Amidst ongoing tax debates, Friedrich Hayek reminds us why, and how, we protect CA's free market
Depicted: Economist Friedrich August von Hayek. Image by Levan Ramishvili
As Bay Areans scrutinize Prop 5—which lets gov't spike taxes with lower public approval—we turn to a beloved Opp Now figurehead in Austrian economist Friedrich Hayek. Researchers Bejaković and Luburić summarize Hayek's illuminating idea that the market's spontaneous, dynamic consolidation of billions of hopes, dreams, and aspirations produces far better decisions than could the political "elite."
Hayek’s most important argument against planned economies is based on an estimation that a small group of individuals would be utterly in charge of determining the allocation and distribution of resources. According to his view, for them it would be completely impossible to ever have enough information to do this and adequately meet people’s needs. Hayek thought that market forces alone would have the information needed to make these decisions, because markets coordinate opinions and information held by all stakeholders in the society in a spontaneous way. …
Hayek firmly believed that a free market economy would let the market, consumers and producers to decide how resources should be used without intervention from the state. Hayek categorises liberty as a consisting part of the Western civilisation. The terms liberty or freedom which he uses interchangeably are the product of the Western experience, and the West thrived by adhering to them. However, approximately by the mid-19th century, the West commenced to lose faith in the ethics of liberty, and henceforth there have been no firm beliefs on which the West could oppose intimidating ideologies.
In various texts Hayek underlines multiple threats to Western liberty, like demands for social justice, central planning, the extremes of majority rule, but the biggest danger is this loss of self-confidence and a lack of faith in human capabilities. Hayek is particularly strict in his accusation of Western intellectuals, who have for long period been disenchanted with their own civilization and its accomplishment. According to Hayek, they departed from Western ideas, just as other people around the world were looking up to the Western principles for guidance. The West should renew its thoughtful attitude towards liberty and liberty’s value as a desired goal, both to society and to individuals. …
Whether combined with the welfare state or not, according to Hayek’s opinion, progressive taxation is the main measure of redistributing income, but it is also the most important source of governmental arbitrariness and democratic irresponsibility (Miller, 2010). Therefore, he advocated strongly against redistributive legislation because:
Formal equality before the law is in conflict and in fact incompatible, with any activity of the government deliberately aiming at material or substantive equality of different people, and ... any policy aimed at a substantive ideal of redistributive justice must lead to the destruction of the Rule of Law (Hayek, 1944: 76).
In the same way he was against Karl Marx’s dogma of “from each according to his ability”, pointing out the fallacy of this thinking;
Unlike proportionality, progression provides no principle which tells us what the relative burden of different persons ought to be... the argument based on the presumed justice of progression provides no limitation, as has often been admitted by its supporters, before all incomes above a certain figure are confiscated, and that bellow left untaxed (Hayek, 1960: 272).
Although in his time, redistribution by progressive taxation has come to be almost universally accepted as just, Hayek is consistently against it arguing that: Individual taxes, and especially the income tax, may be graduated for a good reason - that is, so as to compensate for the tendency of many indirect taxes to place a proportionally heavier burden on the smaller incomes. This is the only valid argument in favour of progression. It applies, however, only to particular taxes as part of a given tax structure and cannot be extended to the tax system as a whole (Hayek, 1993: 127).
In a proportional and progressive system, citizens with higher wages pay more, but in the progressive system they do so at an escalating rate. Hayek reminds that in the progressive taxation, in principle, there is no limit how high a progressive rate can be. A high progressive rate is of- ten accepted under false pretenses and all arguments in support of it can be applied to justify any degree of progression. …
Modern society, Hayek (1993) mentioned capitalism, as it exists today in consequence undeniably has many remediable defects that an intelligent policy of freedom ought to correct. A system which relies on the spontaneous ordering market forces, once it has reached a certain level of wealth, is also by no means incompatible with government providing, and outside the market, some security against severe deprivation. But the attempt to provide to each what he is thought to deserve, by imposing upon all a system of common concrete ends towards which their efforts are directed by authority, as was a habit in socialism, would be a retrograde step that would deprive mankind of knowledge and advantages of free society. …
When Hayek originally wrote these words on taxation and redistribution at the end of 1950s, it was thought impossible by many that progressive taxation could have a profound adverse effect on incentives and on the total production of wealth in society. Reading these chapters sixty years later, we are the beneficiaries of several of Hayek’s insights into the dangers that follow the erosion of market forces, including the menacing effects of too progressive taxation.
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