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Adam Smith on why we sympathize with the rich and hesitate to tax them overly much:

July 22, 2012
Profile of Adam Smith

Profile of Adam Smith (Photo credit: Wikipedia)

Adam Smith way back in the 18th Century while he was busy inventing the concept we now call Capitalism, attempted to explain why, despite the fact that we have a moral obligation to tax our superrich at the peak of the Laffer Curve: to tax them so heavily that we raise the most possible money from them — to the point beyond which their diversion of energy and enterprise into tax avoidance and sheltering would mean that any extra taxes would not raise but reduce revenue, we in society feel it is wrong to so tax their incomes. In the case of the hard-working rich (as opposed to inherited wealth), he posited that we sympathize with the type of person who:

“devotes himself forever to the pursuit of wealth and greatness….With the most unrelenting industry he labors night and day….serves those whom he hates, and is obsequious to those whom he despises….[I]n the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments….he begins at last to find that wealth and greatness are mere trinkets of frivolous utility…. Power and riches….keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death…”
Adam Smith, The Theory of Moral Sentiments.

Tax

Tax (Photo credit: 401(K) 2012)

According to the modern economist Brad deLong, “we don’t wish to disrupt the perfect felicity of the lifestyles of the rich and famous; and we don’t wish to add to the burdens of those who have spent their most precious possession — their time and energy — pursuing baubles.”

These two arguments are not consistent, but that does not matter. They both have a purchase on our thinking. Unlike today’s public-finance economists, Smith understood that we are not rational utilitarian calculators. Indeed, that is why we have collectively done a very bad job so far in dealing with the enormous rise in inequality between the industrial middle class and the plutocratic superrich that we have witnessed.

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