Power and Market: Government and the Economy

In a sense, all taxes are taxes on capital. In order to pay a tax, a man must save the money. This is a universal rule. If the saving took place in advance, then the tax reduces the capital invested in the society. If the saving did not take place in advance, then we may say that the tax reduced potential saving. Potential saving is hardly the same as accumulated capital, however, and we may therefore consider a tax on current income as separate from a tax on capital. Even if the individual were forced to save to pay the tax, the saving is current just as the income is current, and therefore we may make the distinction between taxes on current saving and current incomes, and taxes on accumulated capital from past periods. In fact, since there can be no consumption taxes, except where there is dissaving, almost all taxes resolve themselves into income taxes or taxes on accumulated capital. We have already analyzed the effect of an income tax. We come now to taxes on accumulated capital.

Here we encounter a genuine case of “double taxation.” When current savings are taxed, the charge of double taxation is a dubious one, since people are allocating their newly produced current income. Accumulated capital, on the contrary, is our heritage from the past; it is the accumulation of tools and equipment and resources from which our present and future standard of living derive. To tax this capital is to reduce the stock of capital, especially to discourage replacements as well as new accumulations, and to impoverish society in the future. It may well happen that time preferences on the market will dictate voluntary capital consumption. In that case, people will deliberately choose to impoverish themselves in the future so as to live better in the present. But when the government compels such a result, the distortion of market choices is particularly severe. For the standard of living of everyone in the society will be absolutely lowered, and this includes perhaps some of the tax consumers—the government officials and the other recipients of tax privilege. Instead of living off present productive income, the government and its favorites are now dipping into the accumulated capital of society, thereby killing the goose that lays the golden egg.

Taxation of capital, therefore, differs considerably from income taxation; here the type matters as well as the level. A 20-percent tax on accumulated capital will have a far more devastating, distorting, and impoverishing effect than a 20-percent tax on income.