Chapter 4. Binary Intervention. Taxation.
1. Introduction. Government Revenues and Expenditures.
An interventionist agency such as the government must spend funds.
In the monetary economy, this means spending money.
This money can be derived only from revenues or income.
The bulk of the revenue, and the reason the agency is called interventionary, must come from two sources, in the case of the government, taxation and inflation.
Taxation is a coerced levy that the government extracts from the populace.
Inflation is the basically fraudulent issue of pseudo-warehouse receipts for money, or new money.
Inflation, which poses special problems of its own, has been dealt with elsewhere.
This chapter focuses on taxation.
We are discussing the government for the most part since empirically it is the prime organization
for coercive intervention.
However, our analysis will actually apply to all coercive organizations.
If governments budget their revenues and expenditures, so must criminals.
Where a government levies taxes, criminals extract their own brand of coerced levies.
Where a government issues fraudulent or fiat money, criminals may counterfeit.
It should be understood that, praxeologically, there is no difference between the nature
The Government imposes its jurisdiction over a wide area, and usually operates unmolested.
Criminals, on the contrary, usually impose their jurisdiction on a narrow area only,
and generally eke out a precarious existence.
Even this distinction does not always hold true, however.
In many parts of many countries, bandit groups win the passive consent of the majority in
a particular area, and establish what amounts to effective governments, or states, within
in the Area.
The difference between a government and a criminal band, then, is a matter of degree
rather than kind, and the two often shade into each other.
Thus, a defeated government in a civil war may often take on the status of a bandit group
clinging to a small area of the country, and there is no praxeological difference between
the two.
The striking title of Mr. Frank Chatarov's pamphlet, Taxation is Robbery, is therefore
praxeologically accurate.
As Chatarov says, a historical study of taxation leads inevitably to loot, tribute, ransom,
the economic purpose of conquest.
The barons who put up toll gates along the Rhine were tax gatherers.
So were the gangs who protected, for a forced fee, the caravans going to market.
The Danes, who regularly invited themselves into England and remained as unwanted guests
until paid off, called it dannegeld.
For a long time, that remained the basis of English property taxes.
The conquering Romans introduced the idea that what they collected from subject peoples was
was merely just payment for maintaining law and order.
For a long time the Norman conquerors collected catch as catch can tribute from the English,
but when by natural processes an amalgam of the two peoples resulted in a nation, the
collections were regularized in custom and law and were called taxes.
Some writers maintain that only government expenditures, not revenues, constitute a burden
on the rest of society.
But the government cannot spend money until it obtains it as revenue, whether that revenue
comes from taxation, inflation, or borrowing from the public.
On the other hand, all revenue is spent.
Revenue can differ from expenditure only in the rare case of deflation of part of the
government funds, or government hoarding, if the standard is purely specie.
In that case, as we shall see, revenues are not a full burden, but government expenditures
are more burdensome than their monetary amount would indicate, because the real proportion
of Government Expenditures to the National Income will have increased.
For the rest of this chapter we shall assume that there is no such fiscal deflation and
therefore that every increase in taxes is matched by an increase in government expenditures.
2.
The Burdens and Benefits of Taxation and Expenditures
As John C. Calhoun brilliantly pointed out, there are two groups of individuals in society,
the taxpayers and the tax consumers, those who are burdened by taxes and those who benefit.
Who is burdened by taxation?
The direct or immediate answer is those who pay taxes.
We shall postpone the questions of the shifting of tax burdens to a later section.
Who benefits from taxation?
It is clear that the primary beneficiaries are those who live full-time off the proceeds.
For example, the politicians and the bureaucracy.
These are the full-time rulers.
It should be clear that regardless of legal forms, the bureaucrats pay no taxes.
They consume taxes.
If a bureaucrat receives a salary of $5,000 a year and pays $1,000 in taxes to the government,
it is quite obvious that he is simply receiving a salary of $4,000 and pays no taxes at all.
The heads of the government have simply chosen a complex and misleading accounting device
to make it appear that he pays taxes in the same way as any other men making the same
income.
The UN's arrangement, whereby all its employees are exempt from any income taxation, is far
more candid.
All beneficiaries of government revenue are those in society subsidized by the government.
These are the part-time rulers.
Generally, a state cannot win the passive support of a majority unless it supplements
its full-time employees, that is, its members, with subsidized adherents.
The hiring of bureaucrats and the subsidizing of others are essential in order to win active
1. Active support from a large group of the populace.
Once a state can cement a large group of active adherents to its cause, it can count on the
ignorance and apathy of the remainder of the public to win passive adherents from a majority
and to reduce any active opposition to a bare minimum.
The problem of the diffusion of expenditures and benefits is, however, more complicated
when the government spends money for its various activities and enterprises.
In this case, it acts always as a consumer of resources, for example, military expenditures,
public works, etc.
And it puts tax money into circulation by spending it on factors of production.
Suppose, to make the illustration clearer, the government taxes the codfish industry
and uses the proceeds of this tax to spend money on armaments.
The first receiver of the money is the armament manufacturer, who pays it out to his suppliers
and the owners of original factors, etc.
In the meantime, the codfish industry, stripped of capital, reduces its demand for factors.
In both cases, the burdens and benefits diffuse themselves throughout the economy.
Consumer demand, by virtue of state coercion, has shifted from codfish to armaments.
The result imposes short-run losses on the codfish industry and those who supply it,
and short-run gains on the armaments industry and those who supply it.
As the ripples of expenditure are pushed further and further back, the impact dies out, having
been strongest at the points of first contact, that is, the codfish and the armaments industries.
In the long run, however, all firms and all industries earn a uniform return, and any
gains or losses are imputed back to original factors.
The non-specific or convertible factors will tend to shift out of the codfish and into
the armaments industry.
The shift will not necessarily or even probably be from the codfish to the armament industry
directly.
Rather, factors will shift from the codfish to other related industries and to the armament
industry from its related lines.
The purely specific or non-convertible original factors will remain to bear the full burden
of the Loss, and to reap the gain respectively.
Even the non-specific factors will bear losses and reap gains, though to a lesser degree.
The major effect of the change, however, will eventually be felt by the owners of the specific
original factors, largely the landowners of the two industries.
Taxes are compatible with equilibrium, and therefore we may trace the long-run effects
of a tax and expenditure in this manner.
The diffusion effect of inflation differs from that of taxation in two ways.
A, it is not compatible with a long-run equilibrium, and B, the new money always benefits the first
Most half of the money receivers and penalizes the last half.
Taxation diffusion has the same effect at first, but shifting alters incidence in the
final reckoning.
In the short run, of course, entrepreneurs suffer losses and earn profits because of
the shift in demand.
All government expenditure for resources is a form of consumption expenditure in the sense
that the money is spent on various items because the government officials so decree.
The purchases may therefore be called the consumption expenditure of government officials.
It is true that the officials do not consume the product directly, but their wish has altered
the Production Pattern to Make These Goods, and therefore they may be called its consumers.
On the other hand, since the officials do not usually consume the products directly,
they often believe that they are acting on behalf of the consumers, hence their choices
are liable to an enormous degree of error.
Alec Nov has pointed out that if these choices were simply the consumer preferences of the
government planners themselves, they would not, as they do now, realize that they can
and do make grievous errors.
Thus, the choices made by government officials do not even possess the virtue of satisfying
their own consumption preferences.
As will be seen, all talk of government investment is fallacious.
Taxation always has a two-fold effect.
One, it distorts the allocation of resources in the society so that consumers can no longer
most efficiently satisfy their wants.
And two, for the first time, it severs distribution from production.
brings the problem of distribution into being.
The first point is clear.
Government coerces consumers into giving up part of their income to the state, which
then bids away resources from these same consumers.
Hence, the consumers are burdened, their standard of living is lowered, and the allocation of
of Resources is distorted away from consumer satisfaction toward the satisfaction of the
ends of the government.
More detailed analysis of the distorting effects of different types of taxes will be presented
later.
The essential point is that the object of many economists' quest, a neutral tax, that
A tax that will leave the market exactly the same as it was without taxation must always be a chimera.
No tax can be truly neutral. Every one will cause distortion.
Neutrality can be achieved only on a purely free market where governmental revenues are obtained by voluntary purchase only.
Two other types of revenue are consonant with neutrality and a purely free market, fines on criminals and the sale of products of prison labor.
Both are methods for making the criminals pay the cost of their own apprehension.
It is often stated that capitalism has solved the problem of production
and that the state must now intervene to solve the problem of distribution.
A more clearly erroneous formulation would be difficult to conceive,
for the problem of production will never be solved until we are all in the Garden of Eden.
Furthermore, there is no problem of distribution on the free market.
In fact, there is no distribution at all.
at all.
On the free market, a man's monetary assets have been acquired precisely because his or
his predecessor's services have been purchased by others.
There is no distributional process apart from the production and exchange of the market.
Hence, the very concept of distribution as something separate becomes meaningless.
Since the free market process benefits all participants on the market and increases social
utility, it follows directly that the distributional results of the free market, the pattern of
income and wealth, also increases social utility and, in fact, maximizes it at any given time.
When the government takes from Peter and gives to Paul, it then creates a separate distribution
process and a problem of distribution.
No longer do income and wealth flow purely from service rendered on the market.
They now flow from special privilege created by the coercion of the state.
Both is now distributed to exploiters at the expense of the exploited.
It might be objected that while bureaucrats are solely exploiters and not producers, other
subsidized groups may also be producers as well.
Their exploitation extends, however, to the degree that they are net tax consumers rather
than taxpayers.
Where other productive activities are beside the point.
The crucial point is that the extent of the distortion of resources, and of the state's
plunder of producers, is in direct proportion to the level of taxation and government expenditures
in the economy, as compared with the level of private income and wealth.
It is a major contention of our analysis, in contrast to many other discussions of the
subject, that by far the most important impact of taxation results not so much from the type
of tax as from its amount.
It is the total level of taxation, of government income, compared with the income of the private
Sector that is the most important consideration.
Far too much significance has been attached in the literature to the type of tax, to whether
it is an income tax, progressive or proportional, sales tax, spending tax, etc.
Though important, this is subordinate to the significance of the total level of taxation.
3.
The Incidents and Effects of Taxation
Part 1 Taxes on Incomes
A. The General Sales Tax and the Laws of Incidence
One of the oldest problems connected with taxation is, who pays the tax?
It would seem that the answer is clear-cut, since the government knows on whom it levies
a tax.
The problem, however, is not who pays the tax immediately, but who pays it in the long
run.
That is, whether or not the tax can be shifted from the immediate taxpayer to somebody else.
Shifting occurs if the immediate taxpayer is able to raise his selling price to cover
the tax, thus shifting the tax to the buyer.
Or if he is able to lower the buying price of something he buys, thus shifting the tax
to some other seller.
In addition to this problem of the incidence of taxation, there is the problem of analyzing
other economic effects of various types and amounts of taxes.
The first law of incidence can be laid down immediately, and it is a rather radical one.
No tax can be shifted forward.
In other words, no tax can be shifted from seller to buyer and on to the ultimate consumer.
We shall see how this applies specifically to excise and sales taxes, which are commonly
thought to be shifted forward.
It is generally considered that any tax on production or sales increases the cost of
of Production and therefore is passed on as an increase in price to the consumer.
Prices, however, are never determined by costs of production, but rather the reverse is true.
The price of a good is determined by its total stock in existence and the demand schedule
for it on the market.
But the demand schedule is not affected at all by the tax.
The selling price is set by any firm at the maximum net revenue point, and any higher
price, given the demand schedule, will simply decrease net revenue.
A tax, therefore, cannot be passed on to the consumer.
It is true that a tax can be shifted forward in a sense, if the tax causes the supply of
of the Good to Decrease and Therefore the Price to Rise on the Market.
This can hardly be called shifting per se, however, for shifting implies that the tax
is passed on with little or no trouble to the producer.
If some producers must go out of business in order for the tax to be shifted, it is
is hardly shifting in the proper sense, but should be placed in the category of other
effects of taxation.
A general sales tax is the classic example of a tax on producers that is believed to
be shifted forward.
The government, let us say, imposes a 20% tax on all sales at retail.
We shall assume that the tax can be equally well enforced in all branches of sales.
Usually, of course, it cannot, and the result will be equivalent to a specific excise tax
on some branches of sales, but not on others.
To most people, it seems obvious that the business will simply add 20% to their selling
The problem is hardly that simple, however.
In fact, as we have seen, there is no reason whatever to believe that prices can be raised
at all.
Prices are already at the point of maximum net revenue, the stock has not been decreased,
and demand schedules have not changed.
Therefore, prices cannot be increased.
Furthermore, if we look at the general array of prices, these are determined by the supply
of and the demand for money.
For the array of prices to rise, there must be an increase in the supply of money, a decrease
in the schedule of the demand for money, or both.
Yet neither of these alternatives has occurred.
The demand for money to hold has not decreased, the supply of goods available for money has
not declined, and the supply of money has remained constant.
There is no possible way that a general price increase can be obtained.
Whereas a partial excise tax will eventually cause a drop in supply and therefore a rise
is in the price of the product, there is no way by which resources can escape a general
tax except into idleness.
Since as we shall see, a sales tax is a tax on incomes, the rise in the opportunity cost
of leisure may push some workers into idleness and thereby lower the quantity of goods produced.
To this tenuous extent, prices will rise.
It should be quite evident that if businesses were able to pass tax increases along to the
consumer in the form of higher prices, they would have raised these prices already, without
waiting for the spur of a tax increase.
Businesses do not deliberately peg along at the lowest selling prices they can find.
If the state of demand had permitted higher prices, firms would have taken advantage of
this fact long before.
It might be objected that a sales tax increase is general, and therefore that all the firms
together can shift the tax.
Each firm, however, follows the state of the demand for its own product, and none of these
demands has changed.
A tax increase does nothing to make higher prices more profitable.
The myth that a sales tax can be shifted forward is comparable to the myth that a general union-imposed
wage increase can be shifted forward to higher prices, thereby causing inflation.
There is no way that the general array of prices can rise, and the only result of such
a wage increase will be mass unemployment.
Of course, if the money supply is increased and credit expanded, prices can be raised
so that money wages are no longer above their discounted marginal value products.
Many people are misled by the fact that the price the consumer pays must necessarily include
the tax.
When someone goes to a movie and sees prominently posted the information that the $1 admission
covers a price of 85 cents and a tax of 15 cents, he tends to conclude that the tax has
simply been added on to the price.
But $1 is the price, not 85 cents, the latter sum being the income accruing to the firm
after taxes.
This income might well have been reduced to allow for payment of taxes.
In fact, this is precisely the effect of a general sales tax.
Its immediate impact lowers the gross revenue of firms by the amount of the tax.
In the long run, of course, firms cannot pay the tax, for their loss in gross revenue is
imputed back to interest income by capitalists and to wages and rents earned by original
factors, labor and ground land.
A decrease in the gross revenue of retail firms is reflected back to a decreased demand for
the products of all the higher order firms.
All the firms, however, earn in the long run a pure uniform interest return.
Here a difference arises between a general sales tax and, say, a corporate income tax.
There has been no change in time preference schedules or other components of the interest
rate.
While an income tax compels a lower percent interest return, a sales tax can and will
be shifted completely from investment and back to the original factors.
The result of a general sales tax is a general reduction in the net revenue accruing to original
The sales tax has been shifted backwards to original factor returns.
No longer does every original factor of production earn its discounted marginal value product.
Now original factors earn less than their DMVPs, the reduction consisting of the sales
It is necessary now to integrate this analysis of the incidence of a general sales tax with
our previous general analysis of the benefits and burdens of taxation.
This is accomplished by remembering that the proceeds of taxation are, in turn, spent by
the government.
If the government does not spend all of its revenue, then deflation is added to the impact
of taxation.
Whether the government spends the money for resources for its own activities, or simply
transfers the money to people it subsidizes, the result is to shift consumption and investment
demand from private hands to the government, or to government-supported individuals, by
by the amount of the tax revenue.
In this case, the tax has been ultimately levied on the incomes of original factors
and the money transferred from their hands to the government.
The income of the government and or those it subsidizes has been increased at the expense
of those taxed, and therefore consumption and investment demands on the market have
have been shifted from the latter to the former by the amount of the tax.
As a consequence, the value of the money unit will remain unchanged, barring a difference
in demands for money between the taxpayers and the tax consumers.
But the array of prices will shift in accordance with the shift in demands.
Thus, if the market has been spending heavily on clothing, and the government uses the revenue
mostly for the purchase of arms, there will be a fall in the price of clothes, a rise
in the price of arms, and a tendency for non-specific factors to shift out of clothing and into
the production of armaments.
As a result, there will not be, as might be assumed, a proportional 20% fall in the incomes
of all original factors as a result of a 20% general sales tax.
Specific factors in industries that have lost business as a result of the shift from private
to governmental demand will lose proportionately more in income.
Non-specific factors in industries gaining in demand will lose proportionately less, and
some may gain so much as to gain absolutely as a result of the change.
Non-specific factors will not be affected as much proportionately, but they too will
lose and gain according to the difference that the concrete shift in demand makes in
and their marginal value productivity.
The knowledge that taxes can never be shifted forward is a consequence of adhering to the
Austrian analysis of value, that is, that prices are determined by ultimate demands
for stock, and not in any sense by the cost of production.
Unhappily, all previous discussions of the incidence of taxation have been marred by
hangovers of classical cost-of-production theory, and the failure to adopt a consistent Austrian
approach. The Austrian economists themselves never really applied their doctrines to the
theory of tax incidence, so that this discussion breaks new ground.
The shifting forward doctrine has actually been carried to its logical and absurd conclusion that producers shift taxes to consumers, and consumers in turn can shift them to their employers, and so on ad infinitum, with no one really paying any tax at all.
It should be carefully noted that the general sales tax is a conspicuous example of failure
to tax consumption.
It is commonly supposed that a sales tax penalizes consumption rather than income or capital.
But we find that the sales tax reduces not just consumption but the incomes of original
factors.
The general sales tax is an income tax, albeit a rather haphazard one, since there is no
way that its impact on income classes can be made uniform.
Many right-wing economists have advocated general sales taxation as opposed to income
taxation on the ground that the former taxes consumption, but not savings investment.
Many left-wing economists have opposed sales taxation for the same reason.
Both are mistaken.
The sales tax is an income tax, though of more haphazard and uncertain incidence.
The major effect of the general sales tax will be that of the income tax, to reduce
the consumption and the savings investment of the taxpayers.
Mr. Frank Chatarov, in his The Income Tax, Root of All Evil, fails to indicate what other
type of tax would be better from a free market point of view than the income tax.
It will be clear from our discussion that there are few taxes indeed that will not be
as bad as the income tax from the viewpoint of an advocate of the free market.
Certainly, sales or excise taxation will not fill the bill.
Chatarov, furthermore, is surely wrong when he terms income and inheritance taxes unique
denials of the right of individual property.
Any tax whatever infringes on property rights, and there is nothing in an indirect tax which
makes that infringement any less clear.
It is true that an income tax forces the subject to keep records and disclose his personal
dealings, thus imposing a further loss in his utility.
The sales tax, however, also forces record keeping.
The difference, again, is one of degree rather than of kind, for here the extent of directness
covers only retail storekeepers instead of the bulk of the population.
In fact, since, as we shall see, the income tax by its nature falls more heavily on savings
investment than on consumption, we reach the paradoxical and important conclusion that
a tax on consumption will also fall more heavily on savings investment in its ultimate incidence.
B. Partial Excise Taxes, Other Production Taxes
The partial excise tax is a sales tax levied on some, rather than all, commodities.
The chief distinction between this and the general sales tax is that the latter does
not in itself distort productive allocations on the market, since a tax is levied proportionately
on the sale of all final products.
A partial excise, on the other hand, penalizes certain lines of production.
The general sales tax, of course, distorts market allocations insofar as government
expenditures from the proceeds differ in structure from private demands in the absence
of the tax.
The excise tax has this effect, too, and, in addition, penalizes the particular industry
taxed.
The tax cannot be shifted forward, but tends to be shifted backward to the factors working
in the industry.
Now, however, the tax exerts pressure on non-specific factors and entrepreneurs to leave the taxed
Taxed Industry and enter other, non-taxed industries.
During the transition period, the tax may well be added to cost.
As the price, however, cannot be directly increased, the marginal firms in this industry
will be driven out of business and will seek better opportunities elsewhere.
The exodus of non-specific factors, and perhaps firms from the taxed industry, reduces the
This reduction in stock or supply will raise the market price of the good, given the consumer's demand schedule.
Thus, there is a sort of indirect shifting in the sense that the price of the good to consumers will ultimately increase.
However, as we have stated, it is not appropriate to call this shifting, a term better reserved for an effortless direct passing on of a tax in the price.
Everyone in the market suffers as a result of an excise tax.
Tax.
Non-specific factors must shift to fields of lower income.
Since the discounted marginal value product is lower there, specific factors are hit particularly
hard and consumers suffer as the allocations of factors and the price structure are distorted
in comparison with what would have satisfied their desires.
The supply of factors in the taxed industries becomes excessively low, and the selling price
in these industries too high, while the supply of factors in other industries becomes excessively
large and their product prices too low.
In addition to those specific effects, the excise tax also has the same general effect
and the cost of production is not something fixed but is in itself determined by the selling price.
Most important, any decrease in the stock will raise the market price and any increase in the stock will lower the price
regardless of the elasticity of demand for the product.
Elasticity of demand is a topic that warrants only a relatively minor role in economic theory.
Perhaps the reason for the undeserved popularity of the elasticity concept
is that economists need to employ it in their vain search for quantitative laws and measurements in economics.
In sum, an excise tax, A, injures consumers in the same way that all taxes do by shifting resources and demands from private consumers to the state, and B, injures consumers and producers in its own particular way by distorting market allocations, prices and factor revenues.
But, C, cannot be considered a tax on consumption in the sense that the tax is shifted to consumers.
The excise tax is also a tax on incomes, except that in this case the effect is not general
because the impact falls most heavily on the factors specific to the taxed industry.
Any partial tax on production will have effects similar to an excise tax.
A license tax imposed on an industry, for example, granting a monopolistic privilege
to firms with a large amount of capital, will restrict the supply of the product and raise
the price.
Factors and pricing will be misallocated, as in an excise tax.
In contrast to the latter, however, the indirect grant of monopolistic privilege will benefit
the specific quasi-monopolized factors that are able to remain in the industry.
C. General Effects of Income Taxation
In the dynamic real economy, money income consists of wages, ground rents, interest
and Profits, Counterbalanced by Losses, Ground Rents are also capitalized on the market so
that income from rents is resolvable into interest and profit minus losses.
The income tax is designed to tax all such net income.
We have seen that sales and excise taxes are really taxes on some original factor incomes.
This has been generally ignored, and perhaps one reason is that people are accustomed to
thinking of income taxation as being uniformly levied on all incomes of the same amount.
Later, we shall see that the uniformity of such a levy has been widely upheld as an important
canon of justice for taxation.
Actually, no such uniformity does or need exist.
Tax size and sales taxes, as we have seen, are not uniformly levied, but are imposed
on some income receivers and not others of the same income class.
It must be recognized that the official income tax, the tax that is generally known as the
income tax, is by no means the only form in which income is or can be taxed by the government.
Even the official tax is hardly uniform, being interlarded with extra burdens and exemptions.
An income tax cannot be shifted to anyone else.
The taxpayer himself bears the burden.
He earns profits from entrepreneurial activity, interest from time preference, and other income
Income from marginal productivity and none can be increased to cover the tax.
Income taxation reduces every taxpayer's money income and real income, and hence his
standard of living.
His income from working is more expensive and leisure cheaper, so that he will tend
to work less.
and the Human Standard of Living in the form of exchangeable goods will decline.
In rebuttal, much has been made of the fact that every man's marginal utility of money
rises as his money assets fall, and therefore that there may be a rise in the marginal utility
of the reduced income obtainable from his current expenditure of labor.
It is true, in other words, that the same labor now earns every man less money.
But this very reduction in money income may also raise the marginal utility of a unit
of money to the extent that the marginal utility of his total income will be raised and he
will be induced to work harder as a result of the income tax.
This may very well be true in some cases, and there is nothing mysterious or contrary
to economic analysis in such an event.
However, it is hardly a blessing for the man or for society, for if more work is expended,
leisure is lost, and people's standards of living are lower because of this coerced
loss.
In the free market, in short, individuals are always balancing their money income or
real income in exchangeable goods against their real income in the form of leisure activities.
Both are basic components of the standard of living.
The greater their exchangeable goods income, in fact, the higher will be their marginal
It is not surprising, therefore, that a coerced lower income may force individuals to work
harder.
Whichever the effect, the tax lowers the standard of living of the taxpayers, either depriving
In addition to penalizing work relative to leisure, an income tax also penalizes work for money as against work for a return in kind.
Obviously, a relative advantage is conferred on work done for a non-monetary reward.
Working women are penalized as compared with housewives.
In short, the income tax tends to bring about a reduction in specialization and a breakdown
of the market, and hence a retrogression in living standards.
Make the income tax high enough and the market will disintegrate altogether, and primitive
economic conditions will prevail.
The income tax confiscates a certain portion of a person's income, leaving him free to
allocate the remainder between consumption and investment.
It might be thought that since we may assume time preference schedules as given, the proportion
of Consumption to Savings Investment and the pure interest rate will remain unaffected
by the income tax.
But this is not so.
For the taxpayer's real income and the value of his monetary assets have been lowered.
The lower the level of a man's real monetary assets, the higher will his time preference
How is an individual taxpayer's time preference schedule related to his monetary assets?
Let us say that the government levies an income tax, reducing his initial monetary assets
at the start of his spending period.
His effective time preference rate is now higher.
We have seen that an individual's real as well as nominal money assets must decline in order
for this result to take place.
If there is deflation, the value of the monetary unit will increase roughly in proportion and,
in the long run, time preference ratios, Ceteris Paribus, will not be changed.
In the case of income taxation, however, there will be no change in the value of the monetary
unit since the government will spend the proceeds of taxation.
As a result, the taxpayers' real as well as nominal money assets decline and decline
to the same extent.
It might be objected that the government officials or those subsidized receive additional money
and the fall in their time preference ratios may well offset or balance the rise in the rate from the taxpayer's side.
It could not be concluded, then, that the social rate of time preference will rise, and savings investment particularly decrease.
Government expenditures, however, constitute diversion of resources from private to government purposes,
Since the government, by definition, desires this diversion, this is a consumption expenditure
by the government.
These expenditures are commanded by the government, and not by the free action of individuals.
They therefore may satisfy the utility, or are expected to satisfy the utility, only of
the government officials.
And we cannot be sure that anyone else's is satisfied.
The Keynesians, on the contrary, classify all government resource-using expenditure
as investment on the ground that these, like investment expenditures, are independent and
not passively tied to income by means of a psychological function.
The reduction in income and therefore in consumption and savings investment imposed on the taxpayers
will therefore be counterbalanced by government consumption expenditure.
As for the transfer expenditures made by the government, including the salaries of bureaucrats
and subsidies to privileged groups, it is true that some of this will be saved and invested.
These investments, however, will not represent the voluntary desires of consumers, but rather
investments in fields of production not desired by the producing consumers.
They represent the desires not of the producing consumers on the free market, but of exploiting
consumers fed by the unilateral coercion of the State.
Once let the tax be eliminated and the producers are free to earn and consume again.
The new investments called forth by the demands of the specially privileged will turn out
to be malinvestments.
At any rate, the amount consumed by the government ensures that the effect of income taxation
will be to raise time preference ratios and to reduce saving and investment.
Some economists maintain that income taxation reduces saving and investment in the society
in a third way.
They assert that income taxation, by its very nature, imposes a double tax on savings investment
as against consumption.
All is used in the sense of two instances, not arithmetically twice.
The reasoning runs as follows.
Saving and consumption are not really symmetrical.
All saving is directed toward enjoying more consumption in the future.
Otherwise, there would be no point at all in saving.
Saving is abstaining from possible present consumption in return for the expectation
of Increased Consumption at Sometime in the Future.
No one wants capital goods for their own sake.
Although there is much merit in Professor John F. Dew's critique of this general position,
he is incorrect in believing that people may own capital for its own sake.
If people, because of the uncertainty of the future, wish to hold wealth for its service
Capital is far less marketable and is desired only for its fructification in consumers' goods and earnings from the sale of these goods.
Capital goods are only the embodiment of an increased consumption in the future.
Savings investment is Crusoe's building a stick to obtain more apples at a future date.
It fructifies in increased consumption later.
Hence the imposition of an income tax excessively penalizes savings investment as against consumption.
These economists generally go on to advocate taxation of consumption alone
alone as the only real income.
This line of reasoning is correct in its explanation of the investment consumption process.
It suffers, however, from one grave defect.
It is irrelevant to problems of taxation.
It is true that saving is a fructifying agent, but the point is that everyone knows this.
That is precisely why people save.
Yet, even though they know that saving is a fructifying agent, they do not save all
their income.
Why?
Because of their time preference for present consumption.
Every individual, given his current income and value scales, allocates that income in
in the most desired proportion among consumption, investment and addition to his cash balance.
Any other allocation would satisfy his desires to a lesser extent and lower his position
on his value scale.
There is therefore no reason here to say that an income tax especially penalizes savings
investment.
It penalizes the individual's entire standard of living, encompassing present consumption,
future consumption, and his cash balance.
It does not, per se, penalize saving any more than it does the other avenues of income allocation.
There is another way, however, in which an income tax does, in fact, levy a particular
burden on saving.
For the interest return on savings investment, like all other earnings, is subject to the
income tax.
The net interest rate received, therefore, is lower than the free market rate.
The return is not consonant with free market time preferences.
Instead, the imposed lower return induces people to bring their savings investment into
line with the reduced return.
In short, the marginal savings and investments now not profitable at the lower rate will
not be made.
The argument cited earlier, based on the work of John Stuart Mill and Irving Fisher, is
an example of a curious tendency among economists generally devoted to the free market to be
be unwilling to consider its ratio of consumption to investment allocations as optimal.
The economic case for the free market is that market allocations tend at all points to be
optimal with respect to consumer desires.
The economists who favor the free market recognize this in most areas of the economy, but for
for some reason show a predilection for and special tenderness toward savings investment
as against consumption.
They tend to feel that a tax on saving is far more of an invasion of the free market
than a tax on consumption.
It is true that saving embodies future consumption, but people voluntarily choose between present
and Future Consumption in accordance with their time preferences.
And this voluntary choice is their optimal choice.
Any tax levied, particularly on their consumption, therefore, is just as much a distortion and
invasion of the free market as a tax on their savings.
There is nothing, after all, especially sacred about savings.
They are simply the road to future consumption, but they are no more important than present
consumption, the allocation between the two being determined by the time preferences of
all individuals.
The economist who shows more concern for free market savings than he does for free market
consumption is implicitly advocating statist interference and a coerced distortion of
of Resource Allocation in favor of greater investment and lower consumption.
The free market advocate should oppose with equal fervor coerced distortion of the ratio
of consumption to investment in either direction.
Thus, one of the standard conservative arguments against progressive income taxation is that
savings would be taxed in greater proportion than consumption.
Many of these writers leave the reader with the inference that if present consumption were
taxed more heavily, everything would be alright.
Yet what is so worthy about future as against present consumption?
And what principle do these economists adopt that permits them to alter by force the voluntary
time preference ratios between present and future?
As a matter of fact, we have seen that income taxation by other roots tends to distort the
allocation of resources into more consumption and less savings investment, and we have seen
that attempts to tax consumption in the form of sales or production taxation must fail
and end as levies on incomes instead.
D. Particular Forms of Income Taxation
1. Taxes on Wages
A tax on wages is an income tax that cannot be shifted away from the wage earner. There
is no one to shift it to, especially not the employer, who always tends to earn a uniform
Interest Rate
In fact, there are indirect taxes on wages that are shifted to the wage earner in the
form of lower wage incomes.
An example is that part of social security or of unemployment compensation premiums levied
on the employer.
Most employees believe that they completely escape this part of the tax, which the employer
pays.
They are wholly mistaken.
The employer, as we have seen, cannot shift the tax forward to the consumer.
In fact, since the tax is levied in proportion to wages paid, the tax is shifted backward
wholly on the wage earners themselves.
The employer's part is simply a collected tax levied at the expense of a reduction of
of the Net Wages of the Employees 2. Corporate Income Taxation
Taxation of corporate net income imposes a double tax on the owners of corporations,
once on the official corporate income and once on the remaining distributed net income of the owners themselves.
The extra tax cannot be shifted forward onto the consumer.
Since it is levied on net income itself, it can hardly be shifted backward.
It has the effect of penalizing corporate income as opposed to income from other market forms, single ownership, partnerships, etc.,
thereby penalizing efficient forms of enterprise and encouraging the inefficient.
resources shift from the former to the latter until the expected rate of net
return is equalized throughout the economy at a lower level than originally
since interest return is forcibly lower than before the tax penalizes savings
and investment as well as an efficient market form some writers have pointed
out that the penalty lowers future consumption from what it would have been, reducing the
supply of goods and raising prices to consumers.
This can hardly be called shifting, however, but is rather a manifestation of the ultimate
effect of the tax in reducing consumer standards of living from the free market level.
The penalty or double taxation feature of corporate income taxes could be eliminated
only by abolishing the tax and treating any net incomes accruing to a corporation as pro-rata
income to its stockholder owners.
In other words, a corporation would be treated as a partnership and not, according to the
the absurd fiction that it is some sort of separate real entity functioning apart from
the actions of its actual owners.
Income accruing to the corporation obviously accrues pro rata to the owners.
Some writers have objected that the stockholders do not really receive the income on which
they would be taxed.
Let's suppose that the Star Corporation earns a net income of $100,000 in a certain period,
and that it has three stockholders, Jones with 40% of the stock, Smith holding 35% of
the stock, and Robinson owning 25%.
The majority stockholders, or their management representatives, decide to retain $60,000
is undistributed earnings in the firm while paying only $40,000 as dividends.
Under present law, Jones' net income from the Star Corporation is considered as $16,000,
Smith's as $14,000 and Robinson's as $10,000.
The corporation's is listed at $100,000.
Each of these entities is then taxed on these amounts.
Yet, since there is no real corporate entity separate from its owners, the incomes would
be more properly recorded as follows, Jones $40,000, Smith $35,000, Robinson $25,000.
The fact that these stockholders do not actually receive the money is no objection for what
What happens is the equivalent of someone's earning money yet keeping it on account without
bothering to draw it out and use it.
Interest that piles up in someone's savings bank account is considered as income and taxed
accordingly, and there is no reason why undistributed earnings should not be considered individual
income as well.
The fact that total corporate income is first taxed and then distributed as dividend income
to be taxed again encourages a further distortion of market investment and organization.
For this practice encourages stockholders to leave a greater proportion of their earnings
undistributed than they would have done in a free market.
These are frozen in, and either held or invested in an uneconomic fashion in relation to the
satisfaction of consumer wants.
To the reply that this at least fosters investment, there are two rejoinders.
One, that a distortion in favor of investment is as much a distortion of optimum market
Allocations as Anything Else, and 2, that not investment is encouraged, but rather frozen
investment by owners back into their original firms at the expense of mobile investment.
This distorts and renders inefficient the pattern and allocation of investment funds,
and tends to freeze them in the original firms, discouraging the diffusion of funds to
3. Excess Profit Taxation
This tax is generally levied on that part of business netting.
Income, dubbed EXCESS, which is greater than a base income in a previous period of time.
A penalty tax on EXCESS business income directly penalizes efficient adjustment of the economy.
The profit drive by entrepreneurs is the motive power that adjusts, estimates and coordinates
It's the economic system so as to maximize producer income in the service of maximizing
consumer satisfactions.
It is the process by which malinvestments are kept to a minimum and good forecasts encouraged
so as to arrange advanced production to be in close harmony with consumer desires at
the date when the final product appears on the market.
Attacking profits doubly disrupts and hampers the whole market adjustment process.
Such a tax penalizes efficient entrepreneurship.
Furthermore, it helps to freeze market patterns and entrepreneurial positions as they were
in some previous time period, thus distorting the economy more and more as time passes.
No economic justification can be found for attempting to freeze market patterns in the
mold of some previous period.
The greater the changes in economic data that have occurred, the more important it is not
to tax excess profits, or any form of excess revenue for that matter.
Otherwise, adaptation to the new conditions will be blocked just when rapid adjustment
is particularly required.
It is difficult to find attacks more indefensible from more points of view than this one.
4.
The Capital Gains Problem
Much discussion has raged over the question, are capital gains income?
It seems evident that they are. Indeed, capital gain is one of the leading forms of income.
In fact, capital gain is the same as profit. Those who desire uniformity of income pattern
taxation would therefore have to include capital gains, if all forms of monetary profit are
to be brought into the category of taxable income. It must not be inferred that the present
Author is an advocate of uniform taxation. Uniformity, in fact, will be sharply criticized
as an ideal impossible of attainment. An ethical goal absolutely impossible of attainment is
an absurd goal. To this extent, we may engage not in ethical exhortation, but in praxeological
Criticism of the Possibility of Realizing Certain Ethical Goals However, it is analytically
more convenient to treat various types of income taxation in relation to uniform treatment
of all income.
Using as an example the star corporation described earlier, let us consider time 1 to be the
The period just after the corporation has earned $100,000 net income and just before
it decides where to allocate this income.
In short, it is at a decision point in time.
It has earned a profit of $100,000.
For the sake of convenience, we are assuming that this income is pure profit and that interest
Interest income has already been disposed of. Only pure profit increases capital value,
for in the evenly rotating economy, there will be no net savings, and the interest income
will just pay for maintaining the capital income structure intact.
At time one, its capital value has therefore increased by $100,000. The stockholders have
have, in the aggregate, earned a capital gain of $100,000.
But this is the same as their aggregate profit.
Now the Star Corporation keeps $60,000 and distributes $40,000 in dividends.
And for the sake of simplicity, we shall assume that the stockholders consume this amount.
What is the situation at time 2?
After this allocation has taken place, in comparison with the situation prevailing originally,
say at time zero, we find that the capital value of the Star Corporation has increased
by $60,000.
This is unquestionably part of the income of the stockholders.
Yet, if uniform income taxation is desired, there is no need to levy a tax on it, for
Where it was already included in the $100,000 income of the stockholders subject to tax.
The stock market always tends toward an accurate reflection of the capital value of a firm.
One might think, therefore, that the quoted value of the firm's shares would increase,
in the aggregate, by $60,000.
In the dynamic world, however, the stock market reflects anticipations of future profit, and
therefore its values will diverge from the relatively ex-post accounting of the firm's
balance sheet.
Furthermore, entrepreneurship, in addition to profits and losses, will be reflected in
the valuations of the stock market as well as in business enterprises directly.
A firm may be making slim profits now, but a far-seeing entrepreneur will purchase stock
from more short-sighted ones.
A rise in price will net him a capital gain, and this is a reflection of his entrepreneurial
wisdom in directing capital.
Since it would be impossible administratively to identify the profits of the firm, it would
would be better from the point of view of uniform income taxation not to tax the business
income of corporate stockholders at all, but to tax a stockholder's capital gains instead.
Whatever gains the owners reap will be reflected in capital gains on their stock anyway, so
that taxation of the business income itself becomes unnecessary.
On the other hand, taxation of business income, while exempting capital gains, would exclude
from income the entrepreneurial gains reaped on the stock market.
In the case of partnerships and single enterprises that are not owned in shares of stock, the
business income of the owners would, of course, be taxed directly.
One of both business income, that is, profits accruing to stockholders, and capital gains
on stock, would impose a double tax on efficient entrepreneurs.
A genuinely uniform income tax, then, would not tax a stockholder's pro-rata business
income at all, but rather the capital gain from his shares of stock.
If business profits or capital gains are income subject to tax, then, of course, business
losses or capital losses are a negative income, deductible from other income earned by any
particular individual.
What of the problem of land and housing?
Here the same situation obtains.
Governments earn income annually, and this may be included in their net income as business profits.
However, real estate, while not given to stock ownership, also has a flourishing capital market.
Land is capitalized, and capital values increase or dwindle on the capital market.
It is clear that once again the government has an alternative if it desires to impose
Uniform Personal Income Taxes
Either it can impose the tax on net profits from real estate, or it can forgo this and
impose a tax on increases in the capital values of real estate.
If it does the former, it will omit the entrepreneurial gains and losses made on the capital market,
the regulator and anticipator of investment and demand.
If it does both, it imposes a double tax on this form of business.
The best solution, once again within the context of a uniform income tax, is to impose a tax
on the capital gain minus the capital loss on the land values.
It must be emphasized that a capital gains tax is truly an income tax only when it is
is levied on accrued rather than on realized capital gains or losses.
In other words, if a man's capital assets have increased during a certain period, from
300 ounces of gold to 400 ounces, his income is 100 ounces, whether or not he has sold
the asset to take the profit.
In any period, his earnings consist not simply in what he may use for spending.
The situation is analogous to that of a corporation's undistributed profits, which, as we have seen,
must be included in each stockholder's accumulation of income.
Taxing realized gains and losses introduces great distortions into the economy.
It then becomes highly advantageous to investors never to sell their stock, but to hand it
down to future generations.
Any sale would require the old owner to pay the capital gains levy accumulated for an
entire period.
The effect is to freeze an investment in the hands of one person, and particularly of one
family, for generations.
The result is rigidity in the economy and failure of the hampered market to meet flexibly
the continual changes in data that always take place.
As time goes on, the distortive effects of the economic rigidity grow worse and worse.
Another serious hampering of the capital market results from the fact that, once the capital
For the capital gain is taken or realized, the income tax on this particular gain is
actually far higher and not uniform.
For the capital gains accrue over a long stretch of time and not simply at the point of sale,
but the income tax is based only on each year's realized income.
In other words, a man who realizes his gain in a certain year must pay a far bigger tax
in that year than would be justified by a tax on his actually acquired income during
the year.
Suppose, for example, that a man buys a capital asset at 50, and its market value increases
is by ten each year until he finally sells it for ninety in four years' time.
For three years his income of ten goes untaxed, while in the fourth year he is taxed on an
income of forty when his income was only ten.
The final tax therefore largely becomes one on accumulated capital rather than on income.
The incentive for keeping investment rigid, therefore, becomes even greater.
There are, of course, grave difficulties in any such tax on accrued capital gains, but,
as we shall see, there are many insuperable obstacles to any attempt to impose uniform
income taxes.
Estimates of market value would pose the greatest problem.
The rules are always simply conjectures, and there would be no way of knowing that the assessed value was the correct one.
Another insuperable difficulty arises from changes in the purchasing power of the monetary unit.
If the purchasing power has fallen in half, then a change in capital value of an asset from 50 to 100 does not represent a real capital gain.
It simply reflects the maintenance of real capital as nominal values double.
Clearly, a constant nominal value of capital when other prices and values double would reflect a high capital loss, a halving of real capital value.
To reflect gains or losses in income, then, a person's capital gain or loss would have
to be corrected for changes in the purchasing power of money.
Thus, a fall in purchasing power tends to result in the overstatement of business income,
and hence leads to a consumption of capital.
But if a man's capital gains or losses must be corrected for changes in the purchasing
power of money in order to state his true income for a certain period, what standards
can be used for such a correction?
For changes in purchasing power cannot be measured.
Any index used would be purely arbitrary.
Whichever method is adopted, therefore, uniformity in income taxation cannot be achieved because
an accurate measurement of income cannot be attained.
Another problem in levying a tax on accrued capital gains is that the income is not realized
in money directly.
Form taxation of income in kind, as well as of psychic income, faces insuperable problems,
as will be seen.
Just as there may be taxes on the imputed monetary equivalence of income in kind, however,
there may also be taxes on accrued capital gains.
Thus, to the controversial question, are capital gains income, the answer is emphatically yes, provided that 1. a correction is made for changes in the purchasing power of the monetary unit, and 2. the accrued, rather than the realized, capital gain is considered.
In fact, whenever businesses are owned by stockholders and bondholders, the gains on these stocks and bonds will provide a fuller guide to income earned than the actual net income of the firm.
If it is desired to tax incomes uniformly, then taxes would have to be levied on the former only.
to tax both would be to level a double tax on the same income.
Professor Harold M. Groves, while agreeing that capital gains are income, lists several
reasons for giving capital gains preferential treatment.
Almost all of them apply, however, to taxation on realized rather than on accrued capital
gains.
The only relevant case is the familiar one that capital gains and losses are not regularly
recurrent as are most other incomes.
But no income is regularly recurrent.
Profits and losses, of course, are volatile, being based on speculative entrepreneurship
and adjustments to changing conditions.
Yet no one contends that profits are not income.
All other income is flexible as well.
No one has a guaranteed income on the free market.
Everyone's resources are subject to change as conditions and the data of the market change.
That the division between income and capital gains is illusory is demonstrated by the confusion
Income Over the Classification of Author's Incomes
Is the income in one year resulting from five years writing of a book, income or an increase
in the capital worth of the author?
It should be evident that this entire distinction is valueless.
Irregular income poses the same problem as irregular realized capital gain.
The difficulty can be met in both cases by the suggested solution of averaging income
over several years and paying taxes annually on the average.
Capital gains are profits, and the real value of aggregate capital gains in society will
equal total aggregate profits.
A profit increases the capital worth of the owner, whereas a loss decreases it.
Moreover, there are no other sources from which real capital gains can come.
What of the savings of individuals?
Individual savings, to the extent that they do not add to cash balances, go into investments.
These purchases of capital lead to capital gains for stockholders.
Profits Savings Lead to Aggregate Capital Gains But it is also true that profits can
exist in the aggregate only when there is aggregate net saving in the economy.
Thus, aggregate pure profits, aggregate capital gains, and aggregate net savings all go hand
in hand in the economy.
That dissavings lead to aggregate pure losses and aggregate capital losses.
To sum up, if it is desired to tax uniformly, this goal will be analyzed critically later.
The correct procedure would be to consider capital gains as equivalent to income when
and to consider capital losses as negative income.
Some critics charge that it would be discriminatory to correct capital for changes in prices without
doing the same for income, but this objection misses the point.
If the desire is to tax income rather than accumulated capital, it is necessary to correct
for changes in the purchasing power of money.
For example, capital rather than pure income is being taxed during an inflation.
5.
Is a tax on consumption possible?
We have seen that attempts to tax consumption via sales and excise taxes are vain, and
that they inexorably result in a tax on incomes.
Irving Fisher has suggested an ingenious plan for a consumption tax, a direct tax on the
individual akin to the income tax, requiring annual returns, etc.
The base for the individual's tax, however, would be his income minus net additions to
his capital or cash balance, plus net subtractions from that capital for the period, that is,
his consumption spending.
The individual's consumption spending would then be taxed in the same way as his income
is now.
We have seen the fallacy in the Fisher argument that only a tax on consumption would be a
true income tax, and that the ordinary income tax constitutes a double tax on savings.
This argument places greater weight on savings than the market does, since the market knows
all about the fructifying power of savings and allocates its expenditures accordingly.
The problem we have to face here is this. Would such a tax as Fisher proposes actually have
the intended effect? Would it tax consumption only?
Let us consider a Mr. Jones with a yearly income of 100 gold ounces. During the year
Here he spends 90% or 90 ounces on consumption and saves 10% or 10 ounces.
If the government imposes a 20% income tax upon him, he must pay 20 ounces at the end
of the year.
Assuming that his time preference schedule remains the same, and setting aside the fact
Note that there will be an increased proportion spent on consumption because an individual
with fewer money assets has a higher time preference rate.
The ratio of his consumption to investment will still be 90 to 10.
Jones will now spend 72 ounces on consumption and 8 on investment.
Now suppose that instead of an income tax, the government levies a 20% annual tax on
consumption.
Fisher maintained that such a tax would be levied only on consumption.
But this is incorrect, since savings investment is based solely on the possibility of future
consumption.
Its future consumption will also be taxed in equilibrium at the same rate as present
consumption, it is evident that saving does not receive any special encouragement.
Neither does hoarding receive any special encouragement, since hoarding must finally
eventuate in consumption.
It is true that keeping cash balances itself yields a benefit, but the basis for such balances
Taxes is always the prospect of future consumption.
Even if it were desirable for the government to encourage saving at the expense of consumption,
taxing consumption would not do so.
Since future and present consumption will be taxed equally, there will be no shift in
favor of savings.
In fact, there will be a shift in favor of consumption, to the extent that a diminished
), the average amount of money causes an increase in the rate of preference for present goods.
Setting aside this shift, his loss of funds will cause him to reallocate and reduce his
savings as well as his consumption.
Any payment of funds to the government necessarily reduces the net income remaining to him, and
Since his time preference remains the same, he reduces his savings and his consumption
proportionately.
It will help to see how this works arithmetically.
We may use the following simple equation to sum up Jones' position.
Net income equals gross income minus tax.
Consumption equals 90% of net income.
Tax equals 20% of consumption. With gross income equal to 100, and solving for these
three equations, we get this result. Net income equals 85, tax equals 15, consumption
equals 76. We may now sum up what happened to Jones under an income tax and under a consumption
Tax. Under a 20% income tax, Joan's gross income was 100, his tax was 20, his net income was 80,
his consumption was 72, and his savings investment was 8. Under a 20% consumption tax,
We thus see this important truth.
A consumption tax is always shifted so as to become an income tax, though at a lower
rate.
In fact, the 20% consumption tax becomes equivalent to a 15% income tax.
This is a very important argument against the plan.
Fisher's attempt to tax consumption alone must fail.
The tax is shifted by the individual until it becomes an income tax, albeit at a lower
rate than the equivalent income tax.
Thus, the rather startling conclusion is reached in our analysis that there can be no tax on
consumption alone.
All consumption taxes resolve themselves in one way or another into taxes on incomes.
Of course, as is true of the direct consumption tax, the effect of the rate is discounted.
And here, perhaps, lies a clue to the relative predilection that free market economists have
shown toward consumption taxes.
Their charm, in the final analysis, consists in the discounting, in the fact that the same
rate in a consumption tax has the effect of a lower rate of income tax.
The tax burden on society and the market is lower.
In the same way, the charm of the sales tax lies in the fact that it cannot be progressive,
thus reducing the burden of income taxation on the upper groups.
This reduction of the tax burden may be a very commendable objective, but it should
be stated as such, and it should be realized that the problem lies not so much in the type
of Tax Levied, as in the overall burden of taxes on individuals in the society.
We must now modify our conclusions by admitting the case of dis-hoarding or dis-saving, which
we had ruled out of the discussion.
To the extent that dis-hoarding occurs, consumption is tapped rather than income, for the dis-saver
The Fisher tax would thus tap spending out of accumulated wealth, which would remain untaxed by ordinary income taxation.
4. The Incidents and Effects of Taxation
Part 2 Taxes on Accumulated Capital
In a sense, all taxes are taxes on capital. In order to pay a tax, a man must save the money.
This is a universal rule. If the saving took place in advance, then the tax reduces the capital invested in the society.
If the saving did not take place in advance, then we may say that the tax reduced potential saving.
Potential saving is hardly the same as accumulated capital, however, and we may therefore consider a tax on current income as separate from a tax on capital.
and Capital.
Even if the individual were forced to save to pay the tax, the saving is current, just
as the income is current, and therefore we may make the distinction between taxes on
current saving and current incomes and taxes on accumulated capital from past periods.
In fact, since there can be no consumption taxes except where there is dis-saving, almost
all taxes resolve themselves into income taxes or taxes on accumulated capital.
We have already analyzed the effect of an income tax.
We come now to taxes on accumulated capital.
Here we encounter a genuine case of double taxation.
When current savings are taxed, the charge of double taxation is a dubious one, since
people are allocating their newly produced current income.
Accumulated capital, on the contrary, is our heritage from the past.
It is the accumulation of tools and equipment and resources from which our present and future
The future standard of living derive.
To tax this capital is to reduce the stock of capital, especially to discourage replacements
as well as new accumulations, and to impoverish society in the future.
It may well happen that time preferences on the market will dictate voluntary capital
consumption.
In that case, people will deliberately choose to impoverish themselves in the future so
as to live better in the present.
But when the government compels such a result, the distortion of market choices is particularly
severe.
For the standard of living of everyone in the society will be absolutely lowered, and
And this includes perhaps some of the tax consumers, the government officials and the
other recipients of tax privilege.
Instead of living off present productive income, the government and its favorites are now dipping
into the accumulated capital of society, thereby killing the goose that lays the golden egg.
Taxation of capital, therefore, differs considerably from income taxation.
Here the type matters, as well as the level.
A 20% tax on accumulated capital will have a far more devastating, distorting and impoverishing
effect than a 20% tax on income.
a. Taxation on gratuitous transfers, bequests and gifts.
The receipt of gifts has often been considered simple income.
It should be obvious, however, that the recipient produced nothing in exchange for the money received.
In fact, it is not an income from current production at all,
Capital, but a transfer of ownership of accumulated capital.
Any tax on the receipt of gifts, then, is a tax on capital.
This is particularly true of inheritances, where the aggregation of capital is shifted
to an heir and the gift clearly does not come from current income.
An inheritance tax, therefore, is a pure tax on capital.
This impact is particularly devastating because a. large sums will be involved, since at
some point within a few generations every piece of property must pass to heirs and b.
the prospect of an inheritance tax destroys the incentive and the power to save and build
up a family competence.
The inheritance tax is perhaps the most devastating example of a pure tax on capital.
A tax on gifts and bequests has the further effect of penalizing charity and the preservation
of family ties.
It is ironic that some of those most ardent in advocating taxation of gifts and bequests
are the first to assert that there would never be enough charity were the free market left
to its own devices.
B. Property Taxation
A property tax is a tax levied on the value of property and hence on accumulated capital.
There are many problems peculiar to property taxation.
In the first place, the tax depends on an assessment of the value of property, and the
rate of tax is applied to this assessed value.
But since an actual sale of property has usually not taken place, there is no way for assessments
to be made accurately.
Since all assessments are arbitrary, the road is open for favoritism, collusion, and bribery
in making them.
Another weakness of current property taxation is that it taxes doubly both real and intangible property.
The property tax adds real and intangible property assessments together.
Thus the bondholder's equity in property is added to the amount of the debtor's liability.
Property under debt is therefore doubly taxed as against other property.
If A and B each own a piece of property worth $10,000, but C also holds a bond worth $6,000 on B's property, the latter is assessed at a total of $16,000 and taxed accordingly.
Thus the use of the credit system is penalized and the rate of interest paid to creditors
must be raised to allow for the extra penalty.
One peculiarity of the property tax is that it attaches to the property itself rather
than to the person who owns it.
As a result, the tax is shifted on the market in a special way, known as tax capitalization.
Suppose for example that the social time preference rate, or pure rate of interest, is 5%.
Five percent is earned on all investments in equilibrium, and the rate tends to 5% as
equilibrium is reached.
Suppose a property tax is levied on one particular property or set of properties, for example,
on a house worth $10,000.
Before this tax was imposed, the owner earned $500 annually on the property.
An annual tax of 1% is now levied, forcing the owner to pay $100 per year to the government.
What will happen now?
As it stands, the owner will earn $400 per year on his investment.
The net return on the investment will now be 4%.
Clearly no one will continue to invest at 4% in this property when he can earn 5% elsewhere.
What will happen?
The owner will not be able to shift his tax forward by raising the rental value of the
The property's earnings are determined by its discounted marginal value productivity,
and the tax on the property does not increase its merits or earning power.
In fact, the reverse occurs.
The tax lowers the capital value of the property to enable owners to earn a 5% return.
The market drive toward uniformity of interest return pushes the capital value of the property
down to enable a return on investment.
The capital value of the property will fall to $8,333 so that future returns will be 5%.
The final capital value is not $8,000 since the property tax is levied at 1% of the final
value.
The tax does not remain at 1% of the original capital value of $10,000.
The capital value will fall to $8,333.
Property tax payment will be $83, net annual return will be $417, and an annual rate of
return of 5% on the capital of $8,333.
In the long run, this process of reducing capital value is imputed backward, falling
mainly on the owners of ground land.
Suppose a property tax is levied on a capital good, or a set of capital goods.
Income to a capital good is resolvable into wages, interest, profit, and rental to ground
land.
A lower capital value of capital goods would shift resources elsewhere.
Workers, confronted with lower wages in producing this particular good, would shift to a better
Capitalists would invest in a more remunerative field, and so forth.
As a result, workers and entrepreneurs would largely be able to slough off the burden of the property tax,
the former suffering to the extent that their original DMVP was higher here than in the next highest paying occupations.
The Man Bearing the Major Burden, then, is the owner of ground land.
Therefore the process of tax capitalization applies most fully to a property tax upon
ground land.
The incidence falls on the owner of the original ground land, that is, the owner at the time
the tax is first imposed.
For not only does the landlord pay the annual tax, a tax he cannot shift, so long as he
is the owner, but he also suffers a loss in capital value.
If Mr. Smith is the owner of the property, not only does he pay $83 per year in taxes,
but the capital value of his property also falls from $10,000 to $8,333.
Smith openly absorbs the loss when he sells the property.
What however of the succeeding owners?
They buy the property at $8,333 and earn a steady 5% interest, although they continue
to pay $83 a year to the government.
The expectation of the tax payment attached to the property, therefore, has been capitalized
by the market and taken into account in arriving at its capital value.
As a result, the future owners are able to shift the entire incidence of the property
tax to the original owner.
They do not really pay the tax in the sense that they bear its burden.
Tax capitalization is an instance of a process by which the market adjusts to burdens placed
upon it.
Those whom the government wanted to pay the burden can avoid doing so because of the market's
It's resilience in adjusting to new impositions.
The original owners of ground land, however, are especially burdened by a property tax.
Some writers argue that where tax capitalization has taken place, it would be unjust for the
government to lower or remove the tax, because such an action would grant a free gift to
to the current owners of property, who will receive a counterbalancing increase in its
capital value.
This is a curious argument.
It rests on a fallacious identification of the removal of a burden with a subsidy.
The former, however, is a move toward free market conditions, whereas the latter is a
move away from such conditions.
Furthermore, the property tax, while not burdening future owners,
depresses the capital value of the property below what it would be on the free market,
and therefore discourages the employment of resources in this property.
Removal of the property tax would reallocate resources to the advantage of the consumers.
Tax capitalization and its incidence on owners of ground land occur only where the property
tax is partial rather than universal, on some pieces of property rather than all.
A truly general property tax will reduce the rate of income earned from all investments
and thereby reduce the rate of interest instead of the capital value.
In that case, the interest return of both the original owner and later owners is reduced
equally, and there is no extra burden on the original owner.
A general uniform property tax on all property values, then, will, like an income tax, reduce
the interest return throughout the economy.
This will penalize saving, thereby reducing capital investment below what it would have
been and depressing real wage rates further below their free market level.
Finally, a property tax necessarily distorts the allocation of resources in production.
It penalizes those lines of production in which capital equipment per sales dollar is
is large and causes resources to shift from these to less capitalistic fields, thus investment
in higher-order productive processes is discouraged and the standard of living lowered.
Individuals will invest less in housing, which bears a relatively heavy property tax burden,
and shift instead to less durable consumers' goods, thus distorting production and injuring
consumer satisfaction.
In practice, the property tax tends to be uneven from one line and location to another.
Of course, geographic differences in property taxation in impelling resources to escape
and heavy tax rates will distort the location of production by driving it from those areas
that would maximize consumer satisfaction.
This distortion of location would result from all other forms of taxes as well.
Thus, a higher income tax rate in Region A than in Region B would induce workers to shift
from A to B, in order to equalize net wage rates after taxes.
The location of production is distorted as compared with the free market.
C. A Tax on Individual Wealth Although a tax on individual wealth has not
been tried in practice, it offers an interesting topic for analysis.
Such a tax would be imposed on individuals instead of on their property and would levy
a certain percentage of their total net wealth, excluding liabilities.
In its directness, it would be similar to the income tax and to Fisher's proposed
consumption tax.
A tax of this kind would constitute a pure tax on capital and would include in its grasp
cash balances, which escape property taxation.
It would avoid many difficulties of a property tax, such as double taxation of real and tangible
property, and the inclusion of debts as property.
However, it would still face the impossibility of accurately assessing property values.
A tax on individual wealth could not be capitalized, since the tax would not be attached to a property
where it could be discounted by the market.
Like an individual income tax, it could not be shifted, although it would have important
effects.
Since the tax would be paid out of regular income, it would have the effect of an income
tax in reducing private funds and penalizing savings investment, but it would also have
the further effect of taxing accumulated capital.
How much accumulated capital would be taken by the tax depends on the concrete data and
the valuations of the specific individuals.
Let us postulate, for example, two individuals, Smith and Robinson, each has an accumulated
wealth of $100,000. Smith, however, also earns $50,000 a year, and Robinson, because of retirement
or other reasons, earns only $1,000 a year. Suppose the government levies a 10% annual
Tax on an Individual's Wealth
Smith might be able to pay the $10,000 a year out of his regular income without reducing
his accumulated wealth, although it seems clear that since his tax liability is reduced
thereby, he will want to reduce his wealth as much as possible.
Robinson, on the other hand, must pay the tax by selling his assets, thereby reducing
his accumulated wealth.
It is clear that the wealth tax levies a heavy penalty on accumulated wealth, and that therefore
the effect of the tax will be to slash accumulated capital.
No quicker route could be found to promote capital consumption and general impoverishment
than to penalize the accumulation of capital.
Only our heritage of accumulated capital differentiates our civilization and living standards from
those of primitive men, and a tax on wealth would speedily work to eliminate this difference.
The fact that a wealth tax could not be capitalized means that the market could not, as in the
case of the property tax, reduce and cushion its effect after the impact of the initial
blow.
5.
The Incidents and Effects of Taxation Part 3.
The Progressive Tax
Of all the patterns of tax distribution, the progressive tax has generated the most controversy.
In the case of the progressive tax, the conservative economists who oppose it have taken the offensive.
For even its advocates must grudgingly admit that the progressive tax lowers incentives
and productivity.
Hence, the most ardent champions of the progressive tax on equity grounds admit that the degree
and intensity of progression must be limited by considerations of productivity.
The major criticisms that have been levied against progressive taxation are A. It reduces
Reduces the Savings of the Community B. It Reduces the Incentive to Work and Earn
and C. It Constitutes Robbery of the Rich by the Poor
To evaluate these criticisms, let us turn to an analysis of the effects of the progression
principle.
The progressive tax imposes a higher rate of taxation on a man earning more.
In other words, it acts as a penalty on service to the consumer, on merit in the market.
Incomes in the market are determined by service to the consumer in producing and allocating
factors of production, and vary directly according to the extent of such services.
To impose penalties on the very people who have served the consumers most is to injure
A progressive tax is therefore bound to cripple incentives, impair mobility of occupation,
and greatly hamper the flexibility of the market in serving the consumers.
It will consequently lower the general standard of living.
The ultimate of progression, coercively equalized incomes, will, as we have seen, cause a reversion
There is also no question that progressive income taxation will reduce incentives to save, because people will not earn the return on investment consonant with their time preferences.
Their earnings will be taxed away.
Since people will earn far less than their time preferences would warrant, their savings will be depressed far below what they would be on the free market.
Thus, conservatives' charges that the progressive tax reduces incentives to work and save are correct, and, in fact, are usually understated,
because there is not sufficient realization that these effects stem a priori from the very nature
of progression itself. It should not be forgotten, however, that proportional taxation will induce
many of the same effects as, in fact, will any tax that goes beyond equality or the cost principle.
For proportional taxation also penalizes the able and the saver.
It is true that proportional taxation will not have many of the crippling effects of
progression, such as the progressive hampering of effort from one income bracket to another.
But proportional taxation also imposes heavier burdens as the income brackets rise, and these
is also hamper earning and saving.
A second argument against the progressive income tax, and one which is perhaps the most
widely used, is that by taxing the incomes of the wealthy, it reduces savings in particular,
thus injuring society as a whole.
This argument is predicated on the usually plausible assumption that the rich save more
or proportionately than the poor.
Yet, as we have indicated, this is an extremely weak argument, particularly for partisans
of the free market.
It is legitimate to criticize a measure for forcing deviations from free market allocations
to arbitrary ones, but it can hardly be legitimate simply to criticize a measure for reducing
savings per se.
For why does consumption possess less merit than saving?
Allocation between them on the market is simply a matter of time preference.
This means that any coerced deviation from the market ratio of saving to consumption
imposes a loss in utility, and this is true whichever direction the deviation takes.
A government measure that might induce more saving and less consumption is then no less
subject to criticism than one that would lead to more consumption and less saving.
To say differently is to criticize free market choices and, implicitly, to advocate governmental
measures to force more savings upon the public.
If they were consistent, therefore, these conservative economists would have to advocate
taxation of the poor to subsidize the rich, for in that case, savings would presumably
increase and consumption diminish.
The third objection is a political-ethical one, that the poor rob the rich.
The implication is that the poor man who pays 1% of his income in taxes is robbing the
rich man who pays 80%.
Without judging the merits or demerits of robbery, we may say that this is invalid.
Both citizens are being robbed.
By the state, that one is robbed in greater proportion does not eliminate the fact that
both are being injured.
It may be objected that the poor receive a net subsidy out of the tax proceeds because
the government spends money to serve the poor.
Yet this is not a valid argument, for the actual act of robbery is committed by the
state and not by the poor.
Secondly, the state may spend its money, as we shall see, on many different projects.
It may consume products, it may subsidize some or all of the rich, it may subsidize
some or all of the poor.
The fact of progressive income taxation does not itself imply that the poor en masse will
be subsidized.
If some of the poor are subsidized, others may not be, and these latter will still be
will be net taxpayers rather than tax consumers and will be robbed along with the rich.
The extent of this deprivation will be less for a poor taxpayer than for a rich one.
And yet, since usually there are far more poor than rich, the poor en masse may very
well bear the greatest burden of the tax robbery.
In contrast, the state bureaucracy, as we have seen, actually pays no taxes at all.
This misconception of the incidence of robbery and the defective argument on savings, among
other reasons, have led most conservative economists and writers to overemphasize greatly
the importance of the progressiveness of taxation.
Actually, the level of taxation is far more important than its progressiveness in determining
the distance that a society has traveled from a free market.
An example will clarify the relative importance of the two.
Let us contrast two people and see how they fare under two different tax systems.
Smith makes $1,000 a year, and Jones makes $20,000 a year.
In society A, taxation is proportionate for all at 50%.
In society B, taxation is very steeply progressive.
Rates are ½% for $1,000 income, 20% for $20,000 income.
How Much Money Will Each Pay in Taxes in the Different Societies?
Smith, with an income of $1,000, pays $500 in taxes in Society A and $5 in taxes in
Society B. Jones, with an income of $20,000, pays $10,000 in taxes in Society A and $4,000
Taxes in Society B. Now we may ask both the rich and the poor taxpayers, under which system
of taxation are you better off? Both the rich man and the poor man will unhesitatingly pick
Society B, where the rate structure is far more progressive, but where the level of taxation
for Every Man is Lower.
Some may object that the total amount of tax levied is far greater in Society A, but this
is precisely the point.
The point is that what the rich man objects to is not the progressiveness of the rates,
but the high level of the rates imposed upon him, and he will prefer progressiveness when
rates are lower.
This demonstrates that it is not the poor who rob the rich through the progressive principle
of taxation.
It is the state that robs both through all taxation.
And it indicates that what the conservative economists are actually objecting to, whether
they fully realize it or not, is not progression, but high levels of taxation, and that their
Their real objection to progression is that it opens the sluice gates for high levels
of taxation of the rich.
Yet this prospect will not always be realized, for it is certainly possible, and has often
occurred, that a rate structure is very progressive and yet lower all around, on the high brackets
and on the low, than a less progressive structure.
As a practical matter, however, progressiveness is necessary for high tax rates, because the
multitude of lower-income citizens might revolt against very steep tax rates if they were
imposed on all equally.
On the other hand, many people may accept a high tax burden if they are secure in the
The knowledge or belief that the rich pay a still higher rate.
We have seen that coerced egalitarianism will cause a reversion to barbarism, and that steps
in that direction will result in dislocations of the market and a lowering of living standards.
Many economists, notably the members of the Chicago School, believe that they champion
The Free Market, and yet they do not consider taxation as connected with the market or as
an intervention in the market process. These writers strongly believe that on the market,
every individual should earn the profits and marginal value productivity that the consumers
wish to pay in order to achieve a satisfactory allocation of productive factors. Nevertheless,
They see no inconsistency in then advocating drastic taxation and subsidies.
They believe that these can alter the distribution of incomes without lowering the efficiency
of productive allocations.
In this way, they rely on an equivalent of Keynesian money illusion, a tax illusion,
A belief that individuals will arrange their activities according to their gross, rather
than net, after-tax income.
This is a palpable error.
There is no reason why people should not be tax-conscious and allocate their resources
and energies accordingly.
Altering relative rewards by taxation will disrupt all the allocations of the market,
The movement of labor, the alertness of entrepreneurship, etc.
The market is a vast nexus with all strands interconnected, and it must be analyzed as
such.
The prevailing fashion in economics of chopping up the market into isolated compartments,
the firm, a few macroscopic holistic aggregates, market exchanges, taxation, etc., distorts
What's the discussion of each one of these compartments and fails to present a true picture
of the interrelations of the market?
6.
The Incidents and Effects of Taxation Part 4.
The Single Tax on Ground Rent We have refuted elsewhere the various arguments
Documents that form part of the Henry Georgist edifice, the idea that society owns the land
originally and that every new baby has a right to an aliquot part, the moral argument that
an increase in the value of ground land is an unearned increment due to external causes,
One of the doctrines that speculation incites wickedly withholds productive land from use.
Here we shall analyze the famous Georgist proposal itself, the single tax, or the 100%
expropriation of ground rent.
One of the first things to be said about the Georgist theory is that it calls attention
to an important problem, the land question.
Land economics tends to treat land as part of capital and to deny the existence of a
separate land category at all.
In such an environment, the Georgist thesis serves to call attention to a neglected problem,
even though every one of its doctrines is fallacious.
Much of the discussion of ground-rent taxation has been confused by the undoubted stimulus
as to production that would result not from this tax but from the elimination of all other
forms of taxation.
George waxed eloquent over the harmful effect taxation has upon production and exchange.
However, these effects can as easily be removed by eliminating taxation altogether as by shifting
all taxes onto ground rent.
George virtually admitted as much.
As he wrote in Progress and Poverty,
To abolish the taxation, which, acting and reacting, now hampers every wheel of exchange,
and presses upon every form of industry, would be like removing an immense weight from a
powerful spring.
Imbued with fresh energy, production would start into new life, and trade would receive
of a stimulus which would be felt to the remotest arteries.
The present method of taxation operates upon energy and industry and skill and thrift like
a fine upon those qualities.
If I have worked harder and built myself a good house while you have been contented to
live in a hovel, the tax gatherer now comes annually to make me pay a penalty for my energy
and my industry, by taxing me more than you.
If I have saved while you wasted, I am mulked while you are exempt.
We say we want capital, but if anyone accumulate it or bring it among us, we charge him for
it as though we were giving a privilege.
To abolish these taxes would be to lift the enormous weight of taxation from productive
of Industry, instead of saying to the producer, as it does now, the more you add to the general
wealth, the more shall you be taxed.
The state would say to the producer, be as industrious, as thrifty, as enterprising as
you choose.
You shall have your full reward.
You shall not be taxed for adding to the aggregate wealth.
In fact, it will be here demonstrated that taxation of ground rent also hampers and distorts
production.
Whatever beneficial effects the single tax might have on production would flow only from
the elimination of other taxes, not from the imposition of this one.
The two acts must be kept conceptually distinct.
A tax on ground rent would have the effect of a property tax as described earlier.
That is, it could not be shifted and it would be capitalized, with the initial burden falling
on the original owner and later owners escaping any burden because of the fall in the capital
value of the ground land.
The Georgists propose to place a 100% annual tax on ground rents alone.
One critical problem that the single tax could not meet is the difficulty of estimating ground
rents.
The essence of the single tax scheme is to tax ground rent only and to leave all capital
goods free from tax.
But it is impossible to make this division.
Georgists have dismissed this difficulty as merely a practical one, but it is a theoretical
flaw as well.
As is true of any property tax, it is impossible accurately to assess value because the property
has not been actually sold on the market during the period.
Ground land taxation faces a further problem that cannot be solved.
How to distinguish quantitatively between that portion of the gross rent of a land area
which goes to ground land, and that portion which goes to interest and to wages.
Since land in use is often amalgamated with capital investment, and the two are bought
and Sold Together, this distinction between them cannot be made.
But the Georgist theory faces even graver difficulties.
For its proponents contend that the positive virtue of the tax consists in spurring production.
They point out to hostile critics that the single tax, if it could be accurately levied,
would not discourage capital improvements and maintenance of landed property.
But then they proceed to argue that the single tax would force idle land into use.
This is supposed to be one of the great merits of the tax.
Yet if land is idle, it earns no gross rent whatever.
If it earns no gross rent, then obviously it earns no net rent as ground land.
Idle land earns no rent, and therefore earns no ground rent that could be taxed.
It would bear no taxes under a consistent operation of the Georgist scheme.
Since it would not be taxed, it could not be forced into use.
The only logical explanation for this error by the Georgists is that they concentrate
on the fact that much idle land has a capital value that it sells for a price on the market,
even though it earns no rents in current use.
From the fact that idle land has a capital value, the Georgists apparently deduce that
But it must have some sort of true annual ground rent.
This assumption is incorrect, however, and rests on one of the weakest parts of the Georgist's
system, its deficient attention to the role of time.
George himself can hardly be blamed for the weak treatment of time, for he could draw
only on the classical economic theories, which had the same defect.
In fact, compared with the classical school, George made advances in many areas of economic
theory.
The Austrian school, with its definitive analysis of time, was barely beginning when George
framed his theory.
There is less excuse for George's modern followers, who have largely ignored all advances
in economics since 1880.
The fact that currently idle land has a capital value means simply that the market expects
it to earn rent in the future.
The capital value of ground land, as of anything else, is equal to, and determined by, the
sum of expected future rents, discounted by the rate of interest.
But these are not presently earned rents.
Therefore, any taxation of idle land violates the Georgist's own principle of a single tax on ground rent.
It goes beyond this limit to penalize land ownership further and to tax accumulated capital,
which has to be drawn down in order to pay the tax.
Any increase in the capital value of idle land, then, does not reflect a current rent.
It merely reflects an upgrading of people's expectations about future rents. Suppose, for example,
that future rents from an idle site are such that, if known to all, the present capital value of the
The market price would be $10,000.
Suppose further that these facts are not generally known, and therefore that the ruling price is $8,000.
Jones, being a far-sighted entrepreneur, correctly judges the situation and purchases the site for $8,000.
If everyone soon realizes what Jones has foreseen, the market price will now rise to $10,000.
Jones' capital gain of $2,000 is the profit to his superior judgment, not earnings from current rent.
The Georgist bogey is idle land. The fact that land is idle, they assert, is caused by land speculation, and to this land speculation they attribute almost all the ills of civilization, including business cycle depressions.
The Georgists do not realize that since labour is scarce in relation to land, sub-marginal
land must remain idle.
The sight of idle land enrages the Georgist, who sees productive capacity being wasted
and living standards reduced.
Idle land should, however, be recognized as beneficial, for if land were ever fully used,
This would mean that labor had become abundant in relation to land, and that the world had
at last entered on the terrible overpopulation stage in which some labor has to remain idle
because no employment is available.
The present writer used to wonder about the curious Georgist preoccupation with idle or
withheld ground land as the cause of most economic ills, until he found a clue in a
revealing passage of a Georgist work.
Poor countries do not lack capital.
Most of us have learned to believe that the people of India, China, Mexico, and other
so-called backward nations are poor because they lack capital, since, as we have seen,
Capital is nothing more than wealth, and wealth nothing more than human energy combined with
land in one form or another.
The absence of capital too often suggests that there is a shortage of land, or of labor,
in backward countries like India and China.
But that isn't true, for these poor countries have many times more land and labor than they
use.
Undeniably they have everything it takes, both land and labor, to produce as much capital
as people anywhere.
And so, since these poor countries have plenty of land and labor, it follows that landlords
must be withholding land from use.
Only this could explain the low living standards.
Here a crucial Georgist fallacy is exposed clearly, ignorance of the true role of time
in production.
It takes time to save and invest and build up capital goods, and these capital goods
embody a shortening of the ultimate time period needed to acquire consumers' goods.
India and China are short of capital because they are short of time.
They start from a low level of capital, and therefore it would take them a long time to
reach a high capital level through their own savings.
Once again, the Georgists' difficulty stems from the fact that their theory was formulated
before the Rise of Austrian Economics, and that the Georgists have never re-evaluated
their doctrine in the light of this development.
As we have indicated earlier, land speculation performs a useful social function.
It puts land into the hands of the most knowledgeable and develops land at the rate desired by the
and Good Sites will not be kept idle, thus incurring a loss of ground rent to the site owner, unless the owner expects a better use to be imminently available.
The allocation of sites to their most value-productive uses, therefore, requires all the virtues of any type of entrepreneurship on the market.
As Frank Knight puts it,
men do hold land speculatively for an expected increase in value.
This is a social service, tending to put ownership in the hands of those who know best how to handle the land,
so that the value will increase.
They obviously do not need to keep it idle to get the increase,
and Do Not, if there is a clear opening for remunerative use.
If land having value for use is not used by an owner, it is because of uncertainty as to how it should be used,
and waiting for the situation to clear up or develop.
An owner naturally does not wish to make a heavy investment in fitting a plot for use,
which does not promise amortization before some new situation may require a different plan.
One of the most surprising deficiencies in the literature of economics is the lack of effective
criticism of the Georgist theory. Economists have either temporized, misconceived the problem,
or in many cases granted the economic merit of the theory, but caviled at its political implications.
Such gentle treatment has contributed greatly to the persistent longevity of the Georgist movement.
One reason for this weakness in the criticism of the doctrine is that most economists have conceded a crucial point of the Georgists, namely that a tax on ground rent would not discourage production and would have no harmful or distorting economic effects.
Granting the economic merits of the tax, criticism of it must fall back on other political or
practical considerations.
Many writers, while balking at the difficulties in the full single tax program, have advocated
the 100% taxation of future increments in ground rent.
Georgists have properly treated such halfway measures with scorn.
Since the opposition concedes the economic harmlessness of a ground rent tax, its other
doubts must seem relatively minor.
The crucial economic problem of the single tax, then, is this.
Will a tax on ground rent have distortive and hampering effects?
Is it true that the owner of ground land performs no productive service, and therefore that
that a tax upon him does not hamper and distort production.
Ground rent has been called economic surplus, which would be taxed up to any amount with
no side effects.
Many economists have tacitly agreed with this conclusion and have agreed that a landowner
can perform a productive service only as an improver, that is, as a producer of capital
Federal Goods on Land.
Yet this central Georgist contention overlooks the realities.
The owner of ground land performs a very important productive service.
He brings sites into use and allocates them to the most value-productive bidders.
We must not be misled by the fact that the physical stock of land is fixed at any given
time.
In the case of land as of other goods, it is not just the physical good that is sold, but a whole bundle of services along with it, among which is the service of transferring ownership from seller to buyer.
Ground land does not simply exist, it must be served to the user by the owner.
One man can perform both functions when the land is vertically integrated.
As Spencer Heath put it, land itself does not service civilized men any more than food
itself does.
Both are served to them.
The land owner earns the highest ground rents by allocating land sites to their most value
The view that bringing sites into use and deciding on their location is not really productive
is a vestige of the old classical view that a service which does not tangibly create something
physical is not really productive.
As Spencer Heath states, wherever the services of landowners are concerned, Henry George
is firm in his dictum that all values are physical.
In the exchange services performed by landowners, their social distribution of sites and resources
or an arbitrary and tyrannical distribution of land.
Actually, this function is just as productive as any other,
and a particularly vital function it is.
To hamper and destroy this function would have grave effects on the economy.
Suppose that the government did in fact levy a 100% tax on ground rent.
What would be the economic effects?
The current owners of ground land would be expropriated, and the capital value of ground land would fall to zero.
Since site owners could not obtain rents, the sites would become valueless on the market.
From then on, sites would be free, and the site owner would have to pay his annual ground rent into the Treasury.
But since all ground rent is siphoned off to the government, there is no reason for owners to charge any rent.
Ground rent will fall to zero as well, and rentals will thus be free.
So, one economic effect of the single tax is that, far from supplying all the revenue of government, it would yield no revenue at all.
The single tax, then, makes sites free when they are actually not free and unlimited, but scarce.
Any good is always scarce, and therefore must always command a price in accordance with the demand for it and the supply available.
The only free goods on the market are not goods at all, but abundant conditions of human welfare that are not the subject of human action.
The effect of this tax, then, is to fool the market into believing that sites are free when they are decidedly not.
The result will be the same as any case of maximum price control.
Instead of commanding a high price and therefore being allocated to the highest bidders, the most value productive sites will be grabbed by first-comers and wasted, since there will be no pressure for the best sites to go into their most efficient uses.
People will rush in to demand and use the best sites, while no one will wish to use
the less productive ones.
On the free market, the less productive sites cost less to the tenant.
If they cost no less than the best sites, that is, if they are free, then no one will
want to use them.
Thus, in a city, the best or most potentially value-productive sites are in the downtown
areas, and these consequently earn and charge higher rents than the less productive but
still useful sites in the outlying areas.
If the Henry George scheme went into effect, there would not only be complete misallocation
of Sites to less productive uses, but there would also be great overcrowding in the downtown areas,
as well as underpopulation and under use of the outlying areas. If Georgists believe that the
single tax would end overcrowding of the downtown areas, they are gravely mistaken, for the reverse
Furthermore, suppose the government imposed a tax of more than 100% on ground rents, as the Georgists really envision, so as to force idle land into use.
The result would be aggravated wasteful misapplication of labor and capital.
Since labor is scarce relative to land, the compulsory use of idle land would wastefully
misallocate labor and capital, and force more work on poorer land, and therefore less on
better land.
At any rate, the result of the single tax would be locational chaos, with waste and
and misallocation everywhere, overcrowding would prevail, and poorer sites would either
be overused or underused and abandoned altogether.
The general tendency would be toward underuse of the poorer sites, because of the tax-induced
rush to the better ones.
As under conditions of price control, the use of the better sites would be decided by
by favoritism, queuing, etc., instead of economic ability.
Since location enters into the production of every good, locational chaos would introduce
an element of chaos into every area of production, and perhaps ruin economic calculation as well.
For an important element to be calculated, location would be removed from the sphere
of the Market.
To this contention, the Georgists would reply that the owners would not be allowed to charge
no rents because the government's army of assessors would set the proper rents.
But this would hardly alleviate the problem.
In fact, it would aggravate matters in many ways.
It might bring in revenue and check some of the excess demand of land users, but it would
would still provide no reason and no incentive for the land owners to perform their proper
function of allocating land sites efficiently.
In addition, if assessment is difficult and arbitrary at any time, how very much more
chaotic would it be when the government must blindly estimate, in the absence of any rent
Market, The Rent for Every Piece of Ground Land.
This would be a hopeless and impossible task, and the resulting deviations from free market
rents would compound the chaos, with over and under use and wrong locations.
With no vestige of market left, not only would the landowners be deprived of any incentive
for efficient allocation of sites, they would have no way of finding out whether their allocations
were efficient or not. Finally, this all-around fixing of rents by the government would be
tantamount to virtual nationalization of the land, with all the enormous wastes and chaos that
afflict any government ownership of business, all the greater in a business that would permeate
The Georgists contend that they do not advocate the nationalization of land, since ownership
would remain de jure in the hands of private individuals.
The returns from this ownership, however, would all accrue to the state.
George himself admitted that the single tax would accomplish the same thing as the land
Nationalization in a simpler, easier, and quieter way.
Georgia's method, however, would, as we have seen, be neither simple, easy, nor quiet.
The single tax would leave de jure ownership in private hands while completely destroying
its point, so that the single tax is hardly an improvement upon, or differs much from,
outright nationalization.
As Frank Knight puts it, to collect such rent, the government would in practice have to compel
the owner actually to use the land in the best way, hence to prescribe its use in some
detail.
Thus, we already see that the advantage of taxation over socialization of management
has practically disappeared.
Of course, as we shall see further, the state has no incentive or means for efficient allocation
either.
At any rate, land sites, like any other resources, must be owned and controlled by someone, either
a private owner or the government.
Sites can be allocated either by voluntary contract or by governmental coercion, and
The latter is what is attempted by the single tax or by land nationalization.
As Spencer Heath puts it, must we suppose that land distributes itself?
It can be and often is distributed by the government of a prison camp or by the popularly
elected denizens of a city hall.
Alternatively, in any free society, its sites and resources must be and chiefly are distributed
by the process of free contract, in which the title holder is the only possible first
party to the contract.
From him flows his social service of distribution.
The rent is his automatic recompense, set and limited in amount by the free market.
Frank Knight says of the georgous dream of every man's unconditional right of access
to the soil, that, one, everyone actually has this right subject to competitive conditions,
that is, that he pay for it what it is worth, and that, two, the only viable alternative
would be to get permission from some political agent of government.
For any attempt to give every person an unconditional right to access to the soil would establish
anarchy, the war of all against all, and is, of course, not approximated by a confiscation
and distribution of rent or its employment for social ends.
The Georgists believe that ownership or control by the state means that society will own or
command the land or its rent.
But this is fallacious.
Society or the public cannot own anything.
Only an individual or a set of individuals can do so.
At any rate, in the Georgist scheme, it would not be society, but the state that would own
Own the Land Caught in an inescapable dilemma are a group
of anti-statist Georgists who wish to statize ground rent, yet abolish taxation at the same
time.
Frank Chaturov, a leader of this group, could offer only the lame suggestion that ground
land be municipalized, rather than nationalized, to avoid the prospect that all of a nation's
Every element in the Georgist system is thus seen to be fallacious, yet the Georgist doctrines
These hold a considerable attraction even now, and, surprisingly, for many economists
and social philosophers otherwise devoted to the free market.
There is a good reason for this attraction, for the Georgists, though in a completely
topsy-turvy manner, do call attention to a neglected problem, the land question.
There is a land question, and no attempt to ignore it can meet the issue.
Contrary to George's doctrine, however, the land problem does not stem from free market
ownership of ground land.
It stems from failure to live up to a prime condition of free market property rights.
namely that new, unowned land be first owned by its first user, and that from then on it become the
full private property of the first user or those who receive or buy the land from him.
This is the free market method. Any other method of allocating new, unused land to ownership employs
Statist Coercion
Under a first-user, first-owner regime, the Georgists would be wrong in asserting that
no labor had been mixed with nature-given land to justify private ownership of sites.
For then, land could not be owned unless it were first used, and could be originally appropriated
for ownership only to the extent that it was so used.
The mixing of labor with nature may take the form of draining, filling, clearing, paving,
or otherwise preparing the site for use.
Tilling the soil is only one possible type of use.
American homestead legislation, while attempting to establish a first-user, first-owner principle,
Aired in believing that a certain type of agriculture was the only legitimate use for land, actually any productive activity, including grazing or laying railroad tracks, qualifies as use.
The use claim to the land could be certified by courts if any dispute over its ownership arose.
Certainly, the claim of the pioneer as first finder and first user is no more disputable than any other claim to a product of labor.
Knight does not overdraw the picture when he charges that
the allegation that our pioneers got the land for nothing, robbing future generations of their rightful heritage, should not have to be met by argument.
The whole doctrine was invented by city men living in comfort, not by men in contact with the facts as owners or renters.
If society were later to confiscate the land value, allowing retention only of improvements or their value,
it would ignore the costs in bitter sacrifice and would arbitrarily discriminate between one set of property owners and another set.
Problems and difficulties arise whenever the first user, first owner principle is not met.
In almost all countries, governments have laid claim to ownership of new, unused land.
Governments could never own original land on the free market.
This act of appropriation by the government already sows the seeds
for Distortion of Market Allocations when the land goes into use. Thus suppose
that the government disposes of its unused public lands by selling them at
auction to the highest bidder. Since the government has no valid property claim to
ownership, neither does the buyer from the government. If the buyer, as often
Man happens, owns, but does not use or settle the land, then he becomes a land speculator
in a pejorative sense.
For the true user, when he comes along, is forced either to rent or buy the land from
this speculator, who does not have valid title to the area.
He cannot have valid title, because his title derives from the state, which also did not
have valid title in the free market sense. Therefore, some of the charges that the Georgists
have levelled against land speculation are true, not because land speculation is bad
per se, but because the speculator came to own the land not by valid title, but via the
Government, which originally arrogated title to itself.
So now, the purchase price, or alternatively, the rent, paid by the would-be user, really
does become the payment of a tax for permission to use the land.
Governmental sale of unused land becomes similar to the old practice of tax farming, where
Government's sale of its unused land to speculators, therefore, restricts the use of new land, distorts
keeps the allocation of resources and keeps land out of use that would be employed were
it not for the tax penalty of paying a purchase price or rent to the speculator.
Keeping land out of use raises the marginal value product and the rents of remaining land
and lowers the marginal value product of labor, thereby lowering wage rates.
The affinity of rent and taxation is even closer in the case of feudal land grants.
Let us postulate a typical case of feudal beginnings.
A conquering tribe invades a territory of peasants and sets up a state to rule them.
It could levy taxes and support its retinue out of the proceeds, but it could also do
to something else, and it is important to see that there is no essential difference
between the two.
It could parcel out all of the land as individual grants of ownership to each member of the
conquering band.
Then, instead of, or in addition to, one central taxing agency, there would be a series of
regional rent-collecting agencies.
But the consequences would be exactly the same.
This is clearly seen in Middle Eastern countries where rulers have been considered to own their
territories personally and have therefore collected taxes in the form of rent charged
for that ownership.
The subtle gradations linking taxation and feudal rent have been lucidly portrayed by
Franz Oppenheimer.
The peasant surrenders a portion of the product of his labor without any equivalent service
in return.
In the beginning was the ground rent.
The forms under which the ground rent is collected or consumed vary.
In some cases, the lords, as a closed union or community, are settled in some fortified
camp and consume as communists the tribute of their peasantry.
In some cases, each individual warrior noble has a definite strip of land assigned to him.
But generally, the produce of this is still, as in Sparta, consumed in the Sececia by class
associates and companions in arms.
In some cases, the landed nobility scatters over the entire territory, each man housed
with his following in his fortified castle, and consuming, each for himself, the produce
of his dominion or lands.
As yet, these nobles have not become landlords in the sense that they administer their property.
Each of them receives tribute from the labor of his dependents, whom he neither guides
nor supervises.
This is the type of medieval dominion in the lands of the Germanic nobility.
Finally, the knight becomes the owner and administrator of the knight's fee.
Of course, there are considerable differences between land speculation by the original buyer
from the government and a feudal land grant.
In the former case, the user eventually purchases the land from the original buyer, and once
Since he does so, the tax has been fully paid and disappears.
From that point on, free market allocations prevail.
Once land gets into the hands of the user, he has, as it were, bought out the permission
tax, and from then on everything proceeds on a free market basis.
It must be repeated here that direct users would not be the only ones ever permitted
to Own Land in the Free Market.
The only stipulation is that use be the principle that first brings original, unused land into
ownership.
Once ownership accrues to a user, then the user can sell the land to a speculator, let
it be idle again, etc., without distorting market allocations.
The problem is the original establishment of valid titles to property.
After valid titles are established, the owner can, of course, do what he likes with his
property.
In contrast, the feudal lord passes the land on to his heirs.
The true owners now have to pay rent where they did not have to pay before.
This rent tax continues indefinitely.
Because of the generally vast extent of the grant, as well as various prohibitory laws,
it is most unusual for the feudal lord to be bought out by his tenant subjects.
When they do buy out their own plots, however, their land is, from then on, freed from the
permission tax incubus.
One charge often made against the market is that all property can be traced back to coercive
depredations or state privilege, and therefore there is no need to respect current property
rights.
Waving the question of the accuracy of the historical contention, we may state that historical
tracings generally make little difference.
Suppose, for example, that Jones steals money from Smith, or that he acquires the money
through state expropriation and subsidy, and suppose that there is no redress, Smith and
his heirs die and the money continues in Jones' family.
In that case, the disappearance of Smith and his heirs means the dissolution of claims
is from the original title holders at that point on the homestead principle of property
right from possession of unowned property.
The money therefore accrues to the Jones family as their legitimate and absolute property.
Note the assumption that Smith and his heirs die out or cannot be traced.
If they can be, then the property rightly reverts to them in a free market system.
This process of converting force to service, however, does not work where rent paid for
ground land is akin to regional taxation.
The effects of speculation in original land disappear as the users purchase the land sites.
But dissolution does not take place where feudal land grants are passed on unbroken
over the generations.
As Mises states, nowhere and at no time has the large-scale ownership of land come into
being through the working of economic forces in the market.
It is the result of military and political effort.
The Great Landed Fortunes
7.
Canons of Justice in Taxation
a.
The Just Tax and the Just Price
For centuries before the science of economics was developed, men searched for criteria of
the just price.
Of all the innumerable, almost infinite possibilities among the myriads of prices daily determined,
What pattern should be considered as just?
Gradually it came to be realized that there is no quantitative criterion of justice that
can be objectively determined.
Suppose that the price of eggs is 50 cents per dozen.
What is the just price?
It is clear, even to those like the present writer who believe in the possibility of irrational
Ethics, that no possible ethical philosophy or science can yield a quantitative measure
or criterion of justice.
If Professor X says that the just price of eggs is 45 cents, and Professor Y says it
is 85 cents, no philosophical principle can decide between them.
Even the most fervent anti-utilitarian will have to concede this point.
and the various contentions all become purely arbitrary whim.
Economics, by tracing the ordered pattern of the voluntary exchange process,
has made it clear that the only possible objective criterion for the just price is the market price.
For the market price is, at every moment, determined by the voluntary,
are mutually agreed upon actions of all the participants in the market.
It is the objective resultant of every individual's subjective valuations and voluntary actions,
and is therefore the only existent objective criterion for quantitative justice in pricing.
Practically nobody now searches explicitly for the just price,
It is generally recognized that any ethical criticisms must be leveled quantitatively against the values of consumers,
not against the quantitative price structure that the market establishes on the basis of these values.
The market price is the just price, given the pattern of consumer preferences.
Furthermore, this just price is the concrete actual market price, not equilibrium price, which can never be established in the real world, nor the competitive price, which is an imaginary figment.
If the search for the just price has virtually ended in the pages of economic works, why
does the quest for a just tax continue with unabated vigor?
Why do economists, severely scientific in their volumes, suddenly become ad hoc ethicists
when the question of taxation is raised?
In no other area of his subject does the economist become more grandiosely ethical.
There is no objection at all to discussion of ethical concepts when they are needed, provided
that the economist realizes always, a, that economics can establish no ethical principles
by itself, that it can only furnish existential laws to the ethicist or citizen as data,
and that any importation of ethics must be grounded on a consistent, coherent set of
ethical principles, and not simply be slipped in ad hoc in the spirit of, well, everyone
must agree to this.
Planned assumptions of universal agreement are one of the most irritating bad habits
of the economist turned ethicist.
This book does not attempt to establish ethical principles.
It does, however, refute ethical principles to the extent that they are insinuated, ad-hoc,
and unanalyzed into economic treatises.
An example is the common quest for canons of justice in taxation.
The prime objection to these canons is that the writers have first to establish the justice
of taxation itself.
If this cannot be proven, and so far it has not been, then it is clearly idle to look
for the just tax.
If taxation itself is unjust, then it is clear that no allocation of its burdens, however
ingenious, can be declared just.
This book sets forth no doctrines on the justice or injustice of taxation, but we do exhort
economists either to forget about the problem of the just tax, or, at least, to develop
Why do not economists abandon the search for the just tax as they abandoned the quest for
the just price?
One reason is that doing so may have unwelcome implications for them.
The just price was abandoned in favor of the market price.
Can the just tax be abandoned in favor of the market tax?
Clearly not, for on the market there is no taxation, and therefore no tax can be established
that will duplicate market patterns.
As will be seen further, there is no such thing as a neutral tax, a tax that will leave
Leave the market free and undisturbed, just as there is no such thing as neutral money.
Economists and others may try to approximate neutrality in the hopes of disturbing the
market as little as possible, but they can never fully succeed.
B. Costs of Collection, Convenience, and Certainty
Even the simplest maxims must not be taken for granted.
Two centuries ago, Adam Smith laid down four canons of justice in taxation that economists
have parroted ever since.
One of them deals with the distribution of the burden of taxation, and this will be treated
in detail later.
Perhaps the most obvious was Smith's injunction that costs of collection be kept to a minimum,
and the taxes be levied with this principle in mind.
An obvious and harmless maxim?
Certainly not.
This canon of justice is not obvious at all, for the bureaucrat employed in tax collection
will tend to favor a tax with high administrative costs, thereby necessitating more extensive
bureaucratic employment.
Why should we call the bureaucrat obviously wrong?
The answer is that he is not, and that to call him wrong, it is necessary to engage
in an ethical analysis that no economist has bothered to undertake.
A further point, if the tax is unjust on other grounds, it may be more just to have high
administrative costs, for then there will be less chance that the tax will be fully
collected.
If it is easy to collect the tax, then the tax may do more damage to the economic system
and cause more distortion of the market economy.
The same point might be made about another of Smith's canons, that a tax should be
levied so that payment is convenient.
Here again, this maxim seems obvious, and there is certainly much truth in it.
Someone may urge that a tax should be made inconvenient to induce people to rebel and
force a lowering of the level of taxation.
Indeed, this used to be one of the prime arguments of conservatives for an income tax as opposed
to an indirect tax.
The validity of this argument is beside the point.
The point is that it is not self-evidently wrong, and therefore this canon is no more
simple and obvious than the others.
Smith's final canon of just taxation is that the tax be certain and not arbitrary,
so that the taxpayer knows what he will pay.
Here again, further analysis demonstrates that this is by no means obvious.
Some may argue that uncertainty benefits the taxpayer, for it makes the requirement more
flexible and permits bribery of the tax collector.
This benefits the taxpayer to the extent that the price of the bribe is less than the tax
that he would otherwise have to pay.
Furthermore, there is no way of establishing long-range certainty, for the tax rates may
may be changed by the government at any time.
In the long run, certainty of taxation is an impossible goal.
A similar argument may be levelled against the view that taxes should be difficult to evade.
If a tax is onerous and unjust, evasion might be highly beneficial to the economy and moral to boot.
Thus, none of these supposedly self-evident canons of taxation is a canon at all.
From some ethical points of view, they are correct.
From others, they are incorrect.
Economics cannot decide between them.
C. Distribution of the tax burden.
Up to this point, we have been discussing taxation as it is levied on any given individual
of the People or Firm.
Now we must turn to another aspect, the distribution of the burden of taxes among the people in
the economy.
Most of the search for justice in taxation has involved the problem of the just distribution
of this burden.
Various proposed canons of justice will be discussed in this section, followed by analysis
Process of the Economic Effects of Tax Distribution
1.
Uniformity of Treatment
a.
Equality Before the Law
Tax Exemption
Uniformity of Treatment has been upheld as an ideal by almost all writers.
This ideal is supposed to be implicit in the concept of equality before the law, which
Which is best expressed in the phrase, like to be treated alike.
To most economists this ideal has seemed self-evident, and the only problems considered have been
the practical ones of defining exactly when one person is like someone else.
Problems that, we shall see, are insuperable.
All these economists adopt the goal of uniformity regardless of what principle of likeness they
may hold.
Thus, the man who believes that everyone should be taxed in accordance with his ability to
pay also believes that everyone with the same ability should be taxed equally.
He who believes that each should be taxed proportionately to his income also holds that
Everyone with the same income should pay the same tax, etc.
In this way, the ideal of uniformity pervades the literature on taxation.
Yet this canon is by no means obvious, for it seems clear that the justice of equality
of treatment depends first of all on the justice of the treatment itself.
Suppose, for example, that Jones, with his retinue, proposes to enslave a group of people.
Are we to maintain that justice requires that each be enslaved equally?
And suppose that someone has the good fortune to escape.
Are we to condemn him for evading the equality of justice meted out to his fellows?
It is obvious that equality of treatment is no canon of justice whatever.
If a measure is unjust, then it is just that it have as little general effect as possible.
Equality of unjust treatment can never be upheld as an ideal of justice.
Therefore, he who maintains that a tax be imposed equally on all, must first establish
Many writers denounce tax exemptions, and levy their fire at the tax exempt, particularly
those instrumental in obtaining the exemptions for themselves.
These writers include those advocates of the free market, who treat a tax exemption as
a special privilege, and attack it as equivalent to a subsidy, and therefore inconsistent with
with the Free Market.
Yet an exemption from taxation or any other burden is not equivalent to a subsidy.
There is a key difference.
In the latter case, a man is receiving a special grant of privilege wrested from his fellow
men.
In the former, he is escaping a burden imposed on other men.
Whereas the one is done at the expense of his fellow men, the other is not.
For in the former case, the grantee is participating in the acquisition of loot.
In the latter, he escapes payment of tribute to the looters.
To blame him for escaping is equivalent to blaming the slave for fleeing his master.
It is clear that if a certain burden is unjust, blame should be levied not on the man who
escapes the burden, but on the man or men who impose it in the first place.
If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to
extend the tax to everyone, but on the contrary to extend the exemption to everyone.
The exemption itself cannot be considered unjust unless the tax or other burden is first established
as just.
Thus, uniformity of treatment per se cannot be established as a canon of justice.
A tax must first be proven just.
If it is unjust, then uniformity is simply imposition of general injustice, and exemption
Taxation is to be welcomed.
Since the very fact of taxation is an interference with the free market, it is particularly incongruous
and incorrect for advocates of a free market to advocate uniformity of taxation.
One of the major sources of confusion for economists and others who are in favor of
of the Free Market is that the free society has often been defined as a condition of equality
before the law or as special privilege for none.
As a result, many have transferred these concepts to an attack on tax exemptions as a special
privilege and a violation of the principle of equality before the law.
As for the latter concept, it is again hardly a criterion of justice, for this depends on
the justice of the law or treatment itself.
It is this alleged justice, rather than equality, which is the primary feature of the free market.
In fact, the free society is far better described by some such phrase as equality of rights
to Defend Person and Property, or Equality of Liberty, rather than by the vague, misleading
expression Equality before the Law.
In the literature on taxation, there is much angry discussion about loopholes, the inference
being that any income or area exempt from taxation must be brought quickly under its
sway.
Any failure to plug loopholes is treated as immoral.
But as Mises incisively asked, what is a loophole?
If the law does not punish a definite action or does not tax a definite thing, this is
not a loophole.
It is simply the law.
The income tax exemptions in our income tax are not loopholes.
Thanks to these loopholes, this country is still a free country.
B. The Impossibility of Uniformity.
Aside from these considerations, the ideal of uniformity is impossible to achieve.
Let us confine our further discussion of uniformity to income taxation for two reasons.
1. Because the vast bulk of our taxation is income taxation, and 2. Because, as we have seen, most other taxes boil down to income taxes anyway.
A tax on consumption ends largely as a tax on income at a lower rate.
There are two basic reasons why uniformity of income taxation is an impossible goal.
The first stems from the very nature of the state.
We have seen, when discussing Calhoun's analysis, that the state must separate society into two
classes or castes, the tax-paying caste and the tax-consuming caste.
The tax-consumers consist of the full-time bureaucracy and politicians in power, as well
as well as the groups which receive net subsidies, that is, which receive more from the government
than they pay to the government.
These include the receivers of government contracts and of government expenditures on
goods and services produced in the private sector.
It is not always easy to detect the net subsidized in practice, but this caste can always be conceptually
Thus, when the government levies a tax on private incomes, the money is shifted from
private people to the government, and the government's money, whether expended for
government consumption of goods and services, for salaries to bureaucrats, or as subsidies
to privileged groups, returns to be spent in the economic system.
It is clear that the tax expenditure level must distort the expenditure pattern of the
market and shift productive resources away from the pattern desired by the producers
and toward that desired by the privileged.
This distortion takes place in proportion to the amount of taxation.
If, for example, the government taxes funds that would have been spent on automobiles
and itself spends them on arms, the arms industry and, in the long run, the specific factors
in the arms industry become net tax consumers, while a special loss is inflicted on the automobile
industry and, ultimately, on the factors specific to that industry.
It is because of these complex relationships that, as we have mentioned, the identification
in practice of the net subsidized may be difficult.
One thing we know without difficulty, however, bureaucrats are net tax consumers.
As we pointed out, bureaucrats cannot pay taxes.
Hence it is inherently impossible for bureaucrats to pay income taxes uniformly with everyone
else, and therefore the ideal of uniform income taxation for all is an impossible goal.
We repeat that the bureaucrat who receives $8,000 a year income and then hands $1,500
is engaging in a mere bookkeeping transaction of no economic importance, aside from the waste of paper and records involved.
For he does not and cannot pay taxes. He simply receives $6500 a year from the tax fund.
If it is impossible to tax income uniformly because of the nature of the tax process itself, the attempt to do so also confronts another insuperable difficulty, that of trying to arrive at a cogent definition of income.
Should taxable income include the imputed money value of services received in kind, such as farm produce grown on one's own farm?
What about imputed rent from living in one's own house, or the imputed services of a housewife?
Regardless of which course is taken in any of these cases,
A good argument can be made that the incomes included as taxable are not the correct ones.
And if it is decided to impute the value of goods received in kind, the estimates must
always be arbitrary, since the actual sales for money were not made.
A similar difficulty is raised by the question whether incomes should be averaged over several
Businesses that suffer losses and reap profits are penalized as against those with steady incomes, unless of course the government subsidizes part of the loss.
This may be corrected by permitting averaging of income over several years.
But here again, the problem is insoluble, because there are only arbitrary ways of deciding the period of time to allow for averaging.
If the income tax rate is progressive, that is, if the rate increases as earnings increase,
then failure to permit averaging penalizes the man with an erratic income.
But again, to permit averaging will destroy the ideal of uniform current tax rates.
Furthermore, varying the period of averaging will vary the results.
We have seen that in order to tax income only, it is necessary to correct for changes in
the purchasing power of money when taxing capital gains.
But, once again, any index or factor of correction is purely arbitrary, and uniformity cannot
be achieved because of the impossibility of securing general agreement on a definition
of income.
For all these reasons, the goal of uniformity of taxation is an impossible one.
It is not simply difficult to achieve in practice, it is conceptually impossible and self-contradictory.
Surely any ethical goal that is conceptually impossible of achievement is an absurd goal,
and therefore any movements in the direction of the goal are absurd as well.
To say that an ethical goal is conceptually impossible is completely different from saying
It is therefore legitimate, and even necessary, to engage in a logical, that is, praxeological,
Critique of Ethical Goals and Systems when they are relevant to economics.
Having analyzed the goal of uniformity of treatment, we turn now to the various principles that
have been set forth to give content to the idea of uniformity, to answer the question,
uniform in respect to what?
Should taxes be uniform as to ability to pay, or sacrifice, or benefits received?
In other words, while most writers have rather unthinkingly granted that people in the same
income bracket should pay the same tax, what principle should govern the distribution of
income taxes between tax brackets?
Should the man making $10,000 a year pay as much as, as much proportionately as, more
than, more proportionately than, or less than, a man making $5,000 or $1,000 a year?
In short, should people pay uniformly in accordance with their ability to pay, or sacrifice made,
or some other principle?
2.
The Ability to Pay Principle a.
The Ambiguity of the Concept
This principle states that people should pay taxes in accordance with their ability to
pay.
It is generally conceded that the concept of ability to pay is a highly ambiguous one
and presents no sure guide for practical application.
Most economists have employed the principle to support a program of proportional or progressive
income taxation, but this would hardly suffice.
It seems clear, for example, that a person's accumulated wealth affects his ability to
pay.
A man earning $5,000 during a certain year probably has more ability to pay than a neighbor
earning the same amount if he also has $50,000 in the bank, while his neighbor has nothing.
Yet a tax on accumulated capital would cause general impoverishment.
No clear standard can be found to gauge ability to pay.
Both wealth and income would have to be considered.
Medical expenses would have to be deducted, etc.
But there is no precise criterion to be invoked, and the decision is necessarily arbitrary.
Thus, should all or some proportion of medical bills be deducted, what about the expenses
of child rearing, or food, clothing and shelter as necessary to consumer maintenance?
Professor John Doe attempts to find a criterion for ability in economic well-being, but it
should be clear that this concept, being even more subjective, is still more difficult to
define.
Adam Smith himself used the ability concept to support proportional income taxation, taxation
are often at a constant percentage of income, but his argument is rather ambiguous and applies to the benefit principle as well as to ability to pay.
Said Smith,
are all obliged to contribute to their respective interests in the estate.
Indeed, it is hard to see in precisely what sense ability to pay rises in proportion to income.
Is a man earning $10,000 a year equally able to pay $2,000 as a man earning $1,000 to pay $200?
Setting aside the basic qualifications of difference in wealth, medical expenses, etc., in what sense can equal ability be demonstrated? Attempting to define equal ability in such a way is a meaningless procedure.
J.K. McCullough, in a famous passage, attacked progressiveness and defended proportionality of taxation.
The moment you abandon the cardinal principle of exacting from all individuals the same proportion of their income or their property, you are at sea without rudder or compass, and there is no amount of injustice or folly you may not commit.
Seemingly plausible, this thesis is by no means self-evident.
In what way is proportional taxation any less arbitrary than any given pattern of progressive
taxation, that is, where the rate of tax increases with income? There must be some
principle that can justify proportionality. If this principle does not exist, then proportionality
is no less arbitrary than any other taxing pattern. Various principles have been offered and will be
considered, but the point is that proportionality per se is neither more nor less sound than any
other taxation. One school of thought attempts to find a justification for a progressive tax
via an Ability to Pay principle.
This is the faculty approach of E.R.A. Seligman.
This doctrine holds that the more money a person has, the relatively easier it is for
him to acquire more.
His power of obtaining money is supposed to increase as he has more.
A rich man may be said to be subject to a law of increasing returns.
Therefore, since his ability increases at a faster rate than his income, a progressive
income tax is justified.
This theory is simply invalid.
Money does not make money.
If it did, then a few people would by now own all the world's wealth.
To be earned, money must continually be justifying itself in current service to consumers.
Personal income, interest, profits and rents are earned only in accordance with their
current, not their past, services.
The size of accumulated fortune is immaterial, and fortunes can be and are dissipated when
their owners fail to reinvest them wisely in the service of consumers.
As Bloom and Calvin point out, the Seligman thesis is utter nonsense when applied to
to personal services such as labor energy, it could only make sense when applied to income
from property, that is, investment in land or capital goods, or slaves in a slave economy.
But the return on capital is always tending toward uniformity, and any departures from
Some uniformity are due to especially wise and far-seeing investments, profits, or especially
wasteful investments, losses.
The Seligman Thesis would fallaciously imply that the rates of return increase in proportion
to the amount invested.
Another theory holds that ability to pay is proportionate to the producer's surplus of
of an Individual, that is, his economic rent, or the amount of his income above the payment
necessary for him to continue production.
The consequences of taxation of site rent have been noted.
The necessary payments to labor are clearly impossible to establish.
If someone is asked by the tax authorities what his minimum wage is, what will prevent
The Theory of Money and Credit The Theory of Money and Credit
The Theory of Money and Credit
Any Surplus Over Necessary Payment from Land or Capital Since None Exists and Practically
Impossible to Tax the Surplus to Labor Since the Existence of a Sizable Surplus is Rare,
Impossible to Determine and, in any case, No Criterion Whatever of Ability to Pay
B. The Justice of the Standard
The extremely popular ability-to-pay idea was sanctified by Adam Smith in his most important
canon of taxation and has been accepted blindly ever since.
While much criticism has been leveled at its inherent vagueness, hardly anyone has criticized
the basic principle, despite the fact that no one has really grounded it in sound argument.
Roth himself gave no reasoning to support this alleged principle, and few others have done
so since.
John Doe, in his text on public finance, simply accepts it because most people believe in
it, thereby ignoring the possibility of any logical analysis of ethical principles.
The only substantial attempt to give some rational support to the ability-to-pay principle
rests on a strained comparison of tax payments to voluntary gifts to charitable organizations.
Thus, Harold M. Groves writes,
To hundreds of common enterprises, community chests, Red Cross, etc.,
people are expected to contribute according to their means.
Governments are one of these common enterprises fostered to serve the citizens as a group.
Seldom have more fallacies been packed into two sentences.
In the first place, the government is not a common enterprise akin to the community
chest.
No one can resign from it.
No one on penalty of imprisonment can come to the conclusion that this charitable enterprise
is not doing its job properly and therefore stop his contribution.
No one can simply lose interest and drop out.
If, as will be seen further, the state cannot be described as a business engaged in selling
services on the market, certainly it is ludicrous to equate it to a charitable organization.
Government is the very negation of charity, for charity is uniquely an unbought gift,
A freely flowing, uncoerced act by the giver. The word expected in Grove's phrase is misleading.
No one is forced to give to any charity in which he is not interested, or which he believes
is not doing its job properly. The contrast is even clearer in a phrase of Merlin Hunter
and Harry Allen's.
Contributions to support the church or the community chest are expected, not on the basis
of benefits which individual members receive from the organization, but upon the basis
of their ability to contribute.
But this is praxeologically invalid.
The reason that anyone contributes voluntarily to a charity is precisely the benefit that
that he obtains from it.
Yet benefit can be considered only in a subjective sense.
It can never be measured.
The fact of subjective gain or benefit from an act is deducible from the fact that it
was performed.
Each person making an exchange is deduced to have benefited, at least ex ante.
Similarly, a person who makes a unilateral gift is deduced to have benefited ex ante
from making the gift.
If he did not benefit, he would not have made the gift.
This is another indication that praxeology does not assume the existence of an economic
man, for the benefit from an action may come either from a good or a service directly received
The Theory of Money and Credit
The market price, generally considered the just price, is almost always uniform or tending toward uniformity.
Market prices tend to obey the rule of one price throughout the entire market.
Everyone pays an equal price for a good, regardless of how much money he has or his ability to pay.
Indeed, if the ability to pay principle pervaded the market, there would be no point in acquiring
wealth, for everyone would have to pay more for a product in proportion to the money in
his possession.
Money incomes would be approximately equalized, and in fact there would be no point at all
to acquiring money, since the purchasing power of a unit of money would never be definite,
would drop, for any man, in proportion to the quantity of money he earns.
A person with less money would simply find the purchasing power of a unit of his money
rising accordingly.
Therefore, unless trickery and black marketeering could evade the regulations, establishing
the ability-to-pay principle for prices would wreck the market altogether.
The wrecking of the market and the monetary economy would plunge society back to primitive
living standards, and, of course, eliminate a large part of the current world population,
which is permitted to earn a subsistence living or higher by virtue of the existence of the
modern developed market.
It should be clear, moreover, that establishing equal incomes and wealth for all, for example,
by taxing all those over a certain standard of income and wealth and subsidizing all those
below that standard would have the same effect, since there would be no point to anyone's
working for money.
Those who enjoy performing labor will do so only at play, that is, without obtaining a
monetary return.
and forced equality of income and wealth, therefore, would return the economy to barbarism.
If taxes were to be patterned after market pricing, then, taxes would be levied equally,
not proportionately, on everyone.
As will be seen, equal taxation differs in critical respects from market pricing, but
The ability to pay principle means precisely that the able are penalized, that is, those
most able in serving the wants of their fellow men.
Penalizing ability in production and service diminishes the supply of the service and in
in proportion to the extent of that ability.
The result will be impoverishment, not only of the able, but of the rest of society, which
benefits from their services.
The ability to pay principle, in short, cannot be simply assumed.
If it is employed, it must be justified by logical argument, and this economists have
yet to provide.
Rather than being an evident rule of justice, the ability to pay principle resembles more
the highwayman's principle of taking where the taking is good.
3.
Sacrifice Theory Another attempted criterion of just taxation
was the subject of a flourishing literature for many decades, although it is now decidedly
going out of fashion.
The many variants of the sacrifice approach are akin to a subjective version of the ability
to pay principle.
They all rest on three general premises.
A. That the utility of a unit of money to an individual diminishes as his stock of money
increases.
B. That these utilities can be compared interpersonally and thus can be summed up, subtracted, etc.
And C. That everyone has the same utility of money schedule.
The first premise is valid, but only in an ordinal sense, but the second and third are
nonsensical.
The marginal utility of money does diminish, but it is impossible to compare one person's
utilities with another, let alone believe that everyone's valuations are identical.
Utilities are not quantities, but subjective orders of preference.
Any principle for distributing the tax burden that rests on such assumptions must therefore
be declared fallacious.
Happily, this truth is now generally established in the economic literature.
Utility and sacrifice theory has generally been used to justify progressive taxation,
although sometimes proportional taxation has been upheld on this ground.
Briefly, a dollar is alleged to mean less, or be worth less in utility to a rich man
Many ability-to-pay theories are really inverted sacrifice theories, since they are couched
in the form of Ability to Make Sacrifices. Since the nub of the sacrifice theory, interpersonal
comparisons of utility is now generally discarded, we shall not spend much time discussing the
sacrifice doctrine in detail. However, several aspects of this theory are of interest. The
The Sacrifice Theory divides into two main branches, one, the Equal Sacrifice Principle,
and two, the Minimum Sacrifice Principle.
The former states that every man should sacrifice equally in paying taxes.
The latter, that society as a whole should sacrifice the least amount.
Both versions abandon completely the idea of government as a supplier of benefits, and
treat government and taxation as simply a burden, a sacrifice that must be borne in
the best way we know how.
Here we have a curious principle of justice indeed, based on adjustment to hurt.
We are faced again with that pons asinorum that defeats all attempts to establish canons
of justice for taxation, the problem of the justice of taxation itself.
The proponent of the sacrifice theory in realistically abandoning unproved assumptions of benefit
from taxation must face and then founder on the question, if taxation is pure hurt, why
Why Endure It at All?
The Equal Sacrifice Theory asks that equal hurt be imposed on all.
As a criterion of justice, this is as untenable as asking for equal slavery.
One interesting aspect of the Equal Sacrifice Theory, however, is that it does not necessarily
imply progressive income taxation.
For although it implies that the rich man should be taxed more than the poor man, it
does not necessarily say that the former should be taxed more than proportionately.
In fact, it does not even establish that all be taxed proportionately.
In short, the equal sacrifice principle may demand that a man earning $10,000 be taxed
more than a man earning $1,000 but not necessarily that he be taxed a greater percentage or even
proportionately. The equal sacrifice principle may well call for regressive taxation under which a
wealthier man would pay more in amount but less proportionately. For example, the man earning
The man earning $10,000 would pay $500, and the man earning $1,000 would pay $200.
The more rapidly the utility of money declines, the more probably will equal sacrifice yield progressivity.
A slowly declining utility of money schedule would call for regressive taxation.
The Minimum Sacrifice Theory has often been confused with the Equal Sacrifice Theory,
because, as we have seen, the entire theory is untenable.
But the point is that even on its own grounds,
the Equal Sacrifice Theory can justify neither progressive nor proportionate taxation.
The Minimum Sacrifice Theory has often been confused with the Equal Sacrifice Theory,
and the Minimum Sacrifice Theory, both rest on the same set of false assumptions, but the Minimum Sacrifice Theory counsels very drastic progressive taxation.
Suppose, for example, that there are two men in a community, Jones making $50,000 and Smith making $30,000.
The principle of minimum social sacrifice, resting on the three assumptions earlier described, declares one dollar taken from Jones imposes less of a sacrifice than one dollar taken from Smith.
Hence if the government needs one dollar, it takes it from Jones.
But suppose the government needs $2. The second dollar will impose less of a sacrifice on Jones than the first dollar taken from Smith, for Jones still has more money left than Smith, and therefore sacrifices less.
This continues as long as Jones has more money remaining than Smith.
Should the government need $20,000 in taxes, the minimum sacrifice principle councils taking
the entire $20,000 from Jones and zero from Smith.
In other words, it advocates taking all of the highest incomes in turn until governmental
needs are fulfilled.
Push to its logical conclusion, in which the state is urged to establish maximum social
satisfaction, the obverse of minimum social sacrifice, the principal council's absolute
compulsory egalitarianism, with everyone above a certain standard taxed in order to subsidize
everyone else to come up to that standard.
The consequence, as we have seen, would be a return to the conditions of barbarism.
The minimum sacrifice principle depends heavily, as does the equal sacrifice theory, on the
untenable view that everyone's utility of money schedule is roughly identical.
Both rest also on a further fallacy, which now must be refuted.
That sacrifice is simply the obverse of the utility of money.
For the subjective sacrifice in taxation may not be merely the opportunity cost foregone
of the money paid.
It may also be increased by moral outrage at the tax procedure.
Thus Jones may become so morally outraged at the proceedings that his marginal subjective
Subjective sacrifice quickly becomes very great, much greater than Smith's, if we grant for
a moment that the two can be compared.
Once we see that subjective sacrifice is not necessarily tied to the utility of money,
we may extend the principle further.
Consider for example a philosophical anarchist who opposes all taxation fervently.
is that his subjective sacrifice in the payment of any tax is so great as to be almost infinite.
In that case, the minimum sacrifice principle would have to exempt the anarchist from taxation,
while the equal sacrifice principle could tax him only an infinitesimal amount.
Practically then, the sacrifice principle would have to exempt the anarchist from taxation.
Furthermore, how can the government determine the subjective sacrifice of the individual?
By asking him?
In that case, how many people would refrain from proclaiming the enormity of their sacrifice
and thus escape payment completely?
Similarly, if two individuals subjectively enjoyed their identical money incomes differently,
The Minimum Sacrifice Principle would require that the happier man be taxed less, because
he makes a greater sacrifice in enjoyment from an equal tax.
Who will suggest heavier taxation on the unhappy or the ascetic, and who would then refrain
from loudly proclaiming the enormous enjoyment he derives from his income?
It is curious that the minimum-sacrifice principle counsels the obverse of the ability-to-pay
theory, which, particularly in its state-of-well-being variant, advocates a special tax on happiness
and a lower tax on unhappiness.
If the latter principle prevailed, people would rush to proclaim their unhappiness and
deep-seated asceticism.
It is clear that the proponents of the ability to pay and sacrifice theories have completely
failed to establish them as criteria of just taxation.
These theories also commit a further grave error.
For the sacrifice theory explicitly, and the ability to pay theory implicitly, set up presumed
Criteria for Action in Terms of Sacrifice and Burden
The ability to pay principle is unclear on this point.
Some proponents base their argument implicitly on sacrifice, others on the necessity for
payment for untraceable benefits.
The state is assumed to be a burden on society, and the question becomes one of justly distributing
Man is constantly striving to sacrifice as little as he can for the benefits he receives
from his actions.
Yet here is a theory that talks only in terms of sacrifice and burden, and calls for a certain
distribution without demonstrating to the taxpayers that they are benefiting more than
they are giving up.
Since the theorists do not so demonstrate, they can make their appeal only in terms of
sacrifice, a procedure that is praxeologically invalid.
Since men always try to find net benefits in a course of action, it follows that a discussion
in terms of sacrifice or burden cannot establish a rational criterion for human action.
To be praxeologically valid, a criterion must demonstrate net benefit.
It is true, of course, that the proponents of the sacrifice theory are far more realistic
than the proponents of the benefit theory, in considering the state a net burden on society
rather than a net benefit.
But this hardly demonstrates the justice of the sacrifice principle of taxation.
Quite the Contrary
4.
The Benefit Principle
The benefit principle differs radically from the two preceding criteria of taxation.
For the sacrifice and ability to pay principles depart completely from the principles of action
and the accepted criteria of justice on the market.
On the market, people act freely in those ways which they believe will confer net benefits
upon them.
The result of these actions is the monetary exchange system, with its inexorable tendency
toward uniform pricing and the allocation of productive factors to satisfy the most
urgent demands of all the consumers.
Yet the criteria used in judging taxation differ completely from those which apply to
all other actions on the market.
Suddenly free choice and uniform pricing are forgotten and the discussion is all in terms
of sacrifice, burden, etc.
If taxation is only a burden, it is no wonder that coercion must be exercised to maintain
it.
The benefit principle, on the other hand, is an attempt to establish taxation on a similar
basis as market pricing.
That is, the tax is to be levied in accordance with the benefit received by the individual.
It is an attempt to achieve the goal of a neutral tax, one that would leave the economic
system approximately as it is on the free market.
It is an attempt to achieve praxeological soundness by establishing a criterion of payment on
the basis of benefit rather than sacrifice.
The great gulf between the benefit and other principles was originally unrecognized because
of Adam Smith's confusion between ability to pay and benefit.
In the quotation cited earlier, Smith inferred that everyone benefits from the state in proportion
to his income, and that this income establishes his ability to pay.
Therefore, a tax on his ability to pay will simply be a quid pro quo in exchange for benefits
conferred by the state.
Some writers have contended that people benefit from government in proportion to their income,
Procedures that they benefit in increased proportion to their income, thus justifying
a progressive income tax.
Yet this entire application of the benefit theory is nonsensical.
How do the rich reap a greater benefit proportionately, or even more than proportionately, from government
than the poor?
They could do so only if the government were responsible for these riches by a grant of
special privilege, such as a subsidy, a monopoly grant, etc.
Otherwise how do the rich benefit?
From welfare and other redistributive expenditures, which take from the rich and give to the bureaucrats
and the poor?
Certainly not.
from Police Protection, but it is precisely the rich who could more afford to pay for
their own protection and who therefore derive less benefit from it than the poor.
The benefit theory holds that the rich benefit more from protection because their property
is more valuable.
But the cost of protection may have little relation to the value of the property, since
Since it costs less to police a bank vault containing one hundred million dollars than
to guard one hundred acres of land worth ten dollars per acre, the poor landowner receives
a far greater benefit from the state's protection than the rich owner of personality.
Neither would it be relevant to say that A earns more money than B because A receives
is a greater benefit from society and should therefore pay more in taxes.
In the first place, everyone participates in society.
The fact that A earns more than B means precisely that A's services are individually worth
more to his fellows.
Therefore, since A and B benefit similarly from society's existence, the reverse argument
It is far more accurate that the differential between them is due to A's individual superiority
in productivity and not at all to society.
Secondly, society is not at all the state, and the state's possible claim must be independently
validated.
Hence, neither proportionate nor progressive income taxation can be sustained on benefit
principles.
In fact, the reverse is true.
If everyone were to pay in accordance with benefit received, it is clear that a.
The recipients of welfare benefits would bear the full costs of these benefits.
The poor would have to pay for their own doles, including, of course, the extra cost of paying
the bureaucracy for making the transfers.
b.
The buyers of any government service would be the only payers, so that government services
could not be financed out of a general tax fund.
and c.
For police protection, a rich man would pay less than a poor man, and less in absolute amounts.
Furthermore, landowners would pay more than owners of intangible property,
and the weak and infirm, who clearly benefit more from police protection than the strong,
would have to pay higher taxes than the latter.
It becomes immediately clear why the benefit principle has been practically abandoned in
recent years, for it is evident that if a. welfare recipients and b. receivers of other
special privilege, such as monopoly grants, were to pay according to the benefit received,
there would not be much point in either form of government expenditure, and if each were
were to pay an amount equal to the benefit he received, rather than simply proportionately,
and he would have to do so, because there would be nowhere else for the state to turn
for funds.
Then, the recipient of the subsidy would not only earn nothing, but would have to pay the
bureaucracy for the cost of handling and transfer.
The establishment of the benefit principle would therefore result in a laissez-faire
system, with governments strictly limited to supplying defense service, and the taxation
for this defense service would be levied more on the poor and the infirm than on the strong
and the rich.
At first sight, the believer in the free market, the seeker after a neutral tax, is inclined
to rejoice.
It would seem that the benefit principle is the answer to his search, and this principle
is indeed closer to market principles than the previous alleged canons.
Yet, if we pursue the analysis more closely, it will be evident that the benefit principle
is still far from market neutrality.
On the market, people do not pay in accordance with individual benefit received.
They pay a uniform price, one that just induces the marginal buyer to participate in the exchange.
The more eager do not pay a higher price than the less eager.
The chess addict and the indifferent player pay the same price for the same chess set,
and the opera enthusiast and the novice pay the same price for the same ticket.
The poor and the weak would be most eager for protection, but in contrast to the benefit
principle, they would not pay more on the market.
There are even graver defects in the benefit principle.
For market exchanges, A, demonstrate benefit, and B, only establish the fact of benefit
without measuring it.
The only reason we know that A and B benefit from an exchange is that they voluntarily
make the exchange.
In this way, the market demonstrates benefit.
But where taxes are levied, the payment is compulsory, and therefore benefit can never
be demonstrated.
As a matter of fact, the existence of coercion gives rise to the opposite presumption and
implies that the tax is not a benefit, but a burden. If it really were a benefit, coercion
would not be necessary. Secondly, the benefit from exchange can never
be measured or compared interpersonally. The consumer's surplus derived from exchange
is purely subjective, nonmeasurable and noncomparable scientifically. Therefore, we never know
know what these benefits are, and hence there can be no way of allocating the taxes in accordance
with them.
Thirdly, on the market, everyone enjoys a net benefit from an exchange.
A person's benefit is not equal to his cost, but greater.
Therefore, taxing away his alleged benefit would completely violate market principles.
Finally, if each person were taxed according to the benefit he receives from government,
it is obvious that, since the bureaucracy receive all their income from this source,
they would, like other recipients of subsidy and privilege, be obliged to return their
whole salary to the government.
The bureaucracy would have to serve without pay.
We have seen that the benefit principle would dispense with all subsidy expenditures of
whatever type.
Government services would have to be sold directly to buyers, but in that case there
would be no room for government ownership, for the characteristic of a government enterprise
is that it is launched from tax funds.
Police and judicial services are often declared by the proponents of the benefit principle
to be inherently general and unspecialized, so that they would need to be purchased out of the
common tax fund rather than by individual users. However, as we have seen, this assumption is
incorrect. These services can be sold on the market like any others. Thus, even in the absence of all
other deficiencies of the benefit principle, it would still establish no warrant for taxation at
at all, for all services could be sold on the market directly to beneficiaries.
It is evident that while the benefit principle attempts to meet the market criterion of limiting
payment solely to beneficiaries, it must be adjudged a failure.
It cannot serve as a criterion for a neutral tax or any other type of taxation.
5. The Equal Tax and the Cost Principle
Equality of taxation has far more to commend it than any of the principles discussed earlier,
none of which can be used as a canon of taxation.
Equality of taxation means just that, a uniform tax on every member of the society.
This is also called a head tax, capitation tax, or poll tax.
The latter term, however, is best used to describe a uniform tax on voting, which is
what the poll tax has become in various American states.
Each person would pay the same tax annually to the government.
The equal tax would be particularly appropriate in a democracy, with its emphasis on equality
before the law, equal rights and absence of discrimination and special privilege.
It would embody the principle one vote, one tax.
It would appropriately apply only to the protection services of the government, for the government
is committed to defending everyone equally.
Therefore, it may seem just for each person to be taxed equally in return.
The principle of equality would rule out, as would the benefit principle, all government
actions except defense, for all other expenditures would set up a special privilege or subsidy
of some kind.
Finally, the equal tax would be far more nearly neutral than any of the other taxes considered,
For it would attempt to establish an equal price for equal services rendered.
One school of thought challenges this contention and asserts that a proportional tax would
be more nearly neutral than an equal tax.
The proponents of this theory point out that an equal tax alters the market's pattern
of Distribution of Income.
Thus, if A earns 1,000 gold ounces per year, B earns 200 ounces and C earns 50 ounces
and each pays 10 ounces in taxes, then the relative proportion of net income remaining
after taxes is altered and altered in the direction of greater inequality.
A proportionate tax of a fixed percentage on all three would leave the distribution
of income constant and would therefore be neutral relative to the market.
This thesis misconceives the whole problem of neutrality in taxation.
The object of the quest is not to leave the income distribution the same as if a tax had
not been imposed.
The object is to affect the income distribution and all other aspects of the economy in the
same way as if the tax were really a free market price.
And this is a very different criterion.
No market price leaves relative income distribution the same as before.
If the market really behaved in this way, there would be no advantage in earning money,
For people would have to pay proportionately higher prices for goods in accordance with
the level of their earnings.
The market tends toward uniformity of pricing and hence toward equal pricing for equal service.
Equal taxation, therefore, would be far more nearly neutral and would constitute a closer
approach to a market system.
The equal tax criterion, however, has many grave defects, even as an approach toward
a neutral tax.
In the first place, the market criterion of equal price for equal service faces the problem,
what is an equal service?
The service of police protection is of far greater magnitude in an urban crime area than
it is in some sleepy backwater.
That service is worth far more in the crime center, and therefore the price paid will
tend to be greater in a crime-ridden area than in a peaceful area.
It is very likely that in the purely free market, police and judicial services would
be sold like insurance, with each member paying regular premiums in return for a call on the
benefits of protection when needed.
It is obvious that a more risky individual, such as one living in a crime area, would
tend to pay a higher premium than individuals in another area.
To be neutral, then, a tax would have to vary in accordance with costs, and not be uniform.
This does not concede that costs determine prices.
The general array of final prices determines the general array of cost prices, but then
the viability of firms is determined by whether the price people will pay for their products
is enough to cover their costs, which are determined throughout the market.
In equilibrium, costs and prices will all be equal.
Since a tax is levied on general funds, and therefore cannot be equivalent to market pricing,
the only way to approximate market pricing is to set the tax according to costs, since
costs at least reflect market pricing of the non-specific factors.
Equal taxation would distort the allocation of social resources in defense.
The tax would be below the market price in the crime areas and above the market price
in the peaceful areas, and there would therefore be a shortage of police protection in the
dangerous areas and a surplus of protection in the others.
Another grave flaw of the equal tax principle is the same that we noted in the more general
principle of uniformity.
No bureaucrat can pay taxes An equal tax on a bureaucrat or politician
is an impossibility because he is one of the tax consumers rather than taxpayers.
Even when all other subsidies are eliminated, the government employee remains a permanent
obstacle in the path of equal tax.
As we have seen, the bureaucrat's tax payment is simply a meaningless bookkeeping device.
These flaws in the equal tax cause us to turn to the last remaining tax canon, the cost
principle.
The cost principle would apply as we have just discussed it, with the government setting
the tax in accordance with costs, like the premiums charged by an insurance company.
Walter J. Bloom and Harry Calvin mention the cost principle, but casually dismiss it as
being practically identical with the benefit principle.
Sometimes the theory is stated in terms of the cost of the government services performed
for each citizen, rather than in terms of the benefits received from such services.
This refinement may avoid the need of measuring subjective benefits, but it does little else
for the theory.
Yet their major criticism of the benefit principle is precisely that it requires the impossible
measurement of subjective benefit.
The cost principle, along with the benefit principle, dispenses with all government expenditures
except laissez-faire ones, since each recipient would be required to pay the full cost of
the service.
With respect to the laissez-faire service of protection, however, the cost principle
is clearly far superior to the benefit principle.
The cost principle would constitute the closest approach possible to neutrality of taxation.
Yet even the cost principle has fatal flaws that finally eliminate it from consideration.
In the first place, although the costs of non-specific factors could be estimated from
market knowledge, the costs of specific factors could not be determined by the state.
The impossibility of calculating specific costs stems from the fact that products of
Tax Supported Firms have no real market price, and so specific costs are unknown.
As a result, the cost principle cannot be accurately put into effect.
The cost principle is further vitiated by the fact that a compulsory monopoly, such
as state protection, will invariably have higher costs and sell lower quality service
A final flaw is common to both the equality and the cost theories of taxation.
In neither case is benefit demonstrated as accruing to the taxpayer.
Although the taxpayer is blithely assumed to be benefiting from the service, just as
he does on the market, we have seen that such an assumption cannot be made, that the use
of coercion presumes quite the contrary for many taxpayers.
The market requires a uniform price, or the exact covering of costs, only because the
The purchaser voluntarily buys the product in the expectation of being benefited.
The state, on the other hand, would force people to pay the tax even if they were not
voluntarily willing to pay the cost of this or any other defense system.
Hence, the cost principle can never provide a route to the neutral tax.
6. Taxation for Revenue Only
A slogan popular among many right-wing economists is that taxation should be for revenue only
and not for broad social purposes. On its face, this slogan is simply and palpably absurd,
since all taxes are levied for revenue. What else can taxation be called but the appropriation
Taxation of funds from private individuals by the state for its own purposes.
Some writers therefore amend the slogan to say,
Taxation should be limited to revenue essential for social services.
But what are social services?
To some people, every conceivable type of government expenditure appears as a social
service.
State takes from A and gives to B, C may applaud the act as a social service, because he dislikes
something about the former and likes something about the latter.
If on the other hand social service is limited by the unanimity rule to apply only to those
activities that serve some individuals without making others pay, then the taxation for revenue
The New Only formula is simply an ambiguous term for the benefit or the cost principles.
7. The Neutral Tax, a Summary
We have thus analyzed all the alleged canons of tax justice. Our conclusions are twofold.
One, that economics cannot assume any principle of just taxation, and that no one has successfully
established any such principles.
And two, that the neutral tax, which seems to many a valid ideal, turns out to be conceptually
impossible to achieve.
Economists must therefore abandon their futile quest for the just or the neutral tax.
Some may ask, why does anyone search for a neutral tax?
Why Consider Neutrality an Ideal?
The answer is that all services, all activities, can be provided in two ways only, by freedom
or by coercion.
The former is the way of the market, the latter of the state.
If all services were organized on the market, the result would be a purely free market system.
If all were organized by the state, the result would be socialism.
Therefore, all who are not socialists must concede some area to market activity, and
once they do so, they must justify their departures from freedom on the basis of some principle
or other.
In a society where most activities are organized on the market, advocates of state activity
must justify departures from what they themselves concede to the market sphere.
Hence, the use of neutrality is a benchmark to answer the question,
why do you want the state to step in and alter market conditions in this case?
If market prices are uniform, why should tax payments be otherwise?
But if neutral taxation is at bottom impossible, there are two logical courses left for advocates
of the neutral tax, either abandon the goal of neutrality or abandon taxation itself.
D. Voluntary Contributions to Government
A few writers, disturbed by the compulsion necessary to the existence of taxation,
have advocated that governments be financed not by taxation but by some form of voluntary
contribution. Such voluntary contribution systems could take various forms. One was
the method relied on by the old city-state of Hamburg and other communities, voluntary
gifts to the government. President William F. Warren of Boston University in his essay
Tax Exemption, The Road to Tax Abolition described his experience in one of these communities.
For five years it was the good fortune of the present writer to be domiciled in one of these
communities. Incredible as it may seem to believers in the necessity of illegal enforcement of taxes
by pains and penalties, he was for that period his own assessor and his own tax gatherer.
In common with the other citizens, he was invited, without sworn statement or declaration,
to make such contribution to the public charges as seemed to himself just and equal.
That sum, uncounted by any official, unknown to any but himself, he was asked to drop with
his own hand into a strong public chest.
On doing which, his name was checked off the list of contributors.
Every citizen felt a noble pride in such immunity from prying assessors and rude constables.
Every annual call of the authorities on that community was honored to the full.
Dr. Warren's article appeared in the Boston University Yearbook for 1876.
The Board of the Council of the University endorsed the essay in these words,
In place of the further extent of taxation advocated by many, the essay proposes a far more imposing reform, the general abolition of all compulsory taxes.
It is hoped that the comparative novelty of the proposition may not deter practical men from a thoughtful study of the paper.
Adam Smith, in one of his most sensible canons, declared,
In a small republic, where the people have entire confidence in their magistrates,
and are convinced of the necessity of the tax for the support of the state,
and believe that it will be faithfully applied to that purpose,
such conscientious and voluntary payment may sometimes be expected.
The gift method, however, presents some serious difficulties.
In particular, it continues that disjunction between payment and receipt of service,
which constitutes one of the great defects of a taxing system.
Under taxation, payment is severed from receipt of service,
in striking contrast to the market, where payment and service are correlative.
The voluntary gift method perpetuates this disjunction.
As a result, A, B, and C continue to receive the government's defense service even if
they paid nothing for it, and only D and E contributed.
D's and E's contributions furthermore may be disproportionate.
It is true that this is the system of voluntary charity on the market, but charity flows
from the more to the less wealthy and able it does not constitute an efficient
method for organizing the general sale of a service automobiles clothes etc are
sold on the market on a regular uniform price basis and are not indiscriminately
given to some on the basis of gifts received from others under the gift
In short, where service, such as defense, flows to people regardless of payment, there will tend to be excessive demands for service, and an insufficient supply of funds to support the government.
When the advocates of taxation therefore contend that a voluntary society could never efficiently finance defense service because people would evade payment, they are correct, in so far as their strictures apply to the gift method of finance.
The gift method, however, hardly exhausts the financing methods of the purely free market.
A step in the direction of greater efficiency would have the defense agency charging a set price, instead of accepting haphazard amounts varying from the very small to the very large, but continuing to supply defense indiscriminately.
Of course, the agency would not refuse gifts for general purposes or for granting a supply
of defense service to poor people, but it would charge some minimum price commensurate
with the cost of its service.
One such method is a voting tax, now known as a poll tax.
The current poll tax began simply as a head tax, but in practice it is enforced only as
As a requirement for voting, it has therefore become a voting tax.
A poll tax or voting tax is not really a tax at all.
It is only a price charged for participating in the state organization.
Only those who voluntarily vote for state officials, that is, who participate in the
state machinery, are required to pay the tax.
If all the state's revenues were derived from poll taxes, therefore, this would not
be a system of taxation at all, but rather voluntary contributions in payment for the
right to participate in the state's machinery.
The voting tax would be an improvement over the gift method because it would charge a
certain uniform or minimal amount.
To the proposal to finance all government revenues from poll taxes, it has been objected that
practically no one would vote under these conditions.
This is perhaps an accurate prediction, but curiously the critics of the poll tax never
pursue their analysis beyond this point.
It is clear that this reveals something very important about the nature of the voting process.
Voting is a highly marginal activity, because a. the voter obtains no direct benefits from
his act of voting, and b. his aliquot power over the final decision is so small that his
abstention from voting would make no appreciable difference to the final outcome.
In short, in contrast to all other choices a man may make, in political voting he has
has practically no power over the outcome, and the outcome would make little direct difference
to him anyway.
It is no wonder that well over half the eligible American voters persistently refused to take
part in the annual November balloting.
This discussion also illuminates a puzzling phenomenon in American political life, the
The constant exhortation by politicians of all parties for people to vote.
We don't care how you vote, but vote is a standard political slogan.
Voting like taxation is another activity generally phrased in terms of duty rather than benefit.
The call to duty is as praxeologically unsound as the call to sacrifice, and generally amounts
to the same thing.
For both exhortations tacitly admit that the actor will derive little or no benefit from
his action.
Further, the invocation of duty or sacrifice implies that someone else is going to receive
the sacrifice or the payment of the obligation, and often that someone is the exhorter himself.
On its face, it makes little sense, for one would think that at least one of the parties
would see advantages in a small vote.
But it does make a great deal of sense when we realize the enormous desire of politicians
of all parties to make it appear that the people have given them a mandate in the election,
that all the democratic shibboleths about representing the people, etc., are true.
The reason for the relative triviality of voting is, once again, the disjunction between
voting and payment on the one hand and benefit on the other.
The poll tax gives rise to the same problem.
The voter, with or without paying a poll tax, receives no more benefit in protection than
the non-voter.
Consequently, people will refuse to vote in droves under a single poll tax scheme, and everyone will demand the use of the artificially free defense resources.
Both the gift and the voting tax methods of voluntary financing of government, therefore, must be discarded as inefficient.
A third method has been proposed, which we can best call by the paradoxical name voluntary taxation.
The plan envisioned is as follows.
Every land area would, as now, be governed by one monopolistic state.
The state's officials would be chosen by democratic voting as at present.
The state would set a uniform price, or perhaps a set of cost prices, for protective services,
and it would be left to each individual to make a voluntary choice whether to pay or
not to pay the price.
If he pays the price, he receives the benefit of governmental defense service.
If he does not, he goes unprotected.
We are assuming that the government will confine its use of force to defense, that is, will
pursue a strictly laissez-faire policy.
Theoretically, it is possible that a government may get all its revenue from voluntary contribution,
and yet pursue a highly coercive interventionist policy in other areas of the market.
The possibility is so remote in practice, however, that we may disregard it here.
It is highly unlikely that a government coercive in other ways would not take immediate steps
to see that its revenues are assured by coercion.
Its own revenue is always the state's prime concern.
Note the very heavy penalties for income tax evasion and counterfeiting of government paper
money.
The leading voluntary taxationists have been Oberon Herbert, his associate Jay Greaves Fisher
and sometimes Gustav de Molinari.
The same position is found earlier, to a far less developed extent, in the early editions
of Herbert Spencer's Social Statics, particularly his chapter on the right to ignore the state
and in Thoreau's Essay on Civil Disobedience.
The voluntary taxation method preserves a voluntary system, is or appears to be neutral
vis-à-vis the market, and eliminates the payment benefit disjunction.
And yet, this proposal has several important defects.
Its most serious flaw is inconsistency.
For the voluntary taxationists aim at establishing a system in which no one is coerced who is
is not himself an invader of the person or property of others, hence their complete elimination
of taxation.
But although they eliminate the compulsion to subscribe to the government defense monopoly,
they yet retain that monopoly.
They are therefore faced with the problem, would they use force to compel people not
to use a freely competing defense agency within the same geographic area.
The voluntary taxationists have never attempted to answer this problem.
They have rather stubbornly assumed that no one would set up a competing defense agency
within a state's territorial limits.
And yet, if people are free to pay or not to pay taxes, it is obvious that some people
People will not simply refuse to pay for all protection.
Dissatisfied with the quality of defense they receive from the government or with the price
they must pay, they will elect to form a competing defense agency or government within the area
and subscribe to it.
The voluntary taxation system is thus impossible of attainment because it would be in unstable
equilibrium.
If the government elected to outlaw all competing defense agencies, it would no longer function
as the voluntary society sought by its proponents.
It would not force payment of taxes, but it would say to the citizens, you are free to
accept and pay for our protection or to abstain, but you are not free to purchase defense from
a competing agency.
This is not a free market.
This is a compulsory monopoly, once again a grant of monopoly privilege by the state
to itself.
Such a monopoly would be far less efficient than a freely competitive system, hence its
costs would be higher, its service poorer.
It would clearly not be neutral to the market.
On the other hand, if the government did permit free competition in defense service, there
There would soon no longer be a central government over the territory.
Defense agencies, police and judicial would compete with one another in the same uncoerced
manner as the producers of any other service on the market.
The prices would be lower, the service more efficient, and for the first and only time
the defense system would then be neutral in relation to the market.
It would be neutral because it would be a part of the market itself.
Defense service would at last be made fully marketable.
No longer would anyone be able to point to one particular building or set of buildings,
one uniform or set of uniforms, as representing our government.
While the government would cease to exist, the same cannot be said for a constitution
or a rule of law, which, in fact, would take on in the free society a far more important
function than at present.
For the freely competing judicial agencies would have to be guided by a body of absolute
law to enable them to distinguish objectively between defense and invasion.
This law, embodying elaborations upon the basic injunction to defend person and property
from acts of invasion, would be codified in the basic legal code.
Failure to establish such a code of law would tend to break down the free market.
For then, defense against invasion could not be adequately achieved.
On the other hand, those neo-Tolstoyan non-resisters who refuse to employ violence even for defense
would not themselves be forced into any relationship with the defense agencies.
Thus, if a government based on voluntary taxation permits free competition, the result will
be the purely free market system outlined in Chapter 1.
The previous government would now simply be one competing defense agency among many on
the market.
It would, in fact, be competing at a severe disadvantage, having been established on the
principle of democratic voting.
Looked at as a market phenomenon, democratic voting, one vote per person, is simply the
method of the consumer cooperative.
Empirically, it has been demonstrated time and again that cooperatives cannot compete
successfully against stock-owned companies, especially when both are equal before the
law.
There is no reason to believe that cooperatives for defense would be any more efficient, hence
we may expect the old cooperative government to wither away through loss of customers on
in the market, while joint stock, that is, corporate defense agencies, would become the
prevailing market form.
These corporations would not, of course, need any charter from a government, but would charter
themselves in accordance with the ways in which their owners decided to pool their capital.
They could announce their limited liability in advance, and then all their creditors would
would be put amply on guard.
There is a strong a priori reason for believing that corporations will be superior to cooperatives
in any given situation, for if each owner receives only one vote, regardless of how
much money he has invested in a project, and earnings are divided in the same way, there
is no incentive to invest more than the next man.
In fact, every incentive is the other way. This hampering of investment militates strongly
against the cooperative form.