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Are Americans Undertaxed?

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Tags Taxes and Spending

Every day that passes brings further evidence, in the marvelous phrase of Bill Kauffman in Chronicles, of “the enormous gulf between those who live in America and those who run it.” We who live in America are firmly convinced that we are taxed far too much, that government spending and taxation are eating out our substance to support a growing parasitic army of crooks and moochers, and that the accelerating burden of government has caused our economy to stagnate over the last two decades.

The ruling elites who run America, including the sophisticated technocratic economists who lend a patina of “science” to their rule, see the American problem, of course, in a very different way. This economist elite, whose task it is to apologize for Leviathan rule, and to take highly-placed jobs directing that elite rule is, if nothing else, cool and calm about their own counter-theme: “the trouble with America is that it is undertaxed.”

To the cries of understandable outrage that greet this claim, the elite is sophisticated and “scientific.” It is typical of us cloddish types to be narrow and “selfish,” greedily trying to keep some of our own money from the depredations of the taxman.

For they, the elite, are wise and all-seeing; in contrast to us narrow and selfish resisters, they have only the common good, the general welfare, and the public weal at heart. To point out that their version of the common good coincides suspiciously with the narrow and selfish interests of the selfsame technocratic economic elite, is to lay ourselves open to one of the worst cuss phrases in our contemporary lexicon: “conspiracy theorist of history.”

One familiar ploy used by the nation’s serried ranks of economists is to point to other countries in Europe and elsewhere, whose percentage of national product absorbed in taxes is greater than in the U.S. Well, bully. On that reasoning, why not point to the glorious economic successes of the Soviet Union, whose government output absorbed and constituted all of the nation’s resources?

On a closer look, the claim is a replay of the old Galbraith thesis, publicized in his best-selling, The Affluent Society (1958), which looked around at America and saw the private sector prosperous and thriving, while the public sector, or the “socialized” sector, lay in squalor and disarray. Assuming that the prosperity and efficiency of a sector depends only upon the resources spent, Galbraith concluded that “too much” was being spent on the private sector, and “too little” on public. Hence, Galbraith called for a massive transfer of resources from the private to the public sector.

The crucial fallacy at the root of this nonsense is the idea that government spending really is saving and investing, indeed a superior form of saving and investing to the private sector. The technocrats agree with free-market economists that a rise in the standard of living can only come about via increased saving and investment, but their idea of such saving is collectivist and can only be effected through government spending.

Thus, in the New York Times paraphrase, Professor Robert Solow has the nerve to conclude that “if Americans are seeking to insure that their children live better than they do, they must learn to consume less, meaning live less well, and to save and invest more.” Unfortunately, due to higher taxes, they are already living less well, but this sacrifice will scarcely help their future state or their children’s. Solow’s conception is very much like Stalin’s, in which the State sweats the consumers, taxes them and keeps down their living standards, all for the sake of a future pie-in-the-sky that never comes true.

In contrast, in a free-market economy of private savings and investment, no one is forced to sacrifice, for those who are able and eager to save and invest do so, and the others can consume to their hearts’ content.

The crucial fallacy, then, of this economic elite, is to designate virtually every bit of government spending with the honorific label “investment.” But on the contrary, government spending is not “investment” at all; it is simply money spent for the edification or the power of the unproductive ruling elite in the government. All government spending, far from deserving the term “investment,” is in reality consumption spending by politicians and bureaucrats. Any increase in the government budget is therefore a push toward more consumption and less saving and investment; and the reverse is true for any cut in the budget.

There is nothing noble, or public-interest-oriented, or “unselfish” about the call of Solow and other Establishment economists for more government and higher taxes. Quite the contrary.

And what of the original Galbraithian claim about private prosperity and public squalor, a gap that is even more glaring now than it was in the 1950s? The observation is true enough, but the conclusion is wrongheaded. If the public sector is the big problem, may not the answer lie in the contrasting nature of the two sectors? May not the answer be to get rid of, or at the very least to shrink drastically, the failed public sector? 

In short, privatize the public sector, and the noteworthy squalor would rapidly disappear. And if anyone should prove skeptical, let’s try it for a while. Let’s privatize the government for, say, ten years, and see what happens; we can even call it a “Great Social Experiment,” performed in the best interests of “value-free science.” 

Any takers? 

[Excerpted from Are We Undertaxed? in Murray Rothbard's Making Economic Sense. Originally published in April 1992.]


Murray N. Rothbard

Murray N. Rothbard made major contributions to economics, history, political philosophy, and legal theory. He combined Austrian economics with a fervent commitment to individual liberty.

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