WEBVTT NOTE 12.07. Binary Intervention: The Government Budget 1 00:00:00.000 --> 00:00:06.000 7. Binary Intervention, The Government Budget 2 00:00:06.000 --> 00:00:15.000 Binary intervention occurs, we have seen, when the intervener forces someone to transfer property to him. 3 00:00:15.000 --> 00:00:24.000 All government rests on the coerced levy of taxation, which is therefore a prime example of binary intervention. 4 00:00:24.000 --> 00:00:41.000 Government intervention, consequently, is not only triangular, like price control, it may also be binary, like taxation, and is therefore embedded into the very nature of government and governmental activity. 5 00:00:41.000 --> 00:00:53.000 For years, writers on public finance have been searching for the neutral tax, that is, for that system of taxes which would keep the free market intact. 6 00:00:53.000 --> 00:00:59.600 The object of this search is altogether chimerical. For example, economists have often sought 7 00:00:59.600 --> 00:01:06.080 uniformity of taxes, so that each person, or at least each person in the same income 8 00:01:06.080 --> 00:01:12.720 bracket, pays the same amount of tax. But this is inherently impossible, as we have 9 00:01:12.720 --> 00:01:19.480 already seen from Calhoun's demonstration that the community is inevitably divided into 10 00:01:19.480 --> 00:01:27.300 Tax Payers and Tax Consumers, who, of course, cannot be said to pay taxes at all. 11 00:01:27.300 --> 00:01:34.140 To repeat the keen analysis of Calhoun, nor can it be otherwise, unless what is collected 12 00:01:34.140 --> 00:01:40.840 from each individual in the shape of taxes shall be returned to him in disbursements, 13 00:01:40.840 --> 00:01:44.640 which would make the process nougatory and absurd. 14 00:01:44.640 --> 00:01:52.980 In short, government bureaucrats do not pay taxes, they consume the tax proceeds. 15 00:01:52.980 --> 00:02:01.200 If a private citizen earning $10,000 income pays $2,000 in taxes, the bureaucrat earning 16 00:02:01.200 --> 00:02:08.200 $10,000 does not really pay $2,000 in taxes also. 17 00:02:08.200 --> 00:02:12.540 That he supposedly does is simply a bookkeeping fiction. 18 00:02:12.540 --> 00:02:18.700 It will be more convenient to use dollars rather than gold ounces in this section, but we still 19 00:02:18.700 --> 00:02:23.660 assume complete equivalence of dollars and gold weights. 20 00:02:23.660 --> 00:02:29.420 We do not consider monetary intervention until the end of this chapter. 21 00:02:29.420 --> 00:02:39.380 The bureaucrat is actually acquiring an income of $8,000 and paying no taxes at all. 22 00:02:39.380 --> 00:02:46.400 Not only bureaucrats will be tax consumers, but, to a lesser degree, other, private members 23 00:02:46.400 --> 00:02:49.080 of the population as well. 24 00:02:49.080 --> 00:02:55.920 For example, suppose that the government taxes $1,000 away from private people who would 25 00:02:55.920 --> 00:03:02.040 have spent the money on jewels, and uses it to purchase paper for government offices. 26 00:03:02.040 --> 00:03:09.180 This induces a shift in demand away from jewels and toward paper, a decline in the price of 27 00:03:09.180 --> 00:03:14.180 of Jewels and a Flow of Resources from the Jewelry Industry. 28 00:03:14.180 --> 00:03:18.060 Conversely, paper prices will tend to increase 29 00:03:18.060 --> 00:03:22.020 and resources will flow into the paper industry. 30 00:03:22.020 --> 00:03:25.540 Incomes will decline in the jewelry industry 31 00:03:25.540 --> 00:03:27.740 and rise in paper. 32 00:03:27.740 --> 00:03:31.420 This does not mean that resources will flow directly 33 00:03:31.420 --> 00:03:34.380 out of jewelry and into paper. 34 00:03:34.380 --> 00:03:37.260 It is more likely that resources will flow 35 00:03:37.260 --> 00:04:04.260 The paper industry will be, to some extent, beneficiaries of the government budget, of the tax and expenditure process of government, but not just the paper industry. 36 00:04:04.260 --> 00:04:17.260 For the new money received by the paper firms will be paid out to their suppliers and original factor owners, and so on, as the ripples impinge on other parts of the economy. 37 00:04:17.260 --> 00:04:25.260 On the other hand, the jewelry industry, stripped of revenue, reduces its demands for factors. 38 00:04:25.260 --> 00:04:32.400 Thus, the burdens and benefits of the tax and expenditure process diffuse themselves 39 00:04:32.400 --> 00:04:39.480 throughout the economy with the strongest impact at the points of first contact, jewelry 40 00:04:39.480 --> 00:04:41.120 and paper. 41 00:04:41.120 --> 00:04:48.440 In the long run of the ERE, of course, all firms in all industries earn a uniform interest 42 00:04:48.440 --> 00:04:54.900 return and the bulk of the gains or losses are imputed back to the original specific 43 00:04:54.900 --> 00:05:04.460 Factors. Everyone in the society will be either a net taxpayer or a net tax consumer, and 44 00:05:04.460 --> 00:05:11.380 this to different degrees, and it will be for the data of each specific case to determine 45 00:05:11.380 --> 00:05:19.260 where any particular person or industry stands in this distribution process. The only certainty 46 00:05:19.260 --> 00:05:26.980 The reality is that the bureaucrat or politician in office receives 100% of his governmental 47 00:05:26.980 --> 00:05:35.060 income from tax proceeds and pays no genuine taxes in return. 48 00:05:35.060 --> 00:05:41.300 The tax and expenditure process, therefore, will inevitably distort the allocation of 49 00:05:41.300 --> 00:05:47.900 productive factors, the types of goods produced and the pattern of incomes from what they 50 00:05:47.900 --> 00:05:50.400 They Would Be on the Free Market. 51 00:05:50.400 --> 00:05:56.400 The larger the level of taxing and spending, that is, the bigger the government budget, 52 00:05:56.400 --> 00:05:59.660 the greater the distortion will tend to be. 53 00:05:59.660 --> 00:06:05.680 And moreover, the larger the budget in relation to market activity, the greater the burden 54 00:06:05.680 --> 00:06:08.280 of government on the economy. 55 00:06:08.280 --> 00:06:15.860 A larger burden means that more and more resources of society are being coercively siphoned off 56 00:06:15.860 --> 00:06:23.060 from the producers into the pockets of government, those who sell to government, and the subsidized 57 00:06:23.060 --> 00:06:25.340 favorites of government. 58 00:06:25.340 --> 00:06:31.860 In short, the higher the relative level of government, the narrower the base of the producers, 59 00:06:31.860 --> 00:06:36.700 and the greater the take of those expropriating the producers. 60 00:06:36.700 --> 00:06:42.680 The higher the level of government, the less resources will be used to satisfy the desires 61 00:06:42.680 --> 00:07:00.780 There has been a great deal of controversy among economists on how to approach the analysis 62 00:07:00.780 --> 00:07:02.580 of taxation. 63 00:07:02.580 --> 00:07:09.180 Old-fashioned Marshallians insist on the partial equilibrium approach of looking only 64 00:07:09.180 --> 00:07:16.180 at a particular type of tax in isolation and then analyzing its effects. 65 00:07:16.180 --> 00:07:23.380 Valracians, more fashionable today and exemplified by the late Italian public finance expert 66 00:07:23.380 --> 00:07:31.220 Antonio Daviti De Marco, insists that taxes cannot be considered at all in isolation, 67 00:07:31.220 --> 00:07:38.180 that they may be analyzed only in conjunction with what the government does with the proceeds. 68 00:07:38.180 --> 00:07:44.800 In all this, what would be the Austrian approach, had it been developed, is being neglected. 69 00:07:44.800 --> 00:07:51.780 This holds that both procedures are legitimate and necessary to analyze the taxing process 70 00:07:51.780 --> 00:07:52.820 fully. 71 00:07:52.820 --> 00:08:00.780 In short, the level of taxes and expenditures may be analyzed, and its inevitable redistributive 72 00:08:00.780 --> 00:08:09.580 and Distortive Effects Discussed, and within this aggregate of taxes, individual types of taxes may 73 00:08:09.580 --> 00:08:17.260 then be analyzed in isolation. Neither the partial nor the general approaches should be overlooked. 74 00:08:18.460 --> 00:08:25.420 There has also been a great amount of useless controversy about which activity of government 75 00:08:25.420 --> 00:08:32.780 imposes the burden on the private sector. Taxation or government spending? It is actually 76 00:08:32.780 --> 00:08:39.980 futile to separate them, since they are both stages in the same process of burden and redistribution. 77 00:08:40.540 --> 00:08:47.740 Thus, suppose the government taxes the betel nut industry one million dollars in order to buy paper 78 00:08:47.740 --> 00:08:55.020 for government bureaus. One million dollars worth of resources are shifted from betel nuts to paper. 79 00:08:55.420 --> 00:09:01.720 This is done in two stages, a sort of one-two punch at the free market. 80 00:09:01.720 --> 00:09:07.220 First, the betel nut industry is made poorer by taking away its money. 81 00:09:07.220 --> 00:09:17.520 Then, the government uses this money to take paper out of the market for its own use, thus extracting resources in the second stage. 82 00:09:17.520 --> 00:09:21.020 Both sides of the process are a burden. 83 00:09:21.020 --> 00:09:29.020 In a sense, the betel nut industry is compelled to pay for the extraction of paper from society. 84 00:09:29.020 --> 00:09:33.020 At least, it bears the immediate brunt of payment. 85 00:09:33.020 --> 00:09:46.020 However, even without yet considering the partial equilibrium problem of how or whether such taxes are shifted by the betel nut industry onto other shoulders, 86 00:09:46.020 --> 00:09:50.020 we should also note that it is not the only one to pay. 87 00:09:50.020 --> 00:09:58.720 to pay, the consumers of paper certainly pay by finding paper prices raised to them. 88 00:09:58.720 --> 00:10:04.480 The process can be seen more clearly if we consider what happens when taxes and government 89 00:10:04.480 --> 00:10:12.040 expenditures are not equal, when they are not simply obverse sides of the same coin. 90 00:10:12.040 --> 00:10:18.280 When taxes are less than government expenditures, and omitting borrowing from the public for 91 00:10:18.280 --> 00:10:22.560 For the time being, the government creates new money. 92 00:10:22.560 --> 00:10:29.240 It is obvious here that government expenditures are the main burden, since this higher amount 93 00:10:29.240 --> 00:10:32.660 of resources is being siphoned off. 94 00:10:32.660 --> 00:10:39.420 In fact, as we shall see later when considering the binary intervention of inflation, creating 95 00:10:39.420 --> 00:10:44.580 new money is, anyway, a form of taxation. 96 00:10:44.580 --> 00:10:50.660 But what of that rare case when taxation is higher than government spending? 97 00:10:50.660 --> 00:10:55.880 Say that the surplus is either hoarded in the government's gold supply or that the 98 00:10:55.880 --> 00:10:59.240 money is liquidated through deflation. 99 00:10:59.240 --> 00:11:07.000 Thus assume that $1 million is taken from the betel nut industry and only $600,000 is 100 00:11:07.000 --> 00:11:08.880 spent on paper. 101 00:11:08.880 --> 00:11:15.500 In this case, the larger burden is that of taxation, which pays not only for the extracted 102 00:11:15.500 --> 00:11:20.200 paper but also for the hoarded or destroyed money. 103 00:11:20.200 --> 00:11:27.320 While the government extracts only $600,000 worth of resources from the economy, the betel 104 00:11:27.320 --> 00:11:35.320 nut industry loses $1 million of potential resources, and this loss should not be forgotten 105 00:11:35.320 --> 00:11:40.880 in toting up the burdens imposed by the government's budgetary process. 106 00:11:40.880 --> 00:11:47.480 In short, when government expenditures and receipts differ, the fiscal burden on society 107 00:11:47.480 --> 00:11:54.320 may be very approximately gauged by whichever is the greater total. 108 00:11:54.320 --> 00:12:01.100 Since taxation cannot really be uniform, the government in its budgetary process of tax 109 00:12:01.100 --> 00:12:26.100 In addition to distorting the allocation of resources, therefore, the budgetary process redistributes incomes, or rather, distributes incomes, for the free market does not distribute incomes. 110 00:12:26.100 --> 00:12:32.540 Income there arises naturally and smoothly out of the market processes of production 111 00:12:32.540 --> 00:12:40.340 and exchange, thus the very concept of distribution as something separate from production and 112 00:12:40.340 --> 00:12:46.780 exchange can arise only from the government's binary intervention. 113 00:12:46.780 --> 00:12:53.340 It is often charged, for example, that the free market maximizes the utility of all and 114 00:12:53.340 --> 00:13:01.500 and the Satisfactions of All Consumers only given a certain existing distribution of income. 115 00:13:01.500 --> 00:13:04.460 But this common fallacy is incorrect. 116 00:13:04.460 --> 00:13:11.580 There is no assumed distribution on the free market separate from the voluntary activities 117 00:13:11.580 --> 00:13:15.700 of every individual's production and exchange. 118 00:13:15.700 --> 00:13:22.980 The only given on the free market is the property right of every man in his own person and in 119 00:13:22.980 --> 00:13:29.580 The resources which he finds, produces or creates, or which he obtains in voluntary 120 00:13:29.580 --> 00:13:36.100 exchange for his products or as a gift from their producers. 121 00:13:36.100 --> 00:13:42.300 The binary intervention of the government's budget, on the other hand, impairs this property 122 00:13:42.300 --> 00:13:50.140 right of everyone in his own product, and creates the separate process and the problem 123 00:13:50.140 --> 00:13:51.980 of distribution. 124 00:13:51.980 --> 00:13:58.220 No longer do income and wealth flow purely from service rendered on the market, they 125 00:13:58.220 --> 00:14:05.740 now flow to special privilege created by the state and away from those specially burdened 126 00:14:05.740 --> 00:14:07.900 by the state. 127 00:14:07.900 --> 00:14:16.220 There are many economists who regard the free market as only being free of triangular interference. 128 00:14:16.220 --> 00:14:22.420 Such binary interference as taxation is not considered intervention in the purity of the 129 00:14:22.420 --> 00:14:23.860 free market. 130 00:14:23.860 --> 00:14:29.800 The economists of the Chicago School, headed by Frank H. Knight, have been particularly 131 00:14:29.800 --> 00:14:37.980 adept at splitting man's economic activity and confining the market to a narrow compass. 132 00:14:37.980 --> 00:14:44.020 They can thus favor the free market because they oppose such triangular interventions 133 00:14:44.020 --> 00:14:51.920 as price control, while advocating drastic binary interventions in taxes and subsidies 134 00:14:51.920 --> 00:14:56.900 to redistribute the income determined by that market. 135 00:14:56.900 --> 00:15:04.440 In short, the market is to be left free in one sphere, while being subject to perpetual 136 00:15:04.440 --> 00:15:09.240 harassment and reshuffling by outside coercion. 137 00:15:09.240 --> 00:15:16.120 This concept assumes that man is fragmented, that the market man is not concerned with 138 00:15:16.120 --> 00:15:21.400 what happens to himself as a subject to government man. 139 00:15:21.400 --> 00:15:28.120 This is purely an impermissible myth, which we might call the tax illusion, the idea that 140 00:15:28.120 --> 00:15:35.720 people do not consider what they earn after taxes, but only before taxes. 141 00:15:35.720 --> 00:15:46.040 In short, if A earns $9,000 a year on the market, B $5,000 and C $1,000 and the government 142 00:15:46.040 --> 00:15:54.040 decides to keep redistributing the incomes so that each earns $5,000, the individuals, 143 00:15:54.040 --> 00:16:00.760 apprised of this, are not going to keep foolishly assuming that they are still earning what 144 00:16:00.760 --> 00:16:13.720 Thus we see that the government budgetary process is a coercive shift of resources and 145 00:16:13.720 --> 00:16:19.120 incomes from producers on the market to non-producers. 146 00:16:19.120 --> 00:16:25.800 It is also a coercive interference with the free choices of individuals by those constituting 147 00:16:25.800 --> 00:16:26.800 the government. 148 00:16:26.800 --> 00:16:33.840 Later, we shall analyze the nature and consequences of government spending in more detail. 149 00:16:33.840 --> 00:16:41.040 At this time, let us emphasize the important point that government cannot be in any way 150 00:16:41.040 --> 00:16:43.560 a fountain of resources. 151 00:16:43.560 --> 00:16:51.280 All that it spends, all that it distributes in largesse, it must first acquire in revenue. 152 00:16:51.280 --> 00:16:56.340 That is, it must first extract from the private sector. 153 00:16:56.340 --> 00:17:02.260 The great bulk of the revenues of government, the very nub of its power and its essence, 154 00:17:02.260 --> 00:17:06.460 is taxation, to which we turn in the next section. 155 00:17:06.460 --> 00:17:10.540 Another method is inflation, the creation of new money. 156 00:17:10.540 --> 00:17:13.940 A third method is borrowing from the public. 157 00:17:13.940 --> 00:17:22.120 A fourth method, revenue from sale of governmental goods or services, is a peculiar form of taxation. 158 00:17:22.120 --> 00:17:29.360 At the very least, to acquire the original assets for this business, taxation is needed.