WEBVTT NOTE XXVIII. Interference by Taxation 1 00:00:00.000 --> 00:00:05.000 Chapter 28 Interference by Taxation 2 00:00:05.000 --> 00:00:09.000 1. The Neutral Tax 3 00:00:09.000 --> 00:00:18.000 To keep the social apparatus of coercion and compulsion running requires expenditure of labor and commodities. 4 00:00:18.000 --> 00:00:25.000 Under a liberal system of government, these expenditures are small compared with the sum of the individual's incomes. 5 00:00:25.000 --> 00:00:32.800 The more the government expands the sphere of its activities, the more its budget increases. 6 00:00:32.800 --> 00:00:39.360 If the government itself owns and operates plants, farms, forests and mines, it might 7 00:00:39.360 --> 00:00:47.080 consider covering a part or the whole of its financial needs from interest and profit earned. 8 00:00:47.080 --> 00:00:53.000 But government operation of business enterprises as a rule is so inefficient that it results 9 00:00:53.000 --> 00:01:00.320 in Losses rather than in Profits. Governments must resort to taxation, that is, they must 10 00:01:00.320 --> 00:01:07.560 raise revenues by forcing the subjects to surrender a part of their wealth or income. 11 00:01:07.560 --> 00:01:13.160 A neutral mode of taxation is conceivable that would not divert the operation of the 12 00:01:13.160 --> 00:01:19.880 market from the lines in which it would develop in the absence of any taxation. However, the 13 00:01:19.880 --> 00:01:25.920 The vast literature on problems of taxation, as well as the policies of governments, have 14 00:01:25.920 --> 00:01:30.720 hardly ever given thought to the problem of the neutral tax. 15 00:01:30.720 --> 00:01:35.480 They have been more eager to find the just tax. 16 00:01:35.480 --> 00:01:40.720 The neutral tax would affect the conditions of the citizens only to the extent required 17 00:01:40.720 --> 00:01:47.440 by the fact that a part of the labor and material goods available is absorbed by the government 18 00:01:47.440 --> 00:01:49.360 apparatus. 19 00:01:49.360 --> 00:01:55.280 In the imaginary construction of the evenly rotating economy, the Treasury continually 20 00:01:55.280 --> 00:02:03.080 levies taxes and spends the whole amount raised, neither more nor less, for defraying the costs 21 00:02:03.080 --> 00:02:07.080 incurred by the activities of the government's officers. 22 00:02:07.080 --> 00:02:12.440 A part of each citizen's income is spent for public expenditure. 23 00:02:12.440 --> 00:02:19.480 If we assume that in such an evenly rotating economy there prevails perfect income equality 24 00:02:19.480 --> 00:02:25.480 in such a way that every household's income is proportional to the number of its members, 25 00:02:25.480 --> 00:02:32.240 both a head tax and a proportional income tax would be neutral taxes. 26 00:02:32.240 --> 00:02:36.200 Under these assumptions there would be no difference between them. 27 00:02:36.200 --> 00:02:43.040 A part of each citizen's income would be absorbed by public expenditure, and no secondary effects 28 00:02:43.040 --> 00:02:46.400 of taxation would emerge. 29 00:02:46.400 --> 00:02:51.960 The changing economy is entirely different from this imaginary construction of an evenly 30 00:02:51.960 --> 00:02:56.720 rotating economy with income equality. 31 00:02:56.720 --> 00:03:03.100 Continuous change and the inequality of wealth and income are essential and necessary features 32 00:03:03.100 --> 00:03:05.800 of the changing market economy. 33 00:03:05.800 --> 00:03:10.940 The only real and working system of the market economy. 34 00:03:10.940 --> 00:03:15.940 In the frame of such a system, no tax can be neutral. 35 00:03:15.940 --> 00:03:22.300 The very idea of a neutral tax is as unrealizable as that of neutral money. 36 00:03:22.300 --> 00:03:28.060 But of course, the reasons for this inescapable non-neutrality are different in the case of 37 00:03:28.060 --> 00:03:32.280 taxes from what they are in the case of money. 38 00:03:32.280 --> 00:03:38.760 A head tax that taxes every citizen equally and uniformly without any regard to the size 39 00:03:38.760 --> 00:03:45.480 of his income and wealth, falls more heavily upon those with more moderate means than upon 40 00:03:45.480 --> 00:03:48.580 those with more ample means. 41 00:03:48.580 --> 00:03:54.200 It restricts the production of the articles consumed by the masses more sharply than that 42 00:03:54.200 --> 00:03:58.540 of the articles mainly consumed by the wealthier citizens. 43 00:03:58.540 --> 00:04:04.580 On the other hand, it curtails saving and capital accumulation less than a more burdensome 44 00:04:04.580 --> 00:04:08.060 taxation of the wealthier citizens does. 45 00:04:08.060 --> 00:04:13.620 It does not slow down the tendency toward a drop in the marginal productivity of capital 46 00:04:13.620 --> 00:04:20.140 goods as against the marginal productivity of labor to the same extent as does taxation 47 00:04:20.140 --> 00:04:25.140 discriminating against those with higher income and wealth. 48 00:04:25.140 --> 00:04:30.660 And consequently, it does not to the same extent retard the tendency toward a rise in 49 00:04:30.660 --> 00:04:33.100 wage rates. 50 00:04:33.100 --> 00:04:39.860 The actual fiscal policies of all countries are today exclusively guided by the idea that 51 00:04:39.860 --> 00:04:46.040 taxes should be apportioned according to each citizen's ability to pay. 52 00:04:46.040 --> 00:04:51.300 In the considerations which finally resulted in the general acceptance of the ability to 53 00:04:51.300 --> 00:04:58.220 To Pay Principle, there was some dim conception that taxing the well-to-do more heavily than 54 00:04:58.220 --> 00:05:03.860 those with moderate means renders a tax somewhat more neutral. 55 00:05:03.860 --> 00:05:09.700 However this may be, it is certain that any reference to tax neutrality was very soon 56 00:05:09.700 --> 00:05:12.420 entirely discarded. 57 00:05:12.420 --> 00:05:19.260 The ability to pay principle has been raised to the dignity of a postulate of social justice. 58 00:05:19.260 --> 00:05:26.140 As people see it today, the fiscal and budgetary objectives of taxation are of secondary importance 59 00:05:26.140 --> 00:05:27.540 only. 60 00:05:27.540 --> 00:05:35.140 The primary function of taxation is to reform social conditions according to justice. 61 00:05:35.140 --> 00:05:38.940 Taxation is a method of government interference with business. 62 00:05:38.940 --> 00:05:45.700 A tax is the more satisfactory, the less neutral it is, and the more it serves as a device 63 00:05:45.700 --> 00:05:51.300 Case for diverting production and consumption from those lines into which the unhampered 64 00:05:51.300 --> 00:05:54.700 market would have directed them. 65 00:05:54.700 --> 00:05:56.460 2. 66 00:05:56.460 --> 00:05:59.120 The Total Tax. 67 00:05:59.120 --> 00:06:05.520 The idea of social justice implied in the ability to pay principle is that of perfect 68 00:06:05.520 --> 00:06:09.140 financial equality of all citizens. 69 00:06:09.140 --> 00:06:16.300 As long as any inequality of income or wealth remains, it can as plausibly be argued that 70 00:06:16.300 --> 00:06:22.860 these larger incomes and fortunes, however small their absolute amount, indicate some 71 00:06:22.860 --> 00:06:29.420 excess of ability to be levied upon, as it can be argued that any existing inequalities 72 00:06:29.420 --> 00:06:33.740 of income and wealth indicate differences in ability. 73 00:06:33.740 --> 00:06:40.100 The only logical stopping place of the ability to pay doctrine is at the complete equalization 74 00:06:40.100 --> 00:06:47.400 of incomes and wealth by confiscation of all incomes and fortunes above the lowest amount 75 00:06:47.400 --> 00:06:50.400 in the hands of anyone. 76 00:06:50.400 --> 00:06:56.420 The notion of the total tax is the antithesis of the notion of the neutral tax. 77 00:06:56.420 --> 00:07:03.220 The total tax completely taxes away, confiscates all incomes and estates. 78 00:07:03.220 --> 00:07:09.900 Then, the government, out of the community chest thus filled, gives to everybody an allowance 79 00:07:09.900 --> 00:07:12.940 for defraying the costs of his sustenance. 80 00:07:12.940 --> 00:07:19.700 Or, what comes to the same thing, the government, in taxing, leaves free that amount which it 81 00:07:19.700 --> 00:07:26.260 considers everybody's fair share, and completes the shares of those who have less, up to the 82 00:07:26.260 --> 00:07:36.180 The idea of the total tax cannot be thought out to its ultimate logical consequences. 83 00:07:36.180 --> 00:07:42.420 If the entrepreneurs and capitalists do not derive any personal benefit or damage from 84 00:07:42.420 --> 00:07:47.900 their utilization of the means of production, they become indifferent with regard to the 85 00:07:47.900 --> 00:07:51.540 choice between various modes of conduct. 86 00:07:51.540 --> 00:07:57.800 Their social function fades away and they become disinterested irresponsible administrators 87 00:07:57.800 --> 00:08:00.040 of public property. 88 00:08:00.040 --> 00:08:05.180 They are no longer bound to adjust production to the wishes of the consumers. 89 00:08:05.180 --> 00:08:12.180 If only the income is taxed away while the capital stock itself is left free, an incentive 90 00:08:12.180 --> 00:08:18.140 is offered to the owners to consume parts of their wealth and thus to hurt the interests 91 00:08:18.140 --> 00:08:19.840 of everyone. 92 00:08:19.840 --> 00:08:26.620 A total income tax would be a very inept means for the realization of socialism. 93 00:08:26.620 --> 00:08:33.140 If the total tax affects wealth no less than income, it is no longer a tax, that is, a 94 00:08:33.140 --> 00:08:38.000 device for collecting government revenue within a market economy. 95 00:08:38.000 --> 00:08:42.060 It becomes a measure for the transition to socialism. 96 00:08:42.060 --> 00:08:48.660 As soon as it is consummated, socialism has been substituted for capitalism. 97 00:08:48.660 --> 00:08:55.820 Even when looked upon as a method for the realization of socialism, the total tax is disputable. 98 00:08:55.820 --> 00:09:01.220 Some socialists launched plans for a pro-socialist tax reform. 99 00:09:01.220 --> 00:09:08.840 They recommended either a 100% estate and gift tax, or taxing away totally the rent 100 00:09:08.840 --> 00:09:12.660 of land, or all unearned income. 101 00:09:12.660 --> 00:09:19.620 That is, in the socialist terminology, all revenue not derived from labor performed. 102 00:09:19.620 --> 00:09:23.420 The examination of these projects is superfluous. 103 00:09:23.420 --> 00:09:28.220 It is enough to know that they are utterly incompatible with the preservation of the 104 00:09:28.220 --> 00:09:30.860 market economy. 105 00:09:30.860 --> 00:09:33.340 3. 106 00:09:33.340 --> 00:09:38.420 Fiscal and non-fiscal objectives of taxation. 107 00:09:38.420 --> 00:09:45.220 The fiscal and non-fiscal objectives of taxation do not agree with one another. 108 00:09:45.220 --> 00:09:48.940 Consider for instance excise duties on liquor. 109 00:09:48.940 --> 00:09:54.460 If one considers them as a source of government revenue, the more they yield, the better they 110 00:09:54.460 --> 00:09:55.840 appear. 111 00:09:55.840 --> 00:10:03.600 Of course, as the duty must enhance the price of the beverage, it restricts sales and consumption. 112 00:10:03.600 --> 00:10:10.760 It is necessary to find out by testing under what rate of duty the yield becomes highest. 113 00:10:10.760 --> 00:10:16.080 But if one looks at liquor taxes as a means of reducing the consumption of liquor as much 114 00:10:16.080 --> 00:10:21.120 as possible, the rate is better the higher it is. 115 00:10:21.120 --> 00:10:27.320 Pushed beyond a certain limit, the tax makes consumption drop considerably, and also the 116 00:10:27.320 --> 00:10:30.240 revenue concomitantly. 117 00:10:30.240 --> 00:10:37.260 If the tax fully attains its non-fiscal objective of weaning people entirely from drinking alcoholic 118 00:10:37.260 --> 00:10:40.640 beverages, the revenue is zero. 119 00:10:40.640 --> 00:10:44.120 It no longer serves any fiscal purpose. 120 00:10:44.120 --> 00:10:47.160 Its effects are merely prohibitive. 121 00:10:47.160 --> 00:10:53.360 The same is valid not only with regard to all kinds of indirect taxation, but no less 122 00:10:53.360 --> 00:10:56.120 for direct taxation. 123 00:10:56.120 --> 00:11:02.160 Discriminating taxes levied upon corporations and big business would, if raised above a 124 00:11:02.160 --> 00:11:09.040 certain limit, result in the total disappearance of corporations and big business. 125 00:11:09.040 --> 00:11:15.480 Capital levies, inheritance and estate taxes, and income taxes are similarly self-defeating 126 00:11:15.480 --> 00:11:18.320 if carried to extremes. 127 00:11:18.320 --> 00:11:24.440 There is no solution for the irreconcilable conflict between the fiscal and the non-fiscal 128 00:11:24.440 --> 00:11:34.340 The Power to Tax is, as Chief Justice Marshall pertinently observed, the power to destroy. 129 00:11:34.340 --> 00:11:39.800 This power can be used for the destruction of the market economy, and it is the firm 130 00:11:39.800 --> 00:11:45.340 resolution of many governments and parties to use it for this purpose. 131 00:11:45.340 --> 00:11:51.940 With the substitution of socialism for capitalism, the dualism of the coexistence of two distinct 132 00:11:51.940 --> 00:11:58.060 and its spheres of action disappears. The government swallows the whole orbit of the 133 00:11:58.060 --> 00:12:05.140 individual's autonomous actions and becomes totalitarian. It no longer depends for its 134 00:12:05.140 --> 00:12:11.020 financial support on the means exacted from the citizens. There is no longer any such 135 00:12:11.020 --> 00:12:17.360 thing as a separation of public funds and private funds. 136 00:12:17.360 --> 00:12:20.280 Management is a matter of the market economy. 137 00:12:20.280 --> 00:12:24.960 It is one of the characteristic features of the market economy that the government does 138 00:12:24.960 --> 00:12:31.080 not interfere with the market phenomena, and that its technical apparatus is so small that 139 00:12:31.080 --> 00:12:37.240 its maintenance absorbs only a modest fraction of the total sum of the individual citizen's 140 00:12:37.240 --> 00:12:38.640 incomes. 141 00:12:38.640 --> 00:12:45.440 Then, taxes are an appropriate vehicle for providing the funds needed by the government. 142 00:12:45.440 --> 00:12:51.120 They are appropriate because they are low and do not perceptibly disarrange production 143 00:12:51.120 --> 00:12:53.480 and consumption. 144 00:12:53.480 --> 00:12:59.860 If taxes grow beyond a moderate limit, they cease to be taxes and turn into devices for 145 00:12:59.860 --> 00:13:03.360 the destruction of the market economy. 146 00:13:03.360 --> 00:13:09.280 This metamorphosis of taxes into weapons of destruction is the mark of present-day public 147 00:13:09.280 --> 00:13:10.900 finance. 148 00:13:10.900 --> 00:13:16.300 We do not deal with the quite arbitrary value judgments concerning the problems of whether 149 00:13:16.300 --> 00:13:22.640 heavy taxation is a curse or a benefit, and whether the expenditures financed by the tax 150 00:13:22.640 --> 00:13:27.320 yield are or are not wise and beneficial. 151 00:13:27.320 --> 00:13:33.300 What matters is that the heavier taxation becomes, the less compatible it is with the 152 00:13:33.300 --> 00:13:36.500 preservation of the market economy. 153 00:13:36.500 --> 00:13:41.760 There is no need to raise the question of whether or not it is true that no country 154 00:13:41.760 --> 00:13:48.300 was ever yet ruined by large expenditures of money by the public and for the public. 155 00:13:48.300 --> 00:13:55.580 It cannot be denied that the market economy can be ruined by large public expenditures, 156 00:13:55.580 --> 00:14:01.580 and that it is the intention of many people to ruin it in this way. 157 00:14:01.580 --> 00:14:05.580 People often complain about the oppressiveness of heavy taxes. 158 00:14:05.580 --> 00:14:10.580 Statesmen are alarmed about the danger of eating the seed corn. 159 00:14:10.580 --> 00:14:17.580 Yet the true crux of the taxation issue is to be seen in the paradox that the more taxes increase, 160 00:14:17.580 --> 00:14:25.580 the more they undermine the market economy and, concomitantly, the system of taxation itself. 161 00:14:25.580 --> 00:14:35.580 Thus the fact becomes manifest that ultimately the preservation of private property and confiscatory measures are incompatible. 162 00:14:35.580 --> 00:14:46.580 Every specific tax, as well as a nation's whole tax system, becomes self-defeating above a certain height of the rates. 163 00:14:46.580 --> 00:14:51.580 4. The Three Classes of Tax Interventionism 164 00:14:51.580 --> 00:15:04.580 The various methods of taxation which can be used for the regulation of the economy, that is, as instruments of an interventionist policy, can be classified in three groups. 165 00:15:04.580 --> 00:15:12.580 1. The tax aims at totally suppressing or at restricting the production of definite commodities. 166 00:15:12.580 --> 00:15:17.580 It thus indirectly interferes with consumption too. 167 00:15:17.580 --> 00:15:23.380 It does not matter whether this end is aimed at by the imposition of special taxes or 168 00:15:23.380 --> 00:15:30.180 by exempting certain products from a general tax imposed upon all other products, or upon 169 00:15:30.180 --> 00:15:37.700 those products which the consumers would have preferred in the absence of fiscal discrimination. 170 00:15:37.700 --> 00:15:42.660 Tax exemption is employed as an instrument of interventionism in the case of customs 171 00:15:42.660 --> 00:15:43.980 duties. 172 00:15:43.980 --> 00:15:49.900 The domestic product is not burdened by the tariff which affects only the merchandise imported 173 00:15:49.900 --> 00:15:51.940 from abroad. 174 00:15:51.940 --> 00:15:57.520 Many countries resort to tax discrimination in regulating domestic production. 175 00:15:57.520 --> 00:16:04.220 They try, for instance, to encourage the production of wine, a product of small or medium-sized 176 00:16:04.220 --> 00:16:10.460 grape growers, as against the production of beer, a product of big-size breweries, by 177 00:16:10.460 --> 00:16:16.460 by Submitting Beer to a More Burdensome Excise Tax Than Wine 178 00:16:16.460 --> 00:16:22.460 2. The tax expropriates a part of income or wealth. 179 00:16:22.460 --> 00:16:28.460 3. The tax expropriates income and wealth entirely. 180 00:16:28.460 --> 00:16:35.460 We do not have to deal with the third class, as it is merely a means for the realization of socialism, 181 00:16:35.460 --> 00:16:39.460 and as such is outside the scope of interventionism. 182 00:16:39.460 --> 00:16:47.460 The first class is, in its effects, not different from the restrictive measures dealt with in the following chapter. 183 00:16:47.460 --> 00:16:54.460 The second class encompasses confiscatory measures dealt with in Chapter 32.