Taxation - Chapter 5

American Journal of Economics and Sociology, The, Dec, 2002

Taxes on Labor

Brown's next two chapters dealt with taxes on labor. He divided his brief treatment into three cases: taxes on wages in general; taxes on wages in a given line of work; and taxes on "surplus" labor incomes. A then largely hypothetical tax on wages had for Brown long-run effects that depended primarily on how population was affected. That the revenues from such a tax may be used to benefit wage-earners was not ignored, but he pointed out that this may not be the case and that nominal incomes were lowered regardless of other sources of income. The effect of such a tax on population growth was seen as uncertain, although a sufficiently large tax probably would reduce this rate of growth and thereby tend to raise future wage rates. He further argued that should the rate of population growth fall, the landowning class definitely would find its income reduced as the Physiocrats had maintained. However, he saw this only as a possibility contingent on many factors, as he viewed an increased birth rate as a conceivabl e consequence of lower living standards.

Otto von Mering, in his text The Shifting and Incidence of Taxation (1942), referred frequently to Brown's treatment of a wage on a particular line of work or occupation. (38) Brown saw wages in the taxed line of work eventually rising to their original position relative to other lines of work and thus putting downward pressure on other wage rates. Mering objected to Brown's implication that labor and labor alone would bear the burden of the tax. (39) Furthermore, Mering noted that this was not compatible with Brown's view of the effect of a particular commodity tax. Mering was correct in part. However, Brown had qualified his position by pointing out that his conclusion required a redistribution of workers out of the taxed area, which may occur slowly and incompletely because of a lack of substitutability in employment, tastes in work, or the existence of rents in highly specialized areas of work. Mering's point as to compatibility remained, yet Brown had indicated an awareness of the problem:

we have to reopen for possible qualification of our conclusion, the case of taxes on commodities. For although such taxes may seem to be shifted, in large part, on consumers, in the first instance, it is possible that in the long run some or all of the consumers (in our present problem, the wage earners) will find the burden again shifted upon the shoulders of some other class or classes. (40)

Brown's last case was the incidence of taxes on surplus or unusually high labor incomes. He described the present system of income taxes as a discriminatory tax where it applied to labor incomes. He concluded that such a tax would not be likely to reduce the numbers in these high-paying areas because advancement toward them would remain relatively unimpeded as long as lower incomes were not taxed at the same rate.

In an article published two years earlier and included in his text, Brown considered the incidence of compulsory insurance of workers. (41) The article was probably inspired by his dissent from the then common opinion that the incidence of such a tax would ultimately lie with the consumers of the goods produced by insured workers. Brown cited Taussig (42) as holding in general the correct view and in the article Brown expanded and refined this view. Compulsory insurance programs were under consideration in this country, while Germany in 1884, Great Britain in 1897 and the state of California in 1916 had implemented insurance programs. (43) Brown examined in succession the cases where the insurance was general (paid by all employers) and where only high-risk industries were made to pay. Brown took into consideration the advantages of compensation for employees. He maintained (with Taussig) that in the first case the long-run effect would fall on wage earners alone with only minor qualifications. By the early 1930s unemployment insurance schemes were topical and studies would cite Brown's analysis, such as Dale Yoder's 1931 Quarterly Journal of Economics article: "Ultimately, wages tend to be reduced by the amount of the tax and employment to return to its former level. Professor Brown has described this result and the manner in which this readjustment takes place with care and clarity.,, (44) J. A. Brittain has pointed out that Brown assumed in addition to a fixed labor supply that "the tax would not increase the money supply and have little effect on aggregate demand." (45) In their text Public Finance, Earl Rolph and George Break referred to Brown's article as the original one to treat this subject. (46) As late as 1997 a political scientist would attribute, somewhat incorrectly, the incidence of Social Security taxation to Brown and Brittain. (47) E. H. Downing, in his posthumous Workmen's Compensation, argued (as noted by Dorfman) that Brown had taken the marginal productivity doctrine to extremes in order to reach his conclusion. (48) Downing, an advocate of such insurance, mistook Brown's position and implied that he did not favor compulsory insurance when he actually did.