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Friday, November 1, 1996

Ending Tax Socialism

A Progressive Income Tax Violates the Heart and Soul of the Constitution

In 1848 Marx and Engels proposed that progressive taxation be used to wrest, by degrees, all capital from the bourgeois, to centralize all instruments of production in the hands of the state. Although communism has failed, the idea of progressive taxation as a means of achieving social justice endures.

A progressive income tax violates the very heart and soul of the Constitution. Our constitutional government rests on the principles that individuals are equal under the law, that consent is the basis of just laws, and that the powers of the federal government are strictly limited. None of those principles are consistent with taxing incomes at progressively higher rates. It’s time to expose the pretense of morality that is inherent in progressive taxation and to end the system of tax socialism that has eroded economic and personal liberties in the United States.

A “Calamitous Monstrosity”

Prior to the passage of the Sixteenth Amendment in 1913, the Supreme Court consistently struck down attempts to legislate a federal income tax. There was little public support for such a tax. Indeed, when the first income tax was passed by Congress in 1894, the New York Times called the legislation a vicious, inequitable, unpopular, impolitic, and socialistic act, and the Washington Post added, It is an abhorrent and calamitous monstrosity.

Constitutional principle and justice require that individuals be treated equally under the law and that the law itself be just. A progressive income tax, which discriminates against individuals simply because they have higher incomes, is based on an arbitrary precept that would never gain universal consent. The minority would never consent to be enslaved by the majority.

Because there is no objective way to measure social justice, there is no end to the redistribution that can occur under a progressive tax system. Under such a system, neither persons nor property are safe from the hand of the state.

In his Constitution of Liberty, the late Nobel laureate economist F. A. Hayek wrote, “Progression provides no criterion whatever of what is and what is not to be regarded as just. It indicates no halting point for its application, and the `good judgment’ of the people on which its defenders are usually driven to rely as the only safeguard is nothing more than the current state of opinion shaped by past policy.”

Hayek was right and Marx and Engels were wrong. Yet conservatives and liberals alike fall into a populist trap by trying to justify progressive income taxation on the basis of majority rule. Elevating democratic values above individual rights to achieve equality of result, however, violates the very rules of just conduct that lie at the heart of a free society.

A flat-rate tax is consistent with the rule of law and with the principle of nondiscrimination. Everyone pays the same tax rate on their taxable income, and income from both labor and capital are treated alike—there is no double taxation of interest and dividends. If the flat-rate tax is applied to consumption rather than income, the current bias against saving would disappear and economic growth would increase.

One major benefit of a flat-rate tax is that it would make the cost of government expansion visible to all taxpayers, especially if government were required to balance its budget each year. There would be a built-in incentive to compare the costs and benefits of new government programs.

Under progressive taxation, on the other hand, there is a constant temptation to raise tax rates on productive citizens to pay for new programs. At the limit, persons with high incomes may face a marginal tax rate of 100 percent, while those with low incomes pay nothing. (During the 1950s marginal tax rates exceeded 90 percent in the United States.) That’s tax socialism in spades.

Progressive taxation is not a virtue but a vice. It presumes that the property rights of the wealthy are not as sacred as the property rights of the poor, and that the values of the majority are superior to the rights of the minority.

Those who support progressive taxation pretend to be on the moral high ground but, in fact, they have no ground to stand on. Envy, not justice, is at the root of the argument for discriminatory taxation. If we let constitutional principles be eroded by majority rule, in the name of social justice, then both freedom and true justice will be lost.

Law is the bond of civil society, and justice is equality under the law, wrote Cicero. If we are to restore civil society and move from tax socialism to tax justice, we need to abolish progressive taxation, institute a fair flat tax, and limit the size of government. Otherwise class warfare and welfare will prevail.

  • James A. Dorn is vice president for monetary studies, editor of the Cato Journal, senior fellow, and director of Cato’s annual monetary conference.