FEE was founded in 1946, yet the wheels began to spin even earlier. Today’s document is a letter from Leonard Read inviting Henry Hazlitt to a group discussion of what was to become FEE’s first publication, Fred Fairchild’s “Profits and the Ability to Pay” pamphlet. The letter is dated December 12, 1945, before the Foundation was even founded, showing they were eager to start fighting for freedom.
Fairchild, at the time a professor of economics at Yale University, attacked the ability-to- pay-principle of taxation, which states that the rate at which one is taxed should increase as income increases. And as Read told Hazlitt in the letter, “It is extremely important at this particular moment.”
So why might Leonard Read and the other founders of FEE have wanted to start with that topic?
The answer lies in what the principle truly means to a free society. Like the income tax itself, the ability-to-pay principle threatens the very foundation of a free society. It attacks private property and the wealth creation that comes with it.
Progressive taxation hides behind the mirage of social justice. But the principle itself is vague and lacks any true logical foundation. If followed to its logical conclusion, it would mean complete financial equality among all citizens. For any excess amount that one person has over another, no matter how small, would indicate an ability to pay more in taxes. And as Ludwig von Mises put it, “The only logical stopping place of the ability-to-pay doctrine is at the complete equalization of incomes and wealth by confiscation of all incomes and fortunes above the lowest amount in the hands of anyone.”
This is dangerous and counterproductive for a free and wealthy society. The only realistic way to achieve such equality is to level downwards, making us all worse off. It would cut away all the incentives to be productive. After all, money does not make money. As Murray Rothbard put it,
“To be earned, money must continually be justifying itself in current service to consumers. Personal income, interest, profits, and rents are earned only in accordance with their current, not their past, services. The size of accumulated fortune is immaterial, and fortunes can be and are dissipated when their owners fail to reinvest them wisely in the service of consumers.”
By taking away the profits of those who had previously and successfully satisfied consumers, we are taking away their incentives to do so again in the future. This also takes away the incentives of anyone new from similarly trying to create wealth.
Thus this justification of taxation attacks the very nature of what makes our society wealthy. It undermines our property rights and the incentives to be productive. It is not the justice of a free society but rather of highway robbers. We should be vigilant against anything that attacks the foundation of a free and prosperous society. Leonard Read and the rest of FEE’s founders understood this.