“The ultimate basis for any progressive rate of taxation is to be found in the general scale of desires. According to this basis the personal value of the money unit is appreciably higher for the first thousand than for the second and is hardly to be compared with the appraisal in the case of the 99th or 100th thousand. Furthermore, the difference between the first and second thousand is appreciably greater than that between the 99th and 100th. Thus, all tendencies of the modern policy of taxation find a firm theoretical basis in the concept and laws of economic value.Of course, by modern standards, this is a very conservative justification of a limited progressive tax system, not concerned with abolishing or seriously diminishing historical inequality of wealth.
It is not the function of the state in any of its administrative branches to interfere with the private constitution of the economy. This is an historically tested social institution which the state is bound to accept. This holds also in the administration of taxes. The state should never so use its prerogative of taxation as to eliminate existing inequalities of income and property; but in determining the contributions to be demanded of its citizens it should take into consideration the gradations of personal value that are the expression of the inequalities of income and property. The plan of the state’s management would offend economic principle were the private economies which are being assessed to be treated as units of equal wealth.
A consideration of personal valuation in the assessment of taxes and progressive taxation in particular has its prototype in a phenomenon of commercial exchange that was discussed in the case of a monopoly of supply in connection with the doctrine of joint costs. It was seen that a monopolistic classification of the demand, popularly felt as exploitation, may at times be the only available method of sufficiently increasing the yield of a socially required enterprise to ensure its continued operation. Special reference was made to experiences in connection with the operation of railroads and canals. Had it not been for the rule to charge what the traffic will bear, many extensive enterprises could not have been carried through. A progressive tax is the application of the principle to the whole administration of the state. Precisely as the railroad tariff classifies both travellers and merchandise in order to realize the large revenues that are required for the financial obligations of the road, just so a progressive rate classifies tax payers in order to assess each according to his tax-paying ability. It has become recognized that each must pay taxes according to the margin allowed by his circumstances, if the public economic process is to be maintained. A progressive tax-rate and a consideration of personal wealth in a system of taxation are therefore logical applications to public economy of experiences practically tested in private economies. The heavy burdens falling upon financially weaker households, owing to the increased demands of modern public economy, can only be relieved by a policy that continuously undertakes so to assess the compulsory contributions of citizens that the more wealthy are taxed correspondingly higher. By such a distribution of taxes a public economy may obtain the widest possible extension of its boundaries without violating in any particular the limits drawn for private economy.
Up to a certain point the modern state thus approaches the socially equalizing use-value computation of the simple economy. But it does this without offence to the spirit of the private constitution of the economy itself, for it refrains from interfering with private property as such and the historically transmitted inequality of its distribution. Modern policies of taxation do not seek to rectify the existing distribution of wealth. They are intended to do no more than adjust the incidence of the burden of taxation in accord with the distribution of wealth, so that the margin of use by the state economy may be extended through the larger contributions of those citizens whose incomes allow them a broader margin of use in their private economies.” (Wieser 1927: 433–434).
But, by the standards of his day, Wieser was regarded as a type of progressive liberal, as Hayek noted:
“I was personally a pupil of [sc. Eugen von Böhm-Bawerk’s] … contemporary, friend and brother-in-law, Friedrich von Wieser. I was attracted by him, I admit, because unlike most of the other members of the Austrian school, he had a good deal of sympathy with a mild Fabian socialism to which I was inclined as a young man. He in fact prided himself that his theory of marginal utility had provided the basis of progressive taxation, which then seemed to me one of the ideals of social justice.”It is often forgotten that there was a liberal and interventionist wing of the early Austrian school.
F. A. Hayek, “Coping With Ignorance,” July 1978
But, to return to the main point, Wieser’s defence of the “historically transmitted inequality” of wealth on economic grounds is not convincing. Once the theoretical economic justification for vast or significant inequality of wealth falls apart (as it did indeed after Keynes’s revolution in economics), then the same idea from marginal utility theory can also be used to support some degree of wealth redistribution. (I am not thinking of total wealth equality, however, but simply a reduction of gross inequality to eliminate poverty).
If indeed there is good theoretical reason to think that the value of an additional unit of income to a person who is already very rich is considerably less than the value of an additional unit to someone who is poor, then redistribution of income to increase happiness and reduce hardship has sound justification.
And indeed empirical evidence seems to show that as wealth rises, the happiness that one derives from additional income falls or levels off after about $70,000 (US).
This is a fascinating discussion of this topic here, in the context of a debate about secular ethical theory and the scientific basis of ethics.
Wieser, F. von. 1927. Social Economics (trans. A. Ford Hinrichs), Adelphi Company, New York.