7. Binary Intervention, The Government Budget
Binary intervention occurs, we have seen, when the intervener forces someone to transfer property to him.
All government rests on the coerced levy of taxation, which is therefore a prime example of binary intervention.
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.
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.
The object of this search is altogether chimerical. For example, economists have often sought
uniformity of taxes, so that each person, or at least each person in the same income
bracket, pays the same amount of tax. But this is inherently impossible, as we have
already seen from Calhoun's demonstration that the community is inevitably divided into
Tax Payers and Tax Consumers, who, of course, cannot be said to pay taxes at all.
To repeat the keen analysis of Calhoun, nor can it be otherwise, unless what is collected
from each individual in the shape of taxes shall be returned to him in disbursements,
which would make the process nougatory and absurd.
In short, government bureaucrats do not pay taxes, they consume the tax proceeds.
If a private citizen earning $10,000 income pays $2,000 in taxes, the bureaucrat earning
$10,000 does not really pay $2,000 in taxes also.
That he supposedly does is simply a bookkeeping fiction.
It will be more convenient to use dollars rather than gold ounces in this section, but we still
assume complete equivalence of dollars and gold weights.
We do not consider monetary intervention until the end of this chapter.
The bureaucrat is actually acquiring an income of $8,000 and paying no taxes at all.
Not only bureaucrats will be tax consumers, but, to a lesser degree, other, private members
of the population as well.
For example, suppose that the government taxes $1,000 away from private people who would
have spent the money on jewels, and uses it to purchase paper for government offices.
This induces a shift in demand away from jewels and toward paper, a decline in the price of
of Jewels and a Flow of Resources from the Jewelry Industry.
Conversely, paper prices will tend to increase
and resources will flow into the paper industry.
Incomes will decline in the jewelry industry
and rise in paper.
This does not mean that resources will flow directly
out of jewelry and into paper.
It is more likely that resources will flow
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.
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.
On the other hand, the jewelry industry, stripped of revenue, reduces its demands for factors.
Thus, the burdens and benefits of the tax and expenditure process diffuse themselves
throughout the economy with the strongest impact at the points of first contact, jewelry
and paper.
In the long run of the ERE, of course, all firms in all industries earn a uniform interest
return and the bulk of the gains or losses are imputed back to the original specific
Factors. Everyone in the society will be either a net taxpayer or a net tax consumer, and
this to different degrees, and it will be for the data of each specific case to determine
where any particular person or industry stands in this distribution process. The only certainty
The reality is that the bureaucrat or politician in office receives 100% of his governmental
income from tax proceeds and pays no genuine taxes in return.
The tax and expenditure process, therefore, will inevitably distort the allocation of
productive factors, the types of goods produced and the pattern of incomes from what they
They Would Be on the Free Market.
The larger the level of taxing and spending, that is, the bigger the government budget,
the greater the distortion will tend to be.
And moreover, the larger the budget in relation to market activity, the greater the burden
of government on the economy.
A larger burden means that more and more resources of society are being coercively siphoned off
from the producers into the pockets of government, those who sell to government, and the subsidized
favorites of government.
In short, the higher the relative level of government, the narrower the base of the producers,
and the greater the take of those expropriating the producers.
The higher the level of government, the less resources will be used to satisfy the desires
There has been a great deal of controversy among economists on how to approach the analysis
of taxation.
Old-fashioned Marshallians insist on the partial equilibrium approach of looking only
at a particular type of tax in isolation and then analyzing its effects.
Valracians, more fashionable today and exemplified by the late Italian public finance expert
Antonio Daviti De Marco, insists that taxes cannot be considered at all in isolation,
that they may be analyzed only in conjunction with what the government does with the proceeds.
In all this, what would be the Austrian approach, had it been developed, is being neglected.
This holds that both procedures are legitimate and necessary to analyze the taxing process
fully.
In short, the level of taxes and expenditures may be analyzed, and its inevitable redistributive
and Distortive Effects Discussed, and within this aggregate of taxes, individual types of taxes may
then be analyzed in isolation. Neither the partial nor the general approaches should be overlooked.
There has also been a great amount of useless controversy about which activity of government
imposes the burden on the private sector. Taxation or government spending? It is actually
futile to separate them, since they are both stages in the same process of burden and redistribution.
Thus, suppose the government taxes the betel nut industry one million dollars in order to buy paper
for government bureaus. One million dollars worth of resources are shifted from betel nuts to paper.
This is done in two stages, a sort of one-two punch at the free market.
First, the betel nut industry is made poorer by taking away its money.
Then, the government uses this money to take paper out of the market for its own use, thus extracting resources in the second stage.
Both sides of the process are a burden.
In a sense, the betel nut industry is compelled to pay for the extraction of paper from society.
At least, it bears the immediate brunt of payment.
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,
we should also note that it is not the only one to pay.
to pay, the consumers of paper certainly pay by finding paper prices raised to them.
The process can be seen more clearly if we consider what happens when taxes and government
expenditures are not equal, when they are not simply obverse sides of the same coin.
When taxes are less than government expenditures, and omitting borrowing from the public for
For the time being, the government creates new money.
It is obvious here that government expenditures are the main burden, since this higher amount
of resources is being siphoned off.
In fact, as we shall see later when considering the binary intervention of inflation, creating
new money is, anyway, a form of taxation.
But what of that rare case when taxation is higher than government spending?
Say that the surplus is either hoarded in the government's gold supply or that the
money is liquidated through deflation.
Thus assume that $1 million is taken from the betel nut industry and only $600,000 is
spent on paper.
In this case, the larger burden is that of taxation, which pays not only for the extracted
paper but also for the hoarded or destroyed money.
While the government extracts only $600,000 worth of resources from the economy, the betel
nut industry loses $1 million of potential resources, and this loss should not be forgotten
in toting up the burdens imposed by the government's budgetary process.
In short, when government expenditures and receipts differ, the fiscal burden on society
may be very approximately gauged by whichever is the greater total.
Since taxation cannot really be uniform, the government in its budgetary process of tax
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.
Income there arises naturally and smoothly out of the market processes of production
and exchange, thus the very concept of distribution as something separate from production and
exchange can arise only from the government's binary intervention.
It is often charged, for example, that the free market maximizes the utility of all and
and the Satisfactions of All Consumers only given a certain existing distribution of income.
But this common fallacy is incorrect.
There is no assumed distribution on the free market separate from the voluntary activities
of every individual's production and exchange.
The only given on the free market is the property right of every man in his own person and in
The resources which he finds, produces or creates, or which he obtains in voluntary
exchange for his products or as a gift from their producers.
The binary intervention of the government's budget, on the other hand, impairs this property
right of everyone in his own product, and creates the separate process and the problem
of distribution.
No longer do income and wealth flow purely from service rendered on the market, they
now flow to special privilege created by the state and away from those specially burdened
by the state.
There are many economists who regard the free market as only being free of triangular interference.
Such binary interference as taxation is not considered intervention in the purity of the
free market.
The economists of the Chicago School, headed by Frank H. Knight, have been particularly
adept at splitting man's economic activity and confining the market to a narrow compass.
They can thus favor the free market because they oppose such triangular interventions
as price control, while advocating drastic binary interventions in taxes and subsidies
to redistribute the income determined by that market.
In short, the market is to be left free in one sphere, while being subject to perpetual
harassment and reshuffling by outside coercion.
This concept assumes that man is fragmented, that the market man is not concerned with
what happens to himself as a subject to government man.
This is purely an impermissible myth, which we might call the tax illusion, the idea that
people do not consider what they earn after taxes, but only before taxes.
In short, if A earns $9,000 a year on the market, B $5,000 and C $1,000 and the government
decides to keep redistributing the incomes so that each earns $5,000, the individuals,
apprised of this, are not going to keep foolishly assuming that they are still earning what
Thus we see that the government budgetary process is a coercive shift of resources and
incomes from producers on the market to non-producers.
It is also a coercive interference with the free choices of individuals by those constituting
the government.
Later, we shall analyze the nature and consequences of government spending in more detail.
At this time, let us emphasize the important point that government cannot be in any way
a fountain of resources.
All that it spends, all that it distributes in largesse, it must first acquire in revenue.
That is, it must first extract from the private sector.
The great bulk of the revenues of government, the very nub of its power and its essence,
is taxation, to which we turn in the next section.
Another method is inflation, the creation of new money.
A third method is borrowing from the public.
A fourth method, revenue from sale of governmental goods or services, is a peculiar form of taxation.
At the very least, to acquire the original assets for this business, taxation is needed.