In Ayn Rand’s Capitalism: The Unknown Ideal, she writes,
Every government interference in the economy consists of giving an unearned benefit, extorted by force, to some men at the expense of others. By what criterion of justice is a consensus-government to be guided? By the size of the victim’s gang.
The logic behind this statement is simple and largely self-evident, though often ignored in policy discussions. It should be noted that the article I write about below has nothing to do with the above quote – which is precisely the problem.
A November 19th article from The Economist ponders the question of how governments can best raise revenue through taxes. To the author’s credit, he states in the first paragraph:
Although spending cuts could, and should, be the preferred route to prudence, taxes are all too likely to be part of the mix—at least judging from the experience of those countries that have already acted.
Unfortunately, the article concludes that developed countries would do best to focus on “efficiency” rather than “fairness.” If a government’s goal is to pursue the utilitarian goal of the “greatest good for the greatest number,” this preference for efficiency over fairness would be correct. However, any government with such utilitarian goals is an abomination.
The author does make some important points about alternate tax systems. Taxes on consumption, including a value-added tax (VAT), are regressive; meaning the lower an individual’s income, the higher he is taxed. Consumption taxes do, as the author points out, encourage saving – but they simultaneously discourage spending. Corporate taxes, it is noted, are particularly market-distorting. The critical numbers of the article can be found in the graph below (click to enlarge).
The author also illustrates an interesting phenomenon that often goes overlooked. Very collectivist (communist, socialist, fascist, etc.) have government revenues that make up a relatively large percentage of GDP, when compared with economically liberal countries such as the U.S. Russia, for example, has government revenues equal to 47.7 percent GDP, while the U.S. has government revenues equal to 33.7 percent GDP. But these percentages do not tell the whole story. It is also important to look at the components that make up these percentages. In Russia, non-tax revenues (largely related to state-owned oil companies) make up 14.5 percent of GDP, while in the U.S. non-tax revenues comprise only 5.7 percent of GDP.
At first, this may seem to be a much more efficient way for governments to raise revenue (though, to be sure, the article never makes this claim). It is easy to understand why a person unfamiliar with the record of history may see no difference between a government-run entity earning revenues and a private firm collecting profits. Is there any real difference between the Russian government selling oil and ExxonMobil selling oil?
The answer is a definite “yes”.
History and economics both teach us that no central body can determine the amount of goods and services needed by individuals. Only the invisible hand of market forces can provide society any degree of efficiency. So even if government raises its revenue through so-called production instead of taxation, there will still be massive transaction costs and inefficiencies on both the supply and demand side. And of course, the government has incentives that conflict with offering the best product at the best prices. Governments typically have two goals: 1) gain power, 2) create social value. Yes, these are often at odds; and yes, the second is often a means to the first. Regardless, governments are not motivated by profits. And the profit motive is the driving force behind real economic efficiency.
But all of this talk of efficiency misses the point. I’ll return now to the point of the quote I began with.
When reading such articles, it’s easy to get wrapped up in the author’s arguments and lose the ability to distinguish the forest from the trees. Though the free market is far more efficient than a centrally-planned market, is that really a concern when so many tax systems and government sources of revenue violate individual rights? ExxonMobil has vast resources at its disposable to best its competition. But the one thing it does not have is the ability to coerce by force. Only by offering its customers the greatest value at the lowest price can it win in a free market. While the Russian government (or any other government) only has to pass laws – backed, of course, by men with guns – to maintain its supremacy. Take the U.S. Post Office, for example. If FedEx and UPS were allowed to carry mail, would the USPS have any chance at remaining viable? Of course not. Only by regulation and force can the USPS continue to provide income for the U.S. government.
So whether you are concerned with efficiency or freedom, the property confiscated by government should be reserved only for the protection of our individual rights.
One final thought from Ayn Rand on the subject:
There can be no compromise between freedom and government controls; to accept “just a few controls” is to surrender the principle of inalienable individual rights and to substitute for it the principle of the government’s unlimited, arbitrary power, thus delivering oneself into gradual enslavement. As an example of this process, observe the present domestic policy of the United States.