Heavy Taxation Of The Wealthy

Richard Posner is one of the great jurists and legal scholars of our time. No matter what topic (he is a prolific writer on many subjects), Posner can be counted upon to make thoughtful and interesting arguments, usually from a conservative viewpoint derived from economic analysis. So his recent comments on taxing the very wealthy are surprising, sounding almost like talking points from the Obama campaign.

Posner believes that a “brilliant wealthy person” like Bill Gates is not entitled to his wealth in a moral sense (because “everything is attributable to luck, good or bad”). But he argues nevertheless that it would be “ridiculous” for government to take away his wealth and give it to the poor because “it would have terrible incentive effects.” By this he means that heavy taxation of those who work hard may induce them to substitute leisure for work and thereby reduce incomes. Similarly, taxing success due to talent may induce talented people to engage in activities that may not be “socially as productive as business.”

The incentive effects are not the same for each method of generating wealth. Posner points out that heavily taxing inherited wealth or wealth won in a lottery is unlikely to have an incentive effect whereas taxation of earned wealth indeed is likely to cause the wealthy to reduce income by choosing leisure over work. Posner’s focus on incentives leads him to conclude that there is “nothing unfair about heavy taxation of wealth,” it’s just a matter of practical objections.

This may sound all well and good for liberals, but Posner’s argument is just another way of saying that the mob can steal as much of the income of successful people as it wishes, with one caveat:  don’t go so far as to kill the golden goose. Posner’s argument for heavy taxation of the wealthy is nothing more than an apologetic for mob rule, and can hardly serve as a legitimate principle of taxation (i.e., a principle based on something other than resentment).

In competitive markets (i.e., markets based on voluntary exchange and free choice), firms earn profits and their owners make fortunes only by serving other people in some way – in fact, by serving a lot of other people. Everyone knows that Bill Gates has provided products and services to literally millions of people and this fact has important implications for taxation, which Posner seems to ignore.

For all the money that we’ve given him, Gates has provided, in return, products equal in value to what we paid (actually, voluntary exchange means that we value what we receive more than what we give; if that were not the case, we would not make the exchange). So in this respect there is a fundamental equality between Gates and the rest of us.

Obviously the very wealthy should pay their share of taxes at least at the same tax rate as the rest of us. But heavy taxation means that the wealthy pay at a much higher rate than the rest of us. If we insist that Gates pay a higher rate, the difference between his rate and ours means we’re extracting more from him than we negotiated in the deal we made when we purchased his products in the first place.

Because the exchanges that we made with Gates were voluntary, it’s hard to find a moral basis for changing the rules and demanding an additional after-the-fact rebate in the form of his higher tax rate. We’ve already gotten an even deal in transacting business with Gates, and so Posner has it backward:  it is not Gates, but the rest of us that do not have a moral right to Gates’ wealth (other than at tax rates similar to the rest of us).

NOTE: There may be a principled argument for progressive tax rates, but it is not related to Posner’s argument and so is not addressed in this post.

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