Response to A Lesson in Self-Control

Themon,

In some ways I quite agree with you. Human behavior is not reducible to a collection of equations and charts. It is not always rational or informed. This is the problem with Keynesian Economics, and why I think it is little better than alchemy. Why, after all that has happened, anyone bothers listening to a word they say anymore is beyond comprehension.

I do believe you have misunderstood Austrian Economics, though. In many Austrian texts, you will not find a single chart or equation. Austrian Economics is dedicated to logical principles of natural law as revealed through the study of human action and objective reality (for instance, increasing the supply of money will inevitably cause prices to rise more than they would have without the supply increase). Nor are Austrians terribly concerned with efficiency as espoused by the Chicago School. Their focus is on freedom and justice.

I am terribly confused by your assertions. You claim that free markets are inherently unstable and do not self correct, but you then go on to criticize the brutal market manipulations of government that cause instability, impede corrections, and ultimately cause collapse. This is a contradiction. If markets cannot self correct then they need government guidance. If government guidance is the cause of distortions, though, then it interferes with the market’s ability to self correct.

Look back over history at the collapse of economies and you will not find market failures. You will see government interference acting as cancerous tumors in economies. For a wonderful Austrian view, read Murray Rothbard’s essay, “Economic Depressions: Their Cause and Cure.” Another work which, while not entirely Austrian, correctly identifies the causes of collapse is Manias, Panics, and Crashes: A History of Financial Crises by Charles P. Kindleberger. What are these collapses, though? They are the violent and painful expulsions of the hardened tumors. The market, even if it is a black market, will reassert itself.

Your example of the Jaguar automobile illustrates this perfectly. If the state controlled the means of production, could it possibly anticipate the demand for such a thing? If, by some chance, it managed to procure an oracle who could accurately channel all of human desire (and I guarantee you this oracle is not to be found anywhere near our government), how could it possibly know how best to produce it? Knowing nothing about cars, let us say there is another sudden bursting of the dykes in New Orleans, placing a sudden demand on steel supports. However, the government, which controls production, and has divorced itself from the medium of exchange, has declared that a set amount of steel shall be set aside to make Jaguars while dykes, which have already been built, get no steel allocation. It is possible that a savvy agent will push through a change in the ponderous government agencies before New Orleans is flooded again, diverting all steel away from cars and into dykes. This inevitably causes other problems.

In a free market, the demand for steel in the dykes would push prices up. Fewer jaguars would be made because fewer people would be willing to pay the higher prices. New Orleans, which needs it urgently, though, would pay. They would get the steel they needed. Some, however, would remain behind to build expensive luxury cars. Other auto manufacturers would begin to use cheaper and lighter metals. The market self-corrects because thousands of people are acting on their goals given the reality they are faced with. These thousands of actions cannot be matched by a government overseer even in this one instance, much less an entire economy. All it could manage in its ponderous way would be to respond too slowly to the dykes while causing massive shortages in automobiles.

Taking another example I like from Thomas E. Woods, after the 9/11 disaster, government stepped in to limit hotel prices to prevent what it called gouging. It froze hotel prices. As such, there were hundreds of people with no place to stay. Those who had hotel rooms in NY City obtained them simply by being first in line. Had government not stepped in to interfere, prices for rooms would have risen quickly. A family of four, instead of taking two rooms with double beds, may have taken only one with double beds. Business people traveling together may have chosen to share a room. People who could have driven a little further to stay with family or friends would have done so, rather than paying the higher prices. People who had nowhere else to go, though, and needed a room, would have been able to get one—at the higher price. As a result, fewer people would have been left without lodging while suffering a government imposed race to hotels at prices which do not reflect reality.

The market does not solve all problems. However, it is the best system with which people can make choices given the reality they face and the resources available. On the other hand, socialism and government control of production is quite simply a poison.

The healthcare debate is no different. Although I am no expert in health policy, it is not hard to see that the bill Congress is debating represents nothing but financial ruin. It is an absurdity that they claim that this, the largest expansion of entitlement programs in history, will actually decrease the deficit. It is even more absurd that, after seeing how all our other entitlement programs go bankrupt and cause financial chaos, or just by looking at U.S. finances right now, anyone actually believes their claim. The human effects are perhaps even more terrifying than the financial ones when you consider the inevitable rationing and shortages that will flow from this horror.

That does not mean there is nothing government can do, though. I recognize that it is easy, really easy, to point at the health care bill and cry that it is a monstrosity. People don’t want to be told, “No,” they want to hear solutions. Dr. Ron Paul, a congressman from Texas, is a medical doctor, a staunch adherent to the Austrian School, and a tireless defender of the Constitution and our individual liberties. I have been impressed with his solutions, which clearly and simply address the problem, remain within the bounds of the Constitution, and preserve free market and individual liberties. They also cost us very little as they do not rely on government solutions.

Lowering the Cost of Health Care
Healthcare
Healthcare & Big Government: A Marriage Made In Hell
How to Solve the Healthcare Crisis

At a time when national bankruptcy and total collapse of the dollar is a real possibility, it seems insane to me that we would not try these free market solutions before leaping off the socialist cliff to commit national suicide.

Julian Dunraven.

A lesson in self-control

Julian,

As I read the various articles by free-market enthusiasts, I’m struck by a consistency, which is a rather blind belief in the absolute self-correcting powers of the market. This is naive. Self-correcting systems are not nearly that well-behaved.

Let me illustrate with a very simple model: the thermostat. The thermostat is an example of what engineers call a “negative feedback control loop.” The term “negative” means that the response is opposite (negative) to the stimulus. When pushed, the system corrects by pushing in the opposite direction. This contrasts with a “positive feedback control loop,” which responds in the same (positive) direction as the stimulus: when pushed, it pulls in the same direction, amplifying the effect.

So when the room gets warm, the thermostat also warms up, which tells it to turn down the heat. When the room gets cool, the thermostat cools off, which tells it to turn up the heat. The result is to keep the room temperature constant, regardless of the weather outside. The temperature is “self-correcting.”

Let’s introduce a simple change to the system: a time-delay. Let’s say the thermostat is on one wall, and the heater/air-conditioner is on the opposite wall in a different room. When the thermostat gets too cold, it turns on the heater, which begins to heat the other room. However, it takes a long time for the heat from that room to reach the thermostat, which remains cold and keeps the heat on. By the time the heat reaches the thermostat and it turns off the heater, the other room is unbearably hot. The unbearable heat from that room gradually moves into the room with the thermostat, which senses the warmth and turns on the air-conditioner. The other room now begins to freeze. By the time the thermostat gets the first wave of chill and turns the heat back on, ice is beginning to form on the windows in the other room.

Any time-lag between stimulus and response generally creates oscillation in a negative-feedback control loop. You see this in thermostatic control systems, robotic control, and even in natural systems like predator-prey cycles.

Now let’s introduce a non-linearity on top of the time-delay. Instead of just turning the heat/cold on or off, we have an “advanced” thermostat that can give the heater some extra kick if it gets too cold, or turns the air conditioning up higher when it gets too hot. Without getting into the mathematics, the time-delay now causes amplification on each cycle. The room gets hotter with each hot cycle, and colder with each cold cycle. We have created a situation where a negative feedback loop has become, overall, a positive feedback loop.

Nearly everyone has experienced positive feedback in the phenomenon of a “feedback howl” from live stage loudspeakers. It happens when you move the microphone in front of the line of the speakers. The amplified sound from the speakers enters the microphone, causing it to be amplified and “fed back” to the microphone at an even higher level. The cycle rapidly escalates until it consumes the entire power output of the amplifiers, producing a howl at the maximum volume the speakers can produce. The howl is self-sustaining: you have to turn down the amplifier gain, or cover the microphone, to shut it down. Without intervention, it will howl until something burns out.

This is a typical example of a system that is driven to what is called a “stable boundary case” solution. Instead of self-correcting, the system moves to one of the constraints (the maximum power output of the amplifier) and stays there, unable to adjust or adapt. Most negative feedback control loops experience this when moved too far from their equilibrium position.

Non-linear systems frequently display two other baffling phenomena: complex self-organization, and chaos. In complex self-organization, the system becomes reasonably predictable, but according to a new set of “meta-rules” that have no obvious connection to the underlying rules of the system. In chaos, the system becomes unpredictable, requiring an infinite degree of information to make even the most basic predictions. The former is where evolutionary scientists pin their hopes of explaining how life arises from non-life — the latter is where you get the so-called “butterfly effect,” where a seemingly insignificant stimulus (such as the beating of a butterfly’s wings in China) has huge responses (the formation of a hurricane in the Gulf of Mexico).

Physicists were always very lucky, in that all of the physical non-linearity that arose in the early systems they studied (pendulums, planetary orbits, electromagnetism, thermodynamics) was relatively unimportant. As a result, they could “linearize” their equations, and come up with a useful approximation that they could actually solve, mathematically. When there is significant non-linearity (as in Einstein’s theory of general relativity, or modern string theory), physicists aren’t so lucky: in general, they don’t know how to work with the equations. The whole of mathematics and physics is currently just pecking around the edges of non-linearity.

Which brings us back to economists and the free market. Economists, like physicists, have invested a lot of time and effort in “linearized” theories of the economy. Unlike physics, however, it isn’t clear that these economic equations have any relationship whatsoever to reality, because the economy is highly non-linear. Economists, for instance, generally assume that buyers are rational, informed, and adaptive — assumptions needed to linearize the models. All three of these assumptions are completely false. Buyers are emotional, ill-informed, and brand-loyal. All three of these realities impose a “stickiness” to economic behavior that would necessarily be represented by significant non-linearity in the models. Since economists are no better at non-linear math than physicists and pure mathematicians, they go back and polish their linear models and concepts, even though these have little bearing on the real economy.

As in the example of the thermostat, it doesn’t take a whole lot of change in the system to turn self-correction into oscillation or self-destruction — or self-organization or chaos.

As a general observation, economies are not inherently stable. Historically, they collapse frequently, much more often than empires and governments. So I can’t even begin to swallow the argument that the marketplace is inherently “self-correcting.” My impression is that any economy is a fragile thing poised on the edge of chaos, held together by spit, string, and a whole lot of wishful thinking. It is brutally manipulated by everyone who has a stake in it, and no deception is too low if it results in a short-term profit at the end of the day. Every economy eventually collapses and is replaced by a new economy.

The precise behavior of any market segment is different, depending on the product. Why do Jaguars (the cars) even exist? How can something like a “pet rock” or “virtual real estate in Second Life” make anyone a million dollars? The stock market… well, there’s another whole post, there.

This is precisely what I would expect, given the sensitivity of feedback systems to underlying conditions. It strikes me as extremely naive to expect that the market will “sort things out” indiscriminately, particularly when we come to something like health care and insurance, both of which have some distinctive driving forces.

Some answers — Public Education

Republicans are widely perceived as being opposed to public tax-funded education and in favor of private or home schooling, as evidenced by the recurring “vouchers” theme. Is this true, and why? — Themon

Themon,

Public Education v. Vouchers

Dislike of standard public education is a mixed issue, not limited to Republicans. Notice that some of the strongest support for charter schools comes from poor urban minority Democrats. Why? Because they see more clearly than most that our public education system has failed. I do not think I need spend much time arguing that point. Everyone, including the teachers unions, seems to agree on that point. The question is what to do about it.

The Democratic Party, heavily influenced by the teachers unions, tend to argue that we just need to spend more money on education. In Colorado, Amendment 23 of the state constitution may eventually consume the entire state budget. We have also had more educational ballot questions and mill levies than I can count. Our ‘at risk’ schools get boatloads of money dumped upon them before being closed. Yet, all of this money has done little or no good whatsoever.

The only places where we see noticeable success stories are in charter and private schools where the administration is free from much state interference, free from union regulations, and free to innovate according to what works for their students and demographics. This makes sense. Charter and private schools are not guaranteed funding. Their pupils must show results as good as or superior to normal public schools in order to stay in business. This forces them to maintain good practices that are simply unimportant or impossible at normal public schools given the regulatory scheme and culture under which they operate. This is especially true of private schools, where parents must be convinced to spend money beyond the taxes must pay anyway in order to send their children to such institutions, effectively paying twice.

Competition breeds success in the market. Providing education is just one more service provided in the market. The state has simply created a monopoly and, like all monopolies, it provides stagnant, subpar service at a crushing price that always goes up but never provides better service. I never understand why people can so easily see the dangers of a monopoly and then turn around to passionately defend the public education system we suffer in this country.

While charters are a nice step in the direction of competition, educational vouchers would be a greater step still. They would still allow us to ensure that every child had funds to attend school. However, it would leave the choice and type of school to the parents. If they were willing to drive a long distance for a particular school they liked, that would be possible. If they thought their child would benefit from an all boys school, so be it. If they had a child gifted in the arts, and another gifted in the sciences, well, we would have schools which specialize in such areas. Similarly, there would be schools better suited to the needs of the disabled, just as students of exceptional intelligence would no longer be limited by the ‘average’ public school pupil.

Would the poor have the same opportunities as the rich? No. But they never do. The rich have always had the benefit of choice. If they want their children to attend Eaton, they can do so. Even in our current system of funding schools via property taxes, the rich benefit from high value areas such ads Cherry Creek. Vouchers, however, would beget many good schools competing for the children of middle class and poor families. The poor would certainly be no worse off than they are now. Currently, the middle classes and poor are stuck with the one-size-fits-all style of education the teachers unions see fit to provide, and I have already discussed the problems with unions at length. Vouchers give the poor and middle classes a chance to make choices of their own. And yes, if they chose to subsidize their vouchers with money of their own, would that not be more just than our current system where they must fund the public schools whether they use them or not? This would allow them to use their money in support of the school their children actually attend. True, the rest of us are still paying for the vouchers whether we have children or not. It is not a perfect free market. I, however, am willing to invest in children, whose market wealth under their parents may be far less than their own potential. And a world that values and extends potential is one I am willing to pay for—so long as I know it is being well used.

Vouchers would also put an end to the innumerable debates over state educational standards. The state could simply watch as the market drove standards up and costs down. It could then fairly accurately acknowledge a basic level of competence to accredit schools if it wanted to be involved at all.

The value of vouchers seems so obvious to me that I am utterly confused whenever I see someone erupt in outrage at the mere mention of a vouchers proposal. Does the state provide better education than private business? When has the state ever done anything better than private business? It is the monopoly argument again, but there is plenty of empirical evidence for those who want to look. And if the state is really worried, it can always set basic standards, which will be quickly exceeded by the market.

Moving right along to more interesting topics, I have also heard that private schools might teach religion. So what? The Supreme Court has already decided that the states can provide vouchers, even to religious schools, so long as the primary purpose is secular education. A bit of sectarian instruction is nothing more than the exercise of personal choice. While the U.S. Constitution forbids the state to establish or endorse any one religion or several, it also prevents the state from prohibiting the free exercise of religion. Vouchers clearly do not violate either prohibition.

The only real objection I see to vouchers is that it destroys the power of the teachers unions. So far as I am concerned, this is a good thing—both for the quality of education and for teachers themselves. Again, see my answer regarding unions. Under a vouchers system, it is entirely possible that quality teachers could even be making higher wages, with far more freedom to innovate, than they enjoy in public schools today.

For all these reasons, most Republicans support vouchers. What I fail to understand is why anyone would not support the idea of vouchers. Whether their analysis makes use of empirical evidence, logical deduction, or both, the support for vouchers is clear and unequivocal.

Julian Dunraven

Some answers — Deregulation

Republicans were (in my memory) opposed to business regulation in almost any form during the Reagan years, when the term “deregulation” came into currency. Republicans are widely perceived as continuing support for unlimited deregulation of all business activities. Is this still true, and why? — Themon

Themon,

Deregulation.

No. Republicans do not hate all regulation. They simply recognize that, if it is not limited, it has the effect of crushing business and stifling innovation. Good regulation guards against fraud and theft. Fraud, theft, and dishonesty tend to skew markets. At best, they lead to a hostile atmosphere for investing and stagnant growth. At worst, they can lead to large financial collapses. Thus, without interfering in the operation of the market, the state plays a vital role in ensuring contracts are met and the terms are honest.

Bad regulation, on the other hand, tells businesses exactly what they can and cannot do. While perhaps benign on first glance, when a business practice is enshrined in law, it creates a huge barrier for further innovation. It may also create inefficiencies which drive up costs for both consumers and investors. Though regulators often say these are necessary costs to ensure good practice, the free market and our courts tend to ensure good practices on their own that often achieve the goals we seek without the inefficiency resulting from regulation.

Consumer Products:

Let us take the case of seatbelts, because you mention Ralph Nader, whose dedication to auto safety is without question. Everyone wants their car to be as safe as possible. Most people think it is vitally important that every car come equipped with a standard safety restraining belt. That desire has gone beyond the point of consumer demand and into regulation, which promptly enshrined the best design at the time, now close to 30 or more years ago. Since that time, designs for seat belts have improved. There are some that have a much better safety rate. They are not used, though, because law requires the old model first produced in 1959. Does anyone still use car designs from 1959? No. They are better, lighter, safer, and more efficient because innovation was permitted.

Now, let us consider what would happen without seat belt regulation. We don’t even have to be theoretical. Ford had to pay a $30 million judgment for failing to provide a three point safety harness in the center seat of the back bench of a minivan, which had only a lap belt, and thereby knowingly risking severe lumbar injury. Karlsson v. Ford Motor Co., 140 Cal. App. 4th 1202 (2006). This standard practice standard was imposed without any regulation at the time. It was simply known by the industry that lap belts alone could cause damage and it had become standard to include three point restrains in back seats. As you can imagine, Ford quickly adapted best practices. Imagine how much safer cars might be if they were permitted to innovate beyond the three point restraint. You might say regulation was required to start the practice that eventually led to the industry standard cited in the above case, but that is not true. Consumer demand for safer cars and competition to offer the safest car on the road would be a far better motivator than any stagnant regulation.

Now then, let us consider an example of positive consumer product regulation. The FDA will not allow the sale of poisonous substances for use as medicines. Nor will they permit homeopathic merchants to claim that tiger’s claws can cure cancer. Instead, these merchants are limited to saying their products imbue general wellness, a term so vague that the merchant cannot be prosecuted for false advertising. Now, the FDA has standards I think go too far in some cases (they have forbidden a virtual cure for Alzheimer’s because it has a 6% chance of brain hemorrhaging–which would seem entirely worth the risk to most people). Nonetheless I say they provide a good service in preventing outright fraud. There are some libertarians who argue that the courts could just as easily impose penalties. However, if you take a poisonous snake oil, you will be dead and the merchant company dissolved and vanished by the time your estate sues. Known fraud should be prevented. Similarly, homeopathic remedies, which have not one jot of science behind them (and I say this as a practitioner of many other natural healing methods), should not be permitted to advertise as medicines until they can prove that is what they are. Here, again, the regulation is preventing fraud.

Business Practice Regulation;

Moving from consumer products over into business practice, take a look at good securities regulation. The SEC’s Rule 10b-5 is arguably the only regulation the modern securities world of instant communication really needs. It prohibits fraud of any sort in the purchase or sale of securities. Enforce this vigorously and you don’t need anything else for Madoff, Enron, et al. The quite period that so frustrated Google’s IPO, though? That is a provision of the Securities Acts which truly show their age (1933 and 1934 respectively). It is sheer idiocy today.

Now look at the banking and securities regulations that have landed us in our current mess. Is it really lack of regulation which caused the problem? No. Policy from the government led to the wretched lending practices of Fannie and Freddie. The lack of regulation was when general banking was allowed to combine with investment banking. That would have been okay, though, if banks had to be responsible for their own behavior under such a system. But FDIC’s mere existence promised risky behavior from banks, and this only compounded with the bailouts. We also permitted a leveraging level and fractional reserve banking that cannot be called anything but fraudulent. We then set regulations actively encouraging fraud when we set interest rates so low that any responsible investment and saving was unprofitable. The further regulations we pass to try to fix the already broken regulatory scheme, such as Sarbanes-Oxley, have done nothing to solve the underlying problems while they have driven costs up to crippling levels.

When government sticks to ensuring open markets, enforcing honorable contracts, and preventing fraud, it does well. When it tries to say exactly how things should happen, it succeeds only in stifling innovation, distorting markets, and creating toxic economic problems. A good Republican should recognize this truth.

Julian Dunraven

Additional Questions about Republicans

Julian,

There were several other hysterical comments in the purple article, but thinking about them gave rise to some questions regarding abortion, gay marriage, flag burning, and illegal aliens.

I watched the “illegal alien” hysteria develop, and I think it started right here in District Four of Colorado. I seem to remember it was the 2006 mid-term. Because my ex-wife is gay, I’ve been aware of the “gay bashing” of the Republican party for well over a decade, and it has always played well (for Republicans) here in Colorado. For some reason, in the year in question it simply failed to gain any traction. I think people were tired of it. There was a brief stunned silence, then all of the right-wing ranters started up in the local papers, shotgunning any number of tried-and-true rabble-rousing topics in rapid succession: gun ownership, abortion, flag burning, illegal aliens. Within just a week or so the pollsters must have identified illegal aliens as the Hot Topic, because it suddenly exploded all over the country. We even started building a wall between the US and Mexico. After the election was over, there was a little bit of unconvincing big tough talk, and then the whole issue quietly faded away.

Both parties manipulate the public with insincere rhetoric and propaganda. The Democrats tend to do it with fluffy puppies in pink bows: good government doing good things for We the People, safety nets, helping the underdog, feeding starving children, etc. The Republicans tend to do it by evoking outrage, anger, bigotry, xenophobia, and fear. An observation.

The illegal alien flap was clearly insincere. It is my opinion that the Republican party is equally insincere about gay marriage: they use it because it evokes such strong feelings and gets out the Republican vote. I’m not so sure about abortion or flag burning.

Your thoughts?

— Themon

Reply to Answers on Taxes

Julian,

Agreement

Regarding taxes, I have no substantial moral argument with you at all. I’ve always despised the concept of income tax, to say nothing of the required self-reporting of income and being criminally liable for making mistakes in an increasingly complex, opaque, and incontestable process. Once I started my own business, I gave up on taxes altogether, and pay a tax-certified CPA — not because he is going to find me loopholes I couldn’t find for myself (though often he does), but because he provides a first-line deterrent against bullying by the IRS, and takes a lot of worry off my shoulders.

Disagreement

Economists and Republicans have a rather different view of business than what I’ve experienced. I’ve been told my experience is wrong. I find that amusing.

Income taxes are not really important to business owners. Yes, business owners scream and yell and get irrational about it: one of my employers back in the 1980’s was a rabid single-issue voter — he’d have voted for Satan if he promised lower taxes. I’m assuming that more than just the marginal tax rates must have changed during the Reagan years because now, this really is a bogus issue. Or maybe this is just an irrational hot-button issue for business owners, fanned by Republican rhetoric. Nothing about owning a business guarantees the owner is objective or rational.

Businesses are income-taxed only on profits (income after expenses). This affects ability to expand a business (or retire early), but doesn’t prevent it.

A sales tax is based on revenue, rather than profits. This is deadly.

Example: let’s say I make aluminum carts with wheels, and make $10M in revenues per year. Of this $9M is expense: salaries, rent, electricity, phones, advertising, sheet aluminum, wheels, nuts and bolts, etc. I’m not going to look up the marginal corporate rates — from memory the marginal rate for a C-corp this size would be something like 15%, but let’s be ridiculous and put it all the way up at 70%. So my company pays $700K in profit income taxes (after expenses, which includes my generous paycheck), and I have $300K left to expand the business. We now shift to your 20% sales tax. Since every dollar in revenue is now taxed, I am liable for $2M in taxes. But I only had $1M left over after paying my true costs of doing business. I have no choice but to raise prices at least 10% just to cover the new tax and make no profit at all.

I don’t know if economists realize this, but the marketplace is psychological and emotional, not rational. Every successful salesman and marketeer knows this in their bones. My inability to emotionally connect with the marketplace is precisely why I don’t do well selling products. So let’s take computers. All computers in the volume consumer market are priced between roughly $1K and $3K, each price in this range speaking to slightly different consumers. This price has absolutely nothing to do with what it costs to make a computer: this price is set by the psychological utility of a computer to the consumer, the demand-price. Moore’s Law has been cutting the price of components in half every few years, yet the price of computers stays constant. Consumers regularly shell out $20K for cars — it isn’t like they can’t afford a $20K computer. But they won’t pay $20K for a computer, no matter what it does or claims to do. Nor will they pay $500 for a computer — they’d be suspicious there’s something wrong with it. This is a psychological set-point in the market for this class of products. If I’m forced to raise prices on a computer to sell it, this shift could push me out of the marketplace entirely. Economists who think that the marketplace only creates new products are deluded — it kills far more products than it encourages, usually because the market will not pay the actual cost (plus profit) of the product. So this shift in taxation could spell the end of computers entirely. It will spell the end of a whole range of existing products and services with lower profit margins than consumer electronics.

The Europeans have a kind of sales tax, the VAT. I’m not exactly sure how this works, but it addresses the gross inequity of a simple revenue tax as well as the multiple-taxation issues involved with taxing every financial transaction. For instance, the sheet aluminum company is also going to get taxed on sales, and will raise their prices, which I will be forced to pay in addition to my own tax on my sales. When parts pass through fifteen layers of suppliers, the government will get to tax those parts fifteen times. If you tax only the “value added” by the company that handles the part, you tax only once. But how do you measure the “value added” to a sheet of aluminum in making a cart? You’d ultimately have to look at the price of the aluminum sheet versus the price of the cart — in other words, the profit. So you are right back to taxing labor.

Businesses like the personal income tax, at least compared to any kind of revenue tax. I’m glad Ron Paul is putting it out there for discussion, but it would be a total disaster for businesses. It has zero chance of adoption by a government so deeply in bed with business interests as ours.

Puzzled By Numbers

I’m very puzzled by your numbers. Speaking of the rich, you say, “Their tax burden, over and above their 70% share of income taxes, is incredible.” That is incredible. Could you please break it down for me?

I’m an extremely small DBA/LLC, as is my wife, so my accountant doesn’t even bother filing me as an S-corp, which generally has higher marginal rates than a C-corp (but it’s a damn sight easier to manage). One third of my home expenses (mortgage, utilities), my phone and fax lines, my computer equipment, my business-related software, my medical insurance premiums, and business travel expenses are all untaxed. If I have to subcontract to someone, everything I pay them is untaxed. If my business grew and had employees, I would shift to an S-corp filing and employ myself as well. All of my salaries and benefits (including all withholding on all employee salaries, which includes my employer’s half of FICA for each of them) are untaxed. Anything left over is profit and is taxed. But because I can set my own salary, I can technically avoid ALL profits and pay no business tax whatsoever — in practice, the IRS does not like to see unprofitable companies, so I need to show some profit and pay some tax on it. But it doesn’t have to be very much at all.

The only income taxes I ever pay are my own personal income taxes (as my employees would pay their own income taxes). The company pays something very close to zero. This accounts for the outraged news articles that appear periodically screaming that Exxon paid less than $100 in (income) taxes. Of course it did: all its profits got distributed, and the recipients paid individual taxes on their shares of the distributions. The top personal tax bracket hasn’t been above 50% since 1981, and currently sits at 35%. My personal income tax will asymptotically approach 35% as my income climbs into the multiple millions. So how does zero climb to the “incredible” figure of 70%? How does even 35% in personal taxes climb to 70%?

Capital gains taxes are a different matter. Technically, when I buy a new computer for my business, it isn’t an expense, it’s a capital acquisition: I don’t get to write it off immediately. I let the accountant do the math on that. If I owned a bakery, with significant capital investment (ovens, pans) it would be a whole different story — but that is a kind of property tax, not income tax. Since my business doesn’t really deal with that very much, I don’t know intimately how it works, nor do I understand the rationale.

Inventory taxes are also brutal, as for car dealerships or retailers. Again, this isn’t income tax, it’s a form of property tax, and I don’t know much about it.

I’m not aware of any other property taxes at the federal level. Aren’t most property taxes actually local taxes?

Excise taxes don’t apply to anything I’ve ever done. I had to look up the term. This seems to be the closest to a “social engineering” tax, such as taxing alcohol in an attempt to artificially deter sales of alcohol, or taxing gasoline to pay for road repair. It sucks to be in certain businesses, but most businesses don’t have to deal with these.

What is a “business tax”? I’ve never heard of such a thing. There is the so-called “self-employment” tax, but that is merely the half of the FICA tax that most employees never see or think about. Every individual pays the full 15.3% on their earned income — if you are an employee, you only see half of it on your pay stub, because the other half isn’t usually reported to you; if you are business owner, you see both sides. We could quibble about whether this is a business tax or a personal tax, but it isn’t any more a business tax than income tax itself, which forces pay inflation to allow employees to eat and pay rent after taxes. The “self-employment tax” is a labor tax, exactly like income tax, and is only indirectly a tax on business.

So if you run your business right, your business income taxes are close to zero, and your personal taxes are going to approach 35% of your income as your income increases without bound. If I’m wrong, I’d like to know where.

Incidentally, right around $90K in taxable earned income is where you pay the highest federal taxes. It peaks at just over 38.6% (due to the capped FICA tax plus the 2.9% Medicaid tax). At around $200K, it bottoms again at 35.1%, and then slowly climbs to 37.0% at $1M annual income.

Ethics of Confiscation and Return

All taxation is confiscatory — theft by force or threat of force. Some taxation gives back value, most does not. Most taxation, historically, has been used to fight wars of glory, conquest, and looting. The Roman Empire grew fat on its wars, as did Spain, France, England, and Nazi Germany — until they started losing, of course. I don’t believe there are many (or any?) examples of nations with enough courage or smarts to know when to cut their standing military, once they’ve started down the Glory Road. I’d like to hear about them, if there are any. The US certainly does not qualify.

So I don’t think you can make an ethics argument for any form of taxation. Tax arises simply because the guys with the weapons say they want money. Period. But you can mitigate the pain of it a bit by returning some value to the people you just robbed. It’s nice when the pirates give you a last meal before pushing you off the end of the plank. They don’t have to, you know.

Our government taxes us very nearly as much as any “socialist” European nation. I recently did a numerical comparison of US taxes and Dutch taxes, and up to $100K, the US rate was only four points behind the Dutch rate. If I include the highly-regressive “tax” represented by private health insurance premiums (which is automatically part of the Dutch package), the US rates were as high as 63% on a $25K income. The US government gives back damn little in return for what they take.

The obvious reason for this is the elephant on the table: our standing military. According to http://www.warresisters.org/pages/piechart.htm, this amounts to 54% of the federal budget. Other organizations cite 51%, 43%, and (of course) the CBO itself comes in with the lowball value of 20%, which is based on practices adopted decades ago to hide the real cost of the Vietnam War.

If the Republicans had a realistic plan for shrinking the military and really cutting federal taxes — not a symbolic one or two percent, but a whopping fifty or sixty percent — I’d start listening. But what I see from this “tax cutting” business from the Republicans consists of wiping out aid to dependent families, school lunch programs, and FDA meat and dairy inspections, while the Glory Road taxes go up and up and up. No, thank you. Seeing that we’re stuck with socialist levels of taxation, I’d like to see a little bit of socialist benefit.

It’s also an observation that, during my lifetime, the Republicans are the friends of bloating the military while gutting social programs. The Democrats don’t have the nerve to back down military spending, but they don’t bloat it quite as much. Look at Reagan through Bush II. The numbers speak for themselves.

Ethics of Capital

“In a just world, in a free world, people should be entitled to the fruits of their own labor.”

Sure. But this is hardly a principle of modern corporations. The corporate capitalist — the “owner” of the “capital” that gets put “at risk” in a business venture — is generally a thief who steals the fruits of the labor of his workers. I suspect this is something Marx might have said — I’ve never read Marx. This is a personal observation.

The CEO’s and business owners I’ve met are generally small business owners, and they are extremely hard-working, honest people who go out of their way to help people. They have a strong sense of community involvement, and are generally admirable human beings (with very human flaws). They are also thieves. It’s not a personal failing. It’s just the system.

There are relative degrees of importance in any orchestra. The first violins carry the melody, and the cellos provide the bass counterpoint. The second violins and violas are somewhat less-important filler. Unless the score is unusual, the triangle is optional. So there is some justification for saying that the first violins get paid a little more than the violas, and the triangle player may not get paid nearly as well as anyone else. But unless all the components are there, you do not have an orchestra, and you cannot perform the standard repertoire. Consequently, there is no moral justification for saying that the concertmaster should be paid a thousand times more than any other player in the orchestra — not in salary, not in benefits, not in perquisites.

Remind me what the CEO of General Motors used to make? Or Bill Gates? And why? What exactly did they do that made them worth so much more than the people who did the actual work?

I agree that people should be entitled to the fruits of their own labor. That does not happen in the modern corporate business world. There is no place this comes out more clearly than in the recent disclosure of benefits received by top levels of the financial industry.

Personally, I think a strong distinction needs to be made between the terms “corporatism” and “capitalism.” They are at opposite ends of the economic spectrum. Capitalism distributes wealth through the marketplace. Corporatism concentrates wealth through the marketplace. The conflation of these two distinct concepts has led to what I feel are some very silly concepts in economics.

— Themon

Some answers — Civil Rights

 

Republicans are widely perceived as providing (at best) mixed messages regarding civil rights. What is the Republican stand on individual civil rights, and if it is truly supportive of them, what accounts for these [recent] abuses? — Themon

Themon,

On the question of civil liberties I am as confused as you are. Republicans do indeed talk a lot about individual rights. They contend that government should stay away from these, unless, of course, government is enforcing the law of God (which somehow is the only true freedom, yet only selectively cited; makes not a bit of sense, I know), or protecting people’s safety from thugs with big weapons by imposing tighter controls by even bigger thugs with bigger weapons (really doesn’t make sense).

Only the Libertarians and libertarian Republicans seem to be logical and consistent on this matter. We would really like to jettison the social Rs altogether, but they seem to like low taxes, and it is easier to keep Republicans out of the bedroom than Democrats out of the wallet. Or at least it used to be. Bush II’s spending got way out of hand and McCain was no better on that score. Dear gods it’s depressing.

I will get to your other two questions tomorrow. I just wanted to prove I had at least one short answer.

Julian.

Some answers — Insurance and Unions

Republicans are widely perceived as being opposed to unions and collective bargaining in all forms by labor, yet seem to be in support of collective bargaining between companies (e.g. private medical insurance). Is this true, and what accounts for the difference? — Themon

Themon,

Medical Insurance.

I suspect that many Republicans share my jaundiced view of the manner in which the Sherman Antitrust Act is often applied. The recent attempt against Microsoft was maddening. However, to see one industry exempted completely from its regulations should also alarm Republicans as this is usually a sure sign of special interest legislation and the power of pull.

A closer look at the insurance industry reveals no particularly compelling reason the insurance companies should have an exemption from the Act. They claim they need to share patient data in order to properly set prices when someone transfers from one company to another. I am fairly certain that car dealers would love to know what prices a particular buyer had paid for cars in the past with other dealers, too. There would certainly be an advantage to knowing that information. However, the Act was designed to prevent just that, and the insurance industry has no greater need than any other industry to be exempt from the Act. That exemption should be revoked.

That is not the entire problem, though. The insurance business has clearly become a matter of interstate commerce that fits entirely properly under the commerce clause of the U.S. Constitution. If Congress does not wish to overregulated the industry, that is fine. However, it not only exempted the industry from the antitrust laws, it has allowed the states to close their own borders against insurance companies from other states, effectively creating a government fostered monopolistic climate that would not exist under a truly free market. Idiocy. We can hardly be surprised at the outcome.

Unions.

I doubt any Republican would ever oppose a truly voluntary labor union. Unfortunately, that is like saying we would not be opposed to the idea of unicorns prancing about the world. As it is, it is safe to say that Republicans almost invariably oppose unions. I am so adamantly against them that, in those ridiculous local elections where I may not know the candidates or have much information about them, I simply look for who the unions have endorsed and then I vote for the other candidate.

I could probably spend all day telling you horror stories about the unions. This last election produced an ugly battle with the Teachers Union down in Douglas County and I still have to deal with the mess it created. However, I recently finished a book by an author who, in one small section, has managed to cogently articulate all the reasons I despise unions without any of my vitriol. He even managed to come up with a few reasons I had not yet considered. As I was so thoroughly taken with his argument, I am simply excerpting it here, though without the citations as I am dictating it:

From The Church and the Market: A Catholic Defense of the Free Economy by Thomas E. Woods, Jr. (Lanham, Maryland: Lexington books, 2005). 73-80.


Labor Unions.

What about labor unions? It is all very well to claim to favor voluntary workers’ associations, and that nothing in Catholic social teaching obligates anyone to support every decision or tactic used by a particular union. That is certainly true. What I want to suggest, however, is that in order for a labor union to accomplish its stated goal of improving the welfare of its members, the logic of the economy is such that this can be accomplished only by the use of some kind of compulsion, and that the notion of the purely voluntary union in practice turns out all too often to be a mere chimera.

The judicious use of reason and an unbiased examination of the evidence reveal that labor unions operate clearly and manifestly in opposition to the welfare of labor taken as a whole. Any suggestion that support for labor unions is somehow morally obligatory upon a Catholic must, therefore, be false, since the premise on which it rests is fallacious. A Catholic obviously cannot be forced to support a particular labor policy devised in the name of helping workers when he knows very well that it will do no such thing.

One caveat should be noted before proceeding. Although I have suggested that a purely voluntary union possesses a great tendency to coercive behavior, it is possible to imagine a union that operates on a truly voluntary basis. Henry Hazlitt, who was very much an opponent of labor unions, even acknowledged that a noncoercive strike could serve the salutary purpose of alerting the employer to the fact that he is offering a wage rate below the prevailing market wage and must therefore adjusted if he wishes to continue employing the same number of workers as before. Pope Leo XIII wrote in 1895 that “whilst it is proper and desirable to assert and secure the rights of the many, yet this is not to be done by a violation of duty; and that these are very important duties; not to touch what belongs to another; to allow everyone to be free in the management of his own affairs; not to hinder any one to dispose of his services when he please and where he please.” Those are precisely the principles of voluntary rather than coercive unionism.

The old craft guilds were quite candid about their restrictionist policies; they deliberately limited the number of people who could enter a given craft, often by imposing very high standards for membership. Since modern labor unions appear to welcome all comers, their restrictionist aspect is easily missed. “The crucial point,” Murray Rothbard explains, “is that the unions insist on a minimum wage rate higher than what would be achieved for the given labor factor without the union. By doing so… they necessarily cut the number of men whom the employer can hire.” This conclusion cannot be escaped, as a simple supply and demand-curve analysis reveals. Thus their policy has the effect of restricting the supply of labor in the given area.

In the case of an industry that is especially profitable, as the result of increased consumer demand or the introduction of some cost-cutting measure, and which would therefore be on the verge of expansion, the existence of union wage rates would not necessarily create any unemployment among workers in that industry. What it would do, however, is hamper or prevent altogether the expansion of the industry, and thus the creation of additional jobs. Production that in the absence of union coercion would have certainly taken place never does, and instead production is diverted to less urgently desired fields. This is yet another example of the importance of bearing in mind what is seen and what is not seen, since this case of Union coercion is no less destructive than any other, even if the jobs lost are only potential jobs (which of course are not seen, and therefore easily neglected in a careless analysis).

How the union achieves these artificially high wage rates is largely by means of the strike threat, as well as through various legal privileges it has been accorded by the government. Edward Chamberlain describes these privileges:

If A is bargaining with B over the sale of his house, and if A were given the privileges of a modern labor union, he would be able (1) to conspire with all other owners of houses not to make any alternative offer to B, using violence or the threat of violence if necessary to prevent them, (2) to deprive B himself of access to any alternative offers, (3) to surround the house of B and cut off all deliveries, including food (except by parcel post), (4) to stop all movement from B’s house, so that if he were for instance a doctor he could not sell his services and make a living, and (5) to institute a boycott of B’s business. All of these privileges, if he were capable of carrying them out, would no doubt strengthen A’s position. But they would not be regarded by anyone as part of “bargaining”—unless A were a labor union.

In practice, during strikes the police have typically stood aside and done nothing in the face of union intimidation and even violence against nonunion workers or those who simply wish to continue working. By means of this kind of coercion, labor unions are able to deprive employers of labor if they do not accede to union demands. The result of union activity, therefore, is to raise the money wages of their members, while at the same time relegating many workers, driven out of this line of work by the decreased quantity of labor demanded there, to other lines of work, whose money wages must decrease as a result of the greater supply of workers now forced to compete for them.

The net result of all this must be negative – that is, the gains to certain workers must be more than offset by the disabilities inflicted upon other workers. The reason is not difficult to see. When union activity reduces the number of people who can be profitably employed in skilled trades, it correspondingly increases the number of skilled laborers forced to find work in fields requiring only unskilled labor. This is why labor economist Morgan Reynolds could conclude that “unions divert labor from more productive to less productive activities, thereby impoverishing the common man.” The outcome of this displacement of skilled labor is no different from a situation in which laborers never possessed these skills in the first place. If union privilege prevents some workers from putting their skills to the proper use, the effect is the same as if they had never gone to the trouble to acquire them at all. Once again, union activity has an impoverishing effect upon society. No society can become wealthier by doing the equivalent of reducing the skills and productivity of its workers.

Reynolds has identified seven distinct ways in which a labor unionism imposes substantial costs on the economy, all of which tend to be ignored in standard calculations of the economic burden of unions:

  1. The redistribution of income (rent) from the general community to union bureaucracies and their members.
  2. The unemployment effects of unions.
  3. The consequences of union wage inflexibilities over the business cycle.
  4. The cost of union work rules.
  5. The dynamic impact of unions in discouraging research and development, investment, and entrepreneurship.
  6. The direct cost of strikes, strike threats, negotiating costs, labor consultants, National Labor Relations Board elections, bureaucratic costs, grievance costs, and related expenses.
  7. The political role of unions in increasing inflation, international trade barriers, government spending, and related forms of discoordination sustained by political action.

It is, therefore, rather difficult to calculate the precise burdens that labor unions have imposed upon the economy. But in a study published jointly in late 2002 by the National Legal and Policy Center and the John M. Olin Institute for Employment Practice and Policy, economist Richard Vedder and Lowell Galloway of Ohio University calculated that labor unions have cost the American economy an incredible $50 trillion over the past 50 years alone.

How could the figure be so high? “The deadweight economic losses are not one-shot impacts on the economy,” the study explains. “what our simulations reveal is the powerful effect of the compounding over more than half a century of what appears at first to be small annual effects.”

While the study found that unionized labor does indeed earn wages 15% higher than those of their nonunion counterparts – as is to be expected, of course, given the logic of labor unionism – wages in general suffer dramatically as a result of an economy that is 30 to 40% smaller than it would have been in the absence of labor unionism. This constitutes a staggering destruction of wealth.

Migration patterns among the states are also highly suggestive. According to Vedder and Galloway, the 11 states with the lowest unionization rates from 1990 to 1999 “had net in-migration of 3,530,108, which is more than one thousand persons a day, every day, for nine years.” Conversely, the 11 most highly unionized states suffered a drain of population of amounting to some 2,984,007 people.

Likewise, recent research reveals that between 1970 and 2000, states with so-called “right-to-work” laws (which prevent workers from being compelled to join a union as a condition of employment) created jobs at nearly twice the rate of states without such laws. In fact, the average family in a right-to-work state boasts $2,800 more in purchasing power annually. None of the seven states in which the poverty rate has increased over the past 30 years had right-to-work legislation.

The condition of the American manufacturing base is the source of much handwringing and concern, but it turns out that here, too, unionism is a likely culprit. While right-two-work states created 1.43 million manufacturing jobs over the past three decades, states without such laws lost 2.18 million manufacturing jobs.

We have already seen quite a number of reasons that such an outcome is to be expected, but let us say a bit more about union work rules. Labor unions are notorious for opposing the introduction of labor-saving machinery, since they believe (sometimes rightly) that it will lead to the unemployment of some of their members. But such machinery – in the steel industry, let us say – allows the same amount of output to be produced by fewer hands, thereby releasing into the economy a supply of labor that can now be applied to the production of goods that we could not have had before because the requisite labor had been tied up in the production of steel. This is an example of how wealth is created. The additional goods produced by the additional labor have the happy result of raising real wages, since (as we have seen) any increase in the supply of goods available will increase real wages by endowing all real incomes with greater purchasing power. Thus by opposing the introduction of labor-saving machinery, labor unions directly sabotage the very mechanism by which real wages are raised.

Labor unionism is all the more pernicious because its negative effects go essentially unnoticed, while its beneficiaries are clear and identifiable. Not equipped with the tools of sound economic analysis, the general public is hardly likely to come to spontaneous realization of the causes of the unemployment that unionism has brought about. To the contrary, workers who have been displaced from unionized sectors of the economy and have been forced into less remunerative work are likely to conclude the unionism is the solution to their lower wages. And the process continues.

The unimportance of labor unionism is empirically evident as well: at a time when unionism was numerically negligible and Federal regulation all but nonexistent, American workers were much better off than their much more heavily unionized counterparts in Europe. Real wages in manufacturing climbed an incredible 50% of the United States from 1860 to 1890 and another 37% from 1890 to 1914.

It turns out, therefore, that the testimony provided both by reason and by overwhelming empirical evidence leads inexorably to the conclusion that labor unions are in fact harmful, rather than beneficial, to the cause of labor, and the relatively anemic growth that characterizes heavily unionized economies tends to make unionism deleterious even to unionized workers themselves in the long run. Since the support for labor unionism that permeates Catholic social teaching describes it as something necessary for the economic well-being of workers who would otherwise find themselves impoverished, and since the exact opposite is in fact the case, it would at the very least be unreasonable for labor union sympathy to be portrayed as morally binding on Catholics, especially on those who know very well the profound destruction and harm that such policies have created. To be sure, the popes themselves have never claimed that a favorable attitude toward coercive labor unionism constitutes an infallible moral teaching, but it is easy to come away from much popular exposition of Catholic social teaching with that impression.

No appeal to reason is made within recent Catholic social thought to explain why those who believe in the productivity theory of wages are in fact mistaken, or why it is factually incorrect to insist that artificially imposed wage increases will lead to unemployment, or why the benefits accruing to those select workers who may enjoy the higher wages must morally outweigh the damage done to other workers who were thereby forced to find work in lower paying fields or who find no work at all. This later question certainly does contain moral implications: is it morally acceptable to favor policies that all but guarantee unemployment for some workers? But since the possibility that interventionist wage policies might create unemployment is essentially not raised, this important moral question is never addressed.

And this, ultimately, is what Catholic social teaching has not fully engaged. Suppose that the description of wage rate determination sketched earlier it is in fact correct. In that case, coercive attempts to enforce a wage rate higher than that reached on the free market must lead to unemployment (or at least to more unemployment than would have existed in the absence of such attempts), as employers substitute capital for artificially overpriced labor. There is no reason to doubt the sincerity of the popes who thought they were defending the integrity of the family, the very cell of human society, when they advocated the payment of wages sufficient to provide for a man and his family in reasonable comfort. But if material comfort is the desired outcome and decent wages the means of achieving it, the question of how wages can be increased across the board inevitably arises—a question whose answer requires that we have recourse to the sober reflection of human reason. Simply assuming that because higher wages are desirable they can be brought into effect by legislative decree, and then rendering a moral judgment on employers who do not meet these requirements, does no good to those workers now priced out of the market by the enforced payment of higher wages. The popes are obviously not incorrect to identify the well being of the family as an important and desirable end, but what are we to say about policies whose inevitable outcome is the unemployment of many heads of households, with countless more relegated to less remunerative or desirable fields than those from which artificial wage increases have shut them out of the market? The only certain method for raising wage rates permanently and across the board is to increase the productivity of the workers who earn those wages. Nothing can change this fundamental fact. These issues and questions do not receive anything like the attention they deserve in the literature of Catholic social thought, and yet they touch the heart of the whole problem of the improvement of the standard of living of the average laborer.

By any definition, it lay well beyond the competence of the Magisterium to presume to describe the workings of economic relationships. The Magisterium itself can no more tell us what makes wages rise than it can tell us how to build a skyscraper. Catholics who make this point are routinely accused of denying the Church’s right to make moral statements pertaining to economic activity. This criticism is completely baseless, and only serves to distract attention from the substantive issues at stake. Of course, the Magisterium may instruct Catholics on the moral demands of the marketplace, since how one ought to conduct oneself in the market involves the application of moral principle—an area, unlike economics, per se, in which the Church can indeed claim expertise. Thus the Church has properly emphasized the justice and indispensability of the institution of private property; she has likewise condemned fraud, dishonesty, and theft, all of which derogate from the moral order within the province of magisterial pronouncement. But the attempt to elevate such principles as the “just wage” to the level of binding doctrine is something altogether different, and indeed is fraught with error. To maintain that private property is just, or that people ought to be upright and honest in their economic activities, requires nothing more than simple reflection on the teaching of Christ, the Fathers, and the natural law itself. The same cannot be said for exhortations to employers that they pay a “just wage,” for embedded within such counsel is a set of unproven assumptions about how economic relationships work, and the belief that all that stands between the world today and the great society of tomorrow is wise legislation, rather than the capital investment which is alone capable of increasing the overall stock of wealth. “What was wrong with Catholic social thought in the nineteenth century,” writes Fr. Sadowsky, “was not so much its ethics as its lack of understanding of hoe the free market can work. The concern for the worker was entirely legitimate, but concern can accomplish little unless we know the causes and the cures for the disease.”


I hope that helped answer why Republicans dislike unions. Take care.

Julian

Some answers — Taxes

 

Republicans are widely perceived as being opposed to progressive income taxes in general, and as giving tax breaks to the rich and taking more tax from the poor. Do Republicans oppose progressive taxation, and why? — Themon

Themon,

This is splendid. At last you give me a few questions which are easy to answer. First, I will warn you that, as far as I can tell from the behavior of elected officials, Republicans in general have no fixed principles whatsoever. Nonetheless, the platform has a few ideas and the remaining principled conservatives are still reliable, so I will give you the best answers I can as to the theory. Like I said though, with the exception of Ron Paul and a handful of others, I have not seen anything in Washington D.C. to indicate Congress sees these ideas as much beyond words on paper.

Taxes

The official party favors low tax rates for both individuals and businesses without specifying how that should be achieved. Some are content with a progressive system so long as it is low. Others want a flat tax or a fair tax. Still others would repeal the 16th Amendment and destroy income tax altogether. Any of these things would be better than the progressive system we have today.

The Moral Argument.

Income taxes are, first and foremost, immoral. They presume that government has some legitimate claim on our labor and that we must pay for the privilege of working. This is absurd. It is no different than, in bygone years, having one’s daily wages robbed while walking home from work or paying mafia protection fees. The fact that it has been enshrined in law and conducted by lawmakers, not by law breakers, makes not one jot of difference to the moral analysis. The principle is the same and it is wrong. In a just world, in a free world, people should be entitled to the fruits of their own labor.

Progressive income taxation is a double injustice, though. Not only does it legitimize robbery of the citizenry, it says that one small section of the citizenry should pay more for the benefit of all the other citizens. It says that the property of some can be seized and given to others, not because those others have earned it or traded for it, giving value for value, but simply because they want it. Thus they will use the machinery of government to point guns at their fellow citizens and effectively say, “Your money or your life.” Despite this, those who pay more in taxes are not entitled to expect more from their government than those who pay nothing at all. But for the 16th Amendment, this would violate the equal protection clause. When only the wealthiest 10% of our citizens pay 72% of all taxes collected, this is not justice, but looting.

Imposing a flat tax (I believe the rate would have to be about 10-20% on all people over a certain poverty threshold and a 0-9% adjustable rate below that) would certainly remove the unequal treatment. It would also greatly simplify the tax code. However, it would not get rid of the basic moral injustice of charging people for the privilege of working.

A fair tax would be better still. It eliminates income tax and would create a 20% (or 23% whatever) nationwide sales tax. This takes care of both moral arguments on the idea of taxing work and an unequal tax burden. It instead taxes a business transaction and one can justify it as the government has the responsibility for enforcing the contract created. However, it is still acts as a sort of flat income tax as people must purchase certain things for survival.

Ron Paul would prefer no income tax at all. He would rather go back to the days prior to the 16th Amendment. He would fund necessary government operations through property taxes, excise taxes, and tariffs as it operated in the past. Given that only 1/3 of government revenues come from income taxes, and government has grown a bit more than a third since the 16th amendment passed, he contends this would be quite workable while getting government back to a more manageable and limited size (i.e., not prying into every aspect of human affairs). Here there are the fewest moral hazards. It treats all people equally and it does not tax the right to work. Rather, it taxes only the use of the land and the entry into the United States markets to benefit from our contract laws. It has the added benefit of restraining government spending and overreaching (save the moral hazard of fiat money and Fed printing). Morally, I would prefer this (though the tariff system would have to be watched closely to avoid protectionism), but would settle for a Fair tax and tolerate a Flat tax. The Progressive system of taxation is not morally justifiable under any sort of legitimate ethical system.

The Economic Argument.

If a productive economy is one’s goal, a progressive tax system is the worst tax policy one can create. Even Keynesian economists acknowledge that every increase in tax rate diverts money from investment and kills jobs. The higher you set the rate, the more inefficiency you will have and the slower and the economy will be, until it collapses entirely. This admission always surprises me given that Keynesians try to find that magical place in tax rates just before the economy starts to strangle. They hate admitting that the magic spot is constantly changing given diverse circumstances and that government rates cannot possibly keep pace, and if they try they just create uncertainty and speed the process of strangulation. Yet, empirical evidence is hard to refute and Keynesians do reluctantly agree that the economy exponentially increases in productivity every time the tax rates are lowered. This is also why even Obama’s Keynesian advisors are worried about new cap and trade taxes and new taxes for a massive healthcare entitlement. Raising taxes during an economic slump is a good way to ensure we stay in an economic slump (i.e. Roosevelt in the Depression).

This is the primary reason cited by Republicans for why they oppose the progressive tax system. They certainly do not want to lower taxes on the rich while increasing taxes on the poor. They want to lower taxes period. However, as I said earlier, because wealthy people pay almost all of our taxes anyway, tax cuts tend to benefit them more than others. This does not increase a burden on the poor, though. It simply makes the law (as distinct from economic status) a bit more equitable, while freeing up additional capital for investment and job creation. That is where the rest of the people begin to benefit as well. Remember that the rich do not just pay income tax. They also pay capital gains taxes, excise taxes, property taxes, business taxes, and the list goes on interminably. Their tax burden, over and above their 70% share of income taxes, is incredible. Freeing that wealth to flow into the real economy rather than government coffers is a good thing for everybody.

A Flat tax system would free up a lot of capital for the real economy to digest. It would also eliminate uncertainty and market imbalances created by the innumerable and unjust special interest subsidies, exemptions, credits, rebates, et cetera that dominate our monstrous tax code. Even the overtly socialist states of Europe look on our tax code with fear, and it is the most maddening and illogical area of law to study. Yet there are armies of lawyers and accountants ready to defend it as they make their living by charging exorbitant amounts to interpret what should be comprehensible to everyone.

A Fair tax system of 20% on all sales transactions creates a high threshold for purchases. However, it also frees up a great deal of capital to flow into the economy. Moreover, it is very easy to enforce, as it can all be placed on business, just as sales tax is now. This is also thought to encourage savings rather than our current need for constant consumption. Austrian School economists argue that this would create real capital to build real and stable wealth in the economy. There would not be so many of the consumption driven bubbles as people would be less inclined to purchase unless they had real wealth backing it. They would see the taxes they pay more effectively. Keynesians, though, who favor constant consumerism and Fed driven inflation, might have a harder time tolerating this.

Then there is the Ron Paul system of pre 16th Amendment taxation. This is also easy to enforce and undoubtedly the least distortion creating. I have only recently begun to look into its practical effects, though. I don’t doubt it would be absolutely impossible to fund government at its current levels through such a system. A few years ago, that might have concerned me. Now, I think that would be a very good thing.

The Druid Perspective

Druids are not a big part of the Republican Party, or really any party I suppose. However, looking back on the Brehon legal system of the Celtic world is somewhat important as if forms the basis of our modern contract and business law in the common law. Brehons never permitted an income tax (until the dawn of Christianity when the rí became a king and wanted divine rights of tyranny). Rather, tenants paid rent for protection to the chieftain. Those not on land directly owned by the chieftain had the option of declaring for another chieftain in the surrounding area if he became too demanding. And the chieftain could always be unelected if enough people disputed his rule.

In Iceland, a mix of Druid and Asatru tradition, and I believe the oldest running republic on earth, one was not territorially tied to a chieftain at all. Regardless of the land you occupied (with the exception of land held by the chieftain as personal property) if you did not like his fees for protection and judicial action, you could always declare your household and land for a competing chieftain, even if that chieftain did not occupy territory contiguous with your own. Both the Celtic and Icelandic law collected revenues based on rents and fees for services, most closely resembling the Flat or Fair tax. Being liberty loving people with firm commitments to equality, this makes sense.

So there is the Republican views on taxation, both economic and moral. While the party has no official view other than wanting to lower taxes all around, I favor any of the three options other than the progressive. In practice, though, Republican lawmakers have been as bad as any others for polluting the tax code with all manner of odd provisions. If tax reform comes, it will have to be at the grassroots level. For conservatives, these are the ideas growing at the grassroots level.

More on the other topics next.

Julian

Some Questions About Republicans

Dear Julian,

A rather vile e-mail crossed my desk, which excoriates “Republicans” using purple prose that unfortunately stokes my own political prejudices. I’m currently trying to find some balance in the world (with difficulty), and I don’t like having my prejudices stoked. So I’m taking the small substance of the diatribe, stripping the inflammatory language, and turning it into some pointed questions about Republican philosophy. Fact-checking, if you will. “Republicans have no fixed ideas on this subject,” is an acceptable answer, if appropriate, but I cannot imagine it is the case for all of these.

  • Republicans are widely perceived as being opposed to progressive income taxes in general, and as giving tax breaks to the rich and taking more tax from the poor. The web page at http://www.ntu.org/main/page.php?PageID=19 tends to bear this out (it’s a list of top and bottom tax brackets from 1913 to present — you can clearly see the Reagan, Bush I, Clinton, and Bush II periods in the data). In addition, the “unearned income” exemption that allows investment income, rents, and royalties to be sheltered from FICA taxes preferentially exempts the wealthy. Do Republicans oppose progressive taxation, and why?
  • Republicans are widely perceived as being opposed to unions and collective bargaining in all forms by labor, yet seem to be in support of collective bargaining between companies (e.g. private medical insurance). Is this true, and what accounts for the difference?
  • Republicans were (in my memory) opposed to business regulation in almost any form during the Reagan years, when the term “deregulation” came into currency. I remember reading an article by Ralph Nader in the early 80’s, where he claimed that within two decades, “deregulation” would be a dirty word in the public mind. Prescient. Republicans are widely perceived as continuing support for unlimited deregulation of all business activities. Is this still true, and why?
  • Republicans are widely perceived as being opposed to public tax-funded education and in favor of private or home schooling, as evidenced by the recurring “vouchers” theme. Is this true, and why?
  • Republicans are widely perceived as providing (at best) mixed messages regarding civil rights. While speaking strongly about “individual liberty,” it was the Reagan administration that substantially weakened the fourth amendment rights regarding search and seizure in support of the “Drug War,” and it was the Bush II administration that gave us Patriot Act I, perpetual Condition Orange, wiretapping without legal oversight, “free speech zones,” the Guantanamo Bay prison, Abu Ghraib, … his list is very long. What is the Republican stand on individual civil rights, and if it is truly supportive of them, what accounts for these abuses?

I’ll stop there for now.

— Themon