[W]e need to change our tax code so that people like me, and an awful lot of Members of Congress, pay our fair share of taxes. Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes. [Emphasis added.]

And:

When Americans talk about folks like me paying my fair share of taxes, it’s not because they envy the rich. It’s because they understand that when I get tax breaks I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference. . . . [Emphasis added.]

There are lots of claims there that cry out for examination. For example, what’s need got to do with it? Does Obama really favor a tax system that leaves you only what you need — as determined by someone else? And look at that term “tax breaks.” If a burglar decides not to break into your house and take your things, have you gotten a break? Or have you simply kept what is yours? Is Obama really suggesting that how much of your income you retain should depend on what “the country” can afford? What does that even mean?

Buffett Rule

All that aside, I want to home in on Obama’s notion of fairness. “If you make more than $1 million a year,” he says, “you should not pay less than 30 percent in taxes.” How does he know that constitutes fairness? Obviously 30 percent is an arbitrary figure. If he’s concerned that income and payroll taxes take a smaller percentage of Warren Buffett’s income than the percentage they take from his secretary’s income, why not reduce his secretary’s tax rate? It’s certainly not obvious that Buffett should pay more. (For an interesting discussion of the secretary’s tax rate, see this and this.) Obama (like most other politicians) regards government spending growth as inexorable and virtually untouchable, but why? (Proposed “cuts” are merely reductions in the rate of growth.)

On this matter of tax fairness, no one tops Murray Rothbard’s discussion in his classic Power and Market: Government and the Economy (online in PDF format here). Rothbard starts by noting that for many years people thought products had a “just price.”

It is clear, even to those (like the present writer) who believe in the possibility of a rational ethics, that no possible ethical philosophy or science can yield a quantitative measure or criterion of justice. . . . Economics, by tracing the ordered pattern of the voluntary exchange process, has made it clear that the only possible objective criterion for the just price is the market price. For the market price is, at every moment, determined by the voluntary, mutually agreed-upon actions of all the participants in the market.”

Rothbard of course is talking about a market unblemished by government monopoly privilege and other interventions.

He goes on next to ask: “If the search for the just price has virtually ended in the pages of economic works, why does the quest for a ‘just tax’ continue with unabated vigor? Why do economists, severely scientific in their volumes, suddenly become ad hoc ethicists when the question of taxation is raised?”

We might also ask why a president makes ethical pronouncements about levels of taxation without first laying out his moral philosophy plainly for all to judge.

Canons of Justice in Taxation

Thus the “canons of justice” in taxation must not be taken for granted. Calling something just does not make it so. Rothbard writes:

The prime objection to these “canons” is that the writers have first to establish the justice of taxation itself. If this cannot be proven, and so far it has not been, then it is clearly idle to look for the “just tax.” If taxation itself is unjust, then it is clear that no allocation of its burdens, however ingenious, can be declared just.

A few pages earlier Rothbard defined taxation, uncontroversially, I hope, as “a coerced levy that the government extracts from the populace.” Pulling no punches, he quotes his mentor Frank Chodorov, once an editor of The Freeman:

A historical study of taxation leads inevitably to loot, tribute, ransom — the economic purpose of conquest. The barons who put up toll-gates along the Rhine were tax-gatherers. So were the gangs who “protected,” for a forced fee, the caravans going to market. The Danes who regularly invited themselves into England, and remained as unwanted guests until paid off, called it Dannegeld; for a long time that remained the basis of English property taxes. The conquering Romans introduced the idea that what they collected from subject peoples was merely just payment for maintaining law and order. For a long time the Norman conquerors collected catch-as-catch-can tribute from the English, but when by natural processes an amalgam of the two peoples resulted in a nation, the collections were regularized in custom and law and were called taxes.

“Why do not economists abandon the search for the ‘just tax’ as they abandoned the quest for the ‘just price’?” Rothbard asks.

One reason is that doing so may have unwelcome implications for them. The “just price” was abandoned in favor of the market price. Can the “just tax” be abandoned in favor of the market tax? Clearly not, for on the market there is no taxation, and therefore no tax can be established that will duplicate market patterns.

So let’s hear no more about tax fairness, unless it’s to point out that fairness is approached as tax rates move toward zero.

In my conception regime uncertainty pertains above all to a pervasive uncertainty about the property-rights regime—about what private owners can reliably expect the government to do in its actions that affect private owners’ ability to control the use of their property, to reap the income it yields, and to transfer it to others on mutually acceptable terms. Will the government simply take over private property? Will it leave titles in private hands but strip the owners of real control and profitable use of their properties? In any event the security of private property rights rests not only on the letter of the law but also on the character of the government officials who enforce—or threaten—presumptive rights.

Between 1935 and 1940 this matter attained prime importance. So many businessmen and investors lost confidence in their ability to forecast the future property-rights regime that few were willing to venture their money in long-term investments. They constantly sought clarification of the government’s designs, as President Franklin D. Roosevelt raged against “economic royalists” and blamed a “strike of capital” for the economy’s ongoing troubles, including the depression of 1937–38, which undermined the general public’s confidence in the New Deal.

Treasury Secretary Henry Morgenthau tried repeatedly to persuade Roosevelt to make a public statement to reassure investors, but the President steadfastly rejected this entreaty. Morgenthau ultimately became so frustrated that in a 1937 cabinet meeting, he blurted out to his boss: “What business wants to know is: Are we headed toward Socialism or are we going to continue on a capitalist basis?” Strange to say, Jim Farley and even Henry Wallace backed Morgenthau’s insistence that the President spell out what kind of economic system the administration sought to foster.

In his plea Morgenthau encapsulated the wide-ranging uncertainty that Lammont du Pont expressed in the same year, when he said: “Uncertainty rules the tax situation, the labor situation, the monetary situation, and practically every legal condition under which industry must operate. Are taxes to go higher, lower or stay where they are? We don’t know. Is labor to be union or non-union? . . . Are we to have inflation or deflation, more government spending or less? . . . Are new restrictions to be placed on capital, new limits on profits? . . . It is impossible to even guess at the answers.”

I doubt the regime uncertainty that a growing number of commentators and analysts have perceived since 2008 is as great as that of the latter 1930s. However, the government’s frantic actions in the past few years have surely shaken investors’ confidence about future property rights in the United States. The takeovers of Fannie Mae, Freddie Mac, AIG, GM, and Chrysler; the massive interventions in financial markets; the huge bailouts of banks and other financial institutions, mixed with letting Lehman Brothers go down while salvaging Bear Stearns—all these actions and many others suggest that a rational investor might well attach a huge risk premium to any money he ventures even for the intermediate term, not to mention the long term.

Moreover, the upsurge of the federal government’s size, scope, and power since the middle of 2008 has scarcely calmed investors’ minds. New taxes and higher rates of old taxes; potentially large burdens of compliance with new financial and energy regulations; unpredictable new mandatory health care expenses; new, intrinsically arbitrary government oversight of so-called systemic risks associated with any type of business—all these unsettling prospects and others of substantial significance must give pause to anyone considering a long-term investment, because any one of them has the potential to turn a seemingly profitable investment into a big loss.

The Current Picture

In testing my hypothesis about regime uncertainty, I have marshaled three distinct types of evidence: historical documentation of government actions and public reactions; findings of public-opinion surveys, especially surveys of businessmen; and financial-market data.

My most striking financial evidence for the New Deal episode pertains to the yield curve for corporate bonds—that is, to the spreads between the effective yields on high-grade corporate bonds of various maturities. I found that this yield curve suddenly became much steeper between the first quarter of 1934 and the first quarter of 1935 (when the New Deal lurched from its first, or business-tolerant, phase to its second, or business-hostile, phase) and remained very steep until it flattened between the first quarter of 1941 and the first quarter of 1942 (when the New Deal handed the reins to the military and the big businessmen who, along with the President, ran the war-command economy). I interpreted these extreme spreads from 1935 to 1941 as risk premiums on longer-term investments caused by regime uncertainty.

Does the corporate-bond yield curve show the same kind of shift during the past few years that it displayed in the face of the regime uncertainty that prevailed from 1935 to 1941? To find out I examined a number of series of corporate-bond yields by term to maturity.

I found that in 2008, before the onset of the financial panic in September, the corporate-bond yield curve was quite flat—that is, the yields increased only slightly with term to maturity. When the panic hit, yields became extremely volatile, especially for the bonds with two years to maturity (the shortest term in the data), and remained volatile for almost a year. After mid-2009 the volatility diminished. Once the dust had settled, the yield curve for corporate bonds had become substantially steeper.

Thus just as the steeper yield curve of the latter 1930s corresponds precisely with the so-called Second New Deal, when Roosevelt and his leading advisers went on the warpath against investors as a class, the steeper yield curve since mid-2009 corresponds with the bigger government left in the wake of the financial-market volatility and frenetic government action between September 2008 and the middle of 2009 and with the subsequent rash of extraordinary government measures.

Given the current regime uncertainty, investors will probably continue to remain for the most part on the sideline, protecting their wealth in cash hoards and low-risk, low-return, short-term investments and consuming wealth that might otherwise have been invested. Slow economic recovery, at best, will be the result.

I’m not convinced.

To be sure, it’s easy to see why an uncritical observer might think people like Krugman and Robinson are right. We can certainly look back on centuries—millennia, even—during which poor people have gotten the short end of the stick, in which poverty has coexisted, heart-breakingly, with great wealth. And perhaps those memories make it tempting for some people to buy the civics-class story that the only thing standing between us and a world full of Dickensian nightmares is activist government.

But that would be a mistake. The poverty and exclusion evident throughout history, and still very much a part of today’s world, can frequently be traced precisely to the unjust acts of government officials and their cronies. When people are denied ownership of land they’ve homesteaded with their labor so feudal overlords can turn them into serfs, the culprit isn’t freedom, or the market—it’s government support for the wealthy and well-connected. Ditto for cases in which people are denied the right to work by laws, like England’s old Acts of Settlement, that limit their ability to travel in search of new opportunities.

More generally: There’s no reason to trust activist government because the people in charge can be expected, time and again, to back those with power and influence over those without. Being poor doesn’t make you a favored object of government attention—instead, it means you’re likely to be used and abused. Politicians will claim to be defending your interests when they’re really promoting their own. They’ll continue to enact rules that limit your ability to support yourself and make it costly for you to provide decent shelter and clothing for yourself and your family. And law enforcement agencies will subject you to violence—whether they’re enforcing drug laws or immigration restrictions, or ensuring that you conform to zoning regulations and local codes designed to be easy for middle-class people to follow while making your life costly and difficult.

Government action in contemporary society makes and keeps people poor. Licensing laws, zoning regulations, and similar restrictions make it hard for poor people to enter particular job markets and to operate businesses out of their homes. Without these kinds of government regulations in place, people would be less likely to be poor.

Poverty is a systemic problem. It’s a product of lots of different, overlapping, mutually reinforcing factors. Getting rid of just one abuse or inequity here or there might well leave many people poor. But systemic change, change that addresses all the different factors that make poverty a persistent, ugly feature of our lives, can make a profound difference. And the kind of systemic change we need is change that eliminates State-secured privileges and State-imposed liabilities, not another State-created bureaucracy designed to ameliorate problems the State itself has created.

State Poverty

Government’s role in making and keeping people poor is just one of the factors that make poverty endemic and make it hard to survive while poor.

For instance: Governments don’t treat recipients of the antipoverty aid they disburse especially well. It’s important to avoid comparing idealized State practice with imaginary worst-case practice in the government’s absence. If we focus on actual government practice we find that poor people are not served particularly well by the State, which routinely intrudes into the lives of recipients of assistance, violating their privacy and seeking to regulate their behavior. People pay a high price for aid from the State. Government aid programs come with hidden price tags.

And governments increase the number of poor people in part precisely through some antipoverty programs, which can create perverse incentives both for people to remain poor enough to qualify for government funds and for bureaucrats to keep people poor in order to retain their own jobs.

Governments raise the cost of being poor. Building codes and zoning regulations raise the cost of housing and so make it harder for people to find inexpensive homes. Some people are forced to live without permanent housing at all, while others must spend much larger fractions of their incomes on housing than they otherwise would. As for food, that’s also more expensive thanks to agricultural tariffs and import quotas. In the absence of government policies that make meeting their basic needs unnecessarily expensive, poor people would have more disposable income and would be more economically secure.

More than that, though, governments actively take money from poor people. Many poor people pay more in taxes than they get back in services under the State’s rule. These people would have more resources on net in the absence of the State’s demand for tax money. In addition many people are poor, or poorer, today because the State has actively stolen land and other resources from them or their ancestors or has sanctioned such thefts committed by the wealthy and well-connected. (Think eminent domain among other methods.) Historically the existence of a peasant class and of a class of displaced urban workers willing to accept employment on dismal terms is inexplicable without reference to State violence or State tolerance for or endorsement of violence by the wealthy and well-connected.

The government raises the cost of obtaining key goods and services. The State does a range of things (notably requiring professional licenses, hospital accreditation, and prescriptions and enforcing drug and medical device patents, and other restraints on trade) to make particular services such as health care especially expensive.

All these different factors fit together, each one making people’s conditions worse than they’d otherwise be and making the effects of the other factors more severe. People often start out with less money because of large-scale past injustices. They have less money now because of government limitations on the kind of work they can do and where they can do it. Their ability to provide decent lives for themselves and their families is further limited because the government raises the cost of living, and government regulation of the economy drives down the overall level of productivity even further in ways that obviously hurt the poor the most.

In sum the government plays a crucial role in creating and perpetuating poverty—and that’s really the most important thing to recognize. But of course that doesn’t mean that, absent the government’s abuses, people wouldn’t have accidents, confront disasters, and make unwise choices. With costs of living reduced, as they would be if the government completely left the economy alone, people would find it easier to deal with these challenges. They’d still need one another’s help, but those who think there’d be no way to get this kind of help except through tax-funded government agencies are mistaken.

The existence of State antipoverty programs crowds out alternatives and reduces the effectiveness of those that remain. It’s easy to view these alternatives as essentially ineffectual and anemic. But a crucial reason they’re not more vibrant is that State action commandeers money and attention that might otherwise be directed to these alternatives, creating the illusion that in the government’s absence, they couldn’t be much more effective.

Support for poverty relief doesn’t just come from tax funds now. People give money to charitable causes over and above their tax bills today, despite the huge sums the State claims. There’s no reason to think they would not do so if the government absented itself from economic life. It is naive to suppose that the wealthy and powerful are opposed to State funding for services to the poor at present; the poor have far less clout than the wealthy and powerful, and yet the State provides minimal services for poor people. Why suppose that wealthy and well-connected people willing to see the State spend their tax money to support services for the poor would be dramatically less willing to contribute to the support of such services if the government weren’t involved? (Why do people give money to good causes, including voluntary programs that help the poor? Why do wealthy and well-connected people endorse State spending on programs that provide services to poor people? Presumably for a combination of reasons, including, in no particular order, compassion, social norms, the desire for good reputations, the desire to avoid bad reputations, and the desire to avoid social disorder. All of these reasons would be operative in a free society.)

Mutual Aid

In addition, mutual-aid networks could provide many of the services well-intentioned statists want the government to offer. Societies in which people pooled risk and provided pensions, health care, and other services functioned effectively before the rise of State social services, and there’s no reason they couldn’t do so again in the government’s absence—and, indeed, wouldn’t function much better given that people would have access to more resources and the State would not be regulating them out of existence.

Both charity and mutual aid are more viable than government-run antipoverty programs, more able to help poor people, precisely because those programs have high administrative costs. (Thanks to Tom Woods for this point.) Programs supported freely by people in the government’s absence would not feature such high costs. Because donors could choose among multiple programs, there would be persistent pressure for administrative costs to be reduced.

In addition, social norms could ensure predictable, consistent support of community-wide aid programs without taxation. General acceptance of a social norm entailing regular contributions to a community income support fund, or leaving the edges of fields available (as in Leviticus) for gleaning, could ensure that poor people who needed it could rely on community assistance.

State-managed antipoverty programs draw on tax resources taken unwillingly from people. People work less energetically and enthusiastically when they know that some of what they produce will in effect be taken from them at gunpoint. Thus taking resources from people through taxation to fund antipoverty programs can function as a drag on the economy. By contrast, when people give willingly to support antipoverty efforts, their own objectives are not being thwarted; if they wish to support these efforts, they will be willing to work hard to do so. With the government out of the economy, people can work enthusiastically to earn wealth and foster overall economic productivity even as they support significant antipoverty efforts.

Advocates of government antipoverty programs sometimes worry that the absence of the State would mean a return to the misery and squalor typical of many people’s lives in the eighteenth and nineteenth centuries; they too often attribute these conditions to the absence of State regulation and antipoverty programs. But it’s important to emphasize that these conditions reflected the much lower overall levels of societal wealth. People weren’t poor because of the absence of State regulations and antipoverty programs; they were poor in part because there was very little wealth overall and thus less for those who wanted to help the poor. (Thanks to Tom Woods again on this score.) And of course the misery and squalor weren’t entirely natural or inevitable: Some resulted from persistent—and remediable—injustice on the part of elites and their political cronies.

Rectification

It’s also important to emphasize that getting the State out of the economy doesn’t—can’t—mean simply stopping State intervention. It also has to mean providing rectification for State-committed and State-sanctioned wrongdoing. Politically privileged elites have stolen land and resources from poor, working-class, and middle-class people—directly and by securing tax-funded subsidies and government contracts. There’s no way to understand the distribution of wealth and power in contemporary society without acknowledging this history of theft and violence. To the extent that it’s possible, past injustice ought to be remedied. For instance, people ought to be able to homestead land engrossed by the State, especially land allocated arbitrarily to the State’s cronies. If land and other resources were made available for homesteading or returned to those from whom they were taken, the poverty of the State’s victims could be significantly reduced.

Structural changes would also make poverty less likely in the absence of government intervention. Rules that made it harder for absentee landlords to sit on undeveloped, uncultivated land could open up this land for homesteading by people with limited resources and thus provide them an avenue to greater economic security. Eliminating subsidies and legal privileges for hierarchical corporations would increase the likelihood that people could enjoy the job security associated with working for themselves (with less risk than accompanies being an independent contractor in a less healthy economy) or in partnerships or cooperatives and that, when they did work for others, they could bargain successfully for better compensation.

Libertarianism isn’t a philosophy of atomism. Libertarians have every reason to value interdependence and shared responsibility. Obviously, that’s true of the interdependence fostered by the market order. But it’s also true of the interdependence of friends and family members and strangers who work together to help one another meet life’s challenges. People working together don’t need the government’s help to deal with poverty. The government often makes the problem worse, and it’s definitely not needed to remedy deprivation and economic insecurity.

Poverty has multiple causes—but many of those causes interact with and reinforce one another. Many are created by government action. If we get the government out of the economy and see to it that past injustices committed or sanctioned by the government are remedied, we can effectively meet the challenge of poverty together.

For over 25 years the Westport, Connecticut industrialist battled the federal withholding tax, which she refused to collect from employees’ wages.  If the government wanted her “to be their agent,” Kellems declared, they “have to pay me, and I want a badge.”

In For a New Liberty, economist Murray Rothbard discussed Kellems’s stance: “What moral principle justifies the government’s forcing employers to act as its unpaid tax collectors? The withholding principle, of course, is the linchpin of the whole federal income tax system. Without the steady and relatively painless process of deducting the tax from the worker’s paycheck, the government could never hope to raise the high levels of tax from the workers in one lump sum.”

“Temporary” Measure

The withholding tax on income had been introduced in 1943 as a temporary measure to finance World War II. Called “the Victory Tax,” it required businesses to use their own resources to withhold taxes, to maintain records, and to remit money; mistakes or noncomplaince could result in severe penalties. Thus businesses became unpaid accountants and tax collectors for the federal government.

After the war there was no sign of withholding’s repeal and so Kellems, who had master’s degree in economics and a nearly completed Ph.D, ceased to comply. Her rebellion was based on far more than the lack of a badge.

In her 1952 book, Toil, Taxes and Trouble, Kellems explained that her rebellion was based on constitutional grounds. Article I Section 2, Clause 3 of the U.S. Constitution declares, “Representatives and direct taxes shall be apportioned among the several States . . . according to their respective Numbers. . . .” Section 9, Clause 4 states, “No capitation, or other direct, Tax shall be laid, unless in proportion to the Census or Enumeration. . . .”

Kellems concluded, “[O]ur forefathers bound fast the hands of Congress and secured the liberty and freedom of the American people. How? By making it utterly impossible to levy an income tax. An income tax is certainly a direct tax [which] must be paid by the person receiving the income. By specifying that direct taxes must be levied in accordance with the number of people, not upon what they produced, as in the days of ancient Egypt, an income tax was simply out of the question.”

(Contrary to Kellems’s position, however, Americans courts have long held that the income tax is a constitutional indirect tax.)

Asked for Prosecution

In February 1948 Kellems publicly invited the government to prosecute her. Instead, four IRS agents arrived and demanded $1,685.40 even though her employees had been paying the correct amount. The rebuffed agents intimidated her bank into surrending that amount from her account.

The conflict became famous nationally when television shows such as “Meet the Press” interviewed Kellems. On Eleanor Roosevelt’s 1950s talk show, “Today With Mrs. Roosevelt,” Kellems explained, “As you know, Congress can pass all of the laws it wishes to. The President may sign all of the laws that he wishes to. But no law is a valid law in our country until it has been declared constitutional by the Supreme Court. Any citizen doubting the constitutionality of a law has the right, and in my opinion the duty, to break the law in order to provide a test case. That is all I did.”

Kellems also organized a nationwide group called the Liberty Belles and Boys to seek the repeal of the withholding tax.

Sues the Government

In 1949 tax agents demanded $6,100. Despite proof that her employees had paid their own withholding, the agents once again forced her bank to turn over the money. In January 1950 Kellems sued for its return in the federal district court in New Haven. She was not permitted to argue constitutional grounds, but she secured a full refund nonetheless.

Eventually Kellems abandoned her legal pursuit of the IRS  because of its expense, but she never abandoned the fight. In 1969 she disobeyed a court order to  produce financial records on the grounds that it violated her Fifth Amendment rights. According to some reports, she also refused to file tax returns; other reports claim she filed blank forms. In a 1975 interview with the Los Angeles Times — the same year as her death — Kellums declared, “Our tax law is a 1,598-page hydra-headed monster and I’m going to attack and attack and attack until I have ironed out every fault in it.”

This little known and indomitable crusader deserves a place in individualist history, standing proudly beside contemporaries such as Rose Wilder Lane and Isabel Paterson.

Suddenly people were calling for significant cuts in government spending in the face of a rapidly growing national debt.

As often happens, calls for cuts in government spending were met by competing calls for higher taxes, especially on higher-income earners and businesses. They can afford to pay the extra taxes, we were told. And what’s more, higher taxes could actually help the economy.

In making this case, proponents of raising taxes pointed to the tax increases that came out of Washington under President Clinton in 1993. The U.S. economy, as measured by GDP growth, was strong in the years after those tax hikes while unemployment and inflation were relatively low. The argument now is that the 1993 tax increases did not inhibit the economic boom the country enjoyed in the last six or seven years of the twentieth century.

In April New York Times columnist Nicholas Kristof made this very argument. He wrote that while it’s true higher taxes in general “tend to reduce incentives,” this apparently “weak effect” is often overwhelmed by other factors. “Were Americans really lazier in the 1950s, when marginal tax rates peaked at more than 90 percent?” Kristof asked. “Are people in high-tax states like Massachusetts more lackadaisical than folks in a state like Florida that has no personal income tax at all?”

Like other observers, Kristof also contrasted the “golden period of high growth” after the Clinton tax hike with the “anemic economy” that followed George W. Bush’s tax cuts.

But do higher taxes really spur (or at least not inhibit) prosperity? Looking at the data from the 1990s, one might believe so. After all, the 1993 tax hikes were followed by years of strong economic performance. Post hoc ergo propter hoc (after this, therefore because of this), many might believe.

But not everyone agrees the data are quite so clear. The Heritage Foundation’s J. D. Foster, for example, believes the data show that the U.S. economy was already expanding when the Clinton tax increases took effect. If anything, he believes, those tax hikes slowed overall growth for several years until 1997, when the Republican-led Congress passed a series of tax cuts, including a reduction in the capital gains tax rate from 28 to 20 percent.

The “real acceleration in the economy began in 1997, when economic growth should have cooled,” Foster wrote. “This acceleration in growth coincided with a powerful pro-growth tax cut.”

Foster also authored a 2008 Heritage Foundation summary of several scholarly studies showing tax hikes corresponding with slower or negative economic growth. In theory higher taxes could encourage greater levels of private investment through lower borrowing costs—if government used the money to retire debt and reduced its competition for lendable funds. But this potential “silver lining” is overshadowed by the negative effects of higher taxes, he stated. However plausible theoretically, in practice the argument runs into trouble, not least from the fact that governments seldom save any of their revenue, Foster notes.

Still, the idea that the 1993 tax increases spurred economic growth will not die easily. For instance, some people argue that those tax hikes provided much needed confidence in the U.S. economy. As Kristof put it: “Tax increases can also send a message of prudence that stimulates economic growth.”

With this much disagreement it’s hard to know what is really the truth. And this is always the case when looking at the effects of any single economic policy in a vast and complex system. Indeed, so much is happening at any given time in a modern economy—central-bank policy, trade policy, military spending, technological innovation, war or peace, and more—it’s impossible to draw hard and fast conclusions from macroeconomic data alone.

The Austrian economist Ludwig von Mises made this point in his classic treatise, Human Action, in 1949. In discussing the role of historical data in economics, he wrote: “The champions of logically incompatible theories claim the same events as the proof that their point of view has been tested by experience. The truth is that the experience of a complex phenomenon—and there is no other experience in the realm of human action—can always be interpreted on the ground of various antithetic theories. . . . History cannot teach us any general rule, principle, or law.”

Stepping back, therefore, it may be worthwhile to consider fairly uncontroversial economic propositions, such as the law of demand or the law of marginal utility, when trying to determine the likely effects of a tax increase.

Basically, taxes alter relative prices. A tax on gasoline makes gasoline more expensive. A tax on whiskey makes whiskey more expensive. By the same token, a tax on income affects the “price” of leisure; that is, an income tax reduces the reward or “price” one receives for forgoing leisure in order to work. If you are willing to work for $10 an hour, you’re essentially “selling” your leisure time for that price. You might not be willing to sell that leisure time for a lower price. Thus an income tax can be expected, on the margin, to reduce the willingness of some people to work.

While all this is important, it’s probably more important to consider what happens to taxes after the government collects them. How government officials spend tax revenue can damage the economy as much as the tax itself can. That’s because taxes are used for any number of things that distort markets and waste resources, such as providing subsidies to favored industries or strengthening bureaucracies.

As a newspaper reporter I have frequent opportunities to witness government decisions to spend taxpayer dollars. Often an argument in favor of a particular spending program is that it will only add a few dollars to any single individual’s tax burden. Once a government program is in place, however, it’s extremely difficult to reverse it because government spending benefits particular individuals and they are quite motivated to maintain it. When budget cuts are proposed, government officials have effective ways of fighting back. For example, a proposed cut in education spending is nearly always said to be taking teachers out of classrooms, and a proposed cut in police spending is nearly always said to be taking neighborhood cops off the streets. The “fat” in education and law-enforcement spending may be elsewhere. But those are the items placed on the public chopping block by clever bureaucrats and politicians.

So the real problem with taxes and tax increases may be that they simply feed the beast—the political and less-efficient government sector—while shrinking the voluntary, more-efficient private sector. For anyone concerned about liberty this is reason enough to oppose higher taxes.

The second kind of existential test can be likened rather to that of researching and writing a dissertation—longer, more drawn out, with less immediate drama but presenting in many ways a more thorough and searching examination. The consequences of failure, however, can often be just as severe, even if they take longer to arrive. This second test is that of managing taxation and public finance. As writers through the ages have recognized, failure at this can ruin a polity as surely as defeat in war.

What, though, is the nature of the test, and in what sense do ruling groups fail it? Historically, ruling groups draw incomes (“rents” in the economists’ language) from the groups they control. They do this through various means, including taxes, fines, fees, tariffs, tolls, the selling of privileges and exemptions, and even outright expropriation. In return they typically provide services, most notably defense against irregular predators, a means of settling disputes, and a range of what are commonly described as “public goods,” which can cover anything from public works and infrastructure to education. Ultimately all these services have to be funded out of the revenues the rulers can gain. It is true that a shortfall can be met by borrowing, but the money lent is secured against future income and so doing this is simply a way of spending income now in anticipation of its arrival in the future.

The failure of rulers to handle this can take two forms. The simplest is when the level of taxation and other exactions is simply too high and discourages productive labor to such a degree that wealth is destroyed rather than created. If taken too far, this can actually destroy the basis for the rulers’ position. Just as a parasite that kills its host is a biological failure, so ruling classes that destroy their own productive base are clearly political failures. The more insidious failure, however, arrives when ruling groups spend more money than they take in and fund it through debt. This can go on for a long time, even indefinitely, provided the underlying economy is productive and dynamic enough and the spending is not too high. The evidence of history is that it cannot go on forever. Sooner or later a crunch will come, and the way the ruling group responds determines whether it passes or fails the test.

In 1783 the Treaty to Paris brought an end to a worldwide conflict. For Americans this was the American Revolution, when the colonies gained their independence from the British Empire. From a world perspective, however, this was only the latest round in a struggle for global leadership between Britain and France that could be traced back to the 1690s. Just as in previous episodes, the war had been financed mainly through the issuing of debt, which was added to the accumulated obligations of earlier conflicts. By 1783 the public finances of both France and Britain were in a desperate state. In many ways the British finances were in worse shape than those of the French: In 1784 total British debt amounted to 156 percent of GDP, comparable to French levels but with an economy not as large as that of France and so less able to support such a burden. However, the next six years saw the British elite address this problem. Their French counterparts did not and failed the test.

Diverging Paths

In Britain the new prime minister, William Pitt the Younger, brought the public finances under control through what was known as “economical reform.” This was a combination of extensive tax increases and major cuts in government spending, most significantly through the abolition of a large number of useless government jobs or sinecures. This had significant political implications because access to these posts was a major form of patronage and central to the political system of the time. Even so, the cuts were made.

In France the new minister of finance, Charles Alexandre de Calonne, did not address the state of the French public finances in the same way, at least not initially. Instead he floated a series of loans to bridge the gap between income and expenditure. Despite its greater wealth, the French crown had to pay twice the interest rate of the British State, because its creditors (the so-called “financiers”) had less confidence in its capacity to repay the debt and its willingness and ability to do what was necessary. Eventually Calonne proposed a series of reforms including tax increases (in particular taxes on the aristocracy and clergy), major cuts in government spending, and a move to internal free trade in France. To overcome opposition, in 1787 he persuaded the king to summon an Assembly of Notables. However, the elites opposed both the tax increases and spending cuts, and he was dismissed. The publicizing of the desperate state of the finances and the accelerating loss of confidence in France’s rulers by their creditors meant the difficulties of the crown became even more acute until, in 1789, the king in desperation called a meeting of the Estates General for the first time in over 150 years to try to break the deadlock. What followed is, as they say, history.

Contemporary America

Contemporary Americans should look back at these events with increasing nervousness. As in Britain and France in 1783, the public finances are in a parlous state. The gap between revenue and expenditure has never been wider and is even worse than the headline figures suggest when the unfunded liabilities of Medicare and Social Security are taken into account. For a long time now the American political class has been funding expenditure through borrowing, depending ultimately on the confidence of their creditors and the underlying productivity of the American people. If this confidence should waver (and there are many signs of this) the cost of this borrowing is bound to rise. If the spending and liabilities exceed the capacity of even the most heroic future productive labor by American citizens (as they clearly do) then something has to give.

Ultimately it is clear that either spending must be cut or taxes and imposts increased or some combination of the two. Just as in France, however, this depends on the willingness of both elites and ordinary people to do what is necessary. That in turn depends on a broad agreement as to the proper role and size of government. In the absence of such an agreement, just as in France in 1787, tough decisions will be ducked and matters will go from bad to worse. Arguments about taxes and the deficit are thus proxies for a deeper debate.

If you spend any time on a social network, you’re bound to come across this video of Elizabeth Warren, who’s running for the U.S. Senate in Massachusetts. In her remarks she says:

There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.

Just goes to show, you can start with a valid premise and end up with an invalid conclusion.

She’s right: When you live in a society you benefit in countless ways, material and otherwise. The language you speak and think in is a social institution and would be impossible without the presence of others. So is custom, which regulates our interpersonal conduct far more than the edicts (mistakenly called “laws”) of legislatures. And the few valid ideas among those edicts had their origin in bottom-up custom. (See my “The Rule of Lore.”) How about money itself? It is also an organic social institution. Of course today money is fiat paper controlled by government, but even that system has a foundation in the institution described by Carl Menger and Ludwig von Mises.

Social Animals

So we need not deny Warren’s premise. Human beings are social animals. We should revel in that fact. Frédéric Bastiat did in Economic Harmonies:

Let us take a man belonging to a modest class in society, a village cabinetmaker, for example, and let us observe the services he renders to society and receives in return. This man spends his day planing boards, making tables and cabinets; he complains of his status in society, and yet what, in fact, does he receive from this society in exchange for his labor? The disproportion between the two is tremendous.

Every day, when he gets up, he dresses; and he has not himself made any of the numerous articles he puts on. Now, for all these articles of clothing, simple as they are, to be available to him, an enormous amount of labor, industry, transportation, and ingenious invention has been necessary. . .

Next, he breakfasts. For his bread to arrive every morning, farm lands have had to be cleared, fenced in, ploughed, fertilized, planted; the crops have had to be protected from theft; a certain degree of law and order has had to reign over a vast multitude of people; wheat has had to be harvested, ground, kneaded, and prepared; iron, steel, wood, stone have had to be converted by industry into tools of production . . . — all things of which each one by itself alone presupposes an incalculable output of labor not only in space, but in time as well. . .

It is impossible not to be struck by the disproportion, truly incommensurable, that exists between the satisfactions this man derives from society and the satisfactions that he could provide for himself if he were reduced to his own resources. I make bold to say that in one day he consumes more things than he could produce himself in ten centuries.

What’s New?

Elizabeth Warren, then, has said nothing startling. This has been the (classical) liberal view of the market social order from time immemorial. But she places what should be a mundane observation in the service of a bad cause: higher taxes. That’s a non sequitur.

Let’s stipulate something before examining Warren’s mission. In today’s society, as in Bastiat’s, great wealth can be made by what Franz Oppenheimer, echoed later by Albert Jay Nock (pdf), called “the political means.” That is, many business people (preaching the gospel of “the free market”) make fortunes from government interventions that directly or indirectly, intentionally or unintentionally, obstruct entry into their industries or limit self-employment opportunities, allowing them to earn oligopolistic rents at the expense of consumers and workers. That’s a traditional classical liberal complaint about government and its connivance with business.

But that is not what Warren means. In the video she says nothing about corporate-state privilege or the long years of intervention that amount to the “subsidy of history.” She mentions only tax-financed roads, schools, and police — three of the worst “services” precisely because they are tax-financed government monopolies. (Roads do entail a subsidy to long-distance shippers, but she seems oblivious to that.) There’s an easy remedy for State-granted privileges: repeal. But like a good corporate-liberal, she prefers regulation to repeal. And as we know, George Stigler’s theory of regulatory capture tells us that the rules will tend to be written with the regulated industries in mind, if not with their active participation. (Not that other-minded regulators would know what to do.)

“[Y]ou built a factory and it turned into something terrific, or a great idea? . . . Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along,” she says.

Produce the Contract

Has anyone seen this social contract that obligates you to surrender a “hunk” of what you produce under penalty of violence? Sorry, I don’t trust unwritten open-ended so-called “contracts” into which any advocate of government power may read conditions ex post. (The idea of social contract can be construed more sensibly. See this.) Moreover, why aren’t honest production and exchange of valuable goods counted as payment forward? Just as our living standard is the fruit of previous generations’ production, so today’s producers are helping to raise the living standard of the next generations.

Boiled down, then, Warren’s argument is that since everyone has paid taxes to provide services without which wealthy people couldn’t have made their money, they should pay more. How does that follow? She’d first have to show that they are paying too little now. She only assumes this. (See Steven Horwitz’s discussion of this matter.) That’s not good enough. And maybe the services are inferior and cost too much — wouldn’t we expect that from a protected monopoly?

She might respond that the presence of the deficit shows that not enough money is collected in taxes and therefore the wealthiest should pay more. Still not good enough. As she herself intimates, the George W. Bush years were marked by unfunded spending. That sounds like a problem of overspending, not undertaxation. Solution: Cut spending.

For those neophytes who have never heard of Spooner, let me simply quote Murray Rothbard’s description from the September 1974 Libertarian Forum: “[H]e was undoubtedly the only constitutional lawyer in history to evolve into an individualist anarchist,” and “of all the host of Lockean natural rights theorists, Lysander Spooner was the only one to push the theory to its logical—and infinitely radical—conclusion: individualist anarchism.”

The table of contents of Steve Shone’s book outlines the major areas of political philosophy and economics about which Spooner wrote: Natural Law, Private Mail, and Property; Poverty and Economics; Political Obligation; Jury Nullification; Slavery; and Religion, Morality, and the Legal Profession.

Spooner’s concern with natural law and justice manifested itself in his lifelong arguments against slavery; government monopolization of money, credit, and the post office; government licensure of lawyers and restrictions on juries; taxation; seizure and confiscation of private property; and government interference with the natural laws of intellectual property.

Just one example will suffice to demonstrate Spooner’s unique interpretation of the U.S. Constitution and the natural right of human beings to use their property peacefully as they see fit. Before Spooner’s own private postal delivery company was harassed and put out of business by federal authorities in 1844, he published “The Unconstitutionality of the Laws of Congress Prohibiting Private Mails.” In it he noted that the Constitution did not grant Congress a sole and exclusive right to establish post offices and post roads. In other words, the power given to Congress did not allow it “to forbid similar establishments by the States or the people.”

Furthermore, Spooner noted that no branch of the government had ever questioned the right of American citizens to mint their own gold coins so long as they did not attempt to imitate current coins of the United States. Spooner argued it was just as much a common-law right to deliver private mail entrusted to one’s care as it was a right “to weigh and assay pieces of gold and silver, mark upon them their weight and fineness, and sell them for whatever they bring, in competition with the coin of the United States.”

Although the author bills his work as “the first full-length work devoted to the ideas of Lysander Spooner,” Spooner’s writings are so extensive and comprehensive that some of his most important commentaries are not mentioned. One, reminiscent of Spooner’s famous No Treason series, is the appendix to his 1852 book, Trial By Jury. This short, seven-paragraph addendum epitomizes Spooner’s outlook on the nature of government, even before the citizens of the southern states were beaten into submission by federal armies and navies. Spooner wrote:

It was a principle of the Common Law . . . that no man can be taxed without his personal consent. The Common Law knew nothing of that system . . . of assuming a man’s own consent to be taxed, because some pretended representative, whom he never authorized to act for him, has taken it upon himself to consent that he may be taxed. . . .

. . . Taxation without consent is as plainly robbery, when enforced against one man, as when enforced against millions; . . . Taking a man’s money without his consent, is . . . as much robbery, when it is done by millions of men, acting in concert, and calling themselves a government, as when it is done by a single individual, acting on his own responsibility, and calling himself a highwayman. Neither the numbers engaged in the act, nor the different characters they assume as cover for the act, alter the nature of the act itself. . . .

. . . The government’s pretence of protecting him, as an equivalent for the taxation, affords no justification. It is for himself to decide whether he desires such protection as the government offers him. If he do not desire it, or do not bargain for it, the government has no more right than any other insurance company to impose it upon him, or make him pay for it.

For anyone interested in the antecedents of contemporary libertarianism and individualism, Lysander Spooner: American Anarchist is a good place to start. Be prepared to meet a man whose ideas are radical.

The IMF has 187 member governments, which together this year have provided $340 billion to the agency. Each country is assigned a contribution quota and a vote count weighted roughly according to its quota. The U.S. government’s financial quota is over 17 percent of the total, almost three times that of the second-largest contributor, Japan. It controls 16.74 percent of the votes. Treasury Secretary Timothy Geithner is the U.S. member of the board of governors, with Federal Reserve Chairman Ben Bernanke as alternate governor. This should be enough to establish that the IMF’s agenda is not free markets.

All IMF money comes from the taxpayers and central bank printing presses. So there’s the first charge against it: It’s financed through compulsion. That should shape our expectations about the agency.

What does the IMF do? Here’s how it describes its mission:

• Surveillance: “oversees the international monetary system and monitors the financial and economic policies of its members”;

• Technical assistance: “assist[s] mainly low- and middle-income countries in effectively managing their economies”; and

• Lending: “provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms.”

Regarding the first, the IMF has been notoriously bad at foreseeing crises. But that should not be surprising. Why would bureaucrats living rather well off the taxpayers, with no personal capital at risk, be expected to be competent at spotting economic trouble?

The promise of “technical assistance” is dubious and even risible because the dominant governments of the world can hardly be said to have “effectively” managed their own economies. The IMF often advises distressed countries to raise taxes and to cut government spending to reduce budget deficits, upsetting both Keynesians and supply-siders. This is regarded as market-oriented, or “neoliberal,” advice, but to the extent that externally imposed measures engender public resentment, they give real market reform a bad name and set back the cause of genuine liberalism.

For example, the IMF may advise a government to remove price controls on food, which in itself would be a pro-market measure if accompanied by other reforms. However, if corresponding government-created scarcities—through licensing, franchises, patents, and so on—remain in place, average people will suffer and blame “the free market.” Food riots occurred some years ago in Egypt under just such circumstances, and as a result market reforms are widely distrusted there.

IMF loans constitute a double bailout. First, they save kleptocratic politicians from the consequences of their exploitative schemes, sparing them the necessity of radical reform—including land reform and free banking.

Second, IMF loans rescue the failing country’s creditors—Wall Street banks, typically—from a government default. In addition U.S. agricultural interests have come out in favor of increased support for the IMF to stimulate American farm exports. In 2009 the debate over increased U.S. funding was framed in the context of pushing an export-led American economic recovery.

This is surely doing well by doing good—with the taxpayers’ money.

Who pays? Aside from the taxpayers who supply the IMF with money, the tab is eventually paid by the working people of the subject countries through the higher taxes prescribed by the IMF.

The likelihood of the IMF’s compounding problems is immense. In The White Man’s Burden, former World Bank economist William Easterly writes: The IMF’s “core function of enforcing financial discipline is flawed by an intrusive Planner’s mentality that sets arbitrary numerical targets for key indicators of government behavior. Like all Planners, the IMF fits the complex reality of economic systems into a Procrustean bed of numerical targets that have little to do with that complexity.”

The IMF emphasizes that loans always come with “conditionality,” but for reasons already alluded to, that should offer little reassurance to advocates of free markets. The agency notes that it uses the principle of “parsimony” when writing conditions: “program-related conditions should be limited to the minimum necessary to achieve the goals of the Fund-supported program . . . .” Thus the deepest violations of individual liberty and market principles—feudal land distribution, for example—will be left untouched. Real markets don’t exist when large tracts of land are controlled by a privileged elite, leaving most people little choice but to take whatever is given. Their acceptance may represent the “best available option,” but if their choice set has been artificially constricted, that’s not saying much. (Fortunately the informal economy offers some hope.)

IMF loans of course channel resources to central governments, reinforcing their power and further politicizing the “aided” countries. As P. T. Bauer wrote,

Foreign aid has thus done much to politicize life in the Third World. And when social and economic life is extensively politicized, who has the power becomes supremely important, sometimes a matter of life and death. . . . People divert their resources and attention from productive activity into other areas, such as trying to forecast political developments, placating or bribing politicians and civil servants, operating or evading controls.

In the end the IMF has fostered long-term dependency, perpetual indebtedness, moral hazard, and politicization, while discrediting market reform and forestalling revolutionary liberal change. The solution is not for the IMF to impose free markets, even if it could. That would smack of imperialism and, writes Easterly, would have “patronizing echoes of the White Man’s Burden.”

The IMF should be scrapped and the people suffering under kleptocracy left to discover the requirements for improving their own conditions. How much more “help” can they stand?