The Economics of Progressive Taxation

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The Economics of Progressive TaxationB R U C E B A R T L E T T

THEPROGRESSIVE, or graduated, income taxis a relatively recent phenomenon in his-tory. It was instituted in the United Statesin 1913 with passage of the 16th Amend-ment to the Constitution.' These first pro-gressive tax rates set a tax on individualincome of one percent at the bottom (be-gin nin g at $3,000-a high income in thosedays) and seven percent at the top (start-ing at $500,000). Today, income tax ratesin all countries are steeply graduated andhave very high maximum rates. In theUnited States income tax rates have beenas high as 91 percent as recently as 1963.In 1977 the highest tax rate was 70 per-cent on incomes above $100,000, and th elowest rate was 14 percent on incomes be-low $500 pe r year.2 This does not mean tha teveryone earning more than $100,000 pays70 percent of his income in taxes. This isthe marginal tax rate, the rate of taxationapplied to each additional dollar earnedabove $100,000. Thus, when one computesthe average, or effective tax rate (the per-centage of tax actually paid to income) onefinds that tax rates vary considerably evenwithin income classes. But it is the mar-ginal tax rate which affects all economic de-cisions, regardless of w hat the effective taxrate may be. This simple fact is the causeof enormous confusion about our tax sys-tem, and the reason why the type of taxa-tion imposed on the economy is just as im -portant as the amount.3The most clear and obvious effect ofsteeply progressive marginal tax rates onthe economy is a reduction in the incen-tive to earn additional income. This factwas aptly expressed by President CalvinCoolidge i n a speech on February 12, 1924:

A very important social and economicquestion is also involved in high taxrates. That is the result taxation has

upon national development. . . . If wehad a tax whereby on the first workingday the Government took 5 percent ofyour wages, on the second day 10 per-cent, on the third day 20 percent, on thefourth day 30 percent, on the fifth day50 percent, a nd on the sixth day 60 per-cent, how many of you would continueto work on the last two d ays of theweek?4Coolidge thought that the answer was self-evident and therefore proposed a reductionin the high surtax ra tes which had been im-posed during World War I, which went ashigh as 77 , to a m aximum of 2 5 percent.This massive tax rate reduction took effectin 1925, over much protest from liberals,and was certainly an important factor inthe economic boom of the 1920's.5 Theonly t ime tax rates were again reduced onsuch a scale was during the early 1960's,under the leadership of President John F.Kennedy an d House W ays and Means Com-mittee Chairman Wilbur Mills, in whichthe high World War I1 tax rates were fi-nally reduced. These rates are essentiallystill in effect.High marginal tax rates reduce thetrade-off between work and leisure. This iscalled the substitution effect and is recog-nized by virtually every writer on the sub-ject oE taxation? There is serio us disagree-ment, however, on the extent to which thesubstitution effect actually reduces the totalvolume of work. It is pointed out that thereis also an opposite force at work called theincomes effect, which says that people willwork har der as marginaI tax rates go up b ecause they want to maintain a given levelof afterta x income.' Th e net loss to theeconomy is therefore considered minimal.8But although the substitution effect an d th eincomes effect may balance each other off

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i n terms of aggreg ate work effort there a reother, more qualitative factors to be con-sidered.The most important qualitative effect ofprogres sive taxation is the de pressing effectof high marginal tax rates on inventive-ness, innovation, risk-taking, and entre-prene urship. Such qualities are clearly vitali f civilization is to advance? T his is a mat-ter which is intimately connected to theproblem of capital forma tion and saving,for unless one can accumulate some capitalan individual will never have any leisurewith which to pursue innovation. As LordRobbins put it:

The fact that i t has become so difficultto accumulate even a comparatively smallfortune must have the most profoundeffects on the organiz ation of busine ss;and it is by no means clear to me thatthese results are in the social interest.Must not the inevitable consequences ofall this be that it will become more andmore difficult for innovation to developsav e with in the am bit of established cor-porate enterprise, and that more andmo re of what ac cum ulation takes placewill take place within the large co ncernswhich-largely as a result of individualente rpris e in the past-managed to getstarted before the ice age descended?1

Th is inherent conservatism and suppressionof inno vation caused by the progres sive taxsystem is, perhaps, its single most detri-mental effect on the economy in the longrun. It may, in fact, go a long way towardexplaining the so-called lack of investmentopportunity which concerned economistslike Joseph Schumpeter greatly and whichis still discussed today. As Ludwig vonMises has pointed out, it is not simply thestifling of individual innovation which iscritical but the prevention of small busi-nesses from ever becoming big businesseswhich is at issue. This is because wind-fall profits are taxed at such high ratestha t they cannot provide seed money or ex-pansion capital to an entrepreneur who hasseized the opportunity for a temporary h igh

profit. The result is a quasi-monopoly situa-tion in which the tax system protects exist-ing compan ies from innovative newcomers.Every ingenious man is free to start

new business projects. He may be poor,his funds may be modest and most ofthem may be borrowed. But if he fillsthe wants of consumers in the best andcheapest way, he will succeed by meansof excessive profits. He plou ghs backthe greater part of his profits into hisbusiness, thus making it grow rapidly.It is the activity of such enterprisingparvenus tha t provides the m arket econ-omy with its Ldynamism. These n ou-veau x riches are the harb inge rs of eco-nomic improvement. Their threateningcompetition forces the old firms and bigcorporations either to adjust their con-duct to the best possible service to thepublic or go out of business.But today taxes often absorb thegreater part of the newcomers exces-sive profits. He cannot accumulatecapital; he cannot expand his own busi-ness; he will never become big businessand a match for the vested interests.The old firms do not need to fear hiscompetition ; hey are sheltered by thetax collector. They may with impunityindulge in routine, they may defy thewishes of the public and become con-servative. It is true, the income tax pre-vents them, too, from accumulating anycapital. They are virtually privileged byth e tax system. I n this sense progressivetaxation checks economic progress andmakes for rigidity?*

W hat better examples can we have from thebusiness world than the Ford Motor Com-pany and U S . Steel Co rpor ation of theconsequences just no ted? There is no doub twhatsoever that the Ford Motor Companynever would have grown to be one of thelargest corporations in America if the taxsystem had prevented Henry Ford fromploug hing the largest portion of his profitsback into the company for expansion dur-ing the 1920s.And the present example of

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US. teel, which was the first billion dol-lar corporation in America, is the essenceof a stagnating, conservative comp anywhich w as protected by the tax system andother government regulations for so longthat it is still opera ting virtually u ncha ngedfrom fifty years ago. This is tr ue of m anylarge corpo rations in Am erica, especiallyin older industries like steel and automo-biles, which are being cut to shreds on in-ternational markets by aggressive competi-tors from Germany, Japan and elsewhere.Predictably, these corporations have failedto recognize the fundamental causes oftheir problems and called for tariffs to fur-ther protect and insulate them from therigors of competition.13As noted earlier, the question of innova-tion is intimately connected to the problemof risk-taking and the acc um ulation of capi-tal. In this sense, progressive taxation altersthe tra de- off between investment a nd con-sump tion just as it alters the trade-off be-tween work and leisure. Risky investmentswhich formerly would be undertaken forthe prosp ect of a high return a re not under-taken when taxation ro bs investors of thatincentive.14 This is different from talkingabou t the effects of progre ssive taxation onaggregate savings and investment. As Ar-thu r Ok un has noted, society can have what-ever am oun t of saving-that is, fore gon econsumption-that it wants. All the govern-ment has to do is force people to save byrunning a budget surplus, although it is rec-ognized that if this involves an increase intaxes it will result in a corresponding re-duction in private saving.15 And even M i s ehas written about the forced savings aspectof inflation, wh ich would be ano ther wayof accomplishing the sam e purpose.16 Th epoint is, however, that the character of thecapital so accumulated and the manner inwhioh it affects the economy is funda-mentally different from that which wouldresult in an unhampered market. In partic-ular, the system becomes biased againstequ ity capital in fav or of debt capital.Equity capital is actual ownership, in theform of stock, an d the trad ition al me ans of

raising risk capital. Debt capital, on theother hand, in the form of loans o r bonds,is necessarily conservative in nature, beinggenerally available only to large, estab-lished corporations rather than small, inno-vative companies. Thus, once again, we seea bias aga inst innovation and entrepreneur-What we are essentially talking abouthe re is t he m isdirection of scarce resourcesresulting from the tax system. This is everybit as imp ortant as the misdirection of re-sources resulting from inflation, which hasreceived f a r more attention from fre e mar-ket economists28 The most obvious aspect

of this effect is the misdir ectio n of resou rcesfrom investments which yield high grossprofits into investments which yield highnet (after tax) profits, such as tax-freemunicipal bonds.ls Professor Martin J.Bailey has calculated that the distortion ofinvestment caused by the misdirection ofcapital into areas dictated by the tax codehas reduced the gross national product sig-nificantly from what it would otherwiseb e J OThis supports the a priori notion thatany deviation from economic decisionswhich would have taken place in an un-hampered market is ultimately subopti-mal.Z1 A sim ple way of seeing how this mis-direction takes place is to note that if themarginal tax rate is 25 percent an invest-me nt wh ich yields a tax free profit of eightpercent is preferable to an investmentwhich yields 10percent before tax. And ifthe marginal tax rate is m ore than 50 per-cent i t is more profitable to find a meansof saving $1.00 in tax than earning $1.00of additional gross income.Indeed , much of w hat is contained in thecur ren t tax code was put th ere precisely tocom pensa te fo r other portions of the codewhich either suppressed or overstimulatedsome eco nom ic activity. For example, theinvestment tax credit, which allows com-panies to dedu ct ten percen t of an invest-ment in new plant and equipment from itstax liability the year the investment ismade, was clearly instituted as an indirectme ans of cutting the corporate tax rate. But

ship.?

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in the process it biased the tax code infavor of machinery, against labor, whichis not necessarily in t he best intere st of th eeconomy.22These sorts of things abound inthe tax code and all have perfectly justifi-able reasons fo r existence.:: Yet the y wouldall be largely superfluous if individual andcorporate income tax rates were muchlower. The complication which is now con-tained in the tax code as the result of allthe exemptions, exclusions, deductions andcredits which only exist in order to lowerthe effective tax rate, eventu ally becomesan additional source of misdirection i n it-self. And the largest part of this complica-tion is directly a ttribu tab le to progressivity.As Blum and Kalven have written:

I t is remarkable how much of the dayto da y work of the lawyer in the incometax field derives from the simple factthat the tax is progressive. Perhaps themajority of his problems a re eithercaused or aggravated by that fact. . . .The price the tax system pays for pro-gression is thus high. It produces a taxiaw of aImost impenetrable complexity.It invites a distorting attention to the taxaspects of any economic transaction. Itaffords an excessive stimulus to taxavoidance with perhaps incalculableconsequences for taxpayer morale andthe general respect for law.z4The argument against progressive taxa-tion on grounds of pure economics or

efficiency thus seems to be very strong.But the ethical case may be even stronger.One of the earliest and most eloquent ex-pressions of the ethical case against pro-gressivity was made by Professor J. R. MC-Culloch in 1863 i n h i s Treatise on th ePrinciples and Practical Influence ofTaxation and the Funding System:Th e moment you abandon, i n the

framing of such taxes, the cardinal prin-ciple of exacting from all individualsthe same proportion of their income orproperty, you are at sea without a rud-der or compass, and there is no amount

of injustice or folly you may not com-mit.25McCullochs admonition basically echoesthe traditional republican distrust of de-

mocracy. Such views, as expressed in TheFederalist Papers (especially Federalist# l o ) or Mills O n Liberty, argued tha t un-less certain fundamental rights are safe-guarded in a democracy there is a dangerthat the majority may tyrannize the minor-ity. Bertrand de Jouvenel has noted theimportance of progressive taxation in divid-ing the ranks of taxpayers into factions,in this respect. Previously, taxpayers hadbeen the preponderate majority, while therecipients of government favors were rela-tively few. Consequently, taxpayers wereunited in opposing unnecessary governmentspending at all times, by revolution ifnecessary. In fact, de Jouvenel credits thedislike of taxation as the pri m ary meansof tu rn in g sub jects into citizens.26 But th etaxpayers ranks were broken by the insti-tution of progressive taxation and the de-velopment of income redistribution on alarge scale. Thus today those receiving thebenefits of go vernment spend ing prog ram smay outnumber those who pay for them.2Income redistribution and progressivetaxation are virtually synonymous. Indeed,the equity argument is undoubtedly thesingle most important justification for pro-gressivity. Although there are any numberof justifications for progressivity based onability to pay, equal sacrifice, the diminish-ing marginal utility of money, etc., in theend equity is the only justification worthseriously considering.** As H. C. Simonswrote in dismissing all nonegalitarianarguments for progressivity :

The case for drastic progression intaxation must be rested on the caseagains t inequality-on the ethical oraesthetic judgment that the prevailingdistribution of wealth and income re-veals a degree (and/or kind) of inequal-ity which is distinctly evil or unlovely.2B

The problem is, as Friedrich Hayek has

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noted, that all arguments in support ofprogression can be used to justify any de-gree of p r o g r e ~ s i o n . ~ ~hus the ultimatedanger is not that progressive taxation isharmful to the economy but that i t is asignificant danger to individual liberty.I n this vein Hilaire Belloc has defined theservile state as:

Th at arrangement of society in whichso considerable a number of the familiesand individuals are constrained by posi-tive law to labor for the advantage ofother families and individuals as t ostamp the whole community with themark of such labor we caU the servilestate?l

Of course, a high level of taxation,whether it be progressive or proportional,would tend to produce the same results.As Professor Robert Nozick has argued,to the extent that taxation exists at all weare all slaves to that extent. In his book,Anarchy, State, and Utopia. he wrote :

Seizing the results of someones laboris equivalent to seizing hours from himand directing him to carry on variousactivities. If peopIe force you to do cer-tain work, or unrewarded work, for acertain period time, they decide whatyo u are to do and what purposes yourwork is to serve apart from your deci-sions. This process whereby they cantake this decision from you makes thema part-owner of you; it gives them aproperty right in you. Just as havingsuch partial control and power of deci-sion, by right, over an animal or inani-m ate object would be to have a propertyright in it .S2

Nevertheless, there is someting especiallyonerous about a tax system which is de-signed solely for the purpose of redistribu-ting income, rather than simply raisingrevenue. It is a well-known fact, forexample, that a flat rate of a bo ut 21 percent(21.6 percent exactly in 1974) would raisethe same revenue as all the rates from 14to 70 percent. Consequently, there is con-

siderable leeway for tax rate reduction evena t present spending levels without a signif-ica nt loss of revenue. I n fact, a tax ratereduction can actually lead to an increasein government tax revenues. This seemingparadox is explained by the earlier men-tioned trade-offs between work and leisure,investment and consumption. These trade-offs, wh ich h igh progressive tax rates biasin favor of leisure and consumption againstwork and investment, would be substan-tially reduced. Hence, there would be anincrease in investment and work effortthroughout the economy which will expandthe tax base and thereby increase revenues.Another way this works is that substantialtax rate reduction will reduce the trade-offbetween investments with a higher grossprofit and those with a higher net profit. Inthis sense it will automatically draw inves-tors out of tax shelters, like municipalbonds, a nd elim inate some of the misdirec-tion of capital resources. And lastly, a sub-stantial tax rate reduction will reduce theincentive to cheat on ones taxes. In coun-tries l ike Great Britain, where marginaltax rates ar e much higher than those in theUnited States, tax cheating proliferate^.^^As previously noted, this affects not onlythe tax base but contributes to the moralbreakdown of society, as respect for lawdiminishes.Andrew Mellon, while Secretary of theTreasury under Harding and Coolidge,made these points over and over again tojustify tax rate reduction. In his book,Taxation: The Peoples Business, he wrote:

he history of taxation shows thattaxes which are inherently excessive arenot paid. The high rates inevitably putpressure upon th e taxpayer to withdrawhis capital from productive business andinvest it in tax-exempt securities or findother lawful methods of avoiding therealization of taxable income. The resultis tha t the sources of taxation a re dry ingup; wealth is fai l ing to carry its shareof the tax burden; and capi tal is be-ing diverted into channels which yield

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neither revenues to the Government nor- pro fit -to the 'peopk. .< .W hat rates will- bring in the largest revenue to theGovernment experience has not yet de-veloped, but it is estimated that by cut-ting the surtaxes in half, the Govern-ment, when th e full effect of th e red uc-tion is felt, will receive more revenuefrom the owners of l arg e incomes at thelower rates of tax than it would havereceived a t the higher rates. . . . ust asMr. Ford makes more money out of pric-ing cars at $380 than at $3,000.5*

Mellon was quite emphatic on the pointthat tax rates which are formulated duringwartime, when maximum sacrifice is de-mand ed, should not be perpetuated afterthe emergency has ceased. Although Mellonwas ultimately successful in reducing theWorld War I tax rates, it was not at all aseasy as one might expect. In fact,progressive tax r at e systems have historical-ly arisen during wartime and rarely everbeen eliminated thereafter. As Bertrand dejouve'ltf: put it;

When war demanded a huge increasein the ra te of income tax, this becamequite unbearable for the poorer taxpay-ers, and deductions and allowances werenecessary ; these were compensated bya n increasing s teepnes s of surtax. Th usthe very steepness of taxation madeneces sary a difference of tre atm ent be-tween the different income classes.When, at the end of the war, the Stateretained part of its taxation gains, itexcused its avidity by providing net ad-vantages out o taxation to the un-favoured mass. Thus a great increase instate takings and expenditure was madetolerable to the majority by some mea-s u re of r e d i s t r i b ~ t i o n . ~ ~The redistribution which arises from

progressive taxation, therefore, soon buildsconstituencies among those receiving thebenefits. There are also those who favorhig h progressive tax rates because they a reenvious of those with high incomes and

wish to punish them for this reason. Onemay scoff that envy cannot possibly be ofmuch significance, yet its importance insupporting the progressive tax rate systemhas heen widely noted.3B I t is, perhap s,easier to accept when you realize that allthe tax rates from fifty percent and up pro-duce only about eight percent of individualincome tax revenues (about $9 billion in1973). Nevertheless, the highest tax ratesdo serve an important revenue function byjustifying higher rates of taxation on alltaxpayers than they would otherwise peace-fully accept. To quote Fried rich Hayek:The illusion that by some means ofprogressive taxation the burden can beshifted substantially onto the shouldersof the wealthy has been the chief reasonwhy taxation has increased as fast as ithas done and that, under the influenceof this illus ion, the masses have come toaccept a much heavier load than theywould have done otherwise. The onlymajor result of the policy has been the

E ~ B P ~ Pimitatinr! nf the incomes thatcould be earned by the most successfuland thereby gratification of the envy ofthe less well off?'Another important support for progres-sive taxation and high tax rates in generalcomes from those institutions that dependon voluntary contributions (motivated bythe prospect of tax deductions) for theirexistence. This group, which includes

churches, foundations, universities andcha rities of all kinds, believes tha t if ta xrates were reduced-especially on high in-comes-people would be less motivated tocontribute and that they would suffer finan-~ i a l l y . ~ *lthough this attitude ignores thefact that high tax rates also reduce the dis-posable income of people who would other-wise contribute and that lower tax rateswould do the reverse, the view is widelyheld that a reduction in tax rates wouldreduce charitable contributions. In fact,Wilbur Mills, who was for many yearschairman of the powerful House Ways andMeans Comm ittee, which is responsible for

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all tax legislation, recently told an audiencein Washington that these institutions werethe single most vocal group opposed to aplan he once had to eliminate a large num -be r of loopholes and lower tax ratesproportionately. Because of their protestthat contributions would fall he was forcedto d rop the ~ l a n . 3 ~Lastly, inflation creates a powerful vestedinterest in the government to continue pro-gressive tax rates. This is because steeplygradu ated tax rates guarantee tha t tax reve-nues will go up faster than inflation, asinflation pushes taxpayers up into higherand higher tax brackets, even though theirreal income may be unchanged. Inflationalso overstates business profits by under-stating business costs, especially deprecia-tion, thereby requiring taxes to be paid onillusory profits. Thus suppose an individualinvested $1,000 and at the end of a yearhad made $100 in nominal profit. If infla-tion has gone up ten percent there is noprofit at all in real terms. Nevertheless thegovernment will require taxes to be paidon the $100 profit. This will result ina net loss to th e investor.The government knows that inflation isincreasing effective tax rate s throughout theeconomy on both individuals and business-es. In fact, the Congressional Budget Officecalculates that the present progressivity ofthe income tax causes tax revenues to goup 1.5 percent for every one percent in-crease in inflation!O This is sometimesreferred to as a fiscal dividend which thegovernment can then use to initiate newspending programs without explicitly in-

For the history and purpose of this amend-ment see Th e Constitution of the Un ited States:Analysis and lnterpretation (Washington: US.Government Printing Office, 19731, pp. 370-4,1553-64; see also Walter J. Blum and HarryKalven, Th e Uneasy Case fo r Progressive Tax-ation (Chicago: University of Chicago Press,19531, pp. 6-11. T h e Tax Reform Act of 1969set a maximum tax rate of 50 percent onearned income. D a n Throop Smith, HighProgressive Tax Rates: Inequality and Immo-rality? University of Florida Law Review

creasing tax rates?l And even when theCongress does decide to return these reve-nues to the people in the form of tax reduc-tion it is almost never done by reducingthe rates. Instead it initiates tax creditsor larger personal exemptions which willreduce taxes only for those in lower incomebrackets, thereby increasing overall pro-gressivity. The result is that many middle-income taxpayers are in marginal taxbrackets once reserved fo r the rich. It is,for example, estimated that in the early1960s only three percent of all taxpayerswere affected by m argina l tax rates of morethan thirty percent. Today more than one-third of all taxpayers are affected by suchrates, an d this takes into consideration onlyfederal income taxes. If Social Security,unemployment insurance, state and localtaxes are also figured in some taxpayersearning as lit tle as $12,000 per year wouldfind themselves paying fifty percent ormore tax on each additional dollar earned.This is the kind of th ing which ha s reducedeconomic growth in Great Bri ta in andSweden to a standstill?*In the early 1950s Professors WalterBlum and Harry Kalven of the Universityof Chicago Law Schoo l undertook an im-partial examination of progressive taxa-tion and concluded The case for progres-sion afte r a long critical look, thus turnsout to be stubborn but uneasy. I t is, per-haps, an indication of changing times thata prominent economist, Dr. Norman Ture,recently said of progressive taxation: Forthe economist qu a economist, the case is notuneasy; it is v i r tu a l ly n ~ n ex i s t en t . ~ ~

(Spring 19681, p. 456. Quoted in Andrew Mel-Ion, Taxation: Th e Peoples Business (New York:Macmillan, 19241, p. 222. Interestingly, the highprogressive tax rates imposed in Wisconsin dur-ing the 1920s caused the states economy to lan-guish while the rest of the country boomed; seeW. Elliott Brownlee, Jr., Progressivism and Eco-nomic Growth: The Visconsin Income Tax, 1911-1929 (Port Washington, NY: Kennikat Press,107 4). See, for example. H. C. Simons, PersonalIncome Tazation (Chicago: University of Chica-go Press, 19381, pp. 19 ff.; Richard Goode, The

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ln div idw l Income Tux (W ashington: Th e Brook-ings Institution, 19751, pp. 96-98. Arthur Okun,Equa lity und Eficiency: The Big Trade-off(Washington: The Brookings Institution, 19751,pp. 96-58. *George F. Break, The Inciden ce an dEconomic Effects of Taxation, in The Economicsof Public Finance (Washington: The BrookingsInstitution, 1974) , pp. 179-91; Blum and Kalven,Uneasy Case, pp. 22-23. Bertrand d e Jouvenel,The Eth ics of Redistribution (London: Cam-bridge University Press, 19511, pp. 58-9; CarrollQuigley, The Evolution of Civilization (NewYork: Macmillan, 19611, pp. 69-73. mLionel(Lord) Robbins, Notes on Public Finance,Lloyds Bank Review (October 19551, p. 10. uJo-seph Schumpeter, Capitalism, Socialism and De-mocracy (Ne w York: Har per & Row, 19501, pp,111-120; see also any current discussion of th eshortfall in capital spending, such as LeonardSilk , Lagging C apital Spend ing and InvestmentIncentives, New York Times (October 17. 1977).-Ludwig von Mises, Hum an Action (N ew Haven:Yale University Press, 1949), pp. 804-5; see alsoFriedrich Hayek, The Constitution of Liber ty(Chicago: University of Chicago Press, 19601,pp. 320-1; Milton Friedman, Capital ism andFree dom (Chicago: University of Chicago Press,19621, p. 173. David Ignatius, US. Steelmak-ers Fail to Modernize Quickly, Fall Behind Jap-anese, Fall Street Journal (August 3, 1977).Blum and Kalven, Uneasy Case, pp. 23-5. Okun,Equality and Zljiciency, pp. 98-iOO. Mises,20-man Action, pp. 545-7, 553-5. Joseph A. Pech-man, Federal Tax Policy (Washington TheBrookings Institution, 1977), pp. 139-40; Blumand Kalven, Uneasy Case, p. 25. =Ludwig vonMises, The Theory of Money and Credit (N ewHaven: Yale University Press, 1953) ; Friedr ichHayek, Prices and Production (New York: Au-gustus M. Kelly, 1941). Smith, T ax Rates,pp . 457-60; see also Mellon, Taxation, pp. 13ff.%artin J. Bailey, Progressivity and InvestmentYields Under U S . Income Taxation, Journa l ofPolit ical Economy 82 (1974) , pp. 1157-75. SeeMises, Human Action. =Wage inflation does thesame thing; see Friedrich Hayek, The RicardoEffect, Economica (May 1942), pp . 127-52.Roger Fre eman, Tax Loopholes (W ash ingt on:American Enterprise Institute, 1973). mBlum an dKalven, Uneasy Case, pp. 15, 18-19; see also W.Allen Wallis, The Case for Progressive Taxa-tion: Easy or Uneasy? in Colin D. Campbell,ed., Incom e Redistribution (W ashington: Amer-ican Enterprise Institute, 1977) . pp. 139-44:Charles 0. Galvin and Boris Bittker, The IncomeTax: How Progressive Should It Be? ( W a s h i n gton: American Enterprise Institute, 19691, pp.16-19. J. R. McCulloch, A Treat ise on the Pr in -ciples and Practical Influence of Taxation andthe Fun ding System (London: Scott ish Academic

Press, 19751, p. 147. We Jouvenel, Ethics, p. 75.Roger Freeman, The Growth of American GO>ernment (Stanford, CA: Hoover Institution Press,1975) . For a summary of economic theories insuppor t of progressivity see Elmer Fagan, Re-cent and Contemporary Theories of ProgressiveTaxation, Journal of Political Economy 46 (Au-gust 19381, pp . 457-98.Simons, P ers ona l IncomeTaxation, pp. 18.19. Hayek, Constitution, p. 313.Hilaire Belloc, The Servile State [19131 (Indi-anapolis: Liberty Classics, 1977) . p. 50. eRobertNozick, Anarchy, State and U topia (New York:Basic Books, 19741, p. 172; see also MurrayRothbard, Power and Market (Menlo Park, CA:Insti tu te fo r Humane Studies, 19701, pp. 63-123.gRobert Prinsky, Income Ta x Cheatm g Is O nT h e Rise In Great Britain As Prices OutstripPay, Val1 Street Journal (October 10, 1977) ;see1 also Smith, Tax Rates, p. 460. Mellon,Taxation, pp. 13, 17; see also Editorial, Tax theRich! Wall Street Journal (M arch 8, 1977).=De Jouvenel, Ethics, p. 76; see also Robbins,No~~s ,p. 8. Helmut Schoeck, Envy (NewYork: Harcourt, Brace & World, 19661, pp. 323-30 ; d e Jouvenel, Ethics, pp. 78-81; Blum andKalven, Uneasy Case, p. 74. q a y e k , C o F t i t u -tion, p. 311; see also de Jouvenel, Ethics, pp. 65-6 ; Rothbard, Power and Market, p. 91. WalterJ. Blum, The Uneasy Case for Progressive Tax-ation, 1976 in Campbell, ed., Income Redistribu-tion, pp. 153-4; Frank Chodorov, The Income19541, p. 72 . These remarks were made on NO-vember 14, 1977 at the Mayflower Hotel in Wash-ington, D.C. at a conference sponsored by theNational Journal. Congress of the United States,Congression al Budget Office, Five- Year BudgetProjections: Fiscal Years 1978-1982 (December19761, pp . 41-2. uThere is a vast literature onthis subject; see Henry J. Aaron, ed., Inflationand the Income Tax (Washington: The Brook-ings Institution, 1976); Randall Kau and Mi-chael Schler, Inflation and the Federal IncomeTax, Yale Law Journal 82 (March 1973). pp.716-44; Advisory Commission on Intergovern-men tal Relations, Inflat ion and Feder al and Statelncome Taxes (Washington: U.S. GovernmentPrinting Office, 1976) ; Jonathan R.T. Hughes,The Governmental Habit (New York: BasicBooks, 19771, p. 210. URobert Prinsky, BritainsOnerous Tax System, Wall Stree t Journal(March 28, 1977); Leonard Silk, The SwedishSickness: Gloomy Eco nom ic Picture, NewYork Times (November 11, 1977) ; Richard Jans-sen, Trouble on the Road to Utopia, WallStreet Journal (November 10, 1977) . Blum andKalven, Uneasy Case, p. 103; Norman Ture,Comment, in Campbell, ed., Income Redis tri-bution, p. 162.

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The Economics of Progressive Taxation