A Libertarian's Library
Will higher taxes and government spending make our nation richer?
April 18, 2012"Supporters of this view would have to provide us with a causal mechanism explaining why the violent seizure of property and its expenditure on economically arbitrary projects would make a country more prosperous than employing those funds in capital investment to increase the productivity of labor." Thomas E. Woods, www.libertyclassroom.com .
The question above is discussed by George Reisman, Professor Emeritus of Economics at Pepperdine University in a blog submitted to the Ludwig von Mises Institute.
Prof. Reisman makes three points in the excerpt below:
1) Socialist redistribution of wealth theories fail to appreciate that consumers do not need to own the factors of production to derive the benefits of the property owned by capitalist entrepreneurs. Redistribution overlooks the need for individual cooperation and customer satisfaction implicit in an economy characterized by free markets and private ownership. Therefore, redistribution of income and property is not required for social good to be accomplished.Appeal to a class mentality in analyzing public policy undermines the proper place of the individual in free markets and free societies. Redistribution of Wealth stands opposed to private property, division of labor and free trade in a competitive market place protected by a consistently applied rule of law. These few points are the basis of the freedoms which have created the climate of innovation, growing employment, productivity and increasing wealth across the last 250 years.
2) Redistribution removes assets, such as money otherwise available for investment, from the hands of the entrepreneurs and places it in the hands of people with less proven ability to provide new jobs, new products and increasing productivity to capital. In a freely competitive market place entrepreneurs are sifted and sorted based only on their ability to profit from satisfying customers. They cannot be as well chosen by government decree. Therefore, spread the wealth theories ignore the naturally occurring division of labor which creates a demand and place for entrepreneurially talented men and women to direct private assets into the projects best suited to satisfy consumer desires. Redistributionist policies carry as their lost opportunity costs the jobs not created, the productivity increases delayed and the production lost by virtue of the unfulfilled visions of entrepreneurs.
3) In a comparison between the entire class of wage earners and the much smaller class of entrepreneurs, the concept of a tax cut or increased benefit for the first group appears to balance itself against a tax increase paid for by the entirety of the second group. However, the picture changes when each individual wage earner evaluates his own personal $1,000 gain in tax relief or benefits as it is juxtaposed against the lost opportunity for future productivity gains along with innovations in new manufacturing processes and products which he foregoes as an employee and consumer by virtue of the $100 billion removed from the resources available to entrepreneurs.
Excerpted from Professor Reisman's article:
"The progressive personal income tax, the corporate income tax, the inheritance tax, and the capital-gains tax are all paid with funds that otherwise would have been saved and invested. All of them reduce the demand for labor by business firms in comparison with what it would otherwise have been, and thus either the wage rates or the volume of employment that business firms can offer. For they deprive business firms of the funds with which to pay wages.Source article: http://mises.org/daily/3087
By the same token, they deprive business firms of the funds with which to buy capital goods. This, together with the greater spending for consumers' goods emanating from the government, as it spends the tax proceeds, causes the production of capital goods to drop relative to the production of consumers' goods. This implies a reduction in the degree of capital intensiveness in the economic system and thus its ability to implement technological advances. The individual and corporate income taxes, and the capital-gains tax, of course, also powerfully reduce the incentive to introduce new products and improve methods of production. In all these ways, these taxes undermine capital accumulation and the rise in the productivity of labor and real wages, and thus the standard of living of everyone, not just of those on whom the taxes are levied.
Two major impediments make it difficult for people to recognize the fact that everyone would benefit from reductions, or, better still, the total abolition of all of these taxes on the so-called rich — made possible, of course, by equivalent reductions in government spending. The first is simply massive ignorance of economics, especially of the general benefit from private ownership of the means of production. People have not grasped the profound insight of Mises that, in a market economy, in order benefit from privately owned means of production, one does not have to be an owner of the means of production. This is because one benefits from other people's means of production — every time one buys the products of those means of production.
One benefits from other people's means of production not only in one's capacity as a buyer of products but also as a seller of labor. Other people's means of production, other people's capital, are the source both of the supply of the goods one buys and of the demand for the labor one sells. The greater is other people's accumulation of capital, the more abundant and less expensive are the products available for one to buy in the market and the greater is the demand for the labor one sells in the market and thus the higher the wages at which one can sell it. Abundant and growing capital in the hands of one's suppliers and potential employers is the foundation of low and falling prices and of high and rising wages.
In contrast, the view of redistributionists, such as Obama, founded in the most complete and utter ignorance, is that the only wealth from which an individual can benefit is his own. This is a view that was not unreasonable in the ages before the rise of capitalism and its market economy. Until then, the only people who could in fact benefit from a given piece of land or a given barn or plow, or whatever, was the family that owned them and used them to produce for its own consumption. This is the view that the redistributionists continue to hold, centuries after it has lost its applicability. They have not yet awakened to the modern world. And it is on this basis that they support the redistribution of wealth. The redistribution of wealth is allegedly necessary to enable an individual who does not own the wealth presently owned by others to benefit from that wealth. Only as and when their property passes to him can he benefit from it, the redistributors believe. This is the kind of "largesse" Obama intends to practice. It is taking funds from those most prodigious at accumulating capital, capital that would benefit all, and then giving the funds to others to consume. Meeting the needs of the poor with the consumption of capital is Obama's formula for prosperity.
"The view of redistributionists, such as Obama, founded in the most complete and utter ignorance, is that the only wealth from which an individual can benefit is his own."
The second impediment that stands in the way of people recognizing that everyone benefits from tax cuts for the rich is something closely related to redistributionism. This is collectivistic habits of thought inspired by Marxism and its doctrine of class interest. What I mean by this is that when it comes to matters of economics, most people tend to think of themselves essentially as members of the class of wage earners rather than as separate individual wage earners, and to think of their interests as indistinguishable from the interests of other wage earners.
Thus, an individual wage or salary earner knows that he would certainly be better off if his own taxes were reduced by some given amount than if the taxes of a millionaire or some large corporation were reduced by that same amount. As far as it relates just to himself, that conviction is absolutely correct. I, for example, would be much better off if my taxes were reduced by, say, a thousand dollars a year than if the taxes of some contemporary John D. Rockefeller or the taxes of General Motors were reduced by a thousand dollars a year. Where most wage earners go wrong is in generalizing from what is true of a reduction in their own, individual taxes, in comparison with an equal reduction in the taxes of businessmen and capitalists — the "rich" — to conclusions about the effects on them of reducing the taxes of other wage earners, in comparison with the same amount of reduction in taxes on businessmen and capitalists.
In considering, for example, whether the taxes of businessmen and capitalists as a class should be reduced by some large sum, such as $100 billion, or whether the taxes of wage earners as a class should be reduced by that sum, almost everyone mistakenly assumes that the interest of the individual wage earner lies with the tax reduction going to the wage earners, as though all wage earners shared a common class interest against all capitalists. This, however, is a fallacy, which becomes apparent as soon as one objectively analyses the situation from the perspective of the individual wage earner. Then it becomes clear that much more is involved than the matter of a reduction in the taxes of the rich or an equal reduction in the individual wage earner's own taxes. For example, while it is certainly true that I gain more from my own taxes being cut by $1,000 rather than the taxes of a Henry Ford or a Bill Gates, it is absolutely false to believe that I gain more from the taxes of my random fellow wage earners — call them Henry Smiths and Bill Joneses — being cut by $1,000 each rather than the taxes of Ford and Gates being cut by $1,000 each.
What is actually involved in the question of a reduction in taxes on businessmen and capitalists as a class in the amount of $100 billion, versus an equal reduction in the taxes of wage earners as a class, is two separate, further questions, that represent distinct elements of this question. There is first the question of the benefit to an individual wage earner of his own taxes being cut by $1,000, versus the taxes of any businessman or capitalist being cut by $1,000. We know the answer to this question: it is more to the individual wage earner's interest that his own taxes be cut. But then there is a second question. Namely, which is more to an individual wage earner's self-interest: a reduction in the taxes of businessmen and capitalists in the remaining amount of $99,999,999,000, or a reduction in the taxes of wage earners other than himself in the same remaining amount, that is, of 99,999,999 other individuals very much like himself perhaps, but not himself, each getting a reduction of $1,000?
In other words, put aside the question of a cut in the individual wage earner's own taxes of $1,000 versus a $1,000 cut in the taxes of businessmen or capitalists. Consider only the effect on his self-interest of a cut in the taxes of all other wage earners besides himself — all of the Henry Smiths and Bill Joneses of the country — in the combined amount of $99,999,999,000, versus an equivalent cut in the taxes of businessmen and capitalists — all of the Henry Fords and Bill Gateses of the country. A $99-billion-plus cut in the taxes of all those other wage earners will make each of them better off, but what will it do for him, for the particular, individual wage earner we are focusing on? To what extent will his fellow wage earners save and invest their tax cut and so raise the demand for his labor? To what extent will his fellow wage earners increase the demand for capital goods and the rate of business innovation and thus bring about improvements in the quantity and quality of the products he buys and thereby increase the buying power of the wages he earns?
It is obvious that the individual wage earner benefits far more from tax reductions on businessmen and capitalists, the so-called rich, than from equivalent tax reductions on his fellow wage earners, and that this is true of each and every individual wage earner, for any wage earner could take the place of the particular individual we have focused on. A tax reduction on businessmen and capitalists will promote capital accumulation, far, far more than a tax reduction on the mass of the individual wage earner's fellow wage earners. The average businessman and capitalist will save and invest the taxes he no longer has to pay, in far greater proportion than would the average wage earner. He will be induced to introduce more improvements in products and methods of production, which are also a major cause of capital accumulation, and is a process in which wage earners qua wage earners play little or no role. (This is not to say that wage earners are never responsible for innovations. They often are. But as soon as they are, they typically become businessmen. Fundamentally, it is always the prospect of higher profits that stimulates innovations, not the earning of higher wages. It is the prospect of higher profits that leads employers to offer incentives to wage earners to make innovations.) And the greater saving of the businessmen and capitalists will promote innovation by virtue of making the economic system more capital intensive. Thus the individual wage earner has far more to gain from the taxes of businessmen and capitalists being reduced than from the taxes of his fellow wage earners being reduced.
"Fundamentally, it is always the prospect of higher profits that stimulates innovations, not the earning of higher wages."
The gains from this aspect of the matter are so substantial that they almost certainly outweigh the fact that having them precludes the ability to have the benefit of one's own taxes being reduced by a sum such as a thousand dollars a year. This is merely to say that the gains to an individual wage earner of his own taxes being cut by a sum such as $1,000 a year are far less than the gains to him of the taxes of businessmen and capitalists being cut by an immensely larger sum such as a $100 billion a year — that is, by an amount that equals the potential $1,000 tax cuts of all the millions ofother wage earners in the economic system, which, in the hands of those fellow wage earners, would have been of little or no value to him."
Warren Smith is a resident of Beaufort County, NC and retired member of the Chicago Board of Trade. He was active as a wheat and corn trader, while serving as a member of the exchange's board of directors and as a governor of the Chicago Board of Trade Clearing Corporation.
Mr. Smith is a Libertarian and believes that entrepreneurial capitalism, supported by individual rights and responsibilities, private property, division of labor, free trade and the rule of law is the best method for producing both peace and prosperity. Government should be limited to protecting people and their property from force and fraud.