This section of Power and Market is nicely broken into two parts.
In the first part, Rothbard gives us a kind of a general treatment of taxation.
And then in the second part, he deals with the question that obsesses the mainstream,
which is the incidence of taxation dealing with the – whether or not the person upon
whom the tax is levied can shift the burden of the tax to someone else.
So we're going to do the same thing.
We're going to divide this up and since most of your questions that you wrote were about
the first part of the material, let's go ahead and have some of our discussion also
and also about the first part before we go on to incidents.
And because of the sort of broad sense in which some of these questions address issues,
it's helpful, I think, to just have them addressed up front.
One of the questions was – and this is a key question, of course, for studying –
for studying this whole week, Rothbard's text.
What sort of contribution have the Austrians made here?
What's the distinctiveness of the Austrians?
Are they just sort of repeating in a better way what the mainstream is doing?
Or is there something fundamentally unique or distinctive about it?
So let me try to address this question by asking you a question.
How many of you have taken a course in public finance?
A few of you, just a few.
How is the course laid out?
What's the sequence of topics that you, just in general, the broad topics that you take?
Do you dive right into taxes in a course in public finance?
What's the first thing you talk about?
Yeah, and what's the purpose?
He said the social costs and benefits,
or you talk a little bit about efficiency or some other thing like this, right?
Why? Why do you talk about that first?
What's next after you talk about efficiency or costs and benefits?
What's the point? Why is the mainstream economist...
I thought this was about public finance, right?
What's the way you're doing this?
Where do they go with this?
Yes?
It's sort of about justifying the viewer.
Justify what?
Taxation.
Okay.
And then you make the wrong diagram.
You just want to talk until it benefits the right person.
And what is their basic justification?
Pick up one of these public finance books and you open it up the first few chapters
and you read through their argument about the justification for government activity at all.
Of course, you don't need taxes if you don't have any government activity, right?
So first you justify government activity. How do they do it?
How does a mainstream economist justify it?
Yeah, it could be kind of a social wealth argument, right?
The government can do certain things to raise our social well-being.
And what are some of these?
What would be a typical list that you would find?
Or how can you say this in the negative?
If the government can increase our social wealth, what's wrong with the market?
Market? It's failure. Market is failing to give us these benefits that the state could give us and this justifies the state engaging in X, Y and Z and if the state, if we can show through some cost-benefit analysis that the state should do X, manage the national forests or something, then in that context we ask the question about taxation, right?
You say, okay, the state has this job to do, now it has to be funded, the state's going to raise taxes to fund it.
And so all the analysis of taxation is done in that context, right?
Now, how is this different already from what you know from reading Power Market?
How is Rothbard's approach different here?
By the way, is it different in the sort of sequence of topics?
Logically, I'm talking about, not as they're chronologically put in the book, but logically.
Yes.
I mean, in Rothbard's case, there's really a market failure system, and one exchange,
is there a gain in interest chain or something?
He came up with a start, and the market's right, and the market's bad.
And why not?
What, I mean, does he just say, in my opinion, there's no such thing as market failure,
and so let's, you know, we can all be anarchists and here we go, let's talk about taxation.
When I teach public finance and I use power and market, and when I teach public finance I set the
topics out in the same way that a mainstream economist would. The students start by reading
So we're doing the last chapter of Power and Market, the one on public policy.
And then we do the sixth chapter, next to the last one, on anti...
What's it called? Anti-market...
Right, anti-market ethics.
And of course, this is a little bit broader than what the mainstream does, right?
But it's the same set of topics.
In other words, first you ask the question, we've already covered how does the market work and does the market fail?
Is there any function the government should do?
He answered these questions, right?
So Rothbard gives his answer to those questions.
And then he, since he takes the position that there isn't, he has to give a critique, right?
So he has to critique all the claims that exist that government should be doing things.
And then he gives us the analysis of taxation.
Now naturally, in that context, his analysis is going to be entirely different, right?
It's entirely... the sort of questions he asks, the answers he gives, of course, are in the praxeological paradigm.
And so we get somewhat different answers with respect to that.
But even the sort of approach he takes to the whole thing is different, right?
there's a there's this hard and fast discussion Professor Block talked about
this hard and fast distinct this praxeological distinction between
voluntary and involuntary we begin right with this and worry about we've settled
the other questions right and so we know that the state is engaged in these
involuntary activities and at this this then is where we begin taxation in
and involuntary extraction of revenue.
If you find that sort of a claim in a mainstream book, they make nothing of it.
No important implications come from this, right?
That taxation is involuntary or extractive, coercive.
They may say that, but there's no analytical implication of it.
So I would say this is the difference, right?
We get a complete praxeological development here, even on the question of the activities
of a state.
What activities of a state can be justified?
His analysis is praxeological.
This is a big difference.
And so when he gets to taxation, it's all within the context of this particular approach.
Okay.
So, given that, let's continue on and some of the other things that he says in the introduction
and some of the questions that you posed here.
He points out, of course, in that the state has two sources of revenue, taxation, which
is praxeologically equivalent to robbery, it's an involuntary extraction, and counterfeiting,
monetary inflation, as he says, the issue of fraudulent money substitutes, or in the
case he hasn't covered yet, a fiat paper.
Okay, so we have robbery and counterfeiting, right?
These are the sources of revenue for the state.
And then he asks the next question, the next question in general analysis is, what's the
burden on society when, generally speaking, what's the burden on society when the state
exercises these revenue raising activities?
And he gives us a very interesting answer here, one again that I don't think you would
find often in the mainstream.
He says, there isn't any way to tell what the burden of taxation is without including
Expenditures
Do you remember the argument? Why does he say it? What's his reason here?
You can't look at taxation alone, in other words.
You have to look at both taxation and expenditure.
And in fact, he says something, I believe he says something in the book, in this section like,
for the bulk of this section, we'll consider that all tax revenues are spent by the state.
In other words, what would happen if the government taxed us?
You know, we sent in our money to the IRS and they didn't spend a dime of it.
They just put it in the treasury vault. Then what would happen?
They burned it or something, right? Tossed it into the ocean, whatever.
But they didn't spend any of it. What would the effect be? The economic effect?
Come on, you guys learned this already.
Yes?
I think that there would be a distribution effect if the process is poor.
Exactly, there would be deflation, monetary deflation,
and we would get the non-neutral distribution effects of the monetary deflation.
And there might be other income distribution effects
if the government taxes us unequally, disproportionately.
They take all the tax money from me or something with that one.
So my real position would fall.
But there wouldn't be anything else, right?
There wouldn't be an overall shifting of resources out of our hands and into the hands of the state.
So this is why you must take the two together.
The government isn't raising tax revenue to bury the money in the ground or to burn it or throw it away.
They want to spend it.
The point is to shift resources into the hands of the state for their use and away from the private sector.
So this is the general burden of taxation.
It's the fact that these resources now are not available to us privately,
but have been taken by the state to use for their own purposes.
So consumer satisfactions must, we as consumers must have our satisfactions reduced.
Now he gets to the next step then, he says,
he says taxes then must divide society into two major groups.
There are taxpayers on the one hand and tax consumers on the other hand.
And the tax consumers would include not only what you might think of as the ruling class,
the politicians, the bureaucrats, and so on, but those who are primarily subsidized by the state,
say armament industry or let's say if they're welfare recipients right they
would be tax consumers and so on now one of you ask a question about this another
good good question that we need to work out before we can go on here and this is
Is this distinction really operational?
And I think the question, and whoever wrote the question, was it Mary?
You can please speak up on my answer to it.
So your question that you posed is something like, well,
isn't it sort of difficult to tell exactly who are in these groups?
because the effects of what the state is doing are hard to disentangle.
They're rearranging property ownership and so on.
And it's sort of difficult to tell exactly whether you're on net benefiting
or being harmed by the overall activity of the state.
I think what Rothbard would say in response to this is that he's not really trying to ascertain the broader,
The answer to the broader question, is a person on net benefiting from the existence of the state or not?
He's trying to answer a narrow question which is, is the revenue, so the income earned by any particular person from the taxation or not?
On net, in other words, is the income that they're earning from taxation?
And that question I think can be somewhat more easily answered.
I agree that your question that you're trying to answer is much more difficult
and probably entirely problematic.
In other words, if we ask the question, you know,
how much do we benefit from the public roads or, you know,
the public subsidies of electricity or something relative to taxes that we pay and what have you.
So yes, go ahead.
Yeah, I don't know if there's a place to discuss part of this idea.
Two of the issues that were implicitly called by this question.
One of them is, yeah, imagine a guy that...
I will take two examples to illustrate that.
Imagine a guy that opened a restaurant in front of the Ministry of Education.
and all these clients are public citizens and yeah, so it's contra-factually if you have no business there,
probably at another place, you don't know, then imagine other, this is one example,
The other one is categories of people under regulation, as we learned in the previous chapters, like professors, formations and policemen.
If you want B2B to be a policeman, he has to be employed by the state, it's no other issue.
So that does not mean that you will not have that he's the direct, of course he's the direct beneficiary of the state distribution, but it doesn't mean that you will not have an opportunity on a free market, maybe at a higher price, or lower price, for formations and for lawyers, for other professions, regulated, is the same, and yeah, so the importance to answer this question, I think it's also from the perspective of
of understanding the implication of the distribution, and probably finally, how to advocate the possibility of restitution, to know from whom we took, to know from which we gave, if hypothetically we should restitute the best benefit itself.
To this, I think, again, is to say what I think Rothbard is aiming at in this distinction.
What implication does he think follows from this distinction?
And because I don't disagree with what you've brought up, I think that, you know, this is one way to look at it.
But I think that you're, by looking at it your way, you're addressing a different question.
What Rothbard is trying to address is, it seems to me, is the question of who makes up the ruling class, so to speak.
How do we identify the class of rulers as opposed, you know, the ones who rule over us,
the state apparatus itself, from those of us who are being ruled?
And if that's your question, I think his distinction is sufficient.
I take your distinction to mean something like, how do we, or what seems to be implied by your distinction is,
says, how do we explain those who are sort of in favor of the state?
How do we explain whether any particular person sort of says, I like my government, or at
least I don't actively work against it?
And there I think what your sort of broader sense in which you're trying to look at this
would apply, right?
So Rothbard really isn't trying to address that particular point here.
How would you answer the first question?
Would you be the answer to the first question?
Who's the winning class?
Well, I don't think that Rothbard's distinction fully answers that question,
but I think his distinction relates to the answer to that question.
In other words, he's trying just simply to say,
who is monetarily benefiting in terms of their income,
Income, who's in a position to influence decision-making in the state, who are the monetary beneficiaries,
the direct monetary beneficiaries of the state, who would be in a position then to lobby the
state to control the decision-making process in the state.
Now there are gray areas, I would admit there are gray areas between these, like maybe your
case of the restaurateur, but he would not be included, right, in Rothbard's category
The theory of a tax consumer, he's just an entrepreneur who has business clientele who
happen to work for the state.
He's not part of the state apparatus, he's unlikely that he's lobbying the state so that
these guys get bigger income so that he gets more of the money and so on.
Well, he would be hired, you mean just the worker.
But no, the entrepreneur, it's a private entrepreneur.
Oh yeah, that he would be part of the apparatus, right?
If he's working directly under contract of the state, he would be.
And the distinction between the...
Because he directly gets income from the state,
he's in a position to be part of the decision-making process of the state.
He's part of this apparatus of the state.
He's part of the ruling class, then.
But he's a private, he has a private business.
Yeah, well, he has a quasi-private business, right?
So you do want him to stay.
Yeah, yeah, so, but anyway, I think that's what he's trying to get at.
Okay, yes, go ahead.
______________
Yeah, well, here we have a somewhat more complicated problem, right?
It's like the, if the state monopolizes or subsidizes an industry
where you've specialized and your labor value exists there,
to the point where you can't find employment elsewhere,
then you're sort of stuck with this, right?
I mean, it's not, I admit that there are great cases
and there are situations where we can't quite make
this distinction black and white that Rothbard's aiming at,
but I think that's what he would say
in response to that particular problem.
Okay, well, let's go on to the next thing.
And so, Rothbard says taxes then divide society into these two big groups, as far as this
narrow question that he's trying to address.
And then he says, on the expenditure side, the basic point about expenditure, of course,
is that the expenditure redistributes income.
So he gives a simple example of taxing the codfish industry, and then the state spends
the money on armaments, and he just quickly rehearses what would happen to factor prices
and incomes and entrepreneurial profits, right?
This story we know fairly well, the prices of the specific factors in codfish industry
would fall dramatically, the nonspecific would fall less, and those guys would exit
and go to less high paying opportunities.
The marginal producers would exit the market, supplies would be reduced, prices would rise.
In armaments there would be, you know, higher income, higher prices, higher incomes, greater
and their profitability to the production of specific factors, and so on.
The third thing he points out in the general part is that
taxing and expenditures of the state are in fact compatible with equilibrium.
Once the state puts into motion a system of taxing and spending,
then entrepreneurs will adjust to this, reallocations will occur,
and a new equilibrium, a new final state of rest would be reached.
And this could in fact then be a stable ongoing equilibrium situation.
Now he wants to say this because he wants to contrast this situation with inflation.
So if the state uses its second form of raising revenue, monetary inflation,
especially through credit expansion, this activity that they set in motion,
The economic repercussions of this do not lead to equilibrium.
This activity leads to the boom bust.
There is no permanent new final state of rest that can be reached
if the state finances its expenditures through monetary inflation and credit expansion.
So that's an important distinction between these two methods of finance.
Then he gets to the next point in the general overview,
which is again one that questions were asked about and this is that he says all
government expenditures for resources are a consumption in other words they
cannot be considered investment or producing capital goods they're only
they're only consumption and he says this is true just as a matter of
category, definitions, right? What is a consumer good? A consumer good is a good
that directly satisfies the end. And when a government official decides or a group
of them decide, we'll spend on this particular good, it directly satisfies
their preference. Now one of you asked a question about this, you said, well what
but isn't, but isn't the distinction between a capital good and a consumer
consumer good also related to time. So wouldn't it be, in other words, there might be some
future end that's being achieved by a government production. So wouldn't, couldn't that be
considered a capital good? And I think the example was like a dam. So the government
builds a Hoover Dam or whatever. And then wouldn't it be, wouldn't that be a capital
good because it gives consumption value to politicians in the future? But I don't think
that's right. I think it would just be a durable consumer good. Would it, would it not? Would
would just be a durable consumer good, right?
It's just continuously giving, if it does,
it would continuously give direct consumption services
to politicians.
In other words, they're not using it
to produce something else.
It's not integrated into the capital structure.
It's just a direct consumption good for them.
Now, there's another question that Rothbard doesn't address,
which I think we might usefully explore.
Maybe it's true, maybe he's right about that.
Let's set that question aside as to the nature, the consumptive nature of the good from the viewpoint of government officials.
Could we say that the dam or the road or whatever it is that the state produces is a capital good for the economy, for entrepreneurs in the economy?
Is the dam a capital good in this respect?
or the road or again whatever infrastructure or whatever durable goods are produced by the state.
And I think here the answer that Rothbard would give, I'm not sure he addresses this question in the text,
but I think the answer he would give here is no, it's not.
It's not a capital good.
And the reason that I would say this or a couple of reasons actually I would say this.
First of all, one way to look at this would be in the following.
The good that's produced, the dam, the road, whatever it might be, isn't integrated into
the entrepreneur's assessment of economic calculation of the different stages of production
and capital goods, right? The road is a free good. Now, how should an entrepreneur treat
a free good. It's free to him. Free to him with respect to his business calculation.
It's free. Well, he treats it just like it were an existing, a pre-existing fact of nature.
Like it were a grove of trees or a, right, something that just exists in nature. That's
not a capital good. That isn't definitionally a capital good. And let me give you an example
If this sounds maybe not quite right to you, let me give you an example to illustrate this.
Mark Thornton mentioned in his discussion the railroads.
Okay, so we know the story of the railroads, right?
We have these huge subsidies, land grants and loan guarantees and so on to the railroad companies
that fostered all this building of the transcontinentals and we agree, right,
Right? This is all malinvestment, or a large portion of this is malinvestment. In fact,
later on, many of these railroads do in fact go bankrupt. But what do we say about the,
what then do we say about the entrepreneurs who built their businesses along the railroad?
What about them? Isn't this inefficient too? Wasn't there an overbuild-up, right? A malinvestment,
too much capital was being directed here because they were getting essentially a free, well,
not a free, but a subsidized good. This isn't fully, right? This creates some malinvestment.
So it seems to me the same thing would be true about a road. You put in a road, right?
The government puts in a nice new road. Entrepreneurs, it's a free good to them.
They come and they build along the road. They buy their, right?
They get their businesses set up along the road. And this, well, this is malinvestment then.
This is a distortion in the same way.
So those are the reasons that I would suggest.
Again, the good that the state produces is not produced under economic calculation.
And therefore, even if we treat it, even if we say somehow categorically it's a capital good,
there would be a distortion involved.
Okay. So, let's see. The next thing that Rothbard gets is the last couple of things here.
He says, okay, so in general, then, there's a two-fold effect of taxation.
The first is that it distorts the allocation of resources, consumers under some taxing scheme.
Then have the preferences satisfied as less fully as possible.
This is his idea that no tax is neutral to the market.
Every tax affects, just like every monetary inflation,
affects the pattern of prices, income distribution, production patterns in the economy.
He says there are only three things that are neutral to the market.
These are voluntary purchases that lead to prices and so on.
Second would be voluntary contributions, gifts, voluntary transfers.
These are neutral to the market.
And the third would be restitution payments that are made by criminals.
These are neutral.
And aside from this, nothing else is neutral.
Everything else distorts the allocation of resources.
Now one of you asked a question about the relationship between Mises' views and Rothbard's
views on the question of tax neutrality.
So let me try to address this, most of you know Mises is a, well, a minarchist, right?
He's a minimal government advocate, so he advocates the minimal state necessary just
to defend person and property from criminal aggression and nothing else.
And so this does raise the question of, well, you have to have taxes, so Mises was in favor
for the Necessary Taxes to Do This.
Did he think that the taxes that would be raised for the state in the minimal condition
could be raised in a neutral fashion?
Did he think that raising the amount of money would be, could in fact be neutral to the
market?
Now, to the best of my knowledge, you can help me out as to the faculty if I just am
ignorant of this, he didn't write on this particular question.
I don't think he ever, at least in human action, I'm pretty sure he didn't say anything about this,
whether or not they would distort the market.
I take his position by inference to be that they would distort the market.
In his section on taxation, he certainly doesn't give any indication
that there's something like a neutral tax.
And of course, Mises was interested in other lines of argument from Rothbard.
He wasn't really interested in this question of neutral taxation,
but in his other theories of taxation like the sort of snowballing effect of intervention and so on.
But I think that Mises would say whatever distorting effect that the taxes create
that are necessary to fund the minimal state, you just have to bear them.
You have to bear them because they're the price you pay, part of the price you pay
to have the defense services of the state.
So I don't know of any, you know, drawn out debate between the two positions.
He does limit for mutual, but does distinguish between confiscatory taxation,
which does, between principal on his destructive health and market,
and then taxation that's sort of fun.
Yeah, right, right. You're absolutely right.
He doesn't say about that.
And I'm pretty sure his position would be that if he thought that the taxes necessary to fund the minimal state did disrupt the market,
well, so be it, right, because you had to have the state performing these functions.
So on that point, I don't think they really had any give and take or there was much discussion between them on that.
Okay, so that's the first effect of taxation, right?
It distorts the allocation of resources.
And then the second is that it severs income distribution, so to speak, from production.
So Rothbard makes the point, again, this is directly from his praxeological view,
that there is no income distribution in the market.
There's just the production and earning of income.
There's no separate distribution process.
People simply produce income and then they earn it.
And what the state does through taxing and spending, of course, is sever this link.
So the state actually creates the problem of income distribution,
since there is no income distribution, per se, on the market.
Then finally, the last point that he makes, again, that you won't find in,
I don't think in the standard treatment, is he says,
he says the extent, or you won't find any emphasis on this in standard treatment.
He says, the extent of the distortion that's created by taxation and expenditure of the state
depends primarily upon the level of taxation and expenditure
and not upon the form of taxation and expenditure.
So that's just a secondary question.
The big question is, does the state take 50% of our income or does it take 20% or does it take 5%?
not does the state have excise taxes or does it have tariffs or does it raise its taxes through income taxes and so on.
Now, it's not to say that those questions are totally unrelated.
It's just that Rothbard's emphasis then is on, of course, reducing this distortion.
You want to reduce the distortion, it's better to reduce overall taxes than it is to say shift from the,
I don't know, income tax to a value-added tax or something of the sort.
Now, let me get to one last question that was asked in this introductory part.
And I think this was asked by Jonas.
I'll ask him to comment on this because I don't, because it wasn't elaborated on.
But I think the question went something like this.
Okay, I don't really, I can't go along with Rothbard really here on this,
I think Rothbard has an incorrect or stunted notion of human nature, but there was no elaboration, so maybe you can say exactly what you have in mind here.
I think it goes back again to my question on the time scale space, because I think that if you decide that there is no comparison, then by definition, all taxation, all redistribution is but admission that it can increase you to it.
However, if you do not take that standpoint, you have to approach it from a different angle.
And sort of from there, I find that these discussions on taxation, et cetera, doesn't conform with my view,
because I still am not convinced, or I can't see the logic of not comparing it with some values.
So from there, I mean, these conclusions follow a lot, it's just that, to me, they don't feel relevant because I have another view on this issue, to a certain extent.
Okay, but would you say, though, that the analysis that he does after this introductory section where he goes through the incidents of taxation and kind of lays out the economic implications of each of these different types of taxes,
You wouldn't then say that all of that is incorrect, right?
No, definitely not.
I think it relies on the basic notion that all forms of redistribution are for definition
and mislocation of resources.
And I think from that point of view, it stems from this conviction that we cannot compare
and I agree with some of the other people.
So I really didn't want to be a harper for this.
I was just justifications for why I didn't submit any questions.
But it would be great if I could be convinced of the argument.
But it would be great if I could, well, if I could be convinced of the argument that has far, it has been sort of, not avoided, but, and to me it's a crucial part of it, because, I mean, this is where it becomes political, because I think this is the, you know, the crucial point we have to think about.
Right, okay, let me take one stab at that. The way that I think about the relationship
between those two elements, the utilities analysis and the sort of economic effects
that we trace out through the economy, that I don't think, the way I see it, the distinction
The distinction that Rothbard makes is that in the market, all these changes are voluntary.
And with the state, they're involuntary.
And so that distinction is sufficient.
It isn't that we, it isn't that any interpersonal comparisons need to be made in order to get
to the latter part of the analysis.
We just have to have that distinction.
I know, and I think that is a very valid distinction to this point.
On the other hand, I think it's just that I think it's a question of what we want to maximize.
What is it that we strive for?
And I think I am more bound to have a more...
I'm coming from Sweden.
I think I tend to more...
I'm trying more to think in terms of society, for me it's an actual term, and I think maybe increase utility for me.
And I mean, from that point of view, where there are voluntary transactions, I definitely agree.
It's just that I think that the involuntary actions can upset people.
I think it's a...
Okay, well maybe something we say will trigger further thoughts on that. Okay, so anything else you want to take up at this point in this introductory section?
All right, let's go to the second half of this, then, and talk about incidence theory.
And here, too, we find that Rothbard's treatment is somewhat different than the mainstream.
So he begins this discussion just by introducing the idea of incidence and says, okay, the
question at hand is whether a tax can be shifted if a tax is placed upon, let's say, a seller
More of a Good on an Entrepreneur, you tax Apple computers.
Can this tax just be sent along by raising, let's say, selling prices, sent along to
the consumer?
Can it be passed on to the consumer or can it be passed backward by lowering factor prices?
So this is a question of incidence or does the tax have to be borne by the person upon
On Whom the Tax is Levied, this is the question.
And he says the basic law of incidence is that no tax can be shifted forward.
In no circumstances can any tax be shifted forward.
Now his argument is straightforward here, although again it depends upon the absorption
of his economic theory.
And the argument is this, that the prices that exist in markets for goods that the consumers
are paying are set by the consumer's demands.
And the seller has already set the price at the point where he thinks he's getting the
greatest revenue.
He's already set it at the point where he thinks he's, you know, his monetary situation
is as good as it can be.
So when the tax is levied on him, it would simply hurt him even more if he tries to raise
his price.
This is his price, then his revenues will fall.
This is the position that he's in, right?
The tax on the seller does nothing to change the demand
that the buyer has for the good.
The demand the buyer has for the good
is based upon the marginal utility he places on the good.
He doesn't even know what taxes the seller is paying.
He doesn't know what his production costs are.
He doesn't care about any of this.
And so no tax could ever be passed forward
because these prices depend upon the buyer's demands.
And the buyer's demands cannot be influenced by the seller's costs or taxes or other aspects.
Okay, that's the basic law of the incidence.
Then he says, then he gets to topology of taxes and he says there are two types of taxes.
They're, first of all, taxes on income, these taxes that we pay out of our earnings from production.
And these he subdivides into the general categories are a general income tax and a partial income tax.
So a general income tax would be an income tax at the same rate on all sources of income.
A partial income tax obviously then on just some forms of income,
like a tax on just wages or a tax just on corporate profits.
And then the third category is a general sales tax,
a tax at the same rate on all sales of everything,
and then a partial sales tax.
So those are the income taxes.
And then he says the second broad type of taxes
are taxes on accumulated capital.
This is a wealth tax, a tax on the accumulation of wealth
that people have engaged in in the past.
And here he gives us the following types.
He says they're tax on gifts or bequests.
They're taxes on property, on the value of your,
the capital value of your property, the accumulated value of your property
and taxes on personal wealth. So these are the three categories.
So now let's work through each of these briefly
and see if this stimulates some additional questions.
And again, when we open up for the final round of questions,
we can come back to the material at the beginning if you'd like.
Okay, so let's start with the general sales tax.
We'll just take these in the same order that he offers them.
The general sales tax, I'd say it's a 20% tax that is on all sale,
so all sellers are, the tax is levied upon them, no matter what they're selling,
as a 20% tax on the value of what they sell.
As Rothbard points out, this can't be shifted forward.
Buyers' demands are already set, whatever they happen to be,
and the sellers have already set their prices with respect to those demands
at the best possible point and so it would only be harmful to raise them so
what the tax what the general sales tax does of course is lower the net income
of the or net revenues of the entrepreneur it lowers his proceeds
right is a monetary sum of money that he has to demand the factors of production
for all entrepreneurs throughout the whole economy and so naturally if they
If they have less money to bid for the factors of production, all the factor prices must fall.
So a general sales tax, as he points out, is just an income tax.
It's a tax that's shifted backwards onto producers and it lowers their incomes.
It isn't really a tax on consumption itself.
It's imputed back and becomes an income tax.
So this is the first step, in the second step he says, again, to have a full analysis, we have to include the expenditures.
What would happen then with the expenditures?
Okay, he's explained this in the general section before, but the expenditures of the state then would add an income redistribution
and a change in the pattern of production.
So the state spends on armaments, so entrepreneurs would respond to this,
and building up, because it's more profitable now to produce, they would have more income,
bidding factors away from other processes, and wages of those workers would rise, and
specific factor prices would rise, they're necessary to produce here, more entrepreneurs
would move into this field and out of others, right, so we get this pattern of change of
the resource allocation and incomes along this lines of spending of the state.
And then he addresses this last, the last question he addresses is just on the general sales tax.
The general sales tax, he says, does not favor saving and investing.
It isn't that you tax consumption, right, and so people shift away from consumption towards saving and investing.
Why not? Well, as we said before, what happens to the general sales tax is not that prices don't rise, right?
So, demands don't change in that respect. Incomes are reduced and when incomes are reduced,
if time preferences don't change, you'll get to that question later but at this point
he's just assuming time preferences don't change, then with their lower incomes people
will in fact distribute their incomes to consumption and saving in the same proportion and so saving
Everything isn't favored by this and he gives us this example just to illustrate a useful
algebraic example where we have the net income people, is their gross income minus the tax
and their consumption is 90% of their net income.
So we have fixed time preferences, right, 10% is being saved, 90% consumed.
And we have two cases, an income tax, which is 20% of gross income, and a tax on consumption,
which is 20% of consumption.
And so he gives us a numeric example to work through, a gross income is 100.
With the income tax, we get this sequence, right?
We just work out the simple algebra here.
So net income with the tax becomes 80% of gross income.
So with gross income at 100, net income is 80.
90% of that gives us consumption, that's 72, 8% is saved, right?
And then here in the second column is the tax on consumption.
So we have net income equal to gross income minus the consumption tax.
We plug in, do the algebra, right?
Substitute for consumption what we know it's equal to with respect to net income.
Solve the equation.
And we find that net income is gross over 1.18.
So then we solve this when gross income is 100, we see that net income is 85,
and then 90% of that, roughly 76, and 10% 9.
So the whole, so all of us, in the face of a general sales tax,
all of us work out the, you know, best arrangement,
the best new arrangement of when our income is being reduced,
also considering our time preference.
And our time preference, if it doesn't change, would still dictate the same proportion between saving and consumption.
And so, saving is not proportionately aided by a consumption tax.
Or as he puts it somewhere else in the chapter, he says, there's no such thing as a consumption tax.
If you try to tax, a general consumption tax, if you try to tax consumption, it's just an income tax.
Okay, now what about a partial sales tax?
Here, Rothbard points out there would be additional effects, right?
Because what would happen in the case of just taxing one particular line of good,
you just tax Apple products, iPods, iPhones and so on,
you would get shifting effects.
Now you can, producers and so on would begin to shift away from these tax goods into untaxed.
So, let's say if Steve Jobs tried to lower the incomes of his workers in the face of the tax, right?
He can't, again, pass it on to his consumers, but he tries to lower his wage payments,
then his nonspecific factors will leave,
because they can get the market wage in the untaxed sector of the economy.
So they'll just, they'll bolt, at least on the margin they'll leave, right?
And so we would get this effect, this shifting out effect, right?
And the specific factors, the full burden of the reduction of income would fall upon the specific factors.
The specific capital that's been invested, the name brand of Apple, whatever capital assets they possess,
the income value, the capital value of those things would then decline.
This means it would be less invested in these areas since the capital value of these particular assets are less.
capital investment would move to other lines of production
and we get a further distortion, a big, you know,
an additional economic effect that would not occur under the general sales tax.
Okay, now let's move to the general income tax.
And so here, Rothbard goes through the additional, you know,
The effects are unique to a general income tax that he didn't address in talking about the general sales tax.
So remember, a general income tax would be on all sources of income, wages, ground rents, interest, profit.
Again, this can't be shifted forward or backward.
The producer would have to bear the reduction of income.
So when this happens then, of course, standards of living of the producers declines.
They would adjust to this in the following fashions, potentially at least.
They might decrease work and increase their leisure in the face of this, right, at the
margins.
Some people would be doing this.
Here we would get a further than a depressing effect on people's standards of living and
production.
It says, secondly, they might substitute work in kind for work to earn money, to earn income.
They might start doing things themselves.
They work on their own automobiles.
They clean their own houses.
They do their own gardening or lawn maintenance and so on.
As he points out, this then disrupts the division of labor.
This makes us less well-off since the division of labor becomes eliminated by our taking on these tasks.
We're not fully taking advantage of the division of labor as we were before.
And so standards of living again decline because of this.
And then additionally he says, when the general income tax reduces our incomes
and our monetary assets in the present, our time preferences would rise.
Our time preference rates would go up.
When our time preference rates go up, we would save and invest less.
Less would be put into the capital accumulation process
and the whole capital structure would, in the future,
would be less productive and innovative and so on.
Now he points out that this increase in time preference
would not be offset when the income is transferred
to government officials who then spend it since,
of course, in his view, their expenditures are all consumption.
If the income is transferred to other groups,
From one group to another, okay, so you're not, you wouldn't be completely sure of the overall net effect on time preference.
But again, as long as government officials are taking a take out of this, they're taking their cut, right, out of the transfer funds,
then his position would be, since their expenditures are all consumption, this would lower overall time preferences,
lower the amount of saving and investing and have this effect on the capital structure.
Okay, then partial income taxes, he runs through the following list.
He says, first, there could be taxes on wages.
Tax on wages cannot be shifted, the worker has to bear them.
This is true of all levies on labor, right?
Something that isn't well understood by the general public,
that, you know, their social security taxes aren't really half paid by their employer.
They're fully paid by the worker. It doesn't matter whether the employer is nominally sending
the money in. Their overall compensation is lowered by that amount. Same of mandatory
health benefits, right? They're not getting any benefit from this. They're just trading
off monetary income for the payment for health care. So if your employer is paying all of
of Your Healthcare Expenses, he's lowered your wage income commensurately.
Otherwise, there would, again, be a discharge of workers from this activity.
The corporate income tax can't be shifted.
It has to be borne by the corporation, by the owners of the corporation.
This tax, as Rothbard points out, penalizes the corporate form, and therefore, since it
lowers the, you know, return to investment in the corporate form.
Investment then would shift out into less efficient, at the margin, less efficient business forms.
And the overall rate of return throughout the economy would then fall, right?
And so the effect of this is to generally suppress the rate of return and to then therefore reduce saving and investing overall.
He points out that corporate income tax, as it's typically levied, is a double taxation.
First, the corporation's profits are taxed, and then when the remaining amount is distributed to the shareholders,
that would then be taxed again as income.
The only way he points out to eliminate this is to treat corporate income as pro-rata net income to the shareholders.
Under those conditions, you'd have to eliminate the corporate income tax that way, but then you would just tax regular income.
As he points out, this double taxation then favors retained earnings, and it leads to an inefficient amount of reinvestment in firms, in corporations.
The excess profit tax, he points out, interferes with the most important reallocation process of entrepreneurs.
Entrepreneurs earning more profit the more urgent the reallocation to satisfy consumer preferences is
and therefore this is particularly harmful to the whole process of readjusting, reallocating factors of production.
The capital gains tax as he points out capital gains are in fact income
and so they could be treated this could be treated also as an income tax so it's a public company
There's shares of stock and so if the corporation earns profit and retains the earnings, the stock prices rise.
The capital gain that depreciates to the shareholder is income.
As he points out, there's one situation under which this gain would not be income.
And that would be if the taxation of capital gains is not on a cruel basis, but on a realized basis, like it is in our system.
Then the capital gains tax becomes a tax on accumulated capital.
So in other words, if you don't pay the capital gains tax until you sell and realize the capital gain from your investment,
then the capital gains tax is a tax on accumulated capital and not an income tax.
And this would, in fact, make a difference.
The other point that he makes about this is that there would be one difference between
taxing corporate income, taxing profit, corporate income, and taxing capital gains.
And this is that capital gains would include also speculation of the anticipation of earning
and Profit in the Future, whereas the actual profit of the corporation then would not include that.
So there is a – that difference between those two forms.
And then he points out that there are certain difficulties, of course, involved in capital gains, taxes.
If you want uniformity of the rate, this would be appraisal of the value of assets if they're not often sold,
adjustments for changes in the PPM and so on.
Okay, then he goes on to taxes on accumulated capital.
This section is somewhat shorter.
It points out the main difference here, this is an important distinction.
The main difference here is that when you tax accumulated capital, you actually tax
then the capital structure itself.
And so you begin to give this disincentive to the maintenance and restoration of the
capital structure itself.
Whereas when you're taxing income, you're just taxing the ability people have to accumulate
additional capital, right?
But if you tax their capital, then you're actually destroying or forcing them to consume capital.
So this is much worse.
Taxing accumulated capital is worse for the economy, for our satisfaction of our preferences
than taxing income.
Other things the same.
Now as far as Grotutus transfers as a form of this, he points out that inheritance taxes
These are particularly bad.
This is because every asset eventually has to be taxed under this system.
And so everything is eventually taxed.
This destroys the ability of families to, or impinges upon the ability of families to
accumulate capital.
It has detrimental effects on charitable activity, on intergenerational family relationships
and so on.
Then he gets to the property tax, this, he says, the property tax is levied on property itself and not on the person who owns the property.
That would then be a personal wealth tax.
With a property tax there are two types, partial and general.
The key thing about a partial property tax is that the partial property tax would lead to tax capitalization.
and tax capital. He gives an example of this as well. We'll just quickly run
through his simple algebraic example here. But the basic idea is that if you
if you just tax let's say a particular parcel of land or just some group of
let's say you tax land that's growing soybeans then what would happen of
course is that investors who you know are assessing the value of investing in
and the land that's producing soybeans would reduce their bids for the land that produces the soybeans.
And that's what he means by capitalization, right?
The tax would actually affect the capital value of the asset being taxed.
And it would do so to the extent that the rate of return that's earned in the economy on that,
on the soybeans and the rest of the economy would be equalized again,
just as it was before the tax was levied.
And so here's the simple case that it is.
Let's say we have a parcel of land as a capital value of $10,000.
The interest rate is 5%.
So it's generating a rental value of $500 every period.
So in this simple example, right, we just take the interest rate
multiplied by the capital value and we get the rent.
This is a perpetuity.
It's generating this rent forever into the future.
So the simple formula is adequate to cover the case.
So let's say the state comes along,
assesses a tax of 1% of the capital value.
Now the relationship changes, right?
Algebraically, we would have the interest rate
multiplied by the capital value as the net return,
the gross return minus the tax.
So that gives us this.
We can solve that algebraic formula.
We come down here.
If we solve for the capital value
in terms of the rate of return,
Interest Rate and the Tax Rate.
So if it's generating the same rent of $500,
the capital value now is reduced to $8,333.33.
The tax would be 1% of that.
The return then would be the $500,
the rent would be the $500 minus the tax.
So the net rent is $416.67.
That net rent is a percent of the capital,
the lower capital value is the 5%, right?
So you're just running through a quick illustration
of how this would, you know, what the outcome of this would be.
But the logic is just based upon the economics we've gone through before.
Now, I point to there's certain implications of this, right?
Current holders of land would be affected.
They would be the ones who fill the burden of this tax, right?
When the tax is levied, the value of their land would drop.
So they suffer the full burden of this.
Others who come in later and invest in the land would not, right?
Right? They get the same rate of return as they would anywhere in the economy.
By the way, this also works in reverse for subsidies.
If you have land subsidies, then the person who owns the land at the beginning,
well, that person gets the full benefit forever into the future, right?
The full anticipated benefit of that subsidy.
Anybody who invests later on doesn't.
This is why farm subsidies, for example, don't do farmers any good.
They don't actually benefit them over the long run, right?
They give them a one-time capital gain, but then their operation is just the same as it was before.
Same here, the one-time loss, then the operation is restored, its economic calculation is restored.
Now, of course, the allocation isn't exactly the same, right?
If the government is taxing soybean production, you know, land just producing soybeans,
then, of course, there'll be exodus from that production process, right?
So in the interim, what Rothbard's not showing in this example is farmers would –
Some of them would take their land out of soybeans, shift into corn and so on.
So we'd get, again, a misallocation and a less full satisfaction of consumer preferences.
Then, let me point out, then, the general property tax, of course, would not be capitalized, right?
Because there's nowhere to shift, right? There's no – well, Rothbard's assuming that we just –
we're just looking at a domestic economy.
If the United States government were the only government that levied a general property tax,
then we'd have exodus to foreign countries.
And we would have some re-equal, we would have some capitalization of that.
But if we just had one tax again on all property everywhere at the same rate,
then there wouldn't be anywhere to move, right?
And so the rate of return would have to be reduced,
and saving and investing would be reduced commensurate with this.
And then finally he mentions the personal wealth tax.
This is a tax on the person that has to be paid out of his wealth.
And as he points out, this could be, this would have the general effect that he mentioned before
of if the person has to pay out of his accumulated wealth in order to meet the tax burden,
then this would actually begin to destroy the capital structure.
He's consuming his capital now. The value of his capital is actually falling.