WEBVTT

NOTE 4. Binary Intervention: Taxation

1
00:00:00.000 --> 00:00:06.000
Chapter 4. Binary Intervention. Taxation.

2
00:00:06.000 --> 00:00:13.000
1. Introduction. Government Revenues and Expenditures.

3
00:00:13.000 --> 00:00:19.000
An interventionist agency such as the government must spend funds.

4
00:00:19.000 --> 00:00:23.000
In the monetary economy, this means spending money.

5
00:00:23.000 --> 00:00:29.000
This money can be derived only from revenues or income.

6
00:00:29.000 --> 00:00:42.000
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.

7
00:00:42.000 --> 00:00:48.000
Taxation is a coerced levy that the government extracts from the populace.

8
00:00:48.000 --> 00:00:57.000
Inflation is the basically fraudulent issue of pseudo-warehouse receipts for money, or new money.

9
00:00:57.000 --> 00:01:03.720
Inflation, which poses special problems of its own, has been dealt with elsewhere.

10
00:01:03.720 --> 00:01:07.840
This chapter focuses on taxation.

11
00:01:07.840 --> 00:01:14.040
We are discussing the government for the most part since empirically it is the prime organization

12
00:01:14.040 --> 00:01:16.240
for coercive intervention.

13
00:01:16.240 --> 00:01:23.020
However, our analysis will actually apply to all coercive organizations.

14
00:01:23.020 --> 00:01:28.900
If governments budget their revenues and expenditures, so must criminals.

15
00:01:28.900 --> 00:01:35.760
Where a government levies taxes, criminals extract their own brand of coerced levies.

16
00:01:35.760 --> 00:01:41.900
Where a government issues fraudulent or fiat money, criminals may counterfeit.

17
00:01:41.900 --> 00:01:47.520
It should be understood that, praxeologically, there is no difference between the nature

18
00:01:47.520 --> 00:02:12.240
The Government imposes its jurisdiction over a wide area, and usually operates unmolested.

19
00:02:12.240 --> 00:02:19.280
Criminals, on the contrary, usually impose their jurisdiction on a narrow area only,

20
00:02:19.280 --> 00:02:23.260
and generally eke out a precarious existence.

21
00:02:23.260 --> 00:02:27.640
Even this distinction does not always hold true, however.

22
00:02:27.640 --> 00:02:34.120
In many parts of many countries, bandit groups win the passive consent of the majority in

23
00:02:34.120 --> 00:02:41.080
a particular area, and establish what amounts to effective governments, or states, within

24
00:02:41.080 --> 00:02:42.640
in the Area.

25
00:02:42.640 --> 00:02:48.640
The difference between a government and a criminal band, then, is a matter of degree

26
00:02:48.640 --> 00:02:53.280
rather than kind, and the two often shade into each other.

27
00:02:53.280 --> 00:03:00.080
Thus, a defeated government in a civil war may often take on the status of a bandit group

28
00:03:00.080 --> 00:03:06.840
clinging to a small area of the country, and there is no praxeological difference between

29
00:03:06.840 --> 00:03:08.560
the two.

30
00:03:08.560 --> 00:03:15.640
The striking title of Mr. Frank Chatarov's pamphlet, Taxation is Robbery, is therefore

31
00:03:15.640 --> 00:03:18.420
praxeologically accurate.

32
00:03:18.420 --> 00:03:27.240
As Chatarov says, a historical study of taxation leads inevitably to loot, tribute, ransom,

33
00:03:27.240 --> 00:03:30.360
the economic purpose of conquest.

34
00:03:30.360 --> 00:03:35.760
The barons who put up toll gates along the Rhine were tax gatherers.

35
00:03:35.760 --> 00:03:42.640
So were the gangs who protected, for a forced fee, the caravans going to market.

36
00:03:42.640 --> 00:03:49.280
The Danes, who regularly invited themselves into England and remained as unwanted guests

37
00:03:49.280 --> 00:03:52.880
until paid off, called it dannegeld.

38
00:03:52.880 --> 00:03:58.240
For a long time, that remained the basis of English property taxes.

39
00:03:58.240 --> 00:04:04.320
The conquering Romans introduced the idea that what they collected from subject peoples was

40
00:04:04.320 --> 00:04:08.820
was merely just payment for maintaining law and order.

41
00:04:08.820 --> 00:04:15.660
For a long time the Norman conquerors collected catch as catch can tribute from the English,

42
00:04:15.660 --> 00:04:22.140
but when by natural processes an amalgam of the two peoples resulted in a nation, the

43
00:04:22.140 --> 00:04:29.260
collections were regularized in custom and law and were called taxes.

44
00:04:29.260 --> 00:04:36.500
Some writers maintain that only government expenditures, not revenues, constitute a burden

45
00:04:36.500 --> 00:04:38.980
on the rest of society.

46
00:04:38.980 --> 00:04:45.200
But the government cannot spend money until it obtains it as revenue, whether that revenue

47
00:04:45.200 --> 00:04:50.940
comes from taxation, inflation, or borrowing from the public.

48
00:04:50.940 --> 00:04:55.500
On the other hand, all revenue is spent.

49
00:04:55.500 --> 00:05:02.100
Revenue can differ from expenditure only in the rare case of deflation of part of the

50
00:05:02.100 --> 00:05:08.640
government funds, or government hoarding, if the standard is purely specie.

51
00:05:08.640 --> 00:05:15.780
In that case, as we shall see, revenues are not a full burden, but government expenditures

52
00:05:15.780 --> 00:05:22.400
are more burdensome than their monetary amount would indicate, because the real proportion

53
00:05:22.400 --> 00:05:28.800
of Government Expenditures to the National Income will have increased.

54
00:05:28.800 --> 00:05:35.260
For the rest of this chapter we shall assume that there is no such fiscal deflation and

55
00:05:35.260 --> 00:05:43.280
therefore that every increase in taxes is matched by an increase in government expenditures.

56
00:05:43.280 --> 00:05:45.040
2.

57
00:05:45.040 --> 00:05:51.120
The Burdens and Benefits of Taxation and Expenditures

58
00:05:51.120 --> 00:05:58.300
As John C. Calhoun brilliantly pointed out, there are two groups of individuals in society,

59
00:05:58.300 --> 00:06:06.880
the taxpayers and the tax consumers, those who are burdened by taxes and those who benefit.

60
00:06:06.880 --> 00:06:09.940
Who is burdened by taxation?

61
00:06:09.940 --> 00:06:15.100
The direct or immediate answer is those who pay taxes.

62
00:06:15.100 --> 00:06:22.060
We shall postpone the questions of the shifting of tax burdens to a later section.

63
00:06:22.060 --> 00:06:24.540
Who benefits from taxation?

64
00:06:24.540 --> 00:06:31.700
It is clear that the primary beneficiaries are those who live full-time off the proceeds.

65
00:06:31.700 --> 00:06:35.820
For example, the politicians and the bureaucracy.

66
00:06:35.820 --> 00:06:38.660
These are the full-time rulers.

67
00:06:38.660 --> 00:06:45.260
It should be clear that regardless of legal forms, the bureaucrats pay no taxes.

68
00:06:45.260 --> 00:06:48.120
They consume taxes.

69
00:06:48.120 --> 00:06:57.380
If a bureaucrat receives a salary of $5,000 a year and pays $1,000 in taxes to the government,

70
00:06:57.380 --> 00:07:05.780
it is quite obvious that he is simply receiving a salary of $4,000 and pays no taxes at all.

71
00:07:05.780 --> 00:07:12.620
The heads of the government have simply chosen a complex and misleading accounting device

72
00:07:12.620 --> 00:07:18.940
to make it appear that he pays taxes in the same way as any other men making the same

73
00:07:18.940 --> 00:07:20.360
income.

74
00:07:20.360 --> 00:07:28.200
The UN's arrangement, whereby all its employees are exempt from any income taxation, is far

75
00:07:28.200 --> 00:07:30.700
more candid.

76
00:07:30.700 --> 00:07:37.500
All beneficiaries of government revenue are those in society subsidized by the government.

77
00:07:37.500 --> 00:07:40.020
These are the part-time rulers.

78
00:07:40.020 --> 00:07:47.020
Generally, a state cannot win the passive support of a majority unless it supplements

79
00:07:47.020 --> 00:07:54.100
its full-time employees, that is, its members, with subsidized adherents.

80
00:07:54.100 --> 00:08:00.660
The hiring of bureaucrats and the subsidizing of others are essential in order to win active

81
00:08:00.660 --> 00:08:04.300
1. Active support from a large group of the populace.

82
00:08:04.300 --> 00:08:12.020
Once a state can cement a large group of active adherents to its cause, it can count on the

83
00:08:12.020 --> 00:08:19.360
ignorance and apathy of the remainder of the public to win passive adherents from a majority

84
00:08:19.360 --> 00:08:25.320
and to reduce any active opposition to a bare minimum.

85
00:08:25.320 --> 00:08:31.980
The problem of the diffusion of expenditures and benefits is, however, more complicated

86
00:08:31.980 --> 00:08:37.980
when the government spends money for its various activities and enterprises.

87
00:08:37.980 --> 00:08:46.180
In this case, it acts always as a consumer of resources, for example, military expenditures,

88
00:08:46.180 --> 00:08:48.320
public works, etc.

89
00:08:48.320 --> 00:08:54.980
And it puts tax money into circulation by spending it on factors of production.

90
00:08:54.980 --> 00:09:01.260
Suppose, to make the illustration clearer, the government taxes the codfish industry

91
00:09:01.260 --> 00:09:07.100
and uses the proceeds of this tax to spend money on armaments.

92
00:09:07.100 --> 00:09:14.460
The first receiver of the money is the armament manufacturer, who pays it out to his suppliers

93
00:09:14.460 --> 00:09:18.560
and the owners of original factors, etc.

94
00:09:18.560 --> 00:09:26.560
In the meantime, the codfish industry, stripped of capital, reduces its demand for factors.

95
00:09:26.560 --> 00:09:34.080
In both cases, the burdens and benefits diffuse themselves throughout the economy.

96
00:09:34.080 --> 00:09:41.760
Consumer demand, by virtue of state coercion, has shifted from codfish to armaments.

97
00:09:41.760 --> 00:09:49.120
The result imposes short-run losses on the codfish industry and those who supply it,

98
00:09:49.120 --> 00:09:55.160
and short-run gains on the armaments industry and those who supply it.

99
00:09:55.160 --> 00:10:02.220
As the ripples of expenditure are pushed further and further back, the impact dies out, having

100
00:10:02.220 --> 00:10:10.200
been strongest at the points of first contact, that is, the codfish and the armaments industries.

101
00:10:10.200 --> 00:10:17.660
In the long run, however, all firms and all industries earn a uniform return, and any

102
00:10:17.660 --> 00:10:22.840
gains or losses are imputed back to original factors.

103
00:10:22.840 --> 00:10:30.320
The non-specific or convertible factors will tend to shift out of the codfish and into

104
00:10:30.320 --> 00:10:32.600
the armaments industry.

105
00:10:32.600 --> 00:10:40.380
The shift will not necessarily or even probably be from the codfish to the armament industry

106
00:10:40.380 --> 00:10:41.880
directly.

107
00:10:41.880 --> 00:10:49.600
Rather, factors will shift from the codfish to other related industries and to the armament

108
00:10:49.600 --> 00:10:53.400
industry from its related lines.

109
00:10:53.400 --> 00:11:00.840
The purely specific or non-convertible original factors will remain to bear the full burden

110
00:11:00.840 --> 00:11:06.040
of the Loss, and to reap the gain respectively.

111
00:11:06.040 --> 00:11:13.540
Even the non-specific factors will bear losses and reap gains, though to a lesser degree.

112
00:11:13.540 --> 00:11:20.200
The major effect of the change, however, will eventually be felt by the owners of the specific

113
00:11:20.200 --> 00:11:26.560
original factors, largely the landowners of the two industries.

114
00:11:26.560 --> 00:11:33.360
Taxes are compatible with equilibrium, and therefore we may trace the long-run effects

115
00:11:33.360 --> 00:11:37.560
of a tax and expenditure in this manner.

116
00:11:37.560 --> 00:11:43.840
The diffusion effect of inflation differs from that of taxation in two ways.

117
00:11:43.840 --> 00:11:53.500
A, it is not compatible with a long-run equilibrium, and B, the new money always benefits the first

118
00:11:53.500 --> 00:11:59.540
Most half of the money receivers and penalizes the last half.

119
00:11:59.540 --> 00:12:05.860
Taxation diffusion has the same effect at first, but shifting alters incidence in the

120
00:12:05.860 --> 00:12:08.060
final reckoning.

121
00:12:08.060 --> 00:12:14.540
In the short run, of course, entrepreneurs suffer losses and earn profits because of

122
00:12:14.540 --> 00:12:17.340
the shift in demand.

123
00:12:17.340 --> 00:12:24.580
All government expenditure for resources is a form of consumption expenditure in the sense

124
00:12:24.580 --> 00:12:31.860
that the money is spent on various items because the government officials so decree.

125
00:12:31.860 --> 00:12:38.520
The purchases may therefore be called the consumption expenditure of government officials.

126
00:12:38.520 --> 00:12:46.320
It is true that the officials do not consume the product directly, but their wish has altered

127
00:12:46.320 --> 00:12:54.800
the Production Pattern to Make These Goods, and therefore they may be called its consumers.

128
00:12:54.800 --> 00:13:01.040
On the other hand, since the officials do not usually consume the products directly,

129
00:13:01.040 --> 00:13:07.200
they often believe that they are acting on behalf of the consumers, hence their choices

130
00:13:07.200 --> 00:13:11.160
are liable to an enormous degree of error.

131
00:13:11.160 --> 00:13:17.560
Alec Nov has pointed out that if these choices were simply the consumer preferences of the

132
00:13:17.560 --> 00:13:24.320
government planners themselves, they would not, as they do now, realize that they can

133
00:13:24.320 --> 00:13:27.280
and do make grievous errors.

134
00:13:27.280 --> 00:13:34.620
Thus, the choices made by government officials do not even possess the virtue of satisfying

135
00:13:34.620 --> 00:13:38.520
their own consumption preferences.

136
00:13:38.520 --> 00:13:46.160
As will be seen, all talk of government investment is fallacious.

137
00:13:46.160 --> 00:13:49.440
Taxation always has a two-fold effect.

138
00:13:49.440 --> 00:13:57.040
One, it distorts the allocation of resources in the society so that consumers can no longer

139
00:13:57.040 --> 00:14:00.920
most efficiently satisfy their wants.

140
00:14:00.920 --> 00:14:07.500
And two, for the first time, it severs distribution from production.

141
00:14:07.500 --> 00:14:12.700
brings the problem of distribution into being.

142
00:14:12.700 --> 00:14:15.260
The first point is clear.

143
00:14:15.260 --> 00:14:20.820
Government coerces consumers into giving up part of their income to the state, which

144
00:14:20.820 --> 00:14:25.420
then bids away resources from these same consumers.

145
00:14:25.420 --> 00:14:32.180
Hence, the consumers are burdened, their standard of living is lowered, and the allocation of

146
00:14:32.180 --> 00:14:38.820
of Resources is distorted away from consumer satisfaction toward the satisfaction of the

147
00:14:38.820 --> 00:14:41.140
ends of the government.

148
00:14:41.140 --> 00:14:47.820
More detailed analysis of the distorting effects of different types of taxes will be presented

149
00:14:47.820 --> 00:14:48.820
later.

150
00:14:48.820 --> 00:14:56.140
The essential point is that the object of many economists' quest, a neutral tax, that

151
00:14:56.140 --> 00:15:06.140
A tax that will leave the market exactly the same as it was without taxation must always be a chimera.

152
00:15:06.140 --> 00:15:12.140
No tax can be truly neutral. Every one will cause distortion.

153
00:15:12.140 --> 00:15:23.140
Neutrality can be achieved only on a purely free market where governmental revenues are obtained by voluntary purchase only.

154
00:15:23.140 --> 00:15:36.140
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.

155
00:15:36.140 --> 00:15:43.140
Both are methods for making the criminals pay the cost of their own apprehension.

156
00:15:43.140 --> 00:15:49.140
It is often stated that capitalism has solved the problem of production

157
00:15:49.140 --> 00:15:55.140
and that the state must now intervene to solve the problem of distribution.

158
00:15:55.140 --> 00:16:00.140
A more clearly erroneous formulation would be difficult to conceive,

159
00:16:00.140 --> 00:16:06.140
for the problem of production will never be solved until we are all in the Garden of Eden.

160
00:16:06.140 --> 00:16:12.140
Furthermore, there is no problem of distribution on the free market.

161
00:16:12.140 --> 00:16:16.140
In fact, there is no distribution at all.

162
00:16:16.140 --> 00:16:17.460
at all.

163
00:16:17.460 --> 00:16:24.740
On the free market, a man's monetary assets have been acquired precisely because his or

164
00:16:24.740 --> 00:16:29.860
his predecessor's services have been purchased by others.

165
00:16:29.860 --> 00:16:37.020
There is no distributional process apart from the production and exchange of the market.

166
00:16:37.020 --> 00:16:44.380
Hence, the very concept of distribution as something separate becomes meaningless.

167
00:16:44.380 --> 00:16:51.300
Since the free market process benefits all participants on the market and increases social

168
00:16:51.300 --> 00:16:59.060
utility, it follows directly that the distributional results of the free market, the pattern of

169
00:16:59.060 --> 00:17:09.220
income and wealth, also increases social utility and, in fact, maximizes it at any given time.

170
00:17:09.220 --> 00:17:16.700
When the government takes from Peter and gives to Paul, it then creates a separate distribution

171
00:17:16.700 --> 00:17:21.240
process and a problem of distribution.

172
00:17:21.240 --> 00:17:27.980
No longer do income and wealth flow purely from service rendered on the market.

173
00:17:27.980 --> 00:17:34.580
They now flow from special privilege created by the coercion of the state.

174
00:17:34.580 --> 00:17:42.020
Both is now distributed to exploiters at the expense of the exploited.

175
00:17:42.020 --> 00:17:49.060
It might be objected that while bureaucrats are solely exploiters and not producers, other

176
00:17:49.060 --> 00:17:54.340
subsidized groups may also be producers as well.

177
00:17:54.340 --> 00:18:01.640
Their exploitation extends, however, to the degree that they are net tax consumers rather

178
00:18:01.640 --> 00:18:03.820
than taxpayers.

179
00:18:03.820 --> 00:18:08.820
Where other productive activities are beside the point.

180
00:18:08.820 --> 00:18:15.580
The crucial point is that the extent of the distortion of resources, and of the state's

181
00:18:15.580 --> 00:18:23.580
plunder of producers, is in direct proportion to the level of taxation and government expenditures

182
00:18:23.580 --> 00:18:30.300
in the economy, as compared with the level of private income and wealth.

183
00:18:30.300 --> 00:18:36.180
It is a major contention of our analysis, in contrast to many other discussions of the

184
00:18:36.180 --> 00:18:44.300
subject, that by far the most important impact of taxation results not so much from the type

185
00:18:44.300 --> 00:18:47.620
of tax as from its amount.

186
00:18:47.620 --> 00:18:55.420
It is the total level of taxation, of government income, compared with the income of the private

187
00:18:55.420 --> 00:19:00.260
Sector that is the most important consideration.

188
00:19:00.260 --> 00:19:06.980
Far too much significance has been attached in the literature to the type of tax, to whether

189
00:19:06.980 --> 00:19:15.580
it is an income tax, progressive or proportional, sales tax, spending tax, etc.

190
00:19:15.580 --> 00:19:23.340
Though important, this is subordinate to the significance of the total level of taxation.

191
00:19:23.340 --> 00:19:25.100
3.

192
00:19:25.100 --> 00:19:29.300
The Incidents and Effects of Taxation

193
00:19:29.300 --> 00:19:33.000
Part 1 Taxes on Incomes

194
00:19:33.000 --> 00:19:39.260
A. The General Sales Tax and the Laws of Incidence

195
00:19:39.260 --> 00:19:46.020
One of the oldest problems connected with taxation is, who pays the tax?

196
00:19:46.020 --> 00:19:51.140
It would seem that the answer is clear-cut, since the government knows on whom it levies

197
00:19:51.140 --> 00:19:52.500
a tax.

198
00:19:52.500 --> 00:19:59.340
The problem, however, is not who pays the tax immediately, but who pays it in the long

199
00:19:59.340 --> 00:20:00.340
run.

200
00:20:00.340 --> 00:20:08.540
That is, whether or not the tax can be shifted from the immediate taxpayer to somebody else.

201
00:20:08.540 --> 00:20:14.700
Shifting occurs if the immediate taxpayer is able to raise his selling price to cover

202
00:20:14.700 --> 00:20:19.500
the tax, thus shifting the tax to the buyer.

203
00:20:19.500 --> 00:20:26.500
Or if he is able to lower the buying price of something he buys, thus shifting the tax

204
00:20:26.500 --> 00:20:29.260
to some other seller.

205
00:20:29.260 --> 00:20:35.740
In addition to this problem of the incidence of taxation, there is the problem of analyzing

206
00:20:35.740 --> 00:20:42.140
other economic effects of various types and amounts of taxes.

207
00:20:42.140 --> 00:20:49.040
The first law of incidence can be laid down immediately, and it is a rather radical one.

208
00:20:49.040 --> 00:20:53.240
No tax can be shifted forward.

209
00:20:53.240 --> 00:21:02.040
In other words, no tax can be shifted from seller to buyer and on to the ultimate consumer.

210
00:21:02.040 --> 00:21:08.700
We shall see how this applies specifically to excise and sales taxes, which are commonly

211
00:21:08.700 --> 00:21:11.600
thought to be shifted forward.

212
00:21:11.600 --> 00:21:18.240
It is generally considered that any tax on production or sales increases the cost of

213
00:21:18.240 --> 00:21:25.680
of Production and therefore is passed on as an increase in price to the consumer.

214
00:21:25.680 --> 00:21:33.920
Prices, however, are never determined by costs of production, but rather the reverse is true.

215
00:21:33.920 --> 00:21:40.980
The price of a good is determined by its total stock in existence and the demand schedule

216
00:21:40.980 --> 00:21:43.240
for it on the market.

217
00:21:43.240 --> 00:21:47.880
But the demand schedule is not affected at all by the tax.

218
00:21:47.880 --> 00:21:54.720
The selling price is set by any firm at the maximum net revenue point, and any higher

219
00:21:54.720 --> 00:22:01.160
price, given the demand schedule, will simply decrease net revenue.

220
00:22:01.160 --> 00:22:07.360
A tax, therefore, cannot be passed on to the consumer.

221
00:22:07.360 --> 00:22:15.040
It is true that a tax can be shifted forward in a sense, if the tax causes the supply of

222
00:22:15.040 --> 00:22:21.200
of the Good to Decrease and Therefore the Price to Rise on the Market.

223
00:22:21.200 --> 00:22:28.600
This can hardly be called shifting per se, however, for shifting implies that the tax

224
00:22:28.600 --> 00:22:33.560
is passed on with little or no trouble to the producer.

225
00:22:33.560 --> 00:22:39.720
If some producers must go out of business in order for the tax to be shifted, it is

226
00:22:39.720 --> 00:22:46.000
is hardly shifting in the proper sense, but should be placed in the category of other

227
00:22:46.000 --> 00:22:49.240
effects of taxation.

228
00:22:49.240 --> 00:22:56.200
A general sales tax is the classic example of a tax on producers that is believed to

229
00:22:56.200 --> 00:22:58.440
be shifted forward.

230
00:22:58.440 --> 00:23:05.720
The government, let us say, imposes a 20% tax on all sales at retail.

231
00:23:05.720 --> 00:23:12.380
We shall assume that the tax can be equally well enforced in all branches of sales.

232
00:23:12.380 --> 00:23:20.060
Usually, of course, it cannot, and the result will be equivalent to a specific excise tax

233
00:23:20.060 --> 00:23:24.820
on some branches of sales, but not on others.

234
00:23:24.820 --> 00:23:31.060
To most people, it seems obvious that the business will simply add 20% to their selling

235
00:23:31.060 --> 00:23:40.980
The problem is hardly that simple, however.

236
00:23:40.980 --> 00:23:48.020
In fact, as we have seen, there is no reason whatever to believe that prices can be raised

237
00:23:48.020 --> 00:23:49.740
at all.

238
00:23:49.740 --> 00:23:56.860
Prices are already at the point of maximum net revenue, the stock has not been decreased,

239
00:23:56.860 --> 00:23:59.980
and demand schedules have not changed.

240
00:23:59.980 --> 00:24:03.580
Therefore, prices cannot be increased.

241
00:24:03.580 --> 00:24:10.560
Furthermore, if we look at the general array of prices, these are determined by the supply

242
00:24:10.560 --> 00:24:13.900
of and the demand for money.

243
00:24:13.900 --> 00:24:21.340
For the array of prices to rise, there must be an increase in the supply of money, a decrease

244
00:24:21.340 --> 00:24:25.700
in the schedule of the demand for money, or both.

245
00:24:25.700 --> 00:24:29.400
Yet neither of these alternatives has occurred.

246
00:24:29.400 --> 00:24:36.620
The demand for money to hold has not decreased, the supply of goods available for money has

247
00:24:36.620 --> 00:24:42.120
not declined, and the supply of money has remained constant.

248
00:24:42.120 --> 00:24:48.960
There is no possible way that a general price increase can be obtained.

249
00:24:48.960 --> 00:24:57.000
Whereas a partial excise tax will eventually cause a drop in supply and therefore a rise

250
00:24:57.000 --> 00:25:03.920
is in the price of the product, there is no way by which resources can escape a general

251
00:25:03.920 --> 00:25:07.840
tax except into idleness.

252
00:25:07.840 --> 00:25:15.720
Since as we shall see, a sales tax is a tax on incomes, the rise in the opportunity cost

253
00:25:15.720 --> 00:25:24.600
of leisure may push some workers into idleness and thereby lower the quantity of goods produced.

254
00:25:24.600 --> 00:25:30.820
To this tenuous extent, prices will rise.

255
00:25:30.820 --> 00:25:37.220
It should be quite evident that if businesses were able to pass tax increases along to the

256
00:25:37.220 --> 00:25:43.940
consumer in the form of higher prices, they would have raised these prices already, without

257
00:25:43.940 --> 00:25:47.920
waiting for the spur of a tax increase.

258
00:25:47.920 --> 00:25:54.160
Businesses do not deliberately peg along at the lowest selling prices they can find.

259
00:25:54.160 --> 00:26:00.040
If the state of demand had permitted higher prices, firms would have taken advantage of

260
00:26:00.040 --> 00:26:02.460
this fact long before.

261
00:26:02.460 --> 00:26:08.940
It might be objected that a sales tax increase is general, and therefore that all the firms

262
00:26:08.940 --> 00:26:12.080
together can shift the tax.

263
00:26:12.080 --> 00:26:19.000
Each firm, however, follows the state of the demand for its own product, and none of these

264
00:26:19.000 --> 00:26:21.220
demands has changed.

265
00:26:21.220 --> 00:26:27.540
A tax increase does nothing to make higher prices more profitable.

266
00:26:27.540 --> 00:26:35.780
The myth that a sales tax can be shifted forward is comparable to the myth that a general union-imposed

267
00:26:35.780 --> 00:26:44.620
wage increase can be shifted forward to higher prices, thereby causing inflation.

268
00:26:44.620 --> 00:26:51.820
There is no way that the general array of prices can rise, and the only result of such

269
00:26:51.820 --> 00:26:56.500
a wage increase will be mass unemployment.

270
00:26:56.500 --> 00:27:03.660
Of course, if the money supply is increased and credit expanded, prices can be raised

271
00:27:03.660 --> 00:27:11.560
so that money wages are no longer above their discounted marginal value products.

272
00:27:11.560 --> 00:27:19.280
Many people are misled by the fact that the price the consumer pays must necessarily include

273
00:27:19.280 --> 00:27:20.940
the tax.

274
00:27:20.940 --> 00:27:28.200
When someone goes to a movie and sees prominently posted the information that the $1 admission

275
00:27:28.200 --> 00:27:36.560
covers a price of 85 cents and a tax of 15 cents, he tends to conclude that the tax has

276
00:27:36.560 --> 00:27:40.080
simply been added on to the price.

277
00:27:40.080 --> 00:27:49.080
But $1 is the price, not 85 cents, the latter sum being the income accruing to the firm

278
00:27:49.080 --> 00:27:51.100
after taxes.

279
00:27:51.100 --> 00:27:58.160
This income might well have been reduced to allow for payment of taxes.

280
00:27:58.160 --> 00:28:03.420
In fact, this is precisely the effect of a general sales tax.

281
00:28:03.420 --> 00:28:10.560
Its immediate impact lowers the gross revenue of firms by the amount of the tax.

282
00:28:10.560 --> 00:28:17.460
In the long run, of course, firms cannot pay the tax, for their loss in gross revenue is

283
00:28:17.460 --> 00:28:25.700
imputed back to interest income by capitalists and to wages and rents earned by original

284
00:28:25.700 --> 00:28:29.540
factors, labor and ground land.

285
00:28:29.540 --> 00:28:37.340
A decrease in the gross revenue of retail firms is reflected back to a decreased demand for

286
00:28:37.340 --> 00:28:41.580
the products of all the higher order firms.

287
00:28:41.580 --> 00:28:49.380
All the firms, however, earn in the long run a pure uniform interest return.

288
00:28:49.380 --> 00:28:57.000
Here a difference arises between a general sales tax and, say, a corporate income tax.

289
00:28:57.000 --> 00:29:03.060
There has been no change in time preference schedules or other components of the interest

290
00:29:03.060 --> 00:29:04.060
rate.

291
00:29:04.060 --> 00:29:12.260
While an income tax compels a lower percent interest return, a sales tax can and will

292
00:29:12.260 --> 00:29:19.580
be shifted completely from investment and back to the original factors.

293
00:29:19.580 --> 00:29:26.980
The result of a general sales tax is a general reduction in the net revenue accruing to original

294
00:29:26.980 --> 00:29:38.980
The sales tax has been shifted backwards to original factor returns.

295
00:29:38.980 --> 00:29:46.740
No longer does every original factor of production earn its discounted marginal value product.

296
00:29:46.740 --> 00:29:54.980
Now original factors earn less than their DMVPs, the reduction consisting of the sales

297
00:29:54.980 --> 00:30:05.460
It is necessary now to integrate this analysis of the incidence of a general sales tax with

298
00:30:05.460 --> 00:30:11.680
our previous general analysis of the benefits and burdens of taxation.

299
00:30:11.680 --> 00:30:18.460
This is accomplished by remembering that the proceeds of taxation are, in turn, spent by

300
00:30:18.460 --> 00:30:20.140
the government.

301
00:30:20.140 --> 00:30:27.140
If the government does not spend all of its revenue, then deflation is added to the impact

302
00:30:27.140 --> 00:30:29.100
of taxation.

303
00:30:29.100 --> 00:30:35.020
Whether the government spends the money for resources for its own activities, or simply

304
00:30:35.020 --> 00:30:42.740
transfers the money to people it subsidizes, the result is to shift consumption and investment

305
00:30:42.740 --> 00:30:49.500
demand from private hands to the government, or to government-supported individuals, by

306
00:30:49.500 --> 00:30:52.620
by the amount of the tax revenue.

307
00:30:52.620 --> 00:30:59.620
In this case, the tax has been ultimately levied on the incomes of original factors

308
00:30:59.620 --> 00:31:04.300
and the money transferred from their hands to the government.

309
00:31:04.300 --> 00:31:11.140
The income of the government and or those it subsidizes has been increased at the expense

310
00:31:11.140 --> 00:31:17.740
of those taxed, and therefore consumption and investment demands on the market have

311
00:31:17.740 --> 00:31:23.340
have been shifted from the latter to the former by the amount of the tax.

312
00:31:23.340 --> 00:31:30.300
As a consequence, the value of the money unit will remain unchanged, barring a difference

313
00:31:30.300 --> 00:31:36.180
in demands for money between the taxpayers and the tax consumers.

314
00:31:36.180 --> 00:31:42.300
But the array of prices will shift in accordance with the shift in demands.

315
00:31:42.300 --> 00:31:48.900
Thus, if the market has been spending heavily on clothing, and the government uses the revenue

316
00:31:48.900 --> 00:31:55.660
mostly for the purchase of arms, there will be a fall in the price of clothes, a rise

317
00:31:55.660 --> 00:32:03.820
in the price of arms, and a tendency for non-specific factors to shift out of clothing and into

318
00:32:03.820 --> 00:32:06.900
the production of armaments.

319
00:32:06.900 --> 00:32:14.820
As a result, there will not be, as might be assumed, a proportional 20% fall in the incomes

320
00:32:14.820 --> 00:32:22.580
of all original factors as a result of a 20% general sales tax.

321
00:32:22.580 --> 00:32:28.860
Specific factors in industries that have lost business as a result of the shift from private

322
00:32:28.860 --> 00:32:35.420
to governmental demand will lose proportionately more in income.

323
00:32:35.420 --> 00:32:41.700
Non-specific factors in industries gaining in demand will lose proportionately less, and

324
00:32:41.700 --> 00:32:49.420
some may gain so much as to gain absolutely as a result of the change.

325
00:32:49.420 --> 00:32:55.080
Non-specific factors will not be affected as much proportionately, but they too will

326
00:32:55.080 --> 00:33:01.920
lose and gain according to the difference that the concrete shift in demand makes in

327
00:33:01.920 --> 00:33:06.080
and their marginal value productivity.

328
00:33:06.080 --> 00:33:12.920
The knowledge that taxes can never be shifted forward is a consequence of adhering to the

329
00:33:12.920 --> 00:33:20.000
Austrian analysis of value, that is, that prices are determined by ultimate demands

330
00:33:20.000 --> 00:33:26.200
for stock, and not in any sense by the cost of production.

331
00:33:26.200 --> 00:33:32.760
Unhappily, all previous discussions of the incidence of taxation have been marred by

332
00:33:32.760 --> 00:33:40.520
hangovers of classical cost-of-production theory, and the failure to adopt a consistent Austrian

333
00:33:40.520 --> 00:33:47.240
approach. The Austrian economists themselves never really applied their doctrines to the

334
00:33:47.240 --> 00:33:52.200
theory of tax incidence, so that this discussion breaks new ground.

335
00:33:52.200 --> 00:34:15.200
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.

336
00:34:15.200 --> 00:34:23.760
It should be carefully noted that the general sales tax is a conspicuous example of failure

337
00:34:23.760 --> 00:34:26.300
to tax consumption.

338
00:34:26.300 --> 00:34:34.380
It is commonly supposed that a sales tax penalizes consumption rather than income or capital.

339
00:34:34.380 --> 00:34:41.320
But we find that the sales tax reduces not just consumption but the incomes of original

340
00:34:41.320 --> 00:34:42.900
factors.

341
00:34:42.900 --> 00:34:51.100
The general sales tax is an income tax, albeit a rather haphazard one, since there is no

342
00:34:51.100 --> 00:34:57.300
way that its impact on income classes can be made uniform.

343
00:34:57.300 --> 00:35:04.540
Many right-wing economists have advocated general sales taxation as opposed to income

344
00:35:04.540 --> 00:35:12.460
taxation on the ground that the former taxes consumption, but not savings investment.

345
00:35:12.460 --> 00:35:19.180
Many left-wing economists have opposed sales taxation for the same reason.

346
00:35:19.180 --> 00:35:20.840
Both are mistaken.

347
00:35:20.840 --> 00:35:28.280
The sales tax is an income tax, though of more haphazard and uncertain incidence.

348
00:35:28.280 --> 00:35:34.620
The major effect of the general sales tax will be that of the income tax, to reduce

349
00:35:34.620 --> 00:35:40.700
the consumption and the savings investment of the taxpayers.

350
00:35:40.700 --> 00:35:47.680
Mr. Frank Chatarov, in his The Income Tax, Root of All Evil, fails to indicate what other

351
00:35:47.680 --> 00:35:54.360
type of tax would be better from a free market point of view than the income tax.

352
00:35:54.360 --> 00:35:59.840
It will be clear from our discussion that there are few taxes indeed that will not be

353
00:35:59.840 --> 00:36:06.000
as bad as the income tax from the viewpoint of an advocate of the free market.

354
00:36:06.000 --> 00:36:11.200
Certainly, sales or excise taxation will not fill the bill.

355
00:36:11.200 --> 00:36:18.280
Chatarov, furthermore, is surely wrong when he terms income and inheritance taxes unique

356
00:36:18.280 --> 00:36:22.200
denials of the right of individual property.

357
00:36:22.200 --> 00:36:29.520
Any tax whatever infringes on property rights, and there is nothing in an indirect tax which

358
00:36:29.520 --> 00:36:32.920
makes that infringement any less clear.

359
00:36:32.920 --> 00:36:39.580
It is true that an income tax forces the subject to keep records and disclose his personal

360
00:36:39.580 --> 00:36:44.640
dealings, thus imposing a further loss in his utility.

361
00:36:44.640 --> 00:36:48.740
The sales tax, however, also forces record keeping.

362
00:36:48.740 --> 00:36:55.740
The difference, again, is one of degree rather than of kind, for here the extent of directness

363
00:36:55.740 --> 00:37:02.100
covers only retail storekeepers instead of the bulk of the population.

364
00:37:02.100 --> 00:37:09.700
In fact, since, as we shall see, the income tax by its nature falls more heavily on savings

365
00:37:09.700 --> 00:37:16.700
investment than on consumption, we reach the paradoxical and important conclusion that

366
00:37:16.700 --> 00:37:27.260
a tax on consumption will also fall more heavily on savings investment in its ultimate incidence.

367
00:37:27.260 --> 00:37:34.060
B. Partial Excise Taxes, Other Production Taxes

368
00:37:34.060 --> 00:37:41.760
The partial excise tax is a sales tax levied on some, rather than all, commodities.

369
00:37:41.760 --> 00:37:47.240
The chief distinction between this and the general sales tax is that the latter does

370
00:37:47.240 --> 00:37:55.260
not in itself distort productive allocations on the market, since a tax is levied proportionately

371
00:37:55.260 --> 00:37:58.500
on the sale of all final products.

372
00:37:58.500 --> 00:38:04.900
A partial excise, on the other hand, penalizes certain lines of production.

373
00:38:04.900 --> 00:38:11.300
The general sales tax, of course, distorts market allocations insofar as government

374
00:38:11.300 --> 00:38:18.020
expenditures from the proceeds differ in structure from private demands in the absence

375
00:38:18.020 --> 00:38:19.660
of the tax.

376
00:38:19.660 --> 00:38:26.820
The excise tax has this effect, too, and, in addition, penalizes the particular industry

377
00:38:26.820 --> 00:38:28.000
taxed.

378
00:38:28.000 --> 00:38:34.680
The tax cannot be shifted forward, but tends to be shifted backward to the factors working

379
00:38:34.680 --> 00:38:36.180
in the industry.

380
00:38:36.180 --> 00:38:44.900
Now, however, the tax exerts pressure on non-specific factors and entrepreneurs to leave the taxed

381
00:38:44.900 --> 00:38:49.540
Taxed Industry and enter other, non-taxed industries.

382
00:38:49.540 --> 00:38:54.940
During the transition period, the tax may well be added to cost.

383
00:38:54.940 --> 00:39:01.780
As the price, however, cannot be directly increased, the marginal firms in this industry

384
00:39:01.780 --> 00:39:07.460
will be driven out of business and will seek better opportunities elsewhere.

385
00:39:07.460 --> 00:39:14.880
The exodus of non-specific factors, and perhaps firms from the taxed industry, reduces the

386
00:39:14.880 --> 00:39:26.880
This reduction in stock or supply will raise the market price of the good, given the consumer's demand schedule.

387
00:39:26.880 --> 00:39:36.880
Thus, there is a sort of indirect shifting in the sense that the price of the good to consumers will ultimately increase.

388
00:39:36.880 --> 00:39:49.880
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.

389
00:39:49.880 --> 00:39:54.880
Everyone in the market suffers as a result of an excise tax.

390
00:39:54.880 --> 00:39:55.880
Tax.

391
00:39:55.880 --> 00:40:00.680
Non-specific factors must shift to fields of lower income.

392
00:40:00.680 --> 00:40:07.760
Since the discounted marginal value product is lower there, specific factors are hit particularly

393
00:40:07.760 --> 00:40:15.360
hard and consumers suffer as the allocations of factors and the price structure are distorted

394
00:40:15.360 --> 00:40:20.160
in comparison with what would have satisfied their desires.

395
00:40:20.160 --> 00:40:27.000
The supply of factors in the taxed industries becomes excessively low, and the selling price

396
00:40:27.000 --> 00:40:34.220
in these industries too high, while the supply of factors in other industries becomes excessively

397
00:40:34.220 --> 00:40:39.000
large and their product prices too low.

398
00:40:39.000 --> 00:40:45.840
In addition to those specific effects, the excise tax also has the same general effect

399
00:41:15.840 --> 00:41:24.840
and the cost of production is not something fixed but is in itself determined by the selling price.

400
00:41:24.840 --> 00:41:34.840
Most important, any decrease in the stock will raise the market price and any increase in the stock will lower the price

401
00:41:34.840 --> 00:41:38.840
regardless of the elasticity of demand for the product.

402
00:41:38.840 --> 00:41:46.840
Elasticity of demand is a topic that warrants only a relatively minor role in economic theory.

403
00:41:46.840 --> 00:41:52.840
Perhaps the reason for the undeserved popularity of the elasticity concept

404
00:41:52.840 --> 00:42:01.840
is that economists need to employ it in their vain search for quantitative laws and measurements in economics.

405
00:42:01.840 --> 00:42:27.840
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.

406
00:42:27.840 --> 00:42:38.160
But, C, cannot be considered a tax on consumption in the sense that the tax is shifted to consumers.

407
00:42:38.160 --> 00:42:46.600
The excise tax is also a tax on incomes, except that in this case the effect is not general

408
00:42:46.600 --> 00:42:54.380
because the impact falls most heavily on the factors specific to the taxed industry.

409
00:42:54.380 --> 00:43:00.860
Any partial tax on production will have effects similar to an excise tax.

410
00:43:00.860 --> 00:43:07.100
A license tax imposed on an industry, for example, granting a monopolistic privilege

411
00:43:07.100 --> 00:43:13.740
to firms with a large amount of capital, will restrict the supply of the product and raise

412
00:43:13.740 --> 00:43:14.980
the price.

413
00:43:14.980 --> 00:43:21.100
Factors and pricing will be misallocated, as in an excise tax.

414
00:43:21.100 --> 00:43:28.220
In contrast to the latter, however, the indirect grant of monopolistic privilege will benefit

415
00:43:28.220 --> 00:43:35.940
the specific quasi-monopolized factors that are able to remain in the industry.

416
00:43:35.940 --> 00:43:41.120
C. General Effects of Income Taxation

417
00:43:41.120 --> 00:43:48.820
In the dynamic real economy, money income consists of wages, ground rents, interest

418
00:43:48.820 --> 00:43:56.620
and Profits, Counterbalanced by Losses, Ground Rents are also capitalized on the market so

419
00:43:56.620 --> 00:44:03.700
that income from rents is resolvable into interest and profit minus losses.

420
00:44:03.700 --> 00:44:09.340
The income tax is designed to tax all such net income.

421
00:44:09.340 --> 00:44:17.460
We have seen that sales and excise taxes are really taxes on some original factor incomes.

422
00:44:17.460 --> 00:44:23.020
This has been generally ignored, and perhaps one reason is that people are accustomed to

423
00:44:23.020 --> 00:44:31.020
thinking of income taxation as being uniformly levied on all incomes of the same amount.

424
00:44:31.020 --> 00:44:38.020
Later, we shall see that the uniformity of such a levy has been widely upheld as an important

425
00:44:38.020 --> 00:44:41.180
canon of justice for taxation.

426
00:44:41.180 --> 00:44:46.420
Actually, no such uniformity does or need exist.

427
00:44:46.420 --> 00:44:53.080
Tax size and sales taxes, as we have seen, are not uniformly levied, but are imposed

428
00:44:53.080 --> 00:44:59.080
on some income receivers and not others of the same income class.

429
00:44:59.080 --> 00:45:06.180
It must be recognized that the official income tax, the tax that is generally known as the

430
00:45:06.180 --> 00:45:15.760
income tax, is by no means the only form in which income is or can be taxed by the government.

431
00:45:15.760 --> 00:45:23.680
Even the official tax is hardly uniform, being interlarded with extra burdens and exemptions.

432
00:45:23.680 --> 00:45:28.480
An income tax cannot be shifted to anyone else.

433
00:45:28.480 --> 00:45:31.880
The taxpayer himself bears the burden.

434
00:45:31.880 --> 00:45:38.800
He earns profits from entrepreneurial activity, interest from time preference, and other income

435
00:45:38.800 --> 00:45:46.080
Income from marginal productivity and none can be increased to cover the tax.

436
00:45:46.080 --> 00:45:53.760
Income taxation reduces every taxpayer's money income and real income, and hence his

437
00:45:53.760 --> 00:45:55.600
standard of living.

438
00:45:55.600 --> 00:46:01.800
His income from working is more expensive and leisure cheaper, so that he will tend

439
00:46:01.800 --> 00:46:03.840
to work less.

440
00:46:03.840 --> 00:46:09.340
and the Human Standard of Living in the form of exchangeable goods will decline.

441
00:46:09.340 --> 00:46:15.840
In rebuttal, much has been made of the fact that every man's marginal utility of money

442
00:46:15.840 --> 00:46:23.540
rises as his money assets fall, and therefore that there may be a rise in the marginal utility

443
00:46:23.540 --> 00:46:29.620
of the reduced income obtainable from his current expenditure of labor.

444
00:46:29.620 --> 00:46:36.460
It is true, in other words, that the same labor now earns every man less money.

445
00:46:36.460 --> 00:46:43.600
But this very reduction in money income may also raise the marginal utility of a unit

446
00:46:43.600 --> 00:46:51.100
of money to the extent that the marginal utility of his total income will be raised and he

447
00:46:51.100 --> 00:46:56.580
will be induced to work harder as a result of the income tax.

448
00:46:56.580 --> 00:47:02.540
This may very well be true in some cases, and there is nothing mysterious or contrary

449
00:47:02.540 --> 00:47:05.900
to economic analysis in such an event.

450
00:47:05.900 --> 00:47:13.980
However, it is hardly a blessing for the man or for society, for if more work is expended,

451
00:47:13.980 --> 00:47:20.140
leisure is lost, and people's standards of living are lower because of this coerced

452
00:47:20.140 --> 00:47:21.740
loss.

453
00:47:21.740 --> 00:47:28.500
In the free market, in short, individuals are always balancing their money income or

454
00:47:28.500 --> 00:47:37.420
real income in exchangeable goods against their real income in the form of leisure activities.

455
00:47:37.420 --> 00:47:41.320
Both are basic components of the standard of living.

456
00:47:41.320 --> 00:47:47.660
The greater their exchangeable goods income, in fact, the higher will be their marginal

457
00:47:47.660 --> 00:48:06.780
It is not surprising, therefore, that a coerced lower income may force individuals to work

458
00:48:06.780 --> 00:48:07.780
harder.

459
00:48:07.780 --> 00:48:14.700
Whichever the effect, the tax lowers the standard of living of the taxpayers, either depriving

460
00:48:14.700 --> 00:48:30.700
In addition to penalizing work relative to leisure, an income tax also penalizes work for money as against work for a return in kind.

461
00:48:30.700 --> 00:48:37.700
Obviously, a relative advantage is conferred on work done for a non-monetary reward.

462
00:48:37.700 --> 00:48:42.700
Working women are penalized as compared with housewives.

463
00:48:42.700 --> 00:49:01.460
In short, the income tax tends to bring about a reduction in specialization and a breakdown

464
00:49:01.460 --> 00:49:06.740
of the market, and hence a retrogression in living standards.

465
00:49:06.740 --> 00:49:12.680
Make the income tax high enough and the market will disintegrate altogether, and primitive

466
00:49:12.680 --> 00:49:16.240
economic conditions will prevail.

467
00:49:16.240 --> 00:49:22.540
The income tax confiscates a certain portion of a person's income, leaving him free to

468
00:49:22.540 --> 00:49:27.760
allocate the remainder between consumption and investment.

469
00:49:27.760 --> 00:49:34.560
It might be thought that since we may assume time preference schedules as given, the proportion

470
00:49:34.560 --> 00:49:41.680
of Consumption to Savings Investment and the pure interest rate will remain unaffected

471
00:49:41.680 --> 00:49:43.840
by the income tax.

472
00:49:43.840 --> 00:49:45.680
But this is not so.

473
00:49:45.680 --> 00:49:52.760
For the taxpayer's real income and the value of his monetary assets have been lowered.

474
00:49:52.760 --> 00:49:59.620
The lower the level of a man's real monetary assets, the higher will his time preference

475
00:49:59.620 --> 00:50:16.820
How is an individual taxpayer's time preference schedule related to his monetary assets?

476
00:50:16.820 --> 00:50:23.380
Let us say that the government levies an income tax, reducing his initial monetary assets

477
00:50:23.380 --> 00:50:26.460
at the start of his spending period.

478
00:50:26.460 --> 00:50:31.060
His effective time preference rate is now higher.

479
00:50:31.060 --> 00:50:38.860
We have seen that an individual's real as well as nominal money assets must decline in order

480
00:50:38.860 --> 00:50:41.640
for this result to take place.

481
00:50:41.640 --> 00:50:49.380
If there is deflation, the value of the monetary unit will increase roughly in proportion and,

482
00:50:49.380 --> 00:50:56.280
in the long run, time preference ratios, Ceteris Paribus, will not be changed.

483
00:50:56.280 --> 00:51:03.040
In the case of income taxation, however, there will be no change in the value of the monetary

484
00:51:03.040 --> 00:51:08.400
unit since the government will spend the proceeds of taxation.

485
00:51:08.400 --> 00:51:16.420
As a result, the taxpayers' real as well as nominal money assets decline and decline

486
00:51:16.420 --> 00:51:19.100
to the same extent.

487
00:51:19.100 --> 00:51:26.000
It might be objected that the government officials or those subsidized receive additional money

488
00:51:26.000 --> 00:51:35.500
and the fall in their time preference ratios may well offset or balance the rise in the rate from the taxpayer's side.

489
00:51:35.500 --> 00:51:46.000
It could not be concluded, then, that the social rate of time preference will rise, and savings investment particularly decrease.

490
00:51:46.000 --> 00:51:54.000
Government expenditures, however, constitute diversion of resources from private to government purposes,

491
00:51:54.000 --> 00:52:01.120
Since the government, by definition, desires this diversion, this is a consumption expenditure

492
00:52:01.120 --> 00:52:03.060
by the government.

493
00:52:03.060 --> 00:52:09.720
These expenditures are commanded by the government, and not by the free action of individuals.

494
00:52:09.720 --> 00:52:17.400
They therefore may satisfy the utility, or are expected to satisfy the utility, only of

495
00:52:17.400 --> 00:52:19.240
the government officials.

496
00:52:19.240 --> 00:52:24.480
And we cannot be sure that anyone else's is satisfied.

497
00:52:24.480 --> 00:52:30.720
The Keynesians, on the contrary, classify all government resource-using expenditure

498
00:52:30.720 --> 00:52:38.440
as investment on the ground that these, like investment expenditures, are independent and

499
00:52:38.440 --> 00:52:45.280
not passively tied to income by means of a psychological function.

500
00:52:45.280 --> 00:52:54.000
The reduction in income and therefore in consumption and savings investment imposed on the taxpayers

501
00:52:54.000 --> 00:52:59.920
will therefore be counterbalanced by government consumption expenditure.

502
00:52:59.920 --> 00:53:06.520
As for the transfer expenditures made by the government, including the salaries of bureaucrats

503
00:53:06.520 --> 00:53:14.020
and subsidies to privileged groups, it is true that some of this will be saved and invested.

504
00:53:14.020 --> 00:53:20.900
These investments, however, will not represent the voluntary desires of consumers, but rather

505
00:53:20.900 --> 00:53:28.340
investments in fields of production not desired by the producing consumers.

506
00:53:28.340 --> 00:53:35.780
They represent the desires not of the producing consumers on the free market, but of exploiting

507
00:53:35.780 --> 00:53:41.380
consumers fed by the unilateral coercion of the State.

508
00:53:41.380 --> 00:53:48.620
Once let the tax be eliminated and the producers are free to earn and consume again.

509
00:53:48.620 --> 00:53:54.400
The new investments called forth by the demands of the specially privileged will turn out

510
00:53:54.400 --> 00:53:57.160
to be malinvestments.

511
00:53:57.160 --> 00:54:04.320
At any rate, the amount consumed by the government ensures that the effect of income taxation

512
00:54:04.320 --> 00:54:12.560
will be to raise time preference ratios and to reduce saving and investment.

513
00:54:12.560 --> 00:54:19.580
Some economists maintain that income taxation reduces saving and investment in the society

514
00:54:19.580 --> 00:54:21.520
in a third way.

515
00:54:21.520 --> 00:54:30.280
They assert that income taxation, by its very nature, imposes a double tax on savings investment

516
00:54:30.280 --> 00:54:32.700
as against consumption.

517
00:54:32.700 --> 00:54:39.060
All is used in the sense of two instances, not arithmetically twice.

518
00:54:39.060 --> 00:54:41.980
The reasoning runs as follows.

519
00:54:41.980 --> 00:54:45.900
Saving and consumption are not really symmetrical.

520
00:54:45.900 --> 00:54:51.180
All saving is directed toward enjoying more consumption in the future.

521
00:54:51.180 --> 00:54:55.580
Otherwise, there would be no point at all in saving.

522
00:54:55.580 --> 00:55:01.940
Saving is abstaining from possible present consumption in return for the expectation

523
00:55:01.940 --> 00:55:06.220
of Increased Consumption at Sometime in the Future.

524
00:55:06.220 --> 00:55:10.340
No one wants capital goods for their own sake.

525
00:55:10.340 --> 00:55:17.080
Although there is much merit in Professor John F. Dew's critique of this general position,

526
00:55:17.080 --> 00:55:23.320
he is incorrect in believing that people may own capital for its own sake.

527
00:55:23.320 --> 00:55:29.260
If people, because of the uncertainty of the future, wish to hold wealth for its service

528
00:55:29.260 --> 00:55:48.260
Capital is far less marketable and is desired only for its fructification in consumers' goods and earnings from the sale of these goods.

529
00:55:48.260 --> 00:55:54.260
Capital goods are only the embodiment of an increased consumption in the future.

530
00:55:54.260 --> 00:56:01.260
Savings investment is Crusoe's building a stick to obtain more apples at a future date.

531
00:56:01.260 --> 00:56:06.260
It fructifies in increased consumption later.

532
00:56:06.260 --> 00:56:15.260
Hence the imposition of an income tax excessively penalizes savings investment as against consumption.

533
00:56:15.260 --> 00:56:21.260
These economists generally go on to advocate taxation of consumption alone

534
00:56:21.260 --> 00:56:25.900
alone as the only real income.

535
00:56:25.900 --> 00:56:32.900
This line of reasoning is correct in its explanation of the investment consumption process.

536
00:56:32.900 --> 00:56:36.520
It suffers, however, from one grave defect.

537
00:56:36.520 --> 00:56:40.420
It is irrelevant to problems of taxation.

538
00:56:40.420 --> 00:56:47.900
It is true that saving is a fructifying agent, but the point is that everyone knows this.

539
00:56:47.900 --> 00:56:51.180
That is precisely why people save.

540
00:56:51.180 --> 00:56:58.360
Yet, even though they know that saving is a fructifying agent, they do not save all

541
00:56:58.360 --> 00:56:59.980
their income.

542
00:56:59.980 --> 00:57:01.300
Why?

543
00:57:01.300 --> 00:57:05.520
Because of their time preference for present consumption.

544
00:57:05.520 --> 00:57:11.940
Every individual, given his current income and value scales, allocates that income in

545
00:57:11.940 --> 00:57:20.020
in the most desired proportion among consumption, investment and addition to his cash balance.

546
00:57:20.020 --> 00:57:27.300
Any other allocation would satisfy his desires to a lesser extent and lower his position

547
00:57:27.300 --> 00:57:29.620
on his value scale.

548
00:57:29.620 --> 00:57:36.780
There is therefore no reason here to say that an income tax especially penalizes savings

549
00:57:36.780 --> 00:57:38.240
investment.

550
00:57:38.240 --> 00:57:46.000
It penalizes the individual's entire standard of living, encompassing present consumption,

551
00:57:46.000 --> 00:57:49.600
future consumption, and his cash balance.

552
00:57:49.600 --> 00:57:58.780
It does not, per se, penalize saving any more than it does the other avenues of income allocation.

553
00:57:58.780 --> 00:58:05.720
There is another way, however, in which an income tax does, in fact, levy a particular

554
00:58:05.720 --> 00:58:08.080
burden on saving.

555
00:58:08.080 --> 00:58:14.620
For the interest return on savings investment, like all other earnings, is subject to the

556
00:58:14.620 --> 00:58:16.320
income tax.

557
00:58:16.320 --> 00:58:22.200
The net interest rate received, therefore, is lower than the free market rate.

558
00:58:22.200 --> 00:58:27.040
The return is not consonant with free market time preferences.

559
00:58:27.040 --> 00:58:34.600
Instead, the imposed lower return induces people to bring their savings investment into

560
00:58:34.600 --> 00:58:37.720
line with the reduced return.

561
00:58:37.720 --> 00:58:44.680
In short, the marginal savings and investments now not profitable at the lower rate will

562
00:58:44.680 --> 00:58:46.980
not be made.

563
00:58:46.980 --> 00:58:53.160
The argument cited earlier, based on the work of John Stuart Mill and Irving Fisher, is

564
00:58:53.160 --> 00:59:00.160
an example of a curious tendency among economists generally devoted to the free market to be

565
00:59:00.160 --> 00:59:07.940
be unwilling to consider its ratio of consumption to investment allocations as optimal.

566
00:59:07.940 --> 00:59:15.140
The economic case for the free market is that market allocations tend at all points to be

567
00:59:15.140 --> 00:59:19.300
optimal with respect to consumer desires.

568
00:59:19.300 --> 00:59:26.140
The economists who favor the free market recognize this in most areas of the economy, but for

569
00:59:26.140 --> 00:59:33.180
for some reason show a predilection for and special tenderness toward savings investment

570
00:59:33.180 --> 00:59:35.260
as against consumption.

571
00:59:35.260 --> 00:59:41.820
They tend to feel that a tax on saving is far more of an invasion of the free market

572
00:59:41.820 --> 00:59:44.420
than a tax on consumption.

573
00:59:44.420 --> 00:59:52.220
It is true that saving embodies future consumption, but people voluntarily choose between present

574
00:59:52.220 --> 00:59:57.260
and Future Consumption in accordance with their time preferences.

575
00:59:57.260 --> 01:00:01.740
And this voluntary choice is their optimal choice.

576
01:00:01.740 --> 01:00:09.160
Any tax levied, particularly on their consumption, therefore, is just as much a distortion and

577
01:00:09.160 --> 01:00:13.860
invasion of the free market as a tax on their savings.

578
01:00:13.860 --> 01:00:18.480
There is nothing, after all, especially sacred about savings.

579
01:00:18.480 --> 01:00:25.680
They are simply the road to future consumption, but they are no more important than present

580
01:00:25.680 --> 01:00:32.540
consumption, the allocation between the two being determined by the time preferences of

581
01:00:32.540 --> 01:00:34.520
all individuals.

582
01:00:34.520 --> 01:00:41.000
The economist who shows more concern for free market savings than he does for free market

583
01:00:41.000 --> 01:00:48.320
consumption is implicitly advocating statist interference and a coerced distortion of

584
01:00:48.320 --> 01:00:54.600
of Resource Allocation in favor of greater investment and lower consumption.

585
01:00:54.600 --> 01:01:01.080
The free market advocate should oppose with equal fervor coerced distortion of the ratio

586
01:01:01.080 --> 01:01:05.240
of consumption to investment in either direction.

587
01:01:05.240 --> 01:01:12.700
Thus, one of the standard conservative arguments against progressive income taxation is that

588
01:01:12.700 --> 01:01:17.940
savings would be taxed in greater proportion than consumption.

589
01:01:17.940 --> 01:01:23.360
Many of these writers leave the reader with the inference that if present consumption were

590
01:01:23.360 --> 01:01:27.500
taxed more heavily, everything would be alright.

591
01:01:27.500 --> 01:01:33.900
Yet what is so worthy about future as against present consumption?

592
01:01:33.900 --> 01:01:41.140
And what principle do these economists adopt that permits them to alter by force the voluntary

593
01:01:41.140 --> 01:01:46.680
time preference ratios between present and future?

594
01:01:46.680 --> 01:01:53.800
As a matter of fact, we have seen that income taxation by other roots tends to distort the

595
01:01:53.800 --> 01:02:01.520
allocation of resources into more consumption and less savings investment, and we have seen

596
01:02:01.520 --> 01:02:09.680
that attempts to tax consumption in the form of sales or production taxation must fail

597
01:02:09.680 --> 01:02:14.880
and end as levies on incomes instead.

598
01:02:14.880 --> 01:02:18.880
D. Particular Forms of Income Taxation

599
01:02:18.880 --> 01:02:23.880
1. Taxes on Wages

600
01:02:23.880 --> 01:02:30.920
A tax on wages is an income tax that cannot be shifted away from the wage earner. There

601
01:02:30.920 --> 01:02:38.340
is no one to shift it to, especially not the employer, who always tends to earn a uniform

602
01:02:38.340 --> 01:02:39.340
Interest Rate

603
01:02:39.340 --> 01:02:47.140
In fact, there are indirect taxes on wages that are shifted to the wage earner in the

604
01:02:47.140 --> 01:02:50.540
form of lower wage incomes.

605
01:02:50.540 --> 01:02:57.700
An example is that part of social security or of unemployment compensation premiums levied

606
01:02:57.700 --> 01:03:00.020
on the employer.

607
01:03:00.020 --> 01:03:06.460
Most employees believe that they completely escape this part of the tax, which the employer

608
01:03:06.460 --> 01:03:07.780
pays.

609
01:03:07.780 --> 01:03:09.820
They are wholly mistaken.

610
01:03:09.820 --> 01:03:16.560
The employer, as we have seen, cannot shift the tax forward to the consumer.

611
01:03:16.560 --> 01:03:24.280
In fact, since the tax is levied in proportion to wages paid, the tax is shifted backward

612
01:03:24.280 --> 01:03:27.820
wholly on the wage earners themselves.

613
01:03:27.820 --> 01:03:34.620
The employer's part is simply a collected tax levied at the expense of a reduction of

614
01:03:34.620 --> 01:03:42.620
of the Net Wages of the Employees 2. Corporate Income Taxation

615
01:03:42.620 --> 01:03:50.620
Taxation of corporate net income imposes a double tax on the owners of corporations,

616
01:03:50.620 --> 01:03:59.620
once on the official corporate income and once on the remaining distributed net income of the owners themselves.

617
01:03:59.620 --> 01:04:04.620
The extra tax cannot be shifted forward onto the consumer.

618
01:04:04.620 --> 01:04:10.620
Since it is levied on net income itself, it can hardly be shifted backward.

619
01:04:10.620 --> 01:04:21.620
It has the effect of penalizing corporate income as opposed to income from other market forms, single ownership, partnerships, etc.,

620
01:04:21.620 --> 01:04:27.620
thereby penalizing efficient forms of enterprise and encouraging the inefficient.

621
01:04:27.620 --> 01:04:33.780
resources shift from the former to the latter until the expected rate of net

622
01:04:33.780 --> 01:04:40.220
return is equalized throughout the economy at a lower level than originally

623
01:04:40.220 --> 01:04:47.300
since interest return is forcibly lower than before the tax penalizes savings

624
01:04:47.300 --> 01:04:53.900
and investment as well as an efficient market form some writers have pointed

625
01:04:53.900 --> 01:05:00.140
out that the penalty lowers future consumption from what it would have been, reducing the

626
01:05:00.140 --> 01:05:04.840
supply of goods and raising prices to consumers.

627
01:05:04.840 --> 01:05:11.220
This can hardly be called shifting, however, but is rather a manifestation of the ultimate

628
01:05:11.220 --> 01:05:19.260
effect of the tax in reducing consumer standards of living from the free market level.

629
01:05:19.260 --> 01:05:26.380
The penalty or double taxation feature of corporate income taxes could be eliminated

630
01:05:26.380 --> 01:05:35.180
only by abolishing the tax and treating any net incomes accruing to a corporation as pro-rata

631
01:05:35.180 --> 01:05:38.540
income to its stockholder owners.

632
01:05:38.540 --> 01:05:44.460
In other words, a corporation would be treated as a partnership and not, according to the

633
01:05:44.460 --> 01:05:50.560
the absurd fiction that it is some sort of separate real entity functioning apart from

634
01:05:50.560 --> 01:05:54.180
the actions of its actual owners.

635
01:05:54.180 --> 01:06:00.500
Income accruing to the corporation obviously accrues pro rata to the owners.

636
01:06:00.500 --> 01:06:06.260
Some writers have objected that the stockholders do not really receive the income on which

637
01:06:06.260 --> 01:06:08.220
they would be taxed.

638
01:06:08.220 --> 01:06:16.140
Let's suppose that the Star Corporation earns a net income of $100,000 in a certain period,

639
01:06:16.140 --> 01:06:24.420
and that it has three stockholders, Jones with 40% of the stock, Smith holding 35% of

640
01:06:24.420 --> 01:06:28.740
the stock, and Robinson owning 25%.

641
01:06:28.740 --> 01:06:36.680
The majority stockholders, or their management representatives, decide to retain $60,000

642
01:06:36.680 --> 01:06:44.500
is undistributed earnings in the firm while paying only $40,000 as dividends.

643
01:06:44.500 --> 01:06:53.000
Under present law, Jones' net income from the Star Corporation is considered as $16,000,

644
01:06:53.000 --> 01:06:59.100
Smith's as $14,000 and Robinson's as $10,000.

645
01:06:59.100 --> 01:07:04.160
The corporation's is listed at $100,000.

646
01:07:04.160 --> 01:07:08.400
Each of these entities is then taxed on these amounts.

647
01:07:08.400 --> 01:07:15.320
Yet, since there is no real corporate entity separate from its owners, the incomes would

648
01:07:15.320 --> 01:07:27.400
be more properly recorded as follows, Jones $40,000, Smith $35,000, Robinson $25,000.

649
01:07:27.400 --> 01:07:34.140
The fact that these stockholders do not actually receive the money is no objection for what

650
01:07:34.140 --> 01:07:40.580
What happens is the equivalent of someone's earning money yet keeping it on account without

651
01:07:40.580 --> 01:07:44.580
bothering to draw it out and use it.

652
01:07:44.580 --> 01:07:51.020
Interest that piles up in someone's savings bank account is considered as income and taxed

653
01:07:51.020 --> 01:07:57.660
accordingly, and there is no reason why undistributed earnings should not be considered individual

654
01:07:57.660 --> 01:08:00.340
income as well.

655
01:08:00.340 --> 01:08:08.080
The fact that total corporate income is first taxed and then distributed as dividend income

656
01:08:08.080 --> 01:08:15.820
to be taxed again encourages a further distortion of market investment and organization.

657
01:08:15.820 --> 01:08:22.040
For this practice encourages stockholders to leave a greater proportion of their earnings

658
01:08:22.040 --> 01:08:26.860
undistributed than they would have done in a free market.

659
01:08:26.860 --> 01:08:34.580
These are frozen in, and either held or invested in an uneconomic fashion in relation to the

660
01:08:34.580 --> 01:08:37.540
satisfaction of consumer wants.

661
01:08:37.540 --> 01:08:43.460
To the reply that this at least fosters investment, there are two rejoinders.

662
01:08:43.460 --> 01:08:50.220
One, that a distortion in favor of investment is as much a distortion of optimum market

663
01:08:50.220 --> 01:08:59.060
Allocations as Anything Else, and 2, that not investment is encouraged, but rather frozen

664
01:08:59.060 --> 01:09:07.400
investment by owners back into their original firms at the expense of mobile investment.

665
01:09:07.400 --> 01:09:13.900
This distorts and renders inefficient the pattern and allocation of investment funds,

666
01:09:13.900 --> 01:09:20.020
and tends to freeze them in the original firms, discouraging the diffusion of funds to

667
01:09:20.020 --> 01:09:45.940
3. Excess Profit Taxation

668
01:09:45.940 --> 01:09:49.940
This tax is generally levied on that part of business netting.

669
01:09:49.940 --> 01:09:58.320
Income, dubbed EXCESS, which is greater than a base income in a previous period of time.

670
01:09:58.320 --> 01:10:07.060
A penalty tax on EXCESS business income directly penalizes efficient adjustment of the economy.

671
01:10:07.060 --> 01:10:14.680
The profit drive by entrepreneurs is the motive power that adjusts, estimates and coordinates

672
01:10:14.680 --> 01:10:21.760
It's the economic system so as to maximize producer income in the service of maximizing

673
01:10:21.760 --> 01:10:24.280
consumer satisfactions.

674
01:10:24.280 --> 01:10:31.860
It is the process by which malinvestments are kept to a minimum and good forecasts encouraged

675
01:10:31.860 --> 01:10:38.840
so as to arrange advanced production to be in close harmony with consumer desires at

676
01:10:38.840 --> 01:10:42.960
the date when the final product appears on the market.

677
01:10:42.960 --> 01:10:50.580
Attacking profits doubly disrupts and hampers the whole market adjustment process.

678
01:10:50.580 --> 01:10:54.480
Such a tax penalizes efficient entrepreneurship.

679
01:10:54.480 --> 01:11:01.300
Furthermore, it helps to freeze market patterns and entrepreneurial positions as they were

680
01:11:01.300 --> 01:11:10.100
in some previous time period, thus distorting the economy more and more as time passes.

681
01:11:10.100 --> 01:11:16.740
No economic justification can be found for attempting to freeze market patterns in the

682
01:11:16.740 --> 01:11:19.900
mold of some previous period.

683
01:11:19.900 --> 01:11:26.820
The greater the changes in economic data that have occurred, the more important it is not

684
01:11:26.820 --> 01:11:33.780
to tax excess profits, or any form of excess revenue for that matter.

685
01:11:33.780 --> 01:11:40.420
Otherwise, adaptation to the new conditions will be blocked just when rapid adjustment

686
01:11:40.420 --> 01:11:42.960
is particularly required.

687
01:11:42.960 --> 01:11:50.460
It is difficult to find attacks more indefensible from more points of view than this one.

688
01:11:50.460 --> 01:11:51.880
4.

689
01:11:51.880 --> 01:11:55.300
The Capital Gains Problem

690
01:11:55.300 --> 01:12:01.620
Much discussion has raged over the question, are capital gains income?

691
01:12:01.620 --> 01:12:08.640
It seems evident that they are. Indeed, capital gain is one of the leading forms of income.

692
01:12:08.640 --> 01:12:17.020
In fact, capital gain is the same as profit. Those who desire uniformity of income pattern

693
01:12:17.020 --> 01:12:24.900
taxation would therefore have to include capital gains, if all forms of monetary profit are

694
01:12:24.900 --> 01:12:31.420
to be brought into the category of taxable income. It must not be inferred that the present

695
01:12:31.420 --> 01:12:38.700
Author is an advocate of uniform taxation. Uniformity, in fact, will be sharply criticized

696
01:12:38.700 --> 01:12:46.820
as an ideal impossible of attainment. An ethical goal absolutely impossible of attainment is

697
01:12:46.820 --> 01:12:54.820
an absurd goal. To this extent, we may engage not in ethical exhortation, but in praxeological

698
01:12:54.820 --> 01:13:02.200
Criticism of the Possibility of Realizing Certain Ethical Goals However, it is analytically

699
01:13:02.200 --> 01:13:09.940
more convenient to treat various types of income taxation in relation to uniform treatment

700
01:13:09.940 --> 01:13:12.360
of all income.

701
01:13:12.360 --> 01:13:19.940
Using as an example the star corporation described earlier, let us consider time 1 to be the

702
01:13:19.940 --> 01:13:27.940
The period just after the corporation has earned $100,000 net income and just before

703
01:13:27.940 --> 01:13:32.240
it decides where to allocate this income.

704
01:13:32.240 --> 01:13:36.640
In short, it is at a decision point in time.

705
01:13:36.640 --> 01:13:40.600
It has earned a profit of $100,000.

706
01:13:40.600 --> 01:13:46.860
For the sake of convenience, we are assuming that this income is pure profit and that interest

707
01:13:46.860 --> 01:13:54.460
Interest income has already been disposed of. Only pure profit increases capital value,

708
01:13:54.460 --> 01:14:01.540
for in the evenly rotating economy, there will be no net savings, and the interest income

709
01:14:01.540 --> 01:14:08.100
will just pay for maintaining the capital income structure intact.

710
01:14:08.100 --> 01:14:16.740
At time one, its capital value has therefore increased by $100,000. The stockholders have

711
01:14:16.740 --> 01:14:22.380
have, in the aggregate, earned a capital gain of $100,000.

712
01:14:22.380 --> 01:14:26.100
But this is the same as their aggregate profit.

713
01:14:26.100 --> 01:14:34.340
Now the Star Corporation keeps $60,000 and distributes $40,000 in dividends.

714
01:14:34.340 --> 01:14:40.940
And for the sake of simplicity, we shall assume that the stockholders consume this amount.

715
01:14:40.940 --> 01:14:44.740
What is the situation at time 2?

716
01:14:44.740 --> 01:14:52.220
After this allocation has taken place, in comparison with the situation prevailing originally,

717
01:14:52.220 --> 01:14:59.380
say at time zero, we find that the capital value of the Star Corporation has increased

718
01:14:59.380 --> 01:15:01.960
by $60,000.

719
01:15:01.960 --> 01:15:06.820
This is unquestionably part of the income of the stockholders.

720
01:15:06.820 --> 01:15:14.540
Yet, if uniform income taxation is desired, there is no need to levy a tax on it, for

721
01:15:14.540 --> 01:15:23.380
Where it was already included in the $100,000 income of the stockholders subject to tax.

722
01:15:23.380 --> 01:15:30.720
The stock market always tends toward an accurate reflection of the capital value of a firm.

723
01:15:30.720 --> 01:15:36.820
One might think, therefore, that the quoted value of the firm's shares would increase,

724
01:15:36.820 --> 01:15:40.180
in the aggregate, by $60,000.

725
01:15:40.180 --> 01:15:47.660
In the dynamic world, however, the stock market reflects anticipations of future profit, and

726
01:15:47.660 --> 01:15:54.580
therefore its values will diverge from the relatively ex-post accounting of the firm's

727
01:15:54.580 --> 01:15:56.340
balance sheet.

728
01:15:56.340 --> 01:16:02.940
Furthermore, entrepreneurship, in addition to profits and losses, will be reflected in

729
01:16:02.940 --> 01:16:09.460
the valuations of the stock market as well as in business enterprises directly.

730
01:16:09.460 --> 01:16:16.980
A firm may be making slim profits now, but a far-seeing entrepreneur will purchase stock

731
01:16:16.980 --> 01:16:19.580
from more short-sighted ones.

732
01:16:19.580 --> 01:16:26.700
A rise in price will net him a capital gain, and this is a reflection of his entrepreneurial

733
01:16:26.700 --> 01:16:29.740
wisdom in directing capital.

734
01:16:29.740 --> 01:16:35.800
Since it would be impossible administratively to identify the profits of the firm, it would

735
01:16:35.800 --> 01:16:42.800
would be better from the point of view of uniform income taxation not to tax the business

736
01:16:42.800 --> 01:16:51.640
income of corporate stockholders at all, but to tax a stockholder's capital gains instead.

737
01:16:51.640 --> 01:16:58.860
Whatever gains the owners reap will be reflected in capital gains on their stock anyway, so

738
01:16:58.860 --> 01:17:04.760
that taxation of the business income itself becomes unnecessary.

739
01:17:04.760 --> 01:17:11.980
On the other hand, taxation of business income, while exempting capital gains, would exclude

740
01:17:11.980 --> 01:17:18.100
from income the entrepreneurial gains reaped on the stock market.

741
01:17:18.100 --> 01:17:24.480
In the case of partnerships and single enterprises that are not owned in shares of stock, the

742
01:17:24.480 --> 01:17:30.620
business income of the owners would, of course, be taxed directly.

743
01:17:30.620 --> 01:17:38.340
One of both business income, that is, profits accruing to stockholders, and capital gains

744
01:17:38.340 --> 01:17:44.460
on stock, would impose a double tax on efficient entrepreneurs.

745
01:17:44.460 --> 01:17:51.940
A genuinely uniform income tax, then, would not tax a stockholder's pro-rata business

746
01:17:51.940 --> 01:17:58.700
income at all, but rather the capital gain from his shares of stock.

747
01:17:58.700 --> 01:18:06.220
If business profits or capital gains are income subject to tax, then, of course, business

748
01:18:06.220 --> 01:18:14.380
losses or capital losses are a negative income, deductible from other income earned by any

749
01:18:14.380 --> 01:18:17.420
particular individual.

750
01:18:17.420 --> 01:18:21.020
What of the problem of land and housing?

751
01:18:21.020 --> 01:18:24.580
Here the same situation obtains.

752
01:18:24.580 --> 01:18:31.620
Governments earn income annually, and this may be included in their net income as business profits.

753
01:18:31.620 --> 01:18:38.980
However, real estate, while not given to stock ownership, also has a flourishing capital market.

754
01:18:39.620 --> 01:18:46.980
Land is capitalized, and capital values increase or dwindle on the capital market.

755
01:18:46.980 --> 01:18:53.620
It is clear that once again the government has an alternative if it desires to impose

756
01:18:53.620 --> 01:18:56.720
Uniform Personal Income Taxes

757
01:18:56.720 --> 01:19:04.020
Either it can impose the tax on net profits from real estate, or it can forgo this and

758
01:19:04.020 --> 01:19:09.780
impose a tax on increases in the capital values of real estate.

759
01:19:09.780 --> 01:19:17.500
If it does the former, it will omit the entrepreneurial gains and losses made on the capital market,

760
01:19:17.500 --> 01:19:22.420
the regulator and anticipator of investment and demand.

761
01:19:22.420 --> 01:19:28.320
If it does both, it imposes a double tax on this form of business.

762
01:19:28.320 --> 01:19:36.180
The best solution, once again within the context of a uniform income tax, is to impose a tax

763
01:19:36.180 --> 01:19:42.860
on the capital gain minus the capital loss on the land values.

764
01:19:42.860 --> 01:19:50.300
It must be emphasized that a capital gains tax is truly an income tax only when it is

765
01:19:50.300 --> 01:19:58.060
is levied on accrued rather than on realized capital gains or losses.

766
01:19:58.060 --> 01:20:04.460
In other words, if a man's capital assets have increased during a certain period, from

767
01:20:04.460 --> 01:20:13.140
300 ounces of gold to 400 ounces, his income is 100 ounces, whether or not he has sold

768
01:20:13.140 --> 01:20:16.460
the asset to take the profit.

769
01:20:16.460 --> 01:20:22.980
In any period, his earnings consist not simply in what he may use for spending.

770
01:20:22.980 --> 01:20:30.340
The situation is analogous to that of a corporation's undistributed profits, which, as we have seen,

771
01:20:30.340 --> 01:20:35.980
must be included in each stockholder's accumulation of income.

772
01:20:35.980 --> 01:20:43.280
Taxing realized gains and losses introduces great distortions into the economy.

773
01:20:43.280 --> 01:20:50.060
It then becomes highly advantageous to investors never to sell their stock, but to hand it

774
01:20:50.060 --> 01:20:53.020
down to future generations.

775
01:20:53.020 --> 01:20:59.800
Any sale would require the old owner to pay the capital gains levy accumulated for an

776
01:20:59.800 --> 01:21:01.760
entire period.

777
01:21:01.760 --> 01:21:09.320
The effect is to freeze an investment in the hands of one person, and particularly of one

778
01:21:09.320 --> 01:21:11.980
family, for generations.

779
01:21:11.980 --> 01:21:18.760
The result is rigidity in the economy and failure of the hampered market to meet flexibly

780
01:21:18.760 --> 01:21:23.880
the continual changes in data that always take place.

781
01:21:23.880 --> 01:21:31.920
As time goes on, the distortive effects of the economic rigidity grow worse and worse.

782
01:21:31.920 --> 01:21:37.920
Another serious hampering of the capital market results from the fact that, once the capital

783
01:21:37.920 --> 01:21:44.900
For the capital gain is taken or realized, the income tax on this particular gain is

784
01:21:44.900 --> 01:21:49.440
actually far higher and not uniform.

785
01:21:49.440 --> 01:21:57.280
For the capital gains accrue over a long stretch of time and not simply at the point of sale,

786
01:21:57.280 --> 01:22:03.460
but the income tax is based only on each year's realized income.

787
01:22:03.460 --> 01:22:10.940
In other words, a man who realizes his gain in a certain year must pay a far bigger tax

788
01:22:10.940 --> 01:22:18.660
in that year than would be justified by a tax on his actually acquired income during

789
01:22:18.660 --> 01:22:19.660
the year.

790
01:22:19.660 --> 01:22:27.020
Suppose, for example, that a man buys a capital asset at 50, and its market value increases

791
01:22:27.020 --> 01:22:34.300
is by ten each year until he finally sells it for ninety in four years' time.

792
01:22:34.300 --> 01:22:42.400
For three years his income of ten goes untaxed, while in the fourth year he is taxed on an

793
01:22:42.400 --> 01:22:47.220
income of forty when his income was only ten.

794
01:22:47.220 --> 01:22:55.540
The final tax therefore largely becomes one on accumulated capital rather than on income.

795
01:22:55.540 --> 01:23:02.100
The incentive for keeping investment rigid, therefore, becomes even greater.

796
01:23:02.100 --> 01:23:08.980
There are, of course, grave difficulties in any such tax on accrued capital gains, but,

797
01:23:08.980 --> 01:23:16.260
as we shall see, there are many insuperable obstacles to any attempt to impose uniform

798
01:23:16.260 --> 01:23:18.540
income taxes.

799
01:23:18.540 --> 01:23:23.180
Estimates of market value would pose the greatest problem.

800
01:23:23.180 --> 01:23:32.180
The rules are always simply conjectures, and there would be no way of knowing that the assessed value was the correct one.

801
01:23:32.180 --> 01:23:39.180
Another insuperable difficulty arises from changes in the purchasing power of the monetary unit.

802
01:23:39.180 --> 01:23:52.180
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.

803
01:23:52.180 --> 01:23:59.180
It simply reflects the maintenance of real capital as nominal values double.

804
01:23:59.180 --> 01:24:12.180
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.

805
01:24:12.180 --> 01:24:19.980
To reflect gains or losses in income, then, a person's capital gain or loss would have

806
01:24:19.980 --> 01:24:24.620
to be corrected for changes in the purchasing power of money.

807
01:24:24.620 --> 01:24:32.220
Thus, a fall in purchasing power tends to result in the overstatement of business income,

808
01:24:32.220 --> 01:24:35.820
and hence leads to a consumption of capital.

809
01:24:35.820 --> 01:24:42.020
But if a man's capital gains or losses must be corrected for changes in the purchasing

810
01:24:42.020 --> 01:24:49.160
power of money in order to state his true income for a certain period, what standards

811
01:24:49.160 --> 01:24:52.380
can be used for such a correction?

812
01:24:52.380 --> 01:24:57.060
For changes in purchasing power cannot be measured.

813
01:24:57.060 --> 01:25:01.180
Any index used would be purely arbitrary.

814
01:25:01.180 --> 01:25:09.100
Whichever method is adopted, therefore, uniformity in income taxation cannot be achieved because

815
01:25:09.100 --> 01:25:14.660
an accurate measurement of income cannot be attained.

816
01:25:14.660 --> 01:25:21.700
Another problem in levying a tax on accrued capital gains is that the income is not realized

817
01:25:21.700 --> 01:25:24.620
in money directly.

818
01:25:24.620 --> 01:25:33.020
Form taxation of income in kind, as well as of psychic income, faces insuperable problems,

819
01:25:33.020 --> 01:25:34.900
as will be seen.

820
01:25:34.900 --> 01:25:42.620
Just as there may be taxes on the imputed monetary equivalence of income in kind, however,

821
01:25:42.620 --> 01:25:47.340
there may also be taxes on accrued capital gains.

822
01:25:47.340 --> 01:26:10.340
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.

823
01:26:10.340 --> 01:26:27.340
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.

824
01:26:27.340 --> 01:26:36.340
If it is desired to tax incomes uniformly, then taxes would have to be levied on the former only.

825
01:26:36.340 --> 01:26:43.180
to tax both would be to level a double tax on the same income.

826
01:26:43.180 --> 01:26:50.540
Professor Harold M. Groves, while agreeing that capital gains are income, lists several

827
01:26:50.540 --> 01:26:55.340
reasons for giving capital gains preferential treatment.

828
01:26:55.340 --> 01:27:02.980
Almost all of them apply, however, to taxation on realized rather than on accrued capital

829
01:27:02.980 --> 01:27:04.220
gains.

830
01:27:04.220 --> 01:27:11.140
The only relevant case is the familiar one that capital gains and losses are not regularly

831
01:27:11.140 --> 01:27:15.260
recurrent as are most other incomes.

832
01:27:15.260 --> 01:27:19.900
But no income is regularly recurrent.

833
01:27:19.900 --> 01:27:26.220
Profits and losses, of course, are volatile, being based on speculative entrepreneurship

834
01:27:26.220 --> 01:27:29.420
and adjustments to changing conditions.

835
01:27:29.420 --> 01:27:33.580
Yet no one contends that profits are not income.

836
01:27:33.580 --> 01:27:36.780
All other income is flexible as well.

837
01:27:36.780 --> 01:27:42.060
No one has a guaranteed income on the free market.

838
01:27:42.060 --> 01:27:49.140
Everyone's resources are subject to change as conditions and the data of the market change.

839
01:27:49.140 --> 01:27:56.500
That the division between income and capital gains is illusory is demonstrated by the confusion

840
01:27:56.500 --> 01:28:00.240
Income Over the Classification of Author's Incomes

841
01:28:00.240 --> 01:28:08.280
Is the income in one year resulting from five years writing of a book, income or an increase

842
01:28:08.280 --> 01:28:11.460
in the capital worth of the author?

843
01:28:11.460 --> 01:28:16.820
It should be evident that this entire distinction is valueless.

844
01:28:16.820 --> 01:28:22.780
Irregular income poses the same problem as irregular realized capital gain.

845
01:28:22.780 --> 01:28:29.640
The difficulty can be met in both cases by the suggested solution of averaging income

846
01:28:29.640 --> 01:28:36.820
over several years and paying taxes annually on the average.

847
01:28:36.820 --> 01:28:45.140
Capital gains are profits, and the real value of aggregate capital gains in society will

848
01:28:45.140 --> 01:28:48.100
equal total aggregate profits.

849
01:28:48.100 --> 01:28:55.280
A profit increases the capital worth of the owner, whereas a loss decreases it.

850
01:28:55.280 --> 01:29:02.180
Moreover, there are no other sources from which real capital gains can come.

851
01:29:02.180 --> 01:29:05.260
What of the savings of individuals?

852
01:29:05.260 --> 01:29:12.120
Individual savings, to the extent that they do not add to cash balances, go into investments.

853
01:29:12.120 --> 01:29:18.080
These purchases of capital lead to capital gains for stockholders.

854
01:29:18.080 --> 01:29:24.720
Profits Savings Lead to Aggregate Capital Gains But it is also true that profits can

855
01:29:24.720 --> 01:29:31.680
exist in the aggregate only when there is aggregate net saving in the economy.

856
01:29:31.680 --> 01:29:40.560
Thus, aggregate pure profits, aggregate capital gains, and aggregate net savings all go hand

857
01:29:40.560 --> 01:29:43.280
in hand in the economy.

858
01:29:43.280 --> 01:29:51.280
That dissavings lead to aggregate pure losses and aggregate capital losses.

859
01:29:51.280 --> 01:29:59.920
To sum up, if it is desired to tax uniformly, this goal will be analyzed critically later.

860
01:29:59.920 --> 01:30:06.560
The correct procedure would be to consider capital gains as equivalent to income when

861
01:30:06.560 --> 01:30:17.120
and to consider capital losses as negative income.

862
01:30:17.120 --> 01:30:24.440
Some critics charge that it would be discriminatory to correct capital for changes in prices without

863
01:30:24.440 --> 01:30:29.480
doing the same for income, but this objection misses the point.

864
01:30:29.480 --> 01:30:37.280
If the desire is to tax income rather than accumulated capital, it is necessary to correct

865
01:30:37.280 --> 01:30:41.200
for changes in the purchasing power of money.

866
01:30:41.200 --> 01:30:48.880
For example, capital rather than pure income is being taxed during an inflation.

867
01:30:48.880 --> 01:30:50.560
5.

868
01:30:50.560 --> 01:30:54.880
Is a tax on consumption possible?

869
01:30:54.880 --> 01:31:02.040
We have seen that attempts to tax consumption via sales and excise taxes are vain, and

870
01:31:02.040 --> 01:31:06.400
that they inexorably result in a tax on incomes.

871
01:31:06.400 --> 01:31:13.800
Irving Fisher has suggested an ingenious plan for a consumption tax, a direct tax on the

872
01:31:13.800 --> 01:31:21.080
individual akin to the income tax, requiring annual returns, etc.

873
01:31:21.080 --> 01:31:28.040
The base for the individual's tax, however, would be his income minus net additions to

874
01:31:28.040 --> 01:31:36.840
his capital or cash balance, plus net subtractions from that capital for the period, that is,

875
01:31:36.840 --> 01:31:39.300
his consumption spending.

876
01:31:39.300 --> 01:31:45.280
The individual's consumption spending would then be taxed in the same way as his income

877
01:31:45.280 --> 01:31:46.920
is now.

878
01:31:46.920 --> 01:31:53.320
We have seen the fallacy in the Fisher argument that only a tax on consumption would be a

879
01:31:53.320 --> 01:32:02.060
true income tax, and that the ordinary income tax constitutes a double tax on savings.

880
01:32:02.060 --> 01:32:08.380
This argument places greater weight on savings than the market does, since the market knows

881
01:32:08.380 --> 01:32:15.500
all about the fructifying power of savings and allocates its expenditures accordingly.

882
01:32:15.500 --> 01:32:23.300
The problem we have to face here is this. Would such a tax as Fisher proposes actually have

883
01:32:23.300 --> 01:32:28.940
the intended effect? Would it tax consumption only?

884
01:32:28.940 --> 01:32:35.780
Let us consider a Mr. Jones with a yearly income of 100 gold ounces. During the year

885
01:32:35.780 --> 01:32:45.500
Here he spends 90% or 90 ounces on consumption and saves 10% or 10 ounces.

886
01:32:45.500 --> 01:32:53.260
If the government imposes a 20% income tax upon him, he must pay 20 ounces at the end

887
01:32:53.260 --> 01:32:54.460
of the year.

888
01:32:54.460 --> 01:33:01.020
Assuming that his time preference schedule remains the same, and setting aside the fact

889
01:33:01.020 --> 01:33:07.100
Note that there will be an increased proportion spent on consumption because an individual

890
01:33:07.100 --> 01:33:12.420
with fewer money assets has a higher time preference rate.

891
01:33:12.420 --> 01:33:19.040
The ratio of his consumption to investment will still be 90 to 10.

892
01:33:19.040 --> 01:33:26.380
Jones will now spend 72 ounces on consumption and 8 on investment.

893
01:33:26.380 --> 01:33:33.980
Now suppose that instead of an income tax, the government levies a 20% annual tax on

894
01:33:33.980 --> 01:33:35.580
consumption.

895
01:33:35.580 --> 01:33:41.180
Fisher maintained that such a tax would be levied only on consumption.

896
01:33:41.180 --> 01:33:48.300
But this is incorrect, since savings investment is based solely on the possibility of future

897
01:33:48.300 --> 01:33:50.160
consumption.

898
01:33:50.160 --> 01:33:56.800
Its future consumption will also be taxed in equilibrium at the same rate as present

899
01:33:56.800 --> 01:34:03.680
consumption, it is evident that saving does not receive any special encouragement.

900
01:34:03.680 --> 01:34:09.720
Neither does hoarding receive any special encouragement, since hoarding must finally

901
01:34:09.720 --> 01:34:12.400
eventuate in consumption.

902
01:34:12.400 --> 01:34:20.140
It is true that keeping cash balances itself yields a benefit, but the basis for such balances

903
01:34:20.140 --> 01:34:24.860
Taxes is always the prospect of future consumption.

904
01:34:24.860 --> 01:34:31.540
Even if it were desirable for the government to encourage saving at the expense of consumption,

905
01:34:31.540 --> 01:34:34.860
taxing consumption would not do so.

906
01:34:34.860 --> 01:34:41.060
Since future and present consumption will be taxed equally, there will be no shift in

907
01:34:41.060 --> 01:34:42.960
favor of savings.

908
01:34:42.960 --> 01:34:49.020
In fact, there will be a shift in favor of consumption, to the extent that a diminished

909
01:34:49.020 --> 01:34:55.220
), the average amount of money causes an increase in the rate of preference for present goods.

910
01:34:55.220 --> 01:35:02.380
Setting aside this shift, his loss of funds will cause him to reallocate and reduce his

911
01:35:02.380 --> 01:35:05.760
savings as well as his consumption.

912
01:35:05.760 --> 01:35:13.420
Any payment of funds to the government necessarily reduces the net income remaining to him, and

913
01:35:13.420 --> 01:35:20.400
Since his time preference remains the same, he reduces his savings and his consumption

914
01:35:20.400 --> 01:35:22.920
proportionately.

915
01:35:22.920 --> 01:35:26.480
It will help to see how this works arithmetically.

916
01:35:26.480 --> 01:35:32.140
We may use the following simple equation to sum up Jones' position.

917
01:35:32.140 --> 01:35:37.500
Net income equals gross income minus tax.

918
01:35:37.500 --> 01:35:42.040
Consumption equals 90% of net income.

919
01:35:42.040 --> 01:35:50.440
Tax equals 20% of consumption. With gross income equal to 100, and solving for these

920
01:35:50.440 --> 01:36:00.360
three equations, we get this result. Net income equals 85, tax equals 15, consumption

921
01:36:00.360 --> 01:36:09.320
equals 76. We may now sum up what happened to Jones under an income tax and under a consumption

922
01:36:09.320 --> 01:36:21.000
Tax. Under a 20% income tax, Joan's gross income was 100, his tax was 20, his net income was 80,

923
01:36:21.000 --> 01:36:30.280
his consumption was 72, and his savings investment was 8. Under a 20% consumption tax,

924
01:36:30.280 --> 01:36:49.760
We thus see this important truth.

925
01:36:49.760 --> 01:36:58.000
A consumption tax is always shifted so as to become an income tax, though at a lower

926
01:36:58.000 --> 01:36:59.000
rate.

927
01:36:59.000 --> 01:37:07.200
In fact, the 20% consumption tax becomes equivalent to a 15% income tax.

928
01:37:07.200 --> 01:37:10.960
This is a very important argument against the plan.

929
01:37:10.960 --> 01:37:16.120
Fisher's attempt to tax consumption alone must fail.

930
01:37:16.120 --> 01:37:23.480
The tax is shifted by the individual until it becomes an income tax, albeit at a lower

931
01:37:23.480 --> 01:37:26.800
rate than the equivalent income tax.

932
01:37:26.800 --> 01:37:34.760
Thus, the rather startling conclusion is reached in our analysis that there can be no tax on

933
01:37:34.760 --> 01:37:37.080
consumption alone.

934
01:37:37.080 --> 01:37:44.760
All consumption taxes resolve themselves in one way or another into taxes on incomes.

935
01:37:44.760 --> 01:37:52.000
Of course, as is true of the direct consumption tax, the effect of the rate is discounted.

936
01:37:52.000 --> 01:37:58.280
And here, perhaps, lies a clue to the relative predilection that free market economists have

937
01:37:58.280 --> 01:38:01.680
shown toward consumption taxes.

938
01:38:01.680 --> 01:38:08.400
Their charm, in the final analysis, consists in the discounting, in the fact that the same

939
01:38:08.400 --> 01:38:15.200
rate in a consumption tax has the effect of a lower rate of income tax.

940
01:38:15.200 --> 01:38:19.880
The tax burden on society and the market is lower.

941
01:38:19.880 --> 01:38:27.040
In the same way, the charm of the sales tax lies in the fact that it cannot be progressive,

942
01:38:27.040 --> 01:38:32.720
thus reducing the burden of income taxation on the upper groups.

943
01:38:32.720 --> 01:38:38.000
This reduction of the tax burden may be a very commendable objective, but it should

944
01:38:38.000 --> 01:38:45.320
be stated as such, and it should be realized that the problem lies not so much in the type

945
01:38:45.320 --> 01:38:53.320
of Tax Levied, as in the overall burden of taxes on individuals in the society.

946
01:38:53.320 --> 01:39:01.560
We must now modify our conclusions by admitting the case of dis-hoarding or dis-saving, which

947
01:39:01.560 --> 01:39:04.680
we had ruled out of the discussion.

948
01:39:04.680 --> 01:39:13.160
To the extent that dis-hoarding occurs, consumption is tapped rather than income, for the dis-saver

949
01:39:13.160 --> 01:39:31.160
The Fisher tax would thus tap spending out of accumulated wealth, which would remain untaxed by ordinary income taxation.

950
01:39:31.160 --> 01:39:36.160
4. The Incidents and Effects of Taxation

951
01:39:36.160 --> 01:39:41.160
Part 2 Taxes on Accumulated Capital

952
01:39:41.160 --> 01:39:50.160
In a sense, all taxes are taxes on capital. In order to pay a tax, a man must save the money.

953
01:39:50.160 --> 01:39:59.160
This is a universal rule. If the saving took place in advance, then the tax reduces the capital invested in the society.

954
01:39:59.160 --> 01:40:07.160
If the saving did not take place in advance, then we may say that the tax reduced potential saving.

955
01:40:07.160 --> 01:40:20.160
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.

956
01:40:20.160 --> 01:40:21.160
and Capital.

957
01:40:21.160 --> 01:40:27.800
Even if the individual were forced to save to pay the tax, the saving is current, just

958
01:40:27.800 --> 01:40:34.100
as the income is current, and therefore we may make the distinction between taxes on

959
01:40:34.100 --> 01:40:42.840
current saving and current incomes and taxes on accumulated capital from past periods.

960
01:40:42.840 --> 01:40:50.680
In fact, since there can be no consumption taxes except where there is dis-saving, almost

961
01:40:50.680 --> 01:40:58.820
all taxes resolve themselves into income taxes or taxes on accumulated capital.

962
01:40:58.820 --> 01:41:02.680
We have already analyzed the effect of an income tax.

963
01:41:02.680 --> 01:41:07.880
We come now to taxes on accumulated capital.

964
01:41:07.880 --> 01:41:13.080
Here we encounter a genuine case of double taxation.

965
01:41:13.080 --> 01:41:19.680
When current savings are taxed, the charge of double taxation is a dubious one, since

966
01:41:19.680 --> 01:41:25.520
people are allocating their newly produced current income.

967
01:41:25.520 --> 01:41:30.200
Accumulated capital, on the contrary, is our heritage from the past.

968
01:41:30.200 --> 01:41:36.880
It is the accumulation of tools and equipment and resources from which our present and future

969
01:41:36.880 --> 01:41:39.400
The future standard of living derive.

970
01:41:39.400 --> 01:41:47.040
To tax this capital is to reduce the stock of capital, especially to discourage replacements

971
01:41:47.040 --> 01:41:53.560
as well as new accumulations, and to impoverish society in the future.

972
01:41:53.560 --> 01:41:59.640
It may well happen that time preferences on the market will dictate voluntary capital

973
01:41:59.640 --> 01:42:01.000
consumption.

974
01:42:01.000 --> 01:42:07.560
In that case, people will deliberately choose to impoverish themselves in the future so

975
01:42:07.560 --> 01:42:10.580
as to live better in the present.

976
01:42:10.580 --> 01:42:17.600
But when the government compels such a result, the distortion of market choices is particularly

977
01:42:17.600 --> 01:42:18.780
severe.

978
01:42:18.780 --> 01:42:25.160
For the standard of living of everyone in the society will be absolutely lowered, and

979
01:42:25.160 --> 01:42:31.080
And this includes perhaps some of the tax consumers, the government officials and the

980
01:42:31.080 --> 01:42:34.280
other recipients of tax privilege.

981
01:42:34.280 --> 01:42:40.840
Instead of living off present productive income, the government and its favorites are now dipping

982
01:42:40.840 --> 01:42:50.360
into the accumulated capital of society, thereby killing the goose that lays the golden egg.

983
01:42:50.360 --> 01:42:56.240
Taxation of capital, therefore, differs considerably from income taxation.

984
01:42:56.240 --> 01:43:00.200
Here the type matters, as well as the level.

985
01:43:00.200 --> 01:43:08.680
A 20% tax on accumulated capital will have a far more devastating, distorting and impoverishing

986
01:43:08.680 --> 01:43:13.320
effect than a 20% tax on income.

987
01:43:13.320 --> 01:43:21.320
a. Taxation on gratuitous transfers, bequests and gifts.

988
01:43:21.320 --> 01:43:26.320
The receipt of gifts has often been considered simple income.

989
01:43:26.320 --> 01:43:33.320
It should be obvious, however, that the recipient produced nothing in exchange for the money received.

990
01:43:33.320 --> 01:43:38.320
In fact, it is not an income from current production at all,

991
01:43:38.320 --> 01:43:43.560
Capital, but a transfer of ownership of accumulated capital.

992
01:43:43.560 --> 01:43:49.240
Any tax on the receipt of gifts, then, is a tax on capital.

993
01:43:49.240 --> 01:43:55.480
This is particularly true of inheritances, where the aggregation of capital is shifted

994
01:43:55.480 --> 01:44:01.800
to an heir and the gift clearly does not come from current income.

995
01:44:01.800 --> 01:44:07.220
An inheritance tax, therefore, is a pure tax on capital.

996
01:44:07.220 --> 01:44:14.700
This impact is particularly devastating because a. large sums will be involved, since at

997
01:44:14.700 --> 01:44:23.100
some point within a few generations every piece of property must pass to heirs and b.

998
01:44:23.100 --> 01:44:30.540
the prospect of an inheritance tax destroys the incentive and the power to save and build

999
01:44:30.540 --> 01:44:32.900
up a family competence.

1000
01:44:32.900 --> 01:44:40.620
The inheritance tax is perhaps the most devastating example of a pure tax on capital.

1001
01:44:40.620 --> 01:44:47.940
A tax on gifts and bequests has the further effect of penalizing charity and the preservation

1002
01:44:47.940 --> 01:44:50.100
of family ties.

1003
01:44:50.100 --> 01:44:57.180
It is ironic that some of those most ardent in advocating taxation of gifts and bequests

1004
01:44:57.180 --> 01:45:03.780
are the first to assert that there would never be enough charity were the free market left

1005
01:45:03.780 --> 01:45:06.700
to its own devices.

1006
01:45:06.700 --> 01:45:10.580
B. Property Taxation

1007
01:45:10.580 --> 01:45:18.620
A property tax is a tax levied on the value of property and hence on accumulated capital.

1008
01:45:18.620 --> 01:45:22.860
There are many problems peculiar to property taxation.

1009
01:45:22.860 --> 01:45:29.040
In the first place, the tax depends on an assessment of the value of property, and the

1010
01:45:29.040 --> 01:45:33.640
rate of tax is applied to this assessed value.

1011
01:45:33.640 --> 01:45:41.520
But since an actual sale of property has usually not taken place, there is no way for assessments

1012
01:45:41.520 --> 01:45:43.920
to be made accurately.

1013
01:45:43.920 --> 01:45:50.580
Since all assessments are arbitrary, the road is open for favoritism, collusion, and bribery

1014
01:45:50.580 --> 01:45:52.640
in making them.

1015
01:45:52.640 --> 01:46:01.640
Another weakness of current property taxation is that it taxes doubly both real and intangible property.

1016
01:46:01.640 --> 01:46:08.640
The property tax adds real and intangible property assessments together.

1017
01:46:08.640 --> 01:46:15.640
Thus the bondholder's equity in property is added to the amount of the debtor's liability.

1018
01:46:15.640 --> 01:46:21.640
Property under debt is therefore doubly taxed as against other property.

1019
01:46:21.640 --> 01:46:41.640
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.

1020
01:46:41.640 --> 01:46:48.160
Thus the use of the credit system is penalized and the rate of interest paid to creditors

1021
01:46:48.160 --> 01:46:53.460
must be raised to allow for the extra penalty.

1022
01:46:53.460 --> 01:47:00.300
One peculiarity of the property tax is that it attaches to the property itself rather

1023
01:47:00.300 --> 01:47:03.260
than to the person who owns it.

1024
01:47:03.260 --> 01:47:11.920
As a result, the tax is shifted on the market in a special way, known as tax capitalization.

1025
01:47:11.920 --> 01:47:19.660
Suppose for example that the social time preference rate, or pure rate of interest, is 5%.

1026
01:47:19.660 --> 01:47:27.300
Five percent is earned on all investments in equilibrium, and the rate tends to 5% as

1027
01:47:27.300 --> 01:47:30.060
equilibrium is reached.

1028
01:47:30.060 --> 01:47:37.740
Suppose a property tax is levied on one particular property or set of properties, for example,

1029
01:47:37.740 --> 01:47:41.260
on a house worth $10,000.

1030
01:47:41.260 --> 01:47:48.500
Before this tax was imposed, the owner earned $500 annually on the property.

1031
01:47:48.500 --> 01:47:58.380
An annual tax of 1% is now levied, forcing the owner to pay $100 per year to the government.

1032
01:47:58.380 --> 01:48:00.340
What will happen now?

1033
01:48:00.340 --> 01:48:06.420
As it stands, the owner will earn $400 per year on his investment.

1034
01:48:06.420 --> 01:48:10.740
The net return on the investment will now be 4%.

1035
01:48:10.740 --> 01:48:19.460
Clearly no one will continue to invest at 4% in this property when he can earn 5% elsewhere.

1036
01:48:19.460 --> 01:48:20.660
What will happen?

1037
01:48:20.660 --> 01:48:27.740
The owner will not be able to shift his tax forward by raising the rental value of the

1038
01:48:27.740 --> 01:48:34.740
The property's earnings are determined by its discounted marginal value productivity,

1039
01:48:34.740 --> 01:48:40.740
and the tax on the property does not increase its merits or earning power.

1040
01:48:40.740 --> 01:48:43.740
In fact, the reverse occurs.

1041
01:48:43.740 --> 01:48:51.740
The tax lowers the capital value of the property to enable owners to earn a 5% return.

1042
01:48:51.740 --> 01:48:59.020
The market drive toward uniformity of interest return pushes the capital value of the property

1043
01:48:59.020 --> 01:49:03.220
down to enable a return on investment.

1044
01:49:03.220 --> 01:49:14.460
The capital value of the property will fall to $8,333 so that future returns will be 5%.

1045
01:49:14.460 --> 01:49:23.020
The final capital value is not $8,000 since the property tax is levied at 1% of the final

1046
01:49:23.020 --> 01:49:24.640
value.

1047
01:49:24.640 --> 01:49:32.060
The tax does not remain at 1% of the original capital value of $10,000.

1048
01:49:32.060 --> 01:49:37.960
The capital value will fall to $8,333.

1049
01:49:37.960 --> 01:49:47.620
Property tax payment will be $83, net annual return will be $417, and an annual rate of

1050
01:49:47.620 --> 01:49:55.800
return of 5% on the capital of $8,333.

1051
01:49:55.800 --> 01:50:02.880
In the long run, this process of reducing capital value is imputed backward, falling

1052
01:50:02.880 --> 01:50:06.940
mainly on the owners of ground land.

1053
01:50:06.940 --> 01:50:13.940
Suppose a property tax is levied on a capital good, or a set of capital goods.

1054
01:50:13.940 --> 01:50:21.100
Income to a capital good is resolvable into wages, interest, profit, and rental to ground

1055
01:50:21.100 --> 01:50:22.100
land.

1056
01:50:22.100 --> 01:50:27.820
A lower capital value of capital goods would shift resources elsewhere.

1057
01:50:27.820 --> 01:50:34.960
Workers, confronted with lower wages in producing this particular good, would shift to a better

1058
01:50:34.960 --> 01:50:39.960
Capitalists would invest in a more remunerative field, and so forth.

1059
01:50:39.960 --> 01:50:47.960
As a result, workers and entrepreneurs would largely be able to slough off the burden of the property tax,

1060
01:50:47.960 --> 01:50:58.960
the former suffering to the extent that their original DMVP was higher here than in the next highest paying occupations.

1061
01:50:58.960 --> 01:51:13.240
The Man Bearing the Major Burden, then, is the owner of ground land.

1062
01:51:13.240 --> 01:51:20.120
Therefore the process of tax capitalization applies most fully to a property tax upon

1063
01:51:20.120 --> 01:51:22.040
ground land.

1064
01:51:22.040 --> 01:51:29.240
The incidence falls on the owner of the original ground land, that is, the owner at the time

1065
01:51:29.240 --> 01:51:32.160
the tax is first imposed.

1066
01:51:32.160 --> 01:51:39.520
For not only does the landlord pay the annual tax, a tax he cannot shift, so long as he

1067
01:51:39.520 --> 01:51:45.160
is the owner, but he also suffers a loss in capital value.

1068
01:51:45.160 --> 01:51:53.740
If Mr. Smith is the owner of the property, not only does he pay $83 per year in taxes,

1069
01:51:53.740 --> 01:52:03.400
but the capital value of his property also falls from $10,000 to $8,333.

1070
01:52:03.400 --> 01:52:09.160
Smith openly absorbs the loss when he sells the property.

1071
01:52:09.160 --> 01:52:12.340
What however of the succeeding owners?

1072
01:52:12.340 --> 01:52:21.160
They buy the property at $8,333 and earn a steady 5% interest, although they continue

1073
01:52:21.160 --> 01:52:25.380
to pay $83 a year to the government.

1074
01:52:25.380 --> 01:52:32.300
The expectation of the tax payment attached to the property, therefore, has been capitalized

1075
01:52:32.300 --> 01:52:38.620
by the market and taken into account in arriving at its capital value.

1076
01:52:38.620 --> 01:52:44.640
As a result, the future owners are able to shift the entire incidence of the property

1077
01:52:44.640 --> 01:52:47.560
tax to the original owner.

1078
01:52:47.560 --> 01:52:54.300
They do not really pay the tax in the sense that they bear its burden.

1079
01:52:54.300 --> 01:53:00.920
Tax capitalization is an instance of a process by which the market adjusts to burdens placed

1080
01:53:00.920 --> 01:53:02.480
upon it.

1081
01:53:02.480 --> 01:53:08.560
Those whom the government wanted to pay the burden can avoid doing so because of the market's

1082
01:53:08.560 --> 01:53:12.820
It's resilience in adjusting to new impositions.

1083
01:53:12.820 --> 01:53:21.200
The original owners of ground land, however, are especially burdened by a property tax.

1084
01:53:21.200 --> 01:53:28.180
Some writers argue that where tax capitalization has taken place, it would be unjust for the

1085
01:53:28.180 --> 01:53:35.580
government to lower or remove the tax, because such an action would grant a free gift to

1086
01:53:35.580 --> 01:53:41.780
to the current owners of property, who will receive a counterbalancing increase in its

1087
01:53:41.780 --> 01:53:43.960
capital value.

1088
01:53:43.960 --> 01:53:45.940
This is a curious argument.

1089
01:53:45.940 --> 01:53:53.100
It rests on a fallacious identification of the removal of a burden with a subsidy.

1090
01:53:53.100 --> 01:53:59.420
The former, however, is a move toward free market conditions, whereas the latter is a

1091
01:53:59.420 --> 01:54:02.660
move away from such conditions.

1092
01:54:02.660 --> 01:54:07.740
Furthermore, the property tax, while not burdening future owners,

1093
01:54:07.740 --> 01:54:14.500
depresses the capital value of the property below what it would be on the free market,

1094
01:54:14.500 --> 01:54:20.060
and therefore discourages the employment of resources in this property.

1095
01:54:20.060 --> 01:54:27.940
Removal of the property tax would reallocate resources to the advantage of the consumers.

1096
01:54:27.940 --> 01:54:35.380
Tax capitalization and its incidence on owners of ground land occur only where the property

1097
01:54:35.380 --> 01:54:43.380
tax is partial rather than universal, on some pieces of property rather than all.

1098
01:54:43.380 --> 01:54:50.820
A truly general property tax will reduce the rate of income earned from all investments

1099
01:54:50.820 --> 01:54:56.880
and thereby reduce the rate of interest instead of the capital value.

1100
01:54:56.880 --> 01:55:03.640
In that case, the interest return of both the original owner and later owners is reduced

1101
01:55:03.640 --> 01:55:09.760
equally, and there is no extra burden on the original owner.

1102
01:55:09.760 --> 01:55:18.320
A general uniform property tax on all property values, then, will, like an income tax, reduce

1103
01:55:18.320 --> 01:55:22.080
the interest return throughout the economy.

1104
01:55:22.080 --> 01:55:28.660
This will penalize saving, thereby reducing capital investment below what it would have

1105
01:55:28.660 --> 01:55:35.920
been and depressing real wage rates further below their free market level.

1106
01:55:35.920 --> 01:55:43.960
Finally, a property tax necessarily distorts the allocation of resources in production.

1107
01:55:43.960 --> 01:55:50.340
It penalizes those lines of production in which capital equipment per sales dollar is

1108
01:55:50.340 --> 01:55:59.300
is large and causes resources to shift from these to less capitalistic fields, thus investment

1109
01:55:59.300 --> 01:56:07.260
in higher-order productive processes is discouraged and the standard of living lowered.

1110
01:56:07.260 --> 01:56:13.900
Individuals will invest less in housing, which bears a relatively heavy property tax burden,

1111
01:56:13.900 --> 01:56:21.100
and shift instead to less durable consumers' goods, thus distorting production and injuring

1112
01:56:21.100 --> 01:56:23.500
consumer satisfaction.

1113
01:56:23.500 --> 01:56:30.940
In practice, the property tax tends to be uneven from one line and location to another.

1114
01:56:30.940 --> 01:56:37.620
Of course, geographic differences in property taxation in impelling resources to escape

1115
01:56:37.620 --> 01:56:44.660
and heavy tax rates will distort the location of production by driving it from those areas

1116
01:56:44.660 --> 01:56:48.620
that would maximize consumer satisfaction.

1117
01:56:48.620 --> 01:56:54.540
This distortion of location would result from all other forms of taxes as well.

1118
01:56:54.540 --> 01:57:02.620
Thus, a higher income tax rate in Region A than in Region B would induce workers to shift

1119
01:57:02.620 --> 01:57:09.340
from A to B, in order to equalize net wage rates after taxes.

1120
01:57:09.340 --> 01:57:16.220
The location of production is distorted as compared with the free market.

1121
01:57:16.220 --> 01:57:23.900
C. A Tax on Individual Wealth Although a tax on individual wealth has not

1122
01:57:23.900 --> 01:57:29.800
been tried in practice, it offers an interesting topic for analysis.

1123
01:57:29.800 --> 01:57:36.080
Such a tax would be imposed on individuals instead of on their property and would levy

1124
01:57:36.080 --> 01:57:42.860
a certain percentage of their total net wealth, excluding liabilities.

1125
01:57:42.860 --> 01:57:48.600
In its directness, it would be similar to the income tax and to Fisher's proposed

1126
01:57:48.600 --> 01:57:50.420
consumption tax.

1127
01:57:50.420 --> 01:57:57.980
A tax of this kind would constitute a pure tax on capital and would include in its grasp

1128
01:57:57.980 --> 01:58:02.500
cash balances, which escape property taxation.

1129
01:58:02.500 --> 01:58:09.500
It would avoid many difficulties of a property tax, such as double taxation of real and tangible

1130
01:58:09.500 --> 01:58:14.180
property, and the inclusion of debts as property.

1131
01:58:14.180 --> 01:58:22.340
However, it would still face the impossibility of accurately assessing property values.

1132
01:58:22.340 --> 01:58:30.500
A tax on individual wealth could not be capitalized, since the tax would not be attached to a property

1133
01:58:30.500 --> 01:58:34.060
where it could be discounted by the market.

1134
01:58:34.060 --> 01:58:40.500
Like an individual income tax, it could not be shifted, although it would have important

1135
01:58:40.500 --> 01:58:42.100
effects.

1136
01:58:42.100 --> 01:58:47.960
Since the tax would be paid out of regular income, it would have the effect of an income

1137
01:58:47.960 --> 01:58:56.000
tax in reducing private funds and penalizing savings investment, but it would also have

1138
01:58:56.000 --> 01:59:01.320
the further effect of taxing accumulated capital.

1139
01:59:01.320 --> 01:59:08.320
How much accumulated capital would be taken by the tax depends on the concrete data and

1140
01:59:08.320 --> 01:59:12.200
the valuations of the specific individuals.

1141
01:59:12.200 --> 01:59:19.500
Let us postulate, for example, two individuals, Smith and Robinson, each has an accumulated

1142
01:59:19.500 --> 01:59:29.760
wealth of $100,000. Smith, however, also earns $50,000 a year, and Robinson, because of retirement

1143
01:59:29.760 --> 01:59:38.080
or other reasons, earns only $1,000 a year. Suppose the government levies a 10% annual

1144
01:59:38.080 --> 01:59:41.280
Tax on an Individual's Wealth

1145
01:59:41.280 --> 01:59:48.720
Smith might be able to pay the $10,000 a year out of his regular income without reducing

1146
01:59:48.720 --> 01:59:55.560
his accumulated wealth, although it seems clear that since his tax liability is reduced

1147
01:59:55.560 --> 02:00:01.440
thereby, he will want to reduce his wealth as much as possible.

1148
02:00:01.440 --> 02:00:08.460
Robinson, on the other hand, must pay the tax by selling his assets, thereby reducing

1149
02:00:08.460 --> 02:00:11.520
his accumulated wealth.

1150
02:00:11.520 --> 02:00:18.820
It is clear that the wealth tax levies a heavy penalty on accumulated wealth, and that therefore

1151
02:00:18.820 --> 02:00:24.500
the effect of the tax will be to slash accumulated capital.

1152
02:00:24.500 --> 02:00:31.460
No quicker route could be found to promote capital consumption and general impoverishment

1153
02:00:31.460 --> 02:00:35.980
than to penalize the accumulation of capital.

1154
02:00:35.980 --> 02:00:43.280
Only our heritage of accumulated capital differentiates our civilization and living standards from

1155
02:00:43.280 --> 02:00:50.660
those of primitive men, and a tax on wealth would speedily work to eliminate this difference.

1156
02:00:50.660 --> 02:00:57.220
The fact that a wealth tax could not be capitalized means that the market could not, as in the

1157
02:00:57.220 --> 02:01:04.540
case of the property tax, reduce and cushion its effect after the impact of the initial

1158
02:01:04.540 --> 02:01:06.060
blow.

1159
02:01:06.060 --> 02:01:07.680
5.

1160
02:01:07.680 --> 02:01:12.540
The Incidents and Effects of Taxation Part 3.

1161
02:01:12.540 --> 02:01:15.380
The Progressive Tax

1162
02:01:15.380 --> 02:01:23.020
Of all the patterns of tax distribution, the progressive tax has generated the most controversy.

1163
02:01:23.020 --> 02:01:30.420
In the case of the progressive tax, the conservative economists who oppose it have taken the offensive.

1164
02:01:30.420 --> 02:01:37.180
For even its advocates must grudgingly admit that the progressive tax lowers incentives

1165
02:01:37.180 --> 02:01:38.820
and productivity.

1166
02:01:38.820 --> 02:01:47.060
Hence, the most ardent champions of the progressive tax on equity grounds admit that the degree

1167
02:01:47.060 --> 02:01:54.440
and intensity of progression must be limited by considerations of productivity.

1168
02:01:54.440 --> 02:02:01.240
The major criticisms that have been levied against progressive taxation are A. It reduces

1169
02:02:01.240 --> 02:02:07.680
Reduces the Savings of the Community B. It Reduces the Incentive to Work and Earn

1170
02:02:07.680 --> 02:02:14.020
and C. It Constitutes Robbery of the Rich by the Poor

1171
02:02:14.020 --> 02:02:19.880
To evaluate these criticisms, let us turn to an analysis of the effects of the progression

1172
02:02:19.880 --> 02:02:21.520
principle.

1173
02:02:21.520 --> 02:02:28.480
The progressive tax imposes a higher rate of taxation on a man earning more.

1174
02:02:28.480 --> 02:02:36.800
In other words, it acts as a penalty on service to the consumer, on merit in the market.

1175
02:02:36.800 --> 02:02:42.840
Incomes in the market are determined by service to the consumer in producing and allocating

1176
02:02:42.840 --> 02:02:50.080
factors of production, and vary directly according to the extent of such services.

1177
02:02:50.080 --> 02:02:56.560
To impose penalties on the very people who have served the consumers most is to injure

1178
02:02:56.560 --> 02:03:08.660
A progressive tax is therefore bound to cripple incentives, impair mobility of occupation,

1179
02:03:08.660 --> 02:03:13.960
and greatly hamper the flexibility of the market in serving the consumers.

1180
02:03:13.960 --> 02:03:18.760
It will consequently lower the general standard of living.

1181
02:03:18.760 --> 02:03:26.540
The ultimate of progression, coercively equalized incomes, will, as we have seen, cause a reversion

1182
02:03:26.540 --> 02:03:42.540
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.

1183
02:03:42.540 --> 02:03:45.540
Their earnings will be taxed away.

1184
02:03:45.540 --> 02:03:57.540
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.

1185
02:03:57.540 --> 02:04:09.540
Thus, conservatives' charges that the progressive tax reduces incentives to work and save are correct, and, in fact, are usually understated,

1186
02:04:09.540 --> 02:04:17.380
because there is not sufficient realization that these effects stem a priori from the very nature

1187
02:04:17.380 --> 02:04:25.140
of progression itself. It should not be forgotten, however, that proportional taxation will induce

1188
02:04:25.140 --> 02:04:34.020
many of the same effects as, in fact, will any tax that goes beyond equality or the cost principle.

1189
02:04:34.020 --> 02:04:40.140
For proportional taxation also penalizes the able and the saver.

1190
02:04:40.140 --> 02:04:46.180
It is true that proportional taxation will not have many of the crippling effects of

1191
02:04:46.180 --> 02:04:53.380
progression, such as the progressive hampering of effort from one income bracket to another.

1192
02:04:53.380 --> 02:05:00.860
But proportional taxation also imposes heavier burdens as the income brackets rise, and these

1193
02:05:00.860 --> 02:05:04.800
is also hamper earning and saving.

1194
02:05:04.800 --> 02:05:10.720
A second argument against the progressive income tax, and one which is perhaps the most

1195
02:05:10.720 --> 02:05:19.360
widely used, is that by taxing the incomes of the wealthy, it reduces savings in particular,

1196
02:05:19.360 --> 02:05:22.580
thus injuring society as a whole.

1197
02:05:22.580 --> 02:05:28.760
This argument is predicated on the usually plausible assumption that the rich save more

1198
02:05:28.760 --> 02:05:31.240
or proportionately than the poor.

1199
02:05:31.240 --> 02:05:37.920
Yet, as we have indicated, this is an extremely weak argument, particularly for partisans

1200
02:05:37.920 --> 02:05:39.720
of the free market.

1201
02:05:39.720 --> 02:05:46.480
It is legitimate to criticize a measure for forcing deviations from free market allocations

1202
02:05:46.480 --> 02:05:54.000
to arbitrary ones, but it can hardly be legitimate simply to criticize a measure for reducing

1203
02:05:54.000 --> 02:05:56.400
savings per se.

1204
02:05:56.400 --> 02:06:02.120
For why does consumption possess less merit than saving?

1205
02:06:02.120 --> 02:06:07.520
Allocation between them on the market is simply a matter of time preference.

1206
02:06:07.520 --> 02:06:14.560
This means that any coerced deviation from the market ratio of saving to consumption

1207
02:06:14.560 --> 02:06:22.200
imposes a loss in utility, and this is true whichever direction the deviation takes.

1208
02:06:22.200 --> 02:06:28.940
A government measure that might induce more saving and less consumption is then no less

1209
02:06:28.940 --> 02:06:35.240
subject to criticism than one that would lead to more consumption and less saving.

1210
02:06:35.240 --> 02:06:43.060
To say differently is to criticize free market choices and, implicitly, to advocate governmental

1211
02:06:43.060 --> 02:06:47.440
measures to force more savings upon the public.

1212
02:06:47.440 --> 02:06:53.120
If they were consistent, therefore, these conservative economists would have to advocate

1213
02:06:53.120 --> 02:07:00.200
taxation of the poor to subsidize the rich, for in that case, savings would presumably

1214
02:07:00.200 --> 02:07:04.480
increase and consumption diminish.

1215
02:07:04.480 --> 02:07:11.600
The third objection is a political-ethical one, that the poor rob the rich.

1216
02:07:11.600 --> 02:07:19.200
The implication is that the poor man who pays 1% of his income in taxes is robbing the

1217
02:07:19.200 --> 02:07:22.480
rich man who pays 80%.

1218
02:07:22.480 --> 02:07:29.000
Without judging the merits or demerits of robbery, we may say that this is invalid.

1219
02:07:29.000 --> 02:07:31.800
Both citizens are being robbed.

1220
02:07:31.800 --> 02:07:38.200
By the state, that one is robbed in greater proportion does not eliminate the fact that

1221
02:07:38.200 --> 02:07:40.520
both are being injured.

1222
02:07:40.520 --> 02:07:46.720
It may be objected that the poor receive a net subsidy out of the tax proceeds because

1223
02:07:46.720 --> 02:07:50.600
the government spends money to serve the poor.

1224
02:07:50.600 --> 02:07:56.740
Yet this is not a valid argument, for the actual act of robbery is committed by the

1225
02:07:56.740 --> 02:07:59.680
state and not by the poor.

1226
02:07:59.680 --> 02:08:06.360
Secondly, the state may spend its money, as we shall see, on many different projects.

1227
02:08:06.360 --> 02:08:13.040
It may consume products, it may subsidize some or all of the rich, it may subsidize

1228
02:08:13.040 --> 02:08:15.580
some or all of the poor.

1229
02:08:15.580 --> 02:08:23.600
The fact of progressive income taxation does not itself imply that the poor en masse will

1230
02:08:23.600 --> 02:08:25.480
be subsidized.

1231
02:08:25.480 --> 02:08:31.320
If some of the poor are subsidized, others may not be, and these latter will still be

1232
02:08:31.320 --> 02:08:39.880
will be net taxpayers rather than tax consumers and will be robbed along with the rich.

1233
02:08:39.880 --> 02:08:46.420
The extent of this deprivation will be less for a poor taxpayer than for a rich one.

1234
02:08:46.420 --> 02:08:53.480
And yet, since usually there are far more poor than rich, the poor en masse may very

1235
02:08:53.480 --> 02:08:57.980
well bear the greatest burden of the tax robbery.

1236
02:08:57.980 --> 02:09:06.180
In contrast, the state bureaucracy, as we have seen, actually pays no taxes at all.

1237
02:09:06.180 --> 02:09:13.140
This misconception of the incidence of robbery and the defective argument on savings, among

1238
02:09:13.140 --> 02:09:20.180
other reasons, have led most conservative economists and writers to overemphasize greatly

1239
02:09:20.180 --> 02:09:24.700
the importance of the progressiveness of taxation.

1240
02:09:24.700 --> 02:09:32.580
Actually, the level of taxation is far more important than its progressiveness in determining

1241
02:09:32.580 --> 02:09:37.540
the distance that a society has traveled from a free market.

1242
02:09:37.540 --> 02:09:41.840
An example will clarify the relative importance of the two.

1243
02:09:41.840 --> 02:09:48.420
Let us contrast two people and see how they fare under two different tax systems.

1244
02:09:48.420 --> 02:09:55.140
Smith makes $1,000 a year, and Jones makes $20,000 a year.

1245
02:09:55.140 --> 02:10:01.480
In society A, taxation is proportionate for all at 50%.

1246
02:10:01.480 --> 02:10:06.820
In society B, taxation is very steeply progressive.

1247
02:10:06.820 --> 02:10:15.660
Rates are ½% for $1,000 income, 20% for $20,000 income.

1248
02:10:15.660 --> 02:10:21.260
How Much Money Will Each Pay in Taxes in the Different Societies?

1249
02:10:21.260 --> 02:10:32.420
Smith, with an income of $1,000, pays $500 in taxes in Society A and $5 in taxes in

1250
02:10:32.420 --> 02:10:44.180
Society B. Jones, with an income of $20,000, pays $10,000 in taxes in Society A and $4,000

1251
02:10:44.180 --> 02:10:52.740
Taxes in Society B. Now we may ask both the rich and the poor taxpayers, under which system

1252
02:10:52.740 --> 02:11:00.620
of taxation are you better off? Both the rich man and the poor man will unhesitatingly pick

1253
02:11:00.620 --> 02:11:08.460
Society B, where the rate structure is far more progressive, but where the level of taxation

1254
02:11:08.460 --> 02:11:11.740
for Every Man is Lower.

1255
02:11:11.740 --> 02:11:18.800
Some may object that the total amount of tax levied is far greater in Society A, but this

1256
02:11:18.800 --> 02:11:20.800
is precisely the point.

1257
02:11:20.800 --> 02:11:27.660
The point is that what the rich man objects to is not the progressiveness of the rates,

1258
02:11:27.660 --> 02:11:34.600
but the high level of the rates imposed upon him, and he will prefer progressiveness when

1259
02:11:34.600 --> 02:11:36.620
rates are lower.

1260
02:11:36.620 --> 02:11:43.100
This demonstrates that it is not the poor who rob the rich through the progressive principle

1261
02:11:43.100 --> 02:11:44.660
of taxation.

1262
02:11:44.660 --> 02:11:50.000
It is the state that robs both through all taxation.

1263
02:11:50.000 --> 02:11:55.940
And it indicates that what the conservative economists are actually objecting to, whether

1264
02:11:55.940 --> 02:12:04.020
they fully realize it or not, is not progression, but high levels of taxation, and that their

1265
02:12:04.020 --> 02:12:10.480
Their real objection to progression is that it opens the sluice gates for high levels

1266
02:12:10.480 --> 02:12:13.060
of taxation of the rich.

1267
02:12:13.060 --> 02:12:19.460
Yet this prospect will not always be realized, for it is certainly possible, and has often

1268
02:12:19.460 --> 02:12:27.340
occurred, that a rate structure is very progressive and yet lower all around, on the high brackets

1269
02:12:27.340 --> 02:12:32.180
and on the low, than a less progressive structure.

1270
02:12:32.180 --> 02:12:39.340
As a practical matter, however, progressiveness is necessary for high tax rates, because the

1271
02:12:39.340 --> 02:12:46.620
multitude of lower-income citizens might revolt against very steep tax rates if they were

1272
02:12:46.620 --> 02:12:49.660
imposed on all equally.

1273
02:12:49.660 --> 02:12:55.960
On the other hand, many people may accept a high tax burden if they are secure in the

1274
02:12:55.960 --> 02:13:02.240
The knowledge or belief that the rich pay a still higher rate.

1275
02:13:02.240 --> 02:13:09.160
We have seen that coerced egalitarianism will cause a reversion to barbarism, and that steps

1276
02:13:09.160 --> 02:13:16.520
in that direction will result in dislocations of the market and a lowering of living standards.

1277
02:13:16.520 --> 02:13:22.420
Many economists, notably the members of the Chicago School, believe that they champion

1278
02:13:22.420 --> 02:13:29.700
The Free Market, and yet they do not consider taxation as connected with the market or as

1279
02:13:29.700 --> 02:13:36.420
an intervention in the market process. These writers strongly believe that on the market,

1280
02:13:36.420 --> 02:13:43.300
every individual should earn the profits and marginal value productivity that the consumers

1281
02:13:43.300 --> 02:13:51.060
wish to pay in order to achieve a satisfactory allocation of productive factors. Nevertheless,

1282
02:13:51.060 --> 02:13:58.500
They see no inconsistency in then advocating drastic taxation and subsidies.

1283
02:13:58.500 --> 02:14:05.400
They believe that these can alter the distribution of incomes without lowering the efficiency

1284
02:14:05.400 --> 02:14:08.260
of productive allocations.

1285
02:14:08.260 --> 02:14:15.860
In this way, they rely on an equivalent of Keynesian money illusion, a tax illusion,

1286
02:14:15.860 --> 02:14:22.380
A belief that individuals will arrange their activities according to their gross, rather

1287
02:14:22.380 --> 02:14:26.460
than net, after-tax income.

1288
02:14:26.460 --> 02:14:28.580
This is a palpable error.

1289
02:14:28.580 --> 02:14:34.340
There is no reason why people should not be tax-conscious and allocate their resources

1290
02:14:34.340 --> 02:14:36.660
and energies accordingly.

1291
02:14:36.660 --> 02:14:43.760
Altering relative rewards by taxation will disrupt all the allocations of the market,

1292
02:14:43.760 --> 02:14:48.920
The movement of labor, the alertness of entrepreneurship, etc.

1293
02:14:48.920 --> 02:14:56.600
The market is a vast nexus with all strands interconnected, and it must be analyzed as

1294
02:14:56.600 --> 02:14:57.600
such.

1295
02:14:57.600 --> 02:15:04.280
The prevailing fashion in economics of chopping up the market into isolated compartments,

1296
02:15:04.280 --> 02:15:13.620
the firm, a few macroscopic holistic aggregates, market exchanges, taxation, etc., distorts

1297
02:15:13.620 --> 02:15:19.880
What's the discussion of each one of these compartments and fails to present a true picture

1298
02:15:19.880 --> 02:15:23.520
of the interrelations of the market?

1299
02:15:23.520 --> 02:15:25.000
6.

1300
02:15:25.000 --> 02:15:29.880
The Incidents and Effects of Taxation Part 4.

1301
02:15:29.880 --> 02:15:36.860
The Single Tax on Ground Rent We have refuted elsewhere the various arguments

1302
02:15:36.860 --> 02:15:43.860
Documents that form part of the Henry Georgist edifice, the idea that society owns the land

1303
02:15:43.860 --> 02:15:51.420
originally and that every new baby has a right to an aliquot part, the moral argument that

1304
02:15:51.420 --> 02:15:59.820
an increase in the value of ground land is an unearned increment due to external causes,

1305
02:15:59.820 --> 02:16:07.380
One of the doctrines that speculation incites wickedly withholds productive land from use.

1306
02:16:07.380 --> 02:16:15.960
Here we shall analyze the famous Georgist proposal itself, the single tax, or the 100%

1307
02:16:15.960 --> 02:16:19.800
expropriation of ground rent.

1308
02:16:19.800 --> 02:16:24.720
One of the first things to be said about the Georgist theory is that it calls attention

1309
02:16:24.720 --> 02:16:28.640
to an important problem, the land question.

1310
02:16:28.640 --> 02:16:34.640
Land economics tends to treat land as part of capital and to deny the existence of a

1311
02:16:34.640 --> 02:16:38.040
separate land category at all.

1312
02:16:38.040 --> 02:16:44.560
In such an environment, the Georgist thesis serves to call attention to a neglected problem,

1313
02:16:44.560 --> 02:16:49.880
even though every one of its doctrines is fallacious.

1314
02:16:49.880 --> 02:16:56.180
Much of the discussion of ground-rent taxation has been confused by the undoubted stimulus

1315
02:16:56.180 --> 02:17:03.420
as to production that would result not from this tax but from the elimination of all other

1316
02:17:03.420 --> 02:17:06.500
forms of taxation.

1317
02:17:06.500 --> 02:17:13.780
George waxed eloquent over the harmful effect taxation has upon production and exchange.

1318
02:17:13.780 --> 02:17:22.300
However, these effects can as easily be removed by eliminating taxation altogether as by shifting

1319
02:17:22.300 --> 02:17:25.620
all taxes onto ground rent.

1320
02:17:25.620 --> 02:17:28.620
George virtually admitted as much.

1321
02:17:28.620 --> 02:17:31.300
As he wrote in Progress and Poverty,

1322
02:17:31.300 --> 02:17:39.700
To abolish the taxation, which, acting and reacting, now hampers every wheel of exchange,

1323
02:17:39.700 --> 02:17:45.780
and presses upon every form of industry, would be like removing an immense weight from a

1324
02:17:45.780 --> 02:17:47.740
powerful spring.

1325
02:17:47.740 --> 02:17:53.940
Imbued with fresh energy, production would start into new life, and trade would receive

1326
02:17:53.940 --> 02:17:58.000
of a stimulus which would be felt to the remotest arteries.

1327
02:17:58.000 --> 02:18:05.660
The present method of taxation operates upon energy and industry and skill and thrift like

1328
02:18:05.660 --> 02:18:08.700
a fine upon those qualities.

1329
02:18:08.700 --> 02:18:14.580
If I have worked harder and built myself a good house while you have been contented to

1330
02:18:14.580 --> 02:18:22.360
live in a hovel, the tax gatherer now comes annually to make me pay a penalty for my energy

1331
02:18:22.360 --> 02:18:27.400
and my industry, by taxing me more than you.

1332
02:18:27.400 --> 02:18:33.960
If I have saved while you wasted, I am mulked while you are exempt.

1333
02:18:33.960 --> 02:18:40.720
We say we want capital, but if anyone accumulate it or bring it among us, we charge him for

1334
02:18:40.720 --> 02:18:43.720
it as though we were giving a privilege.

1335
02:18:43.720 --> 02:18:50.160
To abolish these taxes would be to lift the enormous weight of taxation from productive

1336
02:18:50.160 --> 02:18:57.120
of Industry, instead of saying to the producer, as it does now, the more you add to the general

1337
02:18:57.120 --> 02:19:00.360
wealth, the more shall you be taxed.

1338
02:19:00.360 --> 02:19:06.340
The state would say to the producer, be as industrious, as thrifty, as enterprising as

1339
02:19:06.340 --> 02:19:07.560
you choose.

1340
02:19:07.560 --> 02:19:09.960
You shall have your full reward.

1341
02:19:09.960 --> 02:19:14.800
You shall not be taxed for adding to the aggregate wealth.

1342
02:19:14.800 --> 02:19:22.440
In fact, it will be here demonstrated that taxation of ground rent also hampers and distorts

1343
02:19:22.440 --> 02:19:24.040
production.

1344
02:19:24.040 --> 02:19:31.000
Whatever beneficial effects the single tax might have on production would flow only from

1345
02:19:31.000 --> 02:19:37.300
the elimination of other taxes, not from the imposition of this one.

1346
02:19:37.300 --> 02:19:42.360
The two acts must be kept conceptually distinct.

1347
02:19:42.360 --> 02:19:49.140
A tax on ground rent would have the effect of a property tax as described earlier.

1348
02:19:49.140 --> 02:19:55.880
That is, it could not be shifted and it would be capitalized, with the initial burden falling

1349
02:19:55.880 --> 02:20:02.920
on the original owner and later owners escaping any burden because of the fall in the capital

1350
02:20:02.920 --> 02:20:05.720
value of the ground land.

1351
02:20:05.720 --> 02:20:14.840
The Georgists propose to place a 100% annual tax on ground rents alone.

1352
02:20:14.840 --> 02:20:22.120
One critical problem that the single tax could not meet is the difficulty of estimating ground

1353
02:20:22.120 --> 02:20:23.120
rents.

1354
02:20:23.120 --> 02:20:30.080
The essence of the single tax scheme is to tax ground rent only and to leave all capital

1355
02:20:30.080 --> 02:20:32.600
goods free from tax.

1356
02:20:32.600 --> 02:20:36.160
But it is impossible to make this division.

1357
02:20:36.160 --> 02:20:42.180
Georgists have dismissed this difficulty as merely a practical one, but it is a theoretical

1358
02:20:42.180 --> 02:20:44.280
flaw as well.

1359
02:20:44.280 --> 02:20:52.120
As is true of any property tax, it is impossible accurately to assess value because the property

1360
02:20:52.120 --> 02:20:58.960
has not been actually sold on the market during the period.

1361
02:20:58.960 --> 02:21:04.160
Ground land taxation faces a further problem that cannot be solved.

1362
02:21:04.160 --> 02:21:10.960
How to distinguish quantitatively between that portion of the gross rent of a land area

1363
02:21:10.960 --> 02:21:18.240
which goes to ground land, and that portion which goes to interest and to wages.

1364
02:21:18.240 --> 02:21:24.800
Since land in use is often amalgamated with capital investment, and the two are bought

1365
02:21:24.800 --> 02:21:30.920
and Sold Together, this distinction between them cannot be made.

1366
02:21:30.920 --> 02:21:35.080
But the Georgist theory faces even graver difficulties.

1367
02:21:35.080 --> 02:21:42.700
For its proponents contend that the positive virtue of the tax consists in spurring production.

1368
02:21:42.700 --> 02:21:49.360
They point out to hostile critics that the single tax, if it could be accurately levied,

1369
02:21:49.360 --> 02:21:55.280
would not discourage capital improvements and maintenance of landed property.

1370
02:21:55.280 --> 02:22:02.920
But then they proceed to argue that the single tax would force idle land into use.

1371
02:22:02.920 --> 02:22:07.080
This is supposed to be one of the great merits of the tax.

1372
02:22:07.080 --> 02:22:12.960
Yet if land is idle, it earns no gross rent whatever.

1373
02:22:12.960 --> 02:22:20.240
If it earns no gross rent, then obviously it earns no net rent as ground land.

1374
02:22:20.240 --> 02:22:27.720
Idle land earns no rent, and therefore earns no ground rent that could be taxed.

1375
02:22:27.720 --> 02:22:34.280
It would bear no taxes under a consistent operation of the Georgist scheme.

1376
02:22:34.280 --> 02:22:39.840
Since it would not be taxed, it could not be forced into use.

1377
02:22:39.840 --> 02:22:45.960
The only logical explanation for this error by the Georgists is that they concentrate

1378
02:22:45.960 --> 02:22:54.080
on the fact that much idle land has a capital value that it sells for a price on the market,

1379
02:22:54.080 --> 02:22:58.380
even though it earns no rents in current use.

1380
02:22:58.380 --> 02:23:04.960
From the fact that idle land has a capital value, the Georgists apparently deduce that

1381
02:23:04.960 --> 02:23:10.120
But it must have some sort of true annual ground rent.

1382
02:23:10.120 --> 02:23:16.240
This assumption is incorrect, however, and rests on one of the weakest parts of the Georgist's

1383
02:23:16.240 --> 02:23:21.520
system, its deficient attention to the role of time.

1384
02:23:21.520 --> 02:23:27.000
George himself can hardly be blamed for the weak treatment of time, for he could draw

1385
02:23:27.000 --> 02:23:32.600
only on the classical economic theories, which had the same defect.

1386
02:23:32.600 --> 02:23:39.260
In fact, compared with the classical school, George made advances in many areas of economic

1387
02:23:39.260 --> 02:23:40.360
theory.

1388
02:23:40.360 --> 02:23:46.680
The Austrian school, with its definitive analysis of time, was barely beginning when George

1389
02:23:46.680 --> 02:23:48.760
framed his theory.

1390
02:23:48.760 --> 02:23:54.720
There is less excuse for George's modern followers, who have largely ignored all advances

1391
02:23:54.720 --> 02:23:57.980
in economics since 1880.

1392
02:23:57.980 --> 02:24:05.680
The fact that currently idle land has a capital value means simply that the market expects

1393
02:24:05.680 --> 02:24:08.820
it to earn rent in the future.

1394
02:24:08.820 --> 02:24:16.940
The capital value of ground land, as of anything else, is equal to, and determined by, the

1395
02:24:16.940 --> 02:24:22.940
sum of expected future rents, discounted by the rate of interest.

1396
02:24:22.940 --> 02:24:26.900
But these are not presently earned rents.

1397
02:24:26.900 --> 02:24:36.260
Therefore, any taxation of idle land violates the Georgist's own principle of a single tax on ground rent.

1398
02:24:36.260 --> 02:24:44.660
It goes beyond this limit to penalize land ownership further and to tax accumulated capital,

1399
02:24:44.660 --> 02:24:49.620
which has to be drawn down in order to pay the tax.

1400
02:24:49.620 --> 02:24:57.540
Any increase in the capital value of idle land, then, does not reflect a current rent.

1401
02:24:57.540 --> 02:25:06.260
It merely reflects an upgrading of people's expectations about future rents. Suppose, for example,

1402
02:25:06.260 --> 02:25:14.420
that future rents from an idle site are such that, if known to all, the present capital value of the

1403
02:25:14.420 --> 02:25:17.420
The market price would be $10,000.

1404
02:25:17.420 --> 02:25:26.420
Suppose further that these facts are not generally known, and therefore that the ruling price is $8,000.

1405
02:25:26.420 --> 02:25:36.420
Jones, being a far-sighted entrepreneur, correctly judges the situation and purchases the site for $8,000.

1406
02:25:36.420 --> 02:25:45.420
If everyone soon realizes what Jones has foreseen, the market price will now rise to $10,000.

1407
02:25:45.420 --> 02:25:56.420
Jones' capital gain of $2,000 is the profit to his superior judgment, not earnings from current rent.

1408
02:25:56.420 --> 02:26:15.420
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.

1409
02:26:15.420 --> 02:26:23.580
The Georgists do not realize that since labour is scarce in relation to land, sub-marginal

1410
02:26:23.580 --> 02:26:26.820
land must remain idle.

1411
02:26:26.820 --> 02:26:33.660
The sight of idle land enrages the Georgist, who sees productive capacity being wasted

1412
02:26:33.660 --> 02:26:36.500
and living standards reduced.

1413
02:26:36.500 --> 02:26:44.020
Idle land should, however, be recognized as beneficial, for if land were ever fully used,

1414
02:26:44.020 --> 02:26:50.420
This would mean that labor had become abundant in relation to land, and that the world had

1415
02:26:50.420 --> 02:26:58.380
at last entered on the terrible overpopulation stage in which some labor has to remain idle

1416
02:26:58.380 --> 02:27:02.340
because no employment is available.

1417
02:27:02.340 --> 02:27:09.300
The present writer used to wonder about the curious Georgist preoccupation with idle or

1418
02:27:09.300 --> 02:27:16.820
withheld ground land as the cause of most economic ills, until he found a clue in a

1419
02:27:16.820 --> 02:27:20.900
revealing passage of a Georgist work.

1420
02:27:20.900 --> 02:27:24.520
Poor countries do not lack capital.

1421
02:27:24.520 --> 02:27:30.080
Most of us have learned to believe that the people of India, China, Mexico, and other

1422
02:27:30.080 --> 02:27:38.140
so-called backward nations are poor because they lack capital, since, as we have seen,

1423
02:27:38.140 --> 02:27:44.260
Capital is nothing more than wealth, and wealth nothing more than human energy combined with

1424
02:27:44.260 --> 02:27:47.060
land in one form or another.

1425
02:27:47.060 --> 02:27:54.180
The absence of capital too often suggests that there is a shortage of land, or of labor,

1426
02:27:54.180 --> 02:27:57.740
in backward countries like India and China.

1427
02:27:57.740 --> 02:28:04.340
But that isn't true, for these poor countries have many times more land and labor than they

1428
02:28:04.340 --> 02:28:05.340
use.

1429
02:28:05.340 --> 02:28:13.340
Undeniably they have everything it takes, both land and labor, to produce as much capital

1430
02:28:13.340 --> 02:28:16.420
as people anywhere.

1431
02:28:16.420 --> 02:28:23.140
And so, since these poor countries have plenty of land and labor, it follows that landlords

1432
02:28:23.140 --> 02:28:26.860
must be withholding land from use.

1433
02:28:26.860 --> 02:28:31.460
Only this could explain the low living standards.

1434
02:28:31.460 --> 02:28:39.480
Here a crucial Georgist fallacy is exposed clearly, ignorance of the true role of time

1435
02:28:39.480 --> 02:28:41.180
in production.

1436
02:28:41.180 --> 02:28:49.140
It takes time to save and invest and build up capital goods, and these capital goods

1437
02:28:49.140 --> 02:28:56.580
embody a shortening of the ultimate time period needed to acquire consumers' goods.

1438
02:28:56.580 --> 02:29:02.480
India and China are short of capital because they are short of time.

1439
02:29:02.480 --> 02:29:09.020
They start from a low level of capital, and therefore it would take them a long time to

1440
02:29:09.020 --> 02:29:13.860
reach a high capital level through their own savings.

1441
02:29:13.860 --> 02:29:20.140
Once again, the Georgists' difficulty stems from the fact that their theory was formulated

1442
02:29:20.140 --> 02:29:26.860
before the Rise of Austrian Economics, and that the Georgists have never re-evaluated

1443
02:29:26.860 --> 02:29:31.540
their doctrine in the light of this development.

1444
02:29:31.540 --> 02:29:38.300
As we have indicated earlier, land speculation performs a useful social function.

1445
02:29:38.300 --> 02:29:45.340
It puts land into the hands of the most knowledgeable and develops land at the rate desired by the

1446
02:29:45.340 --> 02:30:00.340
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.

1447
02:30:00.340 --> 02:30:11.340
The allocation of sites to their most value-productive uses, therefore, requires all the virtues of any type of entrepreneurship on the market.

1448
02:30:11.340 --> 02:30:13.840
As Frank Knight puts it,

1449
02:30:13.840 --> 02:30:20.840
men do hold land speculatively for an expected increase in value.

1450
02:30:20.840 --> 02:30:29.340
This is a social service, tending to put ownership in the hands of those who know best how to handle the land,

1451
02:30:29.340 --> 02:30:32.340
so that the value will increase.

1452
02:30:32.340 --> 02:30:37.840
They obviously do not need to keep it idle to get the increase,

1453
02:30:37.840 --> 02:30:43.340
and Do Not, if there is a clear opening for remunerative use.

1454
02:30:43.340 --> 02:30:53.340
If land having value for use is not used by an owner, it is because of uncertainty as to how it should be used,

1455
02:30:53.340 --> 02:30:57.840
and waiting for the situation to clear up or develop.

1456
02:30:57.840 --> 02:31:04.840
An owner naturally does not wish to make a heavy investment in fitting a plot for use,

1457
02:31:04.840 --> 02:31:11.960
which does not promise amortization before some new situation may require a different plan.

1458
02:31:13.400 --> 02:31:19.800
One of the most surprising deficiencies in the literature of economics is the lack of effective

1459
02:31:19.800 --> 02:31:27.160
criticism of the Georgist theory. Economists have either temporized, misconceived the problem,

1460
02:31:27.160 --> 02:31:34.760
or in many cases granted the economic merit of the theory, but caviled at its political implications.

1461
02:31:34.840 --> 02:31:44.840
Such gentle treatment has contributed greatly to the persistent longevity of the Georgist movement.

1462
02:31:44.840 --> 02:32:03.840
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.

1463
02:32:03.840 --> 02:32:11.840
Granting the economic merits of the tax, criticism of it must fall back on other political or

1464
02:32:11.840 --> 02:32:14.480
practical considerations.

1465
02:32:14.480 --> 02:32:20.880
Many writers, while balking at the difficulties in the full single tax program, have advocated

1466
02:32:20.880 --> 02:32:27.840
the 100% taxation of future increments in ground rent.

1467
02:32:27.840 --> 02:32:32.640
Georgists have properly treated such halfway measures with scorn.

1468
02:32:32.640 --> 02:32:38.800
Since the opposition concedes the economic harmlessness of a ground rent tax, its other

1469
02:32:38.800 --> 02:32:42.600
doubts must seem relatively minor.

1470
02:32:42.600 --> 02:32:47.760
The crucial economic problem of the single tax, then, is this.

1471
02:32:47.760 --> 02:32:53.560
Will a tax on ground rent have distortive and hampering effects?

1472
02:32:53.560 --> 02:33:00.720
Is it true that the owner of ground land performs no productive service, and therefore that

1473
02:33:00.720 --> 02:33:06.000
that a tax upon him does not hamper and distort production.

1474
02:33:06.000 --> 02:33:12.880
Ground rent has been called economic surplus, which would be taxed up to any amount with

1475
02:33:12.880 --> 02:33:15.080
no side effects.

1476
02:33:15.080 --> 02:33:21.080
Many economists have tacitly agreed with this conclusion and have agreed that a landowner

1477
02:33:21.080 --> 02:33:28.880
can perform a productive service only as an improver, that is, as a producer of capital

1478
02:33:28.880 --> 02:33:32.280
Federal Goods on Land.

1479
02:33:32.280 --> 02:33:37.160
Yet this central Georgist contention overlooks the realities.

1480
02:33:37.160 --> 02:33:42.760
The owner of ground land performs a very important productive service.

1481
02:33:42.760 --> 02:33:49.920
He brings sites into use and allocates them to the most value-productive bidders.

1482
02:33:49.920 --> 02:33:56.720
We must not be misled by the fact that the physical stock of land is fixed at any given

1483
02:33:56.720 --> 02:33:57.720
time.

1484
02:33:57.720 --> 02:34:14.720
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.

1485
02:34:14.720 --> 02:34:22.720
Ground land does not simply exist, it must be served to the user by the owner.

1486
02:34:22.720 --> 02:34:29.220
One man can perform both functions when the land is vertically integrated.

1487
02:34:29.220 --> 02:34:36.060
As Spencer Heath put it, land itself does not service civilized men any more than food

1488
02:34:36.060 --> 02:34:38.400
itself does.

1489
02:34:38.400 --> 02:34:41.400
Both are served to them.

1490
02:34:41.400 --> 02:34:48.060
The land owner earns the highest ground rents by allocating land sites to their most value

1491
02:34:48.060 --> 02:35:16.480
The view that bringing sites into use and deciding on their location is not really productive

1492
02:35:16.480 --> 02:35:23.840
is a vestige of the old classical view that a service which does not tangibly create something

1493
02:35:23.840 --> 02:35:28.280
physical is not really productive.

1494
02:35:28.280 --> 02:35:34.820
As Spencer Heath states, wherever the services of landowners are concerned, Henry George

1495
02:35:34.820 --> 02:35:39.380
is firm in his dictum that all values are physical.

1496
02:35:39.380 --> 02:35:46.460
In the exchange services performed by landowners, their social distribution of sites and resources

1497
02:36:16.460 --> 02:36:21.460
or an arbitrary and tyrannical distribution of land.

1498
02:36:21.460 --> 02:36:26.460
Actually, this function is just as productive as any other,

1499
02:36:26.460 --> 02:36:29.460
and a particularly vital function it is.

1500
02:36:29.460 --> 02:36:35.460
To hamper and destroy this function would have grave effects on the economy.

1501
02:36:35.460 --> 02:36:42.460
Suppose that the government did in fact levy a 100% tax on ground rent.

1502
02:36:42.460 --> 02:36:45.460
What would be the economic effects?

1503
02:36:45.460 --> 02:36:54.460
The current owners of ground land would be expropriated, and the capital value of ground land would fall to zero.

1504
02:36:54.460 --> 02:37:01.460
Since site owners could not obtain rents, the sites would become valueless on the market.

1505
02:37:01.460 --> 02:37:10.460
From then on, sites would be free, and the site owner would have to pay his annual ground rent into the Treasury.

1506
02:37:10.460 --> 02:37:19.460
But since all ground rent is siphoned off to the government, there is no reason for owners to charge any rent.

1507
02:37:19.460 --> 02:37:26.460
Ground rent will fall to zero as well, and rentals will thus be free.

1508
02:37:26.460 --> 02:37:38.460
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.

1509
02:37:38.460 --> 02:37:47.460
The single tax, then, makes sites free when they are actually not free and unlimited, but scarce.

1510
02:37:47.460 --> 02:37:59.460
Any good is always scarce, and therefore must always command a price in accordance with the demand for it and the supply available.

1511
02:37:59.460 --> 02:38:11.460
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.

1512
02:38:11.460 --> 02:38:21.460
The effect of this tax, then, is to fool the market into believing that sites are free when they are decidedly not.

1513
02:38:21.460 --> 02:38:27.460
The result will be the same as any case of maximum price control.

1514
02:38:27.460 --> 02:38:46.460
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.

1515
02:38:46.460 --> 02:38:53.360
People will rush in to demand and use the best sites, while no one will wish to use

1516
02:38:53.360 --> 02:38:55.620
the less productive ones.

1517
02:38:55.620 --> 02:39:01.220
On the free market, the less productive sites cost less to the tenant.

1518
02:39:01.220 --> 02:39:07.380
If they cost no less than the best sites, that is, if they are free, then no one will

1519
02:39:07.380 --> 02:39:08.860
want to use them.

1520
02:39:08.860 --> 02:39:16.540
Thus, in a city, the best or most potentially value-productive sites are in the downtown

1521
02:39:16.540 --> 02:39:23.940
areas, and these consequently earn and charge higher rents than the less productive but

1522
02:39:23.940 --> 02:39:28.160
still useful sites in the outlying areas.

1523
02:39:28.160 --> 02:39:34.540
If the Henry George scheme went into effect, there would not only be complete misallocation

1524
02:39:34.540 --> 02:39:42.460
of Sites to less productive uses, but there would also be great overcrowding in the downtown areas,

1525
02:39:42.460 --> 02:39:50.620
as well as underpopulation and under use of the outlying areas. If Georgists believe that the

1526
02:39:50.620 --> 02:39:58.540
single tax would end overcrowding of the downtown areas, they are gravely mistaken, for the reverse

1527
02:39:58.540 --> 02:40:14.540
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.

1528
02:40:14.540 --> 02:40:21.540
The result would be aggravated wasteful misapplication of labor and capital.

1529
02:40:21.540 --> 02:40:29.180
Since labor is scarce relative to land, the compulsory use of idle land would wastefully

1530
02:40:29.180 --> 02:40:37.540
misallocate labor and capital, and force more work on poorer land, and therefore less on

1531
02:40:37.540 --> 02:40:39.500
better land.

1532
02:40:39.500 --> 02:40:46.100
At any rate, the result of the single tax would be locational chaos, with waste and

1533
02:40:46.100 --> 02:40:52.320
and misallocation everywhere, overcrowding would prevail, and poorer sites would either

1534
02:40:52.320 --> 02:40:57.480
be overused or underused and abandoned altogether.

1535
02:40:57.480 --> 02:41:04.360
The general tendency would be toward underuse of the poorer sites, because of the tax-induced

1536
02:41:04.360 --> 02:41:06.920
rush to the better ones.

1537
02:41:06.920 --> 02:41:12.740
As under conditions of price control, the use of the better sites would be decided by

1538
02:41:12.740 --> 02:41:18.740
by favoritism, queuing, etc., instead of economic ability.

1539
02:41:18.740 --> 02:41:25.580
Since location enters into the production of every good, locational chaos would introduce

1540
02:41:25.580 --> 02:41:35.020
an element of chaos into every area of production, and perhaps ruin economic calculation as well.

1541
02:41:35.020 --> 02:41:41.300
For an important element to be calculated, location would be removed from the sphere

1542
02:41:41.300 --> 02:41:43.420
of the Market.

1543
02:41:43.420 --> 02:41:49.380
To this contention, the Georgists would reply that the owners would not be allowed to charge

1544
02:41:49.380 --> 02:41:56.100
no rents because the government's army of assessors would set the proper rents.

1545
02:41:56.100 --> 02:41:59.220
But this would hardly alleviate the problem.

1546
02:41:59.220 --> 02:42:03.300
In fact, it would aggravate matters in many ways.

1547
02:42:03.300 --> 02:42:09.340
It might bring in revenue and check some of the excess demand of land users, but it would

1548
02:42:09.340 --> 02:42:16.780
would still provide no reason and no incentive for the land owners to perform their proper

1549
02:42:16.780 --> 02:42:21.420
function of allocating land sites efficiently.

1550
02:42:21.420 --> 02:42:27.780
In addition, if assessment is difficult and arbitrary at any time, how very much more

1551
02:42:27.780 --> 02:42:35.500
chaotic would it be when the government must blindly estimate, in the absence of any rent

1552
02:42:35.500 --> 02:42:41.000
Market, The Rent for Every Piece of Ground Land.

1553
02:42:41.000 --> 02:42:47.780
This would be a hopeless and impossible task, and the resulting deviations from free market

1554
02:42:47.780 --> 02:42:55.140
rents would compound the chaos, with over and under use and wrong locations.

1555
02:42:55.140 --> 02:43:01.820
With no vestige of market left, not only would the landowners be deprived of any incentive

1556
02:43:01.820 --> 02:43:09.100
for efficient allocation of sites, they would have no way of finding out whether their allocations

1557
02:43:09.100 --> 02:43:16.940
were efficient or not. Finally, this all-around fixing of rents by the government would be

1558
02:43:16.940 --> 02:43:24.220
tantamount to virtual nationalization of the land, with all the enormous wastes and chaos that

1559
02:43:24.220 --> 02:43:30.220
afflict any government ownership of business, all the greater in a business that would permeate

1560
02:43:30.220 --> 02:43:40.260
The Georgists contend that they do not advocate the nationalization of land, since ownership

1561
02:43:40.260 --> 02:43:45.300
would remain de jure in the hands of private individuals.

1562
02:43:45.300 --> 02:43:51.220
The returns from this ownership, however, would all accrue to the state.

1563
02:43:51.220 --> 02:43:57.140
George himself admitted that the single tax would accomplish the same thing as the land

1564
02:43:57.140 --> 02:44:02.580
Nationalization in a simpler, easier, and quieter way.

1565
02:44:02.580 --> 02:44:10.380
Georgia's method, however, would, as we have seen, be neither simple, easy, nor quiet.

1566
02:44:10.380 --> 02:44:17.220
The single tax would leave de jure ownership in private hands while completely destroying

1567
02:44:17.220 --> 02:44:24.740
its point, so that the single tax is hardly an improvement upon, or differs much from,

1568
02:44:24.740 --> 02:44:27.020
outright nationalization.

1569
02:44:27.020 --> 02:44:33.540
As Frank Knight puts it, to collect such rent, the government would in practice have to compel

1570
02:44:33.540 --> 02:44:41.740
the owner actually to use the land in the best way, hence to prescribe its use in some

1571
02:44:41.740 --> 02:44:42.740
detail.

1572
02:44:42.740 --> 02:44:49.440
Thus, we already see that the advantage of taxation over socialization of management

1573
02:44:49.440 --> 02:44:52.260
has practically disappeared.

1574
02:44:52.260 --> 02:44:59.780
Of course, as we shall see further, the state has no incentive or means for efficient allocation

1575
02:44:59.780 --> 02:45:01.220
either.

1576
02:45:01.220 --> 02:45:09.420
At any rate, land sites, like any other resources, must be owned and controlled by someone, either

1577
02:45:09.420 --> 02:45:12.760
a private owner or the government.

1578
02:45:12.760 --> 02:45:19.220
Sites can be allocated either by voluntary contract or by governmental coercion, and

1579
02:45:19.220 --> 02:45:25.960
The latter is what is attempted by the single tax or by land nationalization.

1580
02:45:25.960 --> 02:45:32.100
As Spencer Heath puts it, must we suppose that land distributes itself?

1581
02:45:32.100 --> 02:45:38.780
It can be and often is distributed by the government of a prison camp or by the popularly

1582
02:45:38.780 --> 02:45:41.780
elected denizens of a city hall.

1583
02:45:41.780 --> 02:45:50.140
Alternatively, in any free society, its sites and resources must be and chiefly are distributed

1584
02:45:50.140 --> 02:45:57.300
by the process of free contract, in which the title holder is the only possible first

1585
02:45:57.300 --> 02:45:59.700
party to the contract.

1586
02:45:59.700 --> 02:46:04.020
From him flows his social service of distribution.

1587
02:46:04.020 --> 02:46:12.140
The rent is his automatic recompense, set and limited in amount by the free market.

1588
02:46:12.140 --> 02:46:18.020
Frank Knight says of the georgous dream of every man's unconditional right of access

1589
02:46:18.020 --> 02:46:26.620
to the soil, that, one, everyone actually has this right subject to competitive conditions,

1590
02:46:26.620 --> 02:46:33.800
that is, that he pay for it what it is worth, and that, two, the only viable alternative

1591
02:46:33.800 --> 02:46:39.400
would be to get permission from some political agent of government.

1592
02:46:39.400 --> 02:46:47.320
For any attempt to give every person an unconditional right to access to the soil would establish

1593
02:46:47.320 --> 02:46:55.100
anarchy, the war of all against all, and is, of course, not approximated by a confiscation

1594
02:46:55.100 --> 02:47:02.160
and distribution of rent or its employment for social ends.

1595
02:47:02.160 --> 02:47:09.960
The Georgists believe that ownership or control by the state means that society will own or

1596
02:47:09.960 --> 02:47:13.120
command the land or its rent.

1597
02:47:13.120 --> 02:47:15.600
But this is fallacious.

1598
02:47:15.600 --> 02:47:19.560
Society or the public cannot own anything.

1599
02:47:19.560 --> 02:47:24.820
Only an individual or a set of individuals can do so.

1600
02:47:24.820 --> 02:47:31.980
At any rate, in the Georgist scheme, it would not be society, but the state that would own

1601
02:47:31.980 --> 02:47:36.700
Own the Land Caught in an inescapable dilemma are a group

1602
02:47:36.700 --> 02:47:45.380
of anti-statist Georgists who wish to statize ground rent, yet abolish taxation at the same

1603
02:47:45.380 --> 02:47:46.380
time.

1604
02:47:46.380 --> 02:47:52.580
Frank Chaturov, a leader of this group, could offer only the lame suggestion that ground

1605
02:47:52.580 --> 02:47:59.980
land be municipalized, rather than nationalized, to avoid the prospect that all of a nation's

1606
02:47:59.980 --> 02:48:27.620
Every element in the Georgist system is thus seen to be fallacious, yet the Georgist doctrines

1607
02:48:27.620 --> 02:48:34.040
These hold a considerable attraction even now, and, surprisingly, for many economists

1608
02:48:34.040 --> 02:48:38.880
and social philosophers otherwise devoted to the free market.

1609
02:48:38.880 --> 02:48:44.100
There is a good reason for this attraction, for the Georgists, though in a completely

1610
02:48:44.100 --> 02:48:52.180
topsy-turvy manner, do call attention to a neglected problem, the land question.

1611
02:48:52.180 --> 02:48:58.620
There is a land question, and no attempt to ignore it can meet the issue.

1612
02:48:58.620 --> 02:49:05.420
Contrary to George's doctrine, however, the land problem does not stem from free market

1613
02:49:05.420 --> 02:49:07.920
ownership of ground land.

1614
02:49:07.920 --> 02:49:14.820
It stems from failure to live up to a prime condition of free market property rights.

1615
02:49:14.820 --> 02:49:24.180
namely that new, unowned land be first owned by its first user, and that from then on it become the

1616
02:49:24.180 --> 02:49:30.980
full private property of the first user or those who receive or buy the land from him.

1617
02:49:31.700 --> 02:49:40.900
This is the free market method. Any other method of allocating new, unused land to ownership employs

1618
02:49:40.900 --> 02:49:43.680
Statist Coercion

1619
02:49:43.680 --> 02:49:50.000
Under a first-user, first-owner regime, the Georgists would be wrong in asserting that

1620
02:49:50.000 --> 02:49:57.640
no labor had been mixed with nature-given land to justify private ownership of sites.

1621
02:49:57.640 --> 02:50:05.280
For then, land could not be owned unless it were first used, and could be originally appropriated

1622
02:50:05.280 --> 02:50:10.700
for ownership only to the extent that it was so used.

1623
02:50:10.700 --> 02:50:17.980
The mixing of labor with nature may take the form of draining, filling, clearing, paving,

1624
02:50:17.980 --> 02:50:21.460
or otherwise preparing the site for use.

1625
02:50:21.460 --> 02:50:26.580
Tilling the soil is only one possible type of use.

1626
02:50:26.580 --> 02:50:34.060
American homestead legislation, while attempting to establish a first-user, first-owner principle,

1627
02:50:34.060 --> 02:50:50.060
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.

1628
02:50:50.060 --> 02:50:58.060
The use claim to the land could be certified by courts if any dispute over its ownership arose.

1629
02:50:58.060 --> 02:51:08.560
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.

1630
02:51:08.560 --> 02:51:13.560
Knight does not overdraw the picture when he charges that

1631
02:51:13.560 --> 02:51:24.560
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.

1632
02:51:24.560 --> 02:51:34.560
The whole doctrine was invented by city men living in comfort, not by men in contact with the facts as owners or renters.

1633
02:51:34.560 --> 02:51:43.560
If society were later to confiscate the land value, allowing retention only of improvements or their value,

1634
02:51:43.560 --> 02:51:53.560
it would ignore the costs in bitter sacrifice and would arbitrarily discriminate between one set of property owners and another set.

1635
02:51:54.560 --> 02:52:02.560
Problems and difficulties arise whenever the first user, first owner principle is not met.

1636
02:52:02.560 --> 02:52:10.560
In almost all countries, governments have laid claim to ownership of new, unused land.

1637
02:52:10.560 --> 02:52:15.560
Governments could never own original land on the free market.

1638
02:52:15.560 --> 02:52:20.560
This act of appropriation by the government already sows the seeds

1639
02:52:20.560 --> 02:52:27.400
for Distortion of Market Allocations when the land goes into use. Thus suppose

1640
02:52:27.400 --> 02:52:32.680
that the government disposes of its unused public lands by selling them at

1641
02:52:32.680 --> 02:52:38.480
auction to the highest bidder. Since the government has no valid property claim to

1642
02:52:38.480 --> 02:52:44.620
ownership, neither does the buyer from the government. If the buyer, as often

1643
02:52:44.620 --> 02:52:52.180
Man happens, owns, but does not use or settle the land, then he becomes a land speculator

1644
02:52:52.180 --> 02:52:54.820
in a pejorative sense.

1645
02:52:54.820 --> 02:53:01.360
For the true user, when he comes along, is forced either to rent or buy the land from

1646
02:53:01.360 --> 02:53:06.680
this speculator, who does not have valid title to the area.

1647
02:53:06.680 --> 02:53:13.500
He cannot have valid title, because his title derives from the state, which also did not

1648
02:53:13.500 --> 02:53:20.540
have valid title in the free market sense. Therefore, some of the charges that the Georgists

1649
02:53:20.540 --> 02:53:27.900
have levelled against land speculation are true, not because land speculation is bad

1650
02:53:27.900 --> 02:53:35.980
per se, but because the speculator came to own the land not by valid title, but via the

1651
02:53:35.980 --> 02:53:40.880
Government, which originally arrogated title to itself.

1652
02:53:40.880 --> 02:53:48.280
So now, the purchase price, or alternatively, the rent, paid by the would-be user, really

1653
02:53:48.280 --> 02:53:54.720
does become the payment of a tax for permission to use the land.

1654
02:53:54.720 --> 02:54:01.380
Governmental sale of unused land becomes similar to the old practice of tax farming, where

1655
02:54:01.380 --> 02:54:25.500
Government's sale of its unused land to speculators, therefore, restricts the use of new land, distorts

1656
02:54:25.500 --> 02:54:31.880
keeps the allocation of resources and keeps land out of use that would be employed were

1657
02:54:31.880 --> 02:54:39.660
it not for the tax penalty of paying a purchase price or rent to the speculator.

1658
02:54:39.660 --> 02:54:46.900
Keeping land out of use raises the marginal value product and the rents of remaining land

1659
02:54:46.900 --> 02:54:54.340
and lowers the marginal value product of labor, thereby lowering wage rates.

1660
02:54:54.340 --> 02:55:01.980
The affinity of rent and taxation is even closer in the case of feudal land grants.

1661
02:55:01.980 --> 02:55:06.180
Let us postulate a typical case of feudal beginnings.

1662
02:55:06.180 --> 02:55:13.220
A conquering tribe invades a territory of peasants and sets up a state to rule them.

1663
02:55:13.220 --> 02:55:19.420
It could levy taxes and support its retinue out of the proceeds, but it could also do

1664
02:55:19.420 --> 02:55:25.100
to something else, and it is important to see that there is no essential difference

1665
02:55:25.100 --> 02:55:27.140
between the two.

1666
02:55:27.140 --> 02:55:34.540
It could parcel out all of the land as individual grants of ownership to each member of the

1667
02:55:34.540 --> 02:55:36.180
conquering band.

1668
02:55:36.180 --> 02:55:44.100
Then, instead of, or in addition to, one central taxing agency, there would be a series of

1669
02:55:44.100 --> 02:55:47.780
regional rent-collecting agencies.

1670
02:55:47.780 --> 02:55:51.460
But the consequences would be exactly the same.

1671
02:55:51.460 --> 02:55:57.860
This is clearly seen in Middle Eastern countries where rulers have been considered to own their

1672
02:55:57.860 --> 02:56:05.260
territories personally and have therefore collected taxes in the form of rent charged

1673
02:56:05.260 --> 02:56:07.700
for that ownership.

1674
02:56:07.700 --> 02:56:14.260
The subtle gradations linking taxation and feudal rent have been lucidly portrayed by

1675
02:56:14.260 --> 02:56:16.640
Franz Oppenheimer.

1676
02:56:16.640 --> 02:56:22.880
The peasant surrenders a portion of the product of his labor without any equivalent service

1677
02:56:22.880 --> 02:56:24.600
in return.

1678
02:56:24.600 --> 02:56:27.840
In the beginning was the ground rent.

1679
02:56:27.840 --> 02:56:33.360
The forms under which the ground rent is collected or consumed vary.

1680
02:56:33.360 --> 02:56:40.040
In some cases, the lords, as a closed union or community, are settled in some fortified

1681
02:56:40.040 --> 02:56:45.680
camp and consume as communists the tribute of their peasantry.

1682
02:56:45.680 --> 02:56:53.620
In some cases, each individual warrior noble has a definite strip of land assigned to him.

1683
02:56:53.620 --> 02:57:01.000
But generally, the produce of this is still, as in Sparta, consumed in the Sececia by class

1684
02:57:01.000 --> 02:57:04.500
associates and companions in arms.

1685
02:57:04.500 --> 02:57:11.360
In some cases, the landed nobility scatters over the entire territory, each man housed

1686
02:57:11.360 --> 02:57:18.280
with his following in his fortified castle, and consuming, each for himself, the produce

1687
02:57:18.280 --> 02:57:21.280
of his dominion or lands.

1688
02:57:21.280 --> 02:57:28.940
As yet, these nobles have not become landlords in the sense that they administer their property.

1689
02:57:28.940 --> 02:57:34.940
Each of them receives tribute from the labor of his dependents, whom he neither guides

1690
02:57:34.940 --> 02:57:37.000
nor supervises.

1691
02:57:37.000 --> 02:57:42.560
This is the type of medieval dominion in the lands of the Germanic nobility.

1692
02:57:42.560 --> 02:57:49.480
Finally, the knight becomes the owner and administrator of the knight's fee.

1693
02:57:49.480 --> 02:57:55.760
Of course, there are considerable differences between land speculation by the original buyer

1694
02:57:55.760 --> 02:57:59.900
from the government and a feudal land grant.

1695
02:57:59.900 --> 02:58:06.740
In the former case, the user eventually purchases the land from the original buyer, and once

1696
02:58:06.740 --> 02:58:12.100
Since he does so, the tax has been fully paid and disappears.

1697
02:58:12.100 --> 02:58:16.900
From that point on, free market allocations prevail.

1698
02:58:16.900 --> 02:58:23.160
Once land gets into the hands of the user, he has, as it were, bought out the permission

1699
02:58:23.160 --> 02:58:29.380
tax, and from then on everything proceeds on a free market basis.

1700
02:58:29.380 --> 02:58:35.540
It must be repeated here that direct users would not be the only ones ever permitted

1701
02:58:35.540 --> 02:58:38.380
to Own Land in the Free Market.

1702
02:58:38.380 --> 02:58:47.620
The only stipulation is that use be the principle that first brings original, unused land into

1703
02:58:47.620 --> 02:58:49.100
ownership.

1704
02:58:49.100 --> 02:58:56.420
Once ownership accrues to a user, then the user can sell the land to a speculator, let

1705
02:58:56.420 --> 02:59:02.580
it be idle again, etc., without distorting market allocations.

1706
02:59:02.580 --> 02:59:08.900
The problem is the original establishment of valid titles to property.

1707
02:59:08.900 --> 02:59:15.580
After valid titles are established, the owner can, of course, do what he likes with his

1708
02:59:15.580 --> 02:59:16.820
property.

1709
02:59:16.820 --> 02:59:22.700
In contrast, the feudal lord passes the land on to his heirs.

1710
02:59:22.700 --> 02:59:28.760
The true owners now have to pay rent where they did not have to pay before.

1711
02:59:28.760 --> 02:59:32.720
This rent tax continues indefinitely.

1712
02:59:32.720 --> 02:59:39.480
Because of the generally vast extent of the grant, as well as various prohibitory laws,

1713
02:59:39.480 --> 02:59:45.920
it is most unusual for the feudal lord to be bought out by his tenant subjects.

1714
02:59:45.920 --> 02:59:52.920
When they do buy out their own plots, however, their land is, from then on, freed from the

1715
02:59:52.920 --> 02:59:56.200
permission tax incubus.

1716
02:59:56.200 --> 03:00:03.200
One charge often made against the market is that all property can be traced back to coercive

1717
03:00:03.200 --> 03:00:10.200
depredations or state privilege, and therefore there is no need to respect current property

1718
03:00:10.200 --> 03:00:11.200
rights.

1719
03:00:11.200 --> 03:00:17.680
Waving the question of the accuracy of the historical contention, we may state that historical

1720
03:00:17.680 --> 03:00:21.400
tracings generally make little difference.

1721
03:00:21.400 --> 03:00:27.160
Suppose, for example, that Jones steals money from Smith, or that he acquires the money

1722
03:00:27.160 --> 03:00:33.940
through state expropriation and subsidy, and suppose that there is no redress, Smith and

1723
03:00:33.940 --> 03:00:38.860
his heirs die and the money continues in Jones' family.

1724
03:00:38.860 --> 03:00:45.320
In that case, the disappearance of Smith and his heirs means the dissolution of claims

1725
03:00:45.320 --> 03:00:51.860
is from the original title holders at that point on the homestead principle of property

1726
03:00:51.860 --> 03:00:55.660
right from possession of unowned property.

1727
03:00:55.660 --> 03:01:02.960
The money therefore accrues to the Jones family as their legitimate and absolute property.

1728
03:01:02.960 --> 03:01:08.920
Note the assumption that Smith and his heirs die out or cannot be traced.

1729
03:01:08.920 --> 03:01:16.140
If they can be, then the property rightly reverts to them in a free market system.

1730
03:01:16.140 --> 03:01:22.880
This process of converting force to service, however, does not work where rent paid for

1731
03:01:22.880 --> 03:01:27.400
ground land is akin to regional taxation.

1732
03:01:27.400 --> 03:01:34.880
The effects of speculation in original land disappear as the users purchase the land sites.

1733
03:01:34.880 --> 03:01:41.600
But dissolution does not take place where feudal land grants are passed on unbroken

1734
03:01:41.600 --> 03:01:43.760
over the generations.

1735
03:01:43.760 --> 03:01:50.880
As Mises states, nowhere and at no time has the large-scale ownership of land come into

1736
03:01:50.880 --> 03:01:55.660
being through the working of economic forces in the market.

1737
03:01:55.660 --> 03:01:59.960
It is the result of military and political effort.

1738
03:01:59.960 --> 03:02:01.960
The Great Landed Fortunes

1739
03:02:59.960 --> 03:03:01.520
7.

1740
03:03:01.520 --> 03:03:04.440
Canons of Justice in Taxation

1741
03:03:04.440 --> 03:03:06.720
a.

1742
03:03:06.720 --> 03:03:11.480
The Just Tax and the Just Price

1743
03:03:11.480 --> 03:03:18.040
For centuries before the science of economics was developed, men searched for criteria of

1744
03:03:18.040 --> 03:03:20.380
the just price.

1745
03:03:20.380 --> 03:03:28.260
Of all the innumerable, almost infinite possibilities among the myriads of prices daily determined,

1746
03:03:28.260 --> 03:03:32.420
What pattern should be considered as just?

1747
03:03:32.420 --> 03:03:39.340
Gradually it came to be realized that there is no quantitative criterion of justice that

1748
03:03:39.340 --> 03:03:42.700
can be objectively determined.

1749
03:03:42.700 --> 03:03:46.500
Suppose that the price of eggs is 50 cents per dozen.

1750
03:03:46.500 --> 03:03:49.260
What is the just price?

1751
03:03:49.260 --> 03:03:55.300
It is clear, even to those like the present writer who believe in the possibility of irrational

1752
03:03:55.300 --> 03:04:03.100
Ethics, that no possible ethical philosophy or science can yield a quantitative measure

1753
03:04:03.100 --> 03:04:05.940
or criterion of justice.

1754
03:04:05.940 --> 03:04:13.200
If Professor X says that the just price of eggs is 45 cents, and Professor Y says it

1755
03:04:13.200 --> 03:04:19.420
is 85 cents, no philosophical principle can decide between them.

1756
03:04:19.420 --> 03:04:24.660
Even the most fervent anti-utilitarian will have to concede this point.

1757
03:04:24.660 --> 03:04:30.660
and the various contentions all become purely arbitrary whim.

1758
03:04:30.660 --> 03:04:36.660
Economics, by tracing the ordered pattern of the voluntary exchange process,

1759
03:04:36.660 --> 03:04:45.660
has made it clear that the only possible objective criterion for the just price is the market price.

1760
03:04:45.660 --> 03:04:51.660
For the market price is, at every moment, determined by the voluntary,

1761
03:04:51.660 --> 03:04:57.660
are mutually agreed upon actions of all the participants in the market.

1762
03:04:57.660 --> 03:05:05.660
It is the objective resultant of every individual's subjective valuations and voluntary actions,

1763
03:05:05.660 --> 03:05:14.660
and is therefore the only existent objective criterion for quantitative justice in pricing.

1764
03:05:14.660 --> 03:05:20.660
Practically nobody now searches explicitly for the just price,

1765
03:05:20.660 --> 03:05:29.660
It is generally recognized that any ethical criticisms must be leveled quantitatively against the values of consumers,

1766
03:05:29.660 --> 03:05:37.660
not against the quantitative price structure that the market establishes on the basis of these values.

1767
03:05:37.660 --> 03:05:44.660
The market price is the just price, given the pattern of consumer preferences.

1768
03:05:44.660 --> 03:06:02.660
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.

1769
03:06:02.660 --> 03:06:08.860
If the search for the just price has virtually ended in the pages of economic works, why

1770
03:06:08.860 --> 03:06:15.020
does the quest for a just tax continue with unabated vigor?

1771
03:06:15.020 --> 03:06:22.860
Why do economists, severely scientific in their volumes, suddenly become ad hoc ethicists

1772
03:06:22.860 --> 03:06:26.300
when the question of taxation is raised?

1773
03:06:26.300 --> 03:06:33.940
In no other area of his subject does the economist become more grandiosely ethical.

1774
03:06:33.940 --> 03:06:41.020
There is no objection at all to discussion of ethical concepts when they are needed, provided

1775
03:06:41.020 --> 03:06:49.380
that the economist realizes always, a, that economics can establish no ethical principles

1776
03:06:49.380 --> 03:06:57.980
by itself, that it can only furnish existential laws to the ethicist or citizen as data,

1777
03:06:57.980 --> 03:07:05.820
and that any importation of ethics must be grounded on a consistent, coherent set of

1778
03:07:05.820 --> 03:07:13.300
ethical principles, and not simply be slipped in ad hoc in the spirit of, well, everyone

1779
03:07:13.300 --> 03:07:15.580
must agree to this.

1780
03:07:15.580 --> 03:07:21.100
Planned assumptions of universal agreement are one of the most irritating bad habits

1781
03:07:21.100 --> 03:07:24.860
of the economist turned ethicist.

1782
03:07:24.860 --> 03:07:29.540
This book does not attempt to establish ethical principles.

1783
03:07:29.540 --> 03:07:37.260
It does, however, refute ethical principles to the extent that they are insinuated, ad-hoc,

1784
03:07:37.260 --> 03:07:41.420
and unanalyzed into economic treatises.

1785
03:07:41.420 --> 03:07:47.620
An example is the common quest for canons of justice in taxation.

1786
03:07:47.620 --> 03:07:54.420
The prime objection to these canons is that the writers have first to establish the justice

1787
03:07:54.420 --> 03:07:56.980
of taxation itself.

1788
03:07:56.980 --> 03:08:03.060
If this cannot be proven, and so far it has not been, then it is clearly idle to look

1789
03:08:03.060 --> 03:08:05.680
for the just tax.

1790
03:08:05.680 --> 03:08:13.160
If taxation itself is unjust, then it is clear that no allocation of its burdens, however

1791
03:08:13.160 --> 03:08:16.880
ingenious, can be declared just.

1792
03:08:16.880 --> 03:08:24.280
This book sets forth no doctrines on the justice or injustice of taxation, but we do exhort

1793
03:08:24.280 --> 03:08:31.560
economists either to forget about the problem of the just tax, or, at least, to develop

1794
03:08:31.560 --> 03:08:44.920
Why do not economists abandon the search for the just tax as they abandoned the quest for

1795
03:08:44.920 --> 03:08:47.060
the just price?

1796
03:08:47.060 --> 03:08:52.480
One reason is that doing so may have unwelcome implications for them.

1797
03:08:52.480 --> 03:08:57.360
The just price was abandoned in favor of the market price.

1798
03:08:57.360 --> 03:09:02.920
Can the just tax be abandoned in favor of the market tax?

1799
03:09:02.920 --> 03:09:10.360
Clearly not, for on the market there is no taxation, and therefore no tax can be established

1800
03:09:10.360 --> 03:09:13.480
that will duplicate market patterns.

1801
03:09:13.480 --> 03:09:20.320
As will be seen further, there is no such thing as a neutral tax, a tax that will leave

1802
03:09:20.320 --> 03:09:27.280
Leave the market free and undisturbed, just as there is no such thing as neutral money.

1803
03:09:27.280 --> 03:09:33.920
Economists and others may try to approximate neutrality in the hopes of disturbing the

1804
03:09:33.920 --> 03:09:40.400
market as little as possible, but they can never fully succeed.

1805
03:09:40.400 --> 03:09:46.960
B. Costs of Collection, Convenience, and Certainty

1806
03:09:46.960 --> 03:09:51.220
Even the simplest maxims must not be taken for granted.

1807
03:09:51.220 --> 03:09:58.840
Two centuries ago, Adam Smith laid down four canons of justice in taxation that economists

1808
03:09:58.840 --> 03:10:01.340
have parroted ever since.

1809
03:10:01.340 --> 03:10:07.300
One of them deals with the distribution of the burden of taxation, and this will be treated

1810
03:10:07.300 --> 03:10:09.300
in detail later.

1811
03:10:09.300 --> 03:10:16.720
Perhaps the most obvious was Smith's injunction that costs of collection be kept to a minimum,

1812
03:10:16.720 --> 03:10:21.280
and the taxes be levied with this principle in mind.

1813
03:10:21.280 --> 03:10:24.040
An obvious and harmless maxim?

1814
03:10:24.040 --> 03:10:25.400
Certainly not.

1815
03:10:25.400 --> 03:10:32.400
This canon of justice is not obvious at all, for the bureaucrat employed in tax collection

1816
03:10:32.400 --> 03:10:39.980
will tend to favor a tax with high administrative costs, thereby necessitating more extensive

1817
03:10:39.980 --> 03:10:42.340
bureaucratic employment.

1818
03:10:42.340 --> 03:10:46.440
Why should we call the bureaucrat obviously wrong?

1819
03:10:46.440 --> 03:10:52.700
The answer is that he is not, and that to call him wrong, it is necessary to engage

1820
03:10:52.700 --> 03:10:58.120
in an ethical analysis that no economist has bothered to undertake.

1821
03:10:58.120 --> 03:11:07.360
A further point, if the tax is unjust on other grounds, it may be more just to have high

1822
03:11:07.360 --> 03:11:13.160
administrative costs, for then there will be less chance that the tax will be fully

1823
03:11:13.160 --> 03:11:14.580
collected.

1824
03:11:14.580 --> 03:11:21.220
If it is easy to collect the tax, then the tax may do more damage to the economic system

1825
03:11:21.220 --> 03:11:25.660
and cause more distortion of the market economy.

1826
03:11:25.660 --> 03:11:31.180
The same point might be made about another of Smith's canons, that a tax should be

1827
03:11:31.180 --> 03:11:34.760
levied so that payment is convenient.

1828
03:11:34.760 --> 03:11:40.760
Here again, this maxim seems obvious, and there is certainly much truth in it.

1829
03:11:40.760 --> 03:11:48.160
Someone may urge that a tax should be made inconvenient to induce people to rebel and

1830
03:11:48.160 --> 03:11:51.640
force a lowering of the level of taxation.

1831
03:11:51.640 --> 03:11:59.280
Indeed, this used to be one of the prime arguments of conservatives for an income tax as opposed

1832
03:11:59.280 --> 03:12:01.840
to an indirect tax.

1833
03:12:01.840 --> 03:12:05.360
The validity of this argument is beside the point.

1834
03:12:05.360 --> 03:12:12.520
The point is that it is not self-evidently wrong, and therefore this canon is no more

1835
03:12:12.520 --> 03:12:16.360
simple and obvious than the others.

1836
03:12:16.360 --> 03:12:23.540
Smith's final canon of just taxation is that the tax be certain and not arbitrary,

1837
03:12:23.540 --> 03:12:27.120
so that the taxpayer knows what he will pay.

1838
03:12:27.120 --> 03:12:32.960
Here again, further analysis demonstrates that this is by no means obvious.

1839
03:12:32.960 --> 03:12:39.480
Some may argue that uncertainty benefits the taxpayer, for it makes the requirement more

1840
03:12:39.480 --> 03:12:44.080
flexible and permits bribery of the tax collector.

1841
03:12:44.080 --> 03:12:50.600
This benefits the taxpayer to the extent that the price of the bribe is less than the tax

1842
03:12:50.600 --> 03:12:53.600
that he would otherwise have to pay.

1843
03:12:53.600 --> 03:12:59.980
Furthermore, there is no way of establishing long-range certainty, for the tax rates may

1844
03:12:59.980 --> 03:13:03.620
may be changed by the government at any time.

1845
03:13:03.620 --> 03:13:09.380
In the long run, certainty of taxation is an impossible goal.

1846
03:13:09.380 --> 03:13:16.880
A similar argument may be levelled against the view that taxes should be difficult to evade.

1847
03:13:16.880 --> 03:13:25.980
If a tax is onerous and unjust, evasion might be highly beneficial to the economy and moral to boot.

1848
03:13:25.980 --> 03:13:34.180
Thus, none of these supposedly self-evident canons of taxation is a canon at all.

1849
03:13:34.180 --> 03:13:37.660
From some ethical points of view, they are correct.

1850
03:13:37.660 --> 03:13:40.020
From others, they are incorrect.

1851
03:13:40.020 --> 03:13:44.300
Economics cannot decide between them.

1852
03:13:44.300 --> 03:13:49.100
C. Distribution of the tax burden.

1853
03:13:49.100 --> 03:13:55.440
Up to this point, we have been discussing taxation as it is levied on any given individual

1854
03:13:55.440 --> 03:13:57.140
of the People or Firm.

1855
03:13:57.140 --> 03:14:04.540
Now we must turn to another aspect, the distribution of the burden of taxes among the people in

1856
03:14:04.540 --> 03:14:06.420
the economy.

1857
03:14:06.420 --> 03:14:13.340
Most of the search for justice in taxation has involved the problem of the just distribution

1858
03:14:13.340 --> 03:14:15.800
of this burden.

1859
03:14:15.800 --> 03:14:22.260
Various proposed canons of justice will be discussed in this section, followed by analysis

1860
03:14:22.260 --> 03:14:25.900
Process of the Economic Effects of Tax Distribution

1861
03:14:25.900 --> 03:14:28.980
1.

1862
03:14:28.980 --> 03:14:29.980
Uniformity of Treatment

1863
03:14:29.980 --> 03:14:32.500
a.

1864
03:14:32.500 --> 03:14:34.380
Equality Before the Law

1865
03:14:34.380 --> 03:14:37.700
Tax Exemption

1866
03:14:37.700 --> 03:14:43.420
Uniformity of Treatment has been upheld as an ideal by almost all writers.

1867
03:14:43.420 --> 03:14:49.860
This ideal is supposed to be implicit in the concept of equality before the law, which

1868
03:14:49.860 --> 03:14:55.220
Which is best expressed in the phrase, like to be treated alike.

1869
03:14:55.220 --> 03:15:02.340
To most economists this ideal has seemed self-evident, and the only problems considered have been

1870
03:15:02.340 --> 03:15:10.620
the practical ones of defining exactly when one person is like someone else.

1871
03:15:10.620 --> 03:15:14.860
Problems that, we shall see, are insuperable.

1872
03:15:14.860 --> 03:15:22.380
All these economists adopt the goal of uniformity regardless of what principle of likeness they

1873
03:15:22.380 --> 03:15:23.380
may hold.

1874
03:15:23.380 --> 03:15:29.940
Thus, the man who believes that everyone should be taxed in accordance with his ability to

1875
03:15:29.940 --> 03:15:36.780
pay also believes that everyone with the same ability should be taxed equally.

1876
03:15:36.780 --> 03:15:43.380
He who believes that each should be taxed proportionately to his income also holds that

1877
03:15:43.380 --> 03:15:49.340
Everyone with the same income should pay the same tax, etc.

1878
03:15:49.340 --> 03:15:56.300
In this way, the ideal of uniformity pervades the literature on taxation.

1879
03:15:56.300 --> 03:16:02.760
Yet this canon is by no means obvious, for it seems clear that the justice of equality

1880
03:16:02.760 --> 03:16:09.500
of treatment depends first of all on the justice of the treatment itself.

1881
03:16:09.500 --> 03:16:16.560
Suppose, for example, that Jones, with his retinue, proposes to enslave a group of people.

1882
03:16:16.560 --> 03:16:23.340
Are we to maintain that justice requires that each be enslaved equally?

1883
03:16:23.340 --> 03:16:27.200
And suppose that someone has the good fortune to escape.

1884
03:16:27.200 --> 03:16:34.200
Are we to condemn him for evading the equality of justice meted out to his fellows?

1885
03:16:34.200 --> 03:16:40.360
It is obvious that equality of treatment is no canon of justice whatever.

1886
03:16:40.360 --> 03:16:49.180
If a measure is unjust, then it is just that it have as little general effect as possible.

1887
03:16:49.180 --> 03:16:55.760
Equality of unjust treatment can never be upheld as an ideal of justice.

1888
03:16:55.760 --> 03:17:03.300
Therefore, he who maintains that a tax be imposed equally on all, must first establish

1889
03:17:03.300 --> 03:17:14.060
Many writers denounce tax exemptions, and levy their fire at the tax exempt, particularly

1890
03:17:14.060 --> 03:17:18.920
those instrumental in obtaining the exemptions for themselves.

1891
03:17:18.920 --> 03:17:25.300
These writers include those advocates of the free market, who treat a tax exemption as

1892
03:17:25.300 --> 03:17:32.540
a special privilege, and attack it as equivalent to a subsidy, and therefore inconsistent with

1893
03:17:32.540 --> 03:17:34.420
with the Free Market.

1894
03:17:34.420 --> 03:17:41.860
Yet an exemption from taxation or any other burden is not equivalent to a subsidy.

1895
03:17:41.860 --> 03:17:43.640
There is a key difference.

1896
03:17:43.640 --> 03:17:50.320
In the latter case, a man is receiving a special grant of privilege wrested from his fellow

1897
03:17:50.320 --> 03:17:51.320
men.

1898
03:17:51.320 --> 03:17:56.940
In the former, he is escaping a burden imposed on other men.

1899
03:17:56.940 --> 03:18:03.340
Whereas the one is done at the expense of his fellow men, the other is not.

1900
03:18:03.340 --> 03:18:09.540
For in the former case, the grantee is participating in the acquisition of loot.

1901
03:18:09.540 --> 03:18:14.540
In the latter, he escapes payment of tribute to the looters.

1902
03:18:14.540 --> 03:18:21.420
To blame him for escaping is equivalent to blaming the slave for fleeing his master.

1903
03:18:21.420 --> 03:18:28.540
It is clear that if a certain burden is unjust, blame should be levied not on the man who

1904
03:18:28.540 --> 03:18:35.000
escapes the burden, but on the man or men who impose it in the first place.

1905
03:18:35.000 --> 03:18:42.760
If a tax is in fact unjust, and some are exempt from it, the hue and cry should not be to

1906
03:18:42.760 --> 03:18:51.400
extend the tax to everyone, but on the contrary to extend the exemption to everyone.

1907
03:18:51.400 --> 03:19:00.040
The exemption itself cannot be considered unjust unless the tax or other burden is first established

1908
03:19:00.040 --> 03:19:01.600
as just.

1909
03:19:01.600 --> 03:19:09.140
Thus, uniformity of treatment per se cannot be established as a canon of justice.

1910
03:19:09.140 --> 03:19:13.220
A tax must first be proven just.

1911
03:19:13.220 --> 03:19:20.540
If it is unjust, then uniformity is simply imposition of general injustice, and exemption

1912
03:19:20.540 --> 03:19:22.660
Taxation is to be welcomed.

1913
03:19:22.660 --> 03:19:30.200
Since the very fact of taxation is an interference with the free market, it is particularly incongruous

1914
03:19:30.200 --> 03:19:38.820
and incorrect for advocates of a free market to advocate uniformity of taxation.

1915
03:19:38.820 --> 03:19:44.460
One of the major sources of confusion for economists and others who are in favor of

1916
03:19:44.460 --> 03:19:51.700
of the Free Market is that the free society has often been defined as a condition of equality

1917
03:19:51.700 --> 03:19:57.020
before the law or as special privilege for none.

1918
03:19:57.020 --> 03:20:04.580
As a result, many have transferred these concepts to an attack on tax exemptions as a special

1919
03:20:04.580 --> 03:20:10.700
privilege and a violation of the principle of equality before the law.

1920
03:20:10.700 --> 03:20:17.760
As for the latter concept, it is again hardly a criterion of justice, for this depends on

1921
03:20:17.760 --> 03:20:21.720
the justice of the law or treatment itself.

1922
03:20:21.720 --> 03:20:29.780
It is this alleged justice, rather than equality, which is the primary feature of the free market.

1923
03:20:29.780 --> 03:20:37.560
In fact, the free society is far better described by some such phrase as equality of rights

1924
03:20:37.560 --> 03:20:45.440
to Defend Person and Property, or Equality of Liberty, rather than by the vague, misleading

1925
03:20:45.440 --> 03:20:49.840
expression Equality before the Law.

1926
03:20:49.840 --> 03:20:56.640
In the literature on taxation, there is much angry discussion about loopholes, the inference

1927
03:20:56.640 --> 03:21:04.080
being that any income or area exempt from taxation must be brought quickly under its

1928
03:21:04.080 --> 03:21:05.140
sway.

1929
03:21:05.140 --> 03:21:09.880
Any failure to plug loopholes is treated as immoral.

1930
03:21:09.880 --> 03:21:14.940
But as Mises incisively asked, what is a loophole?

1931
03:21:14.940 --> 03:21:21.540
If the law does not punish a definite action or does not tax a definite thing, this is

1932
03:21:21.540 --> 03:21:23.380
not a loophole.

1933
03:21:23.380 --> 03:21:25.420
It is simply the law.

1934
03:21:25.420 --> 03:21:31.740
The income tax exemptions in our income tax are not loopholes.

1935
03:21:31.740 --> 03:21:36.460
Thanks to these loopholes, this country is still a free country.

1936
03:21:36.460 --> 03:21:42.220
B. The Impossibility of Uniformity.

1937
03:21:42.220 --> 03:21:49.700
Aside from these considerations, the ideal of uniformity is impossible to achieve.

1938
03:21:49.700 --> 03:21:56.700
Let us confine our further discussion of uniformity to income taxation for two reasons.

1939
03:21:56.700 --> 03:22:10.700
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.

1940
03:22:10.700 --> 03:22:17.700
A tax on consumption ends largely as a tax on income at a lower rate.

1941
03:22:17.700 --> 03:22:25.700
There are two basic reasons why uniformity of income taxation is an impossible goal.

1942
03:22:25.700 --> 03:22:29.640
The first stems from the very nature of the state.

1943
03:22:29.640 --> 03:22:36.960
We have seen, when discussing Calhoun's analysis, that the state must separate society into two

1944
03:22:36.960 --> 03:22:44.280
classes or castes, the tax-paying caste and the tax-consuming caste.

1945
03:22:44.280 --> 03:22:51.380
The tax-consumers consist of the full-time bureaucracy and politicians in power, as well

1946
03:22:51.380 --> 03:22:58.340
as well as the groups which receive net subsidies, that is, which receive more from the government

1947
03:22:58.340 --> 03:23:01.140
than they pay to the government.

1948
03:23:01.140 --> 03:23:06.680
These include the receivers of government contracts and of government expenditures on

1949
03:23:06.680 --> 03:23:10.940
goods and services produced in the private sector.

1950
03:23:10.940 --> 03:23:19.540
It is not always easy to detect the net subsidized in practice, but this caste can always be conceptually

1951
03:23:19.540 --> 03:23:28.160
Thus, when the government levies a tax on private incomes, the money is shifted from

1952
03:23:28.160 --> 03:23:33.860
private people to the government, and the government's money, whether expended for

1953
03:23:33.860 --> 03:23:40.740
government consumption of goods and services, for salaries to bureaucrats, or as subsidies

1954
03:23:40.740 --> 03:23:46.580
to privileged groups, returns to be spent in the economic system.

1955
03:23:46.580 --> 03:23:53.380
It is clear that the tax expenditure level must distort the expenditure pattern of the

1956
03:23:53.380 --> 03:24:00.580
market and shift productive resources away from the pattern desired by the producers

1957
03:24:00.580 --> 03:24:04.300
and toward that desired by the privileged.

1958
03:24:04.300 --> 03:24:10.380
This distortion takes place in proportion to the amount of taxation.

1959
03:24:10.380 --> 03:24:16.540
If, for example, the government taxes funds that would have been spent on automobiles

1960
03:24:16.540 --> 03:24:24.080
and itself spends them on arms, the arms industry and, in the long run, the specific factors

1961
03:24:24.080 --> 03:24:32.540
in the arms industry become net tax consumers, while a special loss is inflicted on the automobile

1962
03:24:32.540 --> 03:24:38.860
industry and, ultimately, on the factors specific to that industry.

1963
03:24:38.860 --> 03:24:45.320
It is because of these complex relationships that, as we have mentioned, the identification

1964
03:24:45.320 --> 03:24:50.460
in practice of the net subsidized may be difficult.

1965
03:24:50.460 --> 03:24:58.220
One thing we know without difficulty, however, bureaucrats are net tax consumers.

1966
03:24:58.220 --> 03:25:03.460
As we pointed out, bureaucrats cannot pay taxes.

1967
03:25:03.460 --> 03:25:11.220
Hence it is inherently impossible for bureaucrats to pay income taxes uniformly with everyone

1968
03:25:11.220 --> 03:25:20.140
else, and therefore the ideal of uniform income taxation for all is an impossible goal.

1969
03:25:20.140 --> 03:25:28.900
We repeat that the bureaucrat who receives $8,000 a year income and then hands $1,500

1970
03:25:28.900 --> 03:25:39.900
is engaging in a mere bookkeeping transaction of no economic importance, aside from the waste of paper and records involved.

1971
03:25:39.900 --> 03:25:51.900
For he does not and cannot pay taxes. He simply receives $6500 a year from the tax fund.

1972
03:25:51.900 --> 03:26:10.900
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.

1973
03:26:10.900 --> 03:26:21.900
Should taxable income include the imputed money value of services received in kind, such as farm produce grown on one's own farm?

1974
03:26:21.900 --> 03:26:29.900
What about imputed rent from living in one's own house, or the imputed services of a housewife?

1975
03:26:29.900 --> 03:26:34.900
Regardless of which course is taken in any of these cases,

1976
03:26:34.900 --> 03:26:43.420
A good argument can be made that the incomes included as taxable are not the correct ones.

1977
03:26:43.420 --> 03:26:50.020
And if it is decided to impute the value of goods received in kind, the estimates must

1978
03:26:50.020 --> 03:26:57.100
always be arbitrary, since the actual sales for money were not made.

1979
03:26:57.100 --> 03:27:03.500
A similar difficulty is raised by the question whether incomes should be averaged over several

1980
03:27:03.500 --> 03:27:16.500
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.

1981
03:27:16.500 --> 03:27:22.500
This may be corrected by permitting averaging of income over several years.

1982
03:27:22.500 --> 03:27:34.000
But here again, the problem is insoluble, because there are only arbitrary ways of deciding the period of time to allow for averaging.

1983
03:27:34.000 --> 03:27:42.000
If the income tax rate is progressive, that is, if the rate increases as earnings increase,

1984
03:27:42.000 --> 03:27:48.000
then failure to permit averaging penalizes the man with an erratic income.

1985
03:27:48.000 --> 03:27:55.440
But again, to permit averaging will destroy the ideal of uniform current tax rates.

1986
03:27:55.440 --> 03:28:01.760
Furthermore, varying the period of averaging will vary the results.

1987
03:28:01.760 --> 03:28:08.640
We have seen that in order to tax income only, it is necessary to correct for changes in

1988
03:28:08.640 --> 03:28:13.400
the purchasing power of money when taxing capital gains.

1989
03:28:13.400 --> 03:28:22.640
But, once again, any index or factor of correction is purely arbitrary, and uniformity cannot

1990
03:28:22.640 --> 03:28:29.520
be achieved because of the impossibility of securing general agreement on a definition

1991
03:28:29.520 --> 03:28:31.520
of income.

1992
03:28:31.520 --> 03:28:38.640
For all these reasons, the goal of uniformity of taxation is an impossible one.

1993
03:28:38.640 --> 03:28:47.520
It is not simply difficult to achieve in practice, it is conceptually impossible and self-contradictory.

1994
03:28:47.520 --> 03:28:55.400
Surely any ethical goal that is conceptually impossible of achievement is an absurd goal,

1995
03:28:55.400 --> 03:29:01.500
and therefore any movements in the direction of the goal are absurd as well.

1996
03:29:01.500 --> 03:29:08.040
To say that an ethical goal is conceptually impossible is completely different from saying

1997
03:29:08.040 --> 03:29:36.520
It is therefore legitimate, and even necessary, to engage in a logical, that is, praxeological,

1998
03:29:36.520 --> 03:29:43.520
Critique of Ethical Goals and Systems when they are relevant to economics.

1999
03:29:43.520 --> 03:29:49.920
Having analyzed the goal of uniformity of treatment, we turn now to the various principles that

2000
03:29:49.920 --> 03:29:57.640
have been set forth to give content to the idea of uniformity, to answer the question,

2001
03:29:57.640 --> 03:30:00.160
uniform in respect to what?

2002
03:30:00.160 --> 03:30:08.660
Should taxes be uniform as to ability to pay, or sacrifice, or benefits received?

2003
03:30:08.660 --> 03:30:14.800
In other words, while most writers have rather unthinkingly granted that people in the same

2004
03:30:14.800 --> 03:30:21.600
income bracket should pay the same tax, what principle should govern the distribution of

2005
03:30:21.600 --> 03:30:26.020
income taxes between tax brackets?

2006
03:30:26.020 --> 03:30:34.060
Should the man making $10,000 a year pay as much as, as much proportionately as, more

2007
03:30:34.060 --> 03:30:44.220
than, more proportionately than, or less than, a man making $5,000 or $1,000 a year?

2008
03:30:44.220 --> 03:30:52.900
In short, should people pay uniformly in accordance with their ability to pay, or sacrifice made,

2009
03:30:52.900 --> 03:30:55.940
or some other principle?

2010
03:30:55.940 --> 03:30:56.940
2.

2011
03:30:56.940 --> 03:31:00.940
The Ability to Pay Principle a.

2012
03:31:00.940 --> 03:31:04.500
The Ambiguity of the Concept

2013
03:31:04.500 --> 03:31:10.300
This principle states that people should pay taxes in accordance with their ability to

2014
03:31:10.300 --> 03:31:11.660
pay.

2015
03:31:11.660 --> 03:31:18.580
It is generally conceded that the concept of ability to pay is a highly ambiguous one

2016
03:31:18.580 --> 03:31:23.500
and presents no sure guide for practical application.

2017
03:31:23.500 --> 03:31:30.020
Most economists have employed the principle to support a program of proportional or progressive

2018
03:31:30.020 --> 03:31:34.100
income taxation, but this would hardly suffice.

2019
03:31:34.100 --> 03:31:39.980
It seems clear, for example, that a person's accumulated wealth affects his ability to

2020
03:31:39.980 --> 03:31:40.980
pay.

2021
03:31:40.980 --> 03:31:48.820
A man earning $5,000 during a certain year probably has more ability to pay than a neighbor

2022
03:31:48.820 --> 03:31:56.620
earning the same amount if he also has $50,000 in the bank, while his neighbor has nothing.

2023
03:31:56.620 --> 03:32:03.000
Yet a tax on accumulated capital would cause general impoverishment.

2024
03:32:03.000 --> 03:32:08.660
No clear standard can be found to gauge ability to pay.

2025
03:32:08.660 --> 03:32:12.860
Both wealth and income would have to be considered.

2026
03:32:12.860 --> 03:32:16.600
Medical expenses would have to be deducted, etc.

2027
03:32:16.600 --> 03:32:24.120
But there is no precise criterion to be invoked, and the decision is necessarily arbitrary.

2028
03:32:24.120 --> 03:32:31.640
Thus, should all or some proportion of medical bills be deducted, what about the expenses

2029
03:32:31.640 --> 03:32:39.560
of child rearing, or food, clothing and shelter as necessary to consumer maintenance?

2030
03:32:39.560 --> 03:32:47.120
Professor John Doe attempts to find a criterion for ability in economic well-being, but it

2031
03:32:47.120 --> 03:32:53.600
should be clear that this concept, being even more subjective, is still more difficult to

2032
03:32:53.600 --> 03:32:55.400
define.

2033
03:32:55.400 --> 03:33:03.280
Adam Smith himself used the ability concept to support proportional income taxation, taxation

2034
03:33:03.280 --> 03:33:15.280
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.

2035
03:33:15.280 --> 03:33:16.280
Said Smith,

2036
03:33:45.280 --> 03:33:51.280
are all obliged to contribute to their respective interests in the estate.

2037
03:33:51.280 --> 03:34:01.280
Indeed, it is hard to see in precisely what sense ability to pay rises in proportion to income.

2038
03:34:01.280 --> 03:34:13.280
Is a man earning $10,000 a year equally able to pay $2,000 as a man earning $1,000 to pay $200?

2039
03:34:13.280 --> 03:34:31.280
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.

2040
03:34:31.280 --> 03:34:40.280
J.K. McCullough, in a famous passage, attacked progressiveness and defended proportionality of taxation.

2041
03:34:40.280 --> 03:34:59.280
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.

2042
03:34:59.280 --> 03:35:05.280
Seemingly plausible, this thesis is by no means self-evident.

2043
03:35:05.280 --> 03:35:13.840
In what way is proportional taxation any less arbitrary than any given pattern of progressive

2044
03:35:13.840 --> 03:35:20.720
taxation, that is, where the rate of tax increases with income? There must be some

2045
03:35:20.720 --> 03:35:28.560
principle that can justify proportionality. If this principle does not exist, then proportionality

2046
03:35:28.560 --> 03:35:35.920
is no less arbitrary than any other taxing pattern. Various principles have been offered and will be

2047
03:35:35.920 --> 03:35:44.080
considered, but the point is that proportionality per se is neither more nor less sound than any

2048
03:35:44.080 --> 03:35:51.920
other taxation. One school of thought attempts to find a justification for a progressive tax

2049
03:35:51.920 --> 03:35:55.320
via an Ability to Pay principle.

2050
03:35:55.320 --> 03:35:59.960
This is the faculty approach of E.R.A. Seligman.

2051
03:35:59.960 --> 03:36:05.960
This doctrine holds that the more money a person has, the relatively easier it is for

2052
03:36:05.960 --> 03:36:08.320
him to acquire more.

2053
03:36:08.320 --> 03:36:14.160
His power of obtaining money is supposed to increase as he has more.

2054
03:36:14.160 --> 03:36:20.000
A rich man may be said to be subject to a law of increasing returns.

2055
03:36:20.000 --> 03:36:26.740
Therefore, since his ability increases at a faster rate than his income, a progressive

2056
03:36:26.740 --> 03:36:29.660
income tax is justified.

2057
03:36:29.660 --> 03:36:32.500
This theory is simply invalid.

2058
03:36:32.500 --> 03:36:35.060
Money does not make money.

2059
03:36:35.060 --> 03:36:40.660
If it did, then a few people would by now own all the world's wealth.

2060
03:36:40.660 --> 03:36:48.960
To be earned, money must continually be justifying itself in current service to consumers.

2061
03:36:48.960 --> 03:36:55.360
Personal income, interest, profits and rents are earned only in accordance with their

2062
03:36:55.360 --> 03:36:59.200
current, not their past, services.

2063
03:36:59.200 --> 03:37:06.320
The size of accumulated fortune is immaterial, and fortunes can be and are dissipated when

2064
03:37:06.320 --> 03:37:12.560
their owners fail to reinvest them wisely in the service of consumers.

2065
03:37:12.560 --> 03:37:18.520
As Bloom and Calvin point out, the Seligman thesis is utter nonsense when applied to

2066
03:37:18.520 --> 03:37:25.280
to personal services such as labor energy, it could only make sense when applied to income

2067
03:37:25.280 --> 03:37:34.400
from property, that is, investment in land or capital goods, or slaves in a slave economy.

2068
03:37:34.400 --> 03:37:41.320
But the return on capital is always tending toward uniformity, and any departures from

2069
03:37:41.320 --> 03:37:49.600
Some uniformity are due to especially wise and far-seeing investments, profits, or especially

2070
03:37:49.600 --> 03:37:53.080
wasteful investments, losses.

2071
03:37:53.080 --> 03:38:00.000
The Seligman Thesis would fallaciously imply that the rates of return increase in proportion

2072
03:38:00.000 --> 03:38:03.280
to the amount invested.

2073
03:38:03.280 --> 03:38:09.980
Another theory holds that ability to pay is proportionate to the producer's surplus of

2074
03:38:09.980 --> 03:38:17.540
of an Individual, that is, his economic rent, or the amount of his income above the payment

2075
03:38:17.540 --> 03:38:21.400
necessary for him to continue production.

2076
03:38:21.400 --> 03:38:26.280
The consequences of taxation of site rent have been noted.

2077
03:38:26.280 --> 03:38:31.640
The necessary payments to labor are clearly impossible to establish.

2078
03:38:31.640 --> 03:38:38.320
If someone is asked by the tax authorities what his minimum wage is, what will prevent

2079
03:38:38.320 --> 03:38:45.320
The Theory of Money and Credit The Theory of Money and Credit

2080
03:39:08.320 --> 03:39:38.320
The Theory of Money and Credit

2081
03:39:38.320 --> 03:39:46.000
Any Surplus Over Necessary Payment from Land or Capital Since None Exists and Practically

2082
03:39:46.000 --> 03:39:54.480
Impossible to Tax the Surplus to Labor Since the Existence of a Sizable Surplus is Rare,

2083
03:39:54.480 --> 03:40:02.680
Impossible to Determine and, in any case, No Criterion Whatever of Ability to Pay

2084
03:40:02.680 --> 03:40:06.800
B. The Justice of the Standard

2085
03:40:06.800 --> 03:40:14.800
The extremely popular ability-to-pay idea was sanctified by Adam Smith in his most important

2086
03:40:14.800 --> 03:40:20.320
canon of taxation and has been accepted blindly ever since.

2087
03:40:20.320 --> 03:40:26.700
While much criticism has been leveled at its inherent vagueness, hardly anyone has criticized

2088
03:40:26.700 --> 03:40:33.840
the basic principle, despite the fact that no one has really grounded it in sound argument.

2089
03:40:33.840 --> 03:40:39.960
Roth himself gave no reasoning to support this alleged principle, and few others have done

2090
03:40:39.960 --> 03:40:41.320
so since.

2091
03:40:41.320 --> 03:40:48.200
John Doe, in his text on public finance, simply accepts it because most people believe in

2092
03:40:48.200 --> 03:40:55.400
it, thereby ignoring the possibility of any logical analysis of ethical principles.

2093
03:40:55.400 --> 03:41:02.160
The only substantial attempt to give some rational support to the ability-to-pay principle

2094
03:41:02.160 --> 03:41:10.960
rests on a strained comparison of tax payments to voluntary gifts to charitable organizations.

2095
03:41:10.960 --> 03:41:13.760
Thus, Harold M. Groves writes,

2096
03:41:13.760 --> 03:41:20.160
To hundreds of common enterprises, community chests, Red Cross, etc.,

2097
03:41:20.160 --> 03:41:24.480
people are expected to contribute according to their means.

2098
03:41:24.480 --> 03:41:31.440
Governments are one of these common enterprises fostered to serve the citizens as a group.

2099
03:41:31.440 --> 03:41:36.040
Seldom have more fallacies been packed into two sentences.

2100
03:41:36.040 --> 03:41:41.640
In the first place, the government is not a common enterprise akin to the community

2101
03:41:41.640 --> 03:41:42.760
chest.

2102
03:41:42.760 --> 03:41:45.640
No one can resign from it.

2103
03:41:45.640 --> 03:41:52.400
No one on penalty of imprisonment can come to the conclusion that this charitable enterprise

2104
03:41:52.400 --> 03:41:58.680
is not doing its job properly and therefore stop his contribution.

2105
03:41:58.680 --> 03:42:02.840
No one can simply lose interest and drop out.

2106
03:42:02.840 --> 03:42:10.140
If, as will be seen further, the state cannot be described as a business engaged in selling

2107
03:42:10.140 --> 03:42:17.920
services on the market, certainly it is ludicrous to equate it to a charitable organization.

2108
03:42:17.920 --> 03:42:24.760
Government is the very negation of charity, for charity is uniquely an unbought gift,

2109
03:42:24.760 --> 03:42:34.280
A freely flowing, uncoerced act by the giver. The word expected in Grove's phrase is misleading.

2110
03:42:34.280 --> 03:42:41.080
No one is forced to give to any charity in which he is not interested, or which he believes

2111
03:42:41.080 --> 03:42:48.640
is not doing its job properly. The contrast is even clearer in a phrase of Merlin Hunter

2112
03:42:48.640 --> 03:42:51.600
and Harry Allen's.

2113
03:42:51.600 --> 03:42:57.480
Contributions to support the church or the community chest are expected, not on the basis

2114
03:42:57.480 --> 03:43:03.900
of benefits which individual members receive from the organization, but upon the basis

2115
03:43:03.900 --> 03:43:06.860
of their ability to contribute.

2116
03:43:06.860 --> 03:43:10.140
But this is praxeologically invalid.

2117
03:43:10.140 --> 03:43:17.540
The reason that anyone contributes voluntarily to a charity is precisely the benefit that

2118
03:43:17.540 --> 03:43:19.580
that he obtains from it.

2119
03:43:19.580 --> 03:43:24.800
Yet benefit can be considered only in a subjective sense.

2120
03:43:24.800 --> 03:43:26.820
It can never be measured.

2121
03:43:26.820 --> 03:43:33.360
The fact of subjective gain or benefit from an act is deducible from the fact that it

2122
03:43:33.360 --> 03:43:35.320
was performed.

2123
03:43:35.320 --> 03:43:42.300
Each person making an exchange is deduced to have benefited, at least ex ante.

2124
03:43:42.300 --> 03:43:49.840
Similarly, a person who makes a unilateral gift is deduced to have benefited ex ante

2125
03:43:49.840 --> 03:43:51.980
from making the gift.

2126
03:43:51.980 --> 03:43:55.820
If he did not benefit, he would not have made the gift.

2127
03:43:55.820 --> 03:44:02.400
This is another indication that praxeology does not assume the existence of an economic

2128
03:44:02.400 --> 03:44:10.520
man, for the benefit from an action may come either from a good or a service directly received

2129
03:44:10.520 --> 03:44:17.520
The Theory of Money and Credit

2130
03:44:40.520 --> 03:44:50.520
The market price, generally considered the just price, is almost always uniform or tending toward uniformity.

2131
03:44:50.520 --> 03:44:56.520
Market prices tend to obey the rule of one price throughout the entire market.

2132
03:44:56.520 --> 03:45:05.520
Everyone pays an equal price for a good, regardless of how much money he has or his ability to pay.

2133
03:45:05.520 --> 03:45:13.280
Indeed, if the ability to pay principle pervaded the market, there would be no point in acquiring

2134
03:45:13.280 --> 03:45:19.680
wealth, for everyone would have to pay more for a product in proportion to the money in

2135
03:45:19.680 --> 03:45:21.520
his possession.

2136
03:45:21.520 --> 03:45:28.080
Money incomes would be approximately equalized, and in fact there would be no point at all

2137
03:45:28.080 --> 03:45:35.120
to acquiring money, since the purchasing power of a unit of money would never be definite,

2138
03:45:35.120 --> 03:45:41.560
would drop, for any man, in proportion to the quantity of money he earns.

2139
03:45:41.560 --> 03:45:47.520
A person with less money would simply find the purchasing power of a unit of his money

2140
03:45:47.520 --> 03:45:49.400
rising accordingly.

2141
03:45:49.400 --> 03:45:56.240
Therefore, unless trickery and black marketeering could evade the regulations, establishing

2142
03:45:56.240 --> 03:46:02.720
the ability-to-pay principle for prices would wreck the market altogether.

2143
03:46:02.720 --> 03:46:08.680
The wrecking of the market and the monetary economy would plunge society back to primitive

2144
03:46:08.680 --> 03:46:15.540
living standards, and, of course, eliminate a large part of the current world population,

2145
03:46:15.540 --> 03:46:21.740
which is permitted to earn a subsistence living or higher by virtue of the existence of the

2146
03:46:21.740 --> 03:46:24.980
modern developed market.

2147
03:46:24.980 --> 03:46:32.060
It should be clear, moreover, that establishing equal incomes and wealth for all, for example,

2148
03:46:32.060 --> 03:46:39.260
by taxing all those over a certain standard of income and wealth and subsidizing all those

2149
03:46:39.260 --> 03:46:45.660
below that standard would have the same effect, since there would be no point to anyone's

2150
03:46:45.660 --> 03:46:47.720
working for money.

2151
03:46:47.720 --> 03:46:55.160
Those who enjoy performing labor will do so only at play, that is, without obtaining a

2152
03:46:55.160 --> 03:46:57.500
monetary return.

2153
03:46:57.500 --> 03:47:05.740
and forced equality of income and wealth, therefore, would return the economy to barbarism.

2154
03:47:05.740 --> 03:47:13.260
If taxes were to be patterned after market pricing, then, taxes would be levied equally,

2155
03:47:13.260 --> 03:47:16.340
not proportionately, on everyone.

2156
03:47:16.340 --> 03:47:23.460
As will be seen, equal taxation differs in critical respects from market pricing, but

2157
03:47:23.460 --> 03:47:39.580
The ability to pay principle means precisely that the able are penalized, that is, those

2158
03:47:39.580 --> 03:47:44.620
most able in serving the wants of their fellow men.

2159
03:47:44.620 --> 03:47:50.900
Penalizing ability in production and service diminishes the supply of the service and in

2160
03:47:50.900 --> 03:47:54.580
in proportion to the extent of that ability.

2161
03:47:54.580 --> 03:48:01.200
The result will be impoverishment, not only of the able, but of the rest of society, which

2162
03:48:01.200 --> 03:48:04.420
benefits from their services.

2163
03:48:04.420 --> 03:48:10.260
The ability to pay principle, in short, cannot be simply assumed.

2164
03:48:10.260 --> 03:48:17.160
If it is employed, it must be justified by logical argument, and this economists have

2165
03:48:17.160 --> 03:48:19.200
yet to provide.

2166
03:48:19.200 --> 03:48:25.840
Rather than being an evident rule of justice, the ability to pay principle resembles more

2167
03:48:25.840 --> 03:48:31.440
the highwayman's principle of taking where the taking is good.

2168
03:48:31.440 --> 03:48:33.560
3.

2169
03:48:33.560 --> 03:48:39.520
Sacrifice Theory Another attempted criterion of just taxation

2170
03:48:39.520 --> 03:48:45.640
was the subject of a flourishing literature for many decades, although it is now decidedly

2171
03:48:45.640 --> 03:48:47.680
going out of fashion.

2172
03:48:47.680 --> 03:48:54.780
The many variants of the sacrifice approach are akin to a subjective version of the ability

2173
03:48:54.780 --> 03:48:56.800
to pay principle.

2174
03:48:56.800 --> 03:49:00.240
They all rest on three general premises.

2175
03:49:00.240 --> 03:49:07.680
A. That the utility of a unit of money to an individual diminishes as his stock of money

2176
03:49:07.680 --> 03:49:08.680
increases.

2177
03:49:08.680 --> 03:49:19.540
B. That these utilities can be compared interpersonally and thus can be summed up, subtracted, etc.

2178
03:49:19.540 --> 03:49:25.440
And C. That everyone has the same utility of money schedule.

2179
03:49:25.440 --> 03:49:31.760
The first premise is valid, but only in an ordinal sense, but the second and third are

2180
03:49:31.760 --> 03:49:33.120
nonsensical.

2181
03:49:33.120 --> 03:49:40.020
The marginal utility of money does diminish, but it is impossible to compare one person's

2182
03:49:40.020 --> 03:49:48.020
utilities with another, let alone believe that everyone's valuations are identical.

2183
03:49:48.020 --> 03:49:53.580
Utilities are not quantities, but subjective orders of preference.

2184
03:49:53.580 --> 03:50:00.020
Any principle for distributing the tax burden that rests on such assumptions must therefore

2185
03:50:00.020 --> 03:50:02.060
be declared fallacious.

2186
03:50:02.060 --> 03:50:09.100
Happily, this truth is now generally established in the economic literature.

2187
03:50:09.100 --> 03:50:15.740
Utility and sacrifice theory has generally been used to justify progressive taxation,

2188
03:50:15.740 --> 03:50:21.020
although sometimes proportional taxation has been upheld on this ground.

2189
03:50:21.020 --> 03:50:29.100
Briefly, a dollar is alleged to mean less, or be worth less in utility to a rich man

2190
03:50:29.100 --> 03:50:55.820
Many ability-to-pay theories are really inverted sacrifice theories, since they are couched

2191
03:50:55.820 --> 03:51:04.140
in the form of Ability to Make Sacrifices. Since the nub of the sacrifice theory, interpersonal

2192
03:51:04.140 --> 03:51:11.740
comparisons of utility is now generally discarded, we shall not spend much time discussing the

2193
03:51:11.740 --> 03:51:19.020
sacrifice doctrine in detail. However, several aspects of this theory are of interest. The

2194
03:51:19.020 --> 03:51:26.980
The Sacrifice Theory divides into two main branches, one, the Equal Sacrifice Principle,

2195
03:51:26.980 --> 03:51:30.840
and two, the Minimum Sacrifice Principle.

2196
03:51:30.840 --> 03:51:36.940
The former states that every man should sacrifice equally in paying taxes.

2197
03:51:36.940 --> 03:51:43.040
The latter, that society as a whole should sacrifice the least amount.

2198
03:51:43.040 --> 03:51:49.920
Both versions abandon completely the idea of government as a supplier of benefits, and

2199
03:51:49.920 --> 03:51:56.500
treat government and taxation as simply a burden, a sacrifice that must be borne in

2200
03:51:56.500 --> 03:51:59.160
the best way we know how.

2201
03:51:59.160 --> 03:52:06.280
Here we have a curious principle of justice indeed, based on adjustment to hurt.

2202
03:52:06.280 --> 03:52:13.600
We are faced again with that pons asinorum that defeats all attempts to establish canons

2203
03:52:13.600 --> 03:52:20.640
of justice for taxation, the problem of the justice of taxation itself.

2204
03:52:20.640 --> 03:52:28.000
The proponent of the sacrifice theory in realistically abandoning unproved assumptions of benefit

2205
03:52:28.000 --> 03:52:36.040
from taxation must face and then founder on the question, if taxation is pure hurt, why

2206
03:52:36.040 --> 03:52:39.000
Why Endure It at All?

2207
03:52:39.000 --> 03:52:45.480
The Equal Sacrifice Theory asks that equal hurt be imposed on all.

2208
03:52:45.480 --> 03:52:52.200
As a criterion of justice, this is as untenable as asking for equal slavery.

2209
03:52:52.200 --> 03:52:58.680
One interesting aspect of the Equal Sacrifice Theory, however, is that it does not necessarily

2210
03:52:58.680 --> 03:53:02.920
imply progressive income taxation.

2211
03:53:02.920 --> 03:53:09.020
For although it implies that the rich man should be taxed more than the poor man, it

2212
03:53:09.020 --> 03:53:15.880
does not necessarily say that the former should be taxed more than proportionately.

2213
03:53:15.880 --> 03:53:21.500
In fact, it does not even establish that all be taxed proportionately.

2214
03:53:21.500 --> 03:53:29.320
In short, the equal sacrifice principle may demand that a man earning $10,000 be taxed

2215
03:53:29.320 --> 03:53:38.040
more than a man earning $1,000 but not necessarily that he be taxed a greater percentage or even

2216
03:53:38.040 --> 03:53:46.360
proportionately. The equal sacrifice principle may well call for regressive taxation under which a

2217
03:53:46.360 --> 03:53:54.280
wealthier man would pay more in amount but less proportionately. For example, the man earning

2218
03:53:54.280 --> 03:54:03.280
The man earning $10,000 would pay $500, and the man earning $1,000 would pay $200.

2219
03:54:03.280 --> 03:54:12.280
The more rapidly the utility of money declines, the more probably will equal sacrifice yield progressivity.

2220
03:54:12.280 --> 03:54:19.280
A slowly declining utility of money schedule would call for regressive taxation.

2221
03:54:19.280 --> 03:54:25.280
The Minimum Sacrifice Theory has often been confused with the Equal Sacrifice Theory,

2222
03:54:25.280 --> 03:54:30.280
because, as we have seen, the entire theory is untenable.

2223
03:54:30.280 --> 03:54:34.280
But the point is that even on its own grounds,

2224
03:54:34.280 --> 03:54:42.280
the Equal Sacrifice Theory can justify neither progressive nor proportionate taxation.

2225
03:54:42.280 --> 03:54:48.280
The Minimum Sacrifice Theory has often been confused with the Equal Sacrifice Theory,

2226
03:54:48.280 --> 03:55:00.280
and the Minimum Sacrifice Theory, both rest on the same set of false assumptions, but the Minimum Sacrifice Theory counsels very drastic progressive taxation.

2227
03:55:00.280 --> 03:55:09.280
Suppose, for example, that there are two men in a community, Jones making $50,000 and Smith making $30,000.

2228
03:55:09.280 --> 03:55:25.280
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.

2229
03:55:25.280 --> 03:55:30.280
Hence if the government needs one dollar, it takes it from Jones.

2230
03:55:30.280 --> 03:55:48.280
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.

2231
03:55:48.280 --> 03:55:54.120
This continues as long as Jones has more money remaining than Smith.

2232
03:55:54.120 --> 03:56:01.280
Should the government need $20,000 in taxes, the minimum sacrifice principle councils taking

2233
03:56:01.280 --> 03:56:07.720
the entire $20,000 from Jones and zero from Smith.

2234
03:56:07.720 --> 03:56:14.680
In other words, it advocates taking all of the highest incomes in turn until governmental

2235
03:56:14.680 --> 03:56:17.160
needs are fulfilled.

2236
03:56:17.160 --> 03:56:23.480
Push to its logical conclusion, in which the state is urged to establish maximum social

2237
03:56:23.480 --> 03:56:30.840
satisfaction, the obverse of minimum social sacrifice, the principal council's absolute

2238
03:56:30.840 --> 03:56:39.080
compulsory egalitarianism, with everyone above a certain standard taxed in order to subsidize

2239
03:56:39.080 --> 03:56:42.800
everyone else to come up to that standard.

2240
03:56:42.800 --> 03:56:49.560
The consequence, as we have seen, would be a return to the conditions of barbarism.

2241
03:56:49.560 --> 03:56:56.160
The minimum sacrifice principle depends heavily, as does the equal sacrifice theory, on the

2242
03:56:56.160 --> 03:57:03.680
untenable view that everyone's utility of money schedule is roughly identical.

2243
03:57:03.680 --> 03:57:09.120
Both rest also on a further fallacy, which now must be refuted.

2244
03:57:09.120 --> 03:57:15.040
That sacrifice is simply the obverse of the utility of money.

2245
03:57:15.040 --> 03:57:22.400
For the subjective sacrifice in taxation may not be merely the opportunity cost foregone

2246
03:57:22.400 --> 03:57:24.320
of the money paid.

2247
03:57:24.320 --> 03:57:30.720
It may also be increased by moral outrage at the tax procedure.

2248
03:57:30.720 --> 03:57:37.680
Thus Jones may become so morally outraged at the proceedings that his marginal subjective

2249
03:57:37.680 --> 03:57:44.440
Subjective sacrifice quickly becomes very great, much greater than Smith's, if we grant for

2250
03:57:44.440 --> 03:57:47.960
a moment that the two can be compared.

2251
03:57:47.960 --> 03:57:55.120
Once we see that subjective sacrifice is not necessarily tied to the utility of money,

2252
03:57:55.120 --> 03:57:58.080
we may extend the principle further.

2253
03:57:58.080 --> 03:58:04.980
Consider for example a philosophical anarchist who opposes all taxation fervently.

2254
03:58:04.980 --> 03:58:13.380
is that his subjective sacrifice in the payment of any tax is so great as to be almost infinite.

2255
03:58:13.380 --> 03:58:20.820
In that case, the minimum sacrifice principle would have to exempt the anarchist from taxation,

2256
03:58:20.820 --> 03:58:27.380
while the equal sacrifice principle could tax him only an infinitesimal amount.

2257
03:58:27.380 --> 03:58:34.740
Practically then, the sacrifice principle would have to exempt the anarchist from taxation.

2258
03:58:34.740 --> 03:58:41.000
Furthermore, how can the government determine the subjective sacrifice of the individual?

2259
03:58:41.000 --> 03:58:42.600
By asking him?

2260
03:58:42.600 --> 03:58:49.400
In that case, how many people would refrain from proclaiming the enormity of their sacrifice

2261
03:58:49.400 --> 03:58:52.600
and thus escape payment completely?

2262
03:58:52.600 --> 03:59:00.980
Similarly, if two individuals subjectively enjoyed their identical money incomes differently,

2263
03:59:00.980 --> 03:59:07.780
The Minimum Sacrifice Principle would require that the happier man be taxed less, because

2264
03:59:07.780 --> 03:59:13.460
he makes a greater sacrifice in enjoyment from an equal tax.

2265
03:59:13.460 --> 03:59:21.620
Who will suggest heavier taxation on the unhappy or the ascetic, and who would then refrain

2266
03:59:21.620 --> 03:59:28.760
from loudly proclaiming the enormous enjoyment he derives from his income?

2267
03:59:28.760 --> 03:59:35.240
It is curious that the minimum-sacrifice principle counsels the obverse of the ability-to-pay

2268
03:59:35.240 --> 03:59:44.600
theory, which, particularly in its state-of-well-being variant, advocates a special tax on happiness

2269
03:59:44.600 --> 03:59:48.200
and a lower tax on unhappiness.

2270
03:59:48.200 --> 03:59:54.780
If the latter principle prevailed, people would rush to proclaim their unhappiness and

2271
03:59:54.780 --> 03:59:58.000
deep-seated asceticism.

2272
03:59:58.000 --> 04:00:04.720
It is clear that the proponents of the ability to pay and sacrifice theories have completely

2273
04:00:04.720 --> 04:00:10.640
failed to establish them as criteria of just taxation.

2274
04:00:10.640 --> 04:00:14.500
These theories also commit a further grave error.

2275
04:00:14.500 --> 04:00:22.460
For the sacrifice theory explicitly, and the ability to pay theory implicitly, set up presumed

2276
04:00:22.460 --> 04:00:28.220
Criteria for Action in Terms of Sacrifice and Burden

2277
04:00:28.220 --> 04:00:32.820
The ability to pay principle is unclear on this point.

2278
04:00:32.820 --> 04:00:39.300
Some proponents base their argument implicitly on sacrifice, others on the necessity for

2279
04:00:39.300 --> 04:00:43.380
payment for untraceable benefits.

2280
04:00:43.380 --> 04:00:51.280
The state is assumed to be a burden on society, and the question becomes one of justly distributing

2281
04:00:51.280 --> 04:01:00.360
Man is constantly striving to sacrifice as little as he can for the benefits he receives

2282
04:01:00.360 --> 04:01:02.360
from his actions.

2283
04:01:02.360 --> 04:01:09.520
Yet here is a theory that talks only in terms of sacrifice and burden, and calls for a certain

2284
04:01:09.520 --> 04:01:16.840
distribution without demonstrating to the taxpayers that they are benefiting more than

2285
04:01:16.840 --> 04:01:18.960
they are giving up.

2286
04:01:18.960 --> 04:01:25.080
Since the theorists do not so demonstrate, they can make their appeal only in terms of

2287
04:01:25.080 --> 04:01:30.560
sacrifice, a procedure that is praxeologically invalid.

2288
04:01:30.560 --> 04:01:37.520
Since men always try to find net benefits in a course of action, it follows that a discussion

2289
04:01:37.520 --> 04:01:45.840
in terms of sacrifice or burden cannot establish a rational criterion for human action.

2290
04:01:45.840 --> 04:01:52.320
To be praxeologically valid, a criterion must demonstrate net benefit.

2291
04:01:52.320 --> 04:01:58.560
It is true, of course, that the proponents of the sacrifice theory are far more realistic

2292
04:01:58.560 --> 04:02:05.360
than the proponents of the benefit theory, in considering the state a net burden on society

2293
04:02:05.360 --> 04:02:07.600
rather than a net benefit.

2294
04:02:07.600 --> 04:02:14.000
But this hardly demonstrates the justice of the sacrifice principle of taxation.

2295
04:02:14.000 --> 04:02:15.480
Quite the Contrary

2296
04:02:15.480 --> 04:02:18.240
4.

2297
04:02:18.240 --> 04:02:20.800
The Benefit Principle

2298
04:02:20.800 --> 04:02:27.680
The benefit principle differs radically from the two preceding criteria of taxation.

2299
04:02:27.680 --> 04:02:34.760
For the sacrifice and ability to pay principles depart completely from the principles of action

2300
04:02:34.760 --> 04:02:39.440
and the accepted criteria of justice on the market.

2301
04:02:39.440 --> 04:02:46.240
On the market, people act freely in those ways which they believe will confer net benefits

2302
04:02:46.240 --> 04:02:47.480
upon them.

2303
04:02:47.480 --> 04:02:54.160
The result of these actions is the monetary exchange system, with its inexorable tendency

2304
04:02:54.160 --> 04:03:01.120
toward uniform pricing and the allocation of productive factors to satisfy the most

2305
04:03:01.120 --> 04:03:04.440
urgent demands of all the consumers.

2306
04:03:04.440 --> 04:03:11.440
Yet the criteria used in judging taxation differ completely from those which apply to

2307
04:03:11.440 --> 04:03:14.880
all other actions on the market.

2308
04:03:14.880 --> 04:03:21.960
Suddenly free choice and uniform pricing are forgotten and the discussion is all in terms

2309
04:03:21.960 --> 04:03:25.560
of sacrifice, burden, etc.

2310
04:03:25.560 --> 04:03:32.360
If taxation is only a burden, it is no wonder that coercion must be exercised to maintain

2311
04:03:32.360 --> 04:03:33.360
it.

2312
04:03:33.360 --> 04:03:39.240
The benefit principle, on the other hand, is an attempt to establish taxation on a similar

2313
04:03:39.240 --> 04:03:41.980
basis as market pricing.

2314
04:03:41.980 --> 04:03:49.240
That is, the tax is to be levied in accordance with the benefit received by the individual.

2315
04:03:49.240 --> 04:03:55.740
It is an attempt to achieve the goal of a neutral tax, one that would leave the economic

2316
04:03:55.740 --> 04:04:00.360
system approximately as it is on the free market.

2317
04:04:00.360 --> 04:04:07.920
It is an attempt to achieve praxeological soundness by establishing a criterion of payment on

2318
04:04:07.920 --> 04:04:13.320
the basis of benefit rather than sacrifice.

2319
04:04:13.320 --> 04:04:20.020
The great gulf between the benefit and other principles was originally unrecognized because

2320
04:04:20.020 --> 04:04:26.400
of Adam Smith's confusion between ability to pay and benefit.

2321
04:04:26.400 --> 04:04:33.260
In the quotation cited earlier, Smith inferred that everyone benefits from the state in proportion

2322
04:04:33.260 --> 04:04:38.840
to his income, and that this income establishes his ability to pay.

2323
04:04:38.840 --> 04:04:47.440
Therefore, a tax on his ability to pay will simply be a quid pro quo in exchange for benefits

2324
04:04:47.440 --> 04:04:49.840
conferred by the state.

2325
04:04:49.840 --> 04:04:55.880
Some writers have contended that people benefit from government in proportion to their income,

2326
04:04:55.880 --> 04:05:02.120
Procedures that they benefit in increased proportion to their income, thus justifying

2327
04:05:02.120 --> 04:05:04.960
a progressive income tax.

2328
04:05:04.960 --> 04:05:10.160
Yet this entire application of the benefit theory is nonsensical.

2329
04:05:10.160 --> 04:05:18.480
How do the rich reap a greater benefit proportionately, or even more than proportionately, from government

2330
04:05:18.480 --> 04:05:19.960
than the poor?

2331
04:05:19.960 --> 04:05:26.320
They could do so only if the government were responsible for these riches by a grant of

2332
04:05:26.320 --> 04:05:32.400
special privilege, such as a subsidy, a monopoly grant, etc.

2333
04:05:32.400 --> 04:05:35.280
Otherwise how do the rich benefit?

2334
04:05:35.280 --> 04:05:42.160
From welfare and other redistributive expenditures, which take from the rich and give to the bureaucrats

2335
04:05:42.160 --> 04:05:43.800
and the poor?

2336
04:05:43.800 --> 04:05:44.980
Certainly not.

2337
04:05:44.980 --> 04:05:50.780
from Police Protection, but it is precisely the rich who could more afford to pay for

2338
04:05:50.780 --> 04:05:58.100
their own protection and who therefore derive less benefit from it than the poor.

2339
04:05:58.100 --> 04:06:04.500
The benefit theory holds that the rich benefit more from protection because their property

2340
04:06:04.500 --> 04:06:06.580
is more valuable.

2341
04:06:06.580 --> 04:06:12.820
But the cost of protection may have little relation to the value of the property, since

2342
04:06:12.820 --> 04:06:18.980
Since it costs less to police a bank vault containing one hundred million dollars than

2343
04:06:18.980 --> 04:06:26.220
to guard one hundred acres of land worth ten dollars per acre, the poor landowner receives

2344
04:06:26.220 --> 04:06:33.420
a far greater benefit from the state's protection than the rich owner of personality.

2345
04:06:33.420 --> 04:06:40.100
Neither would it be relevant to say that A earns more money than B because A receives

2346
04:06:40.100 --> 04:06:46.640
is a greater benefit from society and should therefore pay more in taxes.

2347
04:06:46.640 --> 04:06:51.140
In the first place, everyone participates in society.

2348
04:06:51.140 --> 04:06:58.640
The fact that A earns more than B means precisely that A's services are individually worth

2349
04:06:58.640 --> 04:07:00.820
more to his fellows.

2350
04:07:00.820 --> 04:07:08.260
Therefore, since A and B benefit similarly from society's existence, the reverse argument

2351
04:07:08.260 --> 04:07:15.820
It is far more accurate that the differential between them is due to A's individual superiority

2352
04:07:15.820 --> 04:07:20.780
in productivity and not at all to society.

2353
04:07:20.780 --> 04:07:29.660
Secondly, society is not at all the state, and the state's possible claim must be independently

2354
04:07:29.660 --> 04:07:31.660
validated.

2355
04:07:31.660 --> 04:07:39.060
Hence, neither proportionate nor progressive income taxation can be sustained on benefit

2356
04:07:39.060 --> 04:07:40.460
principles.

2357
04:07:40.460 --> 04:07:43.340
In fact, the reverse is true.

2358
04:07:43.340 --> 04:07:49.940
If everyone were to pay in accordance with benefit received, it is clear that a.

2359
04:07:49.940 --> 04:07:55.980
The recipients of welfare benefits would bear the full costs of these benefits.

2360
04:07:55.980 --> 04:08:02.620
The poor would have to pay for their own doles, including, of course, the extra cost of paying

2361
04:08:02.620 --> 04:08:06.180
the bureaucracy for making the transfers.

2362
04:08:06.180 --> 04:08:07.180
b.

2363
04:08:07.180 --> 04:08:13.700
The buyers of any government service would be the only payers, so that government services

2364
04:08:13.700 --> 04:08:18.140
could not be financed out of a general tax fund.

2365
04:08:18.140 --> 04:08:19.140
and c.

2366
04:08:19.140 --> 04:08:27.060
For police protection, a rich man would pay less than a poor man, and less in absolute amounts.

2367
04:08:27.780 --> 04:08:33.620
Furthermore, landowners would pay more than owners of intangible property,

2368
04:08:33.620 --> 04:08:40.420
and the weak and infirm, who clearly benefit more from police protection than the strong,

2369
04:08:40.420 --> 04:08:43.380
would have to pay higher taxes than the latter.

2370
04:08:43.380 --> 04:08:50.740
It becomes immediately clear why the benefit principle has been practically abandoned in

2371
04:08:50.740 --> 04:08:58.820
recent years, for it is evident that if a. welfare recipients and b. receivers of other

2372
04:08:58.820 --> 04:09:06.060
special privilege, such as monopoly grants, were to pay according to the benefit received,

2373
04:09:06.060 --> 04:09:11.660
there would not be much point in either form of government expenditure, and if each were

2374
04:09:11.660 --> 04:09:18.760
were to pay an amount equal to the benefit he received, rather than simply proportionately,

2375
04:09:18.760 --> 04:09:23.680
and he would have to do so, because there would be nowhere else for the state to turn

2376
04:09:23.680 --> 04:09:24.900
for funds.

2377
04:09:24.900 --> 04:09:31.100
Then, the recipient of the subsidy would not only earn nothing, but would have to pay the

2378
04:09:31.100 --> 04:09:35.560
bureaucracy for the cost of handling and transfer.

2379
04:09:35.560 --> 04:09:40.520
The establishment of the benefit principle would therefore result in a laissez-faire

2380
04:09:40.520 --> 04:09:47.300
system, with governments strictly limited to supplying defense service, and the taxation

2381
04:09:47.300 --> 04:09:54.280
for this defense service would be levied more on the poor and the infirm than on the strong

2382
04:09:54.280 --> 04:09:56.160
and the rich.

2383
04:09:56.160 --> 04:10:02.960
At first sight, the believer in the free market, the seeker after a neutral tax, is inclined

2384
04:10:02.960 --> 04:10:04.440
to rejoice.

2385
04:10:04.440 --> 04:10:10.000
It would seem that the benefit principle is the answer to his search, and this principle

2386
04:10:10.000 --> 04:10:16.080
is indeed closer to market principles than the previous alleged canons.

2387
04:10:16.080 --> 04:10:22.400
Yet, if we pursue the analysis more closely, it will be evident that the benefit principle

2388
04:10:22.400 --> 04:10:26.280
is still far from market neutrality.

2389
04:10:26.280 --> 04:10:32.360
On the market, people do not pay in accordance with individual benefit received.

2390
04:10:32.360 --> 04:10:41.160
They pay a uniform price, one that just induces the marginal buyer to participate in the exchange.

2391
04:10:41.160 --> 04:10:45.880
The more eager do not pay a higher price than the less eager.

2392
04:10:45.880 --> 04:10:51.840
The chess addict and the indifferent player pay the same price for the same chess set,

2393
04:10:51.840 --> 04:10:57.400
and the opera enthusiast and the novice pay the same price for the same ticket.

2394
04:10:57.400 --> 04:11:03.500
The poor and the weak would be most eager for protection, but in contrast to the benefit

2395
04:11:03.500 --> 04:11:08.220
principle, they would not pay more on the market.

2396
04:11:08.220 --> 04:11:12.280
There are even graver defects in the benefit principle.

2397
04:11:12.280 --> 04:11:20.700
For market exchanges, A, demonstrate benefit, and B, only establish the fact of benefit

2398
04:11:20.700 --> 04:11:22.840
without measuring it.

2399
04:11:22.840 --> 04:11:30.400
The only reason we know that A and B benefit from an exchange is that they voluntarily

2400
04:11:30.400 --> 04:11:32.620
make the exchange.

2401
04:11:32.620 --> 04:11:36.920
In this way, the market demonstrates benefit.

2402
04:11:36.920 --> 04:11:43.520
But where taxes are levied, the payment is compulsory, and therefore benefit can never

2403
04:11:43.520 --> 04:11:45.500
be demonstrated.

2404
04:11:45.500 --> 04:11:52.000
As a matter of fact, the existence of coercion gives rise to the opposite presumption and

2405
04:11:52.000 --> 04:11:59.400
implies that the tax is not a benefit, but a burden. If it really were a benefit, coercion

2406
04:11:59.400 --> 04:12:05.300
would not be necessary. Secondly, the benefit from exchange can never

2407
04:12:05.300 --> 04:12:13.240
be measured or compared interpersonally. The consumer's surplus derived from exchange

2408
04:12:13.240 --> 04:12:21.880
is purely subjective, nonmeasurable and noncomparable scientifically. Therefore, we never know

2409
04:12:21.880 --> 04:12:29.320
know what these benefits are, and hence there can be no way of allocating the taxes in accordance

2410
04:12:29.320 --> 04:12:30.800
with them.

2411
04:12:30.800 --> 04:12:37.860
Thirdly, on the market, everyone enjoys a net benefit from an exchange.

2412
04:12:37.860 --> 04:12:43.320
A person's benefit is not equal to his cost, but greater.

2413
04:12:43.320 --> 04:12:50.600
Therefore, taxing away his alleged benefit would completely violate market principles.

2414
04:12:50.600 --> 04:12:57.400
Finally, if each person were taxed according to the benefit he receives from government,

2415
04:12:57.400 --> 04:13:03.920
it is obvious that, since the bureaucracy receive all their income from this source,

2416
04:13:03.920 --> 04:13:10.440
they would, like other recipients of subsidy and privilege, be obliged to return their

2417
04:13:10.440 --> 04:13:13.240
whole salary to the government.

2418
04:13:13.240 --> 04:13:18.020
The bureaucracy would have to serve without pay.

2419
04:13:18.020 --> 04:13:23.780
We have seen that the benefit principle would dispense with all subsidy expenditures of

2420
04:13:23.780 --> 04:13:25.900
whatever type.

2421
04:13:25.900 --> 04:13:31.060
Government services would have to be sold directly to buyers, but in that case there

2422
04:13:31.060 --> 04:13:37.260
would be no room for government ownership, for the characteristic of a government enterprise

2423
04:13:37.260 --> 04:13:41.100
is that it is launched from tax funds.

2424
04:13:41.100 --> 04:13:47.180
Police and judicial services are often declared by the proponents of the benefit principle

2425
04:13:47.180 --> 04:13:53.740
to be inherently general and unspecialized, so that they would need to be purchased out of the

2426
04:13:53.740 --> 04:14:01.100
common tax fund rather than by individual users. However, as we have seen, this assumption is

2427
04:14:01.100 --> 04:14:09.260
incorrect. These services can be sold on the market like any others. Thus, even in the absence of all

2428
04:14:09.260 --> 04:14:16.540
other deficiencies of the benefit principle, it would still establish no warrant for taxation at

2429
04:14:16.540 --> 04:14:24.340
at all, for all services could be sold on the market directly to beneficiaries.

2430
04:14:24.340 --> 04:14:30.900
It is evident that while the benefit principle attempts to meet the market criterion of limiting

2431
04:14:30.900 --> 04:14:36.740
payment solely to beneficiaries, it must be adjudged a failure.

2432
04:14:36.740 --> 04:14:44.540
It cannot serve as a criterion for a neutral tax or any other type of taxation.

2433
04:14:44.540 --> 04:14:49.540
5. The Equal Tax and the Cost Principle

2434
04:14:50.540 --> 04:14:57.540
Equality of taxation has far more to commend it than any of the principles discussed earlier,

2435
04:14:57.540 --> 04:15:01.540
none of which can be used as a canon of taxation.

2436
04:15:01.540 --> 04:15:09.540
Equality of taxation means just that, a uniform tax on every member of the society.

2437
04:15:09.540 --> 04:15:16.140
This is also called a head tax, capitation tax, or poll tax.

2438
04:15:16.140 --> 04:15:22.540
The latter term, however, is best used to describe a uniform tax on voting, which is

2439
04:15:22.540 --> 04:15:27.260
what the poll tax has become in various American states.

2440
04:15:27.260 --> 04:15:32.100
Each person would pay the same tax annually to the government.

2441
04:15:32.100 --> 04:15:38.660
The equal tax would be particularly appropriate in a democracy, with its emphasis on equality

2442
04:15:38.660 --> 04:15:45.140
before the law, equal rights and absence of discrimination and special privilege.

2443
04:15:45.140 --> 04:15:49.700
It would embody the principle one vote, one tax.

2444
04:15:49.700 --> 04:15:56.260
It would appropriately apply only to the protection services of the government, for the government

2445
04:15:56.260 --> 04:15:59.660
is committed to defending everyone equally.

2446
04:15:59.660 --> 04:16:06.060
Therefore, it may seem just for each person to be taxed equally in return.

2447
04:16:06.060 --> 04:16:12.300
The principle of equality would rule out, as would the benefit principle, all government

2448
04:16:12.300 --> 04:16:20.040
actions except defense, for all other expenditures would set up a special privilege or subsidy

2449
04:16:20.040 --> 04:16:21.540
of some kind.

2450
04:16:21.540 --> 04:16:29.300
Finally, the equal tax would be far more nearly neutral than any of the other taxes considered,

2451
04:16:29.300 --> 04:16:36.820
For it would attempt to establish an equal price for equal services rendered.

2452
04:16:36.820 --> 04:16:43.040
One school of thought challenges this contention and asserts that a proportional tax would

2453
04:16:43.040 --> 04:16:47.120
be more nearly neutral than an equal tax.

2454
04:16:47.120 --> 04:16:52.600
The proponents of this theory point out that an equal tax alters the market's pattern

2455
04:16:52.600 --> 04:16:54.680
of Distribution of Income.

2456
04:16:54.680 --> 04:17:04.840
Thus, if A earns 1,000 gold ounces per year, B earns 200 ounces and C earns 50 ounces

2457
04:17:04.840 --> 04:17:12.320
and each pays 10 ounces in taxes, then the relative proportion of net income remaining

2458
04:17:12.320 --> 04:17:18.760
after taxes is altered and altered in the direction of greater inequality.

2459
04:17:18.760 --> 04:17:24.840
A proportionate tax of a fixed percentage on all three would leave the distribution

2460
04:17:24.840 --> 04:17:31.560
of income constant and would therefore be neutral relative to the market.

2461
04:17:31.560 --> 04:17:37.480
This thesis misconceives the whole problem of neutrality in taxation.

2462
04:17:37.480 --> 04:17:44.560
The object of the quest is not to leave the income distribution the same as if a tax had

2463
04:17:44.560 --> 04:17:46.400
not been imposed.

2464
04:17:46.400 --> 04:17:54.300
The object is to affect the income distribution and all other aspects of the economy in the

2465
04:17:54.300 --> 04:18:00.140
same way as if the tax were really a free market price.

2466
04:18:00.140 --> 04:18:02.980
And this is a very different criterion.

2467
04:18:02.980 --> 04:18:09.620
No market price leaves relative income distribution the same as before.

2468
04:18:09.620 --> 04:18:15.300
If the market really behaved in this way, there would be no advantage in earning money,

2469
04:18:15.300 --> 04:18:21.380
For people would have to pay proportionately higher prices for goods in accordance with

2470
04:18:21.380 --> 04:18:23.600
the level of their earnings.

2471
04:18:23.600 --> 04:18:32.300
The market tends toward uniformity of pricing and hence toward equal pricing for equal service.

2472
04:18:32.300 --> 04:18:38.900
Equal taxation, therefore, would be far more nearly neutral and would constitute a closer

2473
04:18:38.900 --> 04:18:42.520
approach to a market system.

2474
04:18:42.520 --> 04:18:49.160
The equal tax criterion, however, has many grave defects, even as an approach toward

2475
04:18:49.160 --> 04:18:50.880
a neutral tax.

2476
04:18:50.880 --> 04:18:58.420
In the first place, the market criterion of equal price for equal service faces the problem,

2477
04:18:58.420 --> 04:19:01.180
what is an equal service?

2478
04:19:01.180 --> 04:19:07.660
The service of police protection is of far greater magnitude in an urban crime area than

2479
04:19:07.660 --> 04:19:10.600
it is in some sleepy backwater.

2480
04:19:10.600 --> 04:19:16.240
That service is worth far more in the crime center, and therefore the price paid will

2481
04:19:16.240 --> 04:19:22.000
tend to be greater in a crime-ridden area than in a peaceful area.

2482
04:19:22.000 --> 04:19:27.660
It is very likely that in the purely free market, police and judicial services would

2483
04:19:27.660 --> 04:19:34.900
be sold like insurance, with each member paying regular premiums in return for a call on the

2484
04:19:34.900 --> 04:19:38.220
benefits of protection when needed.

2485
04:19:38.220 --> 04:19:44.260
It is obvious that a more risky individual, such as one living in a crime area, would

2486
04:19:44.260 --> 04:19:49.680
tend to pay a higher premium than individuals in another area.

2487
04:19:49.680 --> 04:19:58.300
To be neutral, then, a tax would have to vary in accordance with costs, and not be uniform.

2488
04:19:58.300 --> 04:20:03.000
This does not concede that costs determine prices.

2489
04:20:03.000 --> 04:20:10.680
The general array of final prices determines the general array of cost prices, but then

2490
04:20:10.680 --> 04:20:17.900
the viability of firms is determined by whether the price people will pay for their products

2491
04:20:17.900 --> 04:20:23.360
is enough to cover their costs, which are determined throughout the market.

2492
04:20:23.360 --> 04:20:28.240
In equilibrium, costs and prices will all be equal.

2493
04:20:28.240 --> 04:20:35.640
Since a tax is levied on general funds, and therefore cannot be equivalent to market pricing,

2494
04:20:35.640 --> 04:20:42.520
the only way to approximate market pricing is to set the tax according to costs, since

2495
04:20:42.520 --> 04:20:49.440
costs at least reflect market pricing of the non-specific factors.

2496
04:20:49.440 --> 04:20:55.460
Equal taxation would distort the allocation of social resources in defense.

2497
04:20:55.460 --> 04:21:01.740
The tax would be below the market price in the crime areas and above the market price

2498
04:21:01.740 --> 04:21:07.720
in the peaceful areas, and there would therefore be a shortage of police protection in the

2499
04:21:07.720 --> 04:21:13.840
dangerous areas and a surplus of protection in the others.

2500
04:21:13.840 --> 04:21:19.980
Another grave flaw of the equal tax principle is the same that we noted in the more general

2501
04:21:19.980 --> 04:21:22.520
principle of uniformity.

2502
04:21:22.520 --> 04:21:29.880
No bureaucrat can pay taxes An equal tax on a bureaucrat or politician

2503
04:21:29.880 --> 04:21:37.920
is an impossibility because he is one of the tax consumers rather than taxpayers.

2504
04:21:37.920 --> 04:21:44.400
Even when all other subsidies are eliminated, the government employee remains a permanent

2505
04:21:44.400 --> 04:21:48.000
obstacle in the path of equal tax.

2506
04:21:48.000 --> 04:21:56.000
As we have seen, the bureaucrat's tax payment is simply a meaningless bookkeeping device.

2507
04:21:56.000 --> 04:22:03.360
These flaws in the equal tax cause us to turn to the last remaining tax canon, the cost

2508
04:22:03.360 --> 04:22:04.800
principle.

2509
04:22:04.800 --> 04:22:10.120
The cost principle would apply as we have just discussed it, with the government setting

2510
04:22:10.120 --> 04:22:17.360
the tax in accordance with costs, like the premiums charged by an insurance company.

2511
04:22:17.360 --> 04:22:23.760
Walter J. Bloom and Harry Calvin mention the cost principle, but casually dismiss it as

2512
04:22:23.760 --> 04:22:28.960
being practically identical with the benefit principle.

2513
04:22:28.960 --> 04:22:34.520
Sometimes the theory is stated in terms of the cost of the government services performed

2514
04:22:34.520 --> 04:22:41.740
for each citizen, rather than in terms of the benefits received from such services.

2515
04:22:41.740 --> 04:22:48.220
This refinement may avoid the need of measuring subjective benefits, but it does little else

2516
04:22:48.220 --> 04:22:50.180
for the theory.

2517
04:22:50.180 --> 04:22:56.620
Yet their major criticism of the benefit principle is precisely that it requires the impossible

2518
04:22:56.620 --> 04:22:59.860
measurement of subjective benefit.

2519
04:22:59.860 --> 04:23:06.980
The cost principle, along with the benefit principle, dispenses with all government expenditures

2520
04:23:06.980 --> 04:23:14.420
except laissez-faire ones, since each recipient would be required to pay the full cost of

2521
04:23:14.420 --> 04:23:15.700
the service.

2522
04:23:15.700 --> 04:23:21.380
With respect to the laissez-faire service of protection, however, the cost principle

2523
04:23:21.380 --> 04:23:26.020
is clearly far superior to the benefit principle.

2524
04:23:26.020 --> 04:23:33.300
The cost principle would constitute the closest approach possible to neutrality of taxation.

2525
04:23:33.300 --> 04:23:40.700
Yet even the cost principle has fatal flaws that finally eliminate it from consideration.

2526
04:23:40.700 --> 04:23:46.820
In the first place, although the costs of non-specific factors could be estimated from

2527
04:23:46.820 --> 04:23:53.940
market knowledge, the costs of specific factors could not be determined by the state.

2528
04:23:53.940 --> 04:24:00.740
The impossibility of calculating specific costs stems from the fact that products of

2529
04:24:00.740 --> 04:24:09.180
Tax Supported Firms have no real market price, and so specific costs are unknown.

2530
04:24:09.180 --> 04:24:15.020
As a result, the cost principle cannot be accurately put into effect.

2531
04:24:15.020 --> 04:24:21.020
The cost principle is further vitiated by the fact that a compulsory monopoly, such

2532
04:24:21.020 --> 04:24:29.100
as state protection, will invariably have higher costs and sell lower quality service

2533
04:24:29.100 --> 04:24:51.860
A final flaw is common to both the equality and the cost theories of taxation.

2534
04:24:51.860 --> 04:24:58.540
In neither case is benefit demonstrated as accruing to the taxpayer.

2535
04:24:58.540 --> 04:25:04.280
Although the taxpayer is blithely assumed to be benefiting from the service, just as

2536
04:25:04.280 --> 04:25:10.220
he does on the market, we have seen that such an assumption cannot be made, that the use

2537
04:25:10.220 --> 04:25:15.580
of coercion presumes quite the contrary for many taxpayers.

2538
04:25:15.580 --> 04:25:23.180
The market requires a uniform price, or the exact covering of costs, only because the

2539
04:25:23.180 --> 04:25:30.100
The purchaser voluntarily buys the product in the expectation of being benefited.

2540
04:25:30.100 --> 04:25:36.200
The state, on the other hand, would force people to pay the tax even if they were not

2541
04:25:36.200 --> 04:25:42.420
voluntarily willing to pay the cost of this or any other defense system.

2542
04:25:42.420 --> 04:25:49.500
Hence, the cost principle can never provide a route to the neutral tax.

2543
04:25:49.500 --> 04:25:54.460
6. Taxation for Revenue Only

2544
04:25:54.460 --> 04:26:02.960
A slogan popular among many right-wing economists is that taxation should be for revenue only

2545
04:26:02.960 --> 04:26:11.020
and not for broad social purposes. On its face, this slogan is simply and palpably absurd,

2546
04:26:11.020 --> 04:26:18.100
since all taxes are levied for revenue. What else can taxation be called but the appropriation

2547
04:26:18.100 --> 04:26:23.900
Taxation of funds from private individuals by the state for its own purposes.

2548
04:26:23.900 --> 04:26:27.620
Some writers therefore amend the slogan to say,

2549
04:26:27.620 --> 04:26:33.520
Taxation should be limited to revenue essential for social services.

2550
04:26:33.520 --> 04:26:35.720
But what are social services?

2551
04:26:35.720 --> 04:26:42.120
To some people, every conceivable type of government expenditure appears as a social

2552
04:26:42.120 --> 04:26:43.120
service.

2553
04:26:43.120 --> 04:26:51.360
State takes from A and gives to B, C may applaud the act as a social service, because he dislikes

2554
04:26:51.360 --> 04:26:56.000
something about the former and likes something about the latter.

2555
04:26:56.000 --> 04:27:03.160
If on the other hand social service is limited by the unanimity rule to apply only to those

2556
04:27:03.160 --> 04:27:11.360
activities that serve some individuals without making others pay, then the taxation for revenue

2557
04:27:11.360 --> 04:27:19.360
The New Only formula is simply an ambiguous term for the benefit or the cost principles.

2558
04:27:19.360 --> 04:27:24.600
7. The Neutral Tax, a Summary

2559
04:27:24.600 --> 04:27:32.160
We have thus analyzed all the alleged canons of tax justice. Our conclusions are twofold.

2560
04:27:32.160 --> 04:27:40.880
One, that economics cannot assume any principle of just taxation, and that no one has successfully

2561
04:27:40.880 --> 04:27:44.120
established any such principles.

2562
04:27:44.120 --> 04:27:52.120
And two, that the neutral tax, which seems to many a valid ideal, turns out to be conceptually

2563
04:27:52.120 --> 04:27:55.440
impossible to achieve.

2564
04:27:55.440 --> 04:28:03.760
Economists must therefore abandon their futile quest for the just or the neutral tax.

2565
04:28:03.760 --> 04:28:09.040
Some may ask, why does anyone search for a neutral tax?

2566
04:28:09.040 --> 04:28:12.400
Why Consider Neutrality an Ideal?

2567
04:28:12.400 --> 04:28:20.720
The answer is that all services, all activities, can be provided in two ways only, by freedom

2568
04:28:20.720 --> 04:28:22.520
or by coercion.

2569
04:28:22.520 --> 04:28:27.320
The former is the way of the market, the latter of the state.

2570
04:28:27.320 --> 04:28:35.080
If all services were organized on the market, the result would be a purely free market system.

2571
04:28:35.080 --> 04:28:40.160
If all were organized by the state, the result would be socialism.

2572
04:28:40.160 --> 04:28:47.460
Therefore, all who are not socialists must concede some area to market activity, and

2573
04:28:47.460 --> 04:28:54.300
once they do so, they must justify their departures from freedom on the basis of some principle

2574
04:28:54.300 --> 04:28:55.660
or other.

2575
04:28:55.660 --> 04:29:02.860
In a society where most activities are organized on the market, advocates of state activity

2576
04:29:02.860 --> 04:29:09.660
must justify departures from what they themselves concede to the market sphere.

2577
04:29:09.660 --> 04:29:15.180
Hence, the use of neutrality is a benchmark to answer the question,

2578
04:29:15.180 --> 04:29:22.140
why do you want the state to step in and alter market conditions in this case?

2579
04:29:22.140 --> 04:29:28.780
If market prices are uniform, why should tax payments be otherwise?

2580
04:29:28.780 --> 04:29:36.780
But if neutral taxation is at bottom impossible, there are two logical courses left for advocates

2581
04:29:36.780 --> 04:29:43.980
of the neutral tax, either abandon the goal of neutrality or abandon taxation itself.

2582
04:29:45.420 --> 04:29:49.260
D. Voluntary Contributions to Government

2583
04:29:50.700 --> 04:29:57.020
A few writers, disturbed by the compulsion necessary to the existence of taxation,

2584
04:29:57.020 --> 04:30:03.980
have advocated that governments be financed not by taxation but by some form of voluntary

2585
04:30:03.980 --> 04:30:10.780
contribution. Such voluntary contribution systems could take various forms. One was

2586
04:30:10.780 --> 04:30:17.420
the method relied on by the old city-state of Hamburg and other communities, voluntary

2587
04:30:17.420 --> 04:30:24.460
gifts to the government. President William F. Warren of Boston University in his essay

2588
04:30:24.460 --> 04:30:31.580
Tax Exemption, The Road to Tax Abolition described his experience in one of these communities.

2589
04:30:32.380 --> 04:30:38.060
For five years it was the good fortune of the present writer to be domiciled in one of these

2590
04:30:38.060 --> 04:30:45.900
communities. Incredible as it may seem to believers in the necessity of illegal enforcement of taxes

2591
04:30:45.900 --> 04:30:53.740
by pains and penalties, he was for that period his own assessor and his own tax gatherer.

2592
04:30:53.740 --> 04:31:00.380
In common with the other citizens, he was invited, without sworn statement or declaration,

2593
04:31:00.380 --> 04:31:07.500
to make such contribution to the public charges as seemed to himself just and equal.

2594
04:31:07.500 --> 04:31:14.740
That sum, uncounted by any official, unknown to any but himself, he was asked to drop with

2595
04:31:14.740 --> 04:31:18.780
his own hand into a strong public chest.

2596
04:31:18.780 --> 04:31:23.700
On doing which, his name was checked off the list of contributors.

2597
04:31:23.700 --> 04:31:31.300
Every citizen felt a noble pride in such immunity from prying assessors and rude constables.

2598
04:31:31.300 --> 04:31:37.140
Every annual call of the authorities on that community was honored to the full.

2599
04:31:37.140 --> 04:31:44.060
Dr. Warren's article appeared in the Boston University Yearbook for 1876.

2600
04:31:44.060 --> 04:31:49.420
The Board of the Council of the University endorsed the essay in these words,

2601
04:31:49.420 --> 04:32:02.920
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.

2602
04:32:02.920 --> 04:32:12.420
It is hoped that the comparative novelty of the proposition may not deter practical men from a thoughtful study of the paper.

2603
04:32:12.420 --> 04:32:17.420
Adam Smith, in one of his most sensible canons, declared,

2604
04:32:17.420 --> 04:32:23.420
In a small republic, where the people have entire confidence in their magistrates,

2605
04:32:23.420 --> 04:32:28.420
and are convinced of the necessity of the tax for the support of the state,

2606
04:32:28.420 --> 04:32:32.420
and believe that it will be faithfully applied to that purpose,

2607
04:32:32.420 --> 04:32:38.420
such conscientious and voluntary payment may sometimes be expected.

2608
04:32:38.420 --> 04:32:43.420
The gift method, however, presents some serious difficulties.

2609
04:32:43.420 --> 04:32:50.420
In particular, it continues that disjunction between payment and receipt of service,

2610
04:32:50.420 --> 04:32:54.420
which constitutes one of the great defects of a taxing system.

2611
04:32:54.420 --> 04:32:59.420
Under taxation, payment is severed from receipt of service,

2612
04:32:59.420 --> 04:33:05.420
in striking contrast to the market, where payment and service are correlative.

2613
04:33:05.420 --> 04:33:11.260
The voluntary gift method perpetuates this disjunction.

2614
04:33:11.260 --> 04:33:18.500
As a result, A, B, and C continue to receive the government's defense service even if

2615
04:33:18.500 --> 04:33:23.820
they paid nothing for it, and only D and E contributed.

2616
04:33:23.820 --> 04:33:29.140
D's and E's contributions furthermore may be disproportionate.

2617
04:33:29.140 --> 04:33:35.380
It is true that this is the system of voluntary charity on the market, but charity flows

2618
04:33:35.380 --> 04:33:41.780
from the more to the less wealthy and able it does not constitute an efficient

2619
04:33:41.780 --> 04:33:49.460
method for organizing the general sale of a service automobiles clothes etc are

2620
04:33:49.460 --> 04:33:56.340
sold on the market on a regular uniform price basis and are not indiscriminately

2621
04:33:56.340 --> 04:34:02.420
given to some on the basis of gifts received from others under the gift

2622
04:34:02.420 --> 04:34:09.420
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.

2623
04:34:32.420 --> 04:34:52.420
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.

2624
04:34:52.420 --> 04:34:59.420
The gift method, however, hardly exhausts the financing methods of the purely free market.

2625
04:34:59.420 --> 04:35:19.420
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.

2626
04:35:19.420 --> 04:35:26.200
Of course, the agency would not refuse gifts for general purposes or for granting a supply

2627
04:35:26.200 --> 04:35:32.980
of defense service to poor people, but it would charge some minimum price commensurate

2628
04:35:32.980 --> 04:35:35.620
with the cost of its service.

2629
04:35:35.620 --> 04:35:41.020
One such method is a voting tax, now known as a poll tax.

2630
04:35:41.020 --> 04:35:47.680
The current poll tax began simply as a head tax, but in practice it is enforced only as

2631
04:35:47.680 --> 04:35:53.360
As a requirement for voting, it has therefore become a voting tax.

2632
04:35:53.360 --> 04:35:58.480
A poll tax or voting tax is not really a tax at all.

2633
04:35:58.480 --> 04:36:04.680
It is only a price charged for participating in the state organization.

2634
04:36:04.680 --> 04:36:11.120
Only those who voluntarily vote for state officials, that is, who participate in the

2635
04:36:11.120 --> 04:36:14.920
state machinery, are required to pay the tax.

2636
04:36:14.920 --> 04:36:20.520
If all the state's revenues were derived from poll taxes, therefore, this would not

2637
04:36:20.520 --> 04:36:27.940
be a system of taxation at all, but rather voluntary contributions in payment for the

2638
04:36:27.940 --> 04:36:31.620
right to participate in the state's machinery.

2639
04:36:31.620 --> 04:36:37.020
The voting tax would be an improvement over the gift method because it would charge a

2640
04:36:37.020 --> 04:36:41.320
certain uniform or minimal amount.

2641
04:36:41.320 --> 04:36:47.720
To the proposal to finance all government revenues from poll taxes, it has been objected that

2642
04:36:47.720 --> 04:36:51.880
practically no one would vote under these conditions.

2643
04:36:51.880 --> 04:36:57.640
This is perhaps an accurate prediction, but curiously the critics of the poll tax never

2644
04:36:57.640 --> 04:37:01.160
pursue their analysis beyond this point.

2645
04:37:01.160 --> 04:37:07.840
It is clear that this reveals something very important about the nature of the voting process.

2646
04:37:07.840 --> 04:37:15.300
Voting is a highly marginal activity, because a. the voter obtains no direct benefits from

2647
04:37:15.300 --> 04:37:23.240
his act of voting, and b. his aliquot power over the final decision is so small that his

2648
04:37:23.240 --> 04:37:29.240
abstention from voting would make no appreciable difference to the final outcome.

2649
04:37:29.240 --> 04:37:36.140
In short, in contrast to all other choices a man may make, in political voting he has

2650
04:37:36.140 --> 04:37:43.140
has practically no power over the outcome, and the outcome would make little direct difference

2651
04:37:43.140 --> 04:37:45.080
to him anyway.

2652
04:37:45.080 --> 04:37:51.220
It is no wonder that well over half the eligible American voters persistently refused to take

2653
04:37:51.220 --> 04:37:54.720
part in the annual November balloting.

2654
04:37:54.720 --> 04:38:00.860
This discussion also illuminates a puzzling phenomenon in American political life, the

2655
04:38:00.860 --> 04:38:07.340
The constant exhortation by politicians of all parties for people to vote.

2656
04:38:07.340 --> 04:38:13.860
We don't care how you vote, but vote is a standard political slogan.

2657
04:38:13.860 --> 04:38:22.020
Voting like taxation is another activity generally phrased in terms of duty rather than benefit.

2658
04:38:22.020 --> 04:38:29.900
The call to duty is as praxeologically unsound as the call to sacrifice, and generally amounts

2659
04:38:29.900 --> 04:38:31.820
to the same thing.

2660
04:38:31.820 --> 04:38:38.820
For both exhortations tacitly admit that the actor will derive little or no benefit from

2661
04:38:38.820 --> 04:38:40.020
his action.

2662
04:38:40.020 --> 04:38:47.620
Further, the invocation of duty or sacrifice implies that someone else is going to receive

2663
04:38:47.620 --> 04:38:56.060
the sacrifice or the payment of the obligation, and often that someone is the exhorter himself.

2664
04:38:56.060 --> 04:39:01.480
On its face, it makes little sense, for one would think that at least one of the parties

2665
04:39:01.480 --> 04:39:04.820
would see advantages in a small vote.

2666
04:39:04.820 --> 04:39:11.020
But it does make a great deal of sense when we realize the enormous desire of politicians

2667
04:39:11.020 --> 04:39:18.260
of all parties to make it appear that the people have given them a mandate in the election,

2668
04:39:18.260 --> 04:39:25.480
that all the democratic shibboleths about representing the people, etc., are true.

2669
04:39:25.480 --> 04:39:31.880
The reason for the relative triviality of voting is, once again, the disjunction between

2670
04:39:31.880 --> 04:39:37.520
voting and payment on the one hand and benefit on the other.

2671
04:39:37.520 --> 04:39:41.160
The poll tax gives rise to the same problem.

2672
04:39:41.160 --> 04:39:48.260
The voter, with or without paying a poll tax, receives no more benefit in protection than

2673
04:39:48.260 --> 04:39:49.260
the non-voter.

2674
04:39:49.260 --> 04:40:02.260
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.

2675
04:40:02.260 --> 04:40:12.260
Both the gift and the voting tax methods of voluntary financing of government, therefore, must be discarded as inefficient.

2676
04:40:12.260 --> 04:40:21.540
A third method has been proposed, which we can best call by the paradoxical name voluntary taxation.

2677
04:40:21.540 --> 04:40:24.440
The plan envisioned is as follows.

2678
04:40:24.440 --> 04:40:30.000
Every land area would, as now, be governed by one monopolistic state.

2679
04:40:30.000 --> 04:40:35.300
The state's officials would be chosen by democratic voting as at present.

2680
04:40:35.300 --> 04:40:43.320
The state would set a uniform price, or perhaps a set of cost prices, for protective services,

2681
04:40:43.320 --> 04:40:49.360
and it would be left to each individual to make a voluntary choice whether to pay or

2682
04:40:49.360 --> 04:40:51.620
not to pay the price.

2683
04:40:51.620 --> 04:40:57.000
If he pays the price, he receives the benefit of governmental defense service.

2684
04:40:57.000 --> 04:41:00.620
If he does not, he goes unprotected.

2685
04:41:00.620 --> 04:41:07.280
We are assuming that the government will confine its use of force to defense, that is, will

2686
04:41:07.280 --> 04:41:11.180
pursue a strictly laissez-faire policy.

2687
04:41:11.180 --> 04:41:18.660
Theoretically, it is possible that a government may get all its revenue from voluntary contribution,

2688
04:41:18.660 --> 04:41:25.420
and yet pursue a highly coercive interventionist policy in other areas of the market.

2689
04:41:25.420 --> 04:41:31.640
The possibility is so remote in practice, however, that we may disregard it here.

2690
04:41:31.640 --> 04:41:38.160
It is highly unlikely that a government coercive in other ways would not take immediate steps

2691
04:41:38.160 --> 04:41:42.440
to see that its revenues are assured by coercion.

2692
04:41:42.440 --> 04:41:47.240
Its own revenue is always the state's prime concern.

2693
04:41:47.240 --> 04:41:53.280
Note the very heavy penalties for income tax evasion and counterfeiting of government paper

2694
04:41:53.280 --> 04:41:54.800
money.

2695
04:41:54.800 --> 04:42:02.280
The leading voluntary taxationists have been Oberon Herbert, his associate Jay Greaves Fisher

2696
04:42:02.280 --> 04:42:05.740
and sometimes Gustav de Molinari.

2697
04:42:05.740 --> 04:42:11.960
The same position is found earlier, to a far less developed extent, in the early editions

2698
04:42:11.960 --> 04:42:19.480
of Herbert Spencer's Social Statics, particularly his chapter on the right to ignore the state

2699
04:42:19.480 --> 04:42:24.720
and in Thoreau's Essay on Civil Disobedience.

2700
04:42:24.720 --> 04:42:32.080
The voluntary taxation method preserves a voluntary system, is or appears to be neutral

2701
04:42:32.080 --> 04:42:38.160
vis-à-vis the market, and eliminates the payment benefit disjunction.

2702
04:42:38.160 --> 04:42:42.520
And yet, this proposal has several important defects.

2703
04:42:42.520 --> 04:42:45.940
Its most serious flaw is inconsistency.

2704
04:42:45.940 --> 04:42:53.080
For the voluntary taxationists aim at establishing a system in which no one is coerced who is

2705
04:42:53.080 --> 04:43:00.200
is not himself an invader of the person or property of others, hence their complete elimination

2706
04:43:00.200 --> 04:43:02.160
of taxation.

2707
04:43:02.160 --> 04:43:08.480
But although they eliminate the compulsion to subscribe to the government defense monopoly,

2708
04:43:08.480 --> 04:43:11.660
they yet retain that monopoly.

2709
04:43:11.660 --> 04:43:18.080
They are therefore faced with the problem, would they use force to compel people not

2710
04:43:18.080 --> 04:43:25.680
to use a freely competing defense agency within the same geographic area.

2711
04:43:25.680 --> 04:43:30.680
The voluntary taxationists have never attempted to answer this problem.

2712
04:43:30.680 --> 04:43:37.000
They have rather stubbornly assumed that no one would set up a competing defense agency

2713
04:43:37.000 --> 04:43:40.000
within a state's territorial limits.

2714
04:43:40.000 --> 04:43:47.120
And yet, if people are free to pay or not to pay taxes, it is obvious that some people

2715
04:43:47.120 --> 04:43:51.960
People will not simply refuse to pay for all protection.

2716
04:43:51.960 --> 04:43:57.680
Dissatisfied with the quality of defense they receive from the government or with the price

2717
04:43:57.680 --> 04:44:05.480
they must pay, they will elect to form a competing defense agency or government within the area

2718
04:44:05.480 --> 04:44:07.600
and subscribe to it.

2719
04:44:07.600 --> 04:44:14.940
The voluntary taxation system is thus impossible of attainment because it would be in unstable

2720
04:44:14.940 --> 04:44:16.660
equilibrium.

2721
04:44:16.660 --> 04:44:23.520
If the government elected to outlaw all competing defense agencies, it would no longer function

2722
04:44:23.520 --> 04:44:28.100
as the voluntary society sought by its proponents.

2723
04:44:28.100 --> 04:44:33.940
It would not force payment of taxes, but it would say to the citizens, you are free to

2724
04:44:33.940 --> 04:44:41.940
accept and pay for our protection or to abstain, but you are not free to purchase defense from

2725
04:44:41.940 --> 04:44:44.100
a competing agency.

2726
04:44:44.100 --> 04:44:46.280
This is not a free market.

2727
04:44:46.280 --> 04:44:53.380
This is a compulsory monopoly, once again a grant of monopoly privilege by the state

2728
04:44:53.380 --> 04:44:55.080
to itself.

2729
04:44:55.080 --> 04:45:00.780
Such a monopoly would be far less efficient than a freely competitive system, hence its

2730
04:45:00.780 --> 04:45:04.320
costs would be higher, its service poorer.

2731
04:45:04.320 --> 04:45:08.920
It would clearly not be neutral to the market.

2732
04:45:08.920 --> 04:45:14.880
On the other hand, if the government did permit free competition in defense service, there

2733
04:45:14.880 --> 04:45:20.000
There would soon no longer be a central government over the territory.

2734
04:45:20.000 --> 04:45:26.440
Defense agencies, police and judicial would compete with one another in the same uncoerced

2735
04:45:26.440 --> 04:45:31.000
manner as the producers of any other service on the market.

2736
04:45:31.000 --> 04:45:37.800
The prices would be lower, the service more efficient, and for the first and only time

2737
04:45:37.800 --> 04:45:43.340
the defense system would then be neutral in relation to the market.

2738
04:45:43.340 --> 04:45:49.920
It would be neutral because it would be a part of the market itself.

2739
04:45:49.920 --> 04:45:54.280
Defense service would at last be made fully marketable.

2740
04:45:54.280 --> 04:46:01.040
No longer would anyone be able to point to one particular building or set of buildings,

2741
04:46:01.040 --> 04:46:07.640
one uniform or set of uniforms, as representing our government.

2742
04:46:07.640 --> 04:46:14.240
While the government would cease to exist, the same cannot be said for a constitution

2743
04:46:14.240 --> 04:46:21.760
or a rule of law, which, in fact, would take on in the free society a far more important

2744
04:46:21.760 --> 04:46:23.840
function than at present.

2745
04:46:23.840 --> 04:46:29.880
For the freely competing judicial agencies would have to be guided by a body of absolute

2746
04:46:29.880 --> 04:46:37.320
law to enable them to distinguish objectively between defense and invasion.

2747
04:46:37.320 --> 04:46:44.000
This law, embodying elaborations upon the basic injunction to defend person and property

2748
04:46:44.000 --> 04:46:49.920
from acts of invasion, would be codified in the basic legal code.

2749
04:46:49.920 --> 04:46:55.940
Failure to establish such a code of law would tend to break down the free market.

2750
04:46:55.940 --> 04:47:01.640
For then, defense against invasion could not be adequately achieved.

2751
04:47:01.640 --> 04:47:09.780
On the other hand, those neo-Tolstoyan non-resisters who refuse to employ violence even for defense

2752
04:47:09.780 --> 04:47:15.740
would not themselves be forced into any relationship with the defense agencies.

2753
04:47:15.740 --> 04:47:23.340
Thus, if a government based on voluntary taxation permits free competition, the result will

2754
04:47:23.340 --> 04:47:28.620
be the purely free market system outlined in Chapter 1.

2755
04:47:28.620 --> 04:47:34.920
The previous government would now simply be one competing defense agency among many on

2756
04:47:34.920 --> 04:47:36.160
the market.

2757
04:47:36.160 --> 04:47:42.300
It would, in fact, be competing at a severe disadvantage, having been established on the

2758
04:47:42.300 --> 04:47:45.520
principle of democratic voting.

2759
04:47:45.520 --> 04:47:51.560
Looked at as a market phenomenon, democratic voting, one vote per person, is simply the

2760
04:47:51.560 --> 04:47:54.480
method of the consumer cooperative.

2761
04:47:54.480 --> 04:48:00.640
Empirically, it has been demonstrated time and again that cooperatives cannot compete

2762
04:48:00.640 --> 04:48:07.040
successfully against stock-owned companies, especially when both are equal before the

2763
04:48:07.040 --> 04:48:08.200
law.

2764
04:48:08.200 --> 04:48:14.320
There is no reason to believe that cooperatives for defense would be any more efficient, hence

2765
04:48:14.320 --> 04:48:21.320
we may expect the old cooperative government to wither away through loss of customers on

2766
04:48:21.320 --> 04:48:28.040
in the market, while joint stock, that is, corporate defense agencies, would become the

2767
04:48:28.040 --> 04:48:30.640
prevailing market form.

2768
04:48:30.640 --> 04:48:36.300
These corporations would not, of course, need any charter from a government, but would charter

2769
04:48:36.300 --> 04:48:42.980
themselves in accordance with the ways in which their owners decided to pool their capital.

2770
04:48:42.980 --> 04:48:48.680
They could announce their limited liability in advance, and then all their creditors would

2771
04:48:48.680 --> 04:48:51.560
would be put amply on guard.

2772
04:48:51.560 --> 04:48:58.700
There is a strong a priori reason for believing that corporations will be superior to cooperatives

2773
04:48:58.700 --> 04:49:05.620
in any given situation, for if each owner receives only one vote, regardless of how

2774
04:49:05.620 --> 04:49:12.120
much money he has invested in a project, and earnings are divided in the same way, there

2775
04:49:12.120 --> 04:49:16.320
is no incentive to invest more than the next man.

2776
04:49:16.320 --> 04:49:23.440
In fact, every incentive is the other way. This hampering of investment militates strongly

2777
04:49:23.440 --> 04:49:25.720
against the cooperative form.