Chapter 12—The Economics of Violent
Intervention in the Market (continued)
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Chapter
12—The Economics of Violent Intervention in the Market
(continued)
B.
Attempts at Neutral Taxation
So far, we have discussed the impact of a tax on an individual
considered by himself. Equally important is the distortion of the
market’s pattern of factor prices and
incomes, created by the way taxes bear down upon different people. The
free market determines an intricate, almost infinite array and
structure of prices, rates, and incomes. The imposition of different
taxes disrupts these patterns and cripples the
market’s work of allocating resources and output. Thus, if
firm A pays $5,000 a year for a certain type of labor, and firm B pays
$3,000, laborers will tend to shift from B to A and thereby more
efficiently serve the wants of consumers. But if the income earned at
firm A is taxed $2,000 per annum, while income at B is taxed negligibly
or not at all, the market inducement to move from B to A will totally
or virtually disappear, perpetuating a misallocation of
productive resources and hampering the growth and even the
existence of firm A.
We have seen above that the quest for a neutral tax—a
tax neutral to the market, leaving the market roughly as it was
before the tax was imposed—is a hopeless venture.
For there can be no uniformity in paying taxes when some people in
society are necessarily taxpayers, while others are privileged
tax-consumers. But even if we disregard these objections and
fail to consider the redistributionist effects of government spending
out of tax revenues, we cannot arrive at a system of neutral
taxation.
Many writers have
maintained that uniformly proportional income taxes for all would yield
a neutral tax; for then, the relative ratios of incomes in
society would remain the same as before. Thus, if A received
$6,000 a year, B earned $3,000, and C $2,000, a 10-percent tax on each
man would yield a “distribution” of: A, $5,400; B,
$2,700; C, $1,800—the same mutual ratios as before.
(This assumes, of course, no disincentive effects of the tax on the
various individuals or, rather, equiproportional disincentive
effects on each individual in the society—a most unlikely
occurrence.) But the trouble is that this
“solution” misconceives the nature of what a
neutral tax would have to be. For a tax truly neutral to the free
market would not be one that left income patterns the same as
before; it would be a tax which would affect the income
pattern, and all other aspects of the economy, in the same way as if
the tax were really a free-market price.
This is a very important correction; for we must surely realize that
when a service is sold at a certain price on the free market, this sale
emphatically does not leave income
“distribution” the same as before. For, normally,
market prices are not proportional to each
man’s income or wealth, but are uniform in the
sense of equal to everyone, regardless of his income or
wealth or even his eagerness for the product. A loaf of bread does not
cost a multimillionaire a thousand times as much as it costs the
average man. If, indeed, the market really behaved in this
way, there would soon be no market, for there would be no advantage
whatever in earning money. The more money one earned, the
more, pari passu, the price of every good would be
raised to him. Therefore, the entire civilized money economy
and the system of production and division of labor based upon
it would break down. Far from being “neutral” to
the free market, then, a proportional income tax follows a
principle which, if consistently applied, would eradicate the
market economy and the entire monetary economy itself.
It is clear, then, that equal taxation of everyone—the
so-called “head tax” or “poll
tax”—would be a far closer approach to the goal of
neutrality. But even here, there are serious flaws in its neutrality,
entirely apart from the ineluctable
taxpayer–tax-consumer dichotomy. For one thing,
goods and services on the free market are purchased only by those
freely willing to obtain them at the market price. Since a tax is a
compulsory levy rather than a free purchase, it can never be assumed
that each and every member of society would, in a free market, pay this
equal sum to the government. In fact, the very compulsory nature of
taxation implies that far less revenue would be paid in to the
government were it conducted in a voluntary manner. Rather
than being neutral, therefore, the equal tax would distort market
results by imposing undue levies on at least three groups of
citizens: the poor, the uninterested, and the hostile, i.e.,
those who, for one reason or another, would not
have voluntarily paid these equal sums to the government.
Another grave problem in treating the equal tax as akin to a
free-market price is that we do not know what
“services” of government the people are
supposed to be “purchasing.” For example,
if the government uses the tax to subsidize a certain favored group, it
is difficult to know what sort of “service” the
payers of the head tax are reaping from this act of government. But let
us take a seemingly clear-cut case of pure service, police
protection, and let us assume that the head tax is being paid
for this expenditure. The free-market rule is that equal prices are
paid for equal services; but what, here, is an “equal
service”? Surely, the service of police protection is of far
greater magnitude in an urban crime center than it is in some sleepy
backwater, where crime is rare. Police protection will certainly cost
more in the crime-ridden area; hence, if it were supplied on the
market, the price paid there would be higher than in the backwater.
Furthermore, a person under particular threat of crime, and
who might require greater surveillance, would have to pay a higher
police fee. A uniform tax would be below market price in the dangerous
areas and above it in the peaceful areas. To approach neutrality, then,
a tax would have to vary in accordance with the costs
of services and not be uniform.
This is the neglected cost
principle of taxation.
The cost principle, however, is hardly neutral either. Apart from the
inexorable taxpayer–tax-consumer problem, there is, again,
the problem of how a “service” is to be defined and
isolated. What is the “service” of
redistribution from Peter to Paul, and what is the
“cost” for which Peter is to be assessed? And even
if we confine the discussion to such common services as police
protection, there are grave flaws. In the first place, the costs of
government, as we shall see further below, are bound to be much higher
than those of the free market. Secondly, the State cannot calculate
well and therefore cannot gauge its costs accurately. Thirdly, costs
are equal to prices only in equilibrium; since the economy is never in
equilibrium, costs are never a precise estimate of what the
free-market price would have been. And finally, as in the equal tax,
and in contrast to the free market, the taxpayer never demonstrates
his benefit from the governmental act; it is simply and
blithely assumed that he would have purchased the service voluntarily
at this price.
Still another attempt at neutral taxation is the benefit
principle, which states that a tax should be levied equal to
the benefit which the individuals receive from the government service.
It is not always realized what this principle would mean: e.g., that
recipients of welfare benefits would have to pay the full
costs of these benefits. Each recipient of government welfare would
then have to pay more than he received, for he
would also have to pay the “handling” costs of
government bureaucracy. Obviously, there would be no such welfare or
any other subsidy payments if the benefit principle were maintained.
Even if we again confine the discussion to services like police
protection, grave flaws still remain. Let us again disregard
the persistent taxpayer–tax-consumer dichotomy. A fatal
problem is that we cannot measure benefits or even know whether they
exist. As in the head tax and cost principles, there is here no free
market where people can demonstrate that
they are receiving a benefit from the exchange greater than the value
of the goods they surrender. In fact, since taxes are levied by
coercion, it is clear that people’s benefits from
government are considerably less than the
amount that they are required to pay, since, if left free, they would
contribute less to government. The “benefit,” then,
is simply assumed arbitrarily by government officials.
Furthermore, even if the benefit were freely demonstrable, the benefit
principle would not approach the process of the free
market. For, once again, individuals pay a uniform
price for services on the free market, regardless of the
extent of their subjective benefits. The man who would “walk
a mile for a Camel” pays no more, ordinarily, than the man
who couldn’t care less. To tax everyone in accordance with
the benefit he receives, then, is diametrically opposed to the
market principle. Finally, if everyone’s benefit is taxed
away, there would be no reason for him to make the exchange or to
receive the government service. On the market, not all people,
not even the marginal buyers, pay the full amount
of their benefit. The supramarginal buyers obtain unmeasurable
surplus benefit, and so do the marginal buyers, for
without such a surplus they would not buy the product.
Moreover, for such services as police protection, the benefit
principle would require the poor and the infirm to pay more
than the rich and the able, since the former may be said to benefit
more from protection. Finally, it should be noted that if each
person’s benefit from government is to be taxed away, the
bureaucrats, who receive all their income from the government,
would have to return their whole salary to the government and so serve
without pay.
We have thus seen that no principle of taxation can be neutral with
respect to the free market. Progressive taxation,
where each man pays more than proportionately to
his income, of course makes no attempt at neutrality. If the
proportional tax embodies a principle destructive to the entire market
economy and the monetary economy itself, then the progressive tax does
so still more. For the progressive tax penalizes the able and efficient
in even greater proportion than their relative ability and efficiency.
Progressive rates are a particular disincentive against especially able
work or entrepreneurship. And since such ability is engaged in serving
the consumer, a progressive tax levies a particular burden on
the consumers as well.
In addition to the two ways discussed above by which income taxation
penalizes saving, the progressive tax imposes an added penalty. For
empirically, in most cases, the wealthy save and invest proportionately
more of their incomes than the lower-income groups. There is, however,
no apodictic, praxeological reason why this must always be so. The rule
would not hold, for example, in a country where the wealthy bought
jewelry while the poor thriftily saved and invested.
While the progressive principle is certainly highly destructive of the
market, most conservative, pro-free-market economists tend to overweigh
its effects and to underweigh the destructive effects of proportional
taxation. Proportional income taxation has many of the same
consequences, and therefore the level of income
taxation is generally more important for the market than the
degree of progressivity. Thus, society A may have a proportional income
tax requiring every man to pay 50 percent of his income; society B may
have a very steeply progressive tax requiring a poor man to
pay percent and the richest man
10 percent of his income. The rich man will certainly prefer society B,
even though the tax is
progressive—demonstrating that it is not so much the
progressivity as the height of his tax that burdens the rich man.
Incidentally, the poor producer, with a lower tax upon him, will also
prefer society B. This demonstrates the fallacy in the common
conservative complaint against progressive taxation that it is a means
“for the poor to rob the rich.” For both the poor
man and the rich man have, in our example, chosen progression! The
reason is that the “poor” do not “rob the
rich” under progressive taxation. Instead, it is the State
that “robs” both through taxation, whether
proportional or progressive.
It may be objected that the poor benefit from the State’s
expenditures and subsidies from the tax proceeds and thus do
their “robbing” indirectly. But this overlooks the
fact that the State can spend its money in many different ways: it may
consume the products of specific industries; it may subsidize some or
all of the rich; it may subsidize some or all of the poor. The fact of
progressivity does not in itself imply that the
“poor” are being subsidized en masse.
Indeed, if some of the poor are being subsidized, others will probably
not be, and so these latter net taxpayers will be
“robbed” along with the rich. In fact, since there
are usually far more poor than rich, the poor en masse may very well
bear the greatest burden of even a progressive tax system.
Of all the possible types of taxes, the one most calculated to cripple
and destroy the workings of the market is the excess profits
tax. For of all productive incomes, profits are a relatively
small sum with enormous significance and impact; they are the motor,
the driving force, of the entire market economy. Profit-and-loss
signals are the prompters of the entrepreneurs and capitalists who
direct and ever redirect the productive resources of society in the
best possible ways and combinations to satisfy the changing desires of
consumers under changing conditions. With the drive for profit
crippled, profit and loss no longer serve as an effective incentive,
or, therefore, as the means for economic calculation in the market
economy.
It is curious that in wartime, precisely when it would seem most urgent
to preserve an efficient productive system, the cry invariably goes up
for “taking the profits out of war.” This zeal
never seems to apply so harshly to the clearly war-borne
“profits” of steel workers in higher
wages—only to the profits of entrepreneurs. There is
certainly no better way of crippling a war effort. In addition, the
“excess” concept requires some sort of norm above
which the profit can be taxed. This norm may either be a certain rate
of profit, which involves the numerous difficulties of measuring profit
and capital investment in every firm; or it may refer to profits at a
base period before the war started. The latter, the general favorite
because it specifically taps war profits, makes the
economy even more chaotic. For it means that while the government
strains for more war production, the excess profits
tax creates every incentive toward lower and inefficient war
production. In short, the EPT tends to freeze the process of
production as of the peacetime base period. And the longer the
war lasts, the more obsolete, the more inefficient and absurd, the
base-period structure becomes.
C.
Shifting and Incidence: A Tax on an Industry
No discussion of taxation, however brief, can overlook the famous
problem of “the shifting and incidence” of
taxation. In brief, who pays a tax? The person on whom it is levied, or
someone else to whom the former is able to
“shift” the tax? There are still economists,
incredibly, who hew to the old nineteenth-century “equal
diffusion” theory of taxation, which simply closes the
problem by proclaiming that “all taxes are shifted to
everyone,” so that there is no need to analyze each one in
particular.
This obscurantist tendency
is fostered by treating “shifting” in too broad a
way. Thus, if an income tax is levied on Jones at 80 percent, this will
hurt not only Jones, but also—by
decreasing Jones’ incentives as well as
capacities—other consumers by reducing Jones’ work
and savings. It is therefore true that the effects
of taxation diffuse outward from the center of the target. But this is
far from saying that Jones can simply shift the tax burden onto the
shoulders of others. The concept of
“shifting” will here be limited to the case where
the payment of a tax can be directly transferred from
the original payer to someone else, and will not be used when others
suffer in addition to the original taxpayer. The
latter may be called the “indirect effects” of the
tax.
The first rule of shifting is that an income tax cannot be
shifted. This formerly accepted truth in economics is now
countered with the popular assumption that, for example, a tax on wages
will spur unions to demand higher wages to compensate for the tax, and
that therefore the tax on wages is shifted
“forward” onto the employer, who, in turn, shifts
it again forward onto the body of consumers. And yet almost every step
in this commonly proclaimed sequence is an egregious fallacy.
It is absurd, in the first place, to think that workers or unions wait
quietly for a tax to galvanize them into making demands. Workers always
want higher wages; unions always demand more. The question is: Will
they get more? There is no reason to think that they can. A worker can
get only the value of the discounted marginal productivity of his
labor. No clamor will raise that productivity, and therefore none can
raise the wage he earns from his employer. Union demands for
higher wages will be treated as usual, i.e., they can be satisfied only
at the cost of the unemployment of some of the work force in that
industry. But this is true whether or not there has been a tax on
wages; the tax will have nothing to do with the final wage set on the
market.
The idea that the increased cost will be passed on to the
consumer by the employer is an illustration of perhaps the
single most widespread fallacy on taxation: that businessmen can simply
shift their higher costs forward onto the consumers in the form of
higher prices. All the economic theory expounded in this book shows the
error of this doctrine. For the price of a given product is set by the
demand schedules of the consumers. There is nothing in higher costs or
higher taxes which, per se, increases these
schedules; hence, any change in
selling prices, whether higher or lower, will decrease
the revenues of the business involved. For each business, on the
market, tends to be, at all times, at its “maximum profit
point” in relation to the consumers. Prices are already at
their point of maximum return for the business; therefore, higher taxes
or other costs imposed on the firm will reduce their net incomes rather
than be smoothly and easily passed on to consumers. We thus
arrive at this significant conclusion: no tax (not
just an income tax) can ever be shifted forward.
Suppose that a particularly heavy tax—of whatever
type—has been laid on a specific industry: say the liquor
industry. What will be the effects? As we have noted, the tax will not
simply be “passed on” to the consumers.
Instead, the price of
liquor will remain the same; the net income of the firms will decline.
This will mean that returns will be lower to capital and enterprise in
liquor than in other industries of the economy; marginal liquor firms
will suffer losses and go out of business; and, in general, productive
resources of all types will flow out of liquor and into other
industries. The long-run effect,
therefore, is to decrease the supply of liquor produced, and therefore,
by the law of supply and demand, to raise the price of liquor on the
market. However, as we have said above, this process—this
diffusion of suffering over the economy—is hardly
“shifting.” For the tax is not simply
“passed on”; it only permeates to the consumers through hurting
the industry taxed. The final result will be a distortion of the
factors of production; fewer goods are now being produced than
the consumers would prefer in the liquor industry; and too many goods,
relatively to liquor, are being produced in the other industry.
Taxes, in short, can more readily be “shifted
backward” than forward. Strictly, the result is not shifting
because it is not a painless process. But it is clear that the backward
process (backward to the factors of production) happens more
quickly and directly than the effects on consumers. For losses or
lowered profits to liquor firms will immediately lower their demand for
land, labor, and capital factors of production; this falling of demand
schedules will lower wages and rents earned in the liquor
industry; and these lower earnings will induce a shift of
labor, land and capital out of liquor and into other industries. The
rapid “backward-shifting” is in harmony with the
“Austrian” theory of consumption and production
developed in this volume; for prices of factors are determined by the
selling prices of the goods which they produce, and not vice
versa (which would have to be the conclusion of the naive
“shifting-forward” doctrine).
It should be noted that, in some cases, the industry itself can welcome
a tax upon it, for the sake of conferring an indirect, but effective,
monopolistic privilege on the supramarginal firms. Thus, a flat
“license” tax will confer a particular privilege on
the more heavily capitalized firms, which can more easily afford to pay
the fee.
D.
Shifting and Incidence: A General Sales Tax
The most popular example of a tax supposedly shifted forward
is the general sales tax. Surely, for example, if
the government imposes a uniform 20-percent tax on all retail
sales, and if we can make the simplifying assumption that the tax can
be equally well enforced everywhere, then business will simply
“pass on” the 20-percent increase in all prices to
consumers. In fact, however, there is no way for prices to increase at
all! As in the case of one particular industry, prices were
previously set, or approximately so, at the points of maximum net
revenue for the firms. Stocks of goods or factors have not yet changed,
and neither have demand schedules. How then could prices rise?
Moreover, if we look at the general array of prices, as is proper when
dealing with a general sales tax, these are determined by the
supply of and the demand for money, from the goods and money
sides. For the general array of prices to rise, there must be either an
increase in the supply of money, a decrease in the demand
schedule for money, or both. Nothing in a general sales tax causes a
change in either of these determinants.
Furthermore, the long-run effects of a general sales tax on prices will
be smaller than in the case of an equivalent partial excise tax. A tax
on a specific industry, such as liquor, will push resources out of this
industry and into others, and therefore the relative price of the taxed
commodity will eventually rise. In a general, uniformly enforced sales
tax, however, there is no room for such shifts of resources.
The myth that a sales tax can be shifted forward is comparable to the
myth that a general union-imposed wage increase can be shifted forward
to higher prices for consumers, thereby “causing
inflation.” There is here no way that the general array of
prices can rise, and the only possible result of such a wage increase
is mass unemployment.
In considering the general sales tax, many people are misled by the
fact that the price paid by the consumer necessarily includes
the tax. If someone goes to a movie and pays $1.00 admission, and if he
sees prominently posted the information that this covers a
“price” of 85¢ and a tax of 15¢,
he tends to conclude that the tax has simply been added on to the
“price.” But $1.00 is the price, not 85¢,
the latter sum simply being the revenue accruing to the firm after
taxes. The revenue to the firm has, in effect, been reduced
to allow for payment of taxes.
This is precisely the consequence of a general sales tax. Its
immediate impact lowers the gross revenue of firms by the
amount of the tax. In the long run, of course, firms cannot pay the
tax, the loss in gross revenue of firms being imputed backward to
interest income by capitalists and to wages and rents earned by owners
of original factors—labor and ground land. A decrease in
gross revenue to retail firms is reflected back to a decreased
demand for the products of all the higher-order firms. The
major result of a general sales tax is a general reduction in the net
revenues accruing to original factors. The sales tax has been shifted
backwards to original factor returns—to interest
and to all wages and ground rents. No longer does every original factor
of production earn its discounted marginal product. Original
factors now earn less than their DMVPs, the
reduction consisting of the sales tax paid to the government.
Let us now integrate this analysis of the incidence of a general sales
tax with our previous general analysis of the benefits and burdens of
taxation. This is accomplished by remembering that the proceeds of
taxation are, in turn, spent by the government. Whether or not the
government spends the money for resources for its own activities or
simply transfers the money to people it subsidizes, the effect is to shift
consumption and investment demand from private hands to the
government or to government-supported individuals, by the amount of the
tax revenue. The tax has been ultimately levied on the incomes
of original factors, and the money transferred from their hands to the
government. The income of the government and of those subsidized by the
government has been increased at the expense of the tax
producers, and therefore consumption and investment demands on
the market have been shifted from the producers to the expropriators by
the amount of the tax. As a consequence, the value of the monetary unit
will remain unchanged (barring a difference in demands for money
between the taxpayers and the tax-consumers), but the array
of prices will shift in accordance with the shift in demands. Thus, if
the market has been spending heavily on clothing, and the government
uses the revenue mostly for the purchase of arms, there will be a fall
in the price of clothes and a rise in the price of arms, and a tendency
for nonspecific factors to shift out of the production of clothing and
into the production of armaments.
As a result, there will not finally be, as might be assumed, a
proportional 20-percent fall in all original factor incomes as the
result of a 20-percent general sales tax. Specific factors in
industries that have lost business from the shift from private to
governmental demand will lose proportionately more in income; specific
factors in industries gaining in demand will lose
proportionately less—some may gain so much as to gain
absolutely from the change. Nonspecific factors will not be
affected as much proportionately, but they too will lose and gain
according to the difference that the concrete shift in demand makes in
their marginal value productivity.
It should be carefully noted that the general sales tax is a
conspicuous example of failure to tax consumption.
The sales tax is commonly supposed to penalize
consumption, rather than income or capital. Yet we find that the sales
tax reduces, not just consumption, but the incomes
of original factors. The general sales tax is therefore an
income tax, albeit a rather haphazard one. Many
“right-wing” economists have advocated general
sales taxation, as opposed to income taxation, on the grounds that the
former taxes consumption but not savings-investment; many
“left-wing” economists have opposed sales taxation
for the same reason. Both are mistaken; the sales tax is an income tax,
though of a more haphazard and uncertain incidence. The major effect of
the general sales tax will be that of the income tax—to
reduce the consumption and the saving-investment of
the taxpayers.
In fact, since, as we have
seen, the income tax by its nature falls more heavily on
savings-investment than on consumption, we reach the
paradoxical and important conclusion that a tax on consumption will
fall more heavily on savings-investment than on
consumption in its ultimate incidence.
E.
A Tax on Land Values
Wherever taxes fall, they blight, hamper, and distort the
productive activity of the market. Clearly, a tax on wages
will distort the allocation of labor effort, a tax on profits will
cripple the profit-and-loss motor of the economy, a tax on interest
will tend to consume capital, etc. One commonly conceded
exception to this rule is the doctrine of Henry George that
ground-landowners perform no productive function and that therefore the
government may safely tax site value without reducing the supply of
productive services on the market. This is the economic,
as distinguished from the moral, rationale for the famous
“single tax.” Unhappily, very few economists have
challenged this basic assumption, the single-tax proposal being
generally rejected on grounds purely pragmatic (“there is no
way in practice of distinguishing site from improvement value of
land”) or conservative (“too much has been invested
in land to expropriate the landowners now”).
Yet this central Georgist contention is completely fallacious. The
owner of ground land performs a very important productive service. He
finds, brings into use, and then allocates, land sites to the most
value-productive bidders. We must not be misled by the fact that the
physical stock of land is fixed at any given time. In the case of land,
as of other material goods, it is not just the physical good that is
being sold, but a whole bundle of services along with
it—among which is the service of transferring
ownership from seller to buyer, and doing so efficiently.
Ground land does not simply exist; it must be served
to the user by the owner (one man, of course, can
perform both functions when the land is “vertically
integrated”).
The landowner earns the
highest ground rents by allocating land sites to their most
value-productive uses, i.e., to those uses most desired by
consumers. In particular, we must not overlook the importance
of location and the productive
service of the site-owner in assuring the most productive locations for
each particular use.
The view that bringing sites into use and deciding upon their location
is not really “productive” is a vestige from the
old classical view that a service which does not tangibly
“create” something physical is not
“really” productive.
Actually, this function is
just as productive as any other, and a particularly vital function it
is. To hamper and destroy this function would wreck the market
economy.
F.
Taxing “Excess Purchasing Power”
In this necessarily hasty overview of the high spots of
taxation theory, we have space for only one more comment: a
criticism of the very common view that, in a business boom, the
government should increase taxation “in order to sop up
excess purchasing power,” and thereby halt the inflation and
stabilize the economy. We shall discuss the problems of inflation,
stabilization, and the business cycle below; here, let us note the
oddity of assuming that a tax is somehow less of a
social cost, less of a burden, than a price. Thus,
suppose, in a boom, that Messrs. A, B, and C, with the money they have
on hand, would spend a certain amount on some commodity—say
pipes—at a certain market price, e.g., $10 per pipe. The
government decides that this is a most unfortunate situation, that the
market price is—by some arbitrary, undivulged
standard—“too high,” and that therefore
it must help its subjects by taxing their money away from them, and
thus lowering prices. Suppose, indeed, that A, B, and C are taxed
sufficiently to lower the pipe price to, say, $8. By what reasoning are
they better off, now that taxes have been increased by precisely the
amount that their monetary funds have dwindled? In short, the
“tax price” has gone up in order that the prices of
other goods may decline. Why is a voluntary price, paid willingly by
buyers and accepted by sellers, somehow “bad” or
burdensome for the buyers, while at the same time a
“price” levied compulsorily on the same buyers for
dubious governmental services for which they have not
demonstrated a need is somehow “good”? Why
are high prices burdensome and high taxes not?
9.
Binary Intervention: Government Expenditures
A.
The “Productive Contribution” of
Government Spending
Government expenditures are a coerced transfer of resources from
private producers to the uses preferred by government
officials. It is customary to classify government spending
into two categories: resource-using, and transfer.
Resource-using expenditures frankly shift resources from
private persons in society to the use of government: this may take the
form of hiring bureaucrats to work for government—which
shifts labor resources directly—or of buying products from
business firms. Transfer payments are pure subsidy
spending—when the government takes from Peter to pay Paul. It
is true that, in the latter case, the government gives
“Paul” money to decide the allocation as he wishes,
and in a sense we may analyze the two types of spending separately. But
the similarities here are greater than the differences. For, in both
cases, resources are seized from private producers and shifted to the
uses which government officials think best. After all, when a
bureaucrat receives his government salary, this payment is in the same
sense a “transfer payment” from the taxpayers, and
the bureaucrat is also free to decide how further to allocate the
income at his command. In both cases, money and resources are
shifted from producers to nonproducers, who consume or
otherwise use them.
This type of analysis of government has been neglected because
economists and statisticians tend to assume, rather blithely, that
government expenditures are a measure of its productive
contribution to society. In the “private
sector” of the economy, the value of productive output is
sensibly gauged by the amount of money that consumers spend voluntarily
on that output. Curiously, on the other hand, the
government’s “productive output” is
gauged, not by what is spent on
government, but by what government itself spends! No wonder that
grandiose claims are often made for the unique productive power of
government spending, when a mere increase in that spending serves to
raise the government’s “productive
contribution” to the economy.
What, then, is the productive contribution of
government? Since the value of government is not gauged on the market,
and the payments to the government are not voluntary, it is impossible
to estimate. It is impossible to know how much would be paid in to the
government were it purely voluntary, or indeed, whether one central
government in each geographical area would exist at all. Since, then,
the only thing we do know is that the tax-and-spend process diverts
income and resources from what they would have been doing in the
“private sector,” we must conclude that the
government’s productive contribution to the economy is
precisely zero. Furthermore, even if it be objected that governmental
services are worth something, it would
have to be noted that we are again suffering from the error pointed out
by Bastiat: a sole emphasis on what is seen,
to the neglect of what is not seen. We may see the
government’s hydroelectric dam in operation; we do not
see the things that private individuals would have done with the
money—whether buying consumers’ goods or investing
in producers’ goods—but which they were
compelled to forgo. In fact, since private consumers would have done
something else, something more desired, and therefore from
their point of view more productive, with the
money, we can be sure that the loss in productivity incurred
by the government’s tax and spending is greater than whatever
productivity it has contributed. In short, strictly, the
government’s productivity is not simply zero, but negative,
for it has imposed a loss in productivity upon society.
Government expenditure is often referred to as
“investment” resulting in
“capital.” And we have heard much in recent years
about Soviet and other multi-Year Plans busily engaged in
building up “capital” by government
action. Yet it is illegitimate to use the term
“capital” for government expenditures. Capital is
the status of productive goods along the path to eventual
consumption. In any sort of division-of-labor economy, capital
goods are built, not for their own sake by the investor, but in order
to use them to produce lower-order and eventually consumers’
goods. In short, a characteristic of an investment expenditure is that
the good in question is not being used to fulfill the needs of the
investor, but of someone else—the consumer. Yet,
when government confiscates resources from the private market economy,
it is precisely defying the wishes of the consumers; when
government invests in any good, it does so to serve the whims of
government officials, not the desires of consumers. Therefore, no
government expenditures can be considered genuine
“investment,” and no government-owned assets can be
considered capital. Government expenditures are divisible into two
parts: consumption expenditures by
government officials, beneficiaries of government subsidies,
and other nonproductive recipients; and waste
expenditures, where government officials really believe that they are
“investing” in “capital.” These
waste expenditures result in waste assets.
The consumption of the
governmentally privileged is, of course, in a different category from
private consumption, since it is necessarily at the expense
of the private consumption of producers. We may therefore call the
former “antiproductive consumption.”
This is true if we also disregard
the grave conceptual difficulties of arriving at a definition
of “income,” in accounting for the imputed monetary
value of work done within a household, of averaging
fluctuating incomes over various years, etc.
We are not here conceding that
“costs” determine “prices.” The
general array of final prices determines the general array of cost
prices, but then the viability of firms is
determined by whether the price that people will pay for their
particular products will be enough to cover the costs, which are
determined throughout the market.
Ever since Adam Smith, economists
have tried, fallaciously, to use the benefit principle to justify
proportional, and even progressive, taxation, on the ground that people
benefit “from society” in proportion, or even more
than in proportion, to their incomes. But it is clear that the rich
benefit less from such services as police
protection, since they could more afford to pay for their own than the
poor. And the rich derive no benefit from welfare expenditures.
Therefore, the rich derive fewer benefits,
absolutely, from government than the poor, and the benefit principle
cannot be used to justify proportional or progressive taxation.
But, it might be objected, can’t we say that everyone derives
proportional benefits to his income from
“society,” though not from government? In
the first place, this cannot be established. In fact, the opposite
argument would be more accurate: for since both A and B participate in
society and its benefits, any differential income between A and B must
be due to their own particular worths rather than
to society. Certainly equal benefits from society cannot be used to
imply a proportional tax. And, furthermore, even if the argument were
true, by what legerdemain can we say that “society”
is equivalent to the State ? If A, B, C, producers on the market,
benefit from each other’s existence as
“society,” how can G, the government, use this fact
to establish its claim to their
wealth?
For a critique of this doctrine,
see E.R.A. Seligman, The Shifting and Incidence of Taxation
(New York: Macmillan & Co., 1899), pp. 122–36.
Businessmen are particularly prone
to this “passing on” argument— obviously
in an attempt to convince consumers that they are
really paying any tax on that industry. Yet the argument is clearly
belied by the very zeal of each industry to have its taxes lowered and
to fight against a tax increase. If taxes could really be shifted so
easily and businessmen were simply unpaid collection agents for the
government, they would never protest a tax on their industry. (Perhaps
this is the reason why almost no businessmen have protested being
collection agents for withholding taxes on their workers!)
It might be objected that the
firms can pass along the sales tax because it is a general
increase for all firms. Aside from the fact that no relevant general
factor (supply, demand for money) has increased, the individual firm is
still concerned only with its individual demand curve, and these curves
have not shifted. A tax increase has done nothing to make a higher
price more profitable than it was before.
Resources can now shift only from
work into idleness (or into barter). This, of course, may and probably
will happen; since, as we shall see further, a sales tax is a tax on
incomes, the rise in opportunity cost of leisure may push some workers
into idleness and thereby lower the quantity of goods produced. To this
extent, prices will eventually rise, although
hardly in the smooth, immediate, proportionate way of
“shifting.” See the pioneering article by Harry
Gunnison Brown, “The Incidence of a General Output or a
General Sales Tax,” reprinted in R.A. Musgrave and C.S.
Shoup, eds., Readings in the Economics of Taxation
(Homewood, Ill.: Richard D. Irwin, 1959), pp. 330–39. While
this was the first modern attack on the fallacy that sales taxes are
shifted forward, Brown unfortunately weakened the implications of this
thesis toward the end of his article.
Of course, if the money supply is
increased after a wage rise, and credit expanded, prices can be raised
so that money wages are again not above their discounted marginal value
products.
Mr. Frank Chodorov, in his The
Income Tax—Root of All Evil (New York: Devin-Adair,
1954), fails to indicate what other type of tax would be
“better” from a free-market point of view, than the
income tax. It is clear from our discussion that there are few taxes
indeed that will not be as bad as the income tax from the viewpoint of
the free market. Certainly sales or excise taxation will not fill the
bill.
Mr. Chodorov, furthermore, is surely wrong when he terms income and
inheritance taxes unique denials of the right of
individual property. Any tax whatever infringes on property right, and
there is nothing in an “indirect tax” which makes
the infringement any less clear. It is true that an income tax forces
the subject to keep records and disclose his personal dealings, thus
imposing a further loss in his utility. The sales tax, however, also
forces record-keeping; the difference again is one of degree rather
than of kind, since here the directness covers only retail storekeepers
instead of the bulk of the population.
Thus, even so eminent an economist
as F.A. Hayek has recently written:
This
scheme [the single tax] for the socialization of land is, in its logic,
probably the most seductive and plausible of all socialist schemes. If
the factual assumptions on which it is based were correct, i.e., if it
were possible to distinguish clearly between the value of the
“permanent and indestructible powers” of the soil .
. . and . . . the value due to . . . improvement . . . the argument for
its adoption would be very strong. (F.A. Hayek, The
Constitution of Liberty [Chicago: University of Chicago
Press, 1960], pp. 352–53)
Also
see a somewhat similar concession by the Austrian economist
von Wieser. Friedrich Freiherr von Wieser, “The Theory of
Urban Ground Rent” in Louise Sommer, ed., Essays in
European Economic Thought
(Princeton, N.J.: D. Van Nostrand, 1960), pp. 78ff.
I do not know anyone who has
brought out the productivity of landowners as clearly as Mr.
Spencer Heath, an ex-Georgist. See Spencer Heath, How
Come That We Finance World Communism? (mimeographed MS., New
York: Science of Society Foundation, 1953); idem, Rejoinder
to ‘Vituperation Well Answered’ by Mr. Mason Gaffney
(New York: Science of Society Foundation, 1953); idem,
Progress and Poverty Reviewed (New York: The
Freeman, 1952).
Spencer Heath comments on Henry
George as follows:
Wherever
the services of land owners are concerned he is firm in his dictum that
all values are physical . . . In the exchange
services performed by [landowners], their social distribution of sites
and resources, no physical production is involved; hence he is
unable to see that they are entitled to any share in the distribution
of physical things and that the rent they receive . . . is but
recompense for their non-coercive distributive or exchange services. .
. . He rules out all creation of values by the services performed in
[land] distribution by free contract and exchange, which is the sole
alternative to either a violent and disorderly or an arbitrary and
tyrannical distribution of land. (Heath, Progress and Poverty
Reviewed, pp. 9–10)
For the effects of the
“single tax” and for other criticisms, see
Murray N. Rothbard, The Single Tax: Economic and Moral
Implications (Irvington-on-Hudson, N.Y.: Foundation for
Economic Education, 1957); Rothbard, “A Reply to Georgist
Criticisms” (mimeographed MS., Foundation for Economic
Education, 1957); and Frank H. Knight, “The Fallacies in the
‘Single Tax,’” The Freeman,
August 10, 1953, pp. 810–11. One of the more amusing
objections is that of the dean of Georgist economists, Dr. Harry
Gunnison Brown. Although the Georgists base much of their
economic case on a sharp distinction between ownership of land and
ownership of improvements on that land, Brown tries to refute the
disruptive economic effects of the single tax by implicitly assuming
that land and improvements are owned by the same people anyway!
Actually, of course, the disruptive effects remain; vertical
integration by individuals or firms does not remove the economic
principle from either of the integrated stages of production. See
Harry Gunnison Brown, “Foundations, Professors and
‘Economic Education,’” The
American Journal of Economics and Sociology, January, 1958,
pp. 150–52.
Government expenditures are made
from government revenue. In the preceding section we have dealt with
the major source of governmental revenue, taxation. Below we shall deal
with inflation, or money creation, and in the present section a
discussion of government “enterprise” is included.
For a brief treatment of the final major source of government
revenue—borrowing from the public—see Appendix A
below.
It may be objected that while
bureaucrats may not be producers, other “Pauls” who
receive subsidies on occasion are basically producers on the market. To
the extent that they receive subsidies from the government,
however, they are being nonproductive and living off the producers by
compulsion. What is relevant, in short, is the extent to which they are
in a relation of State to their fellow men. We
might add that, in this work, the term “State” is
never meant in an anthropomorphic manner.
“State” really means people acting toward one
another in a systematically “stateish” relationship.
I am indebted to Mr. Ralph Raico, of the University of Chicago, for the
“relation of State” concept.
Originally, Professor Simon
Kuznets contended that only taxes should gauge the
government’s productive output, thus measuring product by
revenue as in the case of private firms. But taxes, being compulsory,
cannot be used as a productive gauge. In contrast to the present method
of national income accounting, Kuznets would have eliminated all
government deficits from its “productive
contribution.”
Even for those who do not accept
this analysis, any who believe, empirically, that waste in government
exceeds 50 percent of its expenditures would have to agree that our
assumption is more accurate than the current estimate of 100 percent
productivity by the government.
If a waste asset owned by the
government is sold to private enterprise, then all
or part of it might become a capital good. But this potential does not
make the good capital while used by the government. It might be
objected that government purchases are genuine investments when used by
a government “enterprise” that charges prices on
the market. We shall see, however, that this is not really enterprise
but playing at enterprise.
See below for a more detailed discussion of the waste involved in waste
assets.
This is to be distinguished from
the classical concept of “nonproductive
consumption” as all consumption above that needed to maintain
the productive capacity of the laborer.
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