Suppose that Lois Lender and Sammy Spender work at identical jobs, earning identical incomes. However, Sammy spends all his earnings, while Lois saves 20 percent of hers. Do you think that Lois should pay more in taxes than Sammy, as happens when we treat interest, dividends, and capital gains as income?
Along the conservative civilization-barbarism axis, the answer is clearly “no.” Lois is deferring gratification and is entitled to consume more as a result. Sammy is enjoying instant gratification and should not be given favored treatment for doing so.
Along the libertarian freedom-coercion axis, it is hard to say. From this perspective, all taxation is theft. One libertarian argument might be that you want to permit the government to tax as few activities as possible in order to hold down theft. But does that argument provide a rationale for making capital income, rather than labor income, excluded from taxation? Ultimately, I think that a lot of libertarians would fall back on the conservative rationale against taxing capital.
From the progressive’s oppressor-oppressed axis, Lois becomes an oppressor. I realized this when this Douglas Hopkins essay was emailed to me by the author. Hopkins argues for taxing capital income at the same rate as labor income, rather than at a lower rate (remember that the conservative position would be that capital income should not be taxed at all).
Who would have believed that a society governed by majority vote would over-burden its working middle class in order to provide tax preferences to its privileged elite? But that is exactly what we do when we offer preferential tax treatment to investment income. …Reducing the marginal tax rate on earned income and putting more discretionary income in the hands of laborers would be a far more effective method of stimulating savings where we most need it – than continuing to siphon money from the middle class into the hands of current wealth-holders.
Since Hopkins emailed the essay to me, I tried to open his mind to other narratives about capital taxation. Not surprisingly, in his email responses he would not budge. I thought that his responses just recycled the same rhetoric, in which those who accumulate capital are oppressors and those who only have labor income are oppressed.
The essay complains about economists failing to get the oppressor-oppressed narrative. I only wish that were the case. In fact, there is a whole army of economists ready to talk about income and wealth inequality in oppressor-oppressed terms. When the U.S. experiences a sovereign debt crisis, I predict that wealth confiscation will be put on the table as a solution. Why cut spending on the oppressed when there is so much wealth concentrated among the oppressors that could be used to pay down the debt?
I expect that the demonization of “the rich” and “the one percent” will gain more and more traction as the level of government spending ratchets ever upward. And, yes, I am mostly on the libertarian axis on this issue.