The Conservative Sensibility Read online

  John Rawls, author of A Theory of Justice, the most influential twentieth-century work of American political philosophy, proposed a thought experiment. To judge the equity of social arrangements, “Imagine you are a risk-averse person making rules for society behind a veil of ignorance about your own location in the society.”81 Regarding economic practices, the threshold question is: Behind that veil, are you more comfortable endorsing a society largely driven by the spontaneous order of voluntary transactions, or a society in which government, meaning political power, has a large role in the allocation of wealth and opportunity? Remember, you are rationally risk-averse, and you are ignorant of your social position relative to the various constellations of political influence. Remember also that the government’s large role is apt to grow ever larger, for this reason: Government interventions to modify market outcomes breed more of the same. As such interventions become common, and then routine, and society becomes more comfortable with them, factions within society become more focused on advancing their interests not by competition in the market but by capturing government’s attention and solicitousness. Factions are formed for this purpose.

  Gresham’s Law (bad money drives out good money) has a political corollary: Competition to capture government favoritism tends to supplant competition as the way to prosper amid the welter of market uncertainties. Besides, you have no choice: When the halls of Congress and the offices of regulatory agencies become the cockpits where more and more social and economic outcomes are determined, more and more factions will compete there. And few will have the option of being absent from this arena. Unilateral disarmament in the lobbying arms race is not a realistic choice. So life becomes more saturated by politics as government grows ineluctably. And government becomes regressive, transferring wealth upward to those who can exploit the system. Too often in today’s political economy—today’s very political economy—the rich get richer not just or even primarily because they are gifted participants in market processes of wealth creation. Instead, they get rich because they are nimble at using their mastery of mechanisms for influencing political processes.

  AN EXAMPLE OF CONSERVATIVE ECONOMIC THINKING:

  THE CASE FOR PROGRESSIVE TAXATION,

  STILL UNEASY AFTER ALL THESE YEARS

  This adds new urgency to a perennial question. Daniel Patrick Moynihan said that democracies always must decide how much government they want and how much economic growth. His point was that there is tension between the goal of growing the nation’s wealth by allowing the market to direct resources to the most productive uses and the goal of redistributing incomes in accordance with this or that political conception of equity. From Moynihan’s question, subsidiary questions flow, such as: What do we want that only government can do or give? Or that government can do or give much better than other institutions can? What price, in taxes or otherwise diminished freedom or slowed economic growth, are we willing to pay for these things? Conservatism can bring to this discussion two things that are often missing from it. One is realism about the inevitable costs and benefits of the trade-offs that are inescapable. The other is candor about the ethical premises that too often go unarticulated or unexamined. So this is a suitable point for a case study of conservative reasoning. The subject is progressive taxation and how the policy of progressive taxation intersects with society’s commitment to equality.

  “Taxes,” Oliver Wendell Holmes said, in words now carved in stone on the Constitution Avenue side of Washington’s Internal Revenue Service building, “are what we pay for civilized society.” This is true to the extent that civilization is the result of government rather than government being the result of civilization. Woodrow Wilson, who was nimble at infusing the mundane with moral grandeur, said that paying taxes is a “glorious privilege.”82 Perhaps. But the history of American taxation shows that the privilege has been inextricably bound up with war.

  The Civil War briefly gave the nation its first income tax. It was signed into law on July 1, 1862, by President Abraham Lincoln. Karl Marx described Lincoln as “the single-minded son of the working class,” but, a few years earlier, as a prosperous lawyer with railroads as clients, Lincoln had an income of about $2,000 a year, placing him in at least the top 2 percent of American earners. The first iteration of an American income tax was probably never paid by more than 1 percent of the American people, but one of them was pleased by the experience. Mark Twain said that his 1864 tax bill of $36.82 (plus a $3.12 fine for filing late) made him feel “important” because it meant the government was paying attention to him. This tax was repealed after the war, partly because manufacturers and other protectionists assumed, correctly, that abolishing this stream of federal revenue would strengthen support for high tariffs as an alternative source of revenue. Nevertheless, the Civil War income tax was, as Steven R. Weisman says, “a momentous piece of legislation, rivaling, in its way, the abolition of slavery, the Homestead Act, the establishment of a national currency and federal bank regulation.”83 The income tax compelled public debate about the allocation of gains and sacrifices in providing for the national state. What is remarkable is how little debate there was about the principle of progressivity: From the start, rich people would be taxed at a higher rate than others. When the income tax was revived more than four decades later, this principle was generally accepted as uncontroversial.

  In the early years of the twentieth century, a few states tentatively tried taxation of income, sometimes with unfortunate results. According to Weisman, “Virginia enacted a tax in 1909, but many citizens refused to pay it. After some tax agents sent to rural areas were never heard from again, Virginia repealed the tax, having collected less than $100,000.”84 Two forces revived the national income tax. One was the desire to lower tariffs, which were indirect, semi-hidden sales taxes that crimped the consumption of Americans with modest incomes. Lowering tariffs would, however, jeopardize a major source of federal revenue. The other force propelling the nation toward an income tax was the desire to lower the boom on demon rum: Prohibition would threaten alcohol taxes, another major source of federal revenue. These two pressures presaged ratification of the Sixteenth Amendment.

  Rear-guard resistance to the income tax relied on flimsy arguments. The New York Times fretted that income taxation would hurt the poor by reducing the ability of the rich to contribute to charities. The Albany Evening Journal said the income tax would divide the nation between those who do and those who do not “contribute to the support of the national government,” which was silly because all consumers were supporting the government through tariffs and excise taxes. In 1913, 95 percent of federal revenues came from the purchase of commodities subject to tariffs or excise taxes paid disproportionately by persons of modest means.85

  Nevertheless, the national income tax arrived in 1913, the first year of Woodrow Wilson’s presidency, when the glorious privilege of paying it was indeed for the privileged few: The average worker’s income was $500 a year. The tax fell only on incomes over $4,000, so it was paid only by the top 3 percent of earners. The incomes of the president and federal judges were exempt because this was somehow thought to be required by the separation of powers. In 1913, the top rate was 7 percent. In 1917, America went to war, and the top rate went to 77 percent. The Second World War democratized the income tax. In 1939, 3.9 million Americans paid it; by 1945, 42.6 million did. The Cold War and, even more important, the welfare state would entrench the income tax as a democratic experience. But by the second decade of the twenty-first century, more than 75 percent of earners paid more in payroll taxes than in income taxes. The top 1 percent of earners paid 39 percent of the income taxes, the top 5 percent paid 60 percent, the top 10 percent paid 70 percent. And the bottom 50 percent of earners paid a paltry 3 percent. Sixty percent of households paid either no income tax or less than 5 percent of their income in taxes.86 This is what is called a situation of moral hazard, where incentives are for perverse behavior: A large and growing majority have no incentiv
e to restrain the growth of a government they are not paying for through the principal sources of its revenues. This is a hazard directly related to progressivity.

  Jefferson, in an 1816 letter, argued that what we have come to call progressive taxation would violate natural justice: “To take from one, because it is thought that his industry and that of his fathers has acquired too much, in order to spare to others, who, or whose fathers have not exercised equal industry or skill, is to violate arbitrarily the first principle of association, the guarantee to every one of a free exercise of his industry, and the fruits acquired by it.”87 With his phrase “the first principle of association” Jefferson, who had a bust of Locke at Monticello, was harkening back to Locke’s reasoning from the state of nature: This is why we come together in political association in the first place. All men are created equal as rational pursuers of happiness as they define it, and are equally entitled to the enjoyment of the fruits of their striving. Lincoln thought that economic inequality could and should be a spur to industry: “That some should be rich, shows that others may become rich, and hence is just encouragement to industry and enterprise.” And in the next sentence of his March 21, 1864, letter to the Workingmen’s Association he implicitly cautioned against what today is known as redistribution: “Let not him who is houseless pull down the house of another; but let him labor diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built.”88

  Nevertheless, of the ten principal demands in the Communist Manifesto, a “progressive or graduated income tax” now is, like another demand, “free education for all children in public schools,” normal in developed nations. But the case for progressive taxation of income is just as “uneasy” today as it was when, in a famous 1952 essay, two professors at the University of Chicago Law School, Walter J. Blum and Harry Kalven, Jr., so described it. Arguments for progression are invariably linked to arguments for greater equality of social outcomes. But egalitarian aspirations live in tension with the disincentivizing effects of progression.89

  Few would disagree with the proposition that there are some extremes of inequality that are intolerably unlovely. That word puts off, for the moment, the use of the more problematic word unjust, which propels the argument into deep and choppy philosophic waters. Inequality can be unlovely in and of itself. It also can be unlovely because it arises from unjust social arrangements. It is, however, not logically entailed that social arrangements that produce inequalities, even unlovely ones, are for that reason unjust. The degree to which inequality is troubling does depend somewhat on the degree to which the process by which the rich have become so is considered an equitable process—one based on merit and self-reliance rather than political influence and rent-seeking. Once existing inequalities are deemed unacceptable because they are somehow inequitable, the question becomes: Does equity demand, and does the ethic of redistribution mandate, only the elimination of extreme privation? Or is the proper objective the achievement of some ideal narrowing of the gap between the top and the bottom of the income or wealth distributions? If so, how is the ideal determined? And how, and how much, should this determination depend on empirical questions about the disincentive effects that progressive taxation must have? To the extent that one believes (in the 1960 words of Senator John F. Kennedy) that “a rising tide lifts all boats”—that economic growth is very broadly beneficial to most members of most social strata—then to that extent the case for progressive taxation depends on a demonstration that such taxation, or a particular degree of progression, does not do more harm to economic growth than economic growth would do in distributive good.90

  So the argument for progressive taxation must pivot from a moral assessment of social conditions to a moral assertion about the equities of individuals’ sacrifices. The assertion is that money has declining marginal utility. That is, $1,000 subtracted from a wealthy person’s income diminishes that person’s happiness less than $1,000 subtracted from a person with a modest income would diminish that person’s happiness. One problem, however, is this, as formulated by Blum and Kalven: “The ostensibly scientific form of sacrifice theory, which purports to deal with the way people actually react to money, frequently conceals a normative judgment either about the way that people ought to value money or about the social value of typical expenditures at different levels of income.” This brings us back to the actual centrality of an aesthetic judgment (“unlovely”). It is an aesthetic judgment chock-full of moral judgments. And these judgments rub up against this fact: “Presumably, it is one of the virtues of a free society that, within the widest limits, men are free to maximize their satisfactions according to their own hierarchy of preferences.”91

  Is this still a foundational presumption of American society? It certainly is not shared by those who argue as follows: An individual’s preferences are so socially conditioned, so colored by inherited class assumptions, so derivative from advertising and other external and imposed stimuli and promptings, that these preferences need not really be considered the individual’s at all. Hence they need to be only lightly respected, if at all. This argument is just one facet of the social and political relevance of one of the great preoccupations and debates of the last two centuries, the debate about the extent to which individuals are responsible for their differences.

  A proportionate levy on income will tax each income at the same rate regardless of how many dollars the taxpayer earns: If taxpayer A earns twenty times more than taxpayer B earns, taxpayer A pays twenty times more dollars. Under a progressive tax, taxpayer A pays more than twenty times more dollars. Whatever else is to be said for or against a proportionate tax, it is simple. Progressive taxation is never simple. The foundational assumption that justifies progression—the faith that, at any moment in society’s ongoing evolution, equity can be known and fine-tuned by government—also justifies, indeed mandates, incessant tinkering with the tax code. This certainly has been the American experience. This is how the nation got a tax code as baroque as the current one, a code that, since the heralded simplification of 1986—which left it quite complex—has been re-complicated by more changes than the number of days that have passed since then.

  Majority rule is a good principle for groups to use in making decisions. But as Blum and Kalven said, “It is the very nature of majority rule that the majority can vote distinctive burdens for the minority.”92 And some of the burdens targeted at a minority can rebound against the entire community if, by impairing economic incentives, they suppress economic growth. Progression, by reducing the prospective rewards of risk-taking investments, always makes such investments less attractive. Progression also encourages consumption by discouraging saving. It does this by reducing the real rate of return on savings. Progressive taxation is aimed at those who have the most money, and the more money people have, the more apt they are to save some of it. As Blum and Kalven said, the more the burden of taxation is shifted to the wealthy, the more substantial will be the diminution of saving, and therefore the diminution of the potential for capital formation. The challenge for advocates of progression is to strike a balance between the equity pursued and the damage done to growth by that pursuit.

  Clearly a 100 percent marginal tax rate would have some depressing effect on investment, and hence on productivity, and hence on society’s general level of satisfaction. At any rate, it would do this unless you believe, as socialists do, or used to, that the state, having drained what used to be the reservoirs of investment capital, can step in and do the investing with at least as much skill as that of private investors deploying their own money. That belief, however, requires another belief: That government, which everywhere and always is political in every fiber of its being, will nevertheless be a consummate investor, because in allocating capital to productive uses it will not allow its decisions to be tainted by political considerations.

  It is difficult to justify progressive taxation by arguing that there is a strong correlation betw
een the amount of income one earns and the amount that one benefits from government. And as Blum and Kalven noted, “the principle of progression requires not merely that the benefits increase with income but that they increase more rapidly than income.”93 It is difficult to argue this, unless you argue as follows: All striving occurs in a social context, so all success is conditioned by its context. Hence individualism is a chimera, because each individual’s achievement, like each individual, is a derivative of society. So the achievements need not be regarded as really belonging to the individual. This justifies, or even entails, a collectivist agenda: Society is entitled to socialize—i.e., conscript—whatever portion of the individual’s acquisitions that government calculates is its share. This computation will inevitably be quite complex. A manufacturer may make a lot of money, but in what sense did he really make it? The materials he used came to his factory on public roads. His products were fabricated by workers who were educated in public schools, as was he. His finished products were shipped on those roads or perhaps flown away on air cargo planes operating out of public airports. His factory is protected by public police and fire departments. And so on. With each invocation of another facet of the social context, the sense of individual achievement supposedly becomes more attenuated.