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Full text of "Taxation and Confiscation"

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 ci a wica l 
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; femwi i 
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. 

Belie vers in fr eedom often suffer the accusatxm of negaavum. 
True, the consistent voluntanst thinker seeks tt) reduce a governme nt 
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 baic fi t u i g 
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 govrnwnc n t 
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»U iHpB |\ ff li % 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 A h i h — 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» t4 ik'n» m Krtai dctul: Lud>»'ig von Miscs, Human Action (3rd 
r nw d 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.m d m 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 gran te d 
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 pic aa o 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 pf o pcm- 
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\ni u iic m 
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 gcncm m cn t , 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 govern m en ta l 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 benef it s 
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.) GoNcrn m c n t s 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 
um wMH wi 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 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 F rrew tmm. 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 per c ent 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 P rfrM f>. 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 bcc umin g 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 g o ^crnnie nt 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 en titA cmcnt i 
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 oppre ssi ve. 

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. M e tb r m h cm 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 gosr m mc n t 
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, g wamnem 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 
g oven w K n i 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»tiiWKi tt 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\' p i u gi im 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 gincm m c n t 

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 go v ennnen t 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 Pt ftU t mm (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 g uv a nm ent 
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 p i u b kni i 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 attemp te d 
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. So vxrcig nty 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 ult in v ii el y 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 a re conv inced 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 cntr cu m c 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 pf ufcjKin 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 a p pe a re d «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 g u scin n K n t 
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 c ff c c i iv dy 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 rei nfo rce d 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 progr a im 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 p u cutta gc 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. 

Aooof di n g 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 mp onsc 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 per c e nt , 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 fr ee d om 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 prosper i ty, 
entire new industries urrc bcxn The oil tndustr>', railnitads, e l citiiuiy, 
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 govern m ent 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 co rp o r a ic 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 t hcmiftc t 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 for gotte n 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> eim on. 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 n o npr o ductive 
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\x rei ng. 

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 Ck mninw md *r U^kKUn Tm.' 
Jourmil afMoHftmn kcm mm a ( |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 Sec uri ty 
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' pr o gr a ms 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 pce vtm* 
economic produaicxi. It may vvrakcn co m petition 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 go v xmmeut 
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 com p lete l y 
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 P i uytJ» 

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\rmmc n t 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 im pe di n g 
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» bct u '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 gc n -e mm cm 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 ope ra tion 

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 thcmt cK r s , 
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 p w i c et d c d 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 mnem m c m 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 g in emmcn t 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>- gine r n m e nts , 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^ ^>Mt nif^ 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\em m cnt 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 
h a ppene d . 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 un emptoy- 
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 ccnnn mi c 
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 b cciuic 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 w Mtm 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 anemf n ed 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 g in aiMiic m 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 gover n me n t'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 cnK u ccn cm 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^im tm yi, 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 Ame m lmcnt ( 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 



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