Argument: Modern state budgets do not require progressive taxes
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Friedrich A. Hayek. "Taxation and Redistribution". The Constitution of Liberty. 1960 - 4. An explanation of this development that is usually offered is that the great increase in public expenditure in the last forty years could not have been met without resort to steep progression, or at least that, without it, an intolerable burden would have had to be placed on the poor and that, once the necessity of relieving the poor was admitted, some degree of progression was inevitable. On examination, however, the explanation dissolves into pure myth. Not only is the revenue derived from the high rates levied on large incomes, particularly in the highest brackets, so small compared with the total revenue as to make hardly any difference to the burden borne by tile rest; but for a long time after the introduction of progression it was not the poorest who benefited from it but entirely the better-off working class and the lower strata of the middle class who provided the largest number of voters. It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off.
How small is the contribution of progressive tax rates (particularly of the high punitive rates levied on the largest incomes) to total revenue may be illustrated by a few figures for the United States and for Great Britain. Concerning the former it has been stated (in 1956) that "the entire progressive super-structure produces only about 17 per cent of the total revenue derived from the individual income tax"-or about 8.5 per cent of all federal revenue,-- and that of this “half is taken from taxable income brackets up through $16,000-$18,000, where the tax rate approaches 50 per cent (while] the other half comes from the higher brackets and rates."is As for Great Britain, which has an even steeper scale of progression and a greater proportional tax burden, it his been pointed out that "all surtax (on both earned and unearned incomes) only brings in about 2.5 per cent of all public revenue, and that if we collared every pound of income over 2,000 pounds per annum. [$5,600], we would only net an extra 1.5 per cent of revenue....Indeed the massive contribution to income tax and sur-tax comes from incomes between 750 pounds p.a. and 3,000 pounds per annum [$2,100-$8,400] -i.e. just those which begin with foremen and end with managers, or begin with public servants just taking responsibility and end with those at the head of our civil and other services. Generally speaking and in terms of the progressive character of the two tax systems as a whole, it would seem that the contribution made by progression in the two countries is between 2.5 and 8.5 per cent of total revenue, or between 0.5 and 2 per cent of gross national income. These figures clearly do not suggest that progression is the only method by which the revenue required can be obtained. It seems at least probable (though nobody can speak on this with certainty) that under progressive taxation the gain to revenue is less than the reduction of real income which it causes.
If the belief that the high rates levied on the rich make an indispensable contribution to total revenue is thus illusory, the claim that progression has served mainly to relieve the poorest classes is belied by what happened in the democracies during the greater part of the period since progression was introduced. Independent studies in the United States, Great Britain, France, and Prussia agree that, as a rule, it was those of modest income who provided the largest number of voters that were let off most lightly, while not only those who had more income but also those who had less carried a much heavier proportional burden of total taxation. The best illustration of this situation, which appears to have been fairly general until the last war, is provided by the results of a detailed study of conditions in Britain, where in 1936-37 the total burden of taxation on fully earned income of families with two children was 18 per cent for those with an annual income of 100 pounds per annum, which then gradually fell to a minimum of 11 per cent at 350 pounds and then rose again, to reach 19 percent only at 1,000 pounds. What these figures (and the similar data for other countries) clearly show is not only that, once the principle of proportional taxation is abandoned, it is not necessarily those in greatest need but more likely the classes with the greatest voting strength that will profit, but also that all that was obtained by progression could undoubtedly have been obtained by taxing the masses with modest incomes as heavily as the poorest groups. It is true, of course, that developments since the last war in Britain, and probably elsewhere, have so increased the progressive character of the income tax as to make the burden of taxation progressive throughout and that, through redistributive expenditure on subsidies and services, the income of the very lowest classes has been increased (so far as these things can be meaningfully measured: what can be shown is always only the cost and not the value of the services rendered) by as much as 22 per cent. But the latter development is little dependent on the present high rates of progression but is financed mainly by the contributions of the middle and upper ranges of the middle class.