Hey remember me? Just a quick driveby to start some discussion.
Classical, neo-classical, and neo-liberal economics all share a common mistaken psychological premise, one that is simple but deep, and in itself explains why they don’t understand the aims of Progressive Taxation.
Label it how you like, the academic discipline that emerged from England in the 18th and 19th century implicitly, hell I’ll make it stronger, explicitly assumed that the goal of capitalism is accumulation, i.e. getting more an more numbers on the right side of the ledger sheet. Which assumption seems blindingly obvious, which is why it is simple and goes so deep. In this model taxation on gains from capital serve to displace investment on the equally simple assumption that if you tax something people do less of it. Again perhaps blazingly obvious.
But it doesn’t hold up well against the historical record either narrowly considered in relation to 18th and 19th century England or more broadly across cultures and across history. Instead in most of those cultures and most definitely in Georgian and then Victorian England the evidence is strong that capitalists saw investment as the means to different ends, those of consumption and display that in turn would lead to societal status. You only have to look at the great Country Houses that were built during this period, with no expenses spared inside or out whether that be on landscape architects or silversmiths. And even a passing familiarity with say English literature of the time shows this on full display, the manufacturing classes rushing to build those country houses and buy their daughters way into society as soon as they could afford it, the facts on the ground clearly show that the driving goal of most investors was to finance consumption and display in the form of dress and habitations. Let us put it this way Scrooge was not then or now considered the hero, and throughout history the miser has been a despised and mocked figure.
Now this runs directly against the “blindingly obvious” assumption that the goal of investment is purely accumulation. So what happens when we substitute ‘consumption and display’? Well a couple of things. First we can recognize that under some circumstances accumulation IS display, rankings on the list of ‘the most wealthy X of Y’s’ being just as important as more explicit displays of status on the British and European pattern. And since the U.S. doesn’t have patents of nobility, this aspect of accumulation as display has an outside importance. But in any case none of it seems to effect the other side of the equation, very few billionaires not named Warren Buffet actually resist the temptation to buy the multiple mansions, the penthouse apartments on Central Park, the yacht, the vacations in the South of France, the jewelry, the trophy or society wives (depending on whether they are new or old money). You just don’t have the MOTUs reinvesting every single penny, instead when given an opening they can and do spend and often in the most conspicuous ways possible, there not being much difference between an American billionaire of today and a 16th century British Duke or more to the point a 19th century Manchester industrialist in this regards. Instead re-investment is often seen as just the vehicle needed to climb to the next consumption level.
So what does this have to do with progressive taxation? Well once you accept the assumption that the fundamental goal of investment among the upper classes is consumption and display and further that in most cases that consumption doesn’t have the multiplicative effects on the wider economy that re-investment would then the goal of progressive taxation becomes obvious, and by the way a lot less socialist than the old shibboleth of redistribution. The goal of progressive taxation in the classical political liberal position dominate in this country from 1913-1980 was to penalize consumption and favor re-investment. After all at least under current law gains on capital are by and large not exposed to federal taxation until they are realized, if instead they are plowed back into productivity improvements they are at the corporate or individual level largely tax exempt. It is only when you take the equity out in the form of interest, dividends or simply cashing out equity that tax is encured.
The logical conclusion of this model is that if we accept the principle that to tax something is to induce people to do it less, if nothing else by increasing its marginal cost, then Supply Side becomes the Voodoo the Elder Bush always said it was. Lowering top marginal rates and taxing capital gains at half the rates of capital income would under my model have the effect of encouraging consumption and discouraging reinvestment. Whereas high rates would have the opposite effect. Which has the advantage of being testable, if we had to constrast the 50s and the 80s in terms of the consumption patterns of the near the top level of capitalists and managers we see a lot less conspicuous consumption among the former than we do in the post Reagan-era. In the 50s and 60s only Greek shipping magnates could afford the kind of consumption patterns that became common in before, during, and after the Enron era and certainly continuing today. From my perspective all Supply Side did was to lower the cost of consumption in pre-tax dollars, purchases that were inconceivable in the days of 90 and then 70% top rates have become routine in the days of 15%.
Which suggests that the current neo-liberal surrender to the idea that any increase in tax on capital inevitably will lead to disinvestment, almost as if it were an accounting identity, when history suggests the effects are the other way around, capitalists wanting to maintain the same level of consumption in a higher tax environment simply needing to intensify their re-investment rather than lazily take those gains out in the form of salaries, bonuses, and dividends.
You could sum up the whole argument by saying that Manchester and allied schools of economics assumes that everyone behaved like a Northern European Calvinist Burgher, or more narrowly that the triumph of capitalism was represented in the premises of Scrooge and Marley.
BTW this substitution of ‘consumption’ for ‘accummulation’ has explanatory powers far outside the narrow confines of capitalist taxation. A great deal about peasant economies that have historically baffled both branches of liberal economics, that which led to Chicago and that which gave us Marx, in my view stemmed from not getting that most peasants even in the strictest systems organized their economic life around consumption targets rather than growing net worth (say by acquiring more fields). You get a strong whiff of this with the modern bafflement that the French would substitute 35 hour weeks with seven weeks of vacation for longer hours that would lead to higher net worth. Do they not want to get rich? Well yes, but to what end? Adopt a consumption based model and lots about the European system and early retirement here starts making perfect sense.