The tax state and entrepreneurial profit

Corey Robin, the author of The Reactionary Mind, wrote on Crooked Timber:

Schumpeter famously said that taxes are the “thunder of world history.”

In The Guardian, he put it this way:

Taxes are the “thunder of world history,” wrote Joseph Schumpeter. “The spirit of a people … is written in its fiscal history.”

Schumpeter’s 1918 essay, Die Krise des Steuerstaats (The Crisis of the Tax State), is available at free of charge, but in the original German. One can also find an English translation at The sentence concerning the “thunder of history” can be found on page 7 of the original article:

Wer ihre Botschaft zu hören versteht, der hört da deutlicher als irgendwo den Donner der Weltgeschichte.

“Ihre” refers to “die Finanzgeschichte,” commonly translated as “fiscal history.” If I understand him correctly, Schumpeter is saying this: If you have the ears for the message of fiscal history, you should be able to hear the thunder of world history in it, more clearly than anywhere else.

This 1918 article is an investigation into the emergence of the fiscal state and the limits of the taxman’s reach. However, it also includes a reference to what would become one of Schumpeter’s central ideas.

Entrepreneurial profit proper… arises in the capitalist economy wherever a new method of production, a new commercial combination, or a new form or organization is successfully introduced. It is the premium which capitalism attaches to innovation. As it arises continuously so it disappears continuously through the effect of competition… Even if taxation merely reduced this profit substantially [without taxing it all away], industrial development would progress considerably more slowly…

However, in 1918 Schumpeter did not yet regard entrepreneurial profit as a special case of monopolistic profit:

The monopoly profit of a cartel, for instance, that is the difference between the net return and the sum which is necessary to pay for the means of production employed (including interest) may be almost completely taxed away without any unfavorable repercussions. So can pure ground rent…

The Economist ran a good summary of this work in this article, published in 1983 to mark Schumpeter’s centenary. The review makes for much more satisfying reading than Schumpeter columns in The Economist nowadays – such as this one, where the author attributes Schumpeter’s ideas to Ayn Rand.

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