It Is Dangerous to Be Right When the Government Is Wrong

by Andrew P. Napolitano

  A Budget Not Even a Mother Could Love

  But social justice legitimizes our system of taxation, right? Before you settle on the image of government as a self-described nurturing caretaker, consider the following statistics. America on average gives Egypt, a country which the Human Rights Watch sought fit to characterize as having a “poor human rights record,” $1.3 billion a year in military assistance. Or, what a colleague of mine likes to call “Military Expenditures on Shifty, Suspicious Dictatorships and Unsavory Polities” (MESSD-UP). Interestingly, MESSD-UP’s military aid to Egypt works out to around $867 for every homeless child in America, certainly enough to provide each with warm clothes for the winter, that is, if the government were in the business of providing clothes.

  “Okay,” a critic will concede, “perhaps taxation isn’t legitimized by social justice, but what about stimulating the economy and job creation? Are we supposed to just sit in unemployment lines and wait for things to get better?” In the recent American Recovery and Reinvestment Act, for which the federal government borrowed and spent $1 trillion, $389,357 was spent on researching “the concurrent versus separate use of Malt Liquor and marijuana.” And rather than pay a cover to get into a comedy club, your college student and his buddies can stay in the dorm and enjoy the fruits of $712,883 spent developing “machine-generated” comedy (i.e., robots that tell jokes). Although no doubt fascinating research topics which will benefit society, precisely how these projects relate to “Recovery and Reinvestment” can only be understood while relishing the concurrent effects of malt liquor and marijuana and joke telling. At least we’ll have something to laugh about when the Act starts cutting into our paychecks.

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  Nonetheless, the government insists that our current system of taxation is justified by social justice, or public necessity more generally. However, this is and always will be a deeply flawed claim. As for social justice, consider the sales tax, which applies both to luxury items and to those goods which are essential to the maintenance of life, such as food and shelter. Everyone pays the same tax on a gallon of milk, irrespective of one’s total assets. Thus, the burden of that tax will be much heavier on the poor than the wealthy, because it takes up a higher proportion of their disposable income.

  Moreover, taxes on the businesses which produced those goods also raise prices, as do taxes on the materials that went into making them. Thus, the effective tax paid on a good is much higher than the sales tax we see printed on a receipt, especially when considering the numerous hands through which a good will pass before it reaches the end consumer (think of a snowball increasing in size as it rolls down a hill). Ironically, how much of that tax is passed on to consumers is a function of how “essential” the good is. If consumers cannot do without it, such as is the case with food and medicine, then producers can raise prices to reflect the increased cost of doing business without fear of lost sales. This serves to compound the inequitable effect of taxes on the poor.

  More fundamentally, the sales tax is a direct affront on the natural right to trade. How can we be free if the government can impair that right? How can we survive in anything more than a hunter-gatherer society without a right to trade? Without this right, the rocket scientist could not trade his services for food, the actor could not trade his services for health care, and the banker could not trade his services for clothes. Infringements upon the right to trade, such as the sales tax, are a substantial impediment to economic development; they reduce the incentive to work hard and trade the product of that labor for other goods and services. In sum, when the middle and lower classes claim that they are being squeezed to death by the skyrocketing cost of living, they should look first to taxation. And lest you think American taxpayers are getting those revenues right back in the form of welfare programs, recall our friend MESSD-UP and its reallocation of wealth abroad.

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  Furthermore, welfare programs themselves, financed by taxation, so often denigrate the poor more than they help. Consider public housing. Public housing imposes a maximum limit on the earnings of individuals who wish to benefit from use of the program. Thus, once your earnings exceed this level, you are no longer eligible to live there. Not only does this give people a disincentive to earn as much as they can, it also ensures that the poorest members of society will all be living in close proximity to one another with limited opportunities and motivation to escape. In other words, it discourages socioeconomic integration. The natural trend of these large apartment complexes is that families lucky enough to be successful will move out, and the majority of residents who remain will likely be single female heads of households. This leads to large concentrations of poor teenagers, who cannot find employment, who lack the discipline and guidance of an older male, and who are left to their own devices. As economist Thomas Sowell has argued, the massive increases in the welfare state have caused the destruction of African American families; “The black family, which had survived centuries of slavery and discrimination, began rapidly disintegrating in the liberal welfare state that subsidized unwed pregnancy and changed welfare from an emergency rescue to a way of life.”

  Even more infuriating is that this decrease in living standards, caused by the government, ends up serving as the government’s justification for increasing public wealth transfers, and thus increasing taxation. In short, it is a self-perpetuating system of inefficiency. Recall when we discussed the government’s breach of the social contract: The government cannot create the necessity for providing its own services.

  This brings us to public necessity. The problem with public necessity is that, as a term, it is inherently subjective and bears no restrictions; what Chodorov called “unspecified social betterment.” Moreover, history teaches us that the size of government has always been a function of the public’s distaste for taxation and taste for public spending, not what officials understand to be “necessary.” People opt for government programs not because they determine that society cannot function without them, but because they feel uncertain about their ability to provide for themselves. Thus, people favor stimulus spending during a recession not because it is necessary, but simply because it is comforting to think that the government is doing something to fix the recession. In any event, most government spending is not even debatably necessary by any stretch of the imagination. Remember the joke-telling robots?

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  Furthermore, taxes cannot be necessary, because government programs now financed by taxes could be paid for by user fees instead, or provided by the free market. Not only would this not violate our rights, it would also be better public policy. Take public roads, for example. Why would it be fair for someone who never uses roads to pay taxes to support them? And if we had to pay for roads whether we used them or not, wouldn’t more people choose to travel on them, thus congesting highways and diverting consumers away from alternative means of travel, many of which are better for quality of life and the environment?

  It is an accepted principle that if you do not pay in proportion to what you consume, then you will opt to overconsume, depleting scarce resources. Assuming we already had a car, we would be much more likely to use a road instead of a train if the road use was free. And the reverse is true. If trains were already paid for by taxes, no one would use roads. Why is it any more sensible to have a user fee for trains (i.e., a ticket), but not roads? The simple solution to both the fairness and the efficiency problems is, of course, to use privately owned tolls instead.

  And even then, unless the government relinquishes its monopoly control over toll roads, which effectively taxes us in a different form; if we must drive to work on a government road, and the road has already been more than paid for with tolls, how is the toll at that point anything different from a coercive tax? Only competition can lead to less waste. Consider that the George Washington Bridge, which was completed in 1931, originally cost $19.6 million, or $273,538,789 today. Nonetheless, the bridge currently collects about $1 million in tolls each da
y. In other words, ignoring maintenance for a moment, its original cost can be made up in a quick nine months. No wonder the government does not want any competition! As we can see, not only is taxation unnecessary; it violates our natural rights and leads to wasteful results.

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  Moreover, consider the effect that redistribution of wealth has on a market economy. The difficulty with forced taxation is that it discourages the production of goods and services, since the wealth garnered is not commensurate with the amount produced. Why would we choose to work hard if we knew that our money would be taken away from us on our way home from work? As Murray Rothbard notes, “Instead of helping expand the amount and degree of production in society, the robber is parasitically draining off that production. Whereas an expanded market encourages increases in production and supply, theft discourages production and contracts the market.”1

  Additionally, the government’s choice of how to spend the money it takes will always be more inefficient than the market. Government spending must, in the long run, come from its citizens, citizens who could be spending it upon the projects which they value the most. By contrast, an out-of-touch government with little access to the information necessary to make prudent spending decisions, cannot allocate those resources in a manner which will maximize our welfare. Consider the recipients of New Deal spending, the most “lauded” spending project in American history: Unused roads, dams, and bridges, and white-collar beneficiaries and the unemployable. How could taxation possibly serve the public necessity if it strangles our economy?

  Human history confirms these theoretical arguments. Americans experienced the greatest increase in living standards the world had ever seen during the period from the late nineteenth century up until the early twentieth century. While there was some government intervention in the economy during this time, the interventions absolutely paled in comparison to the interventionist policies which started in the early twentieth century and continue to the present day.

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  Starting in 1870, prices began to fall sharply in America as a result of a stable monetary supply combined with a massive increase in the American economy’s productive capacity. The government, shockingly, lowered the cost of living by withdrawing some of the Civil War greenbacks; and by 1879 the rest of the currency was convertible into gold. Lower prices meant that over time Americans’ earnings and savings were gaining purchasing power (the amount of goods that can be purchased per unit of currency) even if they maintained the same nominal value, and thus they were wealthier as a consequence. Since interventionist policies have gained hold, we have experienced lower rates of growth, and numerous financial crises.

  In sum, many critics may point to the fact that there is still a shortage of truly necessary charitable donations as evidence that libertarianism doesn’t work. However, I think the fact that the government prefers to spend tax dollars on military aid to Egypt rather than provide decent health care for veterans is evidence that a social welfare state, financed by profligate taxation, doesn’t work. That taxes are somehow justified by the public necessity is clearly an outright lie which we, quite literally, cannot afford to believe.

  I’ll Gladly Pay You Tuesday for a War Today

  The government has a few more creative ways of paying for its initiatives, all of which still amount to theft. In this section, we focus our attention on government-issued debt. If the government chooses not to raise taxes in the present to pay for a program, it can issue a bond. In this transaction, someone agrees to give the government money now in exchange for repayment at a later date, plus an interest payment. The problem, however, is that eventually these obligations have to be paid for with taxation. A bond is therefore, as Chodorov notes, a claim on future production. It allows the government simply to defer taxation to a later date.

  It is important to reflect briefly on some of the common but erroneous beliefs about public debt, held by both ends of the ideological spectrum. It is theft in the sense that it can only result in more taxation, and thus property will be taken away from you against your will. It is not, however, literally taking money from future generations; clearly, money cannot be “taken” from the future to pay for something today. It is simply reallocated from bondholders to the government, where it is then injected into the economy. It is for this reason that proponents of bond issuance argue that it is not in fact theft: In essence, although future generations will be burdened with a debt obligation on their heads, the money supply increased when the government spent the revenues from debt issuance. Thus, this argument goes, there will be more money flowing in the economy with which the future generations can pay those taxes; money which would not have been there but for the issuance. Moreover, we receive any benefit of money being spent now as opposed to later, for example, in the form of a cleaner environment brought about by government investment in green technologies.

  This argument, however, runs into the same problems that we encountered in the section on taxation and the social contract. Because future generations obviously cannot consent to pay for government spending when the debt is issued, taxation cannot be in any sense voluntary. Furthermore, it is also unrealistic that future taxpayers will receive benefits commensurate with their tax burden. One group will always be benefitting at the expense of another. As we shall see in a moment, this is even more likely to occur with borrowing than with taxation.

  Debt issuance is more problematic than taxation for several reasons. The first, and most obvious, is that future generations do not get to vote on those government expenditures, thus making it taxation without representation. Moreover, although proponents of debt issuance may paint a sunny picture of our children reaping the benefits of today’s prudent investments, they are ignoring the other half of the picture; they will be shackled to the cost of the previous generation’s political mistakes. I have yet to hear a cogent argument for why our children should have to pay for our military disasters. Children cannot inherit debt from their parents’ debt, so why should they inherit their parents’ government’s debt?

  Second, it is much more likely that profligate spending will result from debt issuance than taxation. Because older folks do not have to pay for as much of the debt as the young (who have a whole taxpaying life ahead of them), it is less costly. This creates an incentive to favor wasteful spending, since the full burden falls on someone else’s shoulders. Thus, debt issuance is a surreptitious form of intergenerational factionalism. Nice try, Dad.

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  Politicians also have an incentive to favor debt issuance, since it allows them to engage in wasteful spending without its typical political consequences; the people get what they think is the benefit of larger social programs, and no corresponding increase in taxes. The key problem with this is that it results in higher spending, and thus higher taxes, than the electorate would have otherwise opted for. A related trick politicians have up their sleeves is simply to cut taxes but not public spending, a tempting “have your cake and eat it, too,” policy given that both actions make them look good in the eyes of the public. Assuming, however, that the budget was balanced before those tax cuts, this reduction in government revenues must be met with an equal amount of debt issuance (you can’t spend more than you have). Thus the effective tax has not changed, just who pays it and when. Put simply, public debt, like credit cards, facilitates fiscal irresponsibility.

  In response to all of these arguments, a proponent of debt issuance may argue that all of these criticisms are outweighed by the fact that government bonds can be a lifesaving tool in times of emergency. There are instances, such as during war or recession, when the government is simply not able to raise taxes to pay for all of its spending. History, however, teaches us that if government must issue debt to pay for its spending, then the odds are it is engaging in something it ought not to be, namely, offensive wars and bailouts of private industry. World War I, and the fifteen million deaths which it caused, would not have been possible if governments cou
ld not have issued debt or printed money to pay for it. Thus, the ability to tax is an important fiscal (as opposed to legal) constraint on the size of government.

  A final criticism of debt is offered by the economist Henry Hazlitt in his masterpiece Economics in One Lesson. Essential to this criticism is the distinction between two possible uses of money—consumption and savings. With both uses, money is being injected into the economy. (If it is saved in a bank, it will be loaned out to businesses and other consumers. Very little money is actually saved as cash “under a mattress” nowadays.) Moreover, both will increase employment. The practical difference relates to the fact that money which is saved is, in the words of Hazlitt, “turned over to someone else to spend on means to increase production”; in other words, it is invested. For any given economy there will be some optimal combination of savings and consumption spending which maximizes total consumption in the long run (we would be poor if we never invested in new technology, or by contrast, never bought the goods which those investments developed).

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  The government often contends, particularly in times of economic crisis, that it is justified in issuing debt to stimulate consumption and restore the economy to its pre-crisis state. Such was the contention during the Great Depression, and such is the contention during the current financial crisis. The government argues that savings are excessively high, and thus it is proper for the government to convert those savings into consumption spending. There are, however, a number of reasons to reject this claim. The two inescapable effects will be an increase in the price of goods and services by shifting money toward consumption, and a long-term reduction in production levels by shifting money away from investments. Moreover, although banks may be refusing to loan in the midst of a crisis, there is no reason whatsoever to believe that temporary, government-induced consumption spending will be able to restore liquidity. If such were the case, then the economy would be well on the path to recovery at the time of this book’s writing. President Obama’s explanation of the failure of spending to correct the economy? “We simply haven’t spent enough yet!” Perhaps he should have read these words spoken by Henry Morgenthau Jr., FDR’s secretary of the treasury, in 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work. . . . [We] have just as much unemployment as when we started . . . and an enormous debt to boot!”