Taxation

Unit Seven

Objectives

The goal of this unit is to:

Discover the nature of taxation as well as some of the myths and misconceptions surrounding it.
Discuss how wealth distribution would occur in a free society.

It should be clear under the premise of self-ownership that the removal of property from its owner against their will is a fundamental violation of their rights; a “garbage in” that is bound to lead to “garbage out”. Such is taxation in all its forms. Yet taxation is the very lifeblood of government; additional confirmation, were any needed, that government is wholly irrational.

Taxation is the heart of the business of government and always has been; though it was not until the “New Deal” of the 1930s that its spokespersons were honest enough to say so openly. The full quote is: “Tax and tax, spend and spend, elect and elect!” by one of United States President Franklin D Roosevelt’s closest aides, Harry Hopkins. The idea was — and is — to maximise taxes from all and to spend what is collected on parts of the population where it will most likely yield votes favourable to the ruling party, so helping perpetuate its rule.

The nature of taxation

The right for every person to own and operate their own life means that any and all actions a person takes are their’s too, along with the consequences; so for example if they carve some driftwood into a chair, that chair is their property; they have as good a right to own that chair as they do to own their person and life.

Take the logic a step further: If they decide to make another chair and, since they are able to sit on only one chair at a time, to sell the second for some medium of exchange — with which they might buy food or clothing — then the proceeds of that sale are also absolutely their’s, and nobody else’s. And so are any objects they may buy in addition to consumable food, such as a bicycle; all are their exclusive property, as much as they are their own self-owner. “Property rights", in other words, derive directly from the right to life and are just as immutable.

In market transactions like those just mentioned they may contract to exchange property, on a basis that is strictly voluntary on all sides. This leads to an increase in overall wealth, because everyone has an unique scale of values; some prefer a chair to a bicycle, some vice versa. “Price” is a mechanism for ensuring that all such exchanges are “fair"; that is, the exchange occurs only if both parties are willing to pay or accept the price agreed.

But taxation is not an agreed price; it is a removal of property without the essential element of voluntary agreement. It is, therefore, theft — an outright violation of fundamental rights. To steal some of a person’s property is to steal some of the person.

Government spokesmen try to disguise this ugly truth by pleading that taxing and spending brings some benefit to society. Here are some common examples:

“Taxes pay for essential services that only government can provide”. This embodies a fatal contradiction: If some service — postal delivery, for example — were truly essential, the market would certainly find a way to provide it, so as to make a profit; and customers would not need to be compelled to pay for it, they would do so willingly. Indeed, some have attempted to provide services that are regarded as the prevue of government, such as postal delivery, and did so well, but were driven out of business for trying to compete with government. This claim is totally specious.
“Government can spend and invest wealth more wisely than citizens”. This astonishing claim holds that people who live as parasites on the honest earnings of others are wiser than those that are investing what they have actually earned! Nobody has ever found a shred of evidence to support such an unlikely claim; it is ludicrous on its face, and the economic history of the Soviet Union proves that in practice — as do the fourteen miserable years of the American Great Depression, between 1931 and 1945, during which government tax and spend prolonged what would otherwise have been a two-year stock-market hiccup.
“Taxes enable government to redistribute wealth more fairly”. Sometimes on the false basis that market transactions leave winners and losers. In a true market there are no losers, only winners. Consequently it is impossible to distribute wealth “more fairly” than the outcomes of voluntary market transactions do.
“Taxes are required to balance the economy”. This claim is based on another false premise: That a free market is inherently unstable, and therefore needs some kind of “dampening mechanism” like tax, to prevent wild swings or “exuberant enthusiasm” this way or that. The exact contrary is the case; there is no more stable system than a free market, for nobody in a market can spend more than they own.
“Taxes are the price society must pay for civilisation”. This is perhaps the sickest claim of all, and the most common. The totally false premises are that what taxes buy can be called “civilisation” and that absent taxes and the governments they fund, society would be uncivilised. The opposite is true for both. In the inimitable words of A I S Alexander:

Taxation violates the natural rights of everyone. Taxation is legalised theft. Taxation distorts the marketplace and wastes time and resources. Taxation creates an elite class of political favourites who feast at the public trough and fence the stolen wealth, and a massive underclass of political victims who are coerced to subsidise this cannibalistic process. Taxation pits man against man, and group against group, as everyone struggles to regain what he has lost — but which has been squandered and cannot be regained. Taxation requires an immoral bureaucracy to terrorise innocent citizens. Taxation is tribute that the citizens are forced to pay the bureaucratic robber-barons. And taxation is the ultimate means which enables the politicians to wage war.

Some civilisation!

Wealth distribution in a free society

The beauty of a free-market society is that every penny of what everyone earns reaches him or her by voluntary agreement. If one does not want to pay the offered price for some item or service then they do not do so — they do without; because they prefer to do without than to paying the price! Participants always win, therefore; everyone always gets what they prefer.

Should it happen that a manufacturer of two-hundred dollar hammers finds that far too few people buy at that price to yield them the profit they seek, they will lower it until they do. Standard business procedure! Only if they completely miscalculated market demand — at their own risk — will they lose; provided the price at which their stock of hammers will sell is higher than what it cost them to make or buy them, they will gain.

From this comes a key principle: Those who best satisfy the needs and wants of other people will earn the highest reward.

"Reward” means either profit or salary; businesses that serve their customers best will make the most profit, and employees who give the best value to their employers will earn the highest salaries. All this is true provided that no third party interferes to redistribute what is earned, through taxes that punish the most productive, and is a truly elegant result of the free market. Nothing could be more fair than that!

But what, some may ask, of the unfairness that some people, being extraordinarily talented or hardworking, may become “filthy rich"? Again, since every cent was earned by voluntary exchange, the premise is absolutely false: It is not unfair in any degree!

Still what, they insist, of the unusually untalented, or bone idle. Will they not starve to death?

There is nothing inherently unfair in those who will not work starving themselves — those who are too proud to offer service to their neighbours in exchange for food or money; on the contrary, that is perfectly just. The alternative is to steal from their neighbours, violating their self-ownership — and that would indeed be grossly unfair. Still, that does leave the question of those unable to work.

The essence of all free-market transactions is that they are voluntary. Normally there will be an exchange; but so long as they are voluntary, there need be no exchange. This is called a “gift”. Arguably, the giving of a gift brings its own reward in exchange, in the warm feeling of self-respect that results. Whether that is so or not, gift-giving is a time-honoured practice of human beings and a perfectly sound component of a free-market society. It may be called “charity” and the gift of help to someone unable to cope for themselves is a very commonplace activity even when government steals massive sums of money on the false promise of spending it to help the poor. In periods of lower taxation, charitable and well directed giving was even more potent. So it will be again, and more so, when society becomes entirely free.

Review

Make use of the following questions and the associated feedback to check knowledge and understanding of the topic covered in this unit.

Question One

How can it be “fair” when some are thousands of times richer than others?

If the rich folk got that way by having their government friends prohibit competition, it is not.

Unfortunately that can happen. Government regularly protects its favourite corporations, in return for handsome campaign contributions, and top managers are grossly overpaid.

Some people work harder and smarter than others, and the free–market outcome is perfectly fair.

Correct! The opportunity for unlimited wealth in return for pleasing customers is a powerful motivator for innovation and nobody loses.

“Rich” is a relative term. Some have very little money, but count themselves immensely rich. What price a happy marriage, for example?

Good. This answer is not a cop–out. Some teachers for example find their work so rewarding in itself that they would not change their job for two or three times the pay.

In a free–market society people can get super–rich only by making a super contribution to its wellbeing; for example, by innovating computer operating systems.

Once an industry has matured, managers can still earn good salaries — but the really big rewards come from the geniuses who invent new ways to do things. The system should encourage and reward them! That is what a free market does, and that is one reason why free–market societies prosper so much more than those regulated by government.

Question Two

How can it be fair that people become successful and rich just because they were born with more talents than others? Surely taxation is needed to produce more equality of results?

Yes it is, and no it is not fair. You are proposing to reverse one hundred fifty years of good progressive social justice.

Please close the door on your way out. Seriously, restudy and reconsider what “fair” means. Voluntary choice is at its centre, and a forced result erases that vital human attribute and violates the right of everyone to use their own life, their own way. Then try again.

“Equality” is possible in terms of opportunity or of outcome — not both. Which do you want?

This is vital to understand. Every race starts at the starting grid; it is rare for two runners to cross the finish line together. So it is in life.

The premise is mistaken. Success comes from hard work as well as from inborn abilities, and in any case people have talents of different kinds. Consider “book smarts” vs “street smarts”!

Right again. Some of the richest people in the world started with no education and a poor upbringing.

If equal results are forced on everyone, what happens to the motive to excel?

Correct. Such motives are eliminated. Result, after a generation or two: Widespread poverty. This is now pending, in the heavily socialist countries of northern Europe, some of which actually boast that they have eliminated differences of take-home pay. Already the motive to go to work is evaporating; absenteeism and “sick days” are multiplying.

Question Three

A large minority of government spending is financed by borrowing. Is this tax? Why, or why not?

No. It is never–never financing, an accounting entry that nobody will ever pay off.

Not correct; it is a tax all right. The money comes from somewhere, and both principal and interest will be paid by tomorrow’s taxpayers. What borrowing does is to shift the burden from the present generation — who enjoy the alleged benefits — to the next; it is a way of making our children pay for our government, and of making present taxpayers imagine that government costs less than it does.

Yes. It shifts the burden from today’s taxpayers to tomorrow’s, but it is tax all right. Even the interest has to be paid.

Correct. A fraction of government budgets are for interest alone on previous borrowing. When considering the interest paid in a year, that accumulated debt can end up being about thirty times that fraction or roughly double the budget; two whole years worth of spending, slipped under the rug. It is a somewhat hidden tax though, hence even less honest than the visible sort.

Not really. When government goes out of business, those bond–holders will be left high and dry.

Good thinking. Some time in the future people will just walk away from government. There will be nobody to pay off that principal, those bonds. Moral: Do not buy government bonds!

Question Four

So presuming the accumulated government debt would still to be around when government is no longer wanted, bond holders will have to whistle for their money. Is that fair and right?

Not at all. Through their pension plans, those bond holders include a large number of individuals with very little money. Some provision should be made to compensate them.

It is a viewpoint, and one can sympathise with those who were misled into their bad situation by pension fund managers and the like. But government is terrible news for a vast range of different people; it is not practical to try to compensate them all. The most that could be done would be to auction off government assets — land, buildings, and so on — and portion out the proceeds on a per–capita basis.

No it is not, but the blame rests fully on the government who sold those bonds knowing full well that they could only be redeemed by stealing more money from future taxpayers. Do not blame those who end the nightmare!

Correct, the blame sits on government for sure. Even so, buyers of bonds are underwritten by the government, so they knew what they were doing.

It is fair. The bond buyers knew perfectly well when they bought them that neither interest nor principal could ever be paid except by taxes on real people; they were certainly accessories to theft and need no special accommodation.

Correct. It is hard, but as the day of liberation draws close the facts of the situation will be ever wider understood and those who understand them should divest themselves of government bonds at the best price they can. An advantage to those who embrace the ideas of freedom earlier rather than later.

Question Five

Is inflation a tax? Why, or why not?

Of course not. Inflation is when prices rise, and that is caused by greedy merchants and manufacturers.

Not true. Inflation is a dilution of the currency and price rises are its result, not its cause. Try again.

No. Whatever causes it, inflation hits government buyers just as everyone else.

Not true. Government buyers buy before prices have risen as a result of printing more money. Real people get stuck with the bill, about a year to eighteen months later.

Certainly it is. Government prints more money to pay its bills, and after some months everyone else has to pay higher prices for everything. The government gains, the people lose. That is a tax.

Correct, except that inflation is caused not literally by printing more hundred dollar bills but by a complex trick of selling bonds to the central bank, which pays for them from an account that has no funds until the bonds — an apparent asset — are deposited there. Yes, that is not easy to understand, but it is the way it is done.

No. It is a banking manoeuvre, operated by the central bank, and is not connected with taxes.

The central bank does take part in the swindle, but would be powerless to do it alone, without government sanction and active participation. Try again, please.

Question Six

What are the different kinds of tax?

Income tax.

It is one of the biggest. But it is not the only one. What else?

Sales and property taxes.

These are how cities and regional governments grab most of their loot. For that reason it is no longer possible to outright own any real estate. But there is more.

Inflation tax.

Yes, that is a component of the grab. But there is more.

Borrowing from future taxpayers.

Certainly. But there is more.

Loading companies with excise, import, and profits taxes.

Yes, that too — though notice, only real people ever pay taxes. If a company is burdened by a tax, it merely builds that expense into its price structure and end–users end up stuck with the payment, well hidden as a tax. Even so, there is more.

All of the above.

Exactly. The political trick is to exaggerate the benefits of government and understate its costs. Very few who have not studied this information would be able to list all of the ways one get taxed! And even the tax total does not nearly present a full picture of the cost of government; the way its voluminous rules and regulations interfere with production and so raise prices and depress living standards is almost incalculably huge. When government goes, all that will go with it; hence an enormous resulting surge in living standards.

Question Seven

It is often said that any tax reduction should not favour “the rich“, because the rich can obviously afford to pay taxes more easily than others. Is that correct? Why, or why not?

Certainly, it is obscene that those struggling to get by should get a tiny tax reduction while millionaires get handed tens of thousands a year.

Sounds a great way to win votes. But how did it happen that the millionaires were paying so much in the first place?

Not correct. The rich are paying more tax in the first place, so any general reduction is bound to cut theirs by a larger dollar amount.

That is true, but it still misses the main point. Try again, please.

The whole argument misses the point; taxation is theft and should therefore be zero for everybody, rich and poor alike. Pitting one class against another is just a way of distracting attention from that central point.

Correct! Fomenting class warfare is a favourite trick of some politicians to disguise the fact that they are totally superfluous.

Question Eight

It is all very well saying that if a service is “essential” the market would provide it. But what about the “free rider” problem? There are some services like national defence which cannot be priced for discrete sale to large numbers of individuals. Do they not need to be furnished by government and paid for by taxes?

Indeed there are some such needs, and taxation is the only feasible way to fund them.

Wrong. Some services may be a bit clumsy to fund without taxes, but it is never impossible — and always vital to find one so as to avoid the obscenity of government theft. Try harder, please.

The premise is false; there are no collective needs, only individual ones. The alleged problem does not exist.

Good. Any person has only individual needs and wants. Even the concept of a nation will carry little meaning in a free society and if there is a perceived danger of foreign attack the market would swiftly provide a means to repel it. Check the other answers, and move on.

Where there is a will, there is a way. The “free rider” problem is grabbed by collectivists like lifebuoys are grabbed by drowning men, but if one works at it, a way can be found to fund such needs without taxes.

There probably is a way, given a will, but in this case there is no need for such a way. Try again please.

Question Nine

It is all very well saying that trillions a year in redistribution should not take place. But what about the millions of people dependent on such money — welfare recipients, for example?

Obviously that is the flaw in all of this. There is no way millions can be left to starve; blood would run in the streets. What is done is done, it is fixed and can never change.

No, this thinking is still inside the political box. Try harder, please.

There must be some kind of transition program; cancel welfare for those under forty-five years old and wind it down progressively for those older.

Nice idea, but this is still inside the box. Further, it has been tried: Politicians have tried to end welfare, which they rightly see as doomed, however voters will not buy it. While “something for nothing” remains on offer, that is what they will prefer. No, there is a better way.

There will still be the same amount of money around — more, in fact. So it is just a matter of finding a way to bail out those who would otherwise suffer.

Yes, that is the key. Welfare benefits approximately equal welfare taxes, so when both are cancelled the same amount of money will be available. Members of the younger generation — which were paying the tax — will need to consider supporting their parents with the liberated money. Further, there are very many in the older generation who do not in fact depend on welfare handouts; the over-65s are the richest part of society, as a group, and many could reverse–mortgage their houses so as to free up cash on which to live. The problem is not nearly as big as at first appears. Further, there is ample notice of the change as it will not happen for some time. In the meantime, everyone has time to make some provision for their retirement.

Hardship or not, theft is theft and it must stop, period.

That is correct, though there is no need to appear harsh once the facts and size of the problem is examined realistically. There is a better answer.

Unit Seven

Resources

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freeblr taxation what if charity replaced taxation

freeblr taxation taxation call it what it is

freeblr taxation six lessons on the history and economics of taxation

freeblr taxation funding public goods six solutions

freeblr taxation private charity versus public welfare

freeblr taxation whos the scrooge libertarians and compassion

freeblr taxation taxes are the price we pay to live in a civilised society or are they

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