WEBVTT NOTE Rothbard's Economics of Taxation: Where the Mainstream Went Wrong 1 00:00:00.000 --> 00:00:08.000 First of all, I have an answer to that question if somebody asks why Virginia gets more money back in government spending than it pays in taxes. 2 00:00:08.000 --> 00:00:15.000 The answer is the Washington establishment lives in Northern Virginia, and they make sure they take care of themselves. 3 00:00:15.000 --> 00:00:23.000 In fact, friends of ours, Richard Vetter and a colleague, he just retired from Ohio University, 4 00:00:23.000 --> 00:00:29.280 University. He did a study for the Cato Institute several years ago where he looked at the average 5 00:00:29.280 --> 00:00:36.640 income of Americans and the average income in and around the areas of the state capitals 6 00:00:36.640 --> 00:00:43.260 in all 50 states. And I can't remember the number exactly, but I think he said the average 7 00:00:43.260 --> 00:00:50.120 income in a certain area around each state capital was 40% higher than in the rest of 8 00:00:50.120 --> 00:00:59.120 and of course the same is true of Washington D.C. in general, the average income is much higher than the national average. 9 00:00:59.120 --> 00:01:04.120 And so I think that's a simple answer to why Virginia gets more money back than it pays in taxes. 10 00:01:04.120 --> 00:01:07.120 It's because you've got a lot of bureaucrats up there in Northern Virginia. 11 00:01:07.120 --> 00:01:15.120 And that's also a big reason why Virginia is going to hell politically at the same time. 12 00:01:15.120 --> 00:01:19.120 I moved to Virginia in 1981. I taught at George Mason for eight years. 13 00:01:19.120 --> 00:01:26.720 and it's, that's what, 20, 24 years ago and it's changed quite a bit. Back then George Mason was 14 00:01:26.720 --> 00:01:32.160 almost like a community college in Northern Virginia, it wasn't nearly as big as it was 15 00:01:32.160 --> 00:01:40.400 as it is now, for better or worse, and the political center had just recently started 16 00:01:40.400 --> 00:01:46.080 shifting toward Northern Virginia and toward the bureaucracy and toward Washington and I recall some 17 00:01:46.080 --> 00:01:55.080 and reading about fierce battles in the legislature from the representatives from this part of the state and southwestern Virginia 18 00:01:55.080 --> 00:02:02.080 who really didn't like the fact that they were becoming outnumbered and outspent by the Northern Virginia delegation. 19 00:02:02.080 --> 00:02:05.080 But I guess that's inevitable. 20 00:02:05.080 --> 00:02:13.080 And the federal budget, by the way, I believe it's about four times bigger than it was when Ronald Reagan took office. 21 00:02:13.080 --> 00:02:22.080 I recall the number of $500 billion as being Jimmy Carter's last budget and so we're talking $2 trillion now. 22 00:02:22.080 --> 00:02:31.080 So Lewis Wright, we could eliminate the income tax altogether and go back to the good old days of the last year of Bill Clinton's presidency. 23 00:02:31.080 --> 00:02:37.080 It's not as though that would be a great dramatic change. 24 00:02:37.080 --> 00:02:47.080 Well, Murray Rothbard, he was an amazing man, and I've never met anybody with such energy as Murray. 25 00:02:47.080 --> 00:02:54.080 You wouldn't know it to look at him, but he was writing brilliant articles and treatises in his 20s. 26 00:02:54.080 --> 00:02:59.080 And while he was pursuing his PhD, he was writing all sorts of brilliant articles. 27 00:02:59.080 --> 00:03:05.080 And even von Mises, and Lew and I were talking about this earlier, never wrote that much about public finance. 28 00:03:05.080 --> 00:03:10.980 Of all the things Ludwig von Mises wrote, and Human Action is this great, thick treatise 29 00:03:10.980 --> 00:03:14.760 that Rothbard himself says it's a book on everything. 30 00:03:14.760 --> 00:03:17.280 That's how he described Human Action. 31 00:03:17.280 --> 00:03:22.440 Even so, Mises didn't really have much to say about tax policy and public finance in 32 00:03:22.440 --> 00:03:23.440 general. 33 00:03:23.440 --> 00:03:28.640 But Murray Rothbard did, and as Lew said, in Man Economy and State, he covers an analysis 34 00:03:28.640 --> 00:03:31.480 of just about every kind of taxation there is. 35 00:03:31.480 --> 00:03:38.880 But I couldn't possibly give a talk on Rothbard's economics of taxation in a mere hour and cover 36 00:03:38.880 --> 00:03:39.880 all of that. 37 00:03:39.880 --> 00:03:44.920 So what I've done is sort of cherry-pick some of the ideas of Murray Rothbard in his various 38 00:03:44.920 --> 00:03:50.800 writings that I think really distinguish him from other public finance economists, other 39 00:03:50.800 --> 00:03:53.600 economists who write on public finance. 40 00:03:53.600 --> 00:04:01.160 And probably one of the first things I'll mention is that Murray was not only a student 41 00:04:01.160 --> 00:04:09.400 of Economic Theory but of political economy, political philosophy, history, psychology, 42 00:04:09.400 --> 00:04:14.840 sociology and that's one of the things that to me has always distinguished the great Austrian 43 00:04:14.840 --> 00:04:20.360 economists like Ludwig von Mises and Friedrich Hayek and Murray Rothbard and quite a few 44 00:04:20.360 --> 00:04:27.240 others that they weren't so narrow, they weren't just narrowly trained and Murray was one of 45 00:04:57.240 --> 00:04:59.720 and essentially a criminal gang. 46 00:04:59.720 --> 00:05:02.800 And I'll give you a quote. 47 00:05:02.800 --> 00:05:06.320 I'm sure Murray would have agreed with this definition of government 48 00:05:06.320 --> 00:05:08.280 by Ludwig von Mises. 49 00:05:08.280 --> 00:05:09.400 He said this, 50 00:05:09.400 --> 00:05:13.000 government interference always means either violent action 51 00:05:13.000 --> 00:05:15.200 or the threat of such action. 52 00:05:15.200 --> 00:05:17.120 Government is in the last resort, 53 00:05:17.120 --> 00:05:19.640 the employment of armed men, 54 00:05:19.640 --> 00:05:23.800 of policemen, gendarmes, soldiers, 55 00:05:23.800 --> 00:05:26.600 prison guards and hangmen. 56 00:05:26.600 --> 00:05:33.700 The essential feature of government is the enforcement of its decrees by beating, killing, and imprisoning. 57 00:05:33.700 --> 00:05:41.400 Those who are asking for more government interference are asking ultimately for more compulsion and less freedom." 58 00:05:41.400 --> 00:05:45.500 And I'm sure Murray would have agreed completely with that description. 59 00:05:45.500 --> 00:05:52.500 And I mentioned in a discussion in one of my MBA classes once during a break in the class 60 00:05:52.500 --> 00:05:55.800 when they were talking about government and so forth, 61 00:05:55.800 --> 00:06:02.800 And I mentioned to them, well, you know, basically if you don't pay your taxes, your income taxes, the government can and may well kill you. 62 00:06:02.800 --> 00:06:05.800 And they laughed at me like I was a lunatic. 63 00:06:05.800 --> 00:06:10.800 But then I just asked them, well, what if you didn't pay your income tax? What would happen? 64 00:06:10.800 --> 00:06:16.800 And well, they all knew the answer. Well, a federal agent of some kind will appear at my house 65 00:06:16.800 --> 00:06:20.800 and with a piece of paper that says they're going to take my house. 66 00:06:20.800 --> 00:06:26.800 Well, what if you resist? I mean, if you're convinced that you don't need to pay your tax, then what will happen? 67 00:06:26.800 --> 00:06:31.800 What if you resist the federal agent? Well, then they'll try to force you. How are they going to do that? 68 00:06:31.800 --> 00:06:35.800 Well, they're going to bring guns with them, aren't they? What if you continue to resist? 69 00:06:35.800 --> 00:06:41.800 Well, you know what will happen. And so it is true, the bottom line is, as Mises said, 70 00:06:41.800 --> 00:06:48.800 government is basically, at the end, the last resort, as he said, is the employment of armed men, policemen, gendarme, soldiers, 71 00:06:48.800 --> 00:06:51.800 researchers, prison guards, and hangmen. 72 00:06:51.800 --> 00:06:54.200 And so that was sort of the first premise, 73 00:06:54.200 --> 00:06:56.900 the first basic understanding of government 74 00:06:56.900 --> 00:06:59.800 that Murray started off with. 75 00:06:59.800 --> 00:07:03.400 And unlike a lot of other public finance economists, 76 00:07:03.400 --> 00:07:09.000 he also was a big fan of John C. Calhoun's political philosophy. 77 00:07:09.000 --> 00:07:11.100 And one book I would recommend, 78 00:07:11.100 --> 00:07:13.300 if you've never read anything by Calhoun, 79 00:07:13.300 --> 00:07:16.000 there's a book called Union and Liberty, 80 00:07:16.000 --> 00:07:18.600 and it's edited by Ross Lentz, 81 00:07:18.600 --> 00:07:23.760 Published by the Liberty Fund, and it contains some of Calhoun's seminal articles, especially 82 00:07:23.760 --> 00:07:28.680 his Disquisition on Government, a book called Disquisition on Government. 83 00:07:28.680 --> 00:07:33.560 If you read that, you know, he was the Vice President of the United States, Calhoun, he 84 00:07:33.560 --> 00:07:41.640 was the United States Senator, and it's hard to imagine a Senator or George W. Bush writing 85 00:07:41.640 --> 00:07:47.700 a sentence like this, let alone, in fact, it's hard for me to imagine George W. Bush 86 00:07:47.700 --> 00:07:55.140 I love being able to read a sentence clearly like this, because obviously every time I see him read, he can't. 87 00:07:55.140 --> 00:08:03.700 I mean, he stumbles and mumbles, he can't read, but this is, you know, it really shows you how low we've got with our politicians. 88 00:08:03.700 --> 00:08:14.940 But some of Calhoun's ideas, Calhoun was famous for resurrecting what I would call libertarian class analysis, 89 00:08:14.940 --> 00:08:17.740 is very different than Marxian class analysis. 90 00:08:17.740 --> 00:08:27.940 Marxian class analysis was about the theory of how the capitalist class supposedly exploited the working class. 91 00:08:27.940 --> 00:08:34.340 Well, there was exploitation in Calhoun's theory and in what's called the libertarian class analysis. 92 00:08:34.340 --> 00:08:40.540 But the exploitation was the people who ran the government exploited the people who paid for it. 93 00:08:40.540 --> 00:08:46.540 As Lew mentioned, the tax consumers were basically the people who got more out of government than they paid in, 94 00:08:46.540 --> 00:08:54.540 and then there were the tax eaters, and then the taxpayers were people who paid more than they got back from the government. 95 00:08:54.540 --> 00:08:56.540 And that's how Calhoun divided things. 96 00:08:56.540 --> 00:09:01.540 And I'll read you a few things because Murray, in his writings on public finance, 97 00:09:01.540 --> 00:09:07.540 always seemed to start somewhere by mentioning Calhoun in this basic fact. 98 00:09:07.540 --> 00:09:11.060 Here's one of the things that Calhoun wrote that when one's formed, he's talking about 99 00:09:11.060 --> 00:09:17.100 a political community and a democracy, the community will be divided into two great parties, 100 00:09:17.100 --> 00:09:22.980 a major and a minor, between which there will be incessant struggles on the one side to 101 00:09:22.980 --> 00:09:29.660 retain and on the other to obtain the majority. Consequently, some portion of the community 102 00:09:29.660 --> 00:09:34.380 must pay in taxes more than it receives back in disbursements, while another receives in 103 00:09:34.380 --> 00:09:37.220 and Disbursements more than it pays in taxes. 104 00:09:37.220 --> 00:09:42.620 The community is thus divided into two great classes, class analysis, one consisting of 105 00:09:42.620 --> 00:09:47.080 those who pay the taxes and the other of those who are the recipients of the proceeds. 106 00:09:47.080 --> 00:09:52.500 And he was a wise man, a Calhoun, he went on to say that the power to tax in a democracy 107 00:09:52.500 --> 00:09:57.940 will inevitably be used for the purpose of aggrandizing and building up one portion of 108 00:09:57.940 --> 00:10:03.700 the community at the expense of another, which will give rise to violent conflicts and struggles 109 00:10:03.700 --> 00:10:09.380 between the two competing parties, and then he went on to say it is a great mistake to 110 00:10:09.380 --> 00:10:16.060 suppose that a mere written constitution would be sufficient to protect individual liberties 111 00:10:16.060 --> 00:10:22.060 because the parties in power will quote, will always have no need for constitutional 112 00:10:22.060 --> 00:10:24.700 restrictions on governmental powers. 113 00:10:24.700 --> 00:10:33.020 And he talked about naive defenders of the constitution who believed that the constitution 114 00:10:33.020 --> 00:10:39.080 could somehow be protected by an appeal to reason, truth, justice, or the obligations 115 00:10:39.080 --> 00:10:42.060 imposed by the Constitution. 116 00:10:42.060 --> 00:10:49.860 He forecast that the power-hungry status would use cunning, falsehood, deception, slander, 117 00:10:49.860 --> 00:10:54.940 fraud, and gross appeals to the appetites of the lowest and most worthless portions 118 00:10:54.940 --> 00:11:00.740 of the community until the constitutional restrictions would be ultimately annulled 119 00:11:00.740 --> 00:11:05.140 World and the government be converted into one of unlimited powers. 120 00:11:05.140 --> 00:11:08.100 How's that for a forecast? 121 00:11:08.100 --> 00:11:13.200 That's why, of course, this is all part of his defense of states' rights and the right 122 00:11:13.200 --> 00:11:18.940 of nullification in particular, in this particular instance, because he didn't think the Constitution 123 00:11:18.940 --> 00:11:19.940 was enough. 124 00:11:19.940 --> 00:11:26.020 You had to give the people of the states some sort of power to enforce the Constitution. 125 00:11:26.020 --> 00:11:29.040 You can't just let the government enforce it in itself. 126 00:11:29.040 --> 00:11:35.520 And so Murray quite often started with Calhoun in a lot of the essays he wrote in his basic 127 00:11:35.520 --> 00:11:38.200 theory of government. 128 00:11:38.200 --> 00:11:44.580 And this really set Murray apart from your typical public finance economist who struggles 129 00:11:44.580 --> 00:11:50.400 and struggles and struggles to argue that taxation is really voluntary. 130 00:11:50.400 --> 00:11:56.840 And I went to graduate school at VPI and I studied under James Buchanan. 131 00:11:56.840 --> 00:11:59.480 And he was a professor of mine, he won the Nobel Prize. 132 00:11:59.480 --> 00:12:03.240 He was also a colleague of mine at George Mason later after that. 133 00:12:03.240 --> 00:12:06.440 And one of the reasons he won the Nobel Prize was public finance. 134 00:12:06.440 --> 00:12:11.400 And so when I was at VPI, it was one of the centers in the world of the study of economics 135 00:12:11.400 --> 00:12:13.060 and public finance. 136 00:12:13.060 --> 00:12:18.240 We had scholars from all over the world coming to state, spend a semester or a year there 137 00:12:18.240 --> 00:12:20.100 back when I was there. 138 00:12:20.100 --> 00:12:24.320 And so I had a pretty decent training in public finance and one of the things I learned is 139 00:12:24.320 --> 00:12:29.880 Because the vast majority of the literature in public finance, when it comes to taxation, 140 00:12:29.880 --> 00:12:36.120 is devoted to spinning tall tales about how coercive taxation is not really coercive. 141 00:12:36.120 --> 00:12:41.400 And Buchanan himself has spun a lot of these tall tales, which I'll explain to you in a minute. 142 00:12:41.400 --> 00:12:43.320 And so how is this done? 143 00:12:43.320 --> 00:12:48.280 If you get into the literature, well one thing we're told is that there's this free rider 144 00:12:48.280 --> 00:12:55.080 Another problem that exists with regard to public goods, national defense always used 145 00:12:55.080 --> 00:12:59.760 as an example of a public good, it's something that, it's very difficult if not impossible 146 00:12:59.760 --> 00:13:03.960 supposedly to exclude anybody once it's provided. 147 00:13:03.960 --> 00:13:08.700 For example, clean air, if you define clean air as a public good, how can you exclude anybody 148 00:13:08.700 --> 00:13:10.600 once the air is clean? 149 00:13:10.600 --> 00:13:15.240 And it's non-partitionable, you can't partition it, you can't sell somebody a chunk of clean 150 00:13:15.240 --> 00:13:20.240 or you can't sell somebody a chunk of national defense. It's all or nothing. 151 00:13:20.240 --> 00:13:27.240 And with these types of goods, the problem supposedly is if they benefit all of us collectively, 152 00:13:27.240 --> 00:13:32.240 there's this incentive to let George do it, to not pay sufficient amounts of taxes, 153 00:13:32.240 --> 00:13:40.240 especially in a big community like a state or a nation as large as ours with 300 million people approximately. 154 00:13:40.240 --> 00:13:52.240 There will be a temptation on the part of a lot of people to just not pay, and under the hunch that others will pay, they'll pay enough and I'll just free ride on other people's backs. 155 00:13:52.240 --> 00:13:59.240 And from this theory of the free rider comes the notion that, well, then what happens is we all agree to tax ourselves. 156 00:13:59.240 --> 00:14:07.240 We all understand this dilemma, that we can't have all these good things that the government gives us, public goods, unless we tax ourselves. 157 00:14:07.240 --> 00:14:14.360 There is a big literature in economics suggesting that because of this free rider problem, taxation 158 00:14:14.360 --> 00:14:20.320 really is voluntary because we agree to tax ourselves by being part of the political community. 159 00:14:20.320 --> 00:14:26.280 But Murray, in his typical clear thinking, just in one sentence, I think, shoots this 160 00:14:26.280 --> 00:14:31.240 down by saying, if coercion is used, it is not voluntary. 161 00:14:31.240 --> 00:14:35.520 So you can come up with all the theories you want, but as long as you have a system that 162 00:14:35.520 --> 00:14:41.920 where one person says, I'm not going to pay, your theory says I volunteer but I don't really, 163 00:14:41.920 --> 00:14:45.760 then watch what will happen, coercion will be used to make you pay. 164 00:14:45.760 --> 00:14:48.920 If that's true then it's not voluntary. 165 00:14:48.920 --> 00:14:53.760 Then there's the theory that democracy makes it voluntary because we all have the freedom 166 00:14:53.760 --> 00:14:57.920 to vote after all, so that makes it all voluntary. 167 00:14:57.920 --> 00:15:03.560 Not really, of course as Murray pointed out and as others have too, democracy simply means 168 00:15:03.560 --> 00:15:09.280 doesn't mean majority rule tyranny, doesn't mean freedom, doesn't mean a voluntary society. 169 00:15:09.280 --> 00:15:13.760 The only way you can have a voluntary community is if there's unanimous agreement. 170 00:15:13.760 --> 00:15:15.800 And we never have that under democracy. 171 00:15:15.800 --> 00:15:20.960 Actually, you know, democracy, after all, we have to realize that a good example of 172 00:15:20.960 --> 00:15:27.080 democracy is if I walk out in a parking lot and I see Mark Thornton's Mercedes sitting 173 00:15:27.080 --> 00:15:33.720 out there. And Lew Rockwell is with me and we say, boy that's a nice looking car, let's 174 00:15:33.720 --> 00:15:40.860 take it. And so Lew and I break the window and start her up and just as we drive off 175 00:15:40.860 --> 00:15:45.600 Mark Thornton comes running out, wait a minute, wait a minute, that's my car. And Lew and 176 00:15:45.600 --> 00:15:51.260 I educate Mark Thornton in the wonders of democracy and tell him that we believe in 177 00:15:51.260 --> 00:15:57.000 majority rule so let's take a vote on whose car this is. Lew and I vote, it's our car, 178 00:15:57.000 --> 00:16:02.000 So, the fact that we voted doesn't mean it's not theft. 179 00:16:02.000 --> 00:16:05.000 It's just theft with a smiling face. 180 00:16:05.000 --> 00:16:10.000 And one of the ways Murray explained this in one of his articles was 181 00:16:10.000 --> 00:16:15.000 if majority rule democracy means volunteerism, 182 00:16:15.000 --> 00:16:19.000 then the Holocaust was a mass example of voluntary suicide. 183 00:16:19.000 --> 00:16:22.000 Because, after all, Hitler was elected. 184 00:16:22.000 --> 00:16:25.000 You know, the Germans did elect Adolf Hitler. 185 00:16:25.000 --> 00:16:29.500 and so he had a flair for the dramatic, I guess, this sort of thing. 186 00:16:29.500 --> 00:16:39.000 And besides that, Murray, as I said, he was well studied in the history of politics and philosophy. 187 00:16:39.000 --> 00:16:44.000 So he understood how democracy worked in the ancient times as well as in the modern times, 188 00:16:44.000 --> 00:16:48.500 and so therefore he understood what the modern public choice economists know, 189 00:16:48.500 --> 00:16:52.000 and that with democracy you don't even get what the majority wants. 190 00:16:52.000 --> 00:17:04.000 You know, you get such things as log rolling, where you might not have a majority within a legislature, let's say, in favor of, say, spending more money on schools. 191 00:17:04.000 --> 00:17:11.000 So what they'll do is one group of politicians will say to the farm vote, to the people from the farm districts, 192 00:17:11.000 --> 00:17:15.000 we don't really give a hoot about spending more money on farm subsidies. 193 00:17:15.000 --> 00:17:21.240 However, we will vote for farm subsidies if when our vote for school spending comes up, 194 00:17:21.240 --> 00:17:25.760 you the farmers who don't give a hoot about school spending, promise to vote for school 195 00:17:25.760 --> 00:17:27.040 spending. 196 00:17:27.040 --> 00:17:31.920 That way even though there's not a legitimate majority, vote trading or log rolling as it's 197 00:17:31.920 --> 00:17:34.420 called will get you a majority. 198 00:17:34.420 --> 00:17:40.680 So you don't really get a majority rule under democracy anyway. 199 00:17:40.680 --> 00:17:46.480 Friedrich Hayek put this in a decent way in his book Law, Legislation, and Liberty. 200 00:17:46.480 --> 00:17:54.480 He said what we get under democracy is basically what all the minority coalitions have to give 201 00:17:54.480 --> 00:18:00.120 up in order to get what they want next time around, next time the vote is taken on what 202 00:18:00.120 --> 00:18:01.120 they want. 203 00:18:01.120 --> 00:18:06.920 So majority rule outcomes are sort of combinations of things that all the minority coalitions 204 00:18:06.920 --> 00:18:15.920 decided they have to give up or vote on, even though they don't want, so that when the vote comes for their thing, they can get what they want, next time around. 205 00:18:15.920 --> 00:18:24.920 And Murray also understood about rational ignorance, about how the average citizen really doesn't pay that much attention to social policy, public policy. 206 00:18:24.920 --> 00:18:34.920 We all spend most of our time educating ourselves about our private lives, doing our jobs, raising families and so forth. 207 00:18:34.920 --> 00:18:40.920 The government is so big anyway, it's impossible for any citizen to understand what it's doing. 208 00:18:40.920 --> 00:18:44.920 And it's worse than that though. Not only is the average citizen rationally ignorant, 209 00:18:44.920 --> 00:18:51.920 but we're constantly bombarded with lies and propaganda by the state and all its minions. 210 00:18:51.920 --> 00:18:54.920 And that's where the court intellectuals come in. 211 00:18:54.920 --> 00:19:01.920 And Murray's theory of the state also recognized that governments, as Lew mentioned earlier, 212 00:19:01.920 --> 00:19:07.920 are always really a tiny minority of the population, even in the United States today. 213 00:19:07.920 --> 00:19:10.920 I think somebody asked you how many government employees. 214 00:19:10.920 --> 00:19:15.920 I think the federal government claims it has about 4 million people on the payroll. 215 00:19:15.920 --> 00:19:20.920 Of course, there might be tens of millions of contractors who are also contract employees, 216 00:19:20.920 --> 00:19:27.920 but it claims it has around 4 million people who get their paycheck every two weeks from the U.S. Treasury. 217 00:19:27.920 --> 00:19:32.920 But even if it's 20 or 30 million, it's still a minority of the population. 218 00:19:32.920 --> 00:19:42.920 And so, ultimately, the power of the government does rest on the ability of the government to convince this big population that it's legitimate. 219 00:19:42.920 --> 00:19:47.920 That's legitimate. That's why I, for example, think it's unpatriotic to vote. 220 00:19:47.920 --> 00:19:51.920 You're legitimizing an unconstitutional government. 221 00:19:51.920 --> 00:19:55.920 But we can talk about that some other time. It's off the topic. 222 00:19:55.920 --> 00:20:22.920 So Murray wrote in a number of places about the role of intellectuals and how the role of intellectuals is to essentially be court historians and prop up the state in return for jobs, research grants, accolades, and so forth that it gets from being a government economist or a government spokesman of some sort or another. 223 00:20:22.920 --> 00:20:30.620 Okay. And so these court historians create quite a barrage of lies and fog. 224 00:20:30.620 --> 00:20:38.920 And I brought a quotation in from one of my favorite government liars, Paul Bagala. 225 00:20:38.920 --> 00:20:47.620 Remember him? Bill Clinton's buddy? I wrote this down. He was on television during the... 226 00:20:47.620 --> 00:20:54.460 This is an old quote. It was when Al Gore was running against George Bush. 227 00:20:54.460 --> 00:20:56.860 Buggala said this, quote, 228 00:20:56.860 --> 00:21:05.700 all this insistence on truthfulness on the part of both candidates is getting out of control, end quote. 229 00:21:05.700 --> 00:21:12.420 So there's a man who devotes his life to telling plausible lies in defense of his candidate. 230 00:21:12.420 --> 00:21:15.460 And he was on television. He was just disgusted with this. 231 00:21:15.460 --> 00:21:21.460 Some people in the media are expecting the truth from politicians, whoever heard of such thing. 232 00:21:21.460 --> 00:21:28.460 But this is pretty pervasive. It's pervasive in the public finance area, among other places. 233 00:21:28.460 --> 00:21:38.460 So let me give you some examples of how public finance economists have tried to make arguments that taxation really is voluntary. 234 00:21:38.460 --> 00:21:43.460 I'm going to start by criticizing my old professor, Jim Buchanan. 235 00:21:43.460 --> 00:21:53.140 He's, for probably much the past 30 years of his career, maybe 40 years, he's basically constructed, he's written many, many books and articles 236 00:21:53.140 --> 00:22:03.740 constructing what a former colleague of mine named Victor Vanberg, who's a sociologist who used to work with Buchanan, called a voluntary theory of government, 237 00:22:03.740 --> 00:22:10.940 voluntary theory of the state. And so, let me read you some of the things that he has written. 238 00:22:10.940 --> 00:22:17.460 Well, first of all, they recognize, of course Buchanan and my other old friend and colleague, 239 00:22:17.460 --> 00:22:23.740 Gordon Telleck, who still teaches at GMU also, recognize that really if you're going to talk 240 00:22:23.740 --> 00:22:29.540 about voluntary communities, you need to talk about unanimous agreement. That's the only 241 00:22:29.540 --> 00:22:35.180 really meaningful way of thinking about volunteerism if it's all unanimous. But you never get that 242 00:22:35.180 --> 00:22:37.180 and Politics and Democracy. 243 00:22:37.180 --> 00:22:40.180 And so they came up with relative unanimity. 244 00:22:40.180 --> 00:22:42.180 That's relative unanimity. 245 00:22:42.180 --> 00:22:49.180 I suppose a four-fifths majority is better than a bare majority, 246 00:22:49.180 --> 00:22:51.180 but it's still coercion. 247 00:22:51.180 --> 00:22:55.180 You're still coercing the one-fifth that disagrees. 248 00:22:55.180 --> 00:22:58.180 And so it's a little better, I suppose. 249 00:22:58.180 --> 00:23:00.180 And that really didn't fly too much. 250 00:23:00.180 --> 00:23:03.180 They talked about that in their famous book, 251 00:23:03.180 --> 00:23:09.100 and Calculus of Consent. And so, after that, Buchanan came up with all sorts of arguments 252 00:23:09.100 --> 00:23:17.520 about how coercion is really voluntary. And I'll read you some of these arguments. A lot 253 00:23:17.520 --> 00:23:25.220 of his writings involve what's called conceptual unanimity. I'll give you one quote. He calls 254 00:23:25.220 --> 00:23:31.220 himself a contractarian. To the contractarian, that law is legitimate and just, which might 255 00:23:31.220 --> 00:23:38.220 have emerged from a genuine social contract in which he might have participated. 256 00:23:40.220 --> 00:23:45.220 That law is illegitimate and unjust, which finds no such contractual basis. 257 00:23:45.220 --> 00:23:54.220 So, theoretically, if you can imagine a situation where somebody might have consented, then it's voluntary. 258 00:23:54.220 --> 00:24:07.220 Leland Yeager, who used to teach at the University of Virginia in the economics department, then he moved to Auburn, and I believe he still lives in Auburn, he's retired now, wrote an article commenting on this statement, where he said, 259 00:24:07.220 --> 00:24:18.220 as a rule, if you read Buchanan and others talking about conceptual unanimity, if you replace the word no for conceptual, you know what they're talking about. 260 00:24:18.220 --> 00:24:21.220 So it's conceptual unanimity. 261 00:24:21.220 --> 00:24:24.220 And he goes on and he says, 262 00:24:24.220 --> 00:24:28.220 Each and every participant has implicitly accepted the contract 263 00:24:28.220 --> 00:24:30.220 embodied in the rules of the game. 264 00:24:30.220 --> 00:24:33.220 So he doesn't say that participants in the political community 265 00:24:33.220 --> 00:24:36.220 actually did accept the rules of the political game. 266 00:24:36.220 --> 00:24:38.220 They implicitly accepted. 267 00:24:38.220 --> 00:24:42.220 He says the social contract is best conceived as subject to 268 00:24:42.220 --> 00:24:44.220 continual revision and change, 269 00:24:44.220 --> 00:24:48.220 and the consent that is given must be thought of as being continuous. 270 00:24:48.220 --> 00:24:52.220 No word as to why it must be thought of other than he says so. 271 00:24:52.220 --> 00:24:55.220 So it must be thought of as continuous. 272 00:24:55.220 --> 00:24:57.220 And then it goes even further than this. 273 00:24:57.220 --> 00:25:02.220 It says, even when an original contract may never have been made, 274 00:25:02.220 --> 00:25:07.220 a social contract between the citizens and the state, 275 00:25:07.220 --> 00:25:12.220 when current members of the community sense no moral or ethical obligation 276 00:25:12.220 --> 00:25:17.900 to adhere to the terms that are defined in the status quo and when such a 277 00:25:17.900 --> 00:25:23.900 contract may have been violated many times over by the state, the status quo 278 00:25:23.900 --> 00:25:28.620 define that which exists, hence regardless of the history it must be 279 00:25:28.620 --> 00:25:33.500 evaluated as if it were legitimate contractually. So even if you never 280 00:25:33.500 --> 00:25:37.940 entered into a contract it's legitimate and even if you did if the state breaks 281 00:25:37.940 --> 00:25:45.940 And if you take the contract on its side of the deal, continuously, you still have to accept the state as voluntary, he says. 282 00:25:45.940 --> 00:25:56.940 And David Hume dismissed this kind of argument many, many years ago, long before that, by giving an example of a conscripted sailor. 283 00:25:56.940 --> 00:26:06.940 And he said that just because the conscripted sailor does not jump overboard and commit suicide, does not mean that he really consented to being conscripted into the Navy. 284 00:26:06.940 --> 00:26:12.140 and that I think would have seemed to apply to what this has to do with. 285 00:26:12.140 --> 00:26:16.380 And kind of an interesting thing about this whole area of literature 286 00:26:16.380 --> 00:26:20.540 is they claim that since it's called constitutional economics and they 287 00:26:20.540 --> 00:26:24.380 claims that the roots are in the founding fathers, 288 00:26:24.380 --> 00:26:27.500 Madison and the right, the framers of the 289 00:26:27.500 --> 00:26:31.660 constitution, but one of the more famous founding 290 00:26:31.660 --> 00:26:34.940 fathers, George Washington, was of the exact opposite opinion 291 00:26:34.940 --> 00:26:45.940 Washington's farewell address, in his most famous speech, I suppose, he said this about breaking the social contract. 292 00:26:45.940 --> 00:26:54.940 If in the opinion of the people, the distribution or modification of the constitutional powers be in any particular wrong, 293 00:26:54.940 --> 00:26:59.940 let it be corrected by an amendment in the way which the Constitution designates. 294 00:26:59.940 --> 00:27:05.700 And here's the important part, but let there be no change by use or patient, for though 295 00:27:05.700 --> 00:27:10.960 this in one instance may be the instrument of good, it is the customary weapon by which 296 00:27:10.960 --> 00:27:13.500 free governments are destroyed. 297 00:27:13.500 --> 00:27:18.020 So George Washington wasn't on the idea that if there's change by use or patient, that 298 00:27:18.020 --> 00:27:22.540 is ignoring the Constitution, that we should just pretend that it's all voluntary anyway 299 00:27:22.540 --> 00:27:24.260 and go about our business. 300 00:27:24.260 --> 00:27:29.720 And if you read this, he probably was ready to draw his sword again if this sort of thing 301 00:27:29.720 --> 00:27:36.640 goes on. And so I brought this up because if a reputed free-market economist makes excuses 302 00:27:36.640 --> 00:27:42.360 for taxation being voluntary like this, you can imagine what the Harvard economists have 303 00:27:42.360 --> 00:27:47.360 been saying for the past 50 years and the other much more interventionist economists 304 00:27:47.360 --> 00:27:51.280 have been saying. And they've been saying an awful lot. I'll go over just some of the 305 00:27:51.280 --> 00:27:55.440 things. And of course, the whole public goods theory, the theory of public goods in a free 306 00:27:55.440 --> 00:27:59.440 The free rider problem has been grossly exaggerated 307 00:27:59.440 --> 00:28:02.440 because it dwells far too much on pure theory, 308 00:28:02.440 --> 00:28:04.440 the logic of the free rider problem. 309 00:28:04.440 --> 00:28:08.440 It's been restated and restated over and over and over again. 310 00:28:08.440 --> 00:28:12.440 But there's a famous article in economics by Ronald Coase 311 00:28:12.440 --> 00:28:14.440 called The Lighthouse in Economics. 312 00:28:14.440 --> 00:28:17.440 And what this is about, maybe some of you are familiar with this, 313 00:28:17.440 --> 00:28:21.440 who have studied economics, is that in all the textbooks in economics 314 00:28:21.440 --> 00:28:23.440 for years and years and years, 315 00:28:23.440 --> 00:28:29.040 When they would talk about the free rider problem and public goods, the prototypical 316 00:28:29.040 --> 00:28:33.920 example was a lighthouse. The lighthouse is there on the shore and it beams this big light 317 00:28:33.920 --> 00:28:40.080 and the light is available to all the ships that come by. So it's non-partitionable. You can't 318 00:28:40.080 --> 00:28:45.040 have a ship that benefits only from one part of the light. You know, once the light is out there, 319 00:28:46.000 --> 00:28:51.920 they benefit and it's very difficult to stop anybody from benefiting from the light if a 320 00:28:51.920 --> 00:28:56.920 How do you keep ship sales into your light, into your harbor, how do you keep them from benefiting from this? 321 00:28:56.920 --> 00:29:02.920 So it was thought to be the prototypical public good, and therefore the government had to provide lighthouses. 322 00:29:02.920 --> 00:29:09.920 And that was the theory, propounded by Paul Samuelson for many years in his economics textbook. 323 00:29:09.920 --> 00:29:12.920 Generations of economic students were taught this. 324 00:29:12.920 --> 00:29:20.920 But lo and behold, Coase discovered that in England for many, many years, there were privately funded lighthouses. 325 00:29:20.920 --> 00:29:27.080 and it just wasn't true that you need government to provide lighthouses and I found out that 326 00:29:27.080 --> 00:29:31.900 this was true in the United States too. I tried to get some foundations to give me a 327 00:29:31.900 --> 00:29:37.760 research grant to spend one summer going up and down the East Coast visiting all the beaches 328 00:29:37.760 --> 00:29:44.120 studying the lighthouse because I happened to be in Delaware and I took one of these 329 00:29:44.120 --> 00:29:48.800 dusk cruises, one of these restaurants that you buy dinner and they take you on a cruise 330 00:29:48.800 --> 00:30:18.800 This is the Delaware Bay at dusk, and the captain of the boat pointed out this broken down old lighthouse, and he had some history, he had something from like the local chamber of commerce or something, and he said, you know, 150 years ago, merchants from New England kept ship wrecking, wrecking their ships on the rock side here, he's pointing at these rocks, and so they all chipped in and built a series of lighthouses from here all the way down to the Carolinas, 331 00:30:18.800 --> 00:30:29.800 and your own nickel. So that's what gave me the idea. I think to this day, it probably still would be a legitimate research project, whether I could get a grant to subsidize my summer vacation or not. 332 00:30:29.800 --> 00:30:36.800 But you could probably find the information about this in local courthouses and historical societies. 333 00:30:36.800 --> 00:30:46.800 And so if anybody's ever been to the beach near Rehoboth, Delaware, you might have seen some of these broken down old lighthouses down there that they're privately funded. 334 00:30:46.800 --> 00:30:50.800 And so the free rider problem has been grossly exaggerated. 335 00:30:50.800 --> 00:30:56.800 Not only that, if you have a problem like this, there are all sorts of ways of getting around it. 336 00:30:56.800 --> 00:31:01.800 In my book on capitalism, I have a whole chapter called Highways of Capitalism. 337 00:31:01.800 --> 00:31:07.800 And it's about a literature in economics about how roads in America, roads and canals, 338 00:31:07.800 --> 00:31:15.800 were primarily privately financed in the early years of the Republic, around the turn of the 19th century. 339 00:31:15.800 --> 00:31:23.800 A road is supposedly a public good and would provide all these benefits that only tax dollars could provide. 340 00:31:23.800 --> 00:31:32.800 Not true. There were thousands of miles of roads built all over the United States at that time, privately financed. 341 00:31:32.800 --> 00:31:42.800 And whenever they did run into free rider problems, they used social ostracism as a tool to get the members of the community to pay up. 342 00:31:42.800 --> 00:31:46.800 They didn't pay up, but they invested. 343 00:31:46.800 --> 00:31:50.800 The investment was only returning about 3% on the road building, 344 00:31:50.800 --> 00:31:54.800 which was below the market, what you could get on other investments. 345 00:31:54.800 --> 00:31:58.800 However, the merchants of all the towns understood that it wasn't just 346 00:31:58.800 --> 00:32:02.800 that 3% return that they would be getting, that they would be selling a lot more of their goods 347 00:32:02.800 --> 00:32:06.800 if their town was connected to other towns nearby. There would be more business, 348 00:32:06.800 --> 00:32:10.800 the community would grow, and so people understood that there was more to this 349 00:32:10.800 --> 00:32:15.360 There is more to this than just a 3% return and so they understood that and they urged 350 00:32:15.360 --> 00:32:20.000 all their neighbors and their friends and relatives to invest, and they did, and they 351 00:32:20.000 --> 00:32:21.000 did. 352 00:32:21.000 --> 00:32:25.720 When railroads first came around, the Mormons built several railroads in Utah, in the state 353 00:32:25.720 --> 00:32:30.860 of Vermont they were privately built railroads in Vermont, and so, and this was long before 354 00:32:30.860 --> 00:32:36.320 the government got in the business of subsidizing the transcontinental railroads, and in fact 355 00:32:36.320 --> 00:33:06.320 In fact, I also talk about how the governments did, the state and local governments did get involved in subsidizing railroads and after the early, the early 1820s was when railroads were really invented and so after that, state and local governments did, but it was such a calamity, the waste of government money for railroad, rail building and construction that by the time the so-called civil war broke out, by the time that broke out, 356 00:33:06.320 --> 00:33:13.320 I think every single state, I think Massachusetts was the only state that had not amended its constitution 357 00:33:13.320 --> 00:33:20.320 to prohibit the use of taxpayer dollars for private corporations for such things as road building and railroad building 358 00:33:20.320 --> 00:33:26.320 because there had been so many scandals, so much corruption and waste and abuse and so forth. 359 00:33:26.320 --> 00:33:33.320 So here's, you know, supposedly a classic public goods problem, road building was totally done in the early years, 360 00:33:33.320 --> 00:33:39.800 not totally but you know pervasively done with private financing okay another 361 00:33:39.800 --> 00:33:44.840 thing government does and this is another Rothbardian type commentary is 362 00:33:44.840 --> 00:33:51.480 if the government steps in to provide a supposed public good it short-circuits 363 00:33:51.480 --> 00:33:58.040 the entrepreneurial process whereby entrepreneurs individuals would figure 364 00:33:58.040 --> 00:34:01.960 out a way around these problems how to finance the roads how to finance the 365 00:34:01.960 --> 00:34:06.260 Railroads. Why bother if the government is stepping in and doing it? And so we don't 366 00:34:06.260 --> 00:34:12.240 know what would have happened with the transcontinental railroads. The same argument was made that 367 00:34:12.240 --> 00:34:17.000 the government needs to finance them. That became, of course, one of the biggest and 368 00:34:17.000 --> 00:34:22.320 most corrupt boondoggles in American history after the Civil War with the Crédit Mobilier 369 00:34:22.320 --> 00:34:28.480 scandal of the Grant Administrations. And James J. Hill came around and built a privately 370 00:34:28.480 --> 00:34:33.880 When he financed railroad, the Great Northern, without a dime in his autobiography, he brags 371 00:34:33.880 --> 00:34:38.160 that he didn't get a dime in government subsidy, not even a land grant. 372 00:34:38.160 --> 00:34:43.820 He paid for rights of way all the way along the way, and he built it better and faster 373 00:34:43.820 --> 00:34:48.120 and more profitable than all the government subsidized railroads. 374 00:34:48.120 --> 00:34:51.120 And so, you know, that would have been the alternative. 375 00:34:51.120 --> 00:34:55.680 Had the government not stepped in and done this, we wouldn't have had all the corruption, 376 00:34:55.680 --> 00:35:08.680 and all the waste and so forth, and it might have taken a little longer, the transcontinental might have been built in 1880 instead of 1870, completed, but it would have been built a lot better. 377 00:35:08.680 --> 00:35:20.680 As far as, you know, the basic argument about public goods is that, well, people will contribute but not sufficient amounts, therefore we won't have enough. 378 00:35:20.680 --> 00:35:26.680 Well, that seems to be, I think the scientific term is ass backwards. 379 00:35:26.680 --> 00:35:28.680 I think it's a scientific term for this. 380 00:35:28.680 --> 00:35:31.680 Because, you know, it's government that creates shortages. 381 00:35:31.680 --> 00:35:34.680 Just look at California energy. 382 00:35:34.680 --> 00:35:38.680 You know, who creates the shortages in bottlenecks? 383 00:35:38.680 --> 00:35:41.680 Look at traffic in Northern Virginia on all those government roads. 384 00:35:41.680 --> 00:35:45.680 Who is creating the bottlenecks and shortages of goods and services? 385 00:35:45.680 --> 00:35:49.680 The schools, you know, who's creating all these problems? 386 00:35:49.680 --> 00:35:57.680 It's not that we're stingy so much as it is. Government is inherently inept in providing these things. 387 00:35:57.680 --> 00:36:05.680 So very little of what government does is genuine public goods by any definition, especially at the state and local level. 388 00:36:05.680 --> 00:36:10.680 I used to hand out to some of my classes, there's a publication called the Municipal Yearbook, 389 00:36:10.680 --> 00:36:16.680 that is sort of a handbook for local city managers, and it listed all the things that city governments do. 390 00:36:46.680 --> 00:37:16.680 cannot do, and cannot do better for that matter, as far as that goes, so very little of what governments do is that you could really call a public good, and Murray made that point, and besides that, much of what governments do is a public bad, it's not a public good that we're all dying to have, it's a public bad, take public education for example, it's not considered to be a public bad, welfare, look at what welfare has done to the 391 00:37:16.680 --> 00:37:22.360 Society, destroying the work ethic, breaking up families, all these things have been documented 392 00:37:22.360 --> 00:37:30.960 a thousand times over. That's a public good. Social Security, the post office, that's a 393 00:37:30.960 --> 00:37:36.920 public good. And so much of this is just a public bad, which makes the free rider problem 394 00:37:36.920 --> 00:37:42.400 seem even more ridiculous, because if so much of this is a public bad, then the problem 395 00:37:42.400 --> 00:37:47.760 Supposedly is, we can't raise enough money to provide these bad things, therefore we 396 00:37:47.760 --> 00:37:52.240 need to coerce people so we can have more of these bad things. That's basically the 397 00:37:52.240 --> 00:38:02.660 idea. And then the other economic rationale for taxes is externalities, external benefits 398 00:38:02.660 --> 00:38:12.080 and costs. And like as with public goods, this is greatly overblown in theory by relying 399 00:38:12.080 --> 00:38:20.080 One of the very well-known articles on this in economics is an article on what's called 400 00:38:20.080 --> 00:38:26.600 the fable of the bees and the story is about how if you consider a situation of an apple 401 00:38:26.600 --> 00:38:33.000 orchard and you've got bees that are owned by a beekeeper somewhere, the bees go in there 402 00:38:33.000 --> 00:38:38.160 and pollinate the apple trees and the apple trees feed the bees. 403 00:38:38.160 --> 00:38:43.060 So there's some sort of a reciprocal benefit going on there between the beekeeper benefits 404 00:38:43.060 --> 00:38:48.860 because his bees have food and the apple orchard owner benefits because his trees are pollinated 405 00:38:48.860 --> 00:38:51.360 and they grow more apples. 406 00:38:51.360 --> 00:38:56.740 And this is another, for years and years, decades, this was a textbook example of market 407 00:38:56.740 --> 00:38:57.740 failure. 408 00:38:57.740 --> 00:39:03.700 And the reason was, the logic was, well, there's an external benefit. 409 00:39:03.700 --> 00:39:10.740 You see, the beekeeper, he invests in bees because he sells honey. 410 00:39:10.740 --> 00:39:15.460 But not only do his bees provide honey, they provide what's called an external benefit 411 00:39:15.460 --> 00:39:18.420 to apple orchard owners. 412 00:39:18.420 --> 00:39:21.300 But the beekeeper doesn't take that into consideration. 413 00:39:21.300 --> 00:39:24.740 He only takes his own private benefit into consideration. 414 00:39:24.740 --> 00:39:29.460 Therefore there is an underproduction of bees and the government therefore should subsidize 415 00:39:29.460 --> 00:39:30.460 beekeepers. 416 00:39:30.460 --> 00:39:33.580 And the same with apple orchard owners. 417 00:39:33.580 --> 00:40:03.580 They're providing a benefit, the apple orchard owner only takes into consideration the fact that he's selling apples and profiting from selling apples, but they're feeding some guy's beads, so they're providing an external benefit, he should be subsidized too, there's a market failure, the market fails again, how about that, and there's an economist named Steven Chung who used to teach at the University of Washington in Seattle, where they grow a lot of apples, and he was kind of familiar with the apple industry, 418 00:40:03.580 --> 00:40:20.580 He published this article that was in the Journal of Law and Economics many years ago on the fable of the bees and lo and behold he found that there was a long paper trail of very detailed contracts between beekeepers and apple orchard owners 419 00:40:20.580 --> 00:40:25.580 to make sure that they got the maximum benefit from the bees pollinating the apple orchards 420 00:40:25.580 --> 00:40:29.580 in very detailed such things as if the orchard owner is going to spray pesticides, 421 00:40:29.580 --> 00:40:33.580 he has to give two weeks notice to the beekeeper so he can get his bees out of there 422 00:40:33.580 --> 00:40:35.580 and they don't harm the bees. 423 00:40:35.580 --> 00:40:39.580 So without the government stepping in and controlling the bee industry, 424 00:40:39.580 --> 00:40:44.580 and this was used in Samuelson's textbook and all the textbooks of market failure, 425 00:40:44.580 --> 00:40:47.580 we need to raise taxes to subsidize beekeepers and all this, 426 00:40:47.580 --> 00:40:50.580 But, you know, the market worked it all out very easily. 427 00:40:50.580 --> 00:40:52.580 It's no sweat. 428 00:40:52.580 --> 00:40:55.580 And there are many, many examples like this 429 00:40:55.580 --> 00:40:58.580 of where economists rely purely on this theory, 430 00:40:58.580 --> 00:41:00.580 which sounds very plausible, 431 00:41:00.580 --> 00:41:03.580 but they never lift their rear ends up off their swivel chairs 432 00:41:03.580 --> 00:41:05.580 and look out the window 433 00:41:05.580 --> 00:41:07.580 to find out what's really going on out there. 434 00:41:07.580 --> 00:41:09.580 But Murray Rothbard did. 435 00:41:09.580 --> 00:41:13.580 And so that's another virtue of Murray's 436 00:41:13.580 --> 00:41:15.580 that he was a great theorist, 437 00:41:15.580 --> 00:41:45.580 Another comment that Murray Ray made somewhere that I really loved was that about free riding is, if you think about it, the working class free rides off the efforts of entrepreneurs, and if you think about it, you know, some businessman who mortgages his house and all his property because he thinks he has a great business idea, 438 00:41:45.580 --> 00:41:49.580 and starts up the business and ends up employing 10,000 people. 439 00:41:49.580 --> 00:41:51.580 You know, those people are free riding. 440 00:41:51.580 --> 00:41:53.580 You know, he risked everything. 441 00:41:53.580 --> 00:41:55.580 You know, he invested all his money. 442 00:41:55.580 --> 00:41:56.580 He risked everything. 443 00:41:56.580 --> 00:41:58.580 He worked like a dog for years and years. 444 00:41:58.580 --> 00:42:00.580 And it finally pays off. 445 00:42:00.580 --> 00:42:03.580 And the working class, the people who work for him, 446 00:42:03.580 --> 00:42:05.580 are basically free riding off a lot of his efforts. 447 00:42:05.580 --> 00:42:07.580 But Murray says, well, so what? 448 00:42:07.580 --> 00:42:11.580 You know, should the government intervene there and tax the workers 449 00:42:11.580 --> 00:42:14.580 to make them pay for this guy's investment? 450 00:42:14.580 --> 00:42:26.580 Of course not, but if you take the free rider theories seriously, you get into all sorts of suggestions like this of government tinkering in almost every aspect of people's life. 451 00:42:26.580 --> 00:42:35.580 Lou mentioned tax neutrality and the economists have a number of different definitions of what they call tax neutrality. 452 00:42:35.580 --> 00:42:46.140 One meaning of it is if we can make the taxation and government spending kind of like the market, 453 00:42:46.140 --> 00:42:51.660 try to make the whole business of taxing and spending similar to a market, it'll be efficient. 454 00:42:51.660 --> 00:42:56.780 And how do we do that? Well, we try to set taxes equal to the benefits of government spending. 455 00:42:56.780 --> 00:43:04.460 Because when I buy a loaf of bread, presumably the benefits are a little higher than what I pay for it. 456 00:43:04.460 --> 00:43:08.060 Otherwise, why would I buy a loaf of bread if the benefits were equal? 457 00:43:08.060 --> 00:43:11.660 But anyway, that's one of the meanings of tax neutrality. 458 00:43:11.660 --> 00:43:14.260 But, you know, using his common sense again, 459 00:43:14.260 --> 00:43:19.660 you know, Murray pointed out that, well, taxes are always larger than benefits 460 00:43:19.660 --> 00:43:25.860 to the citizens because you have to subtract out the money that goes for the government administration. 461 00:43:25.860 --> 00:43:30.960 And so you can never have taxes that people pay equal to the benefits that they get from government 462 00:43:30.960 --> 00:43:35.080 if they do get any benefits at all, because you have to subtract out all the money that 463 00:43:35.080 --> 00:43:40.040 goes to pay all the bureaucrats and the overhead for the government itself. So you can never 464 00:43:40.040 --> 00:43:45.400 have that. And besides that, benefits are subjective. You can never set taxes equal 465 00:43:45.400 --> 00:43:49.120 to benefits because benefits are subjective. They're in the eye of the beholder. So it 466 00:43:49.120 --> 00:43:55.840 really doesn't make sense. And I'm going to read a quote from Murray Rothbard on this 467 00:43:55.840 --> 00:44:04.060 This topic about the subjectivity of benefits and the absurdity of thinking that it would 468 00:44:04.060 --> 00:44:11.320 be desirable or possible to set taxes roughly equal to the benefits of government spending. 469 00:44:11.320 --> 00:44:12.320 He said this. 470 00:44:12.320 --> 00:44:14.080 This is in his book, The Logic of Action II. 471 00:44:14.080 --> 00:44:18.160 He has an essay called The Myth of Neutral Taxation. 472 00:44:18.160 --> 00:44:23.020 If indeed we are to tax people in accordance with their benefit from government, we would 473 00:44:23.020 --> 00:44:27.220 We would have to tax all the net tax consumers 474 00:44:27.220 --> 00:44:29.780 to the amount of their subsidies. 475 00:44:29.780 --> 00:44:34.840 We would have to tax 100% of the salaries of bureaucrats, 476 00:44:34.840 --> 00:44:37.300 of the incomes of welfare recipients, 477 00:44:37.300 --> 00:44:40.100 and of defense contractors, and so on. 478 00:44:40.100 --> 00:44:43.260 We would then have our ideal model of the neutral tax, 479 00:44:43.260 --> 00:44:45.060 where all recipients of government funds 480 00:44:45.060 --> 00:44:48.380 would systematically repay them to the taxpayers, 481 00:44:48.380 --> 00:44:53.380 and an absurd, if rather charming, state of affairs. 482 00:44:53.380 --> 00:44:59.380 And so, I think he pretty much destroyed that idea. 483 00:44:59.380 --> 00:45:06.380 And so, if you read Murray on taking on the mainstream economists and taxation, 484 00:45:06.380 --> 00:45:10.380 you find that the public finance economists, a lot of them, 485 00:45:10.380 --> 00:45:15.380 have acted as court historians, more or less, who have concocted a lot of excuses 486 00:45:15.380 --> 00:45:21.380 State Power and State Invention dressed up in the language of economic science, but it's 487 00:45:21.380 --> 00:45:28.060 not pure science, there's a lot of subjectivity involved there, and that's one of his themes. 488 00:45:28.060 --> 00:45:33.900 And Lou mentioned loopholes, I'm going to close by mentioning loopholes, and Murray 489 00:45:33.900 --> 00:45:39.460 was of course atypical of the mainstream of the profession on loopholes. 490 00:45:39.460 --> 00:45:45.340 I recently went to a dinner with some of our economic students at Loyola every spring, 491 00:45:45.340 --> 00:46:15.340 We have several dinners for students. One of this one was the Adam Smith club. We have an Adam Smith club on our campus and we have an annual dinner and one of our alumni come to it and one of our alumni were talking about tax policy and he was saying how much he was appreciative of George Bush talking about tax neutrality in the closing of loopholes in the name of efficiency and he was well taught 492 00:46:15.340 --> 00:46:21.340 by Whoever Taught on Public Finance in my school, and so it motivated me to write a 493 00:46:21.340 --> 00:46:27.300 little article for Mises.org on this, because it struck me that here's this young man who 494 00:46:27.300 --> 00:46:34.020 is a financial advisor now, and we're working for some company, spending millions of other 495 00:46:34.020 --> 00:46:38.700 people's money or investing millions of other people's money, and he was essentially saying 496 00:46:38.700 --> 00:46:48.700 If I pay my accountant $500 and he saves me $5,000 in taxes, that's not efficient. 497 00:46:48.700 --> 00:46:51.700 From my perspective, that's pretty darn efficient. 498 00:46:51.700 --> 00:47:00.700 And moreover, if I do this every year, if I pay my accountant $500 every year and he saves me $5,000, $6,000 every year, 499 00:47:00.700 --> 00:47:04.700 that's not efficient, if I do this year in and year out. 500 00:47:04.700 --> 00:47:06.700 And that just doesn't make any sense. 501 00:47:06.700 --> 00:47:11.200 When people keep repeating a particular pattern of behavior year in and year out, 502 00:47:11.200 --> 00:47:17.500 that's the prototypical definition of economic efficiency in the eye of the decision-maker. 503 00:47:17.500 --> 00:47:21.900 But that goes against the grain of what the mainstream has to say. 504 00:47:21.900 --> 00:47:27.700 I dug up an Associated Press article about the current discussion of tax reform. 505 00:47:27.700 --> 00:47:31.700 President Bush said he wanted a tax reform that was, quote, 506 00:47:31.700 --> 00:47:35.700 fair without tax loopholes for special interests. 507 00:47:35.700 --> 00:47:38.420 and it was also revenue neutral. 508 00:47:38.420 --> 00:47:42.420 And that's kind of interesting for a reputed conservative. 509 00:47:42.420 --> 00:47:44.940 As I said, the government budget now, the federal budget, 510 00:47:44.940 --> 00:47:48.060 is four times what it was when Ronald Reagan took office. 511 00:47:48.060 --> 00:47:51.500 And so here's the latest Republican president saying 512 00:47:51.500 --> 00:47:54.380 he wants any tax reform to be revenue neutral, 513 00:47:54.380 --> 00:47:58.740 which means the government budget should not drop by a single penny. 514 00:47:58.740 --> 00:47:59.740 It has to be the same. 515 00:47:59.740 --> 00:48:03.780 So he's endorsing this current side of the government. 516 00:48:03.780 --> 00:48:08.580 The AP article said, Republicans in the House of Representatives want, quote, 517 00:48:08.580 --> 00:48:13.780 a flat tax that gets rid of deductions, thanks a lot, 518 00:48:13.780 --> 00:48:18.180 while other conservative tax reformers argue for reduced income tax rates 519 00:48:18.180 --> 00:48:23.780 that are, quote, paid for by eliminating or scaling back deductions. 520 00:48:23.780 --> 00:48:28.080 So they want to raise one tax and reduce another tax paid for. 521 00:48:28.080 --> 00:48:32.380 And so the underlying premise, of course, is that the state 522 00:48:32.380 --> 00:48:36.660 has some sort of God-given right to the current amount of income 523 00:48:36.660 --> 00:48:39.660 that takes out of our pockets and nothing should happen 524 00:48:39.660 --> 00:48:42.380 that would reduce that amount of money. 525 00:48:42.380 --> 00:48:44.340 And that's all called science. 526 00:48:44.340 --> 00:48:48.020 That's called objective science by economists. 527 00:48:48.020 --> 00:48:51.660 But Murray thought otherwise. 528 00:48:51.660 --> 00:48:57.140 And for one thing, do we have any tax accountants 529 00:48:57.140 --> 00:49:00.220 in the audience, tax lawyers? 530 00:49:00.220 --> 00:49:02.700 No, there's not a single tax cop. 531 00:49:02.700 --> 00:49:06.100 He's admitted, okay, that man is a hero. 532 00:49:06.100 --> 00:49:09.900 He helps people reduce their tax burden. 533 00:49:09.900 --> 00:49:11.700 And so when you read all these quotes 534 00:49:11.700 --> 00:49:13.900 from the Bush administration and elsewhere, 535 00:49:13.900 --> 00:49:18.900 special interests, loopholes, evil special interests, 536 00:49:18.900 --> 00:49:19.980 what are we talking about here? 537 00:49:19.980 --> 00:49:22.980 We're talking about the John Hancock of today. 538 00:49:22.980 --> 00:49:25.140 John Hancock was a smuggler. 539 00:49:25.140 --> 00:49:29.100 He helped Americans get around the import restrictions 540 00:49:29.100 --> 00:49:36.700 from King George, tax lawyers and accountants who help people figure out how to reduce their tax load are doing the same thing. 541 00:49:36.700 --> 00:49:50.300 They're heroes of the civil society, the way I see it, but the media talks about them like they're some sort of borderline criminals helping people reduce taxes. 542 00:49:50.300 --> 00:49:56.700 A few other things about tax loopholes. 543 00:49:56.700 --> 00:50:02.860 Now, one argument that's often made is that, you know, tax loopholes, you can never give, 544 00:50:02.860 --> 00:50:07.020 it's hard to think of a tax deduction that benefits everybody. 545 00:50:07.020 --> 00:50:11.580 If you don't own a home, you don't benefit from the mortgage interest deduction, and so forth. 546 00:50:11.580 --> 00:50:16.700 And the argument is often made that, well, since everyone doesn't benefit from it, it's unfair. 547 00:50:16.700 --> 00:50:19.140 Therefore, we shouldn't have it. 548 00:50:19.140 --> 00:50:24.620 Murray's take on this is what, well, if not everyone benefits from it, what we ought to 549 00:50:24.620 --> 00:50:30.620 What we have to do then is work as hard as we can to try to expand it so that everyone can benefit from it. 550 00:50:30.620 --> 00:50:34.620 That's the approach to take, not to complain that it's unfair, we don't benefit from it, 551 00:50:34.620 --> 00:50:38.620 because after all, what happens in the economy that benefits everybody? 552 00:50:38.620 --> 00:50:46.620 In a capitalist economy, nothing that happens at any time in a capitalist economy benefits everybody equally. 553 00:50:46.620 --> 00:50:52.620 But with tax policy, the discussion is always, well it has to be fair, it has to benefit everybody equally, 554 00:50:52.620 --> 00:51:07.480 Another argument is that if tax deductions are given, say, to one industry or a few industries, 555 00:51:07.480 --> 00:51:14.320 but not all industries, then what will happen is that the allocation of resources will, 556 00:51:14.320 --> 00:51:20.980 of course, be diverted artificially into those industries that are given this special tax 557 00:51:20.980 --> 00:51:25.040 tax deduction, and therefore the return on capital in those industries will be higher 558 00:51:25.040 --> 00:51:30.420 than elsewhere, and it will be different than what happens under the free market, with no 559 00:51:30.420 --> 00:51:36.220 deductions at all, neutral tax policy, and almost any economist you'll read about or 560 00:51:36.220 --> 00:51:42.980 listen to will say this is a bad idea on efficiency grounds to do this, but once again Murray's 561 00:51:42.980 --> 00:51:47.860 clear thinking asks the question, well what's the alternative? What's the alternative with 562 00:51:47.860 --> 00:51:53.860 with doing away with the tax deduction for Industry X, it's to give the government more money. 563 00:51:53.860 --> 00:51:59.860 It's to bloat the government even more. And why is that a good thing? 564 00:51:59.860 --> 00:52:06.860 And so that's why Murray was of the same opinion that Milton Friedman has often expressed. 565 00:52:06.860 --> 00:52:14.860 Milton has often said that he's in favor of any kind of tax cut at any time, for any reason, for any purpose, anywhere. 566 00:52:14.860 --> 00:52:20.780 But it deprives the state of more money, and that's always a good thing, despite all these 567 00:52:20.780 --> 00:52:26.540 efficiency and inefficiency arguments that you hear. 568 00:52:26.540 --> 00:52:32.240 So that's just about all I wanted to say about Murray's take and why it is different than 569 00:52:32.240 --> 00:52:37.240 a lot of the mainstream tax analysts, other finance economists.