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Source link: http://archive.mises.org/8440/why-taxes-dont-matter-much-anymore/

Why Taxes Don’t Matter Much Anymore

August 28, 2008 by

Why is it that talk of tax policy doesn’t seem to have a relationship to policy generally? Whether it’s a bailout of subprime mortgage holders, large investment banks, or going to war, whether or not the resources exist to do these wonders rarely enters into the equation. Why is it that tax cuts don’t curb the government? And why do politicians not feel the need to tax us more when they spend more? FULL ARTICLE


Brad August 28, 2008 at 9:34 am

I think the simplest (and perhaps cutting, to the left of center compadre) way to put it is that money and interest has been “socialized”. The next step then is to list the litany of damage socialism has done over the last century, and make a pass at the concept of the Welfare/Warfare connection. Until our “left (or right for that matter) of center” boobs grasp that THEY (and their soft, ill defined notions) lead enexorably to an out of control State, and all the pleasantry that goes with it, libertarians of any stripe will make no headway.

Bob Kaercher August 28, 2008 at 9:51 am

Thanks for such a clearly written explanation of the fiat money regime that fuels the tyranny that lords over us, Mr. Tucker. I will definitely pass this on to all my friends and acquaintances who subscribe to varying schools of statism.

magnus August 28, 2008 at 10:08 am

The topic of this article was actually the one that started me thinking about free-market economics in the first place, all those years ago. (Actually, it was a combination of two questions I wanted answers to — (1) why income taxation is irrelevant, and (2) why housing prices were skyrocketing. I was buying my first house at the time.)

Think of the political implications of the fact that taxation has no connection to governmental activities. Taxation is the number one political hot-button. It is the ultimate wedge issue. It is what the two US political parties use to define and differentiate themselves.

It is also what they use to raise money — the Democrats’ main advertising slogan is some variant of “Let’s tax those stinking rich people!” (which is a complete lie the stinking rich never pay taxes anyway). The Republicans’ main advertising slogan is “The Democrats want to tax you till you bleed” (also a complete lie, since both parties want to do so.)

But even if these PR campaigns were not complete lies, and if the result of electing a Republican or a Democrat would actually result in a genuine difference in taxation, the actual change in tax policy means nothing. So, why bother? Why continue to have two parties defined by their tax strategies in the first place?

The political fake-politics between Republicans and Democrats is just like the fake-wars we have with non-existent foreign enemies. In Orwell’s Nineteen Eighty-Four, the three superstates were at constant war with one another, but the war was meaningless. There was no risk of any of the three invading the territory of any other. They fought over control of constantly-disputed foreign territories, but the changes of control over them were also meaningless, and changed nothing in terms of the global balance of power. So, the war with Eurasia and/or Eastasia no longer served a substantive purpose. It’s only remaining purpose was largely theatrical — to justify domestic oppression.

We can make a rough analogy between politics and war (politics is a kind of war of ideas and opinion, at least). Because the government is not operated on taxes, a political fight over taxes is completely meaningless. There is nothing for the Democrats and Republicans to really fight over. So, why do they continue to do it?

Answer: to justify their own existence. Politics in America, under our system of currency and taxation, is purely theatrical. It’s a staged, contrived fight, used to manipulate people into supporting those two parties, and to keep people from challenging the system as a whole.

I would call it a conspiracy, but it’s the most poorly concealed conspiracy in history. It’s all right out on the open.

Alex August 28, 2008 at 10:29 am

People typically separate government spending from government taxes, but this separation is false. Government spending is taxation and the taxation always occurs at the very instant the government spending occurs. The only other taxation question is incidence: who actually pays for the government spending.

Suppose the government spends $1 billion on goods and services today. This means that today the government has taken $1 billion of goods and services away from various people. This extraction of goods and services from the private sector is by definition taxation. It doesn’t matter whether the government “pays” for these goods and services with some kind of immediate “taxes” (personal income tax, business tax, consumption taxes, fees or what-have-you), or borrows (in which case, the present value of the amount of previously mentioned future “taxes” required to service the debt is exactly $1 billion), or sells bonds to the central bank and then spends from its deposit account (in which case it taxes by means of diluting the value of money).

David Spellman August 28, 2008 at 11:26 am

If a counterfeiter is passing bad bills, most of us have the tendency to want to bring him to justice. But if the counterfeiter offers to share his funny money, quite a large number of people would rather participate than shut down the operation.

Thus we see why the government can inflate the currency without accountability–they share just enough of the proceeds to buy compliance from their victims.

Yancey Ward August 28, 2008 at 12:00 pm

Across the border in New York, a local state senator is running for reelection and his opponent has been running a radio ad on a local station that has the following message:

Greg Ball has gone to Albany and voted against state aid for our schools, state aid for our villages, state aid for our seniors, state aid for our families. Send a message to Greg Ball- we need tax relief now!

Seriously- that was the ad.

Gasman August 28, 2008 at 12:06 pm

If taxes don’t matter then why have them?

Its not a trivial question given your, in my view, correct analysis. I have come up with two points that I think are of equal importance.

1. I think at least part of the answer is that taxes remain with us because they help to bolster the illusion that money is scarce. Both because one has to pay them and because you can ONLY pay them in the annointed currency of the state.

2. Of course the need to have the money to pay the taxes also helps create a demand for the currency. Thus bolstering its perceived value.

Patrick Barron August 28, 2008 at 12:21 pm

I had a pleasant conversation at a cocktail party a few years ago with a former member of the Fed’s board of governors. He is what I call a “political banker”–he inherited his daddy’s smallish bank in Minnesota, then got involved in banking politics. I asked him if he agreed with me that the Fed creates money out of thin air. He agreed, but said that sometimes it was necessary in order to stimulate the economy. So, I asked him if that were so, why couldn’t I print money and stimulate the economy? He turned his back and walked away without a word.

billwald August 28, 2008 at 12:29 pm

First, the US could not unilaterally go on a gold backed system.

Second, when the world was on a gold backed money system the working class people didn’t have any gold.

Third, going off the gold system produced our large middle class.

Mike D. August 28, 2008 at 12:35 pm

I think the major problem is that people fail to make the distinction between tax rates and tax revenue. Politicians usually just say raise taxes. They expect that increasing tax rates will increase revenue, and decreasing tax rates will increase revenue.
Does anyone know the origin of:
When tax rates are low the economy will grow. When tax rates are high the economy will die.

Mike D. August 28, 2008 at 1:04 pm

They expect that increasing tax rates will increase revenue, and decreasing tax rates will increase revenue.
Sorry, I meant to say
They expect that increasing tax rates will increase revenue, and decreasing tax rates will decrease revenue.

Tim Kern August 28, 2008 at 1:08 pm

I suppose we should take some comfort in the fact that we are paying our taxes with the Fed’s worthless money, and that no (intrinsically valuable) substitute is acceptable.

BTW, I don’t think the the phrase “after World War I when the Federal Reserve was created” is unambiguously correct. The Fed began operations on November 15, 1914.

magnus August 28, 2008 at 1:25 pm

If taxes don’t matter then why have them?

Control. Under the present system of currency, taxation is a control mechanism, not a revenue-generating mechanism.

With that control comes the political benefits I mentioned above. The government has the power to decide who pays a disproportionate amount. Since government officials have that control, people tend to suck up to them to get special favors from them. Call it rent-seeking, political patronage, bribery/extortion.

Curt Howland August 28, 2008 at 4:08 pm

Billwald, please think for a moment.

The “middle class” was established and large long before the gold standard was abandoned.

In the 35 years since the last vestiges of the gold standard was abolished, the “middle class” has shrunk.

The only thing the fiat dollar has accomplished is to make the boom-bust cycles truly huge in magnitude.

fundamentalist August 28, 2008 at 4:26 pm

I heard someone on TV say they were tired of the taxpayer having to pay for all of these programs and that it was time the government paid its fair share.

Alex, Off the subject, didn’t we have a discussion a while back about whether marginal productivity causes interest rates? If so, I’m ready to reconsider. I’ve been reading Hayek’s Pure Theory and he says marginal productivity is the major determinant of interest rates. Time preference determines the amount that people will save while productivity determines how much they will invest and therefore the interest rate.

Greg August 28, 2008 at 4:54 pm

David Spellman wrote:

“If a counterfeiter is passing bad bills, most of us have the tendency to want to bring him to justice. But if the counterfeiter offers to share his funny money, quite a large number of people would rather participate than shut down the operation.”

And people think they’re sticking it to the government when they participate when they’re actually sticking it to themselves.

Elizabeth A. Male August 28, 2008 at 5:02 pm

Magnus is correct.

Once you understand that the government can print all the money they “need” to fund socialist programs or war, one then has to wonder why we have an income tax.

The income tax serves as a means by which to contract the money supply and a means by which to manipulate the citizenry. Period. That is a stark realization.

Alex August 28, 2008 at 6:04 pm

Fundamentalist: Yes, we did have that discussion.

“Time preference determines the amount that people will save while productivity determines how much they will invest and therefore the interest rate.”

My position was that marginal productivity (the expected yield from new investment) and time preference jointly determine the natural interest rate and the natural level of investment.

fundamentalist August 28, 2008 at 6:54 pm

Alex, well I think you’re right. Check out Pure Theory online at Mises.org, APPENDIX I

“…time preference is a subordinate factor compared with the productivity of investment in determining the rate of interest, since it operates only by way of determining the rate of saving and the rate of capital accumulation, and hence the productivity of investment.”

Good job!

nicholas gray August 28, 2008 at 7:59 pm

You Americans NEED taxes. Wouldn’t you be dissing all those Founding Fathers if you had Representatives WITHOUT taxation? If taxes were good enough for them, they are almost too good for you!

P.M.Lawrence August 28, 2008 at 9:20 pm

The role taxes play in a fiat currency system is like what electrical engineers call “reactive volt amps” in regenerative braking of an induction motor. Without an AC power source, even though it’s not supplying power, the braking won’t happen.

Somewhat similarly, having taxes in a fiat currency economy spreads a need for it through all parts of the economy. Without that, people could start opting out of using it; they would probably switch to a hard currency rather than revert to barter, but even barter would be better than trading for the hyper-inflated cash you would get without taxes supporting the fiat currency. For the government, how much they take in cash depends on how much inflation they are willing to tolerate, after considering all its side effects.

A small (minarchist?) government could get away without any formal tax structure at all, apart maybe from duties to offset the effects of market imperfections spilling over from other countries, by getting revenues from a portfolio of revenue yielding assets and being willing to take payment in its own currency. As such a portfolio tends to erode over time, it would be necessary to top it up from time to time – but it’s quite practical to do that using new issues of fiat currency, then either putting up with the inflation or gradually redeeming the issue with a sinking fund approach. Effectively, this is how the Dutch set up their Culture System to exploit the East Indies. It’s still ripping off the public, but to a much smaller extent as there are real investments and there is only the opportunity cost of crowding out real people and the wealth transfer involved in making real investments but paying for it with fiat currency (that last only happens much at set up time, if you prevent further inflation with the sinking fund approach – with that, you spread the risk onto the public and only do a little continuing wealth transfer).

magnus August 29, 2008 at 9:08 am

A small (minarchist?) government could get away without any formal tax structure at all, apart maybe from duties to offset the effects of market imperfections spilling over from other countries, by getting revenues from a portfolio of revenue-yielding assets and being willing to take payment in its own currency.

This is how monarchies operate, or at least how the more successful ones operated once upon a time.

I recommend an article on LRC entitled Roundheads, Whigs, and Decivilization: A Hoppean Analysis of Stuart England, by Jason Jewell.

It discusses the largely private, self-sustaining economy of the English monarchy, which ended with the arrival of Cromwell’s Commonwealth.

“The English over time had developed the quite sensible belief that under normal circumstances the king was to “live of his own” – that is to say, provide for expenses of government from his own pocket. Taxes, with the exception of customs duties, were only to be levied in extraordinary conditions such as war. Thus, the summoning of Parliament traditionally had been received throughout the realm with trepidation and suspicion, because it was perceived to have few other functions than that of raising taxes. One of the reasons the reign of Elizabeth I was considered a Golden Age is that Parliament was rarely summoned.”


P.M.Lawrence August 29, 2008 at 10:33 pm

Magnus, I drew on precedents like that. You could add that many “government” functions were carried out by qauasi-independent endowed institutions like university colleges or by office holders receiving fees from people who had to interact with them rather than salaries from central revenue (that went out later, with 19th century reforms first tried out in India to wall off local corrupting influences). These were buttressed with privileges, though, so the government had its thumb on the scales.

The general approach largely failed in the 16th and 17th centuries because bullion inflation from Spanish possessions eroded Crown revenues. It was the opposite of the Crown being able to rebuild its holdings through inflation – it didn’t have that mechanism available. The Dissolution of the Monasteries only gave Henry VIII a one off cash gain, because he had to sell off most of the assets to the elite to keep them on side; they ended up with the revenue streams instead of the Crown.

Joshua Katz August 31, 2008 at 9:13 am

We have taxes so that we can have an IRS. We have an IRS so that we can file tax returns and provide the government with a complete description of our financial transactions, and so they can periodically arrest “tax cheats.” Plus, it creates demand for money to pay the damn taxes.

Bruce Koerber August 31, 2008 at 11:38 am

Taxes have one justification in a classical liberalism society and that is to pay for the services that are best supplied by government. That said, in a classical liberalism society subjectivist economics will be used to analyze all of the various means. If the best means is thought to be through government supplied services then it would be paid for through taxation.

Also in a classical liberalism society there will be no institutionalization of any government services and so after a period of evaluation and re-analysis if it is determined that the best means is something other than a government service then those taxes will be rescinded and the service will be provided through contracts made in the free market process.

Only an ego-driven interventionist could object to this!

New Journey August 31, 2008 at 11:50 am

Taxes do matter but they may not be what we think they are.

Printing is the invisible tax and borrowing is the differed taxation that they hope to either repay in devaluated currency or not at all. That is the100% flat tax rate.
So, why do so many people provide the Government with money by buying negative return government bonds? (It this not a tax?)

Because in very bad times in most country the perception is that they are safe. It’s better to have a devaluated currency then losing everything.

That is the rational of people investing in 2 years government bonds at 2.37 % minus taxation when the money is devaluating at a official forecast rate of 5.7% in august 2008.

Those bonds are safe to the extent that you will get you a devaluated currency maturity. They are basically guarantied buy the tax payers and the money supply increase; (which also guaranties its devaluation.)

No one but the Government can borrow this way. They borrow at 2% collect taxes on that 2% and managed to have a 9.4 trillion debt. If they had to borrow at free market rates and pay an honest positive real return based on the real inflation rate this charade would end very fast. (In time it will anyway, you can’t be irresponsible and defy gravity for very long)

In such a context often pension fund, financial Institutions, Individuals etc are indirectly left with little alternative but to subsidize the monster.

In reality we are being mislead,the government does not have an income problem it has a major spending addiction.

Don P. August 31, 2008 at 1:17 pm

Rather than raising taxes, the government prints more fiat money, resulting in the people having to pay more for goods and services. Pays for things in the short term rather than having a tax increase perform that function.

Then employers eventually have to pay higher salaries for the same work.

Presto – higher salaries push incomes into higher tax brackets! (But they never raised your taxes…)

Stanley Pinchak August 31, 2008 at 5:48 pm

To say that the US cannot go unilaterally back to the gold standard is to fall into the same trap that got us into this mess in the first place. Jeffery offers the solution of letting money be determined by the market. Your comment insinuates that there will be a centralized agency performing the switch. Money like all matters economic suffers when a technocratic class of planners is substituted for the subjective choices of all members of society.

I would guess that you allude to projected balance of trade issues and flows of specie. These are non issues when you don’t have governments arbitrarily valuing currencies against one another, leading to the fruition of Gresham’s Law. Your second point of no gold available is historically attributable to governmental bimetallism and legalized counterfeiting of the banks via fractional reserve. Fixing the ratios between Au and Ag may seem to streamline commerce and tax collection for the government technocrat, but it creates the same problems of any governmental price fixing, an over abundance of the overvalued good, and a scarcity of the undervalued good.

In the free market in money proposed, sellers would be free to accept only specie for their wares, or currencies and electronic funds fully backed by specie and reputable money changers. The argument of fear from which your statement appears to be sourced does not advance the goal of a stable and sound money.

Stanley Pinchak August 31, 2008 at 6:04 pm

New Journey,
If I am not interpreting you wrong, your contention, “[t]hat [inflation] is the100% flat tax rate,” is mistaken. I counter that inflation is not a flat tax at all. There are clearly winners and losers in the system (although that is also the case with the flat tax, but I digress). If I may quote a post over on Inside Catholic by Columcille to express the unforseen consequences of inflation.

The politically connected people and organizations who get the newly printed money first, get the privilege of using that money at a pre-dilution level of value. To use your lemonade analogy, they get to drink their fill of lemonade before the dilution takes place.

The effect over time is that value, whether in savings or assets, migrates from the poor and middle classes to the politically well connected people and organizations through this politicized monetary racket. Whoever gets to spend newly printed money first, gets more value per dollar than the guy who gets to spend that money down the road. This is because it takes time for the effects of dilution to take place.< \blockquote>

New Journey September 1, 2008 at 12:26 pm

Stanley Pinchak

“Printing is the invisible tax and borrowing is the differed taxation that they hope to either repay in devaluated currency or not at all. That is the100% flat tax rate.”

I totally agree with you.I should have mention that historically some time with Government Bonds you may have very little or no valuation at maturity.

If we think that Inflation is a tax that would be like a 100% devaluation or taxation.

P.M.Lawrence September 1, 2008 at 9:00 pm

Stanley Pinchak, “[t]hat [inflation] is the 100% flat tax rate,” does make sense if someone is breaking up the effects into two parts, the value taken and the benefits conferred, and is specifically looking at the first in isolation. The mistake would be, if that person didn’t pull it all together and just stopped there. Interestingly, if we do that sort of analysis, we find that the first receivers do end up out of pocket first – it’s just that when we pull it together we find that they gain it back from literally passing the buck. The analysis also shows that if the inflation is slow and/or people further downstream are already factoring inflation into their calculations, there isn’t a material first receiver advantage (that is, there is some, but not much as it washes out too fast to build up). The only guaranteed gainer is the currency issuer.

JIMB September 3, 2008 at 3:36 pm

Jeffrey, it should be sub-titled “Why Your Vote Doesn’t Mean Anything Anymore”.

Keep up the great work.

Daytona Beach News September 21, 2008 at 6:44 pm

No different but due to its smaller size, the effect of this corruption is much greater in small cities. Here in Daytona Beach we have the same problem so well exposed by Jeff. Corrupt politicians spending above and beyond the capabilities of the taxpayers that have to eventually pay the bills. To add insult to injury, this is one of the poorest cities in Florida and with crime so rampant that business and tourism have fled. http://www.DaytonaPost.com

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