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Saturday, July 20, 2013

The state and taxation

Amidst the morass of bland economic writings on taxation, Jean-Baptiste Say stands out like a beacon light. It is true that he was unusually devoted – even in that generally liberal era – to laissez-faire and the rights of private property, and only waffled a very few times in that creed. But for some reason, most laissez-faire and libertarian thinkers in history have not really considered taxation to be an invasion of the rights of private property. In J.B. Say, however, an implacable hostility to taxation pervades his work; he tended to make it responsible for all the economic evils of society, even, as we have seen, for recessions and depressions. Say's discussion of taxation was brilliant and unique; and yet, as with almost all his work, it has received no attention whatever from the historians of economic thought.
In contrast to almost all other economists, Say had an astonishingly clearsighted view of the true nature of the state and of its taxation. In Say there was no mystical quest for some truly voluntary state, nor any view of the state as a benign semi-business organization supplying services to a public grateful for its numerous ‘benefits’. No; Say saw clearly that the services government indubitably supplies are to itself and to its favourites, and that all government spending is therefore consumption spending by the politicians and the bureaucracy. He also saw that the tax funds for that spending are extracted by coercion at the expense of the tax-paying public.

As Say points out: ‘The government exacts from a tax-payer the payment of a given tax in the shape of money. To meet this demand, the tax-payer exchanges part of the products at his disposal for coin which he pays to the tax-gatherers.’ The money is then spent for the government's ‘consumption’ needs, so that ‘the portion of wealth, which passes from the hands of the tax-payer into those of the tax-gatherer, is destroyed and annihilated’. Were it not for taxes, the tax-payer would have spent his own money on his own consumption. As it is, the state ‘enjoys the satisfaction resulting from that consumption’.

Say goes on to attack the ‘prevalent notion’ that tax monies are no burden on the economy, since they simply ‘return’ to the community via the expenditures of government. Say is indignant:

This is gross fallacy; but one that has been productive of infinite mischief, inasmuch as it has been the pretext for a great deal of shameless waste and dilapidation. The value paid to government by the tax-payer is given without equivalent or return: it is expended by the government in the purchase of personal service, of objects of consumption...

Thus, in contrast to the naive Smith's purblind assumption that taxation always confers proportional benefit, we see J.B. Say treating taxation as very close to sheer robbery. Indeed, at this point Say revealingly quotes with approval Robert Hamilton's likening of government to a large-scale robber. Hamilton had been refuting this very point: taxation is harmless because the money is recirculated into the economy by the state. Hamilton had likened such impudence to the ‘forcible entry of a robber into a merchant's house, who should take away his money, and tell him he did him no injury, for the money, or part of it, would be employed in purchasing the commodities he dealt in, upon which he would receive a profit’. (Hamilton might have added a Keynesian touch: that the robber's spending would benefit his victim many-fold, by the benign operations of the magical multiplier.) Say then comments on Hamilton's point that ‘the encouragement afforded by the public expenditure is precisely analogous’.

Say then bitterly goes on to denounce the ‘false and dangerous conclusion’ of writers who claim that public consumption (government expenditures) increases general wealth. But the damage is not really in the writing: ‘If such principles were to be found only in books, and had never crept into practice, one might suffer them without care or regret to swell the monstrous heap of printed absurdity...’. But unfortunately, these precepts have been put into ‘practice by the agents of public authority, who can enforce error and absurdity at point of the bayonet or mouth of the cannon’. In short, once again, Say sees the uniqueness of government as the exercise of force and coercion, particularly in the way it extracts its revenue.
Taxation, then, is the coercive imposition of a burden upon the members of the public for the benefit of the government, or, more precisely, of the ruling class in command of the government. Thus Say writes:

Taxation is the transfer of a portion of the national products from the hands of individuals to those of the government, for the purpose of meeting the public consumption or expenditure... It is virtually a burthen imposed upon individuals, either in a separate or corporate character, by the ruling power... for the purpose of supplying the consumption it may think proper to make at their expense; in short, an impost, in the literal sense.

He is not impressed with the apologetic notion, properly ridiculed in later years by Schumpeter, that all society somehow voluntarily pays taxes for the general benefit; instead, taxes are a burden coercively imposed on society by the ‘ruling power’. Neither is Say impressed if the taxes are voted by the legislature; to him this does not make taxes any more voluntary: for ‘what avails it... that taxation is imposed by consent of the people or their representatives, if there exists in the state a power, that by its acts can leave the people no alternative but consent?’
Moreover, taxation cripples rather than stimulates production, since it robs people of resources that they would rather use differently:

Taxation deprives the producer of a product, which he would otherwise have the option of deriving a personal gratification from, if consumed... or of turning to profit, if he preferred to devote it to an useful employment... [T]herefore, the subtraction of a product must needs diminish, instead of augmenting, productive power.

Say engages in an instructive critique of Ricardo, which reveals the crucial difference over the latter's long-run equilibrium approach and the great difference in their respective attitudes toward taxation. Ricardo had maintained in his Principles that, since the rate of return on capital is the same in every branch of industry, taxation cannot really cripple capital. For, as Say puts it, ‘the extinction of one branch by taxation must needs be compensated by the product of some other, towards which the industry and capital, thrown out of employ, will naturally be diverted’. Here is Ricardo, blind to the real processes at work in the economy, stubbornly identifying a static comparison of long-run equilibrium states with the real world. Say replies forcefully and trenchantly:

I answer, that whenever taxation diverts capital from one mode of employment to another, it annihilates the profits of all who are thrown out of employ by the change, and diminishes those of the rest of the community; for industry may be presumed to have chosen the most profitable channel. I will go further, and say, that a forcible diversion of the current or production annihilates many additional sources of profit to industry. Besides, it makes a vast difference to the public prosperity, whether the individual or the state be the consumer. A thriving and lucrative branch of industry promotes the creation and accumulation of new capital; whereas, under the pressure of taxation, it ceases to be lucrative; capital diminishes gradually instead of increasing; wealth and production decline in consequence, and prosperity vanishes, leaving behind the pressure of unremitting taxation.

Say then adds a charming sentence, taking a praxeological slap at Ricardo's fondness for what might be called his method of utterly unrealistic, verbal mathematics, ‘Ricardo has endeavoured to introduce the unbinding maxims of geometrical demonstration; in the science of political economy, there is no method less worthy of reliance’.
Say then goes on to heap scorn on the argument that taxes can positively stimulate people to work harder and produce more. Work harder, he replies, to furnish funds to allow the state to tyrannize still further over you! Thus:

To use the expedient of taxation as a stimulative to increased production, is to redouble the exertions of the community, for the sole purpose of multiplying its privations, rather than its enjoyments. For, if increased taxation be applied to the support of a complex, overgrown, and ostentatious internal administration, or of a superfluous and disproportionate military establishment, that may act as a drain of individual wealth, and of the flower of the national youth, and an aggressor upon the peace and happiness of domestic life, will not this be paying as dearly for a grievous public nuisance, as if it were a benefit of the first magnitude?

What, then, is the bottom line; what is Say's basic prescription for taxation? Indeed, what is his prescription for total public spending? Basically, it is what one might expect from a man who believed the state to be a ‘grievous public nuisance’ and ‘an aggressor upon the peace and happiness of domestic life’. Quite simply, ‘the best scheme of [public] finance, is to spend as little as possible; and the best tax is always the lightest’. In the next sentence, he amends the latter clause to say ‘the best taxes, or rather those that are least bad...’.

In short, J.B. Say, unique among economists, offered us a theory of total government spending as well as a theory of overall taxation. And that theory was a lucid and remarkable one, amounting to: that government is best (or ‘least bad’) that spends and taxes least. But the implications of such a doctrine are stunning, whether or not Say understood them or followed them through. For if, in the Jeffersonian phrase, that government is best that governs least, then it follows that ‘least least’ is zero, and therefore, as Thoreau and Benjamin R. Tucker were later to point out, that government is best that governs – or in this case, spends and taxes – not at all!

Austrian Perspective on the History of Economic Thought (2 volume set)

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