Chapter 5: Taxes Discourage Production
And he will take the tenth of your seed, and of your vineyards, and give to his officers, and to his servants. And he will take your menservants, and your maidservants, and your goodliest young men, and your asses, and put them to his work. He will take the tenth of your sheep: and ye shall be his servants. And ye shall cry out in that day because of your king which ye shall have chosen you; and the Lord will not hear you in that day. (I Samuel 8:15-18).
The people of Israel wanted a king. They heard of the nations around them, and they were told that these nations had strong central governments. Each was led by a king, who embodied the power, prestige, and glory of his nation-state. The system of civil rule in Israel at this time was based on decentralized tribes. Each tribe had a system of judges. There was no legislature. There was no central civil government.
Samuel was both a priest and a civil judge. Representatives of the people of Israel came to him and asked him to anoint someone to serve as a king. He warned them against this. His warning came in the form of a threat: increased taxation. Not only would they have to pay taxes to the local tribal civil governments, they would now have to pay taxes to the central government, as embodied by the king.
Nevertheless the people refused to obey the voice of Samuel; and they said, Nay; but we will have a king over us; That we also may be like all the nations; and that our king may judge us, and go out before us, and fight our battles (vv. 19-20).
We might think that the threat of increased taxation would have scared them off. Not so. They wanted to be represented by someone with power, and they were willing to pay the price. The price was an additional tax of 10% of their income.
This 10% figure was the same as the tithe that was owed to the Levites, the tribe of the priesthood. Samuel warned them that the king would extract as much wealth from them as the entire priestly tribe was entitled to. This centralization of wealth and power would be enormous. But they did not care. They wanted a powerful central state, so they got one. It lasted through four kings. During the early years of the fourth king, Rehoboam, a tax revolt took place. The nation of Israel separated into the northern and southern kingdoms (I Kings 12). It was never brought together again under the rule of a Hebrew king.
The threatened system of taxation was proportional. It followed the same rule as the principle of the tithe. Everybody paid the same percentage. No group within the society would be able to extract a greater percentage of wealth from a richer group. The economic burden that afflicted the rich would also afflict the poor. The king of Israel would be an equal opportunity exploiter. Nevertheless, the people demanded a king.
It was clear that the productivity of the people of Israel would decline under the rule of the centralized government as manifested by a single king. A tenth of their wealth would be extracted every year. In addition, he would take menservants and maidservants away from them. These servants would no longer be part of the household production system. The wealth that they would otherwise have produced would be transferred to the king and his household. The households would no longer be as productive, because the resource inputs available to them would be siphoned off by the king. Nevertheless, the people demanded a king.
We take away two lessons from this. First, people who are in ethical rebellion prefer tyranny to liberty. This came as no surprise to Samuel, for God had told him that this would be the case.
And the Lord said unto Samuel, Hearken unto the voice of the people in all that they say unto thee: for they have not rejected thee, but they have rejected me, that I should not reign over them (v. 7).
Second, they are not swayed by the argument that higher taxes will reduce their wealth. They prefer to live under the embodiment of power rather than enjoy greater personal productivity. They did not listen to the economic logic of Samuel. He was correct in his assessment, but they paid no attention.
This is always the problem with voters who criticize the existing tax code. They do not object to taxation as such. They are happy to extend power to the central government. They just want a different tax code, so that someone else will have to bear a greater burden of taxation. They reject the principle of the tithe: proportional taxation. They think they can use their influence so that the central government will extract greater wealth from those who have more income than they do. Their call for tax reform is this: "Don't tax you. Don't tax me. Tax the guy behind the tree."
Private ownership is based on a legal connection between ownership rights -- legal immunities from theft -- and personal responsibility. In the biblical worldview, God grants ownership to an individual. He thereby increases the individual's personal responsibility.
Ownership provides a test of performance: ethical and economic. The owner has a responsibility to increase his wealth on behalf of God, the original owner This was taught by Jesus in the parable of the talents (Matthew 25:14-30). The original owner delegates the responsibilities of asset management to three men. Later, he returns for an accounting. He sees if each of them has increased the owner's wealth. Two did; one did not. The two who did are then given greater wealth -- redistributed by the owner from the steward who had buried his coin: a zero rate of return.
Jesus used a parable about money as a way to get the main point across: increasing your productivity is an ethical requirement. It is also a judicial requirement. The best way to increase someone's productivity is to make him an owner. God then holds him responsible. In the parable, God did not hand over ownership to a committee. He handed it over to individuals.
Wealth serves as a tool of production. In the case of Samuel's warning, the focus was on the output of the land and the household: seeds, domesticated animals, and servants. Some of these assets served as consumption goods. But they could also be converted into production goods: capital. It is clear from the parable of the talents that God expects a positive rate of return on His investments. This means that owners must set aside a portion of their wealth for investment purposes.
The free market allows owners to increase their wealth by serving customers. Asset owners -- customers -- bid against each other for the output of capital. They are the strongest bidders for assets. They own money. Money is the most marketable commodity. The capital owner then decides whose bid to accept, including his own if he decides not to sell. He can select from a wide range of bidders. If he is successful in producing goods and services desirable in the eyes of customers, he then allocates his output by the rule of every auction among strangers: high bid wins.
This allows resource owners to bid for ownership or temporary control over each other's assets. Owners of money (buyers) compete against each other. Owners of goods (sellers) compete against each other. Out of this competition comes an array of prices. The highest bidder wins, product by product, auction by auction. This judicial system of voluntary resource allocation allows people with any amount of wealth to seek to exchange whatever they own for whatever they would like to own. This is a judicial system of liberty. It produces an economic system of exchange. What is being exchanged? Ownership: legal immunities and economic stewardship.
In the free market system, the most efficient -- least wasteful -- producers gain an increasing share of the society's wealth. As long as they continue meet the demands of competing customers, they will continue to accumulate wealth if they are more efficient than their competitors. Meanwhile, those producers who are not efficient in meeting the demands of customers will be losers. They will steadily experience a depletion of their capital. Capital is transferred, through voluntary competition, from inefficient producers to efficient producers. The arbitrators of this transfer are customers, who reward the most efficient producers. This system of ownership encourages capital owners to continue to produce. It leads to capital accumulation: better tools. It leads to richer customers: higher output/income and more choices. This ownership system hands control over the scarce means of production to customers by way of their economic agents: efficient producers. Customers retain authority in this auction process because they own money: the most marketable commodity.
In this case, the stone is a tax increase. There is no easy way to disguise a new tax as a benefit to the nation or the taxpayer. It is usually seen for what it is: a liability. People are rarely persuaded when a Keynesian economist says: "A tax hike will create jobs." This is job-creation for tax collectors. This does not impress voters. In this case, "the thing not seen" is clearly seen. A spoonful of Keynesian sugar does not make the medicine go down.
The way for politicians to sell a tax increase to a majority of voters is to persuade middle-class voters that only the rich will pay the new tax. Middle-class voters keep buying this obvious lie. They are told that there is too much economic inequality today. They think the rich can afford to pay. The following question never seems to occur to American voters: "If the rich have not been paying their fair share of taxes ever since 1914, maybe the latest tax hike proposal will not be paid by them, either." Jealousy prevails. They accept the new tax. But even if they do not pay it out of their bank accounts, they will still pay, as we shall see.
The state collects a portion of the money of existing property owners. The ownership of money is transferred from owners who are responsible before God, and who are inescapably the economic agents of money-bidding customers, into the hands of bureaucrats, who are agents of the state. The bureaucrats, who are under the general rule of the central government, then use the newly confiscated money as a way to satisfy the various competitors for the state's wealth. The politicians have already authorized the tax code. The bureaucrats now collect the money and hand it out.
In a democratic system, there are many bidders for the state's newly confiscated assets. They bid in political currency: votes. They also bid in the form of contributions to political campaigners. They may even bid in the form of under-the-table payoffs to specific legislators. Exchanges take place. Politicians decide how much they have to pay to politically adept special-interest groups.
In every division-of-labor economy, there is specialization. Politics is no exception. Special-interest groups specialize in obtaining special favors for their members. Potential recipients of government largesse specialize in how to get their hands on the state's confiscated wealth. In contrast, the voters, not having enough time or interest to study exactly what is done with the money confiscated from them individually, pay far less attention to the details of the state's voluminous wealth transfers. The public tries to compete with these specialists by voting every few years, but they are not as skilled in retaining their wealth as the special-interest groups are skilled in obtaining the voters' wealth. The only way voters can compete is by refusing to vote for politicians who vote to raise taxes. This is the specialty of voting no. Few politicians ever develop this skill. They are too busy buying votes with confiscated money. So, the field of available candidates is severely limited.
The primary difference between the competitive free market and the state is this: there is no legalized coercion in the competitive free market. Owners have a legal right to reject bids. In contrast, when an agent of the civil government comes calling, taxpayers do not have the right to reject what is now the highest bid. This bid is enforced by a gun. Someone with a badge has a gun, and he is in a position to collect the government's declared share of the asset owner's wealth.
The asset owner has a direct incentive not to waste his wealth. The bureaucratic agencies that redistribute wealth do not take the same degree of interest in allocating wealth in a way that will increase future production. The stone breaks the window of wealth creation.
Because of the transfer of asset ownership from individual owners to bureaucratic agencies operating under the general jurisdiction of politicians, the economy's emphasis steadily shifts from increasing the capital base by means of satisfying customer demand to decreasing the capital base by satisfying special-interest demand for "free" money.
Special-interest groups do not pay a market price in direct competition with the general public. They pay a non-market price to politicians in order to receive a net increase by means of the state's confiscated wealth. If they are successful in their political bidding, they will have more wealth at the end of the redistribution process than they had before it began. The taxpayers will have less wealth.
The focus of the individual owner who wishes to increase his wealth is on saving, accurate forecasting, efficient production, and the reinvestment of profits. The corporate focus of a bureaucracy is to get a larger budget in the following fiscal year. This money is supplied by the legislature. The bureaucracy's other major goal is to increase its overall jurisdiction. When bureaucracies are successful in this two-fold quest, the result is an increase in the amount of wealth transferred to bureaucracies and therefore a decrease in the rate of economic growth. The money is transferred from people who have an incentive to invest their personal wealth to another group of people who have an incentive to spend the state's wealth. The bureaucrats cannot lay personal claim to a share of this confiscated wealth as individuals, but they receive lifetime career salaries for distributing it.
Owners specialize in increasing production. Bureaucrats specialize in decreasing production. So, the cost of the modern tax system is a decrease of production. Specialists in distributing wealth by means of coercion gain greater control over the capital base of the society. This is the division of labor in action, as established through state coercion.
Producers have a long-term view of capital growth because they or their families will be the beneficiaries of this growth. Politicians have a short-term view of taxation and spending -- a view which does not extend beyond the next election. So, the tax system transfers decision-making from people who have a long-term commitment to capital formation and increasing productivity to people who have a short-term commitment to winning the next election.
A tax on the guy behind the tree will reduce the wealth of other citizens. He had more productive uses for his money than paying taxes, but now he will not be spending money his way. He will at some point lose interest in working for the state. He will stop taking so many risks with his money. He knows the rule: "Win, and the state wins with me. Lose, and I lose alone."
The consequences of raising taxes should be obvious. Production slows because capital is transferred from specialists in production to specialists in political distribution. The salaried, job-protected specialists in transferring confiscated wealth do not conserve scarce resources, let alone increase them. They have this attitude: "There is always more where that came from." This is because they possess the legal authority to extract wealth from productive members of the society. Voters grant them this authority.
The social order pays a price. First, it loses liberty because wealth is transferred to an agency of coercion. Second, there is reduced productivity because capital is transferred to those who do not invest their own money, but who transfer this money to special-interest groups that are successful in political bidding.
People who are successful in building wealth then devote less of their wealth to capital formation than they would otherwise have done. Why? Because the results of their efforts and their investments in a market ruled by uncertainty, if successful, will be taxed. The political oligarchs who are skilled in gaining money through political pressuring increase their authority in the social order.
Customers then will have reduced choices available to them because economic output has been reduced by the tax system. For as long as most of them vote for politicians who vote to raise taxes, or merely to keep taxes where they are, they will continue to disinherit themselves.
When taxes increase, the rate of growth of personal wealth decreases. The rate of wealth creation decreases because customers have a reduced range of choices available to them. They might have increased their savings as a result of the greater range of choices, but there is no greater range of choices. The state confiscated their money.
It is difficult to persuade voters that taxation is reducing the rate of economic growth. Why? Because there has been incomparable economic growth in the world as a whole. From approximately 1800 until the present, the only decade in which there was not steady economic growth in the West was the decade of the Great Depression: the 1930's. People do not understand economic cause-and-effect. They also do not understand this moral principle: "Thou shalt not steal, even by majority vote." So, they continue to vote for programs of state wealth redistribution, always in the hope that the rich will at long last pay a greater percentage of their income than the common taxpayer pays. But the state is never content to tax only the rich. The state wants every productive citizen to pay his fair share, which always means more.
People's voting behavior will not change until such time as they are trapped by national government debt that has been incurred in the name of predictable tax receipts. But tax receipts will not be sufficient to meet the state's legal obligations. The state will not be able to borrow at low interest rates any longer. Hyperinflation will not work, because the state has made long-term promises, and hyperinflation can last only a few years before the currency is destroyed. But the political promises still remain in the law books.
Voters are very much like the people of Israel in the days of Samuel. They do not listen to the argument that the state will confiscate a large portion of their wealth. They always think that they will be winners in the political wealth redistribution process. They become the losers, for they do not specialize in between elections. The winners are specialists in tax avoidance and wealth redistribution: large corporations and industries that hire highly skilled lawyers, accountants, and lobbyists. A voter cannot affect the outcome of an election. A lobbyist can affect the wording of one paragraph in a 1,000-page tax bill. Who benefits most from political specialization?
There are three ways by which voters may someday come to their senses. The first is a moral transformation. They may finally decide not to steal by means of the voting booth. Second, they may finally figure out the economic argument that they are made poorer by the tax system. Third, and far more likely, they will learn their lesson, just as the Hebrews learned their lesson under King Rehoboam, when tax increases bring widespread pain to all of those who have become dependent upon the state's wealth-transfer process. When the non-market auction for votes at last undermines the economy, voters may finally decide to rely on the free market's auction process: gaining ownership of other people's assets by means of voluntary exchange, not coercion. They may at last abandon this commandment: "Thou shalt not steal, except by majority vote."
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