Friday, February 25, 2011

Milton Friedman on Progressive Taxes

A further factor that has reduced the impact of the graduated tax structure on inequality of income and wealth is that these taxes are much less taxes on being wealthy than on becoming wealthy. While they limit the use of the income from existing wealth, they impede even more strikingly -- so far as they are effective -- the accumulation of wealth. The taxation of the income from the wealth does nothing to reduce the wealth itself, it simply reduces the level of consumption and additions to wealth that the owners can support. The tax measures give an incentive to avoid risk and to embody existing wealth in relatively stable forms, which reduces the likelihood that existing accumulations of wealth will be dissipated. On the other side, the major route to new accumulations is through large current incomes of which a large fraction is saved and invested in risky activities, some of which will yield high returns. If die income tax were effective, it would close this route. In consequence, its effect would be to protect existing holders of wealth from the competition of newcomers. In practice, this effect is largely dissipated by the avoidance devices already referred to.
Capitalism and Freedom
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