Fiscal Mysteries Revealed 56 ARE WE UNDERTAXED?

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.”

Leading the most recent parade of “many” (if not all) economists calling for long-range tax increases are Nobel Laureate Robert M. Solow of MIT, Benjamin Friedman of Harvard, and Charles L. Schultze, chairman of the Council of Economic Advisers under Carter. (“Economists See Long-Run Need to Raise Taxes,” New York Times, Jan. 27, 1992.) 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 Solow, et al. 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.

And after 24 years of following such a transfer program, of taxing the private sector ever more to feed the swollen public sector, what has been the result? What has been the consequence of following Galbraithian doctrine? Patently: aggravated squalor of the public sector, accompanied by a noticeable fraying of the edges in the private sector. The answer of Solow, Galbraith and others is that we still haven’t done enough: that the government must tax and spend ever more. If we keep doing so, we can look forward to the economic situation of the Soviet Union in 1991 as the end result.

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. Solow and company 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 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?

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First published in April 1992.

57

THE RETURN OF THE TAX CREDIT

Modern liberalism works in a simple but effective manner: liberals Find Problems. This is not a difficult task, considering that the world abounds with problems waiting to be discovered. At the heart of these problems is the fact that we do not live in the Garden of Eden: that there is a scarcity of resources available for us to achieve all of our desired goals.

Thus: there is the Problem of X number (to be discovered by sociological research) of people over 65 with hangnails; and the Problem that there are over 200 million Americans who cannot afford the BMW of their dreams. Having Found the Problem, the liberal researcher examines it and worries about it until it becomes a full-fledged Crisis.

A typical procedure: the liberal finds two or three cases of people with beri-beri. On television, we are treated to graphic portrayals of suffering beri-beri victims, and we are flooded with direct-mail appeals to help conquer the dread beri-beri outbreak. After ten years, and billions of federal tax dollars poured into beri-beri research, beri-beri treatment centers, beri-beri maintenance doses, and whatever, a survey of the results of the great struggle demonstrates the potentially disquieting fact that there is more beri-beri around than ever before. The idea that federal funding for beri-beri has been a waste of time and money and perhaps even counterproductive is quickly dismissed. Instead, the liberal draws the lesson that beri-beri is even more of a menace than he had thought, and that there must be a prompt across-the-board tripling of federal funding. And, moreover, he points out that we now enjoy the advantage in the struggle of having in place 200,000 highly trained beri-beri professionals, ready to devote the rest of their lives, on suitably lavish federal grants, to the great Cause.

Since voicing the idea that perhaps it is not the government’s place to go around Solving Social Problems had subjected them to the withering charge of “insensitivity” and “lack of compassion,” some conservatives latched onto a shrewd end-run strategy. “Yes, yes,” they agreed, “we too are convinced of the urgency of your Social Crisis, and we thank you for calling it to our attention. But we believe that the way to solve the problem is not through increased government spending and higher taxes, but by allowing private persons and groups to spend money solving the problem, to be financed by tax credits.”

In short, the social crisis would be solved by allowing people to keep more of their own money, provided they spend it on: aiding hangnail research, BMWs, or combatting beri-beri. While the fundamental philosophical problem was sidestepped, at least people were allowed to spend their money themselves, and taxes would fall instead of increase. It is true that people were still not being allowed to keep their money, period, but at least the tax credit was a welcome step away from government and toward private action and operation.

In 1986, however, everything changed. Conservatives joined liberals in scorning the tax credit as a “subsidy” (as if allowing people to spend their own money is the same thing as giving them some of other people’s money!) and in rejecting the tax credit approach as a “loophole,” a breach in the noble ideal of a monolithic uniformity of taxation. Instead of trying to get people’s taxes as low as possible, reducing taxes where they could, conservatives now adopted the ideal of a monolithic, “fair,” imposition of an equal pain on everyone in society.

The Tax Reform Act of 1986 was supposed to bring sweet simplicity to our tax forms, and to bring about fairness without changing total revenue. But when Americans finally got through wending their way through the thickets of their tax forms, they found everything so complex that even the IRS couldn’t understand what was going on and most of them found that their tax payments had gone up. And there were no tax credits to bring them solace.

But there is hope. The Liberal Crisis of 1988, displacing the Homeless of the previous year and the Hungry of the year before, is the fact that upper-middle class, two-wage-earner families, the very backbone of the liberal constituency, can’t afford the child care services to which they would like to become accustomed. Hence, the call, heeded on all sides, for many billions of federal taxpayer dollars, by which relatively low-income, single-wage-earner families would be forced to subsidize wealthier families with working mothers. Truly the Welfare State in action!

In despair, and not prepared to say either (a) that this problem is none of the government’s business, or (b) that child care would be both cheaper and more abundant if government regulations requiring minimum cubic feet of space, licensed RNs on the premises, etc. were abolished, the conservatives, in their desperation, came up with our old, forgotten taxpayers’ friend: the tax credit. That credit would apply, not only toward professional child care, but also for mothers choosing to tend their children at home.

Let us hope that the tax credit will return in full force. And then we can revive the lost tactic, not of “closing the loopholes,” but of ever-widening them, opening them so widely for all indeed, that everyone will be able to drive a Mack truck through them, until that wondrous day when the entire federal revenue system will be one gigantic loophole.

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First published in July 1988.

58

DEDUCTIBILITY AND SUBSIDY

One of the most controversial aspects (because it involves scores of billions of dollars) of the Reagan administration’s tax “reform” plan is its proposal to eliminate the deductibility of state and local taxes from the federal income tax. The argument rests on the view that, under deductibility, the citizens of the low-tax states are “subsidizing” the high-tax states. Since subsidies are presumed to be unfortunate and non-neutral to the market, deductibility is supposed to be eliminated in a quest for neutrality and an approximation to the workings of the free market. The opponents make the obvious reply that since taxation is supposed to be on net income, eliminating deductibility would mean that people are being taxed twice on the same income; once by the federal, and again by the state or local authorities.

But, in the meanwhile, the subsidy argument has not faced enough discussion. For the proponents of the reform have engaged in tricky semantics on the word “subsidy.” Subsidy has always meant that one set of people has been taxed and the funds transferred to another group: that Peter has been taxed to pay Paul. But if the tax-oppressed citizens of New York are taxed less because of deductibility, in what way are they “subsidized”? All that has happened is that New Yorkers are suffering less expropriation of their hard-earned property than they would otherwise. But they are only being “subsidized” in precisely the same sense as when a robber, assaulting someone on the highway, graciously allows his victim to keep bus fare home. How can allowing you to keep more of your own money be called a “subsidy?”

Only on one assumption. For the hidden assumption of those who want to eliminate deductibility (not only of state and local taxes but of many other expenditures and “loopholes”), is that the government is really the just owner of all of our income and property, and that allowing us to keep any of it, or any more of it than before, constitutes an illegitimate “subsidy.” Or, more specifically, that the federal government must collect a certain amount of taxes from its subjects, that this amount is somehow written in stone, and that any person or group paying less than some arbitrarily allotted figure means that someone else will have to pick up his tab. Only then does the idea that a tax cut is equivalent to a subsidy make any sense at all. But this is a curious argument indeed. There is no warrant for the notion that payment of some grand allotted total is so vital that it must override any devotion to the rights of person and property, to the idea that people are entitled to keep the property they have earned.

The recent emphasis on tax allocation, on concentrating on “fair shares” or alleged “subsidies,” has been a clever and largely successful device to divert people’s attention from the real problem: that taxes are burdensome and oppressive for everyone. The agitation for tax “reform” has managed to deflect people’s attention from the need to lower everyone’s taxes to a great crusade to try to make sure that the other guy pays his “fair share” and is not being “subsidized.” In that way, the long suffering citizens are encouraged to fight among themselves, to try to get someone else’s taxes increased, instead of maintaining taxpayer solidarity and keeping their eyes on lowering taxes, period, wherever and however they can. Such a grand taxpayers’ coalition can only be maintained if there is a tacit agreement that, regardless of whose taxes are cut and by how much, no person or group will have to suffer an increase of taxes, and this means all coerced payments to government, whether they be called taxes, fees, revenues, contributions, or “closing of loopholes.”

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First published in November 1985.

59

THAT GASOLINE TAX

The big bad gasoline tax, one of the favorite programs of left-liberalism, is back in the limelight. After having denounced the scheme during the campaign as a tax on the middle class, then President-elect Clinton professed surprise that so many luminaries at the interregnum “economic summit” championed the idea.

Of course, he should not have been surprised at all, since Clinton’s much-vaunted love of “diversity” clearly does not extend to the intellectual realm. At the Little Rock economic summit, the economists and businessmen ran the full gamut from left-liberal to left-liberal (my own invitation, as they say, got lost in the mail). The only questions seem to be: how high should the gas tax increase go—the “moderate” 50 cents a gallon suggested by Tsongas (the mainstream) or the more rigorous $1 or more a gallon suggested by Rivlin (the administration)—and how many months or years are we to be allowed for the tax to be phased in?

The official arguments for the gas tax are general (helping to cut the deficit) as well as specific to this particular tax. On the glories of the gas tax per se, one common argument is that the tax would force the consumer to “conserve” more gasoline by purchasing less. That it will, but why is it such a good idea to force people to buy less gas?

If the federal government slapped a $500 tax on the sale of chess sets, it would surely “conserve” them by forcing people to purchase a lot less. But why is this dictatorial coercion, this forcing a lower standard of living upon American consumers, supposed to be a good thing in a free society?

One favorite answer of the pro-gas-taxers is that consumers will be led, by the tax, to conserve scarce fuel. But conservation of resources is one of the major functions of the free price system. The market economy is continually being forced to choose: how much of product X or product Y, of resource X or Y, should be produced now, and how much should be “conserved” to be produced in the future? Not just of oil and gas, but of everything else: copper, iron, timber, etc.

In every area, this “conservation,” this decision on how to allocate production over time, takes place smoothly and harmoniously on the free market. The price of every resource and product is set on the market by the interaction of demand (ultimately consumer demand) and the relative scarcities of supply. If the supply of X, now and in the expected near future, falls, then the current price of X will rise. In this way, an expected future decline in supply is met right now with a rise in price, which will induce buyers to purchase less, and producers to mine or manufacture more of the product in response to the higher price. You don’t need a tax to accomplish the task of allocation and conversation.

In fact, a tax is a most clumsy way of meeting the problem. In the first place, since government knows very little and the market knows a lot, the government will not hit the proper target; indeed, since government’s coercion comes on top of market action, a tax is bound to “overconserve,” to reduce the production of a good below the optimum. And second, unlike a price rise accruing to producers, a tax provides no incentive for supply to increase or productivity to improve.

And why is gasoline supposed to need non-market conservation measures? On the contrary, over the past decade, the real price of gasoline (corrected for inflation) has fallen by 40 percent; in short an increasing abundance of oil and gas relative to demand has demonstrated that there is no need to worry about conservation of oil.

Another argument for a gas tax is that it will force consumers to use gas in a more “fuel-efficient” way. But the entire worry about “fuel efficiency” is absurd and ill-conceived. Why should automobiles only be efficient in using fuel? There are many aspects of “efficiency,” including efficiency per man hour, efficiency in use of tires, and efficiency in the car taking you where you want to go. The market coordinates all these efficiencies in the most optimal way for the consumer.

Why the fuel fetish? Moreover, federal rules mandating ever-greater miles-per-gallon have already greatly increased the cost of cars and crippled auto safety by forcing upon us ever-lighter-weight automobiles.

Another argument claims that a higher gas tax would “reduce our dependence on foreign oil.” But in the first place, the tax would discourage the use and production of domestic oil as well as foreign; and second, haven’t we demonstrated, with the Gulf War, the willingness to use the direst coercion against even the sniff of a possible threat to our foreign oil supplies? And besides, what’s wrong with free trade and the international division of labor?

Probably the dopiest, though one of the common, arguments is that other countries have a much higher gas tax: the United States now has a gas tax that is “only” 37 percent of the retail price, whereas in Western Europe the gas tax averages over 70 percent.

Maybe we can find lots of countries with a higher TB rate. Are we supposed to rush to emulate them too? This is an absurd twist on a typical kid’s argument to his parents: “Jimmy’s parents let him stay up till 11” or, a few years later, “Jimmy’s parents bought him a bigger car.” I understand what the kids are getting out of these other-directed arguments. But what do we get out of pointing to other countries that are even more socialistic than our own?

Even the media recognize a couple of problems with the gas tax. First, that it penalizes rural people and Westerners, where distances are great and cars are driven far more than in Eastern or urban areas. A feeble response is that the proceeds of the tax will be used to “invest” in America’s highways, thereby aiding the drivers. But if it goes into highways, how will it help reduce the deficit?

The second recognized difficulty is that the gas tax which injures the broad middle class, is “regressive” and is therefore “unfair.” This was Clinton’s reason for rejecting a higher gas tax in the first place. But presumably, this argument can be countered by giving some other tax or spending goody to the middle class (a process which again defies the deficit argument).

The general argument for the gas tax is, of course, that it will cut the deficit; official estimates claim that a 50 cent a gallon tax rise will cut the deficit by $50 billion. It is strange that liberals only worry about the deficit when they can use it as an excuse to raise taxes.

How come there is no similar enthusiasm for the only deficit reduction scheme that works: cutting government expenditures? When have tax increases ever worked to cut deficits? The huge tax increases under Reagan? Under Bush? This is apart from the problem that these estimates are only shots in the dark, since no one knows by how much people will reduce their purchases from any given increase.

Cutting through the raft of specious arguments, we must ask: why the persisting yen for a gas increase among left-liberals? In the first place, of course, it is the essence of the liberal creed that they have never met a tax, or for that matter a government expenditure, they haven’t liked. Both taxes and expenditures take away from producers money they have earned, and shift resources from private citizens to the maw of government.

In short, taxes and expenditures both fulfill the Fabian liberal objective of moving the country ever closer to full-scale socialism. This accounts for the general itch for taxation, but why the long-time special fondness for the gas tax?

Because, of all the features of modern American life, liberals have special hatred for the automobile. For the first time in history, the automobile permits each individual to travel about cheaply and comfortably on his own. In contrast to mass transport, which liberals find satisfyingly collective, egalitarian, and rigidly fixed to time and place schedules, the automobile is gloriously individualistic.

Above all, liberals detest cars which are plush, luxuriant “gas guzzlers,” cars that embody and glorify the values and the lifestyle of the bourgeoisie, the productive middle-class whom liberal intellectuals, in their deep resentment of non-intellectuals so yearn to cripple and bring down.

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First published in March 1993.

60

BABBITRY AND TAXES: A PROFILE IN COURAGE?

There is no question that the media darling of the early 1988 presidential election season was former governor Bruce Babbitt of Arizona. As time neared for the Iowa caucuses, pundits for virtually every organ of the Establishment media weighed in with serioso think-pieces about the glory and the wonder, the intelligence and especially the high courage of a great man who suffered the misfortune of looking like Ichabod Crane on television.

Gloomily, the pundits figured that the Iowa masses would lack the perception and the wisdom of being able to look beyond the TV surface and see the statesman lurking underneath. Fortunately perhaps for America, the pundits proved correct, and the number of voters for Bruce Babbitt barely exceeded the number of his ardent fans in the national media.

Of what does the great courage of Bruce Babbitt, as trumpeted by the media, consist? The answer is his intrepid valor in coming out, frankly and squarely, for higher taxes to slash the federal deficit. The similar gallantry of Mondale in 1984 is then recalled. Set aside the palpable fact that Mondale had a lot more to lose, in contrast to Bruce Babbitt, who began close to zero percent popularity in any case. The interesting question to ask is: what kind of “courage” is this?

It used to be thought that heroism and “courage” meant being willing to go out into the lists, candidly and unafraid, to battle the mighty and despotic powers-that-be. Can we really call it “courage” when a Mondale or a Babbitt frankly calls upon the eager state apparatus to increase still further its already outrageous and parasitic plunder of the hard-earned money of honest and productive American citizens? Whooping it up for higher taxes is the moral equivalent of some Ugandan theoretician of a few years ago publicly urging Idi Amin to pile on his looting and his despotism still further, or of a Mafia consigliere advising the capo to add an extra ten percent to the “protection fee” imposed on neighborhood stores. We can think of many names for this sort of activity, but “courage” is surely not one of them.

It might be objected that, after all, a politician who urges higher taxes is not only imposing suffering on other people; he himself as a taxpayer will also have to bear the same deprivations as other citizens. Isn’t there, then, a kind of nobility, even if misguided, in his plea for “belt-tightening” common sacrifice?

To meet this question, we must realize a vital truth that has long remained discreetly veiled to the tax-burdened citizenry. And that is: contrary to carefully instilled myth, politicians and bureaucrats pay no taxes. Take, for example, a politician who receives a salary of, say, $80,000; assume he duly files his income tax return, and pays $20,000. We must realize that he does not in reality pay $20,000 in taxes; instead, he is simply anet tax-receiver of $60,000. The notion that he pays taxes is simply an accounting fiction, designed to bamboozle the citizenry into believing that he and the rest of us are on the same moral and financial footing before the law. He pays nothing; he simply is extracting $60,000 per annum from our pockets. The only virtue of United Nations’ employees is that they are frankly and openly exempt from all taxes levied by any nation-state—which simply makes their position the same as other national bureaucrats, except uncamouflaged and unadorned.

The same principle, too, applies to sales or property or any other tax. Bureaucrats and politicians do not pay them; they are simply subtracted from the net transfer to themselves from the body of taxpayers.

Unfortunately in current American politics, we are trapped between purveyors of false choices: the “courageous” who call for higher taxes, and the supply-siders who say that there’s nothing really wrong with deficits, and that we should learn to relax and enjoy them. It seems to be forgotten that there is another tried and true, and perhaps far more “courageous,” way of slashing the deficits: cutting government spending.

It would seem embarrassingly trivial to mention it, except somehow this alternative has gotten lost down the Orwellian memory hole. “But where would you cut?” asks the cunning critic, hoping to get us all bogged down in the numbing minutiae of whether $50,000 should be cut from a grant to some New Jersey avant-garde theater group.

The proper answer is: anywhere and everywhere; only wholesale flailing away with a meat axe could possibly do justice to the task. An immediate 50 percent across-the-board slash in literally everything; abolishing every other government agency at random; a line-by-line reduction of the budget to some previous president’s—the further back in time the better; all these will do nicely for openers. The important thing is to adopt the spirit, the mind-set; and a balanced budget will be the least of the wondrous results to follow.

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First published in April 1988.

61

FLAT TAX OR FLAT TAXPAYER?

Hosannas poured in from all parts of the academic spectrum—left, right, and center—hailing the Treasury’s 1986 draft plan as an approach to the ideal of the “flat tax.” (Since the plan calls for three classes of income tax rates, it has been called a “flat tax with bumps.”)

This near-unanimity should not be surprising, because a flat tax appeals to the sort of academic who, regardless of ideology, likes to push people around like pawns on a chessboard. The great nineteenth-century Swiss historian Jacob Burckhardt called such intellectual social engineers “terrible simplifiers.” The label applies beautifully to the legion of flat-taxers because one of their prime arguments is that they would replace our bewildering mosaic of tax laws by one of limpid simplicity, one that “you could make out on a postcard.”

Unfortunately, this proposed simplicity is more childlike and naive than a great burst of clarifying intelligence. For our Terrible Simplifiers fail to stop and ask themselves why the tax laws are so complicated. No one likes complexity for its own sake. There is a good reason for the current complexity: it is the result of a myriad of individuals, groups, and businesses trying their darndest to get out from under the crippling income tax.

And, in contrast to the flat-tax academic who sneers at all other groups than his own as slaves of sinister special interests, there is nothing wrong with this often messy process. For these are people who, quite simply and even admirably, are trying to keep some of their hard-earned money from being snatched up in the maw of the tax-collector.

And these people have already found out what our flat-tax academics seem not to have cottoned to: there are things in this life worse than complexity, and one of them is paying more taxes. Complexity is good if it allows you to keep more of your own money.

In the name of sacred simplicity, in fact, our flat-taxers are cheerfully willing to impose enormous losses on a very large number of individuals and businesses, in the following ways:

RAISE the tax on capital gains to treat it like income, thereby crippling saving and investment, particularly in new and growing firms. One of the things that has kept the English economy from going totally down the tubes is that England, despite its cripplingly high income taxation, has no tax at all on capital gains.

ELIMINATE accelerated depreciation, thereby destroying an excellent 1981 tax reform that allowed businesses to depreciate rapidly and reinvest. This change will particularly hurt heavily capitalized “smokestack” industries, already in economic trouble.

ELIMINATE OR RESTRICT income-tax deductions for mortgage payments, plus treat homeowners as having a taxable income from “imputed” rent, i.e., from the rent they would otherwise have paid if they had been tenants instead of homeowners. This double blow to homeowners is so politically explosive that it will probably not go through—but such is the full intention of the flat-taxers. Unfortunately, those who are taxed on “imputed” income will not be able to pay their taxes in “imputed” form. They will have to pay Uncle Sam in money.

ELIMINATE oil depletion allowances, a neat way to send the oil industry into a depression. Flat-tax academics persist in regarding depreciation payments and depletion allowances as “subsidies” to capitalists and oil or mining companies. They are not subsidies, however, they are ways of permitting these firms to keep more of their own money, something which at least pro-free enterprise academics are supposed to believe in. Furthermore, only income is supposed to be taxed, and not accumulated wealth; taxing “income” which is merely the loss of capital value (either by depreciation or depletion) is really a tax on capital or wealth.

ELIMINATE tax deductions for uninsured medical payments or losses due to accident or fire. Does one get a glimmer of why economists are sometimes called “heartless”?

Note that, unlike some welfare economists, I am in no sense a slave to the ideal of “Pareto-optimality” (the notion that no government action must impose a loss on anyone). I am willing to advocate radical measures that impose losses on some people, but only to achieve a substantial increase in freedom. But severe losses merely for the sake of symmetry?!

We are left with the final Argument From Simplicity: that the flat tax will enable all of us to dispense with tax lawyers and accountants. A powerful lure, perhaps, but fallacious and untrue on many levels. In the first place, those taxpayers who want simplicity can achieve it now: they can fill out the simplified tax forms. Two-thirds of American taxpayers do so now.

The rest of us who struggle with complex forms are doing so for a good reason: to pay less taxes. Second, those of us who have our own businesses, including the business of writing and lecturing, will enjoy no reduction in the complexity of our tasks; we will still be struggling at great length to see what our net business gain (or loss) might be. None of this will change under the reign of the Simplifiers.

And finally, there is, once again, a good reason for our paying money to tax lawyers and accountants. Spending money on them is no more a social waste that our purchase of locks, safes, or fences. If there were no crime, expenditure on such safety measures would be a waste, but there is crime. Similarly, we pay money to the lawyers and accountants because, like fences or locks, they are our defense, our shield and buckler, against the tax man.

Many years ago, my friend and mentor Frank Chodorov, during the midst of the McCarthy era, wrote that “the way to get rid of Communists in government jobs is to get rid of the jobs.” Similarly, the way to get rid of tax lawyers and accountants is to abolish the income tax. That would be Sweet Simplicity indeed!

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First published in June 1995.

62

MRS. THATCHER’S POLL TAX

Riots in the streets; protest against a hated government; cops arresting protesters. A familiar story these days. But suddenly we find that the protests are directed, not against a hated Communist tyranny in Eastern Europe, but against Mrs. Thatcher’s regime in Britain, a supposed paragon of liberty and the free market. What’s going on here? Are anti-government demonstrators heroic freedom-fighters in Eastern Europe, but only crazed anarchists and alienated punks in the West?

The anti-government riots in London at the end of March were, it must be noted, anti-tax riots, and surely a movement in opposition to taxation can’t be all bad. But wasn’t the protest movement at bottom an envy-ridden call for soaking the rich, and hostility to the new Thatcher tax a protest against its abstention from egalitarian leveling?

Not really. There is no question that the new Thatcher “community charge” was a bold and fascinating experiment. Local government councils, in many cases havens of the left-wing Labour Party, have been engaging in runaway spending in recent years. As in the case of American local governments, basic local revenue in great Britain has been derived from the property tax (“rates” in Britain) which are levied proportionately on the value of property.

Whereas in the United States, conservative economists tend to hail proportionate taxation (especially on incomes) as ideal and “neutral” to the market, the Thatcherites have apparently understood the fallacy of this position. On the market, people do not pay for goods and services in proportion to their incomes. David Rockefeller does not have to pay $1,000 for a loaf of bread for which the rest of us pay $1.50. On the contrary, on the market there is a strong tendency for a good to be priced the same throughout the market; one good, one price. It would be far more neutral to the market, indeed, for everyone to pay, not the same tax in proportion to his income, but the same tax as everyone else, period. Everyone’s tax should therefore be equal. Furthermore, since democracy is based on the concept of one man or woman, one vote, it would seem no more than fitting to have a principle of one man, one tax. Equal voting, equal taxation.

The concept of an equal tax per head is called the “poll tax,” and Mrs. Thatcher decided to bring the local councils to heel by legislating the abolition of the local rates, and their replacement by an equal poll tax per adult, calling it by the euphemism, “community charge.” At least on the local level, then, soaking the rich has been replaced by an equal tax.

But there are several deep flaws in the new tax. In the first place, it is still not neutral to the market, since—a crucial difference—market prices are paid voluntarily by the consumer purchasing the good or service, whereas the tax (or “charge”) is levied coercively on each person, even if the value of the “service” of government to that person is far less than the charge, or is even negative.

Not only that: but a poll tax is a charge levied on a person’s very existence, and the person must often be hunted down at great expense to be forced to pay the tax. Charging a man for his very existence seems to imply that the government owns all of its subjects, body and soul.

The second deep flaw is bound up with the problem of coercion. It is certainly heroic of Mrs. Thatcher to want to scrap the property tax in behalf of an equal tax. But she seems to have missed the major point of the equal tax, one that gives it its unique charm. For the truly great thing about an equal tax is that in order to make it payable, it has to be drastically reduced from the levels before the equality is imposed.

Assume, for example, that our present federal tax was suddenly shifted to become an equal tax for each person. This would mean that the average person, and particularly the low-income person, would suddenly find himself paying enormously more per year in taxes—about $5,000. So that the great charm of equal taxation is that it would necessarily force the government to lower drastically its levels of taxing and spending. Thus, if the U.S. government instituted, say, a universal and equal tax of $10 per year, confining it to the magnificent sum of $2 billion annually, we would all live quite well with the new tax, and no egalitarian would bother about protesting its failure to soak the rich.

But instead of drastically lowering the amount of local taxation, Mrs. Thatcher imposed no such limits, and left the total expenditure and tax levels, as before, to the local councils. These local councils, Conservative as well as Labour, proceeded to raise their tax levels substantially, so that the average British citizen is being forced to pay approximately one-third more in local taxes. No wonder there are riots in the streets! The only puzzle is that the riots aren’t more severe.

In short, the great thing about equal taxation is using it as a club to force an enormous lowering of taxes. To increase tax levels after they become equal is absurd: an open invitation for tax evasion and revolution. In Scotland, where the equal tax had already gone into effect, there are no penalties for non-payment and an estimated one-third of citizens have refused to pay. In England, where payment is enforced, the situation is rougher. In either case, it is no wonder that popularity of the Thatcher regime has fallen to an all-time low. The Thatcher people are now talking about placing caps on local tax rates, but capping is scarcely enough: drastic reductions are a political and economic necessity, if the poll tax is to be retained.

Unfortunately, the local tax case is characteristic of the Thatcher regime. Thatcherism is all too similar to Reaganism: free-market rhetoric masking statist content. While Thatcher has engaged in some privatization, the percentage of government spending and taxation to GNP has increased over the course of her regime, and monetary inflation has now led to price inflation. Basic discontent, then, has risen, and the increase in local tax levels has come as the vital last straw. It seems to me that a minimum criterion for a regime receiving the accolade of “pro-free-market” would require it to cut total spending, cut overall tax rates, and revenues, and put a stop to its own inflationary creation of money. Even by this surely modest yardstick, no British or American administration in decades has come close to qualifying.

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First published in June 1990.

63

EXIT THE IRON LADY

Mrs. Thatcher’s departure from British rule befitted her entire reign: blustering in rhetoric (“the Iron Lady will never quit”) accompanied by very little concrete action (as the Iron Lady quickly departed).

Her rhetoric did bring free-market ideas back to respectability in Britain for the first time in a half-century, and it is certainly gratifying to see the estimable people at the Institute of Economic Affairs in London become Britain’s most reputable think-tank. It is also largely to the credit of the Thatcher Era that the Labour Party has moved rightward, and largely abandoned its loony left-wing views, and that the British have decisively abandoned their post-Depression psychosis about unemployment rates ever being higher than 1 percent.

The Thatcher accomplishments, however, are a very different story, and very much of a mixed-bag. On the positive side, there was a considerable amount of denationalization and privatization, including the sale of public housing units to the tenants, thereby converting former Labour voters to staunchly Conservative property owners. Another of her successes was breaking the massive power of the British trade unions.

Unfortunately, the pluses of the Thatcher economic record are more than offset by the stark fact that the State ends the Thatcher era more of a parasitic burden on the British economy and society than it was when she took office. For example, she never dared touch the sacred cow of socialized medicine, the National Health Service. For that and many other reasons, British government spending and revenues are more generous than ever.

Furthermore, despite Mrs. Thatcher’s lip-service to monetarism, her early successes against inflation have been reversed, and monetary expansion, inflation, government deficits, and accompanying unemployment are higher than ever. Mrs. Thatcher left office, after eleven years, in the midst of a disgraceful inflationary recession: with inflation at 11 percent, and unemployment at 9 percent. In short, Mrs. Thatcher’s macroeconomic record was abysmal.

To top it off, her decisive blunder was the replacement of local property taxes by an equal tax per person (a “poll tax”). In England, in contrast to the United States, the central government has control over the local governments, many of which are ruled by wild-spending left Labourites. The equal tax was designed to curb the free-spending local governments.

Instead, what should have been predictable happened. The local governments generally increased their spending and taxes, the higher equal tax biting fiercely upon the poor and middle-class, and then effectively placed the blame for the higher taxes upon the Thatcher regime. Moreover, in all this maneuvering, the Thatcherites forgot that the great point about an equal tax is precisely that taxes have to be drastically lowered so that the poorest can pay them; to raise equal tax rates above the old property tax, or to allow them to be raised, is a species of economic and political insanity, and Mrs. Thatcher reaped the proper punishment for egregious error.

Why then didn’t the Thatcher government, upon installing the equal tax for local governments, directly decree drastically lower tax rates for each locale? Then the British masses would have welcomed instead of combatted the poll tax. The Thatcherite answer is that the central government would have had to assume funding of such local government activities as education, which would have raised either central taxes or the central government deficit.

But that only pushed the analysis one step further: why wasn’t the Thatcher government prepared to slash such spending, which is almost as bloated as in the U.S.? Clearly the answer is either that the Thatcherites did not truly believe their own rhetoric or that they didn’t have the guts to raise the issue. In either case, Mrs. Thatcher deserved her eventual fate.

In one area of the macro-economy we must regret the exit of Mrs. Thatcher: hers was the only voice raising a cry against the creation of the European Central Bank, issuing a new European currency unit. Unfortunately, and especially since the firing of her monetarist economic adviser, Sir Alan Walters, Mrs. Thatcher failed to make a convincing case for her opposition to this coming new order, putting it solely in cranky, hectoring terms of British national glory as against subordination to “Europe.” She therefore came off as a narrow anti-European obstructionist as against a seemingly enlightened and beneficent “united Europe.”

The problem in almost all analyses of the new European Community is the usual conflation of State and society. Socially and economically, to the extent that the new Europe will be a vast free-trade and free-capital investment area, this new order will be all to the good: expanding the division of labor, the productivity, and the living standards of all the participating nations. Unfortunately, the essence of the new Europe will not be its free-trade area, but a giant new State bureaucracy, headquartered in Strasbourg and Brussels, controlling, regulating, and “equalizing” tax rates everywhere by coercing the raising of taxes in low-tax countries.

And the worst aspect of this united Europe is precisely the area that Mrs. Thatcher zeroed in on: money and banking. While the monetarists are dead wrong in preferring a Europe (or a world) of nationally fragmented fiat monies to an international gold money, they are right in warning of the dangers of the new scheme. For the problem is that the new currency will of course not be gold, a market-produced money, but a fiat paper issued in new currency units. So that the result of this neo-Keynesian scheme will be inflationary fiat money, the issue of which is controlled by the regional Central Bank, i.e., by the new regional government.

This collaboration will then make it much easier for the Central Banks of the U.S., Britain, and Japan, to collaborate with the new European Central Bank, and thereby to move rapidly toward the old Keynesian dream: a World Central Bank issuing a new world paper currency unit. And then, we would be truly off to the races, with the world’s Money and macro-economy totally at the mercy of a worldwide inflation, centrally controlled by self-proclaimed all-wise Keynesian masters. It is unfortunate that Mrs. Thatcher would not articulate her opposition to the new monetary Europe in such terms.

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First published in February 1991.

64

THE BUDGET CRISIS

In politics fall, not spring, is the silly season. How many times have we seen the farce: the crisis deadline in October, the budget “summit” between the Executive and Congress, and the piteous wails of liberals and centrists that those wonderful, hard-working, dedicated “federal workers” may be “furloughed,” which unfortunately does not mean that they are thrown on the beach to find their way in the productive private sector. The dread furlough means that for a few days or so, the oppressed taxpaying public gets to keep a bit more of its own money, while the federal workers get a rare chance to apply their dedication without mulcting the taxpayers: an opportunity that these bureaucrats invariably seem to pass up.

Has it occurred to many citizens that, for the few blessed days of federal shutdown, the world does not come to an end? That the stars remain in their courses, and everyone goes about their daily life as before?

I would like to offer a modest proposal, giving us a chance to see precisely how vital to our survival and prosperity is the Leviathan federal government, and how much we are truly willing to pay for its care and feeding. Let us try a great social experiment: for one year, one exhilarating jubilee year, we furlough, without pay, the Internal Revenue Service and the rest of the revenue-gathering functions of the Department of Treasury.

That is, for one year, suspend all federal taxes and float no public debt, either newly incurred or even for payment of existing interest or principal. And then let us see how much the American public is willing to kick into, purely voluntarily, the public till.

We make these voluntary contributions strictly anonymous, so that there will be no incentive for individuals and institutions to collect brownie-points from the feds for current voluntary giving. We allow no carryover of funds or surplus, so that any federal spending for the year—including the piteous importuning of Americans for funds takes place strictly out of next year’s revenue.

It will then be fascinating to see how much the American public is truly willing to pay, how much it thinks the federal government is really worth, how much it is really convinced by all the slick cons: by the spectre of roads falling apart, cancer cures aborted, by invocations of the “common good,” the “public interest,” the “national security,” to say nothing of the favorite economists’ ploys of “public goods” and “externalities.”

It would be even more instructive to allow the various anonymous contributors to check off what specific services or agencies they wish to earmark for expenditure of their funds. It would be still more fun to see vicious and truthful competitive advertising between bureaus: “No, no, don’t contribute to those lazy louts in the Department of Transportation (or whatever), give to us.” For once, government propaganda might even prove to be instructive and enjoyable.

The precedent has already been set: if it is proper and legitimate for President Bush and his administration to beg Japan, Germany, and other nations for funds for our military adventures in the Persian Gulf, why shouldn’t they be forced, at least for one glorious year, to beg for funds from the American people, instead of wielding their usual bludgeon?

The 1990 furlough crisis highlights some suggestive but neglected aspects of common thinking about the budget. In the first place, all parties are talking about “fair sharing of the pain,” of the “necessity to inflict pain,” etc. How come that government, and only government, is regularly associated with a systematic infliction of pain?

In contemplating the activities of Sony or Proctor and Gamble or countless other private firms, do we ask ourselves how much pain they propose to inflict upon us in the coming year? Why is it that government, and only government, is regularly coupled with pain: like ham-and-eggs, or . . . death-and-taxes? Perhaps we should begin to ask ourselves why government and pain are Gemini twins, and whether we really need an institution that consists of a massive engine for the imposition and administration of pain and suffering. Is there no better way to run our affairs?

Another curious note: it is now the accepted orthodoxy of our liberal—and centrist—Establishment that taxes must be raised, regardless of where we are in the business cycle. So strong is this article of faith that the fact that we are already in a recession (and intelligent observers do not have to wait for the National Bureau of Economic Research to tell us that retroactively) seems to make no dent whatever in the thirst for higher taxes.

And yet there is no school of economic thought—be it New Classical, Keynesian, monetarist, or Austrian that advocates raising taxes in a recession. Indeed, both Keynesians and Austrians would advocate cutting taxes in a recession, albeit for different reasons.

So whence this fanatical devotion to higher taxes? The liberal-centrists profess its source to be deep worry about the federal deficit. But since these very same people, not too long ago, scoffed at worry about the deficit as impossibly Neanderthal and reactionary, and since right now these same people brusquely dismiss any call for lower government spending as ipso facto absurd, one suspects a not very cleverly hidden agenda at work.

Namely: a love for higher taxes and for higher government spending for their own sake, or, rather, for the sake of expanding statism and collectivism as contrasted with the private sector.

There is one way we can put our hypothesis to the test: shouldn’t these newfound worriers about the deficit delight in our modest proposal one year with no deficit at all, one year with no infliction of pain whatever? Wanna bet?

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First published in December 1990.

65

THE BALANCED-BUDGET AMENDMENT HOAX

It is a hallmark of the triumph of image over substance in modern society that an administration which has submitted to Congress budgets with the biggest deficits in American history should propose as a cure-all a constitutional amendment mandating a balanced budget. Apart from the high irony of such a proposal from such a source, the amendment-mongers don’t seem to realize that the same pressures of the democratic process that have led to permanent and growing deficits will also be at work on the courts that have acquired the exclusive power to interpret the Constitution. The federal courts are appointed by the executive and confirmed by the legislature, and are therefore part and parcel of the government structure.

Apart from these general strictures on rewriting the Constitution as a panacea for our ills, the various proposed balanced-budget amendments suffer from many deep flaws in themselves. The major defect is that they only require a balance of the future estimated budget, and not of the actual budget at the end of a given fiscal year. As we all should know by this time, economists and politicians are expert at submitting glittering projected future budgets that have only the foggiest relation to the actual reality of the future year. It will be duck soup for Congress to estimate a future balance; not so easy, however, to actually balance it. At the very least, any amendment should require the actual balancing of the budget at the end of each particular year.

Second, balancing the budget by increasing taxes is like curing influenza by shooting the patient; the cure is worse than the disease. Dimly recognizing this fact, most of the amendment proposals include a clause to limit federal taxation. But unfortunately, they do so by imposing a limit on revenues as a percentage of the national income or gross national product. It is absurd to include such a concept as “national income” in the fundamental law of the land; there is no such real entity, but only a statistical artifact, and an artifact that can and does wobble according to the political breeze. It is all too easy to include or exclude an enormous amount from this concept.

A third flaw highlights again the problem of treating “the budget” as a constitutional entity. As a means of making the deficit look less bleak, there has been an increasing tendency for the government to spend money on “off-budget” items that simply don’t get included in official expenses, and therefore don’t get added to the deficit. Any balanced-budget amendment would provide a field day for this kind of mass trickery on the American public.

We must here note a disturbing current tendency for “born again” prodeficit economists in conservative ranks to propose that “capital” items be excluded from the federal budget altogether. This theory is based on an analogy with private firms and their “capital” versus “operating” budgets. One would think that allegedly free-market economists would not have the effrontery to apply this to government. Get this adopted, and the government could happily throw away money on any boondoggle, no matter how absurd, so long as they could call it an “investment in the future.” Here is a loophole in the balanced-budget amendment that would make any politician’s day!

A fourth problem is that the various proposals make it all too easy for Congress to override the amendment. Suppose Congress or the president violate the amendment. What then? Would the Supreme Court have the power to call the federal marshals and lock up the whole crew? To ask that question is to answer it. (Of course, by making the budget balance prospective instead of real, this problem would not even arise, since it would be almost impossible to violate the amendment at all.)

But isn’t half a loaf better than none? Isn’t it better to have an imperfect amendment than none at all? Half a loaf is indeed better than none, but even worse than no loaf is an elaborate camouflage system that fools the public into thinking that a loaf exists where there is really none at all. Or, to mix our metaphors, that the naked Emperor is really wearing clothes.

We now see the role of the balanced budget amendment in the minds of many if not most of its supporters. The purpose is not actually to balance the budget, for that would involve massive spending cuts that the Establishment, “conservative” or liberal, is not willing to contemplate.

The purpose is to continue deficits while deluding the public into thinking that the budget is, or will soon be, balanced. In that way, the public’s slipping confidence in the dollar will be shored up. Thus, the balanced-budget amendment turns out to be the fiscal counterpart of the supply-siders’ notorious proposal for a phony gold standard. In that scheme, the public would not be able to redeem its dollars in gold coin, the Fed would continue to manipulate and inflate, but all the while this inflationist policy would now be cloaked in the confidence-building mantle of gold.

In both plans, we would be dazzled by the shadow, the rhetoric of sound policy, while the same old program of cheap money and huge deficits would proceed unchecked. In both cases, the dominant ideology seems to be that of P.T. Barnum: “There’s a sucker born every minute.”

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First published in October 1987.