Side Notes
Note 1
The Two Laws mentioned in this chapter, laws essential for a civilized society, were first formulated by writer Richard Maybury in his book Whatever Happened to Justice?
Note 2
Businesses in a free market that engage in genuine capitalism do not constrain people to buy their products and services the way governments can.
When businesses get in bed with governments to exercise force through monopolies and coercive trades, we are not talking about free markets and capitalism anymore.
These businesses are exercising the power of government force to get what they want.
At best these businesses are engaging in crony-capitalism. Free markets have nothing to do with their activities.
Remember: Crony-capitalism is not true capitalism.
Chapter 5
Taxes
Taxation is the price which civilized communities pay
for the opportunity of remaining civilized.
Albert Bushnell Hart,
from Actual Government As Applied Under American Conditions (1903)
Taxes can be good or bad.
When governments tax, they use the threat of coercive power to take something of value from people. Sometimes the term voluntary is used to describe legitimate taxation. But there is nothing voluntary about what happens when someone refuses to pay the tax.
Taxation always comes with the implied or direct threat of force: confiscation of property, prison, and in rare cases lethal force. There’s a reason why special agents of the Internal Revenue Service are authorized to carry concealed weapons.
Normally, when the threat of force is used to take something of value, we call it robbery. But when governments do it, with or without consent, we call it taxation.
In the best case, the people who are being taxed get a say over who gets taxed, and how that tax revenues are used.
On Gold Island, the people support the guardians and the local council, who protect everyone from the bandits from Iron Island.
Everyone helps with the support. Everyone benefits.
Taxes are good when everyone contributes,
and everyone benefits from
how the taxes are used.
Taxes on Gold Island are good taxes.
The bandits on Iron Island think differently. Zahn and his followers simply take what they want, as much as they want, from whomever they want.
They make people catch fish, and then they take all the fish they want. They leave just enough so the fishers can survive and catch more fish.
They call that “collecting taxes.” Of course, when someone does not pay their taxes, the consequences are bad.
Are they acting like a government?
Yes. They use the threat of force to take what they want, and threat of force is the distinguishing characteristic of government.
Businesses like those that have developed on Gold Island trade through choice. They do not exercise force; they exercise simple persuasion. (Not the manipulative kind.)
In other words, governments force; businesses persuade.
Bad government takes without rules, unequally,
without regard for those they take from.
Bad government does not lead
to a healthy, civil community.
Not surprisingly, Zahn and his buddies don’t care about a healthy, civil community. All they care about is satisfying their own greedy desires.
Therefore, the government on Iron Island is clearly bad. And taxes on Iron Island are bad taxes.
But what about the people on Silver Island?
The people on Gold Island are naturally good. Those on Iron Island are naturally bad.
Silver Island people are different. They are both good and bad, and mixed. Some have come from Gold Island and are openly good. Some have come from Iron Island and are openly bad.
But some from Iron Island appear good and hide their badness. And the rest who are born on Silver Island do not realize how they’ve been influenced by Iron Island.
Tor and Sophia on Gold Island have a daughter, Jade. She has a friend on Silver Island and ends up moving there and staying with her friend.
Zahn’s son, Zeb, also moves to Silver Island, but nobody knows he comes from Iron Island. Zeb has lots of charm, good looks, and a great smile. He is a smooth talker.
He knows how to look good and hide his bad intentions.
Zeb and Jade meet and begin dating. They are both interested in the activities of the local council and having nice things.
Zeb slowly corrupts Jade’s thinking about how the Silver Island government should use power, although she does not realize what he is doing. What he says makes so much sense.
For example, Zeb introduces the idea that more should be taken from some people, and other people shouldn’t have to pay taxes at all. In essence, Zeb thinks people should be treated unequally before the law.
Jade begins to think he’s right, even though, at first, she feels uncomfortable with the idea. Zeb persuades her to get elected to the local council. She does.
He also teaches her how to be a smooth talker.
The people who govern Silver Island are smooth talkers. They know how to use language to fool others and sometimes even fool themselves.
They can talk themselves and others into
believing that Good is Bad and Bad is Good.
How this misuse of language works is more fully explored in two other books in this series:
Language and Rhetoric: (A Lifetime of Learning, Book 7)
Law and Liberty: (A Lifetime of Learning, Book 9)
Taxes on Production and Consumption
Generally speaking, a government can tax what people produce (wealth) or they can tax what people consume (purchase or trade).
A tax on production means taking a portion of the wealth that is created. Let’s say a government has a 10% wealth tax. Then for every ten fish caught, the government gets one. For every ten baskets created, the government gets one.
A tax on consumption means taking a portion of what is purchased or traded. If you buy ten fish, the government gets one. If you buy ten baskets, the government gets one.
You can already see that in a free trade economy where only the wealth created is traded, problems will arise when a government wants to tax either through consumption or production.
We’ll see in the chapter on Money how this issue is resolved.
Production and consumption taxes can be either good or bad depending on how they are applied.
Let’s list the characteristics of both good taxes and bad taxes.
And keep in mind that exceptions are easy to imagine. An exception does not invalidate the characterization. The discipline comes in applying exceptions rarely, transparently, and with right discrimination.
Characteristics of Good Taxes:
• Everyone contributes in some way
• Everyone benefits from how the tax is used
• If the tax benefits a smaller portion of the people, only those people pay the tax
• The people taxed have a real say in who taxes, who gets taxed, and the amount of the tax
• People are able to keep a majority of what they produce
Characteristics of Bad Taxes:
• The tax allows some people to take without a sense of obligation or indebtedness
• People benefit from taxes who do not pay the tax
• Some smaller groups benefit from a tax while others who do not benefit pay for the tax
• People have no real say in who taxes, who gets taxed, and the amount of the tax
• People are taxed a majority of what they produce (turning people into serfs or slaves)
You are probably thinking, “Wait a minute. I can already think of exceptions to this.”
What about a basket weaver? How can a basket weaver help the guardians like the fisher, who can provide food?
What about someone who can’t work?
/> Shouldn’t taxes be used to help them?
Good questions.
Questions about someone who can’t work will be answered more fully in another book. For now, think about what bad things can happen when the threat of force is used to take from one person and to give to another.
When does using the threat of force, even for what the government thinks is good, become similar to what the bandits on Iron Island do?
Think about the smooth talkers on Silver Island.
People can talk you into believing the threat of force is a good thing, and then they use that threat of force for their own benefit.
Or for the benefit of their friends.
George Washington said:
“Government is not reason, it is not eloquence;
it is force! Like fire, it is a dangerous servant
and a fearful master.”
When you use the threat of force, limits should be placed on it.
What limits?
We will explore the answers to this question in Law and Liberty (A Lifetime of Learning, Book 9).
For now let’s keep things simple and focus on the questions about the basket weaver and the fisher.
These questions lead us to our next topic:
Money.
Deep Dive: Who Pays Taxes?
Generally speaking, there are two kinds of people when thinking of taxes: 1) Those paying taxes, and 2) Those who live off the taxes paid.
People in the first category have their own private businesses or work for a private business.
People in the second category work in public service; for example, as military, firefighters, police, and for agencies that perform particular non-first responder roles, such as the U.S. Geological Survey and the Environmental Protection Agency.
These are not moral categories. You may have good and bad people in both.
The distinction drawn here is simple: If you have any kind of government agency sending you a check, or, if you work for a company whose income is completely dependent on government funding, you do not pay taxes.
But some argue that even though their income comes from government, they in fact do pay taxes.
Well, no. Not really. Sure, government sends you tax forms and applies sales taxes and other kinds of taxes to the money you have.
But those who are really paying your taxes are taxpayers.
Remember, government can’t create wealth. If it could, it would have no need for taxes. Government can only tax wealth. And since government can’t create wealth, it cannot tax people who do not create wealth.
Even if they have an income, spend money, and fill out tax forms.
The fact that so many people fail to understand this distinction is why so many people do not have a realistic, grounded understanding of economics.
Chapter 6
Money
“Specie [gold and silver coin] is
the most perfect medium
because it will preserve its own level;
because, having intrinsic and universal value,
it can never die in our hands.”
Thomas Jefferson,
letter to John W. Eppes, Nov. 6, 1813
What is money?
In the best sense, money is anything that people agree to use as:
1) A unit of account
2) A medium of exchange
3) A store of value
4) A unit of deferred payment.
Historically, precious metals, mainly gold and silver, best fulfill all four functions. Everyone on Gold Island wants gold and silver (as do the people on Silver Island and Iron Island).
Why do gold and silver work best as money?
Let’s break down the four functions of good money:
1. A unit of account
On Gold Island, how many fish equal one woven basket?
What if the fisher thinks the basket is not worth two fish, but agrees that it’s worth more than one?
What if the basket weaver does not need fish, but the person wanting the basket has only fish to trade?
You can see the problem.
The basket weaver wants several things, but not fish. The fisher would then have to go to other people and make trades for things the basket weaver wants. Then after much work and several trades, the fisher can trade these items for baskets.
Now... let’s say that the local council begins to create standard gold and silver coins.
They create small gold coins that weigh 1 ounce (oz.), 1/2 oz., 1/4 oz., 1/10 and 1/20 oz.
These coins were measured in Troy ounces, which means 12 ounces per pound rather than the standard 16 ounces.
The silver coins are of the same weight. However, it takes 15 silver coins to equal a gold coin of the same weight. So 15 silver coins weighing 1 oz. equals one gold coin weighing 1 oz.
15 silver coins = 1 gold coin.
Now the people on Gold Island can price all of their goods in terms of gold and silver coins (also known as specie).
The fisher does not need to make all those trades just to get baskets. The fisher can price the fish, and then trade the fish for gold or silver coins.
The basket weaver sets a price for baskets and accepts the gold and silver coins in trade.
The gold and silver coins become a “unit of account” that helps everyone easily relate the value of one item to another.
Anything of value that can be traded, both goods and services, now has a price in gold and silver coins.
And the economy of Gold Island speeds up.
Why?
Because money functions as a medium of exchange.
2. A medium of exchange
Obviously, the people of Gold Island can now exchange their goods and services much more easily.
• Money simplifies and speeds up trade.
• Money makes possible more division of labor.
• Money allows workers to price their skills more easily creating specialized skills.
Prices can change easily, even day by day.
If a product is suddenly in greater demand,
the price can be raised.
If people think the price is too high and stop buying,
the price can be dropped immediately.
The community becomes more effective and efficient. And the people’s standard of living begins to rise more rapidly.
3. A store of value
Tor can pay his fishers gold and silver for the fish they catch rather than pay them in fish. The fishers can spend the money right away, or they can save and store it to use later.
When money and prices are stable, the stored money can buy as much later as it does the day it’s stored. In other words, in a stable economy the money maintains its purchasing power, and then saving money can be encouraged.
Saved money can create capital.
As Tor builds his business, and his fishers and coconut gatherers continue working for him, he begins saving gold and silver coins.
This savings gives him flexibility. He can build his business by hiring more laborers, or he can build more fishing rods and slingshots to sell later.
These fishing rods and slingshots, otherwise known as durable goods, are called capital assets.
Capital creation can only happen
out of stored savings.
A community or society with increasing capital can increase the quantity of goods.
Therefore, sound money, like gold and silver coins, results in an increasing standard of living for the community.
4. A unit of deferred payment
Money can be loaned to others when they have a strong need for it. The person who lends the money expects that the money repaid equals in value the money loaned, not counting interest.
In other words, the amount of goods and services the lender can buy now equals the amount the lender can buy later, once the borrower repays the loan.
If someone who has saved money discovers that the money will have less value over time, they will probably not
save it. They would rather spend it now while it has more value.
When money loses purchasing power due to rising prices (popularly, but wrongly, called inflation), interest rates rise to compensate for the loss.
One day, Alex comes to Tor and wants to borrow 20 gold coins to invest in a project. Tor thinks Alex has a good idea and decides to loan the 20 gold coins, but with interest.
Tor expects Alex to pay him back 22 gold coins in six months.
Payment is therefore deferred for six months.
But the gold coins work only as units of deferred payment as long as the value of the coins is the same, six months later, as they are at the time he makes the loan.
If prices are rising steadily, then Tor will build into the rate of interest the amount of the rising prices.
In other words, if what 20 gold coins buy today will cost 21 gold coins in six months, Tor will add an additional gold coin to the amount to be paid back: a total of 23 gold coins.
Money that maintains its value as a unit of deferred payment helps keep interest rates low.
Low interest rates, and saved money that maintains its value, make long-term financing of projects possible.
Once again, sound money increases a community’s standard of living.
A note on counterfeiting
Counterfeiting means that the value of the coin is not the same as the stated value stamped on the coin. In other words, if a gold coin is stamped with the words “1 oz. in Gold” but the coin weighs less than 1 oz., it is counterfeit.
The stated value must be the same
as the actual value.
Look at the gold coins below and notice the little mill marks on the edge. (Or look at your dimes, quarters, or half dollars.) Those marks have been milled onto the edge of the coins to keep people from shaving the coins.
Imagine the coins did not have these marks.
Bandits from Iron Island could take a bunch of coins and shave just a little bit of gold off of each one. Then they could melt down the gold and make another coin.
They could pass off the shaved coins, which have less gold in them, as if they held the full intrinsic value. They would have made counterfeit coins.
Gold and silver coins all have these mill marks to prevent shaving. Coins made out of nickel or copper (or zinc) do not have these marks because those coins are made of base metals, which hold much less value.
Money and Wealth Page 4
