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.” It is generally conceded that the concept of ability to pay is a highly ambiguous one and presents no sure guide for practical application.64 Most economists have employed the principle to support a program of proportional or progressive income taxation, but this would hardly suffice.It seems clear, for example, that a person’s accumulated wealth affects his ability to pay.A man earning $5,000 during a certain year probably has more ability to pay than a neighbor earning the same amount if he also has $50,000 in the bank while his neighbor has nothing.Yet a tax on accumulated capital would cause general impoverishment.No clear standard can be found to gauge “ability to pay.” Both wealth and income would have to be considered, medical expenses would have to be deducted, etc.But there is no precise criterion to be invoked, and the decision is necessarily arbitrary.Thus, should all or some proportion of medical bills be deducted? What about the expenses of childrearing? Or food, clothing, and shelter as necessary to consumer “maintenance”? Professor Due attempts to find a criterion for ability in “economic well-being,” but it should be clear that this concept, being even more subjective, is still more difficult to define.65Adam Smith himself used the ability concept to support proportional income taxation (taxation at a constant percentage of income), but his argument is rather ambiguous and applies to the “benefit” principle as well as to “ability to pay.”66 Indeed, it is hard to see in precisely what sense ability to pay rises in proportion to income.Is a man earning $10,000 a year “equally able” to pay $2,000 as a man earning $1,000 to pay $200? Setting aside the basic qualifications of difference in wealth, medical expenses, etc., in what sense can “equal ability” be demonstrated? Attempting to define equal ability in such a way is a meaningless procedure.McCulloch, in a famous passage, attacked progressiveness and defended proportionality of taxation:The moment you abandon.the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit.67Seemingly plausible, this thesis is by no means self-evident.In what way is proportional taxation any less arbitrary than any given pattern of progressive taxation, i.e., where the rate of tax increases with income? There must be some principle that can justify proportionality; if this principle does not exist, then proportionality is no less arbitrary than any other taxing pattern.Various principles have been offered and will be considered below, but the point is that proportionality per se is neither more nor less sound than any other taxation.One school of thought attempts to find a justification for a progressive tax via an ability-to-pay principle.This is the “faculty” approach of E.R.A.Seligman.This doctrine holds that the more money a person has, the relatively easier it is for him to acquire more.His power of obtaining money is supposed to increase as he has more: “A rich man may be said to be subject.to a law of increasing returns.”68 Therefore, since his ability increases at a faster rate than his income, a progressive income tax is justified.This theory is simply invalid.69 Money does not “make money”; if it did, then a few people would by now own all the world’s wealth.To be earned money must continually be justifying itself in current service to consumers.Personal income, interest, profits, and rents are earned only in accordance with their current, not their past, services.The size of accumulated fortune is immaterial, and fortunes can be and are dissipated when their owners fail to reinvest them wisely in the service of consumers.As Blum and Kalven point out, the Seligman thesis is utter nonsense when applied to personal services such as labor energy.It could only make sense when applied to income from property, i.e., investment in land or capital goods (or slaves, in a slave economy).But the return on capital is always tending toward uniformity, and any departures from uniformity are due to especially wise and farseeing investments (profits) or especially wasteful investments (losses).The Seligman thesis would fallaciously imply that the rates of return increase in proportion to the amount invested.Another theory holds that ability to pay is proportionate to the “producer’s surplus” of an individual, i.e., his “economic rent,” or the amount of his income above the payment necessary for him to continue production.The consequences of taxation of site rent were noted above.The “necessary payments” to labor are clearly impossible to establish; if someone is asked by the tax authorities what his “minimum” wage is, what will prevent him from saying that any amount below the present wage will cause him to retire or to shift to another job? Who can prove differently? Furthermore, even if it could be determined, this “surplus” is hardly an indicator of ability to pay.A movie star may have practically zero surplus, for some other studio may be willing to bid almost as much as he makes now for his services, while a disabled ditch-digger may have a much greater “surplus” because no one else may be willing to hire him.Generally, in an advanced economy there is little “surplus” of this type, for the competition of the market will push alternative jobs and uses near to the factor’s discounted marginal value product in its present use.Hence, it would be impossible to tax any “surplus” over necessary payment from land or capital since none exists, and practically impossible to tax the “surplus” to labor since the existence of a sizable surplus is rare, impossible to determine, and, in any case, no criterion whatever of ability to pay
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