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Argument: Progressives shift money from entrepreneurs, capital investments

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Friedrich A. Hayek. "Taxation and Redistribution". The Constitution of Liberty. 1960 - Closely connected with this problem is the effect of progressive taxation on an aspect of capital formation which is different from that already discussed, namely, the place of formation. It is one of the advantages of a competitive system that successful new ventures are likely for a short time to bring very large profits and that thus the capital needed for development will be formed by the persons who have the best opportunity of using it. The large gains of the successful innovator meant in the past that, having shown the capacity for profitably employing capital in new ventures, he would soon be able to back his judgment with larger means. Much of the individual formation of new capital, since it is offset by capital losses of others, should be realistically seen as part of a continuous process of redistribution of capital among the entrepreneurs. The taxation of such profits, at more or less confiscatory rates, amounts to a heavy tax on that turnover of capital which is part of the driving force of a progressive society.

The most serious consequence, however, of the discouragement of individual capital formation where there are temporary opportunities for large profits is the restriction of competition. The system tends generally to favor corporate as against individual saving and particularly to strengthen the position of the established corporations against newcomers. It thus assists to create quasi- monopolistic situations. Because taxes today absorb the greater part of the newcomer's “excessive" profits, he cannot, as has been well said, "accumulate capital; he cannot expand his own business; he will never become big business and a match for the vested interests. The old firms do not need to fear his competition: they are sheltered by the tax collector. They may with impunity indulge in routine, they may defy the wishes of the public and become conservative. It is true, the income tax prevents them, too, from accumulating new capital. But what is more important for them is that it prevents the dangerous newcomer from accumulating any capital. They are virtually privileged by the tax system. In this sense progressive taxation checks economic progress and makes for rigidity.

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