The Consumption Tax: A
Critique
by Murray N. Rothbard
The Alleged Superiority of the
Income Tax
Orthodox neoclassical
economics has long maintained that, from the point of view of the taxed
themselves, an income tax is "better than" an excise tax on a
particular form of consumption, since, in addition to the total revenue
extracted, which is assumed to be the same in both cases, the excise tax
weights the levy heavily against a particular consumer good. In addition to the
total amount levied, therefore, an excise tax skews and distorts spending and
resources away from the consumers' preferred consumption patterns. Indifference
curves are trotted out with a flourish to lend the scientific patina of
geometry to this demonstration.
As in many other cases when
economists rush to judge various courses of action as "good,"
"superior," or "optimal," however, the ceteris paribus
assumptions underlying such judgments — in this case, for example, that total
revenue remains the same — do not always hold up in real life. Thus, it is
certainly possible, for political or other reasons, that one particular form of
tax is not likely to result in the same total revenue as
another. The nature of a particular tax might lead to less or more revenue than
another tax. Suppose, for example, that all present taxes are abolished and
that the same total is to be raised from a new capitation, or head, tax, which
requires that every inhabitant of the United States pay an equal amount to the
support of federal, state, and local government. This would mean that the
existing total government revenue of the United States, which we estimate at 1
trillion, 380 million dollars — and here exact figures are not important —
would have to be divided between an approximate total of 243 million people.
Which would mean that every man, woman, and child in America would be required
to pay to government each and every year, $5,680. Somehow, I don't believe that
anything like this large a sum could be collectible by the authorities, no
matter how many enforcement powers are granted the IRS. A clear example where
the ceteris paribus assumption flagrantly breaks down.
But a more important, if less
dramatic, example is nearer at hand. Before World War II, Internal Revenue
collected the full amount, in one lump sum, from every taxpayer, on March 15 of
each year. (A month's extension was later granted to the long-suffering taxpayers.)
During World War II, in order to permit an easier and far smoother collection
of the far higher tax rates for financing the war effort, the federal
government instituted a plan conceived by the ubiquitous Beardsley Ruml of R.H.
Macy & Co., and technically implemented by a bright young economist at the
Treasury Department, Milton
Friedman. This plan, as all of us know only too well, coerced every employer into
the unpaid labor of withholding the tax each month from the employee's paycheck
and delivering it to the Treasury. As a result, there was no longer a need for
the taxpayer to cough up the total amount in a lump sum each year. We were
assured by one and all, at the time, that this new withholding tax was strictly limited to the
wartime emergency, and would disappear at the arrival of peace. The rest, alas,
is history. But the point is that no one can seriously maintain that an income
tax deprived of withholding power, could be collected at its present high
levels.
One reason, therefore, that an
economist cannot claim that the income tax, or any other tax, is better from
the point of view of the taxed person, is that total revenue collected is often
a function of the type of tax imposed. And it would seem that, from the point
of view of the taxed person, the less extracted from him the better. Even
indifference-curve analysis would have to confirm that conclusion. If someone
wishes to claim that a taxed person is disappointed at how little tax he is asked to pay, that person is
always free to make up the alleged deficiency by making a voluntary gift to the
bewildered but happy taxing authorities.[1]
A second insuperable problem
with an economist's recommending any form of tax from the alleged point of view
of the taxee, is that the taxpayer may well have particular subjective
evaluations of the form of tax, apart from the total amount levied. Even if the
total revenue extracted from him is the same for tax A and tax B, he may have
very different subjective evaluations of the two taxing processes. Let us
return, for example, to our case of the income as compared to an excise tax.
Income taxes are collected in the course of a coercive and even brutal
examination of virtually every aspect of every taxpayer's life by the
all-seeing, all-powerful Internal Revenue Service. Each taxpayer, furthermore,
is obliged by law to keep accurate records of his income and deductions, and
then, painstakingly and truthfully, to fill out and submit the very forms that
will tend to incriminate him into tax liability. An excise tax, say on whiskey
or on movie admissions, will intrude directly on no one's life and income, but
only into the sales of the movie theater or liquor store. I venture to judge
that, in evaluating the "superiority" or "inferiority" of
different modes of taxation, even the most determined imbiber or moviegoer
would cheerfully pay far higher prices for whiskey or movies than neoclassical
economists contemplate, in order to avoid the long arm of the IRS.[2]
The Forms of Consumption Tax
In recent years, the old idea
of a consumption tax in contrast to an income tax has been put forward by many
economists, particularly by allegedly pro-free-market conservatives. Before
turning to a critique of the consumption tax as a substitute for the income
tax, it should be noted that current proposals for a consumption tax would
deprive taxpayers of the psychic joy of eradicating the IRS. For while the
discussion is often couched in either-or terms, the various proposals really
amount to adding a new consumption tax
on top of the current massive armamentarium of taxing power. In short, seeing
that income tax levels may have reached their political limits for the time
being, our tax consultants and theoreticians are suggesting a shining new tax
weapon for the government to wield. Or, in the immortal words of that exemplary
economic czar and servant of absolutism, Jean-Baptiste Colbert, the task of the
taxing authorities is to "so pluck the goose as to obtain the largest
amount of feathers with the least amount of hissing." We the taxpayers, of
course, are the geese.
A second proposed consumption
tax, the VAT, or value-added tax, imposes a curious hierarchical tax on the
"value added" by each firm and business. Here, instead of every
individual, every business firm would be subjected to intense bureaucratic scrutiny,
for each firm would be obliged to report its income and its expenditures,
paying a designated tax on the net income. This would tend to distort the
structure of business. For one thing, there would be an incentive for
uneconomic vertical integration, since the fewer the number of times a sale
takes place, the fewer the imposed taxes. Also, as has been happening in
European countries with experience of the VAT, a flourishing industry may arise
in issuing phony vouchers, so that businesses can overinflate their alleged
expenditures, and reduce their reported value added. Surely a sales tax, other
things being equal, is manifestly both simpler, less distorting of resources,
and enormously less bureaucratic and despotic than the VAT. Indeed the VAT
seems to have no clear advantage over the sales tax, except of course, if
multiplying bureaucracy and bureaucratic power is considered a benefit.
The third type of consumption
tax is the familiar percentage tax on retail sales. Of the various forms of
consumption tax, the sales tax surely has the great advantage, for most of us,
of eliminating the despotic power of the government over the life of every
individual, as in the income tax, or over each business firm, as in the VAT. It
would not distort the production structure as would the VAT, and it would not
skew individual preferences as would specific excise taxes.
Let us now consider the merits
or demerits of a consumption as against an income tax, setting aside the
question of bureaucratic power. It should first be noted that the consumption
tax and the income tax each carry distinct philosophical implications. The
income tax rests necessarily on the ability-to-pay principle, namely the
principle that if a goose has more feathers it is more ripe for the plucking.
The ability-to-pay principle is precisely the creed of the highwayman, of
taking where the taking is good, of extracting as much as the victims can bear.
The ability-to-pay principle is the philosophical embodiment of the memorable
answer of Willie Sutton when he was asked, perhaps by a psychological social
worker, why he robbed banks. "Because," answered Willie, "that's
where the money is."
The consumption tax, on the
other hand, can only be regarded as a payment for permission-to-live. It
implies that a man will not be allowed to advance or even sustain his own life
unless he pays, off the top, a fee to the State for permission to do so. The
consumption tax does not strike me, in its philosophical implications, as one
whit more noble, or less presumptuous, than the income tax.
Proportionality and
Progressivity: Who? Whom?
One of the suggested virtues
of the consumption tax advanced by conservatives is that, while the income tax
can be and generally is progressive, the consumption tax is virtually
automatically proportional. It is also claimed that progressive taxation is tantamount
to theft, with the poor robbing the rich, whereas proportionality is the fair
and ideal tax. In the first place, however, the Fisher-type consumption tax
could well be every bit as progressive as the income tax. Even the sales tax is
scarcely free from progressivity. For most sales taxes in practice exempt such
products as food, exemptions that distort individual market preferences and
also introduce progressivity of taxation.
But is progressivity really
the problem? Let us take two individuals, one who makes $10,000 a year and
another who makes $100,000. Let us posit two alternative tax systems: one
proportional, the other steeply progressive. In the progressive tax system,
income tax rates range from 1 percent for the $10,000-a-year man, to 15 percent
for the man with the higher income. In the succeeding proportional system, let
us assume, everyone, regardless of income, pays the same 30 percent of his
income. In the progressive system, the low-income man pays $100 a year in
taxes, and the wealthier pays $15,000, whereas in the allegedly fairer
proportional system, the poorer man pays $3000 instead of $100, while the
wealthier pays $30,000 instead of $15,000. It is, however, small consolation to
the higher-income person that the poorer man is paying the same percentage of
income in tax as he, for the wealthier person is being mulcted far more than
before. It is unconvincing, therefore, to the richer man to be told that he is
now no longer being "robbed" by the poor, since he is losing far more
than before. If it is objected that the total level of
taxation is far higher under our posited proportional than progressive system,
we reply that that is precisely the point. For what the higher-income person is
really objecting to is not the mythical robbery inflicted upon him by "the
poor"; his problem is the very real amount being extracted from him by the State. The wealthier man's real complaint, then, is not
how badly he is being treated relative to someone else, but how much money is
being extracted from his own hard-earned assets. We submit that progressivity
of taxes is a red herring; that the real problem and proper focus should be on
the amount that any given individual is obliged to
surrender to the State.[4]
The State, of course, spends
the money it receives on various groups, and those who claim that progressive
taxation mulcts the rich on behalf of the poor argue by comparing the income
status of the taxpayers with those on the receiving end of the State's largess.
Similarly, the Chicago School claims that the tax system is a process by which
the middle class exploits both the rich and the poor, while the New Left
insists that taxes are a process by which the rich exploit the poor. All of
these attempts misfire by unjustifiably bracketing as one class the payers to,
and recipients from, the State. Those who pay taxes to the State, be they
wealthy, middle class or poor, are certainly on net, a different set of people than those wealthy,
middle-class, or poor, who receive money from State coffers, which notably
includes politicians and bureaucrats as well as those who receive favors from
these members of the State apparatus. It makes no sense to lump these groups
together. It makes far more sense to realize that the process of tax and
expenditures creates two and only two separate, distinct, antagonistic social
classes, what Calhoun brilliantly identified as the (net) taxpayers and the
(net) tax consumers, those who pay taxes and those who live off them. I submit
that, looked at in this perspective, it also becomes particularly important to
minimize the burdens which the State and its privileged tax consumers place on
the productivity of the taxpayers.[5]
The Problem of Taxing Savings
The major argument for
replacing an income by a consumption tax is that savings would no longer be
taxed. A consumption tax, its advocates assert, would tax consumption and not
savings. The fact that this argument is generally advanced by free-market economists,
in our day mainly by the supply-siders, strikes one immediately as rather
peculiar. For individuals on the free market, after all, each decide their own
allocation of income to consumption or to savings. This proportion of
consumption to savings, as Austrian economics teaches us, is determined by each
individual's rate of time preference, the degree by which he prefers present to
future goods. For each person is continually allocating his income between
consumption now, as against saving to invest in goods that will bring an income
in the future. And each person decides the allocation on the basis of his time
preference. To say, therefore, that only consumption should be taxed and not
savings is to challenge the voluntary preferences and choices of individuals on
the free market, and to say that they are saving far too little and consuming
too much, and therefore that taxes on savings should be removed and all the
burdens placed on present as compared to future consumption. But to do that is
to challenge free-market expressions of time preference, and to advocate
government coercion to forcibly alter the expression of those preferences, so
as to coerce a higher saving-to-consumption ratio than desired by free
individuals.
We must, then, ask, By what
standards do the supply-siders and other advocates of consumption taxes decide
why and to what extent savings are too low and consumption too high? What are
their criteria of "too low" or "too much," on which they
base their proposed coercion over individual choice? And what is more, by what
right do they call themselves advocates of the "free market" when
they propose to dictate choices in such a vital realm as the proportion between
present and future consumption?
Supply-siders consider
themselves heirs of Adam Smith, and in one sense they are right. For Smith,
too, driven in his case by a deep-seated Calvinist hostility to luxurious
consumption, sought to use government to raise the social proportion of
investment to consumption beyond the desires of the free market. One method he
advocated was high taxes on luxurious consumption; another was usury laws, to
drive interest rates below the free-market level, and thereby coercively
channel or ration savings and credit into the hands of sober, industrious prime
business borrowers, and out of the hands of "projectors" and
"prodigal" consumers who would be willing to pay high interest
charges. Indeed, through the device of the ghostly Impartial Spectator, who, in
contrast to real human beings, is indifferent to the time at which he will
receive goods, Smith virtually held a zero rate of time preference to be the
ideal.[6]
The only coherent argument
offered by advocates of consumption against income taxation is that of Irving
Fisher, based on suggestions in John Stuart Mill.[7] Fisher argued that,
since the goal of all production is consumption, and since all capital goods
are only way stations on the way to consumption, the only genuine income is consumption spending. The
conclusion is quickly drawn that therefore only consumption income, not what is
generally called "income," should be subject to tax.
More specifically, savings and
consumption, it is alleged, are not really symmetrical. All saving is directed
toward enjoying more consumption in the future. Potential present consumption
is foregone in return for an expected increase in future consumption. The
argument concludes that therefore any return on investment can only be
considered a "double counting" of income, in the same way that a
repeated counting of the gross sales of, say, a case of Wheaties from
manufacturer to jobber to wholesaler to retailer as part of net income or
product would be a multiple counting of the same good.
This reasoning is correct as
far as it goes in explaining the consumption-savings process, and is quite
helpful in leveling a critique of conventional national income or product
statistics. For these statistics carefully leave out all double or multiple
counting in order to arrive at total net product, yet they arbitrarily include
in total net income, investment in all capital goods lasting longer than one year — a clear example
itself of double counting. Thus, the current practice absurdly excludes from
net income a merchant's investment in inventory lasting 11 months before sale,
but includes in net income investment in inventory
lasting for 13 months. The cogent conclusion is that an estimate of social or
national income should include only consumer spending.[8]
Despite the many virtues of
the Fisher analysis, however, it is impermissible to leap to the conclusion
that only consumption should be taxed rather than income. It is true that
savings leads to a greater supply of consumer goods in the future. But this
fact is known to all persons; that is precisely why people
save. The market, in short, knows all about the productive power of savings for
the future, and allocates its expenditures accordingly. Yet even though people
know that savings will yield them more future consumption, why don't they save
all their current income? Clearly, because of their time preferences for
present as against future consumption. These time preferences govern people's
allocation between present and future. Every individual, given his money
"income" — defined in conventional terms — and his value scales, will
allocate that income in the most desired proportion between consumption and
investment. Any otherallocation of such income, any
different proportions, would therefore satisfy his wants and desires to a
lesser extent and lower his position on his value scale. It is therefore
incorrect to say that an income tax levies an extra burden on savings and
investment; it penalizes an individual's entire standard of living, present and
future. An income tax does not penalize saving per se any more than it
penalizes consumption.
Hence, the Fisher analysis,
for all its sophistication, simply shares the other consumption-tax advocates'
prejudices against the voluntary free-market allocations between consumption
and investment. The argument places greater weight on savings and investment
than the market does. A consumption tax is just as disruptive of voluntary time
preferences and market allocations as is a tax on savings. In most or all other
areas of the market, free-market economists understand that allocations on the
market tend always to be optimal with respect to satisfying consumers' desires.
Why then do they all too often make an exception of consumption-savings
allocations, refusing to respect time-preference rates on the market?
Perhaps the answer is that
economists are subject to the same temptations as anyone else. One of these
temptations is to call loudly for you, him, and the other guy to work harder,
and save and invest more, thereby increasing one's own present and future
standards of living. A follow-up temptation is to call for the gendarmes to
enforce that desire. Whatever we may call this temptation, economic science has
nothing to do with it.
The Impossibility of Taxing
Only Consumption
Having challenged the merits
of the goal of taxing only consumption and freeing savings from taxation, we
now proceed to deny the very possibility of
achieving that goal, i.e., we maintain that a consumption tax will devolve,
willy-nilly, into a tax on income and therefore on savings as well. In short,
that even if, for the sake of argument, we should want to tax only consumption and not income, we
should not be able to do so.
Let us take, first, the Fisher
plan, which, seemingly straightforward, would exempt saving and tax only
consumption. Let us take Mr. Jones, who earns an annual income of $100,000. His
time preferences lead him to spend 90 percent of his income on consumption, and
save and invest the other 10 percent. On this assumption, he will spend $90,000
a year on consumption, and save-and-invest the other $10,000. Let us assume now
that the government levies a 20 percent tax on Jones's income, and that his
time-preference schedule remains the same. The ratio of his consumption to
savings will still be 90:10, and so, after-tax income now being $80,000, his
consumption spending will be $72,000 and his saving-investment $8,000 per year.[9]
Suppose now that instead of an income tax, the government follows the
Irving Fisher scheme, and levies a 20 percent annual tax on Jones's consumption. Fisher maintained that such a tax would
fall only on consumption, and not on Jones's savings. But this claim is
incorrect, since Jones's entire savings-investment is based solely on the
possibility of his future consumption,
which will be taxed equally. Since future consumption will be taxed, we assume,
at the same rate as consumption at present, we cannot conclude that savings in
the long run receives any tax exemption or special encouragement. There will
therefore be no shift by Jones in favor of savings-and-investment due to a
consumption tax.[10] In sum, any payment of
taxes to the government, whether they be consumption or income, necessarily
reduces Jones's net income. Since his time-preference schedule remains the
same, Jones will therefore reduce his consumption and his savings
proportionately. The consumption tax will be shifted by Jones until it becomes
equivalent to a lower rate of tax on his own income. If Jones still spends 90
percent of his net income on consumption, and 10 percent on savings-investment,
his net income will be reduced by $15,000, instead of $20,000, and his
consumption will now total $76,000, and his savings-investment $9,000. In other
words, Jones's 20 percent consumption tax will become equivalent to a 15
percent tax on his income, and he will arrange his consumption-savings
proportions accordingly.[11]
We saw at the beginning of this paper that an excise tax skewing resources
away from more desirable goods does not necessarily mean we can recommend an
alternative, such as an income tax. But how about a general sales tax, assuming
that one can be levied politically with no exemptions of goods or services?
Wouldn't such a tax burden be only on consumption and not income?
In the first place, a sales tax would be subject to the same problems as
the Fisher consumption tax. Since future and present consumption would be taxed
equally, there would again be shifting by each individual so that future as
well as present consumption would be reduced. But, furthermore, the sales tax
is subject to an extra complication: the general assumption that a sales tax
can be readily shifted forward to the consumer is totally fallacious. In fact,
the sales tax cannot be shifted forward at all!
Consider: all prices are determined by the interaction of supply, the stock
of goods available to be sold, and by the demand schedule for that good. If the
government levies a general 20 percent tax on all retail sales, it is true that
retailers will now incur an additional 20 percent cost on all sales. But how
can they raise prices to cover these costs? Prices, at all times, tend to be
set at the maximum net revenue point for each seller. If the sellers can simply
pass the 20 percent increase in costs onto the consumers, why did they have to
wait until a sales tax to raise prices? Prices are already at highest net income levels for each
firm. Any increase in cost, therefore, will have to be absorbed by the firm; it
cannot be passed forward to the consumers. Put another way, the levy of a sales
tax has not changed the stock already available to the consumers; that stock has
already been produced. Demand curves have not changed, and there is no reason
for them to do so. Since supply and demand have not changed, neither will
price. Or, looking at the situation from the point of the demand and supply of
money, which help determine general price levels, the supply of money has
remained as given, and there is also no reason to assume a change in the demand
for cash balances either. Hence, prices will remain the same.
It might be objected that, even though shifting forward to higher prices
cannot occur immediately, it can do so in the longer run, when factor and
resources owners will have a chance to lower their supply at a later point in
time. It is true that a partial excise can be shifted forward in this way, in
the long run, by resources leaving, let us say, the liquor industry and
shifting into other untaxed industries. After a while, then, the price of
liquor can be raised by a liquor tax, but only by reducing the future supply,
the stock of liquor available for sale at a future date. But such
"shifting" is not a painless and prompt passing on of a higher price
to consumers; it can only be accomplished in a longer run by a reduction in the
supply of a good.
The burden of a sales tax
cannot be shifted forward in the same way, however. For resources cannot escape
a sales tax as they can an excise tax — by leaving the liquor industry and
moving to another. We are assuming that the sales tax is general and uniform;
it cannot therefore, be escaped by resources except by fleeing into idleness.
Hence, we cannot maintain that the sales tax will be shifted forward in the
long run by all supplies of goods falling
by something like 20 percent (depending on elasticities). General supplies of goods
will fall, and hence prices rise, only to the relatively modest extent that
labor, seeing a rise in the opportunity cost of leisure because of a drop in
wage incomes, will leave the labor force and become voluntarily idle (or more
generally will lower the number of hours worked).[12]
In the long run, of course, and that run is not very long, the retail firms will not be able to
absorb a sales tax; they are not unlimited pools of wealth ready to be confiscated.
As the retail firms suffer losses, their demand curves for all intermediate
goods, and then for all factors of production, will shift sharply downward, and
these declines in demand schedules will be rapidly transmitted to all the
ultimate factors of production: labor, land, and interest income. And since all
firms tend to earn a uniform interest return determined by social time
preference, the incidence of the fall in demand curves will rest rather quickly
on the two ultimate factors of production: land and labor.
Hence, the seemingly common-sense view that a retail sales tax will readily
be shifted forward to the consumer is totally incorrect. In contrast, the
initial impact of the tax will be on the net incomes of retail firms. Their
severe losses will lead to a rapid downward shift in demand curves,backward to land and labor, i.e., to wage rates
and ground rents. Hence, instead of the retail sales tax being quickly and
painlessly shifted forward, it will, in a longer run, be painfully shifted backward
to the incomes of labor and landowners. Once again, an alleged tax on consumption, has been transmuted by the processes of
the market into a tax on incomes.
The general stress on forward shifting, and neglect of backward shifting,
in economics is due to the disregard of the Austrian theory of value, and its
insight that market price is determined onlyby the
interaction of an already-produced stock, with the subjective utilities and
demand schedules of consumers for that stock. The market supply curve,
therefore, should be vertical in the usual supply-demand diagram. The standard
Marshallian forward-sloping supply curve illegitimately incorporates a time
dimension within it, and it therefore cannot interact with an instantaneous, or
freeze-frame, market-demand curve. The Marshallian curve sustains the illusion
that higher cost can directly raise prices, and not only indirectly by reducing
supply. And while we may arrive at the same conclusion as Marshallian
supply-curve analysis for a particular excise tax, where partial equilibrium
can be used, this standard method breaks down for general sales taxation.
Conclusion: The Amount vs. the Form of Taxation
We conclude with the observation that there has been far too much
concentration on the form, the type of
taxation, and not enough on its total amount. The result has been endless
tinkering with kinds of taxes, coupled with
neglect of a far more critical question: how much of the
social product should be siphoned away from the producers? Or, how much income
should be retained by the producers and how much income and resources
coercively diverted for the benefit of nonproducers?
It is particularly odd that economists who proudly refer to themselves as
advocates of the free market have in recent years led the way in this mistaken
path. It was allegedly free-market economists for example who pioneered in and
propagandized for the alleged Tax Reform Act of 1986. This massive change was
supposed to bring us "simplification" of our income taxes. The
result, of course, was so simple that even the IRS, let alone the fleet of tax
lawyers and tax accountants, has had great difficulty in understanding the new
dispensation. Peculiarly, moreover, in all the maneuverings that led to the Tax
Reform Act, the standard held up by these economists, a standard apparently so
self-evident as to need no justification, was that the sum of tax changes be
"revenue neutral." But they never told us what is so great about
revenue neutrality. And of course, by cleaving to such a standard, the crucial
question of total revenue was deliberately precluded from the discussion.
Even more egregious was an early doctrine of another group of supposed
free-market advocates, the supply-siders. In their original Laffer-curve
manifestation, now happily consigned to the dustbin of history, the
supply-siders maintained that the tax rate that maximizes tax revenue is the "voluntary"
rate, and a rate that should be diligently pursued. It was never pointed out in
what sense such a tax rate is "voluntary," or what in the world the
concept of "voluntary" has to do with taxation in the first place.
Much less did the supply-siders in their Lafferite form ever instruct us why we
must all uphold maximizing government revenue as our beau idéal. Surely, for
free-market proponents, one might think that minimizing government
depredation of the private product would be a bit more appealing.
It is with relief that one turns for a realistic as well as a genuine
free-market approach to Jean-Baptiste
Say, who contributed considerably more to economics than Say's law. Say was under no illusion
that taxation is voluntary nor that government spending contributes productive
services to the economy. Say pointed out that, in taxation,
The government exacts from a taxpayer the payment of a given tax in the
shape of money. To meet this demand, the taxpayer exchanges part of the
products at his disposal for coin, which he pays to the tax-gatherers.
Eventually, the government spends the money on its own needs, so that
in the end … this value is consumed; and then the portion of wealth, which passes from the hands of the taxpayer into those of the tax-gatherer, is destroyed and annihilated.
Note that, as in the case of the later Calhoun, Say sees that taxation
creates two conflicting classes, the taxpayers and the tax gatherers. Were it
not for taxes, the taxpayer would have spent his money on his own consumption.
As it is, "The state … enjoys the satisfaction resulting from that
consumption."
Say proceeds to denounce the prevalent notion, that the values, paid by the community for the public
service, return it again … that what government and its agents receive, is
refunded again by their expenditures.
Say angrily comments that this "gross fallacy … has been productive of
infinite mischief, inasmuch as it has been the pretext for a great deal of
shameless waste and dilapidation."
On the contrary, Say declares, "the value paid to government by the
taxpayer is given without equivalent or return; it is expended by the
government in the purchase of personal service, of objects of
consumption."
Say goes on to denounce the "false and dangerous conclusion" of
economic writers that government consumption increases wealth. Say noted
bitterly that "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, he noted, these notions have been put into
"practice by the agents of public authority, who can enforce error and
absurdity at the point of a bayonet or mouth of the cannon."[13] Taxation, then, for Say
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 of 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.[14]
But taxation, for Say, is not merely a zero-sum game. By levying a burden
on the producers, he points out, taxes, over time, cripple production itself.
Writes Say,
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.
J.B. Say's policy recommendation was crystal clear and consistent with his
analysis and that of the present paper. "The best scheme of [public]
finance is, to spend as little as possible; and the best tax is always the
lightest."
Murray N. Rothbard (1926–1995) was dean of the Austrian School. He was an
economist, economic historian, and libertarian political philosopher. See
Murray N. Rothbard's article archives.
This article serves as a complete response to Alan Greenspan's call for a
consumption tax. It originally appeared in the "Review of Austrian Economics,"
1994, Volume 7, No. 2, pp. 75–90.
It appeared on Mises.org
on March 18, 2005.
It appeared on Mises.org
on March 18, 2005.
Notes
[1] In 1619, Father Pedro
Fernandez Navarrete, "Canonist Chaplain and Secretary of his High
Majesty," published a book of advice to the Spanish monarch. Sternly
advising a drastic cut in taxation and government spending, Father Navarrete
recommended that, in the case of sudden emergencies, the king rely soley on
soliciting voluntary donations. Alejandro Antonio Chafuen, Christians for Freedom: Late
Scholastic Economics (San Francisco: Ignatius Press, 1986), p. 68.
[2] It is particularly
poignant, on or near any April 15, to contemplate the dictum of Father
Navarrete, that "the only agreeable country is the one where no one is
afraid of tax collectors," Chafuen, Christians for Freedom,
p. 73. Also see Murray N. Rothbard, "Review of A. Chafuen, Christians for Freedom: Late
Scholastic Economics,"International Philosophical Quarterly 28 (March
1988): 112–14.
[3] See, for example, Irving
and Herbert N. Fisher, Constructive Income Taxation (New
York: Harper, 1942).
[4] For a fuller treatment,
and a discussion of who is being robbed by whom, see Murray N. Rothbard, Power and Market: Government and the
Economy, 2nd ed. (Kansas City: Sheed Andrews & McMeel, 1977), pp. 120–21.
[5] See Murray N. Rothbard, Man, Economy, and State: A Treatise
on Economic Principles.
[6] See the illuminating
article by Roger W. Garrision, "West's 'Cantillon and Adam Smith': A
Comment," Journal of Libertarian Studies 7
(Fall 1985): 291–92.
[7] See Rothbard, Power and Market, pp. 98–100.
[8] We omit here the
fascinating question of how government's activities should be treated in
national income statistics. See Rothbard, Man, Economy, and State,
2, pp. 815–20; idem, Power and Market,
pp. 199–201; idem,America's Great Depression, 4th ed. (New York:
Richardson & Snyder, 1983), pp. 296–304; Robert Batemarco,"GNP, PPR, and the Standard of
Living," Review of Austrian Economics 1 (1987): 181–86.
[9] We set aside the fact
that, at the lower amount of money assets left to him, Jones's time-preference
rate, given his time-preference schedule, will be higher, so that his
consumption will be higher, and his savings lower, than we have assumed.
[10] In fact, per note 9, supra, there will be a shift in
favor of consumption because a diminished amount of money will shift the
taxpayer's time preference rate in the direction of consumption. Hence,
paradoxically, a pure tax on consumption will and up taxing savings more than
consumption! See Rothbard, Power and Market,
pp. 108–11.
[11] If net income is defined
as gross income minus amount paid in taxes, and for Jones, consumption is 90
percent of net income, a 20 percent consumption tax on $100,000 income will be
tantamount to a 15 percent tax on this income. Rothbard, Power and Market, pp. 108–11. The basic formula is that net income,
where G=gross income, t=the
tax rate on consumption, and c, consumption as percent of net income, are
givens of the problem, and N = G – T by definition, where T is the amount paid
in consumption tax.
[12] Rothbard, Power and Market, pp. 88-93. Also see the notable
article by Harry Gunnison Brown, "The Incidence of a General Sales
Tax," in Readings in the Economics of Taxation,
R. Musgrave and C. Shoup, eds. (Homewood, Ill: Irwin, 1959), pp. 330–39.
[13] Jean-Baptiste Say, A Treatise on Political Economy, 6th ed. (Philadelphia:
Claxton, Remsen & Heffelfinger, 1880), pp. 412–15. Also see Murray N.
Rothbard, "The Myth of Neutral Taxation," Cato Journal 1 (Fall 1981): 551–54.
[14] Say, Treatise, p. 446.
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