The View From 1776

David Wessel’s June 14, 2007, column in the Wall Street Journal is titled “The Case for Taxing Globalization’s Big Winners.” Online Journal subscribers can access it here.

Mr. Wessel describes the growing unrest among voters, from blue collar to white collar workers, arising from the sense that globalization has unfavorably affected them.  China’s relentlessly growing trade surplus with us, coupled with headlines about jobs outsourcing and the billions of dollars collected by private equity fund partners, have created a pervasive belief that things are not fair, that the greedy rich have grabbed too much for themselves.

One proposal to satisfy that perception is raising taxes on the upper income brackets and eliminating social security taxes on people earning less than $33,000 a year.

Mr. Wessel observes that, while such measures may be economically counter-productive, politicians pandering to public opinion are likely to enact them.

Radicals, beginning with the Populist Party in the 1890s and the Progressives in the early 20th century, advocated this sort of wealth redistribution.  It was not, however, until Franklin Roosevelt’s New Deal in the 1930s that the majority of voters came to believe that such is the function of government.

Certainly, the delegates who wrote the Constitution would have been appalled.  James Madison, the most influential single member of the 1787 Constitutional convention, was hopeful that the internal checks and balances of our federal system (balanced between states and national government) would prevent socialistic schemes for redistributing wealth.  In Federalist No. 10, he wrote:

The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets.

The “inferior number” in our present-day case is the top income brackets.

Proposals to raise taxes on one sector in order to transfer wealth is pure socialism, far removed from the conception of free-market economic and political liberties for which the colonists fought in 1776.

From the standpoint of morality, or what liberals call social justice, the question is whether it is in the long run conducive to a sense of fair play when the government in power presumes that the economy is its creation, to be awarded arbitrarily to its political supporters.

A fairly typical argument for the present-day liberal-socialist viewpoint is made by Michael Walzer, a prominent liberal intellectual, whose principal point is that possession of money amounts to power and that such power is both unjust and unjustly used.  In the liberal-Progressive-socialist view, all that should count is need.  If people need certain things (leaving aside how that need is determined), they should simply be given them, without regard to their ability to pay. 

From the standpoint of economic effectiveness, the historical record is unequivocal.  Raising taxes always dampens economic activity and often throws the economy into recession.  Job creation slows or workers are laid off. 

President Franklin Roosevelt raised marginal income tax rates from the 20% range to the 90% range and imposed punitive taxes on businesses.  The nation remained mired in the Depression for seven bitter years, with unemployment still in double digits at almost 17% in 1939 on the eve of World War II.

In contrast, tax cuts always lever up economic activity and create jobs.  Major tax cuts under Presidents Kennedy and Reagan, along with policies to curb the growth of the money supply, created the two great economic booms of the past fifty years.  President George W. Bush’s tax cuts pulled the economy out of the Clinton administration’s dot.com recession and pushed economic activity and job creation to new highs.

Increasing taxes on the upper income levels, who provide the bulk of risk capital for job creation, is thus guaranteed to make conditions worse for the very people the politicians profess to help by raising taxes.

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