Let’s put the “Tax-the-Rich Truth Squad” on the case and see how Obama’s claims hold up.  We’ll start with the claim that millionaires pay lower rates than their secretaries. This debate started when legendary investor Warren Buffett claimed that the rate he paid on his income last year — 17.4 percent — was about half what his secretary paid.

Defining “Income”

Part of the problem here is in how you define “income” and the relevant “rate.”  Buffett pays himself a very low salary, but earns a great deal of income in capital gains from his speculative activity.  Those gains are indeed taxed at a lower rate — 15 percent — than his secretary’s top rate of 30 percent or more.  The reason the capital-gains rate is so low is that those gains are taxed first at the corporate level — at  35 percent — before being taxed again as Buffett’s income at 15 percent.  In addition, it’s not clear what Buffett included in his secretary’s taxes and income.

In any case, we have aggregate data on the relationship between income and average tax rates.  According to the Tax Foundation, 2008 IRS data show that the top 1 percent of taxpayers paid an average 23.27 percent of their income, with the top 5 percent paying 20.7 percent; top 10 percent, 18.71 percent; top 25 percent, 15.68 percent, and top 50 percent, 13.65 percent.

The bottom 50 percent paid an average 2.59 percent.  So either Warren Buffett is an outlier because so much of his income is from capital gains (which appears to be the case) or he has a terrific accountant whom his secretary should hire.  We might agree that taxes should be lower for everyone, but to claim that the system is regressive, as Buffett and Obama do, is simply wrong.  The Truth Squad says:  “FALSE!”

What about paying “their fair share?”  Defining “fair” and “share” is tricky and subjective of course, but consider this from that same Tax Foundation report: In 2008 the top 1 percent earned 20 percent of all income but paid 38 percent of all total income tax receipts.  The top 10 percent earned 46 percent of all income and paid 70 percent of total taxes.  Seems like more than their fair share.

Percentage of Total Income

Suppose instead we think “fair share” means that people should pay the percentage of total tax receipts that corresponds to their income’s percentage of total income. We can sort of compute this for Warren Buffett.  He paid about $6.9 million in taxes last year, a rate of 17.4 percent. If you do the math, that means he reported about $39 million in income. Total 2010 national personal income (wages/salaries minus transfer payments) was about $6 trillion. So Buffett’s income was about 0.00065 percent of total income. Total income taxes paid by Americans in 2010 was about $900 billion.

Nine-hundred billion multiplied by 0.00065 percent is $5.85 million, hence, Buffett’s “fair share.” Except Buffet paid $6.9 million.  So by that standard, Warren Buffett is overtaxed!  Yes “fair share” is subjective, but these data are strong enough for the Truth Squad to declare: “FALSE!”

Not Enough Money

Finally, would taxing the rich help close the deficit?  The 2009 data show that the slightly more than 250,000 households making more than $1 million earned a total income of $727 billion.  A 10 percent surtax would generate at most about $73 billion, which amounts to a whole 2 percent of federal spending.  This also assumes the rich take no actions to avoid that additional tax.  Taxing millionaires will help the deficit?  The Truth Squad once again says, “FALSE!”

In the end all that’s left of the argument for taxing the rich more heavily is pure demagoguery and a desire to avoid the real solution: reducing the size and cost of government.  The danger here is that in emulating FDR’s Depression-era attacks on “economic royalists,” Obama will repeat FDR’s results: entrepreneurs and investors sitting on the sidelines, afraid to innovate, invest, and take risks lest their hard-earned income be confiscated. Engaging in fact-free class warfare is the last thing we need when private investment continues to lag, keeping the economy in the doldrums and too many people unemployed.

The Washington Times reported Wednesday:

U.S. debt shot up $239 billion on Tuesday — the largest one-day bump in history — as the government flexed the new borrowing room it earned in this week’s debt-limit increase deal.

The debt subject to the statutory limit shot way past the old cap of $14.294 trillion to hit $14.532 trillion on Tuesday, according to the latest the Treasury Department figures, which are released on the next business day.

That increase puts the government already remarkably close to the new debt limit of $14.694, which means one day’s new borrowing ate up 60 percent of the $400 billion in space Congress granted the president this week.

That didn’t take long. Clearly normalcy has returned. But sighs of relief seem inappropriate.

Weathering the “Cuts”

The day after The Deal was signed, lifting the debt limit and “averting default,” America awoke to CNN reporter Richard Quest’s Keynesian lament that “the economy won’t weather the cuts.” Cuts? He apparently meant the small reductions over ten years in the rate of spending growth. That’s Washingtonese for “cuts.” What Murray Rothbard called a “cut-cut,” where the amount spent actually falls from the present level, long ago passed from consideration. In our world there are only two varieties of “cuts,” both of which are in The Deal: “real cuts” (reducing the rate of growth) and “phony cuts” (canceling an authorization for spending that no one expected to occur anyway). If you don’t get that, don’t worry. It will all be in the next edition of the Newspeak dictionary.

Even if we accept the Keynesian framework for the sake of argument, we might wonder about an economy that is so fragile it won’t survive modest reductions in the rate of increase in government spending. Even the New York Times sees what’s going on:

There is something you should know about the deal to cut federal spending that President Obama signed into law on Tuesday: It does not actually reduce federal spending.

By the end of the 10-year deal, the federal debt would be much larger than it is today.

Indeed, both the government and its debts will continue to grow faster than the American economy, primarily because the new law does not address federal spending on health care.

One gets the feeling that the frantic opposition to the mere slowing of the growth rate is motivated less by concerns about the economy than by concerns that the people may be catching on that government spending is the problem not the solution. After all, besides 9.2 9.1 percent unemployment, almost no economic growth, and much more debt, what exactly do we have to show for a trillion dollars in “stimulus” spending?

Government as Consumer

Anxiety over cuts, assuming it is sincere, is unnecessary. We need not wonder what would happen if government spending were reduced because we already know. To the extent government abstains from spending, the resources it would have consumed will be available for private production. (Let’s throw in the repeal of all privilege too.) Government is a consumer of scarce resources. The promise of government investment is debunked when we understand that real market investment is a price-guided entrepreneurial commitment of resources driven by hunches about what consumers will want in the future. Assuming a freed market, whether a particular use of resources best serves consumers is eventually revealed in the profit-and-loss statement.

Although advocates of government projects try to appropriate the aura of market investment, their schemes can’t escape being acts of consumption. They are guided not by market prices and expected consumer preferences but by politicians’ wish to be reelected. The funds won’t be acquired by consent and therefore put to a market test, and the services won’t be offered on the market to free consumers with the power to say no thank you. Rather, resources will be acquired either by taxation, that is, by the threat of force, or by borrowing, which is possible only because the government has power to tax. Any resulting services will be provided not on the market but through the political process in which some are compelled to subsidize others. Costs are severed from benefits.

Value Lost

Thus we have no reason to think that government transforms resources from less-valued to more-valued forms as freed markets tend to happen to do.

Those who fear for the economy if the government fails to spend ever more money should review the near-laboratory test of their belief that took place at the end of World War II in 1945. At that time the Keynesians despaired that if government spending (and hence aggregate demand) dropped sharply after the war and government employment declined with the discharge of 10 million draftees, the economy would fall “back” into depression, complete with the high unemployment seen in the 1930s. Yet this did not happen.

Robert Higgs writes,

The unemployment rate in 1947, when the transition was nearly complete, was less than 4 percent.… The year 1946, when civilian output increased by about 30 percent, was the most glorious single year in the entire history of the U.S. economy. By 1948, real output was back on its long-run growth trend, and during the decades that followed, the economy was spared the sort of deep and long debacle that a congeries of wrongheaded government policies had caused during the 1930s.

As Higgs documents, the war did not end the Depression, unless you count consumer deprivation and eliminating unemployment through military conscription as signs of prosperity. It was the government’s retrenchment after the war that did the trick.

“In brief, the war boom as typically comprehended did not occur; nor did the corresponding ‘crash of 1946′ so evident in the standard GDP data,” Higgs writes.

The lesson then is that real and dramatic spending cuts through a radical reduction in what government does is the authentic way to stimulate economic growth, not to mention expand individual freedom.

After paying creditors [in August], the government will have $87.8 billion on hand in ready cash in August to spend on its myriad programs — such as Social Security, wars in the Middle East, subsidized farming and maintaining a court system. With an un-raised debt ceiling preventing the federal government from borrowing more money, it will indeed be unable to fund the full range of these programs.

To renege on promises to pay subsidized farmers and other non-creditors, however, is not to default; rather, it’s to belt-tighten.

Election after election, Americans go to the polls and elect representatives who frequently promise to make the “tough choices” about allocating scarce government revenues. Now is the time to make those tough choices.

It is assumed almost universally that the U.S. government must make its interest payment and cover its other financial obligations on August 3, the day after the drop-dead date for a debt limit increase, or suffer a severe economic and moral blow. Even a late interest payment would be economically catastrophic, we’re told. (That strikes me as fear-mongering.)

Thus the debate is over how not if the debt limit is to be raised — as if a $14.3 trillion debt is not enough. Some would simply raise the limit. (President Obama wants it raised by $2.4 trillion.) Most want the new limit combined with a plan to reduce the budget deficit over the next decade.

Shrinking that deficit can be accomplished theoretically by cutting spending, increasing tax revenues, or both. I say “theoretically” because a plan to raise revenues would likely fall short of its target: Taxpayers are adept at tax avoidance, which is why for the last several decades total federal revenues have been fairly constant as a share of GDP (at just under 20 percent) regardless of tax rates. (They are lower now because of the recession.)

Lost Dimension

Throughout the political hullabaloo something important – the moral dimension — has been lost. (Now there’s a first!) It is not just that the government’s commandeering of even more resources from the private sector is regarded as the “grownup” thing to do. It’s also that most people assume the government is something noble and its word must be kept at all costs. The pundits and politicians go beyond claiming that missing the deadline would bring economic calamity; they also say that a late payment  — not a default, not a repudiation, but merely a late payment — would be a moral calamity. This is laughable, considering the endless list of lies presidents, members of Congress, and other government officials have peddled for years. Politicians have been the butt of American humor from the beginning precisely for that reason. These are the people who gave us budget cuts that are actually only reductions in the rate of increase, off-budget financing, and other creative accounting. Need I cite more examples? (If you want more, check the statements made in the run-up to any of America’s wars.)

In truth a late payment would expose government for what it is, in case anyone forgot. The lesson would be instructive. Government is not some higher super-competent entity like the man pretending to be the Wizard of Oz wanted the people to think he was. It’s a coercive organization of limited, flawed, and essentially ignorant men and women who, having been anointed in an election after campaigns hawking snake oil, are presumptuous enough to think they are capable of making wise decisions on our behalf.

There’s also a forgotten moral dimension with respect to those who receive government payments. Not all of them are of equal moral stature. While no one (except the actual owners) can deserve government largess because it originates in taxation, some claims are superior to others. Someone who lends money to the government does so freely, knowing that taxation will make repayment possible. (If you doubt this, ask yourself how many bond buyers there would be if government had no power to tax.) In contrast Social Security/Medicare recipients were financially raped all their working lives and pushed into dependence on government at a stage of life when earning an income is difficult or impossible.

Weaker Claim

If the government is going to pay somebody, whom should it be? It’s clear to me that the coerced creditors should be favored over the willing creditors. Back of the line, bondholders.

I am not justifying taxation to pay welfare state beneficiaries — quite the contrary. I am saying only that victims of the State have a stronger claim to resources in its possession than those who freely speculated in and hoped to profit from its power. (The low interest rate assumed obeisant taxpayers.) No one is punished for not buying bonds. Alas we can’t say the same for those who attempt to opt out of Social Security or Medicare.

Finally, if the government suddenly refused to pay its willing creditors (and wasn’t merely late with its payment), the world economy could be disrupted in the short term (though with big benefits later). That potential for disruption, which would surely harm innocents, might justify paying the bondholders for now — but not out of any real moral obligation to them. Among the many offenses of the political class is that finally cleaning up its economic mess is not likely to be painless.

However you come down on the matter, Mario Rizzo reminds us that higher taxes are already on the way.

As the U.S. government neared its $14.29 trillion debt limit, the congressional vote to raise it was expected to be uncontroversial. That’s pretty much how it’s been in the past. In the first decade of this century, the limit was raised a half-dozen times. But this time it’s different. The public is worried about the inconceivably large budget deficits and a total national debt that approaches 100 percent of GDP. Politicians, opportunistically and otherwise, decided to cash in — pun intended – on the public’s concern: There would be no raising the debt limit without a deficit-reduction plan.

At first this position was treated as outrageous. Grownups, the “serious” pundits said, don’t act like this. Grownups would simply raise the limit – enabling the government to incur new debt in order to pay the interest on old debt. It’s an odd idea of what grownups do. But the public was in a deficit-reducing mood, so the demand for a “clean” debt-ceiling bill softened.

So here we are. The debt limit technically was reached in May, but Treasury Secretary Tim Geithner engaged in some accounting maneuvers to pay the bills, extending the de facto deadline to early August. (Robert Murphy has the details.) That leaves just a few weeks to come up with a deal. Efforts at compromise so far have yielded nothing. The hitch is that President Obama and congressional Democrats want new tax revenues to go along with spending cuts, while Republicans oppose increasing taxes. There’s been some ambiguity in the GOP ranks over whether ending corporate tax credits or deductions counts as a tax increase. We’ll let that go here, except to say that giving politicians more money to spend is the nuttiest thing I can imagine.

Catastrophe in the Offing?

The message from Washington – and from most pundits – is that if the debt ceiling is not raised, great catastrophe will befall the United States of America and its people.

Is it true? Consider the source. The people telling us this are the same people who think government spending and tax revenues are never high enough. These are the people who measure “national greatness” in budgetary terms. Of course they’d panic at the news that their credit cards are maxed out.

Would the sky fall if the government couldn’t borrow another penny? Robert Higgs addresses the question:

Have governments defaulted in the past? Of course, they have, on hundreds of occasions over the centuries. Have these defaults triggered “catastrophic economic and market consequences”? No. When a government defaults, there are consequences, of course, including heightened reluctance of lenders to lend to the deadbeat government in the future or at least to lend at such favorable interest rates. Often partial payments of principal and interest are arranged or debts are restructured. The world keeps spinning.

Yes, but we’re not talking just any nation. We’re talking about the United States — American exceptionalism and all that. Writes Higgs:

Has the U.S. government ever defaulted before? Yes, in 1933, by refusing to honor the gold clauses in its bonds, the Treasury engaged in a massive default. Ironically, for mainstream economists and economic historians, the government’s abandonment of the gold standard, along with its associated default on its gold obligations, is seen as the decisive government action that stopped the Great Contraction and set in motion a recovery from the Depression. (Don’t laugh: for some time, this interpretation has been the reigning view in academia.)

Religious Tones

Peter Klein, another excellent economist, notices what I’ve noticed. Pundits and politicians talk about the government in almost religious tones. Its word is sacred, and thus default would be an unspeakable sin.

In following the debates over raising the US debt ceiling I’m struck by the frequent claim that defaulting on public debt is unthinkable because of the “signal” that would send. If you can’t rely on the T-Bill, what can you rely on? Debt instruments backed by the “full faith and credit of the United States” are supposed to be risk-free, almost magically so, somehow transcending the vagaries of ordinary debt markets. The Treasury Bill, in other words, has become a myth and symbol, just like the Constitution.

I find this line of reasoning unpersuasive. A T-bill is a bond, just like any other bond. Corporations, municipalities, and other issuers default on bonds all the time, and the results are hardly catastrophic. Financial markets have been restructuring debt for many centuries, and they’ve gotten pretty good at it. From the discussion regarding T-bills you’d think no one had ever heard of default risk premia before. (Interestingly, this seems to be a case of American exceptionalism; people aren’t particularly happy about Greek, Irish, and Portuguese defaults but no one thinks the world will end because of them.) So, isn’t it time to de-mythologize all this? Treasuries are bonds just like any other bonds. There’s nothing magic, mythical, or sacred about them. A default on US government debt is no more or less radical than a default on any other kind of debt.

Chris Matthews would be screaming, “Heretic!” right about now.

But come on. Really. The fate of the world hinges on the U.S. government’s credibility? That’s a joke, right? Have you followed WikiLeaks? Why are financial obligations more sacred than human rights obligations?

$750 Billion

Yet another wise economist, Robert P. Murphy, puts in all in perspective.

Debt service currently consumes about one-sixth of incoming revenues….

[I]f the government merely returned to its 2003 spending levels, then the current revenue stream would be enough to pay for everything — including interest on existing debt. I personally don’t remember the country falling apart in 2003 from lack of federal-government expenditures.

That would mean cutting $750 billion from the nearly $4 trillion budget. (One item, the war in Afghanistan, costs $10 billion a month.) Murphy suggests that if the politicians don’t want to cut spending, they could sell off government assets to get the money. No need to raise the debt ceiling.

Those are moderate solutions that would leave no lasting reforms. Default would bring lasting benefits. For one thing, it would make people less eager to lend to the U.S. government, and how could that be bad? Debt, among other evils, makes government bigger. As Jeffrey Rogers Hummel says, default would be a balanced-budget amendment with teeth!

The government should indeed give up its land and other assets, but I don’t see why its voluntary creditors should be first in line for payment when there are so many coerced creditors around, including Social Security recipients, who had their potential savings stolen throughout their lives.

Consenting creditors – people who chose to buy T-bills – count on getting repaid with stolen property, aka tax revenue, which in my book taints the contract. If justice is the standard, the State’s victims should get restitution first.

In the April 17 ABC News-Washington Post poll, 59 percent said that the deficit should be reduced through a combination of unspecified spending cuts and tax increases. But 69 percent opposed cutting Medicaid, 78 percent opposed cutting Medicare, and 56 percent opposed cutting the military. Fifty-three percent said they would oppose a plan to reduce the debt significantly by “raising taxes on all Americans by a small percentage and making small reductions in Medicare and Social Security benefits.” Fifty-four percent said Medicare “should remain as it is today.”

In other words, cut spending but stay away from where the money is. Medicare, Medicaid (plus the State Children’s Health Insurance Program), and the military represent nearly 40 percent of the budget. Social Security is about 20 percent more. (Interest on the debt is 4.6 percent.)

In the poll 72 percent supported raising taxes on people making more than $250,000—54 percent “strongly.” There’s far more sympathy for raising taxes than cutting spending—not a good sign for libertarians.

A McClatchy-Marist poll had similar results. It found that a clear majority, 64 percent, thinks the country is “going in the wrong direction.” Of those who identified themselves as conservatives, 78 percent agreed. Moreover, 57 percent of all respondents said reducing the deficit is the priority, with 68 percent of conservatives agreeing. No other objective came close.

I point this out because in the same poll, when asked if Medicare and Medicaid should be cut, 80 percent said no, with 68 percent of conservatives agreeing. How about reducing military spending? Fifty-four percent overall said no, including 72 percent of conservatives. (“Liberals” and moderates approved, 60 and 54 percent, respectively.)

Sixty-nine percent said they were against raising the debt ceiling, right after saying that they would not cut the biggest items in the budget.

I note for the record that of the conservative respondents, 48 percent said they support or “strongly” support the Tea Party, while 44 percent said they do not.

So what does all this mean? It seems to mean that despite the prominence of the Tea Party and despite the fact that the word libertarian is spoken in the news media more than ever before, the prospects for a major reduction in the size of government in the immediate future are dim—this at a time when there is also near-panic about the debt and the deficit. If big cuts aren’t going to happen now, then when?

Sources of Resistance

The political system does not reward budget cutters. There is too much to gain politically by purchasing votes through promises of largess, while hiding or deferring the costs, if they can’t be pushed onto to some unpopular group. I don’t think this means Americans are a bunch of self-conscious freeloaders. Rather they likely (and erroneously) see any benefits they collect as a return on their forced tax “investment.” Social Security and Medicare have certainly been misrepresented as such. Why wouldn’t people be upset at the thought of reduced benefits? Even Medicaid, the medical program for low-income people, affects the middle class. Medicare, the medical program for all retirees, does not cover nursing-home care, but Medicaid does—if a person meets the means test. It’s an open secret that if a nursing-home resident has too much money to qualify for Medicaid, the staff will advise the family on what to do to become eligible. This usually involves a lot of gift-giving and other activities to reduce the resident’s assets to the acceptable level.

The upshot is that even middle-class younger people may well oppose cuts in Medicaid if it means they will have to pay directly for nursing-home care for an elderly parent or perhaps have him or her live in their homes. This is part of a more general consideration. Most people already on Social Security and Medicare would understandably oppose cuts in those programs. Less obvious is that their grown children are likely to take the same position, and not just because they expect to be beneficiaries someday. If those programs were to end, or even be cut substantially, the children would have to help pay their parents’ living expenses out of their own pockets. Yes, they pay today through taxes, but there are differences: First they don’t pay 100 percent, since other taxpayers also kick in, and second there’s a bureaucracy between them and their parents. I suspect most people would rather support their parents through the government rather than directly, and most retired people would probably prefer that too. Face-to-face dependence of aging parents on grown children who are trying to raise their own families can be a source of tension if not outright conflict.

Intervention Begets Intervention

Government interventions are not isolated phenomena; rather they are part of a political-economic-social-cultural system, with one part often intended to ameliorate the effects of some other part. (Remember Ludwig von Mises’s “critique of interventionism.”) Thus we should not discuss any particular part in a vacuum—not if we want to say something constructive.

For example, it is an eminently libertarian prescription to call for the abolition of Medicare on grounds that transferring wealth by force is immoral. But left at that, the argument will persuade no one and might even discredit the speaker. Why? Because it fails to acknowledge that many current beneficiaries would be left in dire straits if the program suddenly ended. Nor would it suffice to say that once the program was gone, “the free market” would handle things satisfactorily. What free market? American medicine consists of a government-insurance-doctor-hospital protectionist cartel that suppresses competition and innovation in the provision of services through licensing and myriad other interventions. High prices and callous bureaucracies are the rule for many people, and that didn’t begin with Obamacare. Surely libertarians don’t wish to be understood as proposing—in the name of human freedom—that a vulnerable portion of the population be subjected to that gauntlet.

None of this means that these programs are legitimate or should not be abolished. They require force (taxes) and induce dependence on the political class. What I’m suggesting is that libertarians need to bear these considerations in mind when making their case against such government intervention. They need to be cognizant of the wider issues and combine their critique of Medicare with a critique of the entire government-medical-insurance complex.

If we are to expand the sphere of freedom while shrinking the sphere of force, we first need to be understood. We won’t be understood if we are oblivious to people’s concerns and to how they currently see the government’s role, however fallaciously, in addressing those concerns.

In his attempt to shrink the budget deficit President Obama hopes to pick up $44 billion over ten years by ending certain tax preferences for the oil industry; the big five companies’ $35 billion in first-quarter profits make them a juicy target for politicians unexpectedly seized with a sense of fiscal responsibility. Of course the oil companies are no strangers to power, having enjoyed a mostly cooperative relationship with national and state officials for generations. Live by the lobbyist, die by the lobbyist, they ought to say.

Not that this should bear on the question, but for the record, even with oil and gasoline prices rising of late, industry profitability is hardly extraordinary. In the first quarter of the year the industry ranked 114th out of 215, with an average profit on sales of 6.2 cents per dollar. The pundits who rail about this aren’t likely to mention that the broadcasting industry average is 10.5 percent and the periodicals industry average is 51 percent.

Discretionary Power

But let’s leave the oil industry aside (today) and concentrate on the arbitrary and discretionary power implicit in the tax controversy. In 2004 the Domestic Manufacturing Deduction (DMD) was enacted, which the Associated Press says “allows companies of almost any type to deduct from their taxable income up to 9 percent of profits from domestic manufacturing. Under the rule, oil and gas companies were classified as manufacturers, but their deduction was capped at 6 percent.” As indicated, the purpose of the deduction was to encourage domestic manufacturing. The money the oil industry saves from this deduction is 42 percent of the total Obama is trying to get his hands on. (The rest of the $44 billion would come from ending specific oil industry allowances regarding intangible costs, well depreciation, and payment of royalties to foreign governments.)

If we judge government actions by the liberty standard, one might well conclude that the DMD was a mistake for two reasons. First it’s an inferior way to reduce the taxes. The burden on economic activity should be lifted not by ad hoc deductions granted by politicians trying to look as though they are “doing something,” but rather by slashing tax rates across the board — if not outright repealing taxes. (The latter is always preferred, given the traits that taxation has in common with robbery – as a previous Freeman editor, Frank Chodorov, was fond of pointing out.) Second the deduction is manipulative: It doesn’t apply to any and all economic activity but only for domestic manufacturing, thus introducing a differential that favors some over others and distorts the marketplace. (At the margin, some will do what is necessary to get the deduction rather than what makes true economic sense.)

Politicians of course love the power to reward and punish that a complex tax code accords them, but the rest of us should be concerned by such discretion. Considering the muddled media coverage, it would be useful to distinguish subsidies from tax “breaks,” “loopholes,” and the like. A subsidy is cash from the government treasury compliments of the taxpayers. The other things are exemptions from a tax: say, a deduction from taxable income or a credit against taxes “owed.”

Moral Distinctions

The moral distinction between a subsidy and a tax break should be obvious. With the former the beneficiary gets someone else’s money by force; with the latter the beneficiary keeps what otherwise would have been taken.

I would offer distinction among varieties of tax breaks. There’s a world of difference between an across-the-board tax cut or repeal and a targeted cut, deduction, or credit. Advocates of liberty should always applaud the first while being dubious of the second. Why? For the reason already noted: Discretion is dangerous. Politicians don’t need the traditional power of a central planner to impose economic schemes. All they need is the power to write differential tax policy. Virtually anything that can be done by regulatory decree can be also done by selective tax preferences. In the 1980s, when Japanese carmakers were running rings about the American Big Three, some protectionist congressmen proposed a tax deduction for buyers of domestic vehicles only. (It wasn’t enacted.) When government can shape economic behavior through the tax code, there surely is no free market. Tax neutrality is a chimera, but we should still object whenever the tax writers try to manipulate the economic process.

What Now?

This of course does not tell us what should happen with the tax preferences already in effect, specifically the oil-industry breaks. I have a few reasons for advising that they be left untouched (pending  drastic reduction or repeal of taxes.) First, removing them would now amount to a tax increase, that is, the additional forced, therefore immoral, transfer of resources to the government. Second, selective elimination would be another exercise in economic planning through the tax code. And third, ending the deductions would give the politicians the means commit further mischief.

Cutting the deficit should be a step toward cutting the budget, which in turn should be a step toward shrinking the government. The State doesn’t need more revenues. It needs to stop doing things.

In the latest ABC-Washington Post poll (April 17), 59 percent said that the deficit should reduced through a combination of unspecified spending cuts and tax increases. But 69 percent opposed cutting Medicaid, 78 percent opposed cutting Medicare, and 56 percent opposed cutting the military.  Fifty-three percent said they would oppose a plan to reduce the debt significantly by “raising taxes on all Americans by a small percentage and making small reductions in Medicare and Social Security benefits.” Fifty-four percent said Medicare “should remain as it is today.”

In other words, cut spending but stay away from where the money is. Medicare, Medicaid (plus the State Children’s Health Insurance Program), and the military represent nearly 40 percent of the budget. Social Security is about 20 percent more. (Interest on the debt is 4.6 percent.)

In the poll, 72 percent supported raising taxes on people making more than $250,000 — 54 percent “strongly.” There’s far more sympathy for raising taxes than cutting spending – not a good sign for libertarians.

Wrong Direction

The new McClatchy-Marist poll had similar results (link here). It found that a clear majority, 64 percent, thinks the country is “going in the wrong direction.” Of those who identified themselves as conservatives, 78 percent agreed with that. Moreover, 57 percent of all respondents said reducing the deficit is the top priority, with 68 percent of conservatives agreeing. No other priority came close.

I point this out because in the same poll, when asked if Medicare and Medicaid should be cut, 80 percent said no, with 68 percent of conservatives agreeing. How about reducing military spending? Fifty-four percent overall said no, including 72 percent of conservatives. (“Liberals” and moderates approved, 60 and 54 percent, respectively.)

Sixty-nine percent said they were against raising the debt ceiling, right after saying that they would not cut the biggest items in the budget.

I note for the record that of the conservative respondents, 48 percent said they support or “strongly” support the Tea Party, while 44 percent said they do not.

Dim Prospects

So what does all this mean? It seems to mean that despite the prominence of the Tea Party and despite the fact that the word libertarian is spoken in the news media more than ever before, the prospects for a major reduction in the size of government in the immediate future are dim — this at a time when there is also near-panic about the debt and the deficit. If big cuts aren’t going to happen now, then when?

Advocates of the freedom philosophy have their work cut out for them.

The political system does not reward budget cutters. There is too much to gain politically by purchasing votes through promises of largess, while hiding or deferring the costs, if they can’t be pushed onto to some unpopular group. I don’t think this means Americans are a bunch of self-conscious freeloaders. Rather, they likely (and erroneously) see any benefits they collect as simply a return on their forced tax “investment.” Social Security and Medicare have certainly been misrepresented as such. Why wouldn’t people be upset at the thought of reduced benefits? Even Medicaid, the medical program for low-income people, affects the middle class. Medicare, the medical program for all retirees, does not cover nursing-home care, but Medicaid does — if a person meets the means test. It’s an open secret that if a nursing-home resident has too much money to qualify for Medicaid, the staff will advise the family on what to do to become eligible. This involve a lot of gift-giving and other activities to reduce the resident’s assets to the acceptable level. (This guy will tell you how to qualify for Medicaid nursing-home coverage without blowing through assets.)

The upshot is that even middle class younger people may well oppose cuts in Medicaid if it means they will have to pay directly for nursing-home care for an elderly parent or perhaps have him or her live in their homes. This is part of a more general consideration. Most people already on Social Security and Medicare would understandably oppose cuts in those programs. Less obvious is that their grown children are likely to take the same position, and not just because they expect to be beneficiaries someday. If those programs were to end, or even be cut substantially, the children would have to pay their parents’ living expenses out of their own pockets. Yes, they pay today through taxes, but there’s are differences: First, they don’t pay 100 percent, since other taxpayers also kick in, and second, there’s a bureaucracy between them and their parents. Libertarians may not want to acknowledge this, but most people would rather support their parents through the government rather than directly, and most retired people would probably prefer that too. Face-to-face dependence of aging parents on grown children who are trying to raise their own families can be a source of tension if not outright conflict.

Relating government programs to broader social issues reminds me of Chris Matthew Sciabarra’s writing on “dialectical libertarianism”:

If one’s aim is to resolve a specific social problem, one must look to the larger context within which that problem is manifested, and without which it would not exist. This is why context-keeping is so indispensable to a radical libertarian political project…. What makes a dialectical approach into a radical approach is that the task of going to the root of a social problem, seeking to understand it and resolve it, often requires that we make transparent the relationships among social problems. Understanding the complexities at work within any given society is a prerequisite for changing it.

Part of a System

Government interventions are not isolated phenomena; rather they are part of a political-economic-social system, with one part often intended to ameliorate the effects of some other part. (Remember Ludwig von Mises’s “critique of interventionism.”) Thus we should not discuss any particular part in a vacuum – not if we want to say something constructive.

For example, it is an eminently libertarian prescription to call for the abolition of Medicare on grounds that transferring wealth by force is immoral. But left at that, the argument will persuade no one and might even discredit the speaker. Why? Because it fails to acknowledge that many current beneficiaries would be left in dire straits if the program suddenly ended. Nor would it suffice to say that once the program was gone, “the free market” would handle things satisfactorily. What free market? We have no free market in medicine. American medicine consists of a government-insurance-doctor-hospital protectionist cartel that suppresses competition and innovation in the provision services through licensing and myriad other interventions. High prices and callous bureaucracies are the rule for many people. It didn’t begin with Obamacare. Surely libertarians don’t wish to be understood as proposing—in the name of human freedom—that a vulnerable portion of the population be subjected to that gauntlet.

None of this means that these programs are legitimate or should not be abolished. They require force (taxes) and induce dependence on the political class. What I’m suggesting is that libertarians need to bear these considerations in mind when making their case against such government intervention. If we are to expand the sphere of freedom while shrinking the sphere of force, we first need to be understood. We won’t be understood if we are oblivious to people’s concerns and to how they currently see government’s role in addressing those concerns.