The Costs of Tax and Spend; J. McGinnis

To begin with, the calculation does not include regulatory requirements, compli ance costs, the liabilities of governmentJohnD. McGinnis is a doctoral student infinance at the Pennsylvania State University. sponsored enterprises, and inflation. Regu lations are, of course, one of the govern ment's ways of making citizens incur costs without being taxed directly, but the effect is the same as taxation-earnings are used to enforce government policies. Compliance costs are those that individuals incur in fillingout tax forms, consulting tax accoun tants, maintaining records, keeping up with the tax code (is it possible?), or anything else required in following governmental man dates. The tax-accounting industry absorbs many billiops of dollars-this is only part of the compliance costs that fall on the shoul ders of citizens. Inflation, too, is a tax. It is the national government's way of paying for projects without explicitly taxing its citizens, but it is no less a burden. Inflation is the result of government creating money. The chief im petus for the national government to inflate is its desire to spend more than it takes in.

(A second impetus is the fact that inflation helps borrowers at the expense of lenders. The public sector, of course, is a net bor rower while the private sector is a net lender.) When the government pays for projects by creating more money, the result is a decrease in the purchasing power of individuals. The cost of this government created inflation in terms of decreased pur chasing power can be staggering. An infla tion rate of just 3 percent (considered tame by recent standards) means an annual de151 152 THE FREEMAN • APRIL 1993 crease in the purchasing power of private Americans of $180 billion. This could rep resent as many as ten additional days of work for all Americans to cover the govern ment's hunger for spending. The Tax Freedom Day calculation also does not include borrowing by governments at the federal, state, and local levels. Not only does the government spend all income earned up until May 5, but it continues to spend more by increasing the liabilities of its citizens. Some might argue that the incurred liabilities are offset by the assets purchased with the borrowing, but this is no less so with the taxes we pay. Government borrowing is every bit an infringement on our economic freedom as taxation. If it weren't, why wouldn't we finance all of government by perpetual debt and remain forever free? An important lesson of finance applies here: How we finance expenditures, whether corporate projects or government programs, is much less important than the choice of those expenditures. When government borrows our money or takes it directly through taxes or indirectly in ways mentioned above, the net effect is the same: The government, not individuals, decides how earnings are spent. This diminishes freedom.

So how do we add all this up? How much of the people's earnings is government taking? Milton Friedman has suggested one way to get an estimate: Begin by adding up all the expenditures of government at the federal, state and local levels. In the current fiscal year, this is about 47 percent of gross domestic product, which means that 47 percent of what the average Amer ican earns is going directly to the govern ment. Now add in regulatory costs and compliance costs as well as off-budgetitems such as expenditures for federal agencies. I have no accurate way of estimating these, but totaled with direct taxes it becomes apparent that the average American is working more than half of the year for government and less than half of the year for himself. Cato the Elder was right -"A king is an animal that lives on human flesh.,,1 The Consequences The costs of such an onerous tax burden are less obvious, yet no less severe and exacting, than one mightthink. The national debt and the budget deficit get attention as causes of impending economic doom. The real problem is not debt-financing of gov ernment enterprise, but government enter prise itself. Even if the government had no debt, there could be great costs to its oper ation. We would, for instance, have a fed eral government with expenditures of 30 percent ofgross domestic product, and iftax collections equaled 30 percent of gross do mestic product there would be no debt.

Nevertheless, the opportunity cost of such large expenditures by government is enor mous. As Adam Smith observed: "The industry of the country, therefore, is thus turned away from a more, to a less advan tageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation.,,2 It is often commented that deficit spend ing crowds out investment by the private sector. This is true enough: Funds lent to the government mean fewer lendable funds for the private sector. However, it is no less true that money spent by the government (whether by borrowing or through tax rev enues or printing more money) means less spending and investment by the private sector. Hence, all government spending, however financed, crowds out private en terprise. It also sacrifices market decisions and all the knowledge that the market brings to bear, in favor of decisions made by politicians, whose motivations may be ques tionable, and whose wisdom is necessarily inferior to the market. Again, Adam Smith says it best: "Great nations are never im poverished by private, though they some times are by public prodigality and miscon duct.',) The issue then is not how we finance government, but the size of government.

The larger the activity of government, the greater the cost to society, regardless of the amount of government debt. A society which aspires to be free surely must admit that control of over half of its product by government is a serious problem. How much liberty exists in such a situation? How much of our lives is spent complying with the dictates of the IRS and other govern mental bureaucracies? How much of our lives is taken directly from us when we are allowed to keep only half of what we pro duce? How much is lost for the present and the future by the usurpation of our personal sovereignty by government? It has been claimed that there is a cultural war goingon in America. In truth, that battle is part of a larger conflict, the war of public sector versus private sector. Currently, the public sector appears to be winning. It is growing much faster than the private sector and its growth insidiously retards private enterprise. The situation is worse than Tax Freedom Day implies and we need to be aware of this. We need also to be aware of the power of freedom. As Adam Smith said: THE COSTS OF TAX AND SPEND 153 The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to di minish its security.4 An economic environment where freedom is being supplanted by political control is one with the highest opportunity cost. That is what makes the fight for freedom so important. 0 1. Quoted by Plutarch in Makers of Rome (New York: Penguin Books, 1965), p. 128.

2. Adam Smith, The Wealth ofNations (The University of Chicago Press, 1976),edited by Edwin Cannan, Vol. 1, p. 479. 3. Smith, Vol. 1, p. 363. 4. Smith, Vol. 2, pp. 49-50. 8th ANNUAL MISES UNIVERSITY An Alternative to NeoClassical Economics Ludwig von Mises 1881-1973 Students interested in an alternative to neoclassical economics are invited to attend the 8th annual "Ludwig von Mises University." This unique program, sponsored by the Ludwig von Mises Institute and held in Clare mont, California, in the foothills of the San Gabriel Mountains, runs from July 17-24, 1993. Undergraduates and graduate students follow a schedule of their own design, suited to their academic interests. And there is no charge. Accepted students receive free tuition, room, and board: a scholarship worth $1,000. The weather is balmy, the library has 1.5 million volumes, and the accomplished faculty-headed by economist and historian Murray N. Roth bard-will make you think you're in Old Vienna. For more information: The Ludwig von Mises Institute Auburn University, Alabama 36849 Phone: 205-844-2500; Fax: 205-844-2583 154 BOOKS Adventures in Porkland: How Washington Wastes Your Money and Why They Won't Stop by.Brian Kelly Villard Books. 1992 • 272 pages. $23.00 Reviewed by John Attarian T his concise, angry, intensely readable result of a year's investigation of Con gress should rouse every taxpayer's rage. A $19 million study of cow flatulence; $80 million for Steamtown, USA (a national railroad museum in Scranton, Pennsylvan ia); $2 billion each for two useless water ways in Alabama and Louisiana-Brian Kelly's catalog of "pork" (federal money spent by Representatives and Senators for their own constituents) is outrageous. So is the way legislators sneak these boondoggles into appropriations bills, and squash at tempts by "porkbusters" to stop it.