Thanks to Marris, I think this is the passage from MES that made me think I had a disagreement with Rothbard on an income tax’s impact on saving (pp. 917-919 of the Scholar’s Edition):
Some economists maintain that income taxation reduces savings and investment in society in yet a third way. They assert that income taxation, by its very nature, imposes a “double” tax on savings-investment as against consumption. The reasoning
runs as follows… [Omitted for brevity.–RPM.]…Hence, the imposition of an income tax is a “double” tax on consumption, and excessively penalizes saving and investment.
This line of reasoning correctly explains the investment-consumption process. It suffers, however, from a grave defect: it is irrelevant to problems of taxation. It is true that saving is a fructifying agent. But the point is that everyone knows this; that is precisely why people save. Yet, even though they know that saving is a fructifying agent, they do not save all their income. Why? Because of their time preferences for present consumption. Every individual, given his current income and value scales, allocates that income in the most desirable proportions between consumption, investment, and additions to his cash balance. Any other allocation would satisfy his desires less well and lower his position on his value scale. The fructifying power of saving is already taken into account when he makes his allocation. There is therefore no reason to say that an income tax doubly penalizes saving-investment; it penalizes the individual’s entire standard of living, encompassing present consumption, future consumption, and his cash balance. It does not per se penalize saving any more than the other avenues of income allocation.
This Fisher argument reflects a curious tendency among economists devoted to the free market to be far more concerned about governmental measures penalizing saving and investment than they are about measures hobbling consumption. Surely an economist favoring the free market must grant that the market’s voluntary consumption/investment allocations are optimal and that any government interference in this proportion, from either direction, is distortive of that market and of production to meet the wants of the consumers. There is nothing, after all, particularly sacred about savings; they are simply the road to future consumption. But they are, then, clearly no more important than present consumption, the allocations between the two being determined by the time preferences of all individuals. The economist who balks more at interference with free-mar- ket savings than he does at infringement on free-market consumption is therefore implicitly advocating statist interference in the opposite direction. He is implicitly calling for a coerced distortion of resources to lower consumption and increase investment.
I’m not certain that the above passage is what made me file away the belief that “Rothbard doesn’t think an income tax distorts the saving/consumption decision in a bad way,” but it is definitely along the lines of what I vaguely remembered.
However, the thing that’s funny is that in the two pages before the above excerpt, Rothbard spells out the standard logic for why an income tax alters the tradeoff:
The income tax, by taxing income from investments, cripples saving and investment, since it lowers the return from investing below what free-market time preferences would dictate. The lower net interest return leads people to bring their savings-investment into line with the new realities; in short, the marginal savings and investments at the higher return will now be valued below consumption and will no longer be made.
So at this point I’m thoroughly confused. When mainstream economists complain about “double taxation” and say that it discourages saving/investment, they are relying on the same analysis that Rothbard just gave (in the second quotation).
Since I am going to re-read the whole chapter on interventionism for my online class, I’ll come back to this issue after I have seen Rothbard’s entire tax analysis and have digested it in one full sweep. Maybe I’ll understand the context of the above excerpts better and be able to say with confidence what Rothbard meant.
At this point, my guess is the following:
==> Rothbard agreed with the standard mainstream view–a view that is often used by mainstream economists in support of a consumption or sales tax–that an income tax penalizes future consumption more than present consumption, i.e. biases people into saving a lower fraction of their income than they would choose on the free market.
==> However, Rothbard objects to the standard rhetoric that accompanies this (correct) analysis, because this rhetoric often invokes the odd phrase “double taxation” and makes it sound as if lower saving per se is a bad thing, when really the problem is with saving below the free-market level.
Last point: You might think that since I wrote the study guide to Man, Economy, and State, I would know this stuff like the back of my hand. If so, you are wrong. How embarrassed you must be, right about now.