I self-consciously borrow from Richard Hofstadter his description of John C. Calhoun as the “Marx of the Master Class” in his first book, The American Political Tradition and the Men Who Made It. Calhoun’s thought on class and power antedated Marx’s by a couple of decades, but the parallels are, as Hofstadter pointed out, eerie. The dominant arguments about American fiscal policy and economic growth are, I submit, far more similar to the thought of Marx and Calhoun than to the thought of any apostle of liberty.
Why isn’t raising taxes on the table? The chief argument seems to be that any increase in taxes will result in a collapse of the economy. Now, the current trillion-dollar government deficit essentially makes American consumptive capacity 10% larger than its production, i.e., the American economy is, one way or another, building much more stuff than we want to buy. And so the government is buying it, and thus propping up the economy.
Stated morally, the issue is that money you don’t have to work to earn is taxed much lower than money you do have to work to earn. From the pure standpoint of fairness, the answer, taxing all income the same whatever its source, is obvious.
But economics assumes we’re all sociopaths, and demands a more general argument without reference to right and wrong. The way it works is this: The further up the income ladder you go, the larger percentage of wealth is derived from investment income. Because capital gains taxes are significantly lower than taxes on earned income—i.e., income someone actually works to gain—there is a significant tax incentive to invest in greater production of goods and services, rather than spending the money on consumption of those same goods and services. So the supply-demand curve in society gets all out of whack. The overall result is that the government finds itself running large deficits to buy all the extra goods and services its tax policy subsidizes the production of—while having a much higher effective tax rate on the middle, i.e., the consumers, workers, small businesspeople, etc. of the society, than on the actually wealthy with significant investment income. In practice, not only do we get over-production and under-consumption, we also get a great transfer of wealth from the middle class to the master class. Not only is this immoral, it creates a giant structural federal budget deficit that must be continually run in order to keep the populace employed.
Nevertheless, the pressure in politics is to decrease the capital gains tax, not equalize it. This would worsen the problem, and increase government deficits as far as they go. The effect of the capital gains tax on matters of Christian vocation will be addressed in a later post...
