day. If all incomes over $100,000 were taxed at a rate of 100 per cent, the maximum revenue gain would be $200 million.
For 1965, 70 per cent of the total income tax was paid by people with adjusted gross incomes under $20,000, for the simple reason that these people constituted 97.5 per cent of all income tax payers, and that they collectively reported more than 80 per cent of the country’s taxable income.
It is not only in the United States that the actual revenue yield from the higher income tax rates is negligible. In Great Britain, in the fiscal year 1964-65, total government revenues were£8,157 million, the revenue from the personal income tax£3,088 million, and the revenue from the surtax£184 million. In other words, the revenue from all the surtax rates (ranging above the standard rate of 41¼ per cent up to 96¼ per cent) yielded less than 6 per cent of all revenue from the income tax, and barely more than 2 per cent of Britain’s total revenues.
In Sweden, in 1963, individuals paid first a local proportional income tax averaging about 15 per cent; then on the rest of their income, they paid progressive national taxes ranging from 10 to 65 per cent. A study published by the Swedish Taxpayers’ Association found that the basic national income tax rate of 10 per cent brought in about 70 per cent of the total national income tax revenue; that if the maximum national rate had stopped at 25 per cent, the tax would have brought in 90 per cent of its then revenue; and that if the maximum rate had stopped at 45 per cent, the government would have received 99 per cent of its actual revenue. In short, the study found that the rates between 45 and 65 per cent brought in only 1 per cent of the total national income tax revenue.
The unavoidable conclusion is that the progressive rates of income tax everywhere, and especially those above 50 per cent, are imposed not to raise revenue, but merely to satisfy vindictiveness and envy.
Yet perhaps the most serious evil of the progressive income tax is that it produces the illusion in the overwhelming majority of taxpayers that the “rich”—meaning the people in the brackets above them—are really paying for most of the benefits that the majority gets from the government. This illusion is probably shared in the United States even by single taxpayers with taxable income just above $7,000, who are in fact paying more than the 21 per cent average rate that yielded the fiscal 1969 revenue. This illusion leads them to accept complacently a burden of government expenditure and taxation that they would not otherwise tolerate.
Though this aspect of progressive income taxation receives practically no attention today, its menace was recognized as early as 1899 by W. E. H. Lecky:
Highly graduated taxation realizes most completely the supreme danger of democracy, creating a state of things in which one class imposes on another burdens which it is not asked to share, and impels the State into vast schemes of extravagance, under the belief that the whole costs will be thrown upon others.