A "classical liberal" argument for progressive taxation

There are several subtle differences between various definitions of 'progressive taxation' which I don't want to get into here. I'll just say that a progressive tax scheme is one in which the wealthy pay more than the poor. The tax system in the US is nominally progressive but effectively fairly regressive -- there are lots of loopholes that allow the wealthy to avoid having their income and expenses taxed, as well the cuts to capital gains and estate taxes passed since 2000.

So-called "classical" liberalism is the nominal liberalism of the Libertarian party, or more accurately the views of Adam Smith or John Locke. On this view, small, limited government that exists primarily to guarantee freedoms, and a largely free market, are seen as the best way to promote the common good. Note the final clause: that's critical. After all, Smith's book isn't just about how the rich in a free market economy get rich; it's about how a free market economy benefits everyone in the society. I'm not positive, but I believe the supply-side cliche that "a rising tide lifts all boats" is actually from The Wealth of Nations.

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Now, in light of that important clause, we consider why the classical liberal feels the whole capitalism thing is so great. A great many of them, of course, just want to be rich, but selfishness has never really caught on a good foundation of moral philosophy. (This is not pace Ayn Rand, for two reasons. One of which is that her "philosophy" doesn't provide a good foundation for a coffee table. 15 Ra points to someone who explains the other reason. You're allowed to ask questions in the comments.) Instead, the more philosophically reflective classical liberals have always argued that capitalism is good because, in a free market, our acquisitive nature gets us to produce more and more goods and services, and distribute them more widely. That is, the pursuit of wealth is good because it drives the creation and distribution of wealth.

My argument here is that capital gains and estate taxes, the two major ways the incomes of the wealthiest members of our society are (were) taxed, and the two inherently most progressive forms of taxation, work in exactly the same way. I take it to be clear that inheriting wealth doesn't lead to the creation of more wealth. The reader might be more sceptical about investment in stocks -- they're offered, after all, as a way for a business to acquire the capital needed to expand, ie, create more wealth. But the remuneration for this takes the form of dividends, not capital gains: capital gains are nothing more than making money by playing on a transient epiphenomenon of human psychology.

Hence, capital gains and estate taxes encourage people to pursue gainful occupations, rather than attempt to acquire wealth by means which do not serve to create new wealth.