Why “Taxing the Rich” Doesn’t Make Us Better Off

by
Ludwig von Mises
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The complete confiscation of all private property is tantamount to the introduction of socialism. Therefore we do not have to deal with it in an analysis of the problems of interventionism. We are concerned here only with the partial confiscation of property. Such confiscation is today attempted primarily by taxation.

The ideological motivations of such action are immaterial. The only question of interest to us is merely: What is sought by these measures and what is actually accomplished?

Let us first consider taxes which directly or indirectly affect incomes only. In all countries there is today a tendency to tax larger incomes at higher rates than smaller incomes. In the case of incomes which exceed a certain amount most countries tax away, even nominally, up to 90 percent. Methods prescribed by law for the determination of the amount of income, and the interpretation of these laws by the administering agencies, fix incomes considerably higher than could be established on the basis of sound accounting principles. If taxpayers could not avoid some taxes by using loopholes in the laws, their actual taxes would thus not infrequently exceed by far the amount of their actual incomes. But legislators try to plug these loopholes.

Popular opinion is inclined to believe that the taxing away of huge incomes does not concern the less wealthy classes. This is a fallacy. The recipients of higher incomes usually consume a smaller proportion of their incomes and save and invest a larger part than the less wealthy. And it is only through saving that capital is created. Only that part of income that is not consumed can be accumulated as capital. By making the higher incomes pay a larger share of the public expenditures than lower incomes, one impedes the operation of capital and eliminates the tendency, which prevails in a society with increasing capital, to increase the marginal productivity of labor and therefore to raise wages.The same is, of course, true even to a greater extent of all methods of taxing away part of the principal. By drawing on capital to pay for public expenditures through inheritance taxes or a capital levy, for instance, capital is directly consumed.

The demagogue tells the voters: “The state has to make large expenditures. But the procurement of funds for these expenditures is not your concern. The rich should be made to pay.” The honest politician should say: “Unfortunately the state will need more money to cover its expenditures. In any case, you will have to carry most of the burden because you are receiving and consuming the largest share of the total national income. You have to choose between two methods. Either you restrict your consumption immediately or you consume the capital of the wealthy first and then a bit later you will suffer from falling wages.”

The worst type of demagogue goes even further by saying: “We have to arm and possibly even go to war. But this not only will not lower your standard of living; it will even increase it. Right now we shall undertake a large-scale housing program and increase real wages.” To this we have to say that with a limited quantity of materials and labor we cannot simultaneously make both armaments and dwellings. Herr Göring was more honest in this respect. He told his people “guns or butter,” but not “guns and (therefore) still more butter.” This honesty is the only thing Herr Göring will be able to claim to his credit before the tribunal of history.

A tax system which would serve the real interests of the wage earners would tax only that part of income which is being consumed, and not saved and invested. High taxes on the spending of the rich do not injure the interests of the masses; however, every measure which impedes the formation of capital or which consumes capital does injure them.

Of course, there are circumstances which make the consumption of capital unavoidable. A costly war cannot be financed without such a damaging measure. But those who are aware of the effects of capital consumption will try to keep this consumption within the limits of necessity, because that is in the interest of labor, not because it is in the interest of capital. There may arise situations in which it may be unavoidable to burn down the house to keep from freezing, but those who do that should realize what it costs and what they will have to do without later on. We must emphasize this, particularly at the present moment, in order to refute the current errors about the nature of the armament and war booms.

The costs of extraordinary armaments may be paid for by inflation, by borrowing, or by taxes which hamper the formation of, or which even consume, capital. How inflation leads to boom conditions does not require further explanation. When funds are made available by borrowing, this can only shift investment and production from one field to another; the increase in production and consumption in one sector of the economy is compensated for by the decline of production and consumption in another part. The funds which are withheld from capital formation and withdrawn from already accumulated capital may have the effect of an increase in current consumption. Thus consumption for military purposes may be increased without a proportionate decrease in other consumption. This may be called a “stimulus” to business. But we should not overlook the fact that all the effects of this boom, which are favorably looked upon now, will be paid for by depression and reduced consumption in the future.

A selection from chapter IV of Interventionism: An Economic Analysis.

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