Monday, August 25, 2008

Taxation and Productivity

The September 2008 issue of Krause Publications' noted hobby magazine World Coin News has published the latest installment (No. 71) of my continuing series, "Hibernicis ipsis Hibernior: A Millennium of Irish Coinage." This particular article features a short discussion on the effect of taxation on productivity as it applied during the tenure of Thomas Wentworth, who was appointed Lord Deputy (governor) of Ireland in 1633. It is useful to quote it here. (The full article is available in the September issue of World Coin News.)
Pursuing commerce in peace was a very important part of Wentworth's program. Not a stupid man, the new Lord Deputy knew very well that it is impossible to tax the poor, however good or ill your motives might be, and however well-intended your projects. Further, if you tax the middle class and rich beyond what they can truly afford to pay, they have a tendency not to engage in productive activities, thereby eroding the tax base and decreasing revenues to the State (or, as in Wentworth's case, the tax collector).

One bizarre example of how the State can kill the goose that lays the golden eggs is the tax code in the United States and most developed countries. There is a "Catch-22" in the Internal Revenue Code, given the combination of the regressive Social Security tax, progressive income tax, and Individual Retirement Account contribution, and adding in the ill-fitting standard deduction, personal exemption, and earned income credit. Self-employed individuals in the United States - the types who tend to be most entrepreneurial and productive - can net less money the more they make within a certain range. This range is roughly $12,000 to $25,000 - the very income bracket into which many new entrepreneurs fall when starting a small business.

Experiencing this, many would-be entrepreneurs simply chuck it and go back into the wage system and pay a less unjust tax, ending up with more disposable income with less effort. Since big businesses that generate workers' taxable wages usually only grow from viable small businesses, the tax system works against itself by choking off potentially productive enterprises and taxing what survives in ways that simply raise prices to consumers. (Corporate and other business taxes, along with interest and fixed wage and benefit packages are costs of doing business. When the cost of doing business goes up, companies raise their prices in order to meet the additional costs, passing the increased costs along to the consumer. When customers no longer want to pay the higher prices or cannot do so, companies go out of business. Workers lose their jobs, and the State loses a portion of both its corporate and its individual tax bases.)

To do him justice, the new Lord Deputy was anxious to avoid such counter-productive measures. Of course, his object was, ultimately, to make the people richer so that he could steal more, but he still first had to make them prosperous. A wise thief doesn't kill a victim or take all he has. He leaves him enough with which to make more, and well enough to do so. This works - up to a point.

In the previous article we touched on the effect that the concentration of economic power in the hands of a few people was having on the social structures in England and Ireland, as well as the ability of the ordinary person to be productive. The fixed belief was that the only way to become wealthy was to take what somebody else had. This was simply an extension and a logical development of a process that had begun in the British Isles in 1485 when Henry VII Tudor usurped the throne from Richard III Plantagenet. The economic changes that started in the middle of the eighteenth century with the Industrial Revolution were simply tremendous accelerations of changes that had begun with the political and religious revolution initiated by the Tudors that caused the growing economic disenfranchisement of most people. (See William Cobbett, A History of the Protestant Reformation in England and Ireland, 1827) As Hilaire Belloc was to point out a few centuries later,

"Consider in what way the industrial system developed upon capitalist lines. Why were a few rich men put with such ease into possession of the new methods? Why was it normal and natural in their eyes and in that of contemporary society that those who produced the new wealth with the new machinery should be proletarian and dispossessed? Simply because the England upon which the new discoveries had come was already an England owned as to its soil and accumulations of wealth by a small minority: it was already an England in which perhaps half of the whole population was proletarian, and a medium for exploitation ready to hand. . . .

"Had property been well distributed, protected by cooperative guilds, fenced round and supported by custom and by the autonomy of great artisan corporations, those accumulations of wealth, necessary for the launching of each new method of production and for each new perfection of it, would have been discovered in the mass of small owners. Their corporations, their little parcels of wealth combined would have furnished the capitalization required for the new processes, and men already owners would, as one invention succeeded another, have increased the total wealth of the community without disturbing the balance of distribution. There is no conceivable link in reason nor in experience which binds the idea of a few employing owners and a mass of employed nonowners working at a wage. Such great discoveries coming in a society like that of the thirteenth century would have blest and enriched mankind. Coming upon the diseased moral conditions of the eighteenth century in this country, they proved a curse." (Hilaire Belloc, The Servile State. Indianapolis, Indiana: Liberty Fund, Inc., 1977, pp. 100-101.)

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