Where the state is, there is the power to tax; for rulers cannot
rule without taxation. As Ludwig von Mises wrote: “The funds that a government
spends for whatever purposes are levied by taxation.” Or as Murray Rothbard put
it: “All state actions rest on the fundamental binary intervention of taxes.”
Where the state is, there also is the growth of the state. Why
does a state’s scope enlarge? One theory is that interest groups seek to use
the state’s taxing power for their own benefit. I would like to suggest a
complementary theory. When the power to tax is conferred upon rulers, many
harmful incentives necessarily are conveyed with it. These encourage the rulers
to expand their destructive acts.
Incentives
The purposeful action involves a choice among alternatives.
Choices embed incentives (rewards) and disincentives (costs), both of which can
be monetary or non-monetary. Consider, for example, the Crown’s provision of
justice in medieval England. Convicted felons were typically hanged and their
goods forfeited to the Crown, although the King might pardon a felon who agreed
to serve in the Royal army. This incentive structure motivated the Crown to
convict felons because for each conviction the payment was either the felon’s
property or use of the felon as a soldier (the incentives). The Crown faced
disincentives too, not only out-of-pocket costs but also disloyalty,
disaffection, loss of reputation and resentment if it wrongly convicted
innocent people of felonies.
Under this incentive structure, the Crown likely displays a
marked enthusiasm for arresting and convicting felons (and perhaps non-felons).
The incentive structure also induces the Crown to change the laws so as to
define more crimes as felonies. If this dynamic sounds similar to the case of
police and municipalities in the United States benefiting from the seizure and
forfeiture of goods and the resulting expansion of crimes subject to seizure
and forfeiture, that is because it is.
Harmful
Incentives of the Power to Tax
Rulers, being human, have wants that they wish to fulfill, items
like doing good (as they see it), power, glory, money, pride, ego-satisfaction,
respect, adulation, security of office, aiding the poor or the rich, ending
capitalism, spreading democracy, etc. However, what rulers want is not what
subjects want. Individuals have widely varying ideas about what is desirable,
as evidenced by the many ways they live. Obviously, rulers are unable to choose
actions that satisfy every subject’s individual preferences, even if they know
them; but also no ruler knows what the subjects want now or ten minutes from
now. Since rulers absorb taxpayer resources and spend them on projects that
cannot satisfy their subjects’ preferences, it follows that rulers destroy the
happiness of those they tax.
When constrained to employ their personal resources, rulers have
a disincentive to spend. The power to tax removes that disincentive, that is,
provides them an incentive to fulfill their aims. Consequently, they are
encouraged to such things as wars to end all wars, wars to further democracy,
great leaps forward, wars on poverty and drugs and terror, genocides,
disruptive programs, territorial expansions, subsidies and guarantees, lavish
parties, entertainments, airplanes and limousines, volumes of regulations that
kill off markets, etc.
While some
“subjects” gain from these depredations and lobby for them, thereby becoming
rulers, most do not. They can only vote, gripe or write letters, highly
imperfect means of affecting ruling actions. Votes are on representatives, not
projects; and they occur only at infrequent intervals during which the rulers
create numerous faits accomplis. No voter can
unilaterally withdraw support from the war on drugs or the war on terror or the
social security program or any other state program.
Getting their way is but the first of the bad incentives that
accompany the rulers’ power to tax. The second is to increase the taxes levied,
which is undesirable because it supports more misguided actions by the rulers.
Tax increases are predictable because the rulers gain from them as long as the
cost in lost votes is not excessive. The incentive structure inherent in the
power to tax is incredibly malign because the rulers control the amount of the
incentive! They can raise taxes at will, subject only to the loss of some
votes, which they have many stratagems to forestall.
Third, taxation provides a powerful incentive to raise funds by
borrowing. Without taxes to pay interest and principal, a state cannot issue
large amounts of debt. With that power, the state can borrow and expand,
thereby mortgaging future taxpayers. Future generations must pay the debt out
of their savings, which harms them. Furthermore, having issued debt, the state
has an incentive to pay it off with cheaper dollars. The power to tax leads the
state to replace private money by the state’s currency and thence to the many
ills attendant upon the inflation of that currency.
Fourth, the power to tax provides the rulers with an incentive
to institute programs that distribute wealth and create dependency.
Distributionist schemes grew enormously in the US only after the state gained
the power to tax incomes. These harmful programs benefit rulers. They create
state support among dependents who fear losing their handouts from the state,
and that support greatly complicates any effort to reduce the state’s power.
Fifth, the power to tax is the power to sell or exchange tax
relief for favors or donations, as well as the power to extort money so as to
prevent taxes from being imposed. Corruption of political officials is
encouraged. Additionally, these activities create a differential taxation and
costly economic inefficiencies.
Sixth, rulers have an incentive to camouflage their levies so
that the subjects do not even know how much tax they are paying. They diffuse
the tax pain widely so that it is more bearable. This is why rulers institute
withholding taxes, social security taxes, gasoline taxes, payroll taxes, sales
taxes, value added taxes, etc. Additionally, they make the tax code so
impossibly complex that even tax collectors do not understand it.
After a while, public attention settles on the complexity of the
tax code rather than the taxes. Those who debate tax code simplification often
assert that their proposals will lower taxes. They may, and pigs may someday
colonize Mars; for the rulers have no incentive to adopt tax simplification
unless they expect a gain—in revenue, in power or some other benefit.
Seventh, in order to persuade taxpayers that they spend taxes
carefully on good causes, rulers have an incentive to lie about the benefits
and costs of their projects and to report them in distorted and confusing ways.
If a war occurs, no one will be able to ascertain its cost without doing a
master’s thesis on the subject. NASA will assert that the benefits of the space
shuttle program “can be found just about everywhere!” or that ” it continues to
give the American people tremendous value for their tax dollar” while avoiding
any mention of the program’s estimated $173 billion cost. Truth is a casualty
of the power to tax.
Eighth, the power to tax encourages rulers to adopt measures
that work badly. Put another way, they have a diminished incentive to do well
with tax monies raised because they do not personally bear the full cost of
error. They can always raise more money by taxes. Hence, all programs funded by
taxes will be less efficiently run than comparable private sector provision of
the same services.
Finally, the rulers have a ninth incentive, to maintain
indefinitely the power to tax. At least three destructive activities result.
One is continually to manufacture propaganda to justify taxes. Rulers are
forever raising a hue and cry about imminent dangers and problems. They
publicize desperate “needs” that are essential to survival: poverty programs to
forestall disunity, riot or crime, drug prohibition to prevent threats to the
nation’s health, subsidies to prevent failure of the food supply or loss of the
family farmers who are the nation’s backbone, and central banking to prevent
catastrophic banking failures. Basically, rulers appeal to their subjects’
fears, insecurities and deep nationalistic, patriotic, religious and other
desires in order to justify their actions.
Second, rulers recruit a corps of propagandists, in government
and out, who tout the party line, and in return receive money, favors, access,
or other emoluments that they value, including power and feelings of
importance. The perverse consequence is a corruption of society’s information
processes.
A third means of keeping the power to tax is to diminish
effective criticism of the rulers. Were rebellious anti-tax voices to gain
influence, the rulers would be worse off. Hence, they try to halt and suppress
such criticism. Sadly, free speech and the power to tax are incompatible, and
the rulers will curtail free speech wherever possible and under whatever clever
guises they can manufacture.
Summary
and Conclusion
Purposeful choice in the realm of voluntary behavior among
ordinary people tends to improve life. The purposeful choice among rulers tends
to destroy life because rulers act on their wants, not those of taxpayers.
John Marshall in 1819 wrote that “The power to tax involves the
power to destroy.” Even if we ignore the moral argument that taxes are theft
and ignore the consequentialist arguments that taxes hamper the pursuit of
happiness and lower economic efficiency, the power to tax has numerous harmful
incentives that indeed encourage destruction in many ways.
The bottom line is this. Place no hope of betterment in changing
the party or man in office, for so long as rulers possess the power to tax,
they will use that mechanism of the state to the detriment of its subjects. The
power to tax provides the serpent of state with its victims, us. Taxes feed the
monster whose growth spreads venom everywhere. Taxes with or without
representation are evil, ever fostering harm and destruction. If we are wise,
we will defang the beast by ending its power to tax.
Originally
published in The Free Market 26, no. 8 (August 2005)
https://www.lewrockwell.com/2016/12/michael-s-rozeff/taxation-isnt-theft/