Saturday, May 10, 2014

The rise and fall of the Tax State

David asked me about this paper, published in an interdisciplinary book (meaning a book that nobody, in any discipline, reads). It is about what Schumpeter referred to as the Tax State (the paper is "The Crisis of the Tax State" from 1918). By the way, this paper, written right before he actually became Finance Minister in Austria, is by far his best, much more relevant than his cycle theory, which remains essentially Austrian and associated to real shocks (yes there is a link between Schumpeter and the Real Business Cycle School).

My take from the conclusion:
The rise of the tax State can be seen as a struggle over who would carry the burden of taxation. Originally taxation was the sole burden of the working class, while the elites were free from taxes. Public debt as a form of repayable taxes fell on the shoulders of the elite; but that was not an excessive burden. Industrial development, urbanization, the democratization process, the enlargement of the franchise and progress in general meant that the burden of taxation was gradually shifted towards the privileged. That, however, has proved to be more problematic. The revolt of the elites has reversed considerably, in a relatively short period of time, the long process of formation of the tax State.
The general unifying theme of the book, I should note, was power, and I suggested (not very originally I might add) that it has been often absent in mainstream economics.


  1. What? You don't follow Joan Robinson and Hyman Minsky in considering Schumpeter a right-wing Marxist? (And a crypto-Historicist, to boot).

    I'd be interested to know more about the history of taxation in Schumpeter's native Austria. From my perspective, it's interesting that:

    -Land taxes, which fall entirely on the elite, have been used by numerous monarchs concerned with efficient collections as a source of revenue for the state (a bunch of English kings, Muhammad Ali in Egypt, and others going back even to ancient times). Pure land taxes are also recommended as the most efficient tax by authorities from Adam Smith to Milton Friedman. AND, in the wake of Henry George's Progress and Poverty (still the best-selling econ book ever, in absolute numbers), there was a popular movement to make land taxes the main source of revenue in most of the English-speaking parts of the world (and in some Chinese-speaking parts), with little lasting effect.

    -Spikes in progressive taxation -- at least in the countries I'm acquainted with -- seem to be most durable when they follow wars. This seems especially the case for the countries involved in World War II, whether victors or not. The US, in particular, imposed heavy taxation on high incomes for the purpose of beating the axis, and then left that tax structure mostly in place until Reagan.

    Taxation in the US is probably more regressive than it used to be. But is this true across the board?


    1. Hi Will:
      Schumpeter certainly took many elements from Marx. His whole discussion of competition, creative destruction, etc., has a Marxist flavor. Yet, there is little doubt that the source of growth and innovation is the Herculean, Protean figure of the entrepreneur. Not Marx's bourgeoisie that accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, etc. Individuals not classes. Also, the analysis of innovation is embedded in his circular flow, which is according to Schumpeter the Walrasian system. So it's basically shocks to productivity, that lead to higher natural rates, more credit, forced savings, and so on, until the economy accommodates in a new circular flow. And historicism is overrrated. As my student Bill McColloch has shown, several authors of the German Historical School, like Roscher, were proto-marginalist. So if the good stuff in Schumpeter is in Marx, I would recommend to read Marx instead. The fiscal stuff is his most sensible, and historical, piece of work. Not sure I get your point on taxation.

      PS: He was a historian of thought too. Erudite no doubt, but like Blaug had an antiquated understanding of science, and thought that one builds only on the analytics and linearly. My guess is he thought he was superior to Marx and the classical political economists. He wasn't.

    2. PS II: Minsky was Schumpeter student. When Schumpeter passed away, he found another PhD advisor, Leontief! His financial innovations have a Schumpeterian flavor no doubt. But I would take Minsky's views on the history of ideas with a grain of salt.

  2. Matias, you write, "Schumpeter certainly took many elements from Marx. His whole discussion of competition, creative destruction, etc., has a Marxist flavor. Yet, there is little doubt that the source of growth and innovation is the Herculean, Protean figure of the entrepreneur."

    I think this is exactly right. Schumpeter thought these valuable entrepreneurial creations would disappear when family-owned companies gave way to corporations, and corporations to socialism - as one form of bureaucracy gives way to another. Socialism was "inevitable" as with Marx, but its inevitability was to be regretted not celebrated. This, along with Schumpeter's generally favorable assessment of Marx as an economist, is laid out in Capitalism, Socialism, and Democracy.

  3. I didn't even see this until today. Nice post, Matias.


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