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TAXATION 


CONFISCATION 


P 


theFreeman 


CLASSICS 


Taxation  and  Confiscation 


•re-  lioro, 
vabroyodo. 


5FropPA?y^  Fl  *►'•''  "f 


Vji 


Published  Oaobcr  1993 

ISBN0-910614-89-X 

Copyright  ©  1993  by 

The  Foundation  for  Economic  Education 

Irvington-on-Hudson,  NY  10533 


Contents 


o^^-^^^: 


Introduction  by  Hans  F.  Scnnholz 

I.  IN  SEARCH  OF  SOCIAL  JUSTICE 

The  FJcmcnts  of  a  Fair  System  of  Taxation 
Ridg^i^ay  K.  Fole)',  Jr. 

The  General  Welfare 
Qarence  B.  Carson 

Some  Thoughts  on  Taxation 
George  C.  Ixef 

Taxation  Theory 
W.  M  C>urtiss 

The  Forgotten  Man 

William  Henr>'  Chambcrlin 

n.  INSTRUMENT  OF  SOCIAL  REFORM 

The  Squeeze  on  the  Middle  Class 
William  Hcnr>'  Chambcrlin 

The  M>tholog>'  of  State  Spending 
John  Hood 

School  Budgets  and  Town  Meetings 
R.  W.  Bochm 

The  Forgotten  Man 
Robert  Awcnius 

The  Growth  of  Government  in  the  United  States 
Robert  Higgs 


1 

7 
22 
31 
40 
46 

57 
64 
68 
72 
79 


iv  /  Contents 

III.  REGULATING  PRODUCTION 

Incentives  and  Income  Taxes  93 

Russell  Shannon 

Educational  Vouchers:  The  Doubk  Tax  97 

Gary  North 

Exporting  Taxes  Threatens  Sutc  Economics  1  IS 

John  Semmens 

Boom  Time  for  State  and  Local  Govcmmcnt  118 

John  Hood 

Government  Policies  and  Capital  Grouth  123 

Christopher  Witzky  and  Rolf  E.  WubbcU 

IV.  WEAPON  OF  DESTRUCTION 

The  Assault  on  Capital  135 

Robert  G.  Anderson 

Capital  Punishment  145 

John  Semmens 

Capital  Consumption  1S3 

Hans  F.  Sennholz 

The  Power  to  Tax  Is  the  Power  to  IV$tn)y  171 

Clarence  B.  Carson 

Sweden's  Welfare  State:  A  Paradise  Ixm  185 

Eric  Brodin 

The  Crisis  in  Public  Finance:  No  Ways  or  Means  193 

John  Semmens 


Index 


203 


'ii//B!BLIOTECA\o\ 


Introduction 


Taxes  fbrcibK'  cxtraa  money  fVom  jxoplc  and  provide  revenue  for 
government.  The>'  reduce  the  levels  of  living  of  taxpayers  and  increase 
the  spending  poccntial  of  politicians  and  government  officials.  They 
raise  a  great  many  questions  about  die  nature  of  government  and  its 
use  of  force  in  the  extraaion  of  rocnuc,  and  thereby  come  face  to  face 
with  questK)m  of  equm*  and  justice. 

Most  Amencans  rarely  compare  their  tax  liabilities  with  the  bene- 
fits they  expea  to  denve  (nxn  government  expenditures.  When  they 
reflect  on  costs  and  benefits,  however,  they  may  approve  of  certain 
taxes  provided  the  public  benefits  offer  a  net  gain  to  them.  Retirees 
do  not  hesitate  to  vcxe  for  greater  Social  Security  benefits  and  higher 
taxes  as  long  as  ihe\'  can  pcKkct  the  benefits  and  working  people  pay 
the  taxes.  Young  parents  gcncralh-  fa\'or  higher  school  taxes  as  long  as 
the  le\'ies  are  placed  on  the  property'  of  other  taxpayers.  Provided  the 
primar)'  burden  rests  on  other  people,  especially  on  people  with  higher 
incomes  and  more  wealth,  it  is  deemed  equitable  and  just.  But  to  the 
victims  who  must  carr\'  the  burden  it  is  highly  unfair.  They  are  forever 
hoping  and  clamoring  for  a  tax  reform  that  will  reduce  their  burden 
and  place  it  on  someone  else.  In  diis  popular  sense,  every  tax  reform 
is  an  eflc>rt  to  alloiatc  the  injustice  perpetrated  in  the  past.  The  Deficit 
Reduction  Act  of  1993  must  be  seen  as  just  another  such  effort. 

Political  scientists  ma>'  go  beyond  this  simple  version  of  popular 
justice,  but  often  arrive  at  similar  conclusions.  They  make  a  distinction 
between  the  tax  burden  on  persons  in  different  economic  circum- 
stances, subjea  to  considerations  of  ^'ertical  equity,"  and  the  burden 
on  indixiduals  in  cssentiall>'  the  same  economic  circumstances,  subject 
to  "horizontal  cquit)'.''  Bodi  considerations  of  equity  play  important 
roles  in  modem  tax  legislation  and  regulation. 

Until  the  dawn  of  welfarism  and  transferism  economists  made  no 
such  distinction.  Thcv  favored  taxation  diat  imposed  its  levies  in  ac- 
cordance with  benefits  received.  Government  activity  consisted  pri- 
marily of  defense  and  police  protection  of  die  basic  human  rights:  life, 
liberty,  and  propcrt>'.  This  activity  was  believed  to  be  proportionate 


2  /  Hans  F.  Smnholz 

to  income,  which  justified  proportionate  taxation.  The  classical  econo- 
mists firom  Adam  Smith  to  John  Stuart  Mill  fa\x>rcd  proportionate 
taxation  as  the  most  equitable  distribution  of  tax  burdens. 

Under  the  influence  of  notions  of  economic  exploitation  and  dass 
conflict,  many  politicians  and  legislators  early  in  this  ccntun*'  began  to 
question  not  only  the  ver\'  role  of  goNemmcnt  but  also  the  ciawical 
assumption  of  proportionate  taxation.  Favoring  a  more  actnr  rofc  of 
government  in  economic  life  necessitating  sigmficantK'  higher  romuc, 
they  developed  the  doctrine  of  "ability'  to  pay."  .\s$uming  nstng  abtltt\' 
to  pay  and  diminishing  sacrifice  as  incomes  increase,  iho  matie  *pfx>- 
gression"  the  paramount  principle  of  *^e^ncal''  equirv- 

In  recent  decades  the  abiht)'-to-pay  pnncipk  rccavrd  hinhcr  sup- 
port fi-om  the  socioeconomic  doctrine  of  the  dcsirabilit>'  of  economic 
equality.  Social  peace  and  harmony  supposedh*  require  a  high  degree 
of  economic  equality  that  can  be  attained  through  pn>gressi\r  taxation. 
Equity  in  taxation  now  means  reduction  of  the  disparities  of  iname 
and  wealth  through  tax  progression;  it  i$  said  to  be  »cnrd  best  by 
taxation  that  aims  at  the  redistribution  of  income  and  nrahh 

Political  scientists  also  search  for  "honzctntal  e^um"  %k-hjch«  m 
their  terminology,  means  equal  treatment  of  all  taxpa^m  in  itmiiar 
economic  circumstances.  Individuals  with  equal  incomes  or  equal  in- 
creases in  the  value  of  their  assets  are  avsumed  to  be  equal  and,  there- 
fore, are  taxed  equally.  But  consideration  of  Mmilar  economic  circum- 
stances immediately  raises  difficult  questiom  abtnit  actual  equality  of 
equal  incomes.  How  equal  arc  bachelors  and  famiK-  fathers  earning 
equal  wages .>  Should  allowance  be  made  for  taxpaver  dependentif 
Should  tax  liabilities  be  diflrrentiatcd  on  the  basis  of  famiK  responsi- 
bilities through  a  system  of  personal  excmptKim  fcx  the  taxpa\TT  and 
other  members  of  his  family?  Or  should  such  rcsponsibihdcs  be  disre- 
garded? 

The  search  for  "horizontal  equit\"  also  raLses  questions  of  differen- 
tiation on  the  basis  of  sources  of  income  How  equal  are  taxpaycn 
with  equal  incomes  fi-om  four  difl^erent  sources— labor,  im-estment, 
entrepreneurial  activit>',  and  political  entitlement*  Dtx^  any  kyrm  of 
income  deserve  preferential  treatment?  At  this  point  the  equal  treat- 
ment of  aU  taxpayers  usually  breaks  doun.  Powerflil  pressure  grtiups 
manage  to  enact  favorable  provisions  for  labor  mcome,  u-hich  thev  call 
"earned  income,"  and  exemptions  for  entitlement  income,  or 
set  aside  for  retirement,  and  numerous  other  special  benefits. 


Introduction  I  3 

Com idcrations  of  ''horizontal''  equity  may  be  given  also  to  expen- 
dtnirct  that  arc  essential  to  earning  income  and  for  a  wide  variety  of 
penonai  expenditures  deemed  desirable.  Allowances  may  be  made  for 
iomc  forms  of  uvmg,  such  as  deposits  in  savings  associations,  for  items 
of  medical  expenses,  charitable  contributions,  interest  on  personal 
k>ans  and  mortgages,  state  and  IcKal  taxes,  casualty  losses,  child  care 
of  working  parents,  premiums  for  life,  sickness,  and  accident  insurance, 
and  payments  into  annuit)',  pension,  or  other  retirement  plans. 

AU  iuch  do'iations  (nm\  equal  treatment  arc  rather  controversial. 
Favoring  certain  earnings  or  outlays  through  preferential  tax  treat- 
ment, thc>'  create  dissatisfaction  among  taxpayers  who  are  the  victims 
of  diKTimination.  Their  grioanccs  provide  the  intellectual  impetus 
and  poUtK'aJ  energy*  for  another  tax  reform. 

Most  lax  experts  arc  no  economists.  While  they  are  searching  for 
tax  equity,  as  the\'  perceive  it,  they  tend  to  overlook  the  crucial  fact 
chat  the  mrrall  tax  burden  is  far  t(X)  heavy.  It  consumes  productive 
capital,  lowers  labor  productivity',  and  hampers  and  exhausts  economic 
activit)'.  Many  exemptions,  deductions,  and  credits  were  designed  to 
permit  economic  activit>'  where  there  would  be  none  under  a  full  tax 
burden. 

The  1993  Deficit  Reduction  Aa  confirms  and  accelerates  the 
trend.  The  most  significant  economic  development  of  the  1980s  has 
been  the  massive  consumption  of  produaive  capital  by  the  federal 
gm-emment.  In  just  rwclve  years  it  suffered  budgetary  deficits  in  excess 
of  tu-o  trillion  dollars;  it  tnplcd  the  federal  debt  and  consumed  the 
lion's  share  of  the  .savings  of  the  American  people.  It  brought  about  a 
**dccapitalizat«>n  of  industr>'"  that  is  clearly  visible  not  only  in  the  rapid 
retreat  of  American  heasy  industn-  from  world  markets  but  also  in  the 
declining  standards  of  living  of  many  classes  of  American  Society.  In 
dur  name  of  tax  equit\'  die  1993  Act  increases  the  tax  burden  on  the 
backs  of  prtxluctive  and  affluent  members  of  American  Society.  It 
raises  die  income  tax  to  36  percent  for  couples  with  incomes  over 
$140,000  and  up  to  39.6  percent  for  couples  widi  incomes  over 
$250,000,  and  backdates  die  raise  to  January  1,  1993.  The  1993  Act 
is  the  fifth  law  in  t^^'elve  \'ears  diat  introduces  major  changes  m  die  tax 
structure.  Many  economic  consequences  of  die  Act  are  clearly  foresee- 
able; some  are  hidden  in  die  haze  of  die  fliture.  No  matter  what  diey 
may  be,  we  do  know  diat  diere  wiU  be  many  future  tax  acts  seeking  to 
repair  die  iniquities  of  die  past.  In  die  meantime,  die  Deficit  Reduc- 


4  /  Hans  F.  Sennholz 

tion  Act  of  1993  will  impose  higher  tax  burdens  on  many  taxpayers 
and  boost  federal  spending.  If  there  were  a  Truth-in-Politks  Act,"  as 
there  is  in  lending,  its  sponsors  would  be  subfca  to  hca\T  fines  and 
long  imprisonment. 

— Hans  F.  Sennholz 


L  IN  SEARCH  OF  SOCIAL  JUSTICE 


The  Elements  of  a  Fair  System  of  Taxation 
by  Ridgway  IC  Foley,  Jr. 

The  current  manw  for  tax  limitation,  tax  reform,  or  tax  protest 
provokes  the  more  mtcmc  inquir)-  into  the  rationale  and  justification 
for  an>'  mtrm  of  taxatK>n  and  the  proper  structure  of  a  fair  conceptual 
frameufKi  for  exercise  of  this  state  power.  This  essay  presents  a  brief 
analysu  of  the  u*ue  and  poses  a  simple  solution  much  more  in  har- 
mony with  the  tdea  of  indnidual  freedom  than  any  existing  dogma. 

The  Bub  and  Uses  oTTixation 

The  Kieoktgical  hkhs  of  taxation  rest  in  the  good  earth  of  sover- 
eignt)',  that  compelhng  state  power  over  the  rights  of  individuals.  ^ 
Traditionally,  the  three  common  attributes  of  sovereignty  consisted  of 
die  power  of  police,^  of  taxation,  and  of  eminent  domain.  From  tribute 
paid  inv'oluntahly  to  the  most  oil  or  cunning  or  powerful  by  members 
ofdK  tribe,  to  the  king  in  his  countinghouse,  to  the  modem  exchequer 
and  tntemal  re\-enue  agents  and  audits,  the  theory  of  taxation  has 
changed  little:  those  in  contn)l  of  the  apparatus  of  the  state  exact  assets 
and  value  fnim  serf  or  citizen  in  order  to  pay  for  governmental  obliga- 
tions and  services. 

It  bcccxncs  possible  to  identify*  three  uses  of  the  sovereign  power 
to  tax:  the  raising  of  raenue,  the  looting  of  citizens,  and  the  im- 
plementation of  social  policies.  Reason  would  suggest  that  only  the 
first  rationale  deser\-es  support,  although  one  could  cogently  urge  that 
the  appropriate  analN-sis  of  that  concept  does  indeed  implement  a  social 
polic)',  the  polic)'  of  non-intcncntion  in  voluntary  human  action. 

Taxation  of  perwns  as  a  means  of  raising  revenue  probably  pre- 
exists recorded  histor>'.  Operating  on  the  assumption  that  all  mankind 
within  a  given  perimeter  benefit  from  die  existence  of  die  order  of  die 
state,  princes  and  dieir  modem  counterparts  have  long  demanded  trib- 


Mr.  Folo-  practices  Uw  m  Portland,  Oregon.  This  article  originally  appeared  in  die 
Sqjeembcr  1982  umcofTbt  Freamm. 


8  /  Ridgway  K.  Foley,  Jr. 

ute  under  force  of  law.  Simph'  stated,  taxation  supports  the  state  by 
supplying  necessary  revenue. 

Like  collecting  revenue,  the  empJoN-mcnt  of  taxation  as  a  means  of 
systematic  looting  and  banditr\'  antedates  the  dxwn  ofhistorv'.  Den\rd 
from  the  sinister  side  of  the  human  actor,  taxation  can  be  enlisted  as  a 
handy  label  to  obscure  outright  thioen*'.  By  its  vcn*  nature,  caxatxm 
requires  coercion,  not  \oluntan.'  action,  on  the  part  of  the  subject; 
therefore,  the  master  can  appeal  to  law  or  theolog)*  or  some  other 
stratagem  to  justifV'  his  confiscation  of  the  \*ralth  created  b\-  another. 
History  is  replete  with  examples  of  the  powerful  and  banal  in\Tiking 
"law^  to  line  their  pockctbooks  and  purses 

The  praaice  of  taxing  to  cnct>uragc  t>r  induce  "stxial"  policv*  ap- 
pears of  more  recent  origin,  yet  it  is  quite  as  uicked  as  the  habits  of  the 
pickpockets  of  yore.  The  tactics  are  similar:  ih<»e  in  ptmrr  detemune 
a  "good"  or  "just"  end  and  n>b  the  pnxluctnr  ti>  pay  kn  that  goal. 
For  example,  the  populists  m  power  may  pen:a\e  that  the  nrakhy 
individuals  in  stxict)'  do  not  dcsers  c  all  of  the  assets  ^iiKh  the\-  ha\T 
secured  through  honest  trade;  therefore,  b\  the  means  of  pni(cm&i\r 
tax  laws,  the  more  wealth  created  and  empkned.  the  higher  the  tax 
payments  levied,  so  as  to  achic\c  a  loeling  pnKevi  and  a  mispbocd, 
false  cgalitarianism.  The  entire  mcxiem  pn>gram  of  entitlements  cmt% 
its  genesis  and  continued  vitalit)  to  this  \er\  %imple  taax  <wxe  made 
famous  by  Robin  Hcxxi;  the  only  ditferemc  reside\  in  the  fact  that  the 
mtxiem  counterpart  of  the  Sherv^tKxl  Forest  rascal  en^ni  tnvnunity 
from  prosecution  since  he  defines  the  issues  and  makes  the  rule*. 

TTie  First  Question:  Is  Taxation  Proper  in  Any  Form? 

The  rapidit\'  of  mtxlcm  life  cncourago  thinkers  to  leap  to  tncnm* 
pletc  conclusions  without  plodding  thn>ugh  the  necevsar\  intenncdi- 
ate  steps.  The  initial  question  under  the  topic  considered  is  not,  what 
is  a  fair  system  of  taxation?  Rather,  the  fundamental  inquirv  must  be, 
is  any  tax  structure  philosophically  permissible  as  harmonKnis  with  the 
freedom  philosoph)?  Only  if  the  seminal  inquirv  is  answered  in  the 
affirmative  may  we  prcxeed  to  another  question 

I  have  addressed  this  ke>-  question  in  general  terms  elsewhere*;  it 
would  not  do  to  repeat  the  analysis  at  length  here  For  me,  a  |ustifica- 
tion  for  die  existence  and  life  of  the  state  anscs  from  a  Rule  of  Neces- 
sity premised  upon  the  incontestable  nature  of  man  The  soaalist  and 


The  EUmaits  of  a  Fair  System  of  Taxation  I  9 

the  anarchist  faU  into  the  same  trap:  they  fail  to  observe  that  man  is 
not  capaWc  of  pcffecTK>n;  rather  he  is  possessed  of  a  wicked  side  and 
while  able  to  impnn-e  he  is  no-er  endowed  with  die  inherent  ability 
CO  achie%T  pcrfctiKNi. 

The  Rule  of  Neccssit>'  augurs  that  a  free  and  orderly  society  must 
potfCM  a  ftatc  force  to  prc\-cnt  internal  and  external  fraud  and  aggres- 
iioo  and  a  mandator)'  coun  of  last  resort  to  setde  otherwise  insoluble 
disputes  Without  these  limited  state  powers  enforced  by  die  monop- 
oly of  coercKm.  mankind  would  always  be  at  the  mercy  of  the  strongest 
and  most  vktmhu  memben  of  the  world.  Beyond  diese  necessary  re- 
straints, the  state  should  not  interfere  with  the  market  for  creative 
human  endeavor 

The  anarchist  argues  that  the  need  for  personal  protection  and 
dispute  rrw>lutK)n  can  be  met  b\'  private  defense  agencies  and  private 
ludk'iaJ  arbitration  But  what  if  soma)nc  refuses  to  play  by  the  rules? 
VNliai  if  an  aggressor,  convinced  of  the  propriety  of  his  position,  em- 
pkn-s  forvc  aiHl  wipes  out  your  defense  agency?  What  if  a  disputant 
refuses  tJ>  come  to  arbitration  or  to  abide  by  the  arbitrator's  decision? 
There  must  be  some  community-recognized  and  -supported  court  of 
last  reion  ti>  pnKea  nghts  and  enforce  judgments,  else  die  world  will 
quickh'  trundle  intt>  civil  chaos,  mountain  feuds,  and  mob  warfare, 
uith  no  rules  except  **might  makes  right." 

Why  VohintAfy  Taxation  Is  Not  a  Feasible  <:k)ncept 

The  tralm  of  tax  polic>'  has  introduced  a  like  idea  which  must  be 
mentioned,  ana]\7xd,  and  discarded:  die  concept  of  voluntary  taxation. 
Of  course,  "x-oluntarv"  taxation  represents  an  impossibihty,  a  contra- 
diction in  terms,  because  b\'  accepted  definition,  taxation  is  never  vol- 
untary' but  alwaN-s  coercive  (although  members  of  society  may  acqui- 
esce in  the  form  of  go\-emment  and  its  application  of  coercive  powers). 

The  doctrine  of  voluntan-  taxation  proposes  diat  pubUc  works 
protects  be  submitted  to  die  vote  of  die  electorate  for  approval;  diose 
casting  a  negative  ballot  mav  show  diat  vote  to  die  clerk  and  receive  a 
certificate  of  exemption  from  taxation  for  die  particular  project  should 
it  pass.  ,    .  . 

Without  discounting  die  procedural  difficulties  in  admmismtion 
of  such  an  enterprise,  voluntarN'  taxation  in  diis  form  suffers  from  a 
more  serious  dckct:  it  tends  to  approve  government  mtervention  m 


10  /  Rid^ay  K.  Foley  Jr. 

economic  enterprises  in  which  it  has  no  business.  If  it  is  wTong  for  the 
state  to  build  and  maintain  port  facilities,  airports,  muniapal  auditori- 
ums, domed  stadiums,  hydroelectric  projects,  and  a  host  d"  other  en- 
deavors, then  it  remains  v^Tong  e>'en  if  the  dissenters  arc  sa\rd  trom 
taxation  to  support  the  businesses.  Those  acti\ities  beyond  keeping  the 
peace  and  settling  wrangling  can  be  done  much  more  eiikicnth'  pri- 
vately and  with  a  higher  moral  tone  and  the  voter  should  not  be  forced 
to  lend  tacit  approval  to  government  meddlmg  \%'here  it  docsn\  be- 
long. 

Moreover,  justice  demands  that  all  participants  in  socict\-  pay  a  hir 
share  of  the  cost  of  maintaining  order  m  that  st>ciet>-.  The  cxempbon 
described  heretofore  disparages  that  pnnciple  b>-  excluding  the  di»- 
senter  from  the  cost,  albeit  for  a  laudable  purpose  If  the  hinaMW  is 
properly  one  which  the  state  should  perfoan,  all  should  pay  equally; 
if  the  frmaion  resides  beyond  the  limited  ptmm  t jI' ginrmmcnt,  then 
none  should  be  mulaed  for  that  purpcwe  and  the  nutter — if  woah 
doing  at  all — should  be  left  to  pnvatc  enircpfcneur* 

The  Role  of  the  Voluntarist 

Properly  viewed,  then,  government,  the  rcpoMtoo'  of  organucd 
coercion,  possesses  certain  legitimate  hinanxu:  keep  the  pcjcc,  pre- 
vent the  application  of  force  or  fraud  b>  one  nun  again\t  another,  and 
provide  a  fair,  common,  and  equal  system  Wh  scnhng  dupute»  and 
administering  justice. 

These  functions  require  funding:  judges  and  pi»lKeinen  muse  be 
paid  a  fair  salar\'  in  order  to  induce  competent  people  to  »er>e;  femwii 
must  be  maintained  for  public  observation,  the  nuchinery  of  govern- 
ment must  be  housed  in  appn>pnatc  quaners,  the  nevxvurv'  and  proper 
implements  for  earning  on  these  obhgatKxis — fireanns,  paper,  gav- 
els— must  be  purchased. 

Believers  in  freedom  often  suffer  the  accusatxm  of  negaavum. 
True,  the  consistent  voluntanst  thinker  seeks  tt)  reduce  a  government 
to  its  proper  minimum.  In  searchmg  for  reductKKU,  he  must,  of  neces- 
sity, oppose  spending  of  public  monies  for  impnjper  and  wastefol 
frmctions  and  ask  that  well-meaning  pnjgrams  be  achio-ed  b>'  coopera- 
tive action,  not  coercive  sanction  Noertheless,  the  adherent  of  limited 
government  need  not  always  fit  the  mold  of  unswaymg  opposition,  for 
he  recognizes  that  true  state  rcsponsibiliaes  require  government  xav- 


The  Elements  ofa  Fair  System  of  Taxation  I  11 

ity  and,  within  the  ambit  of  the  legitimate  conduct  of  government  he 
sarks  ways  to  perform  the  job  weU.  After  aU,  for  more  than  6,000  years 
of  recorded  history,  no  state  has  approached  perfection  in  performing 
die  proper,  i.e.,  legitimate,  but  limited  fiinctions  of  government. 

The  tax  system  represents  one  place  which  demands  constructive 
affirmative  action  from  the  free  individual  in  our  society.  Creativity 
and  ingenuity  proceed  from  adherence  to  fimdamental  principles;  the 
voluntarist  should  possess  those  etemal  values  which  enable  him  to 
coastrua  a  nKxie  of  taxation  according  to  the  rigors  of  a  free  society. 
Thus,  like  Diogenes'  quest  for  an  honest  man,  our  search  for  a  fair  tax 
system  (to  support  a  legitimate,  limited  government  only)  goes  for- 
ward. 


Types  of  Taxation  in  the  Present  World 

Modes  of  taxation  proliferate,  restrained  only  by  the  limits  of  hu- 
man ingenuity'  or  imagination.  As  we  approach  the  waning  years  of  the 
twentieth  centun»',  more  than  two  centuries  into  our  nation's  history, 
the  United  States  bears  wimess  to  a  plethora  of  taxing  devices.  State 
and  nation  tax  net  income  in  progressive  fashion.  States  collert  fees, 
Ucenses,  franchises,. and  permits.  States  levy  sales  and  use  taxes  upon 
the  purchases  of  some  or  all  commodities.  Congressmen  clamor  for  a 
vaJue-addcd  tax  so  prevalent  in  Europe  which  imposes  a  national  sales 
fee  on  each  step  of  the  production  and  distribution  process  in  our 
complex  world.  Net  estates  of  deceased  citizens  suffer  the  ignominy 
of  another  progressive  assessment,  usually  by  both  the  federal  and 
(sometimes  more  than  one)  local  government.  Highway  use  taxes  ap- 
ply to  gasoline  consumption.  Even  gifts  beyond  a  limited  exemption 
arc  taxed  on  a  progressive  scale.  Real  property,  assailed  by  a  bewilder- 
ing variety  of  measures,  bears  a  disproportionate  burden  at  the  state 
and  local  level.  Certain  luxuries  carry  additional  taxes.  Customs  duties 
on  imports  add  to  die  cost.  In  some  jurisdictions,  personal  property 
or  goods  held  for  sale  are  assessed  once  a  year.  A  mere  Utany  would 
unduly  lengthen  diis  treatise  and  boggle  the  mind  to  boot. 

Disguised  Forms  of  Taxes 

Beyond  diese  specific  taxes  lie  the  more  invidious  assessments  im- 
posed by  die  state— more  invidious  because  diey  are  not  called  by  their 


12  /  Rid^ay K.Foley, Jr. 

proper  names.  Social  Security  offers  a  prime  example.  Truh'  a  tax,  this 
exaction  bears  the  label  of  an  "insurance"  payment,  a  misleading  term 
since  the  law  provides  neither  fund  nor  true  >x)luntar\*  insurance.^ 
Estimated  inconK  taxes  and  uithholding  pav-ments  likewise  constitute 
disguised  methods  of  increasing  taxes:  a  citizen's  income  tax  bill  faUs 
due  3V2  months  following  the  close  of  his  tax  \tar  >«,  b\'  these  de- 
vices, the  federal  and  local  authonties  dcpn\-e  the  taxpa>Tr  of  the  in* 
come  he  could  have  earned  on  his  funds  bet^^rcn  the  tune  he  acquired 
them  and  the  tax  due  date. 

Surely,  inflation  constitutes  the  most  insidious  and  unfair  tax  of 
all.  We  properly  call  inflation  a  tax  because  it  results  stnah'  from 
governmental  meddling  uith  the  market  $>-stcm  Ancient  monarchs 
clipped  coins  and  practiced  otlier  petrv-  debasements.  Our  gmrnvncnc 
for  many  decades  has  ruled  b>'  deficit  spcndmg  and,  v^-hcn  the  powtn 
that  be  wish  to  fund  their  Uttlc  schemes  thc\  debase  the  cunrncv  (no 
longer  bound  by  the  market  lau-s  asMKiated  %^ith  ihtc  gold  standard) 
by  churning  out  tons  of  paper  dollars.  The  increase  m  the  frdenl 
money  supply  causes  the  phenomenon  \%t  label  "inflation"  the  more 
dollars  in  circulation  relative  to  the  value  of  created  gixxb  and  icfvioca, 
the  less  each  indixidual  dollar  is  \%-orth  and  the  more  dollars  it  takes  to 
purchase  a  given  gocxl  or  servKe.^ 

Inflation  operates  as  the  cruelest  tax  of  all  because  ( 1 )  it  is  not 
labeled  as  a  tax,  ( 2 )  it  penalizes  the  thnth*.  and  ( 3 )  ahhoufch  occasioned 
by  government  policies,  the  polmcians  habttualh*  blame  odicr  alleged 
causes  and  thus  misdirect  the  anger  and  ccxTecti\r  pimm  of  the  do- 
zens. One  cannot  imagine  a  more  un|ust  situatKin  tfun  a  hardwnritng 
laborer  who,  by  thnft  and  foresight,  saves  up  to  SSO.OOO  dunng  hu 
working  life,  b>'  forgoing  luxurv'  expenditures  and  restncting  hu  con- 
sumption, in  order  to  provide  for  his  famih*  uhen  he  is  too  old  or  loo 
ill  to  work,  only  to  discover  that  his  hard-earned  fund  Hill  onK  buy 
$5,000  worth  of  goods.  Yet  that  is  precisch  the  rcsuh  according  to  the 
decline  in  the  dollar  purchasing  power  smce  WorU  War  11. •  Outnght 
thievery  would  seem  less  painful. 

The  Elusive  "Fair  Share" 

Reflection  suggests  that  a  fair  tax  system  might  contain  two  basic 
ingredients:  First,  each  citizen  should  pay  his  fair  share  of  the  coits  of 


The  EUmmts  of  a  Fair  System  of  Taxation  I  13 

government;  iccond,  the  government  should  only  tax  real  value,  not 
fiat  money  inflation. 

What  comntutes  fairness  in  taxation?  In  the  first  place,  the  pro- 
ceeds »houid  only  be  used  to  pay  legitimate  costs  incurred  by  a  limited 
government.  In  the  second  place,  since  every  citizen  receives  theoretical 
bcncfiu  from  the  fiinaions  of  the  state,  so  every  citizen  should  contrib- 
ute on  a  relati\Tly  similar  scale  as  his  neighbor.  A  cardinal  rule  in 
taxation  should  require  those  persons  who  benefit  from  government 
aaivttics  to  pay  therefor. 

Ad\'ocatcs  of  progressive  taxation  assert  that  "from  each  according 
to  his  abtlm'  to  pay,  to  each  according  to  his  need."  In  other  words, 
thoK  who  produce  more  value  should  pay  progressively  greater  taxes. 

This  postulate  rests  on  both  spoken  and  silent  fallacies.  The  crea- 
tor*of-valuc  benefits  no  more  from  the  proper  frinctions  of  the  state 
than  does  the  dereha;  to  each  man,  safety  of  person  and  ability  to  setde 
disputes  without  civil  chaos  represent  ultimate  values.  Since  the  pro- 
ducer secures  no  greater  benefits,  justice  does  not  demand  larger  pay- 
ments. The  •*abilit>'  to  pay"  justification  dwells,  in  fmal  analysis,  upon 
the  "principle"  that  **might  makes  right,"  that  it  is  just  and  proper  to 
band  togedier  to  take  b>'  force  from  one  man  that  which  he  has  pro- 
duced and  to  give  these  ill-gotten  gains  to  another  individual  without 
the  \'oluntar\'  action  of  the  producer.  Since  the  justification  fails,  the 
proposition  sht>uld  k»e  vitality.^ 

Likeu'ise,  exactions  levied  against  certain  kinds  of  property  or  pur- 
chases to  the  exclusion  of  odiers  bear  litde  fidelity  to  fairness.  Thus  a 
propcrry  tax  lexied  against  residential  and  commercial  real  property 
exclusive  of  that  o\%'ned  by  die  state  and  its  minions  falls  too  heavily 
upon  one  group  of  people  to  the  exclusion  of  odiers  in  society.  Those 
who  do  not  oun  property  pay  a  lesser  share  of  die  tax  (through  rent) 
particularh-  in  an  inter\'entionist  society  where  rent,  wage,  and  price 
controls  flourish.  Luxur>',  sales,  and  use  taxes  fall  more  heavUy  upon 
users  of  the  taxed  goods  (hence  die  term  "regressive"  usually  applied 
pejoratively  to  these  taxes). 

Elements  of  Confusion 

Since  income,  estate,  gift,  and  inheritance  taxes  generaUy  part^c 
of  die  progressive  feature,  diey  suffer  from  die  "abiHty  to  pay"  malaise. 


14  /  RidgwayK.  Foley,  Jr. 

Moreover,  these  taxes  also  suffer  from  unequal  application  since  se- 
mantic and  definitional  problems  inherent  in  deciding  u-hat  constitutes 
"income"  (is  a  scholarship,  fellowship,  or  prize  'income*?)  or  a  'de- 
duction" (should  medical  expense  and  other  taxes  be  deducted?)  or  an 
"exemption"  (should  a  person  be  entitled  to  a  tax  break  because  he 
contributes  to  the  support  of  another  person?). 

In  addition  to  rampant  fundamental  unfairness,  modem  tax  sys- 
tems suffer  from  gross  inefficieno'  and  waste  of  pcrcious  scarce  re- 
sources. The  amount  of  human  encrg>' — ^^-tuch  could  be  crcati%^ 
employed — wasted  on  regulatmg  and  compl>Tng  uith  unreasonable 
and  unnecessary'  rules  and  orders  astounds  c\en  the  casual  obscrvrr. 
The  various  governmental  units  empkn  ciHintlcss  pcrMms  ii>  ^Tite, 
interpret,  and  decipher  the  roenue  regulations,  regulations  t^-hich  are 
so  vast  that  no  living  creature  can  understand  ttKm  fiilK'.  Thote  ume 
public  agencies  utilize  oen  more  cocrcers  m  the  iotm  tif  auditors  and 
agents  and  the  like,  men  and  u-omen  bent  tin  enhxcement  o«  nccdkssh' 
complex  laws. 

The  taxpayer,  on  the  other  hand,  must  spend  large  amounts  of 
time  and  energy  mastermg  the  rules  and  regulations  and  avnphmg 
with  the  regulaton'  prtKess  all  at  the  expense  of  his  crranxr  endeawm; 
after  all,  human  time  and  cnerg>'  represents  the  miMt  pa>ducti\x  and 
precious  of  our  scaRC  resources  u-hich  should  be  husbanded  hn  higher 
endeavors.  Again,  the  beleaguered  taxpa\-er  must  hire  a  \Tntable  amn' 
of  tax  preparers,  certified  public  accountants,  tai  spevialists,  attume>'V 
bookkeepers,  clerks,  and  the  like,  |mt  to  satish  the  maxc  of  ruks  and 
orders  which  ptxkmark  the  fair  face  of  fustxe  Truh  the  cn«t  of  die 
present  system,  m  economic  terms  t>f  waste  and  ineffKienc>'  and  in 
natural  law  terms  of  moralir>,  represents  tixi  high  a  prxe  to  pay. 

Indexing  to  a  Constant  DolUr:  False  Security 

Measurements  of  income,  assets,  and  expenditures  in  fiat  currency 
produce  several  unenviable  distortions  in  tax  la>%-\,  leading  to  the  sug- 
gestion by  prtxnincnt  authonties  that  the  tax  bise — ^vfutoer  the  reve- 
nue prt)gram  adopted — ought  tti  be  measured  m  c^mstant  dollars  of 
uninflated  value.  In  a  nxxiified  form,  for  example,  the  Canadian  Con- 
servative Party  proposed  such  an  inflation  discount  in  tfK  1972  elec- 
tions and  came  within  an  e\elash  of  o\ ertuming  the  Liberal  Trudeau 
government  on  this  issue  alone.  Of  course,  the  plan  was  hackne^rd 


The  EUmmts  of  a  Fair  System  of  Taxation  I  15 

bcycmd  alJ  rca>gnition  with  the  political  shenanigans  so  common  to 
pohnciam  who  neither  know  nor  care  about  sound  economic  theory. 
Nocnhclci*,  the  harassed  Canadian  taxpayers  responded  so  favorably 
la  the  inherent  equm'  of  the  idea  that  the  Liberal  government  adopted 
a  modified  vcnion  of  the  plan  as  an  essential  part  of  its  program. 

On  die  surface,  such  a  plan  appears  to  possess  merit.  As  the  emi- 
nent oconomist  Henry  Hazlitt  has  long  advocated,^  capital  gains 
should  be  taxed  m  real  doliars,  not  inflated  currency.  For  example, 
Mip|x>*c  I  purchase  100  shares  of  ABC  stock  in  1940  at  $10  a  share, 
cstablidiing  $1,000  as  my  basis.  I  sell  the  stock  in  1980  at  a  price  of 
$100  a  share  (sales  pnce  $10,000).  Under  current  legislation,  I  would 
be  iHtfKd  a  tax  based  on  a  long-term  (more  than  one-year  holding 
period)  capital  gain  of  $9,000,  although  varying  distortions  in  the  law 
currently  treat  capital  transaaions  somewhat  favorably.  Tet  fny£fain  is 
lUmurry  heumu  1982  dollars  are  worth  less  than  10  cents  in  1940  dollars.^ 
Mr.  Ha/Jiti  suggests  that  the  government  should  tax  only  the  real 
(uninflatcd)  gain  on  the  constant  dollar  value  and  thus  discount  my 
$10,000  sales  pnce  to  $1,000  (value  stated  in  1940  dollars).  Thus,  in 
die  example  chosen,  I  have  realized  no  real  gain,  not  a  $9,000  inflation- 
wracked  charade.  Under  diis  dieor>',  if  my  sale  discounted  to  constant 
dollars  rr\calcd  a  deficit  position,  I  should  be  entitled  to  a  tax  loss  for 
I  have  truly  suffered  a  k>ss  measured  in  real  doUars,  or  dollars  of  con- 
stant value. 

OdKrr  imbalances  caused  by  inflation  appear  less  readily  but  just 
as  viciously.  For  example,  the  graduated  income,  gift,  estate,  and  m- 
hcritance  'tax  schemes  promote  what  is  euphemisticaUy  termed 
-bracket  creep,"  creating  an  evU  sibling  to  the  distortion  discussed  by 
Mr.  Hazlitt.  As  the  nominal  wages  of  a  taxpayer  increase,  he  moves  to 
a  higher  bracket  or  tax  rate  on  his  base  aldiough  inflation  has  robbed 
him  of  anv  real  gam  and,  m  many  cases,  has  placed  him  m  a  deficit 
position.  Tlie  rtiult:  higher  fiat  mcome,  higher  tax  rates,  less  real 
spending  power,  and  a  windfaU  to  die  taxing  audiorities. 

Recent  Proposals  to  Achieve  Fairness  in  Taxing 

As  a  result  of  diese  patent  inequities,  P-P^^  .o'lS  tX^  ^ 
dK  past  decade  to  apply  a  constant  ^-^^^^^^'^'^''l^^^^ 
For  mstance,  the  Oregon-based  ^^-^^  C^^j^^^f  f^^^^^^^^^ 
proposed  a  net  receipts  tax  on  an  mdexed  basis  m  die  early 


16  /  Rid^fway K.Foley, Jr. 

such  a  proposal,  the  tax  rate  should  be  lc>Tcd  upon  receipts  N-ahicd 
without  the  inflation  factor  so  that  the  taxpayer  paN-s  his  share  of  the 
cost  of  government  based  upon  what  he  realh'  earned  and  what  his 
receipts  or  "income"  (in  the  broad  sense)  realh'  uill  buy  in  the  marict- 
place.  The  proponents  argued  that  it  makes  little  sense,  and  certainly 
does  not  accord  with  common  fairness,  to  tax  a  man  on  mone\-  subso- 
tutes  in  terms  of  money  substitutes  which  have  been  debased  bs  the 
taxing  authorities. 

Let  us  consider  a  common  example.  Our  taxpa\-er  eanu  $15,000 
in  1980  from  all  sources.  That  $15,000  uill  buv  equivalent  gixxls  and 
services  in  1980  to  those  which  could  be  purchased  in  1940  for 
$1,500.  Now,  docs  it  harmonize  ^^^th  |usticc  to  k>T  any  kind  of  tax 
on  the  $15,000  income  when  it  is  really  onh'  worth  $1,500  in  1940 
market  power  terms,  particularly  where  the  k»s  of  purchasing  power 
is  solely  attributable  to  the  policies  of  the  same  hod\  ^fc-hich  non-  levies 
the  tax?  To  state  the  question  answers  the  inquiry*  ' ' 

Application  of  this  novel  idea  educes  at  least  three  ciimpkx  issuo. 
The  first  issue:  What  base  year  or  years  to  use  from  ^-hich  to  mcasurt 
inflation,  since,  according  to  Dr.  Pick,  "^We  started  ti>  project  the 
financial  syphilis  all  over  the  world  in  1 776  when  Ben  Franklm  befcm 
the  Continental  dollar  which  became  worthless  after  four  wars  "*^  In 
the  examples,  1940  has  been  used  as  die  base  \rar  because,  according 
to  Dr.  Pick,  that  represented  the  la.st  inflation -free  vrar  m  this  ajuntiy. 

Undoubtedly,  other  economists  using  (Kher  measuring  doiccs 
could  disagree  with  Dr.  Pick  and  suggest  their  ir*>i\  base  \eafv  infli* 
tion-free  years,  and  rates  of  inflation.  One  couki  make  a  stnmg  case  Uit 
using  1914  (before  the  twentieth  ccntun-  wan  and  after  a  long  pencjd 
of  peace  during  which  time  a  relatively  free  econtimv  existed),  19S3 
(before  the  nation  left  the  gold  standard,  which  imposes  certain  natural 
law  impediments  restriaing  currency'  nonsense),  1957  (subsequent  to 
the  Korean  war  and  during  a  time  of  rclanvcly  balanced  budgets),  or 
any  one  of  a  number  of  other  key  years 

A  Shifting  10- Year  Average  as  a  Basis  for  Taxation 

Probably  the  fairest  approach  requires  the  use  of  a  10- year  a\rnige 
which  shifts  the  burden  forward  each  year.  For  example,  the  mfbtxin 
discount  could  be  determined  by  using  the  federal  government's  own 
statistical  studies  for  the  years  1957-1966,  avrrtiffw^  the  mflation  be- 


The  EUnunts  of  a  Fair  System  of  Taxation  I  17 

lor,  and  applying  it  to  receipts  during  1980.  For  1981  receipts,  the 
bMC-year  average  could  be  shifted  forward  to  1958-1967;  for  1982, 
wt  could  UMT  1959- 1968;  and  so  on. 

The  u»c  of  the  shifting  10  year  average  strikes  a  relatively  fair 
balance  neccaaitatcd  by  the  realities  of  the  situation.  No  year  forms  a 
pcrfea  meaiure,  and  no  state-produced  econometric  tool  offers  an 
cxaa  yardttidL  Reaching  too  far  back  into  antiquity  may  unfairly  ham- 
per the  ginrmment  because  of  intervening  crises  not  truly  the  respon- 
sibility of  the  present  men  in  power.  Using  a  base  period  too  close  to 
the  &ct  (C^anada  pn>po»ed  1970  as  a  base  year  for  1972)  destroys  the 
efficacy  of  the  s>*stcm  ^•hich  is  designed  to  aid  the  taxpayer  who  has 
accumulated  fiat  currency. 

A  tingle  year  can  dttproportionately  affea  the  currency  because  of 
world-wide  fiscal,  emotional,  and  natural  disasters  while  a  10-year  av- 
erage shiHild  balance  out  the  hilU  and  valle>'s  which  beset  any  economic 
chan.  Wk  pcrwid  1957-1966  supplies  a  happy  medium  from  which 
to  nan.  Although  budgets  were  ne\er  in  balance  at  the  outset,  and  the 
Vietnam  war  had  not  >xt  heated  up,  diese  inflationary  factors  pro- 
ceeded apace  as  die  period  wore  on;  the  real  glut  of  currency  produc- 
tion did  not  take  place  until  the  advent  of  die  Nixon  administration. 

Mcasurii^  Capital  Gains 

The  lecond  issue  a>ncerm  die  interrelationship  between  assets 
purduied,  heW  for  a  period  of  time,  and  sold,  and  other  receipts. 
Capital  assets,  as  explained,  might  be  treated  to  a  discount  factor  be- 
tween die  war  of  acquisition  and  the  year  of  transfer.  All  odier  receipts 
could  be  discounted  from  die  vear  of  acquisition  and  die  base-year 
period.  Although  gifts  and  inhentance  could  be  treated  similarly  to 
^pital  assets,  ease  of  application  might  require  that  they  be  considered 
as  general  receipts  in  die  year  of  acquisition. 

The  diird  i«ue:  N.'hat  should  be  die  first  step  m  implementation 
of  rfK  constant  doUar  approach?  Assuming  diat  most  leg^^^^^^^^^ 
decide  that  an  indexed  tax  plan,  as  oudmed  m  this  paper,  would^o^ 
reflea  d^ir  xrsted  interests,  die  citizens  can  still  take  steps  ^^^^^^^^ 
some  of  these  proposals.  TTie  obs^ous:  elect  better  ^-V^^^"^^^'^^^^^ 
less  obnous:  i^ZTenpmg  a  system  of  direct  ^^^^^^^^^ 
measure  to  tax  onh'  real  mcome  by  means  of  the  "^^^^^^  P^^^^'^ 
Once  such  a  measure  is  enacted  by  die  people,  die  government  will 


18  /  Ru^ay  K.  Foley  Jr. 

learn  to  Uvc  within  its  means.  The  state  exaniplc  or  examples  i^iU 
demonstrate  the  soundness  of  fair  and  credibk  tax  pobacs  and,  hope- 
My,  wiU  induce  the  federal  government,  rfirough  its  elected  represen- 
tatives, to  follow  suit.  . 

Despite  the  appeal  and  lucidity  of  a  constant  dollar  approach,  its 
defects  impel  that  it  be  discarded  in  favor  of  a  better  plan.  Human 
nature  dictates  that  such  a  device  tends  to  encnist  inflation  into  the 
political  system  rather  than  defeat  it,  b>-  amcUorating  xhc  patent  e%Tls 
of  paper  money.  Like  the  insidious  uirfiholding  tax,  a  amstani  doUar 
offset  would  render  currency  debasement  rclatix  ely  painlcis  to  all  but 
the  perceptive  observer;  thus,  it  would  serve  as  an  opiate  lo  mask  the 
real  cancer  of  government  run  amok.  In  addition,  there  exists  Uttk 
chance  that  a  fair  constant  dollar  credit  u-ould  be  enacted  and  main- 
tained by  elected  officials  who  benefit  greatly  from  the  uxul  ichcmes 
induced  and  encouraged  by  inflated  currcno.'.  Mocttnrr,  the  s>-«cm 
raises  complexities  which  would  defeat  the  desired  end  ol'  eradicating 
obfuscation  and  creating  a  simple  yet  fair  tax  structure. 

A  Proposal:  Proportional  Gross  Receipts  Taxation 

Review  the  elements  neccssan'  for  a  fair  $>'stem  of  taxation:  Fint, 
the  law  should  raise  the  necessary  re\enuc  to  fund  tmly  the  legitimate 
purposes  of  government,  the  pre\'ention  of  aggressKm  and  the  icttk- 
ment  of  insoluble  disputes.  It  should  not  act  as  a  rix>l  fiw  kiocing  the 
citizenry  nor  should  it  constitute  a  doice  for  implcmcnnng  social 
policy  such  as  the  redistribution  of  income  and  the  satutKm  of  the 
ends  of  envy,  greed,  and  covctousness  under  the  fa«^ade  of  egalitarian- 
ism  and  entidement.  Second,  it  should  t)pcratc  to  collect  a  fair  and 
equal  share  of  the  legitimate  costs  of  government  from  each  baicfituig 
citizen.  Third,  it  should  be  simple  to  administer  m)  as  to  uve  the  time 
and  energy  now  needlessly  expended  on  ccxnpliancc  and  enfiircemem. 

Given  the  flawed  nature  of  mankind,  no  pcrlca  i\^tcm  emerges, 
yet  one  concept  seems  better  qualified  than  all  otliers  to  fulfill  these 
appropriate  ends:  Each  person  should  contnbutc  a  propocnonatc 
amount  of  his  gross  receipts  each  year  from  each  and  every  source  to 
defray  the  legitimate  and  limited  functions  of  his  gtnrmment,  the 
government  should  be  circumscribed  from  acting  bex-ond  its  limited 
authority  and  from  spending  or  pledging  funds  in  excess  of  its  income. 
Mr.  John  Chamberlain  has  delineated  the  justification  of  a  proper- 


The  Eirmentsofa  Fair  System  of  Taxation  I  19 

tional  theory  of  income  taxation,  a  rationale  which  can  be  carried  to  its 
logicaJ  ajocliuion  b>'  applying  the  sound  idea  of  proportional  taxation 
to  ^roM  reccipcs: 

Under  che  proportional  theory  of  tax  equity,  a  rich  man  would 
pty  more  taxes  than  a  poor  man  naturally.  But  every  dollar  of 
iHCttcd  propcm*  vaiue,  or  of  income,  or  of  spending,  would 
be  uxcd  in  equal  amount,  at  flat  percentage  rates.  Dollars 
would  be  treated  equally,  no  matter  who  owned  them,  or 
ipcni  chcm.  Thu*  the  citizens  would  be  accorded  the  "equal 
procoction  of  the  Uh's"— and  their  "^privileges  and  immuni- 
tki*  would  be  equal,  as  prmided  for  in  the  United  States 
Comtirution.  Any  other  way  of  treating  taxation  was  regarded 
at  diKTiminaton*.  or  as  putting  penalties  on  ability,  ambition, 
11 


Under  the  proportMNul  gn>ss  receipts  tax  system,  every  person, 
oorporatkm*  fbundatKNi,  or  other  entit>'  (save  for  governmental  units) 
would  piy  i  flat  percentage  (e.g.,  one  percent)  of  its  annual  gross 
receipt  of  funds  fnim  c\en'  source.  There  should  be  no  exceptions, 
limitations,  exclusions,  dcductjons,  credits,  or  exemptions,  thereby 
greatly  sunplifv-ing  the  whole  tax  preparation  process.  This  system 
would  produce  surtkicni  mcnuc  to  support  necessary  governmental 
functions  and  utxiid  result  m  a  great  saving  of  creative  energy  now 
utilized  in  the  regulator>'  and  compliance  process. 

Comincnts  on  the  Plan 

Several  aspects  deserve  comment,  for  die  proposal  does  not  lack 
Baws.  First,  u-hv  should  aU  mstitutions  be  subject  to  tax?  The  answer: 
The  tax  will  not'  be  onerous  because  die  rate  will  not  be  graduated;  the 
burden  of  government  should  faU  equaUy  upon  individuals  qua  indi- 
viduals and  upon  indi>iduals  operating  in  concert  as  entities  or  aggre- 
gates because  dK  latter  enjov  die  protections  of  a  properly  restricted 
government.  There  exists  no  good  reason  to  exclude  hospitals,  founda- 
tions, churches,  and  dK  like  from  die  payment  of  die  cost  necessary 
to  soK-e  disputes  and  to  maintain  order  and  safety;  indeed,  cogent 
arguments  can  be  made  diat  taxation  will  impel  diose  institutions  to 
operate  on  a  more  businesslike  and  sound  basis. 


20  /  Rid^wayK.  Foley,  Jr. 

Second,  will  the  plan  unduly  rcstria  rfK  state?  I  think  noc.  While 
the  actual  income  to  the  government  from  a  one  percent  gross  rcoeipcs 
tax  is  not  dear,^*  preliminan'  studies  demonstrate  that  such  a  rate 
should  be  ample  to  carry  out  the  proper  functions  of  government.  hJo 
moral  reason  exists  to  permit  the  state  to  li\x  be>'ond  its  means  and  to 
mortgage  the  future  of  its  citizens,  nor  to  ailou-  it  to  cam*  out  func- 
tions which  ought  better  be  left  to  the  pnvate  endca\t)n  of  the  dd- 
zenry  if  indeed  they  are  worth  doing  at  all. 

Third,  what  constitutes  gross  receipts,  and  u-hy  noc  apply  the  tax 
to  net  receipts  only?  Gross  receipts  en\Tsions  all  income  of  eveiy  kind 
and  nature  accumulated  during  the  tax  year:  Wages  and  saiarKs,  inheri- 
tances, gifts,  prizes,  scholarships,  transfer  paNinents,  to  name  a  few 
items.  Simplicity  demands  no  exclusKxis;  exempCKms  breed  special 
interest  legislation  and  inherent  unfairness. 

Fourth,  is  it  fair  to  tax  proportionateh  so  that  a  nun  earning 
$1,000,000  pays  one  percent  or  $10,000  in  tax  while  a  u-elfarr  recipi- 
ent receiving  $1,000  pays  only  $10  to  the  state?  IVohabh  not,  bui  the 
concept  is  ever  so  much  better  than  u  hat  n<m  exists  that  Mime  Uifilt 
deviation  from  philosophical  precision  might  be  xcepcabk  A  case  can 
be  made  that  each  person  and  entm  in  i  temtorv  gams  an  equal  vakic 
from  the  protection  of  his  perst)n  and  the  establishment  of  order  to 
that  each  ought  to  pay  a  flat  rate,  e.g.,  $100  a  >rar.  for  govrnwncnt 
services. 

The  proportional  gross  receipts  tax  incoqxiratcs  a  pa»gre»M\T  fea- 
ture in  that  each  person  paN's  a  flat  percentage  of  his  rrceipcs.  and  the 
receipts  by  definition  may  van-.  The  Libenanan  Parry  frU  into  an 
identical  trap  during  the  1980  presidential  campaign  y^hcn  it  dccncd 
unfair  taxation  yet  produced  a  plan  which  still  incorporated  *<wne  pro- 
gressive features.  In  the  end  result,  the  pniportKinal  gniu  receipts  tax 
is  acceptable  because  the  person  or  cntit>-  uith  greater  reccipcs  nuy 
have  more  at  stake  in  material  things  and  thus  may  require  fuicicc 
services  more  often  or  in  greater  mtensm-  than  tine  possessing  Icatcr 
wealth. 

Conclusion 

No  system  designed  by  fallible  individuals  vmU  produce  perfection 
in  this  orderly  world.  However,  much  remains  to  be  done  in  the  re- 
striction of  the  state  to  its  proper  functions  and  in  the  restraint  upon 


The  EUments  of  a  Fair  System  of  Taxation  I  21 

itmnmrnekd  taxing  and  innaring  powers.  Adoption  of  the  propor- 
tional groM  recapo  tax  uill  mark  a  bng  step  toward  sanity  and  moral- 
ity in  the  concept  of  lov'crtignty . 


I.  Mr^  ^  W«y.  I'  .  The  Source  of  Sovereignty,"  32  Fruman  167-175  (March 
19t2) 

2  Mn  power  •  dHCiMcd  m  kngnh  in,  Ridgway  K.  Foley,  Jr.,  Tolice  Power: 
5»UiHpB|\  ffli%llliiiiiiii  .-  25  hrmmm  677-687  (November  1975). 

I  Sac  c  f .  Ib4f«r«v  K  Wey.  \t .  "Individual  Liberty  and  the  Rule  of  Law,"  Free- 
mtm  117-171  (jimc  1971 )  and  7  WHmmttu  Uwjmnud  396-418  (December  1971),  and 
^Tht  Soma  *d  Sowvrnpncy.*  if  at  tune  1 

4  Sec  Ahih—  Ellk.  TV  SmW  ibawr  f rwM^  (Arlington  House,  New  RocheUe, 
New  Yofi.  1971  K^MM 

I  AdtoWHdljr  rtM  candiiiur>-  MJirmcnt  doc»  link  justice  to  the  subject  of  the  root 
CMMi  of  wlhnnw  but  «  wil  Millicr  kn  dw  purpotcs  of  this  article.  The  following  works, 
mmf  akhtit..  Smvm  the  p»t4ik'n»  m  Krtai  dctul:  Lud>»'ig  von  Miscs,  Human  Action  (3rd 
rnwd  cdmon.  tlcnr\  Rqinm  Cxviipam-.  Chicago  1966),  p.  7%0etseq.;  Murray  N.  Roth- 
huA,  Whm  Hm  (.tuimmmt  t)mt  m  ()m  Mmnl  27  a  tt^.;  Donald  T.  Hoppc,  How  to  Invest 
m  Cmid  Smk  mdAimditm  rwfmO,  (AHingnm  Houk,  Neu'  RocheUe,  New  York,  1972), 

6  frmu  ftek\  \>«rei  Somnar'  Gold  and  Siher  and  the  Coming  'Upheaval',"  The 
tmmmm^  Pv^tmmtti  Uunr  197 J )  S6  Or  Pict  dates  that  the  last  relatively  infladon-free  year 
wm  1940  Md  dK  1940  dolar  u  »-<«ih  Itm  than  10  cents  today. 

7  A  ««•  wnmn  iftnk  •Iwth  dttiiuto  the  problem  of  the  progressive  income  tax 
n  dfnl  »  Mw  QiMhcTiMn.  TV  PmjroM^T  Income  Tax,"  IX  Essays  on  Liberty  277-296 

I  See,  c  f .  liMlin.  Ikno-.  "Ikm  it»  Adue%c  a  Fair  Tax  Structure,"  Human  Events 
{M«dll7.  |97|).9-I0 

9  Sec  ^4^lr  6.  if  or 

10  Indml.  a  modified  mdcunft  propoMl  appears  in  die  Economic  Recovery  Tax  Act 
of  1911  akhm^  m  ihn  «tiiv^  the  national  politicians  are  reconsidering  the  wisdom  of 

ikiuho  thai  (»»h  the  United  States  government  can  flood  the  marketplace 
let  hm  pnm  hu  o»-n  doUan  and  tiy  to  use  them.  Radicr  severe  penalties 

I  to  well  ODfliJlKl 

12  Sec  Now  6.  If  or  Amulh.  dehasemcnt  and  inflation  far  antedate  the  history  of 
the  UfMcd  S<«c»  Sec. eg .  Hoppe.  Note  5.  ef  at 

IJ  ai«lxf«Mi.fl»  or.  Note  7.  p«ge  281 

14  Go««naMK  itcnwb  arc  i»ot  available  to  make  the  exaa  determinations  necessary 
fcr  a  vndm  mmm  Smc  iccwd*  ha%T  been  stiidied  in  the  years  1973-1976  which  demon- 
««d«  one  peitcnl  nm  >ieU  much  fiwar  return  than  necessary  to  fimd  state  functions 


The  General  Welfare 
by  Clarence  B.  Carson 


"I  wish  the  Constitution  was  not  so  v-aguc,"  oik  of  im-  daughters 
said.  My  first  reaction  to  that  was  to  deny  that  the  document  is  parcxu- 
larly  vague  or,  for  that  matter,  obscure.  ''Why,"  she  perustcd,  "does 
it  contain  a  clause  on  the  general  welfare?"  Actuaih-,  her  question  was 
a  good  one,  and  it  gave  point  to  her  obscrv atKxi  on  the  \agucnc«  of 
the  Constitution,  if,  as  I  think,  I  know  where  she  was  amung  fnim, 
as  they  say.  She  is  a  college  sophomore  and  is  taking  counc*  in  Amch- 
can  histon,'  and  government,  anKxig  (Khers  t'ndtxibcedh',  »hc  hjd 
hoped  to  find  that  the  Constitution  \%(Hikl  be  a  buh^ark  against  the 
claims  of  the  welfare  state.  Yet,  after  studvmg  it  m  her  cUuo.  *he  has 
been  struck  by  its  ambiguity-  and  what  appears  t«>  be  the  Uippcnness 
of  its  phrases.  It  is  my  hope  that  what  folkm^  may  ihnm  tnme  light 
on  the  troublesome  phrase,  both  for  sophomores  and  the  rest  of  us  as 
weU. 

The  phrase,  "general  welfare,"  (xcurs  tuKe  in  the  Cxinstirutkin. 
It  occurs  first  in  the  Preamble,  which  announces  that  one  «»f  the  pur- 
poses of  the  Q)nstitution  is  to  "prooKHc  the  general  Welfare  "  Since 
this  is  a  statement  of  purp<»e,  not  a  grant  of  pourr.  it  need  mn  tktain 
us  beyond  noting  that  it  is  there.  The  other  use  t>f  the  phrase.  howoTT, 
is  much  more  significant.  It  is  contained  in  the  fir\t  Ktitence  of  Artidc 
I,  Section  8,  which  lists  the  powers  of  Omgrew  Kqualh  important,  it 
is  used  in  conncc-tion  with  the  grant  of  the  pt>uTr  of  taxatKm.  n-fiich, 
then  as  now,  was  reckoned  to  be  an  essential  pcmrr  of  gosemment. 
The  relevant  clause  reads,  "The  Cx>ngrevs  shall  ha\e  Pcmrr  to  la>'  and 
collect  Taxes,  Duties,  Imposts  and  Excises,  to  pav  the  Debts  and  pro- 
vide for  the  common  Defence  and  general  Welfare  of  the  United 

States "  Clearly,  Congress  is  empowered  to  lo-\  taxes  t^i  provide 

for  the  general  welfare.  \'ie>\ed  frtxri  the  present  perspecti>e,  thu  gi\es 


Dr.  Carson  has  written  and  taught  cxtcmivch.  iprculuv^  «i  Amcncw 
history-.  He  is  the  author  of  soeral  booiu  .\m(ing  them  art  OfpmmMl  A^mma  Whmm*  fW 
Labor  Union  m  America  and  the  c(xnprchenM\T  A  Bmt  Hmtmy  tftkt  I  'mutd  S»m 
is  reprinted  fk>m  The  Freeman,  August  1983 

22 


The  General  Welfare  I  23 

color,  at  lca«, » the  idea  that  the  welfare  state  has  some  constitutional 
foundjtxNi. 

But  that  if  to  look  at  the  matter  wrong-cnd-to.  What  counts,  in 
the  6nt  pbce,  it  what  the  words  meant  when  they  were  used.  "Wel- 
fare* u  commonh'  u»cd  today  to  refer  to  or  denote  government  pro- 
grams to  prcnide  for  the  poor,  the  disabled,  diose  widiout  work,  and 
thoic  reckoned  to  he  without  sufficient  means  to  provide  for  their 
hasic  wants  It  u  so  used  m  such  phrases  as,  welfare  state,  welfare 
programs,  nrlfart  woricr.  and  welfare  recipient.  Until  quite  recendy 
it  WM  uwd  in  that  wa>'  m  the  name  of  a  cabinet  rank  department, 
nimeh'.  the  Department  of  Health,  Education  and  Welfare.  This  us- 
age, htiworr.  was  unkncm-n  to  the  makers  of  the  Constitution.  If  they 
had  mtendcd  to  authoruc  what  are  nowadays  called  welfare  programs, 
they  HtHiW  not  ha\x  used  the  utwd  'Velfare"  to  express  that  intent. 
It  if  the  other  way  annmd:  uxlfare  pn)grams  bear  that  name  to  give 
the  cokir  of  amsntutKmalin-  to  them.  But  let  diat  wait  for  a  bit. 

What  AmerKam  hq(an  callmg  welfare  programs  in  the  late  1930s, 
or  thetrahouts.  the  Founders  would  have  known  by  the  name  of  "poor 
relief,"  m>  far  as  the>*  urre  familiar  with  it  at  all.  In  England,  tax- 
supported  relief  of  the  pot>r  was  required  under  the  poor  laws,  more 
specifKaliy.  the  Kltzahethan  r(K>r  I jw,  during  the  American  colonial 
period.  Poor  U%k*»  v^rrc  passed  in  the  wake  of  die  Reformation,  the 
fuppreuion  of  monastcrKs,  and  the  confiscation  of  church  lands.  The 
dotitute  had  recet\'ed  ajd  before  that  time  from  organizations  within 
the  church,  but  vk-hen  much  of  the  uealth  of  die  church  was  taken 
away,  the  state  took  osrr  last  resort  poor  relief  Actually,  Parliament 
sipiph'  required  that  kxal  communities  tax  for  and  provide  such  relief 
A  smular  $>-stcm  took  shape  m  die  American  colonies.  In  New 
England,  irlief  for  the  pcK>r  uas  a  charge  upon  die  villages  and  towns, 
paid  for  from  kKallv  loied  tax  mt)nies.  Where  die  AngUcan  Church 
was  established,  poor  relief  was  a  dut>'  of  die  parishes,  and  parishioners 
were  taxed  to  pav  for  it. 

Poor  telief  was  hardh-  a  sumptuous  affair  in  die  colonies,  or,  for 
diat  matter,  in  nineteenth -centur>'  America.  Unless  die  person  were 
totalh'  incapacitated,  more  anention  u'as  given  to  reformmg  die  poor, 
i.e.,  getting  dvan  to  become  productive  and  self-supportmg,  dian  help- 
ing dwn  to  fair  ^-cU.  For  example.  The  vestries  in  Virginia  disposed 
of  Ae  able-bodied  poor,  desntute  orphans,  and  die  legitimate  chU- 
dten  of  indcnmred  scI^•ants  bv  binding  diem  to  masters  as  apprentices 


24  /  Clarence  B.  Canon 

or  servants."^  Workhouses  were  set  up  in  some  pbccs  fbr  those  ^-ho 
had  no  visible  means  of  support.  In  Nen-  England  *Thc  town  pro- 
vided materials  and  took  with  w'hich  the  inmates  wrrc  required  to  cam 
a  living.''^  The  incapacitated  were  sometimes  prcnidcd  almshouses,  or 
otherwise  given  some  minimal  aid. 

No  one  at  the  time  of  the  writing  of  the  Constitution  wxHild  ha\r 
associated  the  life  of  the  poor  dependent  upon  pubhc  relief  with  the 
word  welfare.  "Welfare,"  in  common  usage  for  centuncs,  stems  from 
the  roots  "well"  and  "fare,"  and  means  hasicalh,  according  to  m)' 
dictionary,  a  "state  of  faring  well;  wellbcmg."  S\'non>"ms  arc:  •pros- 
perity, success,  happiness,  weal."  No  sensible  person  wxxiki  haxr  con- 
fused poor  relief  with  prosperity,  success,  or  c\m  fanng  wrll.  Indeed, 
it  was  in  every  respea  the  opposite. 

So  far  as  my  researches  have  rc\  eaJed,  the  wxxtl,  ">*rlfafc,*  began 
to  take  on  a  new  connotation  annind  the  beginning  of  the  rwmoeth- 
century.  The  phrase,  "welfare- manager,"  appeared  m  print  in  England 
in  1904.  Some  factories,  it  seems,  wrre  empkning  paipic  to  assist 
workers  in  improving  their  well-being  Thus,  the  I.mdm  Dmth  Exfrta 
declared  in  1916  that  "Welfare  work  tends  to  imprmc  the  amdition 
of  life  for  women  and  girls  cmpknrd  in  factories  "*  Htmr^XT.  the 
word  still  had  no  clear  conncanm  with  relict  Un  the  ptxir 

That  connection  was  nude  m  the  United  States  in  the  count  of 
the  routinization,  regulanzation,  and  burcaucratuation  of  go%rmmcnt 
aid  programs  in  the  1930s.  The  ke\  piece  of  legislation  (tir  making  thu 
change  was  the  Stxial  Sccunt>  Aa,  passed  in  1935  There  u  reason 
to  believe  that  the  adoption  of  the  w»>rd  "welfare"  in  pbce  <if  relief 
was  a  more  or  less  deliberate  aaKMi  It  served  a  highh  important 
political  and  constitutional  purpose  Much  of  the  c^h  Sew  Deal  legis- 
lation was  tied  up  in  coun  tests  b\  1934.  As  it  turned  tmit,  the  central 
pieces  of  New  Deal  legislanon  were  nullified  in  the  next  year  or  to 
New  Dealers  were  casting  abt>ut  franncalh'  fbr  wj^-s  to  o^rrcucne  the 
constitutional  impasse. 

Secretar)'  of  Labor  Frances  Perkins  remarked  to  Supreme  Coun 
Justice  Harlan  Stone  in  1934,  that  she  was  worried  that  the  Social 
Security'  system  they  were  dcMsuig  might  not  pass  the  cxmstitutianality 
test.  The  taxing  power  of  the  Federal  Government,  my  dear,"  StocK 
replied;  "the  taxing  power  is  sufficient  for  ortythmg  \-ou  want  and 
need."  This  pointed  dearh'  toward  the  general  welfare  phrase  in  the 
clause  of  the  Constitution  authorizing  taxatKm.  In  the  %wnc  )rar  Pro- 


The  General  Welfare  I  25 

fcMor  E.  S.  Corwin,  a  recognized  constitutional  authority,  maintained 
that  the  taxing  and  spending  aurfiority  of  Congress  was  unchecked  by 
the  Comcitution.  Another  bw  professor  declared,  after  the  Supreme 
Coun  nullified  cnjcial  poroons  of  die  NRA:  The  waters  dammed  by 
judiciil  mtriction  on  the  commerce  power  may  break  out  in  unwel- 
come fieldi  (>f  taxing  and  spending.  What  seems  a  great  victory  against 
national  regulation  may  prtne  to  be  a  Pyrrhic  one."* 

Indeed,  It  did.  The  Social  Security  Aa  leaned  heavily  upon  the 
gcncraJ  %velfarc  phrase  in  the  Constitution.  It  opens  with  the  claim 
that  it  is  "An  Aa  to  provide  for  ihc/fetural  welfare  by  establishing  a 
lyitan  of  Federal  old-age  benefits,  and  by  enabling  the  several  States 
to  make  more  adequate  provision  for  aged  persons,  blind  persons, 
deperkient  and  cnppled  children,  maternal  and  child  welfare,  public 
health,  and  the  administratKNi  of  their  unemployment  compensation 


Sodal  Security  Involves  a  Bundle  of  Programs 

Since  many  people  may  not  rfiink  of  Social  Security  as  a  welfare 
measure,  it  may  be  v^ril  to  emphasize  that,  however  old-age  benefits— 
the  phrase  then  used  w  describe  ScKial  Security  payments  to  the  re- 
tiitd— should  be  classified,  there  was  a  bundle  of  programs  provided 
in  the  aa  which  formed  the  core  of  the  welfare  programs.  The  bundle 
indudcd  such  things  as  pensions  to  those  who  had  not  contributed  to 
Social  Security'  and  aid  to  dependent  children,  among  others. 

Mofernvr,  these  programs  were  administered  in  the  states  by  what 
gcneralh*  became  knouTi  as  uelfare  departments  in  the  1940s  and 
1950$.  Frequendv.  tho-  were  formally  tided  Department  of  PubUc 
Welfare  (DPW),  and  dnwe  who  administered  die  programs  were  re- 
ferred to  as  u-clfare  u-orkers.  In  1953,  an  assortment  of  these  programs 
were  moved  into  die  no^-  cabinet  ranked  Department  of  Healtii,  Edu- 
cation and  Weifkrr  In  diis  fashion,  die  shift  from  referring  to  these 
ptograms  as  poor  relief  to  pubUc  welfare  was  completed,  and  the  claim 
rfiat  such  government  acti>ities  were  sanctioned  by  die  f  erence  in  die 
Constitution  to  general  welfare  Nvas  Unguistically  ratified  after  the  tact. 

•nie  main  point,  of  cour^,  is  diat  die  Founders  could  not  have 
intended  to  include  u-hat  die>'  knew  as  poor  reUef  m  dieir  reference  to 
the  general  welfare.  Poor  relief  was  die  last  resoit  of  local  govermnents 
to  fiovide  minimal  means  for  survival;  it  was  at  die  opposite  end  ot 

ProDiedad  ue  \o  Diji.oieca 


26  /  Clarence  B.  Carson 

the  scale  from  faring  well.  Beyond  that,  the  oidcncc  presented  here 
points  toward  the  conclusion  that  as  bte  as  the  earh'  1930s  it  took  a 
great  deal  of  straining  to  make  the  beginnings  of  an  identification 
between  relief  and  welfare. 

But  there  is  much  more  invohcd  in  this  claim  that  the  federal 
government  is  constitutionally  authorized  to  prtmde  for  the  general 
welfare  than  such  programs  as  have  been  identified,  hour\rr  spun- 
ously,  with  welfare.  The  whole  concatenation  of  rcdistnbutK^nist  and 
interventionist  programs  which  comprise  the  urlfare  «ate  find  thetr 
main  justification  under  it.  Thus,  ^x  arc  brought  back  to  the  coraid- 
eration  of  the  claim  regardless  of  what  meanings  may  be  anached  to 
the  word  welfare. 

The  crucial  question  then  bcctHnes  whether  ck  not  there  u  a  grant 
of  power  in  the  Constitution  to  provide  for  the  general  wrl^ve  There 
are  at  least  two  approaches  that  can  be  taken  ti>  am^rnng  thi»  ques- 
tion. One  is  to  trv'  to  discern  the  meaning  t»f  the  phrase  "general 
welfare"  in  the  clause  in  which  it  tKCunk  The  other  u  ti>  lee  the  clause 
within  the  context  of  the  whole  O^nstituiKin. 

The  Taxing  Power 

First,  then,  let  us  kwk  at  the  clause  agam,  ykiudi  reads:  The 
Congress  shall  ha\c  Power  to  lay  and  collect  Taxes,  I>uties,  Imposts 
and  Excises,  to  pay  the  IVbts  and  pnnkk  fi»c  the  common  IVfence 
and  general  Welfare  of  the  I'nitcd  States.  T  One  thing  is  cenam: 
Congress  is  authorized  to  loy  taxes  Is  it  authorized  n>  do  amihing 
else?  My  view  is  that  it  is  not.  What  folkm-s  the  wvtd  "Eicncs**  » 
restrictive  rather  than  being  a  grant  of  ptmen.  restTKti\T  of  the  taxing 
power.  The  operative  words,  in  my  reading  of  the  rclevam  parts, 
would  be  that  taxes  arc  to  be  loied  to  **pnnKk  for  the  cmmmtm  De- 
fence mdjjtnerai  Welfare  of' the  Vntted  Stmta  " 

What  was  being  guarded  against  b\-  these  restnaxins  was  the  levy- 
ing of  taxes  on  the  whole  pct>ple  to  pay  Ure  stime  benefit  to  some  kxale, 
state,  or  region  of  the  countrv .  For  example,  b>  this  reading,  taxes 
could  not  be  propcrl\  le\  led  to  pay  for  an  undertaking  such  as  the 
Tennessee  Valley  Authont) .  There  wxs  a  definite  interest  in  the  Con- 
stitutional Convention  to  restnc-t  such  practKXs.  At  one  point,  Ben- 
jamin Franklin  proposed  that  the  general  government  be  gi^m  "a 
power  to  provide  for  cuttmg  canals  u-hcrc  deemed  necessary."  Roger 


The  General  Welfare  I  27 

Shcnnan  objected.  The  expense  in  such  cases  will  fall  on  the  United 
State*,  and  the  benefit  accrue  to  the  places  where  the  canals  may  be 
^  ut  "*  Franklin'*  mooon  was  defeated  bs  a  vote  of  8  states  to  3. 

But  kt  me  hasten  to  add  that  there  is  no  way  to  make  certain  that 
rny  interpretation  of  the  words  as  being  restrictive  is  correct  simply  by 
reading  the  clause  and  selecting  emphases  within  it.  Furthermore,  even 
if  It  HTTC  restrictive  to  thc/rrrnvW  welfare,  there  might  still  remain  a 
I^Hefitially  bniad  pcmrr  to  pnnidc  for  the  general  welfare.  After  all, 
in  ordinarv'  usage  the  granting  of  the  power  to  pay  for  something 
tacitly  authort/es  the  buying  of  it.  For  example,  if  I  tell  my  daughter 
that  she  may  %kTite  checks  to  pay  for  her  college  expenses,  it  is  a  logical 
infererKe  that  I  am  authorizing  such  expenses.  The  same  might  be 
expected  to  appK'  to  statements  in  the  Constitution.  To  see  that  they 
do  not.  It  is  necessary*  to  place  the  clause  thus  far  examined  in  the 
t.oniext  of  the  wfv»lc  (  ^rnvtmition.  Phrases  and  clauses  that  may  appear 
to  be  vague  and  general  uhen  considered  in  isolation  take  on  much 
more  precision  u-hen  vieucd  from  the  angle  of  the  whole. 

A  Limited  Government 

The  OmstitutKin  of  the  United  States  is  no  ordinary  set  of  state- 
ments or  dcK-ument  It  u,  if  not  unique,  a  very  special  case  among 
dcxuments.  It  deM.Tibcs  the  form  for  and  grants  power  to  a  Umited 
government.  There  are  no  omnibus  grants  of  power  in  die  Constitu- 
tion; c\-ery  pourr  granted  is  limited  in  one  or  more  and  usually  several 
wiyi  (diough  not  nccessanlv  in  the  clause  that  grants  it).  It  does  not 
grant  the  po%*'ers  of  gm'emment  generally  to  die  United  States  govern- 
ment. 

What  makes  dK  Cx>nstitution  almost  unique  is  that  die  govern- 
ment It  audH>n2es  has  onlv  such  powers  as  are  granted  to  it.  Thus, 
what  can  be  mferred  from  ordinary-  speech  or,  for  that  matter,  the 
general  run  of  legal  documents,  is  no  guide  in  construmg  the  provi- 
sions of  dK  ConsotutKMi.  It  IS  concerned  widi  granting  and  hmitmg 
power  in  an  arrangement  for  which  diere  are  few,  if  any,  parallels  in 
ordinan'  life  situations. 

It  is  contran'  to  the  whole  tenor  of  the  Constitunon  that  the  power 
to  provide  for  the  general  welfare  should  have  1^"  6^^"'^'',"^  *' 
senUe  authorumrt«'tion.  The  men  who  drew  the  Conm'uaon 
did  not  assume  that  bv  granting  the  power  to  tax  m  order  to  pay  debts 


28  /  Clarence  B.  Canon 

that  they  had  authorized  indebtedness.  On  the  contrary,  the  \Tn'  next 
sentence  authorizes  Congress  'To  borrow  Mone\'  on  the  credit  ol  the 
United  States'*  Nor  did  the\'  assume  that  b\'  authonzing  tauckm  id 
pay  for  the  common  defense  that  thc>-  had  granted  the  powrr  to  bring 
into  being  a  militan'  establishment.  On  the  contran',  again,  there  is  a 
list  of  powers  to  accomplish  this  purpose  granted  to  Congress: 

To  define  and  punish  Piracies  and  Felonies  committed  on 
the  high  Seas  and  Offences  against  the  Law  of  Nations; 

To  declare  War,  grant  letters  of  Marque  and  Reprisal  and 
make  Rules  concermng  Captures  on  Land  and  Water. 

To  raise  and  support  .\rmics  . . .  ; 

To  pro\'ide  and  maintam  a  Na\->-; 

To  make  Rules  for  the  Gcnrmmcnt  and  Regulation  of  the 
land  and  naval  Forces 

If  the  power  to  provide  fcK  the  common  defense  had  been  granted 
in  the  taxing  power,  each  of  these  ptwk-ers  ^xiuld  ha\r  been  implaed 
by  it.  Such  an  cnumeratuxi  of  pou-er*  uxxild  ha\r  bcm  redundant 
Redundancies  are  commonplace,  ol'  cinirw.  in  ordinan  legal  docu- 
ments nowadays,  but  the  (constitution  i*  remariabh  free  of  them.  It 
is  spare,  lean,  and  once  stated,  repetitKwi  of  a  poaitmn  is  avTudcd. 

Indeed,  the  powers  which  the  Fcnmders  rrckoncd  necessary'  to  the 
general  welfare  of  the  Ignited  States  are  enumerated  along  wt&\  thiwe 
mentioned  above.  Among  them  arc  the  p^wkrr  of  (xmgreu  tf>  a^M^ 
uniform  laws  on  bankruptcies.  ti>  ann  monew  to  fii  itarklards  <if 
weights  and  measures,  to  establish  po«t  oflkes  aiKl  pntt  roads,  to  p^x 
authors  and  inventors  exclusive  nght  Ux  a  time  to  thew  wntingft  and 
discoveries,  and  the  like.  L'ndoubtedlv.  tho  considered  all  the  po^m 
granted  useful  or  neces.sarv  to  the  general  u-elfarc.  tixluding  the  pou 
crs  of  taxation  and  those  for  a  militan  estaNishment  But  my  pomt  is 
that  the  powers  granted  were  enumerated,  and  those  not  lo  enumer- 
ated were  reserved  to  the  states  or  to  the  petiple 

That  did  not  keep  some  from  claiming  or  asserting  that  some 
objea  they  wanted  to  achioe  by  go\emment  was  pnnided  for  in  the 
phrases  of  the  taxation  clause,  e\en  in  the  earh'  >Tars  of  the  RepuNK 
The  issue  came  up  for  President  Madison  m  1817,  when  he  was  pre- 
sented with  a  bill  for  making  internal  impnivements  such  at  roads  and 
canals.  He  vetoed  it  on  constitutional  grounds 


The  General  Welfare  I  29 
••  Interpretation  of  Enumerated  Powers 

Madiwm  %aid,  m  pan,  The  legislative  powers  vested  in  Congress 
arc  specified  and  enumerated  in  the  eighth  section  of  the  first  article 
c»f  the  OimtinitKia  »nd  it  docs  not  appear  that  the  power  proposed 
to  be  cxcrciftcd  tn*  the  btU  is  among  the  enumerated  powers. . . ."  Re- 
garding the  general  welfare  phrase  specifically,  he  said:  'To  refer  the 
power  m  qucstKm  to  the  clause  'to  provide  for  die  common  defense 
and  general  welfare'  u-oukJ  he  contrary-  to  die  established  and  consis- 
tent rule*  of  tntcrpretatiixi,  as  rendenng  the  special  and  carefiil  enu- 
meration of  i^imcn  u-hich  folkm'  the  clause  nugatory  and  improper. 
Such  a  ^Tcw  of  the  Oxutitunon  would  have  the  effect  of  giving  to 
Congress  a  general  pcmrr  o(  legislation  instead  of  the  defmed  and 
limited  one  hithcno  undentfxxl  to  belong  to  them "^ 

Prc&idcnt  Monnic  echtxrd  Madison's  views,  and  added  some  of  his 
own,  in  \"CtcMng  a  bill  for  maintaining  the  Cumberland  Road  in  1822. 
He  dented  that  Cxmgrcss  had  the  power  to  do  this.  "If  the  power 
exut,"  he  sanl,  "it  must  be  either  because  it  has  been  specifically 
granted  tJ)  the  United  States  or  that  it  is  incidental  to  some  power 
which  has  been  granted.  If  we  examine  die  specific  grants  of  power 
wc  do  not  find  it  among  them,  nor  is  it  incidental  to  any  power  which 
has  been  specifKally  granted."  Among  diose  fi-om  which  he  could  not 
trace  the  pcm-er  he  declared,  was  die  clause  "to  pay  die  debts  and 
provide  (at  the  ct>mnK>n  defense  and  general  welfare."^  In  an  adden- 
dum to  his  \-cto  message,  he  included  diis  diought:  "Have  Congress  a 
right  to  raise  and  appropnate  the  mone>'  to  any  and  to  every  purpose 
according  to  riKir  wiU  and  pleasure?  they  certainly  have  not.  The 
Gosrmment  of  die  United  States  is  a  limited  Government,  instituted 
for  great  national  purposes,  and  for  those  only.'^ 

In  sum,  tfKn,  it  is  most  unlikch'  diat  die  makers  of  die  Constitu- 
tion u-ould  haN-c  chosen  the  phrase  "general  welfare"  to  audiorize  die 
federal  govrmmcnt  to  provide  uhat  die>'  understood  to  be  poor  relief 
It  would  ha>T  NTolated  bodi  dieir  understanding  of  die  meaning  ot 
words  and  dK  common  practice  as  to  what  level  of  government  should 
proxTdc  dK  relief.  On  the  contrary',  it  appears  diat  relief  came  to  be 
called  welfare  to  give  it  a  semblance  of  constitutionaUty.  Indeed,  close 
anah^is  uidim  die  sentence  and  die  context  of  die  Constitution  pomts 
to  the  conclusion  rfiat  die  reference  "to  provide  for  die  general  wel- 


30  /  Clarence  B.  Carson 

fare"  was  the  restriction  of  the  taxing  pow-cr  rather  than  a  sepuaxt 
grant  of  power. 

In  short,  no  powers  were  enumerated  granting  authont>'  to  the 
federal  government  either  to  enaa  relief  measures  or  to  crca  what  has 
come  to  be  called  a  welfare  state.  Nor  is  the  language  of  the  Constini* 
tion  especially  vague  or  carelessly  general  u-hcn  it  is  \TCurd  >»ithin  the 
context  of  the  whole  document.  It  onh-  appears  to  be  so  ^-hcn 
wrenched  out  of  context  and  construed  to  co\-cr  purposes  not  in- 
tended. 

1.  Cums  P  NencK  The Rma  tfAmmcm  CtmkaMmm  (Nr»  Yact  S^^knon<JeuciMr 
Crofts,  1963),  p  463 

2.  lind.,  p.  462 

3.  This  infomunon  ccimn  fnim  the  (isfmd  Bt^/ikik  Ptrtmmm^ 

4  Sec  Anhur  M  Schlcsingrr.  |r .  Tht  fWno  <t>tiwif  y  •««  Hoi^NoB  Mrtai. 
1960),  pp  398-99 

5  Hcnn  S  a««mftcT.  Docmmfna  tfAmtntmm  Hmmn.  tvi  tl  iSrm  Ycrt  Ap^kmm 
Century  Crofts,  1962).  p  326  ItaUs  jdJnl 

6  C:harlcs  C  TamiU.  cd  .  hrnmmttm  4  tki  Vmmm  tf  fkt  1w»tw  Sm 
D.C.:  Goxcmmcnt  Pnnting  (HTkc.  192"  .  p  "24 

7  Iimcs  D   RKhaniMm.  ol  .  A  Cmmflutim  4  tht  Mm^m  mtd  f^tm  eftbt 
vol.  II  (No*  York  Bureau  of  NtfMmii  Litmnirt.  \wr^\.  pp  S«9-'M 

8./*«<.  p  712 
9.  Ibtd.,  p  736 


Some  Thoughts  on  Taxation 
by  George  C.  Leef 


With  the  rtccpCMin  c>f  the  weather,  probably  no  subject  is  more 
CDmpUincd  abtHit  than  laxatum.  Almost  ncryone  feels  that  our  tax 
%>*»tcm  treau  hun  unfairly,  for  one  reason  or  another.  The  poor  say 
that  HTaJthy  pcrKim  and  businesses  should  pay  more  than  they  do,  and 
the  iancr  argue  thai  the  taxes  the>'  already  pay  are  economically  coun- 
tefproduai\e.  Politicians  are  foroer  promising  tax  "reforms"  and  leg- 
i&lative  btxlics  debate  iIk  desirabilit)'  of  an  endless  variety  of  deduc- 
tiom,  credits,  exemptions,  and  rates.  The  overall  tax  scheme  which 
results  IS  not  predicated  upon  any  pnnciple,  but  rather  is  capricious, 
based  only  upc»n  the  respective  success  of  each  interest  group  in  influ- 
encing the  politKal  process. 

This,  I  submit,  is  an  undesirable  state  of  affairs.  In  pace  with  the 
rise  of  nuss  dcmocraok'.  our  tax  system  has  become  an  institution  for 
plunder.  pn>digalit>-.  and  the  gratification  of  envy.  Many  a  shrewd 
jxilitician  has  taken  the  easy  rxjad  to  power  of  promising  die  voters 
goxcmmcntal  services  or  subsidies  paid  for  in  die  main  by  somebody 
else.  The  one  discernible  pnnciple  of  our  tax  system,  diat  of  "progres- 
sivity,"  is  inhetrntly  unjust,  as  it  compels  some  to  subsidize  others'  use 
of  govcnuncntal  services. 

What  >%T  haN-e  is  the  ugh'  speaacle  of  a  societal  gang  war,  each 
gftHjp  attempting  to  manipulate  government  so  as  to  enrich  itself  at 
the  expense  of  the  others.  This  is  possible-indeed,  mevitable-be- 
cause  our  tax  s\-stem  is  not  rooted  in  principles  of  justice  (as  are  e.g., 
our  ptxxKm  and  tort  law).  But  it  need  not  be  so.  There  is,  I  beheve, 
one  principie,  and  onlv  one  prmciple,  upon  which  taxation  could  be 
based  u'hich  avoids  injustice  to  any  citizen.  It  is  the  same  prmciple 
which  undcriies  ail  market  transactions:  You  pay  for  what  you  get. 

15n;cf  »  an  Muna  SchoUr  ..th  the  Macrae  C>nter  ^r  P^U^JoJ^^  M.dand, 
,.  -nm  amcku  rrpnntcd  ftom  the  September  1978  issue  of  The  Freefnan. 

31 


32  /  Geor£fe  C.  Lcef 
The  Rights  of  Man 

The  view  one  takes  of  man's  rights  uill  infbnn  his  judgmott  on 
the  moral  defensibility  of  a  s^-stcm  of  taxation.  I  do  not  propose  here 
to  argue  at  length  for  the  position  I  take,  as  that  has  been  abl>'  <lonc 
elsewhere.' 

Individuals  have  rights.  Locke  distilled  the  hindamcntal  rights  to 
these:  life,  liberty,  and  propcrt>'.  Each  pervm  has  a  right  to  be  the 
master  of  his  life,  the  only  life  he  has.  It  may  ntx  be  taken  from  him, 
and  neither  may  it  be  made  the  tool  of  others.  That  propcm*  i^-hich 
jusdy  comes  into  his  possession  is  his  to  do  i*ith  as  he  picaao  con- 
sume  it,  save  it,  exchange  it,  or  p\x  it  away  The  dominion  of  an 
individual  over  property'  excludes  any  nghtfiil  claim  to  that  pfopcm- 
by  another.  As  Professor  Nozick  ^fc-ntcs,  **The  parTKular  nf^o  cn-cr 
things  fill  the  space  of  nghts,  lea\  ing  no  rtxim  kn  general  rights  to  be 
in  a  certain  material  condition."^  This  concept  of  man's  nghts  is  dtcph* 
embedded  in  our  religious  heritage,  and  was  embodied  in  the  cariicit 
forms  of  the  common  law.^ 

Let  us  agree  that  man  has  a  nghi  to  en^n  the  fruits  <if  his  labor 
Can  there  co-exist  uith  this  nght  such  alleged  nghts  as  the  *nght  to 
decent  housing"  or  the  "nghr  to  an  cducatnwi"*  The  ansi»rr  is  no.  As 
soon  as  an  agent  of  compulsion,  usuallv  the  state,  takes  anv  part  of  the 
fruit  of  one's  labor  fn>m  him  m  order  to  p\x  eflfea  to  these  other 
so-called  rights,  the  pnman  nght  is  xuUated  Then  v^x  can  no  longer 
say  that  man  has  a  nght  to  enjoy  the  fruits  o*  his  labor,  but  onh-  that 
man  is  permitted  to  enjoy  that  which  the  state  d»ies  not  demand  be 
put  to  purposes  of  its  ch<x>sing  The  degree  of  the  taking  does  not 
matter.  The  right  is  violated  wheneser  an  cm-ner  is  compelled  to  p«rt 
with  any  portion  of  his  pn>pert>-  against  his  \%ishes 

The  Nature  of  Taxation 

Taxation  is  the  pnce  u-e  pay  for  gosemment  servTces.  Go\niuiicm 
takes  (or  keeps)  fn>m  us  an  amount  of  pn>pert>  (mone\ ).  calculated 
by  various  formulae,  each  year  Dunng  that  N-ear,  gos-emment  docs 
certain  things  for  (or  to)  its  citizens  Each  of  these  lervices  has  a  co«t 
per  citizen,  although  stxne  svtxild  be  difficuh  to  account  for  with  ccr- 
taint)'.  Under  our  present  tax  system,  hos%-e\rr,  there  u  no  nccestary 


Some  Thoughts  on  Taxation  I  33 

rcbciomhjp  between  the  »izc  of  one's  tax  bill  and  the  cost  of  the 
govemmem  icfviccs  he  has  used. 

If  you  go  to  get  a  haircut,  the  price  you  pay  reflects  the  costs  of  the 
bArixr^i  time,  hu  toob,  rent  on  the  shop,  and  so  forth.  It  is  deemed 
loit  that  the  recipKmt  of  the  haircut  should  pay  for  these  costs  incurred 
<>n  hu  behalf  Oimparc  thu  with  our  tax  system.  Taxes  are  computed 
<in  the  basu  of  incume,  wealth,  purchases,  and  odier  measures.  There 
IS  no  anempc  whaco-er  to  charge  the  costs  of  government  to  those 
people  for  whom  lhe\'  ^rre  incurred.  Unavoidably,  some  taxpayers 
muft  pay  more  than  the  value  of  the  gm'cmmcnt  services  they  received 
whiJe  ochen  pa>'  leu  (or  not  at  all).  This  system  is  undesirable  for  a 
number  of  reaftom  having  tc)  dt)  uith  efficient  use  of  resources,  but  I 
wish  Co  fiicm  on  the  rea&om  why  it  is  immoral. 

TaiatkM  Hid  MonOtty 

Fiiw,  CHIT  fax  tAitem  ii  imnK)ral  because  it  compels  some  individu- 
ab  to  purchase  gtAcmmcnt  services  which  they  do  not  desire.  For 
example,  many  Amencam  contribute  involuntary  support  to  public 
H'h(M>U  e\'en  though  neither  ihc>'  nor  any  children  of  theirs  make  any 
use  of  these  facilities.  There  arc  also  many  citizens  who  drive  very  litde 
or  not  at  all,  m  ha\r  no  choice  but  to  help  underwrite  the  costs  of  our 
high%^y  network.  And  there  arc  those  who,  aldiough  they  do  not  care 
for  such  things,  arc  pammi/ing  the  fine  arts  through  governmental 
subsidies,*  In  this,  their  nghts  arc  violated  because  diey  are  deprived 
of  the  freedtxn  to  ch<x»c  how  thc>'  will  dispose  of  their  property. 

Secondh-.  if  taxation  requires  us  to  purchase  services  we  do  not 
v^-ant  (or  >**ant  less  than  other  things  we  might  have  bought),  a  corol- 
lar\'  is  that  ur  are  compelled  to  subsidize  services  used  by  others,  and 
this  too  is  immoral.  PaN-ments  for  services  we  do  not  use,  or  use  only 
to  a  small  degree,  usually  go  to  reduce  the  amount  that  more  extensive 
users  need  pav.  For  instance,  those  of  us  who  make  considerable  use 
of  public  Ubranes  are  relicNcd  of  paying  die  full  cost  of  our  usage 
because  of  the  tax  doUars  taken  ivom  occasional  and  nonusers  which 
go  to  dcfrav  dK  expense.  It  is  a  nolation  of  those  rights  which  we 
posited  abo%T  to  compel  someone  to  support  anodier's  desires  or  even 
needs,  m  our  tax  SN-stem  is  a  hopeless  maze  of  involuntary  subsidiza- 
tions oir  some  b>'  otfiers.  The  most  obvious  example  of  how  the  tax 


34  /  GeorgeC.Ltef 

system  is  used  to  compel  one  person  to  make  purchases  for  another  is 
the  phenomenon  of  transfer  pa\'ments.  Here,  there  is  no  goveniinenul 
service  at  all,  merely  the  taking  of  mone>-  from  one  penon  thought  not 
to  need  it,  and  giving  it  to  someone  else.  Such  acts  of  robbciy  by 
indirection  can  occur  only  because  our  tax  $\-$tcm  docs  not  link  pay- 
ments to  benefits  received. 

Neither  of  the  above  objections  to  the  moralirv'  of  our  tax  system 
depends  upon  the  existence  of  a  ''progrcssi>e''  rate  structure.  If  the 
government  merely  figured  its  costs  and  di\ided  them  c«)ualh'  among 
all  taxpayers,  we  would  ob)ea  for  the  reasons  gi\m  abosr  rrogrcs- 
sivity  is  a  separate  issue,  and  must  be  regarded  as  a  third  indKtmcnt 
against  our  tax  s^'stem. 

We  have  had  it  drummed  into  us  fcK  to  kmg  that  taxation  should 
be  based  upon  **thc  ability'  to  pay"  that  this  axKim  is  hardh*  e\rr  ques- 
tioned. (We  might  call  it  the  Wilhe  Sutton  principle  of  taxation — 
"Why  do  you  rob  banks?"  "Because  that's  where  the  monc>'  is  *)  Yet, 
upon  examination,  it  cannot  stand  under  our  wck  di  the  rights  of 
individuals. 

When  we  say  that  taxatKxi  should  be  based  upon  "abdirk*  to  pay," 
we  arc  saying  that  rx%-o  persons  who  use  the  \xmt  ginrmmcntal  »cr- 
vices,  and  in  the  same  amount,  should  pav  ditTerent  amounts  of  tax  if 
their  incomes  arc  different.  To  illustrate  the  ptnnt.  imagine  t>*x»  poticn 
who  live  next  d<x)r  to  each  other  The\  place  identical  demands  on 
governmental  services  m  1977  (use  of  rtuds,  KhooU,  natMWul  defense, 
etc.)  and  both  pay  the  same  amtnint  of  tax  bevause  thc\  u4d  the  same 
number  of  pots.  Then,  m  1978,  one  of  the  potters  gets  ambttHHis  and 
produces  and  sells  15  percent  more  ptKs  than  in  the  prwir  \^»x  Hu 
neighbor  prtxiuccs  the  same  number  xs  he  did  in  1977.  Their  lists 
remain  the  same  except  that  the  ambitMxis  potter  now  bw-s  ttcak  more 
frequently  than  hamburger  and  dnvcs  a  new  car  inuead  of  an  old  one. 
Oh  yes,  and  he  also  has  to  pay  the  go>cmxr>cnt  more  in  taxes  But  why 
should  he  have  to?  Why  should  he  now  have  ti)  pav,  let  us  say,  $1.10 
per  unit  of  sen  ice  while  his  neighbor  still  pas-s  onh*  SI. 00  per  unit? 
There  is  no  defensible  gn>und  for  the  discnminatxin.  If  the  gosTtn- 
ment  was  proiously  extracting  a  pn)per  amount  friim  our  ambitious 
potter  to  co\er  the  cost  of  the  services  he  used,  it  now  u  takmg  too 
much;  it  is  demanding  more  than  the  serMces  are  wtxrh  That  is  unfust. 
I  conclude  that  "progressivity"  is  a  bad  pnnciple  of  taxation  m  that  it 
charges  diflferent  people  different  pnces  ftx  the  same  service. 


\ 


Som  Thoughts  on  Taxation  I  35 
A  NcotraJ  Principle 

Wc  have  Kcn  that  our  present  tax  system  is  unjust  in  that  it  violates 
the  ngho  of  many  acucm.  What  wc  desire  is  a  tax  system  which  will 
require  the  gcn-emment  to  respea  the  rights  of  each,  to  remain  neutral 
amcmg  taxpavxn.  I  Mjbnut  that  such  a  system  can  be  based  upon  this, 
and  cmJy  ihw  j>nncij>k:  The  amount  of  tax  one  pays  should  equal  the 
COM  of  pnn kling  iIk  *crvices  he  uses.  In  die  market,  diere  is  only  one 
pfKC  for  a  good  or  »er\'ice,  not  a  slidmg  scale  based  upon  some  notion 
of  abdiiy  to  pay,  and  no  one  is  required  to  buy  things  he  does  not 
wane  Government  khtxild  be  constrained  to  follow  this  principle  in 
charging  Un  its  •cr>-K;e». 

H<m*  could  ihu  be  put  into  practice?  Wherever  possible,  govem- 
HKHf  %lMiukl  finance  its  operations  thn)ugh  user  fees  rather  than  taxes. 
A  g(M»d,  cfvHjgti  ntit  perfea  example  of  what  I  have  in  mind  is  found 
in  ihe  U.S.  Pcwtal  ServKx.  (Of  course,  a  large  part  of  its  budget  comes 
from  caxc»  and  ti»  that  extent  is  immoral  in  compelling  some  people 
to  Hibtiduec  others'  use  of  the  senice,  but  wc  will  ignore  that.  Ignore 
also  the  fact  that  there  is  no  reason  wh\'  the  government  should  deliver 
the  mail. )  'I"he  jmicc  of  a  stamp  is  the  same  for  each  buyer,  regardless 
of  income.  If  whi  do  not  send  any  mail,  you  do  not  have  to  buy  any 
stamps.  'Ilius.  this  method  of  financing  die  service  closely  resembles  a 
market  tramactMNi 

Other  senices  could  be  treated  similarly.  Roads  could  be  paid  for 
through  ti^  and  cKher  fomis  of  user  kcs,  and  schools  (if  we  must 
havT  puWk:  educatuMi)  could  be  paid  for  solely  out  of  fimds  coUected 
fnim  those  who  use  them.  If  put  to  die  task,  man's  ingenuity  would 
be  able  to  de\ise  means  of  acc-uratcly  accounting  for  die  costs  of  gov- 
ernment-pcxnided  services  and  charging  diem  back  to  diose  who 
caused  them  to  be  incurred. 

Thcrr  are,  howo-er,  man\-  elements  of  a  government's  budget 
which  rdate  to  admrnistraoon  and  enforcement  of  die  law  radier  dian 
die  promion  of  a  serMce  per  se,  and  diesc  create  analytical  difficulties. 
How,  for  mstance,  do  we  allocate  to  each  citizen  his  just  share  ot  the 
cost  of  rfK  Presideno-,  rhc  Congress,  or  die  Defense  Department?  uo 
we  assume  rfiat  o-en-one  benefits  equally  from  diese  expenditjires  and 
dixide  rficm  accordingly?  Or  do  we  assume  diat  persons  widi  higher 
incomes  or  greater  wealdi  benefit  more  from  diese  expenditures,  and 
dK^fore  charge  diem  more?  To  a  considerable  extent,  diese  expendi- 


36  /  George  C.  Leef 

turcs  relate  to  the  protection  of  propem',  and  the  proper  aiulyits 
would  seem  to  focus  on  how  the  market  uxxild  handle  analogoui 
services.  Premiums  for  propert\'  insurance  contracts  are  larg^eh*  a  func- 
tion of  the  value  of  the  property-  covered.  Therefore,  an  allocation  of 
costs  based  upon  wealth  might  be  optimal.  I  do  noc  claim  that  no 
better  formula  is  possible,  but  propose  the  urakh  tax  idea  merch-  to 
demonstrate  the  nature  of  the  anah'sis  which  should  undcriie  our  ap- 
proach to  the  just  allocation  of  tax  burdens. 

The  largest  item  of  governmental  spending  m  this  country  mxiukl 
be  dramatically  affeaed  b\'  the  adoption  of  this  principle.  The  item  is 
transfer  paNinents;  they  would  cease.  To  see  %k-hy,  look  to  the  pnnaple. 
You  pay  for  what  you  get.  To  get  a  doUar  from  the  gcncmmcnt,  yuu 
would  have  to  pay  a  dollar,  plus  admmistratiNr  ovrrhead  Otnioush'. 
there  is  no  point  in  doing  that  Manv  uiU  think  it  unspcakabh'  ccM- 
hearted  to  suggest  that  the  gtnemment  not  gi\x  an\thing  t»>  the  nerdv. 
but  it  must  be  answered  that  the  best  polio-  is  to  rrh  upon  individual 
charity  and  noer  allou-  the  idea  that  the  lorl  of  onr*«  moomc  it  a 
matter  for  political  consideratMm  to  gain  a  ftxichokl  Bastiat  was  cer- 
tainly correa  when  he  uTote  m  Tht  Imw  that  ginrmment  %hould  noc 
be  allowed  to  do  any  act  which  winild  be  a  cnme  if  done  h\-  an  individ- 
ual citizen.  We  do  n<K  permit  oen  the  needmt  to  steal  Neither  should 
we  permit  the  government  tt>  play  Robin  Hood 

The  Free  Rider  Argument 

Some  will  object  to  my  aaah^is  on  the  gnxind  that  wncc  mott 
people  benefit  in  some  way  fr^xn  gtnrmmental  expendmirc»,  it  u  noc 
unjust  to  require  them  to  pay  for  these  benefit*  F<if  example,  it  ii  uid 
that  ever\'onc  benefits  fttim  the  sv-stem  of  puNic  education  m  thu 
countr>'  because  better-educated  people  impnnr  »ociet>'  as  a  whole.  I 
contend,  howc%er,  that  the  fire  nder  argument  does  noc  fustify  cocn- 
pulsor)'  tax  support  for  services  one  does  not  use 

In  the  first  place,  it  is  just  too  ea$\  to  assume  that  everyone  is  better 
off  as  a  result  of  the  pro\'ision  of  some  governmental  service.*  Who 
among  us  is  so  all-knouing  that  he  can  make  the  judgment  not  only 
that  c\er\'onc  benefits  from  some  semce,  but  ^k-hat  the  extent  of  that 
benefit  is  in  each  case?  No  one,  I  ans\%-er 

Secondly,  we  shouki  be  extrrmeh  hesitant  to  alkm'  the  nuking  of 
unilateral  contracts.  Even  if  you  dearh'  benefit  from  an  cxpcnditwe 


Sopnc  Thoughts  on  Taxntion  I  37 

by  lofneonc  die,  wc  thouid  prefer  that  you  not  be  compelled  to  help 

defray  die  cote.  Allowing  odKrs  to  direa  in  some  measure  how  you 
ipcnd  your  moon-  b\'  nuking  you  pay  for  "benefits"  for  which  you 
have  HOC  contraacd  might  very  well  deprive  you  of  funds  you  need  for 
things  <>f  grcafcr  value  to  you.  It  is  true  that  an  elderly  couple  might 
dcn\T  Mime  benefit  of  publK  education,  but  requiring  them  to  pay  for 
that  benefit  for  which  the>'  had  not  contraaed  deprives  diem  of  money 
needed  lo  piay  medical  and  urilit>'  bills.  Everyone  has  his  own  hierarchy 
of  vakict,  and  ix  it  %vmng  for  the  government  to  demand  that  its 
hierarchy  cake  precedence  oxer  the  individual's. 

Finally,  people  usually  do  pay  for  services  rendered  by  others,  albeit 
indircaly.  Awume  ftw  a  mcjmcnt  that  public  education  does  yield  a 
benefit  to  all  of  Mxrien'.  Haw  docs  each  person  benefit  from  this  in- 
dcaae  in  eruditKm?  Presumably,  by  the  better  products  and  ideas 
%vhich  educated  pctipic  can  pnxluce.  But  unless  one  lives  his  life  as  a 
telf-fufficient  heimit,  he  will  oentually  pay  for  the  educational  compo- 
nent of  the  pnxlucts  he  uses  and  ideas  he  absorbs,  through  the  opera- 
tion of  the  pncc  sA-stem.  Ph.D.  chemists  do  not  work  for  free— their 
salaries,  pan  of  whKh  is  a  return  on  their  educational  investment— are 
reflected  in  the  pncc  of  the  thmgs  which  their  research  makes  possible. 
Thut,  dicrc  it  no  free  nde,  and  this  objection  fails. 

Some  Advantages 

Not  onh'  U  a  sN-stem  of  taxation  requiring  citizens  to  pay  taxes  only 
to  the  extent  of  benefits  received  consonant  with  man's  rights,  but  it 
is  true  rfiat  an  elderly  couple  might  yield  us  some  significant  tangible 
advantages  as  urll. 

One  benefit  v^-oukl  be  that  no  longer  could  government  use  taxa- 
tion as  a  tool  for  social  engineering  or  economic  tinkering.  The  dense 
pages  of  the  Internal  Re^•enue  Code  are  full  of  deductions  and  credits 
for  use  of  mono-  which  the  state  wishes  to  encourage.^  Smce  govern- 
ment is  to  be  the  scr>ant  of  the  populace  and  not  its  master,  it  is  wrong 


for  it  to  Mtemp.  to  dimrt  how  wc  spend  our  monq^.  ^°^'":'^f 
intcHcrcnces  1^  m  inefficient  use  of  resources.  The  d"!"*'"^^  f 
mortgage  intetrst  unjustifiably  encourages  home  o*""^""?;  *' *" 
du^i^.  of  bond  interest  unjustifiably  causes  corporauons  to  favor 
debt  financing  over  equity.  These  interferences  would  be  at  an  en^^ 
government  Li  to  tak  taxes  to  the  provision  of  services,  rather  than 


38  /  George  C  Leef 

to  income  or  some  other  irrcle\'ant  measure.  For  instance,  ''business 
expenses"  (lunches,  travel,  entertainment,  eu.)  wxiukl  be  immaterial 
to  a  company's  tax  bill  if  it  were  taxed  on  the  basts  of  the  co«  of 
governmental  services  it  used;  thus,  there  \»txiki  be  an  incentive  to 
economize  on  these  currenth'  deductible  items. 

Another  benefit  would  be  that  it  \%xxiki  tend  to  get  g^ovcnimem 
out  of  the  business  of  proN-iding  services  appropnatch'  left  to  the  mar* 
ket.  If  people  had  to  pay  the  full  cost  of  using  govrrnmcm  services, 
they  would  quickly  see  how  inefficient  go\rmment  is,  and  Hxxild  tum 
to  (or  demand  to  be  allowed  to  tum  to)  akemamrs 

Finally,  and  perhaps  most  importanth-.  taxatxm  based  on  benefits 
received  would  eliminate  the  go\rmment*s  mumr  for  mfUcmg  the 
currency.  Inflation  is  gmemmental  additxmi  to  the  money  <uppl>'. 
(Rising  pnces  are  a  consequence.)  GoNcrnmcnts  resort  to  mflatiafi 
because  they  desire  to  spend  mono  in  excess  ol'  the  amount  they  dare 
to  coUca  in  taxes.  Now  suppose  that  gtnTmment  %verc  operated  as  a 
service  company,  requiring  all  who  partook  ol  its  icrvxes  t«»  p>»v  Hitf 
what  the)'  had  used.  IntlatKNi  wtniki  be  impossible  because  ginrm* 
ment  would  have  to  balance  its  expenditures  and  rccnpcs.  With  each 
person  paying  only  the  cost  of  pnntding  him  %vith  tervicci,  there 
would  no  longer  be  any  need,  t>r  mtxive,  fi»r  government  to  resort  to 
money  creation  to  balance  its  btxtks 

Conclusion 

Freedom  would  be  greatly  expanded  m  thu  aiuntn-  if  gtnrmment 
could  not  compel  us,  thnxjgh  the  tax  w^tem,  to  dewne  our  money  to 
ser\'ices  wc  do  not  want,  and  to  vuhnidi/e  ktvkcs  used  b>'  odicn. 
These  annoyances  frcqucnth  are  pan  t>l  a  deliberate  plan  to  redistrib- 
ute wealth,  which  is  inherently  immoral,  but  c\xt\  in  the  ahtencc  of 
redistributionist  schemes,  a  tax  $>'stem  which  d«Ks  not  base  the  amount 
of  tax  one  pav^s  on  his  use  of  government  servKes  is  una\T)idabh'  unfair 
to  some  citizens. 

The  only  tax  system  which  would  require  ginTmment  to  treat  each 
citizen  neutrally — not  forcing  anyixK  to  act  as  a  tixjl  for  tamcarK  cbc 
more  favored  by  the  government— is  one  which  embraces  the  concept 
that  one  should  pay  only  for  the  cmt  of  those  services  he  acTualh'  uses. 
It  is  wrong  to  force  one  person  to  purchase  go\-emment  services  for 
another,  just  as  it  is  uTong  to  force  him  to  purchase  an\thing  eise  for 


Some  Thoughts  on  Taxation  I  39 

another.  If  a  wealthy  pcnon  is  to  pay  more  tax  than  a  poor  person,  it 
ihould  be  became  he  causes  the  government  to  incur  larger  expenses 
on  hif  behalf,  and  not  simply  because  he  has  more  money. 

When  people  make  purdiascs  in  the  market,  they  expect  to  pay  for 
\*'hai  rhe>'  get  Thc>-  have  no  cxpccution  that  others  will  pay  part  or 
a|]  c>f  the  cijst  for  ihcm.  If  it  is  just  that  each  person  pay  the  M  cost 
«>f  a  luircut  or  womc  ticket,  then  it  is  also  just  that  he  pay  the  full  cost 
of  thoie  icrvices  which  the  government  provides  him.  Others  should 
noc  be  ctpcctcd  to  pay  hu  way.  Our  present  tax  system  is  unjust  in 
that  it  often  aimpeU  one  person  to  subsidize  the  government  used  by 
another.  Gcnemment  ^^'oukJ  have  to  remain  neutral  among  its  citizens 
if  \**e  taxed  itrwtiy  on  the  basis  of  the  benefits  received  by  each  person. 
Any  other  s^ttcm  becomes  a  breeding  ground  for  injustice  and  social 


I .  Tlw  naAa  mmf  wwh  id  cunMih  m  thu  r^ard  F.  A.  Hayek,  The  Constitution  of 

2  Ammttrt.  Stmu  mtd  UnftM,  p  2M  The  author  cannot  recommend  this  brilliant  work 
ai  pakntd  fhtkm^  hif(hK-  ma^jCh 

I  IfMrtrMv^.  cuh  Anfijk*^tuv\  cnnunal  law  was  actually  tort  law  in  nature.  That 
M  In  My.  ihr  matt  tkmanSni  thm  mtinitKin  be  made  b)'  criminals  to  those  who  had  suffered 
m  diar  hmdk,  but  HkK  cuttni  n»  punuhmcnt.  One  may  wonder  whether  the  contemporary 
mmt  dcprtvo  dw  «icwm  nt  mmr  <4  a  propcm-  nght  when  it  incarcerates  those  who  have 
umwMHwi  aHoMa  ^tamH  thcw  pcnom  or  propcm-,  thus  making  restitution  difficult  or 

4  The  Smanai  EnAm-moii  for  Ac  Aro  recently  awarded  a  $6,000  grant  to  the 
pfoilum  ciT  «  (ikn  iho«-M^  Ur|tc  mUi  of  crrpc  paper  being  tossed  from  an  airplane  and 
floMii^  KkIl  »  r«th  Thtt  %-K«r*iu»K-  generous  bit  of  artistic  patronage  earned  Senator 
Pnmmrr'i  XW^Jen  Fkwc  trfihe  Month"  award.  Sec  Natunud  Review,  September  30, 1977, 
p  low  M*m  .«hcT  f*nfa«K  b.K«doggJa  are  recounted  in  Donald  Lambro's  The  Federal 
itMMr  lAriif^mMcmur.  19^1 

5.  RcxanliM  ^  uipp.»ed  benefit  of  public  education,  the  reader  should  consider  (or 
itcomidcr)  t  G.  Wcw".  amck  on  The  Penis  of  Public  Education"  in  the  November  1977 
Fwmmm.o(A\ 

6.  It  h»  been  penu-nch-  demonstrated  that  federal  tax  policies  are  m  large  measure 
laponMc  for  the  pU|tht  of  the  Urge  northern  aties.  The  invesmient  tax  credit  has  encour- 
l«Sfri»  ID  buJi  new  pbnt,  m  unoo^ded  soudiem  and  western  states,  and  their  move- 
ment h«  been  Calmed  K-  the  expamwn  of  the  mterstate  highway  system,  paid  for  in  the 
.««  •ith  tai  dotoi  ..ken  from  rfK  alread>-  dexeloH  ^  ^  ^^  ^ordieast  and  Mdwest. 
S«  -Ho*-  frdcni  IVAoes  are  Humng  the  Qties,"  Bustness  Week,  December  19,  1977,  p. 
86. 


Taxation  Theory 
by  W.  M.  Curtiss 


Tax  experts  long  have  theorized  about  the  raising  of  money  for 
various  units  and  functions  of  government. 

Should  taxes  be  for  roenue  onh\  or  as  a  means  of  todal  control, 
or  both? 

Should  taxes  be  loied  on  citizens  equalh',  or  should  *ibilit>'  to 
pay^  be  a  major  consideration? 

Where  practicable,  should  the  ''benefit  principle"  be  followed? 
That  is,  if  government  performs  a  service  for  spcvifK  indiMduib  and 
not  for  all,  should  those  who  directly  benefit  be  charged  (or  the  •er- 
vice?  For  example,  should  highway  user^  be  required  to  piiy  for  them 
through  specific  taxes  <mi  motor  hiels  and  mixi*  \rhiclct  and  direct 
tolls?  And,  if  such  taxes  are  intended  for  highway  use,  art  safcguanls 
against  diversion  desirable? 

How  pay  for  government  schools  at  alJ  le\-rb?  Studies  show  the 
tremendous  economic  advantages  of  high  whtxtl  and  college  educa- 
tion. Most  parents  urgently  want  educatMm  fiir  thew  children.  Should 
the  cost  of  government  sch<x>ling  be  charged  on  a  '^Jcncfif"  bttis, 
either  to  the  parents,  or  against  the  enhanced  future  earnings  of  the 
students? 

Changed  Ciroimstanccs 

In  the  early  da\'s  of  our  countrv-,  tantTs  vnxre  an  important  source 
of  revenue  for  the  federal  gtnemment  And  there  was  much  dehate 
among  tax  theorists  as  to  the  roenue -rawing  xrrsus  the  procectKmist 
and  discriminator)'  aspects  of  tanffs  But  "tanfft  for  romue  onh" 
becomes  an  academic  issue  when  the  national  go\rmment  requires  one 
quarter  or  more  of  people's  eammgs 

Seeking  the  ideal  taxation  formula  is  of  course  praiseworthy,  but 


Dr.  Cuniss  ( 1904- 1979)  WK  a  member  of  the  Knnr  «dr  «  FEE  feoa  « I 
in  1946  until  1973,  scrnng  as  Exeoimx  Sccmm  utd  u  Dwrtmr  of  FEE 
arddc  ohginalh-  appeared  tn  the  Ncnvmbcr  1967  isnjc  of  Tkt  Frmmmm 


40 


Taxation  Theory  I  41 

of  the  search  have  changed!  The  taxation  experts  of  100 
yean  ago  were  talking  about  nine  cents  out  of  each  personal  income 
dollar.  Today.  ncaHy  40  cents  of  every  dollar  of  personal  income  goes 
to  supporr  national,  ttatc,  and  local  units  of  government.  This  calls 
forth  new  theories  of  taxation.  Collecting  the  billions  of  dollars  now 
spent  by  variou*  unii»  of  gf  nemment  is  no  longer  a  question  of  "soak- 
ing the  nch"  but  of  h<m-  to  extract  40  cents  of  each  personal  income 
dc^lar  %nthout  Mtmng  up  a  taxpayer  rexolt. 

TaxaCKm  hai  become  a  ttx)l  of  monetary  and  fiscal  management. 
The  expert!  tpcak  of  *iine-iuning"  the  economy  so  that  employment 
will  be  hij{h  and  producti\irv'  will  expand. 

There  doubt  le*»  are  those  who  i(X)k  upon  taxation  as  a  means  of 
rcdutnbuttng  \nralth.  in  the  belief  that  some  have  too  much  income 
and  Mime  t«>c»  link  The  progressive  income  tax  is  an  expression  of  this 
belief,  at  are  airrcnt  diK-msions  of  a  guaranteed  annual  income  for  all. 

So,  in  view  of  the  gro>Mng  tax  burden  and  die  increasing  use  of 
taxa  at  a  tool  for  tocial  and  fiscal  control,  let  us  ftuther  review  the  new 
theories  and  modem  problems  of  taxation. 

Hidden  Taxes 

The  tendenc>'  of  taxpaveri  to  re\olt  against  high  taxes  causes  tax 
coUecton  to  tr>'  to  hide  the'  tax  burden  so  that  die  taxpayer  will  hardly 
be  awaic  of  what  u  happening  to  him.  If  diis  process  takes  place  at  a 
time  of  rapid  gnmih  in  the  economv,  levels  of  Uving  may  rise  at  the 
same  time  that  taxes  are  increasing.  Without  an  understanding  of  what 
might  have  been,  people  can  trudiftiUy  proclaim:  "We  never  had  it  so 

An  cfl«ti«  metlvKl  of  hidmg  taxes  is  the  withholding  of  federal, 
sow.  and  local  income  taxes  t«-  employers  from  the  wages  of  employ- 
ees. Mo«  ««ken  arc  .nclmed  to  diink  only  of  dieu-  take-home  pay 
and  giwlittk  thought  to  the  tax  they  are  paying.  ...Mine 

^  Sooal  Secintv-  tax  not  only  is  hidden  thro"fh  m*^,'*^f ^ 
as  U  the  incooK  tax.  but  .s  otherv^-se  disguised  as  weU.  If  he  th^  of 
it  at  aU,  the  emplo%«  U  likely  to  consider  only  his  ^hare  .<>f  *e  m  "^ 
t^lixing  that  the  emptover  pays  an  equal  amount  m  his  Wa^  J^ 
STnly  who  pay  m  *e  name  of  social  security  view  it  not  as  a  tax 
but  as  sa>ing  for  their  old  age.  .         .       j 

A  real  «tate  tax  is  rarrly  thought  of  as  a  hidden  tax,  but  when 


42  /  W.M.Curtiss 

asked  a  neighbor  how  much  his  school  taxes  were,  he  replied:  *I 
haven't  the  slightest  idea;  I  pay  them  monthh'  along  >*Tth  my  mort- 
gage, interest,  and  insurance  bill." 

Perhaps  the  most  cloerh'  hidden  tax  is  mflation.  WTkii  the  na- 
tional government  fails  to  co\er  its  expenditures  through  taxes,  it  must 
borrow  the  difference,  either  from  indi\iduals  or  the  central  biank.  If 
the  latter,  a  multiple  of  that  debt  is  UkcK  to  be  added  to  the  mone>' 
supply,  which  is  inflation.  InflatKXi  usualh'  is  accompanied  b>-  rumg 
prices  and  erosion  of  the  purchasing  pimrr  vii  the  dollar  Stncc  1939, 
the  dollar  has  lost  about  half  of  its  purchasing  poiftxr.  This  is  a  tax 
upon  savings,  as  truly  a  tax  as  any  of  the  num-  odicr  wty«  of  raising 
revenue.  From  a  political  standpoint  it  has  the  advantage  of  being 
hidden.  Also,  it  is  possible  to  make  pcopk  behor  that  the  cause  of 
inflation  is  the  raising  of  pnccs  b>'  grced>'  businessmen  or  of  v^-agcs  by 
labor  unions. 

Taxes  arc  hidden  in  other  wa>-s,  too  Many  are  incorporated  in  the 
prices  of  things  wc  buy  and  we  rareh  realize  that  a  tax  has  been  added. 
Taxes  on  liquor,  cigarettes,  automobiles,  and  gasoline  are  eumpla. 

Voluntary  Taxes 

With  compuLsor>'  taxes  absorbing  lo  high  a  proportion  of  mcome, 
it  may  appear  paradoxical  to  speak  of  \x>luntary  taxes  But  what  »  a 
government  lottery',  if  not  a  \x>luntarv  tax*  Ccrtainh*,  a  pcnon  may 
avoid  the  tax  by  not  participating  m  the  kKterv 

The  state  of  New  York  spends  millHim  <il  dollars  each  \Tar  u>  try 
to  prevent  illegal  gambling.  One  might  conclude  that  the  Uwmakcn 
believe  gambling  is  an  e\il  whKh  shoukJ  be  suppressed  But  no;  wc 
find  the  state  permitting  and  oen  cnctniraging  cenain  t\-pcs  of  gam- 
bling. Bingo  i.s  permitted  under  ccnain  conditMim  and  betting  at  race- 
tracks where  the  state  gets  a  heavy  "cut"  u  erwouraged 

And  now,  the  statewide  kitten-  to  raise  mone>  for  'cducaoon"! 
The  state  felt  it  needed  more  general  re>enue  than  it  could  nite 
through  its  many  tax  sources.  So,  why  not  try  a  "Nxiluntary*  tax  like  a 
lottery,  and  call  it  "education"?  This  might  rrmcnr  the  onus  for  tome 
who  think  gambling  is  a  little  bit  oil  and  vk-ho  do  not  realize  that  thu 
is  just  another  way  of  swelling  the  general  roenucs  of  the  state. 

Regardless  of  hou  one  may  appraise  the  moral  aspect!  of  gam- 
bling, there  seems  little  doubt  that  a  sute  kxterv  operates  as  a  regres- 


Taxation  Theory  I  43 

*ivc  fax,  caking  heavily  from  the  poor,  even  though  voluntarily.  His- 
toncalh',  governments  that  have  resorted  to  lotteries  have  had  in  com- 
mon a  cendeno'  toward  decadence.  The  state  lottery  feeds  the  idea  of 
**iomething-for-noching"  already  far  advanced  in  this  country.  From 
the  tcandpcNnt  of  the  bwmakers,  it  is  a  "last  resort,"  desperation  effort 
to  fill  the  oatkn  of  a  profligate  sute. 

Diverted  Taics  and  Highwayt  to  the  Moon 

Taxes  Kimctimcs  arc  le\'ied  for  an  alleged  purpose  and  diverted  to 
anodicr.  The  gaM>bne  tax  often  brings  this  comment:  "I  wouldn't 
mind  paying  the  gas  tax  if  I  could  be  sure  the  money  was  spent  to 
imprmr  highwa>i.** 

The  djvTTkKin  of  taxes  coUeaed  from  highway  users  has  brought 
fuOictcni  pnKcst  that  28  states  have  adopted  anti-diversion  amend- 
memsk  to  thetr  cofuctiutiom.  But,  in  most  instances,  such  anti-diver- 
lion  measures  ha\T  link  effea  on  the  overall  pattern  of  government 
spending. 

True,  in  tome  states,  more  revenue  is  raised  from  highway  users 
than  the  tt>ral  spent  on  highuays.  For  example,  in  New  Jersey  where 
there  was  no  state  income  tax,  more  dian  40  percent  of  all  state  revenue 
in  1966  was  fnxn  mt>tc>r  vehicle,  fuel,  and  license  taxes;  and  about  40 
peaent  of  that  was  used  for  non-highway  purposes.  In  contrast,  some 
state*  spend  more  on  highways  dian  diey  collea  in  highway  taxes.  For 
the  countrv  as  a  u-hole,  disbursements  for  highways  by  all  units  of 
government  are  about  equal  to  the  receipts  from  highway  taxes  by  aU 
units  of  goxemment. 

One  mav  be  certam  that  tax  income  from  lotteries  in  New  York 
and  Ne%%'  Hampshire  will  be  watched  like  a  hawk  to  see  diat  it  is  not 
diNTrtcd  frixn  educational  purposes.  But  dus  fear  will  be  unfounded; 
the  huge  amounts  budgeted  for  education  will  more  than  absorb  aU 
such  lottery'  funds.  VVTiether  the  lotteries  will  make  available  additional 
funds  for  education  or  srniply  release  general  funds  for  other  purposes 
would  be  difficult  to  determine. 

The  ptiint  is  that  when  40  percent  of  personal  income  is  taken  tor 
taxes,  the  diversion  argument  is  hardly  important.  Ways  will  be  sough 
to  raise  this  mone>'  as  pamlesslv  as  possible.  Motorists  apparendy  wiU 
tolerate  a  tax  equal  to  half  die  price  of  dieir  gasoline.  Liquor  and 
cigarette  users  wiU  submit  to  a  very  heavy  tax  on  diose  products,  no 


44  /  W.M.Curtiss 

matter  to  what  purpose  such  funds  arc  dhrrtcd.  Hou'  i^xxild  govctn- 
mcnt  finance  an  excursion  to  the  moon  except  In'  dixrrsion? 

Are  Social  Security  funds  diverted?  It  all  depends  upon  one's  point 
of  view.  In  the  early  days,  when  Social  Security  taxes  coUectod  far 
exceeded  benefit  payments,  was  there  di\rrsion?  If  one  assumes  that 
Social  Security  taxes  are  intended  for  the  general  ^rlfiarc  then  there  is, 
of  course,  no  diversion.  If  future  benefits  arc  amsidercd  a  contractual 
obligation,  then  past  and  current  Social  Seciirm*  taxes  fall  far  shoct  of 
needs,  and  diversion  is  a  term  without  meaning. 

From  an  administrati\x  standpomt,  ^ith  go>rmmcnts  tnvoKTd  in 
so  many  aaivities  and  at  such  trcmcndtnis  co«,  it  hcawne*  practKalh' 
meaningless  to  try  to  earmark  funds  at  thcu"  source  kx  spcvifk  expendi- 
tures. The  attempt  is  made  in  the  Postal  Service,  but  wixh  what  success? 
E>eficit  after  deficit!  People  \^ill  say  "Let  those  who  want  mail  scnioe 
pay  for  it,"  or  "Let  those  who  want  to  go  to  the  moon  ptiy  for  it,"  or 
**Lct  those  who  want  to  fight  in  N'ictnam  pa>-  for  it."  But  do  tho-  rcalh' 
mean  they're  ready  to  vtxc  the  gcncmment  out  of  that  panKular  busi- 
ness and  leave  it  to  compctiti\'c  pnvatc  enterprise? 

In  many  instances,  special  taxmg  dutrKts  arc  act  up  to  ptovidc 
specific  services  such  as  schcx)ls,  fire  prticcctKin,  poller  proccctian, 
water,  or  scN^'cragc.  Divctskxi  of  such  ipecial  dturxt  taxes  ki€  other 
purposes  is  reduced  to  a  minimum  under  »uch  arrangcmencv  though 
such  districts  often  require  extra  funds  fn>m  other  tai  lourccs. 

Not  many  years  ago,  public  clcmcntarv*  and  secondary  schools 
were  financed  almost  cntircK*  from  kxal  real  estate  taxes.  Bui  the  trend 
has  been  increasingly  toward  state  and  federal  aid  for  the  finanang  of 
more  and  more  elaborate  sch<x>b  and  school  programs. 

Conclusion 

So,  we  sec  that  tax  policy  is  more  compbcatcd  than  it  once  wm. 
What  one's  theorv'  of  taxation  finalh-  amounts  to  u  hu  theory  of  gov* 
emment,  because  taxing  is  an  intcf^  pan  of  tfK  ginrmmental  pK>- 
cess.  And  there  arc  really  but  two  basic  and  fundamentally  opposed 
theories  of  government.  One  theorv',  the  one  upon  which  the  United 
States  of  America  was  launched,  held  that  government  ought  to  defend 
the  peaceful  individual  and  his  property. 

The  alternative  theory  of  gm-emment,  uKrcastngtv  popular  «noc^ 
Americans,  would  plunder  the  property  of  indrviduab  far  tftie  sup- 


Taxation  Theory  I  45 

pcMcd  benefit  oTochen.  This  is  socialism.  And  the  tax  policy  of  social- 
lAin  is  to  ciMifucatc  all  private  property. 

The  use  of  tax  policy  for  social  control— for  leveling  wealth— is 
noc  a  new  do'clopntcnt.  The  U.S.  official  who  said  recently  he  would 
take  property  from  thotc  who  had  more  than  they  need  and  give  it  to 
thoic  who  don*t  ha^-c  enough  was  merely  expressing  the  major  tenet 
of  loctaJiim. 

More  important  than  taxation  theories  is  the  question  of  the 
proper  functKm  of  gcnemment.'  Rarfier  than  debate  whedier  10  per- 
cent should  be  added  to  income  taxes  or  raised  through  further  infla- 
tionar)'  dcfKncs,  a  more  basic  question  should  be  raised:  Will  this 
money  be  uted  to  finance  a  proper  function  of  government? 

E\'cn  though  there  will  be  minor  differences  in  details,  a  clear 
undcntanding  of  the  pn>pcr  place  of  government  in  an  advanced  free 
and  open  society  ^nll  largely  eliminate  the  need  for  complicated  taxa- 
tion theory.  With  gcncmmcni  reduced  to  reasonable  size,  the  fmanc- 
ing  of  it  becomes  relatively  simple. 

I.  For  a  ilMnmrti  at  ihc  pfupcr  function  of  government  sec  Government:  An  Ideal 
bf  Uonvd  E  Rnd 


The  Forgotten  Man 
(1968) 

by  William  Henry  Chambciiin 


"Wealth  comes  only  from  productKin,  and  all  that  the  wrangling 
grabbers,  loafers,  and  jobbers  get  to  deal  vkith  comes  from  iomebod>'*s 
toil  and  sacrifice.  WTio,  then,  is  he  who  prmidcs  it  all?  The  Forgoctcn 
Man  . . .  delving  away  in  patient  industry ,  supporting  his  famah\  cast* 
ing  his  vote,  supporting  the  church  and  the  whcxJ  but  he  is  the 
only  one  for  whom  there  is  no  pnnision  in  the  great  scramble  and  the 
big  divide.  Such  is  the  Forgotten  Man  He  wxwks,  he  wices,  gcncralh- 

he  prays — but  he  alwa\^  paN-s .\ll  the  burdens  fall  on  him,  or  on 

her,  for  the  Forgonen  Man  is  nrn  seldom  a  wximan  " 

This  1883  declaration  b\  economist  and  MKnUogist  William  Gra- 
ham Sumner,  a  pn)fess*>r  at  Yak,  is  the  first  use  ol'  the  exprrsMoo. 
"Forgotten  Man,"  which  Franklin  0  RtK>sorh  empknxd  in  a  much 
more  demagogic  context  fifr\'  \Tan  later  What  Sumner  hjd  to  uy  on 
this  subject  kxMns  larger  as  propheo  than  as  a  descnpcmn  of  the 
economist's  own  time  For  m  1883  there  was  n«>  federal  inaime  tai. 
the  United  States  had  not  xssumcd  military  and  evonomK  bunftens  aU 
around  the  world  and  Big  Cioxemment,  m  the  smutrr  modem  sense, 
with  its  enormous  denunds  on  the  rcstxirces  of  the  taxpuyerv  did  not 
exist. 

If  Sumner  were  alive,  he  wtmld  pn>babh  be  the  first  to  rrcognuc 
that  the  plight  of  his  Forgonen  Man  is  tar  wimc  todav  than  it  was 
when  he  first  ased  the  exprcvsKm  Here  i  linle  deitnitMm  u  in  order. 
The  Forgotten  Man  is  the  rare  and  dis<.(Hiraged  breed  of  atucn  ^ho 
wants  to  pay  his  own  way  in  the  wi>rld,  withtnit  benefit  of  am'  cmtchcs 
in  the  way  of  gtnemment  aid. 

He  receives  no  handouts,  but  ls  required  to  help  finance  innumer- 
able handouts  to  others,  at  home  and  abn>ad  RapacKHis  tai  coUecton, 


The  Utc  Mr  Oumbcriin  wu  i  UuUcd  tiUcnrr  «nJ  rq««Trr  at  ttt 
conditKKU  it  htimc  ind  abnuAd    In  *ldmtin  n>  wnm^  a  numtvr  trt  Ivmio.  Iir  bcMrad 
u-ideh-  and  was  a  contnbutnr  to  The  Waii  Strnt  ftmntai  and  numrmui  miyianct  Hm  < 
IS  rcpnntrd  from  The  Frrewtmm.  Fchnian  1968 


46 


The  Forgotten  Mm  I  47 

federal,  «atc,  local,  always  have  their  hands  in  his  pockets.  He  is  sad- 
dled with  an  cvcr-incrcasing  load  of  exactions,  a  load  diat,  if  present 
trcndi  arc  noc  iharpK'  ro'mcd,  wili  one  day  break  his  back,  widi 
incalculable  comequcnccs  for  American  society  and  economy.  He  is  a 
f>roducer.  noc  a  comumer  of  so-called  social  security.  The  Forgotten 
Man  docs  noc  ntx  or  demonstrate  or  strike.  As  his  principal  exploiters 
arc  bureaucrats  af  varnnis  lc\'cls,  armed  widi  die  audiority  of  govern- 
mental pcm-cr.  he  ctiuld  ncx,  unless  he  were  willing  to  go  to  jail, 
employ  dK  itnlie  weapon  so  bekived  of  industrial  workers  organized 
m  monopolistic  unKWU.  of  teachers,  'V-elfare"  dispensers,  even,  incred- 
il>le  as  It  sounds,  of  •*udfare"  recipients. 

FoTfct  the  Coatroif 

The  Forgoncn  Man  only  wishes  that  the  state  would  forget  him 
to  the  dtcnt  of  pcrmittmg  him  to  contraa  out  of  its  cumbersome, 
tncredibh'  mismanaged  bureaucratic  nightmare  of  "social  security"  and 
let  hun  pnnidc  for  hu  tmn  rent,  medical  care,  and  retirement  needs. 
But  thu  u  a  \*am  desire.  x\  the  steady  and  growing  compulsory  deduc- 
tHKU  fn»m  hu  inctinK  prove.  No  matter  how  diligent  he  may  be  in  his 
work  or  pn>fc%sK)n,  tax  lau-s.  cspecialh-  on  the  federal  level,  are  calcu- 
lated to  frustrate  his  efft>rt  to  build  up  a  competence  for  his  old  age 
and  his  family.  One  need  only  think  of  the  steeply  graduated  character 
of  the  federal  income  rax  and  of  such  inequities  as  the  double  taxation 
(as  individual  and  as  corporarion  income)  of  earnings  from  dividends. 
Many  states,  in  ihcir  income  taxation,  have  copied  the  method  of  steep 
graduatKHi. 

The  \*iit>-  and  perceptive  French  economist  Frederic  Bastiat  de- 
fined the  state  as  **riie  great  fiction,  b>'  which  everyone  hopes  to  live 
at  dK  expense  of  e\er>-one  else."  Today  diere  might  be  a  substitute 
definition:  "an  engine  for  pillaging  die  thriftv'  for  die  supposed  benefit 
of  the  dinftlcw."  .\nd  die  >^-orst,  for  die  Forgotten  Man,  is  probably 
stiU  to  come.  The  present  raids  on  his  pocketbook  and  gouges  at  his 
bank  account,  oncnxis  diough  die\'  are,  would  seem  mild  in  retrospect 
if  such  schemes  for  dinding  up  die  wealdi  as  die  guaranteed  annual 
income,  dK  so<alled  negaONe  mcome  tax,  or  die  various  proposals  for 
paying  tens  of  billions  of  "compensation"  to  a  certain  edinic  group  in 
the  population  should  go  into  effect. 


48  /  William  Henry  Chamberiin 

Direct  and  Indirect  Taxes 

The  Forgotten  Man  is  caught  bctA^ccn  the  hammer  of  incxorabi)' 
rising  taxation  (with  state  and  local  grabs  outpacing  the  federal)  and 
the  anvil  of  visible  inflation.  As  a  concrete  example  of  the  continuous 
encroachments  of  state  and  local  tax  authonties  on  the  carmngs  and 
savings  of  citizens,  consider  the  situatKXi  m  the  sutc  ^^-hcrc  I  Unt,  rfK 
Commonwealth  of  Massachusetts,  uidely  rcchnstened  Taxachusctts 
by  its  disgrunded  taxpayers. 

Corruption,  mismanagement,  and  extravagance  arc  old  characteris- 
tics of  the  state  administration,  cspecialh  under  such  noconous  politi- 
cal bosses  as  the  twice  jailed  James  MK'hael  CuHe\',  amustngh'  por- 
trayed as  "Skeffmgton"  in  Eduin  OX^Kinor's  mnrl.  The  Lmt  Hmrrmk. 
The  regime  of  a  more  recent  Gmemor,  Foster  Funcolo,  produced  a 
rich  crop  of  scandals. 

Matters  seemed  to  take  a  turn  for  the  better  mth  the  elcctxin  of  a 
businessman,  John  A.  Volpe,  as  GiAcmor  There  was  substantial  sup- 
port for  Volpc  among  the  harassed  taxpaNm  u^Kn  he  pre\*cd  hw  the 
raising  of  additional  funds  through  a  sales  tax,  detidedh  preferable, 
from  the  individual  taxpayer  s  standpomt,  to  the  intnidiictKVi  of  a 
graduated  income  tax.  Volpc  fought  oH  !iuch  pniposals  and  was  smdi- 
cated  in  a  referendum  and  by  a  smashing  nu^int>  v^-hen  he  ran  last 
year  for  re-election. 

Many  of  the  pa)plc  who  supported  \'olpe  tm  the  referendum  and 
at  the  polls  b)elieved  that  he  would  be  satisfied  with  tappmg  tme  impor- 
tant new  source  of  roenue.  The>'  v^rrc  aho  attracted  by  the  frrqiicnt 
assertion,  during  the  campaign  for  the  sales  tax,  that  its  enactment 
would  make  it  possible  to  reduce  the  extremely  high  rates  of  pcnonal 
property  tax  throughout  the  state.  (Taxachmetts"  is  a  leader  among 
states  in  this  form  of  exaction.) 

On  both  counts  the\'  have  been  sorely  disappomted  Voipe  has 
proved  himself  only  a  politician,  after  all,  uith  the  politKian's  uncon- 
trollable yen  for  spending  taxpayers'  mt>ne>  Safely  re-elected  for  a 
four-year  term,  he  has  come  to  the  legislature  mth  a  request  Un  ab<Kjt 
$100  million  dollars  in  additional  roenue,  to  be  financed  thrvHJgh 
increases  of  the  already  high  rates  of  state  income  tax.  Thu  burden  is 
aggravated  for  anyone  widi  investment  sa^ngs  because  income  from 
investment  is  taxed  at  about  imo  and  a  half  times  the  rate  lesicd  on 
salaries  and  wages. 


The  Forgotten  Man  I  49 

Imtead  of  the  uks  tax  as  an  akcmativc  to  higher  income  taxes, 
Maujchuictts  taxpaycn  arc  hit  fore  and  aft  by  increases  in  both.  They 
have  alio  been  hit  amid&hipi.  The  promised  reduction  in  the  rate  of 
property  cai  hat  proved  a  cruel  hoax,  at  least  in  Cambridge,  the  town 
where  I  live,  and  in  »cimc  other  communities  as  well.  A  cabal  in  the 
Cambridge  arv-  council  ousted  an  admirable  city  manager  who  had 
combined  cifictcni  admmistratK>n  uidi  a  stable  tax  rate  and  installed  a 
successor  wh<i  could  ntit  restrain  his  eagerness  to  pile  up  the  burden 
on  Cambridge  homeownen.  Whereas  the  former  city  manager  had 
kept  the  tax  rate  unchanged  without  a  share  in  the  receipts  of  the  sales 
tax,  which  had  not  gone  mto  effea  during  his  administration,  his 
successor  pushed  fhniugh  tax  increases  of  6  percent  and  15  percent, 
^s-hiJe  also  cn^nmg  cIk  imrcmcnt  of  a  share  in  the  proceeds  of  the  sales 
tax. 

So  *TaxAchusctii"  runs  true  to  form,  and  its  unfortunate  taxpayers 
and  homeownen  get  three  simultaneous  solar  plexus  blows,  through 
the  talca  tau,  the  uKrease  m  income  tax  (unless  sufficient  pressure  can 
be  btVNight  on  the  legislature  to  \ikc  this  doun),  and  through  property 
taxes  that  ha\r  risen,  not  fallen,  since  the  enactment  of  the  state  sales 
tax.  It  does  not  stand  alone;  the  same  pancm,  widi  differing  details, 
may  be  obiervrd  thniughout  the  nation. 


The  Meek  Inhcnt  Burdcrn 

Part  of  the  Name  ftir  the  stcacK-  chipping  away  and  erosion  of  die 
taxpa^TTs*  mcomc  and  standard  of  hving  rests  with  the  undue  meekness 
of  dK  Forgotten  Man.  He  is  a  Uw-abiding  citizen  and  his  impulse,  on 
getting  an  incrrased  biU  from  die  tax  coUeaor,  is  to  pay  up  without 
even  marching  to  dt>'  haU  and  hanging  die  mayor  and  members  of  the 
council  in  effig)'. 

Indeed,  it  is  a  problem  for  a  ps>'chologist  why  organized  umon 
gioups  ^ill  «imctimcs  commit  c\er>'  crime  in  die  book,  assault  and 
batterv,  uiUhil  dcstiuctKXi  of  propcm-,  mayhem,  even  murder,  m  or- 
der to'  extort  a  higher  income  while  die  taxpayer  meekly  accepts  dose 
after  dose  of  diminished  income.  The  latter  is  surely  a  more  serious 
grievmce  and  one  u-ondcrs  uhat  explosion  would  foUow  if  an  em- 
ployer proposed  rfK  same  u-ork  at  reduced  wages.  That  is  what  the 
state,  duough  one  agcno'  or  anodicr,  is  continually  imposing  on  the 


50  /  William  Henry  Chamherlin 

Forgotten  Man,  the  taxpayer  v^-hom  the  politidan  despises  as  a  cow  to 
be  milked  dry,  a  sheep  to  be  shorn. 

How  different  was  the  reaction  of  carh'  Americans  to  the  unpoti- 
tion  of  what  seem,  in  companson  ^*ith  the  present  exactions^  quite 
trivial  taxes  on  tea  and  stamps!  One  of  the  gncxanccs  of  the  colonists 
against  King  George  III  is  phrased  as  folkm-$  in  the  oki-£nhioned, 
grave,  and  dignified  language  of  the  Declaration  of  Independence: 
"He  has  ereaed  a  multitude  of  neu-  Offices,  and  sent  Kithcr  sH-arms 
of  Officers  to  harass  our  People  and  eat  out  their  substance.* 

There  is  enough  lawless  violence  in  the  United  States  tKm\  wvh- 
out  recommending  violent  extralegal  fonns  <if  protest  to  the  op- 
pressed, pillaged,  and  expbited  taxpayers  Besides,  the  Forpnten  Man, 
as  described  by  Sumner,  is  a  sober,  rcspomibk  cituen  ^ith  a  high 
regard  for  public  order.  Howe\er,  there  arc  emincntK  legal  forms  of 
protest  and  resistance  which  have  not  been  called  into  eflcct  as  o^ten 
as  they  should  have  been. 

"Don't  Tread  on  Me" 

One  obvious  reason  why  taxpayers  arc  treated  ^ith  contempt  by 
free-spending  politicians,  eager  to  buy  this  or  that  bloc  of  %xjces  at  the 
price  of  other  people's  mono-,  is  that  tho  arc  compicteh  unorganucd. 
A  very  healthy  change  would  conK  mer  the  picture  if  iaipa>m  in 
states  and  communities  would  organi/c  and  %tud>-  mith  micmcopic 
closeness  the  spending  records  of  elected  offKiab  and  legislaton. 

Then  they  could  punish  at  the  polls  eserv*  exccuti>T,  csxry  admmts- 
trator,  everv'  legislator  on  the  federal,  state,  or  local  Icsel  ^"ho  u  identi- 
fied with  unnecessary'  high  spending  pn>grams  that  insxihe  higher 
taxes.  Let  them  develop  an  elephant's  mcmorv  and  permanently  black- 
list every  man  and  woman  in  public  oftkc  whtJ  has  been  in  the  habit 
of  raiding  their  pcxkctKx^ks  with  impunits  \jct  this  strateg>'  be  ap- 
plied consistendy,  ruthlessly,  implacably,  and  the  pc}|itician*s  instinct 
for  self-preser\'ation  will  come  into  operatKin  and  bnng  about  a  sud- 
den saving  vision  of  the  virtues  of  public  economv 

Unless  the  Forgotten  Men  who  noer  get  any  gosemmcnt  hand- 
outs but  finance  a  good  many  to  others,  who  are  providers  but  not 
consumers  of  security,  take  some  measures  of  financial  self-<kfeme  and 
self-preservation,  unless  present  trends  tt>uard  reckless  spending  at 
federal,  state,  and  local  leveb  are  checked,  the  taxpayer,  more  hcasiJy 


1 


The  Forgotten  Man  I  51 

k>adcd  than  am-  camel  in  a  caravan,  wUI  find  that  he  has  no  more 
caming»,  or  u\in^,  to  be  taxed  away. 

The  Forgonen  Man,  u-ho  is  so  old-fashioned  as  to  believe  in  the 
merit  cjf  thrift,  i»  hard  hit  K\'  inflation.  During  the  nineteenth  century 
x\}c  United  Sutcs  dollar,  although  it  experienced  ups  and  downs  in 
fnirchastng  ponxr,  renumed  basically  stable,  buying  approximately  as 
much  in  1900  as  in  1800.  This  is  emphatically  not  true  as  regards 
America*!  currenqk'  in  the  tu'enneth  centurN-;  and  the  end  of  this  story 
Ls  not  m.  In  \xt\  recent  experience,  items  large  and  small,  newspapers, 
concert  tKket».  %hoe%hiiK^.  haircuts,  dtxtors'  charges,  hospital  costs, 
r<K)d,  furniture,  have  been  changing  in  cost  more  or  less  rapidly,  and 
a)way«  m  <ine  dirraion«  upu-ard. 

The  rcMih  has  been  ven-  much  that  of  clipping  the  coinage,  a 
favorite  inflatiafur>'  de\ice  in  the  Middle  Ages.  Holders  of  bankbooks 
and  insurance  polKies  ha\x  seen  the  real  value  of  their  holdings  shrink. 
Thu  de\eli»jHiKnc  u  not  surprising,  because  politics  has  more  and 
more  dominated  fmancial  polic>',  and  all  political  pressures  are  infla- 
tionary. 

IxgislatKin  giving  privileged  status  to  trade  unions  has  taken  the 
risk  out  of  striking  ( Has  anyone  heard  of  a  major  strike  lost  in  recent 
ywrs?)  As  might  ha\-e  been  expected,  some  unions  have  abused  this 
ncw-ftHind  ptm-er  to  extiKt  wage  scnlcmcnts  quite  out  of  line  with 
increased  prxiductivm-.  with  resultant  government  spending  and  infla- 
tion tt>  ftxestall  unempkn-ment.  Another  cause  of  die  rising  cost  of 
living  and  amKher  blow  at  the  taxpayer  s  pocketbook  is  die  elaborate 
lystem  de\iscd  for  panng  farmers  more  for  producing  less,  or  produc- 
ing nothing  at  all. 

Another  oh\-ious  cause  of  inflation  is  die  persistent  reftisal  of  eidier 
dK  legislati\r  branch  or  die  executive  branch  of  die  federal  govern- 
ment, despite  much  lip  service  to  die  ideal,  to  make  any  serious  attempt 
to  practice  economy  in  public  spending.  Most  private  individuals  could 
cheerfully  spend  a  good  deal  more  dian  dicy  earn,  but  are  obUged  to 
adjust  their  spending  to  their  incomes. 

Unbounded  Government 

TTk  root  cause  of  manv  of  our  difficulties  is  diat  pubUc  administra- 
tion, at  die  federal,  state,'  and  municipal  level,  is  under  no  such  re- 
straint. All  too  often  public  budgets  are  framed  on  die  basis  of  spend- 


52  /  William  Henry  Chamberlin 

ing  without  limit,  and  making  up  the  difference  bs'  infUtkxury  bor- 
rowing or  by  dipping  into  die  pocket  of  rfK  taxpa>-er  for  a  no*-  grab. 

That  the  high  cost  of  government  is  a  nutter  of  c-ooccm  no«  onh- 
to  die  well-to-do  but  to  people  in  xhc  tov^-er  brackets  is  c\Tdcm  from 
an  item  reccndy  published  in  the  S«i  Fnmasco  Exmmaur.  A  parc-tiinc 
typist,  Mrs.  Helen  Burch,  submitted  xhc  foUo%Mng  brcakdou-n  of  her 
earnings  and  taxes  for  the  years  1958  and  1966: 


195S 

1966 

Salary  (gross) 

$2,521 

53,414 

Real  propert)'  taxes 

S40 

681 

Income  tax  withheld 

102 

S21 

Social  Securit)'  tax  withheld 

56 

144 

Total  taxes 

498 

1,346 

Salary  (net) 

2,023 

2,068 

Considering  the  decline  m  the  purchasing  pimrr  of  the  dollar 
Mrs.  Burch  has  c\idcntly  been  running  U\t  without  e\m  being  able 
to  stay  in  the  same  place.  Even  woric  is  the  plight  tjf  ekicHy  retired 
persons  who  cannot  report  a  gain  m  gniss  vklary*. 

Reversing  the  Trend 

The  plight  of  the  Forgotten  Man  who  utniki  like  to  itand  on  his 
own  feet  economically  is  bleak  tcxlay  and  >mU  be  bleaker  mmonow, 
unless  the  merry-go-round  of  e\er  higher  public  spending  and  ever 
higher  taxation  can  be  stopped  or  ihnm-n  intti  rc\-erse  Perhaps  there 
is  consolation  in  the  thought  that,  \*hen  an  oil  bectwnes  intolerable, 
reform,  brought  on  by  public  indignation,  cannot  be  far  aw4>'. 

There  is  also  cause  for  encouragement  in  the  eminently  sound 
economic  resolutions  adopted  at  the  recent  congress  of  Young  Ameri- 
cans for  Freedom.  These  young  Amencam,  who  stand  for  integral 
freedom  and  realize  that  ccomxnic  freedom  is  not  the  least  importmt 
element  in  this  ideal,  came  out  for  abolishing  the  graduated  elemem 
in  the  federal  income  tax,  for  dropping  the  mmimum  wage,  and  for 
making  participation  in  Social  Secunt>'  optional  And  tho*  gave  co- 
gent, detailed  reasons  for  each  of  these  stands 

They  characterized  taxing  of  income  at  different  rates  as  a  violation 
of  the  laws  of  justice  and  "an  economic  attack  on  the  initucive  of 


The  Forgotten  Mm  I  53 

individuab  to  mc  their  awn  income  as  capital  for  maximization  of 
future  income  and  a  penalty*  on  those  who  arc  industrious  and  able." 
They  righdy  lee  in  the  minimum  wage  "a  major  cause  of  unemploy- 
ment among  the  >*oung«  especially  among  minority  groups."  And  they 
%how  that  a  22 -year -old  ^-orier,  earning  $6,600  or  more  will  have  paid 
the  ginemment  $63,894  in  Social  Security  taxes  by  the  time  he  is  65 
and  could  cam  a  much  higher  income  than  his  Social  Security  pittance 
by  invdtmg  thu  uim  with  normal  prudence. 

The  O'lU  of  e»ce*Mvc  and  e\er  increasing  appropriation  of  the 
fhito  of  individuil  labor  b\'  the  state  and  of  inflation  have  reached  crisis 
prt)porTioni.  If  the  Forgc»nen  Man  docs  not  wish  to  become  the  Ex- 
tinct Man«  he  thould  be«tir  humclf  for  remedial  aaion. 


n.  INSTRUMENT  OF  SOCIAL  REFORM 


The  Squeeze  on  the  Middle  Class 
by  Wiiliam  Henry  Chambcrlin 


The  Middk  OaM,  the  Urge  group  of  many  occupations— profes- 
sumaJ  men.  enginecn,  Uulled  mechanics,  farmers,  small  businessmen, 
%abnod  cmpknTC*.  farmen.  to  list  only  a  feu — that  stands  between  the 
cxtrcmo  uf  HTakh  and  pcnem*  has  alwa>'s  been  the  standardbearer  and 
the  surest  and  most  soUd  suppon  of  a  wxiet)-  based  on  political  liberty 
and  cconomK  frccdi»m  It  began  to  emerge  with  increased  power  and 
inHuence  with  cIk  decay  U  the  mcdioal  feudal  system  and  waxed 
Ntnmg  m  the  u niggle  to  c"urb  the  arbitrary'  power  of  monarchy  and 
esobbsh  free  rcprcseniaiivc  utstitutions. 

The  middle  class  was  n,ii\x  m  the  leadership  of  the  three  principal 
rc%'olucions  of  the  Western  utjrkl,  the  Bntish  in  the  seventeenth  cen- 
tun\  the  Amefxan  and  the  Frcixh  m  the  eighteenth.  The  French  was 
pcrvcned  and  dutoried  to  wime  extent  by  the  greater  misery  of  the 
masses,  especially  <»(  ilw  Tansian  nK>b,  which  lent  itself  to  the  manipu- 
lation of  extrenust  denugogues,  mtoxicatcd  with  doctrinaire  ideas  of 
establishing  ikk  equality  of  opportunity',  the  American  ideal,  but  com- 
plete material  equality,  to  be  enforced  b\'  diaators  operating  in  the 
name  of  \irtue  and  using  the  guillotine  whenever  moral  suasion  failed. 
Out  of  all  the  turmoil  and  excesses  of  the  French  Revolution,  its  Napo- 
leonic aftemuth.  and  the  vanous  roval,  imperial,  and  republican  re- 
gimes that  fi^mrd  dunng  the  nineteenth  centur)',  middle-class  social 
and  econoniK  values  acquired  a  firm  footing.  France  supplied  some  of 
the  most  eloquent  and  erudite  exponents  of  the  free  economy,  such 
men  as  Frcdcrk  Bastiat  and  Jean  Say. 

It  is  the  namrr  of  absolute  power,  whether  it  be  that  of  a  king 
suiTOunded  uith  mhented  pomp,  ceremony,  and  pageantry  or  that  of 
a  revolutionar>'  dicTati>r,  to  recognize  no  hmits  on  what  it  may  do  witii 
regard  to  those  under  its  rule.  So  it  U  significant  tiiat  John  Locke,  the 
outstanding  phikMopher  of  the  Bntish  constitutional  revolution  whose 
ideas  \X3V  much  mfluenced  the  leaders  of  the  American  Revolution, 
upon  the  natural  nght  of  man  to  "life,  Uberty,  and  property. 

Mr.aMnbafo  wrott  dm  as*\  for  the  Fcbnun-  1969  issue  oiTheFreman. 

57 


58  /  WiUiam  Henry  Chamberim 

There  was  never  any  doubt  in  Locke's  mind,  or  to  those  of  the 
educated  middle  class  for  whom  he  spoke,  that  property,  far  from 
being  opposed  to  libert)',  is  one  of  the  essential  nghts  of  free  men. 
Locke,  a  true  liberal  in  the  original  sense  of  a  ^xjrd  ncm-  often  per- 
verted and  misapplied,  went  so  far  as  to  describe  the  preaervation  of 
their  property  as  "the  great  and  chief  end  of  men's  uniting  imo  com- 
monwealths." 

The  rising  and  expanding  middle  class  was  open  to  any  aWe  and 
industrious  citizen,  whate>er  his  ongin  and  backgrtnind.  Wlut  they 
more  or  less  consciously  wanted  and  needed  W2s  a  state  authority 
strong  enough  to  protea  honesth-  acquired  pouessKiro  agamst  spolia- 
tion but  not  so  strong  as  to  engage  in  spohatmn  itself 

No  Taxation  Without  Rjeprcscntation 

It  is  not  surprising  that  some  of  the  mcnrmenti  that  led  to  the 
establishment  of  the  supremacy'  of  Parliament  in  Great  Bntatn  and  to 
the  separation  of  the  United  States  Unmy  Circat  Britain  ^rre  tng|(ertd 
by  one  specific  property'  nght:  the  right  t>f  the  indix^duaJ  wn  ro  be 
taxed  without  his  consent.  In  his  effort  ti>  pnmi  without  the  incon- 
venience of  having  a  Parhament  m  scuKm,  King  (Ivarks  I  retorted  to 
an  old  tax  knoun  as  ship  monn  In  the  past  it  had  been  levied  only  in 
time  of  war  and  in  certain  mantime  parts  <»f  the  anintrv  Charles 
imposed  the  lew  in  peace,  and  without  grographk al  limitationft 

One  of  the  leaders  of  the  <»ppo»itK»n  in  Parliament,  John 
Hampden,  refused  to  pay  the  tax,  contending  that  it  was  illegal  Som 
out  of  twelve  judges  who  heard  the  case,  under  ttmng  prcsturr  from 
the  Crown,  ruled  against  Hampden  But  hi*  uand  amused  nationwide 
attention  and  sympathy  and,  as  mm  in  a\  Parlument  was  again  called, 
"ship  money"  was  ruled  illegal  Hampden,  a  cinintr^'  landcmtier,  wa» 
as  willing  to  fight  for  liberrv  as  to  speak  fi»r  it  V^Tien  the  diflferrnccs 
between  King  and  Parliament  reached  the  point  of  a\il  war,  Hampden 
raised  a  regiment  anxing  his  tenants  and  kwt  his  life  in  one  of  the  many 
skirmishes  and  small  banles  that  foUowed 

In  the  United  States,  also,  "taxation  uithout  representation''  wn 
a  fighting  issue.  Like  many  other  small  causes  of  big  esmti,  the  Bntuh 
levies  on  stamps  and  tea  uere  pett>  m  immediate  impua;  but  the 
underlying  claim  that  a  Parliament  in  Ixmdon  three  diousand  mifc» 
away  might  lay  imposts  on  cokwusts  u-ho  were  not  (and,  under  the 


The  Squeeze  on  the  Middle  Class  I  59 

travd  and  ochcr  circumftanccs  of  the  time  probably  could  not  be) 
rcpreacmod  there  cxatcd  jtmificd  suspicion  and  resistance.  The  colo- 
ii»«»  knew  very  well  that  taxation  accepted  widiout  protest  would 
prohaWy  mean  doublr  or  treble  taxation  in  die  future. 

Irrctpofwble  burcaucrac>'  ranked  high  with  arbitrary  taxation 
anxmg  the  cau»c»  u-hKh  led  the  Amencan  colonists,  when  protests  and 
rcmtKUtrancc*  had  failed,  to  take  up  anns.  This  is  evident  from  the 
loUowtng  dauic  in  the  indictment  of  King  George  III  in  die  Declara- 
tion cjf  Independence:  "He  has  ercaed  a  multitude  of  New  Offices, 
and  lent  hither  swanm  of  Officers  to  harass  our  People,  and  eat  out 
their  tuhfttance** 

Hem-  surprttcd  and  shocked  utxild  have  been  the  men  who  fought 
igainst  a  forrtgn  f>Tanny  at  Ixxington  and  Bunker  Hill  and  Saratoga 
iini  Ycirktim-n  if  the>'  aiuld  have  foreseen  today's  bureaucratic  mon- 
Nter»  in  the  ihape  of  federal,  state,  and  local  governments,  costing 
almott  S9.000  a  icciind  to  operate,  and  doubling  its  exactions  from 
the  labor  of  its  attzem  csxty  ten  years. 

Dcrign  for  Limited  Government 

No  nich  monster  w^  envisaged  in  the  Constitution  which  the 
dcUberatiom  of  a  rcpmentan\r  group  of  leading  citizens  of  the  vari- 
oui  itate*  ^-iekfed  as  the  ajnstTXJCtive  fruit  of  the  achievements  of  the 
American  rr\T>lutKinancs  in  arms  and  diplomacy.  It  is  an  uncommonly 
useful  and  instrucn\T  exercise  pencxlically  to  read  over  this  charter  of 
American  b^^-s  and  libenick  .\nd  one  of  its  most  striking  features  is 
dK  sparscncss  of  pctmuscs  as  to  what  the  new  government  will  do  for 
die  people  (mdeed,  tfKrc  are  practically  no  such  promises,  compared 
wiA  the  many  explkit  guaranties  as  to  what  die  government  may  not 
do  »  die  peopfc  as  a  %%-hole  or  as  individuals.  These  immunities  in- 
duded,  until  the  adoption  of  the  Sixteenth  Amendment  in  1913,  assur- 
ance against  the  unp<»itM>n  of  the  graduated  income  tax. 

The  kind  of  gin-cmmcnt  oudined  by  die  American  Constitution 
is  in  line  widi  dK  pdiocal  phikwophv  of  John  Locke  and  Adam  Smidi 
diat  -exTfV  man  is  bN-  nature  first  and  principally  committed  to  his  own 
care."  What  dK  Constitution  promised  is  not  to  make  each  citizen 
hcakhv,  ^-eahhy,  and  uisc— «omediing  be>'ond  die  power  of  govem- 
mcnt-but  to  trmoxr  state  obstacles  to  his  achieving  diese  objectives 
by  his  own  efforts. 


60  /  William  Henry  Chamberim 

This  was  the  logical  outcome  of  the  struggle  against  absolute  mon- 
archy and  feudalism,  a  struggle  in  ^^'hKh  the  middle  class  pUxxd  a 
leading  role.  It  was  under  this  philosophy  that  the  middle  class  pros- 
pered and  expanded,  because  it  was  no  dosed  hereditary'  caste  but  a 
group  in  the  communin.'  which  an>txK  might  jom  wixh  the  requisite 
conditions  of  industn*'  and  abilin.'. 

Social  Security? 

But  today,  at  first  gradually  and  impcrceptibh',  then  more  boldl)' 
and  blatantly,  a  completely  different  philosophy  of  statism  has  tended 
to  supplant  individualism,  both  in  the  Umtcd  States  and  in  Great 
Britain  and  in  vaning  degrees  in  cxher  Western  countncs.  (One  need 
hardly  refer  to  the  Eurt)pean  and  Asian  ccxmtnes  where  the  indixidual 
has  lost  all  liberties — economic,  personal,  and  potmcal,  to  the  grasping 
thrust  of  an  all-powerful  state.) 

Under  this  philosophy  the  gmrmment  promises  its  atncm  vin- 
ous forms  of  alleged  secunt) ,  in  return  Ux  v^iiKrh  it  eucts  a  fini  lien 
on  what  thc\'  cam  by  their  labtx,  a  lien  that  i*  mdeitnttr  and  e\rr- 
expanding.  The  bcncfit.s  may  l<K>k  giKxl  on  paper,  but  their  real  value 
is  steadily  sapped  by  inflation,  the  enjsKm  in  the  purvhasing  pimrr  of 
the  currenc)'  that  is  the  invariable  accompaniment  of  %ast  govcnvncnt 
spending.  Increasing  amounts  are  taken  fnim  exrrvxme's  salary  to  pay 
for  what  is  euphemistically  called  ScKial  Secuntw  whik  the  duUars 
which  may  be  someday  paid  out  steadih  dimmish  in  vakie. 

Following  British  Lead 

This  process  has  gone  further  m  Great  Bntain  tfun  in  the  United 
States,  so  that  a  visit  to  Bntain  gives  a  prcxiew  <if  v^-hat  nu>'  be  the 
plight  of  the  United  States  ten  or  twent>  vear%  hetxe  There  was  a  time, 
before  World  War  I  and  to  a  lesser  extent  m  ttK  mten»'ar  years,  wfwi 
the  British  pound  was  considered  a  desiraWc  currmcv .  not  only  to  earn 
and  spend,  but  to  save.  No  longer.  Malcolm  Muggendge,  leading 
British  television  commentator,  >*Tote  recenth': 

Our  currcnc>'  is  gendy  expinng  which  lets  us  off  any  fonn 
of  saving.  It  would  be  as  sensible  to  save  next  winter's  tnow 
as  the  Pound  Stcrlmg.  We  have  come  to  think  of  our  currtncy 


Thf  Squeeze  on  the  Middle  Class  I  61 

itaniUing  dderiy  uncle;  yesterday  he  had  a  good  day,  diis 
momtng  he  wai  feeling  a  littic  better,  and  able  to  sit  up  and 
take  1  lilffc  nouruhmem,  onh'  in  die  afternoon  to  suffer  a 
dighc  reUptc  One  dx\\  of  course  he  will  pass  away-^ear  old 
Found  SteHing  It  had  to  happen,  but  even  so  he'll  be  missed. 

Mf.  Muggendge  has  a  habit  of  satirical  exaggeration;  but  diere  is 
picmy  of  evidence  to  tuppon  his  dim  view  of  his  national  currency. 
WhJt  weir  once  called  gih -edged  securities  arc  selling  at  fantastic  dis- 
oounn  on  the  Ixjndon  Scock  Exchange.  New  Zealand  rccendy  floated 
a  kMH  in  Ixjndcwi  at  6  ^4  percent,  but  unth  an  interesting  proviso:  die 
vahie  of  the  kun  was  n>  he  reckoned  in  German  marks,  widi  corre- 
ipondingh'  higficr  inicroi  and  pnncipal  payments  in  die  event  of  a 
devahution  or  H-nting  dtmii  of  the  value  of  die  pound  in  terms  of 
other  currencict.  Such  a  devaluation  did  occur  after  the  loan  was 
ilottca. 


The  lack  of  adequate  uxcnnvcs  to  capital  and  to  labor — due  to 
inflitKm  and  the  ncaih-  dcprtcunon  in  the  real  value  of  the  pound— is 
a  btiic  reaton  for  %^'hat  u  called  on  the  European  continent  the  English 
dimic:  the  inabilirv'  of  Bnrain,  >Tar  after  year,  to  balance  its  interna- 
tional pavments.  pa>*ing  out  more  than  it  takes  in. 

In  AmcfHa  also  the  middle  class  fmds  itself  more  and  more  ground 
between  the  tMx>  milUtoncs  of  mflanon  and  ever  higher  taxadon  at  all 
lc\xls,  federal,  state,  and  kKal.  It  is,  of  course,  a  basic  part  of  die  welfare 
state  lhcor>'  that  gin-cmmeni  bureaucrats  can  spend  an  individual's 
money  better  than  he  \*T>ukl  spend,  or  sa\c,  diat  money  himself  if  it 
were  not  siphoned  off  m  taxes.  Some  aspects  of  die  1968  election  in 
Ac  United  States  can  only  be  mterprcted  as  die  desperation  of  certain 
taxpanng.  self- respecting,  substannal  citizens  confronted  widi  con- 
linuaih-  higher  tax  bills  whik  dKir  uives  complain  of  ever  higher  prices 
at  the  supcrmaricct. 

The  Tax  Foundation  rccend>'  reduced  to  specifics  die  impact  of 
inflation  and  higher  prices  on  an  iniaginar>'  character  named  CharUe 
Green.  Charlie  is  in  relati>-elv  favorable  circumstances;  he  earns 
$12,000  a  N-ear,  up  from  $7,500  ten  years  ago.  But  not  aU  is  gold  that 
glitters  in  Charlie's  pockets,  even  diough  his  income  is  about  $3,000 


62  /  WUliam  Henry  Chamberlm 

more  than  that  of  the  average  American  funih*  of  four.  Charlie  has  a 
17-ycar-old  son  and  a  15-year-okl  son  and  financing  them  through 
college,  where  board  and  tuition  charges  ha\x  been  rising  as  fast  as 
taxes,  is  not  the  least  of  his  womcs. 

Between  1958  and  1968,  Charlie's  federal  tax  is  up  from  $1,266 
to  $2,169:  his  sute  tax  from  $169  to  $610;  his  local  propcm-  tax  from 
$590  to  $1,301.  All  have  been  ruing  faster,  ttK  state  and  kxal  tax 
considerably  faster,  than  his  income.  And  ruing  pnccs  Yu\x  wiped  out 
$489  of  his  after-tax  pay  bcxjsts. 

What  makes  the  outlook  e\'en  gkxxnier  for  the  economic  survix-al 
of  the  millions  of  Charlie  Greens  v^-ho  compnsc  the  middk  class  ts  the 
cumulative  effea  of  many  existing  taxes.  The  full  unpaa  of  the  expense 
of  much  of  the  social  welfare  legulatKm  enacted  b\-  the  spcndchnfr 
eighty-ninth  Congress  has  not  yet  been  fch  Thu  u  ahc^  true  of  the 
cost  of  Social  Secunt>',  which  went  up  again,  and  apprrcubh',  at  the 
beginning  of  1969.  As  mvanably  happens  v^nth  such  handouts,  the 
price  tag  of  Medicare,  Medicaid,  and  similar  social  patent  medioncs  it 
much  higher  than  the  original  estimate 

And  there  is  no  lack  of  mgenKHu  schemes  ftir  taking  what  ochen 
have  earned,  for  reapmg  what  has  ncx  been  *<m"n,  fiir  still  further 
pillaging  the  thnfh'  for  the  suppttscd  benefit  «i*  the  thnftlcss  When, 
in  a  time  of  normal  mdustnal  acti\irv\  there  arc  <ine  mtUnn  people  on 
the  welfare  rolls  of  Neu-  York,  v^-tKn  those  n-ho  prxnide  the  most 
essential  .scr\'iccs,  teachers,  policemen,  firemen.  sanitatKm  cmpkiyecs, 
hold  up  an  almost  cmpt>'  municipal  treasury  ti>r  raises  out  of  all  pn> 
portion  to  the  nsmg  cost  of  living,  it  u  clear  tfut  ttxnething  u  radically 
wrong. 

A  Backbreaking  Burden 

If  present  trends  continue  and  accelerate,  it  u  not  difficult  to  fore- 
see a  rime  when  incenrive  to  cTcativc  >fcx>rk  b\  hand  or  brain  will 
disappear,  because  its  fruits  will  be  eagerly  plucked  bv  half  a  dozen  tcti 
of  tax  collectors.  One  root  cause  of  the  trouble  u  the  change  from  the 
time  when  the  American  taxpayer  was  supposed  tt>  ha\-e  done  hu  asic 
duty  when  he  supported  himself  and  hu  familv  aixl  the  religiouft, 
philanthropic,  and  educational  causes  of  hu  choice.  Now,  he  u  ex- 
pected to  carr\'  on  his  shoulders  the  unght  of  supporting  millions  of 
workless  indigent  in  this  country ,  assuring  the  triumph  of  democracy 


The  Squeeze  on  the  Middle  Class  I  63 

tn  coumrio  dut  hardly  know  the  meaning  of  the  word,  rcUeving  the 
a^-old  poverty  of  Asu  and  Africa  and  Utin  America,  and  paying  the 
COM  of  nich  looolopcal  experiments  as  busing  children  for  miles  from 
their  homes  and  rcbuikhng  *lums  u-hich  he  never  made. 

The  burden  u  backbreaking  and  it  will  not  be  surprising  if  some 
Amencam.  dc»painng  of  relief  from  an  intolerable  simation,  are 
tempted  to  experiment  mih  quack  remedies  diat  may  be  foolish  and 
harmhil.  What  u  moK  needed  u  education  in  economic  realities,  edu- 
cation that  yini\  lead  tn  rtmediaJ  action. 

When  more  people  ice  the  state  as  a  robber  baron  that  takes  ^ow 
thcm«  not  ai  a  Santa  ( lam  that  gives  tc  them,  the  prospects  will  have 
improved  Un  the  dumanihng  <>f  the  bureaucratic  monster.  (How  com- 
pletely out  of  hand  ihu  mcwmer  has  grown  is  evident  from  the  fact 
that  the  national  budget,  H-hich  only  passed  the  billion  dollar  mark 
ctriy  in  this  oermin',  now  uands  at  $186  billion).  One  essential  condi- 
tion Un  refficm  u  lor  the  voter  tt)  use  the  power  of  the  ballot  more 
tnteUigrnih  and  diKnminaimgly  than  he  does  at  present.  Every  legisla- 
tor, OTTV*  cxetuinr,  at  ttatc  and  national  le\els,  who  makes  new  taxes 
neccaaan'  should  be  marked  for  defeat  the  next  time  he  runs  for  office. 

When  the  ma|ont>'  of  the  people  recognize  diat  die  free-spending 
leviathan  itate  u  the  main  »ourcc  of  their  fmancial  and  economic  griev- 
ances and  muBt  <in  draMK  retrenchment  at  any  cost,  the  prospect  of 
the  nin-ival  of  the  independent  middle  class  will  be  much  brighter  dian 
it  is  at  present. 


The  Mydiology  of  State  Spending 
by  John  Hood 


In  1991,  30  sutcs  facing  budget  deficits  raised  income,  ialo,  a* 
cisc,  and  other  taxes  a  total  of  $17  billKXi,  %Mth  more  tax  tncxrascs 
promised  for  1992  and  beyond. 

Most  commentators  blamed  federal  aid  cuts  and  the  tax  re\T)hs  of 
the  1980s,  which  supposedh-  left  the  states  unprepiarcd  for  the  1990- 
91  recession.  But  rather  than  simpK  suffering  the  tgltas  of  a  ikm^r 
national  economy,  many  state  and  kxal  gtnrmments,  bs-  raiting  taxc» 
and  squandering  resources,  ^%-ere  a  pnmar\  cmme  of  Uoh-  grtmth 

According  to  Stephen  Mcxxe  of  the  (.itK>  Institute,  state  spending 
increased  at  an  annual  rate  of  8.5  percent  from  1982  to  1989 — n»icc 
the  inflation  rate.  Meanu-hile,  per  capita  state  taxes  abnost  douMcd 
from  1980  to  1989,  and  Tax  Freedom  Dav"— computed  K-  the  Tax 
Foundation  to  identif)'  when  .\merKans  effecinrh  stop  >»xiriing  to 
pay  their  federal,  state,  and  kxal  taxes  and  stan  %kxiHung  ftw  them- 
selves— fell  on  May  8  m  1991.  the  latest  date  e\rr  State  empkntnent 
rose  by  19  percent  m  the  1980s,  while  the  general  pofubtmn  grcm- 
by  only  9  percent.  Federal  aid  to  states  and  kKalities,  after  dipping  in 
the  early  1980s,  increased  h\  an  inflatKin  adfusted  20  percent  in  ihc 
late  1980s.  From  1989  to  1991.  \tatc  spending  rt»e  at  an  asmfc 
annual  rate  of  7.6  percent,  2  7  percent  abinr  the  tnflatMm  rate 

Most  t)f  these  facts  arc  well  knt  mil  b>  state  budget  oAkiah  and 
policy  analysts,  but  conflict  with  mMhokigies  pnimulgatcd  b\'  the 
news  media. 

For  the  past  two  years,  I  ha\r  v^tKied  fiK  a  state  think  tank  in 
Raleigh,  North  Carolina,  that  hxs  been  engaged  in  budget  debates 
IVc  obscr\cd  the  coz>  relationship  between  reporters  and  pubbc  em- 
ployee unions,  teacher  unions,  and  oft -quoted  unismirv  "cxpcrtx*  on 
public  polio-.  I  have  come  to  beliese  that  the  facts  about  state  budgets 
don't  make  it  into  most  news  stones  and  cnmmemancs  because  of  the 
composition  of  news  sources  and  interest  groups  in  state  capitab. 


John  Hcxxi  u  rcscwh  dirrcnir  (i4  the  )<ihn  Ltidtc  FnundKnn  n  PrfrMf>.  Nanli 
CaniUna,  and  a  ailumnist  Itx  SfttUttw  (N  C'  i  nufcaim  Th«  cmm  •  repnnHd  frvan  T*r 
Frtftmm,  Apnl  1992 


64 


The  Mythology  of  State  Spending  I  65 

It  wn^  a  nc£tfiouf  proocn,  but  one  of  necessity:  Reporters  rely 
on  ad\-cKaic»  to  generate  itory  ideas,  provide  information  and  quotes 
abcMJt  puWic  iMucs.  and  to  »ct  dK  agenda  for  public  debate.  Much 
more  to  than  in  Washington,  where  a  legion  of  reporters  covers  the 
fedenl  gavcmmem,  and  atucm'  lobbies  and  think  tanks  point  out 
waitcful  tpcnding,  rcpfvsa natives  of  state  employees,  contractors,  and 
oonfukanu  dominate  the  neu's- gathering  process  in  state  capitals. 

A  fDCCftt  cxampte  m  North  C^arolina  demonstrates  how  budget 
inyihf  arc  orated.  I>unng  the  1991  legislative  session,  die  Nordi 
Carolina  AMoctaticwi  of  Kducators  was  gn)wing  nervous  about  the 
proapcct  of  ncif  rtca\-mg  pay  raises  pn)miscd  in  previous  sessions. 
Indeed,  carh'  in  the  icmkio,  public  educators  warned  that  the  state's 
budget  dcikit  in  many  >xars  would  result  in  education  cuts, 
li  it  turned  out  the  cuts  urre  mmimal.  Major  newspapers  ran 
cxtoUtng  the  a(.hie\*ements  of  panicular  teachers  or  decrying  the 

*t  km-  tcit  Korrs  and  graduatuxi  rates. 

Meanwhile,  our  (iHke  prtmded  the  news  media  with  statistics 
a  tremendous  incrraic  m  public  education  administration 
(from  75  tcachen  (t>f  o-en-  administrator  m  die  1970s  to  50  teachers 
fcr  every  admmmrattir  tuyw )  and  m  non-teaching  personnel  (from  two 
leachen  for  c\xr\  noo- teacher  m  the  1960s  to  one  teacher  for  every 
non-teacher  now)  In  additKHi.  wc  showed  that  die  average  salary  of 
the  state's  teachers  was  cioicr  to  the  national  a\'crage  for  teachers  dian 
North  C'^arnhna's  pnvatc  scour  wage  was  to  die  national  private  sector 
w^.  In  other  uxirds.  compared  uith  other  workers  in  die  state,  teach- 
cn  were  fiurh*  %k"eU  off.  We  also  identified  a  massive  increase  in  state 
cmpkninent  during  the  past  rwo  decades. 

State  media  organuatKins  paid  little  attention  to  diesc  figures, 
although  outside  media  such  as  Satvmal  Review  and  The  Economist 
reporred  riKm  in  sft>rKs  iki  state  fiscal  u-ocs.  Instead,  reporters  contin- 
ued to  do  stones  >Mthout  statistics  or  odier  hard  facts  and  which 
feoned  on  quotes  htim  union  lobbyists  and  dicir  legislative  allies.  It 
worlced.  RadKr  dun  cut  significantlv  into  non-teacher  positions  or 
odKT  goNTinmcni  waste,  die  North  Carolina  legislature  enacted  die 
largest  tax  increase  in  the  sttte's  hisron-. 

Even  if  more  press  attenticxi  had  been  focused  on  numbers  and 
fiscal  trends,  dK  result  might  have  been  die  same.  Thaf  s  because  die 
pobo-makcfs  who  raise  taxes  and  create  government  programs  are 
beholden  to  teacher  unions,  pubUc  employee  umons,  and  mdustry 


66  I  John  Hood 

lobbies  with  an  interest  in  state  contracts.  These  groups  provide  politi- 
cal contributions  and  campaign  volunteers.  They  hire  lobbyists  to 
haunt  the  halls  of  sute  legislatures,  proMding  *^infonnadon*  and  in 
some  cases  virtualh'  wiiting  the  legisbtKXi  that  m^iU  protect  their  indus- 
try or  their  members.  They  host  dinners,  breakfasts,  teas,  parties,  re- 
ceptions, and  other  events  to  foster  contacts  and  provide  vmues  for 
deal-making.  The>'  manipulate  medu  cm-eragc  bs  hokiing  raUics  and 
"marching  on  the  legislature^  although  the  abihrv'  to  mobthic  a  cou- 
ple hundred  people  doesn't  really  suggest  pubbc  support  or  e%"en  news- 
worthiness. 

These  groups  have  been  largch'  siKcessfol  dunng  the  past  decade 
in  promoting  their  agenda:  PubUc  empknre  unions  are  the  onh' 
healthy  segment  of  the  American  labor  mmement.  Andro*  Bates  of 
The  New  RepuUu  reports  that  these  unKms  added  1.2  millMm  ne>* 
members  during  the  1980s,  a  30  percent  increase,  and  that  uate  em- 
ployee salaries  nationwide  increased  b>  59  percent  from  1980  through 
1987,  while  pnvate  salanes  n»e  35  percent  Benefits  abo  expanded 
rapidly,  with  retirement  and  health  plan  aists  bccuming  the  fastest 
growing  catcgorv'  of  state  spending 

Ignoring  the  Appeal  of  Facts  aiKl  Figures 

In  classic  public  choice  sf>lc,  tho*c  vnxh  an  intemt  in  gtnrrnment 
programs  and  higher  taxes  to  piv  for  them  eiervisc  inordinate  influ 
ence  in  state  capitals  and,  ti)  some  extent,  in  cm  halls  The  a\rrage 
citizen,  whose  interests  lie  in  smaller  ginrmment  and  k>wrr  taxes, 
often  cannot  meaningfully  influence  the  process.  The  continued 
growth  of  state  think  tanks  and  taxpiNxr  asMKiatxins  wiSl  help  ofhct 
some  of  the  advantages  pn>-gj>vemment  lobbies  ha\r,  but  no  one 
should  expec-t  rapid  change  In  most  state  capitals,  relationshipi  be- 
tween reporters  and  sources  are  chummv  and  take  a  vkiiile  to  de%rk)p 
Also,  legislators  and  other  policv -makers  have  an  interest  in  informa- 
tion and  analysis,  but  an  c\  en  greater  one  in  political  contnbutians — to 
the  appeal  of  facts  and  figures  isn't  o\  erwhelmmg 

Still,  recent  elections  show  that  voters  acn»s  the  cixintrv-  are  angry 
about  taxes,  dissatisfied  uith  tfie  way  their  go\  ernments  are  being  run, 
and  disgusted  with  waste  and  politKal  scandal  To  translate  these  feel- 
ings into  specific  opposition  to  programs,  ad\TKates  of  limited  govern- 
ment and  free  markets  have  to  be  sax^y,  timeh',  and  effective  purveyors 


The  Mythology  of  State  Spendin£f  I  67 

cjf  inibrmation  about  the  history  of  gm-cmmcnt  taxing  and  spending 
in  their  «atc»  and  the  ptxcntial  impaa  on  economic  growth.  It  may 
take  a  while  for  the  message  to  crv'stalize,  but  it  is  crucial  that  it  do  so. 
The  invnerutty  of  Mate  and  kxal  tax  increases  during  the  past  two  years 
will  tramlatc  into  ugntrKani  econcxnic  costs.  A  repetition  of  the  1991 
%tatc  Hf^y*  dehade  could  wreak  irreparable  harm  on  the  incomes  and 
hvdihoodft  of  Amcncan  families. 


School  Budgets  and  Town  Meetings 
bylLW.  Bochm 


In  New  Hampshire  a  popular  topic  of  con\rrsation  during  the  first 
months  of  the  neu  year  is  the  local  school  budga.  No»-»papcn  report 
frequently  on  the  heated  proceedings  of  to^n  meetings  m-hcre  school 
budgets  are  discussed.  Teloision  ccnerage  sht>%fc-s  that  these  gatherings 
can  become  highly  emotional  as  aggravated  citucns  express  their  am- 
ccms.  There  is  much  gnashing  of  teeth 

There  alwav's  are  many  in  anendarwe  >*-ho  hvar  incrcaung  the 
school  budget  for  a  vahet>'  of  uxU-intentKined  reasons.  They  are  quick 
to  express  their  opinions,  but  sometimes  arc  intolerant  of  the  \'iews  of 
others.  Often  these  petjple  have  children  m  the  whtKil  f>-stcm,  or  wotk 
in  the  sch(X)Ls  as  teachers  or  support  staff 

A  growing  number  of  cm/ms  are  nnng  of  e%rr-escaUting  property 
taxes  and  are  bravely  Ivginning  n>  anend  these  meetings  Thc>'  imulh' 
are  fcv^cr  in  number  than  the  first  gnnip.  frcquenth-  arc  the  reapients 
of  shrill  dcnunciatioas  of  their  lack  of  **chant>."  and  generalh'  arc  heki 
to  be  be\'ond  the  pale  Rut  many,  quite  simph,  no  kwiger  can  affiird 
to  pay  their  sch<x>l  taxes  In  s*»mc  timiu,  such  as  Rcdfiird,  these  people 
are  forming  taxpayer  ass<Kiatiom  The>  want  tt>  amtrol  spending 
The\'  also  resent  the  am>gant  indifference  of  the  %duwl  botfd  to  their 
differing  point  of  vieu. 

There  is  a  third  gnnip  of  cituens  ulvi  Rw  a  vanet>'  of  reasons 
choose  not  to  participate  in  sch<x>l  budget  politics  That  these  paiple's 
rights  often  aren't  e\  en  comidered  d(xsn*t  seem  to  oxike  any  conccfn. 
After  all,  goes  the  popular  retort,  the>'  can  vxite  too. 

So,  what's  the  problem? 

A  ftrquent  result  of  the  sticmg  paxess  is  the  redistribution  of 
wealth.  This  cKcurs  not  only  in  the  ca.se  of  schtxilmg  but  in  most  issues 
that  have  become  politicized.  The  gtn-emment  that  u  supposed  to 
protea  our  rights  equally  nou  takes  fiom  one  group  to  give  to  an- 


Mr  Bochm  is  an  airiinc  ptkn  Ining  m  Bedford.  >4ew  Hjn^^rc  Thm  mXKk  ai^fnJh 
appeared  in  the  September  1990  issue  of  rW  fnrwwBi 


68 


School  Burets  and  TawnUemngs  I  69 

other.  A»  our  appetite  for  »pccial-intcrcst  politics  grows,  so  does  the 
plunder  that  supports  it.  True,  this  democratic  process  is  a  more  civil 
way  to  »cttk  dwagrccmcrm  than  resorting  to  brute  force.  But,  as  James 
Madison  warned  m  The  hedenUut,  democracy  can  and  often  does  pro- 
duce rcsuhs  iimilar  m  the  ph\-sicaJ  violence  it  seeks  to  avoid.  The 
tyranny  of  dK  diaator  u  repUccd  b\'  die  t\Tanny  of  the  masses  when 
anything  can  be  nude  legaJ  b\'  \-otmg.  It  seems  wc  should  be  frequently 
reminded  that  the  ^vituig  process  doesn't  necessarily  make  something 
nght,  cirUy  legal 

Hutor>'  reports  that  our  Founding  Fathers  held  an  underlying 
assumptxin  n-hcn  iho-  ff  irmed  our  denvxratic,  constitutional  republic: 
We  arc  a  moral  pctiplc.  and  thu  moralit)'  is  based  on  the  command- 
menti  of  God.  Therefore  ic  cannot  be  imprudent  to  say  that  the  degree 
to  which  we  wyHH  tmpnnx  our  political  situation  is  likely  to  be  propor- 
tional to  the  degree  ut  cwKe  agam  permit  ourselves  to  be  influenced 
by  the  Iudci><!hn*tun  tradition  The  Bible  reminds  the  faithful  to  be 
She  salt  of  the  eanh  and  the  light  unto  the  world."  We  are  to  reflect 
God*s  knx  as  %kT  interaii  with  the  u-orld.  This  seasoning  role  certainly 
extends  to  the  realm  of  poliiKs  Our  instruction  remains  the  same.  St. 
Matthew  recorded  the  Great  Cximmission  from  our  Lord  at  the  end 
ofhisGofpd. 

The  BiNe  teaches  that  responsible  behavior  primarily  requires  re- 
membering our  obligatKms  to  God  and  to  our  neighbors.  Indeed  vir- 
tually Qsxty  religion  teaches  its  faithful  to  love  one's  neighbor  as  one- 
•df.  St.  Paul  reminds  the  Romans:  "Ixive  is  die  fulfillment  of  die  law." 
(Ramans  13:10)  We  arc  asked  n<x  to  do  to  our  neighbor  diat  which 
wc  do  not  wish  done  to  ourselves.  The  Bible  tells  us  that  die  main 
for  gm-emment  is  to  restrain  die  irresponsible  or  whoever 
to  dimmish  the  libern*  of  another. 

Before  runnmg  dm%-n  to'  dK  next  toun  meeting,  perhaps  we  first 
should  make  sure  di  the  responsibilities  we  have  to  our  neighbors:  to 
bve  them,  to  forgixr  them,  to  pray  for  diem,  and  to  refrain  from 
interfering  i«th  thetr  abiUt>-  to  enjoy  die  same  rights  which  issue 
cqualh-  to  aU.  Forcing  one's  neighbor  to  pav  for  somediing  odier  tiian 
the  rightful  it>le  of  gmrmmcnt  is  not  love.  We  are  instructed  not  to 
judge  our  neighbor's  lack  of  chant>';  radier,  we  are  asked  to  set  a  better 
example  and  increase  our  ov^i  charitable  efforts. 


70  /  R.  W.  Boehm 

Good  IntcntkMM  Arc  Not  Enough 

Given  this,  what  subjects  should  be  considered  at  a  town  nxcting? 
The  proposals  from  those  of  good  intentioos  are  nc\rr-cnding.  So  the 
primary  question  becomes:  Docs  the  subjea  in  question  in\x)hr  a 
legitimate  role  of  government?  Our  good  intentions  are  not  enough- 
Scripture  teaches  that  government  is  to  be  hmitcd  in  po^rr  and  is 
created  primarily  to  regulate  relations  among  the  pcopk  of  a  fidlcn 
world.  The  functions  of  gmcmment  are  feu-:  to  maintain  order,  to 
protea  life  and  propert\\  and  to  prtnide  |usticc  Quite  umph',  this 
involves  litde  more  than  the  opcratxin  of  a  pobce  fiicce  and  courts  of 
law.  This  is  what  is  Caesar's.  The  list  is  amazingh*  shon  and  mott 
definitely  does  not  include  such  items  as  hcahh,  education,  or  wri£uc, 
to  name  just  a  feu'. 

The  skeptic  u-ill  ask:  How  do  y%ya  propose  to  replace  the  tcrviccs 
the  government  pro\idcs?  Doesn't  the  gtnrmment  di>  for  us  mam* 
things  we  can't  do  for  ourscKes?  Be>x)nd  its  rightful  rok,  about  the 
only  thing  the  government  can  do  for  us  that  ur  cannot  u  ItgakK  that 
which  is  \^Tong.  As  F.  A.  Harper  was  quoted  in  the  March  1966 
Freeman:  The  government  .  canntx  pofssibh  di>  amthing  that  peo- 
ple can't  do  for  themselves,  ft>f  the  simple  reaum  that  pcopk  awnpnae 
all  that  is  government.  Government  is  manned  b\  the  \Tr>  vime  per- 
sons whose  deficiencies  arc  presumed  to  disappear  m-hen  combined 
into  a  legal  structure  with  bureaucratK,  politxal  trapping»— a  proccu 
which  makes  an  ordinarv'  person,  if  anvthing.  less  abte  than  bdbre  to 
accomplish  things." 

The  sch<x>l  issue,  like  all  other  issues  that  exceed  the  proper  rok 
of  government,  is  not  a  budgctarv  pn^blem  rmr  is  it  a  problem  tohable 
by  cleaing  bener  rcpresentati\  es  tx  instituting  better  go^crnnient  con- 
trols. Schooling  simply  is  not  a  pamper  functKm  of  go\emmcnt.  The 
involvement  of  government  in  matters  be>i>nd  its  pniper  mk  pnxiuccs 
a  coercive  monopoly  of  special  interests  and  pnxiiegcs  Thu  is  a  perver- 
sion of  justice,  for  the  cMily  way  the  ginrmment  can  create  entitAcmcnti 
is  to  take  from  one  to  give  to  another.  In  doing  thu,  the  govcmmcnc 
must  forsake  its  rightfril  responsibilities. 

The  irony  of  this  situatuMi  is  the  prediaaMe  outcome— <ncdiocrity. 
An  unhampered  market  stimulates  competitKWi.  Economics,  the  «tud\' 
of  human  action,  shows  the  result  of  ccxnpetioon  to  be  higher  qualify 
goods  and  services  for  dK  lou-est  possible  pnce.  The  current  natiorui 


School  Budgets  and  Town  Meetin£is  I  71 

Kihooling  chttf  is  an  cxcdknt  case  in  point.  The  facts  are  these:  We 
have  a  monopoly  ichtx)!  »y*tcm;  we  are  being  forced  to  support  it;  it 
u  by  recent  gcntrnunent  admmion  mediocre;  and  it  is  widely  described 
as  ovcHy  expcmivc  Were  thu  monopoly  eliminated,  the  quality  of 
ichcxiling  would  imprtnx  dramatically  and  the  price  of  it  would  de- 
crease. Educjcors  could  teach  whatever  diey  wished,  but  their  ability 
to  stay  in  business  ivould  be  dctcnnined  b\'  the  sovereign  of  the  mar- 
ket—^ comumer,  not  Cac&ar. 

At  town  mectmg*  wt  ihouki  be  discussing  how  to  return  govern- 
ment to  Its  n((hrful  n>kr  tmtrad  of  talking  about  the  upcoming  school 
budget,  WT  %h(Hild  be  diKiu%mg  how  to  get  government  out  of  the 
business  of  ichciodng  and  all  the  (xher  places  into  which  it  wrongfully 
intrudes. 


The  Forgotten  Man 
(1985) 

by  Robert  Awenius 


In  the  last  ten  years  of  the  nineteenth  cemun-  and  the  first  ten  yean 
of  the  present  the  Amencan  repubU:  was  thrust  into  a  g^rrat  dranu  of 
American  Destiny  earned  to  the  far  reaches  of  the  wtxid.  .\merKa 
breached  the  trade  barriers  of  Japan  and  Clhina,  and  after  winning  the 
Spanish-Amencan  War,  uTenched  C'uba  and  the  Phibppincs  from 
Spain.  The  Philippines  became  an  AmerKan  colony  and  the  idea  of 
American  Destiny  mmed  stn>ngh  acrou  the  Pacific  Ocean.  We  wit- 
nessed Amencan  impenalism,  vkx  urre  mid  it  wis  tnir  dut>-  to  carry 
the  Amencan  concept  to  the  ut>rid 

We  strongly  backed  freedom  kx  the  Philippines,  pbcmg  at  one 
time  as  many  as  soent\  thousand  troops  there  and  beer  lending  ten 
thousand  young  Amencan  teacher*  and  eiperts  <wi  unitatMin.  nutri- 
tion, tropical  medicmc,  and  agrKuhure  to  impttnr  b\ing  conditiom 
and  wipe  out  disease  This  Philippine  ad\enturc  was  a  great  pn-oc- 
point  in  Amencan  h»tor\',  and  as  was  stated  b\  Richard  OXxmnor  m 
his  book  Paafu  Datmy: 

It  signaled  our  determmatKm  to  gain  and  hold  uiprenucv' 
in  the  Pacific  and  over  x%  much  o(  Asu  as  our  military-  power 
could  sustain  The  come^^ucnces  kA  that  mmr  ha\T  insx4%ed 
us  in  three  wars  so  far  and  pnimise  an  unending,  poaubly 
unavailing  contlict  on  the  .\sian  littoral  ' 

Not  all  persons  appnned  this  stated  <\merKan  nobon  of  world 
power.  One  great  Noice  in  opptwitKm  was  a  crusry  conacn'ative  Yak 
University'  professor  named  William  Ciraham  Sumner,  who  based  his 
opposition  on  humanist  gnninds  His  \tnce  was  prophctK  became 
what  he  said  also  relates  to  the  title  piece  of  this  arbde.  Sumner^ 
reasoning  is  put  this  way: 


Mr.  Aw-cnius,  a  rcnrtd  annmrv  and  free  Imcc  wnKr  m  TuIm. 
article  for  the  Marvh  1985  issue  nf  Tkt  Fmmmm 


n 


The  Forgotten  Mm  I  73 

The  ForgoRcn  Man,  to  whom  he  referred  continually  in 
hif  mm.  wa»  fKX  the  slum-dweller  but  the  person  who  paid 
his  bilU  Uw  H-hai  Utcr  sociologists  would  term  die  disadvan- 
taged. The  Fc»rg<inen  Man  of  Sumner's  canon  was  die  one 
%*'hc>  >i»t  H-hen  he  wants  to  enjoy  die  fruits  of  his  care,  is 
told  that  It  u  his  duty  to  take  care  of  some  of  his  negligent 
nctghbtiTft.  ..  but  the  point  now  is,  diat  if  preaching  and 
phikMophmng  can  do  any  good  in  die  premises,  it  is  all 
wnmg  ti»  preach  t«  the  Forgotten  Man  diat  it  is  his  duty  to 
go  and  remedy  other  petiple's  neglea.  It  is  not  his  duty.  It  is 
a  hanh  and  unfust  burden  u-hich  is  laid  upon  him,  and  it  is 
onh*  the  more  un|ust  because  no  one  thinks  of  him  when 
laying  the  burden  •<>  that  it  falls  on  him.  The  exhortations 
ought  CO  be  expended  on  the  negligent— that  they  take  care 
of  thenwehT*."^ 

Sumner  wt»  saving  that  the  millions  of  dollars  of  American  wealth 
and  reMNinrs  spent  <»n  mili(ar>-  and  civil  affairs  at  home  and  abroad 
were  paid  b)*  the  F<»rgoncn  Man,  and  that  this  burden  was  imposed 
upon  him  as  a  dur\'.  Hu  thesis  went  bc\'ond  application  to  the  bellicose 
evcno  of  his  era,  since  he  meant  his  general  theory  to  be  applied 
broadh*  to  all  acts 

So,  likruiie  in  the  TkUI  of  political  science  and  sociology,  the 
Forgcxten  Man  u  the  aimmtMi  man  uho  after  working  hard  and  pay- 
ing his  bills  and  raxes  is  told  b>'  the  liberal  establishment  (oftentimes 
his  go\rnvncnt )  that  it  is  his  "Yurther"  dut>'  to  become  responsible  for 
all  dK  unfomtnate  pcTvxu,  institutions,  or  odier  entities  who, 
through  negligence  on  dxrir  pan  or  for  odier  reasons,  look  to  die 
gm-cmmeni  for  thar  support. 

Here,  fiK  example,  is  rfK  teenage  girl  who  becomes  pregnant  out- 
side of  \*rdlock.  In  rfK  \\cv>  of  many,  if  she  has  no  funds  for  an 
abortion  or  for  childbirth,  rfiesc  expenses  must  be  paid  by  die  state. 
And,  hmhcr,  n-hen  she  goes  on  welfare  she  will  receive  Aid  to  Depen- 
dent Children  (ADC)  unni  rfie  chUd's  eighteendi  birdiday.  All  of  diis 
i«  to  be  paid  b\'  rfK  state  fttxn  taxes  of  die  Forgotten  Man. 

The  Forgotten  Man  is  told,  also,  diat  his  taxes  are  needed  to  pro- 
vide housing  tor  famUies  u-hosc  breaduinner  fails  to  provide. 

The  f^KT  u'ho  produces  more  grain  dian  die  market  will  absorb 
at  support  prices  is  told  b>-  his  government  diat  his  gram  can  be  stored 


74  /  Robert Awenius 

as  collateral  for  a  comnxxlity  loan,  nith  the  loan  proceeds  coming  from 
the  federal  treasury,  and  supported  b\'  the  Forgotten  Man's  taxes. 

The  arts  and  humanities  groups  (museums,  s^inphony  orchestras, 
theaters,  painters,  sculptors,  u-riters,  etc.)  claim  the%-  are  entitled  to 
receive — and  do  receive — millions  of  dollars  of  go\-enimcnt  aid.  And 
all  this  comes  from  taxes  paid  b\'  our  Forgotten  Man. 

He  is  told  that  certain  cat^;one$  of  atizcns — and  e>m  non- 
citizens — are  entided  to  have  legal  counsel  furnished  b\'  the  govern- 
ment, and  this  expense  is  to  be  borne  b\'  him  thnxigh  his  taxes. 

He  is  told  that  certain  classes  of  citizens  arc  entitled  to  (bod 
stamps,  and  he  must  pay  for  this  through  his  taxes. 

Our  Forgotten  Man  is  told  that  v^-hen  a  large  natKmaJ  hank  m  a 
great  city  makes  ill -advised  energ>'  loans  that  Koparduc  the  b«nk*s 
capital  structure,  the  federal  go\  emment  should  inhise  bdlions  of  hit 
tax  dollars  into  that  bank  in  order  to  save  it 

In  short,  he  is  advised  by  liberal  spokesmen  that  all  the  poor  and 
unfortunate  of  the  land  should  be  taken  care  of"  b%-  the  ginxnvnent, 
and  that  he  (the  Forgotten  Man)  should  pav  fiir  all  chss.  Scvct  mind 
whether  many  of  the  poor  and  unfortunate  became  w  (hniugh  their 
own  negligence. 

The  Forgotten  Man  is  tt>ld  that  besides  managing  hu  <mTi  life  he 
also  should  manage  others'  lives  In  that  regard  the  late  Ixtmard  E. 
Read  stated,  "Managing  one's  ohti  hfe  »  complex  en(iu|(h,  managing 
the  lives  of  others  is  impossible  "* 

And  to  support  all  this  gtnemment  spending  again  the  Forguncn 
Man  is  called  upon: 

He  is  the  Forgotten  Man  If  ut  g«>  to  find  him,  wt  shall 
find  him  hard  at  work  tilling  the  soil  ti>  ga  iHit  of  it  the  fund 
for  all  the  jobbers ,  the  object  of  all  the  plunder,  the  am  of  all 
the  economic  quackcn ,  and  the  pa\  ol  all  the  politKiam  and 
statesmen  who  have  sacnficed  his  interests  to  hu  enemies^ 

Human  Motivation 

The  Forgotten  Man  of  whom  we  speak  is  in  faa  a  veiy  unconvnnn 
man  in  view  of  the  burden  cast  uptxi  him  He  is  a  man  of  utmott 
intcgrit)',  and  he  has  been  so  since  civil  mkuI  experience  began  He  has 
searched  for  certain  ends  and  purposes  in  life  and  sought  to  reach 


The  Forgotten  Mm  I  75 

them  He  doa  noc  wdcomc  all  the  burden  that  so  many  well-meaning 
people  impcMC  on  him,  tincc  he  places  first  in  all  his  thoughts  the 
prrm»icjn  for  hi*  awn  famiK-'*  welfare.  The  history  of  mankind  shows 
thtt  rtHJOg  inccnove  u  continually  reduced  by  die  state,  as  well  stated 
by  Rtiudl  Kirk  in  hi*  book  on  conservatism: 

A  . . .  rnodvc  ahft'a)'*  ha*  been  die  desire  to  provide  for  die 
wd£uv  of  one**  aiwn  family  and  heirs;  but  die  assumption  by 
the  Hate  <jf  ihc  fiinctKin*  of  education,  economic  management, 
and  rc*pon*ibilirv  e\m  for  fcxxls-suppiy  and  housing,  has  di- 
minuhcd  ihc  rc»ptinnbilit>*  of  the  individual  here,  while  taxa- 
tion ha*  hjckcid  at  the  \xr\  foundation  of  the  idea  of  bequest.^ 

Today,  a*  at  the  twm  of  the  century  in  Sumner's  time,  the  Forgot- 
ten Man  tt  pacing  the  puNic  ctwt  of  those  who  do  not  pay  their  share. 
In  the  Forgoncn  Man  ut  behold  the  pnncipic  of  dualism  present  in 
every  penon  u-ho  pa)**  hu  cxpcmci  and  also  those  of  the  state.  "He 
will . . .  accept  hcax-)-  fa&atMm  if  he  feck  it  necessary  for  the  maintenance 
of  Socteiy,  yet  make  e%rr\*  legitimate  effort  to  keep  his  own  contribu- 
tion a*  \om  a*  pcmible  "^ 

Thi»  ift  the  ume  Forgocten  Man  who  during  die  war  years  of  the 
nation  doc*  all  of  the  fighrmg  and  most  of  the  dying.  In  many  of  diese 
wan  he  u  lokl  he  i*  fighting  for  dem<Krac>',  when  in  many  cases  die 
countric*  he  i»  tmng  to  \x\x  do  n<K  know  the  meaning  of  democracy. 

When  ur  are  diwuiMng  the  nghis  of  our  Forgotten  Man,  we  are 
dealing  in  the  ficW  of  cixil  libcrt>*.  In  this  respea  William  Graham 
Sumner  abh*  stated  it  thu  way: 

The  noCKWi  of  asil  liberty  which  we  have  inherited  is  diat 
of  a  ttatus  created  for  the  individual  by  laws  and  institutions, 
die  cflect  of  u-hich  is  that  each  man  is  guaranteed  die  use  of  all 
his  own  powrrs  exclusively  for  is  own  welfare. ^ 

AU  of  histon-  and  philosophv  tells  us  diat  die  free  citizen  in  a 
democracy-  shouW  be  guaranteed  die  exclusive  enjoyment  of  all  that 
he  produces  dwtxigh  u-ork.  It  certainly  is  not  die  ftinction  of  die  state 
to  make  men  happ>-;  rfK>-  must  do  it  m  dieir  own  way,  and  at  their 
own  risk. 


76  /  Robert Awmius 

The  Oppressive  State 

For  the  Forgotten  Man  to  be  told  b\'  his  ou-n  gOMcmincnt  or  by- 
other  spokesmen  that  he  has  a  dut>'  to  support  ochcrs  ^-ho  do  noc 
support  themselves,  is  to  accept  dictation  b)-  a  pn\ikgod  dass  that  b 
asserting  itself  to  create  an  imnxxal  poliDcai  $>-stcm.  This  imposes 
upon  his  earnings  an  ill-defined  dut>-  to  make  ochcrs  happ\'.  Our  For- 
gotten Man  rebels  at  this  d\ix\  others  cast  upon  him  because  he  ^-ants 
the  state  to  be  kept  within  reasonabie  bounds  of  powxr  and  function. 
He  full  well  knows  that  the  sute  has  a  tendency-  to  become  oppressive. 

The  social  doaors  focus  their  attention  on  a  gnxip  of  people — the 
poor,  minorities,  workers — appealing  to  s\-mpathv  and  imaginatxm, 
and  devising  programs  to  care  for  them  Tho  (the  mkuI  dtKHxs)  set 
in  force  motion  and  forces  that  react  thnxighout  the  entire  fabrK  of 
society,  and  in  the  fiirtherance  of  their  grandiose  pians  ignore  the  tSkct 
upon  other  members  of  societ>'.  The>  ha\x  drvrioped  the  m>th  of  a 
government  competent  to  sohc  proWems  The>  iotficx  "that  the  State 
cannot  get  a  cent  for  any  man  without  taking  it  inm\  icwne  other  man, 
and  this  latter  must  be  a  man  who  has  pniduced  and  sa\-cd  it.  Thu  is 
the  Forgotten  Man."* 

Their  programs  thus  shift  capital  from  ock  grtnip  of  men  to  an- 
other. The  men  from  whom  the  capital  is  taken.  indi\idualh\  arc  the 
Forgotten  Men.  This  transfer  takes  t'nim  one  and  p\x%  to  another, 
who  performs  no  prtxiuctivc  effort  to  cam  the  pn»perT\  that  comes  his 
way.  The  property'  transferred — usualh  mone>— is  dnrrted  from  pro- 
ductive use.  The  person  who  pn»duccs  this  pniperrv  ts  our  Forf*octcn 
Man.  This  largess  brings  to  mind  the  illmirainin  of  a  man  tfc-ho  gives 
a  hungry  man  a  fish.  The  better  plan  for  the  unall  philanthniptst  m 
follow  here  would  be  to  give  the  hungn  man  a  fishing  p»4c  and  teach 
him  how  to  fish.  VMicn  he  is  hungry  again,  he  wUl  fish  fiw  hu  meal  and 
not  ask  for  a  handout.  Sumner  phrases  tlie  situation  in  thu  manner: 

There  is  an  almost  invmciWe  prqudKe  that  a  man  ^k-ho 
gives  a  dollar  to  a  beggar  is  gencrtnis  and  bnd  hearted,  but 
that  a  man  who  rcfiiscs  the  beggar  axxi  puts  the  dollar  in  a 
savings-bank  is  stmg>'  and  mean  The  former  u  putting  capital 
where  it  is  very  sure  to  be  wasted.' 


The  Forgotten  Man  I  77 

In  the  above  example  the  man  who  pUccd  the  doUar  in  a  bank  wiU 
fcan  a  pnxcM  of  the  doUar  going  into  the  labor  market  as  a  demand 
for  productnr  teniccs.  The  real  parn-  in  interest  is  die  man  who 
perfbnm  the  productive  «et>Tce.  He  is  die  Forgotten  Man.  He  is  die 
one  who  the  mkuJ  dcjctor*  ne\er  think  of  when  diey  lay  dieir  plans. 

The  way  tf>  keep  the  «afe  wxxhm  bounds  is  to  restore  to  die  indi- 
viduaJ  hu  »cme  cjf  »elffdiance  and  dK  control  of  his  private  property 
and  n^  to  inheritance: 

The  comervatnr  u  no  anarchist;  he  knows  diat  die  just 
itate,  kepf  Hithtn  rcakcmaNc  bounds  of  power  and  function, 
if  a  force  for  our  common  bencmicnt;  but  today  die  danger 
it  that  the  Mate  UialJ  become  all,  quite  as  oppressive  as  the 
danger,  tn  other  time».  that  the  state  might  waste  away  to 
nothing.'^ 

The  ttate  cenamlv  \u%  a  pniper  interest  in  expanding  the  opportu- 
nities Un  \t%  free  iiiums  tn  pursue  their  happiness.  In  this  free  demo- 
cratK  MKieT>-.  of  lAhnh  %kT  syak,  the  only  dut>'  a  free  man  has  to  other 
men  of  hu  lame  rank  and  standing  is  to  render  the  others  respect, 
courtesy,  and  gncid-wiU,  here  his  dut>'  ends.  In  other  words,  what  we 
are  u^ing  is  that  men  n-ho  ha\"e  n<K  done  dicir  duty  to  others  in  the 
worid  ne\'er  can  he  equal  m  ih<»e  who  have  done  their  duty  tolerably 
well.  The  cLu%  dminctKm  %k-hich  wc  sec  in  a  democratic  society  results 
from  the  difTerent  degrees  of  success  w  hereby  men  have  utilized  their 
chances  fn»m  opponunitio  placed  before  them.  Sumner,  again,  says  it 
well:  "Instead  oif  endeauKing  to  redistribute  the  acquisitions  which 
have  been  made  betu-een  the  existing  classes,  our  aim  should  be  to 
MKvnvr.  wmUifh,  mmd  txtmd  the  chanas. "' ' 

If,  as  a  natKm.  ^-e  tr\'  to  satisfS-  exen*  demand  put  forth  by  the 
social  planner)  who  eivieauK-  to  help  die  "poor,"  we'll  learn  diat  diere 
is  no  way  u>  meet  such  a  ravenous  appetite.  We  might  just  as  well  try 
to  bail  out  the  AtlantK  Ocean  \Mth  a  sic\c. 

At  ow>'  step  in  the  process  of  gcnemment,  we  should  examine  the 
effect  on  the  Forgotten  Man,  smcc  on  his  economic  and  political  healdi 
depends  the  saiet>'  and  secunt)'  of  our  nation. 

1.  RidunJ  OOwKv.  Pm^  Dettm  (Lmk- Brown  &  Co.,  Boston-Toronto,  1969), 
P.2SS. 


78  /  Robert Awmius 

2.  Ibid. 

3.  Leonard  E.  Read.  Metbrmhcm  m  fmdmm  (The  Foundaoon  fcir  Ronnc— k  Educa- 
tion, Inc.,  Irv'ington-on-Hudson,  Nc»-  York),  p.  22. 

4.  William  Graham  Sumner,  Whm  Smad  Oma  Om  m  £«*  CMv^  (The  Caxun 
Printers,  Ltd.,  Caldwell,  Idaho,  1978,  Eighrii  Caxno  Pnonn^  1978),  pp  125-126. 

5.  RusscU  Kiri,^  Pngrmm  jm  Cmurmum  {Heart  RcfDoy  Col,  CkKafo,  19S4), 
pp.  106-107. 

6.  Karl  Mannheim,  Fmdemi,  Pmrtr,  amd  Dtmtawbt  Plmmm^  {Chtard  Unwenvr 
Press,  New  York,  1950),  p  2«2. 

7.  Sumner,  op.  at.,  p.  30. 

8.  Sumner,  op.  at.,  p.  108. 

9.  Sumner,  op  at.,  p  109 

10.  Kirk,  op.  Of ,  p  120 

11.  Sumner,  «p.  or.,  pp.  144-145. 


The  Growth  of  Government  in  the  United  States 
by  Robert  Higgs 


Big  government— ur  heard  a  kx  about  it  when  Ronald  Reagan 
wai  fim  Kcking  the  PrcMdeno'.  Utcly  the  topic  has  attracted  less 
ittentMNi  fnwn  piiliticufu,  commentators,  and  scholars.  But  the  thing 
Itself  ha»  noc  dtiaffpcarrd  CXer  the  past  decade,  as  over  the  past  cen- 
tun*.  AmetRan  gmcmment  \u%  contmued  to  grow. 

Our  ruticin  W4%  ftiundcd  In*  men  who  believed  in  limited  govern- 
ment, cspcculh-  limited  central  ginemment.  They  were  not  anarchists; 
nor  did  they  cspciuie  Uukz  faire.  But  the)*  did  believe  diat  rulers  ought 
ic»  be  restrained  and  Jtcixmtable  to  the  pa)plc  they  govern.  If  the 
founden  cciuld  *ce  H-hai  has  happened  to  the  relation  between  the 
ctti/ms  and  the  ginrmment  in  the  United  States  during  the  past  two 
centuries,  t\ic\  lAtiuld  he  a{>|uUed 

The  tUK  and  Kt>pe  of  goxrmment  arc  important  for  many  reasons. 
By  virtue  uf  thev  taxing,  spendmg,  and  regulating,  governments  affect 
the  lUocation  of  ecimcwnK  resources,  the  distribution  of  wealth,  and 
the  rate  of  ectmtMnK  gnmih.  Gmemments  determine  the  very  nature 
of  our  ptUiiKal  economy,  the  charaaer  of  the  social  organization 
within  u-hah  u-e  may  lavk-fully  ctxiduct  our  affairs  and  pursue  our 
goals.  The  sue  and  scope  of  gmemment  determine — ^they  are,  so  to 
ipeak,  the  opposite  side  of— our  freedoms. 

All  but  dK  fos'  anarchists  among  us  recognize  diat  effective  liberty 
requires  wmtt  ginrmment,  if  only  to  defuie  and  protect  rights  to  life 
and  pn>perT\'  Boxmd  a  point,  howe\er,  bigger  government  begins  to 
cut  mn>  our  hbenies,  then  d>e  grouih  of  government  becomes  synony- 
mous ^ith  the  sacrifice  of  hbern-.  In  xhc  United  States,  we  entered  this 
stage  a  long  tune  ago. 


Robm  Hmb  n  the  Thnm«»  F  Gfccd  Profosor  of  Business  Administration  in  the 
Afcen  School  of  Bonm.  Sc«k  L'nnmin .  and  the  author  o(  Grists  and  Leviathan:  Cnttcal 
Efmdm  mitiOmmk^Ammam  Gm^rmmnu  (Orford  Umvers.ty  Press,  1987).  This  article 
hmA  OB  Pralbnr  H«p*  ohKnioom  as  the  Fathauer  Lecturer  at  the  University  of  Arizona 
on  Affi  2, 1990.  ^>|>c«cd  n  rbr  f  rvnMPi,  .\ugust  1990 

79 


80  /  Robert  H^ 

Charting  Government's  Growth 

When  we  say  that  government  has  gro^-n,  n-hat  do  ^r  mean? 
Government  is  not  a  single  thing,  measurable  along  a  scale  like  inches 
of  height  or  pounds  of  weight.  The  size  of  goNrmmem  can  change  in 
different  dimensions,  many  of  them  mcommensurabic. 

One  dimension  of  goNemment  is  rfK  burden  of  taxation.  In  the 
early  years  of  the  twentieth  centun-,  federal,  state,  and  local  gosrm- 
ments  took  in  re\'enues  equal  to  6  to  7  percent  of  the  gniss  national 
product  (GNP).  By  1950,  re^enues  had  risen  to  24  percent  of  GNP. 
Over  the  past  40  years  the  tax  proportxjn  has  dnftcd  trregularh'  up- 
ward, and  now  stands  at  about  32  percent  of  GNP 

Many  people  seem  to  think  that  taxes  urrr  art  in  the  1980t, 
perhaps  because  certain  politicians  v^txked  hard  to  create  the  impres- 
sion and  to  take  credit  for  it.  The  truth,  lxn%r>rr.  is  that  tnrrall — dut 
is,  considering  all  taxes  together — taxes  as  a  percentage  of  GNP  v^rre 
slighdy  higher  at  the  end  of  the  1980s  than  tho-  ^rrc  at  the  beginning 
of  the  decade.  The  tax  laws  were  changed  repeatedK*.  and  tome  tax 
rates  were  reduced,  most  notably  the  ttip  rate  of  the  federal  individual 
income  tax.  But  other  taxes  were  increased,  mo»t  no<abh  the  pa\-niU 
tax  rate  and  the  base  earnings  on  which  it  is  lesied  Akngether,  there 
has  been  no  tax  cut. 

Another  dimension  of  government — and  an  om  more  appmph' 
ate  index  of  its  fi.scal  burden  than  tax  menue* — is  gcnrmment  spend- 
ing. In  the  early  years  of  the  twentieth  centun.  federal,  state,  and  local 
governments  spent  an  arrKHint  equal  to  6  to  "  penent  ol  the  grma 
national  prcxiua.  By  19S0,  goxemmeni  (HJtlas^.  net  of  intrrgwsrfn- 
mental  grants,  had  risen  to  2 1  percent  <il"GNP  C>\rr  the  past  40  yean 
the  spending  proportion  his  dnhed  irregularh-  upvk-tftl,  and  now 
stands  at  about  34  percent  of  CiNP 

Many  people  seem  to  think  that  a  wvcalled  Reagan  Res^Wutwm  cut 
government  spending  m  the  1980%  In  fact,  muhing  «i«  the  kind  hap- 
pened. Government  spending  cimtinued  to  gnm  raptdh',  and  rrbtisr 
to  GNP  it  was  slightly  greater  at  the  end  ol  the  1980*  than  at  the 
beginning  of  the  decade  Of  course,  vwe  Umm  <if  spending  grew 
relatively  slovsly,  some  rclati\clv  rapidh.  but  tn-crall  gosrmmcnt 
spending  grew  faster  than  the  prnate  economy 

Still  another  index  of  the  size  of  gtnemmeni  u  gosrmmcnc  cm- 


The  Growth  of  Government  in  the  United  States  I  81 

ploymem.  Early  in  the  twentieth  ccntun'  federal,  state,  and  local  gov- 
emmcftts  employed  about  4  percent  of  die  civilian  labor  force.  By 
1950,  govcnvncm  employment  had  risen  to  about  10  percent.  During 
the  p«C  40  yean,  government  cmploN-mcnt  rose  and  fell:  it  reached  a 
peak  tn  the  mid- 1970*  at  neariy  16  percent,  dicn  fell  to  its  present  level 
« >f  nnjghty  1 4  perccm— that  u,  one  worker  in  c\'cry  seven.  (This  figure 
a<>c*n'i  include  the  two  milhon  members  of  die  armed  forces.) 

Although  the  empknment  rano  seems  at  first  glance  to  indicate  a 
recent  dechne  m  the  gcn-emment's  size,  one  should  not  jump  to  that 
concluMon.  Mam*  people  ifc-ho  are  classified  as  members  of  die  private 
Ubof  force  actiialh-  ^\n\k  Un  gcnemments  as  contraaors  (or  employees 
<»f  subcimtrxKia  <»f  cimtrjaDni  Bcrv^cen  1980  and  1987,  for  ex- 
ample. ahiHjf  J  miUion  jddioc mal  workers  found  jobs  in  the  defense 
indu»tne» — vinually  all  lA  them.  obxKHisly,  working  on  projects  set  in 
motion  and  fmanccd  b>'  the  gcn-emment.  Similar  changes  have  oc- 
curred ebewhere  as  gmrmmenu  have  "^privatized"  more  functions  by 
contracting  out  the  perfonnance  of  tasks  proiously  performed  by 
worfccn  on  the  regular  gt nrmment  payn>ll.  It  would  be  a  mistake  to 
suppose  thai  gm'cmmeni  has  shrunk  |ust  because  regular  government 
cniplovinent  hasn't  kepi  pate  wwh  the  gnmth  of  die  labor  force. 

Increaaed  Regulation 

Indexes  of  gmrmment  taxmg.  spending,  and  employing  tell  us 
Mimethmg  about  the  gnmth  of  goxemmcnt,  but  what  diey  tell  us  is 
far  fn>m  the  \*-ho4c  st»»o-  Kven  if  ginemmcnt  had  grown  in  none  of 
dwse  dinKiisKim.  it  might  ha\c  become  a  bigger  faaor  in  determining 
the  allocation  of  economic  resources,  the  distribution  of  wealdi,  and 
dK  ntc  of  economic  gruv^th.  It  could  have  done  so— and  in  faa  it  has 
done  to— b\*  meam  of  increased  regulation. 

I  refer  to  regubiKJn  m  its  bnwdest  sense,  including  die  legal  re- 
quiiwnents  espre^ed  m  stanites.  executive  orders,  and  judicial  deci- 
sioro  as  wxU  as  the  direanrs  of  regulator)'  agencies  such  as  die  Envi- 
ronmental PftxectKm  .\geno-  and  Uk  Securities  and  Exchange  Com- 
mission. The  sheh-es  are  saggmg  under  die  growing  weight  of  such 
authoritative  commands^ust  skim  dirough  die  Federal  Register  some 
time  if  \'ou  are  ^«Uing  to  nsk  becommg  dccpK'  depressed,  or,  for  an 
o-cn  m^  pcofoundh-  depressing  experience,  attempt  to  read  any  re- 


82  /  Robert  Hi£iifs 

cent  regulatory  statute,  say,  a  consumer  protection  law.  Tax  laws  abo 
are  de  facto  regulatory  statutes,  and  perhaps  the  most  incomprehensible 
of  all  legislation. 

In  regulation  we  come  face  to  foce  >*ith  the  \Tsib*c  hand  of  govern- 
ment at  work  imposing  largely  hidden  costs.  The  costs  arc  hidden  in 
part  because  they  arc  borne  by  private  parties  in  the  process  of  compli- 
ance—meeting  prescribed  standards,  avoiding  prohibited  actions,  and 
so  forth — and  spread  across  the  consuming  public  m  the  forai  of 
higher  prices  for  goods  and  services. 

But  that  cost,  great  as  it  is,  is  not  the  u-hole.  In  Urge  pan  the  costs 
of  an  economy  extensively  controlled  b\'  gtnrmment  requirements  and 
prohibitions  take  a  form  no  one  can  compute:  these  costs  ansc  ^-hen 
governments  distort  the  pnce  structure  so  that  mutualh'  bcneikial 
exchanges  are  never  made,  so  that  neu  products  norr  reach  the  mar- 
ket, so  that  new  competitors  no  er  gain  entrance  intt»  an  industrv',  » 
that  innovations  of  countless  different  sorts  arc  ne%rr  made,  there  be- 
ing no  prospea  of  profit  to  stimulate  thar  de\rk>pment  in  the  fint 
place. 

Americans,  despite  much  habitual  grumNing.  arc  pniud  of  their 
economy,  which  continues  to  rank  among  the  H\>rid*»  most  produc- 
tive. What  we  hasc  done,  uc  can  set  and  appreciate  But  u-hat  ht 
might  have  done,  the  miracles  uc  might  ha\c  ^^Tuught  had  %kx  been 
free  to  do  so,  wc  shall  ncNcr  kncm  In  this  sense,  the  oists  tjf  an  c\xx 
more  regulated  econom)  arc  truly  incakiibble 

But  what  of  the  recent  dercgulatKin  we  hasx  heard  «» much  aboucf 
Yes,  something  did  happen  along  those  lines  In  enerp-,  amvnunica- 
tions,  transportation,  and  certain  finaiKial  sen kts.  the  hea\"v  hand  of 
government  lightened  some>Ahat  m  the  late  1970s  and  earh-  I98(k. 
By  the  mid-1980s,  howc\er,  the  steam  had  gone  <Hit  of  the  deregub* 
tion  movement,  and  little  significant  pn>grcss  has  (Kcurred  durmg  the 
past  five  years. 

Meanwhile,  offsetting  increases  of  regubtKW  x^rre  taking  pbcc  in 
other  areas,  including  international  trade  and  finance,  emironmcnt, 
safety,  agriculture,  acrt^spacc,  insurance,  and  heahh  »er\iccs.  The 
multi-billion-dollar  bailout  of  the  farm  credit  s\-stcm  might  have  de- 
served prominent  mention  had  it  mx  been  completcK'  ofsmhadowed 
by  the  gargantuan  bailout  of  bankrupt  savings  and  kian  institutions. 
In  view  of  die  mind-boggling  magnitude,  it  is  remarkable  hos*-  littk 
political  debate  surrounded  this  transfer  ot— ss-ho  knows?  $300  bil- 


The  Growth  ofGcvcrrmunt  in  the  United  States  I  83 

lion?  $400  billion?— from  the  taxpayers  to  a  select  group  of  hard- 
lobbying  bcnc6dancs. 

Standing  back  and  funr>ing  aU  the  regulatory  changes,  plus  as 
wdl  at  minut,  dunng  the  pa*t  decade,  what  can  we  conclude?  I  defer 
to  die  ftidgmcnts  c>f  WiUum  NiUunen  and  Murray  Weidenbaum,  two 
(jfrfK  bc«  infcinned  itudcnti  of  the  subjea.  Niskanen  concludes  that 
**thc  net  amount  of  regulatKim  and  trade  restraints  has  increased"  since 
1980.  and  Wetdenbaum  M>n  rfiat  "the  federal  government,  objectively 
measured,  it  a  bigger  presence  in  the  American  economy  today  than 
when  Jimmy  C:aner  left  offke  "  So  much  for  deregulation. 

The  Rcaaoot  kx  the  Growth 

So,  gwamnem  u  mil  big.  and  gtnemment  is  still  growing  in  the 
United  Scaco.  Why?  To  aniMrr  thu  question,  we  need  to  understand 
lome  hiitory.  To  «an  ifctih,  >*t  need  to  find  out  whether  American 
government  wi»  evrr  nralh-  wnalJ  and,  if  it  was,  what  made  it  get 
bigger. 

You  may  recall  from  ^-our  ichcx)!  historv'  text  that  the  United  States 
govenwKni  m  the  mid-  and  latenineteeth  century  adhered  to  the 
doctrine  of  Uimcz  fiirc — the  doctnne  of  hands  off.  Well  that  lesson 
oonccab  more  than  it  re\raU.  In  faa,  in  important  respects  the  label 
of  laiucz  fairc  khouldn*!  be  applied  at  all.  At  no  time  did  the  United 
States  fulh-  xhie\T  the  «.onditi<>n  denoted  b>'  the  term  laissez  faire. 

From  about  the  1840*  to  the  1890s,  howexer,  die  United  States 
appcoximared  perhap*  as  ck>»eK'  as  any  large  society  ever  did  a  condi- 
tion we  might  call  the  minimal  state.  Certamly,  governments  didn't 
spend  or  tax  on  an\thmg  like  the  modem  scale— 5  percent  of  GNP 
would  probabh-  wentate  the  ratio.  (We  must  rely  on  imprecise  esti- 
mates, so  WT  can't  uy  for  sure.)  Not  manv  people  worked  eidier  di- 
rectly or  indirccth-  fbr  gin-emments,  certamh'  no  more  than  a  few 
percent  of  the  labor  ftxce  c\xt\  at  the  end  of  the  nineteenth  century. 
By  these  familiar  indexes  of  the  size  of  goNcmment,  the  nineteendi- 
centUA-  govemmem  appears  to  qualih*  as  a  minimal  state. 

And  \'ct,  to  sav  dut  go>emment  u-as  much  smaller  in  diese  dimen- 
sions is  not  to  $av  dut  tfK  gmemments  of  the  nineteenth  century  were 
unimportant  or 'dut  American-s  were  reluaant  to  politicize  essential 
ccononiK  oucstKxu.  ^ 

Most  important,  gmrmments  established  die  legal  framework  of 


84  /  Robert  H^ 

property  rights  within  which  the  price  system  could  operate  to  allocate 
resources.  As  economic  conditions  changed,  gcnrmments  molded  the 
law  to  new  conditions  and  allowed  economic  gro>*-th  to  continue  rela- 
tively unimpeded  by  obsolete  legal  restraints.  Innovation  of  the  doc- 
trine of  eminent  domain,  for  example,  played  a  crucial  role  in  pcnnit- 
ting  construction  of  the  canals  and  railroads  that  did  so  much  to  Ifadli- 
tate  economic  de\'elopment. 

In  addition,  the  central  government  episodicalh'  committed  the 
nation  to  war — at  times  to  wars  of  conquest  such  as  the  Mexican  War 
that  added  vast  terri tones  to  the  ctnintrv's  expanse.  Govxmments  dis- 
posed of  the  public  domam,  transfemng  the  bulk  of  it,  b\  sale  and 
giveaway,  into  private  ovvnership.  (jcnrmmcnts  collected  vanous 
taxes,  including  the  tanff  that  was  empkn-ed  to  cam*  tnit  ^"hat  nowa- 
days would  be  called  an  "industnal  polK>-."  Govrmmenti  tmrstcd  in 
and  regulated  banks  and  transport  $>-stcms,  thc\  supplied  cducatKm; 
and  at  the  local  level  thev  conduacd  the  ctHintleu  intenmtKins  sub- 
sumed under  the  hcadmg  of  **ihe  polne  pimrrs,"  many  of  ^-hich 
would  be  found  intolerable  m  our  time  Beh>ce  the  CUvil  War,  govrm- 
ments  sustained  the  lastitution  of  slavrr>\  a  matter  of  momentous 
economic  consequence  as  well  xv  an  arrangement  jo  vnilenth  inctim- 
patible  with  higher  Amencan  ideals  that  todav  no  ink  vkxiuld  defend 
it.  In  sum,  governments  m  the  nineteenth  ventun,  thou|;h  in  moit 
respeas  far  more  limited  than  governments  today,  w^rre  hardly 
nificant. 

In  certain  respects,  nineteenth -centun-  conditions  made  it 
for  governments  to  be  much  vmaller  than  thev  are  today  and  still  vMeU 
great  power  over  the  ect>nomy  Nineteenth -centurv  ginrmments 
didn't  spend  a  lot  of  monev  to  enrnh  politKalh  intluential  panies  Rut 
they  enforced  slavcn-,  a  momenu>us  nutter  all  h>  itself,  ihcy  dispoecd 
of  the  public  domain  (federal  railnud  vuKsidies  akme  transferred  an 
area  roughly  twice  the  size  of  C'x)k>rado),  and  thev  managtcd  pnipcrty 
rights  in  fundamentally  important  wavs  One  reaMWi  mixiem  ginrm- 
ments  do  so  much  more  by  means  ot  taxes,  sutnidies,  and  pecunian- 
transfers  is  that  they  lack  some  of  the  powrrful  means  available  to  their 
predecessors — millions  of  workers  to  hokJ  in  thrall,  a  continent  to  give 
away. 

Having  acknowledged  that  laissez  faire  nesrr  was  the  case,  and 
that  even  at  its  smallest,  Amencan  government  engaged  m  cxtremeh 
important  activities,  we  must  recognize  dut  govrmments  still  might 


The  Growth  of  Government  in  the  United  States  I  85 

have  been  much  bigger  than  \hcy  wett  during  the  nineteenth  century. 
One  way  to  confirm  thu  potential  ts  to  notice  that,  occasionally,  gov- 
cmmem  did  get  much  bigger.  I>unng  the  CivU  War  the  U.S.  govern- 
ment not  cjnh'  mcTca»cd  it*  laxmg  and  spending  hugely;  it  also  printed 
^t)d  %pcnt  fut  paper  nuino-.  cncmxlc  a  vanet>'  of  civil  rights,  including 
the  WT\x  of  habca%  corpm,  and  conscripted  men  to  serve  in  die  army. 
After  the  war.  himr\'er.  the  go\*emmcnt  shrank— not  quite  to  its  pre- 
war dimcnMom,  but  back  to  a  more  n-adinonal  scope  nonedieless. 

At  the  end  of  the  nmeteenth  ccnrun',  James  Bryce,  a  perspicacious 
Britiih  commentator,  noted  that  America's  pcx)r,  long  invested  with 
political  nglit*.  might  ca%ily  ha\r  turned  on  the  rich  and  "dirown  the 
whole  burden  c»f  (aJutMm  upon  them,  and  disregarded  in  die  supposed 
interc»t  <if  the  nuMo  n-hai  arc  called  die  nghts  of  property."  But, 
Bryce  nxnt  on  to  u>\  "not  onh'  has  rfiis  n<H  been  attempted— it  has 
been  icarody  even  suggeued  and  it  excites  no  serious  apprehen- 
lion  •  There  wt^  he  ot^ervrd.  '^Khing  in  die  machinery  of  govem- 
mcnt  that  could  do  more  than  delay  it  for  a  time,  did  the  masses  desire 
it."  What  promted  such  %u  cc|>mg  redistribution  was,  in  Bryce's  judg- 
ment (and  nunc),  the  pro  ailing  idcolog)-.  In  Brace's  words,  "equality, 
open  aimpctition.  a  fair  field  to  c\*cr\'bt)dy,  ocn'  stimulus  to  industry, 
and  oxxy  iccunt>'  for  it»  fniits.  these  (the  Americans]  hold  to  be  the 
tdf-oideni  pnnapio of  natxmal  prospcnt)." 

A  Revohition  in  Ideology 

Ob^ioush'.  lomeH-herc  along  the  luie,  the  dominant  ideology  of 
the  United  States  has  undergone  a  complae  roolution.  I  exaggerate 
only  a  linle  if  I  say  that  mm  most  .Amcncans  belie\'e  that  governments 
tnay  legitunatch*  gi\r  to  people  tir  take  awa\'  from  them  virtually  any- 
diing,  any  time,  any  place— checked  only  by  die  license  conveyed  by 
go\-cmmcnt  offKials*  ha\ing  been  elected  m  die  Constitutionally  sanc- 
tioned manner.  Where  once  Amencans  vie\ved  die  powers  of  govern- 
ment as  pcopcHy  lunited  and  the  nghts  of  individuals  as  primary  and 
naniral,  Amencans  nou-  \tcu-  the  powen  of  govemment  as  properly 
unlimited  and  the  nghts  of  uidixiduals  as  subordinate  to  die  pursuit 
of  any  declared  "pubbc  poiic>-."  How  did  so  many  activities  once 
vicH-cd  as  "noc  the  proper  business  of  govemment"  come  to  be  under- 
taken b>'  gov-cmments  and  accepted  as  legitimate? 

I  ha\T  no  short,  dcfiniiiN-c  ans\*  er.  The  process  by  which  die  domi- 


86  /  Robert  Hi^ 

nant  ideology  of  the  American  pcopk  changed  o\'er  the  past  ccntiuy 
is  surely  complex,  and  no  one  understands  it  (ulh*.  It  is  possible  how- 
ever, to  identify  certain  critical  aspects  of  the  process. 

Ideologies  are,  to  a  large  degree,  rfK  produrt  of  people's  social 
experience.  Aldiough  polemicists  and  propagandists  arc  iiwxyi  « 
work,  they  don't  work  in  a  vacuum.  Ideas  appeal  to  the  public  more 
or  less,  depending  on  how  the>-  seem  to  fit  the  bcoad  contours  of 
reality.  When  great  e\ents  happen,  ideologues  ah»-a>-s  stand  read\'  to 
interpret  in  a  preconceived  u  ay  u-hat  has  happened,  but  agam  the>-  are 
constrained  by  undeniable  facts.  It  just  u-asn't  powiNe,  Kx  example, 
to  interpret  the  Great  Depression  as  a  triumph  of  capitalism. 

With  the  economic  transformation  of  the  United  Scares  in  the  Uic 
nineteenth  centurv',  a  process  that  witnessed  rapid  urbanization  and 
the  growth  of  big  business  as  urll  as  manv  other  itnking  dc%rlof>- 
ments,  collcctivist  \ie\vs  began  ti>  gam  adherents  here,  as  the>-  did 
throughout  the  Western  world.  The  ideologKal  shift  became  quite 
striking  during  the  Progressive  Era  at  the  beginning  of  the  ti»mticth 
century.  It  was  not  unconneaed  uith  such  amscquential  msntutional 
changes  as  the  Income  Tax  .\mcndmcnt  ti>  the  CxmstitutMm  and  the 
creation  of  the  Federal  Reserve  S\'stem  So.  clearh  a  tendenc\  existed, 
rooted  in  the  changing  charaaer  t>f  .\meTKan  «Kiet>-  and  cownwrn'  and 
related  developments  abroad,  mtmng  .\merKan  opuucm  leaden  awiy 
from  support  for  individualism  and  private  propem  rights  and  toward 
support  for  collectivism  and  n»rc  aai>e  ginTmment  imxihTment  in 
economic  affairs.  By  it.scif  this  tendcno  Minikl  have  helped  to  pnwnotc 
the  growth  of  government  But  the  %ecuiar  tendencv  ol  idet>log\'  was 
hardly  the  only  aspect  of  ideological  change  to  affcrt  our  polibcal 
economy  in  the  rv\cntieth  ccnrun . 


National  Crises  Contribute  to  Shifting  Vi 


Even  more  important,  in  mv  \^c^^\  wi%  the  %ucccssion  of  national 
emergencies  that  struck  the  countrv  bet>*een  1914  and  1945,  and  to  a 
lesser  degree  dunng  the  postwar  era  as  htU  CJcarb'  the  worid  wan 
and  die  Great  Depression  had  the  greatest  impaa,  ahhough  the  period 
from  the  mid-1960s  to  the  mid-1970s  ihc)  witnessed  many  significanc 
events.  How  did  these  cnscs  contribute  u^  shifting  AmcrKan  views 
about  the  proper  role  of  government  m  economic  hfe? 

In  brief,  the  process  worked  as  foUows  First,  each  criia  gave  riae 


Tbt  Growth  ofGavemment  in  the  United  States  I  87 

to  public  damor  that  the  gcn-cmmcnt  "do  something."  In  the  post- 
I»rogrcMive  era,  no  govcnunem  wished,  nor  could  rulers  expect  to 
prcHper  politically  if  they  choie,  to  keep  their  hands  off  the  economy 
vvhcn  a  probkin  of  ovrmdmg  puWK  concern  had  arisen.  So,  whether 
to  prcMccutc  a  war  or  to  alloute  a  depression  or  to  suppress  a  great 
labor  upheaval,  the  gmrnvnent  adopted  interventionist  policies  to 
deal  wtdi  the  crttift. 

Any  government  policy  entails  costs.  The  greater  the  costs,  the  less 
willing  the  public  u  to  suppon  the  polic>'.  Hence  governments  face  a 
lurd  chcnte:  on  the  one  hand  the>'  cannot  just  stand  by,  because  the 
(Hjblk  demandt  that  thc\'  act;  on  the  other  hand,  any  policy  they  adopt 
I*  tubjca  to  the  bw  cif  demand,  u-hich  means  that,  in  the  extreme,  the 
public  will  rcfca  a  government  that  imposes  unbearably  large  sacrifices 
on  the  cicuouy.  How  can  the  gcn-emment  get  off  die  horns  of  this 
dilemma? 

The  shtJft  amiATT  is:  adopt  polwies  that  obscure  the  costs  as  much 
as  pottiNc  ()nc  way  to  do  m)  u  tt)  avoid  policies  that  entail  pecuniary 
(and  therefore  ca%ilv  counted,  aggregated,  and  publicized)  costs;  in- 
stead, adopt  command- and  vontn)!  policies  whose  costs  tend  to  be 
hidden  or  extremeh*  dtflkuh  to  compute  and  aggregate. 

For  example,  if  an  outnght  gift  of  public  funds  is  made  to  farmers, 
cveiyoiic  can  see  htcm-  much  the  goxcmment  is  taking  fi-om  taxpayers 
in  order  tf>  gi\r  tt»  farmen  But  if  the  government  adopts  crop  restric- 
tion programs,  the  costs  arc  spread  acToss  all  those,  including  foreign- 
en,  who  purchase  the  farm  produrts  whose  supplies  have  been  re- 
sokted.  Who  can  uy  hoifc*  great  the  transfer  is?  Indeed,  many  people 
will  never  appreciate  the  rrdistnbutive  aspea  of  die  program,  as  they 
would  if  an  explicit  farmer- berKfit  tax  had  been  cnaaed  and  added, 
say,  as  a  separate  item  on  the  income  tax  return. 

Odter  prominent  example*  include  the  conscription  of  men  into 
the  aimed  fiirces.  the  supprcMitxi  or  restriction  of  certain  industries 
or  products  during  %k-artime,  the  establishment  of  priorities  for  the 
supply  of  sekcted  goods  and  services,  die  rationing  of  consumer 
goods,  and  a  whole  array  o(  price,  wage,  and  rent  controls  diat  distort 
the  structure  of  prices  and  alter  the  allocation  of  resources,  benefiting 
some  while  placing  burdens  on  odiers.  The  common  aspect  of  all  such 
policies  w  that  their  costs  are  more  or  less  hidden,  and  hence  the 
political  reaction  to  them  is  muted. 

When  die  go\-cmment  adopted  cost-obscuring  poUcies  durmg  the 


88  /  Robert  H^ 

great  national  emergencies,  officials  also  undertook  massive  propa- 
ganda efforts  to  justif)'  their  actions.  No  cioubt  many  citizens  believed 
what  their  leaders  told  them  about  the  Nirtucs  of  the  policies.  In  addi- 
tion, during  each  crisis  the  administrators  of  the  controb  finessed  them 
to  eliminate  some  of  their  most  objectionable  aspects,  and  people  roocc 
readily  swallowed  the  mcdicme  u-hcn  its  bittcmcss  wa  diminished. 
All  the  while,  people  tried  to  make  the  best  of  a  bad  situation,  and 
many  discovered  that  e\  en  a  controlled  econoou'  oflficn  certain  a\mues 
to  personal  success,  cither  uithm  the  govrmment  itself  or  within  the 
favored  seaors  of  the  remaining  **pnvate''  economy  People  adapt. 

But  here  is  the  crux:  thc%'  adapt  ntx  |ust  thew  actions  but  e\mtualh' 
their  thinking,  too.  In  William  Graham  Sumner's  tellmg  phrase,  *it  b 
not  possible  to  experiment  with  a  societ>  and  |ust  drop  the  expenmcnt 
whenever  we  choose.  The  experiment  enters  inn>  the  life  of  the  tocicty 
and  never  can  be  got  out  again  "  People  vk-hi)  had  expencnced  the 
abrupdy  enlarged  government  pn>gram»  ol  the  natMmal  emerf^cncy 
periods  came  awaN'  from  those  expencntes  %Mth  an  altered  sicw  of  dK 
benefits  and  costs,  virtues  and  vices,  ot  an  expanded  go»tiiWKitt  prc»> 
ence  in  American  economic  life  Funher,  in  each  case,  committed  col* 
leaivists  tcx)k  advantage  of  the  ocnt  to  hammer  hivne  the  pt^nt  that 
what  the  goNcmmcni  had  done,  apparently  %Mih  success,  dunng  the 
crisis  demonstrated  the  great  piKential  h*c  good  that  lay  in  expanded 
government  action  c\cn  during  nomial  tunes  To  mam-  people,  the 
argument  seemed  to  make  seme.  Alter  all,  ht  had  %fcxin  the  war»  wr 
had  got  out  of  the  depression 

In  rctrospca  and  u  ith  carctiil  stud> ,  one  can  *ce  that  people  httc 
committing  the  fallaa  oipatt  Itoc,  nifofrofirr  hoc  In  many  cases,  if  not 
in  all,  the  genuine  benefits  accruing  to  the  natMm  as  a  ^itolc— ocapc 
from  the  depression,  defeat  ot  the  Nazi.%— <ame  fiwth  in  spite  of,  not 
because  of,  the  government's  impimtMin  of  t^xeping  awitnib.  But, 
again,  people  in  general  didn't  rca«.h  this  conclusion  Rather,  they 
tended  to  accept  the  ct)llcaiMst  claims  or,  more  c>-nKalh ,  ti»  apprecute 
that  even  if  the  countn  at  large  might  suffer,  tho  thenuchrs  ntm  had 
a  grip  on  a  personally  rewarding  pievc  of  the  statist  pnigram 

By  the  end  of  Wtjrld  War  II  the  I'nited  States  had  altered  its 
effective  Constitution  radically  from  the  regime  m  place  at  the  begin- 
ning of  die  t^^cntleth  centun  Ntm  \  imially  any  gosemment  action 
whatever  in  relation  to  the  economy  coukl  be  taken,  *t)  kmg  as  an 
electoral  majorit)-  could  be  obtained  b>-  its  initiators.  In  a  yduaak 


The  Gfvwth  of  Government  in  the  United  States  I  89 

caxwoiy  to  corrupted  by  interest-group  poUtics,  an  electoral  majority 
wai  iodf  iomcthmg  chat  could  be  bought,  indirectly  if  not  directly. 
There  remained  no  fundamental  check  on  the  growth  of  government— 
nodling  to  perform  the  rr%trainmg  functions  that  the  old  Constitution 
and  the  dommant  limited  gjncmmcni  ideology-  had  performed  in  the 
nineteemh  centurv  PoltiKum  nou*  could  offer  to  sell  virtually  any 
cc<>nom»c  pohcy  whaiorr.  no  maner  how  few  the  gainers  and  how 
many  the  loierft.  Of  coune,  such  conditK)m  were  tailor-made  to  bring 
forth  ipeciaJ  mtcrem  pref>arcd  to  buy  the  policies  from  die  politician- 
^upp|jen. 

In  fhe  urher  of  largeh  cimtradKion-  policies,  deadweight  costs 
HKHmted  enormouUy  Mcirc  and  m«>rc  resources  were  devoted  simply 
to  \%-(»rimg  fi»r  <ir  agam%(  CLimcwnic  policies  and  to  circumventing  or 
jdaptmg  tc)  the  proliferatmg  rrquircmcnts  imposed  by  government. 
Not  turprumgK'.  more  and  more  latent  mtcrcst  groups  saw  die  need 
t«)  organux  fiir  political  acTKm  By  the  1970s  die  entire  economy  had 
Ixxn  thoniughh'  politKued,  »o  that  ocn  the  most  intimate  matters, 
such  a»  bab\-%irtmg  *er>  ko  or  nur&ing  homes  or  the  religious  calendars 
of  emplo\Te%,  had  iKvtimr  Mjb)cti  to  goxcmmcnt  intervention.  A  few 
\xu%  ago,  Cirace  (UMnmu%Kin  mxcstigators  discovered  that  the  federal 
go^rmmeni  aJonc  wa»  conduamg  963  separate  stxrial  programs,  many 
of  than  designated  •entiikmento."  Amcnca's  political  process  has  be- 
come the  IcKU*  of  orgam/ed  predatMHi  on  a  massive  scale. 

The  gnmih  of  ginemment  cann<K  contmuc  forever.  An  economy 
totalh-  donunated  b\  ginmimcnt  isn't  viable — ocn  the  Communists 
now  recognue  ihu  HventualJy  the  go\cmmcnt  will  eat  up  so  much 
of  the  private  sector  that  it  ^*iU  de$m)y  die  means  of  its  own  suste- 
nance. At  Kimc  ptHnt  the  balance  of  political  power  will  swing  away 
fixim  support  for  bigger  gcncmmcnt  in  an  effort  to  revive  die  dying 
goo«e  that  b>-»  the  g«4dcn  eggs.  If  such  reaction  can  occur  in  die  Soviet 
Union  and  Kastem  Hurxipc.  it  ccnainly  can  cxcur  here. 

But  that  gkvTKHis  day.  m  my  judgment,  is  not  yet  in  sight.  Despite 
x^  pletht>ra  of  burdem  laid  on  dK  .\mcncan  people,  die  private  econ- 
txny  retauu  suffiacni  \itabt>-  to  limp  along  at  a  modest  pace,  albeit  far 
sloH-cr  dun  a  truh-  free  ecomxny  could  progress.  And  die  American 
people  continue  to  demand,  or'  at  least  to  tolerate,  a  multitude  of 
government  programs  promising  solutions  to  almost  every  conceivable 
pn>blem.  So  long  as  dK  dtxninant  ideolog>'  lends  support  to  coUectiv- 
ist  measures  and  acquiesces  m  a  polidcal  s>'stem  dominated  by  special- 


90  /  Robert  H^ 

interest  deals,  no  far-reaching  reform  of  our  pobtical  economy  is  pos- 
sible. So,  as  we  look  into  the  future  of  the  United  States  in  1990,  as 
far  as  the  eye  can  see,  we  behold  onh'  big  go\-cnuncnt  and  more  big 
government. 


m.  REGULATING  PRODUCTION 


Incentives  and  Income  Taxes 
by  RusscU  Shannon 


Hcrc'»  an  inmguing  cippciminjt)-:  A  b(X)k  dub  now  offers  two  free 
boob  to  any  member  Mibminmg  the  name  of  a  friend  who  wants  to 
join.  But  ifyim  uibmtf  a  utomt  name.  \tnj  will  ^ct  five  books! 

Why  <ioe»  the  club  ciffcf  mcwr  than  tv^icc  as  much  "pay"  for  just 
twice  a»  muth  pn»ilu<,t>  I»  the  ciffer  obhgaton*  or  just  odd?  Surpris- 
ingly encHJgJi.  II  g»ic»  a  kmg  way  ttmard  explaining  the  movement  to 
reduce  mctime  tise». 

Findmg  a  icojnd  fhend  to  finn  the  club  could  be  considerably 
more  difficuh  than  findmg  the  fint  You  may  have  to  travel  further, 
or  talk  kmger  t«>  ctmvmce  hmi  That  makes  the  larger  reward  crucial. 

But  what  if  eitra  cffitn  httc  unncvciLun?  WTiat  if  you  could  con- 
vince tut>  fnenth  cif  the  bcncfit%  of  membership  simply  by  making  a 
15*mmute  phtme  call  tt)  each  cme*  \%  it  turns  out,  e\en  then  an  addi- 
tional inccnti\T  ma>-  he  needed 

Eumplo  cif  thti  faci  penade  our  economic  lives.  The  need  to 
incrtaic  tfKcmi\v>  rrgularh  appears  whcno  cr  companies  want  em- 
ployee fiir  cnxTtinK  %kx>fi.  usually  thc>  must  pay  workers  time-and-a- 
half,  e\m  though  the  duties  m\x>l\Td  dt)  run  differ  fn)m  the  ordinary 
routine.  Similarly,  vk-hen  \xki  buy  a  btjx  of  cereal  in  the  supermarket, 
you  may  rccasx  akmg  with  it  a  coupon  worth  ten  cents  on  a  second 
box. 

Dh-crx  though  these  examples  ma\-  seem,  the)-  all  have  one  diing 
in  common.  Thc>-  all  illustrate  the  fundamental  economic  principle  of 
"diminishing  mirgmal  returns "  Sometimes,  the  same  principle  is 
called  the  law  ol"  **iiKrrasing  costs." 

Understanding  of  this  pnnapk  dates  back  at  least  two  centuries. 
In  1789  Thomas  Makhus  pubhshcd  his  dioughts  on  population.  ^  Us- 
ing data  provided  b>-  Bcnjamm  Franklin  and  others,  Malthus  predicted 
that  population  growth  omtuall>-  would  outstrip  die  food  supply. 

RiMdl  Shmmt  D  a  pctifawr  m  the  Ilepimncnt  of  Eamomics,  CoUcgc  of  Industrial 
Mnatemcm  md  Tonic  Samcr,  Otmwn  Unnmin  This  article  U  reprinted  from  the 
November  1981  Mur  of  TV  FnnM* 


93 


94  /  Russell  Shannon 

That  prediction  is  one  of  the  reasons  economics  c\m  today  is 
called  the  "dismal"  science.  In  current  discussions  of  famine  in  Third 
World  countries,  references  to  the  "Makhusian  specter*  arc  not  un- 
usual. In  Aldous  Huxle^-'s  famous  no\el  Brmvt  Sew  Wmid,  women 
wear  "Malthusian  belts"  designed  to  procnt  conception  and  control 
population  grouth.^  But  what  has  Malthus  to  do  uith  book  dubs  and 
income  taxes? 

If  you  take  time  to  fuid  a  friend  to  join  a  book  dub,  you  will  be 
confronted  by  a  cost.  The  cost  isn't  nccessarih'  money— unless  you 
actually  take  time  off  from  your  job.  But  >xhi  vmU  ha\T  to  p\x  up 
working  in  your  yard,  playing  a  game  of  bndge,  or  watching  T\'. 

Such  a  sacrifice  might  be  fairly  easy  to  make  \%-hile  finding  the  first 
friend.  But  what  about  the  second?  Gi\ing  up  one  T\'  piugiim  or  half 
an  hour  of  your  yard  work  may  not  mean  much  But  the  second  half 
hour  will  surely  mean  more;  that  is.  the  com  increases  So  \t)u  will 
need  a  larger  reward  to  compcmaie  The  people  who  run  the  book 
club  obviously  know  this,  and  the>  ha\T  xted  accordrnghv 

By  the  same  token  the  company  that  iclb  cereal  knows  that  a 
second  box  of  their  pnxlua  will  be  Icm  atrractnr  to  mott  people  than 
the  first.  The  cost — or  opp^>^Tunlt^  forgone — will  be  larger  Thus,  by 
making  them  a  better  offer  on  the  second  box,  the  company  may  cmkc 
people  to  buy  more. 

Progressive  Rates  of  Tax 

AH  of  this  may  seem  strangely  rcmt»te  fnwn  the  matter  of  tiKome 
taxes,  but  in  fact  it  is  n<K  Both  our  federal  and  our  %tate  maime  taxes 
arc  "progressive."  Hut  means  that,  as  people  earn  larger  inavnes,  they 
move  into  higher  income  tax  brackets  So  mi»rc  piv  means  they  end 
up  sending  a  larger  share  of  their  income  to  the  gincmmcnt 

Several  arguments  support  the  pn>greMi\-e  »>-»tem,  not  all  of  them 
objectionable.  Some  people,  of  courv,  urged  on  bs  cn\y,  mereh  like 
the  idea  of  tr>'ing  to  "soak  the  nch  "  Others.  howT\rr,  talk  in  terms  of 
people's  ability'  to  pay;  the\  maintain  that  vkrakhier  indniduab  can 
surely  afford  to  shoulder  a  larger  share  of  the  tax  burden.  But  what 
effea  do  rising  tax  rates  has  e  (xi  the  incenti\T  tn  work? 

Clearly,  the  progre.vsise  rates  generate  a  perverse  response.  Con- 
sider, for  example,  a  married  person  whose  empknrr  offers  him  die 
opportunit>'  to  do  more  work  and  earn  more  income.  Say  dm  on- 


Incaitiva  and  Income  Taxes  I  95 

ployte,  in  exchange  iar  ten  percent  more  work,  could  get  15  percent 
more  pay.  BaKd  on  n-hat  u-c  have  just  discussed  about  human  inclina- 
tkxtt,  we  would  rcasonabh'  cxpca  the  employer  to  make  diat  kind  of 
oflcr. 

But  the  incmic  in  pay  ma>'  ihift  the  employee  into  a  higher  in- 
come tax  bradtff.  If  hu  taauWe  income  were  about  $20,000,  he  could, 
as  a  result  of  the  pay  tncreaAe  (and  based  on  1980  federal  income  tax 
mci),  vauh  fnim  pa>'ing  M  percent  on  marginal  income  to  paying  32 
patent.  Thm  the  intcnii\T  n>  u-ork  may  be  so  diminished  that  it  will 
no  lon^  be  attractive. 

For  lomenrK  in  an  e%m  higher  income  tax  bracket,  die  adverse 
dka.  is  iugmcmrd  Thm.  to  Koire  the  employee's  services,  the  em- 
ployer would  he  forced  to  make  an  e\en  better  offer.  Of  course,  the  job 
might  he  offered  rt>  MMncone  eUe  but  he  might  lack  the  competence. 
Thu»  the  fob  will  go  unfilled  and  the  work  undone,  and  society  will 
be  the  poorer  (or  it 

In  reccm  yearu.  Cxmgrtu  hat  graciously  refrained  from  raising  our 
iiKDcne  tax  rates.  Howoxr.  Scxial  Secunt>'  taxes  have  risen  dramati- 
cally. Sunultancoush-,  inflatym,  prompted  largely  by  the  rapid  growth 
of  gcn-emnKni  spending,  ha»  ihinrd  more  and  more  Americans  into 
higher  aiul  higher  uxcmK  (ai  brackets. 

Thm  there  u  le%»  and  lc%%  incentive  to  cam  incomes  that  are  tax- 
able. So  unless  ux  like  more  leuurc.  we  arc  increasingly  inclined  to 
enter  the  to<ilkd  "underground  economy."^ 

CX  coune,  that  doesn't  mean  people  are  actually  burrowing  be- 
neath the  soil— <ir  kioking  for  ihI.  Instead,  the)-  engage  in  barter  or  else 
make  pa>Tnents  in  cash,  leekmg  ihercb\'  to  escape  die  ever  watchful 
e)Tsof  the  Internal  Romuc  Sen  ICC. 

In  one  case,  Um  example,  a  u-orker  presented  a  bill  for  some  repair 
work  to  a  homeoi*-ner  fi>r  $30.  When  the  owner  started  to  write  out 
a  check,  the  ^-orker  demurred  and  insisted  mstcad  on  receiving  cash. 
But  ^-hen  dK  o>*-ner  ductnrred  he  had  only  $25  in  his  wallet,  the 
worker  accepted  it,  gladh'  sacnficmg  the  $5  radier  dian  pay  taxes  on 
$30! 

The  Underground  Econooiy 

The  phenomenal  growth  of  such  activities  has  become  so  substan- 
tial that,  by  some  estimates,  our  ^underground"  activity  may  now  be 


96  /  Russell  Shannon 

the  equivalent  of  20  or  even  30  percent  of  Gross  National  Produa. 
Ccrtaiily,  this  production  is,  in  some  sense,  less  <icsirab4e  than  it  uxxikl 
be  if  everything  were  out  in  the  open.  Besides  that,  our  govennnent  is 
losing  tax  revenue  which  might  otherwise  be  used  to  build  sdioob  or 
shore  up  our  national  defense. 

If  tax  rates  fall,  American  vk-orkcrs  uill  have  greater  incefiti>rs  to 
produce  goods  and  ser\'ice$  for  Amencan  consumers.  Some  people 
who  are  already  working  uill  lea\T  the  underground  for  the  more 
efficient  open  economy.  Thus,  mcome  subyea  to  taxation  ^ill  pow. 

In  fact,  it's  e\'en  possible  that,  though  income  tax  mte  fdl,  the 
increase  in  taxable  economic  acti\it>-  Mkill  be  so  great  that  tax  rmmmo 
will  rise.  That  is  the  thesis  underhing  the  nou  famous  LaiTer  curve 
originated  by  the  economist  An  Laffcr*  The  impbcation  ts  that,  while 
tax  rate  cuts  will  directh'  benefit  indrviduals,  in  the  end  society  as  a 
whole  will  prosper. 

At  first  glance,  you  might  have  thought  the  book  chib*t  oflfcr  was 
either  totally  absurd  or  gn»siy  irreloant  But  tt*»  noc.  It  bespeaks  a 
universal  truth  which  underlies  much  of  the  currrnt  ^supph-wde"  eco- 
nomics. When  you  understand  that  addjtxmal  cfkm  oltcn  rrquires 
increasing  rewards,  then,  akxig  uith  manv  others,  you  may  be  ca^ 
to  ride  the  tide  of  enthusiasm  rismg  relentlessly  bchmd  the  tax  reduc- 
tion program. 

1.  T.  R.  Mahhus,  Am  Earn  m  PtftUtmm  (New  Xtmk  L  P  Dwrn  mi  Cmk  IfM) 
See  Vol.  I,  Book  l.c:hjptcT  l.pp  5-11 

2.  Aklous  Huxln .  Brmwt  Sew  Wmid  i  Nr»  Ycvt  Ammb  BocAa,  I«S2K  p  M 

3.  See  Alfred  L  Mabbrr.  fr  .  Indcritftmaid  Fxtwivm  Omm%  mI  Gtom,*  W^Smm 
Journal,  October  20.  1980.  p  I.  R.ihen  M  Wntwrj.  'Smimw^  *r  knKk."  Bmm^ 
Februan'9,  1981.  p  " 

4.  See  Edward  Mead<mA.  "I^rtcrt  t  unr  ISi.k«  Ip  Sf«nl*  finaw.  F<«ira«>  2J. 
1981,  pp.  85-88;  "A  Guide  to  l'nder«and«nt  the  St^^^v  S.im.*  >ii  i  i  Wmk  Dcnsnbcr 
22,  1980,  pp.  76-78,  Rin^Ufxi  Evam  and  Rotwn  Ntw^  ->%1m  "Sa^  S«k  \jxmumma' 
Means  to  You,"  Rtmdtr^  I^ymt.  |une  I9«l.  pp  I  IS- 122.  "Ldfc»  A  teaiK  it^^  oT 
Ideas,"  Newfwftk,  June  29.  1981.  pp  11.13.  The  Ijikt  km  Iii^mii)  Lm>t'  m  Kmhrnd 
B.  McKenzie  and  Ckxdon  Tullock,  Th*  Sew  Wmid  tfltmmmm  lifkmmmm  mm  tk»  Hmmm 
£«?>mm«  (Homewwd,  lU    Richard  D  Irwui.  19ai  >.  j)^  2i7>24l 


Educational  Vouchers:  The  Double  Tax 
by  Gary  North 

Aii  StM4  idmmwm  umim  ofiyrumio  machine  far  polarizing  the 
ptftdmmmd;  fm  tunun^  uU  holdmg  its  lints  of  farce  in  the 
dufOtm  Mffcud  tp  be  mart  efftctivefar  State  purposes. 

— Hcnn-  Adanu,  The  Education  of  Henry  Adam 

We  ifc  cnntinuilh'  hiimtunicd  by  ncwspajjcr  and  magazine  head- 
line* tnffimung  ui  <if  rhc  cimtinumg  "crisis  in  education,"  which  actu- 
ally u  a  emu  m  gcnrnvnent -operated  education.  Virtually  all  the  avail- 
able data  reveal  thai  che  cruu  u  accelerating.  Inner-city  schools  have 
hecome  ticeral  KanlefKldk  beruTen  rival  gangs,  between  teachers  and 
%t\Kknt&,  ben*Tm  admmuTran>r&  and  increasingly  vociferous  faculty 
iiniom.  and  m«m  important,  bet^ren  outraged  parents  and  the  whole 
%\'*iem  Yet  the  cnu»  u  tn  no  way  confined  to  inner-city  schools.  The 
suburban  whtxtb  of  the  ^A-hite  middle  class  arc  burdened  with  the 
multiple  plagues  of  student  boredom,  drug  addiaion,  and  rapidly  in- 
creasing alaihnlum.  A  dcuen  >ran  of  falling  scores  on  the  college 
entrance  exammation  re\*eal  the  stead)*  nature  of  the  erosion,  despite 
the  acceleratMm  of  ants  asMKUtcd  uith  the  public  schools. 

Hduiaton  cannot  bnng  themscKcs  to  admit  that  the  crisis  is  any- 
thing more  than  a  temporan-  aberration— an  aberration  from  the  "nor- 
mal" >ft'hich  Itself  was  dead  long  before  i(xia\''s  administrators  were 
bom.  The  theoncs  multiply,  the  explanations  proliferate,  and  the  crisis 
gets  wone.  Ulut  the  last  decade  has  brought  is  an  understanding  on 
the  pan  of  the  publn:  and  a  minorit>'  t)f  government  school  employees 
(untenurcd,  getx-rally)  that  there  is  no  answer. 

lake  the  sinking  ship  uhich  fmalh-  takes  on  too  much  water,  the 
gm-emment  education  $>-stem  is  irretnoable.  It  will  be  useftil  in  the 
future  onl>'  as  scrap.  But  what  about  rfiosc  millions  of  students  who 


Coim^O  1976  bvGvT  North. 

Dr.  hfarth  n  Pltadem  of  ihc  Iiwrnitt  for  Omsrian  Economics,  Tyler.  Tcxas^  This 
aftidt,  wtiich  or^^nalr  ^^o^  "  ^  M**'  ^*'^<'  i«uc  of  77v  Freeman,  is  reprinted  here 
•^  I  of  the 


97 


98  /  Gary  North 

will  go  through  the  system  before  it  finalK'  sinks?  Will  they  too  become 
useful  only  as  scrap? 

Parents  are  becoming  aware  of  the  discussion  s>iklronK.  The  end- 
less discussions  in  half-empt>'  halls  between  a  fn*-  parents  and  local 
administrators  have  not  altered  an>thing.  The  teacher  conferences,  the 
administrator  conferences,  the  PTA  conferences,  and  all  the  ochcr  con- 
ferences have  proved  useful  onh-  for  the  cataloguing  of  the  unsoKTd 
and  increasingly  unsoKable  problems  connected  with  guvanment 
education.  Solutions  have  not  emerged  from  conferences— or  at  least 
no  solutions  acceptable  to  parents,  admmistratorv  schot>l  boards,  stu- 
dents, state  legislators,  and  an  angrv*  group  of  le%y-re|cvtmg  wiccrs.  If 
there  arc  no  solutions,  why  pay  higher  taxes?  Thu  is  the  reasoning  of 
the  voters.  The  reasoning  of  the  school  adnuntstraton  is  different. 
They  only  want  to  discover  a  no*'  source  of  tax  mone>'  chat  hiU  be 
acceptable  to  the  voters,  or  better  m,  tfut  ^lU  not  be  subject  tt>  public 
elections  at  all. 

The  Root  of  the  Crisis 

The  problems  of  Amcncan  publK  educatton  are  the  piubknii  asso- 
ciated with  any  system  of  government  cnfucved.  tax-supported  coer- 
cive wealth  redistribution:  the  sv\tcm  lA  fmancing  conflnrts  mth  the 
expressly  stated  gt)als  of  the  plannmg  agencies  Thu  amfba  benotcn 
the  methcxl  of  fmancmg  and  the  stated  goals  of  education  has  been 
with  us  since  the  da\s  of  the  Puntan*  tif  Neu  England  m-ho  ict  up 
compulsorv'  education  uhich  was  to  be  financed,  in  pan,  by  money 
collcaed  by  the  kx:al  pn)pem  tax  xvievMir 

There  is  no  education  apan  fnim  confocmin  of  thought.  One 
thing  is  true  and  another  is  ntK  KducatKm  rct^ires  indocmnation. 
But  the  confomim  of  thought  which  is  basic  tx)  all  educacxm  creates 
conflicts  when  parents  of  diffenng  fir%t  pnnciples  are  required  either 
to  finance  a  hostile  educational  sN-stem  or  H)  send  their  children  to  it. 
The  Puritans'  solution  was  to  enfiMxe  confijcmit)  b\  expellmg  hostile 
families  from  the  community  The  nKxiem  bureaucrat's  lohition  is  to 
force  parents  to  finance  an  alternative  schtK>l  s>'stcm  as  wcU  as  the 
government  system,  and  then  to  take  contn>l  of  the  pnvate  system  later 
on.  Sidney  E.  Mead,  m  his  important  btxik.  The  Lmh  Lift i nm nt:  The 
Shaping  of  Christianity  m  Ammca  (1963 ),  has  argued  pcreepmrh'  that 
the  public  school  system  is  Amenca's  onlv  established  churdi.  His 


EdtuMtiomU  Vouchers:  The  Double  Tax  I  99 

point  11  wcU  taken  IjJur  all  mtcms  of  established  worship,  some  peo- 
ple are  fcxced  to  finance  doanncs  and  principles  that  they  do  not  agree 
with.  They  rocm  ihti  fact,  but  instead  of  seeking  for  die  separation  of 
•'church*  and  Rate,  the  modem  parent  only  seeks  to  "recapture"  the 
public  education  tyiiem.  So  deeply  rooted  is  the  idea  of  the  necessity 
of  pubtic-ftnanced  education  that  those  who  are  being  destroyed  by 
the  •yuem—ifc'ho  are  k»ing  that  chiklrcn  to  the  system— cannot  bring 
rhem»clvc»  to  abandtm  it  on  principle.  If  the  moral  answer  of  die  free 
man  to  the  Miciali%t*»  pobacs  of  coercive  wealth  redistribution  is  "not 
youn  »  give,"  then  the  moral  ansuxr  to  those  who  would  somehow 
take  avtr  the  public  ichool  f>-«em  is  *'not  youre  to  recapture."  The 
relipcNtt  nature  of  the  ccmfiicT  has  been  noted  by  R.  J.  Rushdoony: 
•mur  state  u  (seen  as]  the  order  of  hbert>',  and  the  school  is  the  means 
whcrch\'  citt/ms  arc  prepared  for  the  gtxxl  life.  The  state  has  become 
tiK  saving  institutKm,  and  the  fiinction  of  the  school  has  been  to 
l^nKlaim  a  ikh  gospel  of  salvation.  Educanon  in  this  era  is  a  messianic 
and  Utopian  mosTmcm,  a  facet  of  the  Enlightenment  hope  of  regener- 
ating man  in  terms  of  the  promises  of  science  and  that  new  social  order 
to  be  achjord  in  the  state  "*  Vet  precisely  because  the  new  state  reli- 
gKHU  establishment  has  become  messianic,  it  has  also  become  the  cen- 
ter of  nxm's  cniKism 

Educafion  nxlav  cKOipics  an  ci^uivocal  position  in  contempo- 
niy  lifc  funcnomng  both  as  a  scapegoat  for  every  failure  and 
ai  a  catch  all  fiir  c\xt\  hope  and  expeaation  of  society.  The 
ichcx)b  and  colleges  are  berated  for  extending  dieir  authority 
beyond  the  fundamentals  of  learning  into  a  program  which 
cm-eiopcs  the  whole  chiW  or  the  whole  man,  and,  at  the  same 
time,  arc  gism  additional  responsibilities  which  can  only  ex- 
tend dwr  scope  es-en  fiinher.  Fundamental  to  diis  unhappy 
and  oontradicTon'  approach  is  a  messianic  expeaation  of  edu- 
cation coupled  vk-ith  a  messianic  attitude  on  the  part  of  educa- 
tors. The  attmide  of  people  towards  education  is  diat  it  is  a 
god  that  has  faikxl  and  yet  a  god  who  can  perhaps  still  be 
xs-hipped  inti>  hilfilling  his  mission. "^ 

The  decade  u-hich  has  just  passed— one  which  began  only  a  few 
months  after  tficse  utxxIs  were  published-has  brought  a  massive  disU- 
hBionment  cooccming  educanon.  Nexertheless,  die  public's  faith  m 


100  /  Gofy  North 

government-financed  and  administered  education  still  persists,  at  least 
to  the  extent  that  people  think  the  s>'stcm  can  still  be  rdbrmed.  trans- 
fonned,  or  recaptured. 

The  pluralism  of  American  life  is  nou\  and  aiwzYi  has  been,  in 
direct  opposition  to  a  philosophy  of  public  education.  Yet  the  intCDn> 
cilable  conflia  between  these  two  principles  has  iic\"cr  been  faced  by 
the  vast  bulk  of  our  citizens  and  \irtualh'  any  of  its  educational  theo- 
rists. The  fmancing  of  a  pluralistic  culture  must  be  \\^luntan\  spnn^ing 
from  the  deeply  felt  needs  of  the  vanous  religious,  mtclkctual,  and 
cultural  groups. 

Three  centuries  of  conflia  mer  the  control,  concent,  and  financing 
of  public  education  serve  as  a  testimony  to  the  fimlirv'  of  combining  a 
system  of  tax-financed  schools  \Mth  a  pluralistK  cukurr  financed  b\' 
fi-ec  men.  The  system  of  cducatKXi  is  chtist.  as  all  pr\>tessi(inal  %\-»tcntt 
must  be,  but  with  taxaticxi  as  its  base,  the  sv-stem  is  in  amllKt  vMth 
democratic  principles.  It  leads  to  a  $\-$tcm  of  minunt>'  rule.  Weber  was 
quite  correa  when  he  argued  that  bureaucracv*  is  anodemocrabc  bf 
nature;  control  is  separated  ftxim  those  v^-ho  bear  the  financial  bur- 
dens.^ Tenure  and  civil  service  protcctxwi  assure  that  cimtnW  and  fi- 
nancing are  kept  separate. 

The  Assumption  of  Neutrality 

An  implicit  schizophrenia  undennines  cvrry  ivitcm  of  pubbc  edu- 
cation. On  the  one  hand,  a  pnman  |ustifKatMm  ftir  the  existence  of 
government- financed  education  is  that  the  natMWi  nerds  citurrn  who 
are  educated  for  the  respoasibilities  of  democratK  pamcipatKin  in  the 
political  processes.  The  sch<x>U  arc  to  educate  men  m  tcrmt  cjf  ihc 
"ethics  of  denKxraa"  or  "demtKtatK  values"  or  fust  plain  "patrio- 
tism." Schools  must  inculcate  *^alues,"  although  the  more  v^uc  chcae 
arc,  the  better  for  the  admin  i-strators 

On  the  other  hand,  m  order  ti>  ward  off  criticism  from  vanous 
religious  and  ideological  gnnips,  publK  education  is  simukancouftly 
defended  as  a  system  which  inculcates  no  religious  or  ideological  vahics 
whatsoever.  Public  education  is  simph  technical,  making  possible  a 
better,  more  productive,  and  more  pn>fitable  life  kx  all  of  its  students. 
The  stated  £ioals  ofdemocratu  etUuatwn  and  stnah  wocmiwmmi  m  tnkmkfi 
training  are  in  absolute  opposttum  to  eadt  other  the  first  abwlutdy  i£' 


EdmcatumtU  Vouchers:  The  Double  Tax  I  101 

finm  the  %ilucbdcn  nature  of  public  education,  while  the  second 
abiolutcK'  dcnic«  it. 

The  fdiiaophrcnta  of  public  education  can  be  seen  in  die  doctrine 
of  academic  fteedom.  The  doctrijK  was  first  developed  by  the  profes- 
•Of»  cmploved  by  the  Pruuun  universities  that  were  the  products  of 
itatc  financtng.  (Prmua  invented  the  kindergarten  and  die  graduate 
Kininar,  fi»t>  of  the  iea*t  pr«>duaivc  educational  developments  on  re- 
cord.) The  unj\mitie»  were  *uppo4cd  to  be  extensions  of  die  Prussian 
rtJtc.  and  thc>'  urrc  undentfxxi  as  such  by  everyone,  but  professors 
wanted  lo  be  cicmpced  from  any  fomi  of  censorship  or  control  by  the 
agcma  of  the  «ace.  Thu».  thc>'  immtcd  die  idea  of  academic  freedom— 
the  freedom  of  tnquin'  bckmging  to  any  urufitd  scholar  in  his  area  of 
cipcnwc  He  It  to  be  cmurly  neutral,  hou-ever;  his  instruction  must 
be  baicd  onh*  on  fux%  He  mmt  ntK  indulge  in  propaganda. 

Yet,  iteadih'.  a*  the  imphcaiiom  of  epistemology  have  been  recog- 
nized, the  idea  that  "facn"  lomehcm'  create  a  neutraJ  world  of  scholar- 
ihip  h«ft  been  abtndoned.  The  KxaUcd  sociology  of  knowledge  (soci- 
ology of  preiudice)  indicates  that  men  can  investigate  only  a  tiny  frac- 
tion of  the  infinite  number  of  facts,  gleaning  facts  and  assembling  them 
in  temt*  iif  x  phikiftophKal  franK>%-ork.  Presuppositions  therefore  influ- 
ence tnierprrtatHin%  and  mterprctatKMis  arc  now  recognized  as  ulti- 
mateh'  rehgKim  m  nature,  i  e  .  ihe>'  arc  accepted  as  unchallengeable 
firet  pniKiples.  While  fo*-  ftxMknts  recognized  diis  faa  as  recendy  as 
the  early  196<k,  the  effects  of  the  N'letnam  War  and  the  counterculture 
have  romed  thu.  The  students,  and  many  of  their  professors,  now 
acknovk-ledge  %k-hai  has  aiwax-^  been  true:  education  is  not  neutral.  But 
if  education  canncK  be  neutral,  dicn  xH^c  public  school  system's  legal 
pillar— the  assumptKm  of  neutralit)  — is  exposed  as  a  false  justification 
for  the  maintenance  of  an  established  church  and  a  tenured  priesdiood. 

The  Locus  of  Sovcret^ty 

The  ultimate  source  of  ^  educational  crisis  stems  from  an  error 
in  first  pruKiples.  Once  committed  to  diis  error,  die  pubUc  education 
$>'stcm  has  floundered  rcpcatcdlv.  To  locate  die  source  of  die  error, 
men  need  onh-  ask  rficmscKes  a  smgle  question:  Who  is  responsible 
for  die  cducabon  of  a  chiid?  The  answers,  of  course,  are  vaned:  die 
parents,  dK  chuith,  dK  ON-il  government,  or  a  combination  of  die  diree. 


102  /  Gary  North 

The  conflicts  in  education  arc  in  faa  conflicts  o\rr  a  much  more 
fundamental  issue:  the  locus  of  so\crcignt>',  and  hcncc^  the  kxus  of 
personal  responsibility.  The  person  or  institution  u-hich  possesses  sov- 
ereignty must  be  the  one  which  takes  on  the  rcsponsibtlit>'.  By  affirm- 
ing the  legitimacy  of  tax-supported  education,  \-occrs  ha\-c  attempted 
to  transfer  their  responsibilities  for  the  educatKNi  of  their  children  to 
another  agency,  the  state.  Yet  at  the  same  time,  the>  affirm  their  awn 
sovereignty  over  the  content  and  structure  of  the  educational  s^-stcm. 
That  they  have  lost  almost  e\-erv'  battle  in  their  ikir  with  tenured, 
state-supported  educational  bureaucrats,  is  the  direct  result  of  the  pub- 
lic's abdication  of  personal  rcsponsibilm ,  famih'  b\-  famih\  for  the 
education  of  their  children.  The  war  was  lost  on  the  day  that  parents, 
as  voters,  decided  to  transfer  the  finaiKul  rcspomibilitics  c4'  educating 
their  own  children  to  other  members  of  the  body  potitK.  V^Tuk  Horace 
Mann  can  be  regarded  as  the  general  ^^>  n-as  ^ictorwus  ovrr  pm-atc 
education  in  Massachusetts,  he  was  onh  conducting  mopping- up  op- 
erations. The  end  had  been  determined  nfcx>  centuries  earlier  ^*hcn  the 
Puritans  of  Massachusetts  aflirmcd  the  pruxipic  of  tax-supp^trted  edu- 
cation. 

Any  system  of  education  must  uJtimatch  be  the  rcfkctmn  of  utd 
product  of  the  philosophical  pnnciplcs  of  thotc  %fc-hi>  ftivincc  the  sys- 
tem. The  decision  abt)ut  the  financing  <»l  anv  imtitution  inei^apabh' 
determines  the  shape  and  content  ol  that  tmntution  Modem  men, 
being  secular,  now  recognize  this  fact  when  applied  to  the  ii\stitutian 
of  the  church.  Thc\'  see  that  a  state -supported  church  is  antithetical  to 
the  principle  of  freedom  of  conscicrwc  Tho-  sec,  and  religious  acalocs 
like  Roger  Williams  see,  that  state- financed  churvhes  bcviwnc  the  tools 
of  the  state  which  supplies  the  funds  But  modem  men  do  not  sec  that 
this  stria  relationship  between  finaiKing  and  operatKNU  applies 
equally  well  to  govcmnKni  s<;h<K>l  s>^tem»  Somehow .  the  rclatumUup 
is  ad  hoc;  it  works  uhen  churches  are  ms-ohxd,  but  it  is  inrkvanc  in 
the  field  of  public  cducatuxi.  Like  the  established  churdMncn  of  two 
centuries  ago,  today's  priests  and  panshKmen  of  the  public  Khoob 
refuse  to  recognize  the  nature  of  their  rclatKmship  to  the  stuc. 

Who  Pays? 

E)o  men  finance  their  chiklren's  educations  directly,  throi^  the 
personal  financial  sacrifice  of  the  famih  unit?  If  lo,  then  the  family  ii 


EdmatiomU  Vouchers:  The  Double  Tax 


I  103 


wva^  over  education.  The  school  is  then  merely  an  extension  of 
the  fcmiily .  The  famiK-  nukes  use  of  the  efficiencies  associated  with  the 
divuifjn  of  bbor.  Parent*  hire  professional  educators  to  train  their 
children,  but  choK  who  arc  hired  are  paid  to  adapt  dieir  educational 
UuUt  ID  the  necdf  of  die  famihcs  dut  arc  financing  the  education.  This 
can  be  done  directly,  through  family -controlled  school  boards,  but  it 
can  alio  be  accompli*hcd  thnmgh  the  indirea  means  of  die  market. 
IV  fainiiy  hire*  Uk  tuior .  or  the  school,  in  the  same  way  diat  it  hires 
any  other  ler^'ani  The  parents  arc  directly  responsible  for  dieir  chil- 
dren, and  the  lekcocMi  of  a  school  u  an  aa  of  responsible  stewardship. 
The  iumhf  has  nut  delegated  rfK  responsibility  of  educating  die  chil- 
dren to  anyone  die.  It  amtrols  the  purse  strings—the  ultimate  affirma- 
tion of  eanhh'  smrrrtgnty. 

The  more  distant  iIk  source  of  the  school's  hinds  from  die  family, 
the  less  control  the  familv  has  cnrr  the  selection  of  die  teachers  and 
equipment.  If  the  chun.h  finaiKcs  the  education  of  its  members'  chil- 
dren, then  a  layer  of  institutional  bureaucracy  is  interposed  between 
parents  and  teachers.  Thu  may  be  agreeable  to  many  parents,  but  if 
church  members  other  than  the  parents  arc  expeaed  to  fmance  the 
idiool  (as  u  the  case  in  most  instances),  then  the>'  too  have  a  legitimate 
right  to  deternunc  whcKW  policies. 

By  transferring  some  of  the  burdens  of  financing  education  to 
other  church  members,  the  family  thcrcb\'  relinquishes  a  portion  of  its 
wvcreignty  over  the  educators.  The  educators  then  serve  someone 
other  than  the  parents,  or  at  least  m  addition  to  the  parents:  the  dea- 
coitt,  the  elders,  the  minister,  the  sch<K)l  committee,  or  whatever.  By 
dilunng  s<nrmgnt>-.  the  cducatKmal  bureaucrats  gain  more  autonomy, 
since  thc\  can  pla>  ti<f  one  church  faction  against  another  until  every- 
oiK  gi\rs  up  and  grants  nxxc  autt>nomy  to  the  administrators. 

The  bureaucrats  gam  thar  greatest  control  in  tax-supported  sys- 
tems. Sovxrcignty  is  so  diluted  at  the  loel  of  the  individual  citizen  that 
the  expertise  i>f  the  profcssKinal  and  tenured  bureaucrats  is  overwhelm- 
ingh-  p<n%Trtul.  But  their  pourr  is  not  tied  to  a  personal  relationship 
>Mth  the  children  (as  it  is  \Mth  a  parent),  nor  is  it  linked  to  a  fmancial 
dependence  tin  the  parents,  nor  is  it  e\en  linked  to  a  community  of 
shared  vahies,  as  m  the  case  of  a  church  school.  Their  power  stems 
from  the  unvkiUingness  of  legislators  to  turn  off  die  funds.  And  the 
legislators*  unwillingness  to  interfere  stems  fix)m  two  primary  facts  of 
political  life:  1)  the  experts  have  an  aura  of  invincibility  about  diem, 


104  /  GofyNofth 

plus  tenure;  2)  the  voters  still  believe  in  the  estabtishnKXit  of  the  pubbc 
school  church.  It  is  easier  to  give  speeches  than  to  take  actioa,  so 
legislators  give  speeches.  Most  of  them  arc  re-elected  most  of  the  time, 
so  the  policy  pays  off  in  the  coin  of  the  political  realm:  \x>tes. 

The  crisis  of  education  is  therefore  a  crisis  in  the  realm  of  values, 
with  the  values  of  the  parents  coming  into  confba  with  the  ^ihies, 
philosophies,  and  incompetence  of  those  in  control  of  the  tax-sup- 
ported educational  system.  If  the  parents  continue  to  capitulate  to  the 
philosophy  of  public  education,  then  the>-  ^ill  continue  to  be  defeated 
in  their  attempts  to  gain  the  kind  of  education  tftcy  want  for  tfidr 
children.  There  is  only  one  way  tfut  all  parents  can  gain  such  satisfac- 
tion: they  must  pay  for  the  education  of  their  duklrcn.  Thc%'  can  cam 
the  money  or  the\'  can  conWnce  some  third  parn*  u>  gnr  tftem  or  tlKir 
children  the  necessary'  funds  on  a  \t>luntan-  basu,  but  tf>e  parents  must 
pay.  If  they  want  to  get  what  the>'  pay  for,  they  must  pj>'  directly, 
rather  than  pa\ing  through  the  coenn\T  means  of  state  taxatkm. 

Until  men  arc  willmg  to  cut  off  the  polmcal  funding  of  the  estab- 
lished church  of  Amenca,  thc%'  will  see  the  educational  cnsu  escalate. 
The  visible  sign  of  sovereignty-  is  the  abilin  n>  pav  for  a  scnxT  and  the 
willingness  to  do  so.  Nothmg  shon  of  this  ynU  suffice  to  lohr  the 
crisis  in  the  schools,  for  the  cducatMmal  crisis  is  ultinviiely  a  conflkt 
over  sovereignty.  He  u-ho  pa)^  uith  his  o^-n  funds  will  wm;  he  wtio 
continues  to  pay  b\'  voting  cannot  possibh-  ^kin 

Pseudo-Market  Schemes 

Professor  Milton  Fncdman  of  the  Uni^rrsitv  of  Chic^o  is  one  of 
the  most  technically  pn)ficicnt  economists  in  AmerKa  As  a  defender 
of  the  principle  of  market  cfficienc\\  he  has  been  abk  to  gain  many 
adherents  within  the  eccKKimics  profcssKm  He  has  been  esfvciaUy 
successful  in  challenging  the  inef!kicncics  of  the  federal  regulatory 
commissions.  His  most  popular  and  uideh  read  book,  Csfitmlmm  ami 
freedom  (1962),  was  a  landmark  of  the  196(K,  fbr  it  was  popularly 
written  by  a  professional  economist  ui>o  had  kmg  befm  cstabhihed 
his  technical  proficicnc\'  before  his  peers  Some  of  the  pi>liO'  recom- 
mendations of  the  book,  such  as  dK  abt>litM¥i  of  occupatxmal  licensure 
by  civil  goNcmments,  have  not  been  taken  seriously  by  mo«  econo- 
mists and  certainly  not  by  professionals  nho  now  hold  occupational 
licenses  fh)m  die  civil  go\Tmment  Y«  fVom  die  pomt  of  view  of  thoK 


EdtcMtiomd  Vouchm:  The  Double  Tax  I  105 

who  are  convinced  of  the  tcchnicaJ  supcriorin'  of  the  free  market  over 
gcjvcnimemal  rcguboon,  it  i*  this  kind  of  compromising  stand  taken 
by  ProfcMor  Fncdman  which  is  most  valuable  in  die  defense  of  free- 
dom, noc  CO  fncnuon  capitalum. 

The  problem  that  mam-  free  nurkct  advocates  have  with  some  of 
Profttiof  Friedman's  p«>lic>'  recommendations  is  diat  too  often  he 
speikls  mu\\  pages  m  doising  mgenious  schemes  diat  would  make 
gcnemmenr  pn»grams  more  efTicient  and.  Professor  Friedman  fer- 
vently hopes,  less  burJenscime  to  the  taxpayers,  businessmen,  and  in- 
ncKcnt  atucm  of  the  land  These  polic\'  recommendations  have  one 
feature  in  common:  ihc>'  arc  pseudi>- market  dc\ices.  They  would  cre- 
ate a  bnd  of  shadow  market— "almtKt  a  free  market"— diat  could 
pftwide  success  indKators  analogtHis  to  those  provided  by  a  truly  free 
market.  In  diung  s<i.  he  argues,  these  pseudo-market  alterations  would 
nuke  gcnTmment  more  responsisx  to  the  needs  of  citizens. 

Bamooik  Caloiiation 

Back  in  1920,  IVtilcssor  I^idung  x-on  Miscs  wrote  the  most  famous 
eiaay  of  hu  academn  career.  -Economic  C^>alculation  in  a  Socialist 
OimmonvkTallh  "  Mises  argued  that  the  mcscapablc  weakness  of  all 
systems  of  central  |>Uniimg  is  the  inabilirv-  of  the  planners  to  assess  the 
actual  value  of  any  pniduct  t>r  service  m  the  economy.  Without  freely 
fluctuating  pncrs  that  are  the  pnKluci  of  the  private  ownership  of  both 
amsumer  and  capital  g(x»ds,  there  can  be  no  means  of  imputing  value 
accurately  b>'  any  of  the  panKipants  m  the  economy.  What  should 
an\-thmg  cost?  Wlut  u  it  \»t)rth?  What  should  be  given  up  to  attain 
anv  fanwular  goal?  Without  market  pnccs,  meaning  without  open 
entry  n>  markets  b\'  bu>Trs  and  sellers,  there  can  be  only  random 
guesses  b\'  the  planning  btxlies.  Randomness  is  not  efficient,  except 
on  random  occasions.  Thus,  ajocludcd  Miscs,  die  socialist  common- 
wealth u  of  nccosit>*  meflkient.  It  cannot  plan  rationally.  So  long  as 
the  monopoh'  charaaer  of  the  state-controlled  markets  continues,  the 
planning  authontics  \s-ill  remain  blind  to  die  true  conditions  of  supply 
anddeiTund.^ 

I'nderstandabh.  Mises  had  no  use  for  pseudo-market  schemes  of 
anv  kind.  In  fact,  ^  most  miportant  (diough  ineffectual)  reply  to 
Mises  from  dw  socialist  camp  was  made  b>'  Oskar  Lange,  and  it  con- 
sisted of  a  $\-5tcm  of  h\porf>eocal  pseudo-market  responses  by  central 


106  /  Gary  North 

planners:  artificial  and  arbitrarv'  prices  to  be  set  b\'  the  pUnncrs,  fol- 
lowed by  adjustments  in  the  price  s\'stcm  in  order  for  pUnning  agen- 
cies to  stimulate  the  desired  response  from  binxn  and  producers.^  The 
problem,  as  always,  was  the  closed  nature  of  the  s>-stem.  The  planners 
could  never  be  sure  that  thc>'  were  not  wastmg  resources  in  their 
attempt  to  attain  any  goal.  Those  u-ho  set  pnccs  arc  $o%Tmgn,  and  in 
the  case  of  the  socialist  commonu-ealth,  the  so\Trcign  is  cconomicaUy 
blind. 

In  short,  the  creation  of  a  pseudo- market  cannoc  guarantee  in- 
creased government  efficiency'  or  mcreased  ccooomK  pcmrr  tin  the 
part  of  consumers.  All  that  will  be  accomplished  is  the  irratKinaiuation 
of  the  central  economic  plan  b\-  mixing  it  uith  non-sooahst  m  non- 
market  elements.  Langc's  scheme  was  ne%'er  adopted  tn*  the  Pulish 
planning  agenq.'  he  belonged  to,  nor  ha\r  the  Stniets  adopted  it.  It  » 
neither  socialist  nor  market;  it  is  only  eamomKalh*  irratKmal. 

The  Voucher  Scheme 

Perhaps  the  most  interesting  ot  ail  t>t  the  pscudo-nurket  pohcy 
recommendations  pnxiKXed  b\'  PntlcMir  FrKdman  is  hts  cducatKmal 
voucher  plan.  Under  such  a  v.h(x>l  financmg  swenv  each  famih* 
would  receive  one  voucher  for  each  Kh*»»4  age  chiki  in  the  famiK.  The 
voucher  would  be  redeemable  in  mone\  upim  pmcntatKin  tn-  a  pnvate 
school  to  the  state  or  countrv-  goNrmment  Its  vahie  %k\Hiid  be  cquaJ 
to  the  average  per  student  ci»t  t)f  educatKm  m  the  distna  (This  6gurc, 
by  the  way,  is  seldom  c\cn  calculated  b\  vihool  hoards,  ftir  oh%Kius 
political  and  public  relations  reasons,  and  when  it  is  cakulatcd,  it  \irru' 
ally  never  includes  such  crucial  items  as  the  interest  whKh  the  go^rrn- 
ment  might  ha\c  earned  had  it  M>kl  otf  the  sch(Ki<  buildings  and  in- 
vested the  mone>  elscu  here,  such  a*  m  the  bank  niuch  Hxiuld  lend  ihc 
purchase  money  to  a  Uxral  profitmaking  sthtnW  )  The  parents  cnuld 
then  send  their  students  to  a  public  sch(K>i  or  to  a  pnvate  school.  If  the 
cost  of  tuition  were  higher  in  the  private  sthtiol  than  the  value  of  the 
voucher,  the  parents  could  make  up  the  ditTerence  h\'  pacing  more 
money. 

The  advantages  of  this  scheme,  argue  the  supporters  of  Khool 
vouchers,  would  be  considerable.  The  parents  gain  back  thar  kMt  sov- 
ereignty. The>'  decide  where  the  children  will  attend  *chot>l  The  puMiC 
schools  would  be  forced  to  compete  fcx  students,  thereby  increasing 


Vouchers:  The  Double  Tax  I  107 

efficiency.  Pmntc  schools  wouid  spring  up  everywhere  in  re- 
ipontc  ID  the  nmciKc  of  vcxichcn.  The  diversity  of  educational  op- 
poftunitiei  would  be  fbitcrcd.  The  costs  of  administration  would  be 
very  low.  (One  advocate  back  in  1962— a  rcspcacd  libertarian  philoso- 
pher—announced diat  It  wtjuld  only  take  a  computer  and  four  secre- 
tahei  to  mn  the  n-holc  n-vtcm  for  the  state  of  California.  If  this  were 
true— and  it  ccnamiy  u  mn  true— it  would  iasure  die  doom  of  the 
program  in  the  e>r»  of  die  tmyai  potent  group  of  special-interest  plead- 
en  in  the  nate.  die  a\}\  »enicc  employees.)  The  state  could  establish 
ipeciaJty  ichoob  of  all  kinds  to  lure  back  parents  and  dieir  vouchers. 
The  authonty  of  parents  would  be  re-established,  and  this  would  guar- 
antee a  truly  pnigrcMi^x  cducatKmal  system. 

There  is  n«»  doubt  chat  the  Vtpc  of  the  voucher  program  is  initially 
tmpre%si\x  Parmts  utiuld  *ccm  to  ha\e  far  more  power  in  selecting 
educaiKmal  aliemaii%e%  under  the  voucher  system.  The  below-market 
prKing  monoptih  o(  the  stale  woukJ  be  eliminated.  The  conformity 
of  bureaucratK  education  utnild  be  challenged  by  a  new  diversity.  A 
new  educational  pluralism  Htnild  be  the  creation  of  vouchers.  It  would 
M\T  mone)'  and  uxrease  frrcdi»m.  What  more  could  we  ask  for?  In  any 
caie,  u-hat  mcwe  can  %k-c  cxfwi  m  an  age  of  wealth  redistribution?  This 
u  alwa>'s  the  ke>-  argument  m  favor  of  the  creation  of  pseudo-market 
•chemes:  no  way  exists  to  re -establish  a  truly  free  market,  so  this  is  the 
best  we  can  hope  for. 

The  Locus  of  Soveret(cnt>'  Revisited 

It  all  sounds  »o  pUiiMblc  Yet  it  o\erl(X)ks  the  hindamental  problem 
of  WHKher- financed  ediKatuHi  Ilie  question  must  still  be  asked:  Where 
is  dK  kicui  tif  scn-ereignrk*  And  the  aaswer  must  still  be  die  same:  die 
civil  gosTmment.  The  xxjucher  prt>gram  violates  die  most  important 
principle  of  education:  parents  arc  responsible  for  die  financing  of  dieir 
chiklien's  educatKm.  He  who  is  responsible  is  also  legally  sovereign, 
and  \-ice  \-ersa.  C)peratK>nallv,  the  source  of  die  hmding  determines  die 
kxus  of  sox-errignn-.  The  gixil  of  all  diose  uho  would  defend  market 
arrangements  mavt  be  to  determine  die  moral  locus  of  sovereignty  m 
any  particular  aroimstance,  and  dien  see  to  it  diat  die  sovereign  agent 
be' made  legalh-  and  cconomicallv  responsible  for  die  exercise  of  his 
power.  By  failing  to  demand  rfiat  parents  be  die  source  of  fmidrng  tor 
tfwr  own  chUdirn's  education,  die  promoters  of  die  voucher  scheme 


108  /  Gary  North 

have  abdicated  their  rcsponsibilit>'  in  extending  the  principle  of  \x5hin- 
tarism  and  its  concomitant,  personal  respon$ibilit>'. 

In  the  voucher  system,  the  source  of  the  funding  is  still  the  taxation 
system.  The  financing  is  based  on  the  principle  that  it  i$  legitimate  to 
use  political  power  in  order  to  grant  benefits  to  one  group  at  the 
expense  of  the  other.  The  principle  of  coercion  is  still  dominant.  The 
dominant  principle,  over  time,  uill  thwart  the  elements  of  \x)luntarism 
in  any  pseudo-market  scheme.  The  state  is  still  the  operational  sover- 
eign over  education,  simply  because  the  threat  of  \iolcncc,  i»'hich  is  the 
state's  legal  monopoly,  is  the  source  of  the  hinds  few  cducatxm.  There 
is  no  doubt  that  Professor  Fncdman  recognize*  this  inct,  \xx  he  does 
not  emphasize  it.  He  beliocs  that  the  technical  aheratKm  cii  the  ^'ay 
in  which  coercively  coUeaed  taxes  arc  redistributed  can  cntrcumc  the 
sovereignty  of  the  state.  He  acknowledges  that  the  authority  of  the 
parents  in  a  voucher  scheme  canncx  be  ahiolute  The  state- financed 
"educational  di\  crsity"  under  a  \xiocher  s>-«em  i*  a  dnmirv  operating 
within  govcmment-establLshcd  guidelines  Mones'  spent  b\-  the  stare 
can  never  be  on  a  ''no  strings  anachcd"  basis  There  ts  always  morr 
demand  for  government  mcKie>-  tfian  there  is  mnncs'  availabit  to  meet 
the  demand  (unless  the  purchasing  pouer  of  goxemmem  money  faUs 
to  zero).  Those  legally  responsible  for  itw  distribution  of  tax  mcine>' 
must  have  legal  guidelines,  or  else  rampant  waste  and  dishonests-  wvill 
instantly  appear,  and  the  treasurv  will  be  cmptKd  osrmight  *  Thu  ts 
why  statist  education  must  be  burcaucratK  education.  wt&\  guidelines 
imposed  fi-om  abtnc,  since  the  mone%  comes  fnwn  the  itate  There  is 
no  escape  from  the  rules  of  burcaucrao  m  a  \x)ucher  ts-stem  Friedman 
acknowledges  this  fact: 

Governments  could  require  a  minimum  lo-el  of  ichonting  fi- 
nanced by  giving  parents  vtnKhers  redeemable,  for  a  spccijfied 
maximum  sum  per  child  per  \xm  if  spent  cwi  •apprcnrir  edu- 
cational sers'ices.  Parents  would  then  be  free  to  %pend  this  sum 
and  any  additional  sum  tho  themselves  prvnided  <wi  purchas- 
ing educational  services  from  an  "apprnsed*  inititution  of 
their  own  choice.'' 

The  key  word,  of  course,  is  "approsxd  "  Whv  Professor  Fncdman 
has  chosen  to  put  the  word  in  quotes  is  not  altogether  clear  Docs  he 
mean  "kind  of  approved"?  Certainly,  he  is  wise  enoi;^  to  know  th« 


Vouchers:  The  Double  Tax  I  109 

when  the  ftJte  bureaucrats  appiwc  or  disapprove,  they  do  not  hide 
their  acnom  in  qu.xatKwi  marks.  The>'  simply  decide.  They  decide  in 
terms  <>f  cntena  appnjpnate  to  the  continued  functioning  of  the  statist 
educational  burcaucrac>'.  As  Professor  Friedman  writes: 

Any  lubiidy  should  be  granted  to  individuals  to  be  spent  at 
institutions  of  their  cm-n  chcx»mg,  provided  only  diat  die 
Khooling  IS  of  a  kind  that  it  is  desired  to  subsidize.* 

l^ttmd  h  wham  to  subsidi/x>  The  parents?  Hardly;  diey  are  the  ones 
to  be  dictated  to.  not  dictated  b\-.  The  parents  will  be  told  where  they 
can  freely  fpcnd  dietr  \tiuchen.  and  the\'  have  to  that  degree  lost  dieir 
lovereigmy,  The  state  prtmdcs  the  funds  through  its  monopoly  of 
aienrion;  the  «aie  shall  determine,  coercivcly,  how  and  where  diose 
funds  are  to  be  spent 

Cootrollinf  ttic  Ahcnutivcs 

What  die  decades- kvig  ertHKin  of  the  government  school  systems 
has  prcnidcd  is  a  kmg  list  €>f  reasons  why  it  would  be  profitable  for 
each  famih'  to  rrmtnr  it*  chiklrcn  fn>m  the  subsidized  schools.  A  small 
but  gnmnng  minont>-  of  parents  is  dtung  just  that.  The  state  bureau- 
crats are  k|(aUy  |Hohibited  fnini  pnividing  religious  schools,  ideologi- 
calh-  prt)hibtted  fitim  prrniding  free  market  education,  and  apparendy 
unable  to  proside  aimpetent  instruction.  Thc\'  see  their  task  as  insur- 
ing standards,  %^-hich  means  insunng  educational  conformity.  The  rise 
of  an  independent  school  $>-stem,  which  is  replacing  the  declining 
number  of  Roman  Catholic  parochial  schools,  is  a  direat  to  public 
school  administrators.  The>-  are  as  hostikr  to  alternative  educational 
programs  as  the  postal  sA-stem's  admmistrators  are  to  United  Parcel 
Service  or  am<one  else  earning  first-class  mail. 

Pri\'ate  school  administrators  m  Indiana  were  recendy  imprisoned 
temporarily  for  ha\ing  aK>perated  uidi  parents  who  attempted  to  re- 
mo\-e  dieir  son  from  the  public  school  system  against  his  will.  Parents 
in  Ohio  ha\x  been  threatened  with  the  removal  of  dieir  children  to 
foster  homes  if  dK>-  persist  m  scndmg  dieir  children  to  unaccredited 
schools.  This  is  vk-arfare,  not  some  simple  debate  over  financing.  Tech- 
nical solutions  are  insufficient  to  solve  problems  of  ideological  and 
religious  war^tfe. 


110  /  Gary  North 

What  we  arc  witnessing  is  a  conflia  ovxr  $o\"arignt>'.  XNTk)  is 
responsible  for  the  training  of  children,  the  state  or  the  parents?  The 
lines  are  being  drawn  far  more  sharph'  today  than  at  any  time  in  this 
nation's  history.  Pseudo-market  schemes  cannoc  sohr  questions  of  ul- 
timate sovereignt)',  or  at  least  the)'  cannoc  sohr  them  for  the  benefit 
of  free  market  institutions. 

State  schools  rest  on  a  whole  scries  of  erroneous  assumptions. 
First,  that  the  state  is  ultimateh'  so\  ercign  in  the  field  of  education — 
the  pseudo-parent  of  e\  er\'  child.  Second,  that  state  schoob  can  teach 
children  totally  neutral  values — univrrsalh-  acceptable  principles  that 
all  education  must  pro\idc.  Third,  that  it  is  the  mural  as  urll  as  legal 
obligation  of  taxpayers  to  finance  the  school  s>-stcm.  Fourth,  that  the 
professional,  tenured,  and  cml-servKeproccctcd  oAkiab  ol' the  educa- 
tional monopoK'  are  the  people  best  prepared  to  operate  the  educa- 
tional system. 

Buying  Off  the  Competition 

The  voucher  sN'stem  challenges  dircaK  onh-  the  last  of  that  as- 
sumptions, and  then  only  superficially.  (After  ail,  stale  schools  wnU  stiU 
be  permitted  to  operate. )  The  vtiuchcr  s\Mem  nc\:cssanh  requires  the 
licensing  ofsciyools  For  those  who  favor  bureautratK  bcensmg  ol  alter- 
native educational  systems  b>  the  state  bureaucrats  vk-fkitc  ^ibs  are 
threatened  by  altcmanvc  educatKwul  s\-stems,  I  can  cNih'  rocun¥ncnd 
chapter  nine  of  Professor  Fncdman's  Cjtpumlum  mui  hrmlmm — the 
chapter  on  cKcupational  liccasing 

As  private  sch(x>U  continue  id  replace  tfK  dismtegratmg  gtnem- 
ment  sch(x)ls  at  the  pnmar^  and  sccondarv  loeU,  chc  state's  educa- 
tional bureaucrats  will  have  to  take  decuise  actKm  to  protect  ificu 
monopoly.  One  way  to  accomplish  this  is  to  refuse  to  cerof)-  any  more 
schools.  (I  am  assuming  that  outright  abolition  ykiU  not  be  tolerated 
politically  or  in  the  courts  )  This  appnvKh  may  ssx>ri  for  a  time,  since 
parents  are  concerned  about  qualirk  schools  Bv  siwne  peculiar  r«nst 
of  logic,  the  parents  of  pnvate  schot)!  chikiren  scwncfiow  beheve  chat 
the  state  licensing  boards  are  competent  to  cenif>  educational  perfor- 
mance, despite  the  fact  that  the  schcx>ls  that  the>  tfKmscKes  operate 
are  anathema  to  the  parents  m  questKHi 

Private  school  administrati>rs,  who  come  to  parents  m  the  name 
of  a  superior  educational  program,  arc  equalh  hspnotucd  by  the 


BMumtumal  Vouchers:  TheDoubU  Tax  I  III 

board*  of  cmifkation.  The  mow  intelligent  response  is  that  made  by 
Robert  Thobum,  owner  of  the  profit-making  and  highly  successful 
Fairfex  Oinscun  School  of  Fairfax,  Virginia:  "If  the  bureaucrats  want 

me  to  certify  dwr  ichooU.  ihey  can  come  to  me  and  I'll  look  over  their 
programt.  Thar**  my  view  of  certifwation/' 

If  the  cemficatMJn  pkn*  doe*  not  work,  dien  the  last  hope  of  state 
educaiKmaJ  burcaiKrati  u  the  \-oocher  mtem.  If  parents  continue  to 
%cnd  their  children  to  uncenified  wh<x)is,  then  the  state  must  fmd  a 
way  to  convince  pnvatc  tchool  administrators  that  they  must  register 
with  the  «Jtc  and  conform  their  programs  to  state  educational  stan- 
dards. The  voucher  vyutm  u  the  most  logical  means  of  achieving  this 
goil.  Vouchcn  wilJ  create  a  tecond,  p*cudo-free  market  school  system, 
itting  •free"  in  both  tcn^e*  independent  and  uithout  cost  to  die  users. 
The  itate-<ipcrated  nh<«>l%  uill  thai  compete  with  the  state-licensed 
Khoob.  AimcM  no  third  aitenutn-e  will  be  economically  possible. 

Toed  A^ain  and  A^ain 

Thotc  piarenti  n-ho  %fc*ant  their  children  out  of  the  government- 
operated  tchottU  (u-hkh  char  laxc*  support)  uill  also  be  paying  for  the 
operatNin  of  %xiuiher-ui|^>ned,  state- licensed  sch(X)is.  These  parents 
mu«t  turn  down  the  fin<  subudy  ( free  public  education  in  a  govern- 
ment Khool),  turn  dim-n  a  second  subsidy  (vouchers  for  government- 
liccmed  ichoob),  and  come  up  with  after-tax  income  to  fmance  their 
children's  educatMm  in  a  truly  independent  school. 

Thw  IS  assuming  iho-  can  find  such  a  school.  To  do  so,  they  must 
locate  txher  parents  equally  committed  religiously  and  ideologically 
to  the  pnnciple  of  mdqvndcnt  education,  and  also  financially  able  to 
put  their  preference  mft»  xtion  How  many  concerned  parents  will 
do  this?  Hou-  mam-  private  sch(x>l  administrators  will  be  able  to  oper- 
ate a  ichool  while  den\'ing  admittance  to  those  who  would  pay  with 
vouchers?  Hou-  manv  c»f  these  schcx>ls  with  total  commitment  to  pri- 
vate education  uill  there  be?  I  can  tell  \ou:  \en',  ver\'  few. 

Not  unnl  the  Wight  so  obxious  in  die  government-operated 
xhoob  has  spread  to  the  government-licensed  voucher  schools  will 
parents  e\'en  consider  bearing  the  second  tax  (vouchers)  and  find 
mooe\'  to  pay  for  an  independent  education.  In  short:  Vouchers  are  the 
mtstfmmat^  iMlfor  the  suppreaum  of  independent  pHvate  education  now 
«r  tkt  tkifotal  tfstmtt  eduauumul  bureaucrats. 


112  /  Gaty  North 

What  will  the  price  be?  What  may  not  ha\'c  been  dear  to  Professor 
Friedman  back  in  the  early  1960$  is  ckar  to  us  now.  Wc  will  hive 
HEW  guidelines  operating  in  e\'en'  \x)ucher-using  school  equal  oppor- 
tunity policies,  quou  sv'stems  of  e\ery  kind,  teacher  hirmg  and  tirmg 
policies,  racially  and  rcligiousK'  mixed  student  bodies.  There  \m11  be  a 
whole  army  of  federal  bureaucrats,  noc  to  mentxxi  state  bureaucrats, 
policing  every  private  school.  The  so<allcd  pm-ate  educational  system 
will  be  swallowed  up  in  a  mountain  of  red  tape.  Hctk  much  imagina- 
tion docs  it  take  to  see  u-hat  is  commg?  Isn^  it  sufficient  to  \ook.  at 
what  our  independent  private  colleges  are  no*k-  going  thmugh?  Can 
you  imagine  the  kinds  of  controls  m  stocr  for  schcxils  that  are  set  up 
to  permit  an  escape  hatch  for  the  crumbling  state  educational  monofv 
oly — the  most  horrendous  visible  failure  of  socialism  in  America? 

The  statist  educators  and  politicians  of  Great  Bntam  art  calling  for 
the  abolition  of  all  independent  wh(X)b  in  Bntain,  noc  because  the>' 
think  the  government  sch<x>U  will  be  impnned,  but  because  it  is  mtol- 
erable  in  a  society-  guided  b>'  the  politics  of  enxy  to  let  am-  class,  any 
family,  any  rebgious  gnxip  escape  the  blight  of  the  mkuIim  educational 
system.  If  the  sons  and  daughters  of  the  laboring  class  must  suffer  the 
terrors  of  the  go\cmment  schoi>l  »\-stem,  >»iiv  shcxild  the  mwu  and 
daughters  of  the  nch  be  permitted  to  escape*  The  kigic  is  impeccable. 
After  the  Civil  War  we  abolished  the  nght  of  men  to  bu>'  thew  wzy 
out  of  conscnption  by  panng  the  goxrmment  a  fine  suflicicm  to  enlist 
another  man.  This  practice  was  thtxight  tt>  be  undemocratx.  The  same 
will  be  true,  I  fear,  for  those  u-hti  wTHikl  escape  amscnption  into  the 
public  schcx)l  system. 

Conclusion 

The  state  is  not  about  to  adopt  pseudo- market  schemes  unless  the 
bureaucrats  believe  that  the  adoptxwi  <»f  the  wheme  vkiU  remo\T  com- 
petition from  consi-stcntly  independent  pn>ate  competitors  The  state 
is  not  going  to  consider  the  latest  pseudo-market  proposal  to  come 
out  of  the  graduate  seminars  of  the  pnvfree  market  pfufcjKin  unk» 
the  scheme  can  be  revvntten  to  enhance  the  so\-eretgnry,  poisTr,  and 
cfficicno'  of  those  who  would  suppress  the  independence  of  pnvate 
men.  This  should  be  the  lesson  of  the  age;  statist  ideologues  and  their 
tenured  hirelings  do  not  commit  suicide  \x>lumanh  They  do  not 
abandon  the  ideolog>'  of  the  control  econom>'  simply  bccauie  some 


EducMional  Vouchers:  The  Double  Tax  I  lU 

"^J^T^'*^"^  to  make  the  government  benign  or  reduce  the 
tax  burden  oi  the  public. 

FmidoHiiarlcct  Khcmcs,  promoted  in  the  name  of  the  free  market, 
arc  adopced  by  die  enemies  of  freedom  for  very  specific  purposes:  to 
reduce  Ae  zone*  of  freedom.  Those  who  believe  in  increasing  all  state 
Mneragnn-  n-ill  adopt  p»cudc>markct  schemes  only  when  they  are 
commced  that  the  free  mariet  is  tof)  great  a  threat  to  pure,  uncompro- 
mumg  bufcaucratK  faiJurr— the  same  reason  why  the  Soviets  allow 
tcnumaricT  pncmg  in  a  fci*-  rotnacd  areas  of  the  economy. 

The  itace  may  adopt  vouchers  for  education  on  an  experimental 
bafift,  in  order  to  cot  dtc  scheme.  If  it  does  foster  independent  educa- 
tioti,  vcMichen  wUJ  be  scrapped.  But  the>'  will  not  have  to  be  scrapped. 
Voucher!  may  htU  bcawnc  a  pemunent  fixture  of  our  government 
educatKm  s>-stcm  If  so.  it  uiU  be  for  a  reason:  die  school  voucher 
offcn  va*t  ncH-  pcmrrs  of  control  over  a  vibrant  and  growing  indepen- 
dent Khool  system  that  threatens  to  undercut  government  schools. 

The  grtat  threat  to  freedom  from  school  vouchers  is  that  they 
itrike  »  the  hean  of  M>ctef>':  the  family.  As  a  pseudo-market  device, 
they  prumue  to  be  remariaNy  successful  in  destroying  a  tiny  but  im- 
portant pure  free  marict  docJofxncnt.  I  am  reminded  of  Lenin's  dic- 
tum that  if  the  (ximmunuts  announced  that  all  capitalists  were  to  be 
hanged  tomomm-,  the  capitalists  u-ould  trip  o\'cr  each  other  today 
trying  n>  sell  Ixrun  the  n»pc  The  profit  system  docs  not  regard  the 
orifcim  of  profits,  at  least  shonrun  profits.  Men  aa  to  improve  their 
potitKim  in  We.  Pnvaie  ichcK>l  administrators  and  most  of  the  private 
coUcges  haw  been  eager  tt)  receive  federal  aid;  only  a  minority  of  a 
mmonty  ha%T  hcJd  inii  against  the  lure  of  federal  money.  (Their 
schcKtU,  it  should  be  rrnKmbcred,  arc  \cn'  small  and  may  grow 
smaller.)  The  lure  of  \-ouchen  almost  certainly  will  prove  too  great  a 
tcmpution  for  thousands  of  our  struggling  little  private  schools.  It 
may  take  another  generation  to  reco\cr  from  die  defection  of  tiiese 
schools,  shouki  that  defectKxi  have  an  opportunit>'  to  manifest  itself. 

If  WMchers  are  to  be  stt>ppcd,  thn-  will  have  to  be  stopped  by 
parents  xk-ho  recognize  the  dtniblc  taxation  nature  of  the  voucher 
scheme.  Those  ^-ho  truly  want  independent  schools  and  are  willing  to 
pay  for  them  must  not  seek  after  vouchers,  for  vouchers  are  die  very 
seal  of  doom  for  the  independent  school  system.  Pseudo-market 
schemes  generalh-  kad  to  anti-market  results.  The  opposition  to 
vouchers  must  be  made  on  pnnaple  and  in  opposition  to  die  superfi- 


114  /  GaryNmh 

cial  logic  of  the  pseudo-market.  He  v^-ho  is  monlK'  responsible  must 
pay.  Abandon  this  principle,  and  you  abandon  your  so\'CRignt\'  as  a 
free  man.  Good  results  stem  from  good  principles.  Vouchers  are  an 
intellectual,  moral,  and  educational  disaster.  They  ^ill  noc  wofi  to 
expand  the  realm  of  freedom. 

1.  Rousas  J.  RusMoom-,  The Mmmmt  Ckmrntttr tfAmtnam  Ti    H      (Nvdcy.  N.).: 
Craig  Press,  1963),  p.  4 

2.  Ibid.,  p.  6 

3.  Max  Wcbcr,  "Burcaucncv.-  Frmm  Mm  Wt^ir  tmrnm  m  Ti  niff<.  edaed  bv  H  H 
Gcrth  and  C.  Wnght  Mills  ( Nc«  York  Odbrd  Unsmttt  Prb,  1946 » 

4.  Ludwig  von  Mucs,  "Ecanomic  CiimlMwo  m  a  Sm-iiiw  Cotamomrmrakk'  { 1930>, 

in  F.  A.  Havck  (cd  )  CeUictvmt  Ermmmu  Pit y  tLcndm    lUwdnipc  &  K<fM  twd, 

1935). 

5.  Oskar  Langc  and  Fred  M  Tavtor.  Oa  tki  I wr  71m->  <f      ilii      (>4c»  YoHl 

McGraw-HUl,  [1938]  19S6)  For  a  rtpK.  kc  T  I  B  Hctf.  gnwn  C'liri  l^iii  «  liv 
Socialist  Socuty  (London  Hodge,  1949i  Vnitcmiit  lUrtrk't  laim  mmanaa  on  dv  .fwiwin 
of  central  ccononuc  planning  appeared  «i  Tht  Msrpm  (immmin  Smmn  (lanoary  19?I5) 

6.  Miscs,BMrnMmK7(Nc«  Rodidk,  NY    Afte^pon  llowc,  |1«M|  l«ft9) 

7.  Mihon  Fncdman,  QqptfdbM  an^  frmdmi  (Chiupu   L'fM««n«t  (W  < 
1962),  p.  89 

8.  IM,  p  99 


Exporting  Taxes  Threatens  State  Economies 
by  John  Scmmcns 


The  mm  popular  tax  U  one  paid  by  someone  else.  Thus  state 
Icgiftlatnrft.  in  their  quen  to  rauc  spending  without  angering  local  tax- 
payer*, arc  de\ning  m«»rc  and  nv>re  schemes  to  "export"  taxes  to  out- 
cifMatr  rc%uicnu 

Thc*e  imlude  higher  lAxct  cm  goods  and  services  most  frequently 
purcha»cd  b>'  ttniruo  (e.g..  taxc*  on  hotel  rooms  and  car  rentals), 
higher  taxo  on  cxtractKm  industries  (e.g.,  oil  production  and  mineral 
mining),  and  cflbns  to  aiUcci  more  taxes  (nxn  business  income  earned 
ouuidc  the  itatc  thniugh  "unitarv"  taxes.  In  each  case,  the  targeted 
taxpa>m  h\T  cHiisKk  (Ik  taxing  junsdiction,  so  they  won't  be  able  to 
express  their  diiutufaitMin  at  the  polls. 

F4.(in(imut3i.  hcmr\rr,  pewit  out  that  there  are  no  "free  lunches." 
Everything  hat  a  ctttt  The  apparent  free  lunch  to  be  had  from  attempt- 
ing to  export  the  tax  burden  u  illuson*.  The  short-term  gains  are  more 
than  offiHrt  b>*  larger  kmgtrrm  losses.  WTiat  the  proponents  of  export- 
ing taxe»  faiJ  to  see  is  that  ihe\'  are  also  exporting  the  enterprises  and 
job  opportunities  that  could  help  their  state  grow  and  prosper. 

V\'hen  the  C'^mstitutMin  was  untten  in  1787,  its  authors  were  care- 
ful to  include  a  cbusc  pnthibiting  the  federal  government  from  impos- 
ing taxes  on  expom  (AhkIc  1,  Seaion  9,  paragraph  5:  "No  tax  or 
duty  fthall  be  laid  on  anicles  exported  from  any  state").  They  knew 
that  a  tix  on  a  state's  exports  could  de^•astate  diat  state's  economy. 
The>*  didn't  bother  to  similari>-  restna  states  from  taxing  dieir  own 
exports  because,  apparently,  the>-  didn't  anticipate  that  any  state  would 
be  $o  f(K>Ush 

Attempting  to  cxptxt  a  tax  puts  a  state  at  a  competitive  disadvan- 
tage when  it  comes  ro  importing  income  and  wealdi.  While  it  may 
wdl  be  true  that  nonresidents  are  non\oters  and  as  such  probably 
won't  ha\r  much  impaci  on  state  and  local  elections,  they  are  still 
consumers.  Unlike  the  local  taxpayers  u-ho  may  have  little  choice  but 


Mr.  Smnan  n  m  erononw  for  the  Laissez  Fairc  Institute  in  Tempe,  Arizona.  This 
Mkk  fim  «|)peMvd  n  the  I«M»>  1991  usoco(  The  Fneman. 


115 


116  /  JohnSemmem 

to  pay  the  higher  taxes  imposed  b\'  their  legislature,  the  out-of-state 
taxpayers  may  more  easily  take  their  business  elsewhere. 

Consider  the  dilemma  of  the  in-state  firms  that  are  supposed  to 
export  a  tax  to  their  out-of-$utc  customers.  If  the  tax  is  added  to  the 
price  of  the  exported  produa  (as  state  legislators  seem  to  assume  it 
will  be),  competing  products  from  other,  lourr-taxcd  locations  vkill 
have  an  advantage.  Tourist  attractxxis  m  these  other  locations  ^ill 
become  slighdy  more  alluring.  Manuficturcd  goods  produced  cbe- 
where,  perhaps  in  a  foreign  countr>',  %nll  gain  a  small  pncc  edge  on 
every  unit  offered  for  sale.  Conscquenth-,  sales  re%mue  foe  the  instate 
businesses  will  fall.  Lower  roenucs  mean  a  smaller  business  operation, 
fewer  employees,  and  less  ccononuc  grouth 

On  the  other  hand,  if  the  in-state  businesses  absorb  the  tax  in  order 
to  maintain  competitive  pnces  in  out-of-state  markets,  then  their  prof- 
its will  fall.  The  higher  profits  of  out-of-state  businesses  will  become 
more  attractive  to  investors.  Investment  capital  %m11  tend  lo  fWm-  out 
of  state,  which  will  mean  lcs.s  gnmth  and  fin»eT  cconomK  opportuni- 
ties for  would-be  in -state  cmpknres 

Some  proponents  of  cxpoa  taxes  argiK  that  the  rates  are  fi»  kmr 
to  have  any  effca  on  economic  decmons,  or  that  the  targeted  taxpayers 
arc  "locked  in"  anN-v^ay.  The  kicked  in  ihesu  has  wwnc  plausibility'  A 
mine,  for  example,  is  where  it  is  because  that's  >»-here  the  c»rc  is  ktiated. 
A  tax  won't  change  that.  Howcvrr,  a  tax  uill  change  the  relati\r  profit- 
ability of  the  firm  or  the  salabilit>'  of  its  output  These  small  effects  at 
the  margin  can  have  large  king- term  effects  on  business  expianuon  and 
choice  of  business  kxation.  Mines  in  other  kKatttms  kmU  gam  a  larger 
market  share.  New  mino  arc  a  bit  more  likeh  to  be  cstaNished  in 
lower-taxed  Icxation-s  A  icv,  percentage  ptnno  <if  difference  m  tfie 
short  run  grow  into  millions  ot  dollars  and  thousands  of  |ob  opportu- 
nities lost  in  the  long  run. 

Whether  taxes  arc  exported  or  not,  the>  still  renwnr  funds  from 
the  private  seaor.  The  monc\'  that  giKs  mto  export  taxes  will  be  un- 
available to  invest  in  tounsm,  minmg,  <x  other  busmeaacs,  furtficr 
hurting  the  local  cconomv. 

Economic  growth  rarcK'  comes  m  huge  leaps  frirward.  More  typi- 
cal is  the  continuous  ctjmpcxindmg  of  modest  single-digit  growth 
rates.  In  a  multi-billion  dollar  eaxiomy,  a  reduction  of  just  a  fi^ction 
of  a  percent  in  the  return  on  investment  ex  growth  rates  can  amount 


ExfmW^TaxaThruums  State  Economies  I  117 

to  the  loM  of  billiom  of  doUan  of  wealth  and  millions  of  job  opportu- 
nities over  a  ftngk  generation. 

Both  equity  and  cflkicno'  point  away  from  the  policy  of  attempt- 
ing to  export  taxes  A  gcncmment  that  rcjeaed  the  "free  lunch"  appeal 
inherent  in  the  exponatnin  of  taxes  would  better  serve  its  constituents. 
If  the  rcMdenta  were  diiahmod  of  the  mxion  that  someone  else  is  going 
to  pty  their  itJte  go\xnuncnt*»  bills,  they  would  be  less  tolerant  of 
waste  and  dcoM^T  spending. 

The  ethos  of  contemporary  tax  policy  is  misguided  and,  in  the  long 
run,  seif-dcKTUCtn-e  A  loival  of  a  *no  taxation  without  representa- 
tion** polic)'  would  be  more  cquitabk  and  more  profrtable  for  those 
who  adopt  II. 


Boom  Time  for  State  and  Local  Government 
by  John  Hood 


If  the  press  has  an>thing  to  do  w\xh  it,  the  199(h  will  be  a  decade 
of  higher  taxes  and  government  expansion  in  .\mcTica.  The  last  ^tar 
or  so  has  seen  artide  after  artKle,  editonal  after  editonal  proclaiming 
an  end  to  the  "EVecade  of  Greed'  and  calling  for  a  nc*-  surge  of 
activism — and  a  corresponding  surge  in  taxes  to  pay  for  it.  Much  of 
the  media's  pro-tax  and  pnvgtnemmeni  icntiment  aulesced  around 
Earth  Day  1990,  which  was  realh'  a  ccniple  of  months  of  constant  caUs 
for  America  to  "invest  in  a  clean  enMronment  * 

The  most  recent  de\  elopment  in  thu  barrage  has  been  the  addition 
of  state  and  local  budget  gaps  n>  the  perennial  example  of  the  frdcnl 
budget  deficit  as  prcx>f  that  .\merKam  are  undenaxed  In  boch  1989 
and  1990,  state  governments  annind  the  ctnintrv  expenenced  skmrr- 
than-expeaed  grouth  in  tax  roenues.  kadmg  tt>  record  budget  defiats 
in  some  states.  Since  most  of  the  affected  states  hast  balanced-budget 
provisions,  thc>'  have  n<H  been  able  to  debv  their  day  of  reckoning — as 
has  the  federal  gcnemment  v>  tar  ( Vmsc^uenth .  highh  visible  battles 
have  been  waged  between  adM>cate^  o<  budget  restraint  and  thotc  of 
tax  increases  to  balance  state  budgets  The  natKmal  pre**,  among  oth- 
ers, has  seized  upon  these  state  budget  vktKs  to  prcdKt  that  the  1980s 
of  governmental  restraint  are  preparing  ti>  gisr  wav  ti>  the  1990s  of 
renewed  go\emmental  expansHHi 

Whether  or  not  their  pn>gntntKatK»n  u  correct,  the  press  and  the 
various  interest  gn>ups  that  nunipubte  it  ( teachers'  unions,  state  em- 
ployee unions,  etc. )  have  based  their  entire  case  an  a  false  proptMition: 
that  the  1980s  was  a  decade  of  gosemmental  amtraction.  Nothing 
could  be  ftirther  fn>m  the  truth  Although  the  rate  of  guscinnKnt 
expansion  may  ha\  c  slowed  a  bit  on  the  federal  les-el  dunng  the  Reagan 
Administration,  the  share  of  national  income  consumed  bs  federal 


John  Hixxi  IS  a  no»i>[upcr  cnhmvust.  a  amtnbun^  odMnr  of  lUmm  OHfHne,  mi 
research  director  for  the  John  luxkr  Ftiundjiinn.  a  (Utr  pofco  dwA  tmk  m  Hik^  Nonh 
Carolina.  This  artick  a  reprinted  fnm  the  Ncnxsnher  1990  hmt  ot  Tim  f         r 


118 


Boom  Time  far  Stau  and  Local  Government  I  1 19 

»pcnding  tirai  the  iamc  in  1989  (22  percent)  as  it  was  in  1980 
-Budget  cuti*  bbmcd  on  Reagan  were  only  reductions  in  the  rate  of 
increaic  in  govemmcm  ipcnding,  not  real  reductions  in  government's 
role  in  Kxicty  and  the  economy. 

On  the  federal  le\TK  thi*  %tor\'  has  been  told  more  than  a  few  times. 
But  »incc  the  new  bankgnHinds  of  gcnemmcnt  activism  are  state  legis- 
lature* and  aiy  hilk.  it  u  impocTani  to  recognize  the  truth  about  state 
and  local  govcmmcm  in  the  1980»— that  during  a  time  when  the 
federal  govcnvncm  retained  its  alread>'  large  role  in  American  society, 
•tile  and  local  gmrmmena  incrcaicd  theirs  dramatically,  by  17  per- 
cent in  real  per  capita  vjx^ing  fnwn  1981  to  1989.  And  die  state  and 
kxal  tai  burden  cwi  t>pKal  h<iuicht>lds  increased  steadily  during  the 
ume  penod,  according  tf>  \\\c  lax  Foundation,  while  die  federal  bur- 
den retnaincd  roughlv  the  lamc.  Far  from  being  a  decade  of  fiscal 
conier\'atum,  the  1 980*  urrc  a  boom  rime  for  government  on  the  state 
and  local  level.  Comider  the  record  of  government  expansion  in  two 
itmilar  «tatc»;  Neu*  York,  the  «m>nghold  of  Northeastern  liberalism, 
aiKl  Nonh  C^iltna,  a  Southern  «atc  with  a  conservative  image. 

NcwYoHi 

Ai  of  April  1990,  Neu-  York  State  faced  a  projeaed  $3  billion 
budget  deiidt  for  fucal  sxu  1991.  WTiile  Governor  Mario  Cuomo, 
other  itate  politiciaiu.  and  the  itatc  press  have  attributed  the  state's 
budget  pnthlems  to  tax  cuts,  ikmcr-than-expcaed  economic  growth, 
and  the  1987  *tiKk  market  criih.  Fxi  Rubenstein  of  die  Manhattan 
Institute  attributes  the  ddkits  to  runaway  government  spending.  Dur- 
ing the  1980&,  he  report*.  Neu-  York  state  spending  outpaced  inflation, 
populatKm  growrih,  and  per  capita  income  growth,  consuming  16  per- 
cent of  New  Yorken*  personal  income  m  1988— up  from  14.7  percent 
in  1983 

The  state's  general  fund,  which  doesn't  include  federally  funded 
pfograms  or  capital  protects,  greu-  at  an  average  rate  of  9.6  percent  a 
yetr  from  1980  to  1989.  doubhng  oery  scscn  and  a  half  years.  Chip 
in  federal  and  odKr  hinds,  and  dK  total  state  budget  grew  by  about 
53  percent  from  1983  to  1989 

Naturalh'.  rf»e  meteonc  nse  of  state  spending  in  New  York  has 
been  accompanied  b\'  higher  effective  tax  rates  on  New  York  house- 
holds. From  1983  to  1988,  state  taxes  as  a  percentage  of  personal 


120  I  John  Hood 

income  rose  by  almost  10  percent— a  rate  more  than  three  tinics  as  fost 
as  that  in  "Taxachusctts." 

In  New  York,  as  in  many  other  states,  one  reason  asserted  for  state 
government  expansion  has  been  President  Reagan's  New-  Federalism, 
which  shifted  the  burden  for  some  programs  from  the  federal  level  to 
the  state  level.  But  the  faa  is  that  federal  funds  foUowed  the  programs  | 
more  often  than  not.  In  the  case  of  Ne^-  York,  federal  aid  mone>'  to  | 
the  state  and  to  local  governments  actualh'  increased  b\'  IS. 4  percent 
after  inflation  between  1983  and  1988,  accordmg  to  Rubcnstcin. 

Where  did  the  state  and  kxal  govemnwit  in  No*-  York  spend  their 
massive  influx  of  taxpayers'  mone%'?  Virtualh"  oxn*  area  of  the  state 
budget  increased  in  real  terms  during  the  decade,  especulh  m  educa- 
tion, environment,  ana-pox-ert)-,  and  ccononuc  drvck)pmem  pro- 
grams. For  much  of  the  decade,  Neu  York  kd  the  nation  in  per  capita 
state  spending  on  public  welfare;  in  fiscal  >Tar  1987,  it  spent  almoft 
$600  per  capita  on  public  urlfare,  aoxt  $100  more  chin  die  ncit 
highest  spending  state,  Massachusetts.  Nci»  York  maintained  higher- 
than-avcragc  spending  lo  els  m  educatMm  and  envmmnKTJtal  programs 
during  the  decade,  and  expanded  the  state  ginrmment**  ft>k  m  "eco- 
nomic de\'clopment."  By  1987,  it  had  attained  the  dubious  distinction 
of  being  second  onh'  to  Illinois  in  state  spending  to  encourage  tourisn. 

North  Carolina 

While  New  York's  reputatxm  squares  %k-ith  its  profligate  record 
during  the  1980s,  Nonh  C>an)lina  has  Kimehoi*-  maintained  an  image 
of  a  small  government,  bwtax  state  u^ile  expanding  ginrmment  pro- 
grams, expenditures,  and  taxes  at  almost  the  Mmc  rate  as  New  York. 
In  some  ways,  as  a  matter  of  fact.  North  C^iarotma  taxpayers  have  had 
an  even  rougher  time  of  it. 

From  1978  to  1990,  the  state  budget  increased  b>'  50  percent  after 
inflation,  which  far  outstrips  the  increase  during  roughK  the  same 
period  in  population  grouth  ( up  1 3  pcrcem )  or  state  per  capiu  income 
(up  15  percent).  Moreover,  the  spending  authorucd  for  the  current 
1990  fiscal  year  capped  scNeral  >xars  (»f  unmterrupccd  budget  growth, 
establishing  a  spending  plateau  49  percent  higher  than  in  1983. 

Meanwhile,  North  Carolina  taxpav-ers  paid  an  average  of  aknott 
$1,500  in  state  and  local  taxes  in  1988,  26  percent  more  after  inflation 
than  they  did  in  1978.  North  Carolina  loies  the  highest  individual  and 


Time  fm^  Suae  and  Load  Government  I  121 

^^^  Southeast,  and  recently  raised  its  gas  tax 
»lta»o«2 1  con  per  galJon-^onc  of  the  highest  rates  in  die  nation. 
Significantly.  oJncntm  ouokic  the  state  arc  beginning  to  regard  Nordi 
CifDlina  ai  a  high  ux  lUtc.  In  Januan-  \990M(mty  magazine  ranked 
North  Carolina  1 1th  in  the  oountn*  in  total  tax  burden  levied  on  a 
typical  reader  of  the  magazine,  and  first  in  the  Soudieast. 

A»  in  New  Ycici,  nate  officials  ha\  c  blamed  die  increases  in  spend- 
ing on  Reagan's  Neu-  Federalism,  complaining  diat  new  federal  man- 
date* have  fi»rted  nunx  spending  But  the  flow  of  federal  hinds  to  die 
state  has  increased  In-  26  percent  in  real  tenns  since  1978. 

Dunng  dK  1980s.  North  C:amlina  dramatically  increased  state 
spending  vtt  educatxMi  and  on  economic  doelopment  programs,  as- 
suming that  higher  ginrmment  expenditures  would  "solve"  diese  and 
other  pn»Hcnts  Siarc  suhsKlics  fc»r  pnvatc  industries  and  organiza- 
tions, deemed  a  ~pn»grr*%i\T"  investment  in  economic  development, 
expanded  greatly  during  the  1980s  One  subsidy,  to  die  Nortii  Caro- 
lina Microckctronia  Cxnter.  rtwe  to  $26  million  by  die  end  of  die 
decade. 


What  About  the  Tax  Revoh? 

S<inK  might  he  surpnsed  to  learn  that  state  and  local  governments 
in  K>  many  states  hase  etpaiKlcd  dunng  the  1980s.  After  all,  a  nation- 
wide tax  re%x>h.  starting  in  1978  with  C^ifomia's  Proposition  13,  was 
luppoied  to  be  a  defining  political  e\ent  for  the  1980s. 

And,  indeed,  it  was— tn  those  states  where  die  "revolt"  actually 
ended  up  restrammg  the  gnmth  of  gt)Ncmment  and  even  rolling  it 
back  a  bit.  l*suallv.  this  required  some  kind  of  mechanism  restricting 
taxes  or  speiKlmg.  or  rrquinng  large  legislative  majorities  to  enact 
increases.  California's  tax  limitatioas  spared  the  state  die  kind  of  fiscal 
woes  that  occunrd  in  New  York,  Massachusetts,  Nordi  Carolina,  and 
odter  states. 

The  problem  \s-as  diat  dunng  the  1980s,  an  expanding  economy 
led  to  increasing  romue  colleaions,  bodi  at  die  federal  level  and  in 
iMny  stMcs  and  kxalities.  These  re\  enue  windfalls  gave  legislators  die 
latitude  to  increase  spending  on  so-called  "pressing  needs"  while  main- 
taining their  repuratKxi  as  fiscal  conservatives.  This  became  a  politi- 
cian's drram  (regardfcss  of  part)-  affUiation)  and  a  pubUc  choice  econo- 
mist's nightmare:  u-hile  speaal  mtercst  lobbies  were  successftil  in  ex- 


122  /  John  Hood 

panding  government's  role,  taxpayers  fck  no  real  incentive  to  call  for 
restraint.  Some  states  did  enaa  tax  rate  hikes,  but  most  financed  mas- 
sive expansions  of  government  on  proieciions  of  increased  re>-enues 
for  future  years. 

In  the  last  two  years,  how-oer,  this  bubble  has  popped.  As  the 
economy  has  cooled  off,  revenue  collections  ha\r  bailed  to  keep  up 
with  projections,  and  suddenh'  goxemment  officials  are  faced  uith  a 
dilemma.  They  must  cither  impose  ne^*'  taxes  on  the  slackening  econ- 
omy to  meet  their  rc\  enue  needs,  or  the\'  must  scale  back  die  tremen- 
dous surge  in  government  action  the\'  enacted  durmg  the  1900ik  Their 
decision  will  determine  \*'hcthcr  the  United  States  is  headed  for  a  inic 
rebirth  of  limited  go\  cmmcnt  and  free  markets,  or  for  the  continued 
growth  of  bureaucratic,  inters  cntKimst  pnrmment  that  regulates  and 
subsidizes  virtually  e\er>'  sector  of  the  cconom>-. 

Whate\'er  their  dccisKW,  pubhc  offKials  \»-ill  ex-cntualh'  ha\r  to 
answer  to  the  public.  And  despite  the  amstant  drumbeat  to  mamrain 
the  current  le\'cl  of  goxemment  spending,  there  is  »ome  oidence  dut 
voters  won't  countenance  no*  taxes  to  finance  it  Recent  tnitiatn'cs  to 
increase  state  or  IcKal  tax  rates  in  MKhigan,  Waihtngton  State,  Niirth 
Dakota,  and  V^irginia  ha\-c  k»t  at  the  p»>iU  .\nd  a  recent  >\ite  in 
California  to  increase  the  state's  gas  tax  to  finance  highway  renovation 
and  construction  succeeded  ntx  due  to  \xicer  acceptance  of  big  go%Tni- 
mcnt,  but  instead  because  the  taxes  \%Tre  uKcesUulh'  depicted  as  "user 
iccs"^  dedicated  to  a  specific  purp<»c 

There  arc  c\en  signs  that  a  neu  tax  roxUt  might  be  brewing:  tai 
limitation  referenda  in  states  from  Massachusetts  to  Oregon  are  at- 
traaing  substantial  public  suppon.  The  question  ixm-  u  whether  voter 
resistance  to  taxes — the  **supply  side"  of  ginrmment  expansion — will 
lead  to  reductions  in  the  demand  ft>r  ginemmeni  pnigrams,  uibMdics, 
and  regulations.  Advixatcs  of  gtncmment  restraint,  free  markets,  and 
liberty  have  much  to  do  if  a  neu  tax  rc\x>lt  is  indeed  to  be  translated 
into  a  fundamental  rollback  of  pnemment  <»n  the  iXitc  and  local  le\-els. 
An  important  first  step  is  simplv  ti>  realize  that  the  1980t,  wideiy 
believed  to  be  a  pcntxl  of  ginemment  rcstramt  and  contraction,  was 
a  boom  time  for  state  and  kxal  gtnemment— and  that  after  ihu  decade 
of  big  government  ascendancv,  no  problems  appear  to  have  been 
"solved." 


Government  Policies  and  Capital  Growth 
by  ChristDpher  Witzky  and  Rolf  E.  Wubbels 


Although  nuny  fjcton  hj\-c  contributed  to  current  U.S.  economic 
l>roWcnu.  the  *uhjcn  of  imufTicicnt  capital  formation  has  received 
f(>fcn»i»t  atrcntxm  in  recent  ycar^  Sparked  by  the  obvious  failure  of 
traditMinal  Kp-nciun  demand  management  p()licies,  supply-side  eco- 
(Kimics  ha»  capcurcd  the  puMK  imagmation  while  eliciting  approval 
from  i  bfoad  ipectnim  of  ccnnomi&ts  and  politicians. 

The  CHCIKC  of  the  capital  formatMKi  problem  is  diat  an  insufficient 
jKiction  UtiMtumil  income  u  uved  for  mvcstment,  while  too  much  is 
\("»eni  ffw  ginrmnKTif  and  private  consumption.  Decades  of  fiscal  and 
int«Ktar\  miumiugcmnii  coupled  with  a  pcr\erse  tax  system  have 
generated  a  ciwuumpcion  biMim  at  the  cost  of  chronic  double-digit 
tnflatKm.  Uugguh  pa>diKm\nr\-  and  lackluster  economic  growth.  Con- 
Numer  indebcedncu  helped  finance  the  bcx>m,  rising  from  $188  billion 
in  1976  ti>  $305  billion  in  1980 

r>uincenti\'es  to  repUting  our  aging  capital  stock  are  resulting  in 
wide-tprrad  plant  ohMtleueme  and  declining  rates  of  capital  utilization. 

Nexrr  a»  a\  id  %»\m  as  their  Kuropcan  and  Japanese  counterparts, 
Americans  ha\T  bcaime  one  of  the  least  thrifh'  peoples  of  the  industri- 
alized Htirld.  The  Ic&i  a  natxin  saves,  the  fcuer  are  the  resources  to  be 
devoted  to  the  fbnnatXNi  of  capital  necessar)'  to  insure  healthy  eco- 
nomic gnmth  and  mitigate  mrfation.  The  net  supply  of  funds  from 
household  savings  prxn  idcs  almtnt  all  of  the  net  flmds  raised  by  the 
other  pnman*  scoon  t>f  ginemment  and  business.  Both  government 
and  business  arc  net  dissa%-en. 

Developing  Incentives  for  Sa\ings  and  Investment 

In  seeking  ti>  etKixirage  future  sa\mgs  and  investment,  policymak- 
ers ate  now  scrutmizmg  the  incentive  systems  developed  by  America's 

MTwkrfcv  n  cuRtiKh  Dtttaw  d  Cocporatc  Finance  with  United  Technologies 
Cofpormon  m  ConncaK^M  Dr  Wubhds  rrmrd  from  Nn*  York  University,  where  he  was 
PraCam  ofFsMKc.  Hm  wock  a  rcpomcd  fromTbtFrumaa,  October  1981. 

123 


124  /  Christopher  Witzky  and  Rolf  E.  Wubbds 

trading  partners.  Although  sa\ings  rates  and  consumption  patterns  are 
pardy  a  cultural  phenomenon,  the  U.S.  tax  system  is  cffcciivdy  biased 
against  savings  and  investment,  ^-hile  foreign  countries  tend  to  rdy 
much  more  on  consumption-based  le\Tes  such  as  the  \-ahie-addod  tax. 
The  United  States  also  depends  more  hea\ih'  on  capital  gains  taxes. 
Beyond  such  faaors,  a  number  of  countries  ha\T  adopted  ckarK'  poti- 
tive  investment  and  savings-onented  tax  pobacs. 

The  Japanese  have  a  tradition  of  sa\-ing,  v^'hich  b  reinforced  by  a 
tax  policy  that  exempts  Mrcualh*  all  interest  income  earned  b\'  Japanese 
citizens.  This  exemption  includes  interest  on  deposits  of  up  to  $  1 3,300 
in  both  postal  savings  accounts  and  banks,  mtercst  on  up  to  $  1 3,300 
worth  of  government  bonds,  and  interest  on  as  much  as  $22,000  held 
in  employee  pavToU  sa\ings  accouno.  In  this  w^\  a  maximum  of 
$62,000  in  savings  can  be  sheltered  from  taxes  on  interest  income. 
On  average,  the  Japanese  no^'  msx  about  26  percent  of  their  dtipoa- 
able  income. 

Since  the  1960s  a  cornerstone  of  the  West  German  policy  ro  m- 
crease  savings  had  been  a  gtnemment  tax-free  bonus  program  for 
special  savings  accounts  held  fix  su  tx  torn  >Tars.  Thoe  accounts 
could  take  the  form  of  bank  accounts,  life  insurance  policies,  buikling 
socict)'  shares,  and  sttKk.s  and  btmds  .\nv  aduh  niih  a  taxable  inaime 
of  less  than  $13,700  could  dep<»it  up  ti>  $475  per  >rar  into  such  an 
account,  which  would  earn  an  annual  tax-free  bonus  of  14  percent  a 
year  plus  2  percent  for  each  dependent  chiki  in  addition  to  accrued 
interest.  Deposit  and  inccxnc  ceilings  n-ere  doubled  for  married  cou- 
ples. 

Furthermore,  an  employee  couki  set  up  a  special  acaxint  n>  service 
regular  payroll  deductions  of  up  ro  $3S7  annualh-  and  ^\ialif>-  for  a 
government  bonus  of  30  to  40  percent,  depending  upon  family  mk. 
Individual  annual  interest  income  of  up  ti>  $460  has  been  tax-free,  and 
life  insurance  premiums  arc  deduaiWe  under  certain  amditiom  Such 
policies  have  helped  to  generate  an  impressnr  uvmgs  rate  of  14  per- 
cent. 

The  cost  of  these  tax  rebates  and  UMngs  prograim  Mwunted  to 
$4.1  billion  in  1980,  about  3  5  percent  of  West  German  federal  spend- 
ing. Facing  a  projeaed  1981  public  icctor  defkit  of  some  $32  biUion 
due  to  rapidly  mounting  costs  for  Mxial-urlfare  progranm,  the  govern- 
ment has  eliminated  many  portKxu  of  the  14  percent  bonut  tcheme. 

Austria,  with  its  relatively  bw  inflatKm  rate,  pra\ida  similar  m- 


Gapoimau  PoUdes  and  Capital  Growth  I 


125 

^oioytM  to  nvc  andinvcst.  A  portion  of  interest  on  savings  is  exempt 
from  tn,  and  mimcrout  ochcr  deductions  and  tax  privileges  provide 
die  AiMChan  m^-ator  wxxh  a  posmvc  rate  of  return.  Austria  is  also 
wdl-known  fcx  in  banking  uxxtcs  laws  which  are  more  stringent  than 
thoK  in  Switzerland. 

Prance  Oflcn  Advintagcs 

In  Fnmct  all  individuaU.  including  children,  are  allowed  to  earn 
rai-frec  imrmf  of  7  5  pcncnt  on  dcpmits  of  up  to  $10,840  in  mutual 
uvings  hank*  The  fim  $723  of  dividend  mcome  from  stocks  is  tax- 
free  ufkicr  varKiuk  iimditKim. 

The  popular  Fmxh  uvingi  incentive  is  die  1978  Monory  Act 
(after  former  Finance  Minister  Ren^  Monory)  which  became  effective 
May  1978.  The  law  alkmi  individuals  who  invest  in  French  equities 
to  dcdua  up  to  SOOO  franc*  (about  $1200)  from  dieir  taxable  income 
each  year  ftir  fimr  ctwiux^tne  \Tan.  The  deduaion  limit  is  raised  500 
franc*  for  ttw  fir*t  and  *etond  child  and  1000  francs  for  each  additional 
child.  The  miine>-  muit  remain  invested  for  a  minimum  of  three  years, 
though  IKK  necr*%anh-  in  the  *amc  securities.  Investments  may  be 
made  m  immial  fund*,  prtnidcd  that  at  least  60  percent  of  the  portfolio 
u  de\'oced  ti>  itock  «»f  French  companies. 

Ohier^TT*  regard  pa*uge  of  die  Monorv'  Aa  as  an  important  fac- 
tor in  tiie  rcmultmg  bocwn  on  the  Pans  Bourse.  French  industry  has  also 
benefited  fnim  tnrr  $1  95  billKm  in  ne\^'  equit>'  offerings,  spurring 
in\x«ment»  in  ne>*  plant  and  equipment. 

"Um  Mooor>"  has  been  an  overwhelming  success.  Mr.  Monory 
waa  able  lo  repon  to  t!tK  Cabinet  on  February  15,  1980,  diat  in  1979 
more  than  one  miUion  people  took  advantage  of  the  law,  investing  an 
additKmal  $1.8  bdlion  m  equities  smce  its  enactment.  Since  1978 
FrcfKh  prtxhKtion  has  nsen  b\-  more  dian  17  percent;  and  in  1979  the 
French  sa\Td  approximately  1 7  percent  of  disposable  income.  Since 
d»e  Monor>-  Aa  is  only  a  temporan-  four->'ear  relief  measure,  some 
government  officiab  are  alread>'  worrying  about  die  possible  withdrawal 
of  investors  from  dK  Pans  Bourse  \%^ien  die  Aa  expires  in  1983. 

The  election  of  Soaalist  President  Francois  Mitterrand  in  May 
1981  had  placed  dK  French  economy  in  jeopardy  and  undermined 
many  of  these  achanccs. 

the  problems  of  England's  economy  are  well  known.  Aldiough 


126  /  Christopher  Wftzky  and  RoifE.  Wubbeis 

the  Thatcher  Administration  has  made  maior  strides  in  curbing  mone- 
tary growth  and  reducing  inflation,  go\TmnKm  policies  have  been 
largely  oriented  toward  "tax-shifting^  rather  than  real  tax  reductions. 

After  taking  over  in  April  1979,  the  Thatcher  govmunent  cut 
personal  taxes  for  middle  and  high-mcomc  groups  but  soon  found 
that  the  red  ink  was  excessive.  The  admmistration  then  nearh'  doubled 
the  value-added  tax,  from  8  percent  to  15  percent,  raised  gasoline  taxes 
by  20  cents  per  gaUon,  and  moNrd  a>*-ay  from  promises  to  cut  cocpo- 
rate  taxes. 

These  faaors,  plus  nsmg  interest  rates,  led  to  an  cxpkxaon  in  the 
retail  price  level  and  an  unfavorable  economic  climate.  The  nation's 
bond  market  had  already  \irtuall\-  been  destrosrd  in  1971  by  the  com- 
bination of  inflation  and  high  marginal  personal  tax  rates.  Equity  mar- 
kets, though  also  depressed,  recen-ed  some  benefit  from  reductiom  in 
the  destructive  top  marginal  tax  rate  on  in^rstment  income  from  98 
percent  to  75  percent. 

For  many  years  the  United  Kingdom  abo  had  one  of  the  highest 
capital  gains  taxes.  All  uix-estment  income  exceeding  /^,000  per  an- 
num was  subjea  to  an  additxmal  15  pucuttagc  pomc  tn  over  and 
above  the  maximum  indi\idual  rate  of  60  percent.  The  maximum  tax 
rate  on  capital  gaim  thus  amtninted  to  75  percent  The  c^wtal  gams 
tax  now  stands  at  30  percent  on  any  gams  abcnx  £3.000 

Even  with  these  reforms,  hou-orr,  it  is  likeh*  that  high  inflaoon 
and  falling  productivm-  will  avmnue  to  pbgue  the  Umicd  Km^dom 
unless  both  taxes  and  spendmg  are  frirther  reduced. 

Adverse  Policies  in  the  United  States 

What  docs  the  United  States  do  tt)  encourage  u>-tngs  and  invest- 
ment? Virtually  nothing.  In  fact,  most  existing  pobaes  wort  to  make 
consumption  a  virtue  and  sasmp  a  nsk. 

In  the  United  States  mxninal  interest  and  dnidend  income  has 
been  taxed  as  unearned  income  at  marginal  rates  up  to  70  pcrcem. 
This  pohc\%  combined  with  high  inflation  and  intcrcst-racc  cdlvigs  on 
bank  deposits,  has  made  savings  a  guaranteed- kiss  proposioan.  As  a 
percentage  of  disposable  income,  the  U.S.  savings  rate  dropped  from 
7.4  percent  in  1970  to  6.9  percent  in  1976,  reaching  a  krw  of  3.4 
percent  in  the  first  quarter  of  1980  (In  1981,  the  ConHnerce  Depait* 
ment  issued  a  new  statistical  measure  of  the  savings  rate.  Although  the 


Gawerwmmt  Policus  and  Capital  Growth  I  127 

new  uvingf  rate  itabsdcs  arc  nominally  higher,  the  declining  trend 
remaim.)  Thanks  in  pan  to  thii  decline,  productivity  growdi  slowed 
(D  an  annual  average  of  only  1 .2  percent  in  die  1970s,  down  from  2.5 
percent  in  the  1960*  Betu'een  1%3  and  1973  American  output  per 
penon  wmc  by  1 .9  percent,  the  slowest  of  any  major  industrial  country. 

Under  currem  tax  law,  taxable  income  is  not  adjusted  for  inflation. 
As  a  resuk,  durmg  an  tnflationarv'  period,  individuals  advance  into 
higher  tai  brackets  due  to  increasing  nominal  money  incomes,  while 
real  incnrno  arc  nsing  much  leu  or  nuy  even  be  declining.  In  addition, 
capital  gams  computed  in  dollar  terms  enter  into  the  tax  base,  even 
though  such  ncwntnal  gams  can  represent  very  much  smaller  real  gains 
(or  possibh'  real  Whscs  i  Thus.  inHation  raises  personal  taxes  by  a  much 
larger  percentage  ihan  nominal  incomes,  causing  the  average  tax  rate 
CO  rifc  and  tax  pa^mcms  to  increase  in  real  terms. 

Aooofding  to  Martin  Fcklstetn,  president  of  the  National  Bureau 
of  Economic  Reseanrh.  om  if  corporate  profits  and  stock  prices  could 
manage  m  keep  pace  mih  inflatMin  (an  unlikely  possibility)  and  main- 
rain  traditional  rates  <>f  real  gnmth,  a  20  percent  tax  on  nominal  capital 
gams  utHild  mean  an  80  percent  tax  on  real  gains  given  a  7  percent 
inflation  rate,  depending  on  the  hoklmg  period.  An  8  percent  inflation 
rate  wouki  push  the  effeciivT  rate  mer  100  percent.  Thus,  capital  gains 
taxes  have  actually  been  massi\'cly  confiscatory.  Similar  inflationary 
eifiectB  on  income  tax  rate*  rcsuh  in  a)nfiscation  of  savings. 

PmaHring  Capital  Gaim 

Small  in\Tstors  ncarh-  abandoned  die  American  stock  markets  in 
die  mid*  19701,  partialh-  due  to  exorbitant  taxes  on  capital  gains 
pegged  at  a  nuuomum  of  49  percent  for  most  of  die  decade.  In  addition 
to  depressing  equit\-  market  values  and  reducing  new  capital  formation 
at  measured  b\-  \-ent\ire  capital  funds  and  new  public  offerings,  capital 
gun  taxes  tei>d  to  inhibit  capital  mobilit>'.  If  a  capital  asset  appreciates 
mbMandallv,  rfK  accumulated  capital  gains  tax  liability  upon  realiza- 
tion can  deter  die  asset's  sale.  This  is  referred  to  as  die  "lock-in"  effect. 
It  b  diflkuh  to  measure  the  opportunity  cost  of  diis  capital  immobiUty 
in  terms  of  diminished  expbitation  of  new  technologies. 

Over  die  entrenched  opposirion  of  die  Carter  Admimsttadon, 
Coi^ltss  enacted  die  Stcigcr  Amendment  to  die  Revenue  Act  of  1978, 
kjwmng  die  maximum  tax  on  kxig-term  capital  gains  to  28  percent. 


128  /  Christopher  Witzky  and  Rolf  E.  Wubhds 

According  to  a  Treasury  £)q>arcmcnt  stud\\  die  net  re\Tnuc  loss  in 
1979  from  this  reduction  was  onh*  $100  million,  hi  less  than  the 
forecasted  loss  of  51. 7  billion.  The  rate  cut  was  o6Etct  by  $2.5  billian 
in  new  revenues  fixxn  higher  tumov-cr  rates. 

An  extensive  1980  survey'  of  stock  oHncrship  b\'  the  New  Yofk 
Stock  Exchange  has  shoun  that  the  small  im%stor  returned  to  the  stock 
market  during  the  latter  pan  of  the  decade,  perhaps  in  mponsc  to  the 
Steiger  Amendment.  Even  \*ith  the  cuncnt  surge,  hofwrvtr,  the  1980 
shareholder  total  was  still  one  million  less  than  the  high  of  30.8  million 
in  1970,  when  15.1  percent  of  the  Amcncan  population  hckl  stock. 
In  1980  that  percentage  was  13.6  percent,  up  considerably  from  U.9 
percent  in  1975. 

These  de\'elopments  should  be  mterprctcd  %kith  caution,  howorr, 
for  the  average  portfolio  size  has  shrunk.  In  addition,  durmg  the  1970s 
there  was  a  great  increase  in  the  rate  of  inflation  and  a  senom  dedine 
in  the  prices  of  common  stocks,  measured  in  constant  doUirs.  In  f»a, 
the  total  return  on  common  sttxks  itut  the  n-htik  perxid,  m  amstant 
dollars,  was  negan\x.  Between  the  end  o4  1969  and  the  end  of  1979, 
the  value  of  common  stocks  on  the  New  York  Stock  Eidunge  dedmcd 
by  about  42  percent.  This  drop  is  far  greater  than  that  of  the  1930t 
when  the  value  of  stocks  on  the  New  York  Stock  Eichange  fell  by 
about  31  percent.  Thus,  mvestixs  in  high  tas  brackets  tended  to  experi- 
ence losses  greater  than  those  ol  the  Great  Depression,  \uniX  dividends 
were  taxed  at  higher  rates  in  the  *70»  than  in  the  '30». 

The  decline  in  real  stock  pnces  was  probtabh*  nude  wonc  by  mar- 
ket adjustments  in  response  ti>  n%x)  T)jk%  of  inflanonarv  tai-msmg 
effects  which  anse  from  standard  methods  ftir  computing  business 
costs  and  profits.  First,  deprccutMm  expenses  arc  computed  on  the 
basis  of  historical  awt  t)f  acquisitKm  rather  than  on  rtpUccment  cost, 
resulting  in  underdeprccutKxi  Second,  aist  of  goods  sold  finom  inven- 
tory is  sometimes  valued  at  current  rather  tlian  repbcement  cost.  These 
accounting  procedures  understate  real  current  awts  and  hence  over- 
state real  profits.  Thus,  taxatxjn  t>f  inflated  corporate  profits  eiicctivcly 
results  in  the  net  confiscation  of  capital. 

Tax  Rates  Outrun  Inflation 

In  summary,  the  federal  government's  tax  colkctions  rvc  substan- 
tially as  a  share  of  bodi  corporate  and  personal  income  as  individuak 


G^mnment  PoUdes  and  Capital  Growth  I  129 

and  cocponoom  arc  «p«cd  to  the  effects  of  inflation.  In  fact,  taxes 

^!  ~?«!IL  ^^^  "  *^"*°^  ^"  *^  ^^f<=  of  inflation  since 

chelate  1960i. 

In^prophile  cai  policies  and  inflation  are  not  the  only  sources  of 
our  probfenif.  Govcnwncm  routinciv  attempts  to  direct  the  flow  of 
(iindft  toward  tocially  dctirabic  goah.  These  attempts  fall  under  die 
heading  cif  the  •ociaJ  alJocaiHin  of  capital.  Such  intervention  has  be- 
come incrcaMngh-  pcipuW  in  recent  years  rfirough  various  means:  (1) 
uwrybwt  Of  imcrcw  rate  ceUings;  (2)  government  loan  guarantees; 
(3)  imcrest  rate  Mibudies;  (4)  government  borrowing  and  re-lending, 
and  (S)  rtgulatxim 

SfXoaJ  intemt  group*  »ce  government  intervention  as  a  means  for 
improving  the  ciwuhiKm  of  a  panicular  seaor  of  society,  enabling  it 
to  bomm-  fund*  whuh  might  not  (Khcruisc  be  available  or  might  only 
be  avaiUWe  at  MgnifKantly  higher  micrcst  rates. 

Thnnigh  Mxh  mtcrvmoun,  the  function  of  the  fmancial  markets 
\i  ahered.  Ftinda  no  longer  i\tafw  on  the  basis  of  expeaed  return  and 
riik.  When  the  gmemmcni  cxpUatiy  directs  funds  to  certain  invest- 
mcma,  it  tampen  with  the  utiriings  of  the  marketplace.  This  tamper- 
ing can  lead  to  le%»  cffKicnt  rinanciai  markets  with  the  result  that 
uvingft  arc  Alkxatcd  at  htgfwr  cc»t  and/or  uith  greater  inconvenience. 
Pur  another  way.  »uch  intervention  produces  the  case  in  which 
invTstments  arc  undenakcn  whah  arc  not  optimal  in  terms  of  market 
efficiency  rdaove  to  market  itandards.  As  a  result,  there  may  be  an 
advene  efllea  on  real  camomic  gmv^th.  Financial  markets  simply  be- 
come lets  efficient  in  channeling  savings  to  investment  opportunities 
on  a  nskad|ustcd  return  basis.  C^learly,  cost  estimates  due  to  these 
induced  distorrK¥i«  ihould  be  included  m  any  cost-benefit  analysis  of 
capital  gains  taxatKm  Unfortunately,  such  cost  estimates  are  nearly 
impossible  to  formulate. 

Of  ooune,  go^Tmmcnt  i$  ntx  the  onl>'  culprit  causing  our  myriad 
capital  formation  problems.  Management  and  labor  must  share  die 
blame.  Often  management  continues  to  use  nearsighted  incentive  pro- 
grams u-hich  rcu-ard  short-term  results  radier  dian  long-term  strategic 
ihmkmg.  As  a  rcsuh^  cxccun\xs  ha\e  been  slow  to  introduce  reporting 
techniques  rfut  arc  in  rfK  best  interests  of  the  organization.  For  ex- 
ample, t>»T>-thiids  of  Amcncan  mdustnes  still  use  die  First-In,  First- 
Out  invcntoiv  \'akut]on  method,  resulting  in  an  inflated  bottom  line. 
American  management  has  also  failed  to  provide  die  work  force  widi 


130  /  Christopher  Witzky  and  Bjo^E.  Wmbhtb 

incentives  for  finding  and  initiating  new  wav-s  of  reducing  die  amount 
of  labor  in  die  production  process. 

Politically  Feasible  Measures  to  Encoungc  Growth 

Productivity  and  innovation  arc  not  solely  nianagcment  functions. 
Organized  labor  has  complicated  nutters  b\'  locking  management  into 
Cost  of  Living  Adjustments  (COLAs)  and  b>-  resistmg  automation. 
In  contrast.,  Japanese  workers  gcneralh'  embrace  technological  changes 
which  result  in  more  cffKient  production  processes.  Fufitsu  Fanuc 
Ltd.  is  now  operating  a  $38  miUion  plant  that  uses  robots  and  numen* 
cally  controlled  machine  took  to  help  build  other  robots  and  machine 
tools,  requiring  one-fifth  the  number  of  ^xirkcn  that  a  convcnbonal 
plant  would  need. 

Given  this  operating  envinximent,  vkhat  can  rcalmicalh-  be  done 
to  restore  adequate  capital  gnmth?  Cxmgrcssman  Richard  Schubse  has 
introduced  H.R.  63,  the  Individual  Im-cstors  Inccnti\T  Act.  Thu  bdl 
would  provide  a  10  percent  tax  credit  up  to  51,000  for  indi\iduab 
($2,000  for  mamed  couples  filing  fouith )  fiir  nc^-  or  addmonal  invest- 
ments in  stocks  and  mutual  funds  of  diimestK  aicporations  Patterned 
after  the  French  Mon<>r>'  Aa,  the  "Schul/c  Bill"  tAxnild  dirtcth*  en- 
courage savings  and  mvcstment  and  v^tiuld  provide  a  needed  mccmnr 
for  our  stagnating  cconcxny 

New  York's  Republican  Senator  Alphonsc  D'Amatn  has  intro- 
duced the  Family  Savings  Incentive  Act  This  Act  niiuld  raise  the 
exemption  for  interest  income  to  $1,000  fvir  individuab  and  $2,000 
for  those  who  file  jomi  returns  This  concept  has  been  cndoncd  by  the 
Savings  and  Loan  FoundatHm 

The  Jones-0>nablc  Clapital  0»t  Recovrrv-  Aa,  better  known  as 
"105-3,"  prinides  for  vimplified  accelerated  deprccutMMi  of  capital 
investment.  Because  such  changes  onh  affca  the  timing  of  after-tax 
cash  flows,  the  cfl^ective  reduction  in  the  tax  rate  i*  mereh  the  resuk 
of  the  time  value  of  monev  The  effect  is,  therefore,  lomrwhat  illusory, 
since  taxes  will  be  even  higher  m  later  )xu%  when  deprocuoon  doiffa 
are  exhausted.  Such  taxes  may  txily  be  avT>ided  in  future  vears  if  any  tax 
savings  are  immediately  recapitalized  and  deprecated 

The  ultimate  long-range  solutMm  lo  the  capital  formation  problem 
hinges  on  concerted  actions  by  all  factors  of  pnKiuctKWi.  Natural  re- 
sources must  be  aUocated  b\'  the  market.  Management  must  once  af^ain 


Gavtrmnem  Policies  and  Capital  Growth  I  131 

•eck  to  innovate,  along  with  the  active  cooperation  of  labor  and  gov- 
enunem.  Saving}  must  be  encouraged  and  productively  employed,  and 
obttjdo  to  the  nurict  allocation  of  capital  flows  must  be  abolished. 
The  Kemp- Roth  program,  though  a  step  in  die  right  direction,  is  only 
a  band-aid  ronody.  More  lubftantial  action  will  be  needed  in  the  fu- 
ture. 


IV.  WEAPON  OF  DESTRUCTION 


The  Assault  On  Capital 
Robot  G.  Anderson 


One  of  the  ud  ptjIiricaJ  paradoxes  of  our  times  is  the  simultaneous 
<jn  tapicaJ  fhroughoui  the  world  and  the  continual  clamor, 
often  from  che  lame  Mnirccs,  for  greater  worldwide  prosperity. 

Pcrtupi  the  aflbaion  can  best  be  described  as  "political  schizo- 
phrcnii.**  Pultocil  rhctonc  extoU  xhc  Wrtues  of  the  good  life  and 
greater  nutrrtal  abundance  for  hununjt>',  and  yet,  in  die  next  outburst, 
aitjckft  the  \xr\  ft nrndatton  of  %uch  a  societ)'.  The  dcmagoguery  and 
nonscnie  of  %uth  politKaJ  cwtbursts  are  most  discouraging  to  those 
who  understand  the  cmnomK  policies  required  for  human  progress. 

Mankind '%  otihitKWi  into  the  mtxJem  era  of  the  industrial  society 
was  not  an  hiitoncaJ  accident  It  was,  instead,  the  direa  result  of  forces 
that  bniughc  tnto  ctsiccnce  the  private  property  order  and  its  concomi- 
tant free  mariei  etomwrn-  The  market  s>'$tem  of  social  organization 
opened  to  nun  the  full  i^itentul  of  the  social  division  of  labor  and  the 
efficient  empknment  of  the  Kane  economic  resources  at  his  disposal. 

The  hutiio'  of  maienal  prt»gress  relates  directly  to  an  increase  in 
produauT  captacmv  Materul  ad\-ancement  for  mankind  simply  means, 
"getting  more  gixids  out  of  the  %*txxis"!  And  from  the  dawn  of  human 
adstcncc  this  proccu  has  been  primarily  accomplished  through  the 
substitution  of  captal  for  human  energ>'  in  the  means  of  production. 

UTut  distinguishes  a  so-<alkd  '*nch  nation"  from  a  "poorer  na- 
tion" is  the  abundance  of  productive  capital  employed  in  the  social 
division  of  labor.  The  produanr  output  of  a  worker  moving  dirt  with 
hit  bare  hands  can  hardh'  be  compared  with  the  accomplishments  of  a 
worker  operating  a  giant  buUdozer.  The  capital  tools  with  which  diey 
work  make  the  differrnce.  While  greater  work  effort  and  better  work 
techniques  haxr  crrrainh-  contributed  to  greater  productive  output,  die 
accumulatKm  of  orr-greatcr  quantities  of  capital  employed  in  produc- 
tion has  been  the  esscnnal  "kn"  to  prosperity. 

The  -key"  xognmur  prospenty,  rfierefore,  is  more  capital.  Societies 

Mr  Anknoa  wm  a  member  of  FETi  «enior  aaff  until  his  retimncnt  in  the  spring  of 
19W- Tim  «nkk  ot^m^  ^ipcaird  ■»  the  Nomnber  1979  issue  of  7^fr»mfl«. 

135 


136  /  Robert  G.Anderum 

become  rich  because  individuals  \kithin  dK  socJct>'  become  more  pro- 
ductive. And  diis  greater  producmity  of  die  individual  b  attainable 
only  through  the  effective  empkninent  of  more  capital— multiplying 
the  produa  of  his  efforts  through  the  use  of  tools. 

The  assault  on  capital  throughout  the  Htjrid  toda>'  has  become  a 
direct  attack  on  man's  material  prospcnty.  E\-en  >*t>oc  is  the  planned 
and  systematic  destruction,  throiigh  political  interference,  of  the  insti- 
tutions that  are  essential  to  the  creation  of  capital.  Thb  combination 
of  consuming  accumulated  capital  and  dcstro\ing  am'  inccnti\T  to  re- 
place capital  is  leading  to  the  impo>mshmcnt  and  suffering  of  millions 
of  people  throughout  the  u-orid. 

For  an  example  of  v^-hat  is  happening,  look  at  the  United  Scatcs, 
the  "richest^  nation  in  the  ^fctxld  today  in  terms  of  the  matcnal  htU- 
being  of  the  people.  It  attained  this  emiable  status  as  a  result  of  a 
lengthy  historical  record  of  being  "ihendh'"  to  the  accumulation  of 
capital.  Throughout  the  nineteenth  and  c»x\\  n*mticth  centuTKs,  mil- 
lions of  individuals  u-ere  dravk-n  to  the  United  States  b%'  the  \*att  opP^* 
tunitics  for  personal  economK  advancement. 

Phenomenal  Growth 

From  the  pentxi  folkming  the  end  of  the  (jvil  War  in  1865  until 
the  beginning  of  Worki  War  I,  unbelio able  change  and  advancement 
took  place  in  the  United  States  The  degree  of  individual  freedom  tliM 
prevailed  during  this  perKxl  led  ti)  an  cipamion  of  economic  activity 
and  an  accumulation  of  capital  unmatched  in  human  histnry  Neither 
before  nor  since  has  a  more  rapid  rate  of  gnmih  been  experienced  by 
a  group  of  people  than  dunng  the  tumrv  \ran  fnwn  1870  to  1890 
when  the  real  incomes  of  the  people  more  than  doubled. 

During  this  same  penod  of  phencwnenal  groi«h  m  prosperity, 
entire  new  industries  urrc  bcxn  The  oil  tndustr>',  railnitads,  elcitiiuiy, 
and  modem  steel- making  arc  among  the  better  kmrn-n  examples. 
Methods  of  agriculture,  which  had  remained  unchanged  from  the 
dawn  of  history,  ucrc  radicalK-  altered  The  introduction  of  capital 
equipment  vastly  increased  the  producnvity  of  the  individual  farmer 
in  the  planting  and  harvesting  t>f  hu  crops. 

This  remarkable  era  of  eaxximic  frredom  and  imprcn^ement  abo 
brought  other  changes  in  the  structure  of  life  and  industry.  The  pro- 
ductive employment  of  increasing  quantities  of  capital  literally  annihi- 


The  Assault  on  Capital  I  137 

bted  many  ancient  and  mabUshcd  industries.  We  may  look  back  now 
widi  amtMoncm  at  ionic  of  d»c  individual  failures  that  occurred  in 
dKMC  earty  dayt,  6ani  the  prairie  schooner  to  the  pony  express  But 
with  the  individuaTi  freedom  to  fail  came  also  the  chance  for  success 
Man'toeative  energies  ^-cre  unleashed  m  such  a  setting  of  economic 
freedom,  and  Ac  outcome  was  a  material  progress  that  became  the 
envy  of  ihc  world. 


In  1859  CATkn>€\  KdH-in  Drake  successfully  drilled  for  oil  in  West- 
em  PenmyKama,  and  the  pctn>lcum  industry  was  bom.  The  subse- 
<)licm  axnpcaoan  of  kenncne  took  a  heavy  toll  on  the  whaling  indus- 
try of  New  England.  But  what  electncity  later  did  to  die  candlestick 
makcrt,  and  the  mtcnul  combustxxi  engine  did  to  the  blacksmiths  and 
honcbrtedcn  wat  cv'en  more  de\'a«atmg  to  the  old  ways.  The  changes 
impoicd  by  coononuc  pnigrc&t  ^-erc  dramatic,  to  say  the  least. 

The  poim  u  that  ihw  entire  tramfomuhon  of  society  was  made 
poMible  only  heiamc  tndividuah  po&scssed  economic  freedom,  and 
wtrc  able  ti>  freely  accumulate  and  empkn-  the  needed  capital  to  com- 
pete igainit  existing  tndustn-.  And  u'hile  greater  prosperity  was  a  di- 
tto resuk,  to  too  was  the  demue  of  the  old  ways.  The  price  of  prosper- 
ity is  alwa>t  change,  and  frir  many  the  price  seems  too  high. 

A  reactKin  to  ujch  rapid  change  may  have  been  inevitable.  In  any 
event,  »uch  a  reactxin  has  hem  most  csidcnt  in  the  United  States 
durmg  theic  past  fifr\'  \x^x\.  Pcm-erfiil  political  forces  have  assaulted, 
dircah'  and  indircah*.  both  indi\idual  freedom  and  private  property 
in  an  attempt  to  "pmenr"  the  statm  quo.  Disguised  as  "progressive 
progFum**  to  benefit  "the  people,"  political  intervention  is  consuming 
the  wcakh  of  the  cituenrv-  and  hampering  die  incentive  to  replace  it. 

The  source  of  the  uralth  and  nutcnal  abundance  of  the  United 
States  cituen  today  u  to  be  found  in  die  accumulations  of  private 
capital  made  pcwAiWe  m  an  earlier  era.  The  continued  prosperity  stems 
from  die  momentum  of  rfK  past,  not  from  die  political  intervention 
of  recent  yean.  The  losses  of  individual  freedom  have  been  so  gradual 
and  subtle  diat  perhaps  onh'  >*idim  dK  past  decade  are  diere  clear  signs 
of  a  declining  standard  of  li\'ing. 

It  is  of  dK  utmost  urgcno-  dut  diis  development  be  seen.  Given 
die  dynamic  histor%'  of  economic  frredom  and  prosperity  diat  were 


138  /  Robert  G.Andenm 

once  the  hallmark  of  the  United  States,  the  identin*'  of  these  recent 
destructive  forces  must  be  disclosed— at  home,  as  u-cU  as  abroad.  The 
people  of  other  nations,  w-ho  would  emubte  the  United  States,  other- 
wise might  misconstrue  these  forces  to  be  the  causes  of  our  ^^ralth 
today.  To  pattern  political  intervention  after  the  cumpte  of  the  United 
States  government  today  u-ould  be  nothing  less  than  a  hunun  tragedy- 
The  resurrection  of  indi\idual  bbem*  and  continued  material  prosper- 
ity demands  the  repudiation  of  this  interventjon,  and  not  its  oparaaon. 

Capital  Accumulation 

The  "key^  to  prosperit>'  is  capital.  To  consume  more,  a  people 
must  first  produce  more,  and  to  produce  more  requires  more  and 
better  took.  Real  ccononuc  growth  is  a  dirca  consequence  of  orr- 
greater  quantities  of  capital  being  empknrd  in  the  tools  of  producoon. 

The  greatest  servKe  a  government  can  render  iti  citncnrv'  a  to 
safeguard  and  encourage  this  process  of  capital  acmmulatian.  rrotca- 
ing  the  lives  and  propem'  of  citizens  b\-  kerptng  the  pe^ce  is  absolutely 
vital  to  an  orderly  socict>'.  The  law  thus  icrvrs  as  an  instrument  of 
justice.  Such  a  government  has  alwa>-s  enymrd  the  popular  luppon  of 
its  citizenry,  for  in  a  scKict)'  of  peace  and  harmony,  the  mdnidual 
citizen  is  freed  to  pniduce  and  lervr  the  consumer  throu|(h  the  marict. 

In  the  United  States  ttxlav  gtncmment  is  far  more  engaged  in 
plundering  propert\'  and  contn>Uing  people'*  li\rs  than  in  pursuing  its 
traditional  role  of  protecting  life  and  pnipem  In  the  name  of  "p*^ 
gressive  government,"  \%t  »ee  the  bw  being  uicd  in  the  most  reaction- 
ary way  to  destnn'  pnvatc  capital  and  human  liberiy. 

The  accumulanon  of  capital  requires  both  pmductnr  effort  and 
saving  on  the  pan  t)f  individuah  There  is  an  old  adafce  that  "annme 
can  make  monc>— it's  kcepmg  it  that  is  diflkuh  *  The  point  u  that 
saving  rather  than  comummg  ^ill  cxcur  onh-  if  there  exists  an  inccntnr 
to  do  so.  Prtxiuction  and  saving  requires  the  penonal  sacrifice  of  not 
consuming.  Only  when  the  potential  for  greater  future  consumption 
can  be  clearly  seen  from  saving  and  Hxirking  today,  mill  individuab 
willingly  produce  and  save.  As  the  theoretKal  econcmtic  usually  states 
it,  "all  other  things  being  equal,  leisure  and  consumpoon  arc  prdcrred 
over  work  and  saving"! 

Government  intervention  m  the  Umted  States  during  ihe  paac  fifty 
years  has  time  and  again  undennined  this  process  of  pfoductioo  and 


The  Assault  on  Capital  I  139 

capitaJ  accumubDoiL  VVliik  f»  one  bw  or  policy  can  be  isolated  as  ^^ 
came  of  our  kw  ftwdoro  and  falling  standard  of  living,  the  combined 
intcrvenoon  if  generating  a  burden  rfiat  is  destroying  the  material 
welfare  of  tociety. 

The  manner  ofgovcnuiiaii's  assault  on  capital  is  varied,  but  of  all 
diCK  actiom,  nodung  inflicts  more  damage  on  productive  effort,  sav- 
ing, and  capital  accumulation  than  a  policy  of  monetary  inflation'  The 
imidiouft  effea*  of  mflation  dismpt  d>c  entire  pricing  structure  of  die 
maiiet.  the  »<>lc  guuie  for  the  aaions  of  n-adcrs  in  the  marketplace. 

The  de«n*aHin  of  mcine>'  through  a  policy  of  inflation  consumes 
cveiy  form  of  monetary  u\ing.  Individuals  quickly  learn  the  bitter 
consequence  of  oamening  mone\'  in  the  form  of  bonds,  savings  ac- 
ccMinu,  or  caih  balances.  Monetary  holdings  of  liquid  capital  become 
nothing  but  crmfkates  of  guaranteed  confiscation  of  wealth. 

Inflation  Dunipu  Markets  and  Consumes  Capital 

The  dttrupncm  of  the  pnce  s\'$tcm  through  inflation  generates 
awesome  bates  of  capital  Both  consumers  and  producers  are  led  into 
cconcwnic  chaoa.  The  false  signah  of  inflated  prices  alter  the  allocation 
of  econtimK  mouaes  m  pnxluctKKi  and  encourage  artificial  levels  of 
consumfMKin  The  ultimate  result  is  a  general  impoverishment,  as  capi- 
tal u  taxed  and  destnnrd 

InflatMin  imposes  a  heaw  peiult)'  tax  on  productive  activity.  Any 
inccnthT  to  cmpkw  capital  m  prtxiuaivc  activity  is  soon  lost  to  the 
urgem  ncccsstt>'  of  prcicn-mg  what  little  capital  remains.  Individuals 
turn  to  speculatMm  m  an  eiHxt  to  survive. 

The  resuh  u  wk  economic  survival,  but  instead  market  disruption 
and  capital  amsumpCKin.  Mooc\'  markets  no  longer  perform  die  func- 
tion of  scning  paniucers  and  consumers,  but  instead  become  devices 
for  speculators.  Long-ienn  capital  markets  vanish  widi  die  creditors, 
as  cvtrvone  tries  to  become  a  debtor.  The  order  of  die  day  in  an  age 
of  infla'tion  U  to  consume  capital  m  "things"  before  it  is  consumed  by 
the  ravages  of  inHatKKi 

Inflation's  message  is  dear  to  all.  Increase  consumption,  save  nodi- 
ing.  The  cxitcome  is  the  moitable  destruction  of  accumulated  capital 
Hidi  no  inccntix-e  to  replace  it.  The  tragic  price  is  lost  prosperity^ 

While  inflation  is  one  of  government's  oldest  weapons  m  the  as- 
sault on  capital  and  productive  effort,  it  is  by  no  means  die  only  tool 


140  /  Robert  G.Anderum 

of  such  destruction.  A  multitude  of  laws,  edicts,  and  policies  air  joined 
in  the  attack. 

In  the  United  Sutes,  modem  tax  thcorv-  often  is  man  concerned 
with  penalizing  capital  or  redistributing  u-eakh  from  $a\"crs  to  spenders 
than  with  the  acquiring  of  pubbc  funds.  The  federal  inheritance  tax  is 
a  classic  example  of  such  a  practice;  mam'  larger  estates  arc  wiioUy 
consumed  by  the  tax  rather  than  transferred  to  the  heirs. 

The  accumulation  of  private  capital  and  its  productiw  efnpknment 
is  the  comcrstonc  of  an  ad\  ancmg  market  cconotm-.  InhcntaiKc  taxes 
have  consumed  untold  billions  of  dollars  that  uxxiki  odKTuisc  ha\r 
been  productively  empknxd.  Productnx  indi\iduais  are  left  ^t&i  no 
choice  but  to  consume  their  vkxakh.  Luxury  cars,  fancy  yachci,  and 
exotic  homes  have  replaced  joh-crcating  productnT  tmTstmcms.  Enfoy 
it  today  rather  than  have  it  taxed  away  romomm-  becomes  the  rule  of 
productive  people  confrontmg  such  confiscatory  tax  pobaci. 

The  Impact  of  Taxes 

The  taxation  of  ctxpcx-ations  is  another  wx-apon  in  the  assault  on 
capital.  VVhilc  a  corporatMHi,  as  a  legal  ennrv.  can  be  a  coUector  of 
taxes,  the  burden  of  ccwporatc  taxes  must  ah*  a>-s  fall  upon  the  rticpo- 
rate  owners,  cmpknxes,  customers,  or  some  cnmbmaoon  of  these 
three.  The  corporatKNi  is  mcrelv  an  instttutMWval  entity  productnrhr 
employing  the  capital  of  its  tm-ners  The  rcsuh  of  corponcc  taxatian 
is  a  political  transfer  of  capital  away  from  pmaie  corporaic  uk  and 
produaivc  cmpkn-mcnt. 

The  individual  income  tax  is  another  example  of  a  tax  policv*  that 
is  specifically  structured  to  ducourage  producnw  acmicy  and  capital 
accumulation.  The  percentage  rate  of  taxaticMi  (Wi  pcnonal  incomes  it 
highly  graduated,  assunng  an  o-er- larger  seizure  of  the  private  capital 
of  those  who  arc  most  pnxluanr  Weahhv  u>di\idual»  are  subject  w> 
a  federal  income  tax  rate  of  up  to  somrv  percent,  a  rate  tfut  impotcs 
a  se\'ere  penalty*  on  the  cxpansKxi  of  pnxiucti\-e  capital  and  wotk.  cfivm. 

Perhaps  the  nvxst  subtle  tax  against  capital  n  the  tcntc  due  it 
silentiy  crtxies  the  personal  incenti\r  to  m\t,  u  the  Social  Sccunfy  tax. 
This  tax  transfers  wealth  from  pnxiuanr  wxirkers  to  the  elderH*  mem- 
bers of  societ)'  in  retirement  and  thercb>-  reduces  the  personal  concern 
for  one's  welfare  in  oki  age.  The  expectation  of  a  govemmenc  source 
of  income  in  later  years  thus  leads  to  a  reductKm  m  personal  savings. 


The  Assault  on  Capital  I  141 

But  inflaoon  and  taxation  arc  only  the  beginning  of  government's 
auauh  on  productwc  capital.  TIk  competition  for  votes  Ln". 
cumKa.  kd  to  a  mau  of  IcgisUnon  prov.dmg  all  manner  of  special 
.ntcr«t  pditMiaJ  largc*%  The  redistribution  of  wealth  through  the  po- 
liticaJ  prcxc**  ha.  bcaimc  firmly  entrenched  in  the  United  States 
hvcry  •eofir  of  K«cty  is  ciamonng  for  more.  Everyone  is  plundering 
cvcoroncwith  die  ciy  that,  "Vc'rc  paying  for  it,  so  let's  get  our  fair 
ihait.  The  muk  h  a  ioacty  of  political  victims  and  beneficiaries,  all 
tittng  the  political  pmccM  to  ftirthcr  consume  private  capital. 

Such  a  lywcm  hrccd%  polinciam  radier  dian  statesmen.  Politicians, 
roponding  ti»  a  "mm-  mcntalm-"  among  voters,  win  elections.  The 
statcvnan,  cxprcMing  concern  for  rf^c  future  consequences  of  such 
political  plunder,  u  dw  k>«cr  at  d»c  polls.  The  result  is  that  democracy 
becomes  i)!^^^*^!*  with  dcmagoguciy,  a  vehicle  for  die  poUtical 
phindcrof  cipital. 

ThcWclfitfvSutc 

Thi»  political  tramformation  is  well  illustrated  in  die  United  States 
by  the  growth  of  the  i^Tlfarc  »iatc.  Vast  quantities  of  capital  are  being 
traiiilcncd  toda>'  thniugh  the  political  prtxess  from  diose  who  work 
to  ihoae  who  don't.  WithcHit  cxccpnon,  c\ery  welfare  reform  increases 
the  indi\idual'ft  incentnT  to  cIkkmc  leisure  over  work.  Low-productiv- 
ity* Ub»»f  i%  litcrall)-  prncd  out  of  the  market  by  the  welfare  benefits 
frtim  the  state 

The  \k-ithdrawal  of  urlfarc  recipients  from  the  labor  market  stalls 
the  further  crratKm  of  captal.  The  hea\y  burden  upon  the  productive 
persons  u-ho  suppon  the  urifarc  programs  again  drains  the  capital  so 
csKntial  to  ptofcms.  The  bias  against  u-ork  and  against  the  productive 
empkntnent  of  savings  is  a  built-in  wedge  hampering  economic  growth. 
The  final  assault  against  capital,  and  against  the  very  structure  of 
the  marfcet  economy  itself,  comes  b\'  u-ay  of  direct  controls  upon  prices 
and  wages.  As  long  as  market  prices  remain  free  to  reflect  the  actions 
of  tnden,  the  mariet  can  absorb  massive  doses  of  hostile  government 
intervention.  The  assauh  against  capital  from  inflation,  taxation,  and 
the  redistribution  of  >*ralth  dirough  die  political  process  certainly  re- 
duces the  magnitude  of  prxxluctive  capital,  and  dius  die  material  stan- 
dard of  lixing.  But  these  forms  of  government  intervention  do  not  in 
themaehrs  dcstio\'  the  essence  of  the  market  process. 


142  /  Robert  G.  Anderson 

The  imposition  of  dirca  wage  and  price  controls,  however,  termi- 
nates the  market  price  system  of  allocating  economic  resources.  The 
economic  freedom  of  buyers  and  sellers  to  engage  in  votumary  ex- 
change on  their  own  terms  is  denied.  The  rcsuk  of  such  go\rmnKm 
intervention  is  the  massive  destruction  of  capital  and  product]\-c  dSkm. 

There  is,  of  course,  e\'en  under  wage  and  price  concrok,  some 
escape  from  the  economic  chaos  that  the  controb  inevitably  generate. 
The  escape  route  is  by  way  of  "black  markets."  While  *%bck  maikccs* 
arc  merely  the  practice  of  freedom  of  choice  among  traders  when  their 
liberties  have  been  denied  b>'  the  state,  such  illegal  markets  can  ne\rr 
attain  the  cfficicnc)'  of  free  and  open  competition. 

A  point  to  remember  about  gtn-emment- imposed  wage  and  price 
controls  is  that  gmemments  don't  control  wages  and  pnccs,  chcy  con- 
trol people.  A  pnce  or  ^^-age  control  is  sur^'  a  disguised  way  of 
denying  the  voluntarv'  choices  of  traders  The  establishment  of  go\rm- 
mcnt-imposcd  pnccs  or  wages  bckm  or  abmr  the  market  rate  assures 
cither  shortages  or  surplmcs,  and  the  k»»  «•  freedom 

With  a  government  biased  against  capital,  the  direct  controls  are 
nearly  alwa\3  established  belou  the  market  (or  prKcs,  and  set  abo\T 
the  market  for  v^'ages.  The  resuh  is  the  certain  destruaxxi  of  capical 
prcxluaiveiy  empkn-ed  and  the  creation  of  a  permanef«  bamcr  to  new 
produaivc  activity*. 

Wage  and  Price  Controb 

The  imposition  of  wage  and  prKe  amtrvib  b\  gin-emmem  a)wa\'s 
creates  an  alkKation  cnsis  In  the  United  States  todav  an  "energy 
crisis"  exists  in  the  fomi  ot  uncenain  gaMtlinc  uippbcs  The  reason  u 
simply  explained.  The  pnce  o*  retail  gasoline  is  established  by  govern- 
ment rather  than  b>-  the  voluntarv'  actKxu  of  buyen  and  tdikn.  And 
the  government- imposed  legal  prKe  is  ncm  less  than  market  pnccs. 
With  demand  exceeding  supply  at  this  ginrmment- imposed  pnce,  ar- 
bitrar>'  limits  on  gasoline  saks  and  kmg  lines  belbre  the  pump  are 
inevitable. 

Price  and  u  age  C(xitn>U  $>-mbi>li2e  the  end  of  the  market  economy 
and  individual  freedom  of  choice.  Such  gmrmment  interference  trans- 
forms society-  from  a  natKxi  of  free  traders  into  a  society  of  regulated 
consumers  and  plundered  prcxlucers.  The  impositxm  of  direct  controls 


The  Assault  on  Capital  I  143 

upon  thcmiftct  proem  is  mily  the  final  assault  on  capital  and  the 
private  pcopcity  order. 

¥v  advmced  in  die  United  States  today  is  die  economic  chaos  and 
dcMrucoon  of  capiial  tfut  gm-cmmcnt  inflicts  upon  society  dirough 
tnflttion,  taiJticjn,  iramfer  poliacs,  and  dirca  controls.  There  are  seri- 
ou»  dvcao  of  private  properry  seizure  dirough  nationalization  and  die 
eroction  ofeamomic  bamen  to  international  trade.  The  market  econ- 
omy which  had  brought  forth  prosperity  in  an  atmosphere  of  peace 
and  hannom-  u  becciming  a  battleground  of  internal  conflict.  Bitter- 
new  and  dmUmicinment  arc  expressed  everywhere  one  turns  in  die 
United  .State% 

If  the  aiMuh  on  capital  continues,  die  result  will  be,  not  die  good 
life  diat  it  cfi|oycd  today,  but  conflict,  hardship,  and  a  return  to  pov- 
aiy. 

So  die  people  of  the  United  States  stand  at  a  point  of  decision— 
either  to  abandcwi  the  pnvate  propeny  order  for  socialism,  or  to  return 
to  freedimi  and  the  free  market  Two  points  must  be  clear.  First,  it 
must  be  undersfiMid  that  pawpcnt)'  can  only  come  through  freedom, 
and  tcctmd,  that  the  potiticaJ  mstitutions  of  society  must  support  this 
fivedom  radicr  than  deny  it. 

Thniughout  the  worid  arc  tern  of  thousands  of  individuals  who 
undentand  this  relatKimiiip  between  prosperity  and  freedom.  In  addi- 
ti<in.  hteraliy  mtUM>a%  <>f  indjviduais  have  been  the  beneficiaries  of  the 
pn»pent>-  and  nutenal  abundance  market  economies  have  provided. 
The  xktirid  has  seen  and  experienced  the  good  life  under  freedom.  It  is 
inoofKeivable  that  such  a  s>vem  of  social  organization  could  ever  be 
abandoned  for  the  impcnrrnhment  and  serfdom  of  socialism. 

The  intellectual  arguments  diat  have  been  advanced  in  defense  of 
•odalism  arc  banknipt.  Socialism  has  been  a  dismal  failure  wherever 
tried  or  ftHind  Fnjm  the  slaughtenng  of  Kulaks  by  Stalin  to  the  holo- 
caust ofC^ambodia  today,  stjcialism  has  been  synonymous  widi  human 
miscr\-  and  dearfi.  Stxialism  is  not  die  wa\c  of  die  fiiture.  It  is  die 
sickness  of  the  past. 

The  wav  of  dK  future  is  freedom.  The  assault  on  capital  is  too 
co«h'  to  be'  continued.  There  are  signs  diat  die  inteUectual  tide  has 
turned  in  h\\x  oi  freedtxn.  There  arc  signs  of  dwindling  support  for 
ov-crcxtended  gi^rmment,  as  indiN'iduals  demand  to  be  free. 

Freedom  ^ill  pro-ail  because  freedom  works.  The  creative  poten- 


144  /  Robert  G.  Anderson 

rial  of  individuals  in  sovereign  control  over  their  outi  li\TS  and  prop- 
erty is  an  csublished  faa.  The  hampering  of  productive  people 
through  the  assault  on  their  capital  will  be  repudiated.  The  faihur  of 
socialism  and  overextended  government  v^ill  be  the  great  ksson 
learned  from  the  twentieth  centurv'. 

The  people  of  the  United  Sutes  ha\-e  enioycd  freedom  of  choke 
for  over  two  hundred  years,  and  it  must  ne\rr  be  forgotten  that  the 
market  society  they  created  was  the  generating  source  of  the  great 
wealth  that  exists  today.  The  destnictxxi  of  the  niarict  order,  like  am' 
social  order,  occurs  sbwly.  To  mistake  ^"hat  is  ocoimng  m  the  Umtcd 
States  today  as  a  source  of  this  natxxi's  iftxakh  and  material  abundance 
would  be  the  ultimate  human  tragedy. 

What  good  life  still  pre>'aib  is  in  spite  of  the  go^rmment  policies 
of  these  past  50  years,  and  not  because  of  such  mcer>eimon.  A  naoon 
of  great  wealth  may  be  able  to  sustain  an  assault  on  its  capital  for  a 
while,  but  to  the  poorer  nations  of  die  ^xjt\d  such  an  assMik  wouki 
be  instandy  fatal. 

The  lesson  to  be  learned  is  simple  It  u  that  die  hope  of  the  future 
is  not  to  be  found  in  government  management  of  the  ecoiKimy-  Future 
produaivity  depends  upcxi  the  indnidual,  and  it  can  be  brought  forth 
whenever  he  is  free. 


Capital  Punishment 
by  John  Scmmcns 


A  widdy  forecast  rcccuion  did  not  occur  in  1978.  The  Carter 
AdrnmittTUKMi  mwd  practically  alone  in  its  insistence  that  there 
\%txiJd  be  no  rcccMicm.  So.  u'hcn  the  year  ended  with  healthy  gains  in 
reported  ooqxjrate  pniTtti  there  was  much  rejoicing,  right?  Well,  not 
quite  It  »ecfm  that  n-hile  pn»pent>'  is  a  circumstance  to  be  much 
HHtg^t  after.  pftiTit*— one  of  the  sA-mptoms  of  prosperity— are  a  "catas- 
in>phe"  that  the  htxly  politK  cannot  abide. 

There  u  m*  re|c>king  Instead,  the  occasion  serves  to  stimulate 
demands  kx  mandaton-  pn>fit  controls  from  union  potentates,  while 
the  Prctidem  iecrm  intent  on  pnniding  an  opportunity  for  in-house 
ocontimisti  tt>  grope  for  neu-  meaningless  phrases  to  describe  and  de- 
fend ginrmment  eitmomK  fiolicy. 

IIk  m<»i  ama/jng  :k%[Ka  of  the  whole  spcaacle  is  that  so  much 
tmpiratMm  could  be  gnKrated  b\*  an  c\'cnt  which  never  occurred. 
There  was  rx)  tncrease  m  ctKporate  prt)fits  in  1978.  When  adjustments 
arc  made  to  acaiunt  for  the  effects  of  inflation,  net  profits  actually 
decliiKd  by  4  percent  rather  than  increasing  by  16  percent,  as  the 
reptKTed  ftgurei  seem  to  imply.' 

Thu  diKtrpaniT  between  reported  and  real  profits  is  one  of  the 
le»»  ambiguous  government  accomplishments  of  recent  years.  On  the 
one  hand,  a  manipulative  nv>netan-  polio*  has  facilitated  a  phantom 
doubling  of  nominal  [Hufm  o\er  the  last  decade.  On  the  other  hand, 
a  tax  code  whkh  makes  no  proxision  for  the  declining  value  of  each 
dollar,  allowi  the  ginrmment  to  confiscate  ever  larger  portions  of  the 
nation's  \%Talth.  It  is  the  t>ld  ston-  of  crime  and  punishment.  Only  in 
this  case,  vk-hile  it  is  an  agenc>-  of  the  federal  government  which  robs 
dK  holders  o(  mone\-  of  their  purchasing  power,  the  punishment  is 
dished  out  to  the  productive  sector  of  the  society. 

Such  a  polic>-,  rfKHigh  it  ma>'  be  temporarily  expedient  in  the  ag- 
grandiKmcnt  of  go%emment  power,  has  significant  negative  effects 


»  m  «ooo«m«  for  the  Laissez  Faire  Institute  in  Chandler,  Arizona. 

11m  anxk  ■  iqinracd  ftian  71r  FrcmMH,  September  1979. 


145 


146  /  John  Semmens 

on  the  general  welfare.  The  progrcssivdy  worsening  bouts  of  stagfla- 
tion, with  each  episode  nxjrc  unnerving  than  the  last,  arc  a  manifesta- 
tion of  the  future  that  such  a  polio.'  portends. 

It  is  possible,  one  must  suppose,  that  the  originators  and  executors 
of  this  counterproductive  treatment  of  busmcss  profits  arc  unaware  of 
the  damage  wrought  or,  at  least,  that  the>'  discount  its  lenousness. 
However,  a  supposition  of  this  sort  must  border  on  the  absurd,  given 
both  the  extensive  discussion  of  the  issue  in  academic  and  business 
circles,  as  well  as  recogmtion  of  the  need  to  ^-am  tnxrstors  of  the 
distortions  to  a  firm's  reported  finanaal  condition  oinccd  by  the  Secu- 
rities and  Exchange  CommissKxi. 

In  May  of  1976  the  S.E  C  issued  .\SR  190,  niuch  required  pub- 
licly held  corporations  to  prepare  additxmal  financul  statements  esti- 
mating the  impaa  of  mflation  on  reported  financial  results.  Thus,  the 
business  firm's  access  to  equit\'  finaiwing  is  being  irvmied  from  all 
sides.  The  Internal  Re\enuc  ServKC,  ignoring  the  etfevts  of  inflation 
in  creating  imaginary-  profits,  siphons  ofl^  retained  earnings  Meann-hile 
the  S.E.C.,  citing  the  effects  of  inflation,  u  warning  off  i»<ould-be 
investors  from  pro\  iding  external  Mxirces  of  cquirv'  finance. 

Since  the  countcrproduanr  polKT  perusts.  despite  its  abfturxlirv', 
we  must  dcmoastratc  nxxr  con\incingh  its  cffcvti  and  %k^y  it  u  im- 
perative that  it  be  changed. 

Suppressed  Evidence 

The  most  convincing  exidence  ht  %kxiuld  cite  ti»  illustrate  the  seri- 
ousness of  the  pn)biem  is  the  lack  of  pn>gre*»  in  the  stoci  mariet  The 
Dow  Jones  Indu-strul  Average,  the  moat  famous  of  stoci  prKe  indices, 
has  failed  to  advance  much  aboxe  1. 000  in  the  past  ten  veart.  In  ^Kt 
the  DJIA  now  stands  lower  than  it  did  ten  \rars  ago  Thtt  a  in  ipitc 
of  a  near  "doubling"  of  earnings  o\er  the  span 

Customer's  nKn  and  stixk  market  nniti  arc  rmt  the  onK-  ones  to 
be  mystified  by  the  "sick"  market.  \'ieu-ed  from  the  standpoint  of  the 
'Salue"  of  the  a.sscts  ou-ncd  b>'  the  firm,  it  wxxild  appear  that  shares 
are  unden  alucd  The  ratio  of  market  prne  to  bcxik  value  u  about  half 
of  what  it  was  a  decade  ago  And  since  the  nominal  return  to  equity  is 
approximately  the  same  as  it  was  then  (abtnit  12  percent  on  the  Dow 
Jones  Industrials),  the  shares  must  be  wtxth  rvkTce  as  much,  right? 
Wrong.  The  shares'  pnce-to-eamings  ratK»  are  hahrd  and  the  number 


Capital  Punishment  I  147 

ofoompanies  whoK  shares  sdJ  for  amounts  less  than  tangible  book 
vahic  tt  substantial. 

An  obvious  case  of  market  irrationalit>',  it  would  seem.  Unless 
chat  is,  oncis  willmg  to  consider  an  alternative  hypothesis.  What  if  it 
if  HOC  the  mariict  chat  u  out  of  step  with  reported  earnings,  but,  the 
ftpocttd  camtngs  which  arc  out  of  step  with  an  "efficient"  market? 
There  arc  suflkicm  grt>unds  for  such  a  hNpodiesis  in  economic  theory. 
At  the  root  of  the  capitalmK  thcorv-  of  the  economy  is  the  presumption 
that  given  a  reaKmahk  pencjd  of  time,  the  market  is  the  most  effective 
and  efficient  alknator  of  rcvwrccs.  Now,  if  a  cost  level  adjustment  to 
the  rcponed  f\tus%(.u\  uaicments  f)f  a  sample  of  firms  were  made  for 
the  >ran  1967  chniugh  1977  and  the  resulting  figures  appeared  to 
conform  mart  closeh-  lo  the  market  value  of  the  shares,  dien  would  it 
noc  be  bgicil  to  amclude  that  the  sickness  is  in  profits  and  not  the 
market? 

For  the  purpose  of  o-aluatmg  the  above  hypothesis,  the  earnings 
and  market  values  of  ihe  30  companies  which  now  compose  the  DJLA 
HTfc  comptlcd  Un  ihe  ten  war  period.  Use  of  these  firms  is  defended 
on  the  gniunds  thai  combined  thc>'  account  for  nearly  15  percent  of 
che  tocaJ  eanitng  pcmrr  of  all  VS.  non-financial  corporations.  This  is 
a  sigmfkmt  slice  cif  che  total  economic  pic  m  this  country. 

Using  an  unvk-etghtcd  axrragc  of  common  stock  earnings  divided 
by  average  market  prxo  t»l  DJIA  shares,  wc  find  an  apparent  rise  in 
rate  of  return  fnim  6  4  fxricnr  to  10.0  percent  between  1967  and 
1977.  The  return  on  ccimmon  suxk,  by  this  measure,  has  increased 
substantialh*.  Ho^r^rr,  if  \**e  adjust  earnings  to  reflea  the  effects  of 
tnflaiMin  on  the  firim*  deprccution  reserves  for  long-term  assets,  an 
cntireK'  different  picture  u  rocalcd.  In  this  case  we  find  virtually  no 
change  in  the  return  on  axnmon  sttxk.  In  1967  die  rate  was  5.2 
percent,  ^k-hiJe  m  1977  the  rate  was  5.4  percent. 

Tortuous  Taxatioo 

•As  a  consequence  of  dK  U.S.  tax  system,  inflation  unambiguously 
reduces  inccnti\'es  to  undertake  no%-  mN-estment  projects,  and  diere- 
foce,  business  mxrstment  spending  declmes.''^  It  would  appear  diat  die 
chickens  of  Ke>-ncsian  monctarv  manipulation  have  come  home  to 
roost.  American'  m^-cstor^  can  no  bngcr  be  duped  into  acceptmg  nomi- 
nal rates  of  return  u-hich  conceal  lower  real  rates  of  return. 


148  /  John  Semnuns 

Despite  demagogic  rhetoric  attacking  "obscene  profits"  and  **iax 
loopholes,"  an  examination  of  real  earnings  portrays  a  much  different 
story.  Even  though  inflation  efFecti\-eh'  reduces  income,  the  tax  code 
makes  no  allowances  for  the  reduction  in  real  income.  As  a  rcsuk,  the 
after-tax  return  to  equit>'  takes  a  beating.  In  the  last  decade  real  after- 
tax return  to  equit>'  dropped  b\-  mrr  50  percent,  i.e.,  from  osxx  10 
percent  to  under  5  percent.  Mean^^'hlle,  the  efFecti\r  tax  rate  on  real 
income  has  soared  to  o\'er  70  percent.  Far  from  escaping  •^ur"  taxes 
and  piling  up  'SvindfalT  profits,  American  corporabons  arc  being  pro- 
gressively bled  drv'. 

This  rising  effective  tax  rate  has  been  cited  b\'  numerous  studies 
of  the  tax  consequences  of  inflation.  The  important  amscquence,  of 
course,  has  been  the  powerful  distncenn\-e  ftir  capital  tn\xscmcm  that 
is  created.  The  real  reduction  in  return  that  occurs  when  carii  flows  can 
recover  only  the  onginal  histoncal  awt  of  fixed  assets  leads,  quite 
naturally,  to  a  more  ncgatixc  assessment  of  m\rstment  paniiis,  and 
therefore,  to  less  investment. 

Ostensibly,  the  accelerated  deprccutKm  Kheduks  that  the  IRS 
allows  arc  supposed  to  offset  iIk  tax  effevTs  of  tnllation  \^'hile  thu  may 
have  been  an  adequate  resolution  of  tlK  prnbkm  20  \ran  a(Co  v^-hcn 
inflation  rates  were  more  modest,  it  does  noc  prtnidc  much  help  today. 
An  article  in  the  hetUrtU  Rarrvt  lUmk  of  St  ImM  Rmrm  hiund  ttut  the 
presence  of  a  ncganvc  intlation  ctfevt  wa*  independent  <il  deprcvtatKin 
methtxls  uscd.^  A  similar  ccxkIusmwi  was  reacfKxl  b\  RKfvard  Kopckc.^ 
Whether  one  used  straight  line  or  sum-<il'tfie\rars  digits  deprcciafion 
under  high  inflation  rates,  tlK  ditfercnce  was  minor,  i.e.,  with  an 
equipment  life  of  10  vears  and  an  indatMwi  rate  of  9  penent  per  annum, 
the  difference  in  present  value  of  tfie  ureaim  ol  cash  fVm  under  the 
two  depreciation  methods  uas  onlv  1  percent 

Neither  is  the  insestment  tax  credit  adequate  to  mvrcDmc  the 
penalty'  resulting  fnmi  taxation  based  «»n  hunwKal  a«  recmrry  depre- 
ciation allowances  A  studv  b\  Parker  and  Ziefu  showrd  that  under 
inflation  rates  of  recent  years,  oen  an  msrstment  tai  credit  of  10  percent 
was  not  sufficient  to  offset  the  negans  e  incenn\-es  <if  the  basic  tax  code.* 

The  Real  Crime 

A  look  at  the  earnings  perfixmance  of  tiie  30  DJIA  companies  will 
serve  to  indicate  the  magnitude  of  tfK  disincenn\rs  produced  by  ihc 


Capital  Punishment  I  149 

combination.  After  adjustment  for  inflation 

1967  and  1977.  For  the  entire  period,  profits  were  overstated  by  29 
to  55  pcfccm,  (uting  weighted  and  unweighted  averages  respectively). 
A  year-to-year  oomparuon  ro-cals  die  growing  distortion  in  reported 
figures.  In  1967,  nominal  earnings  were  overstated  by  only  8  to  16 
percent.  However,  by  1977  nominal  earnings  were  overstated  by  66 
to  116  percent 

Thoc  phantom  earnings  arc,  of  course,  taxed  as  if  they  were  real. 
In  1977,  out  of  a  prc-tai  net  income  of  $39  billion,  $28  billion  went 
to  cm-er  tai  lubilit>',  $10  billion  was  paid  out  in  dividends,  and  only 
$  1  billian  wii  retained  to  facilitate  company  growth.  The  ratio  of  taxes 
to  real  retained  caminp  in  1977  was  28  to  1.  For  each  dollar  these 
fimw  retained  for  future  expamKNi,  $28  had  to  be  set  aside  for  govern- 
ment cimiumpfMin  Ilu*  compares  to  a  calculated  ratio  of  $3  in  taxes 
for  every  $1  in  rciaiiKd  earnings  m  1967. 

EiceMive  taxation  u  the  real  catastn>phe,  not  corporate  profits 
that  are  *way  too  high.**  IIk  retained  earnings  of  the  30  companies 
Uied  in  thu  ftud>'  amounted  to  less  than  .3  percent  of  the  total  assets 
of  theie  firm*  Since  it  requires  at  least  $80,000  in  real  capital  (adjusted 
for  the  eifnti  of  inHatKin  on  rc{>bcenKnt  costs)  to  support  each  job, 
the  total  cmpkn-ment- generating  capacit>'  of  these  firms  ft-om  internal 
MHirtes  was  1 3,000  If  this  plKnomcnon  can  be  said  to  be  typical,  then 
the  total  number  of  jobs  that  could  be  generated  by  the  retained  earn- 
ings of  all  U.S.  nonfinaiKial  corpi>rations  in  1977  was  fewer  than 
90,000.  This  equates  tt)  an  emploN-ment  growth  rate  of  one-tenth  of 
one  percent 

These  figures  may  shed  some  much  needed  light  upon  die  great 
mysterv'  of  modem  ea>nomic  orthodox)-:  the  simultaneous  occur- 
rences tif  high  inflatKm  and  uncmplox-ment.  Keynesian  monetary  ma- 
nipulatian  assumes  that  more  inflation  means  less  unemployment,  and 
vice  s-eisa.  This  thcoo*  relies  heavily  on  the  presumption  that  non- 
government insxstors  air  dopes.  This,  of  course,  is  die  fatal  flaw  in  die 
system.  Independent  eccxiomic  aaors  will  seek  to  protect  diemselves 
against  the  kisses  resulting  from  m\e$tments  penalized  by  inflation. 

Job-Creatifig  Programs  Consume  Available  Capital 

The  pfogiessi>«ch'  u-orscning  results  of  monetary  manipulation 
have  been  compounded  b>'  die  unplementarion  of  various  public  job- 


150  /  John  Semmcm 

creating  programs.  If  $80,000  in  capital  can  provide  only  one  iob  in 
the  private  sector,  then  $80,000  ou^t  to  be  aWc  to  make  work  for  at 
least  five  persons  if  it  is  simph'  spent  b>'  the  govcnunenc  on  salaries. 
Such  a  simplistic  solution  ignores  the  lesson  toW  in  the  golden  gootc 
fairy  tale.  Private  capital  nomuih'  earns  a  return  in  ocess  of  its  cost. 
Over  an  extended  period,  the  $80,000  in  capital  woukl  not  onh'  regen- 
erate itself,  but  pro>ide  an  incrcnicnt  for  die  expansion  of  the  enter- 
prise and  emploN-ment.  In  contrast,  the  gwrmment  program  ^'hich 
consumes  the  $80,000  to  create  fi\x  jobs  is  exhausted  within  one  >Tar. 
Repeated  resort  to  consumption  based  job  creation  must  tne>itably 
erode  the  long-term  empkn-mcnt  opportunities  of  the  economy- 
There  can  be  little  question  that  inflation  and  taxjcion  Vad  to  a 
lower  rate  of  capital  formanon  Output  is  reduced,  but  the  question  is: 
by  how  much?  One  researcher  called  the  nital  mkuI  ^rtfire  kiss  result- 
ing from  the  current  tax  treatment  of  eammg*  tm  capttal  "astouiKl- 
ing."^  His  estimate  of  the  yearly  u-elfarc  k»$  was  $50  billion  The  chief 
victims  of  this  k)ss  are  \%x)rking  people.  The  punishmenc  of  capital  and 
the  reduaion  of  returns  on  capital  aho  reduce  the  returns  on  labor. 
Consequently,  upward  mobilin  and  an  impnning  standard  <if  li\-tng 
are  hampered  by  the  poor  returm  <»n  capital  m\-estmem  These  conse- 
quences arc  no  less  real  mereh  because  tho  arc  unintended  robcy 
makers  would  do  well  to  rcnicniber  this  poim  the  next  time  they  seek 
to  punish  corporate  **profitcrrs  " 

The  persistent  reliance  on  intlatiorurv'  policies  has  creaccd  what 
may  be  the  most  ditficult  pn>blem  to  roene — intlatKmarv  ptvchology 
The  penalties  infliacd  on  thntr  and  pniducti\r  in\r%tniem  ha\r  nur- 
tured an  "cat,  dnnk,  and  be  merrv  Kk  ttwnomm  ht  die"  phikisnphy. 
It  was  Ke\'ncs  himself  who  \aid  "in  the  kmg  run  we're  all  dead  "  True 
to  his  word,  Kc\nes  is  dead,  k-aving  the  rest  of  us  to  reap  the  harvest 
sown  by  policies  ba.scd  upt*n  his  thrones 

The  "long  run"  of  1935  is  here  today,  wxt^  all  of  the  dtitortians 
and  disincentives  that  Koiics'  carK  cntKs  predicted  More  ai>d  more, 
we  see  purchases  made  in  order  to  a\x>id  higher  pnccs  later.  Thu  rush 
to  acquire  hard  gtxxis  increxses  the  pniptxtKin  cif  malinvescment.  The 
earlier  one  commits  ivt  a  specific  invxstment,  the  less  certain  one  can 
be  of  the  future.  This  m  itself  utnikl  teiki  ti>  kmrr  return  on  fixed 
assets,  even  v\crc  inflation  to  be  ended 

Further,  manpower  and  resources  arc  diverted  to  nonproductive 
pursuits.  The  deterioration  of  monetarv*  assets  impcb  an  increase  in 


Capital  Punishment  /  151 

money  vdocity  and  paper  financial  transactions,  as  firms  and  individu- 
alf  Mxk  to  minumzc  cash  balances.  This  creates  a  demand  for  financial 
icrviccf  in  gmc  accss  to  what  would  be  necessary  under  a  more  stable 
monetary  unit.  Thoc  trantactiom  consume  resources  that  might  serve 
more  productive  cnd».  In  addition,  managerial  talent  must  be  directed, 
at  Icart  in  pan,  ton-ard  a>pmg  with  the  problems  of  inflation  and  its 
fai  comcqucncc*.  Thu  divcm  laicnt  from  dealing  with  matters  tiiat 
could  be  of  more  tuKtantivc  benefit  to  our  material  well-being. 

Pcmibly  the  mo*f  damaging  effea  of  the  inflation-taxation  policy 
It  the  destructian  of  truth  in  both  fmancial  reporting  and  policy  dis- 
cuune.  The  duintegration  of  the  monetar>'  unit  goes  a  long  way  to- 
ward mvalidatmg  ccjrporatc  annual  reports.  Even  worse,  this  distortion 
pollute*  the  pncc  »^•»tcm  and  upsets  the  balancing  and  allocating  ftmc- 
tiom  peril  Kmcd  b>  thi*  »>-«cm. 

But  the  kmr%t  bkm-  (if  all  is  the  contribution  this  policy  makes  to 
the  detenoratKin  of  public  polio-  debate.  The  whole  "advantage"  of  a 
dciiKeratc  provocation  of  mfiation  is  the  clement  of  deceit  based  upon 
the  "money  lUuMon.**  The  mooe\'  illusion  concept  is  an  illustration  of 
Kcynet*  contempt  ((ir  the  mtciKled  victims  of  government  manipula- 
tion of  the  mone>-  supply  Paiplc  arc  not  astute  enough,  Keynes  rea- 
soned, to  pen:a\T  the  crtJsKin  of  purchasing  power  in  the  monetary 
unit.  As  long  i%  the  nomiiul  dollar  amounts  of  their  incomes  remained 
unchanged  or  higher,  the>-  utnild  ntK  rcaa  to  protea  themselves  fi-om 
the  cflccti  of  inHation  of  the  monc>'  supply. 

Disciples  of  ihu  "mone>'  illusion"  theon,'  attempt  to  trick  the  eco- 
nomic uruts  m  *ociet>'  into  pursumg  aaions  thq'  would  not  ordinarily 
take  This  makes  dissemblers  of  our  public  policy  spokesmen.  How  can 
a  political  s\-stem  based  upon  dcmtKratic  decision-making  operate 
^'hen  the  atueru  must  be  fed  lies  as  a  matter  of  course  in  the  im- 
pfcmenutxm  of  natKwul  ccootMnic  poUc>'>  One  critic  even  goes  so  far 
at  to  daim  that  the  uholc  prcKcss  is  intentionally  dishonest— not  for 
the  people's  im-n  gixid,  as  apologists  might  argue— but  for  die  express 
intent  lA'  mcrcasmg  the  ginemnKnt's  tax  take.^ 

The  Ultimate  Punishment 

We  ha\r  examined  rfK  effects  of  inflation  and  taxation  on  corpo- 
rate profits.  There  can  be  Uttle  doubt  as  to  the  negative  consequences. 
Corporate  profits  are,  as  a  result  of  mflation,  overstated.  Since  die  tax 


152  /  JohnSemmens 

code  makes  no  allowance  for  inflation^  profits  arc  then  cnrrtaxcd  Real 
earnings  are  substantially  rcduccd. 

The  penalties  against  earnings  from  capital  in><cstmcnt  ha\^  natu- 
rally, discouraged  such  investment.  This  portends  a  rather  dire  future 
for  the  United  States  economy.  Discouragement  of  inN-estmcnt  shrinks 
the  capital  stock.  If  the  effea  on  the  30  DJIA  companies  >*t  have 
examined  is  representative,  then  the  economic  growcfa  capaat>-  of  pri- 
vate business  in  the  United  States  is  less  than  1/3  of  the  rate  oi  popula- 
tion growth.  If  the  long-term  standard  of  Ining  is  to  rise,  or  at  least 
avoid  a  decline,  more  capital  must  be  created.  This  n  prcdsch'  Dvhat 
the  government's  policies  on  inflation  and  taxation  are  prc\xreing. 

Perhaps  the  greatest  irony  of  the  manipulatnT  monetan*  pohcv-  has 
been  the  rising  value  of  that  *i>arharous  rehc" — gokl.  At  the  same  tune 
that  stock  prices  and  the  return  on  pniducti>r  assets  ha\r  declined  in 
real  terms,  the  pnce  of  gold  has  surged.  The  intlationar>'  monetary 
policy  spauncd  by  KeNnesian  economic  thcor>'  has  done  mart  to  pro- 
mote the  resurgence  of  the  ''hartxmHis  relic"  than  all  hoaniers  and 
speculators  could  c>er  have  hoped  to  achior  Which  onh  goes  to 
show  that  in  the  kxig  run,  cnme  does  not  pa>'. 

1.  ''rn>tlt  78— InflitKm«>  ILutk  Dude,'  Cili   I  Mi    rt»i  r  Umm  <A|m4 

1979).  pp  5- 10 

2  I()hn  Titimi  and  ]unn  Turin .  *InAai»«i  «nd  Tn  Diiimmu  km  Opal  fumn 
non,""  FetUral  Rarm  lUmk  «f  St  /.«mi  it/vwv  i  |jnuar>  |V?Bk.  pp  i-% 

I  Ibid 

4  Richard  Kofxkc.  The  IViianc  m  Owptnar  fn^kiMn.*  S«w 
/Imnr  (May  June,  1978).  pp  .V^-S6 

5  James  Paricr  and  Fu|(mr  ZjHu,  'InflMnm.  tnttvnr  Tn  ««d  titr  tmnmv  far  ( 
Investment,"  Sanamsl  Tax  Jmmt^  i  V«J  XXIX,  N»»  2,  |9?6».  p^  17^-  ttV 

6.  Michael  B<Mkin.  Taxjtum.  ^k^  mi  the  Kmk  *M  InKrat.*  ftmmtt  <i 
£a»»M»«rr  (Apni.  WS),  pp  S-l" 

7  Ham  lohnvm.  'A  N<«r  cm  the  Pnhimx  Ckmninw  md  *r  U^kKUn  Tm.' 
Jourmil  afMoHftmn  kcmmma  ( |uK  19:^).  pp  J7S-JT7 


Capital  Consumption 
by  Hans  F.  Scnnholz 


Government  spending  Kcms  to  be  an  all-purpose  remedy  for  eco- 
nomic and  lociaJ  ilb.  the  ke>'  to  important  political  ends.  The  world 
of  icarcity  with  which  man  aJwan  has  struggled  is  finally  giving  way 
to  a  fabuJoui  wortd  of  fulfillment  and  plenty. 

In  the  HtiHd  of  rralm-.  c\-en*  economic  good  must  be  produced 
by  man  and  hu  captal  in  cooperation  with  nature.  In  order  to  consume 
more,  nun  mmt  pn  iduce  mcjrc  unless  he  is  prepared  to  eat  into  the 
capital  ftubMance  that  u  helping  to  pnxlucc  the  goods.  Capital  refers 
lo  ihc  monetary  net  amtnint  fif  all  the  productive  assets  of  an  enter- 
prifc,  which  ma>'  conuit  of  anNthing  fnxn  cash  to  receivables,  inven- 
cocy,  tools,  and  mmcimtc  equipment,  or  c\cn  land  and  buildings. 

The  aim  Hint  of  laptal  invested  per  head  of  the  population  basically 
detemune*  the  prndiKinif)-  of  our  labor,  wage  rates,  and  standards  of 
li\ing  We  tpeak  of  a  progressing  economy  when  the  per  capita 
amount  u  increaMng.  n-hich  causes  income  to  rise  through  an  expan- 
sion of  production.  And  %kT  speak  of  a  contraaing  economy  when  the 
amount  of  capital  per  penon  is  shrinking,  which  reduces  incomes  and 
staivjards  of  bnng 

Ev'cn*  day  ht  other  accumulate  capital  through  saving  or  reduce 
it  through  o\TfComumptK»o.  Businessmen  cither  form  capital  through 
rdnvcjtmentt  of  iheir  earnings  or  dissipate  it  through  losses  or  over- 
conuimpcion.  E\rn-  day  total  produaivc  capital  in  die  U.S.  either 
expands  or  contracts,  vkixich  causes  labor  productivity  to  rise  or  fall, 
and  incomes  and  lixing  standards  to  mo\c  accordingly. 

The  gnming  p»>puLant>-  of  many  government  programs  rests  on 
the  inahilit>-  of  the  public  to  understand  the  nature  and  importance  of 
capital.  The  rrdistnbutive  policies  of  the  U.S.  government  have  con- 
sumed productiNT  capital  on  a  massive  scale.  At  first,  these  policies 
mcrch-  skmrd  dou-n  capital  accumulation  and  improvement  in  die 

Dr.  Scnrfiali  •-«»  Outmun  of  the  Economics  Dq)aiTmcnt  at  Grove  City  CoUege, 
Qowe  C«T.  Pwmt^-Mitt.  kw  36  .ran  .\uthor  of  socral  books  and  hundreds  of  ardcles, 
be  iiiw*'  fKtMkm  or  FEE   ThB  rnxk  is  frpnnted  from  the  May  1976  issue  of  The 


153 


154  /  Hans  F .  Sennholz 

rates  of  production.  But  with  the  acceleration  of  government  spending 
in  recent  years,  it  appears  now  that  the  US.  hm  emhmrked  mftm  net 
consumption  cf  capital  that  was  accumulated  in  the  past.  If  this  conchi- 
sion  is  correct,  our  redistributive  policies  hax-e  arrested  fiHlfacr  eco- 
nomic progress  and  now  are  reducing  our  >*'agc  rates  and  standaidi  of 
living.  Neither  law  nor  regulation  can  prc\Tnt  pernicious  povrrty  if 
we  choose  to  consume  our  capital  substance. 

We  are  the  heirs  and  benefiaanes  of  the  capital  that  was  fbnned 
by  our  forebears.  We  are  bener  oflf  than  earlier  generations  of  Ameri- 
cans because  we  are  working  v«th  capital  goods  that  the\-  created  and 
accumulated  for  us.  But  if,  for  any  reason,  our  generation  chooses  to 
consume  more  than  we  produce,  ^%-e  must  prepare  for  reduced  li\ing 
conditions  and  all  the  social  and  political  consequences  thereof.  And 
our  children  must  learn  to  face  hirthcr  po^*em'  and  depmation. 


The  Taxing  of  Progress 

With  the  gn)wmg  populanrv  of  rrdutnbution  b\  political  fbcce, 
all  levels  of  government  have  embaried  upiwi  %pctifK  polxies  of  capital 
consumption.  Their  fasxmte  ttx>l  at  fint  was  taxaoon  of  the  income 
and  wealth  of  nch  capitalists  and  entrcprcneun 

From  a  mtxiest  beginning  in  1913.  the  federal  tncome  tax  rose 
steadily  from  one  pcacnt  of  pervmal  uxtvncs  aUnr  53,000,  or 
$4,000  for  married  ct>uples,  plus  sunaxes  of  6  penxnt  an  incomes  of 
$500,000  or  more,  to  a  maximum  penonal  inciime  tai  rate  of  94 
percent  in  1944.  Q)rpt>rate  income  taxes  Miarrd  to  90  percent  of  "ex- 
cess profits."  SimultanetHwly  the  federal  tax  rates  on  larfEcr  estates  rose 
to  77  percent,  t)n  top  of  which  the  %tates  mav  claim  their  shares.  It  is 
true  that  in  recent  years  indiMdual  and  civporate  income  tax  rates  hi\x 
come  down  a  little;  but  a  \arict)  of  other  taxes,  (nnti  Social  Security 
to  state  and  kxal  taxes,  ha\c  taken  e%en  larger  shares. 

No  matter  what  the  motivatxin,  this  confiscatian  of  the  income 
and  wealth  of  millionaires  must  ha\x  certain  ccononuc  and  •octal  con- 
sequences. Oirporatc  income  may  be  distributed  as  dividends  to  own- 
ers or  reinvested  in  business  actum .  that  is,  m  capital  goods  that 
continue  to  render  prtxiuctive  ser\Tces  Expanding  enterprises  tend  to 
reinvest  most  of  their  eammgs  in  the  busmess.  Confiicatofy  taxation 
surely  reduces  the  amount  of  re\mue  that  can  be  reinvested  in  produc- 


i 


Capital  Consumption  I  155 

And  it  airuils  the  dividends  paid  to  stockholders  and 
thereby  rcduocf  the  savings  that  arc  reinvested. 

IVograttvc  income  taxation  has  die  same  effects.  Most  successful 
biifincMmcn  with  large  incomes  make  large  investments,  diat  is,  they 
comrcn  inccjmc  lo  producnve  capital  which  renders  additional  services. 
OmfiMraiory'  taxation  ohvKHisly  curtails  this  creation  of  capital  and 
rhus  procniA  pnidurtKin  of  gocxls  and  income.  Labor  productivity 
and  Iivmg  itandards  arc  dcbtlitaied  as  die  taxing  audiorities  consume 
thismcomc. 

Inheritance  taxation  to  a  large  extent  is  an  outright  confiscation 
of  pmdiicn%'c  capital  The  uraith  of  a  multimillionaire  mainly  consists 
of  busmc%*  aitcti  chat  arc  pniducmg  gcxxis  for  millions  of  customers 
and  giving  cmpWn-mcnt  to  thousands  of  workers.  What  the  wealthy 
pcTMNi  hi4ds  III  icmtumc.  suth  a*  his  housing  and  clothing,  usually 
comtitutcs  a  tiny  fraciKin  <il'hu  icxal  wealth.  G^nfiscatory  estate  taxa- 
tion tt  bound  to  fall  preponderantly  on  his  prcxiuctive  assets,  which 
meani  chat  the  taxing  authorities  directly  consume  productive  capital, 
and  thus  limit  living  standards  and  employment. 

And  finallv.  the  taxpaxcrs  arc  mflucnccd  by  the  fear  of  such  tax 
rates  ln%tead  iil  nuking  more  pnxluaivc  investments— the  profits  of 
H'hK-h  arc  deitincd  tt>  be  scucd,  or  worse  yet,  the  substance  of  which 
Hill  Kimc  day  be  claimed  b>'  estate  tax  collectors— the  individual  may 
preicr  to  comumc  and  enycn*  the  wealdi  himself  Why  strive  and  strug- 
gle if  the  fruits  %kill  be  reaped  b>'  tax  colleaors?  Why  preserve  his 
capital  for  the  benefit  of  pobtKiam  and  dicir  beneficiaries? 

Deficit  Spending 

When  die  puNK  demand  for  government  services  and  benefits 
giw-s  bn-ond  the  abilirv  of  business  and  wcaltiiy  taxpayers  to  pay, 
budgetary  defiati  become  unaxoidable.  After  all,  die  popularity  of 
redistnbutKin  hs-  political  fimrc  tends  to  grow  widi  every  dollar  of 
"free"  scrvxT  rrndcrrd.  11k  clamor  finally  becomes  so  intense  tiiat,  in 
order  n>  be  heard,  orrv  nov  call  is  presented  as  an  "emergency"  diat 
must  be  ma  immediatcK  before  all  odicrs.  Rcdistributive  government 
dien  rushes  from  one  emergemT  to  anotiier  tr>'ing  to  meet  the  most 
noisv  and  politKalh-  potent  demands.  As  no  one  wants  to  pay  tor  the 
no»''cxpenditures,  krast  of  aU  dK  beneficianes,  die  transfer  administra- 
tion  is  bound  to  suffer  budgetary  deficits. 


156  /  Hans  F.  Sennholz 

When  a  corporation  suffers  losses  for  long  periods  of  tunc,  it  inevi- 
tably comes  to  the  end  of  its  capital  substance  and  ceases  to  operate. 
Any  remaining  assets  uill  be  distributed  to  its  creditors.  WTiile  govern- 
ment deficits  may  not  throw  the  government  into  bankrupcc>\  the\' 
nevertheless  have  economic  consequences.  The\'  destrcn-  productive 
capital.  Indeed,  the  deficits  of  the  U.S.  go%Tmment  ha\'c  consumed, 
and  continue  to  consume,  capital  substance  on  a  scale  fir  greater  than 
all  losing  enterprises  combined.  In  the  decade  of  the  19505  total  U.S. 
government  deficits  amounted  to  a  mere  $17  7  bdlion.  During  the 
1960s  the  total  was  S56.9  billion.  Defiats  during  the  first  half  of  the 
1970s  soared  to  $71 .4  billion,  and,  as  if  the>'  httc  foUov^ing  an  expo- 
nential curve,  in  fiscal  1976  alone  are  expected  to  exceed  $74  billion.^ 

It  is  difficult  to  estimate  tfie  number  of  factorKs  and  stores  that 
were  not  built,  the  tcx)b  and  dies  that  urre  not  cast,  the  fob»  not 
created,  the  uages  not  paid,  the  fcxxl,  clothing  and  shelter  not  pro- 
duced on  account  of  this  massive  consumption  of  capital.  This  genera- 
tion of  Americans  and  countless  others  to  come  mill  be  poorer  by  the 
produaivc  capacity  that  could  ha\-e  been,  but  was  not  created. 

Of  course,  the  beneficiarKs  of  the  redistnbution  pnKeu  mav  ha\r 
enjoyed  c\'cr\'  moment  of  it  .\mong  men  Lacking  vuion,  tiidav's  ennn- 
mcnt  is  always  more  pica<iurablc  than  vi\ing  for  ttimontm-  The\'  may 
applaud  the  \  cr>'  favors  and  handouts  that  are  dcstnning  thctr  |ob«  and 
the  wages  the>'  could  have  earned,  and  cnsth'  emergencv'  programs  may 
be  hailed  as  pn>gress  tfynigh  the\-  \ield  the  opposite  The  bank  or 
insurance  company  that  »  investmg  ttK  pctiple'*  savings  in  Treasury 
bonds,  notes,  or  bills  mav  be  enfining  "safet>"  kn  in  ins-estments 
What  is  significant  is  the  fact  tfui  it  »  cfunneitng  potentialh'  prttduc- 
tivc  savings  intt)  the  maeLstnnn  ot  ginrmment  civuumpcion.  The  re- 
turns it  seeks  fnmi  its  investments  uiU  nc»t  aime  fnwn  new  production 
but  from  taxes  to  be  collected  m  tlK  future 

In  dim  awareness  of  the  imptKTarxe  ol  capital,  uimc  *<Kial  spend- 
ers arc  quick  to  maintain  that  giivemment  spending  u  merrh  anotlier 
form  of  investing.  Therefore,  tf>o  want  go\rmment  to  "imrst"  in  a 
greater  societ)-  that  is  tt)  be  built  b\  ptilitxal  force  and  redistnbution 
of  property'.  Their  judgment  of  ufut  is  most  urgent  and  important  is 
to  prevail  over  that  of  all  otliers 

All  such  planners  are  uxxild-be  diaators.  No  matter  what  the  ob- 
jective, government  expenditures  aKva>-s  constitute  economic  costs  that 


Capital  Consumption  /  157 

are  borne  b>'  taxpa\-cn,  lenders,  or  inflation  victims.  Even  when  the 
gomnmem  buUd*  rojds  or  canals,  utilitv  plants,  or  airports  the  ex- 
pcndmirc  invariably  flunk  the  tests  of  the  market.  Demanded  by  vot- 
cf»,  Judiohzcd  by  politicians,  and  administered  by  bureaucrats,  pubUc 
woriu  oonidnjtc  huge  malinvcstments  that  waste  scarce  resources  and 
comume  producmT  captraJ. 

loflMioo  Datrojn  Captul 

When  the  redtMnbum*e  iocict>'  has  exhausted  its  favorite  victims — 
wtahhy  taifmrn  and  lender*— it  can  be  cxpcaed  to  resort  to  inflation 
as  a  detperate  metht>d  of  fund-raising.  The  inflation  then  taps  die 
uving%  <if  the  middk-  cU%4  u-hiMc  material  wealth  mainly  consists  of 
mooeiary  »Mct%  and  ilatnu  It  dcstnn's  the  capital  markets  that  provide 
die  neccsuTk'  u%injc%  fc»f  the  expansion  and  modernization  of  produc- 
tive entrrpriKs.  And  abcn-e  all,  it  causes  businessmen  to  overestimate 
their  eiming»,  <nTqM>'  thar  taxes,  and  consume  their  fictitious  profits. 

When  the  purduMng  pcmrr  of  mone>'  depreciates,  all  claims  de- 
preciate at  the  tnflatKm  rate  Ocditon  lose  and  debtors  gain.  Now  the 
crcdmiTk — ff»r  inMamr.  ph>-4iciam,  dentists,  attorneys,  business  execu- 
ti\*c»,  and  all  cnhen  holdmg  savmgs  bonds,  life  insurance,  pension 
funds,  and  the  like — may.  in  spite  of  their  inflation  losses,  endeavor  to 
maintain  the  lorb  of  ammmption  tr)  uhich  they  have  grown  accus- 
tomed. The  ph>ttcian  ^-hose  Kcogh  fiind  has  lost  half  or  more  of  its 
purchasing  pcmrr .  uiU  not  sell  his  home  or  automobile,  or  postpone 
his  vaiaiKin  because  of  his  inflation  losses.  On  die  contrary,  in  reaction 
to  his  kiues.  he  may  m\x  less  and  consume  more  because  of  die  appar- 
ent "funlit)-"  of  u\-ing  ()r,  he  may  want  to  hedge  against  further  losses 
by  in\Tsting  m  durable  gocxis,  u-hich  do  not  enhance  the  capital  sup- 
ply 

On  rf»e  other  hand,  the  debtors  who  are  gaining  from  die  debt 
depreciation  mav  immcdiateK-  raise  dieir  consumption.  The  govern- 
ment ^-hcise  real  debt,  kt  us  sav,  is  cut  in  half  will  surely  increase  its 
spending.  In  fact,  it  mav  be  tempted  to  add  more  debt  until  its  old  level 
of  real  debt  is  restoied'  Most  individuals  tend  to  react  die  same  way. 
The  house  o^-ner  u-hose  moftgagc  debt  has  diminished  to  insigmficant 
monthly  pa>Tncnts  may  buy  no*'  furniture  or  appliances.  His  con- 
sumption rises  as  his  debt  decreases. 


158  /  HansF.Sennholz 

Corporate  Losses 

Corporations,  which  as  a  class  arc  the  largest  debtor,  lose  inost  of 
their  inflation  gains  to  tax  collectors,  labor  unions,  and  their  custom- 
ers, all  of  whom  arc  eager  to  boost  their  consumption.  As  prices  rise, 
taxes  rise  at  progrcssiNC  rates.  When  corporate  income  doubles  on 
account  of  the  inflation,  the  multiplKit>-  of  corporate  taxes  >*ill  surely 
more  than  double.  Labor  unions  uill  make  massi\T  demands  dut  arc 
to  compensate  them  for  past  losses  and  antMnpared  losses  during  die 
lifeofthccontraa. 

And  fmallv,  customers  may  reap  inflation  gains  as  corporations 
tend  to  pass  their  gains  from  debt  deprccution  on  to  ^bcu  customers. 
After  all,  when  a  bank  loan  falls  in  \  alue  or  a  corporate  bond  kxcs  in 
purchasing  power,  a  corporation  usualh-  docs  not  ratsc  dK  prices  it 
charges  its  customers.  On  the  contrarv',  facing  die  competition  of  many 
other  enterprises  reaping  similar  gams,  the  corporatMm  may  keep  its 
own  prices  lower  than  it  otherwise  uxiuld  This  means  that  customen 
pay  prices  that  do  rnx  hilly  co\cr  the  ruing  costs  of  capital.  Only 
gradually,  when  the  mfbtKxi  raises  mtercst  rates  and  ourporations  face 
higher  interest  charges  on  ncu  loam,  do  business  costs  rise  and  uki- 
mately  the  pnces  of  gixxls.  Thus,  corporate  custivners  arc  rcapmg 
gains  at  the  cxpeasc  of  ct>rpt>ratc  creditors,  gams  that  may  find  their 
way  into  additional  comumptMKi  Onh  a  small  fraction  of  the  cjpctil 
lost  by  creditors  may  be  retained  as  pniduciisr  capital  b>'  the  corpon- 
tion. 

Capital  Markets  Disappear 

Inflation  destro\-s  the  capital  markets  Surch.  there  arc  always 
debtors  eager  to  bt)rn)u  nvKic)  at  "km"  interest  rates,  that  is,  at  rates 
that  do  not  fully  compensate  the  lender  for  the  antKipatcd  inflation 
losses.  But  the  number  of  credm>rs  willing  to  lend  their  funds  at  such 
rates  tends  to  shrink  with  pn>grcv\ing  inflatxin  Instead  of  suifmng 
losses,  the  would-be  lenders  mav  prefer  to  c^msume  thetf  funds,  or 
invest  them  in  durable  gcxxis  ifut  may  rise  in  pnce  rather  than  deprtd* 
ate  in  purchasing  power 

Thus,  the  capital  market  tends  ti>  wane  and  economic  expansion 
is  checked  for  lack  of  capital  In  \^ci,  tfiere  may  not  o-en  be  enough 
capital  to  matntMn  the  apparatus  <A  productKm  if  business  shouki  fad 


Capital  Consumption  I  159 

ID  cam  fiiffickm  profits  to  rebuild  and  replace  die  capital  goods  diat 
nvcrc  uted  in  the  production  process. 

In  OMniho  that  art  pbgucd  b>'  chronic  inflation,  as  in  Asia  and 
South  America,  long-term  capital  markets  have  long  ceased  to  exist. 
Confequcntly,  nn**  planti  and  enterprises  requiring  large  investments 
of  capital  cannoc  he  built,  bbor  productivity  cannot  rise,  and  living 
conditKiru  arc  drttirKd  to  remain  at  miserv  levels. 

InflatKNi  makc%  ccontimic  calculation  nearly  impossible,  which  in- 
variably cau«c%  buftmc%wncn  to  mcrestimate  their  earnings  and  overpay 
ihctr  cam.  Both  accounting  convention  and  tax  legislation  permit 
buttncHmen  to  treat  at  cows  only  those  costs  of  capital  that  were 
cipcndcd  in  the  past  But  ecorKimic  action  always  aims  at  future  provi- 
Mon  fif  gf  Hid%  and  ierx  »ce».  the  past  is  significant  only  as  it  provides  the 
meaiu  for  future  icXHin.  The  faa  that  a  certain  item  of  capital  equip- 
ment COM  $1  millKm  fne  \*can  ago  is  irrcioant  for  business  decisions 
if  It  coiO  $2  million  tixlay.  If  onh'  SI  million  were  set  aside  for  its 
rvpbccmcnt  the  productKm  process  cannot  continue.  But  tax  account- 
ing onh'  depreciates  past  capital  ams  and  thus  during  inflation  under- 
states present  com  arHl  tn-erstates  business  earnings. 

f^fffity  Overestimated,  Taxes  Overpaid 

The  overcstimation  of  American  corporate  earnings  in  recent  years 
rum  into  tern  of  biUiom  of  dollars.  Opital  intensive  industries,  espe- 
cially, are  badlx-  affccfcd  b\-  thii  delusion,  leading  to  massive  capital 
a>mumptK»n  To  illustrate  the  point,  let's  take  a  chemical  company 
with  capital  facilities  <»f  ooc  billion  dollars  earning  20  percent  before 
taxes,  but  aher  tixc%  onlv  10  pcacnt  or  $100  million  per  year.  If  the 
faahties  need  ti>  be  replaced  on  the  average  of  every  five  years,  our 
company  uiU  depreciate  $200  miUion  per  year.  Let  us  now  assume 
dui  m  a  gis-en  \xir  innatK>n  raises  die  costs  of  die  capital  equipment 
bv  25  percent,  \*-hKh  is  a  realistic  assumption  today.  Our  company 
needs  $250  millKHi  for  replacements  diis  year  and  every  year  diereafter 
If  capital  giKxls  pnccs  ctxitinue  to  nse  at  die  25  percent  rate,  it  will 
need  $312  millKMi  m  the  ft>lk)wing  vear,  S391  million  m  the  year 
thereafter,  $4S8  miUnxi  m  die  fourth  year,  and  $610  million  m  die 
fifth  %w--altogethcr  $2,051  billion  m  five  years.  But  in  order  to 
accumuUte  this  amount  for  mere  capital  replacement,  m  order  to  earn 
the  extra  billion  dollars  m  five  vears,  its  profits  after  taxes  would  have 


160  /  HansF.Sennholz 

to  rise  by  $200  million  per  year,  that  is,  from  $100  million  to  $300 
million,  and  its  gross  profits  before  taxes  wxxiJd  ha\T  to  soar  from 
$200  million  to  $600  million.  Onh'  a  60  percent  gross  rctum  on 
capital  could  maintain  its  substance;  anything  less  wxxikl  lead  to  capital 
consumption. 

Few  companies  are  enjoNing  such  profits  today.  Most  busanesanen 
are  happy  to  earn  their  '^normal  profits"  regardless  ot*  the  rismg  ootts 
of  capital  goods.  They  continue  to  calculate  ^ith  capital  costs  of  the 
distant  past  and  thus  arrive  at  earnings  that  arc  greatly  ov^crstatcd,  and 
at  overestimated  tax  liabilities  that  further  reduce  the  meager  returns. 
Only  when  specific  replacements  of  capital  goods  arc  made,  perhaps 
with  the  help  of  loan  capital,  do  present  a»ts  appear  on  the  compan>' 
ledgers  and  depress  the  calculated  earnings. 

Few  capital-intensive  enterprises  today  arc  earning  returns  that 
fully  cover  the  higher  costs  of  capital.  This  is  ift-hy  capital  spending  tn* 
American  business  is  declining  sxu  after  \xir  fcvm  a  Cximmerce  De- 
partment sur\'e\'  admits  that  protected  spending  in  1976  Htin*i  keep 
pace  with  the  rise  in  capitalgtMxis  costs.  The  spending  profection 
suggests  a  decline  in  **real"  spending  of  about  S  pctvent,  m-hich  fbUows 
a  decline  of  more  than  10  percent  m  1975.  the  mxint  m  14  ytari  (Cf. 
The  Wail  Street  Journal,  Jan  14,  1976,  p  3)  The  utuation  is  c\m 
worse  when  wc  bear  in  mind  that  wime  of  these  capital  eipenditurts 
arc  made  by  mdastncs  that  cater  to  gnming  ginrmment  amsumpdon 
or  arc  making  mandated  changes  ti>  meet  the  rct|uiremcms  of  govern- 
ment regulations  and  cc>ntn>ls  Such  capital  spending  sufdy  docs  noc 
increase  the  st(Kk  of  capital  goods  that  arc  prtiduLing  ctonomK  goods 
and  scr\'iccs.  Thc>  actuallv  consume  capital  ar>d  thus  kmrr  the  produc- 
tivity of  labor. 

The  businessman  who,  because  of  underdeprcoanon,  mmtatcs 
his  earnings  and  on  erpa\-s  his  taxes,  may  blitheh-  consume  his  cafxtal. 
Alter  all,  as  gtxxls  pnces  rue  he  mav  alkm  himself  to  be  unprcsacd  and 
deceived  by  his  nsing  dollar  pn>tits  and  thereitirc  mdulge  himself  mth 
higher  outlays  for  comumption  WTiile  he  is  enftning  hu  •profits"  he 
may  actually  be  eating  mtt)  his  capital  substance. 

The  Business  Cycle 

The  boom  and  bust  cvcle,  Nfc-hich  is  an  inoitable  comcquence  of 
inflation  and  credit  expansion,  is  a  powerful  desmnrr  of  capital  The 


Capital  Consumption  I  161 

thit  resorts  to  such  policies  must  be  charged  with  the 
mponiibility  for  this  capital  destruction. 

When  the  monetaiy  authorities  create  new  money  and  credit  in 
order  to  ttiniuiacc  economic  activity  they  set  in  motion  a  causal  chain 
of  ominous  cv-cnts.  I>ct  us  uy  rfKy,  as  lenders  of  last  resort,  are  financ- 
ing a  $75  biUKjn  federal  deficit.  They  eidier  acquire  Treasury  obliga- 
tKJns  dirccth'  in  exchange  for  newly  created  funds,  or  they  extend  new 
credits  to  hanks  who  then  purchase  the  Treasury  obligations.  No  mat- 
ter how  It  IS  donc^— dircaly  or  indirectly— the  Treasury  comes  into 
poHCMion  of  newh'  created  purchasing  power  diat  enables  it  to  buy 
more  commodities  and  services.  It  thus  withdraws  real  goods  fi-om 
other  membtis  of  iocicf>',  from  consumers  as  well  as  businessmen. 
EveryoTK  u-ho  u  not  a  rcapicnt  of  the  newly  created  deficit  fiinds 
must  ncm*  tighten  his  beh  as  gtnemment  is  consuming  a  larger  share 
of  pnxiucTicin. 

When  the  monetary  authorities  engage  in  credit  expansion  in  order 
to  stimulate  economic  acti%ii>'  thc\'  destroy  capital  on  a  massive  scale. 
The  newly  created  funds,  i.e..  fiduciary  credits,  that  are  injected  into 
the  hanking  s>*sfem  letul  to  disarrange  the  whole  production  process. 
The>"  kmrr  micresi  rates  and  therein'  misguide  business  in  all  its  in- 
\*estmeni  dctuKtm  After  all.  the  market  rate  of  interest  is  an  important 
guidepcMt  <i>r  business,  and  an  important  item  of  cost  that  determines 
the  prtifitabiliry  of  aamn*.  Whether  a  time-consuming  project  can  be 
embarked  upon  largeh'  depends  on  the  rate  of  interest. 

FftbeSignAli 

When  our  monetan-  audKMines  injea  fiduciary  credits,  interest 
rates  tend  to  fall.  That  is.  etK\  falsely  indicate  the  existence  of  savings 
that  in  itality  %vTrc  nc\xx  made.  Misguided  by  such  low  interest  rates, 
businessmen  may  be  led  to  embark  upon  investments  that  later  will  be 
disastrous.  After  all.  the  real  sanngs  are  not  available  for  a  new  round 
of  expansion  and  modemuaoon;  die  guidepost  has  been  misplaced.  It 
causes  business  to  bunch  an  economic  boom  amidst  confiision  and 
delusion.  Many  cxpemi>x  projects  are  undertaken  that  later  wiU  prove 
to  be  costlv  mahn\rstmcnts. 

The  mistakes  become  xisibkr  as  soon  as  the  prices  of  the  ^ctor^ot 
production,  v^-hich  are  busuiess  costs,  soar  on  account  of  die  boom 
while  consumers'  goods  pnccs  fail  to  keep  pace  with  die  former.  Profit 


162  /  HansF.Scnnholz 

margins  are  squeezed  or  turned  into  k>sscs — powerful  reminders  of  the 
misses  that  were  made.  Businessmen  may  then  be  forced  to  abandon 
their  expansion  projects  for  u-hich  there  was  no  economic  dcnund; 
many  may  fall  into  bankruptc>'.  Massive  amounts  of  capital  arc  written 
off— that  is,  are  permancnth'  lost.  A  soact\'  that  mdulges  m  such  de- 
structive policies  must  pay  the  price  in  the  form  of  kmer  labor  produc- 
tivity, lower  wage  rates,  and  a  jouer  standard  of  bMng. 

Government  Regulations 

It  will  never  be  possible  to  calculate  the  economic  cmcs  of  govern- 
ment regulations.  A  fcu'  arc  \isiblc,  but  most  are  hidden  in  the  dimen- 
sion of  economic  action  that  nocr  took  pUce  on  accoum  of  the  gov- 
ernment interference.  The  order  that  ckiscs  a  factorv'  nu>-  coat  httle  in 
bureaucratic  expense;  cNcn  the  capital  loucs  ti>  ownen  may  be  moder- 
ate. But  the  reduction  m  public  uellbeing  uliich  the  factory  used  to 
serve,  the  goods  no  longer  pnxluccd,  the  wages  no  longer  p«ad,  the 
income  no  longer  earned,  the  saxnngs  and  m\estmcncs  that  mill  ne%rr 
be  made,  these  are  incalculable  real  costs  that  nuv  grcath*  surpass  the 
visible  losses. 

Government  intervention  b\-  law  or  decree  mj>'  aswme  te%Tnl 
forms:  it  may  be  directly  pn^hibitixe  ix  re»tncti\r  as  it  fbcaMy  pcevtm* 
economic  produaicxi.  It  may  vvrakcn  competition  through  bcenses 
and  franchises  or  oen  create  cancb  and  monopobcs  It  nu>'  impose 
additional  costs  on  the  pnxlucTKio  pnKcss  The  IV  S  Knumnmental 
Proteaion  Agena-,  for  imtance,  mav  want  .\merKan  industry  to  spend 
some  $32  billion  m  order  tcj  reduce  the  (KcupatKWul  noise  limit  And 
finally,  the  regulation  may  intcrlcrc  Hith  business  nunagemem  and 
efficient  application  of  land,  labor,  and  capital  All  such  cnnfmb  and 
regulations  tend  to  reduce  economK  pnxiucTtMn-.  dcprtas  wage  rate*, 
and  lower  our  standard  of  living 

Capital  is  consumed  when,  for  anv  reason,  the  capital  gcxxis  a- 
pended  in  production  are  n<H  replaced  If  ht  amsume  more  than  we 
produce,  we  dissipate  the  pnxluctixe  mralth  accumulated  in  the  pa« 
Or,  even,  if  our  consumption  should  stav  the  same,  but  production 
falls  b>elow  our  consumption  lc\cU,  \*r  arc  eanng  into  our  substance. 

In  the  United  States  we  arc  attacking  capital  on  both  fironts:  our 
political  institutions  arc  prcvsmg  ajntinucxish'  toward  higher  Icveb  of 
consumption  as  most  politiaans  arc  clamoring  for  es-er  greater  govern- 


Capital  Consumption  I  163 

mem  cxpcndmina;  and  production  is  falling  oflf  because  of  costly  gov- 
cmmcftt  intervention. 


The  Efmromncntal  Decade 

The  1970*  arc  tuppoicd  to  be  the  "environmental  decade"— ten 
yean  devoced  to  cleaning  and  mending  our  environment.  The  laws  and 
regulatory  actiom  of  rfK  1970-1975  period  alone  are  estimated  to 
coit  indutoy  tome  $300  billion  in  addition  to  the  major  costs  the 
taxpayer!  will  be  fiirccd  to  bear.  All  such  costs  are  "unproductive," 
meaning  rfiai  the  expenditures  consume  business  capital  without  gen- 
erating neu-  pniduction  and  income.  Production  costs  per  unit  of  out- 
put are  nof  kmrrcd.  but  raucd.  \*'hich  causes  real  incomes  to  decline. 
F.  C.  Oldft,  icnior  editor  iii  Power  Eti^ftntering  magazine,  estimates  that 
prcaem  cnvtmnmental  protectKxi  bws  are  costing  every  American 
family  $2,000  a  yitMi  (Powrr  Enfluumnfl,  September  1975,  p.  38  et 
Mf .)  If  luch  c«»t»  merely  v^rre  xa  reduce  our  incomes  they  would  not 
destroy  captal  tuKtancc  But  the  $300  biUion  which  industry  must 
%pcnd  u  buuneM  capital  that  will  never  be  used  to  produce  economic 
gcxids 

According  to  a  recent  report  of  the  U.S.  Council  on  Environ- 
mental Quality,  pnllutKin  ccjntn>I  u  a  gro>vth  industry  that  has  created 
roughh'  orK  mtllKm  job*  dunng  1975  (Chicago  Tribune,  January  6, 
1976.  MX.  2.  p.  4)  If  thu  khould  be  true,  we  cannot  escape  die  conclu- 
sion that  thu  ne^-  mduMn*  with  one  million  workers  is  busily  consum- 
ing the  capital  *ub*tan«.c  of  the  prtxiuctive  industries  rendering  eco- 
nomK  icnice*  to  coruumcr*  It  cannot  be  surprising  dien  diat  while 
die  former  it  profpemus  and  growing,  the  latter  industries  are  linger- 
ing in  stagnation  and  rccessKwi. 

Thu  u  n»*t  to  imph*  rf»at  environmental  pollution  is  preferable  to 
dean  air  and  water.  On  the  contrary-,  let  us  favor  full  allocation  of  the 
total  costs  of  pn*pcrt>-  ti>  its  ou-ncrs.  As  the  undiminished  benefits  of 
an  cconomK  gotxl  should  accrue  to  its  owner,  so  should  the  costs  be 
borne  b>-  him.  But  rather  dun  rely  on  government  regulation  and  an 
aimy  of'burraucraix,  let  us  relv  on  the  safeguards  of  contract  and  the 
jurisdiction  bv  courts  of  Uw.  And  let  us  seek  to  reduce  die  sphere  of 
public  propem-  u-hich  is  dK  principal  source  of  environmental  poUu- 
tion. 


164  /  HansF.Sennholz 

Regulatory  Agencies 

Government  regulation  dissipates  capital  dirccth'  through  imposi- 
tion of  capital  oudays,  and  indirecth'  through  restrictions  of  producti\'- 
ity  that  reduce  income,  saving,  and  investment.  The  Amchcan  caitds 
are  cogent  examples  of  the  laner.  Through  compulsory  govxmmeut 
licensing  and  rate  making,  gmemment  agents  control  the  railroad  in- 
dustry, the  motor  carriers,  water  earners,  freight  fbn»*ar(krs,  air  carri- 
ers, power  generation,  and  broadcasting.  Furthermore,  go^xmment  b 
manipulating  labor  and  management  in  order  to  achic%x  its  political 
and  economic  objectives.  The  National  Labor  Relations  Aa  of  1935 
and  1947,  the  Fair  Labor  Standards  Act  of  1938,  the  Empkn-ment 
Aa  of  1946,  die  OccupatKHiai  Safct>'  and  Hcakh  Act  of  1970,  the 
Comprehensive  EmploN-ment  and  Training  Act  of  1973,  all  are  de- 
signed  to  prevent  the  applicatxxi  of  labtir  according  to  the  efficiency 
diaatcs  of  the  market.  Extcnsivr  gmemment  control  mrr  agncukure 
is  preventing  this  important  industrv  fnim  uxirking  eflfKicnth  for  its 
world-wide  markets.  And  finally,  the  recent  guvrmmcnt  takcu%Tr  of 
energy  production  and  distnbutKm  places  all  industncs  in  tcnoui  ioop- 
ardy. 

It  is  the  ver\'  objective  of  such  contnib  to  interfere  ^ith  eflkicnc 
economic  prcxiuction.  .\hcr  all,  if  ux  equate  pa4*itablc  prxxiutiKwi  for 
the  market  with  economic  crtkieno.  ihcn  ginrmment  intertercnoc 
with  this  pnxluction  must  nccessanh  be  ineflkient  and  cotcly.  It  ii 
cosdy  to  consumers  who  pay  more  for  feurr  goods,  and  to  produoen 
who  may  suffer  losses  in  inctjmc  and  capital  A  unall  reduction  in 
business  income  cntaiU  a  large  kiu  ol  capital  Alter  all,  it  is  the  >ield 
of  capital  that  determines  it.%  market  pnce.  a  SI  milhon  reduction  in 
income,  for  instance,  may  lower  capital  gtxxis  pnccs  by  $10  million. 
A  regulation  that  ct)mpletely  idles  a  pnxiucn%e  entcqxuc  completely 
destroys  its  pnxluctivc  capital,  or  at  least  reduxs  it  to  the  sahage  vahic 
of  its  component  pans. 

Labor  Unions 

Capital  can  be  formed  only  b\'  uving,  that  is,  a  uirphn  of  produc- 
tion over  consumption.  .\n  enterprise  tlut  en|cn-s  an  excess  of  procecdt 
over  costs  cams  a  surplus,  commonly  called  profit,  icme  of  fv-hidl 


Capital  Consumption  I  165 

usually  li  plowed  back  into  production.  Profitable  enterprises  tend  to 
grow;  unproAtabIc  one*  must  contraa. 

Laboruniom  owe  dKir  existence  to  the  doctrines  and  notions  of 
labor  exploitation.  The>'  aie  pressure  organizations  of  members  who 
are  dnad  to  ttand  alone  in  the  economic  world  of  competition. 
Thfoi^  ffriko  and  threats  of  strikes  they  aim  to  achieve  one  basic 
f  ibjcctive:  to  imprmr  the  lot  of  their  members  dirough  higher  pay  and 
benefita.  or  dvough  k>wer  output  and  less  work.  In  every  instance, 
labor  uniom  endeavor  to  raise  dK  costs  of  production. 

Productive  bustncss  capital  u  consumed  in  nearly  every  phase  of 
unKm  aamty.  A  »»nke  may  soercly  drain  the  working  capital  of  an 
cnterpn»e  After  all.  mt»t  busmcss  expenses  continue  although  pro- 
duaMm  u  halted  Produane  propert)*  may  be  damaged  or  even  de- 
\tniycd.  And  lA'hen  the  ttnke  is  fmally  senlcd,  the  costs  of  labor  usually 
rue  fubiuntially.  The  hourK'  pay  of  union  members  as  well  as  their 
Aringr  benefits,  such  as  paid  holida)^^,  vacations,  health  and  dental  care, 
pension  funds,  and  the  like  frequently  double  labor  costs  in  just  a  few 
\Tan.  F<ir  the  average  CJcncral  Motors  hourly  employee  in  the  United 
States,  the  m>  tailed  fringes  ncm-  c(»mc  to  $4,500  a  year  (Remarks  by 
Thomas  A  Murphy.  (  Kiirman  of  General  Motors  Corporation  before 
The  Economic  Oub  of  Nev*'  York,  Nm-cmbcr  12,  1975).  But  diis  is 
noc  ill.  The  %vori  rules  t«>  v^-hich  the  company  must  submit  under  the 
new  contract  ma>*  prmr  U)  be  e>-cn  more  cosdy  as  management  loses 
its  abilit>'  to  manage  labor  efTicicntly.  The  seniority  rule  may  prevent  a 
more  efhcient  \tHingcr  ut>rker  fn>m  performing  a  task.  The  "bumping 
right"  of  a  senKJT  ui >rkcT  may  e\en  cause  the  younger  man's  dismissal. 
Management  must  helplessh'  watch  the  replacement  of  its  best  workers 
by  senior  union  n-oriers,  the  subsritution  of  inefficient  work  rules  for 
labor  efficiency,  or  }!t\c  appUcation  of  unproductive  mediods  and  tools 
of  production!  And  fmalh-,  xi\c  job  disciphne  tends  to  suffer  as  union 
members  may  fed  protected  from  managerial  direction  and  supervi- 
sion. 

The  demands  and  tactics  of  militant  labor  unions  invariably  reduce 
die  expansion  of  prt>fuable  enterpnscs  as  business  profits  are  turned 
into  Ubor  expenses  radier  rfian  producrive  capital.  Marginal  enterprises 
diat  are  bunkned  bv  tk^  labor  costs  now  suffer  losses  diat  dissipate 
business  capital.  And  enterprises  diat  were  suffering  losses  even  before 
Ac  union  extracted  its  coercixx  costs  may  be  forced  out  of  busmess. 


166  /  HansF.Sennholz 

In  each  case,  economic  output  is  reduced  and  productive  capital  is 

consumed. 

Capital  Consumption  Tends  to  Accelerate 

Every  day,  one's  economic  condition  either  improves  or  deicrio> 
rates.  It  is  unlikely  that  anyone's  condition  utxild  remain  unchanged, 
as  income  and  consumption  arc  independent  contmuous  proocsKS  duK 
rarely  balance  each  other.  Even  if  >'our  saMngs  and  cashboUmgi 
should  stay  the  same  day  after  day,  >xxj  probabK'  are  suffering  a  dedine 
in  living  conditions  as  your  consumer  goods,  such  as  >xxir  car,  refrig- 
erator, and  shoes,  are  weanng  out.  The  same  is  true  y^1Xh  busincM. 
Every  day  a  business  enterprise  athcr  accumulates  capital  through 
saving,  or  reduces  it  through  mcrconsumption.  In  a  prosperous  soci- 
ety with  high  rates  of  producti\it\'  and  income,  many  pcopk  arc  in  a 
position  to  save  and  invest.  After  the  mo»t  important  needs  are  met,  a 
part  of  income  is  left  for  pnxluctiNx  impnnxments  C)n  the  other  hand, 
in  a  poor  countn'  it  is  more  difficult  to  save  and  imrst.  In  India,  which 
reports  a  per  capita  income  of  $98  per  yxir,  it  is  more  difikuk  to  save 
$50  than  in  the  U.S.  where  individual  incomes  a\rrage  lome  $6,000. 
In  fact,  we  can  easily  make  more  pn>duai\r  impnncmcnt*,  tfiat  is, 
spend  more  mone\'  on  neu-  factories,  stores,  machines,  and  equipment, 
than  the  average  Hindu  is  earning  This  fact,  together  with  the  instmi- 
tionai  handicaps  that  cause  some  countries  tn  be  to  poor  m  the  fine 
place,  explains  why  the  difference  in  living  ttandards  be  t^ ten  varioui 
countries  continues  to  widen 

As  economic  impnnemcnts  mav  accelerate  through  ever  higher 
rates  of  saving  and  investing,  so  may  %^r  see  an  accekracing  prtxess  of 
capital  consumption  and  economK  decline  No  matter  what  our  in- 
comes may  be,  if  we  consume  mcjrc  than  ht  pnxhice  we  arc  eating 
into  our  prcxluctivc  substance  And  (WKe  ht  awuume  capital  while 
stubbornly  clinging  to  old  locU  lA  consumpCKWi  to  n-hich  ht  has-e 
grown  accustomed,  uc  descend  at  esrr  faster  rates  The  stiickhokier 
who  liquidates  some  stcKk  in  order  t«)  supplement  his  dividends  for 
living  expenses  faces  lower  income  in  the  future  If,  neverthclcn,  he 
maintains  his  living  standard  he  ^lU  ha\x  to  bquidate  his  hoAdif^ 
faster  and  faster  until  the  last  share  is  k>W  OtnuHish'  he  aiuld  hak  his 
impoverishment  at  anv  time,  or  escn  restore  hu  fciriune,  through  suit- 
able curtailment  of  his  living  expenses. 


Capital  Consumption  I  167 
Changing  the  Body  Politic 

For  a  fimire-oncntod,  determined  individual,  it  may  be  relatively 
caiy  to  itadyuft  his  comumpcion  to  falling  income.  But  for  a  society 
contitting  of  milliom  of  voters  who  arc  bent  on  redistribution  and 
cofttumption  through  the  political  apparatus,  this  readjustment  may 
be  rather  diffKuit  If  the  pubUc  is  indifferent  or  uninformed  about  the 
significance  <if  pniduaivc  capital,  the  political  pressures  for  govern- 
ment bcneftu  and  services  may  grow  when  incomes  are  falling.  The 
very  fbrcca  that  arc  debilitating  productive  capital  through  overcon- 
tumption  are  Ukdy  to  oppoie  any  reduction  in  consumption.  They 
may  move  hca^m  and  earth  to  maintain  their  spending  levels  which, 
after  all,  aime  fnim  "mkuJ  benefits  and  services"  to  which  they  believe 
they  arc  morally  and  ptilttKally  entitled.  Thus,  the  process  of  dissipa- 
tion once  begun  feed*  im  the  public  pressures  for  simple  preservation 
of  the  cojnomic  way  of  life  to  which  we  have  grown  accustomed. 

If  declming  productnirv'  and  incomes  should  finally  cut  into  those 
benefiu  and  »cnices,  the  beneficiaries  may  rise  in  anger  about  the 
sudden  •\K»Uiion  of  their  nghis."  There  could  be  social  disturbance 
and  dimiptMm  of  the  pnxluctioo  prtKess,  which  would  reduce  output 
and  imcwne  ^xx\  funher.  ^-hich  in  turn  would  again  aggravate  die 
loctal  situation — a  xukhu  circle  of  frustration  and  decline! 

But  cvtn  %nthout  ihu  pamcular  social  force  of  acceleration,  we 
may  coimime  pctxluanx  capital  at  accelerating  rates.  Many  people 
rtaa  to  dcchning  real  inaimes  from  employment  by  producing  less. 
The\'  may  e\Tn  blame  their  cmpkncrs,  diosc  "greedy"  and  "rutiiless" 
meahants  and  iixlustnalms.  whom  the  demagogues  will  be  quick  to 
ctmdemn  few  the  devline  Absenteeism,  slowdowns,  work  stoppages, 
fcadKrbedding,  and  other  restnctive  uork  practices  may  grow  worse. 
But  lower  output  on  account  of  bwer  labor  efficiency  raises  labor  costs 
and  dissipates  busmess  capital.  Only  greater  output  tiirough  harder, 
more  efficient  vkxxi  can  arrest  the  decline. 

In  Spite  ofltAU 

Facing  such  powrrfUl  restraint  on  his  creative  energy,  why  ^^^ 
man  not  just  surrender?  WTiv  does  he  struggle  against  aU  such  odds  to 
pctscrve  his  material  u-eU-bemg  instead  of  consummg  it  m  die  plea- 
sures of  tfK  moment?  \Miv,  m  spite  of  this  massive  capital  consump- 


168  /  HansF.Sennholz 

tion  by  our  political  institutions,  do  wc  continue  to  aiiov'  a  standard 
of  living  that  is  the  envy  of  the  worid?  It  cannot  be  the  nature  of  man 
that  continues  to  guide  us  to  high  incomes  and  rdati\r  prosperity.  For 
the  vast  majority  of  human  beings  throughout  history  ha\T  lingered 
in  abjea  poverty  and  suffering.  It  cannot  be  a  racial  characteristic  of 
the  white  man,  for  he,  too,  has  liv  ed  uith  hunger  and  misery-  through- 
out most  of  his  histor\\  and  millions  still  do  toda>'.  It  cannoc  be  the 
natural  resources  at  our  disposal,  for  countries  that  are  poverty-stricken 
may  be  rich  in  such  natural  resources.  The  ansu^er  must  be  sought  in 
the  moral  antecedents  to  econonuc  freedom  and  prospcnt\'.  Honcs(>', 
integrity,  independence,  sclf-rchance,  respect  for  the  rights  of  one*s 
fellowmen  and  their  properr*',  the  etfws  of  ^xxk,  and  thrift,  and  genu- 
ine concern  for  tomorrow  continue  to  In-e  m  the  hearts  and  minds  of 
millions  of  people.  The  moral  values  that  ga>r  birth  to  our  political 
and  economic  order  with  its  democratK  uistitutKms  and  the  pn>'atc 
property  system  in  production  are  still  alj\r  and  amtimie  to  guide 
many  Americans.  Attacked  and  uxxinded,  hackled  and  munlated,  their 
individual  enterprise  sv'stem  continues  tt)  delncr  more  goods,  affords 
higher  incomes,  and  better  living  conditKwis  than  any  other  fyncm 
now  or  ever  before.  And  although  many  AmerKans  no  kmger  embrace 
its  moral  antecedents,  thev  are  naturalh  caimous  m  eradacating  all 
remnants  of  such  a  sv-stem.  While  en^ning  its  nch  fhuts,  the>-  may 
question  its  various  pillars,  but  are  rchiaant  to  bnng  them  down  all 
at  once. 

Thrift  and  Industry  Bring  Forth  Economic  PiuytJ» 

To  avoid  gradual  impoxcruhment,  >»r  must  romc  thu  ominous 
trend  toward  the  consumptKw  of  tnir  substance  If  ^t  trek  to  unpruve 
our  working  and  living  conditKxu  and  to  gnr  a  better  ecivmmic  life 
to  our  children  and  future  gencratiom,  %kr  must  savr  and  build  now 
Wc  must  curtail  our  appetites  fcK  present  enfcnTnent  and  aUocatc  a 
share  of  our  earthly  gtxxls  to  pnxluaK>n  fior  the  future 

No  matter  what  a  man's  motivrs  for  vaving  may  be,  he  not  only 
serves  himself  but  also  benefits  wKietv  Kvm  ifie  miser  who  uvcs  more 
than  other  people  deem  appn>pnate,  clinging  to  hu  uvmgs  m  growing 
cashholdings,  renders  a  valuable  wxial  senice  Hu  aa  of  savu^  allows 
a  supply  of  gtxxls  that  were  paxiuced  to  be  available  for  further  pro- 
duction activities.  But  most  people  >*-t»  save  part  of  their  incomes 


Capital  Consumption  I  169 

cither  dcpont  ihetr  Mvingi  in  banks  and  other  thrift  institutions  or 
difccdy  purdufc  more  factors  of  production.  In  each  case,  saving  may 
dircoJy  be  turned  into  capital  accumulation.  The  famier  who  builds  a 
fence  or  ham  or  brn-f  a  traaor  is  creating  capital  that  renders  his  labor 
more  productive.  The  merchant  who  improves  his  store  or  enlarges  his 
inventory  u  forming  bmincw  capital.  The  oU  company  diat  builds  a 
refinery  or  leTvice  funon  u  creating  capital  goods  diat  render  human 
labor  more  productive.  And  the  refinery  worker  who  deposits  his  sav- 
ing»  in  hii  bank  or  credit  union  helps  to  create  productive  capital  as 
Mime  of  their  reserves  are  invested  productively,  yielding  incomes  on 
the  investments. 

A  M>ciet>'  thai  kxiks  upon  thnft  and  frugality  as  social  virtues,  diat 
believes  with  Beniamin  Franklm  "^if  >'ou  know  how  to  spend  less  dian 
you  get,  you  Yixvc  d»e  phikwopher's  stone,"  such  a  society  cannot 
cicape  the  rich  ttwut\i  that  come  from  capital  formation.  On  the  other 
hand«  a  iociet>'  H'tioic  habits  arc  ncx  dirifh'  will  soon  be  poverty- 
stricken. 

Our  economic  well-bemg  deperkis  on  our  ability  to  master  the 
M«orkl  of  production  ^-hich  depends  on  our  power  of  work.  Man  must 
work,  H'luch  u  as  certam  as  life  and  death.  In  order  to  earn  more,  he 
mufC  produce  more.  And  he  can  alv^^ays  work  more  in  order  to  produce 
more,  which  gi\Ts  him  the  means  to  create  the  capital  for  ever  higher 
pfoducti^it)'  in  the  future  Work  is  not  a  curse;  it  is  the  only  means  to 
sustain  and  impnAT  human  life.  Work,  hard  work,  and  long  hours  of 
work  arc  the  paretus  of  prx>spent>'. 

ThcBlcttii^orWork 

A  societ>'  that  kxiks  upon  labor  as  a  blessing  diat  brings  happiness 
and  ennobles  all  cht»e  v^ho  labor,  reaps  rich  rewards  in  economic 
prospent>-  and  pa»grcss.  After  ail,  the  greatest  economic  asset  of  any 
people  u  dK  determination  and  courage  to  work.  On  die  other  hand, 
a  aodet)'  that  fhrnTU  upon  \^t>rk  as  a  curse  or  man's  device  of  exploita- 
tion is  destined  to  be  poor  and  \%Tctchcd.  As  die  man  who  lives  in 
constant  fear  of  expkwtanon  and  docs  not  work  for  die  love  of  work, 
but  onh-  for  monc>-.  is  likeh-  to  be  poor  and  dejeaed,  so  is  a  society  of 
such  indixTduab  likch  to  be  plagued  x^ndi  poverty  and  torn  by  strife. 

Man's  thnft  and'indu$tr>-  \icld  rich  fhiits,  even  diough  his  body 
politK  uidulges  in  profViseness'and  encourages  idleness.  In  faa,  when 


170  /  Hans  F.  Sennholz 

the  political  institutions  embark  upon  the  consumpdon  of  economic 
substance,  it  becomes  all  the  more  important  for  the  indi\idual  to 
preserve  his  productive  capital  through  greater  thrift  and  industry. 
And  when  the  amount  of  capital  invested  per  head  of  the  population 
begins  to  decline,  with  ever  lower  real  ^-agcs  and  standards  of  li\ing, 
the  individual  may  endeavor  to  oflfsct  the  social  decline  through  rising 
personal  productivit>'.  Indeed,  he  may  succcssfiilK'  $\»'im  against  the 
stream  as  long  as  the  current  of  dedme  docs  not  surpass  his  own 
forward  movement. 

When  individual  thrift  and  industr>'  decline,  nun*s  political  institu- 
tions invariably  reflea  his  changing  aspirations.  The  go\rmmcnt  of 
profuse  and  idle  men  indulges  m  capital  amsumpcion  and  sanctions 
idleness.  To  re\'erse  our  ominous  trend  to^^-ard  pmrm-  and  conflict, 
our  political  institutions  must  learn  again  to  Ii\t  MMthin  their  present 
circumstances.  For  no  socict>'  can  be  nch  yt^ho&e  cxpcndmira  exceed 
its  means. 

All  present  policies  that  consume  productnr  suhstaiKt  must  be 
abandoned.  Confiscatory  taxes  that  promt  the  fcwmatxin  of  produc* 
tivc  capital  must  be  repealed.  The  dcfKit  %pcrkling  that  consumes  the 
people's  savings  must  be  halted  immediatch  The  inflatKWi  that  is  dr* 
stroying  the  life's  savings  of  millKms  of  thnfrv'  .\mcncjns  must  be 
abhorred  as  a  crime  against  cctxiomK  wcUbetng  and  mcul  peace.  The 
business  acle  must  be  prc\entcd  thniugh  mon  to  lound  and 
money.  The  c()untlcs.s  government  rcgulatKins  that  are  impeding 
nomic  prtxiuctivit)  and  consuming  business  capital  must  be  repealed 
and  bureaucratic  labor  returned  to  pniductixr  empkntnem  And  fi- 
nally, the  legal  immunities  and  pn\ileges  of  Uhor  umom  must  be 
abolished  and  labor  disputes  returned  ti>  the  courts  of  bw  In  short, 
government  must  remove  its  numennis  shackles  on  the  crcatnr  cncrg> 
of  man. 

1  Federal  budga  deiWtts  Kuml  t<>  SJM  hdbim  «iur«^  thr  ITTh.  to  an*  dwi  U 
trillion  during  the  198(H.  and  arc  cxpa.icd  hi  n(.ccd  U  trJbiai  Smwm  dir  1991k 


The  Power  to  Tax  Is  the  Power  to  Destroy 
by  Clarence  B.  Carson 


Chief  Juibcc  John  Manhall  was  at  his  axiomatic  best  in  the  Su- 
preme Coun  itpmntn  %a  forth  m  McCuUoch  v.  Maryland.  He  pro- 
pounded »o-eraJ  tniercMtng  and  pn>found  axioms  in  that  decision.  The 
strange  thing  aboui  ihc»e  axtocm  is  that  they  have  been  permitted  to 
remain  in  the  limited  context  in  u-hich  he  found  use  for  them  rather 
than  being  g|\xn  general  application.  This  is  strange  because  axioms 
are,  by  nanire,  uni\rrul  m  extent  and  cvcrv'where  applicable,  if  they 
arc  true.  Morecn-er,  the»e  axKirm  have  been  given  added  weight  in  the 
United  State%  b\*  being  embedded  m  and  used  to  buttress  a  unanimous 
Supreme  ixnux  deiuKm  which  %till  stands. 

The  axiomft  in  quntion  are  stated  and  appealed  to  in  several  ways 
in  chc  ooune  of  the  optnKm.  The  most  dirca  statement  of  them  is 
oomained  in  the  Itilkm-ing  clames:  That  the  power  to  tax  involves  the 
ptm-er  tt>  deMnn*.  that  the  pimcr  to  dcstn)y  may  defeat  and  render 
uieleM  the  pimxr  it)  create.  "  The  implications  of  the  axioms  had 
already  been  laid  dim-n  a  feu-  sentences  earlier: 

These  arc,  1 .  That  a  ptmcr  to  create  implies  a  power  to  pre- 
icnr.  2.  That  a  ptmrr  to  destn>y,  if  wielded  by  a  different 
hand,  u  honile  to.  and  incompatible  widi,  these  powers  to 
create  and  }>reservT  3  That  where  this  repugnancy  exists,  that 
autlxNirv-  whKh  is  suprenK  must  control,  not  yield  to  that 
o\"er  v^-hKh  it  u  supreme — 

Before  prtKeeding  tt)  Uk  bn>adcr  application  of  these  principles, 
or  axiomi,  it  i»  in  carder  first  to  explain  the  context  widiin  which  they 
UTie  empknxd  bs  Chief  Justice  Marshall.  The  Court  had  before  it  a 
case  ansmg'out  of  a  Uw  passed  by  a  state.  In  1818,  the  Maryland 

BTcinon  K.  •TWm  «i  .augh.  cxtcm.«K.  specializing  in  American  mtcUecmaJ 
kmort  H*  »  tht  ««h.»  erf «>rral  Kx^  .\mcing  them  arc  Organ^d /^a^nst  Whm?The 
Uh^rmm  m  AmmoB  <nd  ihc  cnrnpcthcmnr  Bmsu  Hutmy  of  the  UnUcd  States.  This  article 
fc«  ^»j**mi  ■!  Ac  Oooher  1976  Bwc  of  TV  f  rrruM* 

171 


172  /  Clarence  B.  Carson 

legislature  had  enaaed  a  statute  k>'>'ing  a  tax  on  all  bank  notes  issued 
in  Maryland  by  banks  not  chartered  b>'  the  state.  A  branch  of  the  Bank 
of  the  United  States,  a  bank  incorporated  under  the  lau-$  of  the  United 
States,  was  located  in  Baltimore.  A  man  named  McCuUoch,  cashier  at 
the  bank,  refused  to  pay  the  tax  on  bank  notes  (cun«ncy)  issued.  The 
case  came  to  the  Supreme  Court  in  1819. 

Two  issues  were  taken  up  and  deaded  b\'  the  Court.  The  first  need 
not  much  concern  us  here.  Suffice  it  to  say  that  it  in\T)hTd  the  question 
of  whether  the  United  States  government  was  authorized  b\'  the  Con- 
stitution to  create  such  a  corporation  and  that  the  Court,  fbUowing  the 
reasoning  which  Alexander  Hamilton  had  ongmalh  used  to  |ustif>'  the 
chartering  of  a  United  States  bank,  heki  that  it  n-as.  The  other  issue 
was  the  one  which  called  forth  the  abmr  axioms  in  rcsoKing  it.  The 
issue  was  this:  Could  a  state  tax  an  instrument  of  the  United  ScMcs 
government  created  in  pursuance  of  constitimonalh*  permissible  ob* 
jects?  The  Court  held,  m  as  absolute  terms  a*  couki  be  empknrd,  that 
no  state  could  tax  an  instrument  of  the  United  States  ginrmmeni 

Chief  Justice  Marshall  did  ncx,  then,  rrstrxt  himself  in  v^Titing  the 
opinion  to  the  simple  questxHi  of  whether  or  not  Marviind  couki  tax 
bank  notes  issued  by  the  United  States  Bank  Instead,  he  explored  the 
whole  question  of  the  taxatKHi  of  anv  creation  tif  the  I'nited  Sutcs 
government  by  any  state  Some  of  this  expkiration  is  both  interesting 
and  relevant  to  the  e\cn  baader  issues  to  be  taken  up  in  this  amde. 
Before  quoting  further  fnxn  the  decision.  himT\xr,  tumething  cbc 
needs  to  be  got  out  of  the  way. 

Universal  Application? 

It  is  my  contention  that  the  axMwns  and  pnnaples  set  ftwth  in 
support  of  this  decision,  if  correvt.  ttpph  tv  all  tmxmnm  That  is,  the 
power  to  tax  any  one  by  anv  gosemment  in\i>he»  the  poi*Tr  to  destroy 
and  that  this  power  of  government  b\  taxation  to  destnn'  can  defeat 
and  render  useless  the  power  of  mdixiduals  t«>  create  and  preservr 
what  they  have  created  Superfkiallv.  the  ciwxiusion— that  the  states 
could  not  tax  the  federal  gosemment  at  all— appears  either  to  rule  out 
all  taxation  by  gov  emmcnts  or  ntx  ti>  appK  to  go%-emments  in  rclatian 
to  individuals. 

It  is  tempting,  of  course,  to  apph  the  airwlusion  literally  and  rule 
out  all  taxation,  but  it  is  a  temptanon  that  shouW  be  resisted.  The 


The  Power  to  Tax  Is  the  Poiper  to  Destroy  I  173 

■  ''ion  by  governments  is  almost,  if  not  quite,  as  good  as  the  case 
I  mmcnt  itself.  In  theon-,  governments  might  be  supported  by 
\oluntary  comnbutK>ns.  In  practice,  however,  the  voluntariness  of  die 
ctjntnbunom  wouJd  always  be  suspca.  Govemment  relies  on  coercion 
to  carry  out  hs  edicts,  and  rficrc  should  be  no  doubt  diat  if  it  depended 
iK\  •Vohmtny"  tuppoct  it  would  extend  its  protection  mainly,  or  only, 
to  itt  benciactDn.  Moreover,  it  is  unlikely  that  the  power  of  govem- 
riKftt  could  e\Tr  be  mtramcd  from  such  confiscations  as  would  enable 
It  to  meet  iiA  btlU  JustKc  requires  that  all  who  can  should  pay  for 
gcnemmcm.  TaxatMm  u  probably  the  only  means  of  achieving  this 
result,  or  apprtnumatmg  it.  In  any  case,  the  necessity  for  taxation  is  so 
imivcrully  accepted  that  it  should  be  presumed  to  be  the  correct  ap- 
{>roach  in  the  absence  of  conclusive  pnxjf  to  the  contrary. 

It  docs  not  ItUkm'.  h<m*e\er,  that  Marshall's  strictures  about  the 
jumrr  to  tax  do  not  apply  to  gcnemments  in  their  relations  to  indi- 
NiduaU.  Not  onh-  arc  ihcy  applicable,  but  the\'  apply  even  more  em- 
|>haiK:alh'  a»  bctu'ccn  gcnrmmcnis  and  individuals  than  between  states 
and  the  Federal  gcntmineni.  If  the  power  of  a  state  to  tax  the  Federal 
govcfrnncnt  anUd  dcstnn*  the  in$tTumentalit>'  taxed,  how  much  more 
readily  could  ginemnKtit  taxation  dcstn)y  relatively  helpless  individu- 
als? There  is  nothing  in  logK  to  prc\ent  the  application  of  the  axioms 
to  indi\iduaU  as  urll 

On  cloic  exammatKNi.  it  comes  out  that  Chief  Justice  Marshall  did 
not  hue  the  ■fcw/iifr  prththmom  of  state  taxation  of  instruments  of  the 
federal  gcn-emmcm  on  the  axK>ms  he  adduced  in  McCuUoch  v.  Mary- 
Umd,  Instead,  he  based  the  pn>hibition  on  the  relationship  between 
state  ginTmrnenis  and  the  federal  govemment,  a  relationship  which 
lacks  the  pro^  Imuts  tm  the  power  to  be  exercised.  It  had  apparendy 
been  argued  that  the  Cxy^ux  should  have  confidence  diat  the  state 
utxiki  not  abuse  tfK  po^*cr  of  taxanon.  Marshall  rejected  diis  line  of 
reasoning: 

...  But  all  inconsistenaes  are  to  be  reconciled  by  die  magic  of 
d»e  word  CDNFIDKNCE.  Taxation,  it  is  said,  does  not  neces- 
sarih'  and  una\x>idabK-  destroy.  To  carr>'  it  to  die  excess  of 
destruction  v^xxikl  be  an  abuse,  to  presume  which  would  ban- 
ish dut  confidence  u-hich  is  essential  to  all  govemment.  But 
b  diis  a  case  of  confidence?  Would  die  people  of  any  one  State 
trust  dwsc  of  anodKT  uidi  a  power  to  control  die  most  msig- 


174  /  ClarenuB.  Carson 

nificant  operations  of  their  State  government?  We  know  they 
would  not.  Why,  then,  should  we  suppose  that  the  people  of 
any  one  State  should  be  willing  to  trust  those  of  anocher  with 
a  power  to  control  the  operations  of  a  gox^emmcnt  to  ^^iiich 
they  have  confided  their  most  important  and  most  vahiable 
interests?  In  the  legislature  of  the  Union  alone,  are  all  repre- 
sented. The  legislature  of  the  Umon  alone,  therefore,  can  be 
trusted  by  the  people  with  the  pouer  of  controlling  measures 
which  concern  all,  in  the  confidence  that  it  ^lU  not  be  abused. 
This,  then,  is  not  a  case  of  confidence,  and  >*t  must  consackr 
it  as  it  really  is. 

Marshall  proceeds  to  point  out  that  if  a  state  can  tax  one  operation 

of  the  federal  government,  it  may  tax  any  of  them. 

If  the  States  may  tax  one  instniment,  empknrd  by  the  govcm- 
mcnt  in  the  execution  of  its  po^^rrs,  the>'  ma>'  tax  any  and  cvay 
other  instrument.  The>'  may  tax  the  mail.  the>'  mav  tax  the 
mint;  thc\'  may  tax  patent  nghts,  ihe>-  may  tax  the  papen  of 
the  custom-house;  the>-  may  tax  |udKial  prtKCu,  the>  may  tax 
all  the  means  employed  b>  the  ginemment,  to  an  excess  ^iixti 
would  defeat  the  ends  of  goxemment. .    . 

Granted  that  if  states  could  tax  one  instrument  the>-  aiuld  tax  ochers. 
Perhaps,  too,  such  taxation  ccmkl  be  used  ii>  defeat  the  cnJL\  <i(  gtnrrn- 
mcnt.  Strangely,  however,  Marvhall  goes  tm  ti»  argue  that  the  Federal 
government  could  tax  instruments  ol"  the  states,  and  that  powder,  so  far 
as  his  argument  had  advanced,  ccmkl  be  used  to  destroy  the  states  or 
their  instrumentalities.  The  diflerence.  he  %aid,  is  this; 

The  people  of  all  the  States  ha\T  created  the  general  govern- 
ment, and  have  conferred  upon  it  the  general  power  of  taxa- 
tion. The  people  of  all  the  Slates,  and  the  Sutcs  thcmtcKrs, 
are  represented  in  Omgress,  and.  bs  theu  representatives  exer- 
cise this  power.  WTicn  tho  tax  the  chartered  insntutions  of  the 
States,  they  tax  their  constituents,  and  these  taxes  must  be 
uniform.  But  when  a  State  taxes  the  (iperations  of  the  govern- 
ment of  the  United  States,  it  acts  uptm  institutions  created. 


The  Power  to  Tax  Is  the  Power  to  Destroy  I  175 

noc  by  their  own  corodnjcms,  but  by  people  over  whom  they 
daim  no  control 

The  cnu  of  Manhall'i  argument  for  prohibiting  state  taxation  of 
the  fcderai  government,  then,  was  that  sutc  taxation  lacked  the  proper 
haK  and  Umio.  A  pan  of  the  people  could,  at  least  in  dieory,  be  taxing 
the  whole  people.  If  state*  could  le\y  taxes  on  the  federal  government, 
xhcxx  wfiuJd  be  no  requirement  of  uniformity.  One  state  might,  for 
example,  le\-y  a  5  percent  tax  on  notes  of  the  United  States  Bank, 
anochcr  10  percent,  another  50  percent,  and  so  on. 

An  Ouiyowui  oi  die  System 

The  reason  for  the  tiktaUut  prohbmon  of  such  taxation  was  acciden- 
tal, not  eMcnital  That  u.  it  did  mn  arise  from  the  nature  of  govern- 
ment Of  of  laxatMm  but  fnim  pcviihar,  hence,  accidental,  features  of  the 
fcderai  »>*Mem  of  gtnrmmcnt.  The  Court's  decision  in  this  case,  of 
counc«  wa»  cuncemcd  %kith  rulmg  upon  acts  occurring  within  this 
syKan,  and  oaiwminanal  hmonam  have  usually  held  that  Marshall 
wai  concerned  i*ith  aiktertmg  the  »uprcmac>'  of  the  United  States  gov- 
ernment. Be  that  a»  it  may.  it  i%  n«K  my  purpose  here  to  enter  upon  the 
quctcion  of  the  merit*  of  the  decision  t>r  of  the  particular  arguments 
advanced  m  nippori  of  it.  These  have  been  brought  up  only  to  show 
that  the  absolute  {vohibitKins  against  the  taxation  involved  arose  from 
peculiar  arrangement*  and  not  from  the  axioms  which  were  earlier 
dted.  In  ihort,  they  i»rrr  brought  up  in  order  to  get  them  out  of  the 
u-ay  io  as  to  gi\tr  the  auoms  the  exammaiion  the\'  warrant  and  suggest 
their  implicatKms 

The  only  reason  for  mx  appKing  the  axioms— That  the  power 
to  tax  in\ti|\-e*  the  pourr  to  destroy;  that  the  power  to  destroy  may 
defeat  and  render  useless  the  poucr  to  create"— to  government  taxa- 
tion of  tndi\iduals,  then,  utxild  be  that  the>'  are  not  valid.  It  is  not 
diflkuk  to  test  thetr  vahdit)-  as  axwxns.  It  in\olves  only  determining 
^fc-hether  in  the  nature  of  things  thc>'  are  necessarily  true.  Clearly 
enough,  the  po%*rr  to  tax  ckKs  m\olve  die  power  to  destroy.  The 
power  to  tax  entails  the  pourr  ti)  take  up  to  100  percent  of  die  income 
from  any  undertaking.  No  undertakmg,  no  matter  how  well  it  is  fi- 
nanced, cin  $ur>i\r  indetiniteh'  if  all  its  income  is  drained  away  in 


176  /  Clarence  B.  Carson 

taxes.  Hence,  any  and  c\'cn'  human  undertaking,  shoit  of  breathing, 

can  be  destroyed  by  taxation. 

Counterproductive  Taxation 

If  any  human  undertaking  can  be  uipcd  out  by  taxation,  it  follows 
that  taxation  may  "defeat  and  render  usdcss  the  power  to  create.* 
There  would  be  no  purpose  m  begmnmg  undertakings  if  the\'  ^rre 
certain  to  be  destroyed  by  taxation.  The  chances  are  good  that  man's 
ingenuit)^  would  not  be  completeh-  stifled  b>'  such  gmrniment  action, 
but  it  would  sure!)'  be  rendered  largeK  useless. 

The  axioms  arc  shov^-n  to  be  n  alid  b>-  this  line  of  reasoning,  but, 
unhappily,  the>'  are  thercb\'  made  \rrv  nearh*  irrelexant  One  hundred 
percent  taxation  would  dn-  up  all  stxirccs  of  rexmue,  hence,  such  a 
level  of  taxation  would  be  counterproduanr,  as  the  contemporary 
phrase  has  it.  Or,  the  go\cmment  uxHiki  ha\T  to  proceed  b\-  the  en- 
slavement of  some  portion  or  all  of  the  populatxin.  The  oil  wouki 
then  t>e  slavery',  though  slavcn  is  csscntialh  nothing  more  nor  leu  than 
100  percent  taxation.  While  the  cmlavcmcnt  implKatmm  are  not  en- 
tirely irrelevant,  thc>'  do  tend  to  place  an>thing  less  than  100  pcrecnt 
outside  the  frame  of  the  axioms 

But  does  the  validirv-  of  the  axioms  depend  on  earning  the  argu- 
ment to  its  logical  conclusKJO?  John  Marshall  did  not  hinge  hu  use  of 
them  on  some  potential  cxtremm-  He  did  not  e>Tn  expkire  much  the 
question  of  the  degree  of  the  taxation  He  was  \xrs-  carehil  to  exclude 
the  whole  question  o(  abase,  for  if  Ke  had  admittctl  its  rele\ance  he 
would  have  been  drawn  in  a  quite  different  dircoion  In  poim  of  (ad, 
he  put  in  his  axioms  to  serve  xs  j  toundatmn  and  then  pwicetdcd  to 
cover  them  with  his  edifice  of  federal  supremao-  Ksm  so.  if  the  axMims 
have  the  validit>'  he  ascribed  to  them,  the>  shouki  be  vabd  in  the 
absence  of  abuses. 

All  Taxes  Affect  Creativity 

It  is  my  contention  that  the  axKwns  are  valid  regardless  of  the 
degree  of  the  taxation.  The  pouer  to  tax  in\x>hTs  the  power  to  destroy 
whether  the  degree  is  scwie  fractMKi  udmc  percent  or  100  percent.  It 
is  possible  to  demonstrate  this  b\-  marginal  theorv.  The  marginal  the- 


The  Power  to  Tax  Is  the  P(mer  to  Destroy  I  \77 

ory  ai  it  applies  to  degree  of  taxation  can  be  stated  this  way:  Any  level 
f)f  taxation  wiU  make  wme  undertakings  unprofitable  or  submarginal. 
In  practice,  any  increase  in  taxes  vnW  drive  some  people  out  of  business, 
prevent  them  from  going  into  business,  or  make  it  difficult  or  impos- 
sible fix  ihem  to  sustain  themselves  b\'  whatever  diey  are  doing.  The 
]xnm  v%  of  such  cnicial  importance  rfut  it  should  be  fleshed  out  with 
vimc  details 

This  pnnaple  of  margmalit>'  applies  to  anyone  who  attempts  to 
(miduce,  prtnide,  purve>',  sell,  or  transport  any  good  or  service;  it 
applies  to  fiumers,  manufacturers,  storekeepers,  teachers,  artists,  indus- 
tnal  u-cirkers,  or  u'hoe%'er.  but  the  cficcis  may  be  most  clearly  seen  in 
Inuiness  enterprise  The  power  to  preserve  what  has  been  created  is 
essential  lo  all  ton%tTuai\*e  human  undertakings.  Taxation  impinges 
( Ki  that  pcm-er  and  at  the  margim  always  is  threatening  and  destroying 
undenakmgs  Wlut  happeru  to  business  enterprises  dramatizes  the 
general  principle 

In  die  fint  place,  taxatKm  affects  when  and  whether  a  business 
cniefpnse  i*  begun  To  go  into  bminess  requires  a  greater  or  lesser 
4nMMini  of  iaptial,  depending  on  its  size  and  requirements.  To  gather 
iIk  capital,  savings  must  be  accumulated.  Probably  the  form  of  taxa- 
tKm  mih  the  m«nf  de\astating  effects  on  saving  is  inflation.  Govern- 
ment, by  incrrastng  mone\'  supply,  reduces  the  value  of  money  being 
accumulated  as  u\'mgs  Indeed,  the  propensity'  to  save  is  discouraged 
b\-  infbtKm,  and  the  pnjpensirk'  to  spend  is  encouraged. 

The  pn^jtressix-e  uKtwnc  tax  is  another  deterrent  to  capital  accumu- 
lation. The  tax  is  often  talked  about  as  if  it  were  devised  to  take  from 
the  "ha\Ts  "  It  shtniW  be  bener  understood,  however,  as  taking  from 
those  ^s-ho  arc  "getting,"  or  rnmg  to  accumulate  savings.  A  graduated 
income  tax  does  not,  per  u,  txt  u-ealdi  diat  has  been  accumulated  in 
earlier  times;  rather,  it  taxes  current  income.  It  bears  particularly  hard 
on  potennal  neu-  enterprisers. 

Capital  Formation  Inhibited 

Social  Securit\'  paxments  gready  inhibit  capital  accumulation.  Indi- 
\iduab  are  forced'  to  pav  into  die  "fund,"  yet  all  diat  is  paid  into  it  is, 
in  eflfca,  forfeit.  It  cannot  be  drau-n  out  for  investment.  It  cannot  be 
used  as  securit>'  for  loans.  No  creative  use  may  be  made  of  aU  the 


178  /  Clarence  B.  Canon 

money  that  goes  into  Social  Scairit>'.  Whether  it  will  be  a\-ailable  in 
old  age  may  be  questionable,  but  that  it  is  gcneralh'  unax-ailabic  at  any 
other  age  is  beyond  doubt. 

Even  so,  anyone  who  has  managed  to  accumulate  or  borrow  or 
persuade  others  to  invest  enough  to  go  mto  business  has  fust  begun 
his  difficulties  with  taxation.  The  man  u-ho  enters  busincB  dboovas 
all  too  soon,  if  he  did  not  know  it  alrcad>\  that  he  has  a  Senior  Part- 
ner—government.  More  prcciseh',  he  has  a  committee  of  Senior  Part- 
ners, composed  of  federal,  state,  count>%  and,  depending  upon  die 
locale,  township,  and  mumcipal  authorities.  Once  he  opens  hb  doon, 
these  Farmers  join  the  firm,  so  to  speak,  expecting  him  to  peffomi 
special  services  for  which  the>'  do  not  pay,  ha\ing  the  first  go  «  any 
profits  that  he  makes,  and  besetting  him  with  x-anous  oottiy  rcquiic- 
ments. 

In  the  first  place,  the  Senior  Partnen  require  the 
be  a  tax  colleaor.  Though  he  has  not  been  a  caxxlidate  for  die  | 
though  it  may  be  alien  to  his  nature  to  do  such  things,  thougll  die 
citizenry  have  not  cleaed  him  to  the  post,  a  tax  colle«:ior  he  is  non 
apt  to  be.  If  he  is  a  storekeeper  or  ocherM-ise  leUs  to  consumers,  diac 
are  a  variety  of  taxes  he  is  supposed  to  coUca.  Bodi  the  state  and  local 
governments  may  impose  sales  taxes  %kiiK;h  he  has  to  coUect  The  fed- 
eral government  imposes  excise  taxes  v^-hKh  he  has  to  aiUevt  on  certain 
items.  If  he  employs  other  people,  he  has  to  dedua  inaime  taxes  frooi 
their  paychecks.  Under  mtm  conditions,  he  must  coUect  the  Sodd 
Security  tax  by  way  of  pam>ll  deduaKms.  Scxne  arras  have  employ- 
ment taxes  which  he  may  have  to  collect. 

In  addition  to  the  taxes  \%-hKh  he  a>llects  fnim  cifhers.  the  biai- 
nessman  has  taxes  to  pav  on  his  tm-n  accoum  He  must  pay  the  fed 
connected  with  whatocr  licenses  arc  required.  He  has  to  pay  income 
taxes,  if  he  has  sufiicicnt  income,  ti>  the  federal  go\rnvnent.  and, 
perhaps,  to  other  go\cmmcntal  divisions  Merchandise  of  all  •cm 
carries  with  it  an  arrav  of  hidden  taxes  If  the  ginrmmentallv  pre- 
scribed minimum  wage  is  in  ii^  jb«ne  ulut  the  market  wage  \iv\Juki 
be,  the  difference  bcrv\ccn  the  rwo  is  a  tax 

The  recordkeeping  that  mmt  be  done  m  order  to  accoum  for  aB 
taxes  which  he  collects  and  pnnides  tfK  basis  for  hu  own  payment  of 
taxes  amounts  to  a  tax  alstv  Rect>rds  must  be  kept  of  all  taxes 
of  the  gross  and  net  income  of  die  firm,  of  all  expenses  of  ( 
of  goods  in  stock  and  of  equipment  purchased,  sold,  and 


The  Power  to  Tax  Is  the  Pouvr  to  Destroy  I  179 

OcciMonally  ncwipapm  cam'  stories  of  the  failure  of  some  com- 
pany. Ufually,  It  u  lomc  large  corporation,  such  as  the  Pemi  Central 
Raiifoad.  Mom  busincu  failures,  however,  are  noted  only  in  local  pa- 
per*, tf  af  all,  and  many  of  them  go  unremarked.  A  study  a  few  years 
ago  found  diat  approximatdy  one-third  of  all  new  businesses  do  not 
last  a  year,  and  about  half  of  dxjsc  dut  do  are  unable  to  make  it 
dirough  the  ftocond  >Tar. 

VhcTK  u  no  way  of  bvmmg  hem-  many  of  these  failures  are  directly 
attributable  to  laiatKin.  Some  of  diem  would  no  doubt  have  failed  had 
then  been  no  taxes  to  pay,  none  to  collea,  and  no  records  to  keep. 
But  it  if  iafe  to  u>'  dut  taxo  were  a  contributing  faaor  in  every  failure 
and  a  detcnntnati^'e  one  m  many,  for  taxation  adds  to  die  cost  of  doing 
bmincH. 


BuiificMCi  Abandoned 

That  ihc  power  to  tax  u  the  power  to  destroy  can  actually  be 
viewed,  dicn.  All  that  u  ncccuary  tt)  do  so  is  to  drive  down  almost  any 
n>ad.  The  empty  •torn,  the  abandoned  filling  stations,  the  factory  no 
l<HigcT  m  oprratMm.  the  ru&tmg  rails  on  the  spur  from  the  main  track, 
x\\c  fading  Mgn»  cm  the  prcmue*,  arc  mute  evidence  of  the  destruc- 
tivcnc^t  «»<  laxaiKm  Xhcy  arc  the  relics  of  someone's  dream  and  hope. 
Hut  ihc»c  \'uiblc  rrmamA  do  ncK  tcU  the  whole  story  of  the  destruction 
%%T0Ugh(  by  taxation.  That  u-ouki  have  to  include  all  those  undertak- 
ing! that  might  ha\r  been,  but  utrrc  mn,  were  not  because  inflation 
ind  progrc5un\-c  taxatKm  pro-cntcd  the  neccssan'  amount  of  saving, 
u-CTC  not  because  the  awt  of  the  undertaking  was  made  prohibitive  at 
the  outset  b\'  the  necc%sar>  recordkeeping,  were  not  because  failure  in 
one  undcnakmg  kircstalkd  expansion  into  other  fields. 

The  po\%xr  to  tax,  then,  is  die  po\*er  to  destroy.  It  is  not  just  the 
power  to  desmn^  if  states  may  tax  dK  federal  government.  It  is  not  just 
die  po^kxr  to  dc$tio>-  if  dK  federal  government  may  tax  die  states.  It 
IS  not  just  the  pos*rr  to  dc$tro>-  if  die  degree  is  great  and  abusive.  It  is 
destructi\-c  \*-hcTr\-cr  it  falls  and  m  whatever  degree  die  levy  may  be. 

The  courts  ha\x  no-cr  seen  fit  to  extend  to  the  rest  of  us  the 
protection  ftom  dm  destruction  diat  die>'  have  given  to  die  federal 
government.  It  is  unlikeh-  dut  din-  oer  will.  Nor  is  it  in  the  least 
pcobaMe  diat  anv  odicr  means  uiU  ever  be  used  to  give  us  absolute 
protection  ftom  the  dcsti\ictiveness  of  taxation.  As  already  mdicated, 


180  /  Clarence  B.  Canon 

the  case  for  taxation  is  strong  and  probabh'  condu$i\T.  And,  if  there 
is  taxation,  it  will  have  the  cffca  of  destroying  some  marginal  under- 
takings. There  is  no  way  around  it,  if  the  reasoning  and  c\idencc 
adduced  thus  far  are  correa.  WTut  application,  then,  can  be  made  of 
the  principle  that  the  power  to  tax  is  the  po^xr  to  destroy? 

We  can  no  more  deduce  the  proper  course  of  action  from  the 
axiom  that  the  power  to  tax  is  the  pourr  to  destroy  than  could  Chief 
Justice  Marshall  in  the  case  before  him.  The  axiom  is  x-alid,  but  it 
provides  no  specific  guidelines  as  to  u-hat  course  to  fblkm'.  To  find 
this,  it  is  necessary'  to  turn  to  the  purpose  of  taxation.  In  turn,  the 
purpose  of  taxation  depends  upon  the  purpose  of  go\rmmem.  The 
purpose  of  government  is  to  keep  the  peace.  The  mode  b\'  which 
government  properly  docs  this  is  to  use  u'hate%rr  force  ma\'  be  re- 
quired to  restrain  and  inhibit  disturbers  of  the  peace  and  eflba  just 
settiements  among  disputants  who  cannot  otherwise  reconcile  thetr 
differences.  The  purpose  of  taxation  is  to  raise  the  mone>  ncccuarv'  to 
achieve  the  ends  of  government. 

The  Need  for  Government 

The  maintaining  of  the  peace  b\'  gcnemmcm  is  neccsMry  to  con* 
structive  creative  efforts  and  preserving  what  is  therc+n  pn>diKtd  In 
short,  government  pnnides  a  ncccssar>  *eT>Ke  b\-  its  eHviris  at  mam- 
taining  the  peace.  The  cost  of  that  service  is  a  proper  char|ce  ag^amst 
those  producing  and  pro\  idmg  gtxxis  and  services  They  vc  the  prune 
beneficiaries  of  it  and  ma)  be  expected  t»>  bear  mo«t  or  all  of  the  ixm. 
If  a  business  cannot  survive  its  pn>ponMinate  share  cWthe  curt  of  this 
protcaion,  it  might  be  bencr  thought  <>l  as  a  vKtim  t4  its  <m-n  ineficc- 
tiveness  rather  than  of  taxation  The  ptnvrr  to  tax  u  not  <wih'  the  power 
to  destroy,  then,  but  al.s<>  a  cort»Uarv  ot  the  furwrt  of  mnemmcm  to 
preserve  by  protecting  hfc,  liberrv .  and  properrv 

Nonethclc-vs,  the  power  to  tax  is  an  j%vrs<ime  pimrr  to  dettroy. 
Like  fire  and  water,  w  hen  it  w  tamed,  confmed,  and  limited,  it  serves 
a  useful  and  beneficent  purpose  But  ufKontrtWled  and  unlunited  taxa- 
tion is  like  a  wildfire  or  rampaging  n\eT  <Hit  ol  its  banks,  dcstroving 
whatever  is  in  its  path.  C:hief  JustKc  Marshall  noted  in  hu  dccttnn  m 
McCulloch  V.  Maryland  that  taxation  b>'  the  federal  ginemmcnt  was 
limited  by  the  uniforming  requirement.  So  it  was,  until  the  Sixteenth 
Amendment  was  adopted  in  1913.  This  Amendment  removed  the 


The  Power  to  Tax  Is  the  Pmper  to  Destroy  I  181 

mem  important  of  the  ratramts  imposed  by  the  Constitution,  or  so  it 
ha»  been  intefpitted  by  the  courts.  Almost  simultaneously,  Congress 
ict  up  the  Federal  Roerve  System  and  has  given  it  increasing  power 
over  the  money  wpply.  The  destnioive  power  of  taxation  was  let 
looie,  and  when  it  it  combined  uith  the  taxing  power  of  all  other 
government  unit*  it  makes  it  increasingly  difficult  to  create  or  to  pre- 
•crve  a  ntmhu-hik  pcxtKm  of  what  has  been  created. 

Two  kjnd»  <»f  taxation  are  so  potentially  destructive  and  unjust 
dut  dicy  ihouy  be  abK)lutely  prohibited.  One  of  diese  is  taxation  by 
way  of  mflation,  i.e..  by  increasing  the  money  supply.  The  power  to 
tax  by  inflating  is  die  power  to  destrtw  die  value  of  the  money.  Nor  is 
it  a  potential  pcmrr  onK';  e\-erv'  increase  of  the  money  supply  by 
moneti/jng  the  debt— the  proailmg  mode  of  inflation— destroys  the 
value  of  m«ine>-  in  esutence  to  some  degree.  Inflation  is  an  unjust  tax. 
It  penaJuo  taven  and  creditors,  for  the  value  of  the  new  money  is 
subtracted  fnim  the  vahie  of  mone\'  in  hand  or  loaned  out.  Moreover, 
taxation  by  inflation  u  unreasonable,  for  both  saving  and  lending  are 
legal,  honorable,  and  sanaioncd  as  gcxxl  by  the  highest  authorities. 
No  sound  reason  tan  be  adduced  for  penalizing  them. 

The  second  kind  of  taxation  that  should  be  prohibited  is  the  gradu- 
ated or  pn)grcssi\T  income  tax.  The  graduated  income  tax  destroys 
tncenns-e  to  produce  and  pnnide  gixxis  and  services.  It  attacks  saving 
and  insTstment  in  )ust  those  places  where  the\'  could  be  most  readily 
accomplished  It  u  unjust  because  ir  penalizes  higher  earnings,  earn- 
ings which  in  the  absence  of  proof  to  the  contrary  are  evidence  of 
greater  service  b\'  indi\  iduals  and  corporations. 

Both  taxatMm  by  mflatKMi  and  by  the  graduated  income  tax  lead 
rc^  a  vast  amount  of  wasted  cnerg>'  by  citizens  in  order  to  preserve 
what  the>'  hasr  created.  Not  uastcd  m  that  they  may  not  be  successful 
in  dotfig  ».  Not  «^*asted,  either,  in  that  they  may  not  be  able  to  use 
efl^ccti\"eh'  n-hat  the>'  ha\T  preserved.  But  wasted  because  it  is  energy 
that  couW  ha\T  been  spent  on  constructi\'c  undertakings.  By  imposing 
these  raxes,  ginrmmeni  shifts  from  primarily  aiding  the  citizen  in 
keeping  u-hat  is  his  xk*  amfiscatmg  it  from  him.  Much  of  the  citizen's 
eflbrt,  and  that  of  numerous  lauyers,  tax  experts,  and  investment  coun- 
sdon,  is  dexTJtcd  to  finding  waN-s  to  avoid  paying  the  taxes  or  losing 
what  riK\'  hasT  bs-  inflation.  How  much  better  off  Americans  would 
be  today  if  diis  vast  amount  of  energ>'  could  be  devoted  to  productive 
and  oeatixT  eflbrts!  Such  taxation,  too,  tends  to  destroy  the  rapport 


182  /  Clarence  B.  Carum 

between  the  governors  and  the  governed.  Confiscatorv'  goivcnuncitt 
becomes  an  adversary  to  be  outwitted,  not  a  benefactor  to  be  aided  and 
cherished. 

At  any  rate,  taxation  must  be  drcumscribed  and  limited  else  it  will 
"defeat  and  render  useless  the  power  to  create."  By  u-hat  phndpk 
should  it  be  limited?  There  is  a  pnnaple  embedded  in  our  system 
which  provides  inherent  limits  to  all  taxation.  It  is  so  basic  to  our 
political  institutions  that  it  should  goN  em  e>  er>'  legislator,  e\Tn'  execu- 
tive, and  every  judge.  It  precedes  all  our  constitutions,  all  our  b^-s,  and 
all  our  political  institutions.  It  brought  them  into  existence;  it  siwraire 
them;  without  it  the\'  are  a  nullity.  It  is  nothing  more  nor  ks  than 
this:  All  governments  in  the  United  States  dcn\x  their  just  poum 
from  the  consent  of  the  governed.  This  means,  if  it  has  its  full  meaning, 
that  the  people  arc  superior  to  the  government.  That  v%hich  creates  is 
necessarily  superior  to  what  it  creates.  The  ginrmment  ot  the  United 
States  was  created  by  the  people.  The\'  arc  the  supcnor;  the  goveni- 
ments  arc  the  infcnor.  TaxatKxi  b>-  ginernments,  then,  u  le\icd  by 
inferiors  upon  supcnors. 

The  Superior  Authority 

What  rule  governs  the  rclatRxi  of  the  infcnor  powirr  to  the  supe- 
rior power?  To  answer  thi.s  question,  h-c  can  turn  again  to  Chief  Justice 
Marshall.  In  a  scaion  already  quoted,  he  dcvlarrd  that  "a  pimrr  to 
destroy,  if  wielded  by  a  different  hand,  is  hoatilc  ti».  and  iiKiimpanble 
with,  these  powers  to  create  and  prescrvr,"  and  that  when  this  situ- 
ation exists  the  "authorm  which  is  supreme  must  controi."  It  vroukl 
be  easy  to  obscure  thus  pomt,  in  fact  it  is  rcgularh  done  by  many 
political  theori.sts,  h\  having  it  refer  n>  the  mevhanums  b\'  n-hich  the 
people  control  the  go\cmmcnt.\  in  the  United  States  It  needs  to  be 
clear,  howcNcr,  that  what  wc  arc  talking  about  here  is  not  fcovcmment 
at  all.  The  mcchanusms  by  which  pei>ple  contnil  the  govcnvncms, 
when  and  if  the)'  do,  are  really  mechanisms  of  the  gmrmmcnt— the 
inferior  power  here  WTiat  is  at  L\sue  here  is  the  pimrr  of  cTcating, 
producing,  and  prt)viding  gixxls  and  ser> xes  and  the  supreme  author- 
ity which  must  control  the  disptnal  t»f  them 

Who  is  the  nghthil  supreme  authonrv  <nrr  ^k-hat  has  been  acaced, 
produced,  or  provided?  It  is  he  \%  ht)  created,  produced,  or  provided  it 
The  people  brought  mto  being  the  gmemments;  hence,  die  people  aie 


The  Power  to  Tax  Is  the  Power  to  Destroy  I  183 

the  fuprane  authority  over  them.  But  "the  people"  did  not  bring  into 
being  the  economic  goods  and  senices  which  are  at  issue  in  taxation. 
"^^^o^  ^>Mtnif^  into  being  b\'  individuals,  eidier  by  diemselves  or 
in  CDKipcrJCion  with  ochen.  The  supreme  authority  over  these  crea- 
tKjm  bckingi  id  thoic  who  brought  them  into  being,  neither  the  peo- 
ple coUcctivdy,  nor  ihetr  politicaJ  ann,  die  government.  And,  the 
"authority  which  u  fuprcmc  must  control." 

The  pnnaplc  n-hich  inherend>'  limits  taxes  in  die  United  States  is 
now  before  m.  needing  onh-  to  be  stated.  It  is  diis:  Taxes  must  be 
limited  tf)  a  degree  that  w\W  not  divest  die  owner  of  control  over  his 
creatKNU.  pnidutiicim.  or  pnmsiom.  They  are  his  by  right,  and  only 
*o  much  of  them  may  be  taken  as  is  necessary  to  protea  him  in  his 
uwncrihip  of  them.  If  the  government,  either  by  taxation  or  any  other 
device,  comet  into  control  it  is  the  control  of  the  superior  by  the 
mferior 

There  irc  certain  cortjUary  principles  which  should  control  taxa- 
txm  and  help  to  keep  it  within  pniper  limits. 

1.  Ail  laie*  khouid  be  umfomi.  Whether  levied  upon  income, 
wealth,  or  ipcnding— e.g.,  uks  taxes — z  uniform  rate  should  apply  in 
each  particular  ca»e.  Thu  u  not  only  the  just  approach  to  taxation  but 
abo  it  remcnn  the  lure  of  redistribution  b\'  which  many  people  ap- 
pro\r  graduated  taxes. 

2  Taxes  she  mid  be  tied  as  ckMely  as  possible  to  the  object  for  which 
the  nicme)'  is  to  be  spent  The  pa\*ment  of  a  toll  for  the  use  of  a  road 
wiU  illustrate  the  pniKiple,  though  it  is  not  always  possible  to  link  the 
taxation  at  doaeh'  as  that  to  its  purpose. 

3.  Taxes  should  ne%*er  be  loied  for  an\'  purpose  other  than  raising 
revenue.  If  the>-  are  imposed  for  contn)lling,  regulating,  or  prohibiting 
Mxnething.  taxes  become  not  only  dcstruaive  in  charaaer  but  also  in 
intent.  ai>d  arc  an  abuse  of  gtnemmental  power. 

4.  Gcn-emmeni  spending  should  be  limited  to  that  necessary  to 
maintauung  the  peace  and  prondmg  those  services  to  which  the  use 
of  force  is  necessan*  and  proper. 

All  limitation  d(  government  action  is  a  limit  on  spending,  hence 
upon  taxation,  and  those  u-ho  seek  precise  limits  would  do  well  to 
concentrate  thar  efforts  on  placmg  these  on  government  action. 

Pnnciples  onh-  serve  as  lunitations,  of  course,  if  they  are  believed 
and  adhered  to  b>-  people.  There  are  helpful  guidelines,  however,  to 
tfK»c  who  ha\r  in  mind  die  Umitmg  of  government.  Government,  if 


184  /  Clarence  B.  Carson 

it  is  to  be  limited,  must  be  limited  b\'  prohibitions  on  it  and  by  the 
weight  of  public  opinion  and  the  ballot. 

A  Congressman  once  gained  a  considerable  reputation  by  asking 
this  question  after  each  spending  proposal  came  bdbrc  the  House: 
"But  where  is  the  mone>'  to  come  from  to  pay  for  it?*  It  u-as,  and  is,  a 
good  question.  The  axiom  that  the  po>*er  to  tax  is  the  pcmrr  to  de- 
stroy suggests  an  additional  question.  Nameh-,  **V\Tk>  and  ^-hat  b  to 
be  destroyed  by  die  taxes  to  pay  for  it?"  What  businesses  imII  6u1 
because  of  the  increased  taxation?  VNliat  scmces  can  no  kmgcr  be 
offered  because  of  the  increased  taxation?  VMwse  propem*  is  to  be 
confiscated  to  pay  for  it?  Hou-  much  of  saxinp  are  to  be  subch'  seised 
by  the  inflation?  How  many  jobs  \m11  not  be  pco%idcd  because  there 
was  no  investment  to  pay  for  the  took  to  put  men  to  uxirk  produc- 
tively? What  creative  energies  uiU  be  di\Trted  or  unreieascd  because 
of  the  taxes  to  pay  for  it? 

There  is  no  end  of  laudable  objects  for  >»^ich  money  might  be 
spent.  Even  children,  especially  children,  arc  fertile  sounxs  of  all  mrts 
of  spending,  proposals.  In  our  day.  e\en  interest  gnnip  in  the  anintn* 
probably  has  on  its  agenda  a  gtxxlly  number  ol'  proposab  kit  gcnrrn- 
ment  spending.  Certainly,  politicians  and  bureaucraci  brmg  forth  an 
endless  array  of  notions  for  spending  taxpa\rrs*  money  There  air  lo 
many  goodies  to  be  had  if  only  gtnrmment  Hxnild  unkxnc  the  purse 
strings  and  spend,  and  spend. 

Children  arc  so  prolific  with  their  spending  proptMub  because  their 
eyes  are  only  on  the  gtxxlics  to  be  anaincd,  ntK  on  the  labor,  hardship, 
and  even  deprivation  on  which  their  unwitc  spending  would  depend. 
Many  politicians  tcxlay  treat  the  American  pa>ple  as  if  the>'  were  chil- 
dren, pointing  them  continuallv  to  the  gtMidics  t»>  be  provided  and 
remaining  silent  about  the  pncc  to  be  paid  The\-  spend  and  spend  to 
elect  and  elect,  as  a  Nc\\  IVal  politicun  was  reported  to  have  laid. 
They  do  something  else  at  the  same  time:  Tho-  tax  and  tai  to  dcicroy 
and  destroy.  Do  the>'  intend  the  destruaKin*  It  hardh'  matters,  for  the 
power  to  tax  is  the  poucr  to  destnn .  and  there  can  be  no  ginrmment 
spending  without  the  taxes  to  pav  for  it 

Thomas  Jefferson  once  said  that  v^iui  was  wanted  was  "a  wise  and 
frugal  Government,  which  .  shall  ncx  take  fnwn  rfw  mouth  of  labor 
the  bread  it  has  earned."  Apropos  the  axioms  announced  m  Chief  luscicc 
Marshall's  decision,  it  is  in  order  tt)  add:  **a  wvx  and  frugal  govrmmcnt 
which  will  destroy  as  little  as  possible  b\-  die  taxes  it  tinpoics.* 


Sweden's  Wcl&rc  State:  A  Paradise  Lost 
by  Eric  Brodin 


The  Swcdtth  HTlfarc  ftatc  was  initiated  in  1932  and  has  long  been 
herakkd  the  model  of  the  middle  way.  Seldom  has  there  been  so 
unique  an  oppocTunit>'  to  judge  whether  a  vast  socio-economic  experi- 
mcm,  dr%Tlopcd  unintemipcedly  for  five  decades  under  optimum  con- 
ditioni.  HiU  wutk  ix  not. 

Whether  it  u  corrra  tf>  call  Sweden  a  socialist  country  depends 
<io  the  deftnitMin  y^x  me.  If  wxialism  means  government  ownership 
<if  the  meam  of  pnxiuaion,  then  S\%'eden  is  not  socialist.  Perhaps  not 
m<irc  than  a  (tiunh  of  the  meam  of  produaion  is  in  government  hands, 
although  thai  now  include*  all  wharfs,  most  communications,  trans- 
port, fbrcsti  and  mtnn  I  prcfef  to  call  Sweden  a  Social  Welfare  State. 
The  creaton  of  the  SurdiUi  Welfare  State  in  the  1930s  were  Marxists 
of  MKn.  but  the>-  alkm-ed  a  j>ragmaiic  attitude  of  gradualism  to  modify 
the  radxal  ida>logKal  demands  of  state  ownership.  But  if  socialism 
meam  contnil  mrr  the  results  of  pnxluction,  there  is  no  doubt  that 
Sweden  ii  a  loctaltiif  nation;  and  the  prime  means  of  government  con- 
trol iyvtx  the  results  of  produciKNi  is  thrt)ugh  taxes — now  the  highest 
in  the  %ktirkJ  Un  the  8  3  millKHi  Swedish  pa)ple. 

Noted  among  the  fcnrnden  of  the  Swedish  Welfare  State  are  Gun- 
nar  and  Alva  Myrdal  In  a  book  on  Swedish  Population  Policy  written 
m  N32  the)*  stated:  The  Scandinavian  countries,  and  particularly 
S\%T^kn,  b\'  histoncal  acadent,  arc  given  the  most  advantageous  set  of 
prctrquisites  kvf  a  bold  experiment  in  Social  Democracy  [social  welfare 
state).  If  It  cannot  successfully  be  doeloped  in  Scandinavia,  given  by 
historical  chance  quite  exceptKmaily  ad\  antageous  conditions,  it  would 
pn>bably  not  uxKk  txit  an\'uherc  else."  These  conditions  include  an 
unbrxtken  peace  for  150  >rars,  a  nation  completely  unscarred  by  two 
^Tirid  U'ars,  and  uiih  an  industrv  intaa  which  could  be  transformed 


a  luovc  trf  Sweden,  is  a  naturalized  U.S.  citizen.  He  is  Director  of 
ihc  FowtdMwn  fcw  ImrmaoonaJ  Seudies  in  Buies  Creek,  Noith  Carolina.  This  article,  which 
^^4mi  m  the  Dcvontvr  I980of  TW  fnm»».  is  from  a  lecture  at  the  4th  Annual  Institute 
on  Free  Emcfprar  mtd  Pubhc  Pobo-  n  Gnn-e  Qt>-  College  in  Pennsylvania,  June  17,  1980. 

185 


186  /  EricBrodin 

from  arms  manufacturing  to  manufaouring  the  goods  desperately 
needed  by  Sweden's  war-torn  neighbors.  It  is  a  tighth'  knit,  highly 
industrialized,  remarkably  homogeneous  countn-  rich  in  raw  materials, 
including  hydroelectric  power,  huge  forests  and  rich  sources  of  iron 
ore  in  the  north. 

From  the  1930s  through  the  1960s  S^rden  de\rloped  a  new  so- 
cial welfare  state,  sometimes  called  the  Maed  Economy,  containing 
both  elements  of  pri\'ate  ounership  and  go\emmcnt  control.  That 
involved  retention  of  the  basic  manufacturing  in  pri\-ate  hands,  but 
accompanied  by  a  taxation  policy-  u-hich  uas  to  being  about  a  redistri- 
bution and  equalizarion  of  income.  This  was  to  be  accomplished 
through  a  vast  social  welfare  machine  to  msure  e\Tr>'  Snxde  against 
practically  every  exigency'.  The  pnxate  and  muniapal  insurance  pro- 
grams were  the  first  to  be  mtcgrated  into  a  central  compulsory  system 
even  before  the  Second  World  War  In  the  1950*  came  the  integration 
of  nearly  all  pension  plans  into  a  compulsoo  gmrmmeni  administered 
system. 

To  finance  the  elaborate  u-omb  to  tomb  ex  cradle  to  gra^T  v^rlfut 
system  requires  a  lot  of  mone\'.  .\nd  the  Surdish  go%rmmcnt  has  only 
the  revenue  collcacd  through  taxes  and  ''mkuI  fees  "  T<xla>'  no  less 
than  64  percent  of  the  Grt»s  NatKmaJ  Pitidua  giKs  to  the  public 
seaor  to  finance  the  system.  Frtxn  50  to  60  penxnt  of  the  salary  of  a 
typical  industrial  worker  is  taken  in  taxes  But  in  additKm  to  thu  Kasac 
income  tax,  there  is  an  additional  22  5  percent  in  value-added  tu 
(VAT),  a  form  of  sales  or  excise  tax  on  all  gtiods  and  icrMCCs,  including 
foodstuffs. 

The  Swedish  Cx)nfcdcratK>n  of  Kmpknm  has  gi\m  us  a  amcrcte 
example  of  how  the  subsidy-taxation  distnbutKm  s^-stcm  wnrks.  Let 
us  say  that  a  man  with  ft>ur  children  and  a  nife  not  workup  dms 
$4,600;  add  to  this  the  s<Kial  subsidies  to  ^^-hich  he  u  entitled,  and  he 
has  an  after  tax  actual  income  ot  $14,000  But  let  us  lav  that  another 
man  widi  die  same  sized  family  earned  initialh  $23.0Cio.  after  taxes, 
and  with  little  likclih(xxl  of  subsidies,  his  income  alio  wouki  be 
$14,000.  Presumably  the  higher  earner  is  also  the  harder  traricr,  but 
what  is  die  incentive  in  keeping  that  up>  (Kaxine  this  has  a  trancn- 
dous  effect  on  productiMt> .  It  is  no  kmger  ^•^HThvk'hile  to  work.  The 
difference,  for  example,  in  woriung  flill  time  and  uxirking  half  nme  u 
a  mere  $2,000  for  die  year,  and  a  kx  of  poiple  are  chocning 


Sve^'i  Welfare  State:  A  Paradise  Lost  I  187 

Ictfurc  ifMttad  ProfosKxul  people  such  as  doaors,  dentists  and  law- 
yen  icldom  work  mfjrc  than  five  months  a  year. 

The  fitiution  for  the  private  entrepreneur  is  especially  difficult. 
What  u  HOC  generally  recognized  is  diat  die  employers'  compulsory 
contribution  toward  cmpkn-ec  benefits  is  nothing  but  anotiier  form 
of  payroll  tax.  Thu  a\'erages  40  percent  on  top  of  die  salary  which,  of 
ccxine,  mean*  that  the  -government  bite"  of  die  total  wage  is  even 
higher  than  the  50  to  60  percent  indicated.  Many  small  entrepreneurs, 
<»|Kratmg  on  a  tight  pn>fii  margin,  cannot  afford  diis  additional  bur- 
den, and  face  the  optKiru  of  going  out  of  business,  dismissing  employ- 
ee*, or  cutting  hack  to  a  oncman  operation. 

UndcffRMiid  Eamomy 

It  u  tatd  that  the  only  ctpandmg  sector  of  die  Swedish  economy 
today  i»  that  of  the  undcrgnHind  economy— the  secret  sector.  The 
burden  of  reporting  and  pa\ing  a  22.5  percent  sales  tax  has  made  it 
almoff  annmon  pracTKc  in  Sweden  to  ask  if  a  transaaion  is  to  be 
*Vith  or  without  rtcnpc  "  It  ha*  been  estimated  that  as  much  as  a  third 
of  the  u-ort  b>*  painter*,  carpenters,  mechanics  and  the  like  is  per- 
fxirmcd  in  the  fccvrrt  »cct«»r  untaxed  There  does  not  appear  to  be  any 
way  in  %k*hkh  gincmmcnt  rrprcwntativcs  can  determine  and  prosecute 
thu  gnming  praiiKc  IV^piic  tremendous  man(X)wer  resources  (at 
lea»t  one  third  c»f  all  m  Sweden  arc  working  for  some  form  of  govern- 
meni)  lhe>-  do  not  ha\r  emnigh  people  to  prevent  the  secret  sector 
from  expanding 

Sweden  u  bcowning  a  bancr  trade  s(Kiet>'.  And  this  barter  trade 
takes  many  form*  A»  a  genealogist  I  searched  the  ancestry  of  my 
dcntnt.  u-hile  he  fixed  mv  teeth.  A  plumber  friend  of  mine  could 
decorate  hi*  home  with  oij  paintings  in  a  deal  widi  an  artist  acquain- 
tance. And  so  on. 

The  malaise  in  the  Suxdish  economy  is  in  no  small  part  due  to  the 
taxation  polic\-  %%'hKh  rruards  indolence  and  encourages  illegaHty. 
E\m  Gunnar  MxTdal  calb  for  ncu-  tax  legislation:  "Swedish  honesty 
has  been  a  source  of  pnde  for  me  and  m>-  generation.  Today,  however, 
I  ha%-e  an  unca$>  feeling  that,  due  to  bad  tax  laws,  we  are  more  and 
more  becoming  a  nation  of  cheats." 


188  /  EricBrodin 
The  Absent  Worker 

There  are  many  other  waN-s  in  vihkh  the  emplovcd  danonstntc 
their  unwillingness  to  continue  sharing  the  tax  burdens  of  financing 
the  elaborate  welfare  state  system.  With  an  illness  insurance  s>*stan 
paying  90  percent  of  wage  compensation,  absenteeism  is  spre.Miing  like 
some  contagious  disease  through  the  Su  edish  empkn-mcnt  sector.  On 
any  given  day  10  percent  of  Sweden's  labor  force  is  absent.  On  Mon- 
days and  Fridays  absenteeism  may  reach  20  percent.  At  times  the 
Volvo  car  manufacturing  plant  or  the  Kockum  Wharf  in  Makno  have 
recorded  the  absence  of  25  percent  of  the  ^^xxking  force,  and  this  has 
also  occurred  in  some  hospitals.  Hou  can  an  econonn-  stand  such  \/m 
of  productivit)'?  How  can  an  export -dependent  economy  compete  in 
intemational  markets  against  new  industrial  natxms  such  as  those  of 
Asia  whose  workers  perform  eflfiaendy? 

With  each  liberalization  of  the  illne»s  insurance  s\-stcm  in  Sweden, 
the  increased  "absence  due  to  illness"  has  lumped — h\  as  much  as  four 
million  working  days  in  a  year.  The  empknrrs*  asMKiation  desperatch' 
urges  legislation  which  would  restore  the  three -da>-  v^aitmg  period 
before  the  insurance  pn)gram  takes  effect  This  %kxiukl  rcminx  die 
temptation  for  leaves  of  short  duratMxi  \%^K:h  often  require  no  doctor^ 
statement. 

Absences  are  not  due  to  illness  akxK.  There  arc  at  least  1 2  diffincm 
reasons  for  "excused  absences"  uith  pay  tn»m  the  S^rdish  places  of 
employment.  In  a  recent  expenment,  I  trKd  to  phiwK  ten  penuns  at 
their  places  of  work  and  found  onlv  tuu  «>♦  them  a\ailabk  and  in  dieir 
offices.  When  I  asked  u hy  the%  \^erc  absent,  I  was  gnen  an  indication 
of  the  range  of  "excused  absences  "  One  man  was  taking  advantage  of 
the  law  which  cnct)urages  the  nun  to  leave  hi*  pUie  <if  empl»mnent 
to  take  care  of  a  child  ( freeing  the  mother,  prcsumabh-  to  cnaNe  her 
to  go  to  her  employment).  ArKKher  one  was  said  ti>  be  home  canng 
for  a  sick  child.  Another  tme  was  taking  a  course  m  the  Sv^tdtsh 
language.  Still  another  one  was  taking  a  un  Km -administered  aiunc  in 
how  to  be  "a  worker's  representative"  (»n  a  company  board  StiU  an- 
other was  absent  in  order  to  take  care  of  a  dtKument  at  a  ginrmment 
agency.  And  so  on.  These  arc  not  cases  of  absence  widKiut  pay.  Either 
the  employer  has  to  pay  in  full  or  the  empknee  gets  c-ompemaicd  from 
one  agency  or  die  other  of  gtn  emment 


Sweden'i  Welfare  StaU:  A  Paradise  Lost  I  189 

The  Pubttc  Sector 

To  provide  the  funds  for  such  an  elaborate  system  requires  an 
immenic  bureaucncy,  and  d»c  one-third  of  Sweden's  work  force  which 
*ome  call  die  non-productive  wxtor  must  be  paid.  Today  64  percent 
(if  die  total  GNP  gcjc*  to  suppon  die  public  sector's  increasing  de- 
mands. And  they  wUJ  keep  on  growing  because  diere  is  a  cumulative 
cffca  to  these  demands.  The  Uurc  of  die  GNP  going  into  the  public 
*ecior  increased  by  20  percent  betu'ccn  1950  and  1980.  When  die  first 
non-scxiaUsc  government  wnce  1932  came  into  power  in  1976,  some 
<if  the  groundswell  tuppon  ixanx  the  right  thought  diat  some  altera- 
aom  would  be  made  m  the  *ocial  welfare  system.  No  such  thing  has 
happened.  And  the  C(M- indexing  of  various  forms  of  subsidies  will 
came  the  pnihlcm  to  gnm  a*  the  mflation  continues.  The  idea  of  the 
\%Tlfare  ttace  gam«  %upp<in  from  many  quaners.  The  state-owned  radio 
and  television  monopoly,  for  example,  is  required  by  law  to  devote  40 
peitem  of  pnigrammmg  to  **mformativc*'  pn>grams  and  these  often 
take  the  fbrin  of  pnipaganda  for  and  about  various  social  welfare  mea- 
sures. Advertiiemeni*  in  ncu-spapcr*  and  t)n  vehicles  proclaim:  "Did 
you  know  that  x-tni  dtm't  have  to  be  married  to  get  a  housing  allow- 
ance? If  >tiu*fe  18  \xu\  okl  \-cxi  may  still  qualify."  The  result  is  an 
tncreaied  degree  of  utUuuituin,  and  a  peculiar  interpretation  which 
defines  Sweden's  high  living  standard  b>'  die  increase  in  the  number 
of  persons  Imng  "on  the  dole." 

The  Budget  Deficits 

S^Tdcn'%  naiKHul  budget  rrxeals  die  increasing  burdens  of  die 
pubUc  sector  on  dK  naoonal  exchequer.  And  die  budget  also  reveals, 
dirough  its  defiats,  dK  inabUif>'  of  Sweden  to  finance  diese  increases. 
The  defiats  grti*'  fiom  649  miUion  crouTis  in  1960  to  50.2  billion 
crowns  in  1980.  Much  of  the  budget  today  consists  of  transfer  pay- 
ments, currcnih  abtnit  40  percent.  These  consist  of  revenue-sharmg 
to  local  gtnrmmcnts.  transfer  pavTuents  to  families,  and  subsidies  to 
aUing  industries,  dK  last  of  which  amounted  to  7  percent  of  die  budget 
in  1978.  In  xiew  of  dK  failure  bv-  Swedish  industry  to  compete  for  die 
rettons  mentioned  abosx,  many  enterpnses  are  failing,  especiaUy  m 
shipping  and  in  the  textile  and  shoe  industries. 


190  /  EricBrodin 

Inasmuch  as  the  labor  unions  arc  still  \ct\  strong  (and  Swtden  has 
more  of  its  labor  force  unionized  than  any  other  countn')  there  are 
always  pressures  for  the  government  to  bail  out  ailing  industries  in 
order  to  maintain  employment.  This  is  done  bw  various  forms  of  subsi- 
dies, all  of  which  are  also  subjca  to  some  misuse.  The  government  has 
thus  become  increasingly  involved  in  producing  items  which  cannot 
be  sold,  and  for  which  there  is  no  market  either  at  home  or  abroad. 

The  Real  Face  of  Unemployment 

It  is  necessary'  to  turn  to  the  unemployinent  situation  to  under- 
stand the  current  Swedish  economics  problems.  Full  empknment  has 
always  been  high  among  the  goals  of  Su-edish  planners.  But  the  gov- 
ernment has  been  forced  to  take  cxtensi\c  measures  of  mtenention  in 
the  labor  market.  For  years  goNcmment  spokesmen  ha\r  maintained 
the  fiction  that  Swedish  uncmplox-ment  is  among  the  ^"orld's  k>wcst. 
Such  statistics  can  only  be  maintained  if  the  real  extent  of  unemptoy- 
ment  or  under-employmcnt  is  hidden. 

Dr.  Sven  Rydenfcit  has  exposed  the  m>"th  of  full  empknment  in  a 
number  of  articles  in  Sweden  and  abn>ad.  He  pomts  out  that  there  is 
an  official  figure  of  2  percent  unempkn-ment,  tx  94.000  of  a  work 
force  of  4.1  million  (half  Sweden's  populatKm).  HoMk-c\Tr,  WPA  types 
of  "make  work"  employed  3  peaent  in  educatxin  ex  public  wtwk 
schemes.  Investigations  rocal  that  25  percent  of  the  a>Uege  students 
in  Sweden  are  there  simply  because  thc\-  cannot  get  ^txk,  or  a  further 
2  percent.  Then  there  is  an  additional  90.000  vk-ho  ha^-c  asked  for 
"early  retirement"  because  thc\'  want  to  pnnide  v^txk  ti>  someone  ebc, 
another  2  percent.  Finally,  there  is  the  2  percent  empkiycd  in  industries 
which  are  not  economically  viable,  but  wh^h  amnnue  to  hire  utxkers 
only  because  of  government  subsidies.  Dr  Rvdenfelt  concludes:  "If 
these  items  are  added  we  find  a  total  of  1 1  percent  unempknTd,  a  share 
which  better  refleas  die  realities  of  the  Swedish  labor  market  tfian  the 
official  reports."  While  die  work  force  in  private  manufacturing  was 
reduced  by  100,000  in  die  five-year  pentxJ  1975-1980,  it  u  signifi- 
cant diat  emploNinent  in  the  public  sector  rose  b>'  250,000  during  that 
same  period. 


Swe^m's  Welfare  State:  A  Paradise  Lost  I  191 

A  Wd£uc  Society  in  Trouble 

The  Swediih  Welfare  State  faces  deep  problems  today.  Many 
Swede*  were  yuktcd  into  lome  awareness  of  the  depth  of  die  crises 
during  the  GcneraJ  Strike  in  May  1980.  Curt  Nicolin,  chairman  of  die 
fx«rd  cif  the  Swedish  hmplov'ers'  Associadon,  said  in  1979:  "It  is  high 
tunc  we  comprehend  dm  ht  are  under  severe  direat ...  we,  like  sleep- 
walkcn«  have  moved  «trajght  into  an  economic  crisis  so  serious  diat 
we  muft  count  upon  »ocial  unrest  and  die  loss  of  freedom  for  most  of 
lu."  OrtainK'  the  wnkc  and  kjciunit,  and  die  flirdicr  extension  of  die 
conflia  K'  rfK  l^mgdwjrcmcn'*  Union,  are  pan  of  diis  social  unrest. 
But  there  arc  many  cxher  indjcatioas,  which  are  apparent  for  those 
N^-ho  ttudy  die  moral  cffeai  of  dK  present  crises  in  Sweden's  welfare 

«C1IC. 

In  die  economic  icmc,  it  is  important  to  realize  die  limitations  in 
the  nature  of  the  Hrlfarc  Mate  itself  Feeding  upon  itself,  it  is  slated  for 
cxtmition.  The  German  Maniut  Jurgcn  Habcrmas  defined  die  di- 
lemma in  thc»c  ufirxlA:  The  dixision  of  labor  between  the  state  and 
the  pnvatc  iccttir  that  fomu  the  basis  for  the  Swedish  model,  requires 
that  a  conunualh-  tncrea&ing  share  of  the  national  product  be  trans- 
ferred to  dK  puNK  lector.  Technical  and  economic  changes  must  be 
accompanied  by  cnormtxu  public  inxestmcnts  in  order  to  insure  the 
stabtlm-  of  the  tociet>'.  There  is  a  pomt  where  a  dislocation  in  the  social 
structure  cauicd  h\-  the  free  play  of  the  market  forces,  becomes  so  great 
that  the  jxtiple  arc  no  kmgcr  willing  to  pay  the  price  of  the  necessary 
rrnKdic*  The  demand  ftK  scciirit)'  remains,  but  the  desire  of  each 
pcnon  to  amtnbute  to  the  cost  of  this  securit>'  diminishes.  The  welfare 
iodct>'  then  faces  a  cri&is  of  confidence." 

Thoic  H-ho  seek  tt>  find  the  causes  of  the  Swedish  welfare-state 
tmiUttu  too  often  treat  the  $>-mptoms  not  the  cause.  In  some  cases  diey 
prescribe  medicines,  like  ineffectual  nostrums,  diat  long  ago  proved 
^Tong.  WTiilc  thc\  seek  m  intemarional  economic  developments  the 
kift  nmrt  bchmd  the  failure  of  the  "Swedish  Model"  diey  are  unable 
to  question  the  S^xdish  \%-elfare  state  itself,  or  any  odier  welfare  state. 
It  is,  of  course,  no  kxiger  just  an  "economic  problem."  The  interde- 
pendence of  economic  and  moral  crises  are  well  documented,  not  the 
least  in  dK  case  of  Surden.  At  a  time  like  diis,  it  is  wordiwhile  to  recall 
dK  %%Tsdom  of  a  man  w  ho  still  speaks  widi  a  voice  of  audiority  to  a 
living  gcncratKxi,  Wilhelm  Roepke: 


192  /  EricBrodin 

"The  desire  for  security,  while  in  itself  natural  and  Intimate  can 
become  an  obsession  which  ultimatch'  must  be  paid  for  b\*  the  loss  of 
freedom  and  human  dignit)' — u-hcther  people  realize  it  or  not.  In  the 
end,  it  is  clear  that  whoever  is  prepared  to  pay  this  pncc  is  left  neither 
with  freedom  and  dignity  nor  uith  secunt)-,  for  there  can  be  no  secu- 
rity without  freedom  and  protection  from  arbitrar>'  power.  To  this 
exorbitant  price  must  be  added  another  . . .  namch\  the  stcad\'  diminu- 
tion of  the  value  of  monc)'.  Surely,  e\er\'  single  one  of  us  must  then 
realize  that  security  is  one  of  those  things  u-hich  recede  further  and 
frirther  away  the  more  unrcstrainedh*  and  violenth-  wx  desire  it.*  (/4 
Humane  Economy,  p.  172) 


Public  Finance:  No  Ways  or  Means 
by  John  Semmens 


l^lblic  fifuncc  U  bes«  mth  the  dilemma  of  meeting  two  objectives 
that  may  ncjt  be  animaWc.  On  the  one  hand,  there  is  the  prescription 
that  any  pubbc  finanang  ichcmc  must  be  fair.  Though  there  may  be 
considerable  dnTrgcncc  of  opinion  on  what  this  means,  there  is  some 
comcmuA  that  it  miut  be  comidered  in  any  financing  proposal.  The 
sntmd  tibfcaivT  i*  that  the  plan  must  be  feasible.  Contemplation  of 
fca*ibiht>'  can  range  fn  im  %miphstic  administrative  or  enforcement  con- 
cent* to  more  rcmcicc  indirra  impacts  on  the  economy. 

The  pmblcrm  faced  m  public  finance  are  significantly  different 
from  dime  amfinnnting  gcnrmmcntal  organizations.  Private  enter- 
priici  mufC  obtain  their  funds  Wa  the  voluntan'  transactions  of  the 
maiketplaie  (^^in%umcn  arc  ncx  required  to  purchase,  or  pay  for, 
g(K)d%  and  »crvKc%  thc>"  may  ncK  want.  Such  is  not  the  case  when  the 
gtnTfTunent  t%  m\i>l\cd  as  a  participant  in  the  transaction. 

FairtK%s  in  pnvatc  fmancc  is  achioed  by  virtue  of  the  fact  that  all 
craiuactiom  are  \t)lumar)'.  Any  utnild-be  participant  serves  as  the  sole 
arbiter  of  the  faimeu  of  any  bargain  he  may  choose  to  make.  In  the 
non-voluntar\'  tramacrions  involving  the  government,  the  government 
•er\Ts  as  the  arbiter  of  the  faimeis.  The  conformity  of  actual  transac- 
tions uiih  the  great  differences  m  perception  regarding  fairness  must, 
imavoidabh-.  be  \%x>rke  when  one  must  judge  for  all  (as  in  government 
enterprise)  than  wfwi  each  ma>-  judge  for  himself  (as  in  private  enter- 
Priic). 

In  prix-ate  enterprise  tfK  decision  as  to  feasibility  is  rendered  simply 
and  luifth'.  The  marketplace  is  a  stria  disciplinarian  in  such  practical 
matters.  Unfeasible  ideas  nc\*er  get  off  the  ground,  or  quickly  crash  if 
they  do.  The  marketplace  performs  this  ftmction  continuously.  The 
pri\-ate  enterprise,  irhmg  upon  investors  and  customers  for  its  re- 
90UICC&,  obtains  a  steaih*  flow  of  information  regarding  the  feasibility 
of  its  actual  or  intended  plans. 


«-ith  the  Lusscz  Faire  Institute  in  Chandler,  Arizona. 
Th»  MtKk  ot^ralv  ^ipctfid  in  the  Mmh  1979  issue  of  The  Frcmm. 

193 


194  /  John  Semmens 

Public  enterprise  docs  not  have  access  to  the  same  convenient 
feedback  from  the  marketplace.  Government  produced  goods  and  ser- 
vices are  not  really  marketed  to  consiuiKTs.  Often  the  purchase  deci- 
sion is  involuntary,  at  least  from  the  perspecti\-c  of  the  consumer. 
Instead,  purchase  behavior  must  be  simulated,  assumed,  or  arbitrarily 
determined  by  some  government  emplcn'ee. 

Under  such  a  handicap,  it  is  extremeh'  difficuk  for  public  enter- 
prise to  evaluate  the  feasibilit)-  of  any  plan.  Isolated  from  the  necessary 
information  to  specifically  identify'  those  goods  or  services  which  can 
be  feasibly  supplied,  government  must  rch-  upon  more  remote  iivlica* 
tors  of  viability.  In  place  of  produa  sales  or  compam*  pro6ts  as  mea- 
sures of  feasibility,  the  public  financier  must  grapple  mith  pobtkll 
resistance  to  a  proposed  tax  or  anal\-ze  the  more  vvidcspread  ccnnnmic 
impacts  of  the  government's  cocrcne  mtcrvention  into  a  particular 
sphere  of  business  activit)'.  The  socrancc  of  the  transaction  in  which 
the  service  is  proN'ided  from  that  m  \%hich  the  roxnue  is  collected 
makes  any  such  analysis  that  much  harder. 

Unfair  Means 

The  issue  of  fairness  in  public  fmance  rcwjhrs  around  the  answer 
to  the  question:  Who  should  pay  ft>r  whatocr  icrsicc  u  amtcmplated? 
Three  separate  approaches  have  been  traditKmalh*  bnxight  to  bear 
upon  this  issue.  First,  it  is  often  asscncd  that  ih*»c  n-ho  benefit  from 
a  government  scr\'icc  ought  to  pa>  for  its  pnnxtKin  Setund,  it  may 
be  argued  that  the  burden  of  pa\-mcnt  t  night  to  be  rebted  dirtcth'  to 
the  costs  incurred  to  scnc  a  panicular  user  of  the  icnice  Finallv,  tome 
maintain  that  payment  should  be  bxscd  upon  the  abUir>'  to  pay. 

The  first  and  second  approaches  gcncralh  lead  to  financing 
schemes  based  upon  "users  fiinds,"  such  a*  the  high%%jv  users  fund. 
The  attempt  is  to  draw  rc\cnucs  fn>m  thtwe  who  uac  and  benefit  from 
the  service  rendered. 

The  ability-to-pay  apprtjach  abandons  any  attempt  to  link  con- 
sumption with  pamcnt.  Instead,  it  is  asserted  that  ktvkcs  ought  lo 
be  dispersed  on  the  basis  of  need,  while  receipts  ought  to  be  drawn 
from  individuals  according  \o  their  abilit>  to  pay  Since  the  maior 
forms  of  revenue  generation— income,  sales,  and  pn>p<TT\-  taxo-^cm- 
ployed  by  the  government  arc  alread>-  structured  along  abdity-tD-p«y 


ThtCmmmPuUicFitumce:  No  Ways  or  Means  I  195 

lines,  rcbanoe  upon  dm  approach  suggests  that  government  services 
be  fifunccid  out  of  a  **gcncraJ  fund." 

Each  of  these  three  approaches  to  public  finance  presents  some 
probkmi.  From  a  practical  standpoint  dicrc  is  an  immense  difficulty 
in  aaccrtaining  fUst  how  much  benefit  is  involved  in  any  one  user's 
enyoymenc  of  public  »enice».  Pnvatc  enterprise  cannot  serve  as  a  model 
here  bcciuic  private  fum%  do  not  concern  themselves  with  attempts 
to  eitmute  the  benefit  cn^cn-cd  b>'  specific  customers.  If  enough  cus- 
tomen  peixavc  vuffictcnt  benefit  m  purchasing  a  firm's  products  or 
icrviccft  for  the  firm  to  meet  to  pn)fit  goals,  then  the  produrt  or  service 
will  oomuiue  to  be  provided.  "Enough"  and  "sufficient,"  imprecise  as 
they  «c  can  be  tolerated  in  non-gmemmcntal  enterprises  because 
che>-  arc  duciplincd  b\  cxiemai  market  forces.  On  the  other  hand,  such 
im|>rc<.uKin  prc^cniA  the  gincmmcnt  with  horrendous  problems  be- 
cause IIS  fcoab  arc  cuentialJy  undiKipiined  by  any  outside  market 
forceA 

While  there  can  be  more  precision  m  the  determination  of  costs 
tncurrtd  to  meet  a  general  specification  of  scr\'ices  or  products  sup- 
plied, the  allocatKm  of  these  costs  to  mdividual  users  may  prove  trou- 
MeMime  It  u  true,  of  ctHinc.  that  private  enterprises  are  also  faced 
uith  COM  alicKatKMi  pn>blems.  These  arc,  however,  primarily  book- 
kcc|>ing  pn»blcnw  wmc  the  pncc  of  the  scr%'icc  or  product  is  deter- 
nuned  b>-  the  nufict|>bce.  Kmmlcdgc  or  estimates  of  price  and  vol- 
ume allow  a  pm-ate  firm  ti>  u-ork  backward  to  determine  how  much 
coat  can  be  covxrcd  b\'  antKipatcd  rcNcnucs. 

Unfortunately,  thu  pnxcis  docs  not  work  in  reverse.  That  is, 
knowledge  of  pn»diiaKin  costs  will  not  tell  us  at  what  price  and  in 
what  \x>lumc  the  final  pnxlua  will  sell.  AU  too  often,  public  agencies 
bectime  entrapped  in  a  cycle  of  e\cr-mcrcasing  deficits  by  trying  to 
pnce  the  ier>xes  dK>-  prtnide  on  dK  basis  of  die  costs  incurred. 

How  McMure  Demand? 

AbUm-  to  pav  IS  easier  to  measure  dian  eidier  benefit  or  cost.  It  is 
oidenced  in  tangible  pn>pem-  or  mcomc  and  sales  transactions.  How- 
ever, regardless  of  dK  case  of  measurement  here,  we  are  completely 
jc%wd  fiom  any  mformation  diat  would  uidicate  die  demand  for  die 
aerviccs  to  be  provided. 


196  /  John  Semmens 

As  bad  as  pricing  schemes  based  upon  cstiinatcd  benefits  or  costs 
are,  a  system  in  which  there  is  no  price  is  much  worse.  Conscquoidy, 
determining  the  amount  of  resources  to  be  expended  for  whatcxTT  Icvd 
of  service  is  an  entirely  artificial  process.  We  can  have  no  objective  idea 
of  what  degree  of  effort  is  necessary-.  Instead,  complctch'  arbitran' 
decisions  must  be  made.  Of  course,  there  uill  be  no  u-ay  to  tdJ  whether 
these  decisions  will  even  come  close  to  meeting  genuine  needs.  The 
prospects  for  a  balance  of  supply  and  demand  under  these  aruun- 
stances  are  rather  remote. 

Not  only  is  the  public  enterpnsc  isolated  from  intbmutMin  regard- 
ing price  and  quantity,  but  struggles  with  these  problems  may  appear 
relatively  simple  in  comparison  \Mth  tfK  need  to  determine  the  produa 
mix  that  should  be  offered. 

Typically,  consumer  needs,  wants,  and  means  arc  greath'  di\TrH* 
fied.  The  demand  is  for  variety'.  \'anerk  is  \%'hat  pnvatt  entcrpnse  must 
provide.  The  multiplicity'  of  firms  faaitimta  the  fulfillment  ot  these 
needs.  The  absence  of  the  power  to  aimpel  purvhasc  fbrco  pnvatc 
firms  to  cater  to  these  needs. 

In  contrast,  the  government  has  tfK  pourr  to  compd  payment  for 
such  services  or  produas  it  may  cfKx»c  to  prmide  This  is  not  to  say 
that  the  government  will  nccessanly  abuse  this  pimrr  bs-  enhirvtng  the 
consumption  of  frivolous  or  inappnjpnatc  private  ktvkcs  H<mr\rr, 
it  is  inevitable  that  at  least  some  people  v^ill  he  axnpcikd  to  finance 
services  which  they  deem  fnvokxis  or  inappropriate. 

A  sincere  desire  to  minimize  ifie  instances  in  ^-hich  compubory 
levies  will  be  perceived  to  be  expended  in  an  uniustified  fashion  usuaih* 
results  in  a  polic\'  of  standardized  service  geared  n>  meet  ifK  mmimum 
requirements.  Some  critics  ha\c  characten/rd  thu  as  a  proccM  oi  cater- 
ing to  the  lowest  common  denominatiK  IVtkicnt  as  such  a  pcocCH 
may  be  in  terms  of  some  notion  of  an  •^ideaJ"  rrvWutuwi  of  varKd  needi 
and  wants,  it  is,  nonetheless,  the  best  altemati\e.  gi\m  the  constraints 
under  which  the  public  agenc\-  must  operate 

Can  Might  Make  Right? 

Our  examination  of  the  conditKxis  pertinent  to  pubhc  finance 
would  seem  to  indicate  that  there  is  no  way  in  u-hich  faimcat  can  be 
assured.  To  the  contrarv',  any  public  funding  scheme  u  bound  to  be 


The  CrmtrnPuhUc  Finance.  No  Ways  or  Means  I  197 

unfair.  The  involuntary  nature  of  all  transactions  in  which  the  govern- 
ment t»  a  participant  insures  this. 

Whether  one  takes  an  approach  based  upon  the  "users"  theory  and 
aitanpci  to  equate  taxes  with  some  element  of  service  rendered,  or 
whether  one  adopts  the  rcdmnbutionist  logic  of  "ability  to  pay,"  the 
faa  rcmairu,  some  mdniduals  \m11  be  nude  to  pay  for  services  they 
fKither  want  ntir  c\m  rccavc.  Only  governmental  sovereignty  pre- 
vents this  wMtm  opermndi  from  being  classified  as  criminal. 

Fairness  lo  the  consumer  is  st>7nicd  in  both  key  aspects  of  the 
produa  or  icrvice  exchange.  Whatoer  approach  is  used  to  determine 
pnce,  he  nill  have  no  opCKNi  but  to  pay.  Meanwhile,  the  quality  and 
ifuantm-  m  whah  iIk  (>n>duct  or  wrrvicc  is  dished  out  will  be  decided 
by  methi»d»  of  her  chan  mdividual  consumer  choice. 

Smce  attammcnt  of  universal  faimcss  is  not  possible,  the  next  best 
aiune  open  to  the  government  is  to  minimize  unfairness.  This  it  has 
generally  anemfned  to  do  m  a  number  of  ways.  Almost  without  excep- 
IK«,  the  initial  imposttKin  of  le\ics  based  upon  ability  to  pay  has 
%farted  mch  km-  rate*  IWortunatcly,  these  have  escalated  to  a  point 
xfc-herr  the  searvh  fiir  alternative  roenuc  sources  has  become  a  wide- 
spread phenomenon  at  all  locU  of  government. 

The  nwjCivatKm  behind  ihc  search  for  alternative  revenue  sources 
may  nan  from  an  uncertamry  of  conviction  as  to  the  justice  of  the 
•ahility-io-pay"  pruKiple — that  it  must  stop  short  of  its  logical  conclu- 
sion to  reduce  exrn-onc  to  an  cqualit>'  of  wealth  or  income.  Further 
taxes.  It  u  leli,  must  be  |u»tificd  on  some  sort  of  "services  rendered" 
basis.  Despite  the  utrll-dcK^imcntcd  problems  with  bodi  die  benefits 
rtca\Td  and  costs  mcurrcd  approaches  to  public  fmance,  there  is  a 
general  consensus  that  reliance  upon  such  methods  is  less  unfair  than 
any  other  option  that  mdudcs  connnued  government  involvement  in 
the  pro\isKin  of  products  or  services. 

Ancxhcr  mocnr  impirmg  die  quest  for  new  revenue  sources  is  die 
belief  that  the  suppiv  of  resources  available  under  die  ability-to-pay 
scheme  mav  be  "tappcd-oui."  This  "tapped-out"  concept  may  relate 
to  an  estimate  of  the  economic  or  die  pohdcal  infeasibility  of  heavier 
taxes  for  rfK  general  lund.  The  law  of  diminishing  remms  is  a  well 
estabUshed  principle.  It  is  mescapable  diat,  at  some  point  contmued 
hikes  m  dK  burdens  imposed  on  diose  able  to  pay  wiU  produce  lower 
ro-cnues.  It  is  also  mcMnble  diat  as  increasingly  larger  numbers  ot 


198  /  John  Semmens 

people  are  discovered  to  be  capable  of  paying  larger  and  larger 
amounts,  the  balance  of  political  power  is  bound  to  shift.  Political 
resistance  to  public  financing  demands  cannot  help  but  increase,  as  the 
appetite  for  larger  servings  of  public  re\'enue  can  onh'  be  satisfied  by 
placing  more  taxpayers  on  the  menu. 

Infeasibie  Ways 

Since  the  payment  of  taxes  is  normalh'  an  tn\-oluntar>'  activity,  the 
pragmatic  issue  of  public  fmancc  is  esscntialh'  a  question  of  ">»'ho  can 
be  made  to  pa/'  and  "how  much  he  can  be  made  to  pay."  This  issue 
can  be  considered  horn  two  angles. 

First,  there  are  certain  economic  considerations.  Who  has  how 
much?  What  is  the  cost  of  taking  vanous  amounts  ftom  him?  What  arc 
the  economic  consequences  of  vanous  loels  of  taxatxm? 

Second,  there  arc  socral  political  consideratKins.  What  u  the  ca- 
pacity of  the  targeted  taxpayers  to  resist  the  giwrmment's  taxes?  Are 
the  targets  ignorant  and  powerless?  Or  are  the>'  H-ell  iniiirmcd  and 
powerful?  The  answer  to  these  questions  \«11  detemune  the  atcm  to 
which  the  identity'  of  who  will  be  taxed  vmII  ha\T  to  be  disguised. 

To  date,  the  government  has  not  made  much  pnigrr^*  m  dealing 
with  the  economic  implications  of  publK  financing  actnities  "Who 
has  how  much?"  has  been  given  doxxed  attentMm  The  recnnis  of 
incomes,  sales,  and  property'  are  \x>lumincHis  The  ginaiMiicm  efibrt 
in  this  area  has  been  substantial.  The  cost  iH  enffxcing  the  taxes  has 
been  given  some  attention,  but  the  efftrt  has  been  tnamsistent  and 
marked  by  a  measure  of  indifference  The  evtmcimK  avisequcnccs  of 
various  levels  of  taxation  have  been  largeh  ignored  As  a  rcsuk,  total 
public  revenues  are  increasmg,  but  n<x  as  fast  as  the  cents  of  colkctii^ 
them. 

Meanwhile  die  impaa  of  taxatKxi  on  the  econcvnic  health  of  the 
society  is  subjea  to  a  great  deal  of  speculatKm,  matt  of  it  suspcctif^ 
the  worst. 

It  has  long  been  acknowledged  that,  at  some  pouit,  the  total  bur- 
den of  taxation  would  become  "excessive  "  C)bfccti\rh\  this  mcMit 
that  die  next  hike  in  die  rate  of  the  tax  >»txild  actualK  pctxhicc  knrcr 
public  revenues.  There  has  been  n<i  actual  proof  of  what  rate  turns  die 
tide.  Therefore,  a  prudent  course  might  restna  the  go\rmnKnt's  taxa- 


The  Cfuu  m  Publk  Finance:  No  Ways  or  Means  I  199 

tkxi  aomtic*  to  the  abiolutc  minimum.  Instead,  government  actions 
have  corauiually  incrcaKd  taxes. 

Whether  the  government's  toU  of  the  productive  output  has 
reached  or  pasted  the  point  of  diminishing  returns  is  a  matter  of  seri- 
ous conccm.  Recent  publK  discussion  of  this  problem  and  the  fairly 
fubccantial  argument  over  whether  a  cut  in  tax  rates  would  increase 
govenvncm  rrvcmies,  would  seem  to  indicate,  in  an  informal  way, 
that  we  nu>'  be  at  or  near  a  pomt  of  diminishing  returns.  At  the  very 
least.  It  tt  cstabUshed  dut  a  substantial  number  of  people  are  convinced 
that  iudi  a  point  has  been  passed. 

The  Burden  of  Taxes 

Every  ginmvnental  wax's  and  means  proposal,  then,  is,  of  neces- 
sity, amfnmicd  mih  the  questxxi  of  its  additional  impaa  on  the  total 
tax  burden.  The  bet  that  a  particular  tax  proposal  may  be  linked  with 
a  specific  use  for  the  funds  generated  docs  not  insulate  it  from  this  total 
tax  burden  pn^Wcm.  Cincmmcni  imposed  'Risers  kcs"^  arc  not  market 
exchanges  Xhc  further  rrmtncd  these  fees  arc  from  market  exchanges, 
the  greater  the  im|taci  on  the  ttxal  tax  burden. 

The  Ccnal  burdai.  hcmcxer,  is  not  the  only  economic  consequence 
of  ouncem  in  public  finance  The  specific  cflfccts  of  each  tax  pose  an- 
other p(t)blcm.  Tax  rates  tx  so-called  users  ices  are  not  market  prices. 
If  the  government's  charge  is  less  than  the  market  price  would  have 
been,  huge  eamomic  dmorxKNU  may  result.  Demand  for  the  under- 
priced  product  or  »en'Ke  uiU  be  excessive.  Demand  for  competing 
jnoducts  uill  be  suppressed.  Greater  supplies  of  ingredients  to  the 
underpnced  item  uiU  be  required.  Each  of  these  direct  consequences 
\mU  cause  subiequent  mdircct  consequences,  creating  a  ripple  effect  of 
distortion  throughout  the  economy.  If  the  government's  charge  is 
more  than  dw  market  pnce  u-ouki  have  been,  different,  but  equally 
serious,  ecooocmc  disttxrions  would  follow. 

These  distiHtKHi-s  can  lead  to  misallocation  of  resources  and  inefFi- 
ciencv-.  In  effect,  g»)vcmmcnt  taxes  pollute  the  price  system.  The  role 
of  phces  as  feedback  to  the  productive  entities  in  die  economy  is 
thetrb\-  subverted.  Wrong  signals  arc  given.  Shortages  and  surpluses 
rcsuh.  Resources  air  wasted.  The  rate  of  return  on  investment  is  re- 
duced. EcononiK  progress  for  aU  social  groups  is  retarded. 


200  /  John  Semmens 

This  list  of  evil  consequences  nuy  seem  rather  drastic.  After  aU, 
how  much  devastation  can  be  wrought  b\'  a  kw  erroneous  price  sig- 
nals? The  degree  of  integration  and  sophistication  that  accompanies 
the  advanced  specialization  of  our  high  tcchnolog\'  economy  insures 
that  the  effects  of  even  relativeh'  minor  transactions  ^ill  spread 
throughout  the  economic  system.  Add  to  this  the  $cnsiti>it>'  of  the 
price  system  as  a  continuous  measurement  dcMCc  of  the  div^erse  wants, 
needs,  hopes,  ambitions,  fears,  greed,  and  other  moavations  of  human- 
ity, and  you  have  a  lever  that  can  move  the  u-orkl 

Political  Considerations 

In  contrast  to  the  lack  of  attention  gi\-en  to  the  economic  conse- 
quences of  various  public  financing  schemes,  the  potibcil  cxxvickri- 
tions  of  taxation  have  been  handled  uith  both  dispatch  and  imagina- 
tion. The  growing  proportion  of  total  productKm  being  consumed  b>' 
the  government  is  evidence  of  the  effort  dooted  ti>  soKing  the  political 
problems.  Corporate  America  has  been  conscnpced  as  the  chief  tax 
collector  for  both  income  and  sales  taxes,  %%-hik  the  hanking  industry 
has  been  drafted  to  play  a  major  rokr  in  collecting  the  pfopcfty  taxa 
on  mortgaged  real  estate. 

The  capacity  for  tax  resistance  has  been  mmimurd  b\  UuUfiil  pbcc- 
ment  of  the  collection  point.  The  bulk  of  pervjoal  inciwne  taxes  arc 
withheld.  Purchase  transactions  canmx  be  completed  %kithcHit  payment 
of  the  sales  tax.  Propert)'  taxes  are  normally  included  in  monthly  mort- 
gage payments.  In  most  jurisdictKms,  »euure  and  sale  of  property  for 
nonpayment  of  taxes  is  a  simple  and  expcditMxu  pmceu 

While  the  historical  record  gixcs  us  e\Trv  reason  to  assume  that  the 
government  would  be  able  to  oNcrccxne  the  political  resistance  to  in- 
creased taxation,  diere  are  scNeral  conflicting  fixces.  On  the  otk  hmd, 
most  of  die  easy  sources  of  funding  have  alread>'  been  excrcstcd,  per- 
haps to  exhaustion.  On  the  other  hand,  the  knowledge  and  will  to 
resist  fiirther  burdens  seems  to  be  on  the  nsc. 

The  root  of  the  public  fmancing  pn>bkm  is  tfut  man -made  bw 
cannot  abolish  natural  law.  Enactment  of  g»ncmment  taxes  can  affca 
the  distribution  of  economic  gocxls,  but  legisbtnr  fiat  cannot  dCHe 
economic  goods.  Instead,  taxation  unavoidabh-  km-ers  die  return  on 
productive  activity.  Disregardmg  any  disincenove  eflfcn,  tfK  reductioo 
m  die  return,  when  compounded  mcr  time,  must  reduce  the  total 


TV  Crms  in  PuUk  Finance:  No  Ways  or  Means  I  201 

pool  of  available  resources  because  a  substantial  potential  quantity  will 
nnrr  be  crtmud.  Resources  u-hich  arc  not  created  cannot  be  diverted 
03  government  use.  Even  the  most  advanced  political  skills  cannot  alter 
this  reality. 

The  Public  Interest  in  Private  Enterprise 

Our  cununation  of  the  dilemnu  of  public  finance  would  seem  to 
indicate  that  in  terms  of  cquirv*.  taxation  is  fundamentally  unfair.  The 
|HiblK  enterprise  u  unable  to  drtcrminc  what  demand  is,  much  less 
»ervT  It.  No  bona  fnie  exchange  takes  place.  Individuals  do  not  get 
u-hat  ihcy  pay  for  m  any  reasonable  seme  of  the  word.  There  is,  in 
short,  no  defensible  standard  that  is  consistently  employed  in  taxation 
other  than  comTiueiKe  for  the  gcnemment. 

Even  consmicnce  u  unsustainable  in  the  k)ng  run.  The  defenseless 
and  the  subservient  have  already  been  taxed,  probably  close  to  their 
capacity  to  pay  The  strain  on  the  economy's  limited  resources  has 
betiwne  apparent  There  u  the  vcn*  real  possibility  that  any  further 
ancmpt  to  raise  roxnues  b\-  increasing  the  tax  rates  will  be  counterpro- 
ductive. Public  enterprise  has  alwaN's  been  less  feasible  than  private 
enterprise  The  ginrmment  must  n<m'  face  the  prospect  that  this  rela- 
ti\T  lack  of  feaMbilit>'  u  bemg  replaced  b\'  an  absolute  infeasibility, 
partKularh'  wm\\  regard  to  the  ptnential  for  additional  revenue  genera- 
tion. 

So.  if  publK  fmance  u  btKh  unfair  and  infcasible,  what  are  the 
public  polic>'  impUcatMNU?  Expansion  of  the  government's  role  must 
be  ruled  out.  Replacement  of  public  b\'  private  enterprise  seems  war- 
ranted. 

The  tpcafic  meam  for  achiomg  the  privatization  of  public  enter- 
prise must  fi>lkm  m  the  wake  of  a  more  widely  spread  recognition  that 
such  a  step  utnikl  be  beneficial.  The  future  viability  of  our  economic 
sN-stcm  may  vk-ell  depend  upon  the  speed  widi  which  such  recognition 
takes  pbcc. 


Index 


Adiim.  Hcmy.  97 
Andenan,  tLaben  G  .  ISS- 
ASR  190.  146 
Awmtuik,  lUibcn,  72- 7B 


144 


fl«ciM,Fmknc47.57 
Bihdial  prmciplcm.  69 
B«»hm.  RW.6i-71 
ilnffv  \V»  MWii  (Hutlrv).  94 
Rnnlin.  |-:ni.  ISS    192 
RuMncMcyck,  160-161 


(.M^.  70-71 
(alifcwntii.  107 
(  anjd*.  14-IS.  17 

*%uuknfi.lJS-144.  14S-1S2 

«.timum(KKMi  of.  1  S3- 170 

hmnjttiin  aC.  177 

gnmthcif.  121-131 

prndmin-m'  And.  1  S3 
Ctpml  lUinv  pmAkKs  an.  127 
QfmdmmmmdfnfMm,  104.  110 
CMon.  Utfrmr  R  .  22-30.  171-184 
Cancr  AdnufUHrMxin.  127,  145 
Caio  IiMinitc,  64 
ChMnberlMi.  )ohn.  18-19 
QuHnbcHm.  WtUuun  Hcnn.  46-53, 

57-63 
Ourxhcs  «nd  cducanon,  101-103 
Cxmscnpoan,  87 
OwporaoocM,  158.  159 
Cor*in,  E,S..  25 
CkMt  of  Lh-mg  Adfimmcno  (CX>LAs), 

130 
Cuomo,  Mana,  119 
Cuftm,  WAl ,  40-45 


D'AiTuto,  AJphonsc,  130 
DccUratxNi  of  Independence,  50,  59 
Deficit  ipcnding,  155 
Deparonent  of  Public  Welfare,  25 
Duinccntives  to  thrift,  126-127 
Dow  Jooes  Industrial  Average,  146- 

147,  148,  152 
I>rakc,  Colonel  Edwin,  137 

Economic  calculation,  105,  159 
Eamomic  growth  in  U.S.,  136-137 
EducatKJO,  33,  36,  65,  68-71,  97-114 
Ednaavm  of  Henry  Adam,  The,  97 
"Entitlements,"  89 
Environmcntalism,  162-163 

-Fair  Share,"  12 

ftdfrml Remitter,  %\ 

Federal  Reserve  System,  181 

Ftdmdut,  The,  69 

Fir«-In,  First-Out  inventory  valuation, 

129 
Folo',  Ridgwav  K.,  Jr.,  7-21 
Forgtxtcn  Man,  46-53,  72-78 
France,  125 

Franklin,  Benjamin,  26-27,  93 
-Freelunches,"115,  117 
Free  ndcrs,  36 
French  Rc\olution,  57 
Fnedman,  Milton,  104-105, 106, 

108-110,  112 
Futiire  orientation,  importance  of,  167 

General  Welfare,  22-30 
Germany,  124 
Government 
'^investment,"  156 


203 


204  /  Index 


Government,  continued 
intervention  and  capital  accumula- 
tion, 138-139 
proper  role  of,  45,  79, 85, 180-181, 

183-184 
regulation,  81-82,  162,  164 
Grace  Commission,  89 
Great  Britain,  58,  60,  61,  126 

Haixrmas,  Jurgen,  191 
Hamilton,  Alexander,  172 
Harper,  F.A.,  70 
Hazlitt,  Henry,  15 
Higgs,  Robert,  79-90 
Hood,  John,  64-67,  1 18-122 
Humane  Economy,  A  ( Roq>kc ) , 

192 
Huxley,  Aldous,  94 

Income  tax  and  incentives,  93-96 

Indexing,  14 

Inflation,  12,  42,  51,  128-129,  139. 

141,  148,  150,  151,  157,  158 
Internal  Revenue  Code,  37,  95, 

146 

Japan,  124 

Jefferson,  Thomas,  1 84 
Jobs  programs,  149-150 
Judeo-Christian  tradition,  69 

Keynes,  John  Mavnard,  1 50,  1 5 1 
Kirk,  Russell,  75 ' 
Kulaks,  143 

Labor  unions  and  capital  consumptKHi. 

164-166 
Laisscz  faire,  79,  83,  84 
Lange,  Oskar,  105 
Leef,  George  C,  31-39 
Libertarian  Part)',  20 
Lively  Experiment:  The  Shafnn/f  afC  Jmm  ■ 

anity  in  America,  The,  98-99 
Locke,  John,  32,  59 
"LoiMonory,"  125 
Lottery,  42 


Madison,  James,  2S-29,  69 
Malthus,  Thoous,  93-94 
Marshall  Chief  lusbcc  John,  171, 

172,  173-175,  176,  180,  182, 

184 
Massachusetts,  48,  49,  102 
McCmliech  v  MmnLmd,  1 72  ct  w). 
Mead,  Sidno  E,  98 
Middle  class,  57-^ 
Mmimuin  «'agc,  S2 
Mises,  Lud«ig  vxn,  lOS 
Mitterrand,  Fran^ots,  125 
Mued  ccononn-,  186 
Monor>,  Rene,  125 
Monroe,  James,  29 
Moore,  Stephen,  64 
Muggendfe,  Maknim.  60-«l 
M\Tdai,  .\ha,  185 
M\Tdai,  Gumar.  185.  187 

National  cnKuccncm  and  pximrh  of 

jpn^emmem,  8^—88 
Ne>»  IVal.  24.  184 
NW  HamfHhirr.  43.  68-71 
Nr*  Jer»o .  43 
No*  Ytwi.  42  43.  119-lW 
Nukanen.  WiUimv  83 
N<>cth,Cur».  9^-114 
N<inh  C  an4ina.  64.  65.  120 
N<Mxk,  R.*cn.  32 

OX  iwuiiir.  RiLharU.  72 
()hii».  109 

Pmo^  I^atwn.  "^ 

Paul(Ap.»«ki.ft9 

Pcriin*.  Frames.  24 

pKk,  Fran/,  1ft 

P!urali«n,  100 

Pixw  relief.  23-24 

Pvwrr  ft^imtmyi,  163 

Pimcrv.  enumerated  m\  tVS  Canwnt- 

tKm,  Vi 
Pnnpenrv .  dependent  upon  cjfNliI, 

135-136.  LW.  143 
Prussian  education.  101 


Index  I  205 


PKudo-flUffcct  idKina,  lOS-106, 

107.110.112-113 
Pubbc  finance,  chm  in,  195-201 
PuHk  iccior  cmpkjvmcm,  6S-M 
PunWM.  98.  102 

Reagan  AdmtnMranon.  80.  1 18 
Riicpkr.  WUhdm.  191-192 
Riiman  (  jnhiAH.  panxhul  idwoU,  109 
R<HMcvrk.  FrankJtn  Ddano.  46 
Ruk<ifNc(ciMfy.8-9 
Ritthdcxmy.  R  1 .  99 

Say.  lean  BafKMe.  S7 

Vhi-il  bui%m.  68-71 

Setnmem.  Ifim.  115-117.  14S-152. 

195-201 
Scnnhab;  llam  F  .  1-4.  1S3-170 
ShMnon.  RiMca.  95-96 
Sttfccnih  Amemlmcnt  ( 1915).  S9.  86. 

180 
Smtth.  Aa«n.S9 
"ScKui  aUiKati(in''cif  capMal.  129 
StKiaJ  tkmmrao'  and  SckuI  Wdfarr 

Scale  m  SwTtlm.  185   192 
SaaaX  Scomn .  1 1 .  24.  25.  4 1 .  44.  S2. 

S5. 60. 62. 9S.  177-178 
Stnrmipwv.  Incut  <if.  101-104.  107 
S{>Afu%h  .\mrfxan  War.  72 
SpmdutiL  »«aie.  64  67 
S(ei|icr  .\incTiunieni,  128 
Sctmr.  Hu\»i\,  24 
Suhuil»c».  "5-74 
SumncT.  Wilham  c;raham.  46.  72-73. 

75-77.88 
Supf4\*'«tik  cvummuc^  96 
S«T«kn,  185-192 

T*nflv40 
Tax  hmndatKin.  61 
Tax  Frrcdiim  Dav."  64 
Taxo.  taxantm 

jh«lit>  Wfw.  195.  19" 

a\rra|cing  Kw  inflatKin.  16 

haxs  and  uxs.  7-8 

bunknof.  199 


corporate,  140,  154 

creativity  and,  176 

deductions,  37-38 

disguised  forms,  11-12 

for  education,  100 

arxi  educational  vouchers,  111-112 

elements  of  a  fair  system,  7-21 

"exporting"  taxes  to  out-of-state  resi- 
dents, 115-117 

fairness,  7-21,  194-195,201 

on  gasoline,  43 

hidden,  41-42 

incentives  and,  93-96,  147 

on  inheritance,  155 

on  liquor,  43 

and  morality,  33 

future  of,  32 

pou-er  to  destrov,  171-184 

on  profits,  148,  149,  151,  160 

progressive,  34,  94-95,  154,  155 

pniportKNial  gross  receipts,  18 

real  estate,  41 

reforms,  3 1 

without  representation,  58 

Mate  and  IcKal,  48-49,  115-117, 
118-122 

m  Sweden,  186-187 

axxl  taxpaver  dissatisfaction,  66-67, 
121-122,  198 

thCT)n-  of,  40-45 

tA-pesdcfined,  11,  13-14,  15 

value-added  (VAT),  186 

voluntan',  9-11 

withholding,  200 
Tennessee  \'alle>'  Authority,  26 
Thobum,  Robert,  1 1 1 
Thnft,  123-124, 168-170 

Underground  economy,  95,  187 
Unemployment,  187 
United  States  Bank,  172,  175 
U.S.  Constitution,  19,  22,  23,  25,  26, 

27,28,29,86,88-89,115 
U.S.  government,  growth  of,  79-90 
U.S.  Postal  Service,  35,  44 
U.S.  Supreme  Court,  171 


206  /  Index 

Value-added  tax,  186 
Values  and  education,  100 
Volpe,  John  A.,  48 
Vouchers,  educational,  97-114 


Wage  and  price  controls,  141-143 
Weidenbaum,  Murray,  83 
Welfare,62,  73,  14l' 


Wlialing  industn-,  danise  o^  137 
Williams,  Roger,  102 
Wiizk\,  Christopher,  123-131 
Wofi,  blessings  of,  169 
Wubbds,  Rolf  E,  123-131 


Young  Amcncam  for  Freedom, 

52 


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About  The  Foundation  for  Economic  Education 


The  Foundation  for  Economic  Education  (FEE)  is  a  "home"  for 
the  friends  of  freedom  e\'er\'>%'herc.  Its  spirit  is  upUfnng,  reassuring, 
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FEE  is  the  oldest  conscrv-ati>-c  research  organization  dedicated  to 
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Through<xJt  the  years  the  missKm  of  FEE  has  rcmamed  un- 
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